##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---

FORM 20-F



---

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF

THE SECURITIES EXCHANGE ACT OF 1934 ̈

OR

ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934  x

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

OR

SHELL COMPANY REPORT PURSUANT
TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 1-14964



---

EPCOS AG

(Exact name of Registrant
as specified in its charter)



---



|                                                |  |                                                
|----------------------------------------------- |  | -----------------------------------------------
|N/A                                             |  | Federal Republic of Germany                    
|(Translation of registrants name into English) |  | (Jurisdiction of incorporation or organization)

St.-Martin Strasse 53, D-81669 Munich, Federal Republic of Germany

(Address of principal executive offices)



---

Securities registered or to be registered pursuant to Section 12(b) of the Act:



|                                                                                                                                                 |  |                                          
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------
|Title of each class                                                                                                                              |  | Name of each exchange on which registered
|American Depositary Shares (as evidenced by American Depositary Receipts), each representing one
ordinary share, no par value, notional value 1 |  | New York Stock Exchange                  
|                                                                                                                                                 | 
|Ordinary shares, no par value, notional value 1*                                                                                                |  | New York Stock Exchange                  



|* | Listed, not for trading or quotation purposes, but only in connection with the trading of American Depositary Shares.
|- | ---------------------------------------------------------------------------------------------------------------------

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None



---

The number of outstanding shares of each of the issuers classes of capital or common stock as of
September 30, 2006: 65,300,000 ordinary shares, no par value, notional value 1.

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ̈No  x

If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act of 1934.    Yes ̈No  x

Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈Not applicable ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x        Accelerated filer ̈Non-accelerated filer ̈

Indicate by check mark which financial statement item the registrant has elected to follow.    Item 17 ̈Item 18  x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



---



---

##### Table of Contents

In this annual report on Form 20-F, the terms the Company, we,
us and our refer to EPCOS AG including its predecessor companies and subsidiaries when the context requires.

As
used herein, references to  are to euro and references to dollars, USD or $ are to U.S. dollars.

For information regarding recent rates of exchange between euros and dollars, see Item 3. Key Information  Exchange Rates. On March 19, 2007, the noon buying rate for the euro was
1.00 = $ 1.3299, translated from euros at the official fixed exchange rate. As used in this document, the term noon buying rate refers to the rate of exchange for euro, expressed in U.S. dollars per euro, as announced by the
Federal Reserve Bank of New York for customs purposes as the rate in The City of New York for cable transfers in foreign currencies. We discuss the impact of exchange rate fluctuations on our business below under Item 5. Operating and
Financial Review and Prospects and Item 3. Key Information.

The consolidated financial statements for each of the
years in the three-year period ended September 30, 2006 (the Consolidated Financial Statements) included in this Form 20-F, have been prepared in accordance with United States generally accepted accounting principles
(U.S. GAAP).

Our beliefs about our market shares and market growth rates are based on both external and internal market
research. External sources include both public sector institutions, such as national and international trade and production institutions, and private organizations, such as independent market research institutions. Internal market research is based
on customer communications, review of annual and business reports and press releases of competitors, direct communication with competitors and information gathered from our former joint venture partners, Siemens AG (Siemens) and
Matsushita Electronic Components (Europe) GmbH (together with its affiliates Matsushita).



-i-



---

##### Table of Contents

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the U.S.
Securities Act of 1933, as amended, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made
by or on behalf of the Company.

In this annual report, such forward-looking statements include, without limitation, statements relating
to:



| | 1. | management goals and objectives,
| | -- | --------------------------------



| | 2. | trends in results of operations or margins,
| | -- | -------------------------------------------



| | 3. | the development of revenues overall and within specific business areas,
| | -- | -----------------------------------------------------------------------



| | 4. | the development of expenses,
| | -- | ----------------------------



| | 5. | the effects of our restructuring and cost-cutting program,
| | -- | ----------------------------------------------------------



| | 6. | the market risks associated with interest and exchange rates, and
| | -- | -----------------------------------------------------------------



| | 7. | other statements relating to our future business development and economic performance.
| | -- | --------------------------------------------------------------------------------------

The words anticipate, believe, expect, estimate, intend, plan and similar expressions identify certain of these forward-looking statements.
Readers are cautioned not to put undue reliance on forward-looking statements because actual events and results may differ materially from the expected results described by such forward-looking statements.

Many factors may influence our actual results and cause them to differ materially from expected results as described in forward-looking statements. Such
factors include:



| |  |  | changes in our customers industries,
| | - |  | -------------------------------------



| |  |  | technological developments impacting the prospects for our products,
| | - |  | --------------------------------------------------------------------



| |  |  | slower growth in significant markets,
| | - |  | -------------------------------------



| |  |  | decline in demand and more pronounced recessionary trends in our markets,
| | - |  | -------------------------------------------------------------------------



| |  |  | interest rate levels,
| | - |  | ---------------------



| |  |  | currency exchange rates, including the euro  U.S. dollar and euro  Japanese yen exchange rates,
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | increasing levels of competition in Europe, North America, Asia and other international markets for our products,
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | changes in our business strategy,
| | - |  | ---------------------------------



| |  |  | the ability to realize cost reductions and operating efficiencies without unduly disrupting business operations,
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen environmental obligations,
| | - |  | -------------------------------------



-ii-



---

##### Table of Contents

| |  |  | changes in laws and regulations,
| | - |  | --------------------------------



| |  |  | interruption of production due to strikes, acts of nature, or other unforeseeable events,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | unforeseeable events impacting the economy on a global basis, and
| | - |  | -----------------------------------------------------------------



| |  |  | general economic and business conditions and competitive factors, in each case on a global and regional basis.
| | - |  | --------------------------------------------------------------------------------------------------------------

We disclaim any intention or obligation to update and revise any forward-looking statements, whether as a result of new information, future events or
otherwise.



-iii-



---

##### Table of Contents

TABLE OF CONTENTS



|          |  |                                                                              |  |     
|--------- |  | ---------------------------------------------------------------------------- |  | ----
|          |  |                                                                              |  | Page
|          |  | PART I                                                                       |  |     
|          |  |                                                                             
|Item 1.   |  | Identity of Directors, Senior Management and Advisers                        |  | 1   
|          |  |                                                                             
|Item 2.   |  | Offer Statistics and Expected Timetable                                      |  | 1   
|          |  |                                                                             
|Item 3.   |  | Key Information                                                              |  | 1   
|          |  |                                                                             
|Item 4.   |  | Information on the Company                                                   |  | 8   
|          |  |                                                                             
|Item 4A.  |  | Unresolved Staff Comments                                                    |  | 28  
|          |  |                                                                             
|Item 5.   |  | Operating and Financial Review and Prospects                                 |  | 29  
|          |  |                                                                             
|Item 6.   |  | Directors, Senior Management and Employees                                   |  | 51  
|          |  |                                                                             
|Item 7.   |  | Major Shareholders and Related Party Transactions                            |  | 59  
|          |  |                                                                             
|Item 8.   |  | Financial Information                                                        |  | 61  
|          |  |                                                                             
|Item 9.   |  | The Offer and Listing                                                        |  | 64  
|          |  |                                                                             
|Item 10.  |  | Additional Information                                                       |  | 67  
|          |  |                                                                             
|Item 11.  |  | Quantitative and Qualitative Disclosures about Market Risk                   |  | 81  
|          |  |                                                                             
|Item 12.  |  | Description of Securities other than Equity Securities                       |  | 82  
|          |  |                                                                             
|          |  | PART II                                                                      |  |     
|          |  |                                                                             
|Item 13.  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 83  
|          |  |                                                                             
|Item 14.  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 83  
|          |  |                                                                             
|Item 15.  |  | Controls and Procedures                                                      |  | 83  
|          |  |                                                                             
|Item 16A. |  | Audit Committee Financial Expert                                             |  | 85  
|          |  |                                                                             
|Item 16B. |  | Code of Ethics                                                               |  | 85  
|          |  |                                                                             
|Item 16C. |  | Principal Accountant Fees and Services                                       |  | 85  
|          |  |                                                                             
|Item 16D. |  | Exemptions from the Listing Standards for Audit Committees                   |  | 86  
|          |  |                                                                             
|Item 16E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       |  | 86  
|          |  |                                                                             
|          |  | PART III                                                                     |  |     
|          |  |                                                                             
|Item 17.  |  | Financial Statements                                                         |  | 86  
|          |  |                                                                             
|Item 18.  |  | Financial Statements                                                         |  | 86  
|          |  |                                                                             
|Item 19.  |  | Exhibits                                                                     |  | 87  



-iv-



---

##### Table of Contents

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Consolidated Financial and Statistical Data

Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and audited by the independent auditors KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (KPMG).

The selected consolidated financial data for the
fiscal years ended September 30, 2004 through 2006 appearing in the tables below under the headings Consolidated statement of income data and Consolidated balance sheet data are derived from our Consolidated Financial
Statements and should be read in conjunction with the Consolidated Financial Statements and related notes included herein and in Item 5. Operating and Financial Review and Prospects. As a result of the sale of our tantalum
capacitors business in April 2006, we show our tantalum capacitors business as discontinued operations. Financial data are shown, except as otherwise stated, for our continuing operations, and prior years have been restated accordingly.

The selected financial data presented below for the three-month periods ended December 31, 2006 and 2005 are unaudited and, in the opinion of the
management, reflect all adjustments (consisting of normal recurring items) which are necessary to present a fair statement of results for the interim periods. The interim results do not purport to be and are not indicative of the operating results
to be expected for the entire fiscal years.

The consolidated financial information presented below may not be indicative of our future
performance. We describe some of the relevant risk factors below under Risk Factors.



|                                             |  |                                              |   |  |                                 |   |  |         |   |  |         |   |  |         |   |  |         |  |         |  
|-------------------------------------------- |  | -------------------------------------------- | - |  | ------------------------------- | - |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- |  | ------- | -
|                                             |  | Quarter endedDecember 31,                    |   |  | Fiscal year ended September 30, |  
|                                             |  | 2006                                         |   |  | 2005                            |   |  | 2006    |   |  | 2005    |   |  | 2004    |   |  | 2003    |  | 2002    |  
|                                             |  | (unaudited)                                  |   |  |                                 |  
|                                             |  | (euro in millions, except per share amounts) |  
|Consolidated statement of income data:       |  |                                              |   |  |                                 |   |  |         |   |  |         |   |  |         |   |  |         |  |         |  
|Net sales of continuing operations           |  | 334.4                                        |   |  | 304.8                           |   |  | 1,309.4 |   |  | 1,150.0 |   |  | 1,255.3 |   |  | 1,154.6 |  | 1,192.5 |  
|Gross profit                                 |  | 61.1                                         |   |  | 49.7                            |   |  | 226.4   |   |  | 170.8   |   |  | 268.8   |   |  | 193.6   |  | 149.3   |  
|Operating income/(loss)                      |  | 15.7                                         |   |  | 1.9                             |   |  | 37.2    |   |  | (17.6   | ) |  | 68.7    |   |  | 4.7     |  | (75.4   | )
|Net income (loss) of continuing operations   |  | 13.1                                         |   |  | 0.8                             |   |  | 35.2    |   |  | (66.3   | ) |  | 51.0    |   |  | 4.4     |  | (39.8   | )
|Net income (loss) of discontinued operations |  | (0.0                                         | ) |  | (4.0                            | ) |  | (14.0   | ) |  | (53.0   | ) |  | (1.8    | ) |  | 2.3     |  | 1.3     |  
|Net income/(loss)                            |  | 13.1                                         |   |  | (3.2                            | ) |  | 21.2    |   |  | (119.3  | ) |  | 49.2    |   |  | 6.7     |  | (38.5   | )
|Basic earnings/(loss) per share              |  |                                              |   |  |                                 |   |  |         |   |  |         |   |  |         |   |  |         |  |         |  
|of continuing operations                     |  | 0.20                                         |   |  | 0.01                            |   |  | 0.54    |   |  | (1.02   | ) |  | 0.78    |   |  | 0.07    |  | (0.61   | )
|of discontinued operations                   |  | 0.00                                         |   |  | (0.06                           | ) |  | (0.21   | ) |  | (0.81   | ) |  | (0.03   | ) |  | 0.04    |  | 0.02    |  
|Diluted earnings/(loss) per share            |  |                                              |   |  |                                 |   |  |         |   |  |         |   |  |         |   |  |         |  |         |  
|of continuing operations                     |  | 0.19                                         |   |  | 0.01                            |   |  | 0.52    |   |  | (1.02   | ) |  | 0.74    |   |  | 0.07    |  | (0.61   | )
|of discontinued operations                   |  | 0.00                                         |   |  | (0.06                           | ) |  | (0.21   | ) |  | (0.81   | ) |  | (0.03   | ) |  | 0.04    |  | 0.02    |  



-1-



---

##### Table of Contents

|                                               |  |                     |  |         |  |         |  |         |  |        
|---------------------------------------------- |  | ------------------- |  | ------- |  | ------- |  | ------- |  | -------
|                                               |  | As of September 30,
|                                               |  | 2006                |  | 2005    |  | 2004    |  | 2003    |  | 2002   
|                                               |  | (unaudited)         |  |        
|                                               |  | (euro in millions) 
|Consolidated balance sheet data:               |  |                     |  |         |  |         |  |         |  |        
|Working capital                                |  | 356.6               |  | 288.5   |  | 314.0   |  | 228.3   |  | 26.9   
|Property, plant and equipment, net             |  | 493.4               |  | 576.3   |  | 604.4   |  | 649.5   |  | 737.1  
|Total assets                                   |  | 1,414.5             |  | 1,376.9 |  | 1,486.2 |  | 1,429.0 |  | 1,343.6
|Short-term borrowings                          |  | 89.3                |  | 107.5   |  | 103.0   |  | 96.7    |  | 126.4  
|Long-term debt, excluding current installments |  | 194.8               |  | 206.1   |  | 192.7   |  | 215.0   |  | 65.5   
|Shareholders equity                           |  | 575.7               |  | 556.5   |  | 679.6   |  | 638.7   |  | 642.2  



|                                                                                               |      |                                              |      |                                 |      |       |      |       |   |      |       |      |       |      |       |  
|---------------------------------------------------------------------------------------------- | ---- | -------------------------------------------- | ---- | ------------------------------- | ---- | ----- | ---- | ----- | - | ---- | ----- | ---- | ----- | ---- | ----- | -
|                                                                                               |      | Quarter ended December 31,                   |      | Fiscal Year ended September 30, |     
|                                                                                               | 2006 |                                              | 2005 |                                 | 2006 |       | 2005 |       |   | 2004 |       | 2003 |       | 2002 |      
|                                                                                               |      | (unaudited)                                  |      |                                 |      |       |      |       |   |      |       |      |       |     
|                                                                                               |      | (euro in millions, except per share amounts) |     
|Other data:                                                                                    |      |                                              |      |                                 |      |       |      |       |   |      |       |      |       |      |       |  
|Earnings/(loss) before interest, taxes and minority interest (EBIT) of continuing operations |      | 17.1                                         |      | 3.3                             |      | 46.8  |      | (26.9 | ) |      | 67.5  |      | 0.6   |      | (74.8 | )
|Capital expenditures                                                                           |      | 24.5                                         |      | 18.6                            |      | 107.1 |      | 135.0 |   |      | 102.4 |      | 93.9  |      | 112.0 |  
|Depreciation and amortization                                                                  |      | 28.5                                         |      | 31.5                            |      | 126.6 |      | 145.8 |   |      | 138.6 |      | 139.6 |      | 157.6 |  
|Dividends per share                                                                            |      | n/a                                          |      | n/a                             |      |      |      |      |   |      |      |      |      |      |      |  

At September 30, 2006, we had 65,300,000 ordinary shares outstanding. Our basic earnings per
share are calculated on the basis of the weighted average shares outstanding of 65,300,000 for fiscal years 2006 and 2005, 65,296,107 for fiscal year 2004, 65,275,000 for fiscal year 2003 and 65,288,838 for fiscal year 2002. For potentially dilutive
securities outstanding during the fiscal year ended September 30, 2006, see Note 19 to our Consolidated Financial Statements. Under two stock option plans adopted by our shareholders on September 28, 1999 (the
1999 SOP) and February 11, 2004 (the 2004 SOP), respectively, we granted to our management and some of our employees:



| |  |  | options to purchase a total of 2,269,500 shares under the 1999 SOP;
| | - |  | -------------------------------------------------------------------



| |  |  | in December 2004, options to purchase a further 340,000 shares under the 2004 SOP;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | in December 2005, options to purchase a further 339,000 shares under the 2004 SOP; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | in December 2006, options to purchase a further 559,000 shares under the 2004 SOP.
| | - |  | ----------------------------------------------------------------------------------

For further information, see Item 6. Directors, Senior Management and Employees  Options to Purchase Securities from Registrant or
Subsidiaries. We did not pay any dividends for the fiscal years 2002 through 2005. With respect to fiscal year 2006, a dividend of 0.20 per share was paid on February 15, 2007. For further information on statutory limitations
to our ability to pay dividends, see Item 8. Financial Information  Dividend Policy.

EBIT is not a measure of
financial performance under U.S. GAAP. However, we present EBIT because that is the basis on which our management evaluates the operating performance of our three reportable segments and of the Company as a whole and on which it establishes budgets
and operational goals. We report EBIT information because we believe that it provides investors with meaningful information about our operating performance and especially about the performance of our separate business segments. We believe that EBIT
is a better measure of operating performance than net income since the latter includes interest income (expenses) and benefit (provision) for income taxes, whereas EBIT permits investors to examine the performance of each business segment and the
Company as a whole between years with a higher degree of comparability.

We calculate EBIT as net income (loss) plus (minus) minority
interest minus (plus) benefit (provision) for income taxes minus (plus) interest result. The following table reconciles EBIT for each year shown in the table above to the net income reported for such year:



-2-



---

##### Table of Contents

Reconciliation of EBIT to net income



|                                             |  |                           |   |  |                                 |   |  |       |   |  |        |   |  |      |   |  |       |   |  |       |  
|-------------------------------------------- |  | ------------------------- | - |  | ------------------------------- | - |  | ----- | - |  | ------ | - |  | ---- | - |  | ----- | - |  | ----- | -
|                                             |  | Quarter endedDecember 31, |   |  | Fiscal Year ended September 30, |  
|                                             |  | 2006                      |   |  | 2005                            |   |  | 2006  |   |  | 2005   |   |  | 2004 |   |  | 2003  |   |  | 2002  |  
|                                             |  | (euro in millions)        |  
|Net income (loss)                            |  | 13.1                      |   |  | (3.2                            | ) |  | 21.2  |   |  | (119.3 | ) |  | 49.2 |   |  | 6.7   |   |  | (38.5 | )
|Net income (loss) of discontinued operations |  | (0.0                      | ) |  | (4.0                            | ) |  | (14.0 | ) |  | (53.0  | ) |  | (1.8 | ) |  | 2.3   |   |  | 1.3   |  
|Net income (loss) of continuing operations   |  | 13.1                      |   |  | 0.8                             |   |  | 35.2  |   |  | (66.3  | ) |  | 51.0 |   |  | 4.4   |   |  | (39.8 | )
|Minority interest                            |  | 0.0                       |   |  | 0.1                             |   |  | 0.4   |   |  | 0.2    |   |  | 0.2  |   |  | 0.2   |   |  | 0.0   |  
|Provision (benefit) for income taxes         |  | 2.4                       |   |  | (0.4                            | ) |  | 2.2   |   |  | 31.5   |   |  | 10.9 |   |  | (12.4 | ) |  | (41.5 | )
|Interest result                              |  | (1.6                      | ) |  | (2.8                            | ) |  | (9.0  | ) |  | (7.7   | ) |  | (5.4 | ) |  | (8.4  | ) |  | (6.5  | )
|EBIT of continuing operations                |  | 17.1                      |   |  | 3.3                             |   |  | 46.8  |   |  | (26.9  | ) |  | 67.5 |   |  | 0.6   |   |  | (74.8 | )

Exchange Rates

Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of shares or American
Depositary Shares (ADS) on conversion of dividends, if any, paid in euro on the shares and will affect the U.S. dollar price of the ADSs on the New York Stock Exchange.

To enable you to ascertain how the trends in our financial results might have appeared had they been expressed in U.S. dollars, the table below shows the
average exchange rates of U.S. dollars per euro for the periods shown:

Average exchange rates of U.S. dollars per euro



|                                     |  |        
|------------------------------------ |  | -------
|                                     |  | Average
|Quarter ended December 31, 2006      |  | 1.3077 
|Fiscal year ended September 30, 2006 |  | 1.2522 
|Fiscal year ended September 30, 2005 |  | 1.2727 
|Fiscal year ended September 30, 2004 |  | 1.2199 
|Fiscal year ended September 30, 2003 |  | 1.0919 
|Fiscal year ended September 30, 2002 |  | 0.9208 

The table below shows the high and low exchange rates of U.S. dollars per euro for each month from
September 2006 through March 2007:

Recent exchange rates of U.S. dollars per euro



|                                    |  |        |  |       
|----------------------------------- |  | ------ |  | ------
|                                    |  | High   |  | Low   
|September 2006                      |  | 1.2833 |  | 1.2648
|October 2006                        |  | 1.2773 |  | 1.2502
|November 2006                       |  | 1.3261 |  | 1.2705
|December 2006                       |  | 1.3327 |  | 1.3073
|January 2007                        |  | 1.3286 |  | 1.2904
|February 2007                       |  | 1.3246 |  | 1.2933
|March 2007 (through March 19, 2007) |  | 1.3307 |  | 1.3094

The noon buying rate for euro on September 29, 2006 was 1.00 = $ 1.2687. The noon
buying rate on March 19, 2007 was 1.00 = $ 1.3299.



-3-



---

##### Table of Contents

Risk Factors

Our business, financial condition or results of operations could suffer material adverse effects due to any of the following risks. The risks described below are not the only ones we face. Additional risks not known to us or that we now
consider immaterial may also impair our business operations.

This annual report also contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Annual
Report. For a summary of statements that may include forward-looking statements and of factors that may influence our actual results, see Cautionary Statement with Respect to Forward-Looking Statements on pages (ii) and
(iii) above.

If the current growth in the global economy and in the electronics industry is weaker or shorter than
expected, demand in the electronic components and modules industry may decline again, which could lead to increased price erosion and adversely affect our results of operations.After a prolonged downturn in the global economy in general and
the electronic components and modules industry in particular, we experienced a global upturn in the first half of fiscal year 2004, accompanied by a generally positive trend in demand for electronic components and modules from all industries and
regions. However, this recovery slowed quickly and was followed by a further downturn, especially in our home market Europe, lasting until the second quarter of fiscal year 2005. During the periods of economic downturn, we suffered from declining
demand in the electronic components and modules industry, which caused a significant drop in our average sales prices, resulting in a reduction in our gross margins and operating profits. Although demand for electronic components and modules
stabilized somewhat in the second half of fiscal year 2005 and was strong throughout fiscal year 2006, the future development of the global economy and the demand of the electronic components and modules industry remain uncertain, which makes it
more difficult for us to predict our future sales and manage our operations. If the current economic recovery is weaker or shorter than expected, such developments may recur, which could adversely impact our results of operations.

We must consistently reduce the total costs of our products to combat the impact of downward price trends and may incur additional restructuring
costs in future.Our industry is intensely competitive and prices for existing products tend to decrease steadily over their life cycle. Pricing pressure was notably pronounced in fiscal years 2002 and 2003 as demand declined. Even though
prices stabilized in the second half of fiscal year 2004, there was substantial and continuing pressure from customers to reduce the total cost of using our components and modules. In the first half of fiscal year 2005, orders for electronic
components and modules dropped again due to weak demand in the industry, causing price pressure. This trend was intensified by an unfavorable USD/euro exchange rate. As demand stabilized somewhat in the second half of fiscal year 2005 and was strong
throughout 2006, pressure on prices for electronic components and modules eased. To remain competitive, we must achieve continuous cost reductions through process and product improvements. We must also be in a position to minimize our
customers shipping and inventory financing costs and to meet their other goals for rationalization of supply and production. Our growth and the profit margins of our products will suffer if our competitors are more successful in reducing the
total cost to customers of their products than we are. For a more complete discussion of the competitive factors affecting our major markets, see Item 4. Information on the Company  Competition. In response to the
competition in the electronic components and modules market, we have taken significant steps to streamline our operations and have incurred substantial restructuring costs, including, in fiscal year 2006, significant restructuring charges in
connection with the sale of our tantalum capacitors business and the discontinuation of our UltraCap activities in that year. We may incur additional restructuring costs in future.

Our cash flow from operations may not be adequate to finance all of our planned investments.We have planned capital expenditures over the
next several years to raise productivity, to enable us to develop new products and, in some cases, to expand our capacity. We describe these expenditures in more detail in Item 5. Operating and Financial Review and Prospects 
Capital Expenditures. To the extent our cash flow from operations is not adequate to finance these expenditures, we may rely on debt financing to meet a portion of our remaining investment needs. If



-4-



---

##### Table of Contents

we cannot obtain this debt financing on favorable terms, then we may forego or delay some of these expenditures, which could hinder the development of our
business and our competitiveness. Our profitability will suffer if the return on the investments financed through debt is less than the costs of financing these expenditures.

Exchange rate fluctuations could affect our ability to price our products competitively. The persistent weakness of the U.S. dollar
vis-à-vis the euro has had a negative effect on our results of operations in recent fiscal years since the market prices for our products are essentially dollar-based around the world, even within the euro zone. Additionally, our business
will suffer if we are unable to compensate for any competitive advantage competitors based in Japan, the United States or Asia (especially China) may derive from having a substantial portion of their costs based in a currency other than the euro if
this currency should weaken vis-à-vis the euro. In recent years, we have tried to reduce our exchange rate exposure by relocating our value chain and materials-sourcing activities from Central Europe to countries with lower labor costs and
currencies that are more or less closely tied to the U.S. dollar. If our competitors benefit from weakening currencies by offering their products at prices that are lower than ours, we may need to reduce our prices to make our products competitive,
lowering our profit margins. This was the case in particular in fiscal year 2004 as well as in the first quarter of fiscal year 2005, when the increasing devaluation of the U.S. dollar and Yen against the euro intensified price erosion for our
products. In fiscal year 2006, the devaluation of the U.S. dollar and Yen against the euro continued to give our Japanese and U.S. competitors cost and competitive advantages and resulted in increased price pressure for us. If the weakness of the
U.S. dollar and Yen continues, it could intensify price erosion for our products further and our competitive position and profitability may suffer. In 2006, the strength of the Brazilian real (up almost 20% against the euro since 2005) also
negatively impacted us, in particular resulting in lower profitability in our capacitors and inductors segment.

Cyclical changes in
our customers industries have resulted, and may in future result, in significant fluctuations in demand for our products, increasing our unit costs and reducing our profitability.Most of our customers are in cyclical industries. Their
requirements for electronic components and modules fluctuate significantly as a result of changes in general economic activity and other factors. During periods of increasing demand they typically seek to increase their inventory of our products to
avoid production bottlenecks. When demand for their products has peaked and begins to decline, as happened in the second half of fiscal year 2004 and in the first half of fiscal year 2005, they tend to decrease rapidly or even cancel orders for our
products while they use up accumulated stocks. During the first half of 2005 in particular, persistent price erosion reduced our profitability because reduction of these inventories lasted unexpectedly long and we were not able to utilize production
capacity as planned. In fiscal year 2006, pressure on component and module prices eased from quarter to quarter as demand for electronic components and modules remained strong throughout the year. Business cycles vary somewhat in different
geographical regions and customer industries. Significant fluctuations in sales of our products increase our unit costs and reduce our potential profitability by making it more difficult for us to predict our production, raw materials and shipping
needs. We are also vulnerable to general economic events or trends beyond our control, and our sales and profits may suffer in periods of weak demand.

We must continue to develop innovative products and production techniques to combat downward price pressure for our products and to meet market requirements.EPCOS operates primarily in markets that are
subject to very rapid technological change. Sustaining and improving our profitability depends a great deal on our ability to develop new products quickly and successfully to customer specifications. Pressure on the prices of our products increases
with the age of the product. Non-customized commodity products are especially vulnerable to price pressure, but customized products have also experienced severe price pressure in the last fiscal years. We have traditionally avoided downward pricing
trends in part by offering products with new technologies or applications that offer our customers advantages over older products. We also seek to maintain profitability by developing products to our customers specifications that are not
readily available from competitors stocks. Developing and marketing these products requires continuous efforts and high start-up costs that may not be recouped if those new products or production techniques are not successful. If we are unable
to develop innovative products and production techniques, our competitive position and profitability will suffer. Additionally, if EPCOS is not able to respond as quickly as competitors to new market trends or technologies, we may lose market share.



-5-



---

##### Table of Contents

Our efforts to expand our business in Asia and elsewhere may lead to increased competition with
Matsushita and harm our growth and our cooperation with them.Matsushita is one of the worlds largest manufacturers of electronic components and modules. We expect to face increased competition with Matsushita as we continue our
expansion in Asia, where Matsushita has especially strong market positions. Increased competition with Matsushita may harm our growth. Although we have entered into cross license and technical cooperation agreements to govern our cooperation with
Matsushita, the possibility of more intense competition between the two companies may also hinder cooperation. Difficulties in this relationship may harm our ability to jointly develop some of our products resulting in higher research and
development expenses.

Losing the services of members of our management board or our other highly qualified and experienced employees
could harm our competitiveness.Our success depends upon the continued contributions of experienced members of management who are able to implement our business strategy. We must also attract and maintain experienced and highly skilled
engineering, sales and marketing and managerial personnel. Competition for qualified personnel is intense in our industry, and we may not be successful in hiring and retaining these people. If we unexpectedly lose the services of any members of
management or cannot attract and retain other qualified personnel, our business could suffer through less effective management due to loss of knowledge of our business or through less competitive products due to a reduced ability to design,
manufacture and market innovative products. If management is not able to implement our strategy, we may not be able to realize our goals and our results of operations may suffer.

Shortages and price increases in some of our raw materials as well as defective incoming raw materials may increase our costs and reduce our
profitability.For some of our product lines, we require raw materials that only a limited number of suppliers can provide in sufficient quality or amount to meet our needs. The most significant of these materials include silver/palladium
powder and foils for ceramic capacitors, ceramic packaging materials and wafers made of lithium niobate, lithium tantalate and quartz for SAW components. We describe our use of these materials in more detail in Item 4. Information on the
Company  Description of Business  Raw Materials and Sources of Supply. In fiscal year 2006, we experienced a significant increase in prices for raw materials, in particular for copper wire and aluminum foil, burdening the
profitability of our capacitors and inductors segment. If we are not able to pass on the price increase of our raw materials to our customers, our results of operations may suffer. To reduce the risk of supply interruptions or price increases of our
significant raw materials, we generally try to maintain alternative sources and seek to reduce our needs of those that are expensive or subject to shortages through technical innovation. Despite these measures, we could experience shortages in the
availability of these and other raw materials or a higher volume of defective incoming raw materials that would increase our costs, limit our business volume and hurt our margins.

Environmental laws and regulations may expose us to liability and increase our costs.Our operations are subject to many environmental laws
and regulations wherever we operate governing, among other things, air emissions, wastewater discharges, the use and handling of hazardous substances, waste disposal and the investigation and remediation of soil and groundwater contamination. In the
past, we have incurred costs in connection with liability for remediation of soil and groundwater contamination.

Directives and
regulations of the European Union call for minimizing the energy consumption of electronic products throughout the products lifetime or regulating the use of certain substances are under preparation or already in force. Other foreign countries
including China have announced their intention to establish the same kind of regulations. These laws and regulations could adversely affect our manufacturing costs or product sales because they may force us to change production processes or use more
costly materials for our products. In particular, the EU regulation on the registration, evaluation, and authorization of chemical substances (REACH) may result in a restriction of the use of raw materials that are important for our production and
may cause suppliers to withdraw such raw materials as the costs imposed by REACH may exceed the level of economic production. Thus REACH could adversely affect our manufacturing costs or product sales because it may force us to change production
processes, the design of our products or to use more costly materials. For further details, see Item 8. Financial Information  Legal Matters  Environment.



-6-



---

##### Table of Contents

As with other companies engaged in similar activities, a risk of environmental liability is inherent in
our current and historical manufacturing activities. Future additional environmental compliance or remediation obligations could adversely affect our business through increased production costs from implementing environmentally compliant
manufacturing facilities. By restricting or prohibiting the distribution of our current products, environmental regulations could also harm our business by forcing us to increase research and development expenditures and by shortening the useful
sales lives of our products.

We might be faced with product liability or warranty claims, either directly or indirectly through our
customers.Despite extensive quality assurance measures, there remains a risk that defects may occur in our products. Such defects could, in turn, lead to defects in our customers products that incorporate our products. The occurrence
of defects in our products could give rise to warranty claims against us or to liability for damages caused by such defects to our customers or to the customers of our customers. Such defects could also lead to liability for consequential damages.
Defects in our products could, moreover, impair the markets acceptance of our products. Any of these events could have a material adverse effect on our business and financial condition.

A decline in the value of the euro could reduce the value of your investment and any dividends you receive.Fluctuations in the exchange
rate between the dollar and the euro have affected and will continue to affect the dollar equivalent of the euro price per share and the dollar value of any cash dividends. If the value of the euro relative to the dollar declines, the market price
of the ADSs is likely to be adversely affected. Any decline in the value of the euro would also adversely affect the dollar amounts received by ADS holders on the conversion of any cash dividends paid in euro on the shares.

Because U.S. investors may be unable to participate in future rights offerings, your percentage shareholding may be diluted.Except in
limited circumstances, German public companies must offer preemptive rights to existing shareholders when issuing new shares. For reasons relating to U.S. securities laws or other factors, U.S. investors may not be able to participate in rights
issues we may choose to make and may face dilution as a result.

Rights of shareholders in a German corporation may differ from
rights of shareholders in a corporation organized in another jurisdiction. EPCOS is a public company organized under the laws of Germany. The rights of our shareholders are governed by our articles of association and by German law. These
rights may differ in some respects from the rights of shareholders in corporations organized in jurisdictions other than Germany. In addition, it may be difficult for investors to enforce the securities laws of other jurisdictions, or to prevail in
a claim against the Company based on those laws.

Because we and most of our directors and officers are located in Germany, it may be
difficult for you to sue these persons in the United States or to enforce judgments by U.S. courts against them.We are a corporation organized under the laws of the Federal Republic of Germany and most of our directors and executive
officers are residents of Germany. In addition, most of our assets owned and those of the aforesaid individuals are located outside the United States. As a result, it may be difficult or impossible for you to effect service of process upon us or any
of the aforesaid persons within the United States with respect to matters arising under the U.S. federal securities laws or to enforce against us or any of such persons judgments of U.S. courts predicated upon the civil liability provisions of the
U.S. federal securities laws. We have been advised by counsel that it is doubtful as to whether original actions of liabilities predicated on the U.S. federal securities laws may be enforced in Germany and that in Germany both recognition and
enforcement of U.S. court judgments with respect to the civil liability provisions of the U.S. federal securities laws are solely governed by the provisions of the German Civil Procedure Code (Zivilprozessordnung or ZPO). In some cases,
especially when the relevant statutory provisions of German law do not recognize the international jurisdiction of a U.S. court or the judgment conflicts with certain basic principles of German law (e.g., the prohibition against punitive
damages and limited pre-trial discovery), a U.S. judgment might not be recognized by a German court. Service of process in U.S. proceedings on persons in Germany, however, is regulated by a multilateral treaty guaranteeing service of writs and other
legal documents in civil cases if the current address of the defendant is known.



-7-



---

##### Table of Contents

Item 4. Information on the Company

History and Development of the Company

History

EPCOS consists substantially of a
former joint venture between Siemens and Matsushita formed in 1989 in order to create a more competitive worldwide supplier of electronic components and subassemblies to the electronics industry by making more effective use of their respective
resources. The joint venture consisted of a limited partnership and its general partner. Each of Siemens and Matsushita, the latter through a wholly-owned German subsidiary called Matsushita Electronic Components (Europe) GmbH, owned fifty percent
of the general partner and fifty percent of the limited partnership interests in the limited partnership.

To prepare for our initial
public offering in October 1999, Siemens and Matsushita converted the limited partnership into a stock corporation and Siemens contributed to the Company essentially all of its electronic components operations that had not been a part of the joint
venture. In connection with our pre-IPO reorganization, Siemens also sold us its 51% interest in Xiaogan, a Chinese joint venture, and the electronic components assets and liabilities of one of its Singapore subsidiaries. Until March 2006, Siemens
and Matsushita together owned 25% of our share capital. Siemens sold its entire shareholding of 12.5% in EPCOS on March 29, 2006 and Matsushita sold its entire shareholding of 12.5% in EPCOS on October 23, 2006.

EPCOS is headquartered in Munich, Germany. The address and telephone number of our registered office is St.-Martin Strasse 53, D-81669 Munich, Germany,
+49-89-63609.

Recent Developments

Effective April 13, 2006, EPCOS sold its tantalum capacitors business to Kemet Corporation for an aggregate purchase price of 86.5 million. Kemet acquired EPCOSs plant in Évora, Portugal and took on the employees of
this production facility. Additionally, Kemet took on some, but not all, of our tantalum capacitor-related research and development as well as of our marketing and sales staff from Heidenheim and Munich, Germany. EPCOS closed the deal transferring
its tantalum capacitors business to Kemet on September 30, 2006. For more information on this transaction, see Item 5. Operating and Financial Review and Prospects  Results of Operations  Discontinued operations.

As a result of this sale, EPCOS now reports income from its tantalum capacitor activities, formerly included in the capacitors segment, as
discontinued operations and shows, in accordance with U.S. GAAP, the tantalum capacitor activities for previous periods in a comparable manner. Also effective as of the first quarter of fiscal year 2006, the capacitors segment has been combined with
the inductors and ferrites segment to form the new reportable segment Capacitors and Inductors because of the substantial economic and other similarities between these operating segments after the disposal of the tantalum capacitors
business.

In February 2007, we acquired Aktiv Sensor GmbH. For more information, see Item 5. Operating and Financial Review and
Prospects  First Quarter Results of Fiscal Year 2007 and Recent Developments.

Description of Business

EPCOS is one of the worlds leading producers and suppliers of electronic components and modules. Electronic components and modules process
electrical signals, control power supplies and protect electronic circuitry, among other things.

The main categories of electronic
components and modules that we manufacture are capacitors, thermistors and varistors, sensors, surge voltage arresters, switching spark gaps, piezo actuators, filters, integrated radio frequency modules, soft ferrite cores and inductors. Electronic
components and modules are used in every electronic circuit and are found in equipment and systems marketed by all sectors of the electrical and electronics industries. With our broad range of products,



-8-



---

##### Table of Contents

we supply customers across a wide spectrum of industries and applications with a comprehensive line of standardized electronic components and modules as well
as customer or application-specific solutions. We manufacture our products using an extensive array of proprietary processes in advanced facilities in eleven countries on four continents.

In fiscal year 2006, we report our business from continuing operations in the following three reportable segments:



| | 1. | Capacitors and Inductors: Capacitors and inductors are components that are used throughout electrical engineering and electronics. They store electric charges and filter or
regulate current and voltage in electronic circuitry. Our product spectrum covers aluminum electrolytic capacitors, film capacitors, power capacitors and solutions for power factor correction. Applications for capacitors range from automotive and
industrial electronics to high speed trains. Inductors fulfill two basic electrical functions at the same time: they filter current and store electromagnetic energy. Inductors are used, among other things, in switch-mode power supplies for
industrial, automotive and entertainment electronics, as well as for information and communications. Our portfolio also includes ferrites, which are the heart of inductors and which concentrate electromagnetic fields to transmit electrical signals
and power. Electromagnetic compatibility (EMC) components, which also belong to this segment, suppress high frequency electromagnetic radiation in electronic devices. The segment also includes transformers and other finished inductors made by
winding ferrite cores with wire, as well as some accessories.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Ceramic Components: Ceramic components are indispensable in automotive electronics and appliances as well as in telecommunications and entertainment electronics. They filter
electrical signals, measure physical quantities, such as temperature, and protect electronic circuitry against overvoltage and overcurrent. Our product portfolio in this segment covers surge arresters and switching spark gaps, sensors and sensor
systems, thermistors, varistors and a wide range of multilayer ceramic components, including piezo actuators and capacitors. They are used for applications in the mobile communications, automotive, industrial consumer and household electronics
markets.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Surface Acoustic Wave (SAW) Components: SAW components, together with integrated radio frequency modules and microwave ceramic components, are key components for modern
information and communications technologies. SAW components filter frequencies and have a decisive impact on picture and sound quality in TV and audio equipment as well as in mobile phones. Our subsidiary Crystal Technology, Inc. in Palo Alto,
California, is the world market leader in lithium niobate crystals and wafers, which are the raw materials for many SAW components.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We explain the basic functionalities of these different categories of electronic components and modules below under  The Electronic Components and Modules Industry. You can find more specific information about the types of
products we make and their typical applications below under  Products.

The following table shows the total sales
from continuing operations by segment in each of the last three fiscal years:

Total sales by segment



|                         |  |                                 |  |       |  |      
|------------------------ |  | ------------------------------- |  | ----- |  | -----
|                         |  | Fiscal year ended September 30,
|                         |  | 2006                            |  | 2005  |  | 2004 
|                         |  | (euro in millions)             
|Capacitors and inductors |  | 479.4                           |  | 419.2 |  | 431.3
|Ceramic components       |  | 421.0                           |  | 361.3 |  | 374.3
|SAW components           |  | 409.0                           |  | 369.5 |  | 449.7



-9-



---

##### Table of Contents

Our production and design facilities are located throughout Europe, the Asian region and the Americas,
and our sales network covers about 90 countries worldwide, either directly or through partners such as Siemens and independent agents. The table below shows net sales from continuing operations by region in each of the last three fiscal years:

Total sales by region



|              |  |                                 |  |       |  |      
|------------- |  | ------------------------------- |  | ----- |  | -----
|              |  | Fiscal year ended September 30,
|              |  | 2006                            |  | 2005  |  | 2004 
|              |  | (euro in millions)             
|Europe        |  | 753.5                           |  | 676.4 |  | 728.5
|Asia          |  | 388.0                           |  | 325.1 |  | 366.1
|United States |  | 79.6                            |  | 64.2  |  | 73.5 
|Other         |  | 88.3                            |  | 84.3  |  | 87.2 

The European market for electronic components and modules, which is characterized largely by
telecommunications and automotive and industrial electronics, experienced moderate growth both in Germany as well as in the other European markets in fiscal year 2004. In fiscal year 2005, however, sales in Europe decreased. EPCOS attributes this
mainly to inventory reductions in mobile phones and entertainment electronics products, while business in Germany remained more or less stable due to our strong position in industrial and automotive electronics. In fiscal year 2006, EPCOSs
sales in the European market for electronic components and modules increased again, largely on the basis of increased demand from customers in the automotive and industrial electronics industries.

Production of mass-market consumer goods and electronic data processing equipment has increasingly shifted to the Asian region over the last twenty
years, with many European companies transferring production to remain competitive with local producers. Electronic components and modules markets in the Asian region witnessed strong growth rates through 2004. In fiscal year 2005, inventory
reductions by manufacturers of mobile phones and entertainment electronics products, many of which are based in or manufacture in Asia, were principal factors contributing to a decline in sales. In fiscal year 2006, EPCOS again experienced strong
growth rates in the Asian region resulting from brisker business with manufacturers of mobile phones and entertainment electronics equipment. In the coming years we expect sales to continue to grow in this fast growing market. Consequently, we have
expanded our presence in this key growth region.

Following a decline in sales in fiscal year 2005, EPCOS experienced an increase in sales
in the North American market in fiscal year 2006. Although this region contributes a relatively small amount to our total sales, our business activities in this region remain very important as many American customers still develop most of their new
products and systems in this region.

Our product line is characterized by quality, technological sophistication and innovative design. We
focus our product development efforts on areas of particular importance to our key customers, such as modules (which integrate a variety of components in and on one substrate), piezo stacks (mainly for advanced fuel injection systems) and SAW
components for third-generation telecommunications equipment. We also offer commodity components to complete our product lines and to generate higher production volumes to benefit from the economies of scale.

We structure our product offering to meet the needs of the principal industry groups that we serve: telecommunications, automotive, and consumer and
industrial electronics. Some of these industries have a strong presence in our European home market and require increasing amounts of the technologically advanced electronic components and modules that form the core of our business. For instance, in
industrial electronics, greater use is being made of renewable energy sources, such as wind and solar energy, and demand for electronic components for the associated generators and control systems is rising.

Our customers include equipment manufacturers, as well as other companies that make component modules for equipment manufacturers. To satisfy customers
that increasingly seek to reduce the number of their suppliers, our strategy has traditionally been to offer one of the most comprehensive product lines in the industry. However, in recent years we have shifted our focus for



-10-



---

##### Table of Contents

certain products to customer- and application-specific solutions and have thus reduced our business with standard components. By streamlining our product
portfolios, we are gradually withdrawing from providing unprofitable standard products and increasingly seeking to offer new products, which usually have higher margins. See Strategy. By achieving a more balanced portfolio of products by
industries, we hope to become less dependent on any particular industry.

EPCOS produces an increasing number of products in cooperation
with joint venture partners as part of its strategy to achieve sustainable profitability and strengthen its market position. In January 2006, EPCOS established a joint venture with the Chinese conglomerate Xiamen Xindeco Co., Ltd. to manufacture
aluminum electrolytic capacitors, strengthening our position in the Chinese market. The capacitors manufactured by this joint venture will be marketed exclusively via the EPCOS sales organization. In August 2006, we entered into a cooperation
agreement with TAIYO YUDEN Co., Ltd., under which we obtain unfinished ceramic capacitors produced by Taiyo Yuden, process them further and sell them under the EPCOS brand. We expect that this cooperation will enable us to offer a more competitive
range of ceramic capacitors to customers in the automotive industry. Taiyo Yuden and EPCOS also plan to exchange know-how in specific areas of technology on the basis of licensing agreements.

We sell our products through our own sales network in most of Europe, North America, the Asian region and Brazil. Since October 2000, we have gradually
assumed from Siemens sales companies the responsibility for sales of our products in China, Finland, France, India, Japan, Sweden and the United Kingdom. In fiscal years 2002 and 2003, we expanded our sales network in Asia by establishing new EPCOS
subsidiaries in China and in Taiwan. In October 2004, we fully assumed the Siemens sales activities in Austria, Czech Republic and Hungary that focus on sales of our products in the South-East European markets. In some countries we continue to use
the Siemens group sales network. Sales to Siemens sales companies for resale have declined, from 38.0% of our net sales in fiscal year 2000 to 2.6% in fiscal year 2004, 1.0% in 2005 and 1.0% in 2006. In addition, sales made directly to third-party
customers but through the agency of Siemens sales agents accounted for 10.1% of our net sales in fiscal year 2006, 12.1% in fiscal year 2005 and 9.8% in fiscal year 2004. The impact of Siemenss sale of the mobile device business is minor.

Sales to Siemens for use in its own products accounted for 13.2% of our net sales in fiscal year 2006, 14.0% in fiscal year 2005 and 13.4%
in fiscal year 2004. No other customer accounted for more than 10% of our net sales in fiscal year 2006. Our ten largest customers in fiscal year 2006 were (in alphabetical order) Arrow (U.S.), Bosch (Germany), Flextronics (Singapore), Jabil (U.S.),
LG (Korea), Motorola (U.S.), Nokia (Finland), Samsung (Korea), Siemens (Germany) and Sony Ericsson (Sweden). These customers accounted for about 43% of our net sales in fiscal year 2006. For many of our customers, some or even most of our sales are
to one or more of their subsidiaries.

The Electronic Components and Modules Industry

The fundamental categories of electronic components include resistors, capacitors, inductors and filters. All of these are devices or combinations of
devices that offer resistance to an electric current. The resistance may depend on voltage, as in a varistor, or temperature, as in a thermistor. The resistance of an electronic component may also vary with the frequency of alternating current
applied to the device. As the frequency increases, the resistance may go down, as in a capacitor, or it may go up, as in an inductor. In a filter, it is lowest (or highest) around a specified frequency and higher (or lower) for other frequencies.

Capacitors consist essentially of two electrically charged surfaces called electrodes separated by an insulating material called a
dielectric. Capacitors can be used to store electrical energy and to modify the frequency or phase of electrical signals.

Inductors are
coils of wire wrapped around a core, which may be hollow or made of a metal or ferrite or another synthetic material. They can function as electromagnets or can use the relationship between electric and magnetic fields to couple parts of circuits to
each other or to change the voltage of alternating current, as in a transformer.



-11-



---

##### Table of Contents

Filters may be made as discrete devices or by combining one or more capacitors and inductors. Discrete
filters include microwave ceramic components, which use ceramics to filter electrical signals in the microwave part of the spectrum, and SAW, or surface acoustic wave components, which use crystals to filter radio frequency signals.

Modules are electronic circuits containing various kinds and quantities of discrete electronic components and, for specific units, also integrated
circuits in one surface-mountable package.

Virtually all electrical and electronic equipment contain electronic components or modules of
several of these types. As more and more systems, machinery and equipment become even more sophisticated, the need for electronic components and modules is expected to increase. The automobile industry, for example, has steadily increased the amount
of electronics used in a vehicle. The growth in mobile telecommunications has also increased consumption of electronic components and modules over the last several years as mobile phones are equipped with an increasing number of applications such as
cameras, Bluetooth and navigation functions. In the industrial electronics industry, demand is generally increasing for factory automation and measuring, testing, analyzing, process control and networking of production equipment. The demand for
consumer electronics, such as entertainment and household electronics, has also increased due to the sustained trend toward digital products for entertainment appliances and superior convenience offered by household appliances.

Makers of electronic components and modules comprise companies with diverse worldwide operations such as EPCOS and smaller companies that concentrate on
a particular geographic region or a particular product family or group. Very few of the other global companies produce a broad range of products covering all or nearly all of the categories mentioned above. Most producers instead focus on a limited
range of technologies or component types. Some companies that use electronic components and modules in their applications produce a portion of their own requirements in-house. Competition among electronic components and modules makers is based on
many factors, including price, design capabilities, quality and performance, service and ability to satisfy volume requirements on schedule. The most important competitive factor, however, has become total cost of ownership, which means the total
cost to the customer of using a particular manufacturers products. This concept includes not only the price of the component or module but also the cost and timeliness of delivery, the impact on customers design activities and all other
factors that affect customers costs relating to the use of the component or module. We believe that the range of technologies available to electronic components and modules manufacturers is becoming increasingly important as a competitive
factor, as it facilitates the development of new products integrating different technologies, thereby reducing the size and cost for particular modules or subsystems.

Customers for electronic components and modules mainly comprise manufacturers of electronic equipment for a broad variety of industries ranging from telecommunications to automobiles, consumer goods and industrial
equipment. Some products are further processed by third parties before being sold to equipment manufacturers. For example, producers of ferrite cores typically sell most of their output to other companies that process them into transformers and
other types of inductors.

Increasingly, electronic equipment vendors are outsourcing all or part of their manufacturing activities to
electronic manufacturing service (EMS) providers. Since such vendors typically continue to develop their own products, they rather than the EMS providers still determine the specifications for the electronic components and modules these products
will contain. The EMS providers then place orders for and receive deliveries of such components and modules. We have adapted our sales and logistic processes to this important trend and intend to take further measures in this regard in future.

Although consumption of electronic components and modules has been increasing over time, the market has experienced periods of decline,
reflecting the cyclicality of the markets for all the types of products that use electronic components and modules. As demand begins to decline in a downturn, purchases of electronic components and modules tend to fall rapidly because equipment
manufacturers wish to reduce their own inventories of components and modules as their needs decline. On the other hand, as equipment manufacturers perceive increases in demand for their own products, they tend to increase their stocks of electronic
components and modules rapidly so as not to



-12-



---

##### Table of Contents

risk being caught short as their suppliers come under pressure. This cycle is similar to the semiconductor cycle since a significant portion of the demand
for electronic components and modules is for products that are based on or incorporate semiconductors.

Throughout fiscal year 2006, demand
for electronic components and modules from all regions and industries remained strong. Pressure on component and module prices eased from quarter to quarter as manufacturing capacity in the components and modules industry was better utilized. In
fiscal year 2005, the electronic components and modules industry experienced weak demand, especially in the first half. EPCOS attributes this development in part to customers relatively high inventory levels resulting from very strong demand
in the first half of 2004. Orders for components and modules dropped sharply as a result, keeping capacity utilization in the electronic components and modules industry below satisfactory levels, which in turn drove prices down, before demand
rebounded in the second half of 2005. In 2004, the global economy improved on a broad front from the very weak market in 2002 and 2003, accompanied by a generally positive trend in demand for electronic components and modules from all industries and
regions. This led also to a better capacity utilization in our industry.

