Use these links to rapidly review the documentCROSS REFERENCES TO FORM 20-F CONTENTS INDEX TO FINANCIAL STATEMENTS

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 20-F

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 o

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 ý
For the fiscal year ended September 30, 2003

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to . o

Commission file number: 1-15000

Infineon Technologies AG(Exact name of Registrant as specified in its charter)

Federal Republic of Germany(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 registeredAmerican Depositary Shares, each representing one ordinary share, no par value but with a notional value of €2.00 per share

New York Stock ExchangeOrdinary shares, no par value but with a notional value of €2.00 per share *

New York Stock Exchange


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

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

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The
number of outstanding shares of each of the issuer's classes of capital or common stock as of September 30, 2003: 720,880,604 ordinary shares, no par value but with a notional
value of €2.00 per share.

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 ý        No o        Not
applicable o

Indicate
by check mark which financial statement item the registrant has elected to follow.

Item
17 o        Item 18 ý

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INFINEON TECHNOLOGIES AG

ANNUAL REPORT ON FORM 20-F
FOR THE FINANCIAL YEAR ENDED
SEPTEMBER 30, 2003



CROSS REFERENCES TO FORM 20-F



|          |  |                                                           |  | Page
|--------- |  | --------------------------------------------------------- |  | ----
|PART I    |  |                                                           |  |     
|Item 1:   |  | Identity of Directors, Senior Management and Advisers     |  | n/a 
|Item 2:   |  | Offer Statistics and Expected Timetable                   |  | n/a 
|Item 3:   |  | Key Information                                           |  |     
|          |  | Selected Financial Data                                   |  | 1   
|          |  | Exchange Rate Information                                 |  | 102 
|          |  | Risk Factors                                              |  | 33  
|Item 4:   |  | Information on the Company                                |  |     
|          |  | History and Development of the Company                    |  | 43  
|          |  | Business Overview                                         |  | 41  
|          |  | Organizational Structure                                  |  | 99  
|          |  | Property, Plant and Equipment                             |  | 60  
|Item 5:   |  | Operating and Financial Review and Prospects              |  | 3   
|          |  | Operating Results                                         |  | 9   
|          |  | Liquidity and Capital Resources                           |  | 21  
|          |  | Research and Development; Patents and Licenses            |  | 63  
|          |  | Trend Information                                         |  | 31  
|          |  | Off-balance Sheet Arrangements                            |  | None
|          |  | Contractual Obligations                                   |  | 23  
|Item 6:   |  | Directors, Senior Management and Employees                |  |     
|          |  | Directors and Senior Management                           |  | 77  
|          |  | Compensation                                              |  | 85  
|          |  | Board Practices                                           |  | 77  
|          |  | Employees                                                 |  | 25  
|          |  | Share Ownership                                           |  | 89  
|Item 7:   |  | Major Shareholders and Related Party Transactions         |  |     
|          |  | Major Shareholders                                        |  | 89  
|          |  | Related Party Transactions                                |  | 91  
|Item 8:   |  | Financial Information (See Item 18)                       |  |    
|          |  | Litigation                                                |  | 72  
|          |  | Dividend Policy                                           |  | 100 
|Item 9:   |  | The Offer and Listing                                     |  |     
|          |  | Price History of the Stock                                |  | 100 
|          |  | Markets                                                   |  | 100 
|Item 10:  |  | Additional Information                                    |  |     
|          |  | Articles of Association                                   |  | 94  
|          |  | Material Contracts                                        |  | 111 
|          |  | Exchange Controls                                         |  | 109 
|          |  | Taxation                                                  |  | 103 
|          |  | Documents on Display                                      |  | 109 
|          |  | Subsidiary Information                                    |  | 99  
|Item 11:  |  | Quantitative and Qualitative Disclosure About Market Risk |  | 29  
|Item 12:  |  | Description of Securities Other Than Equity Securities    |  | n/a 
|PART II   |  |                                                           |  |     
|Item 13:  |  | Defaults, Dividend Arrearages and Delinquencies           |  | None
|Item 14:  |  | Material Modifications to the Rights of Security Holders  |  | None
|          |  | Use of Proceeds                                           |  | 103 
|Item 15:  |  | Controls and Procedures                                   |  | 110 
|Item 16A: |  | Audit Committee Financial Expert                          |  | n/a 
|Item 16B: |  | Code of Ethics                                            |  | 110 
|Item 16C: |  | Principal Accountant Fees and Services                    |  | 110 
|Item 16D: |  | Exemption from the Listing Standards for Audit Committees |  | n/a 
|PART III  |  |                                                           |  |     
|Item 18:  |  | Financial Statements                                      |  | F-1 
|Item 19:  |  | Exhibits (See Exhibit Index)                              |  |    

i



CONTENTS



Cross References to Form 20-FPresentation of Financial and Other InformationSelected Consolidated Financial DataOperating and Financial ReviewKey Developments During the 2003 Financial YearResults of OperationsFinancial PositionOther MattersCritical Accounting PoliciesQuantitative and Qualitative Disclosure About Market RiskSubsequent EventsOutlookRisk FactorsBusinessOverviewHistory and StrategyProducts and ApplicationsCustomers, Sales and MarketingCompetitionManufacturingResearch and DevelopmentIntellectual PropertyStrategic AlliancesAcquisitions and DispositionsEmployeesLegal MattersEnvironmental Protection and Sustainable ManagementReal PropertyManagementPrincipal ShareholdersTransactions and Relationship Between Infineon and the Siemens GroupArticles of AssociationAdditional InformationOrganizational StructureDividend PolicyMarket InformationExchange RatesUse of ProceedsTaxationExchange Controls and Limitations Affecting ShareholdersDocuments on DisplayControls and ProceduresCode of EthicsPrincipal Accountant Fees and ServicesMaterial ContractsGlossaryIndex to Financial Statements


ii

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Our consolidated financial statements are expressed in euro, the currency of the European Economic and Monetary Union, which was introduced on January 1, 1999. In this annual report, references
to "euro" or "€" are to euro, references to "DEM" are to Deutsche Mark and references to "U.S. dollars" or "$" are to United States dollars. For convenience, this annual report
contains translations of euro amounts into U.S. dollars at the rate of €1.00 = $1.165, the noon buying rate of the Federal Reserve Bank of New York for euro on
September 30, 2003. The noon buying rate for euro on November 19, 2003 was €1.00 = $1.1909. Our financial year ends on September 30 of each year. References
to any financial year or to "FY" refer to the year ended September 30 of the calendar year specified. In this annual report, references to:



This
annual report contains market data that have been prepared or reported by Gartner Inc. and its unit Dataquest, Inc. (together "Gartner Dataquest"), IC
Insights, Inc. ("IC Insights"), iSuppli Corporation ("iSuppli"), RHK, Inc. ("RHK"), Strategy Analytics, Inc. ("Strategy Analytics"), and World Semiconductor Trade Statistics ("WSTS").

Forward-Looking Statements

This annual report contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are
forward-looking statements. These statements are based on current plans, estimates and projections, and you should not place too much reliance on them. Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update any of them in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties. We caution
you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include those identified under
the heading "Risk Factors" and elsewhere in this annual report.

iii



SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in conjunction with our consolidated financial
statements, the related notes and "Operating and Financial Review", all of which appear elsewhere in this annual report.

We
have derived the selected consolidated statement of operations and cash flow data for the 1999 through 2003 financial years and the selected consolidated balance sheet data at
September 30, 1999 through 2003 from our consolidated financial statements, which have been prepared in accordance with U.S. GAAP and audited by KPMG Deutsche Treuhand-Gesellschaft AG,
independent auditors.

Our
company was formed on April 1, 1999, comprising the semiconductor operations of Siemens. Our consolidated financial statements prior to our formation as a company may not
necessarily be indicative of what our results of operations, financial position and cash flows would have been had we operated as a separate company during the periods presented, nor are they an
indicator of future performance. Note 1 (Description of Business, Formation and Basis of Presentation) to our audited consolidated financial statements explains the methods used to prepare this
financial data.

|                                                                            |  | For the year ended September 30,(1) |      
|--------------------------------------------------------------------------- |  | ----------------------------------- | -----
|
|
|Selected Consolidated Statement of Operations data                          |  |                                     |      
|Net sales                                                                   |  | €                                   | 3,992
|Cost of goods sold                                                          |  |                                     | 2,799
|                                                                            |  |                                     |      
|Gross profit                                                                |  |                                     | 1,193
|Research and development expenses                                           |  |                                     | 734  
|Selling, general and administrative expenses                                |  |                                     | 530  
|Restructuring charges(4)                                                    |  |                                     |     
|Other operating (income) expense, net                                       |  |                                     | 2    
|                                                                            |  |                                     |      
|Operating income (loss)                                                     |  |                                     | (73  
|Interest income (expense), net, inclusive of subsidies                      |  |                                     | 43   
|Equity in earnings (losses) of associated companies                         |  |                                     | 29   
|Gain (loss) on associated company share issuance(5)                         |  |                                     |     
|Other income (expense), net                                                 |  |                                     | 18   
|Minority interests                                                          |  |                                     |     
|                                                                            |  |                                     |      
|Income (loss) before income taxes                                           |  |                                     | 17   
|Income tax (expense) benefit                                                |  |                                     | 36   
|                                                                            |  |                                     |      
|Net income (loss) from continuing operations                                |  |                                     | 53   
|Net income (loss) from discontinued operations                              |  |                                     | 8    
|                                                                            |  |                                     |      
|Net income (loss)                                                           |  | €                                   | 61   
|                                                                            |  |                                     |      
|Earnings (loss) per share  basic and diluted(6)                            |  |                                     |      
|Basic and diluted  continuing operations                                   |  | €                                   | 0.09 
|Basic and diluted  discontinued operation                                  |  |                                     | 0.01 
|Basic and diluted  net loss                                                |  | €                                   | 0.10 
|Weighted average shares outstanding  basic (millions)(6)                   |  |                                     | 600  
|Weighted average shares outstanding  diluted (millions)(6)                 |  |                                     | 600  
|Dividends declared per share and per ADS                                    |  |                                     |     
|Selected Consolidated Balance Sheet data                                    |  |                                     |      
|Cash and cash equivalents                                                   |  | €                                   | 30   
|Marketable securities                                                       |  |                                     |     
|Working capital, excluding cash, cash equivalents and marketable securities |  |                                     | 444  
|Total assets                                                                |  |                                     | 6,445
|Short-term debt, including current portion of long-term debt                |  |                                     | 495  
|Long-term debt, excluding current portion                                   |  |                                     | 135  
|Shareholders' equity                                                        |  |                                     | 3,656
|Selected Consolidated Cash Flow data                                        |  |                                     |      
|Net cash provided by operating activities                                   |  |                                     | 469  
|Net cash used in investing activities                                       |  |                                     | (918 
|Depreciation and amortization expenses                                      |  | €                                   | 573  

1

2



OPERATING AND FINANCIAL REVIEW

This discussion of our consolidated financial condition and result of operations should be read in conjunction with our
audited consolidated financial statements and other financial information included elsewhere in this annual report.

Our audited consolidated financial statements have been prepared on the basis of a number of assumptions more fully explained in Notes 1 (Description of Business,
Formation and Basis of Presentation) and 2 (Summary of Significant Accounting Policies) to our audited consolidated financial statements appearing elsewhere in this annual
report.

Our results of operations, related segment financial information, and disclosures for the 2001, 2002 and 2003 financial years have been reclassified to give
effect to the following matters in order to be consistent with our revised reporting structure and presentation, and to facilitate analysis of current and future financial
information.



This operating and financial review contains forward-looking statements. Statements that are not statements of historical fact, including expressions of our
beliefs and expectations, are forward-looking in nature and are based on current plans, estimates and projections. Forward-looking statements are applicable only as of the date they are made, and we
undertake no obligation to update any of them in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of
important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. These factors include those identified under the heading "Risks
Factors" and other factors to be found elsewhere in this annual report.

We
design, develop, manufacture and market a broad range of semiconductors and complete systems solutions used in a wide variety of microelectronic applications, including computer
systems, telecommunications systems, consumer goods, automotive products, industrial automation and control systems, and chip card applications. Our products include standard commodity components,
full-custom devices, semi-custom devices, and application-specific components for memory, analog, digital and mixed-signal applications. We have operations, investments, and customers
located mainly in Europe, Asia and North America. Our financial year-end is September 30.

3

Our
business is organized primarily into four main operating segments that serve various markets in the semiconductor industry:



Overview

Initial Recovery of the World Economy

The first half of the 2003 financial year saw unfavorable conditions in the semiconductor markets, reflecting continuing weakness in the world economy, political
uncertainty over the situation in Iraq, and worldwide concern over the outbreak of the SARS (Severe Acute Respiratory Syndrome) virus, particularly in Asia. During the second half of our 2003
financial year, the US economy demonstrated signs of renewed growth. In addition, Asian Pacific economies, especially China, increased their growth rates after earlier weakness. The Japanese economy
has also exhibited some signs of improvement after a 10-year recession. In light of the strong euro and weak domestic demand, economic conditions in Europe continue to be difficult, though
some European economies have shown slight improvement.

In
September 2003, the International Monetary Fund (IMF) projected worldwide economic growth of 2.3 percent for the 2003 calendar year, compared to 1.9 percent for
the 2002 calendar year. For the 2004 calendar year, the IMF projects a worldwide growth rate of 3.2 percent. We believe that this growth rate, if achieved, may provide a positive stimulus for
the semiconductor market.

Semiconductor Market Shows Signs of Improvement

According to WSTS (World Semiconductor Trade Statistics), the semiconductor market grew by 1.3 percent in 2002. We view 2003 as a transition period from
moderate growth rates to anticipated higher growth rates in 2004. In October 2003, WSTS predicted a growth rate of 14.2 percent for the semiconductor market during the 2003 calendar
year. Their analysis indicates that both
non-memory products (logic chips, analog, discrete and optical components) as well as memory products (DRAMs, SRAMs and non-volatile memory such as flash memory) are
expected to contribute to this improvement. Sales of non-memory products, which represent 80 percent of the total semiconductor market, are projected by WSTS to increase by
13.5 percent compared to the 2002 calendar year, and memory product sales are expected to grow at an even higher rate of 17.4 percent. For calendar year 2004, WSTS predicts an even
stronger growth rate of 19.4 percent for the worldwide semiconductor market.

Key Developments During the 2003 Financial Year

In 2003, the semiconductor market environment in which we operate improved compared to the substantial downturn of 2001 and 2002. However, the industry continued
to be characterized by

4

unfavorable
global economic conditions, lackluster yet improving demand, and marginal technology spending. As a result of the improvement in both demand and the pricing environment, especially in
memory products, we achieved profitability in the fourth quarter of the 2003 financial year. The following are the key developments in the 2003 financial year:



Revenues and EBIT improvementprofitability achieved in fourth quarter

We experienced difficult market conditions for a majority of the 2003 financial year, resulting in our net loss of €435 million for the
year. However, improvement in both demand and pricing in the latter half of the year coupled with an improvement in our manufacturing cost profile resulted in achieving profitability in the fourth
quarter. Our key financial performance indicators for the 2003 financial year were:



Our
financial performance is discussed in detail under the section "Results of Operations".

Improved market share

In the first half of the 2003 calendar year, we continued to improve our market share of the worldwide semiconductor industry to 4.0 percent, compared to
3.4 percent in the comparable prior period, according to iSuppli, a market research institution. According to iSuppli, we increased our DRAM market share to 17 percent in the first half
of the 2003 calender year, up from 13 percent in the first half of the 2002 calendar year. We also maintained our third-place ranking among DRAM manufacturers worldwide.

Significantly improved liquidity

We substantially improved our liquidity in the 2003 financial year, through certain financing transactions and significantly higher operating cash flow. Cash
flows generated by operating activities

5

from
continuing operations in the 2003 financial year increased to €731 million from €226 million in the 2002 financial year, reflecting the improved
operating results and working capital management. In June 2003, we issued a convertible bond and received net proceeds of €686 million, with which we plan to support our
long-term business strategy.

Continuing improvement through our Impact and ACT programs

In July 2001, we launched an extensive cost-reduction program called "Impact" as our response to the substantial market downturn in the
semiconductor industry. We achieved cash savings and derived operational benefits from reduced capital expenditures, streamlined purchasing processes, reduction in employee headcount, and other cost
reductions. In the 2002 financial year, we also
initiated a process optimization drive called "Impact2", which is intended to improve the efficiency of current processes and structures.

Through
our ACT program we are continuing our efforts to improve our processes, and to complement the effects thereof through outsourcing and transferring certain functions, both
internally and externally. In 2003, we centralized most of our European accounting processes in Portugal. In addition, we outsourced our information technology support function to an external
provider. Through more streamlined operations and improved processes, we expect to be able to react faster to changes in the markets we serve and to focus our resources on our key competencies.
Additionally, we aim for further optimization through decentralization. In this context, we have started to relocate parts of our Automotive & Industrial segment to Villach, Austria, where
other parts of this business are already conducted. We are also expanding our regional presence in the USA and in Asia. We aim to improve our performance through decentralized decision making and
closer proximity to our customers.

Continued R&D investments and commitment to strategic R&D partnerships

Research & Development (R&D) expenses totaled €1,089 million in the 2003 financial year, compared to
€1,060 million in the prior year. These amounts include acquired in-process R&D charges of €6 million in the 2003 financial year and
€37 million in the 2002 financial year. As part of our Impact initiative, our R&D efforts were refocused primarily towards developing new innovative products in our core
business segments and target markets. Major milestones achieved during the 2003 financial year included the development of:



We
also continued to make significant investments in process technologies for semiconductor manufacturing, as well as for the improvement of libraries, tools, software, and methodologies
that help us to maintain leading-edge product development capabilities.

The
majority of our approximately 5,900 R&D employees are directly involved in developing products within our four segments. A central development group conducts those R&D projects that
are

6

of
strategic importance to us, with the results applied across all segments. In addition, we have a central research department dedicated to exploring future technologies.

In
the 2003 financial year, our research team received awards for their work in the field of neural tissue sensor chips; electronics integrated into apparel and textiles; devices for
ultra-dense data storage; and advanced architectures for multi-band and multi-standard cell phones.

We
have intensified our commitment to establishing new strategic R&D partnerships with other leading semiconductor and technology companies. These agreements are designed to provide us
with competitive advantages by enabling more effective development of new technologies, quicker time-to-market, and the sharing of risks and costs. For example, in the 2003
financial year, we started to develop next-generation DRAM technologies together with Nanya Technology Corporation, Taiwan ("Nanya"). We also finalized a joint development agreement with
IBM and Chartered Semiconductor Manufacturing to accelerate the transition to 65-nanometer process technology. This multi-year project closely aligns our low-power
silicon expertise with IBM's leading process technology and Chartered's efforts to drive a common foundry process platform throughout the next technology generations.

Acquisition of SensoNor improves Automotive & Industrial product portfolio

In June 2003, we acquired SensoNor AS ("SensoNor"), for total cash consideration of €34 million. In addition, we contributed capital
of €13 million in connection with the consummation of the transaction. SensoNor, which was previously a publicly-listed company in Norway, develops, produces and markets
tire-pressure and acceleration sensors. With this acquisition, we aim to strengthen our position in semiconductor sensors for the automotive business.

Developments in alliances support growth strategy



7



Ongoing improvements in production

At the start of the 2003 financial year, we again demonstrated the effectiveness of our cost- and capacity-variability measures (e.g. flexible DRAM
vs. Logic corridors, flexible workforce). As a result of the improved market conditions during 2003 compared to 2002, we were able to improve the capacity utilization in most of our production
facilities. Through a shift from DRAM to logic ICs, and by extended silicon foundry utilization, we will have the ability to devote additional capacity to logic IC production in the event of a further
market upswing.

We
completed a number of key productivity projects during the 2003 calendar year that were designed to make us more competitive. We have successfully ramped up our
high-performance process technology using structure sizes of 0.13-micron for logic products, allowing for up to eight layers of copper-metallization. We are now introducing a
90-nanometer process and have a technology roadmap over the next several years, for structure sizes down to 45-nanometer. Our process technologies benefit from many modular
characteristics, including special low-power variants, analog options, and high-voltage capabilities. For memory process technology, we are currently ramping the
0.11-micron process technology for DRAM products. In addition, early in the 2003 financial year we reached the cost cross-over point for our 300-millimeter
production compared to the cost in our existing 200-millimeter fabs.

8



Results of Operations

The table below sets forth information about our total net sales by segment and geographic region, as well as EBIT by segment:

Results of Operations by Segment and Region

|                                |                              | For the year ended September 30,(1) |      
|------------------------------- | ---------------------------- | ----------------------------------- | -----
|
|
|Net sales by segment:           |                              |                                     |      
|                                | Wireline Communications      |                                     | 766  
|                                | Secure Mobile Solutions      |                                     | 1,522
|                                | Automotive & Industrial      |                                     | 1,153
|                                | Memory Products              |                                     | 1,614
|                                | Other Operating Segments     |                                     | 236  
|                                | Corporate and Reconciliation |                                     | 56   
|                                |                              |                                     |      
|                                |                              | Total                               |      
|                                |                              |                                     |      
|Net sales by geographic region: |                              |                                     |      
|                                | Germany                      |                                     | 1,636
|                                | Other Europe                 |                                     | 1,172
|                                | North America                |                                     | 1,208
|                                | Asia/Pacific                 |                                     | 1,247
|                                | Other                        |                                     | 84   
|                                |                              |                                     |      
|                                |                              | Total                               |      
|                                |                              |                                     |      
|EBIT:                           |                              |                                     |      
|                                | Wireline Communications      |                                     | (93  
|                                | Secure Mobile Solutions      |                                     | (142 
|                                | Automotive & Industrial      |                                     | 143  
|                                | Memory Products              |                                     | (938 
|                                | Other Operating Segments     |                                     | 192  
|                                | Corporate and Reconciliation |                                     | (180 
|                                |                              |                                     |      
|                                |                              | Total                               |      
|                                |                              |                                     |      

EBIT

EBIT is determined as follows from the consolidated statements of operations:

For the year ended September 30,2001

2002

2003Net loss from continuing operations

(592
)
(1,017
)
(435
)Add: Income tax (benefit) expense

(427
)
(143
)
84Interest expense, net

1

25

52EBIT

(1,018
)
(1,135
)
(299
)


9

The following table presents the various individual results within the consolidated statements of operations expressed as percentages of sales.

Results of Operations in Percent

|                                                    |  | For the year ended September 30,(1) |   
|--------------------------------------------------- |  | ----------------------------------- | --
|
|Net sales                                           |  | 100.0                               | % 
|Cost of goods sold                                  |  | (85.7                               | ) 
|                                                    |  |                                     |   
|Gross profit                                        |  | 14.3                                |   
|                                                    |  |                                     |   
|Research and development expenses                   |  | (22.2                               | ) 
|Selling, general and administrative expenses        |  | (14.6                               | ) 
|Restructuring charges                               |  | (2.2                                | ) 
|Other operating (income) expense, net               |  | 3.7                                 |   
|                                                    |  |                                     |   
|Operating loss                                      |  | (21.0                               | ) 
|                                                    |  |                                     |   
|Interest expense, net,                              |  | 0.0                                 |   
|Equity in earnings (losses) of associated companies |  | 0.4                                 |   
|Gain (loss) on associated company share issuance    |  | 0.2                                 |   
|Other non-operating income (expense), net           |  | 1.2                                 |   
|Minority interests                                  |  | 0.1                                 |   
|                                                    |  |                                     |   
|Loss before income taxes                            |  | (19.1                               | ) 
|Income tax benefit (expense)                        |  | 8.0                                 |   
|                                                    |  |                                     |   
|Net loss                                            |  | (11.1                               | )%
|                                                    |  |                                     |   

10

2003 Financial Year compared with 2002 Financial Year

OverallWe significantly increased sales in a difficult but improving market environment. This was
achieved primarily through increased sales activity in the United States and Asia-Pacific ("APAC") regions, improved demand and pricing, especially in memory products, as well as continued
growth in the Automotive & Industrial segment.