Most of the fundamental technologies used in the electronic
components and modules industry have been available for a long time. The market is nonetheless typified by rapid changes in product designs and technological advances allowing for better performance and/or lower cost. New applications are frequently
found for existing technologies, and new technologies occasionally replace existing technologies for some applications or open up new business opportunities in other areas of application. Successful innovation is critical for maintaining
profitability in the face of chronic erosion of prices for existing products. Since new generations of electronic equipment demand new and improved electronic components and modules, it is common for components, modules and equipment manufacturers
to work together on the design of new equipment. Manufacturers of electronic components and modules offer these services to promote the sale and use of their products.

One of the most important developments in the electronic components industry in the past twenty years has been the shift to surface-mounted devices. This trend has been driven by the semiconductor industrys
dramatic success in reducing chip size while increasing the number of transistors or other devices on a single chip. Their success in miniaturization has put pressure on the electronic components industry to make smaller components, arrays and
modules. Increasing automation in electronic equipment manufacturing at the same time has increased demand for sturdier and more easily mountable products. Advances in materials and manufacturing technologies over the last twenty-five years have
made it possible to produce sturdier and smaller electronic components that can be mounted rapidly and at high density directly on printed circuit boards using short electrodes in place of fragile wire leads. These features are especially useful in
mobile telephones, laptop computers and other applications that place a premium on small size, mass production and low cost. The increasing functionality of these devices may also call for a larger number of electronic components as well as further
miniaturization. Therefore, electronic equipment manufacturers are working closely together with electronic components and modules manufacturers to develop integrated electronic devices and system packages that are made up of a multitude of single
electronic components or component functions in one surface-mounted device (modules).

Strategy

We are a leading global designer and manufacturer of a broad range of electronic components and modules. Our business objectives are to maintain and
enhance our strong position in Europe and to further improve our position in the Americas and especially in the expanding markets of the Asian region. We seek to achieve competitiveness in the global marketplace and sustainable profitability. To
achieve these goals we have implemented an integrated strategy incorporating the following main elements:

Further increase
profitability by restructuring and relocating manufacturing operations.It is our goal to achieve long-term profitability. Part of this strategy involves streamlining our product portfolio to eliminate loss-makers and relocating
manufacturing operations for labor-intensive processes and products to lower-cost countries in Eastern Europe, India, Singapore, Malaysia and China. We are on an ongoing basis evaluating all of our manufacturing operations for cost-savings



-13-



---

##### Table of Contents

potential. In fiscal year 2006, we completed the sale of our loss-making tantalum capacitors business, decided to discontinue our UltraCap activities,
restructure our plant in Malaga and transfer production of capacitors from Spain and Brazil to China, India and Hungary. In the second quarter of fiscal year 2005, we closed our facility in Bordeaux, France. In our capacitor and inductors segment,
the main relocations in the past were from Heidenheim, Germany, to Szombathely, Hungary, and Gravataí, Brazil (aluminum electrolytic capacitors) and from Germany and France to the Czech Republic, India and Hungary (inductors and ferrites). In
ceramic components, we are relocating parts of our manufacturing operations from Deutschlandsberg, Austria, to Zhuhai, China and to the Czech Republic. In addition, manufacturing capacity was transferred from Germany to Singapore (SAW components).

Continue to focus on the fastest growing and technologically most sophisticated sectors within the electronic components and modules
industry.We intend to build on and further improve our technological competence and traditional strengths in designing and manufacturing electronic components and modules for the automotive, telecommunications, high-end industrial, and
consumer electronics industries. We also continuously seek to intensify our customer relationships with electronic manufacturing service (EMS) providers by, for example, offering outstanding logistical services. To gain market share and to take
advantage of the further need for miniaturization in the mobile telecommunications industry, we are improving our product offering for SAW components and modules. To capitalize on the trend towards increased use of electronics in the automotive
industry, we are increasing the performance of a variety of our capacitors and ceramic components and are offering new solutions, such as for fuel injection and various sensor applications. We are enhancing our product offerings for applications in
the evolving markets for digital media and optical communication networks. We intend to continue to identify and exploit opportunities in these and other rapidly growing markets. We explain these products and applications in more detail below under
 Products.

Develop advanced components, modules and integrated solutions.Our business is characterized by
an increasing rate of technological change. New products are increasingly important contributors to our sales volumes. In fiscal year 2006, sales of new products increased by 30%. We believe that the diversity of our product portfolio, the
applications and industries we serve, the technologies we master and our intense and ongoing dialogue with customers help us to identify promising development opportunities and to act on them quickly. For example, we offer ceramic technologies that
allow us to put increasing numbers of electronic components on and in a single small module, which is known as integration. Combined products and integrated solutions are becoming increasingly important to our business. These modules
generally tend to be considerably more reliable than the large number of discrete components used in the past and fewer components also mean more efficient production and logistical processes. Our multilayer ceramic technology has enabled us to
develop a whole series of new multilayer ceramic components and modules. We have also expanded our production of piezo ceramic components for diesel fuel-injection systems and commenced shipment of piezo actuator for gasoline injection systems. Our
product development efforts also include new temperature-sensing systems for automotive applications and new materials for capacitors and ferrites. We intend to continue to focus our research and development efforts on adapting quickly to new
technological trends and on improving our position in high growth markets. We describe the products and technologies that we believe have particularly promising market potential in greater detail under  Research and
Development below.

Strengthen market positions in growth regions and traditional markets.We are especially focused on
expansion in sales in the worlds growth regions, particularly China, India and the Southeast Asian region. We have been increasing both the size and the level of professional qualification of our sales force as a means of improving sales
growth. In tandem with our customers, we are increasingly globalizing our production by shifting some of our operations to Asia and Eastern Europe. In addition to this relocation process, we have continued our efforts to train our personnel and our
subcontractors and to increase our engineering staff and know-how at our lower-cost sites. At the same time, however, we seek to continue to grow in the traditional markets in which we are already well established and occupy strong market positions.
Accordingly, we plan to continue our expansion into Eastern Europe.



-14-



---

##### Table of Contents

Strengthen position with joint ventures and strategic partnerships. EPCOS seeks to compete
successfully in the global marketplace by producing an increasing number of products in cooperation with other companies. These projects are intended to help EPCOS gain a stronger foothold in Asia and reinforce its position in certain technology
sectors. In 2004, we set up a joint venture with the Chinese components manufacturer Jiangsu Baotong Electronic & Technology Co., Ltd. to manufacture SAW filters mainly for use in television sets, strengthening our position in Chinas
rapidly expanding consumer electronics market. In January 2006, we established a joint venture with the Chinese conglomerate Xiamen Xindeco Co., Ltd. to manufacture aluminum electrolytic capacitors. This joint venture reinforces our presence in the
fast growing Chinese market. Capacitors manufactured by this joint venture will be marketed exclusively via the EPCOS sales organization. In August 2006, we entered into a cooperation agreement with TAIYO YUDEN Co., Ltd., under which EPCOS obtains
unfinished ceramic capacitors produced by Taiyo Yuden, processes them further and sells them under the EPCOS brand. EPCOS intends to further strengthen its position in Asia by acquiring companies, launching new joint ventures and pursuing new
strategic partnerships.

Deliver customer-oriented innovation and service and develop application-specific products.We
strive to anticipate our customers needs faster than our competition through continuous dialog and close collaboration during all stages of the design and production process. To satisfy the high technical performance requirements of our
customers, we focus on innovative products tailored to meet their needs. Most of our sales force consists of qualified engineers, and their understanding of our products and customers design needs forms a significant part of our close
technical cooperation with our customers. We believe that application-specific products may be more resistant to price erosion than standardized components. By focusing on this higher margin business, we also seek to capitalize on our strengths in
innovation and design.

Improve customer satisfaction. Customer satisfaction is an important element in improving our market
position and competitiveness. Quality is key to our success, in particular in the growing market for automobile electronics due to the risk of vehicle failure. The automobile industry sets increasingly higher quality standards, which are passed on
to suppliers to the industry. In response to this development, in fiscal year 2004, we launched a company-wide quality program which aims to make EPCOS a zero-defect company. In fiscal year 2005 the quality program began to show positive results,
and in fiscal year 2006 further progress was made, moving us closer, we believe, to our goal of becoming a zero-defect company.

Accelerate our cost reduction program.Success in our business requires a continuous focus on cost reduction and productivity improvement. In Spring 2001, in response to deteriorating conditions in our industry, we introduced
a cost-cutting program. We intensified this program during fiscal years 2002 and 2003 as the world economy and electronic equipment market failed to recover. In fiscal year 2003, we combined all of our cost-cutting activities under the program
COMPETE, which also includes a company-wide campaign to deploy the six sigma methodology. In 2004, we completed the implementation of this campaign at all major EPCOS sites worldwide. In addition, we further reduced the number of our employees in
countries with relatively high labor costs in the past three fiscal years. To maintain our competitive strength, we continue to optimize our advanced manufacturing processes, intensify our efforts to reduce the cost of materials and to reduce costs
by further increasing the efficiency of our production and logistics processes at all our facilities and throughout the supply chain.

Reduce our exposure to demand cycles.We aim to reduce our exposure to the effects of individual industry business cycles on our operations, for example, by outsourcing selected labor intensive processes to subcontractors,
which reduces our manufacturing costs and increases our flexibility to react to demand cycles. Through our complementary portfolio of products designed for the automotive, telecommunications, industrial, electronic data processing and household and
consumer electronics industries, we serve a wide range of customers, thereby limiting our susceptibility to industry-specific demand cycles.



-15-



---

##### Table of Contents

Products

We offer an extensive line of electronic components and modules, aimed at providing our customers with both standardized and custom products for a wide range of applications across different industries. The following sections describe the
main product families for each of our three segments and some of their typical applications. We discuss the major customers and markets for each segment in more detail under  Customers and Markets and the key manufacturing
locations for each segment under  Description of Property.

Capacitors and Inductors

Our capacitors and inductors segment includes three capacitor product families (film capacitors, power capacitors and aluminum electrolytic capacitors)
and a broad range of soft ferrite cores for inductors, transformers, other finished inductors and EMC components.

The various capacitor
product families are distinguished mainly by how they are manufactured and the material they use as a dielectric, although power capacitors, which use a variety of dielectrics, differ from other families mainly in their applications.

Our inductor products include a broad range of standardized and custom-made soft ferrite cores for inductors, transformers and other finished inductors
made by winding ferrite cores with wire (e.g., copper-wire), as well as EMC components. Ferrite is a versatile magnetic material made from iron oxide and other metallic oxides. Ferrite cores concentrate electromagnetic energy and thereby
improve efficiency and reduce weight in transformers and other electrical devices using inductors. In contrast to hard ferrites, which are permanent magnets, soft ferrites are magnetic only when exposed to an alternating electric current. EMC
components consist of specialized inductors and capacitors or filters combining inductors and capacitors. EMC components are generally used to enhance the performance of electronic equipment, to reduce electromagnetic interference generated by
electronic equipment and to protect electronic equipment and electrical circuits from interference.

As part of our efforts to streamline
our product portfolio in fiscal year 2006, we sold our tantalum capacitors business to Kemet Corporation, a U.S. manufacturer of capacitors (see above under  Description of Business) and decided to discontinue our UltraCaps
activities by March 31, 2007. Ultra capacitors (UltraCaps) are storage devices that possess extremely high capacitance values combined with relatively low internal resistances. They have applications in power supplies, automotive electronics,
and industrial applications. Our decision to withdraw from these activities was triggered by deteriorating prospects for successful high-volume marketing of these double-layer capacitors. Furthermore, the need for significant additional investment
for the development of these products was foreseeable, but no longer economically justifiable.

We believe that we are the worlds
largest manufacturer of power electronic capacitors and that we have the largest market share for aluminum electrolytic and film capacitors in Europe. In 2003, we entered into a cooperation agreement with Continental Temic for the development of
components for power electronics in future hybrid vehicles. We believe that this cooperation will enable us to attain a good position for the delivery of power capacitors to the automobile industry.

We believe that in terms of technology, we are one of the leading manufacturers of ferrite cores worldwide and, in terms of sales and technology, the
leader for EMC components in our European home market. We emphasize high-performance products that make use of our traditional strengths in materials design. Our high-performance products include cores for telecommunications applications.

The following table shows some examples of the industries that use our capacitors, ferrite cores and inductive ferrite components and
typical applications for each product family, and are listed in order of their contribution to our fiscal year 2006 net sales.



-16-



---

##### Table of Contents

|                                 |  |                                                    |  |                                                                                                      
|-------------------------------- |  | -------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------
|Product family                   |  | Industries                                         |  | Applications                                                                                         
|Aluminum electrolytic capacitors |  | Industrial electronics                             |  | Drives, inverters, uninterruptible power supplies (UPS) and switch-mode power supplies.              
|                                 |  | Automotive electronics                             |  | Diesel and gasoline injection, electronic power steering, airbag and fan control.                    
|                                 |  | Consumer electronics                               |  | TV, video, audio and white goods.                                                                    
|                                 |  | Lighting                                           |  | Energy-saving lamps, electronic ballasts, high intensity discharge (HID) lamps and fluorescent lamps.
|                                 |  |                                                   
|Film capacitors                  |  | Lighting                                           |  | Energy saving lamps, electronic ballasts and fluorescent lamps.                                      
|                                 |  | Consumer electronics                               |  | Multimedia and switch-mode power supplies.                                                           
|                                 |  | Automotive electronics                             |  | Motor management systems, EMC protection and high intensity discharge (HID) lamps.                   
|                                 |  | Industrial electronics                             |  | Drives, inverters, uninterruptible power supplies (UPS) and switch-mode power supplies.              
|                                 |  |                                                   
|Power capacitors                 |  | Traction systems                                   |  | Electric locomotives.                                                                                
|                                 |  | Electrical power distribution                      |  | Power-factor correction.                                                                             
|                                 |  | Consumer electronics/Home appliances               |  | Air conditioners, washing machines and refrigerators.                                                
|                                 |  |                                                   
|EMC components                   |  | Automotive electronics                             |  | Engine management, airbags and antilock braking systems.                                             
|                                 |  | Industrial and consumer electronics and appliances |  | Switch-mode power supplies, EMC protection and lighting systems.                                     
|                                 |  | Telecommunications                                 |  | Base stations and xDSL.                                                                              
|                                 |  |                                                   
|Ferrites                         |  | Telecommunications                                 |  | Advanced digital transmission technologies.                                                          
|                                 |  | Industrial electronics                             |  | Switch-mode power supplies.                                                                          
|                                 |  | Lighting equipment                                 |  | Transformers for electronic ballasts.                                                                
|                                 |  | Automotive electronics                             |  | Theft protection systems.                                                                            

Our aluminum electrolytic capacitorshave many industrial applications in the power supply
and power electronics fields. The substantial majority of our aluminum electrolytic capacitors are designed for use in drives and switch-mode power supplies for the industrial and consumer electronics industries, as well as for other applications in
traction systems and lighting. In automotive electronics, aluminum electrolytic capacitors are suitable, among other things, for electronic power steering and fan control. Aluminum electrolytic capacitors use thin foils of very pure aluminum as
their positive electrodes. The specific electrode surface area is increased by electrochemical etching. This large surface area, combined with an ultra thin aluminum oxide dielectric, enables us to produce very compact, light-weight and especially
reliable capacitors. In January 2006, we started a joint venture with Xiamen Xindeco Co., Ltd. for the manufacture of aluminum electrolytic capacitors in Xiamen, China. EPCOS holds a 60% stake in the joint venture, and we expect that the joint
venture will enable us to accelerate our progress in sourcing and improve our competitiveness and market position in the rapidly growing local Chinese market.

Our film capacitorscover a wide variety of applications. They are typically used in picture tube TVs and computer monitors, voltage converters and switch-mode power supplies. Switch-mode power supplies consist
mainly of transformers that lower the voltage for electronic circuits. Capacitors enable these devices to use smaller and lighter transformers, saving space and weight. In the lighting area, capacitors are present in nearly all energy saving lamps
and are used for energy storage and voltage stabilization in special electronic devices that are called electronic ballasts for fluorescent lamps. Another growing field of application is automotive electronics, where film capacitors can
be



-17-



---

##### Table of Contents

found in motor management systems and ignition circuits for xenon headlight lamps. Film capacitors are also useful for radio interference suppression
applications in various kinds of equipment.

Our power capacitorsare used in electric locomotives and other traction systems that
convert electrical power into mechanical energy on a large scale in industrial equipment. Power capacitors are also used to improve the power quality and reduce energy losses and consequently the cost of power distribution (power-factor correction).
AC film capacitors are used for home appliances in air conditioners, washing machines and refrigerators, among other things. They are also used in modern high intensity discharge (HID) lamps for street, tunnel, and industrial lighting as well as in
fluorescent lamps. We are also developing capacitors for hybrid vehicles.

Our EMC components cover a wide range of sizes, ranging
from surface-mounted inductors to large models for high-current applications. They can be used to suppress high-frequency radiation in electrical systems of automobiles, in starters for fluorescent lights, color televisions, disk drives, elevators,
lasers, telecommunications, electronic data processing equipment and many other systems and devices. EMC components are frequently used to bring electronic equipment into compliance with regulations that limit radio frequency emissions.

Given their versatility, ferrite materials have a large number of industrial and consumer applications. Their efficiency at very high signal
frequencies makes inductors with ferrite cores ideal for applications such as digital signal processing in mobile phones. High-frequency applications include advanced digital transmission technologies including asymmetric digital subscriber lines
(ADSL), a digital telecommunications standard for voice and data that complements and enhances the integrated services digital network (ISDN). Ferrites are also widely used in transformer cores, power supplies for home and office electronics
products, noise filters and many other circuit components, and can be used in inductors for suppressing electromagnetic interference in electronic devices.

For signal, filtering and power applications, we are working to reduce the size of our ferrite products while maintaining their performance by improving the shapes of the ferrite cores and the performance of our
ferrite materials. This size reduction allows our ADSL-customers, for example, to increase the number of transmission lines per line card.

Ceramic
components

The main product types of our ceramic components segment are thermistors, multilayer ceramic capacitors, varistors,
piezo stacks, switching spark gaps and surge voltage arresters. The first four product families comprise components that make use of the physical properties of ceramics, while our switching spark gaps and surge voltage arresters are mainly made of
gas-filled ceramic tubes. Like varistors, when voltage exceeds a safe level they divert power surges away from electronic equipment to protect it from damage.

Our ceramic components segment is one of the global market leaders in the design and production of ceramic electronic devices. We believe that our ceramic components product line is one of the industrys most
comprehensive, and we cover all of the most significant applications for each of our markets, including the mobile communications and automotive, industrial, consumer, and household electronics industries. We believe that in terms of market share we
are the leading global manufacturer of thermistors, varistors and gas-filled surge voltage arresters and the sole large scale manufacturer of piezo stacks. We support our customers intensively by designing products to meet their specific needs and
aiding them with product applications. We believe that our expertise in mixing our own ceramic powders as well as our in-house powder manufacturing give us an important financial and technical advantage over most of our competitors.

Important developments in the ceramic components segment include the development of Cera Diodes, which protect sensitive electronic components and
modules in televisions, DVD players and notebooks against electrostatic charges, thermistors that can control evaporation in systems such as automotive air conditioners, and multilayer varistor arrays for applications requiring miniaturization.
Using surge voltage arrester technology, we have developed switching spark gaps for use in high-intensity discharge automobile headlights and high-intensity xenon professional projectors. Our



-18-



---

##### Table of Contents

surface-mounted product range includes multilayer ceramic capacitors, thermistors and varistors. We are especially strong in energy varistors, which are used
to protect power lines from lightning.

The following table shows some examples of the industries that use our ceramic components and surge
voltage arresters and typical applications for each type of product:



|                              |  |                                                                  |  |                                                                                   
|----------------------------- |  | ---------------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|Product family                |  | Industries                                                       |  | Applications                                                                      
|Piezo stacks                  |  | Automotive electronics                                           |  | Fuel injection systems.                                                           
|                              |  |                                                                 
|Surge voltage arresters       |  | Automotive electronics                                           |  | High intensity headlights.                                                        
|                              |  |                                                                 
|Thermistors                   |  | Automotive electronics Home appliances                           |  | Heating systems, Sensors.                                                         
|                              |  |                                                                 
|Varistors                     |  | Automotive electronics Telecommunications Power transmission     |  | Airbags and engine control units. Telephone line
protection. Lightning protection.
|                              |  |                                                                 
|Multilayer ceramic capacitors |  | Automotive electronics Telecommunications                        |  | Engine management. Mobile telephones: decoupling
and EMI protection.              
|                              |  |                                                                 
|Switching spark gaps          |  | Automotive electronics Telecommunications Industrial electronics |  | High intensity discharge (HID) lamps. Telephone
exchanges. Surge protection.      

Our piezo stacksbelong to the family of multilayer ceramic components. If a voltage is
applied to a piezoelectric crystal, its dimensions change. Piezo stacks boost the efficiency of modern common rail diesel injection systems. They are currently mainly used in injection systems made by Siemens AG  Siemens VDO Automotive and
Bosch in Germany. We believe that they may become an industry standard within a relatively short period of time. Advantages are improved combustion of fuel, higher efficiency and 15% lower fuel consumption, substantially reduced exhaust emission and
reduced noise emission. It is anticipated that the number of units to be supplied will increase significantly through 2008. We started production of piezo actuators for Bosch gasoline injection systems in 2004, and for Siemens gasoline injection
systems in fiscal year 2006.

Our surge voltage arrestersprotect people, industrial installations and equipment from injury and
damage caused by power surges. Typically used together with PTC thermistors and varistors, surge voltage arresters react more quickly to power surges but divert less current. Therefore, in optimized systems, a cascade of PTC thermistors, varistors
and surge voltage arresters is used to take advantage of the way in which the physical properties of these products complement each other.

Our thermistorsinclude ceramic temperature sensors, heating elements, overload protectors and switching elements. Ceramic temperature sensors are known as NTCs, which stands for negative temperature coefficient, since their
resistance decreases as temperature increases. The decrease of the resistance of the NTC ceramic material results from the increasing number of conductive electrons correlating to the temperature. PTC stands for positive temperature coefficient,
since the relationship is the opposite to NTCs. For PTCs, with increasing temperature, the resistivity is rising. Thermistors are used for measuring and controlling temperature in automobile engines and home appliances, to restrict temperature
variations in sensitive electronic equipment and to demagnetize color television picture tubes to maintain picture quality. Moreover, PTC thermistors are widely used as resettable fuses and as motor start PTCs in compressor motors. Many thermistors
are custom-designed and application-specific.

Our multilayer ceramic capacitors, or MLCCs, are high-volume, high-quality commodity
products that are manufactured mainly as surface-mounted devices for applications requiring small size, low cost and durability. For example, MLCCs are used in mobile communications and consumer electronics applications requiring miniaturization. In
automotive electronics, however, MLCCs are suitable for high-temperature applications near the engine or transmission. Our customers also use them in large numbers to protect semiconductors and to filter signals for processing by semiconductors.
Multilayer technology may be used to create new innovative and potentially successful products such as multilayer ceramic modules called Low Temperature Co-fired Ceramics (LTCC) and piezo stacks. In fiscal year 2005, we realigned our product
portfolio of multilayer ceramic capacitors and are gradually withdrawing from more unprofitable standard products. We are now focusing instead on automotive electronics and on our home region in Europe. In fiscal year



-19-



---

##### Table of Contents

2006, we entered into a cooperation agreement with Taiyo Yuden, a Japanese company that is the worlds third-largest manufacturer of these products and
one of the innovation leaders in the field. We expect that this cooperation will enable us to expand our portfolio of ceramic capacitors, especially for automotive applications.

Our varistorsare used mainly to protect electronic devices and infrastructure as well as electronic circuits against power surges or
electrostatic discharge. Lightning, uneven power transmission or the startup of heavy equipment can cause damaging power surges. Electrostatic discharge is the sudden discharge of static electricity, and can cause damage to all kinds of electronic
circuits.

Switching spark gapsare powerful switches which can transmit energy stored in capacitors with low losses. They can be
used in all applications where a high voltage impulse needs to be generated, mostly for high intensity discharge (HID) lamps in automotive applications and overhead projectors.

Surface acoustic wave components

Surface acoustic wave (SAW) components and bulk acoustic
wave (BAW) components employ acoustic waves to filter radio frequency electrical signals. For many applications, SAW and BAW devices offer smaller size, higher frequency selectivity, better stability and lower cost than alternative signal processing
and filtering technologies. Their high selectivity facilitates the efficient utilization of todays crowded electromagnetic spectrum for applications using radio frequency signals.

SAW components use piezoelectric crystals to convert electromagnetic signals into mechanical waves and vice versa. A piezoelectric crystal is a crystal
that will vibrate when stimulated by an electrical signal. Through careful design and manufacturing of the crystals and especially of the electrodes carrying current to and from the crystal, SAW components can be made to respond selectively to
specific frequencies and act as filters or resonators. We believe that having our own in-house supplier of lithium niobate wafers gives us an important competitive advantage in the SAW components market.

We have introduced a new type of SAW package in response to the need for miniaturization in applications such as mobile telephones, the Chip-Sized SAW
Package (CSSP). The CSSP is nearly as small as the crystal chip itself, allowing our customers to reduce the size of their products and their production costs. We are currently introducing the third generation of the CSSP technology. We have also
developed surface-mounted SAW filters for a variety of consumer electronics applications. Our switchable SAW filters allow the filter characteristics to be selected to accommodate two or more different transmission standards, thereby reducing the
number of discrete filters required.

BAW resonators use acoustic waves that propagate between the top and bottom surfaces of a thin-film
piezoelectric structure and then traverse the entire thickness of the piezoelectric bulk. The waves are excited by metal electrodes attached to both sides of the piezoelectric layer. BAW filters and duplexers are based on thin-film deposition
technologies. We utilize SMR-technology (Solidly Mounted Resonator), a layer stacking concept which is similar to the Bragg reflector technique used in optics, as this allows us to use standard thin-film technology from semiconductor fabrication.
The carrier substrate for BAW devices is silicon wafers of high ohmic resistance and a protective passivation layer of dielectric material covers the top surface of the resonator.

BAW technology combines the benefits of SAW and microwave ceramic filters and duplexers, offering more performance in less space. BAW filters have lower
electrical losses in the passband (the portion of the spectrum that is transmitted with minimum relative loss by a filter) than SAW filters, with values comparable to those of larger microwave ceramic filters. However, BAW filters have a degree of
miniaturization similar to that of SAW filters, significantly smaller than microwave ceramic filters. BAW filters also have a substantially higher power compatibility than in SAW filters and have extremely steep slopes.



-20-



---

##### Table of Contents

To support our customers efforts toward further miniaturization and functional integration, we have
developed devices with multiple filter functions in a single package, such as dual-band and triple-band filters and duplexers. Duplexers are combinations of filters that enable mobile phones to transmit and receive simultaneously without a switch.
The SAW components segment also produces modules for application in mobile telephones that integrate switches, radio frequency filters and electronic components on multilayer ceramic modules called Low Temperature Co-fired Ceramics (LTCC), which are
manufactured in-house by our ceramic components segment. Furthermore, radio frequency modules are developed and produced for the use in various applications ranging from mobile communications applications to wireless LAN modules for notebooks.

EPCOS is the world market leader in the design and production of SAW devices. We believe that we design and manufacture the broadest
product range of any company manufacturing SAW devices and that our products cover most price and performance levels for nearly all existing applications. We pioneered the widespread application of SAW technology in consumer electronics. We have
generated an increasingly significant portion of our net sales by entering new markets for our products, including keyless automobile locks and alarm systems in 1990, mobile telephones in 1992, mobile communications base stations in 1996 and
wireless tire pressure monitoring systems in 2001. In the last three fiscal years, we have focused on combining our integrated electronic circuits with our SAW technology to provide complete solutions, such as ESD/EMI front-end modules for the use
ranging from mobile communications applications to wireless LAN modules for notebooks. Future applications are expected to include multimedia and mobile communications applications such as mobile phones, digital cameras, MP3 players and gaming
consoles. Our competitive strength in the area of fast design and our reputation for consistently high technical performance have enabled us to become the market leader in several of the applications for which we manufacture SAW devices. With our
production and design facilities in Munich (Germany), Singapore, Deutschlandsberg (Austria), and Wuxi (China) we are able to work closely with our customers to quickly design products to their specifications and produce them in locations close to
our customers and at lower cost. This allows us to customize products and to deliver them more quickly than many of our competitors.

In
July 2004, we set up a joint venture with the Chinese components manufacturer Jiangsu Baotong Electronic & Technology Co., Ltd. to manufacture SAW filters mainly for use in television sets. This joint venture strengthens our position in
Chinas rapidly expanding consumer electronics market. In addition, this cooperation will enable us to take greater advantage of the significant growth potential of local Chinese consumer electronics manufacturers.

The following table shows some examples of the principal industries and applications that use our SAW components:



|                       |  |                                                                                                              
|---------------------- |  | -------------------------------------------------------------------------------------------------------------
|Industries             |  | Applications                                                                                                 
|Telecommunications     |  | Mobile telephones and base stations for cellular networks, cordless telephones and wireless LAN applications.
|Consumer electronics   |  | Television sets, video and digital video disk recorders, digital set-top boxes and tuners.                   
|Automotive electronics |  | Keyless entry devices and tire pressure monitoring systems.                                                  

We design and manufacture SAW devices for use as filters in mobile and cordless telephones,
pagers, and short-range radios. Mobile communications base stations are also an important application for our SAW components. Here we can offer price/performance optimized solutions by making application-specific designs and using the mass
production technologies we have developed for mobile telephone components.

Our SAW devices for consumer electronics cover the entire range
of price and performance for television receivers, video and digital video disk recorders, satellite receivers, multimedia and cable television set-top boxes, and television transmitters.

A smaller, but growing, application for our SAW devices is in keyless entry systems for automobiles. These small remote control devices can be attached
to a key and use SAW devices to create, transmit, and receive a radio frequency signal that allows the user to lock or unlock a car or to



-21-



---

##### Table of Contents

turn its alarm system on or off from a distance. We are working to reduce the size of our SAW devices for this market to allow our customers to produce
smaller remote control devices at lower cost. One recent application in the automotive industry is air pressure control devices for use in tires.

Sales
and Marketing

We sell our products through our own sales network in Austria, Czech Republic, Germany, Hungary, Scandinavia, the United
Kingdom, France, Turkey, North America, the ASEAN (Southeast Asian) region, Japan, India, China, Taiwan and Brazil. In other countries in Europe and around the world (e.g., Belgium, Italy, Spain, Poland, the states of the former Soviet Union,
and Egypt), we use the Siemens group sales network. The portion of our sales handled by Siemens sales companies has, however, been decreasing in recent years. Sales to Siemens sales companies for resale accounted for 1.0% of our net sales in fiscal
year 2006. In addition, sales made directly to third-party customers but through the agency of Siemens sales agents accounted for 10.1% of our net sales in fiscal year 2006. The majority of Siemens sales personnel responsible for selling our
products are dedicated exclusively to this activity.

The majority of our sales force are qualified engineers and have the expertise to
understand both our products and processes and those of our customers. Typically, a substantial portion of their compensation is performance-based. We also sell our products to smaller customers and in regions where business volume is limited
through independent distributors, agents and representatives. Sales through distributors represent less than 15% of our net sales. Each of our segments has its own marketing organization, which is responsible for pricing and strategy and
identification of trends and innovations. Our headquarters in Munich coordinates our worldwide sales operations, and we provide key account coordination for multinational customers.

We strive to develop and strengthen long-term relationships with our customers by providing strong technical support and responding quickly to their
needs. Our sales to major customers are typically covered by annual contracts establishing a framework for determining volumes and prices. Many of our customers regularly provide us with forecasts so that we can better plan our production schedule
and better accommodate their volume and timing needs. In many cases, we offer customers consignment stocks or just-in-time delivery.

Our
worldwide sales and marketing network enables our customers to save time and money by consolidating their electronic components and modules purchases. Using a single sales network for all our products helps us to identify cross-selling opportunities
and develop close customer relationships that help us stay informed of customers needs and design products to their specifications. We believe that our reputation for quality service and technical support are important factors for our
customers in selecting our products.

For additional information on our segments and the sales allocable to them, see Note 24 to the
Consolidated Financial Statements.

Customers and Markets

We sell our products globally to a broad range of industries including telecommunications and automotive, consumer and industrial electronics. In recent years, we have diversified our customer base and expanded the
range of and applications for our products. Our segments share many of the same customers and markets, although market conditions and our market shares vary to some extent from segment to segment. Most of our customers are manufacturers of
electronic equipment.

Our ten largest customers accounted for about 43% of our net sales in fiscal year 2006. Purchases by the Siemens
group for use in its own products accounted for 13.2% of our net sales for fiscal year 2006. As noted above under Sales and Marketing, sales to Siemens sales companies for resale accounted for an additional 1.0% of our net sales in
fiscal year 2006. In addition, sales made directly to third-party customers but through Siemens sales agents accounted for 10.1% of our net sales in fiscal year 2006. No other customer accounted for more than 10% of our net sales in fiscal year
2006. The following table shows the most significant customers for each segment. However, they may vary considerably from product family to product family within the segments.



-22-



---

##### Table of Contents

|                         |  |                                                                                                                                                                                                       
|------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Segment                  |  | Principal customers (in alphabetical order)                                                                                                                                                           
|Capacitors and inductors |  | Arrow (U.S.), Bosch (Germany), Ericsson (Sweden), Hella (Germany), Nokia (Finland), Osram (Germany), Philips (Netherlands), Pulse (U.S.), Siemens (Germany), Toshiba (Japan) and Valeo
(France).      
|Ceramic components       |  | Arrow (U.S.), Behr (Germany), Bosch (Germany), David & Baader (Germany), Delphi (U.S.), Nokia (Finland), Siemens (Germany) and Valeo (France).                                                        
|SAW components           |  | Elcoteq (Finland), Ericsson (Sweden), Flextronics (Singapore), LG (Korea), Motorola (U.S.), Murata (Japan), Nokia (Finland), Philips (Netherlands), Samsung (Korea), Sony (Japan) and Vestel
(Turkey).

Capacitors and inductors.With regard to our aluminum electrolytic capacitors business, we
have our highest market shares in Europe, where industrial electronics markets have traditionally been strong. Our sales of EMC components are also strongest in Europe, due to the traditional strength of the European automotive electronics market.
We expect much of our future growth in the business to come from automotive electronics applications.

Finished products incorporating our
ferrite cores are used predominantly in the telecommunications and industrial electronics industries. While our ferrite core market shares vary by region and product family, we are strongest in Europe. To expand our ferrite core market share in
Asia, we are increasing our production at our facilities in India and China.

Ceramic components.This market is particularly
diverse, reflecting the many different types of ceramic components we produce and their wide variety of applications. During the last four years, we have experienced a decrease in the demand for fixed-line telecommunications. Demand from the
automotive sector, however, rose at the same time, due to the increasing use of electronic systems in automobiles. Technological improvements as well as increased sales in home electronics, office electronics and domestic appliances have also
contributed to the rise in demand for ceramic components. We believe we are the world market leader in the design and production of thermistors, varistors, piezo actuators and surge voltage arresters.

SAW components.We design and manufacture a wide variety of technologically advanced, competitively priced filters for use at every level in the
mobile communications market. Our consumer electronics customers primarily produce goods for the mass market, mainly television sets. SAW filters are a key component in these products and directly affect the picture and sound quality of their
products. We believe that, based on sales in SAW filters, we are the world market leader in surface acoustic wave technology.

Competition

We face intense competition in our markets from many companies based throughout the world, most specializing in certain technologies,
regions or product lines and applications. Competition is particularly dispersed for ceramic components, which encompasses a wide variety of product families and applications. Very few of our competitors are global in scope or offer as broad a line
of electronic components and modules as we do. We are one of the few companies in the industry to offer one-stop shopping opportunities. Our current and potential competitors also include some customers who use our components in the manufacture of
their products and who have or may develop the ability to produce electronic components internally.

While the weighting of the relevant
factors affecting competition varies by product family and application, we believe that competition in our markets is driven primarily by the ability to design and deliver a broad range of price-competitive, high quality, innovative,
high-performance products in sufficient quantities and in a timely manner. Other factors affecting competition include the quality of customer service and technical support and the ability to design products rapidly to customer specifications.
Innovation in product design is an important competitive factor in most of our product families. Film and multilayer ceramic capacitors and products in some of our other product families tend to be more standardized, making cost and speed of
delivery the most significant competitive factors. As for the remaining standard products in our portfolio after the sale of the tantalum business,



-23-



---

##### Table of Contents

EPCOS intends to focus more on specific markets and application-specific products, for example, for automotive electronics customers. Since many of our
competitors are based in Japan, the United States and Asia (especially China), the value of the Japanese yen and of the U.S. dollar versus the euro has a significant impact on our competitiveness. In this context, the persistent weakness of the U.S.
dollar plays an important role since the market for electronic components and modules is essentially dollar-based around the world, even within the euro zone. This factor has had a negative impact on market prices. In fiscal year 2006, the
devaluation of the U.S. dollar and the Japanese yen against the euro continued to give our Japanese and U.S. competitors cost and competitive advantages and resulted in increased price pressure for us.

Many of our current and potential competitors have entrenched market positions, established patents and intellectual property rights and substantial
technological capabilities. Increased competition could reduce our revenues and profitability by reducing demand for our products or forcing us to lower prices. We contend with competition from companies promoting alternative technologies that may
render some of our products or product applications obsolete.

The intense competition of Asian (in particular, Chinese) manufacturers
offering aggressive pricing in our European home-market continued in 2006. Some of these manufacturers offered their products at extremely low cost causing a drastic price erosion. This trend may continue in the coming years.

Our principal competitors vary by segment, by product family and application within the segments. The following table shows our key competitors for each
segment.



|                         |  |                                                                                                                                                                                                            
|------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Segment                  |  | Competitors (in alphabetical order)                                                                                                                                                                        
|Capacitors and inductors |  | Arcotronics (Italy), AVX (U.S.), Ferroxcube (Netherlands), Nichicon (Japan), Panasonic (Japan), Pulse (U.S.), Rubycon (Japan), Schaffner (Switzerland), Taiyo Yuden (Japan), TDK (Japan) and
Vishay (U.S.).
|Ceramic components       |  | AVX (U.S.), Murata (Japan), Panasonic (Japan), Shibaura (Japan), Taiyo Yuden (Japan) and TDK (Japan).                                                                                                      
|SAW components           |  | Fujitsu (Japan), Murata (Japan), Panasonic (Japan) and Sawtek (U.S.).                                                                                                                                      

Research and Development

We believe that innovation is the foundation for our companys success. Our customers will, we believe, continue to demand improved product performance, products designed to their specifications, and lower
product costs. We believe that our success depends on our ability to successfully meet those demands and to identify new markets and applications and to implement the necessary technologies and processes quickly. Our research and development
departments cooperate closely with many renowned research institutions and universities around the world.

Our research and development
efforts are based on the following principles:



| |  |  | close cooperation with customers that are the technological leaders in their own field;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | focus on specific applications for sophisticated key markets with high growth potential; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | development of new technologies for new business areas.
| | - |  | -------------------------------------------------------

In fiscal year 2006, research and development expenditures with respect to our continuing operations amounted to 71.2 million. This level of expenditure reflects our commitment to new innovative projects
such as piezo stacks, various modules and systems. At 5.4% of net sales, research and development expenditures remained close to our long-term average between 4% and 5%. With this, we believe that we continue to spend more for research and
development in terms of percentage of net sales than the average in our industry segment. In addition to our own research and development efforts, we work closely together with the research and development facilities of our



-24-



---

##### Table of Contents

former parent companies Siemens and Matsushita, as well as with research institutions and universities around the world. We stepped up our research and
development partnership with Matsushita in June 2004, when our cooperation agreements with Matsushita were renewed. In 2005, we extended our cooperation agreement on our research and development partnership with Matsushita regarding SAW components.

We endeavor to align our research and development efforts to the specific needs of our customers and to take into consideration the
current trends towards miniaturization, integration, increased complexity and the use of components at increasingly higher temperatures and frequencies. We continue to focus our research and development efforts on reduction of costs, miniaturization
and increased performance of our products, as well as on more efficient manufacturing techniques and high performance raw materials with reduced environmental impact. In fiscal year 2006, we continued to concentrate on the following research and
development areas:



| |  |  | Our piezo-ceramic technology was developed for stacks applicable in high-speed injection valves for diesel and gasoline engines; we have further improved and
adapted the technology to the needs of new customers and applications and have ramped up mass production of new types and designs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our multilayer ceramic technology has enabled us to develop a whole series of new multilayer ceramic components. In the event of a bending crack, for example, the
structure of our new multi-layer serial ceramic capacitors reduces the risk of a short circuit  and hence of a power failure  by a factor of between 100 and 500 compared to conventional ceramic capacitors. Minimizing risk in
this way is especially important in automotive electronics applications.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bulk acoustic wave (BAW) resonators based on thin-film technology supplement our SAW and microwave ceramic filter components for high frequency applications in
mobile phones.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mobile phones and portable entertainment electronics products use increasing amounts of electronic components and modules. The resulting applications boast ever
greater functionality but still remain as small as ever. However, as electronic components and modules become ever more densely packed on the printed circuit board, greater protection is needed against electromagnetic interference and electrostatic
discharge. We have developed new products that combine a variety of individual components. Our CeraDiodes and ESD/EMI modules  both of which were developed on the basis of multilayer ceramic capacitors and varistors  are much
smaller than conventional solutions. CeraDiodes can also replace the more expensive semiconductor solutions used to date.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PhaseMod is a self-contained turn-key module for power factor correction. PhaseMod modules are used, among other things, to minimize reactive power in
electric drive systems in industrial plants, allowing plant operators to lower their energy costs. Ultimately, it also helps to reduce harmful emissions that pollute the environment. For EPCOS, the new PhaseMod module marks a step toward becoming a
systems provider for energy applications.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our helical power inductors store energy and smooth the DC voltage in power supplies.
| | - |  | -------------------------------------------------------------------------------------

The European Unions directive on the restriction of the use of certain hazardous substances (RoHS) in electrical and electronic equipment, which
became effective on July 1, 2006, bans lead in electronic products for RoHS applications. We provide more information on the directive under Item 8. Financial Information  Legal Proceedings  Environment.
With a few exceptions, all of our products are being offered as lead-free terminations and in a form suitable for lead-free soldering processes. For certain lines of our electronic components and modules, we still have to use lead-based materials in
the production, depending on market demand.



-25-



---

##### Table of Contents

Raw Materials and Sources of Supply

Throughout the company, we generally try to maintain alternative sources for our principal raw materials to reduce the risk of supply interruptions or price increases unless our customers prescribe a certain supplier
for a raw material. We also maintain long-term relationships with our key suppliers through master supply agreements and consignment arrangements. We typically re-negotiate our contracts for the purchase of raw materials on an annual basis and
whenever market conditions change. These relationships and the availability of alternative sources also provide us with some protection against price increases. We also seek to reduce our needs for raw materials that are expensive or subject to
shortages through technical innovations in product design and manufacturing. Below we mention some of the most important raw materials for each segment.

Capacitors and inductors. Our main raw materials for capacitors and inductors are aluminum foil, plastic films, copper wire, aluminum casings and ferrite cores. Ferrite cores consist mainly of high-purity iron
oxide, standard iron oxide, manganese oxide and zinc oxide. In fiscal year 2006, we experienced steep increases in the price of some raw materials such as aluminum foil and copper wire. In order to improve our cost structure and to secure the
volumes needed, we have developed alternative sources for raw materials. Currently, we purchase our raw materials for ferrite cores from European and Asian suppliers depending on the price and quality offered. We have successfully achieved price
reductions for iron oxide, while increasing demand for manganese oxide worldwide, especially from the steel industry, has led to price increases.

Ceramic components. Our ceramic powder manufacturing facility has helped us to counter continuous price erosion as benchmarking has demonstrated its cost effectiveness. The focus is now shifting towards the introduction of more
advanced materials allowing the implementation of miniaturized products.

SAW components.We use mainly two types of raw materials
in manufacturing SAW components, wafers (made of lithium niobate, lithium tantalate or quartz crystals) and ceramic materials (used for packaging). We also use plastics and metals for mounting and packaging. Prices for ceramics have steadily
decreased during the last four years. Our Palo Alto, California, subsidiary Crystal Technology, Inc. manufactures our entire supply of lithium niobate crystals for SAW devices and also sells a portion of its output to third parties. We believe that
our Palo Alto site is the technological leader for the manufacture of lithium niobate crystals.

Intellectual Property

The development and production of electronic components and modules requires innovation in product design and the use of advanced technologies in
production. Our success depends in large part on our ability to obtain patents, to maintain trade secret protection and to operate our business without infringing on the intellectual property rights of other parties. As of September 30, 2006,
our portfolio contained approximately 1560 patents and patent applications, comprising about 650 patent families. In the course of fiscal year 2006, we again improved the quality of our portfolio by adding 300 new patents and patent
applications while about 390 older patents and patent applications with low levels of relevance for our current and future business were dropped, expired or sold (about 100 patents were sold with the tantalum business). In addition to our
own portfolio, we also hold licenses to use product designs and production processes developed or patented by third parties.

We have
obtained, or are in the process of obtaining, patents for many of our material innovations in product design and production. Some of our patents covering older technologies are due to expire in coming years. Our patents generally expire
20 years after the date they are registered. Because of the rapid advances in technology and design that characterize our business, our most important technologies are covered by patents that we have acquired recently, most of which are not due
to lapse for at least ten years. We do not expect the lapse of patents that protect the older technology to materially affect our current revenues. We experience difficulties from time to time in enforcing patent rights with respect to certain of
our products. However, we do not believe that these difficulties in enforcement have materially impaired the value of our intellectual property portfolio, materially affected our sales, or are likely to have a material adverse effect on our future
sales.



-26-



---

##### Table of Contents

We are not aware of any pending lawsuits alleging that we infringe on anyones intellectual property
rights that could materially harm our business. We have not experienced significant problems with allegations of infringement of the intellectual property rights of third parties in the past. As is the case with most companies in our industry, we
from time to time receive notices from third parties claiming breach of their intellectual property rights. We investigate these claims as and when they occur and where appropriate, attempt to resolve the claim with the third party. In certain
cases, resolution of the claim may require us to pay the third party a license fee or make other payments to the third party. We do not believe that any such payment would materially adversely affect our financial condition or results of operations.

In addition to patent protection, we also rely extensively on trade secrets, technological know-how and other unpatented proprietary
information relating to our product development and manufacturing activities. We cannot be sure that our trade secrets and proprietary know-how will not become known or be independently discovered by others.

Description of Property

Our facilities consist of
manufacturing plants, research and design centers, sales offices and other properties throughout the world. We generally locate our manufacturing facilities to serve our principal markets and to provide accessibility to labor resources. The
following table provides key information about corporate headquarters and our manufacturing facilities as of September 30, 2006:



|                          |  |           |  |                 |  |                                                 
|------------------------- |  | --------- |  | --------------- |  | ------------------------------------------------
|Location                  |  | Area      |  | Owned or leased |  | Principal activities                            
|Germany                   |  |           |  |                 |  |                                                 
|Munich                    |  | 40,898 m2 |  | Leased          |  | Headquarters, SAW components                    
|Heidenheim                |  | 54,455 m2 |  | Owned/Leased    |  | Film capacitors, EMC components                 
|Berlin                    |  | 3,033 m2  |  | Leased          |  | Surge voltage arresters                         
|Berlin (Herrmann)         |  | 2,274 m2  |  | Leased          |  | Ceramic components                              
|                          |  |           | 
|Other Europe              |  |           |  |                 |  |                                                 
|Deutschlandsberg, Austria |  | 67,789 m2 |  | Owned/Leased    |  | Ceramic components, SAW components              
|Málaga, Spain             |  | 11,296 m2 |  | Owned           |  | Film capacitors                                 
|Szombathely, Hungary      |  | 34,282 m2 |  | Owned/Leased    |  | EMC components, Aluminum electrolytic capacitors
|Sumperk, Czech Republic   |  | 42,544 m2 |  | Owned/Leased    |  | Ferrites, Ceramic components                    
|                          |  |           | 
|Asia                      |  |           |  |                 |  |                                                 
|Singapore                 |  | 16,451 m2 |  | Leased          |  | SAW components                                  
|Malaysia                  |  | 8,540 m2  |  | Leased          |  | Surge voltage arresters                         
|Kalyani, India            |  | 36,263 m2 |  | Owned           |  | Ferrites                                        
|Nashik, India             |  | 15,604 m2 |  | Owned/Leased    |  | Film capacitors                                 
|Wuxi, China               |  | 8,773 m2  |  | Leased          |  | SAW components                                  
|Zhuhai, China             |  | 40,852 m2 |  | Owned/Leased    |  | Ceramic components, Film capacitors, Inductors  
|Xiaogan, China            |  | 3,856 m2  |  | Owned/Leased    |  | Surge voltage arresters                         
|Xiamen, China             |  | 2,500 m2  |  | Leased          |  | Aluminum electrolytic capacitors                
|                          |  |           | 
|Americas                  |  |           |  |                 |  |                                                 
|Gravataí, Brazil          |  | 43,293 m2 |  | Owned/Leased    |  | Film and aluminum electrolytic capacitors       
|Palo Alto, CA, USA        |  | 5,335 m2  |  | Owned/Leased    |  | Lithium niobate for SAW Components              

We lease a number of properties from Siemens subsidiaries, including our corporate headquarters
building in Munich and the Berlin surge voltage arrester facility. We lease our Singapore facility from a regional authority. One of our Chinese subsidiaries leases the Xiaogan facility from our Chinese joint venture partner Hanguang Electron Device
Factory and another of our Chinese subsidiaries leases office and production space from our joint venture partner Jiangsu Baotong Electronic & Technology Co., Ltd.

In addition to manufacturing products at our own facilities, we also subcontract some fine tuning, attachment of leads, coating, packaging, testing and
other back-end finishing processes to



-27-



---

##### Table of Contents

manufacturers in China, Croatia, Hungary, India, Indonesia, Malaysia and Nepal. We subcontracted the manual winding and soldering of inductors for EMC
components to manufacturers in China and Nepal. Taking into account our planned measures to relocate certain production activities, we believe that our facilities will meet our foreseeable design and production needs. Our manufacturing capacity has
historically been sufficient to meet our needs. We also own or in some cases lease technologically sophisticated design and manufacturing equipment, materials handling and data processing equipment, warehouses and vehicles. We lease office space in
Munich for our headquarters and other administrative and sales staff from a Siemens subsidiary. We describe the terms of our leases with Siemens companies under Item 10. Additional Information  Material Contracts 
Agreements with Siemens.

Organizational Structure

Our principal subsidiaries and associated companies are listed in the table below. The most significant subsidiaries are in Deutschlandsberg, Austria, and in Singapore. The following table provides key information
about our principal subsidiaries and associated companies as of, and for the fiscal year ended, September 30, 2006:



|                                                        |  |                    |  |          |   |  |                 
|------------------------------------------------------- |  | ------------------ |  | -------- | - |  | ----------------
|                                                        |  | Equity             |  | Earnings |   |  | % Equityinterest
|                                                        |  | (euro in millions) |  |          |  
|Germany                                                 |  |                    |  |          |   |  |                 
|Ernst Herrmann Ingenieur AG & Co. KG, Berlin            |  | 4.428              |  | 2.628    |   |  | 100             
|                                                        |  |                    | 
|Other Europe                                            |  |                    |  |          |   |  |                 
|EPCOS oHG, Deutschlandsberg, Austria                    |  | 51.149             |  | (30.254  | ) |  | 100             
|EPCOS Electronic Components S.A., Málaga, Spain         |  | 2.220              |  | (6.264   | ) |  | 100             
|EPCOS s.r.o., Sumperk, Czech Republic                   |  | 8.428              |  | (0.125   | ) |  | 100             
|EPCOS SAS, Saint Denis, France                          |  | 0.491              |  | (0.662   | ) |  | 100             
|EPCOS Elektronikai Alkatrész Kft., Szombathely, Hungary |  | 30.973             |  | 13.405   |   |  | 100             
|EPCOS UK Ltd., Bracknell, United Kingdom                |  | 1.877              |  | 0.108    |   |  | 100             
|EPCOS Nordic AB, Kista, Sweden                          |  | 0.784              |  | 0.480    |   |  | 100             
|EPCOS Nordic OY, Espoo (Helsinki), Finland              |  | 0.400              |  | 0.243    |   |  | 100             
|EPCOS Finance B.V., Amsterdam, Netherlands              |  | 2.271              |  | 0.117    |   |  | 100             
|EPCOS 2 Portugal LDA, Évora, Portugal                   |  | 0.305              |  | 0.300    |   |  | 100             
|                                                        |  |                    | 
|Asia                                                    |  |                    |  |          |   |  |                 
|EPCOS PTE LTD, Singapore                                |  | 133.600            |  | 48.839   |   |  | 100             
|EPCOS (China) Investment Ltd., Shanghai, China          |  | 47.172             |  | 3.350    |   |  | 100             
|EPCOS India Private Ltd., Nashik, India                 |  | 4.356              |  | 2.785    |   |  | 100             
|EPCOS (Zhuhai FTZ) Co., Ltd., Zhuhai, China             |  | 17.129             |  | 8.955    |   |  | 100             
|EPCOS Technology (Wuxi) Co., Ltd., Wuxi, China          |  | 30.062             |  | 16.373   |   |  | 100             
|EPCOS (Xiaogan) Co., Ltd., Xiaogan, China               |  | 3.514              |  | 1.439    |   |  | 76              
|EPCOS KK, Yokohama, Japan                               |  | 1.703              |  | 0.181    |   |  | 100             
|EPCOS (Zhuhai) Co., Ltd., Zhuhai, China                 |  | 2.066              |  | (1.887   | ) |  | 100             
|EPCOS SDN. BHD., Johore Bahru, Malaysia                 |  | 20.100             |  | 10.688   |   |  | 100             
|EPCOS (Shanghai), Ltd., Shanghai, China                 |  | 0.392              |  | (0.266   | ) |  | 100             
|EPCOS Limited, Hong Kong, China                         |  | 3.909              |  | 0.444    |   |  | 100             
|Baoke Electronic (Wuxi) Co., Ltd., Wuxi, China          |  | 2.618              |  | 0.160    |   |  | 53.60           
|                                                        |  |                    | 
|Americas                                                |  |                    |  |          |   |  |                 
|EPCOS do Brasil Ltda., Gravataí, Brazil                 |  | 35.458             |  | (6.511   | ) |  | 100             
|EPCOS Inc., Iselin, New Jersey, U.S.                    |  | 13.523             |  | (0.494   | ) |  | 100             
|Crystal Technology, Inc., Palo Alto, California, U.S.   |  | 14.199             |  | 2.503    |   |  | 100             

Item 4A. Unresolved Staff Comments

Not applicable.