These
improvements were partially offset by the strengthening of the euro against other major currencies in our primary export markets during the 2003 financial year.

Our
operating results improved significantly as we continued to reduce our production costs, especially in memory products, due to increased productivity and the benefits of
300-mm volume production, and improved product mix towards higher-margin products.

Net SalesNet sales increased by 26% to €6,152 million from €4,890 million in
the 2002 financial year. The revenue increase was mainly driven by higher demand for memory products and semiconductors used in mobile phones, as well as the continued strong performance of the
Automotive & Industrial segment. Acquisitions (net of divestitures) since the beginning of the prior year had the effect of increasing revenues by €7 million in the 2002
financial year and by €129 million in the 2003 financial year. Memory Products continued to be our largest segment, representing 40 percent of total net sales for the
2003 financial year, compared to 38 percent in the prior year. Foreign currency fluctuations relative to the euro (primarily US$) had the effect of decreasing sales in the 2003 financial year
by approximately €317 million compared to what they would have been utilizing the average exchange rates in effect during the 2002 financial year. We recognized license income
of €183 million in the 2003 financial year, compared to €147 million in the 2002 financial year, primarily in the memory products segment.

The
following section describes the net sales of our main business segments during the 2003 financial year, compared to the 2002 financial year:



11





DRAM Price Development

GRAPHIC



12



Net Sales by Region and Customer

On a regional basis, sales in Europe represented 43 percent of total sales in the 2003 financial year, compared to 45 percent in the prior year.
Sales outside Europe increased from 55 percent in the 2002 financial year to 57 percent, reflecting increased market penetration in Asia, including Japan.

Only
one customer, the Siemens group, accounted for more than 10 percent of our net sales in each of the 2002 and 2003 financial years. These sales comprise both direct sales to
the Siemens Group, which accounted for 12 and 13 percent of net sales, respectively, and sales designated for resale to third parties, which accounted for 2 and 1 percent of net sales
for the 2002 and 2003 financial years, respectively. Sales to the Siemens group are made primarily by our non-memory product segments.

Cost of Goods SoldCost of goods sold increased by 8 percent to
€4,614 million from €4,289 million in the 2002 financial year.

Cost
of goods sold as a percentage of net sales decreased to 75 percent from 88 percent in the 2002 financial year. This improvement is attributable to a variety of
factors, including improved integration and lower idle-capacity costs across most of our segments, a substantially improved cost position in our memory products segment, and a better overall pricing
environment than in the 2002 financial year. Although pricing improvement experienced in the first quarter reversed in the second quarter, principally due to a price decline in memory products,
margins improved in all segments during the second half of the 2003 financial year. Price pressure negatively impacted margins in all of our segments during most of the 2003 financial year, except in
the fourth quarter, when semiconductor market conditions generally improved, particularly for memory products.

The
gross margin development in our segments was as follows:



We
report as cost of goods sold the cost of inventory purchased from our joint ventures and other associated and related companies such as ALTIS Semiconductor, and through
January 1, 2003, ProMOS. Our purchases from these affiliated entities amounted to €470 million in the 2003 financial year and €686 million in the
2002 financial year.

Research and Development (R&D) ExpensesR&D increased by 3 percent to
€1,089 million from €1,060 million in the 2002 financial year. R&D expenses mainly consist of costs for human resources, licensing fees, laboratory
facilities and software, as well as our joint technology development arrangements with partners such as Nanya and UMC. In-process research and development charges

13

amounted
to €6 million in the 2003 financial year, compared to €37 million in the 2002 financial year. Government subsidies for our R&D activities were
€59 million in the 2003 financial year and €59 million in the previous year. We continue to focus our investments in the development of
leading-edge manufacturing technologies with high growth potential, particularly in our secure mobile solutions and memory products segments. As a percentage of net sales, R&D expenses
were 18 percent in 2003, compared to 22 percent in 2002.



Selling, General and Administrative (SG&A) ExpensesSG&A expenses comprise both selling expenses and
general administrative expenses. The balance of SG&A expenses in each year comprises overhead, personnel, advisors' fees, and other administrative expenses. SG&A expenses increased by 6 percent
to €679 million in the 2003 financial year, compared to €643 million in the 2002 financial year. SG&A expenses declined to 11 percent of sales in
the 2003 financial year compared to 13 percent in the previous year, mainly due to the increase in sales compared to the prior year.

Selling
expenses increased 5 percent to €358 million, or 6 percent of sales, from €341 million, or 7 percent of sales,
in the 2002 financial year. Selling expenses increased due to the effect of the full year consolidation of the acquired MIC business in Secure Mobile Solution and higher volume business for memory
products, partially offset by sales and marketing cost-reduction programs in Wireline Communications and Secure Mobile Solutions.

General
and Administrative (G&A) expenses increased 6 percent to €321 million, or 5 percent of sales, from €302 million, or
6 percent of sales, in the 2002 financial year. This increase is mainly attributable to higher corporate Information Technology (IT) expenditures, professional fees, and expenses associated
with expanding our presence in the US and Asia, and was partially offset by savings from our Impact cost-reduction programs. The full year consolidation of the acquired MIC business
increased the general and administrative expense of our Secure Mobile Solutions segment. Expanded business activities of our Memory Products, Automotive & Industrial and Secure Mobile Solutions
segments resulted in higher general and administrative expenses compared to the prior year. General and administrative expenses in our Wireline Communication segment decreased, principally as a result
of reduced headcount and other cost-reduction efforts.

RestructuringIn the 2003 financial year, we continued our restructuring and cost-saving
efforts. In connection with these efforts, we recorded restructuring charges of €29 million, mainly for severance payments. In the 2002 financial year, we recorded restructuring
expenses of €16 million, principally relating to non-cancelable commitments.

14

Other Operating Income (Expense), NetOther operating expense, net, amounted to
€85 million in the 2003 financial year, reflecting a goodwill impairment charge of €68 million related to our acquisition of Catamaran Communications and
a provision of €28 million related to an investigation by the United States Department of Justice into possible antitrust violations in the DRAM industry and related civil
lawsuits. In the 2002 financial year, other net operating income amounted to €46 million, which reflected the pre-tax gains of €39 million
from the sale of the remaining part of the
infrared components business, and €2 million from the sale of our gallium arsenide business.

Equity in Earnings (Losses) of Associated CompaniesEquity in the earnings (losses) of associated
companies is reflected primarily in the results of the Memory Products segment. Equity in the earnings of associated companies amounted to €18 million in the 2003 financial
year, compared to losses of €47 million in the 2002 financial year. The improvement is mainly due to the improved operating performance of our ProMOS joint venture prior to our
withdrawal during the 2003 financial year.

Other Non-Operating (Income) Expense, NetOther non-operating income, net
amounted to €21 million in the 2003 financial year, reflecting a €60 million gain on the sale of ProMOS shares, partially offset by impairment charges of
€34 million related to certain investments, and a €9 million loss on the sale of our interest in UMCi. In the 2002 financial year, other
non-operating expense, net amounted to €41 million, which reflected impairment charges related to certain investments.

Earnings Before Interest and Taxes (EBIT)We recognized an EBIT loss of
€299 million in the 2003 financial year, compared to an EBIT loss of €1,135 million in the 2002 financial year. This reflects the combined effect of the
following:



Interest Expense, NetWe recorded net interest expense of €52 million in the
2003 financial year, compared to €25 million in the 2002 financial year. This increase was mainly due to a full year's interest on the convertible bond we issued in
February 2002, and interest on the convertible bond we

15

issued
in June 2003. This was partially offset by additional interest we earned on our investment portfolio.

Income TaxesWe recorded an income tax expense of €84 million in the 2003
financial year, which represents an effective income tax rate of negative 25 percent. This compares with income tax benefits of €143 million in the 2002 financial year,
representing an effective income tax rate of 12 percent. In the 2002 financial year we recorded an increase to the valuation allowance of €271 million, which limited the
net tax benefit recognized. We increased the valuation allowance because we had incurred a cumulative loss in certain tax jurisdictions over the three-year period ended
September 30, 2002. In the 2003 financial year, we continued to not recognize tax benefits in these jurisdictions and we increased the valuation allowance by
€182 million. We continued, however, to record tax expense in profitable tax jurisdictions in the 2003 financial year. We assess our deferred tax asset position on a regular
basis. Our ability to realize benefits from our deferred tax assets is dependent on our ability to generate future taxable income sufficient to utilize tax loss carry-forwards or tax credits before
expiration. We expect to continue to recognize no tax benefits in these jurisdictions until we have ceased to be in a cumulative loss position for the preceding three-year period.

2002 Financial Year compared with 2001 Financial Year

Net Sales

Net sales decreased by 9 percent to €4,890 million from €5,347 million in the 2001 financial year. The
decrease in net sales was primarily due to significantly lower net sales in our Wireline Communications and Secure Mobile Solutions segments, brought upon by dramatically reduced capital spending by
global telecommunication carriers, weak demand, and strong overall price pressure. This decrease could only be partially offset by increased sales in our Memory Products and Automotive &
Industrial segments. Memory Products continued to be the largest business segment, representing 38 percent of total net sales for the 2002 financial year, compared to 30 percent in the
prior year. During the first three quarters of the 2002 financial year, net sales improved on a sequential quarterly basis, before decreasing in the fourth quarter, primarily as a result of the
decline in prices for memory products.

The
following section describes the net sales of our main business segments during the 2002 financial year, compared to the 2001 financial year:



16











Net Sales by Region and Customer

On a regional basis, sales in Europe represented 45 percent of total sales in the 2002 financial year, compared to 53 percent in the prior year.
Accordingly, we generated 55 percent of our sales outside of Europe, compared to 47 percent in the previous year. Higher volume sales of memory products in the United States and the
Asia/Pacific regions accounted for the higher share in our non-European business.

17

Only
one customer, Siemens Group, accounted for more than 10 percent of our net sales in each of the 2001 and 2002 financial years. Sales to Siemens Group comprise both direct
sales to the Siemens Group, which accounted for 14 percent and 12 percent of net sales in the two years respectively, as well as sales designated for resale to third parties, which
accounted for 2 percent of net sales in both years. Sales to Siemens Group are made primarily by our Secure Mobile Solutions and Automotive & Industrial segments.

Cost of Goods SoldCost of goods sold decreased by 6 percent to
€4,289 million from €4,580 million in the 2001 financial year.

Cost
of goods sold as a percentage of net sales improved in the first half of the 2002 financial year, compared to the negative margin levels experienced in the second half of the 2001
financial year, but declined in the second half of the 2002 financial year, principally due to price pressure for memory products. In the 2001 financial year, we recorded inventory write-downs of
€358 million as a result of significant price declines and order cancellations. The cost of underutilized non-memory products capacity reduced the margin improvement
experienced in the first half of the 2002 financial year. This trend was reversed in the second half of the 2002 financial year, mainly due to increased volume in our communications segments.

In
the 2002 financial year, the cost of goods sold represented 88 percent of sales, compared to 86 percent in the 2001 financial year. Accordingly, for the 2002 financial
year, gross margin was 12 percent of sales, compared to 14 percent for the 2001 financial year. Due to our efforts in our Impact cost-reduction program, the effect of the
decline in sales was partially offset by cost savings and production efficiencies.

The
following represents a description of developments in the cost of goods sold for each of our core business segments as a percentage of net sales:



18



Cost
of sales in corporate and reconciliation increased from €84 million to €272 million in the 2002 financial year, mainly reflecting an
increase in the unallocated cost of underutilized capacity over the prior year.

We
report as cost of goods sold the cost of inventory purchased from our joint ventures ProMOS and ALTIS Semiconductor, and in the 2001 financial year also from our OSRAM Opto joint
venture. Our purchases from these joint ventures and other associated and related companies amounted to €686 million in the 2002 financial year, and
€1,040 million in the 2001 financial year.

We
no longer report R&D and cost of sales as a percentage of segment sales, although we explain the reasons for the fluctuations in each segment, because we do not evaluate our segments
on this basis. For the 2002 financial year, the segment percentages are set forth in the report on Form 6-K that we furnished to the Securities and Exchange Commission on
May 30, 2003.

Research and Development (R&D) ExpensesR&D spending decreased 11 percent to
€1,060 million from €1,189 million in the 2001 financial year. This reflects the overall decrease in R&D spending within the framework of the Impact
cost-reduction program. The majority of R&D expenses were project-related expenses for our key markets, and comprised costs for human resources, licensing fees, laboratory facilities and
software. Additional amounts were spent on the development of CPUs for products and developmental libraries for basic circuits. In-process research and development charges amounted to
€37 million in the 2002 financial year, compared to €69 million in the 2001 financial year. As a percentage of net sales, R&D expenses were
22 percent in both the 2001 and 2002 financial years. R&D expenditure trends in our segments included the following:



Government
subsidies for our R&D activities were €59 million in the 2002 financial year and €71 million in the previous year.

19

Selling, General and Administrative (SG&A) ExpensesSG&A expenses comprise both selling expenses and
general administrative expenses. The balance of SG&A expenses in each year comprises overhead, personnel, advisors' fees and other administrative expenses. SG&A expenses decreased by 18 percent
to €643 million in the 2002 financial year, compared to €782 million in the 2001 financial year. SG&A expenses declined to 13 percent of sales in
the 2002 financial year,
compared to 15 percent in the previous year, mainly due to the Impact cost-reduction program and the decline in sales.

Selling
expenses decreased 24 percent to €341 million, or 7 percent of sales, from €449 million, or 8 percent of sales,
in the 2001 financial year. This reflects the impact of cost-reduction measures taken since the previous year, including headcount reductions and optimization of selling and marketing
functions and processes.

General
and Administrative (G&A) expenses decreased 9 percent to €302 million, or 6 percent of sales, from €333 million, or
6 percent of sales, in the 2001 financial year. G&A expenses decreased in absolute terms due to optimization of processes and successful implementation of our Impact cost-reduction
program, including headcount reductions and IT-cost savings.

RestructuringIn the fourth quarter of the 2001 financial year, we approved plans to restructure our
organization and reduce costs under a comprehensive program called "Impact". In connection with this program, we recorded restructuring charges of €117 million in the fourth
quarter of the 2001 financial year.

We
completed our announced headcount reduction in the 2002 financial year. In completing this program, we recorded additional restructuring expenses of
€16 million in the 2002 financial year, principally relating to non-cancelable commitments.

Other Operating Income, NetOther operating income, net, amounted to
€46 million in the 2002 financial year, reflecting the pretax gains of €39 million from the sale of the remaining part of the infrared components business
and €2 million from the sale of our gallium arsenide business. In the 2001 financial year, other net operating income amounted to €200 million, which
reflected the pre-tax gains of €202 million from the sale of the image & video business and €26 million from the sale of the infrared
components business.

Equity in Earnings (Losses) of Associated CompaniesEquity in the earnings (losses) of associated
companies is reflected primarily in the results of the Memory Products segment. Equity in the losses of associated companies amounted to €47 million in the 2002 financial year,
compared to earnings of €21 million in the 2001 financial year. Our share of losses of the ProMOS joint venture amounted to €53 million in the 2002
financial year, compared to earnings of €17 million in the 2001 financial year, reflecting continuing weakness in the DRAM market.

Earnings Before Interest and Taxes (EBIT)We recorded an EBIT loss of
€1,135 million in the 2002 financial year, compared to an EBIT loss of €1,018 million in the 2001 financial year.

Interest Expense, NetWe recorded net interest expense of €25 million in the
2002 financial year, compared to €1 million in the 2001 financial year. This increase was mainly due to the interest on our convertible bond and financing costs for the
300-millimeter production facility in Dresden, which was partially offset by €12 million of additional interest earned from liquid investments.

Income TaxesWe recorded an income tax benefit of €143 million in the 2002
financial year, which represents an effective income tax rate of 12 percent. This compares with income tax benefits of €427 million in the 2001 financial year,
representing an effective income tax rate of 42 percent. The change in the effective tax rate in the 2002 financial year mainly reflected an additional valuation allowance on deferred tax
assets of €271 million.

20



Financial Position

Cash Flow

The statement of cash flows shows the sources and uses of cash during the reported periods. It is of key importance for the evaluation of our financial position.

Cash
flows from investing and financing activities are both determined based on payments and receipts. Cash flows from operating activities are determined indirectly from net income
(loss). The changes in balance sheet items in connection with operating activities have been adjusted for the effects of foreign currency exchange fluctuations and for changes in the scope of
consolidation. Therefore, they do not conform to the corresponding changes in the respective balance sheet line items.

Cash Flow

|                                                                            |  | For the year ended September 30, |  
|--------------------------------------------------------------------------- |  | -------------------------------- | -
|
|
|Net cash provided by operating activitiescontinuing operations             |  | 221                              |  
|Net cash used in investing activities                                       |  | (1,813                           | )
|Net cash provided by financing activities                                   |  | 1,846                            |  
|Net cash (used in) provided by operating activitiesdiscontinued operations |  | (10                              | )
|Cash and cash equivalents at period end                                     |  | 757                              |  

Cash
provided by operating activities of €731 million in the 2003 financial year, resulted mainly from the net loss of €435 million, offset
by depreciation of €1,437 million and a net increase in operating assets and liabilities of €222 million. Cash from operating activities improved
significantly from the prior year, mainly due to a reduction of €586 million in the net loss.

Cash
used in investing activities of €1,522 million in the 2003 financial year resulted principally from a net investment in marketable securities of
€739 million and investments in property, plant and equipment of €872 million. Cash used in investing activities increased from 2002 primarily due to
increased investment in property, plant and equipment of €229 million.

Cash
provided by financing activities totalled €566 million in the 2003 financial year (2002: €1,448 million), which includes the
€686 million in net proceeds from our convertible bond offering in June 2003. Cash flow from financing activities in the 2002 financial year included
€981 million in net proceeds from our convertible bond offering in February 2002, and €450 million in external financing for the Dresden
300-millimeter facility.

We
define free cash flow as cash from operating and investing activities excluding purchases or sales of marketable securities. Since we hold a substantial portion of our available
monetary resources in the form of readily available marketable securities, and operate in a capital-intensive industry, we report free cash flow to provide investors with a measure to evaluate changes
in liquidity after taking capital expenditures into account. It is not intended to represent the residual cash flow available for

21

discretionary
expenditures, since debt service requirements or other non-discretionary expenditures are not deducted. The free cash flow is determined as follows from the cash flow
statement:

Free Cash Flow

|                                                |  | For the year ended
September 30, |  
|----------------------------------------------- |  | -------------------------------- | -
|
|
|Net cash provided by operating activitiestotal |  | 211                              |  
|Net cash used in investing activities           |  | (1,813                           | )
|Purchases of marketable securities, net         |  | (392                             | )
|                                                |  |                                  |  
|Free cash flow                                  |  | (1,994                           | )
|                                                |  |                                  |  

Net Cash Position

|                          |                                        |       | Payments due by Period |    
|------------------------- | -------------------------------------- | ----- | ---------------------- | ---
|
|
|Cash and cash equivalents | €969                                   |       | €969                   |    
|Marketable securities     | 1,784                                  |       | 1,784                  |    
|Restricted cash           | 67                                     |       |                       |    
|                          |                                        |       |                        |    
|Gross cash position       | 2,820                                  |       | 2,753                  |    
|Less:                     |                                        |       |                        |    
|                          | Long-term debt                         | 2,335 |                        |   
|                          | Capital lease obligations              | 8     |                        |   
|                          | Short-term debt and current maturities | 149   |                        | 149
|                          |                                        |       |                        |    
|Total financial debt      | 2,492                                  |       | 149                    |    
|                          |                                        |       |                        |    
|Net cash position         | €328                                   |       | €2,604                 |    
|                          |                                        |       |                        |    

Our gross cash positionrepresenting cash and cash equivalents, marketable securities and restricted cashincreased to
€2,820 million at September 30, 2003, compared to €2,007 million at the prior year end. The increase was mainly due to the issuance of the
convertible notes and improved operating cash flow.

Our
net cash positionmeaning cash and cash equivalents, plus marketable securities and restricted cash, less total financial debtincreased by
€151 million to €328 million at September 30, 2003, compared to €177 million at September 30, 2002.

Financial Condition

As of September 30, 2003, our total assets amounted to €10,805 million, a decrease of 1 percent compared to
€10,918 million at the end of the 2002 financial year. Total current assets increased by 27 percent, from €4,191 million in 2002 to
€5,306 million in the 2003 financial year. This increase was mainly driven by an increase of cash, cash equivalents and marketable securities to
€2,753 million, up from €1,937 million at the end of the 2002 financial year, due mainly to the issuance of our convertible bond in the amount of
€700 million, and improved operating cash flow. Non-current assets decreased by 18 percent to €5,499 million from
€6,727 million at the end of the 2002 financial year. This decrease mainly relates to property, plant and equipment, since depreciation expense exceeded capital expenditures
during the 2003 financial year. We reduced long-term investments due to the sale of our

22

ProMOS
and UMCi investments and other assets declined due to an impairment of our recorded goodwill in Catamaran Communications, Inc.

Total
liabilities increased by 8 percent to €5,139 million, up from €4,760 million in the 2002 financial year. This increase was
mainly due to an increase in long-term debt of €633 million to €2,343 million, mainly attributable to our convertible bond offering in
June 2003. This increase was offset by a reduction in accounts payable of €320 million (down to €877 million), mainly due to the discontinuation of
business with our former joint ventures ProMOS and OSRAM Opto.

Our
shareholders' equity decreased by 8 percent to €5,666 million, down from €6,158 million in the 2002 financial year. This mainly
reflects the net loss of €435 million and higher negative currency translation effects. At September 30, 2003,
shareholders' equity as a percentage of total assets was 52 percent, down from 56 percent at September 30, 2002.

Capital Requirements

As of September 30, 2003, we had debt of €149 million scheduled to become due within one year. We believe we will be in a position
to fund all these payments through existing cash balances, cash flows from operations, borrowings and the renewal of debt in the ordinary course of business.

On
June 5, 2003, Infineon Technologies Holding B.V. issued subordinated convertible notes due 2010 for net proceeds of €686 million, as we decided to
take advantage of the low interest rates available in the European convertibles market to improve our cash position. The notes are guaranteed by Infineon Technologies AG and may be converted
into up to 68.4 million ordinary shares of our Company.

Commitments and Contingencies

|                         | Payment Due/Expirations by Period 
|------------------------ | ----------------------------------
|
|
|Contractual commitments: |                                   
|                         | Operating lease payments          
|                         | Unconditional purchase commitments
|                         | Other long-term commitments       
|                         |                                   
|                         | Total commitments                 
|                         |                                   
|Other contingencies:     |                                   
|                         | Guarantees(4)                     
|                         | Contingent government grants(5)   
|                         |                                   
|                         | Total contingencies               
|                         |                                   

The above table should be read together with Note 31 to our consolidated financial statements for
the year ended September 30, 2003.