-28-



---

##### Table of Contents

Item 5. Operating and Financial Review and Prospects

The following discussion of our financial
condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes, and the other financial information included elsewhere in this Form 20-F. This discussion includes forward-looking
statements based on assumptions about our future business. Our actual results could differ materially from those contained in the forward-looking statements.

Overview

Exceptional growth in the year 2000 was followed by several years of difficult conditions in the electronic
components and modules markets due to a prolonged downturn in the global economy. After a slow recovery in the first half of fiscal year 2004, the market for electronic components and modules slowed down again in the second half of fiscal year 2004
and the first half of fiscal year 2005, burdened by inventory adjustments among our customers as a result of the recovery in the first half of fiscal year 2004. Because weak demand lasted unexpectedly long, we, along with other electronic components
and modules manufacturers, were not able to utilize production capacity as planned. This led to ongoing price erosion that was intensified by the unfavorable dollar/euro exchange rate. In the second half of fiscal year 2005, demand for electronic
components and modules stabilized somewhat as the global economy began to recover. A more favorable business climate supported our business development in fiscal year 2006, as demand for electronic components and modules was good from all regions
and industries served. As manufacturing capacity utilization in the components and modules industry improved, price pressure for components and modules eased from quarter to quarter.

In general, the electronic components and modules market is subject to price erosion. In our segments, we strive to compensate for the adverse impact of
falling unit prices on our net sales through higher sales volumes as a result of market growth and our efforts to improve our market share. In recent years, we have also been able to reduce the impact of lower unit prices for existing products on
our profit margins through productivity improvements, the introduction of many new products and cost reductions. Once they are fully ramped up, new products designed to customer specifications are typically more profitable for us on a per-unit basis
than older products and commodity-type products. We have also increased our production capacity in countries where labor costs are lower and have more systematically exploited our purchasing power to obtain better terms from our suppliers through
global coordination of our materials procurement. To reduce our manufacturing costs further and to increase our flexibility to react to market cycles, we subcontract selected manufacturing processes to other manufacturers.

In fiscal year 2006, as demand for electronic components and modules remained strong, we were able to post an increase in net sales. The growing share of
sales accounted for by new products likewise had a positive impact. The significantly higher sales volume and further cost savings led to an improvement in earnings despite one-time charges incurred for the discontinuation of the UltraCap
activities.

Responding to the dramatic changes in the electronic components and modules market and the economic climate over the past
years, we continue to focus on the fastest-growing and technologically most demanding markets, customer orientation, innovation, and, more than ever before, rigorous cost management. Our cost management efforts include cost-cutting programs, such as
our purchasing offensive in conjunction with streamlining processes and procedures throughout the Company, as well as a restructuring involving the relocation of production facilities to low-cost countries.

With effect from October 1, 2005, the business segments Capacitors and Inductors and Ferrites were combined to a reportable
segment named Capacitors and Inductors, based on substantial economic and other similarities between these operating segments after the disposal of the tantalum capacitor business, which had been part of the operating segment
Capacitors. Previously reported figures have been restated for comparative purposes to reflect the change in the segmentation.



-29-



---

##### Table of Contents

Cost-cutting program.In 2001 and 2002, we launched two cost-cutting programs that were combined
in fiscal year 2003 into the company-wide COMPETE program. This program provides for restrictions on capital expenditure, further reductions in procurement costs and the accelerated transfer of workforce from high to low-labor-cost countries. Other
key items on the cost-cutting agenda are rationalization, continuous improvement of processes, increased productivity and higher yields in manufacturing.

Restructuring charges.In fiscal years 2006, 2005 and 2004, we recorded restructuring charges for the continuing operations in the amount of 4.7 million, 6.2 million and
4.4 million, respectively, in connection with our reduction of staff levels, disposal of equipment and acceleration of the transfer of production to countries with lower labor costs. Total restructuring costs as they relate to our
business segments were as follows:



|                          |  |                                 |   |  |      |   |  |      |  
|------------------------- |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|                          |  | Fiscal year ended September 30, |  
|                          |  | 2006                            |   |  | 2005 |   |  | 2004 |  
|                          |  | (euro in millions)              |  
|Capacitors and inductors  |  | 6.6                             |   |  | 6.1  |   |  | 1.0  |  
|Ceramic components        |  | 0.8                             |   |  | 1.1  |   |  | (0.1 | )
|SAW components            |  | (2.7                            | ) |  | (1.0 | ) |  | 3.5  |  
|                          |  |                                 |   |  |      |   |  |      |  
|Total restructuring costs |  | 4.7                             |   |  | 6.2  |   |  | 4.4  |  

The net restructuring costs for the continuing operations of 4.7 million for fiscal
year 2006 included gross restructuring costs of 7.4 million, of which personnel costs accounted for 4.0 million. This gross figure was partly offset by 2.7 million of reversals, which resulted from a revision of
previous years estimates. Total net restructuring costs include restructuring costs of 5.5 million for the discontinuation of our UltraCap activities. This amount consisted of 2.9 million in connection with the reduction
of staff levels and 2.6 million of write-offs which were recorded due to production equipment no longer needed. For information on the restructuring costs relating to our discontinued operations, see  Results of Operations
 Discontinued operations.

The net restructuring costs of 6.2 million for fiscal year 2005 included gross
restructuring costs of 7.2 million, of which personnel costs accounted for 6.4 million. This gross figure was partly offset by 1.0 million of reversals, which resulted from a revision of previous years estimates.

The net restructuring costs of 4.4 million for fiscal year 2004 included gross restructuring costs of 5.7 million,
of which personnel costs accounted for 2.1 million. This gross figure was partly offset by 1.3 million of reversals, including previously charged restructuring costs in the amount of 0.9 million for the capacitors
and inductors segment and 0.1 million for the ceramic components segment. These reversals resulted from a revision of the previous years estimate.

Currency Exposure.The persistent weakness of the U.S. dollar vis-à-vis the euro has had a negative effect on our results in recent fiscal years since the market prices for our products are essentially
dollar-based around the world, even within the euro zone. Through the relocation of our production facilities and purchasing activities to low-labor-cost countries with currencies that are linked more to the U.S. dollar than to the euro, we have
been able to reduce (but not eliminate) our exposure to the exchange rate risk resulting from the U.S. dollar.

Related parties.Historically, we have made sales to Siemens AG and its subsidiaries for their own internal usage and have relied on Siemens regional sales representation for resale to other customers. Total sales to the Siemens group as a related party for both
internal usage and resale to other customers represented 6.3% of our net sales in fiscal year 2006 (until March 29, 2006), 15.0% in fiscal year 2005 and 16.0% in fiscal year 2004. Of our total consolidated sales, 6.0% of our net sales in fiscal
year 2006 (until March 29, 2006), 14.0% in fiscal year 2005 and 13.4% in fiscal year 2004 were sales directly to Siemens for internal usage. In addition, sales made directly to third-party customers but through Siemens sales agents accounted
for 4.8% of our net sales in fiscal year 2006 (until March 29, 2006), 12.1% in fiscal year 2005 and 9.8% in fiscal year 2004. These lower 2006 rates reflect the fact that sales through Siemens are only designated as related party transactions
for the period up to its sale of the EPCOS shares on March 29, 2006. The portion of our net sales to the Siemens group for resale to other customers has declined to 0.3% in fiscal year 2006 (until March 29, 2006) since our initial public
offering in October 1999, mainly because we no longer use the Siemens



-30-



---

##### Table of Contents

sales network for resale to other customers in Germany and as a result of switching our sales activities from Siemens sales companies in Austria, China,
Czech Republic, Finland, France, Hungary, India, Japan, Sweden and the United Kingdom to our own sales companies. We expect, however, that a significant portion of our net sales will continue to be to the Siemens group for their internal usage.

In connection with our initial public offering, Siemens, Matsushita and EPCOS AG entered into agreements providing for the separation of
our business from Siemens and Matsushita, including agency and distributorship agreements, lease agreements and research and development agreements with Siemens and cross license and other technology agreements with Matsushita. In June 2004, we
extended our technical cooperation with Matsushita (see Item 10. Additional Information  Material Contracts) and in January 2006 we acquired the right to sublease the know-how pertaining to tantalum capacitors to Kemet
Corporation and its subsidiaries in exchange for certain lump-sump payments (see Note 12 to the financial statements). Before the reorganization of the group, the Siemens group also provided us with a variety of services and functions including
professional and administrative assistance such as legal advice, administration of intellectual property, treasury and cash management, human resources management, data processing and purchasing and logistics planning. The Siemens group provided us
with some of these services at cost and charged us a management fee to cover the other services. We have replaced some of these services and functions with services from third parties or by establishing these functions internally. The Siemens group
continues to provide us with some of these services under new contracts. The overall cost to us of these services and functions that Siemens used to provide has not increased to any significant extent as a result of our separation from the Siemens
group. Neither the sales and distribution agreements with Siemens nor with Matsushita were materially affected by the sales of Siemens and Matsushita of their entire stakes in EPCOS in 2006.

Critical Accounting Policies

Our Consolidated
Financial Statements and related public financial information are based on the application of generally accepted accounting principles in the United States of America (U.S. GAAP). U.S. GAAP require the use of estimates, assumptions, judgments and
subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including
information regarding contingencies, risk and our financial condition. We believe our use of estimates and underlying accounting assumptions adhere to generally accepted accounting principles and are consistently applied. Valuations based on
estimates are reviewed for reasonableness on a consistent basis throughout the Company.

Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe that our accounting policies requiring significant management judgment are
limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements. We have identified the following as our accounting policies requiring
significant management judgment:



| |  |  | valuation of inventories;
| | - |  | -------------------------



| |  |  | estimating the accruals for product warranties;
| | - |  | -----------------------------------------------



| |  |  | valuation of pension obligations;
| | - |  | ---------------------------------



| |  |  | accounting for income taxes;
| | - |  | ----------------------------



| |  |  | valuation of long-lived and intangible assets (excluding goodwill); and
| | - |  | -----------------------------------------------------------------------



| |  |  | valuation of goodwill.
| | - |  | ----------------------



-31-



---

##### Table of Contents

Valuation of inventories

Management needs to make estimates regarding the valuation of inventories. In order to maintain an adequate supply of our products for our customers, we must carry a certain level of inventory. This inventory level
may vary based principally upon either orders received from customers or our forecast of demand for these products. Also, we consider possible supply shortages of raw materials to ensure our continuous ability to manufacture our products.

Our inventories are valued at the lower of cost or market. We apply various assumptions, estimates and methods to address this subjective
and complex topic to arrive at the net inventory amount. As part of these procedures, which collectively comprise a critical accounting policy, we first examine the inventory items that may have some form of obsolescence due to non-conformance with
industry and customer standards as identified by our quality assurance departments. Second, we consider market prices of raw materials and finished goods in view of competitive situations in the marketplace driving the outlook for the future price
levels of our products. Third, the inventory is compared to an assessment of product history and forecasted demand. Finally, we compare the result of this methodology against the prospects for the consumption of the inventory and the appropriateness
of the resulting inventory levels. As of September 30, 2006, we had inventory balances of 213.8 million, net of write-downs of 25.9 million, resulting from the application of this policy.

Accruals for product warranties

The
management needs to make estimates regarding the outcome of warranty claims resulting from defective products. Warranty claims are brought to our attention by customers either during warranty periods specified by law in the countries in which we
operate, or if they claim that our products led to defects in our customers products that incorporate our products. Managements estimates include warranty claims against us including potential liability for damages caused by such defects
to our customers or to the customers of our customers and potential liability for consequential damages.

Assumptions are required both for
determining the likelihood of unfavorable outcomes of warranty disputes and the cost incurred when replacing defective products and compensating our customers for damages caused by our products. First, we collect all information available regarding
potential warranty claims. Second, we evaluate the probability of the Company being required to replace products or make payments. Third, we estimate the cost of products to be replaced and the amount of payments to be made based on information from
our sales and technical departments as well as inhouse and outside counsel. We have recorded warranty accruals of 10.5 million at September 30, 2006. In the event that actual results differ from these estimates or we adjust these
estimates in future periods, we may need to establish additional accruals for product warranties which could materially impact our financial position and results of operations.

Valuation of pension obligations

The valuation of our pension plans requires the use of
assumptions and estimates that are used to develop actuarial valuations of expenses and assets/liabilities. These assumptions include discount rates, investment returns, projected salary increases and benefits and mortality rates. The actuarial
assumptions used in our pension reporting are reviewed annually and compared with external benchmarks to assure that they accurately account for our future pension obligations. The major part of our pension accruals are not funded, and we had a net
unfunded status of our pension plans in the amount of 192.3 million on September 30, 2006. Accordingly, changes in assumptions for future investment returns do not have a material impact on our pension expenses and related funding
requirements.

Accounting for income taxes

As part of the process of preparing our Consolidated Financial Statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual
current tax exposure together with assessing temporary differences resulting



-32-



---

##### Table of Contents

from differing treatment of items for tax and accounting purposes. These differences and net operating loss carryforwards result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against our net deferred tax assets. We have recorded a valuation allowance of 66.2 million on gross deferred tax assets of 210.3 million (net deferred tax assets: 69.2 million) as of
September 30, 2006. 110.3 million of these gross deferred tax assets related to our net operating loss and tax credit carryforwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we
operate and the period over which our deferred tax assets will be recoverable. We also consider expiration dates and other restrictions regarding the utilization of net operating loss carryforwards. In the event that actual results differ from these
estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance which could materially impact our financial position and results of operations.

Valuation of long-lived and intangible assets (excluding goodwill)

We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |  |  | significant underperformance relative to historical or projected future operating results;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | significant changes in the manner of our use of the acquired assets, the technology required by our customers or the strategy for our overall business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | plans to dispose of a business unit; and
| | - |  | ----------------------------------------



| |  |  | significant negative industry or economic trends.
| | - |  | -------------------------------------------------

When we determine that the carrying value of intangibles and long-lived assets or group of assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we use an
estimate of the future undiscounted net cash flows associated with the asset over the remaining life of the asset in measuring whether the asset is recoverable. If this evaluation indicates a potential impairment, we use discounted cash flows to
measure fair value in determining the amount of these assets that should be written off.

In the capacitors and inductors segment, we
recorded an impairment of fixed assets in the amount of 2.8 million and an impairment of intangible assets in the amount of 0.6 million in fiscal year 2006. In fiscal year 2005, we also recorded an impairment of
46.5 million in this segment (effective only for the discontinued operations) relating to property, plant and equipment at the locations in Évora, Portugal, as well as in Munich and Heidenheim, Germany. The main triggering event
was a market valuation made in connection with the planned disposal of the tantalum business that showed a market value of the applicable assets that was smaller than the net book value of those assets. Additionally, an impairment of fixed assets in
the amount of 0.1 million arose in this segment in fiscal year 2005 and in the amount of 0.9 million in fiscal year 2004. In the SAW components segment, we recorded impairment charges of 2.7 million in fiscal year
2004, which related to production equipment no longer needed in that segment. No impairments were recorded in this segment in fiscal years 2005 and 2006.

The accuracy of our recoverability assessment and the measurement of fair value is based on our ability to accurately predict certain key variables such as sales volumes, prices, raw material costs and other economic
factors. Predicting these key variables involves uncertainty about future events; however, the assumptions used are consistent with our internal planning. The assumptions and



-33-



---

##### Table of Contents

conditions reflect our best assumptions and estimates, but these items involve inherent uncertainties which may or may not be controllable by management. As
a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods. In our opinion, the identifiable intangible assets and long-lived assets are
appropriately valued as of September 30, 2006.

Valuation of goodwill

We review our goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets
may not be recoverable. At September 30, 2006, we had no other intangible assets with indefinite lives.

The goodwill impairment test
is performed at the reporting unit level. A reporting unit is the same as, or one level below, an operating segment as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. We compare the fair
value of each reporting unit with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test would be performed to measure the amount of impairment charge, if any. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill, and any excess of the carrying amount over the implied fair value is recognized as an impairment charge. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination is determined, by allocating the fair value of a reporting unit to individual assets and liabilities. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of
goodwill.

The results of our goodwill impairment tests did not indicate any impairment in 2004 and 2006. In fiscal year 2005, we have
recorded an impairment charge of 11.8 million relating to our ferrites unit resulting from a significant adverse change of expected ferrite core sales volumes, combined with higher than originally estimated expenses associated with the
final closure of the ferrite manufacturing facility in Bordeaux, France. As of September 30, 2006 and 2005 we had total goodwill of 8.2 and 8.3 million, respectively. For additional information on this impairment charge, please
refer to Note 9 of the Consolidated Financial Statements.



-34-



---

##### Table of Contents

Results of Operations

The following table sets forth consolidated statement of operations data of EPCOS for each of the past three fiscal years both in absolute terms and as a percentage of net sales in the relevant year, except as
otherwise stated, for our continuing operations; prior years have been restated accordingly:



|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|------------------------------------------ |  | ------------------------------- | - |  | ----- | - |  | ----------------- | - |  | ----- | - |  | ----------------- | - |  | ------ | -
|                                           |  | Fiscal year ended September 30, |  
|                                           |  | 2006                            |   |  | 2005  |   |  | 2004              |  
|                                           |  | (euro inmillions)               |   |  | (%)   |   |  | (euroin millions) |   |  | (%)   |   |  | (euroin millions) |   |  | (%)    |  
|                                           |  |                                 |   |  |       |  
|Net sales                                  |  | 1,309.4                         |   |  | 100.0 |   |  | 1,150.0           |   |  | 100.0 |   |  | 1,255.3           |   |  | 100.00 |  
|Cost of goods sold                         |  | (1,083.0                        | ) |  | (82.7 | ) |  | (979.2            | ) |  | (85.2 | ) |  | (986.5            | ) |  | (78.6  | )
|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|Gross profit                               |  | 226.4                           |   |  | 17.3  |   |  | 170.8             |   |  | 14.8  |   |  | 268.8             |   |  | 21.4   |  
|Research and development expenses          |  | (71.2                           | ) |  | (5.4  | ) |  | (63.9             | ) |  | (5.6  | ) |  | (69.3             | ) |  | (5.5   | )
|Marketing and selling expenses             |  | (104.6                          | ) |  | (8.0  | ) |  | (111.3            | ) |  | (9.7  | ) |  | (116.2            | ) |  | (9.3   | )
|General and administrative expenses        |  | (13.4                           | ) |  | (1.0  | ) |  | (13.2             | ) |  | (1.1  | ) |  | (14.6             | ) |  | (1.2   | )
|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|Operating income (loss)                    |  | 37.2                            |   |  | 2.9   |   |  | (17.6             | ) |  | (1.6  | ) |  | 68.7              |   |  | 5.4    |  
|Interest income (expense), net             |  | (9.0                            | ) |  | (0.7  | ) |  | (7.7              | ) |  | (0.7  | ) |  | (5.5              | ) |  | (0.4   | )
|Impairment of goodwill                     |  |                                |   |  |      |   |  | (11.8             | ) |  | (1.0  | ) |  |                  |   |  |       |  
|Other income (loss)(1)                     |  | 9.6                             |   |  | 0.7   |   |  | 2.5               |   |  | 0.2   |   |  | (1.1              | ) |  | (0.1   | )
|Benefit (Provision) for income taxes       |  | (2.2                            | ) |  | (0.2  | ) |  | (31.5             | ) |  | (2.7  | ) |  | (10.9             | ) |  | (0.8   | )
|Minority interest                          |  | (0.4                            | ) |  | (0.0  | ) |  | (0.2              | ) |  | (0.0  | ) |  | (0.2              | ) |  | (0.0   | )
|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|Net income/(loss) of continuing operations |  | 35.2                            |   |  | 2.7   |   |  | (66.3             | ) |  | (5.8  | ) |  | 51.0              |   |  | 4.1    |  
|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|Loss of discontinued operations            |  | (14.0                           | ) |  | (1.1  | ) |  | (53.0             | ) |  | (4.6  | ) |  | (1.8              | ) |  | (0.2   | )
|                                           |  |                                 |   |  |       |   |  |                   |   |  |       |   |  |                   |   |  |        |  
|Net income (loss)                          |  | 21.2                            |   |  | 1.6   |   |  | (119.3            | ) |  | (10.4 | ) |  | 49.2              |   |  | 3.9    |  

---

|(1) | Includes foreign exchange gains (losses), net, other income (expenses), net, and share of net gains (losses) of unconsolidated affiliates.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

Discontinued operations

As a result of the
sale of our tantalum capacitors business, we show our tantalum capacitors business as discontinued operations. Effective April 13, 2006, EPCOS sold its tantalum capacitors business to Kemet Corporation for an aggregate purchase price of
86.5 million. Kemet acquired EPCOSs plant in Évora, Portugal and took on the employees of this production facility. Additionally, Kemet took on some, but not all of our tantalum capacitor-related research and development as well
as of our marketing and sales staff from Heidenheim and Munich, Germany. As a further component of this transaction, a Manufacturing and Supply Agreement was signed, pursuant to which EPCOS continued to produce tantalum capacitors in Heidenheim for
sale to Kemet. Assets and liabilities related to the tantalum capacitors business, and not yet transferred at the balance sheet date, are classified as held for sale at September 30, 2006. These assets and liabilities are used for the ongoing
support under the supply agreement which is expected to expire on March 31, 2007. This ongoing support agreement serves to help ensure the transition of customers and sales infrastructure to Kemet. Financial data are shown, except as not stated
otherwise, for our continuing operations, and prior years have been restated accordingly.



-35-



---

##### Table of Contents

Gains and losses of discontinued operations for the years ended September 30, 2006, 2005 and 2004
are as follows:

Consolidated Statements of Operations from Discontinued Operations



|                                               |  |                                   |   |  |          |   |  |          |  
|---------------------------------------------- |  | --------------------------------- | - |  | -------- | - |  | -------- | -
|                                               |  | For the years ended September 30, |  
|                                               |  | 2006                              |   |  | 2005     |   |  | 2004     |  
|                                               |  | (euro in thousands)               |  
|Total net sales from discontinued operations   |  | 89,466                            |   |  | 87,497   |   |  | 106,912  |  
|Cost of goods sold                             |  | (97,273                           | ) |  | (137,273 | ) |  | (105,187 | )
|                                               |  |                                   |   |  |          |   |  |          |  
|Gross profit                                   |  | (7,807                            | ) |  | (49,776  | ) |  | 1,725    |  
|Research and development expenses              |  | (9,382                            | ) |  | (6,367   | ) |  | (5,273   | )
|Marketing and selling expenses                 |  | (4,083                            | ) |  | (4,990   | ) |  | (5,834   | )
|General and administrative expenses            |  | (990                              | ) |  | (92      | ) |  | (238     | )
|                                               |  |                                   |   |  |          |   |  |          |  
|Operating loss                                 |  | (22,262                           | ) |  | (61,225  | ) |  | (9,620   | )
|Interest income                                |  | 106                               |   |  | 7        |   |  | 8        |  
|Interest expense                               |  | (740                              | ) |  | (918     | ) |  | (429     | )
|Other income (expense), net                    |  | 4,259                             |   |  | (315     | ) |  | 7,007    |  
|                                               |  |                                   |   |  |          |   |  |          |  
|Loss before income taxes and minority interest |  | (18,637                           | ) |  | (62,451  | ) |  | (3,034   | )
|Provision for income taxes                     |  | 4,654                             |   |  | 9,510    |   |  | 1,279    |  
|                                               |  |                                   |   |  |          |   |  |          |  
|Net loss from discontinued operations          |  | (13,983                           | ) |  | (52,941  | ) |  | (1,755   | )
|                                               |  |                                   |   |  |          |   |  |          |  

The net result of the sale of the tantalum capacitor business unit in fiscal year 2006 amounted to
0.1 million. In fiscal year 2006, costs of goods sold included net restructuring costs of 9.1 million. Cost of goods sold during fiscal year 2005 includes an impairment on non-current assets in the amount of
46.5 million in the tantalum capacitor business unit.

Cash flow relating to the discontinued operations for fiscal year 2006
amounted to 48.5 million. Cash provided by operating activities amounted to minus 11.9 million, while cash provided by investing activities amounted to 60.4 million (including 68.0 million, net, from the
sale).

Net sales

The following
table shows net sales and change in net sales from continuing operations for each of our three segments for the periods shown.



|                         |  |                                 |  |          |  |         |  |           |  |           |  
|------------------------ |  | ------------------------------- |  | -------- |  | ------- |  | --------- |  | --------- | -
|                         |  | Fiscal year ended September 30, |  | % Change | 
|                         |  | 2006                            |  | 2005     |  | 2004    |  | 2005/2006 |  | 2004/2005 |  
|                         |  | (euro in millions)              |  |          |  |         | 
|Capacitors and inductors |  | 479.4                           |  | 419.2    |  | 431.3   |  | 14.4      |  | (2.8      | )
|Ceramic components       |  | 421.0                           |  | 361.3    |  | 374.3   |  | 16.5      |  | (3.5      | )
|SAW components           |  | 409.0                           |  | 369.5    |  | 449.7   |  | 10.7      |  | (17.8     | )
|Less intersegment sales  |  |                                |  |         |  |        |  |          |  |          |  
|                         |  |                                 |  |          |  |         |  |           |  |           |  
|Total                    |  | 1,309.4                         |  | 1,150.0  |  | 1,255.3 |  | 13.9      |  | (8.4      | )

Throughout fiscal year 2006, demand for electronic components and modules from all industries and
regions remained strong in conjunction with the ongoing general recovery of the global economy. Pressure on component and module prices eased from quarter to quarter as we, along with other electronic components and modules manufacturers, were able
to better utilize manufacturing capacity. On a quarterly basis, sales rose continually over each quarter in fiscal year 2006.



-36-



---

##### Table of Contents

The following table shows the development in net sales for each of our three segments on a quarterly
basis in fiscal year 2006:



|                         |  |                                       |  |       |  |       |  |       |  |        
|------------------------ |  | ------------------------------------- |  | ----- |  | ----- |  | ----- |  | -------
|                         |  | 2006 net sales by quarter (unaudited)
|                         |  | Q1                                    |  | Q2    |  | Q3    |  | Q4    |  | Total  
|Capacitors and inductors |  | 109.3                                 |  | 121.0 |  | 123.8 |  | 125.3 |  | 479.4  
|Ceramic components       |  | 97.1                                  |  | 103.2 |  | 106.3 |  | 114.4 |  | 421.0  
|SAW components           |  | 98.4                                  |  | 99.8  |  | 100.4 |  | 110.4 |  | 409.0  
|                         |  |                                       |  |       |  |       |  |       |  |        
|Total                    |  | 304.8                                 |  | 324.0 |  | 330.5 |  | 350.1 |  | 1,309.4

In fiscal year 2005, an unexpectedly long period of weak demand resulting from inventory
adjustments among our customers and the general weakness in the economy weighed on the business development of the electronic components and modules industry in the first half. This in turn was a result of the recovery of demand for electronic
components and modules in the first half of fiscal year 2004. However, we, along with other electronic components and modules manufacturers, were not able to utilize production capacity as planned, which had a negative effect on prices. Price
erosion in the first half of fiscal year 2005 was also intensified by the unfavorable dollar/euro exchange rate. In the second half of the year, demand stabilized somewhat and we were able to increase our sales. On a quarterly basis, sales rose
continually over each quarter in fiscal year 2005, albeit at a lower rate in the first half due to the weak demand for electronic components and modules.

Capacitors and inductors. In fiscal year 2006, sales in the capacitors and inductors segment increased, with all capacitor and inductor product groups contributing to this growth. Demand for aluminum
electrolytic capacitors used in industrial electronics applications was particularly strong. Sales to automotive electronic manufacturers and distributors increased, too. Makers of lighting systems and consumer electronics contributed significantly
to demand for film capacitors in fiscal year 2006. In the power capacitors business, we were able to increase sales of components for power factor correction in particular. Sales for inductive components, especially for communication applications
such as DSL for high-speed Internet access, also developed well, as did demand for EMC components.

In fiscal year 2005, sales in the
capacitors and inductors segment decreased mainly due to the weak demand for inductive components for telecommunications and consumer electronics applications. Sales of ferrites were down primarily due to the realignment of the product portfolio.
Business with EMC components remained fairly stable despite a generally weak market. Sales of aluminum electrolytic capacitors remained stable overall, whereas higher sales to automotive electronics customers and distributors made up for declining
business with manufacturers of consumer electronics products. Lower demand for film capacitors was to some extent offset by stronger demand for power capacitors.

Ceramic components. In fiscal year 2006, all product groups in this segment contributed to the sales growth. The most pronounced increase in sales was posted for piezo actuators sold for diesel injection
systems in auto engines. Sales of thermistors and varistors rose as demand for these temperature- and voltage-dependent resistors was strong among distributors and industrial electronics customers. We also achieved sales growth for sensor and sensor
systems as demand was strong in the automotive electronics industry as well as from household appliance manufacturers. Sales for surge arresters increased too, as did demand for multilayer ceramic components.

In fiscal year 2005, sales in the ceramic components segment decreased, primarily due to the weak business with multilayer ceramic capacitors. Demand for
these products was much weaker in the consumer electronics and mobile communications industries in particular. Realignment of our portfolio of multilayer ceramic capacitors was a further factor that caused sales to decrease. Sales of thermistors and
varistors also declined as a result of the weak demand from household electronics manufacturers. Sales of piezo actuators for diesel injection systems nearly doubled in 2005, whereas demand for sensors and sensor systems remained stable, as did
demand for surge arresters.

SAW components. In fiscal year 2006, all product groups accounted for the sales growth in the SAW
components segment as well. Among SAW mobile communication filters, demand is growing especially for duplexers, which are mainly used by mobile phone manufacturers. EPCOSs SAW multimedia filters posted an increase in sales, too, as the
accelerating worldwide migration from



-37-



---

##### Table of Contents

analog to digital TV standards provided positive stimulus. Moreover, the Soccer World Cup and the Winter Olympics also contributed to the good demand. Sales
of SAW products for automotive electronics likewise increased in fiscal year 2006.

In fiscal year 2005, sales in the SAW components
segment decreased sharply, mainly due to the reduced demand in the first half of fiscal year 2005, especially by manufacturers of mobile phones and consumer electronics products. In this adverse business climate, sales in the first three quarters of
fiscal year 2005 were well below the previous years figures. Toward the end of the fourth quarter, however, demand for SAW filters for mobile phones in particular increased significantly.

Cost of goods sold

The following table shows
our cost of goods sold and change in our cost of goods sold, as well as cost of goods sold as a percentage of our net sales, for the periods shown:



|                            |  |                                        |  |          |  |       |  |           |  |           |  
|--------------------------- |  | -------------------------------------- |  | -------- |  | ----- |  | --------- |  | --------- | -
|                            |  | Cost of goods sold                     | 
|                            |  | Fiscal year ended September 30,        |  | % Change | 
|                            |  | 2006                                   |  | 2005     |  | 2004  |  | 2005/2006 |  | 2004/2005 |  
|                            |  | (euro in millions, except percentages) |  |          |  |       | 
|Cost of goods sold          |  | 1,083.0                                |  | 979.2    |  | 986.5 |  | 10.6      |  | (0.7      | )
|(as a percent of net sales) |  | 82.7                                   |  | 85.2     |  | 78.6  |  |           |  |           |  

In fiscal year 2006, cost of goods sold increased less than net sales on a year-on-year basis,
with the cost of goods sold expressed as a percentage of net sales decreasing to 82.7%. This decrease was due to cost savings and certain economies of scale resulting from higher production volumes. Cost of goods sold included net restructuring
expenses of 4.7 million for continuing operations, mainly incurred in respect of the discontinuation of the UltraCap activities in the capacitors and inductors segment.

In fiscal year 2005, cost of goods sold decreased slightly in conjunction with a reduction of net sales on a year-on-year basis, with the cost of goods
sold expressed as a percentage of net sales increasing to 85.2%. This increase was primarily due to ramp-up costs for new products and inventory write-downs at our ceramic capacitors segment of 6 million. These negative effects as well as
the negative price erosion could not be compensated by the positive effects of our cost savings. Cost of goods sold included restructuring charges of 6.2 million for the continuing operations taken mainly in respect of the closure of our
ferrites plant in Bordeaux, France of 5 million in the capacitors and inductors segment and, to a lesser extent, in the ceramic components segment.

Capacitors and inductors. In fiscal year 2006, cost of goods sold increased by 53.5 million to 430.0 million. Cost of goods sold as a percentage of net sales decreased slightly to 89.7%
compared to the previous years level of 89.8%, mainly due to certain economies of scale resulting from higher production volumes. Additionally, cost of goods sold includes restructuring cost for the discontinuation of the UltraCap activities
of about 6 million.

In fiscal year 2005, cost of goods sold in the capacitor and inductors segment decreased slightly by
2.0 million to 376.5 million, while cost of goods sold as a percentage of net sales increased. The decrease of cost of goods sold is mainly due to the lower sales volume decreasing proportionately to the volume reduction,
although cost of goods sold for this segment was also affected by the unexpected additional expenditures of 5 million for the final closure of the ferrites plant in Bordeaux, France. These negative effects could not be compensated by cost
savings resulting from process optimization and purchasing savings in fiscal year 2005.

Ceramic components. In fiscal year 2006,
cost of goods sold in the ceramic components segment increased by 31.3 million to 361.7 million. However, cost of goods sold as a percentage of net sales decreased from 91.5% in fiscal year 2005 to 85.9%, mainly due to economies of
scale resulting from higher volumes and to cost savings resulting from process optimization and purchasing savings.

In fiscal year 2005,
cost of goods sold in the ceramic components segment increased by 34.4 million to 330.4 million, largely due to high ramp-up costs for new products, inventory write-



-38-



---

##### Table of Contents

downs at our multilayer ceramic capacitors and price adjusted volume. Cost savings resulting from process optimization and purchasing savings could not
offset these effects.

SAW components. In fiscal year 2006, cost of goods sold in this segment increased by 19.0 million
to 291.3 million. Cost of goods sold as a percentage of net sales decreased to 71.2% compared to the previous years level of 73.7%, mainly due to certain economies of scale following from higher production volumes. Cost savings resulting
from process optimization and purchasing savings also contributed to this effect.

In fiscal year 2005, cost of goods sold in the SAW
components segment decreased by 39.7 million, to 272.3 million, primarily due to the lower volumes and cost savings resulting from process optimization and purchasing savings.

Operating expenses

The following table shows
our operating expenses and change in operating expenses for the periods shown:



|                                  |  |                                 |  |          |  |       |  |           |   |  |           |  
|--------------------------------- |  | ------------------------------- |  | -------- |  | ----- |  | --------- | - |  | --------- | -
|                                  |  | Operating expenses              | 
|                                  |  | Fiscal year ended September 30, |  | % Change | 
|                                  |  | 2006                            |  | 2005     |  | 2004  |  | 2005/2006 |   |  | 2004/2005 |  
|                                  |  | (euro in millions)              |  |          |  |       |  |          
|Research and development expenses |  | 71.2                            |  | 63.9     |  | 69.3  |  | 11.4      |   |  | (7.8      | )
|Marketing and selling expenses    |  | 104.6                           |  | 111.3    |  | 116.2 |  | (6.0      | ) |  | (4.2      | )
|General administrative expenses   |  | 13.4                            |  | 13.2     |  | 14.6  |  | 1.5       |   |  | (9.6      | )
|                                  |  |                                 |  |          |  |       |  |           |   |  |           |  
|Total                             |  | 189.2                           |  | 188.4    |  | 200.1 |  | 0.4       |   |  | (5.8      | )

Research and development expenses.

In fiscal year 2006, research and development expenses increased by 7.3 million to 71.2 million. By maintaining research and development
expenses at a level of 5.4% of net sales, EPCOS underscores the importance of research and development to its business model. The vast majority of these expenses are used to help EPCOS follow technological trends and service market demand, such as
for miniaturization and integrated solutions. These trends are moving us from discrete components to modules and systems. For EPCOS, combined products and integrated solutions are therefore becoming increasingly important. The main focus of our
research and development expenses was on the SAW components segment as well as on the ceramic components segment.

In fiscal year 2005,
research and development expenses decreased by 5.4 million to 63.9 million, mainly in response to lower sales in fiscal year 2005. We nevertheless stepped up our work on key innovation projects such as modules for power factor
correction for electric drive systems in industrial plants, bulk acoustic wave filters for mobile phones and multilayer serial ceramic capacitors for automotive electronics applications. In fiscal year 2005, research and development expenses
accounted for 5.6% of net sales, remaining at about the previous years level.

Capacitors and inductors. In fiscal year 2006,
research and development expenses in the capacitors and inductors segment rose by 3.6 million to 19.0 million, amounting 4.0% of net sales. The main focus of these expenditures was on the further development of aluminum
electrolytic capacitors for automotive applications, on modules for power factor correction used in electric drive systems as well as on transponders for keyless entry systems and immobilizers.

In fiscal year 2005, research and development expenses in the capacitors and inductors segment increased by 0.2 million to
15.4 million, amounting to 3.7% of net sales in this segment. Expenditures focused on modules for power factor correction used in electric drive systems in industrial plants, on transponders for keyless entry systems and immobilizers, as
well as on helical power inductors used in power supplies.

Ceramic components. In fiscal year 2006, research and development
expenses in the ceramic components segment increased by 0.9 million to 23.1 million, amounting to 5.5% of net sales for the ceramic components segment. The main focus of these expenses was on the further development of piezo
actuators and multilayer ceramic capacitors for automotive electronics applications.



-39-



---

##### Table of Contents

In fiscal year 2005, research and development expenses in the ceramic components segment decreased by
0.8 million to 22.2 million, amounting to 6.1% of net sales for the ceramic components segment. The main focus of these expenses was on piezo actuators for diesel injection systems and multilayer serial ceramic capacitors for
automotive electronics applications, as well as on multilayer ceramic modules for mobile communication applications.

SAW
components. Research and development expenses in the SAW components segment increased by 2.8 million to 29.1 million, amounting to 7.1% of net sales. Expenditures were concentrated on film bulk acoustic wave resonators,
chip sized SAW packages and wafer level SAW packages mainly used in mobile phone applications, on radio-frequency modules (e.g. WLAN modules), and on low-temperature co-fired ceramics for automotive applications.

In fiscal year 2005, research and development expenses in the SAW components segment decreased by 4.8 million to 26.3 million,
comprising the major share of our total research and development expenses. Amounting to 7.1% of net sales for the SAW components segment, spending was concentrated on film bulk acoustic wave resonators, CeraDiodes and ESD/EMI modules.

Marketing and selling expenses.

In
fiscal year 2006, marketing and selling expenses decreased by 6.7 million to 104.6 million compared with fiscal year 2005. As these expenses decreased compared to an increase in net sales, marketing and selling expenses as a
percentage of net sales decreased from 9.7% in fiscal year 2005 to 8.0% in fiscal year 2006. The reduction in marketing and selling expenses mainly reflects savings due to organizational optimizations and general cost savings.

In fiscal year 2005, marketing and selling expenses decreased by 4.9 million to 111.3 million compared with fiscal year 2004. As
these expenses decreased proportionally less than net sales, marketing and selling expenses as a percentage of net sales increased from 9.3% in fiscal year 2004 to 9.7% in fiscal year 2005.

General administrative expenses.

In
fiscal year 2006, general and administrative expenses increased slightly by 0.2 million to 13.4 million, compared with fiscal year 2005. This increase mainly reflects the higher variable cash components of the compensation paid
to senior management and members of the management board compared with fiscal year 2005. These effects could not be compensated for by various cost saving measures.

In fiscal year 2005, general and administrative expenses decreased by 1.4 million to 13.2 million, compared with fiscal year 2004. This decrease mainly reflects the lower variable cash components
of the compensation paid to senior management and members of the management board.

Earnings before interest, taxes and minority interest (EBIT)

EBIT is not a measure of financial performance under U.S. GAAP. However, we use EBIT as a measure because that is the basis on which
our management evaluates the operating performance for each of our segments and for the Company as a whole, and on which it establishes budgets and operational goals. We believe that EBIT is a better measure of operating performance of our segments
than net income since the latter includes interest income (expenses) and benefit (provision) for income taxes, whereas EBIT permits investors to examine the performance of each business segment and the Company as a whole between years with a higher
degree of comparability. We calculate EBIT as net income (loss) plus (minus) minority interest minus (plus) benefit (provision) for income taxes minus (plus) interest result. Other companies that use EBIT may calculate it differently, and their
figures may not be comparable to ours. The EBIT of our segments differs from our net income and you should not consider them to be the same. Note 24 to our Consolidated Financial Statements shows a reconciliation of segment EBIT to segment
income before income taxes and minority interest. For a reconciliation of EBIT to net income, see Item 3. Key Information  Selected Consolidated Financial and Statistical Data.



-40-



---

##### Table of Contents

The following table sets forth EBIT for continuing operations as well as EBIT as a percentage of net
sales for each of our segments for the periods shown:

Earnings before interest, taxes and minority interest



|                            |  |                                        |    |  |       |    |  |      |   
|--------------------------- |  | -------------------------------------- | -- |  | ----- | -- |  | ---- | --
|                            |  | Fiscal year ended September 30,        |   
|                            |  | 2006                                   |    |  | 2005  |    |  | 2004 |   
|                            |  | (euro in millions, except percentages) |   
|Capacitors                  |  | (12.8                                  | )  |  | (31.3 | )  |  | (9.1 | ) 
|(as a percent of net sales) |  | (2.7                                   | )% |  | (7.5  | )% |  | (2.1 | )%
|Ceramic components          |  | 7.0                                    |    |  | (24.3 | )  |  | 19.4 |   
|(as a percent of net sales) |  | 1.7                                    | %  |  | (6.7  | )% |  | 5.2  | % 
|SAW components              |  | 52.6                                   |    |  | 28.7  |    |  | 57.2 |   
|(as a percent of net sales) |  | 12.9                                   | %  |  | 7.8   | %  |  | 12.7 | % 
|EBIT                        |  | 46.8                                   |    |  | (26.9 | )  |  | 67.5 |   

In fiscal year 2006, EBIT increased by 73.7 million to 46.8 million in our
continuing operations. This improvement was mainly the result of a significantly higher sales volume. Cost savings resulting from process optimization and purchasing savings were able to nearly compensate the negative impact of price erosion. Our
EBIT was further impacted by restructuring costs of about 6 million taken in respect of the discontinuation of the UltraCap activities in the capacitors and inductors segment.

In fiscal year 2005, EBIT fell by 94.4 million, to minus 26.9 million, and was burdened by an impairment on goodwill on our
ferrites business in the amount of 12 million, high ramp-up costs for new products, as well as by an inventory write-down at our ceramic capacitors segment in the amount of 6 million and additional costs for the final closure
of our ferrites plant in Bordeaux, France in the amount of 5 million. Our EBIT was further negatively impacted by the lower sales volumes and a less favorable product mix than in the previous year. Cost savings resulting from process
optimization and purchasing savings were able to more than offset the negative impact of price erosion in fiscal year 2005.

The following
table shows the development of EBIT for continuing operations for each quarter of fiscal year 2006:



|                                     |  |                                                         |   |  |      |   |  |      |   |  |      |   |  |       |  
|------------------------------------ |  | ------------------------------------------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ----- | -
|                                     |  | EBIT by quarter, and reconciliation2006 EBIT by quarter |  
|                                     |  | Q1                                                      |   |  | Q2   |   |  | Q3   |   |  | Q4   |   |  | Total |  
|                                     |  | (unaudited, euro in millions)                           |  
|Net income                           |  | 0.8                                                     |   |  | 8.3  |   |  | 13.9 |   |  | 12.2 |   |  | 35.2  |  
|Minority interest                    |  | 0.1                                                     |   |  | 0.1  |   |  | 0.1  |   |  | 0.1  |   |  | 0.4   |  
|Provision (benefit) for income taxes |  | (0.4                                                    | ) |  | 0.6  |   |  | (1.0 | ) |  | 3.0  |   |  | 2.2   |  
|Interest result                      |  | (2.8                                                    | ) |  | (2.7 | ) |  | (2.0 | ) |  | (1.5 | ) |  | (9.0  | )
|EBIT                                 |  | 3.3                                                     |   |  | 11.7 |   |  | 15.0 |   |  | 16.8 |   |  | 46.8  |  
|Thereof:                             |  |                                                         |   |  |      |   |  |      |   |  |      |   |  |       |  
|Capacitors and inductors             |  | (6.4                                                    | ) |  | (1.8 | ) |  | (0.4 | ) |  | (4.2 | ) |  | (12.8 | )
|Ceramic components                   |  | (2.7                                                    | ) |  | 1.4  |   |  | 3.0  |   |  | 5.3  |   |  | 7.0   |  
|SAW components                       |  | 12.4                                                    |   |  | 12.1 |   |  | 12.4 |   |  | 15.7 |   |  | 52.6  |  

Capacitors and inductors. In fiscal year 2006, EBIT in the capacitors and inductors segment
improved by 18.5 million to minus 12.8 million compared with fiscal year 2005. The segments EBIT was burdened by restructuring charges of about 6 million taken in respect of the discontinuation of the UltraCap
activities. Our EBIT was further impacted by increases in the price of some materials such as aluminum foil and copper wire. A higher coverage of fix cost resulting from higher production volumes and cost savings resulting from process optimization
and purchasing savings more than offset the negative effects of the ongoing price erosion.

In fiscal year 2005, EBIT in the capacitors and
inductors segment decreased by 22.2 million, to minus 31.3 million compared with minus 9.1 million fiscal year 2004. The reduction in the segments EBIT was mainly due to the additional expenditures of
5 million for the final closure of the ferrites plant in Bordeaux, France and an impairment of goodwill of 12 million. Lower sales volume and persistent price erosion also burdened the EBIT of this segment. These negative
effects could not be compensated by cost savings resulting from process optimization and purchasing savings in fiscal year 2005.



-41-



---

##### Table of Contents

Ceramic components. In fiscal year 2006, EBIT in the ceramic components segment increased by
31.3 million to 7.0 million. A higher sales volume was the main reason for this improvement, while the streamlining of our portfolio of multilayer ceramic capacitors also began taking effect. In addition, the EBIT in this segment
was negatively impacted by a less favorable product mix due to the ongoing increased demand for piezo actuators, for which the earnings situation remains unsatisfactory. Cost savings resulting from process optimization and purchasing savings offset
the negative effects of the ongoing price erosion.

In fiscal year 2005, EBIT in the ceramic components segment decreased by
43.7 million, to minus 24.3 million, on a year-on-year basis. The segments EBIT was burdened primarily by high ramp-up costs for new products, the lower sales volume and inventory write-downs at our multilayer ceramic
capacitors.

SAW components. In fiscal year 2006, EBIT in the SAW components segment increased by 23.9 million to
52.6 million. This improvement was mainly the result of a significantly higher sales volume. Cost savings resulting from process optimization and purchasing savings offset the negative effects of the ongoing price erosion.

In fiscal year 2005, EBIT in the SAW components segment decreased by 28.5 million, to 28.7 million, compared to fiscal year 2004.
This reduction was mainly due to the lower sales volume and persistent price erosion, whereas the latter was only partly offset by cost savings resulting from process optimization and purchasing savings.

Interest, other income (expense) and foreign exchange

Our net interest expense amounted to 9.0 million in fiscal year 2006, 7.7 million in fiscal year 2005, and 5.5 million in fiscal year 2004. The increase in net interest expense in fiscal year 2006 reflects
the worldwide increase in interest rates, although we were able to decrease the level of our financial debt during the year.

In fiscal
year 2006, net other income of 6.7 million mainly consisted of grants for research in Austria in the amount of 3.9 million and investment grants in Czech Republic and Germany in the amount of 0.4 million. Our net foreign
exchange gains in the amount of 1.5 million were mainly due to gains resulting from the forward hedging for palladium powder, which were partly offset by hedging costs for foreign exchange activities. In fiscal year 2005, net other income
of 7.3 million mainly consisted of grants for research and continuing education in Austria in the amount of 4.9 million and investment grants in Czech Republic in the amount of 1.3 million. Our net foreign exchange
losses were mainly due to hedging costs for foreign exchange financing activities in the amount of 4.7 million, as well as currency losses.

Income taxes

Tax calculations reflect the current legal structure and the applicable tax laws of the respective
countries in which we have operations. The following table shows income taxes as well as income taxes as a percentage of income before income taxes and minority interests of the continuing operations for the periods shown:



|                                                                                        |  |                                 |   |  |       |    |  |       |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | - |  | ----- | -- |  | ----- | -
|                                                                                        |  | Fiscal year ended September 30, |  
|                                                                                        |  | 2006                            |   |  | 2005  |    |  | 2004  |  
|Benefit/(Provision) for income taxes (euro in millions)                                 |  | (2.2                            | ) |  | (31.5 | )  |  | (10.9 | )
|Income taxes (as a percent of (loss) income before income taxes and minority interests) |  | 5.8                             | % |  | (91.0 | )% |  | 17.5  | %

The low tax rate in fiscal year 2006 relates to the regional distribution of our income. Profits
were generated in entities benefiting from relatively low tax rates, while we recorded losses in jurisdictions with higher tax rates. In fiscal year 2006, profits were recorded in legal entities benefiting from tax incentives, such as our subsidiary
in Singapore. The Singapore tax incentive contributed to our net income in the amounts of 6.5 million in fiscal year 2006, 0.8 million in fiscal year 2005, and 9.9 million in fiscal year 2004. The negative tax rate
in fiscal year 2005 was mainly caused by valuation allowances on tax assets and the total group loss. The tax rate in fiscal year 2004



-42-



---

##### Table of Contents

is based on the positive group income before taxes. The third table in Note 18 to our Consolidated Financial Statement reconciles our expected and actual
provision for income taxes.

At September 30, 2006, EPCOS had consolidated net operating loss (NOL) carry forwards of
337.1 million. The NOL relates mainly to the German, Austrian, French, Brazilian, Indian and Spanish operations. Additionally, the subsidiary in Spain has a tax credit in the amount of 3.2 million at its disposal.

EPCOS AG changed its pension scheme in fiscal year 2003. Liabilities were transferred to and payments will be made by a fund named
Unterstützungskasse der EPCOS AG (UK EPCOS) e.V.. Taxable income of 3.1 million in fiscal year 2006, 7.0 million in fiscal year 2005 and of 3.4 million in fiscal year 2004 were generated from
the conversion at EPCOS AG, because indirect pension obligations can not be considered for tax purposes. A temporary difference has thus arisen between the book value and the tax basis, which led to a deferred tax asset of 43.7 million at
September 30, 2006, 42.4 million at September 30, 2005 and of 39.6 million at September 30, 2004.

Deferred tax assets (net) amounted to 69.2 million at September 30, 2006 and to 56.7 million at September 30, 2005. The increase of the tax assets in fiscal year 2006 was mainly caused by creating an
additional tax asset on net operating losses at EPCOS AG. Management expects that net operating losses will be able to be utilized.

The
Companys valuation allowance increased from fiscal year 2005 to fiscal year 2006 by 14.1 million, in fiscal year 2004 to fiscal year 2005 by 34.7 million and from fiscal year 2003 to fiscal year 2004 by
3.5 million. The valuation allowances reduced the deferred tax assets to a net amount that will more likely than not be realized based on our estimate of future earnings and the expected timing of temporary difference reversals.

Net income

In fiscal year
2006, we recorded a net profit from continuing operations of 35.2, following net loss from continuing operations of 66.3 million in fiscal year 2005 and net profit from continuing operations of 51.0 million in fiscal year
2004. In fiscal year 2006, EPCOS recorded a net profit of 21.2 million for the total Group business including a loss of 14.0 million posted by the discontinued tantalum capacitor business. For the fiscal years 2005 and 2004, we
recorded for the total Group business a net loss of 119.3 million and a net profit of 49.2 million, respectively.