23

We have established independent financing arrangements with several financial institutions, in the form of both short- and long-term
credit facilities that are available for anticipated funding purposes. These facilities amount to an aggregate of €1,832 million, of which €1,015 million
was available at September 30, 2003, and are comprised of the following components:

Credit Facilities

|             |  |                    |  |                                              |  | As of September 30, 2003
|------------ |  | ------------------ |  | -------------------------------------------- |  | ------------------------
|
|
|short-term   |  | firm commitment    |  | working capital, guarantees, cash management |  | 612                     
|short-term   |  | no firm commitment |  | working capital                              |  | 91                      
|long-term    |  | firm commitment    |  | working capital                              |  | 378                     
|long-term(1) |  | firm commitment    |  | project finance                              |  | 751                     
|             |  |                    |  |                                              |  |                         
|Total        |  | 1,832              |  | 817                                          |  | 1,015                   
|             |  |                    |  |                                              |  |                         

At September 30, 2003, we were in compliance with our debt covenants under the relevant facilities. We have a
€375 million syndicated multicurrency revolving credit facility that expires in September 2005. The facility has customary financial covenants, and drawings bear interest
at market-related rates. At September 30, 2003, no amounts were outstanding under this facility. We had an additional €375 million short-term component to the
revolving credit facility available at September 30, 2002; however, in September 2003, we elected not to renew this component of the facility due to available cash resources.

Capital Expenditures

|                    |  | Year ended September 30,
|------------------- |  | ------------------------
|
|
|Memory products     |  | 1,363                   
|Non-memory products |  | 919                     
|                    |  |                         
|Total               |  | 2,282                   
|                    |  |                         

We
expect to invest between €1.0 billion and €1.5 billion in capital expenditures in the 2004 financial year, largely for improving productivity
and upgrading technology at existing facilities. Due to the lead times between ordering and delivery of equipment, a substantial amount of capital expenditures typically is committed well in advance.
Approximately 54 percent of these expected capital expenditures will be made in the Memory Products business group's front-end and back-end processes. Approximately
46 percent of these planned capital expenditures will be invested in our non-memory facilities. In addition, we expect to make financial and equity investments ranging between
€200 million and €400 million in the 2004 financial year.

We
plan to fund our working capital and capital requirements from cash provided by operations, available funds, bank loans, government subsidies and, if needed, the issuance of
additional equity securities. We have also applied for governmental subsidies in connection with certain capital

24

expenditure
projects, but can provide no assurance that such subsidies will be granted in a timely fashion or at all. We cannot assure you that we will be able to obtain additional financing for our
research and development, working capital or investment requirements or that any such financing, if available, will be on terms favorable to us.

Other Matters



Employees

The following table indicates the composition of our workforce by function and region at the end of the financial years indicated, and the average number of
employees during those years by region. The decrease in the 2002 financial year mainly reflects the headcount reduction under the Impact program. In 2003, our headcount increased as a result of the
ramp-up of our 300-millimeter production, and through the acquisition of SensoNor.

Number of Employees

|                       |       | As of September 30,
|---------------------- | ----- | -------------------
|
|Function               |       |                    
|Production             |       | 23,416             
|Research & development |       | 5,510              
|Sales & marketing      |       | 2,259              
|Administrative         |       | 2,628              
|                       |       |                    
|                       | Total |                    
|                       |       |                    
|Region                 |       |                    
|Germany                |       | 16,814             
|Europe                 |       | 5,007              
|North America          |       | 3,023              
|Asia/Pacific           |       | 8,949              
|Other                  |       | 20                 
|                       |       |                    
|                       | Total |                    
|                       |       |                    

|              |       | Average for the year ended September 30,
|------------- | ----- | ----------------------------------------
|
|Region        |       |                                         
|Germany       |       | 16,279                                  
|Europe        |       | 4,921                                   
|North America |       | 3,101                                   
|Asia/Pacific  |       | 9,095                                   
|Other         |       | 7                                       
|              |       |                                         
|              | Total |                                         
|              |       |                                         

Campeon

We plan to enter into a long-term operating lease agreement with MoTo Objekt Campeon GmbH & Co. KG ("MoTo") to lease an office complex
that is to be constructed by MoTo south-east of Munich. The office complex will enable us to centralize our employees, who are currently situated in various locations throughout Munich, in
one physical working environment. MoTo is responsible for the

25

construction,
which is expected to be completed in mid-2005. We have no obligations with respect to financing MoTo, and have provided no guarantees related to the construction.

Critical Accounting Policies

Our results of operations and financial condition are dependent upon accounting methods, assumptions and estimates that we use as a basis for the preparation of
our consolidated financial statements. We have identified the following critical accounting policies and related assumptions, estimates and uncertainties, which we believe are essential to
understanding the underlying financial reporting risks and the impact that these accounting methods, assumptions, estimates and uncertainties have on our reported financial results.

Revenue Recognition

We generally market our products to a wide variety of end users and a network of distributors. Our policy is to record revenue when persuasive evidence of an
arrangement exists, the price is fixed or determinable, shipment is made and collectibility is reasonably assured. We record reductions to revenue for estimated product returns and allowances for
discounts and price protection, based on actual historical experience, at the time the related revenue is recognized. The establishment of reserves for sales discounts and price protection allowances
are dependent on the estimation of a variety of factors, including industry demand and the forecast of future pricing environments. This process is also highly judgmental in evaluating the
above-mentioned factors and requires material estimates, including forecasted demand, returns and industry pricing assumptions.

In
future periods, additional provisions may be necessary due to (1) deterioration in the semiconductor pricing environment, (2) reductions in anticipated demand for
semiconductor products or (3) lack of market acceptance for new products. If these factors result in a significant adjustment to sales discount and price protection allowances, they could
significantly impact our future operating results.

We
have entered into licensing agreements for our technology in the past, and anticipate that we will increase our efforts to monetize the value of our technology in the future. As with
certain of our existing licensing agreements, the licensing arrangement may also include related capacity reservation agreements with the licensee. These transactions could represent multiple element
arrangements pursuant to SEC Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" and EITF Issue 00-21 "Revenue Arrangements with Multiple Elements". In this
context, the process of determining the appropriate revenue recognition is highly complex and requires significant judgment, which includes evaluating material estimates in the determination of fair
value and the level of continuing involvement.

Recoverability of Long-Lived Assets

Our business is extremely capital-intensive, and requires a significant investment in property, plant and equipment. Due to rapid technological change in the
semiconductor industry, we anticipate the level of capital expenditures to be significant in future periods. During the 2003 financial year, we spent €872 million to purchase
property, plant and equipment. At September 30, 2003, the carrying value of our property, plant and equipment was €3,817 million. We have acquired other businesses, which
resulted in the generation of significant amounts of long-lived intangible assets, including goodwill. These include MIC in September 2002 and SensoNor in June 2003.

At
September 30, 2003 we had long-lived intangible assets of €411 million.

26



We adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", as of October 1, 2001. The adoption of SFAS No. 142 did not result in any
impairment as of the adoption date. Pursuant to the requirements of SFAS No. 142, a test for impairment is done at least once a year.

We
review long-lived assets, including intangible assets, for impairment when events or changes in circumstance indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. Estimated fair value is generally
based on either appraised value or by discounted estimated future cash flows.

As
a result of the combination of below forecasted operating results and moderated market expectations, taking the technical milestones achieved to date into account, we revised the
forecasted returns for the optical networking reporting unit of the Wireline Communications segment. Accordingly, we tested the reporting unit's goodwill for impairment pursuant to SFAS No.142, Goodwill and Other Intangible
Assets, and recognized an impairment charge of €68 million during the year ended
September 30, 2003.

Valuation of Inventory

Historically, the semiconductor industry has experienced periods of extreme volatility, in product demand and in industry capacity, resulting in significant price
fluctuations. Since semiconductor demand is concentrated in such highly-volatile industries as wireless communications, wireline communications and the computer industry, this volatility can be
extreme. This volatility has also resulted in significant fluctuations in price within relatively short time-frames. For example, the "spot" market price for 256-Mbit SDRAM fluctuated from
$2.87 at October 1, 2001 to $2.30 at September 30, 2002. The "spot" market price for 256-Mbit DDR RAM fluctuated from $6.40 at September 30, 2002 to $4.53 at
September 30, 2003. At September 30, 2003, total inventory was €959 million.

As
a matter of policy, we value inventory at the lower of cost or market. We review the recoverability of inventory based on regular monitoring of the size and composition of the
inventory positions, current economic events and market conditions, projected future product demand and the pricing environment. This evaluation is inherently judgmental and requires material
estimates, including both
forecasted product demand and pricing environment, both of which may be susceptible to significant change.

In
future periods, additional write-downs of inventory may be necessary due to (1) reduced semiconductor demand in the computer industry and the wireless and wireline
communications industries, (2) increased industry capacity resulting from either technological improvements or new facilities, (3) technological obsolescence due to rapid developments of
new products and technological improvements or (4) changes in economic or other events and conditions that impact the market price for our products. These factors could result in adjustments to
the valuation of inventory in future periods and significantly impact our future operating results.

Recoverability of Long-Term Investments

We have made a series of investments in companies that are principally engaged in the research and development, design, and manufacture of semiconductors,
integrated circuits and related products. At September 30, 2003, the carrying value of our long-term investments totaled €425 million.

At
September 30, 2003, our two most significant long-term investments were our investments in ALTIS Semiconductor, which is a joint venture with IBM, and in Inotera,
which is a joint venture with Nanya.

27

Our
accounting policy is to record an impairment of such investments to net realizable value when the decline in fair value below carrying value is
other-than-temporary. In determining if a decline in value is other-than-temporary, we consider factors such as the length of time and magnitude of the
excess of carrying value over market value, the forecasted results of the investee, the economic environment and state of the industry and our ability and intent to hold the investment. We recognized
an impairment charge of €30 million during the 2003 financial year as a result of such impairment tests.

The
high cyclicality in the semiconductor industry could adversely impact the operations of these investments and their ability to generate future net cash flows. Furthermore, to the
extent that these investments are not publicly traded, further judgments and estimates are required to determine their fair value. As a result, potential impairment charges to write-down
such investments to net realizable value could adversely affect our future operating results.

While
we have recognized all declines that are believed to be other-than-temporary, it is reasonably possible that individual investments in our portfolio may
experience an other-than-temporary decline in value in the future if the underlying investee experiences poor operating results, or the global equity markets experience future
broad declines in value.

Realization of Deferred Tax Assets

At September 30, 2003, total net deferred tax assets were €747 million. Included in this total are the tax benefits of net operating
loss and credit carry-forwards of approximately €508 million, net of the valuation allowance. These tax loss and credit carry-forwards generally do not expire under current law,
except certain amounts attributable to non-German operations, which expire in 2020 and 2021.

We
have evaluated our deferred tax asset position and the need for a valuation allowance. The assessment requires the exercise of judgment on the part of our management with respect to,
among other things, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax
assets is dependent upon our ability to generate the appropriate character of future taxable income sufficient to utilize loss carry-forwards or tax credits before their expiration. Since we have
incurred a cumulative loss in certain tax jurisdictions over the three-year period ended September 30, 2003, the impact of forecasted future taxable income is excluded from such an
assessment, pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109.

For
these tax jurisdictions, the assessment was therefore based only on the benefits that could be realized from available tax strategies, and the reversal of temporary differences in
future periods. As a result of this assessment, we recognized an additional deferred tax asset valuation allowance and charged tax expense in the 2003 financial year of
€182 million related to continuing operations, to reduce the deferred tax asset to an amount that is more likely than not expected to be realized in the future. We assess our
deferred tax asset position on a regular basis. Our ability to realize deferred tax assets is dependent on our ability to generate future taxable income sufficient to utilize tax loss carry-forwards
or tax credits before their expiration. As a result of recently incurred tax losses, we expect to continue to recognize deferred tax benefits in the 2004 financial year at a lower rate than in the
past, until such time as taxable income is generated from operations in tax jurisdictions that would utilize our tax loss carry-forwards in those jurisdictions.

The
recorded amount of total deferred tax assets could be reduced if our estimates of projected future taxable income and benefits from available tax strategies are lowered, or if
changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize tax loss and credit carry-forwards in the future.

28

Purchase Accounting

We have acquired other businesses since we have been a public company, including MIC in the 2002 financial year and SensoNor in the 2003 financial year. These
acquisitions resulted in aggregate in-process research and development costs of €138 million (including €6 million in the 2003 financial year)
that were immediately as expense in the respective periods of acquisition. Additionally, these acquisitions resulted in the generation of a significant amount of long-lived intangible
assets.

Accounting
for business combinations requires the use of the purchase method, whereby the purchase price is allocated to identifiable tangible and intangible assets and liabilities based
upon their fair value. The allocation of purchase price is highly judgmental, and requires the extensive use of estimates and fair value assumptions, which can have a significant impact on operating
results.

We
adopted the provisions of SFAS No. 141, "Business Combinations", as of July 1, 2001, which resulted in the reclassification of €1 million
previously included in Other Intangible Assets to Goodwill upon adoption of SFAS No. 142.

Contingencies

We are subject to various legal actions and claims which arise in the normal conduct of business. We are also subject to investigations by regulatory and judicial
authorities, including the US Department of Justice and the European Commission. We regularly assess the likelihood of any adverse outcome or judgments related to these matters, as well as estimating
the range of possible losses and recoveries. Liabilities related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount of the loss can be
reasonably estimated. Accordingly, we have accrued a liability and charged operating income in the accompanying consolidated financial statements related to certain asserted and unasserted claims
existing as of each balance sheet date. As additional information becomes available, any potential liability related to these actions is assessed and the estimates are revised, if necessary. These
accrued liabilities would be subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material impact on our results of operations,
financial position and cash flows.

Quantitative and Qualitative Disclosure About Market Risk

The following discussion should be read in conjunction with Notes 2, 29 and 30 to our consolidated financial statements.

Single risks

Our principal risk is the continuing fluctuation of DRAM prices. We see a risk for the 2004 financial year similar to that faced during the 2003 financial year.
Pressure to reduce prices is being driven by a combination of ongoing weak market demand and excess capacity in the DRAM sector. In the fourth quarter of our 2003 financial year, we saw a marked
improvement in the semiconductor market environment. However, due to continuing price pressure across our segments, and the volatile nature of the industry, at this stage we cannot determine whether
the recent upturn represents a sustainable upward trend. We attempt to mitigate the effects of price pressure by continually improving our cost position and by entering into new strategic
partnerships. We face additional risk, inherent to the semiconductor industry, as we ramp up production of our 0.11-micron technology, including the risk of significant yield fluctuations.

An
additional significant risk is the future development of the worldwide markets for our logic products, especially in our Wireline Communications and Secure Mobile Solutions segments.
The substantial and prolonged worldwide downturn in the telecommunications sector since 2000, with

29

system-wide
overcapacity and financial problems at large customers, has made it difficult for us to predict the likelihood or strength of any sector recovery.

Foreign Exchange Risk Management

The table below provides information about our derivative financial instruments that are sensitive to changes in foreign currency exchange rates, as of
September 30, 2003. For foreign currency exchange forward contracts related to certain sale and purchase transactions and debt service payments denominated in foreign currencies, the table
presents the notional amounts and the weighted average contractual foreign exchange rates. At September 30, 2003, our forward foreign currency contracts had terms of up to one year and the
currency options had two years. Our cross-currency interest rate swap expires in 2005 and our interest rate swaps expire in 2007 and 2008. We do not enter into derivatives for trading or speculative
purposes.

Derivative Financial Instruments

|                                    |                     | Contract amount
buy/(sell)(1) |      | Average contractual
forward
exchange rate |           | Fair value
September 30, 2003(2) |    
|----------------------------------- | ------------------- | ----------------------------- | ---- | ----------------------------------------- | --------- | -------------------------------- | ---
|Foreign currency forward contracts: |                     |                               |      |                                           |           |                                  |    
|                                    | U.S. dollar         |                               | 54   |                                           | 1.11989   |                                  | (1 
|                                    | U.S. dollar         |                               | (306 | )                                         | 1.11989   |                                  | 5  
|                                    | Japanese yen        |                               | 29   |                                           | 129.37823 |                                  | 1  
|                                    | Japanese yen        |                               | (8   | )                                         | 131.01651 |                                  |   
|                                    | Singapore dollar    |                               | 20   |                                           | 1.95516   |                                  |   
|                                    | Great Britain pound |                               | 4    |                                           | 0.69797   |                                  |   
|                                    | Great Britain pound |                               | (2   | )                                         | 0.69386   |                                  |   
|                                    | Other currencies    |                               | 15   |                                           |          |                                  | 1  
|Currency Options:                   |                     |                               |      |                                           |           |                                  |    
|                                    | U.S. dollar         |                               | 186  |                                           | 1.07442   |                                  | 7  
|                                    | U.S. dollar         |                               | (175 | )                                         | 1.14135   |                                  | (10
|Cross-currency interest rate swap:  |                     |                               |      |                                           |           |                                  |    
|                                    | U.S. dollar         |                               | €547 |                                           | 1.00      |                                  | 113
|Interest rate swap                  |                     | €1,200                        |      | n/a                                       |           | 27                               |    
|                                    |                     |                               |      |                                           |           |                                  |    
|Fair Value, net                     |                     |                               |      |                                           |           | 143                              |    
|                                    |                     |                               |      |                                           |           |                                  |    

Our policy with respect to limiting short-term foreign currency exposure generally is to economically hedge at least 75 percent
of our estimated net exposure for a minimum period of two months in advance and, depending on the nature of the underlying transactions, a significant portion for the periods thereafter. Part of our
foreign currency exposure cannot be mitigated due to differences between actual and forecasted amounts. We calculate this net exposure on a cash-flow basis considering balance sheet items,
actual orders received or made and all other planned revenues and expenses.

We
record our derivative instruments according to the provisions of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133
requires all derivative instruments to be recorded on the balance sheet at their fair value. Gains and losses resulting from changes in the fair values of those derivatives are accounted for depending
on the use of the derivative instrument and whether it qualifies for hedge accounting. Our economic hedges are not considered

30

hedges
under SFAS No. 133. Under our economic hedging strategy we report derivatives at fair value in our financial statements, with changes in fair values recorded in earnings.

Transaction
losses were €35 million in the 2003 financial year, compared with losses of €16 million in the 2002 financial year. A large
portion of our manufacturing, selling and marketing, general and administrative, and research and development expenses are incurred in currencies other than the euro, primarily the U.S. dollar and
Japanese yen. Fluctuations in the exchange rates of these currencies to the euro had an adverse effect on costs and profitability in the 2003 financial year.

Interest Rate Risk Management

We are exposed to interest rate risk through our debt instruments, fixed term deposits and loans. During the 2002 and 2003 financial years, we issued two
convertible bonds. Due to the high volatility of our core business and to maintain high operational flexibility, our cash and marketable securities are kept on a high level. These assets are mainly
deposited in instruments with contractual maturities of between three and twelve months, with short term interest rates. To reduce the risk caused by changes in the market interest rates, the duration
of the interest rates of our debts and current assets are aligned by the use of interest rate derivatives. At September 30, 2003, our convertible bond which matures in 2007 was trading at
93.1 percent of par and our convertible bond which matures in 2010 was trading at 136.8 percent of par.

Commodity Price Risk

We are exposed to commodity price risks with respect to raw materials used in the manufacture of our products. We seek to minimize these risks through our
sourcing policies and operating procedures. We do not utilize derivative financial instruments to manage any remaining exposure to fluctuations in commodity prices.

During
our 2003 financial year price risks were balanced and supply risks had no significant influence on our business.

Subsequent Events

On October 8, 2003, we announced that we have agreed to purchase assets, assume certain liabilities and take over other parts of the Protocol Software
operations of Siemens, in exchange for €13 million and the employment of some 145 of Siemens' mobile communication software engineers. In addition, we entered into a license
agreement, and amended our product supply agreement with Siemens. The finalization of these transactions is subject to a variety of conditions prior to closing.

In
conjunction with our ongoing restructuring efforts, on October 16, 2003, we executed an agreement with Electronic Data Services (EDS) to outsource parts of our worldwide human
resources function. The scope of the outsourcing arrangement is currently being negotiated, which would include the transfer of some of our current employees to EDS. The agreement contains specified
cancellation provisions.

Outlook

In the fourth quarter of our 2003 financial year, we saw a marked improvement in the semiconductor market environment. Leading market analysts have forecasted
growth rates between 19 percent and 26 percent for the semiconductor market as a whole in the 2004 calendar year. However, due to continuing price pressure across our segments, and the
volatile nature of the industry, at this stage we cannot determine whether the recent upturn represents a sustainable upward trend.

31

For
the first quarter of our 2004 financial year, we anticipate the following with respect to our four principal segments:



We
aim to counteract price pressure by continuing to increase our productivity and reduce our manufacturing costs through our 300-millimeter production capabilities. We believe that our
joint technology and manufacturing alliances will offer the possibility to execute our growth strategy and gain further market share. With stable market conditions, we expect to stay on track with our
growth strategy and generate a profit for our 2004 financial year.

32



RISK FACTORS

You should carefully consider the risks described below before making an investment decision. The occurrence of any of the
following events could harm us. If these events occur, the trading price of our company's shares could decline, and you may lose all or part of your investment. Additional risks not currently known to
us or that we now deem immaterial may also harm us and affect your investment.

Risks related to the semiconductor industry

Our business could suffer from periodic downturns

The semiconductor industry is highly cyclical and has suffered significant economic downturns at various times. These downturns have involved periods of
production overcapacity, oversupply, lower prices and lower revenues.

According
to WSTS, worldwide sales of all semiconductor products have fluctuated significantly over the past several years. Sales increased in 1995, 1997, 1999 and 2000, but decreased in
1996, 1998 and 2001. For 2000, the increase was approximately 37%. In 2001, the decrease was approximately 32%. In the course of 2002, this trend was reversed with
year-over-year industry growth of 1%. In October 2003, WSTS predicted a growth rate of 14% for the 2003 calendar year and 19% for the 2004 calendar year. The increase in
2003 has, however, so far been accompanied by downward price pressure in some of our business segments, especially for automotive and industrial products and for some of the products from our Secure
Mobile Solutions segment.

There
can be no assurance that the market will stabilize or improve in the near term or that the growth rates experienced in the 1999 and 2000 financial years will be attainable again in
the coming years. A
renewed downturn in the industry could result in further substantially reduced volumes of sales and prices for our products, severely adversely impacting our results of operations.

Industry overcapacity could require us to lower our prices, particularly for memory products

Both semiconductor companies with their own manufacturing facilities and specialist semiconductor foundries, which are subcontractors that manufacture
semiconductors designed by others, have added significant capacity in recent years and are expected to continue to do so. In the past, the net increases of supply, meaning the difference of capacity
additions less capacity reductions due to obsolescence, sometimes exceeded demand requirements leading to oversupply situations and downturns in the industry. The table below shows revenue and bit
data as well as year-over-year price per bit development for the DRAM market since 1992 (Source WSTS).

|Calendar Year                               |  | 1992 |     | 1993 |    | 1994 |    | 1995 |    | 1996 |     | 1997 |     | 1998 |     | 1999 |     | 2000 |     | 2001 |     | 2002 |    
|------------------------------------------- |  | ---- | --- | ---- | -- | ---- | -- | ---- | -- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | ---
|DRAM market in billion US$                  |  | $    | 9   |      | 13 |      | 23 |      | 41 |      | 25  |      | 20  |      | 14  |      | 21  |      | 29  |      | 11  |      | 15 
|DRAM market in billion megabits             |  |      | 3   |      | 4  |      | 8  |      | 13 |      | 23  |      | 46  |      | 85  |      | 155 |      | 264 |      | 420 |      | 590
|Year over year change average price per bit |  |      | -30 | %    | 6  | %    | -1 | %    | 1  | %    | -66 | %    | -60 | %    | -62 | %    | -19 | %    | -18 | %    | -76 | %    | -3 

Based
on WSTS market data, during the first nine months of the 2003 calendar year, the average selling price for DRAM declined by 20% compared to the 2002 calendar year. Downturns in the
industry, including the most recent downturn period of 2000-2002, have severely hurt the profitability of the DRAM industry generally, including our DRAM business. The volatility of the
semiconductor industry may at any rate lead to future downturns, which could have similar effects. Fluctuations in the rate at which industry capacity is growing relative to the growth rate in demand
for semiconductor products may in the future put pressure on our average selling prices and hurt our results of operations.

33

Risks related to our operations

We may not be able to protect our proprietary intellectual property and may be accused of infringing the intellectual property rights of others

Our success depends on our ability to obtain patents, licenses and other intellectual property rights covering our products and our design and manufacturing
processes. The process of seeking patent protection can be long and expensive. Patents may not be granted on currently pending or future
applications or may not be of sufficient scope or strength to provide us with meaningful protection or commercial advantage. In addition, effective copyright and trade secret protection may be
unavailable or limited in some countries, and our trade secrets may be vulnerable to disclosure or misappropriation by employees, contractors and other persons.

Competitors
may also develop technologies that are protected by patents and other intellectual property rights. These technologies may therefore either be unavailable to us or be made
available to us only on unfavorable terms and conditions. Litigation, which could cost us financial and management resources, may be necessary to enforce our patents or other intellectual property
rights or to defend against claims of infringement of intellectual property rights brought against us by others. For example, Rambus Inc. filed suits against us in the United States and Germany
in August 2000, alleging infringement of its intellectual property rights. Although we initially prevailed at the U.S. trial court proceedings, Rambus successfully appealed this decision, and
the infringement action has been remanded for a new trial. The German case is still pending in the first instance. In 2002, Mosaid Technologies filed suit against us claiming that we violate certain
of its DRAM patents. The final outcome of these suits may have a material adverse effect on our business. We may be forced either to stop producing substantially all of our memory products or to
license the underlying technology upon economically unfavorable terms and conditions, and possibly to pay damages for prior use of the Rambus or Mosaid technology at issue. See
"BusinessLegal MattersLitigation" for a more detailed description of these proceedings.

Our results may suffer if we are not able to match our production capacity to demand

During periods of industry overcapacity and declining selling prices, such as we have recently experienced, customers do not generally order products as far in
advance of the scheduled shipment date as they do during periods when our industry is operating closer to capacity. We therefore experienced lower levels of backlog during the last downturn. This
development makes it more difficult to forecast production levels and revenues.

We
are currently in a period where it is difficult to predict future growth in the markets we serve, making it very difficult to estimate requirements for production capacity. If the
market does not grow as we have anticipated, we risk under-utilization of our facilities. This may in the future result in write-offs of inventories and losses on products whose demand is
lower than current forecasts may indicate.

During
periods of increased demand we may not have sufficient capacity to meet customer orders. In particular, we suffered capacity constraints throughout our 2000 financial year. Such
constraints affect our customers' ability to deliver products in accordance with their planned manufacturing schedules, making relationships with affected customers difficult. As a result, we lost
sales as customers turned to other manufacturers that could satisfy their increased demand. We may face similar difficulties if and when capacity constraints recur.

In
the past we have responded to fluctuations in industry capacity and demand by adapting production levels, closing existing production facilities, opening new production facilities or
entering into strategic alliances. We have incurred high costs as a result. We have also made increasing use of semiconductor foundries to meet higher levels of demand and have incurred higher cost of
goods sold

34

as
a result. In order to expand or reduce our production capacity in the future, we may have to spend substantial amounts, which could hurt our results of operations.

Our business could suffer from problems with manufacturing

The semiconductor industry is characterized by the introduction of new or enhanced products with short life cycles in a rapidly changing technological
environment. We manufacture our products using processes that are highly complex, require advanced and costly equipment and must continuously be modified to improve yields and performance.
Difficulties in the manufacturing process can reduce yields or interrupt production, and we may not be able to deliver products on time or in a cost-effective, competitive manner.

If
production at a fabrication facility is interrupted, we may not be able to shift production to other facilities on a timely basis or customers may purchase products from other
suppliers. In either case, the loss of revenues and damage to the relationship with our customers could be significant.

Although
flooding in Dresden, Germany, in 2002 did not directly affect production at our facilities there, manufacturing processes were hampered by indirect effects of the flooding on
our suppliers and our workforce. Because we had advance notice that flooding was likely to occur, we were able to implement contingency plans in order to minimize the effects of the flooding. We may
not always be able to foresee such situations and prepare for every contingency.

Increasing
our production capacity to reduce our exposure to potential production interruptions would increase our fixed costs. If we do not increase our net sales to meet these higher
costs, our operating results could be harmed.

We
may at times outsource production of some of our products to third-party suppliers. Using third-party suppliers exposes us to manufacturing problems experienced by those suppliers and
may be less cost-effective than manufacturing at our own facilities.

We have a limited number of suppliers and could suffer shortages if they were to interrupt supply or increase prices

Our manufacturing operations depend upon obtaining deliveries of equipment and adequate supplies of materials on a timely basis. We purchase equipment and
materials from a number of suppliers on a just-in-time basis. From time to time, suppliers may extend lead times, limit supply to us or increase prices due to capacity
constraints or other factors. Because the equipment that we purchase is complex, it is difficult for us to substitute one supplier for another or one piece of equipment for another. Some materials are
only available from a limited number of suppliers. Although we believe that supplies of the materials we use are currently adequate, shortages could occur in critical materials, such as silicon wafers
or specialized chemicals used in production, due to interruption of supply or increased industry demand. Our results of operations would be hurt if we could not obtain adequate supplies of quality
equipment or materials in a timely manner or if there were significant increases in the costs of equipment or materials.

Our business could suffer if we do not have adequate access to capital

Semiconductor companies that operate their own manufacturing facilities require significant amounts of capital to build, expand, modernize and maintain them.
Semiconductor companies also require significant amounts of capital to fund research and development. We used cash in our investing activities of €1,813 million in the 2001
financial year, €1,244 million in the 2002 financial year and €1,522 million in the 2003 financial year. Our research and development expenses were
€1,189 million in the 2001 financial year, €1,060 million in the 2002 financial year and €1,089 million in the 2003 financial year.
We reduced capital expenditures substantially during our 2002 financial year to €

35

643 million.
In the 2003 financial year we increased our capital expenditures by 36% to €872 million. We intend to continue to invest heavily in research and development
and manufacturing facilities, while continuing the policy of cooperation with other semiconductor companies to share these costs with us. A prime example is our joint venture Inotera, where together
with our joint-venture partner, Nanya, we are building one of the world's largest 300-millimeter manufacturing facilities for memory products.

Under
our agreements with the two other investors in the joint venture for our 300-millimeter manufacturing facility in Dresden, each of them has the right to sell its
interest in the joint venture to us on September 30, 2005 and every third anniversary thereafter. We are entitled to purchase such interests once every three years, commencing March 31,
2004. Each of the other investors also has the right to sell its interest to us upon the occurrence of specified events, such as capital increases it does not agree to, the admission of new investors,
substantial budget overruns, or our ceasing to exercise control over the joint venture. If both of the other investors were to elect to sell their interests to us, the total purchase price we would
have to pay would be an amount equal to the
capital contributed by these investors, plus interest. As of September 30, 2003, this amount would have been approximately €242 million.

In
the future, we may not be able to raise the amount of capital required for our business on acceptable terms due to a number of factors, such as general market and economic conditions,
inadequate cash flow from operations or unsuccessful asset management. Our business may be hurt if we are not able to make expected capital expenditures and meet expected research and development
expenses.

The Siemens group is our largest customer and our results could suffer if it were to buy fewer semiconductors from us

In the 2001, 2002 and 2003 financial years 14%, 12% and 13%, respectively, of our net sales resulted from direct sales to the Siemens group. An additional 2%, 2%,
and 1%, respectively, of our net sales in each of the three years resulted from sales through the Siemens group's sales organization for resale to third parties. We expect the Siemens group to
continue to be one of our largest customers, but we cannot assure you that it will continue to purchase as many semiconductors from us as it has in the past. Our results could be harmed if the Siemens
group purchases fewer semiconductors from us in the future and other customers do not increase their orders to make up the shortfall.

We rely on our strategic partners, and provisions in our agreements with them could allow them to terminate those agreements if our ownership changes

As part of our strategy, we have entered into a number of long-term strategic alliances with leading industry participants, both to manufacture
semiconductors and to develop new manufacturing process technologies and products. If our strategic partners encounter financial difficulty, they may no longer be able to participate in our alliances.
Our business could be hurt if we were unable to continue many of our alliances.

Some
of the agreements governing our strategic alliances allow our partner to terminate the agreement if our equity ownership changes so that a third party other than the Siemens group
gains control of our company or of a significant portion of our company's shares. Our business could be harmed if any of our strategic partners were to discontinue its participation in a strategic
alliance.

Our business could suffer as a result of volatility in different parts of the world

We operate globally, with a total of 19 manufacturing assembly and testing facilities on three continents, including one that we operate jointly with
partners. In the 2003 financial year, 75% of our

36

revenues
were generated outside Germany and 57% of our revenues were generated outside Europe. Our business is therefore subject to risks involved in international business, including:



Substantial
changes in any of these conditions could have an adverse affect on our business and results of operations. For example, the economic slowdown in Asia in 1997 and 1998, and
the worldwide economic downturn since 2001, reduced demand for semiconductors, and we suffered losses due to the resulting fall in sales volumes and semiconductor prices. Our results of operations
could also be hurt if demand for the products made by our customers decreases due to adverse economic conditions in any of the regions where they sell their own products.

Our business can be hurt by changes in exchange rates

Our results of operations can be hurt by changes in exchange rates, particularly between the euro and the U.S. dollar and the Japanese yen. Many of our
receivables are denominated in U.S. dollars, while our payables are denominated largely in euro. In addition, the balance sheet impact of currency translation adjustments has been, and may continue to
be, material.

Foreign
currency derivative and transaction gains totaled €34 million in the 2001 financial year. We had foreign currency derivative and transaction losses of
€16 million in the 2002 financial year and €35 million in the 2003 financial year.

Since
its introduction on January 1, 1999, the euro has fluctuated in value against the U.S. dollar, ranging from a high of €1.00 = $1.1910 on
November 19, 2003 to a low of €1.00 = $0.8252 on October 26, 2000. The relative weakness of the euro against the dollar positively affected our revenues and
results of operations in the 2001 and 2002 financial years. Since the beginning of 2003, the dollar has weakened sharply against the euro, which has had a substantial negative effect on our revenues
and profitability. On November 19, 2003, the exchange rate was €1.00 = $1.1910. Any further weakening of the dollar against the euro would negatively affect our results
of operations.

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 ground-water contamination. A recent directive in the European Union imposes a
"take-back" obligation on manufacturers for the financing of the collection, recovery and disposal of electrical and electronic equipment. Additional European legislation will ban the use
of lead and some flame retardants in electronic components beginning in 2006. Finally, a new legislative proposal by the European Commission deals with the registration, evaluation and authorization
of chemicals ("REACH"). This legislation, and the REACH proposal, if adopted, may require us to change certain of our manufacturing processes, to utilize more costly materials and to incur substantial
additional costs.

As
with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing activities. Costs associated with
future additional environmental compliance or remediation obligations could adversely affect our business.

For
a further description of environmental issues that we face see "BusinessEnvironmental Protection and Sustainable Management".

37

Reductions in the amount of government subsidies we receive or demands for repayment could increase our reported expense or harm our ability to fund our
capital expenditures

As is the case with many other semiconductor companies, our reported expenses have been reduced in recent years by various subsidies received from governmental
entities. In particular, we have received, and expect to continue to receive, subsidies for investment projects as well as for research and development projects. We recognized governmental subsidies
as a reduction of R&D and depreciation expense in an aggregate amount of €81 million in the 2001 financial year, €93 million in the 2002 financial year
and €113 in the 2003 financial year. In addition, we reduced the carrying value of fixed assets by €11 million, €83 million and
€17 million during the 2001, 2002 and 2003 financial years, respectively.

As
the general availability of government funding is outside our control, we cannot assure you that we will continue to benefit from such support, that sufficient alternative funding
would be available if necessary or that any such alternative funding would be provided on terms as favorable to us as those we currently receive.

The
application for and implementation of such subsidies often involves compliance with extensive regulatory requirements, including, in the case of subsidies to be granted within the
European Union, notification to the European Commission of the contemplated grant prior to disbursement. In particular, establishment of compliance with project-related ceilings on aggregate subsidies
defined under European Union law often involves highly complex economic evaluations. If we fail to meet applicable formal or other requirements, we may not be able to receive the relevant subsidies or
may be obliged to repay them, which could have a material adverse effect on our business.

The
terms of certain of the subsidies we have received impose conditions which may limit our flexibility to utilize the subsidized facility as we deem appropriate, to divert equipment to
other facilities, to reduce employment at the site, or to use related intellectual property outside the European Union. This could impair our ability to operate our business in the manner we believe
is most cost effective.

We are being investigated for potential antitrust violations in the DRAM industry

Our North American subsidiary received a grand jury subpoena from the U.S. District Court for the Northern District of California on June 19, 2002, seeking
information regarding a Department of Justice ("DOJ") probe into possible U.S. antitrust violations in the DRAM industry. Since then, a number of class action lawsuits have been filed against us and
other DRAM manufacturers in the United States alleging violations of the Sherman Act relating to the sale and pricing of memory products. All of these cases have been transferred to the U.S. District
Court for the Northern District of California (San Francisco) for coordinated pretrial proceedings. In addition, a number of cases have been filed in California alleging violation of the Cartwright
Act.

In
connection with these matters and in accordance with US GAAP, we established an accrual of €28 million in the fourth quarter of the 2003 financial year.
Because these are ongoing matters, we cannot predict at this time whether the reserve will be adequate to cover any potential liabilities that we may incur as a result of the DOJ investigation and the
related civil claims.

In
April 2003, we received a request for information from the European Commission (the "Commission") to enable the Commission to assess the compatibility with the Commission's
rules on competition of certain practices of which the Commission has become aware in the European market for DRAM memory products.

An
adverse final resolution of the DOJ or Commission investigation or the civil antitrust claims described above would result in significant financial liability to, and other adverse
effects upon, us, which would have a material adverse effect on our business, results of operations and financial

38

condition.
Irrespective of the validity or the successful assertion of the above-referenced claims, we could incur significant costs with respect to defending against or settling such claims, which
could have a material adverse effect on our results of operations or financial condition or cash flows. See "BusinessLegal MattersLitigation" for a description of these
matters.

We might be faced with product liability or warranty claims

Despite extensive quality assurance measures, there remains a risk that defects may occur in our products. The occurrence of such defects could give rise to
warranty claims or to liability for damages caused by such defects and for consequential damages and could, moreover, impair the market's acceptance of our products. Both could have a material adverse
effect on our business and financial condition. Also, customers have from time to time notified us of potential contractual warranty claims in respect of products supplied by us, and may do so in the
future. See "BusinessLegal MattersLitigation" for a description of these and other proceedings.

We may be unable to successfully integrate businesses we acquire

We are increasingly engaged in acquiring other businesses, such as our acquisition of Ericsson Microelectronics in September 2002 and SensoNor in
June 2003. We intend to continue acquisitions of, and investments in, other companies in the future. We face risks resulting from the expansion of our operations through acquisitions. These
include the risk that we might be unable to integrate new businesses with our culture and strategies. We also cannot be certain that we will be able to achieve the benefits we expect from a particular
acquisition or investment. Acquisitions may also strain our
managerial and operational resources, as the challenge of managing new operations may divert our managers and employees from monitoring and improving operations in our existing businesses. Our
business, financial condition and results of operations may suffer if we fail to coordinate our resources effectively to manage both our existing businesses and any businesses we acquire.

In
the 2003 financial year we expensed €68 million to reduce the goodwill of our Catamaran acquisition because the amounts of cash we expect to receive in the
future from operating this business is less than what we expected at the time we made the acquisition. We reduced our expectations because of recent changes in the market environment and their effects
over the period for which we can reasonably forecast the future development in the market. It is our policy to review our expectations of future cash inflows related to businesses with goodwill we
have acquired at least once a year. Changes in our expectations in the future due to changes in market developments which we cannot currently foresee could result in our writing off additional amounts
of goodwill in future periods.

Siemens may use all of the intellectual property rights it transferred to us at the formation of our company

In connection with our formation as a legal entity, Siemens transferred approximately 20,000 patent rights to us. Under the terms of this transfer and related
agreements, however, Siemens retained the right to use these patent rights within the scope of its business for an unlimited period of time, subject to various restrictions in the case of patents
relating to information handling systems.

We
have entered into a non-competition agreement with Siemens, which will expire on March 13, 2004. Under this agreement, Siemens has agreed that no member of the
Siemens group will engage in or carry out any research or development, production or distribution of semiconductor devices or license or sublicense any of our patents to any party for use in research
or development, production or distribution of semiconductor devices. The agreement is subject to certain exceptions relating to such matters as application-specific semiconductor devices designed
specifically for use in or in connection with Siemens group products, spare parts for those products, and the application in equipment and systems of circuitry from patents in which both we and
Siemens have rights, as well as to variousde

39

minimisexceptions. When the agreement expires, Siemens could use these patent rights to compete against us, should it ever decide to re-enter the semiconductor
business.

Siemens exercises partial control over some of our intellectual property rights

Siemens has retained the right to assert infringement claims against third parties with respect to approximately 15% of the 20,000 patent rights that it
transferred to us, insofar as these patents relate to the technical field of the Siemens group's business activities. Siemens has agreed that it will not exercise this right against any of our
customers in respect of any part of such customer's products that contains one of our products, unless this right is asserted for defensive purposes. Nevertheless, we can provide no assurance that
these safeguards will be sufficient to protect all of our customers against claims by Siemens with respect to those of their products that incorporate technology covered by these patents. It may
therefore be difficult for us to sell our products or grant licenses of these patents to third parties, and they may not be able to use our products without infringing these patents or incurring
license fees to Siemens.

Sales of substantial number of shares in the public market could adversely affect the market price of the shares and ADSs

Siemens AG has the right, directly or indirectly, to direct the disposition of up to 286,292,363 shares of our company, representing approximately 39.7% of the
currently issued shares of our company. These shares are held by Siemens Nederland N.V., a wholly-owned subsidiary of Siemens AG, and by Wachovia Trust Company, a trust which holds the shares for the
benefit of Siemens AG. Siemens has announced publicly its intention to divest its ownership interest in our company through direct or indirect sales, as and when business and market conditions permit.
Any such disposal could occur at any time or from time to time. Sales of substantial numbers of the shares of our company controlled by Siemens either in the public market or in private transactions,
or the perception that such sales may occur, could adversely affect the market price of the shares and ADSs and could adversely affect our ability to raise capital through subsequent offerings of
equity.

40



BUSINESS

Overview

Industry Background

Semiconductors are the key building blocks used to create an increasing variety of electronic products and systems. Over the years, continuous improvements in
semiconductor process and design technologies have led to ever smaller, more complex and more reliable devices at a lower cost per function. As performance has increased and size and costs have
decreased, semiconductors have become pervasive in everyday life. Semiconductors have expanded from their original primary applications in defense systems and mainframe computers to applications such
as personal computers, telecommunications systems, automotive products, industrial automation and control systems and security applications.

Semiconductor
sales have increased significantly over the long term. Factors contributing to long-term growth include:



These
factors have resulted in semiconductors constituting an increasing percentage of the total cost of the systems and products in which they are incorporated. According to IC
Insights, the percentage of semiconductor content in electronic equipment increased from approximately 11% in 1989 to approximately 18% in 2002. Nevertheless, the market for semiconductors has
historically been volatile. Supply and demand have fluctuated cyclically and have caused pronounced fluctuations in prices and margins. Following a severe downturn in 2001, the industry experienced a
further period of low demand and ongoing worldwide overcapacity during 2002 and large parts of our 2003 financial year resulting in continuous price pressure.

Types of Semiconductors

Semiconductors consist of a material such as silicon or gallium arsenide that can act as a switch allowing electrical current to flow under some conditions but
not others. Semiconductors fulfill a wide range of functions in an increasing variety of applications. The technologies employed vary depending upon the function for which the semiconductor is used.
The following chart describes the main types of

41

semiconductors
and their functions and gives examples of how each different type is used in a mobile telephone, a typical consumer product using semiconductors:

GRAPHIC

The
different types of semiconductors may also be classified by a number of other technical characteristics:



Semiconductors
may be either discrete devices, which have a low level of integration, or ICs, which can have thousands or millions of devices combined on a single chip.



Standard
components are semiconductors that are not customized and that can be used for a wide range of applications. Application-specific ICs (commonly referred to as ASICs) are
customized semiconductors that are designed to perform particular functions in specific applications for particular customers. ASICs can be further classified into three groups according to their
level of customization: full-custom devices, semi-custom devices and application-specific devices.



42



Analog
semiconductors collect, monitor, condition or transform analog signals into electrical signals and vice versa. Analog signals are real world phenomena such as temperature, sound,
light or pressure that vary over a continuous range of values. For example, an analog semiconductor can transform sounds into electrical signals or vice versa.

Digital
signals are created by switching electrical current on or off. They vary based on the sequence of these on and off electrical pulses, which are frequently represented by ones and
zeros. Digital data is used in computer-like functions and calculations. A digital semiconductor stores
information from digital signals or performs functions on digital signals. Examples of digital semiconductors would be memory chips or microprocessors.

Historically,
digital semiconductors have been used primarily in computer systems, sophisticated computer networks and communications systems. In recent years, increasing demand for more
powerful personal computers and networks used by a greater number of users, and new communications tools whose main components are digital semiconductors, have led to dramatic increases in the total
number of devices that use semiconductors and in the total number of semiconductors used in each such device. To meet this demand, significant advances in electronic system integration have occurred
in the design and manufacture of digital devices.

Digital
devices can be used either to store or to process data. ICs that store data are referred to as memory ICs, and ICs that process data are referred to as logic ICs. DRAM ICs are
examples of memory ICs. Memory ICs tend to be standardized products, used in high volume and differentiated by cost, performance, capacity, size, power consumption and speed. Logic ICs are more
differentiated than memory ICs and require a greater variety of intellectual property and more sophisticated design.