Under the German Stock Corporation Act, the amount of income available for distribution to shareholders is based upon the equity of the Company as reported in its financial statements drawn up on a stand-alone basis in accordance with the
German Commercial Code (Handelsgesetzbuch). Accordingly, the Annual General Meeting decides only on the dividends payable from the retained earnings (after deduction of certain reserves) as shown in the Companys annual German statutory
accounts. This amount differs from the total retained earnings as shown in the accompanying financial statements prepared in accordance with U.S. GAAP. As of September 30, 2006, this amount was 54.4 million.

Liquidity and Capital Resources

Liquidity

We finance our operations from a combination of our cash flows from operating activities, loans from banks and funding from the capital markets. We
believe that our working capital is sufficient for our current requirements. As with many companies in our business, we are subject to risks to our operating cash flows. We describe these risks under Item 3. Key Information 
Risk Factors. We do not expect any circumstances to occur that could materially impair our ability to engage in our ordinary activities.

In fiscal year 2006, we had cross currency and interest rate swaps with a nominal value of 16.1 million allocated to transactions with an average size of 2.68 million. The swaps have various



-43-



---

##### Table of Contents

maturities up to March 30, 2009. At March 1, 2007, we had cross currency and interest rate swaps with a nominal volume of 12.1 million
and USD 5.3 million allocated to transactions with an average size of 2.42 million and USD 2.65 million. The swaps have various maturities up to January 5, 2010.

Our short- and long-term borrowing arrangements are described in more detail below under Capital Resources.

Working capital.Our working capital (current assets (including cash and cash equivalents) less current liabilities) amounted to
356.6 million at September 30, 2006, 288.5 million at September 30, 2005 and 314.0 million at September 30, 2004. The increase in fiscal year 2006 was mainly due to an increase of cash and cash
equivalents of 75.4 million reflecting the positive cash flow, including the proceeds of approximately 68 million from the sale of our tantalum capacitors business. Additionally, as a result of the strong business development
in the electronic components and modules industry throughout fiscal year 2006, accounts receivable, net, increased by 15.1 million. Furthermore, net inventories decreased by 13.0 million mainly due to certain inventories being
reclassified under assets held for sale resulting from our activities as a temporary tantalum sales partner to Kemet. Prepaid expenses and other current assets decreased slightly by 1.3 million. These effects were partly
offset by an increase of accounts payable of 19.6 million, a decrease of accrued expenses and other current liabilities of 5.2 million, a decrease of short-term borrowings of 18.2 million as well as an increase of
deferred income tax of 10.8 million. The current portion of long-term debt remained fairly stable on a year-on-year basis.

Cash flows from operating activities.Net cash provided by operating activities amounted to 145.8 million in fiscal year 2006, 88.1 million in fiscal year 2005 and 155.5 million in fiscal year 2004.
The increase in fiscal year 2006 mainly reflects the significant improvement in net income during the period and an increase in accounts payable, which was partly offset by an increase in inventories, net, and an increase in accounts receivable,
net, reflecting the brisk demand for electronic components and modules as well as a lower depreciation and amortization than in the previous year. Depreciation and amortization for the fiscal year 2005 was impacted by the impairment charge for the
long-lived assets in the tantalum business.

Cash flows used in investing activities.Net cash used in investing activities consists
mainly of capital expenditures. Net cash used in investing activities amounted to 47.4 million in fiscal year 2006, 153.4 million in fiscal year 2005 and 107.9 million in fiscal year 2004. Net cash used in investing
activities decreased in fiscal year 2006 mainly due to the proceeds of the sale of the tantalum capacitors business in the amount of  68 million. Additionally, lower levels of funds channeled into production capacity for new products
(including piezo actuators) and the expansion of production capacity for SAW multimedia and mobile communication filters, BAW duplexers and wireless LAN modules had a positive effect on net cash used in investing activities.

Cash flows from financing activities.In fiscal year 2006, net cash used in financing activities amounted to 21.4 million, compared
with net cash provided by financing activities of 18.2 million in fiscal year 2005 and net cash used in financing activities of 2.9 million in fiscal year 2004. In fiscal year 2006, net cash used in financing activities mainly
consisted of a decrease of short-term borrowings of 14.9 million and principal payments on long-term debt of 23.1 million, which were partly offset by proceeds from the issuance of long-term debt of 16.6 million. In
fiscal year 2005, short-term borrowings decreased by 1.6 million, while long-term debt increased by a net 19.9 million during the year.



-44-



---

##### Table of Contents

Contractual obligations

The following table gives you an overview of our contractual cash obligations for the periods shown:



|                                   |  |                     |  |                                              |  |           |  |          |  |       
|---------------------------------- |  | ------------------- |  | -------------------------------------------- |  | --------- |  | -------- |  | ------
|Contractual cash obligations       |  | Total               |  | Payments due by period at September 30, 2006
|                                   |  | <1 year             |  | 1-3 years                                    |  | 4-5 years |  | >5 years
|                                   |  | (euro in thousands)
|Long-term debt*                    |  | 219,742             |  | 24,990                                       |  | 53,090    |  | 134,568  |  | 7,094 
|Operating lease obligations        |  | 59,169              |  | 15,226                                       |  | 15,515    |  | 17,224   |  | 11,204
|                                   |  |                     |  |                                              |  |           |  |          |  |       
|Total contractual cash obligations |  | 278,911             |  | 40,216                                       |  | 68,605    |  | 151,792  |  | 18,298

---

|* | Principal amount; does not include interest payable on principal amount.
|- | ------------------------------------------------------------------------

We did not have a material amount of other financial commitments during the periods shown.

Capital resources

As of September 30, 2006, we had cash and cash equivalents of 268.9 million and short-term financial debt
(including the current portion of long-term debt) of 114.3 million. This amount included short-term borrowings of 89.3 million and 25.0 million of the current portion of long-term debt. The short-term borrowings
consisted principally of unsecured bank loans and export financing. The export financing amounted to 43.0 million at the end of fiscal year 2006 and bore interest at a rate of 2.8% in fiscal year 2006. Other short-term borrowings
consisted of working capital loans with various banks in currencies of the countries where we operate and had a weighted average interest rate of 10.82% in fiscal year 2006.

As of September 30, 2006, we had long-term debt in the amount of 219.7 million, which bore interest at a weighted average rate of 3.1216%
in fiscal year 2006. This debt (including current installments) consisted of:



|                 |         |                 |       |               |              |                 |                   |        |                                                       
|---------------- | ------- | --------------- | ----- | ------------- | ------------ | --------------- | ----------------- | ------ | ------------------------------------------------------
|Principal amount |         | Euro equivalent |       | Interest rate |              | Maturity        |                   | Lender
|(in millions)    |         | (in millions)   |       |               |              | (calendar year) |                   |       
|                | 125.0   |                 | 125.0 |               | 2.5%         |                 | 2010              |        | Convertible Bond                                      
|                | 24.0    |                 | 24.0  |               | 4.2375%      |                 | 2007 through 2009 |        | KfW                                                   
|                | 46.8    |                 | 46.8  |               | 1.00-4.00%   |                 | 2006 through 2011 |        | Austrian banking syndicate and government institutions
|USD              | 1.8     |                 | 1.4   |               | 9.70%        |                 | 2008              |        | Banco Nacional de Desenvolvimento Econômico e Social  
|BRL              | 36.9    |                 | 13.4  |               | 8.35%-15.85% |                 | 2006 through 2009 |        | Banco Nacional de Desenvolvimento Econômico e Social  
|HUF              | 2,500.0 |                 | 9.1   |               | 7.94%        |                 | 2008              |        | HVB                                                   

On July 16, 2003, the Company (as guarantor), through its subsidiary EPCOS Finance B.V. (as
issuer), issued a convertible bond due 2010 with a nominal amount of 126.425 million at an interest rate of 2.5%. At September 30, 2006, deferred debt issuance costs were 1.425 million. The bond is convertible, at the
option of the holders of the notes, into a maximum of 6,500,000 ordinary shares of the Company, at a conversion price of 19.45 per share. Upon conversion, the Company may pay a cash amount in lieu of delivery of all or a part of the
shares. The bond is unsecured and ranks pari passu with all present and future unsecured subordinated obligations of the issuer. The conversion right may be exercised by the bondholder during the period commencing on September 1, 2003 and
ending on July 1, 2010. The bond holders have an early redemption option in the event of a change of control, in which case each bondholder may demand from the issuer redemption of any or all of its bonds at the principal amount plus interest
accrued thereon. Beginning July 17, 2008, the Company may redeem the convertible bond at the principal amount plus interest accrued thereon if the Companys share price exceeds 150% of the conversion price on ten trading days during a
period



-45-



---

##### Table of Contents

of 20 days. If the aggregate principal amount of bonds outstanding falls below 20.000 million the Company may redeem the remaining parts of the
convertible bond.

On April 1, 2003, EPCOS AG entered into a loan of 40.0 million with KfW, carrying an interest rate of
4.2375%. The loan matures on September 30, 2009 and is being repaid since March 31, 2005, in equal semi-annual installments. For further information on our long-term debt arrangements, see Note 11 to our Consolidated Financial
Statements.

We have arranged approximately 361.10 million in lines of credit as of September 30, 2006. These lines of
credit include a syndicated facility for 250 million led by Bayerische Hypo- und Vereinsbank, The Royal Bank of Scotland and HSBC. This credit facility was unused as of September 30, 2006 and carries an interest rate of either
EURIBOR or LIBOR plus 0.25%. For the unused part of the borrowing arrangement a commitment fee is paid to the syndicate of 0.0875% per year. The new facility will expire in November 2009. In addition, we have negotiated a series of bilateral
credit facilities with international and national banks for an aggregate of 111.10 million, of which 37.0 million were used at September 30, 2006. These facilities bear floating rates of interest based on interbank rates
of interest plus margins ranging from 0.50% to 1.20%. We believe these facilities will enable us to meet our obligations as they come due.

Our existing syndicated credit facility contains various financial covenants, which require us to maintain a specified minimum equity ratio and to not exceed a specified financial debt-to-EBITDA ratio. We are in compliance with each of
these covenants. We do not believe that our current borrowing arrangements contain covenants that are likely to restrict our access to funding or would require us to repay any amount that is outstanding.

Capital Expenditures

The following table sets forth
our capital expenditures by segment for fiscal years 2006, 2005 and 2004:



|                         |  |                                 |  |      |  |     
|------------------------ |  | ------------------------------- |  | ---- |  | ----
|                         |  | Fiscal year ended September 30,
|                         |  | 2006                            |  | 2005 |  | 2004
|                         |  | (euro in millions)             
|Capacitors and inductors |  | 20.7                            |  | 31.2 |  | 27.4
|Ceramic components       |  | 20.4                            |  | 71.0 |  | 30.6
|SAW components           |  | 62.1                            |  | 30.4 |  | 41.5

Capacitors and inductors. Capital expenditures for the capacitors and inductors segment
decreased by 10.5 million to 20.7 million in fiscal year 2006. These funds were mainly used to expand production capacity for inductors in Hungary and film capacitors in China.

In fiscal year 2005, capital expenditures for the capacitors and inductors segment increased by 3.8 million to 31.2 million and
were largely invested in modernizing the production of film capacitors, expanding our production of aluminum electrolytic capacitors and our production capacity for inductive components at our plants in China and Hungary.

Ceramic components. In fiscal year 2006, capital expenditures for the ceramic components segment decreased significantly by
50.6 million to 20.4 million as most of the production ramp up for piezo actuators was done in fiscal year 2005. As in fiscal year 2005, the major part of the capital expenditures in fiscal year 2006 was again devoted to
ramping up production of piezo actuators.

Capital expenditures for the ceramic components segment amounted to 71.0 million in
fiscal year 2005, an increase of 40.4 million compared to fiscal year 2004. These funds were mainly used to ramp up production of piezo actuators.

SAW components. Capital expenditures for the SAW components segment amounted to 62.1 million in fiscal year 2006, an increase of 31.7 million compared to fiscal year 2005. The major part
of this amount was mainly used to expand production capacity for SAW multimedia and mobile communication filters. Funds were also invested to ramp up production of BAW duplexers and wireless LAN modules.



-46-



---

##### Table of Contents

In fiscal year 2005, capital expenditures for the SAW components segment were reduced by
11.1 million to 30.4 million and were primarily used to expand production capacity for multilayer modules and SAW filters in CSSP technology.

In the coming years, we are planning further capital expenditures to develop our production capacity for aluminum electrolytic capacitors in the capacitors segment and to further expand production capacity for
inductors. In ceramic components, we will emphasize capital expenditures for multilayer ceramics and piezo actuators. In the SAW components segment, we intend to invest in innovative filtering solutions such as film bulk acoustic wave resonators and
multilayer ceramic module technologies.

Our planned capital expenditures include outlays for environmental compliance. Environmental
considerations, including energy and materials consumption and satisfying emissions standards, contribute to the cost of improvements and expansions of our production facilities. We do not budget separately for capital expenditures relating to
environmental compliance, and few of our capital expenditures are made solely for this purpose. New or more stringent environmental regulations, including any relating to the European Unions directives on waste electrical and electronic
equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment described under Item 8. Financial Information  Legal matters  Environment, could require us to
increase our capital expenditures budget or reallocate resources.

We intend to finance our capital expenditures program from operating
cash flow.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements except for our operating leases, under which we lease manufacturing, sales and administrative facilities and various types of equipment. Rental expenses for operating leases amounted to
22.9 million in fiscal year 2006, 23.5 million in fiscal year 2005 and 23.6 million in fiscal year 2004. Our operating leases include mainly the following items:



| |  |  | The lease for our German premises in the amount of 9.9 million, which mainly includes lease payments for our production and sales facilities as well as
the lease of our headquarters in the amount of 7.9 million,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the lease of a facility in Austria from Siemens for the ceramic components segment. The lease has a term of 10 years and provides for annual lease payments of
1.2 million,
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the lease by our Austrian subsidiary of a factory building. This lease has a term of 15 years and provides for annual lease payments of 2.2 million,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the lease of our production and sales facilities in the U.S. amounting to 1.5 million, and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the lease for our facility in Singapore in the amount of 1.6 million, mainly comprising lease payments for our buildings.
| | - |  | --------------------------------------------------------------------------------------------------------------------------

We have not issued any guarantees or other substantial commitments to third parties.

Effect of New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board
issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN No. 48), to create a single model to address accounting for uncertainty in tax
positions. FIN No. 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on
derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN
No. 48 as of fiscal year



-47-



---

##### Table of Contents

2008 as required. The Company is currently evaluating the effects, if any, the adoption of FIN No. 48 will have on the Companys financial position
and results of operations.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value measurements, the Financial Accounting Standards Board having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, this Statement does not require any new fair value measurements.

In September 2006, the Financial
Accounting Standards Board issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This Statement requires an employer to recognize the overfunded or underfunded status of a defined
benefit post retirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This Statement also
requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. This Statement requires companies with one or more single-employer defined benefit plans, among other things, to

a. Recognize the funded status of a benefit plan - measured as the difference between plan assets at fair value and the benefit obligation - in its
statement of financial position.

b. Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior
service costs.

c. Measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of
financial position.

The Company will adopt SFAS No. 158 as of fiscal year 2007 as required. As of September 30, 2006, for the
principal pension benefit plans and other postretirement plans, the net amount of actuarial gains and losses and prior service cost and benefits not recognized in equity before related taxes, amounted to 15 million.

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits
measurement of recognized financial assets and liabilities at fair value with some exceptions, such as investments in subsidiaries, obligations for pension or other postretirement benefits, and financial assets and financial liabilities recognized
under leases. Changes in the fair value of items for which the fair value option is elected should be recognized in income or loss. The election to measure eligible items at fair value is irrevocable and can only be made at defined election dates or
events, generally on an instrument by instrument basis. Items for which the fair value option is elected should be separately presented or be parenthetically disclosed in the statement of financial position. SFAS No. 159 also requires
significant new disclosures that apply for interim and annual financial statements. SFAS No. 159 will be effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted, if certain conditions are met. The
effect of the first remeasurement of fair value of eligible items existing will be reported as an adjustment to the opening balance of retained earnings as of the date of adoption. EPCOS is currently determining the policy of adoption as well as the
resulting effect of SFAS No. 159 on the Groups consolidated financial statements.



-48-



---

##### Table of Contents

First Quarter Results of Fiscal Year 2007 and Recent Developments

First quarter results (unaudited) compared to previous year

The following table provides key information about the results for the first quarter of fiscal year 2007 (October 1, 2006 to December 31, 2006) and for the first quarter of fiscal year 2006 (October 1, 2005 to
December 31, 2005).



|                                                                                        |  |                                                               |   |  |            |   
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | - |  | ---------- | --
|                                                                                        |  | Three months endedDecember 31,                                |  
|                                                                                        |  | 2006                                                          |   |  | 2005       |   
|                                                                                        |  | (euro in millions, except share andper share data, unaudited) |  
|Consolidated statement of income data:                                                  |  |                                                               |   |  |            |   
|Net sales                                                                               |  | 334.4                                                         |   |  | 304.8      |   
|Gross profit                                                                            |  | 61.1                                                          |   |  | 49.7       |   
|Operating income                                                                        |  | 15.7                                                          |   |  | 1.9        |   
|Income before income taxes and minority interest                                        |  | 15.5                                                          |   |  | 0.5        |   
|Net income of continuing operations                                                     |  | 13.1                                                          |   |  | 0.8        |   
|Net loss of discontinued operations, net of income taxes                                |  | (0.0                                                          | ) |  | (4.0       | ) 
|                                                                                        |  |                                                               |   |  |            |   
|Net income (loss)                                                                       |  | 13.1                                                          |   |  | (3.2       | ) 
|Basic earnings per shareof continuing operations                                        |  | 0.20                                                          |   |  | 0.01       |   
|of discontinued operations                                                              |  | 0.00                                                          |   |  | (0.06      | ) 
|Basic weighted average number of shares                                                 |  | 65,300,000                                                    |   |  | 65,300,000 |   
|Diluted earnings per shareof continuing operations                                      |  | 0.19                                                          |   |  | 0.01       |   
|of discontinued operations                                                              |  | 0.00                                                          |   |  | (0.06      | ) 
|Diluted weighted average number of shares                                               |  | 71,806,568                                                    |   |  | 65,300,000 |   
|                                                                                        | 
|Net sales by segment:                                                                   |  |                                                               |  
|Capacitors and inductors                                                                |  | 121.6                                                         |   |  | 109.3      |   
|Ceramic components                                                                      |  | 111.0                                                         |   |  | 97.1       |   
|SAW components                                                                          |  | 101.8                                                         |   |  | 98.4       |   
|Less inter-segment sales                                                                |  |                                                              |   |  |           |   
|                                                                                        |  |                                                               |   |  |            |   
|Total                                                                                   |  | 334.4                                                         |   |  | 304.8      |   
|                                                                                        | 
|Earnings (loss) before interest and taxes by segment (reconciled to net income (loss)): |  |                                                               |  
|Net income (loss)                                                                       |  | 13.1                                                          |   |  | (3.2       | ) 
|Net loss of discontinued operations, net of income taxes                                |  | (0.0                                                          | ) |  | (4.0       | ) 
|Net income of continuing operations                                                     |  | 13.1                                                          |   |  | 0.8        |   
|Minority interest                                                                       |  | 0.0                                                           |   |  | 0.1        |   
|Provision (benefit) for income taxes                                                    |  | 2.4                                                           |   |  | (0.4       | ) 
|Interest result                                                                         |  | 1.6                                                           |   |  | 2.8        |   
|EBIT (continuing operations)                                                            |  | 17.1                                                          |   |  | 3.3        |   
|(as a percent of net sales)                                                             |  | 5.1                                                           | % |  | 1.1        | % 
|thereof:                                                                                |  |                                                               |   |  |            |   
|Capacitors and inductors                                                                |  | 2.1                                                           |   |  | (6.4       | ) 
|(as a percent of net sales)                                                             |  | 1.7                                                           | % |  | (5.9       | )%
|Ceramic components                                                                      |  | 0.3                                                           |   |  | (2.7       | ) 
|(as a percent of net sales)                                                             |  | 0.3                                                           | % |  | (2.8       | )%
|SAW components                                                                          |  | 14.7                                                          |   |  | 12.4       |   
|(as a percent of net sales)                                                             |  | 14.4                                                          | % |  | 12.6       | % 
|                                                                                        | 
|Capital expenditures by segment:                                                        |  |                                                               |  
|Capacitors and inductors                                                                |  | 2.8                                                           |   |  | 2.8        |   
|Ceramic components                                                                      |  | 6.8                                                           |   |  | 7.7        |   
|SAW components                                                                          |  | 13.2                                                          |   |  | 7.6        |   
|Eliminations                                                                            |  | 1.7                                                           |   |  | 0.5        |   
|                                                                                        |  |                                                               |   |  |            |   
|Total                                                                                   |  | 24.5                                                          |   |  | 18.6       |   

In the first quarter of fiscal year 2007, sales increased by 9.7% to 334.4 million,
from 304.8 million in the first quarter of fiscal year 2006. Net sales of products to the automotive electronics industry and to the industrial electronics customers rose significantly, reflecting the strong demand in these areas. Net
sales of telecom products and to components distributors also grew substantially. Sales to consumer electronics customers decreased on a year-to-year basis, however, as manufacturers of TV tuners scaled back production to adjust their inventories.
Additionally, the first quarter of fiscal



-49-



---

##### Table of Contents

year 2006 was positively influenced by the expectations in relation to major sporting events such as the Winter Olympic Games and the soccer World Cup. EBIT
rose from 3.3 million in the three months ended December 31, 2005 to 17.1 million in the three months ended December 31, 2006, mainly due to the higher production volume on a year-to-year basis, cost savings resulting
from process optimization and purchasing savings, whereas the latter could not completely offset ongoing price erosion. Net income of continuing operations increased from 0.8 million in the first quarter of fiscal year 2006 to
13.1 million in the first quarter of fiscal year 2007 for the reasons described above. As a result, basic earnings per share from continuing operations was 0.20 for the three months ended December 31, 2006 compared to
0.01 in the three months ended December 31, 2006.

Capacitors and inductors. Net sales in the capacitors and
inductors segment increased by 12.3 million to 121.6 million in the first quarter of fiscal year 2007 compared with 109.3 million in the first quarter of fiscal year 2006 due to the strong demand for components used
in industrial electronics applications. In this industry, net sales of aluminum electrolytic capacitors and inductors increased significantly. Demand was also strong for film capacitors for use in energy-saving lamps, for instance. Segment EBIT
increased to 2.1 million in the first quarter of fiscal year 2007, compared with minus 6.4 million in the first quarter of fiscal year 2006 as steps to reduce resources (e.g. resulting from the discontinuation of the
UltraCap activities) were already beginning to improve earnings. Furthermore, our ongoing relocation of production activities in this segment from Málaga, Spain and Gravataí, Brazil to Hungary, China and India are also beginning to
yield positive results.

Ceramic components. Net sales in the ceramic components segment increased by 13.9 million
to 111.0 million in the three months ended December 31, 2006, compared with 97.1 million in the three months ended December 31, 2005. Piezo actuators accounted for the largest share of this growth. At the same time,
business with sensors and sensor systems used in household appliances as well as in automotive electronics applications also increased. EBIT in this segment increased by 3.0 million from minus 2.7 million in the first quarter
of fiscal year 2006 to 0.3 million in fiscal year 2007. However, EBIT has not yet improved as expected despite the growth in net sales due to a less favorable product mix (strong demand in our piezo actuator business for which earnings
are unsatisfactory).

SAW components. Net sales in the SAW components segment increased slightly by 3.4 million
from 98.4 million in the first quarter of fiscal year 2006 to 101.8 million in the first quarter of fiscal year 2007. In particular, demand for SAW filters for mobile communications devices increased and more than offset the
drop in net sales of SAW filters for multimedia applications. The decline in net sales of SAW filters for multimedia applications was caused by lower sales to consumer electronics customers on a year-to-year basis as manufacturers of TV tuners
scaled back production to adjust their inventories. Additionally, the first quarter of fiscal year 2006 was positively influenced by the expectations in relation to major sporting events such as the Winter Olympic Games and the soccer World Cup.

First quarter results (unaudited) compared to previous quarter

In the first quarter of fiscal year 2007 net sales decreased by 4.5% from 350.1 million in the last quarter of fiscal year 2006 to 334.4 million. Net sales to consumer electronics and
telecommunications applications as well as to distributors decreased mainly due to customers year-end inventory adjustments. However, higher net sales of products sold to the automotive electronics industry did not offset this trend.

The market for electronic components and modules has always been characterized by cyclical demand patterns and volatility, and we expect
these factors to continue to affect our business in the future. Additionally, global competition has become even fiercer.

Recent developments

In February 2007, we acquired Aktiv Sensor GmbH, a medium-sized electronics company headquartered in Berlin, Germany, which
possesses comprehensive competence in development, production and applications of pressure sensors and systems. Within the scope of expanding and complementing our technology and product portfolio, this acquisition will enable us, as one of the



-50-



---

##### Table of Contents

leading manufacturers of sensors and sensor systems for temperature measurement, to offer temperature and pressure sensors from a single source.

Item 6. Directors, Senior Management and Employees

Board Practices

In accordance with the German Stock Corporation Act, EPCOS has a supervisory board and a management board. The two boards are separate and no individual
may simultaneously be a member of both boards (except for a period of twelve months by delegation of a supervisory board member into the management board). The management board is responsible for managing our business in accordance with applicable
laws, our Articles of Association and the rules of procedure of the management board. It represents us in our dealings with third parties. The supervisory board appoints and removes the members of the management board and oversees the management of
EPCOS but is not permitted to make management decisions. The supervisory board has determined a catalogue of major business decisions, which shall be implemented by the management board only upon the approval by the supervisory board.

In carrying out their duties, members of both the management board and supervisory board must exercise the standard of care of a prudent and diligent
businessman, and they are liable to EPCOS for damages if they fail to do so. Both boards are required to take into account a broad range of considerations in their decisions, including the interests of EPCOS and our shareholders, employees and
creditors. The management board is required to respect the shareholders rights to equal treatment and equal information.

The
supervisory board has comprehensive monitoring functions, including oversight over accounting and external auditing. To ensure that these functions are carried out properly, the management board must, among other things, regularly report to the
supervisory board with regard to current business operations and future business planning. The supervisory board is also entitled to request special reports at any time. The management board is required to ensure appropriate risk management within
EPCOS and must establish an internal monitoring system.

Further principles of good corporate governance are included in the German
Corporate Governance Code, which came into force with the Transparency and Disclosure Act (Transparenz- und Publizitätsgesetz) in July 2002 and was last updated in June 2006 by a commission established by the German government. It
includes recommendations and suggestions for the organization and functioning of the management and supervisory boards and for the cooperation between the two boards. German stock corporations are obliged to issue once a year a declaration regarding
their compliance with the recommendations of the German Corporate Governance Code. For further information on the German Corporate Governance Code and our Declaration of Conformity dated December 14, 2006, see Item 10. Additional
Information  Articles of Association and Relevant Provisions of German Law.

Under German law, any person who exerts
influence on EPCOS to cause a member of the management board, the supervisory board or holders of special proxies to act in a way that is harmful to EPCOS is liable to EPCOS for damages. A controlling enterprise may not cause EPCOS to take measures
that are unfavorable to us unless any resulting disadvantage is compensated. Board members who have neglected their duties in dealing with a controlling enterprise or other persons exerting influence on EPCOS are jointly and severally liable to
EPCOS for damages together with any controlling shareholder and any other person exerting influence.

As a general rule under German law, a
shareholder has no direct recourse against the members of the management board or the supervisory board in the event that they are believed to have breached a duty to EPCOS. Apart from insolvency or other special circumstances, only EPCOS has the
right to claim damages from members of either board. EPCOS may only waive these damages or settle these claims if at least three years have passed and if the shareholders approve the waiver or settlement at the shareholders meeting with a
simple majority, provided that opposing shareholders that hold, in the aggregate, at least one tenth of our share capital do not have their opposition formally noted in the minutes maintained by a German notary.



-51-



---

##### Table of Contents

Supervisory Board

Our supervisory board consists of twelve members. Six were elected by our employees, including one by our management staff and six were elected by our shareholders.

Until September 2, 2004, each of Siemens and Matsushita had the right under our Articles of Association to appoint one of the members who come up
for appointment by our shareholders, provided Siemens and Matsushita held at least 10% of our shares at the time of such appointment. This right of each of Siemens and Matsushita expired on September 2, 2004. The last member appointed by
Matsushita withdrew from the supervisory board with effect from the end of the annual general meeting for fiscal year 2004. The term of the last member appointed by Siemens expired at the end of the annual general meeting for fiscal year 2006.

The shareholders may remove any member of the supervisory board they have elected in a general meeting by a vote of a majority of the
votes cast by the shareholders in a general meeting. The employees may remove any member they have elected by a vote of three-quarters of the votes. The supervisory board elects a chairman and two deputy chairmen from among its members. The election
of the chairman and the first deputy chairman requires a two-thirds majority vote. If either the chairman or the first deputy chairman fails to attain a vote of two thirds of the members of the supervisory board, the shareholder representatives
elect the chairman and the employee representatives elect the first deputy chairman. The board elects a second deputy chairman by simple majority vote. The supervisory board normally acts by simple majority vote with the chairman having a deciding
vote in the event of a deadlock.

The supervisory board meets at least once during each quarter. In fiscal year 2006, the supervisory board
met six times. Its main functions are:



| |  |  | to monitor the management of the Company;
| | - |  | -----------------------------------------



| |  |  | to appoint our management board;
| | - |  | --------------------------------



| |  |  | to represent the Company in dealing with the management board;
| | - |  | --------------------------------------------------------------



| |  |  | to enter into contracts with independent auditors on behalf of the Company;
| | - |  | ---------------------------------------------------------------------------



| |  |  | to approve matters in areas that the supervisory board has made generally subject to its approval; and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | to approve matters that the supervisory board decides on a case by case basis to make subject to its approval.
| | - |  | --------------------------------------------------------------------------------------------------------------

The members of the supervisory board are each elected for a maximum term of about five years. The term expires at the end of the shareholders general
meeting in which the shareholders discharge the supervisory board member for the fourth fiscal year following the fiscal year in which he or she was elected. Our Articles of Association establish the compensation of the supervisory board members.

The following table sets forth, as of September 30, 2006, the names of the members of our supervisory board, their ages and principal
occupations. The terms of office of all members of our supervisory board expired at the end of the annual general meeting for fiscal year 2004, which was held on February 16, 2005, except for Mr. Ischler, whose term expired at the end of
the annual general meeting for fiscal year 2006. The annual general meeting for fiscal year 2004 reelected Mr. Klaus Ziegler, Dr. Jürgen Heraeus and Prof. Dr. Anton Kathrein for an additional term of five years. Our employees
reelected Mr. Peter Hoffmann, Mr. Francis Oppenauer (who was replaced by Mr. Leppek in July 2006) and Mr. Andreas Strobel for the same term. In addition, our shareholders and our employees elected five new members. The new
supervisory board reelected Klaus Ziegler as chairman and Peter Hoffmann and Prof. Dr. Anton Kathrein as deputy chairmen of the supervisory board.



-52-



---

##### Table of Contents

The members of our supervisory board, their ages and positions were as follows as of September 30,
2006:



|                                           |  |     |  |                                                                                                                                                                                                                                                                              
|------------------------------------------ |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name                                       |  | Age |  | Principal occupation and other business activities                                                                                                                                                                                                                           
|Klaus Ziegler (Chairman)                   |  | 71  |  | Member of the Advisory Council of EPCOS do Brasil Ltda., Gravataí, Brazil                                                                                                                                                                                                    
|                                           |  |    
|Dr. Wolf-Dieter Bopst                      |  | 67  |  | Member of the Supervisory Board of OSRAM GmbH, Member of the Advisory Board of Fr. Jacob Söhne GmbH & Co.                                                                                                                                                                    
|                                           |  |    
|Peter Geschka*                             |  | 57  |  | Product Technology Manager at the Surface Acoustic Wave Components Division of EPCOS AG, Member of EPCOS AG Works Council, Munich facility                                                                                                                                   
|                                           |  |    
|Dr. Jürgen Heraeus                         |  | 70  |  | Chairman of the Supervisory Boards of Heraeus Holding GmbH, GEA Group AG and Messer Group GmbH; Chairman of the Board of Directors of Argor-Heraeus S.A., Mendrisio, Switzerland; Member of the
Supervisory Boards of Heidelberger Druckmaschinen AG and Lafarge Roofing GmbH
|                                           |  |    
|Peter Hoffmann* (Deputy Chairman)          |  | 44  |  | Deputy Chairman of EPCOS AG Works Council, Heidenheim facility                                                                                                                                                                                                               
|                                           |  |    
|Burkhard Ischler                           |  | 44  |  | Managing Director, Corporate Finance Mergers & Acquisition, Siemens AG, Non-Executive Member of the Board of Directors of Demag Holding S.à.r.l., Luxembourg                                                                                                                 
|                                           |  |    
|Prof. Dr. Anton Kathrein (Deputy Chairman) |  | 55  |  | Managing Director and General Partner, KATHREIN-Werke KG; Chairman of the Supervisory Board of Erste Rosenheimer Finanzservice AG                                                                                                                                            
|                                           |  |    
|Michael Leppek                             |  | 35  |  | Secretary of IG Metall, Munich                                                                                                                                                                                                                                               
|                                           |  |    
|Joachim Reinhart                           |  | 60  |  | President and Chief Operating Officer, Panasonic Europe Ltd., UK; Executive Officer of Matsushita Electric Industrial Co., Ltd., Japan; Member of the Supervisory Board of EquityGate
AG                                                                                     
|                                           |  |    
|Claus Ryschawy*                            |  | 47  |  | Chairman of EPCOS AG Central Works Council; Deputy Chairman of EPCOS AG Works Council, Munich facility; Member of the European Employee Council of the EPCOS Group                                                                                                           
|                                           |  |    
|Andreas Strobel*                           |  | 53  |  | First Authorized Representative, IG Metall, Heidenheim; Member of the Supervisory Board of Voith AG, Voith Paper Verwaltungs GmbH and Voith Turbo Beteiligungs GmbH                                                                                                          
|                                           |  |    
|Winfried Wolff*                            |  | 56  |  | Corporate Director of RF Chokes Business Unit, EPCOS AG                                                                                                                                                                                                                      

---

|* | Elected by employees.
|- | ---------------------

Dr. Juergen Heraeus resigned
from his position as member of the supervisory board with effect from the end of the annual general meeting for fiscal year 2006 which was held on February 14, 2007. As successors to him and Mr. Ischler, the annual general meeting for
fiscal year 2006 elected Dr. Bodo Luettge and Prof. Dr. Claus Weyrich. These new members, their ages and positions as of February 23, 2007 were as follows:



|                        |  |     |  |                                                              
|----------------------- |  | --- |  | -------------------------------------------------------------
|Name                    |  | Age |  | Principal occupation and other business activities           
|Dr. Bodo Luettge        |  | 67  |  | Deputy Chairman of the Supervisory Board of Messer Group GmbH
|                        |  |    
|Prof. Dr. Claus Weyrich |  | 63  |  | Member of the Supervisory Board of Heraeus Holding GmbH      

The supervisory board has formed an executive committee and a mediation committee, the latter of
which is required by German law. In September 2002, the supervisory board formed an audit committee.



| |  |  | The executive committee is entitled to take urgent decisions on behalf of the supervisory board. Further, the executive committee assumes some of the
responsibilities of the supervisory board, such as the conclusion of the employment agreements between the members of the management board and our corporation. It consists of the chairman, the first deputy chairman and the second deputy chairman of
the supervisory board. The executive committee met two times in fiscal year 2006.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-53-



---

##### Table of Contents

| |  |  | The sole function of the mediation committee is to act as a mediator between the shareholder representatives and the employee representatives on the supervisory
board in finding a suitable candidate for the management board, in case a first candidate failed to get the necessary majority of votes on the supervisory board. The mediation committee consists of the chairman, the first deputy chairman and two
further members of the supervisory board (Mr. Leppek (who replaced Mr. Oppenauer in this function in July 2006) and Prof. Dr. Anton Kathrein) elected for the mediation committee. The mediation committee did not have to be convened in the
fiscal year 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The audit committee assumes some of the responsibilities of the supervisory board with respect to, among other things, the auditing of our books and financial
statements. In particular, it has direct responsibility for the compensation and oversight of our auditors. The audit committee consists of the chairman of the supervisory board and two further members of the supervisory board (Mr. Strobel (who
replaced Mr. Oppenauer in this function in June 2006) and Dr. Luettge (who replaced Dr. Heraeus in this function in February 2007). The audit committee met six times in fiscal year 2006.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Management Board

Our management board currently
consists of three members. Under our Articles of Association, our supervisory board determines the management boards size, although it must have at least two members.

Under our Articles of Association, the management board adopts rules of procedure for the conduct of its affairs, and may amend them at any time. The
adoption and amendment of these rules require the unanimous vote of the management board and the consent of the supervisory board. The supervisory board may, however, decide to adopt rules of procedure for the management board instead. The
management board members are jointly responsible for all management matters and pursuant to the current rules of procedure must jointly decide on a number of issues, including:



| |  |  | the annual financial statements;
| | - |  | --------------------------------



| |  |  | the calling of the shareholders meeting;
| | - |  | -----------------------------------------



| |  |  | matters for which the supervisory boards consent must be obtained;
| | - |  | -------------------------------------------------------------------



| |  |  | matters involving basic organizational, business policy and corporate planning questions for our company;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | matters involving major real estate or intellectual property contracts; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | other important matters.
| | - |  | ------------------------

The
chairman of the management board must propose a plan that allocates responsibilities among the management board members and notify the supervisory board without delay once the management board has adopted the plan.

The supervisory board appoints the members of the management board for a maximum term of five years. They may be reappointed or have their term extended
for one or more terms of up to five years each. The supervisory board may remove a member of the management board prior to expiration of his term if he commits a serious breach of duty or is incapable of carrying out his duties or if there is a bona
fide vote of no confidence by the shareholders meeting.

The rules of procedure provide that the management board shall take action by a
simple majority vote unless the law requires a larger majority. In the case of a tie, the chairman has the deciding vote when the board has more than two members. In practice, the board reaches its decisions by consensus.



-54-



---

##### Table of Contents

The members of our management board, their ages, positions and terms of appointment were as follows as of
September 30, 2006:



|                 |  |     |  |                          |  |                 
|---------------- |  | --- |  | ------------------------ |  | ----------------
|Name             |  | Age |  | Position                 |  | Term expires    
|Gerhard Pegam    |  | 44  |  | Chief Executive Officer  |  | July 30, 2009   
|Mr. Helmut König |  | 46  |  | Chief Financial Officer  |  | March 31, 2009  
|Dr. Werner Faber |  | 58  |  | Chief Technology Officer |  | October 31, 2008

Mr. Pegam was appointed August 4, 1999, Dr. Faber effective November 1, 2005,
and Mr. König effective April 1, 2006. Mr. Helmut König was appointed as Chief Financial Officer beginning July 1, 2006, succeeding Dr. Backes. Dr. Backes remained responsible for special projects from
July 1, 2006 until September 30, 2006, when he retired.

On March 31, 2006, Mr. Unterlass left the board after having
served as Chief Operating Officer.

Gerhard Pegam served from 1999 to 2001 as Chief Operating Officer before becoming our CEO on
April 1, 2001. From 1995 to 1999, he was President of the Capacitors Division of Siemens Matsushita Components. From 1985 to 1995, he held various sales and marketing positions within Siemens. Prior to 1985, Mr. Pegam worked for
Österreichische Philips Industrie as a capacitors research and development engineer.

Dr. Wilfried Backes served on the
board from April 1, 2002, to September 30, 2006. From 1992 to 2002, he was Executive Vice President, Chief Financial Officer and Treasurer of Osram Sylvania, Inc., USA. From 1982 to 1992, he held various management positions in the former
Siemens Components Group and Siemens Components, Inc. Prior to that, he worked for the Business Administration and Corporate Planning Division of Siemens AG.

Josef Unterlass served on the management board until March 31, 2006. From 1996 to 2001, he was as Chief Executive Officer of EPCOS OHG, Deutschlandsberg, Austria. Prior to 1996, he was head of our business
division for film capacitors in Málaga, Spain.

Dr. Werner Faber has served as president of our business division for
surface acoustic wave components since 2001, before becoming a member of the management board and Chief Technology Officer as of November 1, 2005. Since 2004, he had also been responsible for our capacitors business division, as he was from
1999 to 2001. From 1996 to 1999 he served as head of our business division for film capacitors in Málaga, Spain. Prior to 1996, Dr. Faber held various positions in the surface acoustic wave filter operations of Siemens Matsushita
Components.

Mr. Helmut König became Chief Financial Officer as of July 1, 2006. Prior to that, he had held a number
of leading positions at Panasonic AVC Networks Germany GmbH since 1988. From 2002 on, he was sole managing director, having overall responsibility for both the Panasonic production facility in Peine, Germany, and its wholly owned subsidiary in
Slovakia.

Compensation of Officers and Directors

Pursuant to the Articles of Association, the members of the supervisory board received fixed compensation plus an attendance fee for every meeting of the supervisory board or of a supervisory board committee attended
during the period under review. Each member of the supervisory board was entitled to receive 20,000 as fixed compensation for fiscal year 2006, with the chairman to receive 40,000 and each deputy chairman 30,000. Individual fixed
compensation is calculated according to the period of service as a member, chairman or deputy chairman of the supervisory board during the fiscal year (§11 Paragraph 2 of the Articles of Association). Compensation paid to the members of our
supervisory board amounted to 388,000 in fiscal year 2006 compared with 376,000 in fiscal year 2005. The following table shows an individualized breakdown of the compensation paid to members of our supervisory board in fiscal year 2006:



-55-



---

##### Table of Contents

|                                           |  |              |  |                 |  |       
|------------------------------------------ |  | ------------ |  | --------------- |  | ------
|                                           |  | Compensation
|in                                        |  | Fixed        |  | Attendance fees |  | Total 
|Klaus Ziegler (chairman)                   |  | 40,000       |  | 28,000          |  | 68,000
|Dr. Wolf-Dieter Bopst                      |  | 20,000       |  | 6,000           |  | 26,000
|Peter Geschka                              |  | 20,000       |  | 6,000           |  | 26,000
|Dr. Jürgen Heraeus                         |  | 20,000       |  | 10,000          |  | 30,000
|Peter Hoffmann (deputy chairman)           |  | 30,000       |  | 11,000          |  | 41,000
|Burkhard Ischler                           |  | 20,000       |  | 5,000           |  | 25,000
|Prof. Dr. Anton Kathrein (deputy chairman) |  | 30,000       |  | 9,500           |  | 39,500
|Francis Oppenauer (until May 31, 2006)     |  | 13,315       |  | 10,000          |  | 23,315
|Michael Leppek (since July 4, 2006)        |  | 4,877        |  | 1,000           |  | 5,877 
|Joachim Reinhart                           |  | 20,000       |  | 4,000           |  | 24,000
|Claus Ryschawy                             |  | 20,000       |  | 6,000           |  | 26,000
|Andreas Strobel                            |  | 20,000       |  | 7,000           |  | 27,000
|Winfried Wolff                             |  | 20,000       |  | 6,000           |  | 26,000

The system of management board compensation aims to provide members of the management board with
appropriate remuneration for their activities and responsibilities, taking into account not only the individual members personal performance, but also the performance of the Company as a whole.

Management board compensation is made up of the following components:



| | 1. | Non-performance-related cash compensation, which normally makes up about 40% of annual target compensation, comprises a fixed monthly salary, social security
contributions, a company car that can also be used privately, as well as business and personal liability and accident insurance coverage. Moreover, the company normally takes out policies for occupational disability and term life insurance.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Variable cash compensation normally makes up about 60% of annual target compensation. Half of this performance-related cash compensation is calculated by multiplying a
contractually stipulated basic amount by a corporate factor determined annually by the supervisory board in light of business development. The other half is linked to reaching a target based on the economic value added in the EPCOS Group.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | The management board members are also granted options for shares of EPCOS AG under the EPCOS stock option plans as a variable long-term incentive containing risk
elements, as outlined in Note 15 to the consolidated financial statements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The company pension (retirement and surviving dependants provision), the legal structure of which differs only negligibly from that for other above-tariff
employees, contains both retirement and surviving dependants provision. Retirement pay is agreed individually as a fixed amount.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, members of the management board who leave the Company are normally entitled to transitional payments that are disbursed as a lump sum. In principle, this amount corresponds to the fixed salary paid over
the last 12 months before the member left, plus the sum of the target bonus amount and the annual payment effected in the fiscal year before the members departure.

Total cash compensation paid to all five members of the management board (three in fiscal year 2005) amounted to 2,748,000 in fiscal year 2006 (1,473,000 in fiscal year 2005). This amount was
composed of non-performance-related components totaling 1,161,000 (1,011,000 in fiscal year 2005) and performance-related components totaling 1,587,000 in fiscal year 2006 (462,000 in fiscal year 2005).

In addition, a total of 75,000 stock options were granted to members of the management board in fiscal year 2006 (115,000 in fiscal year 2005).
The weighted average fair value on the date of issue amounted to 2.20 per option.

Pension commitments made to the five
members of the management board (three in fiscal year 2005) at September 30, 2006 (or on the dates when they left the Company) totaled 445,000 (317,000 at September 30, 2005).



-56-



---

##### Table of Contents

An individualized breakdown of management board compensation for fiscal year 2006 is given in the
following table (rounded to thousands of euros):



|                    |  |                          |  |                     |  |         |  |        |  |               
|------------------- |  | ------------------------ |  | ------------------- |  | ------- |  | ------ |  | --------------
|                    |  | Cash compensation        |  | Stock options      
|in                 |  | Non-performance- related |  | Performance-related |  | Total   |  | Number |  | Exercise price
|Gerhard Pegam       |  | 383,000                  |  | 558,000             |  | 941,000 |  | 30,000 |  | 13.05         
|Dr. Wilfried Backes |  | 343,000                  |  | 495,000             |  | 838,000 |  | 15,000 |  | 13.05         
|Dr. Werner Faber(1) |  | 173,000                  |  | 279,000             |  | 452,000 |  | 30,000 |  | 13.05         
|Mr. Helmut König(2) |  | 103,000                  |  | 50,000              |  | 153,000 |  |       |  |              
|Josef Unterlass(3)  |  | 159,000                  |  | 205,000             |  | 364,000 |  |       |  |              

---

|(1) | The figures for Dr. Werner Faber relate to the period from November 1, 2005 through September 30, 2006.
|--- | -------------------------------------------------------------------------------------------------------

|(2) | The figures for Helmut König relate to the period from April 1, 2006 through September 30, 2006.
|--- | ------------------------------------------------------------------------------------------------

|(3) | The figures for Josef Unterlass relate to the period from October 1, 2005 through March 31, 2006.
|--- | -------------------------------------------------------------------------------------------------

Approximately 1,737,000 was appropriated to pension accruals for members of the management board in fiscal year 2006.

At September 30, 2006, accruals for pension commitments to former members of the management board amounted to 1,505,000. Amounts totaling
649,000 were paid to this group in fiscal year 2006. Additional entitlements were either met by Siemens AG or have already been settled.

Options
to Purchase Securities from Registrant or Subsidiaries

As part of a stock option plan adopted on September 28, 1999 (the
1999 SOP) for members of our management board, directors of subsidiaries and affiliates and other eligible employees, the Company was authorized to distribute non-transferable options exercisable for up to 2,480,000 shares over a
five-year period. In connection with the 1999 SOP, our shareholders approved a capital increase in the form of conditional capital (Bedingte Kapitalerhöhung) in an amount not to exceed 2,480,000. With the consent of the supervisory
board, management may authorize the use of existing shares instead of conditional capital to satisfy option exercises.

According to the
1999 SOP, decisions about the grant of options had to be taken within a period of three months after the annual results had been published. The supervisory board decided how many options to grant to the management board and the management board
decided how many options to grant to other eligible employees of EPCOS AG. The bodies responsible for establishing the remuneration for directors of our subsidiaries and affiliates decided how many options were granted to these directors, and the
directors decided how many options were granted to other eligible employees of the subsidiary or affiliate. The exercise price for options distributed pursuant to the option plan was 115% of the average closing market price of our shares on the
German Xetra system during the five-day trading period immediately before the option issuance date. For a description of the Xetra system, see Item 9. The Offer and Listing  Nature of Trading Market. Holders of options
may exercise them during the five-year period starting two years after the options are issued. Holders may exercise options only within fixed time periods following publication of our quarterly or annual results.

The first option grant under the 1999 SOP was made in October 1999 in connection with our initial public offering; additional option grants have been
made since then. The following table sets forth the terms of our options outstanding under the 1999 SOP as of March 1, 2007:



|                     |  |                |  |                     |  |                                |  |                                |  |                  
|-------------------- |  | -------------- |  | ------------------- |  | ------------------------------ |  | ------------------------------ |  | -----------------
|Date of option grant |  | Optionsgranted |  | Optionsoutstanding* |  | Exercise price pershare (in ) |  | Earliest possibleexercise date |  | Expiration date  
|October 1999         |  | 158,000        |  | 0                   |  | 35.65                          |  | October 15, 2001               |  | October 16, 2006 
|November 2000        |  | 394,500        |  | 363,000             |  | 105.04                         |  | November 30, 2002              |  | November 29, 2007
|February 2001        |  | 60,000         |  | 60,000              |  | 90.90                          |  | February 23, 2003              |  | February 22, 2008
|November 2001        |  | 463,500        |  | 414,000             |  | 64.11                          |  | November 28, 2003              |  | November 27, 2008
|November 2002        |  | 698,500        |  | 620,500             |  | 15.23                          |  | November 22, 2004              |  | November 23, 2009
|December 2003        |  | 495,000        |  | 421,500             |  | 21.76                          |  | December 12, 2005              |  | December 13, 2010

---

|* | Neither expired nor exercised.
|- | ------------------------------



-57-



---

##### Table of Contents

As of March 1, 2007, members of our management board together held options to purchase a total of
194,500 shares under the 1999 SOP, while members of our supervisory board held options to purchase a total of 217,500 shares under the 1999 SOP.

To date, a total of 2,269,500 options have been granted under the 1999 SOP, although the first grant of October 1999 has expired. On February 11, 2004, the 1999 SOP was terminated pursuant to a resolution adopted
by the Annual General Meeting of EPCOS AG. No further options will be issued under this plan.

At the same Annual General Meeting, a new
stock option plan (the 2004 SOP) was adopted, which basically has the same key terms as the 1999 SOP: Under the 2004 SOP, the Company is authorized to distribute non-transferable options exercisable for up to 2,480,000 shares to
members of our management board, directors of subsidiaries and affiliates and other eligible employees over a three-year period. In connection with the 2004 SOP, our shareholders approved an additional capital increase in the form of conditional
capital 2004 II in an amount not to exceed 2,480,000. Instead of shares issued from this conditional capital 2004 II, holders of options may, at the discretion of the Company, also be granted treasury shares or paid cash settlements.

During the three-year duration period of the 2004 SOP, decisions about the grant of options may be taken within a period of three months
after the annual results for each fiscal year have been published. The supervisory board may decide how many options to grant to the management board and the management board may decide how many options to grant to other eligible employees of the
EPCOS Group. The exercise price for options distributed pursuant to the 2004 SOP is 115% of the average opening market price of our shares on the German Xetra system during the five-day trading period immediately before the option issuance date.
Holders of options may exercise them during the five-year period starting after the expiration of a vesting period but only within fixed time periods following publication of our quarterly or annual results. The vesting period begins one week after
the grant date and runs for at least two years. In the event of extraordinary, unforeseen developments, the supervisory board and management board are authorized to introduce a cap on possible gains from stock options.

The first option grant under the 2004 SOP was made in December 2004. The following table sets forth the terms of our currently outstanding options under
the 2004 SOP:



|                     |  |                |  |                     |  |                                |  |                                |  |                  
|-------------------- |  | -------------- |  | ------------------- |  | ------------------------------ |  | ------------------------------ |  | -----------------
|Date of option grant |  | Optionsgranted |  | Optionsoutstanding* |  | Exercise price pershare (in ) |  | Earliest possibleexercise date |  | Expiration date  
|December 2004        |  | 340,000        |  | 306,000             |  | 13.74                          |  | December 21, 2006              |  | December 20, 2011
|December 2005        |  | 339,000        |  | 324,000             |  | 13.05                          |  | December 21, 2007              |  | December 20, 2012
|December 2006        |  | 559,000        |  | 559,000             |  | 16.31                          |  | December 22, 2008              |  | December 23, 2013

---

|* | Neither expired nor exercised.
|- | ------------------------------

As of March 1, 2007,
members of our management board together held options to purchase a total of 250,000 shares under the 2004 SOP, while members of our supervisory board held no options under the 2004 SOP.

For further information on our stock option plans, see Note 15 to our Consolidated Financial Statements.

Employees

As of September 30, 2006, we had
17,948 employees worldwide (compared with 16,085 as of September 30, 2005, and 15,587 as of September 30, 2004). The increase in fiscal year 2006 was attributable to a headcount rise in low-labor-cost countries, which was partially
offset by headcount reductions in high-labor-cost countries made in response to market conditions, mainly in Germany. Approximately 11% of our employees work in Germany.

The following table shows a breakdown of our employees by business segments and region as of the dates indicated. It does not include employees in our Munich headquarters or sales offices at our business segments.



-58-



---

##### Table of Contents

|                              |  |                     |  |        |  |      
|----------------------------- |  | ------------------- |  | ------ |  | -----
|                              |  | As of September 30,
|                              |  | 2006                |  | 2005   |  | 2004 
|Employees by business segment |  |                     |  |        |  |      
|                              |  |                     | 
|Capacitors and inductors      |  | 10,970              |  | 10,038 |  | 9,811
|Ceramic components            |  | 3,740               |  | 3,215  |  | 2,911
|SAW components                |  | 2,547               |  | 2,119  |  | 2,166
|                              | 
|                              |  | As of September 30,
|                              |  | 2006                |  | 2005   |  | 2004 
|Employees by regions          |  |                     |  |        |  |      
|                              |  |                     | 
|Asia                          |  | 9,823               |  | 7,673  |  | 7,206
|Europe without Germany        |  | 4,360               |  | 4,562  |  | 4,504
|Germany                       |  | 1,934               |  | 2,064  |  | 2,188
|Americas                      |  | 1,831               |  | 1,786  |  | 1,689

We believe that a significant portion of our employees belong to an organized labor union. We have
experienced no significant work stoppages in recent years, and we consider our employee relations to be very good.

Share Ownership

No member of our management board or our supervisory board individually holds shares or options representing 1% or more of our shares outstanding. As of
February 23, 2007, as a group, members of our management board held 1,328 shares and 444,500 options for shares, representing 0.683% of our nominal share capital, and members of our supervisory board, as a group, held 15,213 shares and 217,500
options for shares, representing 0.356% of our nominal share capital.

Item 7. Major Shareholders and Related Party Transactions

Major Shareholders

The following table shows the beneficial ownership of our companys share capital by the principal shareholders (notified to us according to
disclosure requirements under the German Securities Act, whereby with a change in legislation in Germany (Transparenzrichtlinien-Umsetzungsgesetz) effective January 20, 2007 also the acquisition of shareholdings exceeding 3% have to be
notified) as of March 15, 2007:



|                                     |  |                                                  |  |              |    |  |               |   
|------------------------------------ |  | ------------------------------------------------ |  | ------------ | -- |  | ------------- | --
|Identity of person or group          |  | Title of class                                   |  | Amount owned |    |  | Percent owned |   
|Dodge & Cox International Stock Fund |  | Ordinary shares, no par value, notional value 1 |  | 3,456,500    | *  |  | 5.29          | %*
|Vauban Fund                          |  | Ordinary shares, no par value, notional value 1 |  | 3,420,892    | *  |  | 5.24          | %*
|AXA, S.A.                            |  | Ordinary shares, no par value, notional value 1 |  | 3,291,120    | ** |  | 5.04          | %*
|Odey Asset Management LLP            |  | Ordinary shares, no par value, notional value 1 |  | 3,206,005    | *  |  | 4.91          | %*
|UBS AG                               |  | Ordinary shares, no par value, notional value 1 |  | 2,095,255    | *  |  | 3.21          | %*
|AQR Capital Management               |  | Ordinary shares, no par value, notional value 1 |  | 2,090,426    | *  |  | 3.20          | %*

---

|* | According to notification sent to us and to the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht). For further details see
below under Other Major Shareholders.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|** | Amount calculated from the percentages notified by AXA S.A.
|-- | -----------------------------------------------------------

AXA S.A. On October 21, 2004, AXA S.A. notified us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) according to disclosure requirements under the German
Securities Act that it holds, as of October 11, 2004, an amount of our ordinary shares representing 5.04% of our share capital. The notification was amended on November 13, 2006, clarifying that beneficial ownership extends only to
AllianceBernstein Corporation and AlianceBernstein LP and not to other subsidiaries of AXA S.A.



-59-



---

##### Table of Contents

Dodge & Cox Investment Managers. On March 24, 2006, Dodge & Cox Investment
Managers notified us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) according to disclosure requirements under the German Securities Act that it holds, as of March 22, 2006, an
amount of our ordinary shares representing 5.29% of our share capital.

Odey Asset Management LLP. On January 8, 2007, Odey
Asset Management notified us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) according to disclosure requirements under the German Securities Act that it holds, as of January 3,
2007, an amount of our ordinary shares representing 4.91% of our share capital. Earlier disclosures by Odey Asset Management during 2006 related to exceeding 5% ownership (November 17, 2006, holding of 5.56%, May 5, 2006, holding of 5.09%)
and going below the level of 5% in July (July 11, 2006, holding of 4.33%).

Alken Asset Management LLP and Vauban Fund, Sicav. On
February 13, 2007 Alken Asset Management (formerly Vauban AM) and Vauban Fund, Sicav notified us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) according to disclosure
requirements under the German Securities Act that they hold, as of February 6, 2007, an amount of our ordinary shares representing 5.24% of our share capital.

AQR Capital Management LLC. On February 28, 2007 AQR Capital Management notified us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht)
according to disclosure requirements under the German Securities Act that it holds, as of February 21, 2007, an amount of our ordinary shares representing 3.20% of our share capital.

UBS AG. On March 2, 2007 UBS AG notified us and the German Federal Financial Services Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht) according to disclosure requirements under the German Securities Act that it holds, as of February 26, 2007, an amount of our ordinary shares representing 3.21% of our share capital.

Siemens and Matsushita. Until March 2006, Siemens and Matsushita owned together 25% of our share capital. They were parties to a
shareholders agreement dated June 29, 1999 with a term to June 30, 2004, under which both of them had agreed to maintain its EPCOS shareholdings within a band of 12.5% (plus one share) and 20% of our issued share capital as of the
completion of our 1999 initial public offering. Siemens sold its entire shareholding of 12.5% in EPCOS on March 29, 2006 and Matsushita sold its entire shareholding of 12.5% in EPCOS on October 23, 2006.

Related Party Transactions

Each of Siemens and
Matsushita held a shareholding of 12.5% in EPCOS until they sold their shareholdings in March 2006 and October 2006, respectively. For more information on our relationship with Siemens and Matsushita, see Item 4. Information on the
Company  History and Development of the Company  History and above under  Major Shareholders.

We are
parties to agency and distributorship agreements with 7 Siemens affiliates in various territories worldwide as of September 30, 2006. Each such Siemens agent or distributor has non-exclusive rights to solicit and mediate sales in its
respective assigned territory. We agree separately with most agents and distributors on sales margins for our products in their territory for sales made for their own accounts. We decide whether commission-based sales may take place. We determine
commissions on a case-by-case basis for our agents. These commissions are based on the agents contribution, the nature and volume of the transaction and the price realized. In fiscal year 2006, we paid sales commissions in the amount of
2.9 million to Siemens up to the date of sale of its EPCOS shares. For further information on agreements with Siemens, see Item 10. Additional Information  Material Contracts and Note 12 to our Consolidated
Financial Statements.

We have also entered into a number of intellectual property licensing and development agreements with Matsushita
Electronic Components Co., Ltd. These include a license agreement entered into in fiscal year 2000 on certain know-how of Matsushita relating to tantalum capacitors, for



-60-



---

##### Table of Contents

which we have agreed to make specified lump-sum payments and pay specified licensing fees. In January 2006, Matsushita granted to us, against payment of
certain lump sum fees, the right to sublicense to a certain extent to Kemet Corporation and certain of its subsidiaries the know-how pertaining to tantalum capacitors licensed to us under the aforementioned agreement and patents relating thereto. In
fiscal year 2002 we entered into a know-how cross-license agreement with Matsushita that grants to us and to Matsushita non-exclusive and non-transferable licenses for reciprocal use of certain know-how relating to the production of surface acoustic
wave components. These mutual licenses are not royalty bearing. As of June 1, 2002 and as of November 20, 2003 we entered into two development agreements with Matsushita regarding certain SAW devices. We do not believe that any of these
agreements are material either to us or to Matsushita. In connection with these agreements, we had total expenses, consisting of license and service fees as well as purchases of inventories and services charged to cost of goods sold, to Matsushita
Electronic Components Co., Ltd. in the amount of 4.3 million in fiscal year 2006. For further information on agreements with Matsushita, such as the patent cross license agreement with Matsushita Electric Industrial Co., Ltd. and the
frame agreements on technical cooperation with Matsushita Electronic Components Co., Ltd. as well as with Matsushita Electric Industrial Co., Ltd., which were renewed and extended with effect from June 30, 2004, see Item 10.
Additional Information  Material Contracts and Note 12 to our Consolidated Financial Statements.

Item 8. Financial Information

Consolidated Statements and Other Financial Information

See Item 3. Key Information as well as Item 18. Financial Statements, pages F-1 through F-51.

Legal Proceedings

Litigation

From time to time we have been, and we expect to continue to be, subject to legal proceedings and claims arising in the ordinary course of our business.
We are not currently aware of any legal proceedings or claims against us or our property that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial position or results of operations. During our
last two fiscal years, neither we nor our property has been subject to any legal proceedings or claims that could have such an effect. For claims of infringement of intellectual property rights, see Item 4. Information on the
Company  Intellectual Property.

We have been subject to legal proceedings based on allegations of environmental
contamination, which we describe in Environment below.

Environment

Some of our manufacturing and operations use hazardous substances, and we are subject to extensive environmental regulations governing air emissions,
wastewater discharges, and the use and storage of hazardous materials and wastes. These requirements will continue to be significant to our future operations. In the past, we have been exposed to liability for the remediation of soil or groundwater
contamination at our facilities. We also may face liability for remediation of our sites and third party waste disposal sites located in the United States under the Comprehensive Environmental Response, Compensation and Liability Act or other
federal, state or local environmental remediation laws.

In the past, we have not incurred any significant penalties for environmental
violations and liability for damage to natural resources, property damage and environmental exposure claims, but we could incur some or all of these types of liabilities in the future. Because some of our facilities are closely located to or shared
with those of other companies, including those of Siemens affiliates, we may need to respond to claims relating to environmental contamination not originating from our own operations.



-61-



---

##### Table of Contents

We are not aware of any significant liabilities for environmental matters. We have, however, incurred
significant expenditures to comply with environmental regulations. Significant financial reserves or additional compliance expenditures could be required in the future due to changes in law, new information on environmental conditions or other
events, and those expenditures could adversely affect our business or financial condition.

The banning of certain hazardous substances has
become a global issue. The EU directives on waste electrical and electronic equipment and on the restriction of the use of certain hazardous substances in electrical and electronic equipment were to be implemented in the EU member states on
July 1, 2006. We are in particular affected by the ban on lead (subject to exceptions for certain applications) required by these directives. China now enforces a law on Management Methods for Controlling Pollution by Electronic Information
Products (EIP) that is equivalent to the bans enforced in the EU, but the marking and product certification requirements exceed the requirement of the EU directives. Furthermore, the scope of this legislation is broader than the European ones,
covering even medical devices and measurement instruments. We anticipate higher demands from our customers for material information, compliance declaration and analytical testing. This will raise our costs for certification and documentation. The
risk of environmental liability is inherent in our current and historical manufacturing activities, but will now increase as other countries such as Korea, Australia, parts of USA, etc. enact and enforce similar laws.

In addition, we expect to incur significant environmental capital expenditures over the next several years. Imminent EU regulation such as the
registration, evaluation, and authorization of chemical substances (REACH) will extend the responsibility for product safety and making available information on application and exposure to all manufacturers, importers and downstream users. In a
first step all chemicals imported into or manufactured in the EU in an amount exceeding one metric ton will be required to be registered. An evaluation of the chemicals by EU authorities based on test results and other available information might be
a second step. As EPCOS is both a downstream user or importer of chemicals and preparations, we are required to register and evaluate materials used for production to a certain extent. If there are concerns about carcinogenic, mutagenic etc.
properties of these materials and substances we have to undergo an authorization procedure, which may result in a restriction of the use of these materials. There is also a certain risk that raw materials may be withdrawn by suppliers as the costs
imposed by REACH may exceed the level of economic production. Thus REACH could adversely affect our manufacturing costs or product sales because it may force us to change production processes, the design of our products or to use more costly
materials.

On July 6, 2005, the European Parliament issued a directive establishing a framework for the setting of ecodesign
requirements for energy-using products. The initial focus will be on electric motor systems, water heaters, domestic appliances, consumer electronics, office equipment, and lighting because these products have been identified as having high
potential for a cost-effective reduction in greenhouse gasses. Over time, implementation will expand to include all energy-using products, defined as any product that is dependent on energy input (electricity, fossil fuels, and renewable energy
sources) to work as intended. Relevant information on material and energy consumption of our electronic components and modules is to be provided to our customers on request. Even more, there might be a strong request for reworking the design and
material selection of our products. This could also harm our business by forcing us to increase research and development expenditures shortening the useful sales lives of our products.

Although environmental considerations such as energy and materials consumption and reduction of emissions make us spend more on improvements and
expansions of our facilities than might otherwise be necessary if regulations were less stringent, only minimal amounts of our investments are solely related to environmental compliance up to now. However, additional investments for environmental
compliance could, either individually or in the aggregate, adversely affect our business or financial condition.



-62-



---

##### Table of Contents

Dividend Policy

We expect to reinvest most of our earnings in the next few years to finance our continued growth. The level of dividends in each year will depend on general business conditions, our current and expected future
financial performance, our funding requirements and other relevant factors. We will pay any dividends on our shares in euro. We have not paid any dividend in respect of the fiscal years 2002 through 2005. With respect to fiscal year 2006, a dividend
of 0.20 per share was paid on February 15, 2007.

Under the German Stock Corporation Act, the amount of income available
for distribution to shareholders is based upon the equity of the Company as reported in its financial statements drawn up on a stand-alone basis in accordance with the German Commercial Code (Handelsgesetzbuch). Accordingly, the Annual
General Meeting decides only on the dividends payable from the retained earnings (after deduction of certain reserves) as shown in the Companys annual German statutory accounts. This amount differs from the total retained earnings as shown in
the accompanying financial statements prepared in accordance with U.S. GAAP. As of September 30, 2006, the distributable amount was 54.443 million. As of September 30, 2005, the distributable amount was
49.203 million. As of September 30, 2004, the distributable amount was 46.392 million. As of September 30, 2003, the distributable amount was 6.234 million.

All of our shares and ADSs have the same dividend rights. Our management and supervisory boards must jointly propose any distribution of dividends and
obtain approval of the shareholders in a general meeting. For information regarding the German withholding tax applicable to dividends and related United States refund procedures, see Item 10. Additional Information  German
Taxation  Dividends and  Refund procedure for eligible U.S. holders.



-63-



---

##### Table of Contents

Item 9. The Offer and Listing

Nature of Trading Market

Prior to our initial public offering in October 1999, there was no public market for our shares or ADSs. Our ADSs, each representing the right to receive
one ordinary share, no par value, notional value 1, are listed on the New York Stock Exchange, and our shares are listed on the Frankfurt Stock Exchange. JP Morgan Chase Bank, as successor of Morgan Guaranty Trust Company of New York, is the
depositary for our ADSs. The Frankfurt Stock Exchange is the principal trading market for our ordinary shares.

The Frankfurt Stock
Exchange is operated by Deutsche Börse AG and is the most significant of the seven German stock exchanges. Listed shares are usually traded according to supply and demand during this time. In addition, these shares may also be traded between
banks, outside the parameters of the stock exchange. The rates of shares with a high turnover and the shares of other designated companies are continuously noted during trading.

Shares can be traded in Germany on three statutory market segments: the official market (Amtlicher Markt), the regulated market (Geregelter
Markt) and the regulated unofficial market (Freiverkehr). Our shares are traded on the official market.

Since January 1,
2003, both the official market and the regulated market on the Frankfurt Stock Exchange have consisted of two classes of listings: the so-called General Standard and the Prime Standard. Members of the Prime Standard are required, in addition to the
general listing obligations such as the publication of an annual report, to:



| |  |  | Present the consolidated financial statements according to IAS or U.S. GAAP;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Publish the quarterly reports with certain minimum information;
| | - |  | ---------------------------------------------------------------



| |  |  | Publish an annual financial calendar;
| | - |  | -------------------------------------



| |  |  | Hold an annual analyst conference at least once a year;
| | - |  | -------------------------------------------------------



| |  |  | Publish the Ad hoc-releases according to the German Securities Trading Act simultaneously in English.
| | - |  | -----------------------------------------------------------------------------------------------------

Only shares that are included in the Prime Standard are eligible to be admitted in one of the indexes established by Deutsche Börse AG. On
January 31, 2003, the Frankfurt Stock Exchange decided to admit our shares to the Prime Standard.

Our shares are included in the
Tec-DAX established in March 2003 with 30 companies focusing on future technologies, electronics and similar businesses.

Shares are also
traded on the Exchange Electronic Trading System known as Xetra. Xetra is administered by Deutsche Börse AG. The securities that are currently traded through Xetra include nearly all of the stocks listed on the Frankfurt Stock Exchange. Banks
and securities dealers who have been admitted to trading on at least one of Germanys stock exchanges trade within Xetra systems. During regular trading hours, participants have access to an overview of all currently outstanding buy and sell
orders via their computers. Xetra is an integrated part of the Frankfurt Stock Exchange and is bound by its rules and regulations.

Transactions on the Frankfurt Stock Exchange must be settled on the second business day following the trade. Transactions off the Frankfurt Stock Exchange are generally also settled on the second business day following trading. Transactions
off the Frankfurt Stock Exchange may occur where the transactions are larger or where one of the parties to the transaction is foreign. The parties may agree to a different settlement period. A customers orders to buy or sell listed securities
must be executed on a stock exchange unless the customer gives specific instructions to the contrary.



-64-



---

##### Table of Contents

The Frankfurt Stock Exchange can suspend a quotation if orderly stock exchange trading is temporarily
threatened or if a suspension appears necessary in order to protect the public interest. The Hessian Stock Exchange Supervisory Authority, and the Trading Monitors of the Frankfurt Stock Exchange, which are under the control of the Stock Exchange
Supervisory Authority, both monitor trading on the Frankfurt Stock Exchange. The Federal Financial Services Authority, an independent federal authority, is responsible for generally supervising securities trading pursuant to the provisions of the
German Securities Trading Act. Based on a reform that came into effect end of October 2004, its powers under the German Securities Trading Act were significantly enlarged and now also include the right to suspend a quotation under certain
circumstances. The table below sets forth, for the periods indicated, reported closing high and low quoted prices for our ordinary shares on the Frankfurt Stock Exchange:

Frankfurt Stock Exchange*



|                                        |  |           |  |      
|--------------------------------------- |  | --------- |  | -----
|                                        |  | High      |  | Low  
|                                        |  | (in euro)
|Monthly:                                |  |           |  |      
|September 2006                          |  | 12.01     |  | 10.50
|October 2006                            |  | 12.89     |  | 11.82
|November 2006                           |  | 14.00     |  | 12.55
|December 2006                           |  | 15.33     |  | 13.60
|January 2007                            |  | 15.72     |  | 13.65
|February 2007                           |  | 13.36     |  | 12.22
|                                        |  |          
|Quarterly:                              |  |           |  |      
|October through December 2004           |  | 13.35     |  | 10.98
|January through March 2005              |  | 11.45     |  | 9.36 
|April through June 2005                 |  | 10.93     |  | 8.78 
|July through September 2005             |  | 12.45     |  | 9.93 
|                                        |  |          
|October through December 2005           |  | 11.44     |  | 9.99 
|January through March 2006              |  | 12.91     |  | 10.68
|April through June 2006                 |  | 12.73     |  | 10.37
|July through September 2006             |  | 12.01     |  | 10.10
|                                        |  |          
|October through December 2006           |  | 15.33     |  | 10.50
|                                        |  |          
|Yearly:                                 |  |           |  |      
|Financial year ended September 30, 2002 |  | 62.98     |  | 7.19 
|Financial year ended September 30, 2003 |  | 17.83     |  | 5.66 
|Financial year ended September 30, 2004 |  | 22.63     |  | 11.20
|Financial year ended September 30, 2005 |  | 13.35     |  | 8.78 
|Financial year ended September 30, 2006 |  | 12.91     |  | 9.99 

---

|* | Source: LexisNexis.
|- | -------------------

On March 19, 2007 the closing
sales price per ordinary share on the Frankfurt Stock Exchange was 12.97, as reported by Deutsche Börse AG.



-65-



---

##### Table of Contents

Trading on the New York Stock Exchange

As of March 1, 2007, 246,485 of our American Depositary Receipts (ADRs) were outstanding, evidencing ADSs representing 246,485 of our ordinary shares
or approximately 0.4% of our outstanding share capital, and there were 482 beneficial holders and 23 holders of record of ADRs.

The table
below sets forth, for the periods indicated, the reported closing high and low quoted prices for the ADRs on the New York Stock Exchange:

New York Stock Exchange*



|                                        |  |                  |  |      
|--------------------------------------- |  | ---------------- |  | -----
|                                        |  | High             |  | Low  
|                                        |  | (in U.S. dollar)
|Monthly:                                |  |                  |  |      
|September 2006                          |  | 15.25            |  | 13.35
|October 2006                            |  | 16.22            |  | 15.08
|November 2006                           |  | 18.13            |  | 15.96
|December 2006                           |  | 18.05            |  | 20.23
|January 2007                            |  | 20.59            |  | 17.69
|February 2007                           |  | 17.77            |  | 16.10
|                                        |  |                 
|Quarterly:                              |  |                  |  |      
|October through December 2004           |  | 16.38            |  | 14.78
|January through March 2005              |  | 15.54            |  | 12.06
|April through June 2005                 |  | 13.83            |  | 11.30
|July through September 2005             |  | 15.21            |  | 12.01
|                                        |  |                 
|October through December 2005           |  | 13.67            |  | 11.94
|January through March 2006              |  | 15.52            |  | 12.76
|April through June 2006                 |  | 16.29            |  | 12.83
|July through September 2006             |  | 15.25            |  | 12.80
|                                        |  |                 
|October through December 2006           |  | 20.23            |  | 15.08
|                                        |  |                 
|Yearly:                                 |  |                  |  |      
|Financial year ended September 30, 2002 |  | 55.70            |  | 7.80 
|Financial year ended September 30, 2003 |  | 19.02            |  | 5.70 
|Financial year ended September 30, 2004 |  | 28.09            |  | 13.76
|Financial year ended September 30, 2005 |  | 15.54            |  | 11.30
|Financial year ended September 30, 2006 |  | 16.29            |  | 11.94

---

|* | Source: LexisNexis.
|- | -------------------

On March 19, 2007, the closing
sales price per ADR on the New York Stock Exchange was $ 17.41, as reported by LexisNexis.



-66-



---

##### Table of Contents

Item 10. Additional Information

Articles of Association and Relevant Provisions of German Law

Organization and transfer agent

We are a stock
corporation organized in the Federal Republic of Germany under the Stock Corporation Act (Aktiengesetz). We are registered in the Commercial Register (Handelsregister) maintained by the local courts in Munich, Germany, under the entry
number HRB 127250. Registrar Services GmbH, our transfer agent in Germany, registers record holders of shares in the share register on our behalf pursuant to a transfer agency agreement. Our transfer agent will also maintain the register of our
shareholders on our behalf.

Objects and purposes

According to Section 2 of our Articles of Association, the object of our company is direct or indirect activity in the area of research, development, manufacture and marketing of electronic components, electronic
systems and software, as well as the performance of services related thereto.

Our Articles of Association authorize us to engage in
business of any kind and to take any and all measures related to or useful in promoting our objects; we may also operate domestic and foreign factories, establish branch offices, found, acquire, consolidate with, or participate in, other companies,
conclude or participate in other management contracts, and enter into joint ventures.

Directors

Under German law, our supervisory board members and management board members owe a duty of loyalty and care to our company. They must exercise the
standard of care of a prudent and diligent businessman and bear the burden of proving they did so if their actions are contested. Both boards must take into account the interests of our company and our shareholders, employees, creditors and, to some
extent, the common interest. Those who violate their duties may be held jointly and severally liable for any resulting damages, unless their actions were validly approved by a resolution adopted at a shareholders meeting. Further, a
supervisory board member or a management board member may not vote on a matter that concerns formal approval of his own acts or in which he has a material interest. See also Item 6. Directors, Senior Management and Employees for
further information about the supervisory board and the management board.

Disclosure requirements

Our Articles of Association do not require our shareholders to advise us when their holdings exceed specified thresholds. The German Securities Trading
Act (Wertpapierhandelsgesetz), as amended in January 2007, however, requires each holder of our voting shares whose holding reaches, exceeds, or falls below either 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50% or 75% of our outstanding voting rights
to notify us and the German Federal Financial Services Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) in writing at the latest within four trading days after she or he has reached, exceeded or fallen below such a threshold.
In this notification, the shareholder must also state the percentage of the share capital she or he holds. Such holder cannot derive any rights from those shares until this disclosure requirement is satisfied. The German Securities Trading Act also
contains various rules designed to ensure the attribution of shares to the person who has effective control over the exercise of the voting rights attached to those shares.

In addition, the German Takeover Act (Wertpapiererwerbs- und Übernahmegesetz) sets forth a threshold of 30% or more of the voting rights at
which a person is deemed to have gained control of a publicly listed company. In such a case, this controlling person is required to publish the acquisition of control and to launch a public tender offer for the outstanding
shares.

In July 2002, the German Securities Trading Act was amended to require the reporting of certain directors dealings. These
requirements were expanded in October 2004 by the Investor Protection Improvement Act (Gesetz zur Verbesserung des Anlegerschutzes). Persons having regular



-67-



---

##### Table of Contents

access to insider information and being entrusted with the direction of an issuer whose securities are admitted to trading on a domestic stock exchange, such
as in particular members of the management and supervisory boards of the issuer, have to notify both the issuer and the German Federal Financial Services Authority of acquisitions and sales of shares of the issuer or of other financial instruments
relating to the issuer or its shares. This obligation also applies to certain relatives of the persons concerned, such as their spouses and dependent children, as well as certain companies and institutions affiliated with them. As a de-minimis
exception, transactions are exempted from the notification obligations if the total value of all relevant transactions of one of these persons and its relatives and affiliates within one calendar year does not exceed 5,000. In addition, the
issuer has to publish all notifications it has received. In fiscal year 2006, we received no notifications regarding directors dealings in our shares. On November 13, 2006, one supervisory board member notified us of a purchase of 5,500 shares.

Authorized and contingent capital and issuance of convertible bond

As resolved at the annual general meeting of shareholders on February 11, 2004, our management board is authorized, with the approval of the
supervisory board, to increase, once or in partial amounts, in the period until February 10, 2009, the registered share capital by a total of up to 13,020,000 by issuing new ordinary registered no-par shares against cash or in-kind
contributions (authorized capital 2004). The shareholders are principally entitled to preemptive rights, however, under certain conditions, as determined in the Articles of Association, the Management board is authorized to exclude such preemptive
rights with consent of the supervisory board. The formerly existing authorized capital was cancelled. For a description of our contingent capital increase, see Item 6. Directors, Senior Management and Employees  Options to
Purchase Securities from Registrants or Subsidiaries.

Based on the authorization of the shareholder meeting from March 6, 2002,
we issued a 126,425,000 convertible bond due 2010 with a coupon of 2.5% through our Dutch subsidiary EPCOS Finance B.V. guaranteed by EPCOS AG in June 2003. The convertible bond was placed with institutional investors outside the U.S., Canada
and Japan in reliance on Regulation S and is listed on the Luxemburg Stock Exchange. We issued the convertible bond to benefit from the attractive financing opportunities in the then-current convertible market given the low interest rate and high
volatility environment. The offering has allowed us to increase our financial flexibility.

After the authorization to issue convertible
and/or warrant linked bonds of the year 2002 has been exhausted, our shareholder meeting decided on February 11, 2004 to authorize the management board to issue, with the consent of the supervisory board, once or several times until
February 10, 2009 convertible and/or warrant-linked bonds with an aggregate face value of up to 500 million and a maximum term of fifteen years and to grant holders or creditors of bonds conversion or option rights for our shares
with a proportional interest in the share capital of up to a total of 6.5 million. For this purpose, the shareholder meeting adopted a resolution to conditionally increase our share capital by up to 6.5 million through the
issue of up to 6.5 million new ordinary registered shares of no par value in case the conversion or option rights are exercised (conditional capital 2004).

Repurchase of our own shares

We may not acquire our own shares unless authorized by a
resolution duly adopted at the shareholder meeting or in other limited circumstances set forth in the German Stock Corporation Act, such as for the purpose of offering those treasury shares to employees. The shareholders authorization to
repurchase shares may extend for a period of no more than 18 months. The German Stock Corporation Act generally limits share repurchases to 10% of our nominal share capital. Additional limitations (e.g., regarding the daily volume
repurchased) and certain disclosure requirements (prior to and after the repurchase) resulting from European law must be observed in order to benefit from a safe harbor that ensures that the repurchase cannot constitute market manipulation. Any
resale of repurchased shares must be effected on the stock exchange, in a manner that treats all shareholders equally or in accordance with the rules that apply to preemptive rights relating to a capital increase. Shares that are repurchased may be
reissued without preemptive rights and without shareholder approval as long as they are used for the acquisition of a business or participation in a business.



-68-



---

##### Table of Contents

In fiscal year 2002, we repurchased 51,410 shares at an average purchase price of 40.10 per
share and reissued 26,416 shares to our employees. The repurchase took place pursuant to a stock buy back program in order to offer discounted shares to our employees as described under Item 6. Directors, Senior Management and
Employees. As of September 30, 2003, we held 25,000 shares in preparation for such an offer to our employees for fiscal year 2003, but in October 2003, the management board decided to stop the employee share purchase plans so that we do
not plan to offer an employee share purchase plan for fiscal year 2004 and the years thereafter. In accordance with German law, we sold these shares into the market outside the United States in November 2003. We did not repurchase additional shares
in fiscal years 2006, 2005 or 2004.

The provisions of the Articles of Association relating to the supervisory and management board are
partly described under Item 6. Directors, Senior Management and Employees.

Liquidation rights

In accordance with the German Stock Corporation Act, if we are liquidated, any liquidation proceeds remaining after all our liabilities have been paid off
would be distributed among our shareholder in proportion to their holdings.

Corporate Governance

Overview of the corporate governance system in Germany

In contrast to corporations organized under the laws of the United States, German stock corporations are governed by three separate bodies: the annual general meeting of shareholders, the supervisory board and the management board. Their
roles are defined by German law and by the corporations Articles of Association (Satzung), and may be described generally as follows:

The annual general meeting of shareholdersratifies the actions of the corporations supervisory board and management board. It decides on the amount of the annual dividend, the appointment of an independent auditor, and certain
significant corporate transactions. In addition, it elects the members of the supervisory board. In corporations with more than 2,000 employees such as EPCOS, shareholders and employees elect or appoint an equal number of representatives to the
supervisory board. The annual general meeting elects the shareholder representatives except for those appointed by shareholders entitled to such an appointment by the Articles of Association. The annual general meeting must be held within the first
eight months of each fiscal year.

The supervisory boardappoints and removes the members of the management board and oversees the
management of the corporation. Although prior approval of the supervisory board may be required in connection with certain significant matters, the law prohibits the supervisory board from making management decisions.

The management boardmanages the corporations business and represents it in dealings with third parties. The management board submits
regular reports to the supervisory board about the corporations operations and business strategies, and prepares special reports upon request. A person may not serve simultaneously on the management board and the supervisory board of the same
company.

The German Corporate Governance Code

In February 2002, a Government Commission established by the Ministry of Justice published a German Corporate Governance Code (the CGC), which summarizes the fundamental guidelines of corporate governance
in Germany. The CGC was updated in May 2003, in June 2005 and in June 2006.

The CGC comprises a set of best-practice guidelines for the
governance of German companies listed on a stock exchange. The full text of the CGC, including an English translation thereof, is available on the Internet at http://www.corporate-governance-code.de. In addition to restating various corporate
governance-related provisions of German law, the CGC contains



-69-



---

##### Table of Contents

approximately 50 recommendations, which reflect widely recognized and well-established standards of corporate governance, and approximately
25 suggestions, which reflect additional standards for the sound and responsible management and supervision of a company. Topics covered by the CGC include:



| |  |  | The composition and responsibilities of the management board, the compensation of the management board members, and rules for avoiding and resolving conflicts of
interest;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The composition and responsibilities of the supervisory board and committees of the supervisory board, the compensation of the supervisory board members, and rules
for avoiding and resolving conflicts of interest;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The relationship between the management board and the supervisory board;
| | - |  | ------------------------------------------------------------------------



| |  |  | Transparency and disclosure in periodic reports; and
| | - |  | ----------------------------------------------------



| |  |  | Reporting on, and auditing of, the companys annual financial statements.
| | - |  | -------------------------------------------------------------------------

Although the CGC does not have the force of law and compliance with the recommendations and suggestions set forth in the CGC is voluntary, Section 161 of the German Stock Corporation Act requires that the
management board and the supervisory board of a covered company declare annually either that the company has complied, and will continue to comply, with the recommendations set forth in the CGC or, alternatively, which recommendations the company
has not complied, or does not comply, with (so-called comply or explain system). There is no similar requirement to issue a declaration with respect to the suggestions contained in the CGC. On December 14, 2006, our management board
and supervisory board issued the revised, annual declaration of conformity stating that we have been, since the last declaration of conformity issued on December 13, 2005, and are in compliance with all of the recommendations set forth in the
CGC, with the following exceptions (see Exhibit 15 to this annual report for a copy of this declaration):



| | (i) | Our directors and officers liability insurance policies for the members of our management and supervisory board do not provide for any deductibles. This coverage is
provided under a Group insurance policy to a wide range of executives inside and outside Germany, and it would be inappropriate to distinguish between members of the Boards and other executives. Moreover, deductibles are not customary outside
Germany.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | The stock option plans approved by the annual general meeting in 1999 and 2004 are not based on comparative parameters such as the performance of stock indices. It would be
impossible for EPCOS to define objectively a relative performance target based on a comparative index because no index for manufacturers with comparable product portfolios is available on the market. Furthermore, independent attempts to compile an
industry index suitable for comparison would not work due to the small number of listed competitors. In addition, the 1999 SOP did not provide for a limitation (cap) in case of extraordinary, unforeseen developments in connection with stock options
granted to the management board as provided for in the current CGC. However, the 2004 SOP approved by the annual general meeting on February 11, 2004, expressly authorizes the supervisory board to introduce a cap corresponding to the CGCs
recommendation. The supervisory board made use of this authorization each time it issued stock options based on the 2004 SOP to members of the management board.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | On February 14, 2007, the supervisory board nominated and the annual general meeting elected Dr. Bodo Luettge to the supervisory board for a five-year
term of office, although at the end of his term Dr. Luettge will be about a year older than the age limit of 71 years previously defined by the supervisory board. The main reason for this contravention of the age limit is the wealth of
experience that qualifies Dr. Luettge especially well for a position on our supervisory board. Since 1991, Dr. Luettge was Chief Financial Officer at Siemens Matsushita Components  EPCOS legal predecessor  and up until
March 2003 he was Chief Financial Officer at EPCOS. Prior
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



-70-



---

##### Table of Contents

to these engagements, he had spent two decades in positions of responsibility in corporate planning, accounting and finance at Siemens.



| | (iv) | The annual shareholder meeting on February 16, 2005 elected Mr. Joachim Reinhart to the supervisory board. Even though Mr. Reinhart belongs to the executive
management of Matsushita, one of our competitors, we believe that his representation on the board will not give rise to issues of conflicts of interest and that the outstanding qualifications of Mr. Reinhart will be very valuable to us. Any
conflict of interest that might arise for Mr. Reinhart can be avoided if he does not take part in the relevant supervisory board consultations or abstains from voting on relevant decisions.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | Compensation of the members of the supervisory board does not contain any variable component linked to the Companys performance. This exception is intended to avoid any
conflicts of interest with the supervisory boards monitoring functions by aligning the compensation to the Companys performance.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Summary of significant differences between German corporate governance practices and the NYSEs corporate governance standards

The following paragraphs provide a brief, general summary of significant differences between the corporate governance practices followed by German companies, such as ourselves, and those required by the listing
standards of the New York Stock Exchange (the NYSE) of U.S. companies that have common stock listed on the NYSE. The NYSE listing standards are available on the NYSEs website at http://www.nyse.com.

Composition of Board of Directors; Independence; Conflicts of Interest

The NYSE listing standards provide that the board of directors of a U.S. listed company must consist of a majority of independent directors and that certain committees must consist solely of independent directors. A
director qualifies as independent only if the board affirmatively determines that the director has no material relationship with the company, either directly or indirectly. In addition, the listing standards enumerate a number of relationships that
preclude independence, including employment of the director by the company, or employment of an immediate family member of the director, as an executive officer by the company. The listing standards do not specifically deal with the avoidance of
conflicts of interest and related party transactions. These matters are typically governed by the laws of the state in which the listed company is incorporated. Moreover, the absence of such rules reflects the NYSEs belief that the oversight
of related party transactions is best left to the companys discretion.

Although German law does not explicitly require that the
management or supervisory board members of a German company must be independent, a certain degree of independence of the supervisory board members is assured by the fact that, subject to a limited exception currently not applicable to us, no person
may concurrently serve on the management board and the supervisory board of the same company. See Item 6. Directors, Senior Management and Employees Overview and Supervisory Board for more information on our
practice. In addition, the CGC recommends that the supervisory board include a sufficient number of board members that the supervisory board considers independent. A supervisory board member is considered independent if he or she has no business or
personal relatives within the Company or its management board that causes a conflict of interest. Under the German rules of co-determination as applicable to us, four out of the six employee representatives on our supervisory board are employees of
us or one of our domestic subsidiaries.

Furthermore, German law and the CGC establish a number of principles of general applicability that
are designed to strengthen the independence of board members, to avoid conflicts of interests and to establish procedures and standards for related party transactions. Specifically, German law subjects loans from the company to members of the
management board or supervisory board and their close family members to the supervisory boards approval. In addition, the CGC recommends that:



-71-



---

##### Table of Contents

| |  |  | The members of the management board should not, during the term of their office (1) compete with the company, (2) in connection with their office, demand
or accept special benefits or grant unjustified benefits to third parties, or (3) when making business decisions for the company, pursue personal interests or exploit business opportunities that belong to the company;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The members of the management board and the supervisory board should disclose conflicts of interest;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | All transactions between the company on the one hand and the members of the management board and persons and companies closely related to them on the other hand
should be entered into on market terms and conditions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The members of the management board should not engage in side-line activities outside the company, including the assumption of seats on the governing bodies of
other companies, without the supervisory boards approval;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The supervisory board should include no more than two former members of the management board;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | No supervisory board member should serve on a governing body of, or provide consulting services to, a major competitor of the company;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | When making business decisions for the company, the supervisory board members may not pursue personal interests or exploit business opportunities that belong to the
company; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advisory and other service contracts between the company and members of the supervisory board should be entered into only with the supervisory boards
approval.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

Committees

Overview.The NYSE listing standards require that a U.S. listed company must have an audit committee, a nominating/corporate governance committee and a compensation committee. Each of these committees must consist solely of
independent directors and must have a written charter that addresses certain matters specified in the listing standards. In addition, the NYSE listing standards contain detailed requirements for the audit committees of U.S. listed companies.

Under German law, the only committee required by law is the mediation committee, which is a supervisory board committee that must be
formed in all companies that are subject to the principle of co-determination. The mediation committee consists of the chairman of the supervisory board, the deputy chairman, one shareholder representative and one employee representative. The
committee convenes when the supervisory board as a whole is unable to reach the required supermajority of votes for the appointment or dismissal of members of the management board. For more information on the mediation committee see Item 6.
Directors, Senior Management and Employees Supervisory Board.

In addition, the CGC recommends that covered companies,
such as ourselves, form additional committees at the supervisory board level depending on, among other things, the number of supervisory board members. Specifically, the CGC recommends that covered companies, such as ourselves, should have an audit
committee. In addition, it suggests that specific discussion topics, such as the companys strategy, the remuneration of the members of the management board and investment and financing questions, should be delegated to committees.

Audit committee.The NYSE listing standards contain detailed requirements for the audit committees of U.S. listed companies. Starting on
July 31, 2005, some, but not all, of these requirements, became applicable also to non-U.S. listed companies such as ourselves.



-72-



---

##### Table of Contents

German law currently does not require that companies have an audit committee. However, the CGC recommends
that covered companies form an audit committee that is responsible for, among other things, questions of accounting and risk management, ensuring the independence of the companys auditor, engaging the auditor for the audit of the
companys financial statements, determining the focus of the audit, and agreeing the audit fees. Although the audit committee related provisions of the CGC are less detailed than those contained in the NYSE listing standards, the NYSE listing
standards and the CGC share the goal of establishing a system for overseeing the companys accounting that is independent from management and of ensuring the auditors independence. As a result, they address similar topics, and there is
some overlap.

One structural difference between the legal status of the audit committee of a U.S. listed company and that of a German
company concerns the degree of the committees involvement in managing the relationship between the company and its auditor. While the NYSE listing standards require that the audit committee of a U.S. listed company must have direct
responsibility for the appointment, compensation, retention, and oversight of the work of the auditor, under German law, this responsibility is shared between the shareholders meeting and the supervisory board. The shareholders meeting
is responsible for electing the auditor (in doing so, it may rely on proposals submitted to it by the supervisory board and, if an audit committee exists, the audit committee). The supervisory board, in turn, is responsible for engaging the auditor,
setting the terms of the engagement and administering the engagement on a day-to-day basis. The auditor can be dismissed only through a special court proceeding.

Disclosure regarding corporate governance

The NYSE listing standards require U.S. listed companies to adopt, and post on
their websites, a set of corporate governance guidelines. The guidelines must address, among other things: director qualification standards, director responsibilities, director access to management and independent advisers, director compensation,
director orientation and continuing education, management succession, and an annual performance evaluation itself. In addition, the CEO of a U.S. listed company must certify to the NYSE annually that he or she is not aware of any violations by the
company of the NYSEs corporate governance listing standards. The certification must be disclosed in the companys annual report to shareholders.

Under German law, as discussed, the management and supervisory boards of German companies listed on a stock exchange are required to declare annually either that they have complied, and do comply, with the
recommendations set forth in the CGC or, alternatively, which recommendations they have not complied, or do not comply, with.

Code of Business Conduct
and Ethics

The NYSE listing standards require each U.S. listed company to adopt, and post on its website, a code of business conduct
and ethics for its directors, officers and employees. There is no similar requirement under German law or the CGC. However, under the SECs rules and regulations, all companies required to submit periodic reports to the SEC, including
ourselves, must disclose in their Annual Reports whether they have adopted a code of ethics for their senior financial officers. In addition, they must file a copy of the code with the SEC, post the text of the code on their website or undertake to
provide a copy upon request to any person without charge. There is significant, though not complete, overlap between the code of ethics required by the NYSE listing standards and the code of ethics for senior financial officers required by the
SECs rules. For information on the code of ethics adopted by EPCOS pursuant to applicable SEC rules, see Item 16. Code of Ethics.

Material Contracts

Agreements with Siemens

Siemens holds an irrevocable, non-exclusive and unlimited right to use industrial property rights which Siemens contributed to us in connection with our reorganization and which relate mainly to the surge voltage
arrester business that it contributed to us. However, Siemens right only extends to activities we did not engage in when Siemens made the contributions. Siemens may also use these



-73-



---

##### Table of Contents

rights to satisfy potential claims that could be asserted against it in connection with the surge voltage arrester business.

In connection with our transition as an independent company, we were parties to a series of service agreements with Siemens group companies under which
they provided us with a broad range of personnel and administrative services. Under these agreements, various Siemens group companies administered our pension plans and part of our personnel accounting systems and information management systems.
They also provided us with library and information services, personnel training and educational programs, as well as purchasing, procurement, sourcing, transportation, logistics, IT services and travel management and export related services. In
addition, they provided us with public relations related services, as well as expatriate personnel and leased vehicle fleet services. Most of these services were provided under similar terms to those we enjoyed before the reorganization. We have
replaced some of these services and functions with services from third parties or by establishing these functions internally. The Siemens group continues to provide us with some of these services under new contracts. The overall cost to us of these
services and functions that Siemens used to provide has not increased to any significant extent as a result of our separation from the Siemens group.

We lease a number of properties from Siemens subsidiaries, including our corporate headquarters building in Munich, our facility in Berlin, our North American sales division facilities in Iselin, New Jersey and our
Latin American sales force facilities in São Paolo, Brazil. We lease our corporate headquarters in Munich from a Siemens subsidiary. We can terminate our lease with effect from September 30, 2008, on twelve months notice.
Otherwise, the lease will run until December 31, 2010. Either party can terminate the lease for our Berlin facility on twelve months notice after September 30, 2002.

We are party to a framework agreement with Siemens AG that allows us to commission research and development projects from them on a case-by-case basis as
needed. For each project, we and Siemens will negotiate the costs involved, development objectives, areas of responsibility, and other terms. Under the framework agreement, Siemens may prematurely terminate any project if it has abandoned the
particular field of research involved or if it has closed the department responsible for carrying out the project. Siemens must then return to us the payments we have agreed on in connection with the particular project, to the extent that we have
not received research results from the project. We will hold all proprietary rights to any development results that come out of any research and development projects with Siemens. We may also register any trademarks or other rights that relate to
any such development rights. Siemens will have a non-exclusive, royalty-free right to use those intellectual property rights in its own business, except that they cannot use them to make products that we produce and sell or make them available to
our competitors without our consent.

For further information on our relationship with Siemens, see Note 12 to our Consolidated
Financial Statements and Item 7. Major Shareholders and Related Party Transactions  Related Party Transactions.

Agreements with Matsushita

We are party to a cross license agreement with Matsushita Electric Industrial Co., Ltd.
in which we have given each other non-exclusive, non-transferable, world-wide licenses to our respective patents relating to our major product families. The licenses that we have granted each other under this agreement originally run until 2009 and,
based on a renewal of this agreement entered into with effect from June 30, 2004, now run until 2014 and cover both patents existing at the time of the agreement and any patents under which we or Matsushita gain rights until the expiration of
the agreement. We pay Matsushita an annual fee under this agreement. The agreement may be renewed again after it expires in 2014. If we cannot agree on the terms of a renewal before this date, it will automatically be renewed for one more year.

We have also agreed with Matsushita Electronic Components Co., Ltd. as well as with Matsushita Electric Industrial Co., Ltd. that we will,
to the extent we and Matsushita each think it commercially feasible and beneficial, exchange technology, provide each other with technical assistance, grant each other technical know-how licenses and jointly develop structures, materials,



-74-



---

##### Table of Contents

manufacturing processes, software and applications of certain electronic components and subassemblies. Under these agreements, each of us may provide the
other with technical information. We may then enter into a technical assistance and/or joint development project by negotiating any applicable royalties, license fees and other terms and conditions. We will share ownership of any intellectual
property that we create jointly under these agreements and each have a non-exclusive right to use and to grant non-exclusive licenses to the joint intellectual property. With effect from June 30, 2004, we entered into amended agreements which
provide for an automatic extension of each of these agreements by one year as long as neither party gives due notice.

Pursuant to a
know-how license agreement, Matsushita-Kotobuki Electronics Industries, Ltd., a Matsushita subsidiary, has granted us a non-exclusive, non-transferable, royalty-bearing and worldwide license to use their know-how and information relating to low
temperature co-fired multilayer ceramic substrate in our products. Matsushita-Kotobuki has also agreed to provide us with technical advice and instructions relating to the manufacture of products that use this technology. We are paying an initial
fee in installments and an ongoing royalty of a specified percentage of the net sales price of products containing this technology that we use, sell or otherwise dispose. We will make these royalty payments until five years after the end of the
calendar half year which covers the date of the first commercial shipment of licensed products. After that, we may use the technical information and know-how free of charge. During the term of our agreement, each of us has agreed not to assert our
patent rights against the other with respect to low temperature co-fired multilayer ceramic substrate.

Under a memorandum between us and
the Ceramics Division of Matsushita Electronic Components Co. Ltd. (MACO), dated July 7, 1998, MACO has granted us a perpetual, non-exclusive and non-transferable license to use technical information furnished by it to manufacture
multilayer ceramic capacitors with nickel inner electrodes at our plant in Deutschlandsberg, Austria. In return, we pay MACO fees under this agreement. On July 25, 2001, we entered into a technical know-how agreement with MACO under which it
has granted us a perpetual, non-exclusive and non-transferable license to use further know-how relating to the production of the same kind of multilayer ceramic capacitors at our factory in Deutschlandsberg, Austria. We also pay fees under this
technical know-how agreement.

For further information on our relationship with Matsushita Electronic Components Co., Ltd., see
Note 12 to our Consolidated Financial Statements and Item 7. Major Shareholders and Related Party Transactions  Related Party Transactions.

Exchange Controls and Other Limitations Affecting Security Holders

There are currently no legal
restrictions in Germany on international capital movements and foreign-exchange transactions, except in limited embargo circumstances relating to certain areas, entities or persons as a result of applicable resolutions adopted by the United Nations
and the European Union. Restrictions currently exist with respect to, among others, Zimbabwe, Sudan, Somalia and Iraq. The German Central Bank (Deutsche Bundesbank) publishes information concerning financial sanctions programs at:
http://www.bundesbank.de/finanzsanktionen/finanzsanktionen.en.php.

For statistical purposes, there are, however, limited reporting
requirements regarding transactions involving cross-border monetary transfers. With some exceptions, every corporation or individual residing in Germany must report to the German Central Bank (i) any payment received from, or made to, a
non-resident corporation or individual that exceeds 12,500 (or the equivalent in a foreign currency) and (ii) any claim against, or liability payable to, a non-resident or corporation in excess of 5 million (or the equivalent
in a foreign currency) at the end of any calendar month. Payments include cash payments made by means of direct debit, checks and bills, remittances denominated in euro and other currencies made through financial institutions, as well as netting and
clearing arrangements.

German residents are also required to report annually to the German Central Bank any shares or voting rights of 10%
or more they hold in non-resident corporations with total assets of more than 3 million. Corporations residing in Germany with assets in excess of 3 million must report annually



-75-



---

##### Table of Contents

to the German Central Bank any shares or voting rights of 10% held by a non-resident. Further details on reporting requirements may be obtained at:
http://www.bundesbank.de/meldewesen/mw.en.php.

Neither German law nor our Articles of Association restricts the right of
non-resident or foreign owners of the shares to hold or vote their shares.

Taxation

The following discussion is a summary of the material German tax consequences for beneficial owners of shares or ADSs who are (i) not German
residents for German income tax purposes (i.e., persons whose residence, habitual abode, statutory seat or place of effective management and control is not located in Germany) and (ii) whose shares do not form part of the business
property of a permanent establishment or fixed base in Germany. Throughout this section we refer to these owners as Non-German Holders.

This summary is based on German tax laws and typical tax treaties to which Germany is a party as they are in effect on the date hereof, and is subject to changes in German tax laws or such treaties. The following discussion does not purport
to be a comprehensive discussion of all German tax consequences that may be relevant for Non-German Holders.

You should consult your
tax advisor regarding the German federal, state and local tax-consequences of the ownership and disposition of shares or ADSs, the eligibility for the benefits of any tax treaty and the procedures to follow for a refund of German taxes withheld from
dividends.

Taxation of the Company in Germany

German corporations are subject to corporate income tax at a rate of 25% plus a solidarity surcharge of 5.5% on the net assessed corporate income tax. In the aggregate, the corporate income tax and the solidarity
surcharge amount to 26.375%.

In addition, German corporations are subject to profit-related trade tax on income. The exact amount of the
trade tax varies with the municipality in which the corporation maintains its business establishment(s). Trade tax on income is a deductible item in computing the corporations tax base for corporate income tax purposes.

Beginning in fiscal year 2004, the deduction for a taxable loss carryforward of an amount exceeding 1.0 million is limited to 60% of the
taxable income for the fiscal year. Unused loss carryforwards can be carried forward indefinitely, and subject to the 60%-limitation referred to in the preceding sentence, may offset future taxable income.

Imposition of withholding tax

German withholding tax
is imposed at a rate of 20% for dividend distributions made by EPCOS plus a solidarity surcharge of 5.5% on the withholding tax. The aggregate withholding tax rate with respect to dividends is thus 21.1% of the declared dividend.