Mixed-signal
ICs combine analog and digital devices on a single chip to process both analog signals and digital data. Historically, analog and digital devices have been developed
separately, and it has been technically difficult to combine them on a single chip. However, system designers are increasingly demanding system-level integration containing both analog and digital
functions on a single chip. This allows chips to achieve increased functionality and speed for new applications such as multimedia and reduced power consumption for mobile applications.

History and Strategy

We have been a publicly traded company since March 2000, and were organized as a separate legal entity within the Siemens group with effect from
April 1, 1999. Prior to that date, we were the Siemens Semiconductor Group. As such, we have been actively involved in the development, manufacture and marketing of semiconductors since 1952.
We believe that we inherit from the Siemens Semiconductor Group a strong base of technology and experience in the semiconductor industry.

As
Siemens' Semiconductor Group, we pioneered the development of ICs for use in consumer products in the early 1960s. We produced the first radio-frequency chip set that was
GSM-compatible in 1990 and the FingerTIP sensor, which registers and identifies fingerprints, in late 1998. In 2000, we introduced and commenced deliveries of a mobile
telephone chipset for the Bluetooth standard, introduced the first dual mode GPRS/GSM single baseband chip, and received the first certification for a complete Bluetooth system. In 2001, we introduced
the first OC-192 single-chip 10 Gigabit-per-second transceiver in silicon-germanium for high-speed SONET communications
networks. In 2002, we successfully ramped up manufacturing of 256-Mbit DRAM memory chips produced on a 300-millimeter wafer. In 2003, we developed the smallest
1-Gbit DRAM memory chip in 0.11 micron technology.

From
calendar year 1996 through calendar year 2002 we experienced compound annual growth rates significantly above the semiconductor industry average compound annual growth rate of
approximately 1%, according to industry data. In 2001 the semiconductor industry had its most dramatic downturn ever, with an estimated worldwide decline in semiconductor sales of 32% compared

43

to
2000. According to IC Insights, we were the sixth-largest semiconductor company in the second quarter of the 2003 calendar year.

Our
strategic objective is to achieve profitable growth by targeting fast-growing areas of the semiconductor industry and building upon our position as a leading innovator
within the semiconductor industry.

In
2002, we introduced our "Agenda 5-to-1" program, setting forth the strategic goals that we aim to achieve during the next five years. We aim to increase our
market share in order to become one of the four largest semiconductor companies in the world. We also seek to be among the top three suppliers of products in each of our business segments and to be
the number one supplier in the semiconductor industry of systems solutions.

To
achieve the aims of the "Agenda 5-to-1" program, we launched a corporate program called ACT in early 2003. The ACT program comprises eleven strategic
initiatives, each of which focuses on one key area of the Agenda 5-to-1. These areas include delivering semiconductor solutions, taking into account the needs of
end-consumers, building strong partnership and alliance networks, expanding our reach within significant global markets, as well as strengthening our R&D position. Specifically, we intend
to:



44



Products and Applications

We design, develop, manufacture and market a broad range of semiconductors and complete systems solutions used in a wide variety of microelectronic applications.

We
are organized into four principal business groups, three of which are application-focusedWireline Communications, Secure Mobile Solutions and Automotive &
Industrial; and one of which is product-focusedMemory Products.

The
following table gives an overview of some of the more significant products and applications and the four largest customers of each of our business groups:

Principal Products, Applications and Customers

|Business Group          |  | Principal Products                                                                                                                                                                                             |  | Principal Applications                                                                                                                                                                                                                                                                                                        |  | Four Largest
Customers
in the 2003
Financial Year
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------
|Wireline Communications |  | ICs for xDSL, T1/E1, SONET/SDH SLICs and ISDN applications; fiber-optic modules for datacom and automotive applications                                                                                        |  | Broadband access, WAN, MAN, storage and automotive                                                                                                                                                                                                                                                                            |  | Avnet
Flextronics
Siemens
Tyco                   
|Secure Mobile Solutions |  | Baseband ICs, RF transceivers, silicon discretes, RF-power modules, security memory ICs, security microcontroller ICs, encryption ICs, Trusted Platform Modules (TPM), FingerTIP sensors, RFID ICs             |  | Mobile telephone systems and cordless telephone systems (major standards are: GSM, GPRS, UMTS, WDCT, DECT and Bluetooth) as well as WLAN, wireless infrastructure, RFID systems, security systems                                                                                                                             |  | Ericsson
Gemplus
Nokia
Siemens                   
|Automotive & Industrial |  | Power semiconductors (discretes, ICs and modules), sensors and microcontrollers (8-bit, 16-bit, 32-bit) with and without embedded memory                                                                       |  | Automotive: Powertrain (engine control, transmission control), body and convenience (comfort electronics, air conditioning), safety and vehicle dynamics (ABS, airbag, stability control), infotainment (dashboard, car radio, telematics/navigation).
Industrial: Power management & supplies, drives and power distribution |  | Avnet
Bosch
SAC
Siemens                          
|Memory Products         |  | Mainstream DRAMs (128-Mbit, 256-Mbit), high-end DRAMs (512-Mbit, Rambus, DDR), high-speed graphics DRAMs, low-power Mobile-RAMs, ASICs with embedded DRAM, hard disk drive controllers, MMC and SD-Flash Cards |  | Personal and notebook computers, PC upgrades, workstations and servers, communications equipment, PDAs, computer peripherals, removable solid state memory cards                                                                                                                                                              |  | Dell
HP
IBM
Kingston                             

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Wireline Communications

Our Wireline Communications business group designs, develops, manufactures and markets semiconductors and fiber-optic components for the communications access,
WAN (Wide Area Network), MAN (Metropolitan Area Network) and carrier access (both broadband and traditional access) sectors of the wireline communications market. According to industry data, we had a
market share of approximately 5.6% of the worldwide sales of wireline communications ICs in 2002 in the above mentioned markets (Dataquest 2003) and a 5% market share in 2002 for fiber-optic modules
(RHK 2003).

In
the broadband access market, we are using our leading position in selected access technologies to develop and deliver products using advanced versions of DSL technology, including
10BaseS, VDSL, ADSL and SHDSL. Our Ethernet over VDSL product (10BaseS) utilizes existing telephone lines to deliver Ethernet access. The technology is currently used in modems and switches
manufactured by Far Eastern manufacturers, primarily in Taiwan, and is being deployed in volume to the consumer by telecom operators in Korea. For ADSL, we offer a solution optimized for integrated
voice and data targeted at the Digital Loop Carrier (DLC) market using an innovative splitterless approach. We have also evolved the ADSL products to address the new standards for ADSL. For SHDSL, we
offer a power-efficient complete SHDSL solution for both the customer side and central office equipment.

We
are a leading supplier of traditional telecom products, including T1/E1, ISDN chipsets, coders/decoders (commonly known as codecs) and subscriber line interface circuits, or SLICs,
which are used in telephony-based products. The markets for these products are shifting increasingly to the emerging economies.

We
have broad expertise in fiber-optics module development primarily focused on the datacom market and the evolving market for the adoption of fiber-optical technology into the
automotive market. During the past year, we have developed products for the new Small Form Factor Pluggable (SFP) market, the modules which are used in the storage and enterprise switching market
segment. We have developed products utilizing advanced technologies, including transceivers based on silicon germanium (SiGe) and high speed CMOS. We have combined this expertise with the
framing/mapping expertise of Catamaran Communications Inc., a company that we acquired in August 2001, in order to develop IC solutions for high-speed linecards operating at
rates up to 40 Gbit-per-second, and have attained the market leadership position at this speed. We have also developed a Resilient Packet Ring (RPR) device based on Spatial
Reuse Protocol (SRP) technology licensed from Cisco Systems. Our framer devices have been adopted by leading telecom system vendors and we have begun to expand our product offering to address the
market for lower speed linecard devices, ranging from OC-3 (155MBps) to OC-48 (2.4GBps).

Many
structural changes are taking place in the wireless communications market, including:



46



The
continuing downturn in the telecommunications industry has resulted in reduced capital expenditure by network carriers into the types of infrastructure equipment where our wireline
communications products have traditionally been used. In response to the downturn in spending on traditional wireline products, and to meet the needs of the changing segment, the Wireline
Communications business group has refocused its R&D activities on segments of the broadband access and enterprise storage markets that we believe may provide opportunities for higher growth and higher
margins.

The
principal products of our Wireline Communications business group are:



The
primary applications for our Wireline Communications devices are communications applications for wireline network infrastructure equipment. These applications include high speed
optical line cards, public subscriber line cards, data access and Ethernet switching equipment, modems, multiprotocol access devices, DLCs, DSLAMs, IADs, high and mid range routers, and cellular base
stations.

We
believe that our combination of expertise in fiber-optics and in ICs, together with our broad portfolio of patents and other proprietary mixed signal technology, provide us with a
competitive advantage in many of the markets served by our Wireline Communications business group.

Secure Mobile Solutions

Our Secure Mobile Solutions business group designs, develops, manufactures and markets a wide range of ICs for wireless applications, security controllers, memory
controllers and other semiconductors and complete system solutions for security and wireless applications. The Secure Mobile Solutions business group was formed and reported as such effective
October 1, 2002 by the combination of our Security and Chip Card ICs Business group and our Wireless Solutions business group.

Our
principal products include baseband ICs, standard and customized radio-frequency products, security memory ICs, security microcontroller ICs, Trusted Platform Modules (TPM), RFID
ICs, Bluetooth devices, WLAN ICs, silicon discretes and RF-power modules. Our principal solutions include hardware system design and software solutions for mobile telephone systems
(addressing primarily the

47

GSM,
GPRS, EDGE, UMTS and Bluetooth standards) as well as DECT/WDCT, WLAN, wireless infrastructure, RFID systems and security systems.

According
to Gartner, in the 2002 calendar year we remained the market leader in ICs for smart card applications, with a market share of 40%, and became the market leader for RF
transceiver devices, with a market share of 14%. We believe we will remain the leader in both markets in 2003.

In
April 2003, we bought the assets of MorphICs Technology Inc., a developer of programmable chips for digital baseband signal processing based in California for
€6 million. This
acquisition is intended to enlarge our IP portfolio for multi-standard wireless solutions and broaden our product range for the 3G infrastructure market.

The
markets for products in which our wireless communications ICs are utilized are characterized by trends towards lower cost, increasingly rapid succession of our product generations
and increased system integration. Increasing demand for add-on application such as multimedia is expected to increase the IC content of mobile phones. We expect these trends to create
further opportunities for suppliers of wireless communication semiconductors.

Our
Secure Mobile Solutions business segment offers products and solutions to customers in the following principal application segments:

Communications.We offer products and solutions in the following key segments of the wireless
communications market:



48



Computing.To customers within the computing segment, we offer products and solutions for both
computing and large-scale identification projects. To enable secure computing platforms, our products and solutions are designed to prevent unauthorized use of digital terminals or to secure the data
communication between the transmitter and receiver against manipulation. On a PC motherboard, our Trusted Module (TPM) recognizes and prevents unauthorized access to stored data and attempted attacks
by virus programs. In May 2003, Hewlett-Packard incorporated our TPM security technology into their new HP Compaq Business Desktop PC.

To
customers within the Identification segment, we offer security chips for identity documents, such as identity cards, passports or drivers' licenses, insurance certificates and other
documents. We supply security controllers for high-volume identification projects worldwide, including the US Department of Defense Common Access Card, the Taiwanese electronic health card
and the Hong Kong electronic ID card.

In
June 2003, we signed a memorandum of understanding with the German Federal Ministry of the Interior to initiate a cooperation in the field of Information Technology (IT)
security. The security cooperation with the Interior Ministry aims to establish a sound basis for an enhanced security level in IT systems that are used in the German civil service, in private
companies and households.

Consumer.We address the consumer sector, comprising payment, transport, digital and
pay-TV, set-top boxes for multi-media use of televisions and the Internet, with a product portfolio addressing both wireless devices and security applications.

Our
wireless portfolio offers tuner ICs and discrete ICs for a variety of consumer applications. Our chip card ICs for pay-TV applications are used to ensure that only
authorized persons
gain access to content. We also offer security chips used to quickly verify the validity of electronic tickets, such as those used in local public transport systems or as tickets for events. For the
payment segment, our security chip card controllers perform all of the functions required to issue a qualified electronic signature, enabling a debit or credit card holder to complete a purchase
electronically. At the initiative of the Europay MasterCard Visa (EMV) international payment association, we are participating in a collaborative effort to reduce card fraud and provide cardholders
with access to expand services by transitioning from magnetic stripe to smart card technology. The EMV migration is rapidly changing banking and financial processes within Europe.

Industrial.Our radio frequency identification, or RFID, chips are used for applications in which it
is necessary to identify and manage objects and goods quickly and reliably, or to track their positions. The RFID method can considerably reduce logistics expenditures. We also offer complete RFID
solutions. For example, we have developed a user-friendly self-service system for the users of Vienna's new multimedia main library. As part of the system, 240,000 books and
60,000 CDs and DVDs have been equipped with radio chips for data transmission.

Automotive & Industrial

The Automotive & Industrial business group designs, develops, manufactures and markets semiconductors and complete chipset solutions for use in automotive
and industrial applications. According to Strategy Analytics, in the 2002 calendar year, our market share in terms of sales was 8% of the automotive semiconductor market, in which there is a large
number of suppliers. We are the second-largest producer of ICs for automotive electronics worldwide and the largest in Europe. Within the fragmented market for industrial semiconductor applications,
we focus on power management and supply as well as drives and power distribution.

The
markets for both automotive and industrial semiconductors generally consist of four basic product classes: sensors, microcontrollers, power ICs and discrete semiconductors. Our
Automotive & Industrial business group focuses on microcontrollers and power semiconductors, discrete

49

semiconductors,
modules and sensors. Power semiconductors handle higher voltage and higher current than standard semiconductors. The Automotive & Industrial business group works closely with
our other business groups to offer customers a full system solution, in the engine management, safety & chassis, body and convenience and telematics markets, in some cases including software.

In
June 2003, we acquired SensoNor AS ("SensoNor"), for total cash consideration of €34 million. In addition we contributed capital of €13 million
subsequent to the consummation of the transaction. SensorNor, which was previously a publicly-listed company in Norway, develops, produces and markets tire-pressure and acceleration sensors. With this
acquisition, we aim to strengthen our position in semiconductor sensors for the automotive business.

Automotive.The market for semiconductors for automotive applications has grown substantially in
recent years, despite relatively slow growth in automobile production worldwide. This growth is the result of increased electronic content in growing automotive applications in the areas of safety,
power train and body and convenience systems. This growth also reflects increasing substitution of mechanical devices such as relays by semiconductors in order to meet more demanding reliability,
space, weight and power reduction requirements. This trend has been particularly pronounced in the area of power ICs that deliver additional short-circuit protection and other features.

Power
train applications, such as transmission-, engine- and exhaust control, comprise the largest portion of the market, followed by safety and vehicle-dynamics systems, body and
convenience systems, driver information and in-car entertainment. We believe that the area of navigation and telecommunications equipment for automotive applications also provides growth
opportunities, which we are addressing in a common project together with our Secure Mobile Solutions segment.

We
supply a wide range of semiconductor and complete chipset solutions for applications in the automotive industry. These products include power semiconductors, microcontrollers,
discrete semiconductors and silicon sensors, along with related technologies and packaging. Our TriCore 32-bit microcontroller product, which is the latest microcontroller
generation in power train and safety applications, has had significant design wins at several major customers. Within the sensor area, we complemented our product-portfolio with the acquisition of
SensoNor, giving us access to the market for tire pressure monitoring systems, which we believe will become important due to new legal requirements in the United States.

Time
periods between design and sale of our automotive products are relatively prolonged (two to four years) because of the long periods required for the development of new automotive
platforms, many of which may be in different stages of development at any time. This is one of the reasons why automotive products tend to have relatively long life-cycles compared to our
other products. The nature of this market, together with the need to meet demanding quality and reliability requirements designed to ensure safe automobile operation, makes it relatively difficult for
new suppliers to enter the automotive market.

Our
principal automotive products include:



50



We
seek to exploit our strong relationship with, and proximity to, leading German and American car manufacturers and their suppliers, which have historically been at the forefront in
using electronic components in cars, to strengthen our position in all segments of automotive electronics. We also seek to further strengthen our presence in the United States and to expand in other
geographic areas, notably Japan. We believe that our ability to offer complete system solutions integrating power, analog and mixed-signal ICs and sensor technology is an important differentiating
factor in the automotive market. We also believe that our strength in this relatively stable market complements our strengths in other markets that are subject to greater market volatility.

Industrial.The market for semiconductors for industrial applications is highly fragmented in terms
of both suppliers and customers. It is characterized by a large number of both standardized and application-specific products. These products are employed in a large number of diverse applications in
many industries such as factory automation, power supply and consumer products.

We
supply a broad range of semiconductor products for use in industrial automation and control systems. These products comprise power modules, discrete semiconductors and
microcontrollers.

Our
industrial products are used in a wide range of applications, such as:



Within
the industrial segment, we focus on two major application segments, power management & supply and power conversion. We provide differentiated products combining diverse
technologies to meet our customers' specific needs. We have identified white goods applications as an area of future growth.

Memory Products

Our Memory Products business group designs, develops, manufactures and markets semiconductor memory products with various packaging and configuration options and
performance characteristics for use in standard, specialty and embedded memory applications. We were the third largest producer of DRAM in terms of revenues in the first half of the 2003 calendar
year, with a worldwide market share of approximately 17%, according to iSuppli, compared to a 13% market share in the 2002 calendar year.

The
global market for DRAM has experienced strong cyclicality in the past and is expected to continue to show this behavior in the future. Price and therefore revenue volatility depends
on the relation between supply and demand, leading to strong declines in times of oversupply and relative stability or even increases in times of shortage. Visibility for both supply and demand is
restricted and therefore the market development is difficult to predict. In the table below you find revenue and bit

51

data
as well as year over year price per bit development for the DRAM market since 1992 (Source: WSTS).

|Calendar year                               |  | 1992 |     | 1993 |    | 1994 |    | 1995 |    | 1996 |     | 1997 |     | 1998 |     | 1999 |     | 2000 |     | 2001 |     | 2002 |    
|------------------------------------------- |  | ---- | --- | ---- | -- | ---- | -- | ---- | -- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | --- | ---- | ---
|DRAM market in billion US                   |  | $    | 9   |      | 13 |      | 23 |      | 41 |      | 25  |      | 20  |      | 14  |      | 21  |      | 29  |      | 11  |      | 15 
|DRAM market in billion megabits             |  |      | 3   |      | 4  |      | 8  |      | 13 |      | 23  |      | 46  |      | 85  |      | 155 |      | 264 |      | 420 |      | 590
|Year over year change average price per bit |  |      | -30 | %    | 6  | %    | -1 | %    | 1  | %    | -66 | %    | -60 | %    | -62 | %    | -19 | %    | -18 | %    | -76 | %    | -3 

The
substantial price decline in the 2001 calendar year, which resulted from worldwide oversupply due to reduced demand, especially in the PC segment, resulted in a substantial reduction
in revenues from this business. In the 2002 calendar year prices for our DRAM products stabilized due to increased demand and consolidation within the industry as a consequence of the low price level
in the second half of 2001. In the first three months of the 2003 calendar year prices dropped again due to seasonally slow demand before rising again through the second half of the 2003 financial
year, based on new innovations and returning corporate replacement investment.

The
memory market is characterized by a high rate of technological changes, with successive generations of products succeeding each other with high frequency. This rate of change is
expected to continue in the future.

The
highest share of volume of DRAM products is sold to the personal computer segment, including desktop and notebook computers, followed by workstations and servers. Markets for the
latter products are expected to grow substantially in the next few years, whereas the market for personal computers is expected to decline as a proportion of the total market. Networking and handheld
applications, even though currently representing only a small portion of DRAM demand, are expected to show strong growth rates in the next years. Other applications of memory products include
communications devices, computer peripherals, consumer products and graphics applications.

Our
principal memory products are mainstream DRAMs (128-Mbit and 256-Mbit), high-end DRAMs (512-Mbit),
high-performance and low-power specialty DRAMs, as well as embedded DRAM products. Until the end of the 2003 financial year, we also offered ICs for mass storage applications
based on logic and embedded DRAM technology. 256-Mbit DRAMs formed the largest part of our memory products sales in the 2003 financial year, and we expect the 256-Mbit
DRAMs to be the leading product in the 2004 financial year as well. We believe that, depending on market conditions, high-end products such as
512-Mbit and 1-Gbit DRAMs and specialty DRAMs can offer opportunities to mitigate the effects of the cyclical nature of the memory products market.

Our
current product portfolio for commodity products includes Single Data Rate and Double Data Rate SDRAMs. Single and Double Data Rate SDRAMs are being sold in
128-Mbit, 256-Mbit and 512Mbit configurations. The 512-Mbit DDR is used for high density modules (like 2 Gbyte registered DIMMS) dedicated to the server market. The
128-Mbit products are manufactured using our 0.17-micron technology and are declining in volume following reduced market demand, whereas both 256-Mbit and
512-Mbit SDRAM and DDR have been designed and are currently manufactured in volume using our 0.14-micron technology. The 256-Mbit DDR is also manufactured using our
0.11-micron technology and has been qualified and validated during the 2003 financial year. In the 2004 financial year, we intend to introduce further products, most importantly
512-Mbit DDR and DDR2 products and 1-Gbit products manufactured using our 0.11-micron technology.

52



In addition to commodity products, we are introducing various specialty DRAMs with low power features, such as Mobile-RAM and the CellularRam, or high performance with
respect to bandwidth and access times, such as Reduced Latency DRAM and Graphics RAM:



We
are also engaged in the development of new generations of standard DRAM with one gigabit of capacity used for future IT infrastructure applications, and we are participating in the
development of future DRAM architectures like DDR II.

In
addition to standard DRAM technology, we also sell system-on-chip products with embedded DRAM. System-on-chip products with embedded
DRAM eliminate the need for chip-to-chip interfaces and are particularly well-suited for applications where component space saving, power saving and
higher bandwidth are important, such as the graphics for notebook and personal computers, personal digital assistants and mobile devices.

In
response to the last downturn in the semiconductor market, we have adjusted the business strategy of our Memory Products segment. In the 2001 financial year we decided to suspend the
launching of new embedded DRAM projects and the development of future embedded DRAM technology generations. Nevertheless, we are committed to fulfilling our contracts and obligations in this area. In
the 2003 financial year we restructured our mass storage applications business and transferred remaining parts to the ASIC and Design Solutions (ADS) business of our Other Operating segments. The
Memory Products business group has completely exited the mass storage applications market by the end of the 2003 financial year.

Since
October 1, 2002, the multimedia card business line has been conducted in the Memory Products segment. We also transferred a part of the operations of our joint venture with
Saifun Semiconductors, from Munich to our facility in Dresden, changed the name of the joint venture (which also has operations in Netanya, Israel) from Ingentix to Infineon Technologies Flash and
increased our ownership interest to 70%. In the 2003 financial year we sold MMC (MultiMediaCard) and SD (Secure Digital) cards as OEM products. At the same time we have been developing our own flash
products based on Saifun's NROM (Nitride ROM) technology with current feature sizes of 0.17-micron. A first 512-Mbit flash chip for NAND flash applications has been sampled to
customers and we expect shipments of data and code flash products to start in the 2004 financial year

The
reduction of chip sizes through the introduction of leading-edge process technologies is one of the key factors in reducing manufacturing costs. By the end of the 2003 financial
year, we had converted more than 90% of our DRAM capacities to technologies with a feature size of 0.14-micron and below. More importantly, we have qualified our 0.11-micron
technology at all of our own manufacturing sites and expect to convert the majority of our capacity to this new technology in the 2004 financial year. By increasing volume production of
256-Mbit and 512-Mbit DDR and DDR2 using our advanced 0.11-micron process technology in the 2004 financial year, we expect to significantly

53

reduce
our manufacturing cost. In addition, we are developing 0.09-micron process technology that we believe will allow us to further reduce costs. We expect to begin manufacturing using
0.09-micron process technology during the 2004 calendar year.

We
have invested heavily throughout the DRAM market cycle, including during the current downturn, to maintain and build upon our leadership in DRAMs and high-end
process technology. We aim to continue to be a worldwide leader in DRAM process technology. Due to our belief in the positive long-term growth prospects of the memory business, we have
implemented our 300-millimeter plans and have ramped up the new Dresden production facility to 30,000
wafer starts per month by the end of our 2003 financial year. It is one of the first production facilities of its kind worldwide to manufacture semiconductors on a production scale using
300-millimeter technology, and has enabled us to significantly reduce our per-unit production costs. Due to unfavorable market conditions in the last two years, we have delayed
equipping our Richmond manufacturing facility with 300-millimeter technology, but expect to recommence this effort in the near-term, subject to market conditions.

Going
forward we intend to follow a strategy of limiting our investment in manufacturing assets principally to upgrading existing manufacturing lines and increasing our capacities mainly
through cooperating with partners, e.g. by forming joint ventures or by utilizing foundries. In November 2002 we entered into agreements with Nanya, a Taiwanese DRAM manufacturer, for the joint
development of 90-nanometer and 70-nanometer DRAM technologies as well as the construction of a jointly-owned 300-millimeter DRAM manufacturing facility in Taiwan.
In addition, we signed a product purchase and capacity agreement with the Taiwan-based DRAM manufacturer Winbond, under which we license our 0.11-micron DRAM technology to Winbond in
exchange for output of commodity DRAMs manufactured by Winbond using that technology. We also entered into a Knowhow Transfer Agreement and a Product Purchase and Capacity Reservation Agreement with
SMIC in China, which gives us access to additional DRAM production capacity based on 200-millimeter and 300-millimeter wafers and our 0.14-micron and
0.11-micron technology. We are establishing a venture with China-Singapore Suzhou Industrial Park Venture Co. Ltd., Suzhou, China, to construct a backend facility for the assembly
and testing of memory ICs. See "BusinessManufacturingManufacturing ventures and partnerships" for a description of our manufacturing arrangements with strategic partners.

Although
the market for DRAM has experienced severe price erosion in the most recent financial years, we expect to benefit from any potential future increases in demand for
DRAMs resulting from increased demand for servers and for personal computers with Internet access. We also believe that our leading role in high-end and high-performance
DRAMs provides us with opportunities in the market for workstations and servers. We believe that by broadening our product portfolio within and beyond DRAM, especially with flash, we will be
able to reduce the volatility of our business and strengthen relationships with our customers.

Customers, Sales and Marketing

Customers

We sell our products to customers located in Germany, the rest of Europe, the United States and the Asia/Pacific region, including Japan. We target our sales and
marketing efforts in the field of demand
creation at approximately 340 direct customers worldwide. Of these direct customers, 12 are currently deemed corporate accounts and an additional up to 30 are deemed major customers. We sell our
products through our worldwide sales organization, as well as through distributors, sales representatives and, in some smaller markets, the Siemens sales organizations.

The
responsibility for all direct accounts as well as the management of our indirect sales channels lies within our global sales organization. All strategic accounts are approached on a
global basis by global teams having a dedicated global account manager assigned to this account. Within the indirect sales channel, our sales organization manages relations with our third-party sales
representatives, which

54

are
located primarily in the United States, and with the Siemens sales organizations in certain countries. All other customers are served through our network of independent distributors, which are
managed by our global distribution sales organization. This group coordinates all aspects of channel management and marketing activities of distributors worldwide. Reflecting the changing value and
supply chain in our and our customers' industry, we have installed a specific Electronic Manufacturing Service (EMS) sales force that manages our relationships with EMS providers, such as Flextronics
and Solectron. We also work extensively with Original Design Manufacturers (ODMs), which have expanded their position in the electronics market, in particular the wireless communications market. In
all cases, we seek to serve the individual customer through the most appropriate channeland thereby to best serve our customers while minimizing our sales costs.

The
Siemens group was the only customer that accounted for 10% or more of our net sales in the 2003 financial year.

We
focus our sales efforts on semiconductors customized to meet our customers' needs. We therefore seek to design our products and solutions in cooperation with our customers so as to
become their preferred supplier. We also seek to create relationships with our major customers that are leading in their market segment and have the most demanding technological requirements in order
to obtain the system expertise necessary to compete in the semiconductor markets.

We
have sales offices throughout the world. We believe that this global presence enables us not only to respond promptly to our customers' needs, but also to be involved in our
customers' product development processes and thereby be in a better position to design customized ICs and solutions for their new products. We believe that cooperation with customers that are leaders
in their respective fields provides us with a special insight into these customers' concerns and future development of the market. Contacts to our customers' customers and market studies about the end
consumer enable us to be an effective partner.

We
believe that a key element of our success is our ability to offer a broad portfolio of technological capabilities and competitive services to support our customers in providing
innovative and competitive
products to their customers and markets. This ability permits us to balance variations in demand in different markets and, in our view, is a significant factor in differentiating us from many of our
competitors.

The
following paragraphs provide more detailed information relating to the customers of each of our principal segments:

Wireline Communications.The Wireline Communications segment sells IC products for telecommunications
and data communication applications to a world-wide customer base, targeted at a new generation of Internet infrastructure applications, primarily in Europe and the Asia/Pacific region.
Additionally the segment sells a range of fiber-optical modules for data communication applications. In 2003, the Siemens group was this segment's largest OEM customer. Our leading telecommunication
and data communication OEM customers include Alcatel, Ericsson, Huawei and Nortel.

Sales
of our traditional wireline products had declined significantly during the 2002 financial year, due to the severe downturn and reduced capital expenditure by worldwide
telecommunications operators. However, during the 2003 financial year a focused sales and marketing effort and the rollout of new products for xDSL and fiber-optic modules enabled the Wireline
Communications segment to increase its sales in its respective market segments.

Secure Mobile Solutions.Customers for cellular telephone applications purchase products that range
from our own complete system IC kits to customized ASSPs that we produce to customer design and specifications to complete system solutions. Customers for cordless telephone or Bluetooth applications
typically purchase complete system IC kits. We supply the major share of baseband IC and

55

radio-frequency
requirements of Siemens. To our wireless infrastructure customers we supply RF-ICs, synthesizers and RF-power products. Nokia purchases our silicon discretes
and radio-frequency ASICs.

The
Security business derives a large portion of its revenues from large-scale projects. Four key accountsGemplus, Giesecke & Devrient, SchlumbergerSema and Oberthur
Card Systemsaccounted for a majority of the business group's sales. The customers are mainly card manufacturers, acting both on their own account and as directed by their own service-
provider customers.

We
maintained our strong position in Europe and APAC and have increasingly focused on China for both cellular and security business.

Automotive & Industrial.In the automotive segment, which includes sales of microcontrollers,
power-devices and sensors, our customer base includes most of the world's major automotive suppliers. Two major customers, Bosch and the Siemens group, together accounted for approximately
one-quarter of the segment's net sales in the 2003 financial year. Bosch purchases products mainly for automotive applications. The Siemens group purchases semiconductors for automotive
and industrial applications. Sales of automotive products are made primarily in Europe and, to an increasing extent, the United States.

In
the industrial segment, the Siemens group is the single largest customer, but the bulk of the industrial segment's sales are made in small volumes to customers that are either served
directly or through third-party distributors. Our sales of industrial products vary by type of product, with devices for drive and power conversion applications sold primarily in Europe and the United
States, and devices for power management and supply sold primarily in Asia (other than Japan) and Europe.

Memory Products.The Memory Products business group sells memory devices, primarily DRAMs, in the
United States, Europe and the Asia/Pacific region, including Japan. We focus our marketing efforts for memory products on a number of manufacturers of personal computers and servers that are growing
faster than others, that provide stable demand and that we believe to be good partners for product development. In the 2003 financial year, our major customers included the leading PC and server
manufacturers worldwide.

The
business group's major customers are served on a global basis, with sales efforts and deliveries in all regions where the customer has operations. For each of these major customers,
the business group seeks to be among its top three suppliers of DRAMs in terms of both quality and volume. The business group also sells commodity and specialty DRAM products to a number of
smaller customers.

Sales and Marketing

We create and fulfill the majority of our net sales directly, though we increasingly make sales through our global network of distributors and partners in the
Electronic Manufacturing Services (EMS) segment. A very small and decreasing portion of sales are still made through the Siemens group sales organizations.

To
better serve our customers, our Account Managers develop, maintain, manage and coordinate all aspects of our relationship and activities with each major customer. Twelve Corporate
Account Executives are responsible for the global relationships with our most important strategic customers. The relationships with all other customers that are active on a worldwide basis are
overseen by dedicated Account Managers. Our regional sales units service the global accounts based in that region, as well as regional accounts that are the key players in their local markets. In some
smaller markets, such as Australia, South Africa, Spain, Portugal, and Poland, we currently still use the Siemens group sales
organizations to sell our products. However, we are in the process of establishing our own organizations in these markets.

In
addition, we increasingly cover indirect accounts through our worldwide network of independent distributors, with whom we frequently have major and even global distribution
agreements. This

56

distribution
network is managed by our worldwide Sales Distribution organization, which coordinates all aspects of distribution channel management and increases our market activities in the broad
market.

Many
of our traditional customers rely increasingly on EMS providers to manufacture their products, and many of our customers in newer industries have always outsourced their production.
We have responded to this market trend by establishing an internal EMS sales organization that focuses on the market leaders in the EMS industry. Our EMS global account managers and dedicated support
personnel ensure a high service level and smooth transfers of manufacturing from OEM (Original Equipment Manufacturer) to EMS. The EMS sales organization is also chartered to secure a significant
share of the standard product purchase of these largest users in the industry and to enter strategic partnerships in design and technology projects. Especially in the wireless communications market,
we increasingly deal with Original Design Manufacturers (ODMs) that design and manufacture complete systems for OEMs. We support the ODMs in the development of board design and software, by providing
them with additional assistance using our own resources and/or resources of our partner network.

As
of September 30, 2003, we had approximately 2,000 sales and marketing employees worldwide. Most of these employees are trained engineers who not only act as sales
representatives but also provide technical support.

To
support our sales efforts, strengthen the relationship with our customers and improve our service levels, we utilize internet-based systems solutions. These enable us to reduce our
response time to existing customers and to market inquiries.

We
utilize advertising campaigns in the general and trade press to establish and strengthen our identity as a major semiconductor provider. We sustain our advertising efforts and
participate actively in trade shows, conferences and events to strengthen our brand recognition and industry presence.

Backlog

Standard Products.Cyclical industry conditionsin the Memory Products market, in
particularmake it undesirable for many customers to enter into long-term, fixed-price contracts to purchase standard (i.e., non-customized) semiconductor products.
As a result, the market prices of our standard semiconductor products, and our revenues from sales of those products, fluctuate very significantly. Most of our standard non-Memory products
are priced, and orders are accepted, with an understanding that the price and other contract terms may be adjusted to reflect market conditions at the delivery date. It is common industry practice to
permit major customers to change the date on which products are delivered or to cancel existing orders. For these reasons, we believe that the backlog at any time of standard products such as memory
products is not a reliable indicator of future sales.

Non-standard Products.Logic products are more customized than memory products.
Therefore, orders are generally made and prices are determined well in advance of delivery. Quantities and prices of these logic products may nevertheless change between the times they are ordered and
when they are delivered, reflecting changes in customer needs and industry conditions. During periods of industry overcapacity and falling sales prices, customer orders are generally not made as far
in advance of the scheduled shipment date as during periods of capacity constraints, and more customers request logistics agreements based on rolling forecasts. The resulting lower levels of backlog
reduce our management's ability to forecast optimum production levels and future revenues. As a result, we do not rely solely on backlog to manage our business and do not use it to evaluate
performance.

We
experienced reduced demand, order cancellations and postponements of deliveries under existing purchase contracts during the second half of the 2001 financial year resulted in rising
inventories and reduced backlog at the end of the period. During the 2002 financial year, inventory levels were further reduced and adapted to the run rates, which resulted in an approximate 25% lower
backlog at the end of the year compared to a year earlier. At the end of 2003 financial year our

57

backlog
remained at approximately the same level as at the start of the year. Due to possible changes in customer delivery schedules, cancellation of orders and potential delays in product shipments,
our backlog as of any particular date may not be indicative of actual sales for any later period.

Competition

The markets for many of our products are intensely competitive. We face significant competition in each of our product lines. We compete with other major
international semiconductor companies, some of which have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their
products. Smaller niche companies are also increasing their participation in the semiconductor market, and semiconductor foundry companies have expanded significantly. Competitors include
manufacturers of standard semiconductors, application-specific ICs and fully customized ICs, including both chip and board-level products, as well as customers that develop their own integrated
circuit products and foundry operations. We also cooperate in some areas with companies that are our competitors in other areas.

The
following table shows key competitors for each of our business groups in alphabetical order:

Key Competitors By Business Group

Wireline Communications

Agere, Agilent, AMCC, Broadcom, Finisar, GlobespanVirata, Intel, Legerity, Mindspeed, PMC-Sierra, ST Microelectronics, Texas Instruments and VitesseSecure Mobile Solutions

Texas Instruments, ST Microelectronics, Philips und MotorolaAutomotive & Industrial

Fairchild, International Rectifier, Mitsubishi, Motorola, NEC, ON Semiconductors, Philips, Renesas, ST Microelectronics, and ToshibaMemory Products

ELPIDA, Hynix, Micron Technology and Samsung


Competition
among semiconductor suppliers has intensified in recent years. Memory products, particularly DRAM ICs, have seen the fiercest competition, but we expect that competition
among suppliers of ICs used for logic products will become at least as intense, if not more so, in the next few years.

We
compete in different product lines to various degrees on the basis of product design, technical performance, price, production capacity, product features, product system
compatibility, delivery times, quality and level of support. Innovation and quality are competitive factors for all business groups. Production capacity and delivery reliability play a particularly
important role in the Memory Products business group, where customers demand delivery within a very short period of time, and in the Automotive & Industrial business group.

Our
ability to compete successfully depends on elements both within and outside of our control, including:



58



Entry
into semiconductor manufacturing, particularly DRAM manufacturing, requires substantial capital expenditures and significant technological and manufacturing expertise. We believe
this provides us with a significant time-to-market advantage over any potential new entrant in the DRAM market.

Manufacturing

Our production of semiconductors is generally divided into two steps, referred to as the front-end process and the back-end process.

Front-end.In the first step, the front-end process, electronic circuits are
produced on silicon wafers which we buy from outside sources. The front-end production process involves a series of patterning, etching, deposition and implantation processes. At the end
of the front-end process, we test the chips for functionality.

We
believe that we are one of the leaders in the semiconductor industry in terms of the structure size on our wafers. Structure size refers to the minimum distances between electronic
structures on a chip. Smaller structure sizes increase production efficiencies in the manufacture of memory and logic products. The structure size of our current logic products is as small as 0.13
micron using copper wiring. The structure size of our current memory products is as small as 0.11 micron.

High-end
mask technology is a prerequisite for achieving small structure size. A mask is a master image of a circuit pattern used to produce ICs. Currently we still
manufacture nearly 40% of the high-end masks (and about 10% of all masks) that we use in the patterning part of the front-end process at our Munich Balanstrasse facility; the
other masks are being bought from DuPont Photomasks under a long-term supply agreement. In May 2002 we established the Advanced Mask Technology Center, a joint venture with AMD and
DuPont Photomasks
located in Dresden, to develop leading-edge photo masks. At the same location, DuPont Photomasks is setting up a mask foundry for high-end photomasks. Both plants are expected
to be operational by early 2004 and will later on replace the Munich facility as our mask provider.

In
the 2003 financial year, we significantly increased the share of DRAM manufacturing on wafers with 300-millimeter diameter. Our Dresden facility currently has a capacity
of 30,000 wafer starts per month and achieved full production qualification on 300-millimeter wafers, using 0.11-micron technology and a 256-Mbit DRAM product. At
September 30, 2003, approximately 10% of our memory capacity had been converted to 0.11-micron technology. The increasing share of 300-millimeter production and
0.11-micron technology should substantially reduce our overall cost for memory chips.

Back-end.In the second step of our semiconductor production, the back-end
process, the processed wafers are ground and mounted on a synthetic foil, which is fixed in a wafer frame. Mounted on this foil, the wafer is diced into small silicon chips, each one containing a
complete integrated circuit. A "pick and place" machine removes individual chips from the foil and glues them onto lead-frames, which hold the future pins of the product. The next step is
creating electrical links between the chip and the pins, called bonding. Then all the process steps "inside" the package are finished and the chips are molded with compounds. Depending on the package
type, the molded chips undergo a punching and pin bending process. At the end, the semiconductor undergoes final functional tests.

We
believe that our back-end facilities are equipped with the latest technology, enabling us to perform assembly and test on a cost-effective basis. These
facilities also provide us with the flexibility needed to customize products according to individual customer specifications. We believe that our back-end facilities provide an important
competitive advantage, especially with respect to IC testing and discrete devices.

We
had no significant unplanned production stoppages during the 2003 financial year.

59



Facilities

We operate manufacturing facilities around the world, including joint ventures in which we participate. The following table shows selected key information with
respect to our current major manufacturing facilities:

Current Manufacturing Facilities

|                                                       |  | Year of
commencement of
first production line |  | Principal products or functions                                      
|------------------------------------------------------ |  | --------------------------------------------- |  | ---------------------------------------------------------------------
|Front-end facilities:
wafer fabrication plants         |  |                                               |  |                                                                      
|Dresden, Germany(1)(2)                                 |  | 1996                                          |  | DRAM, ASICs with embedded Flash memory, logic ICs                    
|Richmond, Virginia(1)                                  |  | 1998                                          |  | DRAM                                                                 
|Essonnes, France(3)                                    |  | 1963(4)                                       |  | Logic ICs and ASICs with embedded Flash memory                       
|Munich Perlach, Germany                                |  | 1987                                          |  | High frequency; sensors                                              
|Villach, Austria(5)                                    |  | 1979                                          |  | Power, smart-power and discretes                                     
|Regensburg, Germany(5)(6)                              |  | 1986                                          |  | Non-volatile memory, power and logic ICs; High Frequency ICs         
|Warstein, Germany                                      |  | 1965(4)                                       |  | High power                                                           
|Back-end facilities:
assembly and final testing plants |  |                                               |  |                                                                      
|Dresden, Germany(1)                                    |  | 1996                                          |  | DRAM components and modules                                          
|Richmond, Virginia(1)                                  |  | 1998                                          |  | DRAM components and modules                                          
|Porto, Portugal(1)                                     |  | 1997                                          |  | DRAM components and modules                                          
|Malacca, Malaysia(1)                                   |  | 1973                                          |  | DRAM components and modules, discretes and power packages, logic IC?s
|Singapore                                              |  | 1970                                          |  | Assembly leadless logic ICs, final test logic IC                     
|Batam, Indonesia                                       |  | 1996                                          |  | Assembly & test for more mature lines of logic ICs, Power ICs        
|Regensburg, Germany                                    |  | 2000                                          |  | Chip card modules
Fiber-optic modules, sensors and pilot lines       
|Wuxi, China                                            |  | 1996                                          |  | Discretes, chip card modules                                         
|Berlin, Germany                                        |  | 1986                                          |  | Fiber-optic components and modules                                   
|Trutnov, Czech Republic                                |  | 1994                                          |  | Fiber-optic components and modules                                   
|Warstein, Germany                                      |  | 1965(4)                                       |  | High power                                                           
|Cegled, Hungary                                        |  | 1997                                          |  | High power                                                           

60

Our front-end facilities currently have a capacity of approximately 80,000 wafer starts per week (in 8-inch equivalents).
As a result of improved market conditions during 2003 compared to 2002, we were able to improve the capacity utilization in most of our production facilities. At September 30, 2003, we had the
ability to meet additional demand for logic ICs by shifting production from memory products and expanding our utilization of silicon foundries.

We
have devoted substantial resources to reducing our production costs over the past several years and believe that costs at our Dresden and Richmond DRAM manufacturing facilities are
currently comparable with those of our lowest-cost competitors.

Generally,
we use foundries to assist us in meeting demand for increased chip volumes. In recent years, we have enhanced our manufacturing cooperation with UMC, particularly with respect
to front-end production of EEPROM, flash technology for our chip card IC products, and CMOS baseband products for wireless communications. Currently we are introducing the jointly-
developed 90-nanometer technology node. In August 2003, we announced a joint development
agreement with IBM and Chartered Semiconductor Manufacturing to accelerate the move to 65-nanometer process technology.

In
1998, we introduced our memory "fab cluster" concept. It consists of our world-class wafer fabrication facilities in Dresden and Richmond and corresponding back-end sites
in Dresden, Richmond and Porto, as well as our backend subcontractors EEMS and Kingston. The fab cluster concept allows us to use best processes to maximize quality and enables us to ship memory
products from multiple sites. We can therefore supply memory products to anywhere in the world from any of the fabrication facilities in our fab cluster. We believe that the fab cluster reduces our
exposure to delivery problems. Also, by locating our facilities in different areas, we can recruit talent globally.

We
have extended the fab cluster concept to include fabrication sites of our Taiwanese partners Winbond and Nanya as well as our Chinese partner SMIC. The ProMOS fabrication facility in
Hsinchu, Taiwan was part of the fab cluster prior to our withdrawal from the ProMOS joint venture in the 2003 financial year.

Manufacturing ventures and partnerships

AMTC.In May 2002, we entered into agreements with AMD and Du Pont Photomask which establish
our strategic cooperation in the field of advanced lithographic photomasks. Under the terms of these agreements, we will co-develop photomasks and share development costs. For this purpose
the three partners have established an equally owned joined venture called Advanced Mask Technology Center GmbH & Co. KG in Dresden, Germany, to construct and operate a photomask manufacturing
facility (mask center). The mask center will develop and produce lithographic masks and samples. The mask center is expected to be operational in the early part of the 2004 calendar year.

CSVC.We are establishing a venture with China-Singapore Suzhou Industrial Park Venture
Co. Ltd. ("CSVC"), Suzhou, China, to construct a backend facility for the assembly and testing of memory ICs. The facility will be located in the Suzhou Industrial Park, near Shanghai. It will
have an output capacity of up to one billion chips per year, and will be developed in a number of stages as dictated by growth and trends in the global semiconductor market. We plan to invest
US$242 million over the next five years. It is anticipated that any further investment required to purchase additional equipment would be financed externally by the joint venture.

Inotera.Our newly formed Inotera joint venture with Nanya will employ the production technology
developed under our joint development agreement with Nanya. The Inotera manufacturing facility is expected to be constructed in two phases. The first phase is scheduled to be completed by the second
half of the 2004 calendar year. The first 300-millimeter wafers are planned to be processed using the current 110-nanometer process at the beginning of the 2004 calendar year.
The second phase

61

is
anticipated to be completed in the 2006 financial year. We will be entitled to half of the production capacity of Inotera. For further information on our alliance with Nanya, see "Strategic
AlliancesNanya" below.