For many Non-German Holders (e.g., U.S. shareholders) the withholding tax rate is reduced under applicable income tax treaties. Under most income
tax treaties to which Germany is a party, the rate of dividend withholding tax is reduced to 15%. To benefit from the reduced rate of withholding tax under an applicable income tax treaty, a Non-German Holder generally is required to apply for a
refund of withholding taxes paid. The application for refund must be filed with the German Federal Tax Office (Bundeszentralamt für Steuern, An der Küppe 1, D-53225 Bonn, Germany; www.bzst.de). The relevant forms can be obtained
from the German Federal Tax Office or from German embassies and consulates.

Refund procedure for eligible U.S. shareholders

An eligible U.S. holder is a U.S. holder (as defined below in United States Taxation) that (i) is a resident of the United States for
purposes of the Treaty, (ii) does not maintain a permanent establishment or fixed base in Germany to which shares or ADSs of EPCOS are attributable and



-76-



---

##### Table of Contents

through which the U.S. holder carries on or has carried on business (or, in the case of an individual, performs or has performed personal services), and
(iii) is otherwise eligible for benefits under the Treaty with respect to income and gain from the shares or ADSs.

For shares and
ADSs kept in custody with The Depository Trust Company in New York or one of its participating banks, the German tax authorities have introduced a collective procedure for the refund of German dividend withholding tax and the solidarity surcharge
thereon on a trial basis. Under this procedure, The Depository Trust Company may submit claims for refunds payable to eligible U.S. holders under the Treaty collectively to the German tax authorities on behalf of these eligible U.S. holders. The
German Federal Tax Office will pay the refund amounts on a preliminary basis to The Depository Trust Company, which will redistribute these amounts to the eligible U.S. holders according to the regulations governing the procedure. The German Federal
Tax Office may review whether the refund was made in accordance with the law within four years after making the payment to The Depository Trust Company. Details of this collective procedure are available from The Depository Trust Company.

Individual claims for refunds may be made on a special German form which must be filed with the German Federal Tax Office at the address
noted above. Copies of this form may be obtained from the German Federal Tax Office at the same address or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W., Washington, D.C. 20007-1998. Claims must be filed within a
four-year period from the end of the calendar year in which the dividend was received.

As part of the individual refund claim, an eligible
U.S. holder must submit to the German tax authorities the original bank voucher (or a certified copy thereof) issued by the paying agent documenting the tax withheld, and an official certification on IRS Form 6166 of its last United States federal
income tax return. IRS Form 6166 may be obtained by filing a request with the Internal Revenue Service Center in Philadelphia, Pennsylvania, Foreign Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447. Requests for certification must
include the eligible U.S. holders name, taxpayer identification number, tax return form number and tax period for which the certification is requested. Requests for certifications can include a request to the Internal Revenue Service to send
the certification directly to the German tax authorities. If no such request is made, the Internal Revenue Service will send a certification on IRS Form 6166 to the eligible U.S. holder, who then must submit this document with his refund claim.

Capital gains

Under German domestic
tax law as currently in effect, capital gains derived by a Non-German Holder from the sale or other disposition of shares or ADSs are subject to tax in Germany only if the Non-German Holder has held, directly or indirectly, shares or ADSs
representing 1% or more of the registered share capital of the company at any time during the 5-year period immediately preceding the disposition. Capital gains from the sale of shares received by a corporation are tax exempted under German domestic
law. In general, according to the participation exemption rules, 5% of the capital gain is considered as nondeductible expenses.

Eligible
U.S. holders are exempt from taxation in Germany on capital gains derived from the sale or disposition of shares of ADSs.

Inheritance and gift tax

Under German law, German gift or inheritance tax will be imposed on transfers of shares or ADSs by a holder at death or by way of gift
only if



| |  |  | the decedent or donor, or the heir, donee or other transferee has his residence in Germany at the time of the transfer;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the shares or ADSs are part of the business property of a permanent establishment in Germany;
| | - |  | ---------------------------------------------------------------------------------------------



-77-



---

##### Table of Contents

| |  |  | the decedent or donor, or the heir, donee or other transferee is a citizen of Germany, is not a resident in Germany, but has not been continuously outside of
Germany for a period of more than five years; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the shares or ADSs subject to such transfer form part of a portfolio that represents 10% or more of the registered share capital of the company and has been held,
directly or indirectly, by the decedent or donor, respectively, actually or constructively together with related parties.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The right of the German government to impose inheritance or gift tax on a Non-German Holder may be further limited by an applicable estate tax treaty (such as the Inheritances and Gifts Tax Treaty between the United States and Germany dated
December 3, 1980).

Other taxes

No German transfer, stamp or similar taxes apply to the purchase, sale or other disposition of shares or ADSs by a Non-German Holder. Currently, net worth tax is not levied in Germany.

United States Taxation

This section describes the
material United States federal income tax consequences of owning our shares or ADSs. It applies to you only if you are a U.S. holder, as described below, that holds its shares or ADSs as capital assets for tax purposes. This section does not address
all material tax consequences of owning shares or ADSs. It does not address special classes of holders, some of which may be subject to special rules, including:



| |  |  | tax-exempt entities,
| | - |  | --------------------



| |  |  | life insurance companies,
| | - |  | -------------------------



| |  |  | dealers in securities,
| | - |  | ----------------------



| |  |  | traders in securities that elect a mark-to-market method of accounting for securities holdings,
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | investors liable for alternative minimum tax,
| | - |  | ---------------------------------------------



| |  |  | investors that actually or constructively own 10% or more of our voting stock,
| | - |  | ------------------------------------------------------------------------------



| |  |  | investors that hold shares or ADSs as part of a straddle or a hedging or conversion transaction, or
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | U.S. holders whose functional currency is not the U.S. dollar.
| | - |  | --------------------------------------------------------------

This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, and published rulings and court decisions, all as currently in effect, as well as on
the United StatesGerman Income Tax treaty (the Treaty). These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of Morgan Guaranty Trust Company of New
York, the predecessor of JP Morgan Chase Bank, as depositary for the American Depositary Receipt (or ADR) program. Assuming that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms, for
United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will generally be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to
United States federal income tax.

You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are, for U.S.
federal income tax purposes:



-78-



---

##### Table of Contents

| |  |  | a citizen or resident of the United States,
| | - |  | -------------------------------------------



| |  |  | a domestic corporation,
| | - |  | -----------------------



| |  |  | an estate whose income is subject to United States federal income tax regardless of its source, or
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | a trust if a United States court can exercise primary supervision over the trusts administration and one or more United States persons are authorized to
control all substantial decisions of the trust.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This discussion addresses only United States federal income taxation.
You should consult your own tax advisor regarding the United States federal, state, local and other tax consequences of owning and disposing of shares and ADSs in your particular circumstances. In particular, you should confirm that you are eligible
for the benefits under the Treaty with respect to income and gain from the shares or ADSs.

Taxation of dividends

Under the United States federal income tax laws, and subject to the electronic foreign investment company rules discussed below, if you are a U.S. holder,
the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder,
dividends paid to you in taxable years beginning before January 1, 2011 that constitute qualified dividend income will be taxable to you at a maximum tax rate of 15%, provided that you hold the shares or ADSs for more than 60 days during the
121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the shares or ADSs generally will be qualified dividend income.

You must include any German tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. You must include the
dividend in income when you, in the case of shares, or JP Morgan Chase Bank, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the euro payments made,
determined at the spot euro/U.S. dollar rate on the date the dividend distribution is includable in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to
qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of our current or accumulated earnings and profits, as determined
for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the shares or ADSs and thereafter as capital gain.

Subject to certain limitations, the German tax withheld in accordance with German law or the Treaty and paid over to Germany will be creditable against
your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is available to
you under German law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. See German Taxation  Refund procedure for eligible U.S.
holders above for the procedures for obtaining a tax refund.

Dividends will be income from sources outside the United States.
Dividends paid in taxable years beginning before January 1, 2007 will generally be passive income or financial services income, and dividends paid in taxable years beginning after December 31, 2006 will, depending
on your circumstances, be passive or general income that, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you.



-79-



---

##### Table of Contents

Taxation of capital gains

Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder and sell or otherwise dispose of your shares or ADSs, you will recognize capital gain or loss for United States federal
income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs. Capital gain of a non-corporate U.S. holder that is recognized in
taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15% where the holder has a holding period greater than one year. The gain or loss will generally be income or loss from sources within the United States for
foreign tax credit limitation purposes.

Passive foreign investment company rules

EPCOS believes that its shares and ADSs should not be treated as stock of a passive foreign investment company, or PFIC, for United States
federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If EPCOS were to be treated as a PFIC, unless you are a U.S. holder that elects to be taxed annually on a
mark-to-market basis with respect to the shares or ADSs, gain realized on the sale or other disposition of your shares or ADSs would in general not be treated as capital gain. Instead, if you are a U.S. Holder, you would be treated as if you had
realized such gain and certain excess distributions ratably over your holding period for the shares or ADSs and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an
interest charge in respect of the tax attributable to each such year. With certain exceptions, your shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your shares or ADSs. In addition,
dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead
will be taxable at rates applicable to ordinary income.

Documents on Display

Our company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we
file reports and other information with the Securities and Exchange Commission. Since November 4, 2002, foreign private issuers are required to file on the Electronic Data Gathering, Analysis and Retrieval (EDGAR) system of the SEC and, since
then, our filings can be obtained electronically. In addition, these materials, including this annual report and the exhibits thereto, may be inspected and copies at the Commissions Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the materials may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W. Washington D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commissions
Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, material filed by us can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, New York 10005.



-80-



---

##### Table of Contents

Item 11. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk
through our commercial activities and financial operations. Our market risk consists primarily of exposure to changes in currency exchange rates and interest rates, as well as to changes in the price of some metals that we use as raw materials. We
have implemented a policy of hedging against some of these risks, but we may still incur losses as a result of changes in currency exchange rates, interest rates and prices of commodities. We do not enter into derivatives transactions for trading
purposes. We discuss our metals exposures in Item 4. Information on the Company  Raw Materials and Sources of Supply.

Interest Rate Risks

During fiscal year 2005 and fiscal year 2006, changes in interest rates did not have a material impact
on our results of operations, capital resources or liquidity. The syndicated credit facility of 250 million, provided by twelve international banks, was not used at the end of fiscal year 2006. It is thus available in full and, in any
event, does not provide for an interest rate risk above market standard. The convertible bond we issued in fiscal year 2003 carries a fixed rate and therefore reduces overall interest rate risk. For further information on our liquidity risks, see
Item 5. Operating and Financial Review and Prospects  Liquidity and Capital Resources. Liquid assets available within our group are invested in the money market to ensure our solvency at all times.

In the current fiscal year 2007, we are continuing to invest parts of our liquid assets in certain securities, which do not carry any material price risk
and may be sold any time.

Due to our liquidity situation, our future net interest expenses would not be materially increased by a
substantial increase in interest rates. A sustained increase in interest rates would not increase the cost of financing our capital expenditures and would not require us to reassess some of our planned investments.

Foreign Exchange Risks

The global nature of our
business leads to payment flows in various currencies other than the euro, of which the U.S. dollar, the Japanese yen and the Singapore dollar are most important to EPCOS. Our U.S. dollar revenues normally exceed our U.S. dollar expenses. Our yen
expenses, on the other hand, normally exceed our yen revenues because we purchase a significant amount of materials from Japanese suppliers at yen-denominated prices.

Since this exposes our companies to foreign exchange risks, exchange rate hedging is an essential part of our risk management practice. One further factor is that exchange rate fluctuations improve the cost position
of other electronic components and modules manufacturers and can thus affect market prices. In recent years, we have increasingly relocated our value chain and materials sourcing activities from Central Europe to countries with lower labor costs.
The currencies in many of these countries are more or less closely tied to the U.S. dollar. A significant proportion of our value added is now generated in the extended U.S. dollar area. This has significantly reduced our net risk exposure. Existing
foreign exchange risks are constantly recorded in our central foreign exchange management system. Appropriate instruments are then used to hedge net amounts denominated in the various currencies, usually for a period of three months.

Hedging is executed in permanent consultation with our management board. We have implemented a value-at-risk model to monitor risks resulting from
foreign exchange risks outstanding. The following table indicates the strain that a 15% upward revaluation of the euro in 2007 would impose in connection with foreign exchange contracts concluded for the period from September 30, 2006, through
December 31, 2006:



-81-



---

##### Table of Contents

Sensitivity to exchange rates

(based on exchange rates on September 30, 2006)

(euro in million)



|                                       |  |        |   |  |     |   |  |                 |  
|-------------------------------------- |  | ------ | - |  | --- | - |  | --------------- | -
|                                       |  | U.S. $ |   |  | Yen |   |  | Singaporedollar |  
|Net foreign exchange volume at risk    |  | 127    |   |  | (31 | ) |  | (34             | )
|Result of 15% revaluation of the euro* |  | (17    | ) |  | 4   |   |  | 4               |  

---

|* | Impact on net cash flow adjusted for forward foreign exchange contracts.
|- | ------------------------------------------------------------------------

Investments in our foreign subsidiaries are not protected against exchange rate fluctuations. Valuation differences between balance sheet dates directly affect our groups equity capital.

We believe that changes in exchange rates have not generally had a direct material impact on our results of operations, capital resources or liquidity,
in part due to our foreign currency hedging policy. As we explain under Item 4. Information on the Company  Description of Business  Competition, the value of the Japanese yen and U.S. dollar versus the euro
may affect our competitiveness. A strengthening of the yen could help our competitiveness vis-à-vis Japanese producers, despite the negative financial statement impact resulting from the unhedged portion of the excess of our yen denominated
expenses over revenues. On the other hand, a weakening of the U.S. dollar would benefit our U.S.-based competitors while reducing our operating income since our U.S. dollar denominated revenues exceed our expenses. In fiscal year 2006, the
devaluation of the U.S. dollar and Yen against the euro continued to give our Japanese and U.S. competitors cost and competitive advantages and place increasing pressure on prices for EPCOS. We do not expect that future changes in foreign exchange
rates would have a material impact on our liquidity or capital resources since most of our funding is denominated in euro.

Item 12. Description of Securities other than Equity Securities

Not applicable.



-82-



---

##### Table of Contents

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

Evaluation of disclosure controls and procedures.EPCOS, under
the participation and supervision of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of
September 30, 2006. Based on that evaluation, the CEO and the CFO concluded that, as of September 30, 2006, EPCOS disclosure controls and procedures were effective and designed to provide reasonable assurance that the material
financial and non-financial information required to be disclosed in documents filed or submitted with the Securities and Exchange Commission is recorded, processed, summarized and reported in a timely manner. Although we believe our pre-existing
disclosure controls and procedures were adequate to enable us to comply with these disclosure obligations, we implemented some changes responding to recent legislation and regulations, primarily to formalize and document procedures already in place.
We also established a disclosure committee which consists of certain members of the Companys senior management.

Managements
Annual Report on Internal Control Over Financial Reporting. Management of EPCOS AG is responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting
is a process designed under the supervision of the principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Companys financial statements for
external reporting purposes in accordance with U.S. GAAP.

As of the end of 2006 fiscal year, management conducted an assessment of the
effectiveness of internal control over financial reporting in accordance with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control  Integrated Framework. Based on this assessment,
management has determined that the Companys internal control over financial reporting as of September 30, 2006 was effective.

The Companys internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets;
provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorization of
management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on our financial
statements.

Managements assessment of the effectiveness of the Companys internal control over financial reporting as of
September 30, 2006 has been audited by KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, an independent registered public accounting firm, as stated in their report appearing below.

Attestation Report of the Registered Public Accounting Firm.We have audited managements assessment, included in the accompanying
Managements Annual Report on Internal Control Over Financial Reporting, that EPCOS AG maintained effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).EPCOS AGs management is responsible for maintaining effective internal



-83-



---

##### Table of Contents

control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express
an opinion on managements assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that EPCOS AG maintained effective internal control over financial reporting as of September 30, 2006,
is fairly stated, in all material respects, based on criteria established in Internal ControlIntegrated Framework issued by COSO. Also in our opinion, EPCOS AG maintained, in all material respects, effective internal control over
financial reporting as of September 30, 2006, based on criteria established in Internal ControlIntegrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of EPCOS AG and subsidiaries as of September 30, 2006 and
2005, and the related consolidated statements of operations, cash flows, and changes in shareholder equity and comprehensive income (loss) for each of the years in the three-year period ended September 30, 2006, and our report dated
December 29, 2006 expressed an unqualified opinion on those consolidated financial statements.

KPMG Deutsche
Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Munich, Germany

December 29, 2006

Changes in Internal Control Over Financial Reporting.There has not been any change in our internal control over financial reporting during fiscal
year 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



-84-



---

##### Table of Contents

Item 16A. Audit Committee Financial Expert

On February 3, 2003, the supervisory board determined
that Dr. Heraeus qualifies as a financial expert within the meaning of Section 407 of the Sarbanes-Oxley Act of 2002. The supervisory board also determined that Dr. Heraeus is independent within the meaning of the SEC and New York
Stock Exchange Rules. Dr. Heraeus resigned from his position as a member of the supervisory board with effect from the end of the annual general meeting for fiscal year 2006. Subsequently, the supervisory board determined on February 14,
2007 that the newly elected supervisory board member Dr. Luettge would replace Dr. Heraeus in the audit committee and that he qualifies as a financial expert within the meaning of Section 407 of the Sabarnes-Oxley Act of 2002. The
supervisory board also determined that Dr. Luettge is independent within the meaning of the SEC and New York Stock Exchange Rules.

Item 16B. Code of Ethics

On February 4, 2004, the supervisory board and the management board
adopted a code of ethics that applies to the members of the management board, the heads of the divisions and the heads of the corporate departments accounting, sales, finance, investor relations and corporate communication. You may obtain a copy of
the code of ethics, free of charge, by writing to EPCOS AG, Legal Department, St.-Martin-Strasse 53, 81669 Munich, Germany.

Item 16C. Principal Accountant Fees and Services

The following table shows, in respect of each of the
last two fiscal years, information concerning the fees incurred for professional services rendered by KPMG, EPCOS principal accountant.



|                   |  |                                 |  |     
|------------------ |  | ------------------------------- |  | ----
|                   |  | Fiscal year ended September 30,
|                   |  | 2006                            |  | 2005
|                   |  | (euro in millions)             
|Audit Fees         |  | 1.2                             |  | 1.0 
|Audit-Related Fees |  | 0.1                             |  | 0.2 
|Tax Fees           |  | 0.1                             |  | 0.1 
|All Other Fees     |  | 0.0                             |  | 0.0 
|                   |  |                                 |  |     
|Total              |  | 1.4                             |  | 1.3 

Audit Fees consisted of fees billed by KPMG for services rendered in connection with
the audit of EPCOS consolidated annual financial statements, review of interim financial statements, and other services usually provided in connection with statutory and regulatory filings. Audit-Related Fees consisted of fees
billed by KPMG for assurance and related services that traditionally are performed by the independent accountant, such as due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions,
internal control review and attest services. Tax Fees consisted of fees billed by KPMG for tax compliance, tax advice and tax planning services, and other tax services.

The Audit Committee is responsible, among other things, for the pre-approval of permissible non-audit services to be performed by ECPOS independent
auditor. Accordingly, the Audit Committee has adopted a resolution by which it pre-approved designated services in the categories audit-related services and tax services. In addition, the resolution lists all services that EPCOS independent
auditor may not perform under any circumstances. The resolution also sets forth certain procedures and thresholds for each category of services as well as an overall cap for the total amount of fees that may be charged for these services.



-85-



---

##### Table of Contents

Item 16D. Exemptions from the Listing Standards for Audit Committees

EPCOS does not currently avail
itself of any exemption from the listing standards for its audit committee.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In fiscal year 2006,
EPCOS AG or any of its affiliates has not purchased any of its equity securities.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements



-86-



---

##### Table of Contents

Index to Consolidated Financial Statements



|                                                                                                                                       |  |     
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                       |  | Page
|Consolidated Financial Statements                                                                                                      |  |     
|                                                                                                                                       | 
|Report of independent registered public accounting firm                                                                                |  | F-2 
|                                                                                                                                       | 
|Consolidated Statements of Operations for the years ended September 30, 2006, 2005, and 2004                                           |  | F-3 
|                                                                                                                                       | 
|Consolidated Balance Sheets as of September 30, 2006 and 2005                                                                          |  | F-4 
|                                                                                                                                       | 
|Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss) for the years ended September 30, 2006, 2005, and 2004 |  | F-5 
|                                                                                                                                       | 
|Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005, and 2004                                           |  | F-6 
|                                                                                                                                       | 
|Notes to Consolidated Financial Statements                                                                                             |  | F-7 



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Supervisory Board and Shareholders of EPCOS AG

We have audited the accompanying consolidated balance sheets of EPCOS AG and subsidiaries (the Company) as of September 30, 2006 and 2005, and the
related consolidated statements of operations, cash flows and changes in shareholders equity and comprehensive income (loss) for each of the years in the three-year period ended September 30, 2006. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EPCOS AG and subsidiaries as
of September 30, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys
internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report
dated December 29, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of, and the effective operation of, internal control over financial reporting.

KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Munich, Germany

December 29, 2006



F-2



---

##### Table of Contents

EPCOS AG

Consolidated Statements of Operations

For the years ended September 30, 2006, 2005 and 2004

( thousand,
except per share data)



|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|--------------------------------------------------------------------------------- |  | ---- |  | --------- | - |  | --------- | - |  | --------- | -
|                                                                                  |  | Note |  | 2006      |   |  | 2005      |   |  | 2004      |  
|Net sales from continuing operations                                              |  |      |  |           |   |  |           |   |  |           |  
|Third parties                                                                     |  |      |  | 1,208,680 |   |  | 958,223   |   |  | 1,025,290 |  
|Related parties                                                                   |  | 12   |  | 100,801   |   |  | 191,796   |   |  | 230,017   |  
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Total net sales                                                                   |  |      |  | 1,309,481 |   |  | 1,150,019 |   |  | 1,255,307 |  
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Cost of goods sold                                                                |  | 12   |  | 1,083,035 |   |  | 979,262   |   |  | 986,534   |  
|Gross profit                                                                      |  |      |  | 226,446   |   |  | 170,757   |   |  | 268,773   |  
|Research and development expenses                                                 |  | 12   |  | 71,177    |   |  | 63,928    |   |  | 69,296    |  
|Marketing and selling expenses                                                    |  | 12   |  | 104,648   |   |  | 111,290   |   |  | 116,233   |  
|General and administrative expenses                                               |  | 12   |  | 13,394    |   |  | 13,170    |   |  | 14,584    |  
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|                                                                                  |  |      |  | 189,219   |   |  | 188,388   |   |  | 200,113   |  
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Operating (loss) income                                                           |  |      |  | 37,227    |   |  | (17,631   | ) |  | 68,660    |  
|Interest income                                                                   |  |      |  | 4,710     |   |  | 3,164     |   |  | 4,291     |  
|Interest expense                                                                  |  |      |  | (13,740   | ) |  | (10,906   | ) |  | (9,750    | )
|Foreign exchange gains (losses), net                                              |  |      |  | 1,494     |   |  | (4,702    | ) |  | (6,086    | )
|Impairment on goodwill                                                            |  | 9    |  |          |   |  | (11,800   | ) |  |          |  
|Other income, net                                                                 |  | 17   |  | 6,678     |   |  | 7,273     |   |  | 4,888     |  
|Share of net income (losses) of unconsolidated affiliates and at equity companies |  |      |  | 1,420     |   |  | (6        | ) |  | 102       |  
|Income (Loss) before income taxes and minority interest                           |  |      |  | 37,789    |   |  | (34,608   | ) |  | 62,105    |  
|Provision for income taxes                                                        |  | 18   |  | (2,210    | ) |  | (31,479   | ) |  | (10,899   | )
|Minority interest                                                                 |  |      |  | (419      | ) |  | (234      | ) |  | (223      | )
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Net income (loss) from continuing operations                                      |  |      |  | 35,160    |   |  | (66,321   | ) |  | 50,983    |  
|Loss from discontinued operations, net of income taxes                            |  | 8    |  | (13,983   | ) |  | (52,941   | ) |  | (1,755    | )
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Net income (loss)                                                                 |  |      |  | 21,177    |   |  | (119,262  | ) |  | 49,228    |  
|                                                                                  |  |      |  |           |   |  |           |   |  |           |  
|Basic (loss) earnings per share in                                               |  | 19   |  |           |   |  |           |   |  |           |  
|Net income (loss) from continuing operations                                      |  |      |  | 0.54      |   |  | (1.02     | ) |  | 0.78      |  
|Net loss from discontinued operations                                             |  |      |  | (0.21     | ) |  | (0.81     | ) |  | (0.03     | )
|Diluted (loss) earnings per share in                                             |  |      |  |           |   |  |           |   |  |           |  
|Net income (loss) from continuing operations                                      |  |      |  | 0.52      |   |  | (1.02     | ) |  | 0.74      |  
|Net loss from discontinued operations                                             |  |      |  | (0.21     | ) |  | (0.81     | ) |  | (0.03     | )

See Notes to Consolidated Financial Statements



F-3



---

##### Table of Contents

EPCOS AG

Consolidated Balance Sheets

As of September 30, 2006 and 2005 ( thousand, except share data)



|                                                                                                           |  |       |  |           |   |  |           |  
|---------------------------------------------------------------------------------------------------------- |  | ----- |  | --------- | - |  | --------- | -
|                                                                                                           |  | Note  |  | 2006      |   |  | 2005      |  
|ASSETS                                                                                                     |  |       |  |           |   |  |           |  
|Current assets                                                                                             |  |       |  |           |   |  |           |  
|Cash and cash equivalents                                                                                  |  | 4     |  | 268,851   |   |  | 193,438   |  
|Accounts receivable, net                                                                                   |  | 5, 12 |  | 217,074   |   |  | 201,991   |  
|Inventories, net                                                                                           |  | 6     |  | 213,808   |   |  | 226,802   |  
|Prepaid expenses and other current assets                                                                  |  | 7     |  | 45,264    |   |  | 46,579    |  
|Deferred income taxes                                                                                      |  | 18    |  | 6,446     |   |  | 8,708     |  
|Assets held for sale                                                                                       |  | 8     |  | 15,572    |   |  |          |  
|                                                                                                           |  |       |  |           |   |  |           |  
|Total current assets                                                                                       |  |       |  | 767,015   |   |  | 677,518   |  
|                                                                                                           |  |       |  |           |   |  |           |  
|                                                                                                           |  |       | 
|Property, plant and equipment, net                                                                         |  | 9     |  | 493,378   |   |  | 576,284   |  
|Intangible assets, net                                                                                     |  | 9     |  | 15,436    |   |  | 19,141    |  
|Deferred income taxes                                                                                      |  | 18    |  | 94,036    |   |  | 70,169    |  
|Other assets                                                                                               |  | 9     |  | 44,678    |   |  | 33,822    |  
|                                                                                                           |  |       |  |           |   |  |           |  
|Total assets                                                                                               |  |       |  | 1,414,543 |   |  | 1,376,934 |  
|                                                                                                           |  |       | 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                       |  |       |  |           |   |  |           |  
|Current liabilities                                                                                        |  |       |  |           |   |  |           |  
|Accounts payable                                                                                           |  | 12    |  | 153,460   |   |  | 133,904   |  
|Accrued expenses and other current liabilities                                                             |  | 10    |  | 113,911   |   |  | 119,065   |  
|Short-term borrowings                                                                                      |  | 11    |  | 89,265    |   |  | 107,467   |  
|Current portion of long-term debt                                                                          |  | 11    |  | 24,990    |   |  | 24,944    |  
|Deferred income taxes                                                                                      |  | 18    |  | 14,424    |   |  | 3,629     |  
|Liabilities held for sale                                                                                  |  | 8     |  | 14,322    |   |  |          |  
|                                                                                                           |  |       |  |           |   |  |           |  
|Total current liabilities                                                                                  |  |       |  | 410,372   |   |  | 389,009   |  
|                                                                                                           |  |       |  |           |   |  |           |  
|                                                                                                           |  |       | 
|Long-term debt, excluding current installments                                                             |  | 11    |  | 194,752   |   |  | 206,127   |  
|Pension liabilities                                                                                        |  | 20    |  | 168,816   |   |  | 165,768   |  
|Deferred income taxes                                                                                      |  | 18    |  | 16,827    |   |  | 18,503    |  
|Other liabilities                                                                                          |  | 13    |  | 46,027    |   |  | 40,270    |  
|Minority interest                                                                                          |  |       |  | 2,055     |   |  | 764       |  
|                                                                                                           |  |       |  |           |   |  |           |  
|Total liabilities                                                                                          |  |       |  | 838,849   |   |  | 820,441   |  
|                                                                                                           |  |       |  |           |   |  |           |  
|                                                                                                           |  |       | 
|Shareholdersequity                                                                                        |  | 14    |  |           |   |  |           |  
|Share capital  96,280,000 shares authorized, 65,300,000 shares issued and outstanding in 2006 and in 2005 |  |       |  | 65,300    |   |  | 65,300    |  
|Additional paid-in capital                                                                                 |  |       |  | 256,127   |   |  | 254,833   |  
|Retained earnings                                                                                          |  |       |  | 308,425   |   |  | 287,248   |  
|Accumulated other comprehensive loss                                                                       |  |       |  | (54,158   | ) |  | (50,888   | )
|Total shareholders equity                                                                                 |  |       |  | 575,694   |   |  | 556,493   |  
|                                                                                                           |  |       |  |           |   |  |           |  
|Total liabilities and shareholders equity                                                                 |  |       |  | 1,414,543 |   |  | 1,376,934 |  
|                                                                                                           |  |       |  |           |   |  |           |  

See Notes to Consolidated Financial Statements



F-4



---

##### Table of Contents

EPCOS AG

Consolidated Statements of Shareholders Equity and Comprehensive Income (Loss)

For the years ended September 30, 2006, 2005 and 2004 ( thousand)



|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|---------------------------------------------------------------------------------- |  | ------------- |  | ------------------------ | - |  | ---------------- | - |  | ------------------------------------------ | - |  | -------------- | - |  | ------------------------ | -
|                                                                                   |  | Share capital |  | Additionalpaid-incapital |   |  | Retainedearnings |   |  | Accumulatedothercomprehensiveincome (loss) |   |  | Treasuryshares |   |  | TotalShareholdersequity |  
|Balances as of September 30, 2003                                                  |  | 65,300        |  | 255,225                  |   |  | 357,282          |   |  | (38,253                                    | ) |  | (878           | ) |  | 638,676                  |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|                                                                                   |  |               |  |                          |   | 
|Comprehensive Income:                                                              |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Net income                                                                         |  |              |  |                         |   |  | 49,228           |   |  |                                           |   |  |               |   |  | 49,228                   |  
|Currency translation adjustment                                                    |  |              |  |                         |   |  |                 |   |  | (4,491                                     | ) |  |               |   |  | (4,491                   | )
|Unrealized gains on securities (net of tax of 36)                                  |  |              |  |                         |   |  |                 |   |  | 508                                        |   |  |               |   |  | 508                      |  
|Reclassification of gains from Cash flow hedges to net income (net of tax of 373)  |  |              |  |                         |   |  |                 |   |  | (722                                       | ) |  |               |   |  | (722                     | )
|Cash flow hedges (net of tax of 475)                                               |  |              |  |                         |   |  |                 |   |  | (1,425                                     | ) |  |               |   |  | (1,425                   | )
|Additional minimum pension liabilities (net of tax of 1,797)                       |  |              |  |                         |   |  |                 |   |  | (2,696                                     | ) |  |               |   |  | (2,696                   | )
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Total comprehensive income                                                         |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  | 40,402                   |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Sale of treasury shares                                                            |  |              |  | (392                     | ) |  |                 |   |  |                                           |   |  | 878            |   |  | 486                      |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Balances as of September 30, 2004                                                  |  | 65,300        |  | 254,833                  |   |  | 406,510          |   |  | (47,079                                    | ) |  |               |   |  | 679,564                  |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|                                                                                   |  |               |  |                          |   | 
|Comprehensive Loss:                                                                |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Net loss                                                                           |  |              |  |                         |   |  | (119,262         | ) |  |                                           |   |  |               |   |  | (119,262                 | )
|Currency translation adjustment                                                    |  |              |  |                         |   |  |                 |   |  | 13,133                                     |   |  |               |   |  | 13,133                   |  
|Reclassification of gains from securities to net income (net of tax of 6)          |  |              |  |                         |   |  |                 |   |  | (43                                        | ) |  |               |   |  | (43                      | )
|Unrealized gains on securities (net of tax of 23)                                  |  |              |  |                         |   |  |                 |   |  | 877                                        |   |  |               |   |  | 877                      |  
|Reclassification of losses from Cash flow hedges to net income (net of tax of 475) |  |              |  |                         |   |  |                 |   |  | 1,425                                      |   |  |               |   |  | 1,425                    |  
|Cash flow hedges (net of tax of 138)                                               |  |              |  |                         |   |  |                  |   |  | 416                                        |   |  |               |   |  | 416                      |  
|Additional minimum pension liabilities (net of tax of 13,024)                      |  |              |  |                         |   |  |                 |   |  | (19,617                                    | ) |  |               |   |  | (19,617                  | )
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Total comprehensive loss                                                           |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  | (123,071                 | )
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Balances as of September 30, 2005                                                  |  | 65,300        |  | 254,833                  |   |  | 287,248          |   |  | (50,888                                    | ) |  |               |   |  | 556,493                  |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|                                                                                   |  |               |  |                          |   | 
|Comprehensive Income:                                                              |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Net income                                                                         |  |              |  |                         |   |  | 21,177           |   |  |                                           |   |  |               |   |  | 21,177                   |  
|Currency translation adjustment                                                    |  |              |  |                         |   |  |                 |   |  | (6,086                                     | ) |  |               |   |  | (6,086                   | )
|Reclassification of gains from securities to net income (net of tax of 5)          |  |              |  |                         |   |  |                 |   |  | (40                                        | ) |  |               |   |  | (40                      | )
|Unrealized gains on securities (net of tax of 11)                                  |  |              |  |                         |   |  |                 |   |  | 1,065                                      |   |  |               |   |  | 1,065                    |  
|Reclassification of gains from Cash flow hedges to net income (net of tax of 138)  |  |              |  |                         |   |  |                 |   |  | (416                                       | ) |  |               |   |  | (416                     | )
|Cash flow hedges (net of tax of 145)                                               |  |              |  |                         |   |  |                 |   |  | (432                                       | ) |  |               |   |  | (432                     | )
|Additional minimum pension liabilities (net of tax of 1,702)                       |  |              |  |                         |   |  |                 |   |  | 2,639                                      |   |  |               |   |  | 2,639                    |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Total comprehensive income                                                         |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  | 17,907                   |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Share based payment                                                                |  |              |  | 1,294                    |   |  |                 |   |  |                                           |   |  |               |   |  | 1,294                    |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  
|Balances as of September 30, 2006                                                  |  | 65,300        |  | 256,127                  |   |  | 308,425          |   |  | (54,158                                    | ) |  |               |   |  | 575,694                  |  
|                                                                                   |  |               |  |                          |   |  |                  |   |  |                                            |   |  |                |   |  |                          |  

See Notes to Consolidated Financial Statements



F-5



---

##### Table of Contents

EPCOS AG

Consolidated Statements of Cash Flows

For the years ended September 30, 2006, 2005 and 2004 ( thousand)



|                                                                                       |  |          |   |  |          |   |  |          |  
|-------------------------------------------------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                                                                                       |  | 2006     |   |  | 2005     |   |  | 2004     |  
|Cash flows from operating activities                                                   |  |          |   |  |          |   |  |          |  
|Net income/(loss)                                                                      |  | 21,177   |   |  | (119,262 | ) |  | 49,228   |  
|Adjustment to reconcile net income (loss) to net cash provided by operating activities |  |          |   |  |          |   |  |          |  
|Depreciation and amortization                                                          |  | 127,357  |   |  | 208,086  |   |  | 155,299  |  
|Provision for doubtful accounts                                                        |  | 484      |   |  | 1,387    |   |  | (165     | )
|Loss/(Gain) on sale of property, plant and equipment and businesses                    |  | 76       |   |  | (222     | ) |  | (1,635   | )
|Share of net losses/(income) of unconsolidated affiliates and at equity companies      |  | (1,420   | ) |  | 6        |   |  | (102     | )
|Minority interest                                                                      |  | 419      |   |  | 234      |   |  | 223      |  
|Deferred income tax                                                                    |  | (14,555  | ) |  | 18,805   |   |  | (1,795   | )
|Non-cash item                                                                          |  | 1,294    |   |  |         |   |  |         |  
|Changes in assets and liabilities, excluding effects of acquisitions                   |  |          |   |  |          |   |  |          |  
|(Increase)/Decrease in accounts receivable                                             |  | (34,993  | ) |  | 11,770   |   |  | (27,968  | )
|(Increase)/Decrease in inventories                                                     |  | (9,237   | ) |  | 20,549   |   |  | (38,089  | )
|Decrease/(Increase) in prepaid expenses and other current assets                       |  | 2,085    |   |  | (2,914   | ) |  | (8,615   | )
|Increase/(Decrease) in accounts payable                                                |  | 45,127   |   |  | (30,000  | ) |  | 29,903   |  
|Increase/(Decrease) in accrued expenses and other current liabilities                  |  | 286      |   |  | (23,397  | ) |  | (7,125   | )
|Increase in other assets                                                               |  | (7,009   | ) |  | (3,134   | ) |  | (1,813   | )
|Increase in pension liabilities                                                        |  | 8,866    |   |  | 6,085    |   |  | 5,571    |  
|Increase in other liabilities                                                          |  | 5,863    |   |  | 100      |   |  | 2,550    |  
|                                                                                       |  |          |   |  |          |   |  |          |  
|Net cash provided by operating activities                                              |  | 145,820  |   |  | 88,093   |   |  | 155,467  |  
|                                                                                       |  |          |   |  |          |   |  |          |  
|Cash flows from investing activities                                                   |  |          |   |  |          |   |  |          |  
|Proceeds from sale of equipment                                                        |  | 3,480    |   |  | 1,419    |   |  | 4,132    |  
|Capital expenditures                                                                   |  | (115,656 | ) |  | (152,589 | ) |  | (111,426 | )
|Investments in unconsolidated affiliates and at equity companies                       |  | (3,271   | ) |  | (2,249   | ) |  | (616     | )
|Net proceeds from sale/disposition of businesses                                       |  | 68,038   |   |  |         |   |  |         |  
|                                                                                       |  |          |   |  |          |   |  |          |  
|Net cash used in investing activities                                                  |  | (47,409  | ) |  | (153,419 | ) |  | (107,910 | )
|                                                                                       |  |          |   |  |          |   |  |          |  
|Cash flows from financing activities                                                   |  |          |   |  |          |   |  |          |  
|Net (decrease)/increase in short-term borrowings                                       |  | (14,865  | ) |  | (1,582   | ) |  | 9,344    |  
|Extinguishment of long-term debt                                                       |  |         |   |  | (893     | ) |  | (127     | )
|Proceeds from issuance of long-term debt                                               |  | 16,578   |   |  | 46,118   |   |  | 3,074    |  
|Principal payments on long-term debt                                                   |  | (23,130  | ) |  | (25,348  | ) |  | (15,041  | )
|Principal payments under capital lease obligations                                     |  | (19      | ) |  | (47      | ) |  | (637     | )
|Sale of treasury stock                                                                 |  |         |   |  |         |   |  | 486      |  
|                                                                                       |  |          |   |  |          |   |  |          |  
|Net cash provided by (used in) financing activities                                    |  | (21,436  | ) |  | 18,248   |   |  | (2,901   | )
|                                                                                       |  |          |   |  |          |   |  |          |  
|Effect of exchange rate changes on cash and cash equivalents                           |  | (1,562   | ) |  | 2,130    |   |  | (2,067   | )
|Net increase/(decrease) in cash and cash equivalents                                   |  | 75,413   |   |  | (44,948  | ) |  | 42,589   |  
|Cash and cash equivalents at beginning of year                                         |  | 193,438  |   |  | 238,386  |   |  | 195,797  |  
|                                                                                       |  |          |   |  |          |   |  |          |  
|Cash and cash equivalents at end of year                                               |  | 268,851  |   |  | 193,438  |   |  | 238,386  |  
|                                                                                       |  |          |   |  |          |   |  |          |  

See Notes to Consolidated Financial Statements



F-6



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and basis of presentation

EPCOS AG
(the Company) is a leading producer and supplier of electronic components and modules with headquarters in Munich/Germany. The Company has research and design centers and manufacturing facilities in Europe, Asia and the Americas, and a
worldwide sales network. Electronic components and modules are used in all types of electronic circuitry. The Company designs its product offerings to meet the needs of its principal customer groups, such as the telecommunication, automotive,
consumer and industrial electronics industries and the information technology industry. Customers consist of equipment manufacturers and other companies that make modules or subsystems for equipment manufacturers, and distributors.

The core of the Company was Siemens Matsushita Components, a former fifty-fifty joint venture (the Joint Venture) formed in 1989 by Siemens AG
(Siemens) with Matsushita Electric Industrial Co., Ltd. and Matsushita Electronic Components Co., Ltd. (Matsushita). Siemens Matsushita Components consisted of a limited partnership named Siemens Matsushita Components
GmbH & Co. KG (the Limited Partnership) and Siemens Matsushita Components Verwaltungsgesellschaft mbH (S+M GmbH), the general partner of this limited partnership, as well as all of their subsidiaries. After
reorganizing the Company and in preparation for an initial public offering, S+M GmbH converted to a German stock corporation (Aktiengesellschaft, AG) and changed its Company name to EPCOS AG on September 2, 1999.

After the IPO in October 1999, and after the public sale of shares of EPCOS AG, Siemens and Matsushita group each held 12.5% plus one share of the Companys
outstanding share capital. At the end of the second quarter of fiscal 2006 Siemens sold its interest in EPCOS AG.

The contribution of the Limited
Partnership and the transfer by Siemens of certain subsidiaries and assets to S+M GmbH were made under the terms and conditions of a contribution agreement between Siemens and Matsushita effective July 1, 1999. The contribution of the Limited
Partnership represented a transfer between entities under common control and did not result in any change in ownership as all shares were exchanged between shareholders in direct proportion to their existing ownership. The transfer of certain
subsidiaries and assets by Siemens represented the transfer of assets to a joint venture by a joint venture partner. Accordingly, all such transactions have been accounted for at historical book value.



F-7



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



2. Summary of significant accounting policies

(a) Principles of consolidation

All significant companies over which the Company has legal and effective control are consolidated in accordance with US GAAP. In addition, variable interest entities
(VIEs) are consolidated where the company can be regarded as the primary beneficiary.

All significant intercompany balances and transactions as well as
all significant intra group profits or losses arising on such transactions have been eliminated in the consolidated financial statements.

(b)
Investments in unconsolidated affiliates

Businesses over which the Company does not have control, but has the ability to exercise significant influence
over operating and financial policies, are recorded in the consolidated financial statements using the equity method of accounting.

(c) Consolidated
Group

The consolidated financial statements include all material German and foreign subsidiaries which EPCOS AG directly or indirectly controls. As of
September 30, 2006, 2005 and 2004, the following number of companies was consolidated alongside EPCOS AG:



|             |  |      |  |      |  |     
|------------ |  | ---- |  | ---- |  | ----
|             |  | 2006 |  | 2005 |  | 2004
|Consolidated |  |      |  |      |  |     
|Germany      |  | 2    |  | 2    |  | 2   
|Foreign      |  | 27   |  | 27   |  | 27  
|             |  |      |  |      |  |     
|             |  | 29   |  | 29   |  | 29  
|At Equity    |  | 2    |  | 1    |  |    
|             |  |      |  |      |  |     
|             |  | 31   |  | 30   |  | 29  
|             |  |      |  |      |  |     

The consolidated financial data for these companies is derived from their individual financial statements as of
September 30 of each respective year.

Entities valued at equity are accounted for according to the equity method. Intercompany gains and losses
resulting from transactions with entities valued at equity were not eliminated in the consolidated financial statements; transactions with entities valued at equity were performed in accordance with customary market practices. These inventories at
the balance sheet date are not material.

(d) Cash equivalents

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. These include both bank balances as well as
short-term deposits with a maturity of three months or less as at the date of deposit.



F-8



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



(e) Inventories

Inventories are stated at the cost of acquisition or production or at the market price, after
applying the lower-of-cost-or-market principle. The cost of production is principally determined by the weighted average method and comprises direct material and labor costs plus applicable manufacturing overheads, including depreciation
charges.

(f) Property, plant and equipment

Property,
plant and equipment are stated at cost, less accumulated depreciation. Cost includes major expenditures for improvements and replacements that extend useful lives or increase capacity and also includes interest costs associated with construction in
progress. Maintenance and repairs are charged directly to expense as incurred. Renewal or improvement costs are capitalized, insofar as they enhance the value of the related asset. On disposal, historical acquisition or production costs and
accumulated depreciation are written off, and the difference between this net book value and the disposal proceeds is recorded in the income statement as a gain or loss.

Depreciation for all foreign subsidiaries is computed on the straight-line method. For the German group companies, depreciation for assets acquired in fiscal 2000 or earlier is computed on either the straight-line
method or the declining balance method if the declining balance method resulted in higher depreciation over the estimated useful lives of the assets. Additions after October 1, 2000, are depreciated using the straight-line method only,
consistent with the foreign subsidiaries.

In general, the estimated useful lives of depreciable assets are assigned as follows:



|                                              |  |              
|--------------------------------------------- |  | -------------
|Buildings and improvements to rented property |  | 5 to 50 years
|Machinery and other equipment                 |  | 5 to 10 years
|Other assets, office fixtures and fittings    |  | 3 to 5 years 

(g) Equipment under capital leases

The Company leased some of its office equipment under capital lease agreements in prior periods. The assets and liabilities under capital leases are recorded at the present value of aggregate future minimum lease
payments or at the fair value of the assets leased, whichever is lower. Assets under capital leases are amortized over the lease term or useful life of the asset, whichever is shorter.

(h) Intangible assets

Intangible assets other than goodwill are carried at acquisition cost net of accumulated
amortization, calculated under the straight-line method over the respective useful life of the asset.

Intangible assets other than goodwill, which is the
excess of purchase price over fair value of net assets of companies acquired, consist of customer lists, patents and licenses. Patents are amortized over the term of the patent. Customer lists are amortized over a maximum of 10 years. Licenses are
amortized over the term of the licensing agreement.



F-9



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Effective October 1, 2001, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142 Goodwill and Intangible Assets, whereby goodwill is no longer subjected to regular
amortization. The goodwill allocated to business units will be reviewed at least annually or when circumstances indicate potential impairment and, if necessary, be written down to fair value.

(i) Impairment of long-lived assets

The Company reviews long-lived
assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset, or group of assets, with future undiscounted cash flows expected to be generated by the asset, or group of assets. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Estimated fair value is generally either based on appraised value or measured by discounted estimated future net cash flows. Management judgment
is necessary to estimate discounted future net cash flows. Accordingly, actual results could vary from such estimates.

(j) Revenue recognition

Revenues resulting from sales of products are recognized under SEC Staff Accounting Bulletin (SAB) No. 104 Revenue Recognitiononly when corresponding agreements exist, the purchase price is fixed or clearly defined, products are shipped and the payment of the customer is reasonably predictable. Revenue from sales is recognized net of discounts, customer bonuses and
rebates granted.

(k) Other product-related costs

Research and development costs and marketing and selling expenses are expensed as incurred. Provisions for estimated warranty costs are recorded at the time the related sales are recognized and periodically adjusted to reflect actual
experience.

(l) Income taxes

Income taxes are
calculated using the asset and liability method in accordance with the provisions of SFAS No. 109 Accounting for Income Taxes. All liabilities or claims relating to taxes on earnings, capital and property arising during the fiscal
year are reflected in the consolidated financial statements pursuant to the relevant tax laws applicable to the individual companies. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are computed using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.



F-10



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



(m) Financial instruments and risk management

Derivative financial instruments are utilized by the Company in
principle to reduce foreign exchange and interest rate risks and fluctuations of market prices of precious metals. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company enters into
forward foreign exchange contracts, interest contracts and commodity contracts to reduce its exposure to certain risks inherent within its business.

All
derivative financial instruments, including those which are embedded in other contracts, are recorded in the balance sheet at fair value. The market value of the derivative financial instruments is recorded as other current assets or other current
liabilities.

The Company accounts for some of its financial instruments as cash flow hedges.

The notional amounts of these transactions are not included within the consolidated financial statements. The gains or losses resulting from these instruments are either
shown as foreign exchange gain or loss (for forward foreign exchange contracts) or cost of goods sold (for forward commodity contracts) in the consolidated statement of operations or are recorded in accumulated other comprehensive income/loss if the
financial instruments are designated as hedges of forecasted transactions. These instruments fulfil all requirements of hedge accounting including effectiveness under SFAS No. 133. The gains or losses reported in accumulated other comprehensive
income/loss are shown in the consolidated statement of operations when the hedged transactions are recognized. The ineffective portion of the hedged transactions is always included in the consolidated statement of operations.

Reductions or extra charges of financial instruments or prices of options are included in the net income/loss over the life of the forward contract.

For hedging of currency and interest rate risks, the Company entered into interest rate and cross-currency swaps. The market value of the financial instruments including
derivatives is disclosed in Note 22.

(n) Securities

The Company classifies its existing marketable securities as available for sale in accordance with SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities. These securities are carried at fair market value
with unrealized gains or losses reported in shareholders equity as a component of other comprehensive income (loss), unless impaired. Gains/losses on securities sold or impaired are booked in the statements of operations.

(o) Foreign currencies

Transactions in foreign currencies

Purchases and sales in foreign currencies are converted using the daily rate of exchange at the time of the transaction. Monetary assets and
liabilities denominated in non functional currencies are converted into the functional currency at the rate applying at the balance sheet date. The resulting foreign currency gains and losses are included in the income statement.



F-11



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Translation of financial statements into euros

The Groups reporting currency is the euro (). The balance
sheet items of subsidiary companies whose functional currency is not the euro are translated at the exchange rate applying on the balance sheet date. Income statement items are converted at the weighted average exchange rate for the respective year.
The resulting translation differences are reported as separate components of equity under other comprehensive income/loss.

(p) Use of estimates

The Companys management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial statements in conformity with US GAAP. Actual results may differ from those estimates.

(q) Earnings per share

Basic earnings per share are computed by dividing net income (loss) by the weighted average number of common shares
outstanding for the year. In calculating the diluted earnings per share, the weighted average number of outstanding shares is increased by the number of additional shares that would potentially dilute common shares had they been issued. For
computations of basic and diluted earnings per share, see Note 19.

(r) Stock-based compensation

As of October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principals Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
SFAS No. 123R requires companies to recognize the cost resulting from all share-based payment transactions in the financial statements. With certain limited exceptions, the new standard establishes a grant date, fair-value-based measurement
method in accounting for share-based payment transactions. Equity classified awards are measured at fair value at the grant date, whereas related compensation cost is recognized based on the estimated number of instruments to be issued. For its
equity classified awards, the Company applies the modified prospective transition method. Under this method, compensation cost recognized in fiscal 2006 includes (i) compensation cost for all share-based payments granted prior to, but not yet
vested as of October 1, 2005, based on the grant date fair value estimated in accordance with SFAS No. 123, and (ii) compensation cost for all share-based payments granted subsequent to October 1, 2005, based on grant date fair
value estimated in accordance with SFAS No. 123R.

Prior to the adoption of SFAS No. 123R, stock options were accounted for under the intrinsic
value method of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Therefore compensation expenses for granted share options are calculated by comparing the exercise price
with the market value at the measurement date. The statements of operations of both prior periods do not include any compensation expenses from stock based compensation because the exercise price on the measurement date was identical with the market
value of corresponding share.



F-12



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



On September 30, 2006, the Company has two stock based compensation plans for employees and members of the Management Board. For further details of stock-based compensation, see Note 15.

The following table illustrates recorded compensation expense and the effect on net loss/income and loss/earnings per share if the Company had adopted the fair value
based accounting method prescribed by SFAS No. 123R:

Net income (loss) and earnings (loss) per share



|                                                                                                               |  |        |  |          |   |  |        |  
|-------------------------------------------------------------------------------------------------------------- |  | ------ |  | -------- | - |  | ------ | -
|For the years ended September 30 ( thousand)                                                                  |  | 2006   |  | 2005     |   |  | 2004   |  
|Net income (loss)                                                                                              |  |        |  |          |   |  |        |  
|As reported                                                                                                    |  | 21,177 |  | (119,262 | ) |  | 49,228 |  
|Less: total compensation expense for stock options (calculated using the fair value method, except share data) |  |       |  | (2,320   | ) |  | (4,983 | )
|                                                                                                               |  |        |  |          |   |  |        |  
|Pro forma                                                                                                      |  | 21,177 |  | (121,582 | ) |  | 44,245 |  
|                                                                                                               |  |        |  |          |   |  |        |  
|Basic and diluted earnings (loss) per share (in )                                                             |  |        |  |          |   |  |        |  
|Basic                                                                                                          |  |        |  |          |   |  |        |  
|as reported                                                                                                    |  | 0.32   |  | (1.83    | ) |  | 0.75   |  
|pro forma                                                                                                      |  | 0.32   |  | (1.86    | ) |  | 0.68   |  
|                                                                                                               |  |        | 
|Diluted                                                                                                        |  |        |  |          |   |  |        |  
|as reported                                                                                                    |  | 0.32   |  | (1.83    | ) |  | 0.71   |  
|pro forma                                                                                                      |  | 0.32   |  | (1.86    | ) |  | 0.65   |  
|                                                                                                               |  |        |  |          |   |  |        |  

For further details to stock option plans, see Note 15.