SMIC.On December 4, 2002, we entered into a Know How Transfer Agreement and a Product
Purchase and Capacity Reservation Agreement with SMIC, which gives us access to additional DRAM production capacity. Under the terms of these agreements, we will transfer our 140-nanometer
DRAM-Trench Technology to SMIC. In return, SMIC will manufacture and we will purchase up to 20,000 wafers per month out of SMIC's 200-millimeter production facility in
Shanghai.

On
March 26, 2003 we entered into extended Know How Transfer- and Product Purchase and Capacity Reservation Agreements with SMIC, which gives us access to additional DRAM
production capacity in their 300-millimeter facility currently under construction in Beijing. Under the terms of these agreements, we will transfer our 110-nanometer
DRAM-trench technology and some 300-millimeter manufacturing know-how to SMIC. In return, SMIC will manufacture and we will purchase up to 15,000 wafers per month
out of SMIC's future 300-millimeter production facility in Beijing.

Winbond.On May 2, 2002, we entered into a Know How Transfer and License Agreement and a
Product Purchase and Capacity Reservation Agreement with Winbond, which gives us access to additional DRAM production capacity. Under the terms of these agreements, we will transfer and license our
110-nanometer DRAM trench technology to Winbond. In return Winbond will manufacture and we will purchase up to 20,000 wafers per month out of Winbond's 200-millimeter
production facility in Hsinchu (Taiwan). The agreements further allow Winbond to use the know how for the production of its proprietary Speciality DRAMs.

UEC.We agreed to establish a joint venture with United Epitaxy Company ("UEC"), Taiwan, for the
development and manufacturing of fiber optics components in Hsinchu, Taiwan. We will hold 56 percent of the shares of the joint venture, and UEC will hold the remainder. The total equity
investment amounts to approximately €12 million, and will be made according to the shareholding ratio of the parent companies. Mass production is scheduled for the fourth
quarter of the 2004 calendar year.

62

Research and Development

Research and development (R&D) is critical to our continuing success, and we are committed to maintaining high levels of research and development expenditures.
The amount of our R&D spending has increased significantly over the years. In the 2001 and 2002 financial years we curtailed our overall R&D spending from the levels originally planned in response to
depressed market conditions. The table below sets forth information with respect to our research and development expenditures for the periods shown:

Research and Development Expenditures

Financial year ended September 30,2001

2002

2003Expenditures in millions (net of subsidies received)

€1,189

€1,060

€1,089As a % of net sales

22
%
22
%
18
%


Most
of our R&D activities are concentrated in the following areas: product development, process technology, reusable cores and modules, computer-aided design and libraries, packaging
technology and basic research.

Our
logic ICs belong to the most complex system-on-chip designs and require a wide variety of intellectual property and sophisticated design methodologies, for
example to combine high performance with low power consumption. We believe that our emphasis on intellectual property and methodologies for logic ICs and their protection through patents will enable
us to strengthen our position in the logic IC market and that our expertise in mixed-signal devices is a particular competitive strength.

Process
technologies have been another important focus for our R&D activities, as we have sought to reduce structure sizes and develop new processes. We have successfully ramped up our
high-performance process technology using structure sizes of 0.13-micron for logic products, allowing for up to eight layers of copper-metallization. We are in the phase of
introducing a 90-nanometer process and have a technology roadmap for the next several years encompassing structure sizes down to 45-nanometer. Our process technologies benefit
from many modular characteristics, including special low-power variants, analog options and high-voltage capabilities. For memory process technology we are currently
successfully ramping the 0.11-micron process technology for DRAM products. A strategic development alliance with Nanya Technology Inc. for trench-based DRAM technology allows us to
share development costs and resources. We have reached cost cross-over of our 300-millimeter wafer fabs compared to the cost in our existing 200-millimeter fabs.

In
recent years we have devoted substantial resources to improving our R&D processes. In particular, we have improved our computer-aided design (CAD) systems and our libraries. CAD
systems are a crucial tool for our product designers. Libraries are databases that contain templates and standard design-elements that are common to multiple products. We believe that our efforts in
these areas enable us to reduce development cycle times and optimize our designs with regard to a higher performance and reduced power consumption.

We
also incur R&D expenditures through the purchase of businesses that have R&D projects in process, but which have not yet reached the technological feasibility stage. In the 2003
financial year we incurred an in-process R&D charge of €6 million related to our acquisitions of SensoNor and MorphICs. In the 2002 financial year, we incurred
in-process R&D charges of €37 million related to our acquisition of Ericsson Microelectronics, while in financial year 2001 we incurred an in-process R&D
charge of € 69 million related to the acquisitions of Ardent and Catamaran.

Our
R&D activities are mainly managed within our business groups. A central development group conducts those R&D projects that are of strategic importance, where the results are used
across all

63

business
groups. Very advanced basic or theoretical research, for example in the field of nano-electronics, is conducted by our central research department.

We
maintain an extensive network of cooperation arrangements with technical institutes and universities to remain current with technological developments.

Research
and development activities are conducted at locations throughout the world. The following table shows our major research and development locations and their respective areas of
competence:

Research and Development Locations

|Location                 |  | Areas of Competence                                                                                                                                                                          
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Munich, Germany          |  | Main product development site; CAD, library, simulation technologies, layout synthesis, mixed signal, radio-frequency, DRAM, 16-bit microcontrollers, ASICs with embedded DRAM, chip card ICs
|Bangalore, India         |  | Software development, library, design flow                                                                                                                                                   
|Dresden, Germany         |  | Flash and DRAM technology development                                                                                                                                                        
|Düsseldorf, Germany      |  | Mobile communications, radio frequency                                                                                                                                                       
|Graz, Austria            |  | Chip card ICs, radio frequency                                                                                                                                                               
|Hanover, Germany         |  | Mobile ICs                                                                                                                                                                                   
|Kista, Sweden            |  | Wireless systems                                                                                                                                                                             
|Nuremberg, Germany       |  | Software for wireless systems                                                                                                                                                                
|Regensburg, Germany      |  | Packaging, testing                                                                                                                                                                           
|Singapore                |  | Logic ICs, 8/32-bit microcontrollers, telecommunications                                                                                                                                     
|Sophia Antipolis, France |  | Modules for radio-frequency ICs, digital signal processing, library                                                                                                                          
|Villach, Austria         |  | Power semiconductor products, mixed signal, automotive and telecommunications applications                                                                                                   

At
September 30, 2003 our research and development staff consisted of approximately 5,900 employees working in our R&D units throughout the world, a net increase
of approximately 550 compared to September 30, 2002. This increase in R&D staff reflects new hires to support our solutions strategy and strengthen our position in Asia Pacific, as well as the
addition of R&D personnel of SensoNor and MorphICs.

64

Intellectual Property

Our intellectual property rights include patents, copyrights, trade secrets, trademarks, utility models, designs and maskwork rights. The subjects of our patents
primarily relate to IC designs and process technologies. We believe that our intellectual property is a valuable asset not only to protect our investment in technology but also a vital prerequisite
for cross-license agreements with third parties.

At
September 30, 2003, we owned more than 39,000 patent applications and patents (both referred to as patents below) in countries throughout the world. These patents belong to
approximately 9,900 "patent families" (each patent family containing all patents originating from the same invention). At September 30, 2003, approximately 80% of our patent families included
patents registered in Europe,
approximately 60% included patents registered in the United States and approximately 30% included patents registered in Asia. We filed first patent applications for approximately 1,600 inventions
worldwide in the 2003 financial year. As of September 30, 2003, approximately 4,350 of our patent families included at least one patent granted in the United States or Europe.

In
connection with our formation, the Siemens group transferred most of its semiconductor-related intellectual property to us. Further to our formation as a separate legal entity and in
preparation for our initial public offering in March 2000, we entered into a patent cross-license agreement with Siemens. As described below, certain of our rights and Siemens' rights to
utilize each others' patents under the cross-license agreement depend upon the date on which Siemens ceased to own or control more than 50% of our company's shares (referred to herein as the Control
Date). Under the cross-license agreement, among other things:



65



It
is common industry practice for semiconductor companies to enter into patent cross-license agreements with each other. These agreements enable each company to utilize the patents of
the other on specified conditions. In some cases, these agreements provide for payments to be made by one party to the other. We are a party to a number of patent cross-license agreements, including
agreements with other major semiconductor companies. We believe that our own substantial patent portfolio enables us to enter into patent cross-license agreements on favorable terms and conditions. We
are currently in patent cross-license negotiations with several major industry participants and expect to enter into additional patent cross-license agreements in the future.

Our
success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering our products and their design and manufacturing processes. To that
end, we have obtained many patents and patent licenses and intend to continue to seek patents on our developments. The process of seeking patent protection can be lengthy and expensive, and there can
be no assurance that patents will be issued from currently pending or future applications or that, if patents are issued, they will be of sufficient scope or strength to provide us with meaningful
protection or any commercial advantage. In addition, effective copyright and trade secret protection may be limited in some countries or even unavailable.

Many
of our competitors also seek to protect their technology by obtaining patents and asserting other forms of intellectual property rights. Third-party technology that is protected by
patents and other intellectual property rights may be unavailable to us or available only on unfavorable terms and conditions. Third parties may also claim that our technology infringes their patents
or other intellectual property rights, and they may bring suit against us to protect their intellectual property rights. From time to time, it may also be necessary for us to initiate legal action to
enforce our own intellectual property rights. Litigation can be very expensive and can divert financial resources and management attention from other important uses. It is difficult or impossible to
predict the outcome of most litigation matters, and an adverse outcome can result in significant financial costs that can have a material adverse effect on the losing party. We are currently engaged
in several material disputes over intellectual property rights, including litigation with Rambus and Mosaid Technologies. For a description of these matters, see "Legal
MattersLitigation".

Strategic Alliances

Cooperation in product design, development and manufacturing between semiconductor suppliers and customers is increasing in response to the growing diversity and
complexity of semiconductor products and applications, the demands of technological change and the costs associated with keeping pace with industry developments. Alliances with customers provide the
manufacturer with valuable systems and applications know-how and access to markets for key products, while allowing the manufacturer's customers to share some of the risks and benefits of
product development. Customers also gain access to the manufacturer's process technologies and manufacturing infrastructure. Alliances with other semiconductor manufacturers permit costly research and
development and manufacturing resources to be shared to mutual advantage for joint technology development.

As
part of our strategy, we have entered into a number of long-term strategic alliances with leading industry participants for the manufacture of products and for research
and development

66

relating
to the development of new products and manufacturing process technologies. These strategic alliances confer a number of important benefits, including:



Memory Products

In order to maintain our technological leadership in the DRAM market and to share start-up costs inherent in bringing out successive generations of
memory products, we have entered into a number of strategic alliances with selected partners for research and development and manufacturing activities in relation to memory products.

The
following table shows our most important memory-related strategic alliances, as well as their respective activities and locations:

Strategic alliances for memory products

|Partner |  | Technology                          |  | Activity                                                               |  | Location                        
|------- |  | ----------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------
|IBM     |  | MRAM (magnetic non-volatile memory) |  | R&D in both technology development and early stage product development |  | East Fishkill, New York         
|Nanya   |  | 90 and 70-nanometer DRAM process    |  | R&D in both product and technology development                         |  | Dresden, Germany/
Taoyen, Taiwan

Logic Products

In order to remain at the forefront of technological advancement and to share the initial costs inherent in bringing out successive generations of logic products,
we have entered into a number of strategic alliances with selected partners for research and development and manufacturing activities in relation to logic products.

67

The
following table shows our most important logic-related strategic alliances, as well as their respective activities and locations:

Strategic alliances for logic products

|Partner       |  | Technology                                    |  | Activity                                       |  | Location               
|------------- |  | --------------------------------------------- |  | ---------------------------------------------- |  | -----------------------
|IBM           |  | 0.18-micron and 0.13-micron CMOS process      |  | Technology development                         |  | East Fishkill, New York
|IBM/UMC       |  | 90-nanometer CMOS process                     |  | Technology development                         |  | East Fishkill, New York
|UMC           |  | 90-nanometer CMOS process and product ramp up |  | R&D in both product and technology development |  | Hsinchu, Taiwan        
|UMC           |  | 0.13-micron Embedded Flash                    |  | R&D in both product and technology development |  | Hsinchu, Taiwan        
|IBM/Chartered |  | 65-nanometer CMOS process                     |  | R&D in both product and technology development |  | East Fishkill, New York
|IBM           |  | 45-nanometer CMOS process and product ramp up |  | R&D in both product and technology development |  | East Fishkill, New York

Principal Alliances

Our principal alliances are with IBM, UMC and Nanya:

IBM.In 1997, we entered into a joint development agreement with IBM to develop common process
technologies for manufacturing logic products with minimum feature sizes of 0.18-micron and 0.13-micron. In 1999 we signed an agreement to continue this partnership for
90-nanometer technology, and included UMC in the alliance. In 2000 we entered into a joint development agreement with IBM to develop future generations of DRAM process technologies, down
to feature sizes of 0.11-micron. In 2003 we agreed with IBM to jointly develop 65-nanometer and 45-nanometer logic technologies, and included Chartered
Semiconductor in the alliance with respect to 65-nanometer technologies.

Our
principal cooperation with IBM began in 1991, when we entered into an arrangement with IBM under which IBM manufactured DRAM products in its Essonnes facility and we received a share
of the production. Based upon our history of cooperation with IBM, we agreed with IBM to convert the Essonnes facility to production of logic devices and to convert the existing production cooperation
arrangement into a joint venture called ALTIS Semiconductor. We own 50% of the joint venture's shares plus one share and IBM owns the rest. Both our company and IBM have one vote at the joint
venture's shareholders meeting, and we are both entitled to nominate one of the joint venture's two chairmen. The joint venture became effective on July 12, 1999, and the facility's conversion
to logic production has been completed. Both companies agreed to have only one jointly appointed CEO.

The
joint venture agreements impose certain restrictions on the ability of each of the shareholders to sell or transfer its shares in the joint venture, and also provide that each
shareholder may acquire the other's shares at an appraised value if the other shareholder undergoes a change of control. For this purpose, "change of control" means the acquisition by a third party of
more than 35% of the outstanding equity of the other shareholder or any consolidation, merger or reorganization of the other shareholder in which it is not the surviving corporation. Each of Infineon
and IBM may acquire the

68

other's
shares in the joint venture or dissolve the joint venture if there is a deadlock or if the other party defaults on its obligations under the joint venture agreement.

During
the 2003 financial year, we and IBM amended the original shareholders agreement of ALTIS. Pursuant to the amendment, we will ratably increase our capacity reservation in the
production output
of ALTIS from the existing level of 50% to 100% during calendar years 2004 through 2007. We and IBM have agreed that the both of us will decide about the future business model of ALTIS not later than
January 1, 2007. Additionally, we were granted an option through July 1, 2007 to acquire IBM's interest in ALTIS.

We
and IBM have both extended revolving term loans to ALTIS. As of September 30, 2003, the outstanding balance of our loan to ALTIS was €61 million.

UMC.In 1999, UMC, a leading semiconductor foundry, joined as an additional partner in our alliance
with IBM for logic technology development.

In
2000, we entered into a joint development agreement with UMC to develop common process technologies for the manufacture of logic products with embedded flash memory capabilities based
on a feature size of 0.13-micron.

In
2001 we entered into a joint venture agreement with UMC and a third party investor to construct and operate a 300-millimeter semiconductor facility. The joint venture,
which is named UMCi, was to provide integrated circuit foundry services utilizing 300-millimeter wafer production lines, and to produce, develop and sell integrated circuits in wafer, die
and packaged form. As part of the transaction, we agreed to transfer specified technology, including 300-millimeter manufacturing techniques and certain process commercializations from our
joint development arrangement with IBM and UMC; provided, however, that we would not be required to transfer any information to UMCi that we were not otherwise permitted to disclose. In
December 2001, UMCi extended a loan of $55 million to us, which bore interest at market rates. The loan was paid back in April 2003.

In
2002, UMC decided to leave our alliance with IBM for logic technology development. We decided that after the completion of our development of 90-nanomenter technology, we
would ramp our first products using 90-nanometer technology, however we would cease our future R&D cooperation. Our cooperation continues with respect to electrical and geometrical target parameters,
in order to keep our process technology closely aligned. UMC continues to be the prime manufacturing foundry partner for our products.

We
sold our ownership interest in UMCi to UMC, which resulted in a pre-tax loss of €9 million in the fourth quarter of the 2003 financial year, mainly
due to the adverse fluctuation in the US$/Euro exchange rate after our investment was made. This move allows us and UMC to concentrate on our broader manufacturing partnership, and give us a more
flexible manufacturing approach that includes access to all of UMC's current Taiwanese facilities, and access to UMCi when its production capacity comes on line.

Nanya.On November 13, 2002, we entered into agreements with Nanya, which establish our
strategic cooperation in the field of standard DRAM memory products. Under the terms of these agreements, we are co-developing and share development costs for advanced
90-nanometer and 70-nanometer production technologies for 300-millimeter wafers. We have established the Inotera joint venture for the production of DRAM chips, and
the construction of a new jointly-owned 300-millimeter manufacturing facility in Taiwan.

It
is envisaged that when completed, Inotera's 300-millimeter manufacturing facility will employ the production technology developed under our joint development agreement
with Nanya. The facility is expected to be constructed in two phases. The first phase is projected to be completed by the second half of the 2004 calendar year. The first 300-millimeter
wafers are planned to be processed using the

69

current
110-nanometer process at the beginning of the 2004 calendar year. The second phase is anticipated to be completed in the 2006 financial year. We will be entitled to half of the
production capacity of Inotera.

MVI.In 1996, Siemens formed the ProMOS joint venture with Mosel Vitelic (MVI) to produce
64-Mbit DRAM ICs at a fabrication facility in Hsinchu, Taiwan. Siemens took an initial 38% interest in the joint venture which was later transferred to us. Siemens also licensed relevant
technology to MVI and ProMOS and assisted them in implementing this technology. During the 2000 financial year, we entered into new technology transfer agreements with ProMOS.

On
October 4, 2002, we announced that we had cancelled the shareholders' agreement with MVI relating to the ProMOS joint venture due to repeated material breach of the agreement
by MVI. The termination was effective as of January 1, 2003. The product purchase and capacity reservation agreement, which established the rights and obligations of both shareholders to
purchase product from ProMOS, also terminated upon termination of the shareholders' agreement.

On
January 27, 2003 we terminated the technology license agreement. ProMOS subsequently terminated this same technology license agreement. In January 2003 we announced our
intention to liquidate our investment in ProMOS. Through September 2003, we have sold substantially all of our ProMOS shares. We intend to dispose of our remaining ProMOS shares in the short
term subject to regulatory approvals.

In
May 2003, ProMOS initiated an arbitration proceeding related to this dispute in Munich. See "Legal Matters" for a description of this proceeding.

Acquisitions and Dispositions

In furtherance of our goal of developing and accessing world-class intellectual property and development resources, we have undertaken a number of acquisitions,
entered into several joint ventures and made a variety of financial investments, including through Infineon Ventures, our venture capital investment group. In addition to the arrangements concluded as
part of our strategic alliances described above, the main transactions completed in the 2003 financial year are:

Acquisitions and Joint Ventures

In April 2003, we bought the assets of MorphICs Technology Inc., headquartered in Campbell, California, with the aim of strengthening our position
in the 3G sector and expanding our IP portfolio for multi-standard wireless solutions. This acquisition is expected to broaden our product range for the 3G infrastructure market with programmable
chips for digital baseband signal processing, enabling us to cover the entire signal-processing chain. The acquisition also supports our entrance into the Chinese base station market since MorphICs'
principal customer base is in China. In conjunction with the acquisition we took on 30 employees, customer relationships and a number of patents.

In
May 2003, Infineon acquired the business activities of Hitex group, manufacturer of microcontroller tools (emulators and debuggers) in Germany.

In
June 2003, we acquired SensoNor AS ("SensoNor"), for total cash consideration of €34 million. In addition we contributed capital of
€13 million subsequent to the consummation of the transaction. SensoNor, which was previously a publicly-listed company in Norway, develops, produces and markets
tire-pressure and acceleration sensors. With this acquisition, we aim to strengthen our position in semiconductor sensors for the automotive business.

In
April 2001, we established a joint venture (then called Ingentix) in which we held a 51% ownership interest, with Saifun Semiconductors Ltd. In 2003, we increased our
ownership interest to 70% by contributing additional capital and converting existing shareholder loans to equity. We renamed

70

the
joint venture Infineon Technologies Flash GmbH & Co. KG, which is now located in Dresden, Germany, and Infineon Technologies Flash Ltd., located in Netanya, Israel. Our joint venture
has an enlarged scope focusing on data flash (Multi Media Card, SD-Card, etc.) and code flash products based on Saifun's proprietary NROM flash technology (NROM is a two-bit
flash cell based on charge storage in ONO dielectric).

Other transactions

In November 2002, we signed contracts with OpTun, Inc. to spin off our R&D unit in the Wavelength Division Multiplexing (WDM) optical component
arena, and merge these activities with Optun. The combined company, retaining the name Optun, is targeted at providing Smart WDM solutions and modules to the optical networking systems market. Under
the terms of the agreement, we have transferred related intellectual property and patents to the new company, and became a shareholder. We act as a global distributor for OpTun's products. In
conjunction with the spin-off/merger transaction, OpTun has been raised a second round of financing, in which we and other investors have participated.

As
described above, through September 2003, we sold substantially all of our shares in ProMOS. The sale of our shares in this joint venture resulted in a pre-tax gain of
€60 million in the 2003 financial year.

Infineon Ventures Investments

Beginning in the 1999 financial year, we initiated a program of minority investments in start-up companies through Infineon Ventures, our venture
capital unit. These investments are an important tool for us in accessing innovative new technologies and emerging business opportunities related to our business. Individual investments made through
Infineon Ventures typically range in size from €0.5 million to €6 million. We invested a total of €56 million in the 2001 financial
year, €13 million in the 2002 financial year and €11 million in the 2003 financial year. Our active portfolio of venture capital investments currently
comprises some 33 companies in a wide range of electronics-related areas. We have also made investments in three venture capital funds active in areas related to our business. In order to reflect
current market conditions and based on management judgment of the realizable value of each active portfolio company we have included impairments in the amount of €26 million in
the 2002 financial year and €22 million in the 2003 financial year.

Employees

We employed a total of approximately 32,300 employees as of September 30, 2003. For a further description of our workforce by location and function over
the past three years, see "Operating and Financial ReviewOther MattersEmployees".

A
significant percentage of our employees, especially in Germany, are covered by collective bargaining agreements determining remuneration, working hours and other conditions of
employment, and are represented by works councils. Works councils are employee-elected bodies established at each location in Germany and also at a company-wide level (Infineon
Technologies AG). Works councils have numerous rights to notification and of codetermination in personnel, social and economic matters. Under the German Works Constitution Act
(Betriebsverfassungsgesetz), the works councils must be notified in advance of any proposed employee termination, they must confirm hirings and
relocations and similar matters, and they have a right to codetermine social matters such as work schedules and rules of conduct. Management considers its relations with the works councils to be good.
A separate works council exists at our subsidiaries in Dresden (Infineon Technologies Dresden GmbH & Co. OHG and Infineon Technologies SC 300 GmbH & Co. KG). The members of the senior
management (Infineon Technologies AG) are represented by a senior management committee (Sprecherausschuss).