F-13



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



3. Recent accounting pronouncements

In June 2006, the Financial Accounting Standards Board issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (FIN No. 48), to create a single model to address accounting for uncertainty in tax positions. FIN
No. 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

FIN No. 48 is effective for fiscal
years beginning after December 15, 2006. The Company will adopt FIN No. 48 as of fiscal year 2008 as required. The Company is currently evaluating the effects, if any, the adoption of FIN No. 48 will have on the Companys
financial position and results of operations.

In September 2006, the Financial Accounting Standards Board issued Financial Accounting Standards
No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this
Statement does not require any new fair value measurements.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in
its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. This Statement also requires an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position. This Statement requires companies with one or more single-employer defined benefit plans, among other things, to

a. Recognize the funded status of a benefit plan - measured as the difference between plan assets at fair value and the benefit obligation - in its
statement of financial position.

b. Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior
service costs.

c. Measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of
financial position.

The Company will adopt SFAS No. 158 as of fiscal 2007 as required. The adoption is expected to have a material impact on the
consolidated statements of the Company (see Note 20. Pensions).



F-14



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



4. Cash and cash equivalents

Under cash and cash equivalents, 2.775 million is listed as restricted funds
for September 30, 2006 (September 30, 2005: 1.053 million). These assets are a security for partial retirement funds.

5. Accounts
receivable, net

Accounts receivable are presented net of an allowance for doubtful accounts. The following table presents changes to the allowance for
doubtful accounts for the years ended September 30, 2006, 2005 and 2004:

Allowance for doubtful accounts



|                                                   |  |       |   |  |       |   |  |        |  
|-------------------------------------------------- |  | ----- | - |  | ----- | - |  | ------ | -
|For the years ended September 30 ( thousand)      |  | 2006  |   |  | 2005  |   |  | 2004   |  
|Allowance for doubtful accounts, beginning of year |  | 4,182 |   |  | 3,006 |   |  | 4,354  |  
|Additions (reductions) charged to bad debt expense |  | 484   |   |  | 1,387 |   |  | (165   | )
|Write-offs charged against the allowance           |  | (589  | ) |  | (429  | ) |  | (1,088 | )
|Recoveries of amounts previously written-off       |  |      |   |  | 1     |   |  | 9      |  
|Foreign exchange translation adjustment            |  | (105  | ) |  | 217   |   |  | (104   | )
|                                                   |  |       |   |  |       |   |  |        |  
|Allowance for doubtful accounts, end of year       |  | 3,972 |   |  | 4,182 |   |  | 3,006  |  
|                                                   |  |       |   |  |       |   |  |        |  

The amount of factored accounts receivable for the years ended September 30, 2006, 2005 and 2004, was
90.201 million, 101.787 million and 126.936 million, respectively. Total interest expense on these transactions amounted to 0.202 million, 0.191 million and 0.247 million,
respectively, for the years ended September 30, 2006, 2005 and 2004.

6. Inventories, net

Net inventories



|                                |  |         |  |        
|------------------------------- |  | ------- |  | -------
|As of September 30 ( thousand) |  | 2006    |  | 2005   
|Raw materials and supplies      |  | 56,730  |  | 59,356 
|Work in process                 |  | 64,015  |  | 58,028 
|Finished products               |  | 93,063  |  | 109,418
|                                |  |         |  |        
|Total inventories, net          |  | 213,808 |  | 226,802
|                                |  |         |  |        

Amounts appearing in the preceding table are presented net of valuation allowances of 25.852 million
and 32.823 million as of September 30, 2006 and 2005, respectively.

For September 30, 2006 and 2005, 17.202 million and
17.996 million of the above-mentioned inventories are in consignment stocks at customers.

7. Prepaid expenses and other current assets

The Prepaid expenses and other current assets as of September 30, 2006 and 2005, include tax receivables in amount of 15.358 million
and 22.745 million and prepaid expenses in amount of 3.479 million and 2.279 million, respectively.



F-15



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



8. Discontinued operations/assets and liabilities held for sale

Discontinued operations

On December 12, 2005, EPCOS signed a contract to sell its Tantalum Capacitor Business Unit to Kemet Corporation, Greenville/USA (Kemet). The sale
includes the plants in Évora, Portugal and parts of the activities in Munich and Heidenheim, Germany. EPCOS closed the deal transfering its Tantalum Capacitor Business on September 30, 2006. The results of the Tantalum Capacitor Business
are shown as discontinued operations for all periods presented. Both German sites are split in accordance with the share of the sold activities; the Portuguese entity is included in discontinued operations completely. The information for prior years
has been adjusted.

Gains and losses of discontinued operations for the years ended September 30, 2006, 2005 and 2004
are as follows:

Consolidated Statements of Operations from discontinued operations



|                                               |  |         |   |  |          |   |  |          |  
|---------------------------------------------- |  | ------- | - |  | -------- | - |  | -------- | -
|For the years ended September 30 ( thousand)  |  | 2006    |   |  | 2005     |   |  | 2004     |  
|Total net sales from discontinued operations   |  | 89,466  |   |  | 87,497   |   |  | 106,912  |  
|Cost of goods sold                             |  | (97,273 | ) |  | (137,273 | ) |  | (105,187 | )
|                                               |  |         |   |  |          |   |  |          |  
|Gross profit                                   |  | (7,807  | ) |  | (49,776  | ) |  | 1,725    |  
|                                               |  |         |   |  |          |   |  |          |  
|Research and development expenses              |  | (9,382  | ) |  | (6,367   | ) |  | (5,273   | )
|Marketing and selling expenses                 |  | (4,083  | ) |  | (4,990   | ) |  | (5,834   | )
|General and administrative expenses            |  | (990    | ) |  | (92      | ) |  | (238     | )
|                                               |  |         |   |  |          |   |  |          |  
|                                               |  | (14,455 | ) |  | (11,449  | ) |  | (11,345  | )
|                                               |  |         |   |  |          |   |  |          |  
|Operating loss                                 |  | (22,262 | ) |  | (61,225  | ) |  | (9,620   | )
|                                               |  |         |   |  |          |   |  |          |  
|Interest income                                |  | 106     |   |  | 7        |   |  | 8        |  
|Interest expense                               |  | (740    | ) |  | (918     | ) |  | (429     | )
|Other income (expense), net                    |  | 4,259   |   |  | (315     | ) |  | 7,007    |  
|                                               |  |         |   |  |          |   |  |          |  
|Loss before income taxes and minority interest |  | (18,637 | ) |  | (62,451  | ) |  | (3,034   | )
|                                               |  |         |   |  |          |   |  |          |  
|Provision for income taxes                     |  | 4,654   |   |  | 9,510    |   |  | 1,279    |  
|                                               |  |         |   |  |          |   |  |          |  
|Net loss from discontinued operations          |  | (13,983 | ) |  | (52,941  | ) |  | (1,755   | )
|                                               |  |         |   |  |          |   |  |          |  

Cash flow relating to the discontinued operations for fiscal 2006 amounted to 48.5 million. Cash
provided by operating activities amounted to minus 11.9 million and cash provided by investing activities amounted to 60.4 million (including 68.0 million, net, from the sale).

The net result of the sale of the Tantalum Capacitor Business Unit in fiscal 2006 amounted to 0.1 million. Cost of goods sold during fiscal 2005 includes an
impairment on non-current assets in amount of 46.5 million in the Tantalum Capacitor Business Unit.

Assets held for sale

As a further component of the sale a Manufacturing and Supply Agreement was signed. Per agreement EPCOS continued to produce Tantalum Capacitors in Heidenheim for sale to
Kemet. The related production equipment was sold to Kemet at the end of the contract period. Assets and liabilities related to the Tantalum Capacitors Business, and not yet transferred at the balance sheet date, are classified as held for sale at
September 30, 2006. These assets and liabilities result from the ongoing support of the supply agreement which is expected to expire on March 31, 2007. The ongoing support serves to help ensure the transition of customers and sales
infrastructure to the buyer.



F-16



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Assets and liabilities held for sale as of September 30, 2006, are as follows:

Assets and liabilities held for sale



|                                      |  |       
|------------------------------------- |  | ------
|As of September 30, 2006 ( thousand) |  |       
|Inventories, net                      |  | 4,047 
|Accounts receivable, net              |  | 11,525
|                                      |  |       
|Assets held for sale                  |  | 15,572
|                                      |  |       
|Accounts payable                      |  | 14,322
|                                      |  |       
|Liabilities held for sale             |  | 14,322
|                                      |  |       

Assets classified as held for sale are not to be depreciated in compliance with SFAS No. 144. No impairment
was recognized relating to assets held for sale in fiscal 2006. In fiscal 2005 an impairment charge relating to these assets was recorded in consideration of the pending disposal of the Tantalum Capacitor Business Unit. The result of the valuation
showed a market value of the corresponding assets that was smaller than the net book value of these assets. The impairment concerned property, plant and equipment at the locations in Évora/Portugal and Munich and Heidenheim/Germany.



F-17



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



9. Fixed assets, net

Fixed asset schedule

Information with respect to changes to the Companys intangible assets, property, plant and equipment and long-term financial assets is presented in the following fixed asset schedule:

Acquisition and manufacturing costs



|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|-------------------------------------------------- |  | --------- |  | --------- |  | ---------------- | - |  | --------- | - |  | --------------------- | - |  | ---------
|As of September 30 ( thousand)                    |  | 2005      |  | Additions |  | Reclassification |   |  | Disposals |   |  | Translationadjustment |   |  | 2006     
|Goodwill                                           |  | 23,248    |  |          |  |                 |   |  | (150      | ) |  | (29                   | ) |  | 23,069   
|Other intangible assets                            |  | 47,145    |  | 728       |  |                 |   |  | (4,138    | ) |  | (119                  | ) |  | 43,616   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Intangible assets                                  |  | 70,393    |  | 728       |  |                 |   |  | (4,288    | ) |  | (148                  | ) |  | 66,685   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Land                                               |  | 9,475     |  | 187       |  |                 |   |  | (1,101    | ) |  | (264                  | ) |  | 8,297    
|Buildings                                          |  | 149,433   |  | 901       |  | 1,977            |   |  | (25,711   | ) |  | (1,408                | ) |  | 125,192  
|Technical equipment, machinery and other equipment |  | 1,504,488 |  | 76,208    |  | 25,236           |   |  | (200,654  | ) |  | (11,537               | ) |  | 1,393,741
|Construction in progress                           |  | 40,153    |  | 38,928    |  | (27,213          | ) |  | (17,712   | ) |  | (474                  | ) |  | 33,682   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Property, plant and equipment                      |  | 1,703,549 |  | 116,224   |  |                 |   |  | (245,178  | ) |  | (13,683               | ) |  | 1,560,912
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Investments                                        |  | 4,016     |  | 2,087     |  | 2,150            |   |  | (1,487    | ) |  | (102                  | ) |  | 6,664    
|Investment securities                              |  | 17,827    |  | 2,047     |  |                 |   |  | (621      | ) |  |                      |   |  | 19,253   
|Other financial assets                             |  | 1,048     |  | 1,407     |  | (2,150           | ) |  | (116      | ) |  | (36                   | ) |  | 153      
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Long-term financial assets                         |  | 22,891    |  | 5,541     |  |                 |   |  | (2,224    | ) |  | (138                  | ) |  | 26,070   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|                                                  
|Accumulated depreciation and amortization         
|                                                   |  |           |  |           |  |                 
|As of September 30 ( thousand)                    |  | 2005      |  | Additions |  | Reclassification |   |  | Disposals |   |  | Translationadjustment |   |  | 2006     
|Goodwill                                           |  | 14,910    |  |          |  |                 |   |  | (12       | ) |  | (2                    | ) |  | 14,896   
|Other intangible assets                            |  | 36,342    |  | 4,241     |  |                 |   |  | (4,127    | ) |  | (103                  | ) |  | 36,353   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Intangible assets                                  |  | 51,252    |  | 4,241     |  |                 |   |  | (4,139    | ) |  | (105                  | ) |  | 51,249   
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Land                                               |  | 300       |  | 46        |  |                 |   |  |          |   |  | (12                   | ) |  | 334      
|Buildings                                          |  | 74,106    |  | 3,597     |  |                 |   |  | (7,520    | ) |  | (582                  | ) |  | 69,601   
|Technical equipment, machinery and other equipment |  | 1,052,859 |  | 119,473   |  |                 |   |  | (167,937  | ) |  | (6,796                | ) |  | 997,599  
|Construction in progress                           |  |          |  |          |  |                 |   |  |          |   |  |                      |   |  |         
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Property, plant and equipment                      |  | 1,127,265 |  | 123,116   |  |                 |   |  | (175,457  | ) |  | (7,390                | ) |  | 1,067,534
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Investments                                        |  |          |  |          |  |                 |   |  |          |   |  |                      |   |  |         
|Investment securities                              |  | 245       |  |          |  |                 |   |  |          |   |  |                      |   |  | 245      
|Other financial assets                             |  |          |  |          |  |                 |   |  |          |   |  |                      |   |  |         
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          
|Long-term financial assets                         |  | 245       |  |          |  |                 |   |  |          |   |  |                      |   |  | 245      
|                                                   |  |           |  |           |  |                  |   |  |           |   |  |                       |   |  |          



F-18



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                   |  |         |  |        
|-------------------------------------------------- |  | ------- |  | -------
|Net book value                                     |  |         |  |        
|                                                   |  |        
|As of September 30 ( thousand)                    |  | 2006    |  | 2005   
|Goodwill                                           |  | 8,173   |  | 8,338  
|Other intangible assets                            |  | 7,263   |  | 10,803 
|                                                   |  |         |  |        
|Intangible assets                                  |  | 15,436  |  | 19,141 
|                                                   |  |         |  |        
|Land                                               |  | 7,963   |  | 9,175  
|Buildings                                          |  | 55,591  |  | 75,327 
|Technical equipment, machinery and other equipment |  | 396,142 |  | 451,629
|Construction in progress                           |  | 33,682  |  | 40,153 
|                                                   |  |         |  |        
|Property, plant and equipment                      |  | 493,378 |  | 576,284
|                                                   |  |         |  |        
|Investments                                        |  | 6,664   |  | 4,016  
|Investment securities                              |  | 19,008  |  | 17,582 
|Other financial assets                             |  | 153     |  | 1,048  
|                                                   |  |         |  |        
|Long-term financial assets                         |  | 25,825  |  | 22,646 
|                                                   |  |         |  |        

Long-term financial assets shown above are included in the consolidated balance sheets under other long-term
assets.

The investment securities mainly consist of shares in funds. These securities are defined as available for sale securities under SFAS
No. 115. The shares in funds do not have a specified time to maturity.

The unrealized gains are as follows for the years ended September 30,
2006 and 2005:

Unrealized gains/losses resulting from securities, net



|                                              |  |       |  |        |  |       |  |       
|--------------------------------------------- |  | ----- |  | ------ |  | ----- |  | ------
|For the years ended September 30 ( thousand) |  | 2006  |  | 2005  
|                                              |  | Gains |  | Losses |  | Gains |  | Losses
|Available for sale securities                 |  | 2,414 |  |       |  | 1,395 |  |      

The realized gains resulting from securities were 0.049 million, 0.739 million and
0.342 million for the years ended September 30, 2006, 2005 and 2004.

Proceeds from disposal of securities amounted
0.670 million, 12.821 million and 11.883 million for fiscal 2006, 2005 and 2004.



F-19



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Depreciation expense on property, plant and equipment was 123.116 million, 189.653 million and 148.299 million for the years ended September 30, 2006, 2005 and 2004. For the year
ended September 30, 2004, depreciation includes an impairment charge for the Surface Acoustic Wave (SAW) business segment in the amount of 2.680 million. In fiscal 2005 and 2006 there was no requirement for impairment in this
segment. In the business segment Capacitors and Inductors there was an impairment of fixed assets in the amount of 0.100 million for fiscal year 2005 and 0.927 million for fiscal year 2004. Additionally, in the business segment
Capacitors and Inductors impairment arose in amount of 46.540 million in fiscal 2005. The triggering event was mainly the disposal of the Tantalum Capacitor Business. The result of the valuation showed a market value of the corresponding
assets that was smaller than the net book value of these assets. The impairment concerns property, plant and equipment at the locations in Évora/Portugal, and Munich and Heidenheim/Germany. The corresponding expenses are reported in cost of
goods sold. In fiscal 2006 depreciation expense for property, plant and equipment includes impairment in amount of 2.784 million belonging to the Capacitors and Inductors business segment. In this segment an additional impairment was
recorded for intangible assets in amount of 0.644 million. The impairment in fiscal 2006 was calculated based upon fair market value, derived from potential buyers offers.

Interest expense capitalized on construction projects amounted to 1.580 million in fiscal 2006, 1.629 million in fiscal 2005 and
1.444 million in fiscal 2004, respectively.

Goodwill

On October 1, 2001, the Company adopted SFAS No. 142. This standard requires that amortization of goodwill ceases and that the carrying amount of goodwill be evaluated for recoverability, at least annually,
or when circumstances indicate possible impairment. Accordingly, the Company has not recorded any goodwill amortization since fiscal 2002. Furthermore, the Company has performed its annual impairment test of goodwill and has concluded that there was
no impairment in fiscal 2004 and fiscal 2006.

EPCOS performed an impairment test on the goodwill associated with the inductors reporting unit during the
second quarter of fiscal 2005 due to a significant adverse change of expected ferrite core sales volume, combined with higher than originally estimated expenses associated with the closing-down of the ferrite manufacturing facility in
Bordeaux/France. During the first two quarters of fiscal 2005 and since the last annual impairment test for fiscal 2004, the Company experienced a much longer than expected decrease in demand for its ferrite cores. This development, coupled with the
higher costs associated with closing-down of the manufacturing facility, resulted in a revision to the earnings and cash flow forecasts for the former segment Inductors and Ferrites. Based on these circumstances, a goodwill impairment of
11.800 million was recognized in the former segment Inductors and Ferrites in fiscal year 2005. The fair value of that reporting unit was estimated using the expected present value of future cash flows.

The carrying amount of goodwill as of September 30, 2006 and 2005, is as follows:



F-20



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Segmental analysis of goodwill



|                                |  |       |  |      
|------------------------------- |  | ----- |  | -----
|As of September 30 ( thousand) |  | 2006  |  | 2005 
|Capacitors and Inductors        |  | 3,798 |  | 3,935
|Ceramic Components              |  | 4,092 |  | 4,104
|SAW Components                  |  | 283   |  | 299  
|                                |  |       |  |      
|Total                           |  | 8,173 |  | 8,338
|                                |  |       |  |      

With effect beginning October 1, 2005, the business segments Capacitors and Inductors and
Ferrites were combined to form a reportable segment named Capacitors and Inductors, based on substantial economic and other similarities between these operating segments after the disposal of the Tantalum Capacitor Business, which
was part of the operating segment Capacitors. Balances reported previously have been restated for comparative purposes given the change in the segmentation.

Other intangible assets

Included in the other intangible assets as of September 30, 2006 and 2005, are the
following categories of acquired other intangible assets:

Other intangible assets (finite lives)



|                                       |  |        |  |       |  |        |  |       
|-------------------------------------- |  | ------ |  | ----- |  | ------ |  | ------
|As of September 30 ( thousand)        |  | 2006   |  | 2005 
|                                       |  | Gross  |  | Net   |  | Gross  |  | Net   
|Patents, licenses and similar rights   |  | 39,226 |  | 5,556 |  | 42,888 |  | 8,670 
|Customer lists                         |  | 3,200  |  | 1,387 |  | 3,200  |  | 1,707 
|Other                                  |  | 1,190  |  | 320   |  | 1,057  |  | 426   
|                                       |  |        |  |       |  |        |  |       
|Other intangible assets (finite lives) |  | 43,616 |  | 7,263 |  | 47,145 |  | 10,803
|                                       |  |        |  |       |  |        |  |       

Amortization related to other intangible assets amounted to 4.241 million, 6.633 million and
7.000 million for fiscal 2006, 2005 and 2004. In accordance with SFAS No. 142, the Company reassessed the useful lives of all other intangible assets in fiscal 2006. There were no changes to such lives and there are no expected
residual values associated with these intangible assets.



F-21



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The development of the estimated fiscal year amortization expense is as follows:

Estimated amortization expense



|                          |  |      
|------------------------- |  | -----
|Fiscal years ( thousand)
|2007                      |  | 2,639
|2008                      |  | 1,677
|2009                      |  | 1,449
|2010                      |  | 1,142
|2011                      |  | 250  

10. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities as of September 30, 2006 and 2005, are as follows:

Accrued expenses and other current liabilities



|                                                     |  |         |  |        
|---------------------------------------------------- |  | ------- |  | -------
|As of September 30 ( thousand)                      |  | 2006    |  | 2005   
|Accrued employee-related costs                       |  | 57,819  |  | 57,773 
|Salaries and payroll taxes payable                   |  | 17,865  |  | 20,784 
|Accruals for warranties                              |  | 10,484  |  | 5,146  
|Taxes payable                                        |  | 10,040  |  | 9,608  
|Derivatives                                          |  | 2,130   |  | 1,333  
|Freight and transport                                |  | 1,592   |  | 899    
|Other                                                |  | 13,981  |  | 23,522 
|                                                     |  |         |  |        
|Total accrued expenses and other current liabilities |  | 113,911 |  | 119,065
|                                                     |  |         |  |        

The accruals for product warranties developed as follows:

Accruals for product warranties



|                                                  |  |        |   |  |        |   |  |        |  
|------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
|As of September 30 ( thousand)                   |  | 2006   |   |  | 2005   |   |  | 2004   |  
|Product warranties, beginning of year             |  | 5,146  |   |  | 7,946  |   |  | 4,267  |  
|Product warranties issued during reporting period |  | 8,499  |   |  | 2,913  |   |  | 5,463  |  
|Utilization of accruals                           |  | (2,413 | ) |  | (2,429 | ) |  | (2,529 | )
|Change in estimates                               |  | (702   | ) |  | (3,387 | ) |  | 754    |  
|Foreign exchange translation adjustment           |  | (46    | ) |  | 103    |   |  | (9     | )
|                                                  |  |        |   |  |        |   |  |        |  
|Accrual as of end of period                       |  | 10,484 |   |  | 5,146  |   |  | 7,946  |  
|                                                  |  |        |   |  |        |   |  |        |  



F-22



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



11. Short-term borrowings and long-term debt

Financing

As of September 30, 2006, the Company can call on a 250.000 million credit facility granted until November 2009 by a bank syndicate under the leadership
of Bayerische Hypo- und Vereinsbank, The Royal Bank of Scotland and HSBC. The credit facility carries an interest rate ranging from EURIBOR or LIBOR plus 0.25%. For the unused part of the borrowing arrangement a commitment fee is paid to the
syndicate of 0.0875% per year. This credit facility is bound to adherence with specific financial key data. Further members of the bank syndicate are ABN Amro Bank, Barclays Bank, BNP Paribas, Citibank, Commerzbank, Deutsche Bank, Dresdner
Bank, DZ Bank, and SEB. The credit facility was unused as of September 30, 2006. In addition, the Company has entered into a number of bilateral borrowing arrangements with international and national banks totaling 111.100 million. These
borrowing arrangements were used in the amount of 37.000 million as of September 30, 2006. In addition, the Company has loans from state programs intended to foster exports and investing activities, which are not included in the
borrowing arrangements already mentioned.

Short-term borrowings

Short-term borrowings as of September 30, 2006 and 2005, were 89.265 million and 107.467 million, respectively. These short-term borrowings as of September 30, 2006, consisted of
unsecured bank loans and export financing in amount of 43.000 million. The export financing bears an interest rate of 2.80%. Other short-term borrowings consist of various working capital bank loans with a weighted average interest rate of
10.82% in fiscal 2006 and 8.18% in fiscal 2005.

Long-term debt

Long-term debt consists of the following:

Long-term debt



|                                              |  |         |   |  |         |  
|--------------------------------------------- |  | ------- | - |  | ------- | -
|As of September 30 ( thousand)               |  | 2006    |   |  | 2005    |  
|Debentures                                    |  | 125,000 |   |  | 124,620 |  
|Long-term debt with third parties             |  | 94,742  |   |  | 106,451 |  
|                                              |  |         |   |  |         |  
|Total long-term debt                          |  | 219,742 |   |  | 231,071 |  
|Less current installments                     |  | (24,990 | ) |  | (24,944 | )
|                                              |  |         |   |  |         |  
|Long-term debt excluding current installments |  | 194,752 |   |  | 206,127 |  
|                                              |  |         |   |  |         |  



F-23



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Details of currencies, interest rates, maturities and lenders of the long-term debt are given in the following table:

Long-term debt including current installments (loans and debentures)

As of September 30, 2006 (Currencies in millions)



|            |  |                |  |                     |  |                         |  |                                                       
|----------- |  | -------------- |  | ------------------- |  | ----------------------- |  | ------------------------------------------------------
|Principal   |  | Euroequivalent |  | Interest rate(in %) |  | Maturity(calendar year) |  | Lender                                                
|EUR 125.0   |  | 125.0          |  | 2.50                |  | 2010                    |  | Convertible Bond                                      
|EUR 24.0    |  | 24.0           |  | 4.2375              |  | 2007 to 2009            |  | KfW                                                   
|EUR 46.8    |  | 46.8           |  | 1.00 to 4.00        |  | 2006 to 2011            |  | Austrian banking syndicate and government institutions
|BRL 36.9    |  | 13.4           |  | 8.35 to 15.85       |  | 2006 to 2009            |  | Banco Nacional de Desenvolvimento Econômico e Social  
|USD 1.8     |  | 1.4            |  | 9.70                |  | 2008                    |  | Banco Nacional de Desenvolvimento Econômico e Social  
|HUF 2,500.0 |  | 9.1            |  | 7.94                |  | 2008                    |  | HVB                                                   

In addition there were obligations under capital leases of 0.000 million and 0.014 million as of
September 30, 2006 and 2005, respectively.

On July 16, 2003, the Company (as guarantor) through its subsidiary EPCOS Finance B.V. (as issuer)
issued a convertible bond due 2010 with a nominal amount of 126.425 million at an interest rate of 2.5%. At September 30, 2006, deferred debt issuance costs were 1.425 million. The bond is convertible, at the option of the
holders of the notes, into a maximum of 6,500,000 ordinary shares of the Company, at a conversion price of 19.45 per share. Upon conversion, the Company may pay a cash amount in lieu of delivery of all or some of the shares. The bond is
unsecured and ranks pari passu with all present and future unsecured subordinated obligations of the issuer. The conversion right may be exercised by the bondholder during the period commencing on September 1, 2003, and ending on July 1,
2010. The bond holders have an early redemption option in the event of a change of control in which case each bondholder may demand from the issuer redemption of any or all of its bonds at the principal amount plus interest accrued thereon.
Beginning July 17, 2008, the Company may redeem the convertible bond at the principal amount plus interest accrued thereon if the Companys share price exceeds 150% of the conversion price on ten trading days during a period of 20 days. If
the aggregate principal amount of bonds outstanding falls below 20.000 million the Company may redeem the remaining parts of the convertible bond.

On April 1, 2003, EPCOS AG entered into a loan of 40.000 million with KfW, carrying an interest rate of 4.2375%. The loan matures on September 30, 2009 and is being repaid in equal semi-annual installments, beginning
March 31, 2005.

As of September 30, 2006, long-term debt with third parties includes 46.790 million held by the Companys
Austrian subsidiary EPCOS OHG. An amount of 8.684 million of this debt is secured by investment securities and 32.057 million by liens on land. The weighted average



F-24



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



interest rate of all the Austrian long-term third-party debt as of September 30, 2006 and 2005, was 1.49% and 1.91%, respectively. The loans are due in
semi-annual installments over a period of up to six years.

In fiscal 2006 the Brazilian subsidiary EPCOS do Brazil Ltda. received further loans to finance
capital expenditures. As per September 30, 2006, the five loans were as follows:



|                                                                                     |  |                                                                                         
|------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------
|BRL 4.621 million (1.675 million) with a
variable interest rate currently of 15.85% |  | repayable including interest in monthly installments until December 2006                
|                                                                                     | 
|BRL 15.340 million (5.562 million) with
a variable interest rate currently of 8.35% |  | repayable including interest on May 15, 2007                                            
|                                                                                     | 
|BRL 15.625 million (5.666 million) with a variable interest rate currently of 9.85% |  | repayable including interest in monthly installments from November 2007 until March 2008
|                                                                                     | 
|USD 1.810 million (1.430 million) with an interest rate currently of 9.70%          |  | repayable including interest in monthly installments from November 2007 until March 2008
|                                                                                     | 
|BRL 1.268 million (0.460 million) with a variable interest rate currently of 11.85% |  | repayable including interest in monthly installments until July 2009                    

The Hungarian subsidiary EPCOS Elektronikai Alkatrész Kft. has a bank credit in the amount of Hungarian
forint (HUF) 2,500.000 million (9.158 million), with a variable interest rate currently of 7.94% payable in August 2008.

Further the
Indian subsidiary EPCOS Private Ltd. (EPL) has a non-interest-bearing loan in the amount of Indian rupees (INR) 0.033 million (0.001 million). The loan will be repaid by January 2007. The credit lines of group subsidiaries in some
cases are secured by guarantee letters provided by EPCOS AG.

The aggregate amounts of long-term debt as of September 30, 2006, are, in maturity date
order, as follows:

Long-term debt maturities



|                                      |  |        
|------------------------------------- |  | -------
|As of September 30, 2006 ( thousand)
|Fiscal year due                       |  |        
|2007                                  |  | 24,990 
|2008                                  |  | 33,794 
|2009                                  |  | 19,296 
|2010                                  |  | 134,568
|2011                                  |  | 7,094  
|Thereafter                            |  |       



F-25



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



12. Related party and related persons transactions

Siemens is included in the related party transactions only for
the period up to its sale of the EPCOS shares. Date of sale was March 29, 2006.

Total sales to Siemens for both internal usage and resale were 6.3%,
15.0% and 16.0% of total consolidated net sales for the years ended September 30, 2006, 2005 and 2004, respectively. Resale by Siemens to third parties accounted for 0.3%, 1.0% and 2.6% of total consolidated net sales for the years ended
September 30, 2006, 2005 and 2004, respectively, whereas sales directly to Siemens for internal usage accounted for 6.0%, 14.0% and 13.4% of total consolidated net sales respectively. Sales concerning Siemens are reported only for the period up
to its sale for fiscal 2006.

In a few countries, EPCOS does not have sales organizations established to distribute products. In these countries, EPCOS
utilizes agency or distributor agreements with Siemens. EPCOS is in the process of building up its own sales operations in these countries, which has resulted in the termination of most agency or distributor agreements.

The Siemens sales-companies receive a monthly turnover-based sales commission. Sales promotion measures of the Siemens sales companies have to comply with the
requirements of the Company.

The Company and its subsidiaries make use of various services provided by Siemens. These agreements are either for fixed
terms or can be terminated within one to three years. Under these agreements, Siemens provides the Company with a range of personnel and administrative services. Siemens administers pension plans for the Company, as well as portions of the payroll
accounting and the Companys personnel data processing systems. Siemens also provides the Company with library and information services, as well as specific sourcing and transportation services.

The Company also purchases IT services from Siemens. In the just completed financial year Siemens performed IT services for the Company, which consisted primarily of the
following: operating, servicing and development of IT systems and programs, network and telecommunications services. This business relationship between Siemens and EPCOS is based on framework and specific agreements.

Effective April 1, 1999, the Company entered into a lease with Siemens for the Companys headquarters in Munich. The lease expires on December 31, 2010,
and can be terminated with twelve months prior notice beginning September 30, 2008, at the earliest. The total rent in fiscal 2006 was 1.370 million. The Surge Arresters business unit, Berlin, holds a lease from Siemens for
production facilities and office buildings. The contract can be terminated at the end of any quarter with twelve months prior notice. Total rent was 0.223 million for fiscal 2006, of which 0.113 million was incurred up to
the point Siemens sold its interests in EPCOS AG. The Ceramic Components segment entered into an agreement with Siemens to lease a production building in Austria effective October 1, 1999. For further details see Note 23.

Effective July 1, 1999, the Company entered into an agreement with Siemens which allows the Company to commission Siemens with research and development projects on
a project-



F-26



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



by-project basis. The agreement grants the Company all patents and rights issuing from such research and development projects. Siemens has the non-exclusive,
worldwide and royalty-free right to use these patents and rights for its own business purposes.

Effective January 1, 2001, the Company acquired from
Siemens the operating activity for the development of specialized applications of radio-frequency surface acoustic wave technology. The acquisition price was 5.000 million and is primarily recorded as intangible assets.

In autumn 2004 the Company signed a strategic supplier contract with Siemens VDO. This contract replaces or supersedes other contracts, like the supplier contract for
piezo actuators for unit injector diesel injection systems.

Effective June 15, 1999, the Company entered into a know-how license agreement with
Matsushita-Kotobuki Electronics Industries, Ltd. (Matsushita-Kotobuki). This agreement grants the Company a non-exclusive, non-transferable worldwide license to use Matsushita-Kotobukis know-how and information relating to
low-temperature co-fired multilayer ceramic substrates. Matsushita-Kotobuki has agreed to provide the Company with technical advice and guidance relating to the manufacture of products that use this technology. In consideration for the rights and
licenses granted to the Company, the Company made a one time payment. The Company also pays ongoing royalties fixed at a percentage of the net sales price of products sold using this technology by the Company or its subsidiaries.

Effective June 30, 1999, the Company entered into a technical cooperation agreement with Matsushita Electronic Components Co., Ltd. (MACO). This
agreement is the basis for a project-by-project exchange of technical know-how, advice, and shared development work. All costs are to be borne by the party which incurs them, unless otherwise agreed upon in writing. To cover MACOs costs, the
Company paid an annual fee for the period until June 30, 2004; since then, the Company and MACO continue the agreement without payments to each other. Insofar as MACO and the Company enter into specific technical cooperation and technical
projects resulting from this agreement, the Company must pay either a one-time license fee or an annual fee based on sales of the affected product. It is possible to combine these alternatives.

On the basis of the aforementioned agreement, the Company and MACO entered into a license agreement effective April 5, 2000, for the use of know-how pertaining to
Tantalum Capacitors, which grants the Company certain non-exclusive and non-transferable licenses for the use of the respective know-how. Additionally, MACO advises the Company on technical matters concerning the use of this know-how. In
consideration of the licenses granted to the Company, the Company agreed to make initial payments. The Company also pays ongoing royalties fixed at a percentage of the net sales price of products manufactured using this technology and sold or
otherwise disposed of by the Company or its subsidiaries. In January 2006, MACO, under its new name Panasonic Electronic Devices Co., Ltd., as well as Matsushita Electric Industrial Co., Ltd. granted to the Company, against payment of certain lump
sum fees, the right to sublicense to a certain extent to Kemet Corporation and its subsidiaries the know-how pertaining to Tantalum Capacitors licensed to the Company under the aforementioned agreement and patents relating thereto.



F-27



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Effective July 25, 2001, the Company entered into a know-how license agreement with MACO, granting the Company certain non-exclusive, non-transferable licenses to use know-how relating to the production of
multilayer ceramic capacitors. In consideration for the rights and licenses granted to the Company, the Company has agreed to pay one-time license fees. A license agreement concluded between the Company and MACO as of September 1, 2001, for the
use of know-how pertaining to ultracapacitors, was terminated later by common consent.

Further, the Company and MACO have entered into a SAW know-how
cross-license agreement based on the technical cooperation agreement mentioned above. This agreement has been in force since January 1, 2002, and grants the Company and MACO certain non-exclusive and non-transferable licenses for reciprocal use
of the respective know-how. Additionally, the Company and MACO advise each other on technical matters concerning the use of this know-how. The mutually granted licenses are royalty-free. As of June 1, 2002, and as of November 20, 2003,
respectively, the Company and MACO entered into two development agreements regarding specific SAW devices. These development agreements grant the Company and MACO certain non-exclusive and non-transferable licenses for use of the development results
achieved by the other party within the framework of the joint development. The Company and MACO make no payments to each other for the development work and the granted licenses.

Effective June 30, 1999, the Company entered into a patent cross-license agreement with Matsushita Electric Industrial Co., Ltd. (MEI). Under this agreement, both parties grant each other
non-exclusive, non-transferable, worldwide licenses to their respective patents relating to both parties major product families. As of June 30, 2004, this agreement was renewed. The Company has agreed to pay MEI a fixed annual fee until
the year 2009, at which time the Company and MEI will mutually agree to a new fee schedule.

EPCOS (Xiaogan) Co., Ltd. in China has rented office and
production space from the minority shareholder Hanguang Electron Device Factory for an annual amount of 0.074 million. It also purchased materials and services from this company for 1.175 million in fiscal 2006 and
1.005 million in fiscal 2005.

The Chinese subsidiary Baoke Electronic (Wuxi) Co., Ltd., has rented office and production space from the
minority shareholder Jiangsu Paotong Electronic & Technology Co., Ltd. The expenses in fiscal 2006 amount to 0.119 million.



F-28



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Transactions with related parties were as follows for the years ended September 30:

Transactions with related parties



|                                                                    |  |         |   |  |         |   |  |         |  
|------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|For the years ended September 30 ( thousand)                       |  | 2006*   |   |  | 2005    |   |  | 2004    |  
|Net sales to                                                        |  |         |   |  |         |   |  |         |  
|Siemens (including resale to third parties)                         |  | 88,617  |   |  | 185,233 |   |  | 217,599 |  
|Matsushita and others                                               |  | 8,403   |   |  | 6,563   |   |  | 7,427   |  
|                                                                    |  |         |   |  |         |   |  |         |  
|                                                                    |  | 97,020  |   |  | 191,796 |   |  | 225,026 |  
|                                                                    |  |         |   |  |         |   |  |         |  
|Purchases of inventories and services charged to cost of goods sold |  |         |   |  |         |   |  |         |  
|Siemens                                                             |  | (10,523 | ) |  | (22,709 | ) |  | (21,981 | )
|Matsushita and others                                               |  | (3,393  | ) |  | (1,322  | ) |  | (6,247  | )
|                                                                    |  |         |   |  |         |   |  |         |  
|                                                                    |  | (13,916 | ) |  | (24,031 | ) |  | (28,228 | )
|                                                                    |  |         |   |  |         |   |  |         |  
|Research and development expenses                                   |  |         |   |  |         |   |  |         |  
|Siemens                                                             |  | (1,081  | ) |  | (2,083  | ) |  | (1,098  | )
|Matsushita and others                                               |  |        |   |  | (84     | ) |  | (25     | )
|                                                                    |  |         |   |  |         |   |  |         |  
|                                                                    |  | (1,081  | ) |  | (2,167  | ) |  | (1,123  | )
|                                                                    |  |         |   |  |         |   |  |         |  
|Marketing, selling, general and administrative expenses             |  |         |   |  |         |   |  |         |  
|Siemens                                                             |  | (3,152  | ) |  | (7,502  | ) |  | (12,786 | )
|                                                                    |  |         |   |  |         |   |  |         |  

---

|* | Siemens until March 29, 2006
|- | ----------------------------

Additionally the Company paid sales
commissions to Siemens sales companies until the date of sale of the EPCOS shares in the amount of 2.856 million for fiscal 2006, 6.611 million for fiscal 2005 and 9.715 million for fiscal 2004.

Furthermore, expenses to the Matsushita group for licenses and service fees amounted to 0.892 million, 0.964 million and 1.306 million
for fiscal years 2006, 2005 and 2004, respectively.

In addition to the above mentioned research and development expenses there are further Matsushita lump
sum fees in the amount of 4.320 million in fiscal 2006.

In fiscal 2004 the Companys U.S. subsidiary Crystal Technology, Inc., purchased
an interest of 10% in the U.S. company Siemens Subscriber Networks, Inc., for an amount of 0.689 million. The Siemens company was converted into a Limited Liability Company in fiscal 2005. In fiscal 2006 the equity interest was increased
to 29%. The corresponding purchase amount was 1.509 million.



F-29



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Amounts due from and to related parties included in the consolidated balance sheet as of September 30 were as follows:

Amounts due from and to related parties



|                                |  |        |   |  |        |  
|------------------------------- |  | ------ | - |  | ------ | -
|As of September 30 ( thousand) |  | 2006   |   |  | 2005   |  
|Siemens                         |  |        |   |  |        |  
|Trade accounts receivable       |  |       |   |  | 13,630 |  
|Trade accounts payable          |  |       |   |  | (4,296 | )
|Matsushita and others           |  |        |   |  |        |  
|Trade accounts receivable       |  | 917    |   |  | 510    |  
|Trade accounts payable          |  | (3,197 | ) |  | (565   | )

Transactions with related persons were as follows for the years ended
September 30:

Transactions with related persons



|                                                                    |  |        |   |  |        |   |  |         |  
|------------------------------------------------------------------- |  | ------ | - |  | ------ | - |  | ------- | -
|For the years ended September 30 ( thousand)                       |  | 2006   |   |  | 2005   |   |  | 2004    |  
|Net sales to                                                        |  |        |   |  |        |   |  |         |  
|Members of Supervisory Board                                        |  | 3,781  |   |  | 3,208  |   |  | 2,431   |  
|Purchases of inventories and services charged to cost of goods sold |  |        |   |  |        |   |  |         |  
|Members of Supervisory Board                                        |  | (2,928 | ) |  | (8,001 | ) |  | (10,253 | )

Purchases from companies directly or indirectly owned by members of the Supervisory Board are conducted on an
arms length basis. Purchases in fiscal 2006, 2005 and 2004 were not considered material for either EPCOS AG or those companies that are directly or indirectly owned by members of the Supervisory Board.

Amounts due from and to related persons



|                                |  |      |   |  |      |  
|------------------------------- |  | ---- | - |  | ---- | -
|As of September 30 ( thousand) |  | 2006 |   |  | 2005 |  
|Members of Supervisory Board    |  |      |   |  |      |  
|Trade accounts receivable       |  | 284  |   |  | 386  |  
|Trade accounts payable          |  | (115 | ) |  | (922 | )



F-30



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



13. Other liabilities

Other liabilities as of September 30, 2006 and 2005, are as follows:

Other liabilities



|                                |  |        |  |       
|------------------------------- |  | ------ |  | ------
|As of September 30 ( thousand) |  | 2006   |  | 2005  
|Employee-related costs          |  | 33,199 |  | 28,258
|Accrual for restoration cost    |  | 5,579  |  | 5,067 
|Government loans                |  | 3,441  |  | 3,531 
|Other                           |  | 3,808  |  | 3,414 
|                                |  |        |  |       
|Total other liabilities         |  | 46,027 |  | 40,270
|                                |  |        |  |       

14. Shareholders equity

At September 30, 2006, the Company had common stock amounting to 65.300 million divided into 65,300,000 registered shares of no par value with a nominal value of 1 per share.

The Management Board is authorized, with the consent of the Supervisory Board, to increase common stock on or before February 10, 2009, by up to a total of
13.020 million (Authorized Capital 2004). This Authorized Capital can be utilized to issue new ordinary registered shares of up to 13.020 million for cash or in-kind contributions.

No cash dividends were declared and paid in the years ended September 30, 2006, 2005 and 2004.

Under the German Stock Corporation Act, the amount of income available for distribution to shareholders is based upon the equity of the Company as reported in its financial statements drawn up on a stand-alone basis
in accordance with the German Commercial Code (HGB). Accordingly, the Annual General Meeting decides only on the dividends payable from the retained earnings as shown in the Companys annual German statutory accounts. As of September 30,
2006, the distributable amount was 54.443 million. As of September 30, 2005, this amount was 49.203 million.

The German Stock
Corporation Act also defines the rules for acquisition of treasury shares. The Company does not require authorization or shareholder approval to acquire treasury shares for the purpose of transferring them to employees as part of an employee share
purchase plan. In fiscal 2006, the Company neither purchased shares nor reissued shares to its employees. In fiscal 2004 the Company sold the 25,000 shares owned at September 30, 2003, to third parties. The amount of minus
0.392 million, by which the sales price was below the purchase price, was booked as decrease of the additional paid-in capital.

The Company has
Conditional Capital of up to 4.960 million (Conditional Capital 1999 I: 2.480 million and Conditional Capital 2004 II: 2.480 million) that may be used for a stock option plan. Additionally, the Company has
Conditional Capital of 13.000 million (Conditional Share Capital 2002 I: 6.500 million and Conditional Capital 2004 I: 6.500 million) for the exercise of conversion privileges and option rights for convertible or
warrant-linked bonds.



F-31



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



15. Stock-based compensation

Stock option plans

EPCOS Stock Option Plan 1999

Effective October 13, 1999, an extraordinary shareholders meeting adopted a
stock option plan (EPCOS Stock Option Plan 1999). The plan had a term of five years. Under this plan that was terminated by the shareholders meeting on February 11, 2004, members of the Management Board, directors of subsidiaries and
other eligible key employees could be granted non-transferable options to purchase up to 2,480,000 shares at 115% of the average closing market price of the Companys shares during the five-day period immediately before the date of grant. For
options granted immediately before the Companys initial public offering, the exercise price was 115% of the subscription price of 31 per share. The Supervisory Board of the Company decided annually on the number of options to be
granted to the Management Board. In turn, the Management Board and the governing bodies of the group companies decided annually on the number of shares to be granted to the other eligible employees. Options granted under the plan can be exercised
during the five-year period starting two years after the options are granted, provided that the share price has reached or exceeded the exercise price on at least one day since the grant date. In connection with the EPCOS stock option plan 1999,
Conditional Capital of the Company in the amount of up to 2.480 million was created for the issuance of up to 2,480,000 additional shares with no par value and a nominal value of 1 each. The Conditional Capital became effective on
October 13, 1999, when it was recorded in the German Commercial Register.

EPCOS Stock Option Plan 2004

In the shareholders meeting of February 11, 2004, the shareholders approved the current EPCOS Stock Option Plan 2004.

Under this plan a maximum of 2,480,000 options may be issued to the members of the Management Board of EPCOS AG, to managing directors of EPCOS affiliates and to other
selected executives until February 10, 2007. The Supervisory Board of EPCOS AG decides on the number of options to be granted to the Management Board, and the Management Board on the number of options to be granted to the other eligible
persons. The exercise price amounts to 115% of the base price, i. e. the average opening market price of EPCOS AG shares on the five trading days before the grant date. The exercise price is also the performance hurdle. The options may only be
exercised after the expiration of a vesting period. This vesting period begins one week after the grant date and runs for at least two years. The option rights may be exercised during the five years following the vesting period. Instead of shares
issued from Conditional Capital 2004 II of 2.480 million created for this purpose, the eligible persons may, at the discretion of the Company, be granted treasury shares repurchased from the stock market or paid cash settlement. The
shares, to be issued from the Conditional Capital 2004 II, have no par value and their nominal amount is 1 each. In the event of extraordinary, unforeseen developments, the Supervisory Board and the Management Board are authorized to introduce
a cap on possible gains from stock options.



F-32



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table summarizes stock option activity:

Stock option activity



|                                 |  |                  |  |                                                
|-------------------------------- |  | ---------------- |  | -----------------------------------------------
|                                 |  | Number ofoptions |  | Weighted averageexercise price per share (in )
|Balance as of September 30, 2003 |  | 1,737,750        |  | 52.03                                          
|                                 |  |                  |  |                                                
|Granted                          |  | 495,000          |  | 21.76                                          
|Exercised                        |  |                 |  |                                               
|Forfeited                        |  | 50,500           |  | 40.54                                          
|                                 |  |                  |  |                                                
|Balance as of September 30, 2004 |  | 2,182,250        |  | 45.43                                          
|                                 |  |                  |  |                                                
|Granted                          |  | 340,000          |  | 13.74                                          
|Exercised                        |  |                 |  |                                               
|Forfeited                        |  | 35,500           |  | 24.36                                          
|                                 |  |                  |  |                                                
|Balance as of September 30, 2005 |  | 2,486,750        |  | 41.40                                          
|                                 |  |                  |  |                                                
|Granted                          |  | 339,000          |  | 13.05                                          
|Exercised                        |  |                 |  |                                               
|Forfeited                        |  | 129,250          |  | 33.51                                          
|                                 |  |                  |  |                                                
|Balance as of September 30, 2006 |  | 2,696,500        |  | 38.21                                          
|                                 |  |                  |  |                                                

The following table summarizes all stock options issued by the Company and exercisable as of September 30,
2006:

Options outstanding and exercisable

As of
September 30, 2006



|                                |  |                |  |                  |   |  |                         |  |                                                                       |  |                                                      |  |                                                        |  |                                                               |  |           |  |                                    
|------------------------------- |  | -------------- |  | ---------------- | - |  | ----------------------- |  | --------------------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------------------------------------------------ |  | ------------------------------------------------------------- |  | --------- |  | -----------------------------------
|                                |  |                |  |                  |   |  |                         |  |                                                                       |  |                                                      |  | Options exercisable                                   
|Range of exercise prices (in ) |  | Grantedoptions |  | Forfeitedoptions |   |  | Remaininggrantedoptions |  | Optionsoutstandingweightedaverageremainingcontractual life (in years) |  | Weightedaverageexerciseprice
pergrantedoption (in ) |  | Weightedaverageexerciseprice
perforfeitedoption (in ) |  | Weightedaverageexerciseprice
perremaininggrantedoption (in ) |  | Number    |  | Weightedaverageexerciseprice (in )
|13.05                           |  | 339,000        |  |                 |   |  | 339,000                 |  | 6                                                                     |  | 13.05                                                |  | 13.05                                                  |  | 13.05                                                         |  |          |  |                                   
|13.74                           |  | 340,000        |  | (24,000          | ) |  | 316,000                 |  | 5                                                                     |  | 13.74                                                |  | 13.74                                                  |  | 13.74                                                         |  |          |  |                                   
|15.23                           |  | 698,500        |  | (73,000          | ) |  | 625,500                 |  | 3                                                                     |  | 15.23                                                |  | 15.23                                                  |  | 15.23                                                         |  | 625,500   |  | 15.23                              
|21.76                           |  | 495,000        |  | (62,000          | ) |  | 433,000                 |  | 4                                                                     |  | 21.76                                                |  | 21.76                                                  |  | 21.76                                                         |  | 433,000   |  | 21.76                              
|35.65                           |  | 158,000        |  | (12,000          | ) |  | 146,000                 |  |                                                                      |  | 35.65                                                |  | 35.65                                                  |  | 35.65                                                         |  | 146,000   |  | 35.65                              
|64.11                           |  | 463,500        |  | (49,500          | ) |  | 414,000                 |  | 2                                                                     |  | 64.11                                                |  | 64.11                                                  |  | 64.11                                                         |  | 414,000   |  | 64.11                              
|90.90 to 105.04                 |  | 454,500        |  | (31,500          | ) |  | 423,000                 |  | 1                                                                     |  | 103.17                                               |  | 105.04                                                 |  | 103.03                                                        |  | 423,000   |  | 103.03                             
|                                |  |                |  |                  |   |  |                         |  |                                                                       |  |                                                      |  |                                                        |  |                                                               |  |           |  |                                    
|13.05 to 105.04                 |  | 2,948,500      |  | (252,000         | ) |  | 2,696,500               |  | 3                                                                     |  | 38.24                                                |  | 38.49                                                  |  | 38.21                                                         |  | 2,041,500 |  | 46.18                              
|                                |  |                |  |                  |   |  |                         |  |                                                                       |  |                                                      |  |                                                        |  |                                                               |  |           |  |                                    

The intrinsic value of the options exercisable is zero.

After 158,000 options had been granted at a weighted average fair value of 21.25 per option on October 14, 1999, another 454,500 options were granted in
fiscal 2001 in two tranches on



F-33



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



November 29, 2000, and February 22, 2001. The weighted average fair value for the first tranche was 40.41 and for the second tranche
31.26 per option, measured at the respective grant date. For the entire options granted for fiscal 2001, the weighted average fair value amounted to 39.20 per option. On November 27, 2001, another 463,500 options were
granted at a weighted average fair value of 25.45 per option. On November 21, 2002, an additional 698,500 options were granted in fiscal 2003. The weighted average fair value amounted to 6.87 per option. On
December 11, 2003, 495,000 options were granted at a weighted average fair value of 7.76 per option. On December 14, 2004, 340,000 options were granted. The fair value amounted to 3.90 per option (without considering
the cap on possible gains as defined in the Stock Option Plan 2004). On December 14, 2005, 339,000 options were granted at a weighted average fair value of 2.20 per option. In 2006, 2005 and 2004 433,000, 665,500 and 438,500 options
vested with a fair value of 7.76, 6.87 and 25.45 per option respectively. In fiscal 2006 compensation expense of 1.294 million from stock based compensation was recorded. The expected cost of the stock options for
fiscal year 2007 and fiscal year 2008 are 0.483 million and 0.062 million, respectively. For fiscal year 2006 the effect on earnings per share, for both basic and diluted, amounts to 0.02. Results for prior period have
not been restated. There is no cash flow effect on the granted options.

All forfeited options concern employees who left the Company.

The fair value of the Companys stock options of fiscal 2006, 2005 and 2004 was estimated on the date of grant using the Black-Scholes option pricing model based on
the following weighted-average assumptions for fiscal 2006, 2005 (without consideration of the cap in the case of extraordinary gains) and 2004 at the corresponding grant date:

Average values of stock options



|                                    |  |      |   |  |      |   |  |      |  
|----------------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|As of September 30                  |  | 2006 |   |  | 2005 |   |  | 2004 |  
|Risk-free interest rate             |  | 3.14 | % |  | 3.16 | % |  | 4.13 | %
|Expected life of options (in years) |  | 5    |   |  | 5    |   |  | 5    |  
|Expected volatility                 |  | 26.0 | % |  | 43.4 | % |  | 41.0 | %
|Average expected dividend yield     |  | 1.73 | % |  | 1.73 | % |  | 1.24 | %



F-34



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



16. Restructuring

Due to the considerable changes in market conditions for electronic components since fiscal 2001,
it was necessary for the Company to undertake restructuring measures to reduce the workforce, dispose of certain equipment and speed up relocation of manufacturing operations to countries with lower labor costs. On the basis of various restructuring
plans - amongst others caused by the sale of Tantalum Capacitors Business to Kemet - in fiscal 2006, worldwide measures were taken, which resulted in the following personnel costs and impairments:

Restructuring costs, net



|                                                         |  |        |  |       |  |      
|-------------------------------------------------------- |  | ------ |  | ----- |  | -----
|For the years ended September 30 ( thousand)            |  | 2006   |  | 2005  |  | 2004 
|Personnel costs, net                                     |  | 10,401 |  | 4,726 |  | 828  
|Impairment of property, plant and equipment (see Note 9) |  | 3,404  |  | 404   |  | 3,607
|Other                                                    |  |       |  | 484   |  |     
|                                                         |  |        |  |       |  |      
|Total restructuring costs                                |  | 13,805 |  | 5,614 |  | 4,435
|                                                         |  |        |  |       |  |      

Restructuring costs booked in fiscal 2006 include an amount of 9.086 million that concerns discontinued
operations. The split of restructuring costs by segment was as follows:

Segmental analysis of restructuring costs, net



|                                              |  |        |   |  |       |   |  |       |  
|--------------------------------------------- |  | ------ | - |  | ----- | - |  | ----- | -
|For the years ended September 30 ( thousand) |  | 2006   |   |  | 2005  |   |  | 2004  |  
|Capacitors and Inductors                      |  | 15,680 |   |  | 5,481 |   |  | 1,063 |  
|Ceramic Components                            |  | 828    |   |  | 1,091 |   |  | (89   | )
|SAW Components                                |  | (2,703 | ) |  | (958  | ) |  | 3,461 |  
|                                              |  |        |   |  |       |   |  |       |  
|Total restructuring costs                     |  | 13,805 |   |  | 5,614 |   |  | 4,435 |  
|                                              |  |        |   |  |       |   |  |       |  

With effect from October 1, 2005, the business segments Capacitors and Inductors and
Ferrites, were combined to a reportable segment named Capacitors and Inductors, based on substantial economic and other similarities between these operating segments after the disposal of the Tantalum Capacitor Business, which was
part of the operating segment Capacitors. Balances reported previously have been restated for comparative purposes given the change in the segmentation.

These restructuring costs mainly impact cost of goods sold. In fiscal 2006 EPCOS paid out 6.781 million.

Parts
of accruals were canceled because of structural changes compared with the planned reduction of manpower and fluctuation of employees.



F-35



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The development of accruals and liabilities for personnel restructuring costs during fiscal 2006 and 2005 is as follows:

Development of accruals and liabilities



|                                      |  |                    |   |  |                                      |  
|------------------------------------- |  | ------------------ | - |  | ------------------------------------ | -
|                                      |  | Number ofemployees |   |  | Accruals andliabilities ( thousand) |  
|As of September 30, 2003              |  | 839                |   |  | 30,838                               |  
|                                      |  |                    |   |  |                                      |  
|Increase in accruals/liabilities, net |  | 12                 |   |  | 828                                  |  
|Usage                                 |  | (197               | ) |  | (8,550                               | )
|                                      |  |                    |   |  |                                      |  
|As of September 30, 2004              |  | 654                |   |  | 23,116                               |  
|                                      |  |                    |   |  |                                      |  
|Increase in accruals/liabilities, net |  | 99                 |   |  | 4,726                                |  
|Usage                                 |  | (356               | ) |  | (13,220                              | )
|                                      |  |                    |   |  |                                      |  
|As of September 30, 2005              |  | 397                |   |  | 14,622                               |  
|                                      |  |                    |   |  |                                      |  
|Increase in accruals/liabilities, net |  | 44                 |   |  | 10,401                               |  
|Usage                                 |  | (173               | ) |  | (8,706                               | )
|                                      |  |                    |   |  |                                      |  
|As of September 30, 2006              |  | 268                |   |  | 16,317                               |  
|                                      |  |                    |   |  |                                      |  

17. Other income, net

Net other income of continuing operations in amount of 6.678 million mainly consists of grants for research at an Austrian subsidiary in amount of 3.875 million. Net other income of 7.273 million in fiscal
2005 mainly consists of grants for research and further education in Austria (4.934 million) and investment grants in Czech Republic (1.264 million). The net other income of 4.888 million in fiscal 2004 mainly
consists of grants for research in amount of 3.852 million for an Austrian affiliate.

18. Income taxes

Consolidated income (loss) before income taxes and minority interests for the continuing operations split according to taxation criteria into domestic and foreign sources
was as follows:

Income (loss) before income taxes



|                                              |  |         |   |  |         |   |  |       
|--------------------------------------------- |  | ------- | - |  | ------- | - |  | ------
|For the years ended September 30 ( thousand) |  | 2006    |   |  | 2005    |   |  | 2004  
|Germany                                       |  | (24,949 | ) |  | (10,553 | ) |  | 12,180
|Foreign                                       |  | 62,738  |   |  | (24,055 | ) |  | 49,925
|                                              |  |         |   |  |         |   |  |       
|Total                                         |  | 37,789  |   |  | (34,608 | ) |  | 62,105
|                                              |  |         |   |  |         |   |  |       



F-36



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The income tax provision (benefit) consisted of the following:

Provision (benefit) for income taxes



|                                              |  |         |   |  |        |  |        |  
|--------------------------------------------- |  | ------- | - |  | ------ |  | ------ | -
|For the years ended September 30 ( thousand) |  | 2006    |   |  | 2005   |  | 2004   |  
|(a) Current taxes                             |  |         |   |  |        |  |        |  
|Germany                                       |  | 911     |   |  | 882    |  | 2,925  |  
|Foreign                                       |  | 11,070  |   |  | 1,638  |  | 7,492  |  
|                                              |  |         |   |  |        |  |        |  
|(b) Deferred taxes                            |  |         |   |  |        |  |        |  
|Germany                                       |  | (10,992 | ) |  | 23,640 |  | 4,628  |  
|Foreign                                       |  | 1,221   |   |  | 5,319  |  | (4,146 | )
|                                              |  |         |   |  |        |  |        |  
|Total                                         |  | 2,210   |   |  | 31,479 |  | 10,899 |  
|                                              |  |         |   |  |        |  |        |  

The Companys subsidiary in Singapore was granted a tax holiday by the government of Singapore relating to
production of SAW components there until 2013. Based on the pre-tax income of 32.457 million, 3.788 million, and 49.425 million for the years ended September 30, 2006, 2005 and 2004, respectively, relating to
this production facility, and the statutory tax rate of 20% for 2006, 2005 and 2004 in Singapore, the effect of the tax holiday for the years ended September 30, 2006, 2005 and 2004 on net income amounts to 6.491 million,
0.758 million and 9.885 million, respectively. The effect on basic net income per share is 0.10, 0.01 and 0.15, respectively.

A reconciliation of income taxes follows for the years ended September 30, 2006, 2005 and 2004 based on the consolidated statutory rate of 40% for 2006, 2005 and 2004 which represents the German corporate tax
rate plus the after federal tax benefit rate for trade taxes:

Reconciliation of income taxes



|                                              |  |         |   |  |         |   |  |         |  
|--------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|For the years ended September 30 ( thousand) |  | 2006    |   |  | 2005    |   |  | 2004    |  
|Expected provision (benefit) for income taxes |  | 15,116  |   |  | (13,842 | ) |  | 24,842  |  
|Foreign tax rate differential                 |  | (29,553 | ) |  | 8,259   |   |  | (20,167 | )
|Change in valuation allowance                 |  | 14,082  |   |  | 34,683  |   |  | 3,539   |  
|Non-deductible expenses Germany               |  | 1,718   |   |  | 677     |   |  | 2,139   |  
|Foreign withholding tax                       |  | 921     |   |  | 236     |   |  | 536     |  
|Tax expense (benefit) prior years Germany     |  | (13     | ) |  | 523     |   |  | 24      |  
|Trade tax differential Germany                |  | 326     |   |  | 390     |   |  | 339     |  
|Other                                         |  | (387    | ) |  | 553     |   |  | (353    | )
|                                              |  |         |   |  |         |   |  |         |  
|Actual provision (benefit) for income taxes   |  | 2,210   |   |  | 31,479  |   |  | 10,899  |  
|                                              |  |         |   |  |         |   |  |         |  

The statutory corporate income tax rate in Germany was 25%. The solidarity surcharge of 5.5% was calculated on the
federal corporate tax, so that the total federal corporate tax rate amounted to 26.4% in fiscal year 2006, 2005 and 2004. The effective rate for trade tax was 13.6% for fiscal 2006, 2005 and 2004. The Company is continuously under audit by tax
authorities in different countries. In the Companys opinion the tax provisions adequately cover possible expenses for all open years.



F-37



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Deferred income tax assets and liabilities as of September 30, 2006 and 2005, are summarized as follows:

Deferred
income tax assets and liabilities



|                                                |  |         |   |  |         |  
|----------------------------------------------- |  | ------- | - |  | ------- | -
|As of September 30 ( thousand)                 |  | 2006    |   |  | 2005    |  
|Inventories                                     |  | 4,889   |   |  | 5,026   |  
|Fixed assets                                    |  | 11,040  |   |  | 12,955  |  
|Net operating loss and tax credit carryforwards |  | 110,315 |   |  | 84,732  |  
|Accrued expenses                                |  | 10,314  |   |  | 10,466  |  
|Pension liabilities                             |  | 67,595  |   |  | 67,160  |  
|Other liabilities                               |  | 1,671   |   |  | 1,620   |  
|Other                                           |  | 4,489   |   |  | 3,344   |  
|                                                |  |         |   |  |         |  
|Gross deferred tax assets                       |  | 210,313 |   |  | 185,303 |  
|Deferred tax asset valuation allowance          |  | (66,208 | ) |  | (52,126 | )
|                                                |  |         |   |  |         |  
|Net deferred tax assets                         |  | 144,105 |   |  | 133,177 |  
|Receivable provisions                           |  | (540    | ) |  | (2,173  | )
|Inventories                                     |  | (1,462  | ) |  | (1,461  | )
|Fixed assets                                    |  | (35,724 | ) |  | (47,998 | )
|Accrued expenses                                |  | (12,023 | ) |  | (8,110  | )
|Other                                           |  | (25,125 | ) |  | (16,690 | )
|                                                |  |         |   |  |         |  
|Gross deferred tax liabilities                  |  | (74,874 | ) |  | (76,432 | )
|                                                |  |         |   |  |         |  
|Deferred tax assets, net                        |  | 69,231  |   |  | 56,745  |  
|                                                |  |         |   |  |         |  

The net operating loss carryforwards relate mainly to the German, Austrian, French, Brazilian, Indian and Spanish
operations. Evaluation of the deferred tax assets showed a longer period of recoverability than previously assumed especially for the net operating losses. Therefore, in addition to the valuation allowance already recognized in prior years, a
partial valuation allowance on deferred tax assets particularly for the Austrian, Spanish and Brazilian operations has been made. The evaluation of the deferred tax assets in Germany has not led to a necessity for an additional valuation allowance.
Management assumes that net operating losses can be utilized because of earnings improving activities.

The Company pension plan is managed through a
relief fund (UK EPCOS e.V). A taxable income of 3.123 million in fiscal 2006 and of 6.982 million in fiscal 2005 has been generated at EPCOS AG, because indirect pension obligations cannot be considered for tax purposes. A
temporary difference has arisen between the book value and the tax basis, which has led to a deferred tax asset of 43.655 million at September 30, 2006, and of 42.388 million at September 30, 2005.



F-38



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Net deferred tax assets and liabilities are recorded in the consolidated balance sheets as of September 30, 2006 and 2005, as follows:

Deferred income tax assets and liabilities in consolidated balance sheets



|                                |  |         |   |  |         |  
|------------------------------- |  | ------- | - |  | ------- | -
|As of September 30 ( thousand) |  | 2006    |   |  | 2005    |  
|Deferred tax assets             |  |         |   |  |         |  
|Current                         |  | 6,446   |   |  | 8,708   |  
|Non-current                     |  | 94,036  |   |  | 70,169  |  
|Deferred tax liabilities        |  |         |   |  |         |  
|Current                         |  | (14,424 | ) |  | (3,629  | )
|Non-current                     |  | (16,827 | ) |  | (18,503 | )
|                                |  |         |   |  |         |  
|Total                           |  | 69,231  |   |  | 56,745  |  
|                                |  |         |   |  |         |  

As of September 30, 2006, the Company had consolidated net operating loss (NOL) carryforwards amounting to
337.055 million, of which 4.680 million expire by 2012 and 332.375 million expire later than 2013 or have no expiry date. These figures show the gross amount of the available NOLs. In addition, the subsidiary in
Spain has a tax credit amount of 3.237 million at its disposal which will expire starting from 2012. The Companys valuation allowances increased from 2005 to 2006 by 14.082 million, in 2004 to 2005 by
34.683 million and from 2003 to 2004 by 3.539 million. The valuation allowance reduced the deferred tax asset to a net amount that will more likely than not be realized, based on the Companys estimate of future earnings
and the expected timing of temporary difference reversals.

At September 30, 2006, the Company made provisions for income taxes of
1.530 million and at September 30, 2005, of 2.695 million on retained earnings of foreign subsidiaries. Income taxes on the remaining earnings of 73.755 million at September 30, 2006, of foreign
subsidiaries have not been provided, because such earnings are intended to be indefinitely reinvested in those operations. It is not economically practicable to estimate the amount of unrecognized deferred tax liabilities for these undistributed
earnings.



F-39



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



19. Earnings per share

The following table sets forth the computation of basic and diluted earnings (loss) per share
for the years ended September 30, 2006, 2005 and 2004:

Earnings/(Loss) per share from continuing operations



|                                                                                                  |  |            |   |  |            |   |  |            |  
|------------------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|For the years ended September 30 ( thousand, except per share
data)                              |  | 2006       |   |  | 2005       |   |  | 2004       |  
|Net income/(loss) from continuing operations - basic                                              |  | 35,160     |   |  | (66,321    | ) |  | 50,983     |  
|Interest expense on convertible bonds (net of tax)                                                |  | 2,125      |   |  |           |   |  | 2,125      |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Net income/(loss) - diluted                                                                       |  | 37,285     |   |  | (66,321    | ) |  | 53,108     |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Denominator for basic earnings per share  weighted average shares                                |  | 65,300,000 |   |  | 65,300,000 |   |  | 65,296,107 |  
|Effect of dilutive shares  stock options                                                         |  |           |   |  |           |   |  | 74,386     |  
|Effect of dilutive shares  convertible bonds                                                     |  | 6,500,000  |   |  |           |   |  | 6,500,000  |  
|Denominator for diluted earnings per share  weighted average shares adjusted for dilutive shares |  | 71,800,000 |   |  | 65,300,000 |   |  | 71,870,493 |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Basic earnings per common share,                                                                 |  | 0.54       |   |  | (1.02      | ) |  | 0.78       |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Diluted earnings per common share,                                                               |  | 0.52       |   |  | (1.02      | ) |  | 0.74       |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Earnings/(Loss) per share from discontinued operations                                            |  |            |   |  |            |   |  |            |  
|For the years ended September 30 ( thousand, except per share
data)                              |  | 2006       |   |  | 2005       |   |  | 2004       |  
|Net loss from discontinued operations - basic                                                     |  | (13,983    | ) |  | (52,941    | ) |  | (1,755     | )
|Interest expense on convertible bonds (net of tax)                                                |  |           |   |  |           |   |  |           |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Net loss - diluted                                                                                |  | (13,983    | ) |  | (52,941    | ) |  | (1,755     | )
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Denominator for basic earnings per share  weighted average shares                                |  | 65,300,000 |   |  | 65,300,000 |   |  | 65,296,107 |  
|Effect of dilutive shares  stock options                                                         |  |           |   |  |           |   |  |           |  
|Effect of dilutive shares  convertible bonds                                                     |  |           |   |  |           |   |  |           |  
|Denominator for diluted earnings per share  weighted average shares adjusted for dilutive shares |  | 65,300,000 |   |  | 65,300,000 |   |  | 65,296,107 |  
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Basic earnings per common share,                                                                 |  | (0.21      | ) |  | (0.81      | ) |  | (0.03      | )
|                                                                                                  |  |            |   |  |            |   |  |            |  
|Diluted earnings per common share,                                                               |  | (0.21      | ) |  | (0.81      | ) |  | (0.03      | )

In fiscal 2006 and 2004, 6,500,000 potential dilutive shares resulting from the convertible bonds were considered
in continuing operations. For discontinued operations these shares were not considered, because the inclusion would be antidilutive. For fiscal year 2005, 6,500,000 potential dilutive shares resulting from the convertible bonds were neither
considered in continuing operations nor in discontinued operations, because the inclusion would be antidilutive.



F-40



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



20. Pensions

The Company provides pension benefits principally under several defined benefit pension plans.
September 30 is the measurement date of the leading plans. Both in Germany and also in Brazil employees are covered under two defined benefit pension plans each. Both US subsidiaries, EPCOS Inc., Iselin/New Jersey, and Crystal Technology, Inc.,
Palo Alto/California, provide defined benefit pension plans, the largest of which is funded.

Moreover, in Germany there is a deferred compensation plan,
which gives German employees the opportunity to convert part of their compensation to a pension based on amounts contributed, including the interest earned on them up until retirement age. The provision for future payments to retired staff is
determined actuarially.

The liability is recorded at the maximum of the market value of the plan assets and the actuarial present value of the guaranteed
financial funds.

Payments for defined contribution plans amounted to 1.785 million in fiscal 2006, 2.038 million in fiscal 2005 and
1.639 million in fiscal 2004. The estimated value for fiscal 2007 amounts to 1.900 million.

Consolidated information regarding all
of the Companys pension plans at the dates indicated is presented in the following tables.

The following table
presents the changes in projected benefit obligations (PBO) during the years indicated:

Changes in projected benefit obligations



|                                                           |  |         |   |  |         |   |  |         |  
|---------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|As of September 30 ( thousand)                            |  | 2006    |   |  | 2005    |   |  | 2004    |  
|Projected benefit obligations (PBO) at beginning of year |  | 210,753 |   |  | 161,827 |   |  | 150,575 |  
|Sale of Tantalum Capacitor Business                        |  | (1,210  | ) |  |        |   |  |        |  
|Service cost                                               |  | 6,530   |   |  | 5,830   |   |  | 5,334   |  
|Interest cost                                              |  | 9,161   |   |  | 8,906   |   |  | 8,579   |  
|Actuarial (gains)/losses                                   |  | (2,608  | ) |  | 38,038  |   |  | 4,631   |  
|Foreign exchange rate changes                              |  | (1,451  | ) |  | 2,245   |   |  | (1,104  | )
|Benefits paid                                              |  | (7,297  | ) |  | (5,935  | ) |  | (5,626  | )
|Curtailments                                               |  | 20      |   |  |        |   |  | (36     | )
|Settlements                                                |  | (69     | ) |  | (158    | ) |  | (526    | )
|                                                           |  |         |   |  |         |   |  |         |  
|Projected benefit obligations (PBO) at end of year       |  | 213,829 |   |  | 210,753 |   |  | 161,827 |  
|                                                           |  |         |   |  |         |   |  |         |  

The accumulated benefit obligation at end of fiscal year 2006 amounts to
196.844 million.



F-41



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table presents the changes in plan assets during the fiscal years indicated:

Changes in plan assets



|                                               |  |        |   |  |        |   |  |        |  
|---------------------------------------------- |  | ------ | - |  | ------ | - |  | ------ | -
|As of September 30 ( thousand)                |  | 2006   |   |  | 2005   |   |  | 2004   |  
|Fair value of plan assets at beginning of year |  | 20,127 |   |  | 16,486 |   |  | 15,351 |  
|Actual return on plan assets                   |  | 1,772  |   |  | 1,294  |   |  | 1,505  |  
|Foreign exchange rate changes                  |  | (917   | ) |  | 1,471  |   |  | (780   | )
|Employer contributions                         |  | 1,292  |   |  | 1,808  |   |  | 1,158  |  
|Benefits paid                                  |  | (779   | ) |  | (932   | ) |  | (748   | )
|                                               |  |        |   |  |        |   |  |        |  
|Fair value of plan assets at end of year       |  | 21,495 |   |  | 20,127 |   |  | 16,486 |  
|                                               |  |        |   |  |        |   |  |        |  

The plan asset allocation is as follows:

Plan assets allocation



|                          |  |       |  |      
|------------------------- |  | ----- |  | -----
|As of September 30 (in %) |  | 2006  |  | 2005 
|Investment in stocks      |  | 43.1  |  | 40.9 
|Bonds                     |  | 55.4  |  | 58.4 
|Other                     |  | 1.5   |  | 0.7  
|                          |  |       |  |      
|Total                     |  | 100.0 |  | 100.0
|                          |  |       |  |      

The investment managers of the plan assets seek to reduce volatility by their investment strategy. Thus the
exposure of corporate bonds, which are held in USA, is limited to 50%. The bonds require a minimum rating of Standard & Poors or Moodys of A or better at the date of purchase. The exposure to equity instruments is limited to
60%. The stock investment in any corporation is limited to 5% of total equity assets within the plan assets. The expected contribution in 2007 to the plan assets can not be estimated.



F-42



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



A reconciliation of the funded status with the amounts recognized in the consolidated balance sheets is as follows:

Reconciliation of funded status with consolidated balance sheets



|                                                             |  |          |   |  |          |  
|------------------------------------------------------------ |  | -------- | - |  | -------- | -
|As of September 30 ( thousand)                              |  | 2006     |   |  | 2005     |  
|Funded status of plans *)                                    |  | (192,334 | ) |  | (190,626 | )
|Unrecognized prior service cost                              |  | 599      |   |  | 723      |  
|Unrecognized actuarial net Losses                            |  | 52,551   |   |  | 58,300   |  
|Intangible assets                                            |  | (431     | ) |  | (540     | )
|Accumulated other changes in equity                          |  | (37,650  | ) |  | (42,173  | )
|                                                             |  |          |   |  |          |  
|Net amount to be reported in the consolidated balance sheets |  | (177,265 | ) |  | (174,316 | )
|Less current portion                                         |  | 8,449    |   |  | 8,548    |  
|                                                             |  |          |   |  |          |  
|Long-term portion of pension liability                       |  | (168,816 | ) |  | (165,768 | )
|                                                             |  |          |   |  |          |  

---

|*) | Difference between projected benefit obligations and fair value of plan assets.
|-- | -------------------------------------------------------------------------------

The additional minimum pension liability decreased by 4.341 million from the previous year. This change effected other comprehensive loss in the amount of 2.639 million (net of tax) in fiscal year 2006.

The following table presents the components of net pension cost for the years ended September 30, 2006, 2005 and 2004:

Net pension cost



|                                                       |  |        |   |  |        |   |  |        |  
|------------------------------------------------------ |  | ------ | - |  | ------ | - |  | ------ | -
|For the years ended September 30 ( thousand)          |  | 2006   |   |  | 2005   |   |  | 2004   |  
|Service cost                                           |  | 6,530  |   |  | 5,830  |   |  | 5,334  |  
|Interest cost                                          |  | 9,161  |   |  | 8,906  |   |  | 8,579  |  
|Expected return on plan assets                         |  | (1,649 | ) |  | (1,328 | ) |  | (1,149 | )
|Amortization of unrecognized actuarial gains or losses |  | 2,747  |   |  | 349    |   |  | 265    |  
|Unrecognized prior service cost                        |  | 81     |   |  | 78     |   |  | 82     |  
|Curtailment losses/(gains)                             |  | 14     |   |  | 32     |   |  | (36    | )
|                                                       |  |        |   |  |        |   |  |        |  
|Net periodic pension cost                              |  | 16,884 |   |  | 13,867 |   |  | 13,075 |  
|                                                       |  |        |   |  |        |   |  |        |  

Assumed discount rates and rates of increase in compensation used in calculating the PBO together with long-term
rates of return on plan assets vary with the economic conditions of the country in which the retirement plans apply. The weighted average assumptions used in calculating the actuarial values for the principal pension plans were 4.25% for the
discount rate in fiscal 2006, 4.00% in fiscal 2005 and 5.25% in fiscal 2004. The compensation increases were assumed to be 2.00% in fiscal 2006, 2.00% in fiscal 2005 and 2.00% in fiscal 2004. The expected return on plan assets for the USA funded
pension plan in fiscal 2006 was 7.00% (previous year: 7.00%). The expected return on plan assets of the Brazilian subsidiary amounts to 13.00% (previous year: 13.00%).



F-43



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table presents the estimated pension payment for the next ten years:

Forecast payment of
pensions



|                                      |  |       
|------------------------------------- |  | ------
|Years ended September 30 ( thousand)
|2007                                  |  | 7,714 
|2008                                  |  | 7,434 
|2009                                  |  | 8,666 
|2010                                  |  | 8,549 
|2011                                  |  | 8,715 
|2012 till 2016                        |  | 48,505

21. Supplemental cash flow information

Cash payments for income taxes and interest for the years ended September 30, 2006, 2005 and 2004, were as follows:

Payments for income taxes and interest



|                                              |  |        |  |        |  |       
|--------------------------------------------- |  | ------ |  | ------ |  | ------
|For the years ended September 30 ( thousand) |  | 2006   |  | 2005   |  | 2004  
|Payments for                                  |  |        |  |        |  |       
|Income taxes                                  |  | 9,578  |  | 10,355 |  | 9,268 
|Interest net of amounts capitalized           |  | 16,486 |  | 9,846  |  | 11,045

22. Financial instruments and risk management

Foreign currency forward contracts and options

To reduce its exposure to certain risks inherent in its business, the
Company enters into forward foreign exchange and options contracts based on forecast foreign currency transaction exposures. Contracts generally extend for a period of less than one year. These contracts are marked to market and included in accrued
expenses or other assets. The change in market value of instruments other than hedge, which are designated as cash flow hedges, is included in currency gains or losses within the consolidated statements of operations. The Management Board believes
that the credit risk in these transactions is minimal, and is involved on a daily basis in risk management decisions, operating under rules adopted by the Supervisory Board. The inherent risks are monitored using a value at risk model.

Commodity contracts

The Company shows gains or losses due to
commodity contracts which are designated as cash flow hedges to hedge anticipated future cash flows in other comprehensive income/loss. These hedging contracts are commodity contracts to hedge price fluctuations for palladium over a period of one to
twelve months.

The gains or losses are reclassified in the statements of operations, as soon as the underlying transactions materialize, while the
ineffective portion of these hedging contracts is recorded directly in the statements of operations. The statement of operations as of the fiscal year ending on September 30, 2006, was influenced by reclassification of gains from other
comprehensive income/loss in amount of 0.554 million gross and 0.416 million net of tax



F-44



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



respectively. As there were no ineffective portion of the hedges, the statements of operations were not affected by any changes in the market values. The
unrealized losses due to commodity contracts will be reported in total within the statement of operations of the next fiscal year because of the maturity date.

Interest rate and cross-currency swaps

For hedging of currency and interest rate risks, the Company has entered into cross-currency and
interest rate swaps in the amount of 16.100 million. The swaps bear durations with differing maturities up to March 30, 2009.

These swaps are marked to market and included in accrued expenses or other assets.

Fair value of financial instruments

The carrying amounts of the Companys significant financial instruments as of September 30, 2006 and 2005, are summarized here. The carrying
values of the Companys cash and cash equivalents, trade accounts receivable and payable, short-term borrowings and accrued expenses and other current liabilities approximate their fair market values as of September 30, 2006 and 2005, due
to their short-term maturity. The carrying amounts of the Companys variable rate debt likewise approximate fair value because the interest rates are based on floating rates that reflect market rates. The fair value of the Companys
long-term fixed rate debt is estimated using discounted cash flow analysis based on the Companys current borrowing rates for debt with similar maturities. Because considerable judgment is required in interpreting market data to develop
estimates of fair value, the estimates do not necessarily indicate the amounts that could be realized or would be paid in a current market transaction. The effect of using different market assumptions or estimate methodologies may be material to the
estimated fair value amounts.

The following table summarizes the carrying amount and fair value of the Companys fixed rate long-term debt and
derivative financial instruments:

Carrying amount and fair value





|                                             |  |                |  |                |      |  |           |   |  |                |  |                |   |  |           |  
|-------------------------------------------- |  | -------------- |  | -------------- | ---- |  | --------- | - |  | -------------- |  | -------------- | - |  | --------- | -
|                                             |  | 2006           |  |                | 2005 | 
|As of September 30 ( thousand)              |  | Notionalamount |  | Carryingamount |      |  | Fairvalue |   |  | Notionalamount |  | Carryingamount |   |  | Fairvalue |  
|Convertible bonds                            |  |               |  | 125,000        |      |  | 123,580   |   |  |               |  | 124,620        |   |  | 126,046   |  
|Fixed rate long-term debt                    |  |               |  | 66,417         |      |  | 63,633    |   |  |               |  | 83,970         |   |  | 81,972    |  
|Forward exchange contracts                   |  | 222,686        |  | (559           | )    |  | (559      | ) |  | 193,274        |  | 428            |   |  | 428       |  
|Cross-currency swaps and interest rate swaps |  | 16,100         |  | 866            |      |  | 866       |   |  | 32,000         |  | (408           | ) |  | (408      | )
|Commodity contracts                          |  | 25,070         |  | (518           | )    |  | (518      | ) |  | 8,995          |  | 90             |   |  | 90        |  

Concentrations of risk

The Company has business relationships with numerous customers and affiliates around the world. From a risk concentration standpoint apart from Siemens (see Note 12), there have been no other major customers in fiscal 2006, 2005 and 2004.
Although the Company has a large volume of receivables from a limited number of customers, such receivables are



F-45



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



managed under standard commercial terms. Consequently, in managements opinion, any concentration of credit risk relating to these customers is
appropriately monitored. The Company believes it has adequate sources for the supply of raw materials and components for its manufacturing requirements. The Company purchases a significant amount of raw materials and supplies from single sources on
grounds of technology, availability, price, quality and other criteria. Should a major delivery from such a single-source supplier be delayed or curtailed, the Companys ability to ship the related product in the desired quantity on time may be
impaired. The Company attempts to mitigate these risks by working closely with key suppliers on product plans, strategic inventory levels and coordinated product launches.

23. Commitments and contingencies

(a) Leases

The Company currently leases manufacturing, executive and administrative facilities, and various types of equipment under operating lease agreements. In addition, the Company had capital lease agreements for certain
office equipment in prior periods. Rental expense for all operating lease agreements charged against earnings amounted to 22.911 million, 23.503 million and 23.559 million for the years ended September 30, 2006,
2005 and 2004, respectively. These amounts include lease payments to Siemens of 2.170 million, 4.984 million and 4.685 million for the three years respectively (in fiscal 2006 Siemens is reported individually until
the sale of EPCOS shares). No contingent lease agreements exist.

Assets under capital lease agreements are included in
the consolidated balance sheets as follows:

Capital lease assets



|                                                   |  |      |  |     
|-------------------------------------------------- |  | ---- |  | ----
|As of September 30 ( thousand)                    |  | 2006 |  | 2005
|Technical equipment, machinery and other equipment |  |     |  | 113 
|Less accumulated depreciation                      |  |     |  |    
|                                                   |  |      |  |     
|Net assets under capital lease                     |  |     |  | 113 
|                                                   |  |      |  |     

The following is a summary of future minimum lease payments under operating lease agreements that had initial or
remaining periods of notice of more than one year:

Future minimum lease payments



|                                      |  |               
|------------------------------------- |  | --------------
|As of September 30, 2006 ( thousand) |  | Operatinglease
|2007                                  |  | 15,226        
|2008                                  |  | 9,131         
|2009                                  |  | 6,384         
|2010                                  |  | 12,698        
|2011                                  |  | 4,526         
|Thereafter                            |  | 11,204        
|                                      |  |               
|Total minimum lease payment           |  | 59,169        
|                                      |  |               



F-46



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Effective October 1, 1999, the Ceramic Components segment entered into a lease with Siemens for a facility in Austria. Annual lease payments for the period until the sale of the EPCOS shares amount to 0.625
million. The Companys Austrian subsidiary also has an operating lease agreement for a factory building with annual lease payments of 2.227 million and 2.154 million in fiscal 2006 and fiscal 2005, respectively. The
contract, beginning January 2001, cannot be terminated during its 15-year term. The resulting commitments are included in the above table.

(b) Other
commitments and contingencies

The Company and its subsidiaries are defendants in litigation and proceedings involving various matters. In the opinion
of the Management Board, based on the advice of in-house counsel handling such litigation and proceedings, adverse outcomes, if any, will not result in a material effect on the Companys consolidated financial condition or results of
operations.

The Company is subject to extensive environmental regulation in the jurisdictions in which it operates, including requirements governing air
emissions, effluents, and storage of hazardous materials and waste. These requirements will continue to be significant to its future operations. In the past, the Company has been exposed to liability for the remediation of soil or groundwater
contamination at its facilities. The Company may also face liability for remediation of its sites located in the United States, where it could be designated a potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act or other federal, state or local environmental remediation laws for its U.S. locations.

The Company has not incurred
any significant penalties for environmental violations and liability for damage to natural resources, property damage and environmental exposure claims to date, but the Company could incur some or all of these types of liabilities in the future.
Because some facilities are closely located to or shared with those of other companies, including those of Siemens subsidiaries, the Company may have to answer claims relating to environmental contamination not originating from the operations of the
Company.

Significant financial reserves or additional compliance expenditures could be required in the future due to changes in law, new information on
environmental conditions or other events, and those expenditures could adversely affect the Companys financial condition or results of operations.

As of September 30, 2006 and 2005, the following contingent liabilities exist:

Contingent liabilities



|                                                  |  |      |  |     
|------------------------------------------------- |  | ---- |  | ----
|As of September 30 ( thousand)                   |  | 2006 |  | 2005
|Acceptance liability/discounted bills of exchange |  |     |  | 177 
|Other contingent liabilities                      |  | 513  |  | 328 
|                                                  |  |      |  |     
|Total                                             |  | 513  |  | 505 
|                                                  |  |      |  |     



F-47



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



24. Segment reporting

The Company has three reportable operating segments that are regularly evaluated by the
Management Board in deciding how to allocate resources. The segments are managed separately because of differences in the nature of their respective products. The three reportable operating segments are Capacitors and Inductors, Ceramic Components
and Surface Acoustic Wave (SAW) Components.

The business segment Capacitors and Inductors comprises products which are used throughout electrical
engineering and electronics. They store electric charges and filter or regulate current and voltage in electronic circuitry. The product spectrum of the business segment covers aluminum electrolytic capacitors, film capacitors, power capacitors, and
solutions for power factor correction. Inductors fulfill two basic electrical functions at the same time: they filter current and store electromagnetic energy. The portfolio also includes ferrites, which are the heart of inductors and concentrate
electromagnetic fields to transmit electrical signals and power. Moreover, EPCOS also manufactures components that ensure electromagnetic compatibility for the interference-free operations of electrical equipment and devices of all kinds.

The business segment Ceramic Components manufactures products that are indispensable in automotive electronics and appliances as well as in
telecommunications and entertainment electronics. They filter electrical signals, measure physical quantities, such as temperature, and they protect electronic circuitry against overvoltage and overcurrent. The product portfolio covers surge
arresters and switching spark gaps, sensors and sensor systems, thermistors, varistors, and a wide range of multilayer ceramic components, including piezo actuators and capacitors.

Besides surface acoustic wave filters, resonators and duplexers, the business segment SAW Components produces integrated radio frequency modules and microwave ceramic components. All of these are key components for
modern information and communications technologies. They filter frequencies and have a decisive impact on picture and sound quality in audio and TV equipment as well as in mobile phones. The subsidiary Crystal Technology, Inc., in Palo Alto,
California, is the world market leader in lithium niobate crystals and wafers, which are the raw materials for many SAW components.

The accounting
policies of the segments are the same as those described in the summary of significant accounting policies, except that the disaggregated financial results for the reportable segments have been prepared using a management approach which is
consistent with how management internally analyzes financial information for the purposes of making operating decisions. Generally, the Company evaluates performance based on net income (loss) before interest income and expense, taxes and minority
interest (EBIT), and accounts for inter-segment sales and transfers as if the sales and transfers were to third parties, that is, at current market prices. Net sales are attributed to geographical areas based on the location of the customer.

Information on the business segments is presented in the following table:



F-48



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Financial information on business segments



|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|---------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | ----------------- | - |  | ------------- |  | ------------ |  | ----------------- | -
|( million)                                                                                          |  | CapacitorsandInductors |   |  | CeramicComponents |   |  | SAWComponents |  | Eliminations |  | Consolidatedtotal |  
|2006                                                                                                 |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Net sales to third and related parties from continuing operations                                    |  | 479.4                  |   |  | 421.0             |   |  | 409.0         |  |             |  | 1,309.4           |  
|EBIT from continuing operations                                                                      |  | (12.8                  | ) |  | 7.0               |   |  | 52.6          |  |             |  | 46.8              |  
|Interest result, net from continuing operations                                                      |  |                       |   |  |                  |   |  |              |  |             |  | (9.0              | )
|Income from continuing operations before income taxes and minority interest                          |  |                       |   |  |                  |   |  |              |  |             |  | 37.8              |  
|Provisions for income taxes                                                                          |  |                       |   |  |                  |   |  |              |  |             |  | (2.2              | )
|Minority interest                                                                                    |  |                       |   |  |                  |   |  |              |  |             |  | (0.4              | )
|Net Income from continuing operations                                                                |  |                        |   |  |                   |   |  |               |  |              |  | 35.2              |  
|Loss from discontinued operations                                                                    |  |                       |   |  |                  |   |  |              |  |             |  | (14.0             | )
|Net Income                                                                                           |  |                       |   |  |                  |   |  |              |  |             |  | 21.2              |  
|Depreciation and amortization from continuing operations                                             |  | 36.4                   |   |  | 38.0              |   |  | 49.8          |  | 2.4          |  | 126.6             |  
|Capital expenditures on fixed assets (without long-term financial assets) from continuing operations |  | 20.7                   |   |  | 20.4              |   |  | 62.1          |  | 3.9          |  | 107.1             |  
|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Total assets inclusive asset held for sale                                                           |  | 530.5                  |   |  | 445.0             |   |  | 439.0         |  |             |  | 1,414.5           |  
|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Thereof assets held for sale                                                                         |  | 15.6                   |   |  |                  |   |  |              |  |             |  | 15.6              |  
|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|2005                                                                                                 |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Net sales to third and related parties from continuing operations                                    |  | 419.2                  |   |  | 361.3             |   |  | 369.5         |  |             |  | 1,150.0           |  
|EBIT from continuing operations                                                                      |  | (31.3                  | ) |  | (24.3             | ) |  | 28.7          |  |             |  | (26.9             | )
|Interest result, net from continuing operations                                                      |  |                       |   |  |                  |   |  |              |  |             |  | (7.7              | )
|Loss from continuing operations before income taxes and minority interest                            |  |                       |   |  |                  |   |  |              |  |             |  | (34.6             | )
|Provisions for income taxes                                                                          |  |                       |   |  |                  |   |  |              |  |             |  | (31.5             | )
|Minority interest                                                                                    |  |                       |   |  |                  |   |  |              |  |             |  | (0.2              | )
|Net Loss from continuing operations                                                                  |  |                        |   |  |                   |   |  |               |  |              |  | (66.3             | )
|Loss from discontinued operations                                                                    |  |                       |   |  |                  |   |  |              |  |             |  | (53.0             | )
|Net loss                                                                                             |  |                       |   |  |                  |   |  |              |  |             |  | (119.3            | )
|Depreciation and amortization from continuing operations                                             |  | 43.3                   |   |  | 37.0              |   |  | 63.2          |  | 2.3          |  | 145.8             |  
|Capital expenditures on fixed assets (without long-term financial assets) from continuing operations |  | 31.2                   |   |  | 71.0              |   |  | 30.4          |  | 2.4          |  | 135.0             |  
|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Total assets                                                                                         |  | 592.7                  |   |  | 398.3             |   |  | 385.9         |  |             |  | 1,376.9           |  
|                                                                                                     |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|2004                                                                                                 |  |                        |   |  |                   |   |  |               |  |              |  |                   |  
|Net sales to third and related parties from continuing operations                                    |  | 431.3                  |   |  | 374.3             |   |  | 449.7         |  |             |  | 1,255.3           |  
|EBIT from continuing operations                                                                      |  | (9.1                   | ) |  | 19.4              |   |  | 57.2          |  |             |  | 67.5              |  
|Interest result, net from continuing operations                                                      |  |                       |   |  |                  |   |  |              |  |             |  | (5.4              | )



F-49



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                                                                     |  |       |  |       |  |       |  |     |  |         |  
|---------------------------------------------------------------------------------------------------- |  | ----- |  | ----- |  | ----- |  | --- |  | ------- | -
|Income from continuing operations before income taxes and minority interest                          |  |      |  |      |  |      |  |    |  | 62.1    |  
|Provisions for income taxes                                                                          |  |      |  |      |  |      |  |    |  | (10.9   | )
|Minority interest                                                                                    |  |      |  |      |  |      |  |    |  | (0.2    | )
|Net Income from continuing operations                                                                |  |       |  |       |  |       |  |     |  | 51.0    |  
|Loss from discontinued operations                                                                    |  |      |  |      |  |      |  |    |  | (1.8    | )
|Net Income                                                                                           |  |      |  |      |  |      |  |    |  | 49.2    |  
|Depreciation and amortization from continuing operations                                             |  | 29.1  |  | 33.0  |  | 74.5  |  | 2.0 |  | 138.6   |  
|Capital expenditures on fixed assets (without long-term financial assets) from continuing operations |  | 27.4  |  | 30.6  |  | 41.5  |  | 2.9 |  | 102.4   |  
|                                                                                                     |  |       |  |       |  |       |  |     |  |         |  
|Total assets                                                                                         |  | 674.2 |  | 393.3 |  | 418.7 |  |    |  | 1,486.2 |  
|                                                                                                     |  |       |  |       |  |       |  |     |  |         |  

With effect from October 1, 2005, the business segments Capacitors and Inductors and
Ferrites, were combined to make a reportable segment named Capacitors and Inductors, based on substantial economic and other similarities between these operating segments after the disposal of the Tantalum Capacitor Business, which
was part of the operating segment Capacitors. Balances reported previously have been restated for comparative purposes given the change in the segmentation.

Information on the principal regions, net sales and identifiable assets as of September 30, 2006, 2005 and 2004, are presented in the following table:

Financial information by regions



|                               |                       |         |                            |       |                       |         |                            |       |                       |         |                            |      
|------------------------------ | --------------------- | ------- | -------------------------- | ----- | --------------------- | ------- | -------------------------- | ----- | --------------------- | ------- | -------------------------- | -----
|As of September 30 ( million) |                       | 2006    |                            | 2005  |                       | 2004   
|                               | Net sales(continuing) |         | Identifiabletangibleassets |       | Net sales(continuing) |         | Identifiabletangibleassets |       | Net sales(continuing) |         | Identifiabletangibleassets
|Europe                         |                       |         |                            |       |                       |         |                            |       |                       |         |                            |      
|Germany                        |                       | 393.3   |                            | 184.9 |                       | 338.0   |                            | 191.0 |                       | 337.9   |                            | 233.5
|Austria                        |                       | 16.9    |                            | 103.3 |                       | 15.0    |                            | 117.7 |                       | 19.5    |                            | 83.2 
|Other                          |                       | 343.3   |                            | 73.3  |                       | 323.4   |                            | 130.0 |                       | 371.1   |                            | 151.6
|Asia                           |                       | 388.0   |                            | 91.4  |                       | 325.1   |                            | 91.3  |                       | 366.1   |                            | 103.3
|United States                  |                       | 79.6    |                            | 8.8   |                       | 64.2    |                            | 9.6   |                       | 73.5    |                            | 10.7 
|Other                          |                       | 88.3    |                            | 31.7  |                       | 84.3    |                            | 36.7  |                       | 87.2    |                            | 22.1 
|                               |                       |         |                            |       |                       |         |                            |       |                       |         |                            |      
|Total                          |                       | 1,309.4 |                            | 493.4 |                       | 1,150.0 |                            | 576.3 |                       | 1,255.3 |                            | 604.4
|                               |                       |         |                            |       |                       |         |                            |       |                       |         |                            |      



F-50



---

##### Table of Contents

EPCOS AG

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



25. Acquisitions

The Company adopted SFAS No. 141 Business Combinations which was effective for all
business combinations initiated after June 30, 2001. SFAS No. 141 requires that all business combinations have to be accounted for by the purchase method and requires separate recognition of intangible assets apart from goodwill, if
they meet contractual-legal criteria or a separability criterion. None of the Companys acquisitions during the fiscal years ended September 30, 2006, 2005 and 2004 were significant to the Companys results of operations for the
respective periods.

26. Subsequent events

Panasonic
Electronic Devices Europe GmbH, Lüneburg, Germany (PEDEU), formerly Matsushita Electronic Components (Europe) GmbH, as well as its parent companies, Panasonic Europe Ltd., Uxbridge, UK, formerly Matsushita Electric Europe
(Headquarters) Ltd., and Matsushita Electric Industrial Co., Ltd., Osaka, Japan, informed the Company of the sale of its 12.5% (plus one share) stake in EPCOS AG in October 2006.



F-51



---

##### Table of Contents

Item 19. Exhibits



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|1              |  | Articles of Association of EPCOS AG (English translation), as amended in February 2006 (as registered with the commercial register of the lower court of Munich in April
2006).                                                                                                                                                                                                                                                                                                                                                                                 
|               | 
|2.1            |  | Form of Deposit Agreement between EPCOS AG, Morgan Guaranty Trust Company of New York and Owners and Holders of American Depositary Receipts (incorporated by reference to exhibit 4.1 of
EPCOS Registration Statement on Form F-1 (File No. 333-10844), filed on September 20, 1999).                                                                                                                                                                                                                                                                         
|               | 
|2.2            |  | Form of Share Certificate (English Translation) (incorporated by reference to exhibit 4.2 of EPCOS Registration Statement on Form F-1 (File No. 333-10844), filed on September 20,
1999).                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|2.3            |  | Form of American Depositary Receipt (incorporated by reference to exhibit 4.3 included in exhibit 4.1 of EPCOS Registration Statement on Form F-1 (File No. 333-10844), filed on
September 20, 1999).                                                                                                                                                                                                                                                                                                                                                          
|               | 
|4.1            |  | Patent Cross License Agreement between Matsushita Electric Industrial Co., Ltd. and Siemens Matsushita Components Verwaltungsgesellschaft mbH, dated June 30, 1999 (incorporated by reference
to exhibit 10.3 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).                                                                                                                                                                                                                                                  
|               | 
|4.2            |  | Patent Cross License Agreement between Matsushita Electric Industrial Co., Ltd. and EPCOS AG, effective on June 30, 2004 (incorporated by reference to Exhibit 4.4 of EPCOS Annual Report
for fiscal year 2004 on Form 20-F, filed on March 17, 2005, as subsequently amended).                                                                                                                                                                                                                                                                                
|               | 
|4.3            |  | Technical Cooperation Agreement between Matsushita Electronic Components Co. Ltd. and Siemens Matsushita Verwaltungsgesellschaft mbH, effective on June 30, 1999 (incorporated by reference to
Exhibit 10.4 of EPCOS Registration Statement on Form F-1 (File No. 333-10844), filed on September 20, 1999).                                                                                                                                                                                                                                                    
|               | 
|4.4            |  | Amendment Agreement to the Technical Cooperation Agreement between Matsushita Electronic Components Co., Ltd. and Siemens Matsushita Verwaltungsgesellschaft mbH, effective on June 30, 1999
(incorporated by reference to Exhibit 10.4 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999), effective on June 30, 2004 (incorporated by reference to Exhibit 4.6 of EPCOS Annual Report
for fiscal year 2004 on Form 20-F, filed on March 17, 2005, as subsequently amended).                                     
|               | 
|4.5            |  | Technical Cooperation Agreement between Matsushita Electric Industrial Co., Ltd. and Siemens Matsushita Components Verwaltungsgesellschaft mbH, made on July 14, 1999, with effect as of June
30, 1999 (incorporated by reference to Exhibit 10.5 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).                                                                                                                                                                                                              
|               | 
|4.6            |  | Amendment Agreement to the Technical Cooperation Agreement between Matsushita Electric Industrial Co., Ltd. and Siemens Matsushita Components Verwaltungsgesellschaft mbH, made on
July 14, 1999, with effect as of June 30, 1999 (incorporated by reference to exhibit 10.5 of EPCOS Registration Statement on Form F-1 (File No. 333-10844), filed on September 20, 1999), effective on June 30, 2004 (incorporated by
reference to Exhibit 4.8 of EPCOS Annual Report for fiscal year 2004 on Form 20-F, filed on March 17, 2005, as subsequently amended).
|               | 
|4.7            |  | Rental Contract for Commercial Business Space between Industrieverwaltungsgesellschaft Aktiengesellschaft and Siemens Matsushita Components GmbH & Co. KG, effective as of July 1,
1994 (as supplemented and amended) (as example of form of rental contract relating to 11 properties leased by SAW components product group) (incorporated by reference to Exhibit 10.6 of EPCOS Registration Statement on Form F-1 (File No.
33310844), filed on September 20, 1999).                                                                                      
|               | 
|4.8            |  | Rental Contract for Commercial Business Space between Siemens Immobilien Management GmbH & Co. oHG, represented by Siemensstadt-Grundstücksverwaltung GmbH & Co. oHG, and Siemens
Matsushita Components GmbH, dated July 16, 1999 (incorporated by reference to Exhibit 10.9 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).                                                                                                                                                                                   



-87-



---

##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                                                                                      
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.9  |  | Rental Contract for Commercial Business Space between Siemens Aktiengesellschaft and Siemens Matsushita Components GmbH, dated August 6, 1999 (incorporated by reference to Exhibit 10.10
of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).                                           
|     | 
|4.10 |  | Framework Agreement between Siemens AG and EPCOS AG Regarding Technical Developments of Siemens Central Technical Division, effective July 1, 1999 (incorporated by reference to
Exhibit 10.11 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).                                      
|     | 
|4.11 |  | Memorandum by and between Ceramics Division of Matsushita Electronic Components Co., Ltd. and Siemens Matsushita Components oHG, made and entered into as of July 7, 1998 (incorporated by
reference to Exhibit 10.12 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).               
|     | 
|4.12 |  | Technical Know-How Agreement between EPCOS oHG and Matsushita Electronic Components Co., Ltd., made and entered into as of July 25, 2001 (incorporated by reference to Exhibit 4.11 of
EPCOS Annual Report for fiscal year ended September 30, 2002 on Form 20-F, filed on March 24, 2003).                                         
|     | 
|4.13 |  | Know-How License Agreement by and between Matsushita-Kotobuki Electronics Industries, Ltd. and Siemens Matsushita Components GmbH & Co. KG, made and entered into as of January 15,
1999 (incorporated by reference to Exhibit 10.13 of EPCOS Registration Statement on Form F-1 (File No. 33310844), filed on September 20, 1999).
|     | 
|8    |  | List of Subsidiaries of EPCOS AG at September 30, 2006.                                                                                                                                                                                                                                                                              
|     | 
|12   |  | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            
|     | 
|13   |  | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                            
|     | 
|15   |  | Declaration of Conformity pursuant to the German Corporate Governance Code, dated December 14, 2006.                                                                                                                                                                                                                                 



-88-



---

##### Table of Contents

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



EPCOS AG (Registrant)By:

/S/ HELMUT KÖNIGHelmut König Chief Financial
Officer


Date: March 20, 2007