71



The collective bargaining agreements pertain to certain of our non-management employees in Germany (affecting approximately 7,500 employees) the Czech Republic (affecting
approximately 1,100 employees) and Austria (affecting approximately 2,600 employees). The agreement in the Czech Republic expires on December 31, 2003. The agreement in Germany is perpetual,
but can be terminated by the trade union with a notice of one month prior to December 31, 2003. The agreement in Austria expires on May 1, 2005. The provisions of these agreements
generally remain in effect until replaced through a subsequent agreement. Agreements for periods after expiration are to be negotiated with the respective trade unions through a process of collective
negotiations.

During
the last three years we have not experienced any major labor disputes resulting in work stoppages. During the recent collective bargaining round, in April 2002, brief
"warning" strikes occurred at our facilities in Regensburg and Munich, in which approximately 230 of our employees were involved for approximately 45 minutes.

Legal Matters

Litigation

Rambus.On August 7, 2000 and August 8, 2000, Rambus Inc. ("Rambus"), filed
separate actions against us in the U.S. and Germany. Rambus alleges that our SDRAM and DDR DRAM products infringe patents owned by Rambus.

On
May 4, 2001 and May 9, 2001, the Federal District Court for the Eastern District of Virginia (the "District Court") dismissed all 57 of Rambus' patent infringement
claims against us. In addition, the court found that Rambus committed fraud by its conduct in the JEDEC standard setting organization and awarded damages to us. On January 29, 2003 the U.S.
Court of Appeals for the Federal Circuit ("CAFC") revised the District Court's claim construction on 4 claim terms, and remanded the infringement case back to the District Court for a jury trial. The
CAFC also reversed the District
Court's finding that Rambus had committed fraud by its conduct in JEDEC. We appealed the CAFC's decision unsuccessfully to the U.S. Supreme Court. The retrial in the District Court on the patent
infringement claims is in the early stages. We believe we have meritorious defences to the allegations of infringement.

Court
proceedings in the German court began in December 2000 and are still active. An expert report commissioned by the court was rendered in May 2002 but the court has not
yet made its decision on the basis of this report. In September 2002, the European Patent Office (EPO) declared that the Rambus patent had been unduly broadened, thus making it easier for us to
defend against allegations of direct infringement. Rambus has appealed the EPO's declaration, and the EPO is expected to decide on the appeal following a hearing in February 2004. The Court has
scheduled a hearing in the infringement matter for May 2004 subsequent to the then expected decision of the EPO. We believe we have meritorious defenses to the allegations of infringement.

SDRAM
and DDR DRAM products incorporating the technology that is the subject of the Rambus claims currently constitute substantially all of the products of our Memory Products segment.
This segment contributed net sales of €2,485 million and earnings before interest and taxes of €31 million during the year ended September 30,
2003. If we were to be enjoined from producing SDRAM and DDR DRAM products, our financial position and results of operations would be materially and adversely affected, since we would have to
discontinue the SDRAM and DDR DRAM product lines or enter into a licensing arrangement with Rambus, which could require the payment of substantial licensing fees.

We
currently license certain RDRAM technology from Rambus. Our use of this technology is not in dispute in the proceedings described above.

72

U.S. Department of Justice Investigation.On June 17, 2002, our U.S. subsidiary received a
grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the
"DOJ") into possible antitrust violations in the DRAM industry. We are cooperating with the DOJ in its investigation.

Civil antitrust claims.Subsequent to the commencement of the DOJ investigation, a number of
purported class action lawsuits were filed against us and other DRAM suppliers. Sixteen cases were filed between June 21, 2002 and September 19, 2002 in the following federal district
courts: one in the Southern District of New York, five in the District of Idaho, and ten in the Northern District of California. Each of the federal district court cases purports to be on behalf of a
class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during a specified time period commencing on or after October 1, 2001. The complaints allege
price-fixing in violation of the
Sherman Act and seek treble damages in unspecified amounts, costs, attorneys' fees, and an injunction against the allegedly unlawful conduct. On September 26, 2002, the Judicial Panel on
Multi-District Litigation held a hearing and subsequently ordered that the foregoing federal cases be transferred to the U.S. District Court for the Northern District of California (San Francisco) for
coordinated or consolidated pretrial proceedings.

Eight
additional cases were filed between August 2, 2002 and March 11, 2003 in the following California state superior courts: five in San Francisco County, one in Santa
Clara County, one in Los Angeles County, and one in Humboldt County. Each of the California state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM
during a specified time period commencing December 1, 2001. The complaints allege violations of California's Cartwright Act and Unfair Competition Law and unjust enrichment and seek treble
damages in unspecified amounts, restitution, costs, attorneys' fees, and an injunction against the allegedly unlawful conduct. In response to a petition filed by one of the plaintiffs, a judge
appointed by the Judicial Council of California subsequently ordered that the then-pending state cases be coordinated for pretrial purposes and recommended that they be transferred to San
Francisco County Superior Court for coordinated or consolidated pretrial proceedings.

European Commission Investigation.In April 2003, we received a request for information from
the European Commission (the "Commission") to enable the Commission to assess the compatibility with the Commission's rules on competition of certain practices of which the Commission has become aware
in the European market for DRAM memory products. We are in the process of responding to the Commission in its investigation.

An
adverse final resolution of the Rambus claims, the DOJ or Commission investigations or the civil antitrust claims described above would result in significant financial liability to,
and other adverse effects upon, us, which would have a material adverse effect on our business, results of operations and financial condition. Irrespective of the validity or the successful assertion
of the above-referenced claims, we could incur significant costs with respect to defending against or settling such claims, which could have a material adverse effect on our results of operations or
financial condition or cash flows.

Other Matters

In October 1999, Deutsche Telekom AG notified us of a potential contractual warranty claim in respect of chips supplied by us for Deutsche Telekom calling
cards. The claim relates to damages allegedly suffered by Deutsche Telekom as a result of such cards being fraudulently reloaded by third parties. Deutsche Telekom originally alleged damages of
approximately €90 million as a result of these activities, reflecting damages suffered and the cost of remedial measures, and sought compensation from both Siemens and
ourselves. In September 2001, however, Deutsche Telekom brought an action in the State Court (Landgericht) in Darmstadt, Germany against Siemens alone, and increased the alleged

73

amount
of damages to approximately €125 million. Siemens served third party notice on us on December 21, 2001. In 2003 Deutsche Telekom has increased its claim to
€150 million. On July 15, 2003, the state court ruled that Deutsche Telekom did not have a valid claim for damages against Siemens and us. Deutsche Telekom has appealed
the decision. Should Siemens be found liable, we could be responsible for payments to Siemens in connection with certain indemnifications provided to Siemens at our formation. We have investigated the
Deutsche Telekom claim and believe that it is without merit.

One
of our customers notified us on May 18, 2000 that the customer had received a letter from Rambus alleging that one of the components of its product violates Rambus' patents.
We supplied this customer with the relevant component, and the customer has requested that we indemnify it for any damages it may incur as a result of Rambus' claims. The customer's notice to us does
not specify any figure for such damages. Accordingly, we cannot predict at this time what our exposure, if any, is likely to be if this customer's claim against us is found to be valid.

On
May 7, 2003 ProMOS filed arbitration proceedings against us in Munich under the ICC Arbitration Rules. We had licensed certain DRAM technologies to ProMOS under a license
agreement, which we subsequently terminated due to ProMOS' material breach. ProMOS is seeking an affirmative judgment that ProMOS was entitled to terminate the license agreement due to our material
breach, but to be allowed to continue to use the licensed technology. ProMOS is also seeking payment of approximately $31 million for DRAM products sold to us. We have denied the alleged
material breach and requested the arbitration tribunal to dismiss all of ProMOS' claims. We have also filed counterclaims seeking an affirmative judgment that we were entitled to terminate the license
agreement due to a material breach by ProMOS, that ProMOS be required to cease using our DRAM technologies and that we are entitled to damages for the misappropriation of our DRAM technologies in an
amount exceeding $31 million. We do not believe that the ultimate resolution of these proceedings will have a material adverse effect on our results of operations or financial condition.

In
late 2002, MOSAID Technologies Inc. alleged that we are violating 11 DRAM-related U.S. patents of MOSAID. In December 2002, we filed an action in the U.S.
Federal District Court for the Northern District of California seeking a declaratory judgment that we do not violate such patents.
On February 7, 2003, MOSAID filed a counter-suit opposing our motion for declaratory judgment and seeking damages for the alleged patent infringement. On November 3, 2003
MOSAID announced that it has filed an amended counterclaim to add two new patents to its previous claims. This matter is at an early stage. An adverse final resolution could result in significant
financial liability to, and other adverse effects upon, us, which would have a material adverse effect on our business, results of operations and financial condition.

We
are subject to various other lawsuits, legal actions, claims and proceedings related to products, patents and other matters incidental to our businesses. Based upon information
presently known to management, we do not believe that the ultimate resolution of such other pending matters will have a material adverse effect on our financial position, although the final resolution
of such matters could have a material adverse effect on our results of operations or cash flows in the year of settlement.

Environmental Protection and Sustainable Management

Our global Environmental Management System is designed to eliminate or to minimize possible negative impacts of our manufacturing processes on the environment,
our employees and third parties. Most of our production sites worldwide are already matrix certified according to EN/ISO 14001. The matrix certification audit of our facilities in Richmond (US) and
Cegled (Hungary) will be carried out in the 2004 financial year. We are also planning to integrate in our matrix certificate the production site of SensoNor, a provider of tire pressure and
acceleration sensors in Norway, which we acquired in June 2003.

74

Environmental
protection means not only complying with legal regulations, but also adherence to a continual process of improvement of our products and the operation of our plants and
facilities. It also means educating our staff in environmental issues and motivating them to take part in environmental issues. When developing new products or designing our production processes, we
attempt to minimize the possible impact of production and activities on the environment. For example, our 0.11-micron process gives us a substantially higher chip output per wafer,
compared to our previous 0.14-micron DRAM process, which allows us to save resources.

Hazardous
substances or materials are used in the production of semiconductors. We are implementing a global database to record the chemical substances and compositions that are used in
our manufacturing processes. The database will enable us to better assess the risk characteristics of these substances and to avoid harmful effects on our employees and on the environment. At the
moment, five production sites utilize this database.

Most
of our processes are carried out in closed loops and systems that eliminate the impact of hazardous substances or materials on our employees' health. We regularly test and monitor
employees whose work may expose them to hazardous substances or materials, in order to detect any potential health risks and to take appropriate remedial measures by an early diagnosis. As part of the
Environmental Management System, we train our employees in the proper handling of hazardous substances.

Where
we are not able to eliminate adverse environmental impacts entirely, we aim to minimize the impact to an acceptable level. For example, we utilize PFCs (perfluorinated components)
as etching agents in the production of semiconductors. As early as 1992, we started to install exhaust air filter systems to reduce PFC emissions. We are signatories to a voluntary declaration by the
European Semiconductor Industry that has the goal of reducing overall PFC emissions by 2010 by approximately 10% from the emission level of 1995, calculated in CO2 equivalents. Assuming an
annual production volume growth within the semiconductor industry of 15%, that would represent an emission reduction by 2010 of approximately 90% from the 1995 level, calculated in CO2
equivalents.

Because
the damage and loss caused by a fire at a semiconductor facility can be severe, we have constructed and operate our facilities in ways that minimize the specific risks and that
enable a quick response if a fire should occur. We expect to continue to invest in fire prevention and response at our facilities.

In
connection with our formation, Siemens retained certain facilities located in the United States and certain related environmental liabilities. Businesses that were contributed to us
have conducted operations at some of these facilities and, under applicable law, could be required to contribute to the environmental remediation of these facilities despite the fact that these sites
were retained by Siemens. We currently know of no further investigations at these sites. We believe its potential exposure, if any, to liability for remediating the U.S. facilities retained by
Siemens is therefore low.

Because
some of our facilities are located close to or shared with those of other companies, including members of the Siemens group, we may need to respond to claims relating to
environmental contamination not originating from our own operations.

We
believe that we are in substantial compliance with environmental as well as health and safety laws and regulations. There is, nevertheless, a risk that we may become the subject of
environmental, health or safety liabilities or litigation. Environmental health and safety claims or the failure to comply with current or future regulations could result in the assessment of damages
or imposition of fines against us, suspension of production or a cessation of operations. Significant financial reserves or additional compliance expenditures could be required in the future due to
changes in law or new information regarding environmental conditions or other events, and those expenditures could adversely affect our business or financial condition.

75

National
legislation enacted pursuant to a recent European Union directive will create significant new obligations regarding the collection, recovery and disposal of electrical and
electronic equipment. This directive obligates manufacturers to finance the collection, recovery and disposal of such products at the end of their useful life. Our products constitute electronic
equipment under the terms of this directive. The end-of-life obligations may affect us as suppliers to electrical and electronic equipment producers and as producers of
electronic equipment. These measures will affect our entire industry. The legislation is in the process of being implemented in all of the EU member states. Because it is not clear how the costs of
financing the take-back will be shared between producers, other suppliers and distributors of the affected products, we are not able at this time to estimate the amount of additional costs
that we may incur in connection with this legislation.

Another
European directive restricts the use of lead and some types of flame retardant in electronic components beginning in 2006. The majority of our products will be
lead-free and halogen-free in 2004. We therefore expect to introduce complying products to the market earlier than required by European Union law.

On
October 29, 2003, the European Commission adopted a proposal for a new European Union regulatory framework for chemicals. The new proposal, called REACH, deals with the
registration, evaluation and authorization of chemicals. If approved by the appropriate EU bodies, this proposal will have a considerable impact not only on producers and importers of chemical
substances, but also on downstream users like the semiconductor industry. The availability of chemical substances could be reduced in the European Union, which could have a negative impact on our
production. We expect to incur significant future costs in connection with this proposal if it is adopted, but we are not currently able to estimate these expenditures.

Real Property

We own approximately 1.8 million square meters of property at our facilities at Batam (Indonesia), Cegled (Hungary), Dresden (Germany), Munich (Germany),
Porto (Portugal), Regensburg (Germany), Richmond (Virginia, USA), Singapore, Trutnov (Czech Republic), Villach (Austria) and Warstein (Germany).

In
addition, we have long-term rental agreements in respect of our premises in Berlin (Germany), Düsseldorf (Germany), Munich (Germany), Bristol (England),
Tokyo (Japan), Tel Aviv (Israel), and we also have a number of long-term lease arrangements, including on our premises in Essonnes (France), Malacca (Malaysia), San Jose (California, USA),
Raleigh (North Carolina, USA), Singapore, Suzhou (PR China) and Wuxi (PR China). We believe that these properties are rented or leased on ordinary market terms and conditions.

We
plan to enter into a long-term operating lease agreement with MoTo Objekt Campeon GmbH & Co. KG ("MoTo") to lease an office complex that is to be
constructed by MoTo south-east of Munich. The office complex will enable us to centralize our employees, who are currently situated in various locations throughout Munich, in one physical
working environment. MoTo is responsible for the construction, which is expected to be completed in mid-2005. We have no obligations with respect to financing MoTo, and have provided no
guarantees related to the construction. We expect to occupy under an operating lease arrangement towards mid 2005. We can provide no assurance that this project will be completed.

76



MANAGEMENT

In accordance with the German Stock Corporation Act(Aktiengesetz), our company has a supervisory
board and a management board. The two boards are separate and no individual may simultaneously be a member of both boards. The management board is responsible for managing our business in accordance
with applicable laws, the Articles of Association of our company 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 our company but is not permitted to make management decisions.

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
our company 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 our company and its
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. 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 our company and must establish an internal monitoring system.

Under
German law, shareholders of a company, like other persons, are liable to the company for damages if they intentionally use their influence on the company 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 the company. If a member of the management board or supervisory board neglects his or her
duties, he is jointly and severally liable with the persons exercising such influence. A controlling enterprise may not cause our company to take measures that are unfavorable to our company unless
any resulting disadvantage is compensated or a control agreement has been concluded. Board members who have neglected their duties in dealing with a controlling enterprise are jointly and severally
liable to our company for damages together with the controlling entity.

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 our company. Apart from insolvency or other special circumstances, only our company has the right to claim damages from members of either board. We 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' general meeting with a simple majority, provided that opposing
shareholders do not hold, in the aggregate, one-tenth or more of the share capital of our company and do not have their opposition formally noted in the minutes maintained by a German
notary.

Supervisory Board

Our supervisory board consists of 16 members. The shareholders, by a majority of the votes cast by the shareholders in a general meeting, elect eight members and
the employees elect the remaining eight members. Among the eight employee representatives are one Supervisory Board member from the ranks of the executive employees (Leitende
Angestellte), five from the ranks of the employees (excluding executive employees) and two representatives of the trade unions represented in the Infineon group in Germany. All
current shareholder representatives on the supervisory board were elected at general shareholders' meetings held on January 19, 2000 and January 22, 2002, except Mr. Kley, who was
appointed by a court to replace a retiring member. All of the current employee

77

representatives
were appointed by a court pursuant to Section 104 of the German Stock Corporation Act. The employees have called elections for employee members of the supervisory board which
are scheduled for mid-December 2003 (election via delegates). The elected members will replace the members appointed by the court immediately following the annual general meeting,
which is scheduled for January 20, 2004.

The
shareholders, by a majority of the votes cast by the shareholders in a general meeting, may remove any member of the supervisory board they have elected in a general meeting. The
employee representatives may be removed by those employees that elected them by a vote of three-quarters of the votes cast. The supervisory board elects a chairman and two deputy chairmen from among
its members. If no candidate is elected by a vote of two-thirds of the members of the supervisory board, the shareholder representatives elect the chairman and the employee representatives
elect a deputy chairman. The supervisory board normally acts by simple majority vote, with the chairman having a deciding vote in the event of a deadlock in a second vote on the same matter.

The
supervisory board meets at least once during each quarter year. Its main functions are:



Our
supervisory board has established an Investment, Finance and Audit Committee, comprising the chairman of the supervisory board, who serves as chairman of the committee, and two other
members of the supervisory board, one of whom is elected from the shareholder representatives and the other from the employee representatives on the supervisory board. The Investment, Finance and
Audit Committee carries out the functions normally carried out by the audit committee of a U.S. company, among other duties, including:



The
Investment, Finance and Audit Committee also supports the supervisory board in its duty of supervising our business and may exercise the oversight powers conferred upon the
supervisory board by German law for this purpose. Decisions of the Investment, Finance and Audit Committee require a simple majority.

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According
to German law, the shareholders may determine the term of each shareholder-elected member of the supervisory board. The maximum term of office of shareholder-elected
supervisory board members expires at the end of the shareholders' general meeting in which the shareholders discharge the supervisory board members for the fourth financial year after the start of
their term as a supervisory board member.

The
present members of our supervisory board, their ages, the year in which their term expires and their principal occupations as of September 30, 2003 are as follows:

Supervisory Board Members

|Name                                           |  | Age |  | Term
expires |    | Other business activities(4)                                                                                                                                                                                                                                                                                         
|---------------------------------------------- |  | --- |  | ------------ | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Max Dietrich Kley(1)(2)(3) Chairman            |  | 63  |  | 2005         |    | Member of the supervisory board of BASF AG
Additional external positionsMember of the supervisory board of
    Bayerische Hypo- und Vereinsbank AG, Munich                                                                                                                                                           
|                                               |  |     |  |              |    | Comparable external positionsMember of the advisory board of
    Schott Glas, Mainz
Member of the board of directors of
    Cazenove Group Plc., London, Great Britain
Member of the board of administration of
    Landesbank Rheinland-Pfalz, Mainz                                                                
|Alfred Eibl*(1)(3) Deputy Chairman             |  | 54  |  | 2004         | ** | Member of the works council Munich Balan-/ St.-Martin-Strasse                                                                                                                                                                                                                                                        
|Dr. h.c. Martin Kohlhaussen(1) Deputy Chairman |  | 67  |  | 2005         |    | Chairman of the supervisory board of Commerzbank AG
Additional external positionsMember of the supervisory boards of:
    Bayer AG, Leverkusen
    Heraeus Holding GmbH, Hanau
    HOCHTIEF AG, Essen
    Schering AG, Berlin
    ThyssenKrupp AG, Dusseldorf
    Verlagsgruppe Georg von Holtzbrinck GmbH, Stuttgart
|Ender Beyhan*                                  |  | 35  |  | 2004         | ** | Member of the central works council
Member of the works council Munich-Perlach                                                                                                                                                                                                                                       
|Johann Dechant*                                |  | 38  |  | 2004         | ** | Deputy Chairman of the works council Regensburg-West                                                                                                                                                                                                                                                                 
|                                               |  |     |  |              |    |                                                                                                                                                                                                                                                                                                                      

79

|Dr. Joachim Faber   |  | 53 |  | 2005 |    | Member of the management board of Allianz AG
Additional external positionsMember of the supervisory board of
    Bayerische Börse, Munich
    Societa Metallurgica Italiana S.p.A., Florence, Italy
Company positionsChairman of the supervisory boards of:
    Allianz Dresdner Asset Management, Munich
    DBI Dresdner Bank Investment Management
        Kapitalanlagengesellschaft mbH, Frankfurt
    DEGI Deutsche Gesellschaft für Immobilienfonds mbH,
        Frankfurt
    Deutscher Invest Trust Gesellschaft für Wertpapieranlagen
        mbH, Frankfurt
Comparable company positionsMember of the board of administration of
RASBANK S.p.A., Milan, Italy                                                                                                                                               
|------------------- |  | -- |  | ---- | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Heinz Hawreliuk*    |  | 56 |  | 2004 | ** | Head of the company codetermination department of IG Metall
Additional external positionsMember of the supervisory boards of:
    Astrium GmbH, Ottobrunn
    DaimlerChrysler Aerospace AG, Munich
    DaimlerChrysler Luft- und Raumfahrt Holding AG,
        Munich
    Eurocopter Deutschland GmbH, Donauwörth
    Siemens AG, Berlin and Munich                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Dr. Stefan Jentzsch |  | 42 |  | 2005 |    | Member of the management board of Bayerische Hypo- und Vereinsbank AG
Additional external positionsMember of the supervisory board of
    Deutsche Börse AG, Frankfurt
Company positionsChairman of the supervisory boards of:
    HVB Alternative Investment AG, Vienna, Austria
    HVB Alternative Financial Products AG, Vienna, Austria
    DAB Bank AG, Munich
Deputy chairman of the supervisory board of
    Vereins- und Westbank AG, Hamburg
Member of the supervisory boards of:
    Bank Austria Creditanstalt AG, Vienna, Austria
    HVB Systems GmbH, Munich
    HVB Info GmbH, Munich Comparable company positionsChairman of the board of administration of
    HVB Wealth Management Holding, Munich
Deputy chairman of the board of administration of
    Bank von Ernst & Cie AG, Bern, Switzerland
|                    |  |    |  |      |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

80

|Klaus Luschtinetz*               |  | 60 |  | 2004 | ** | Chairman of the central works council
Vice Chairman of the works council Munich Balan-/ St.-Martin-Strasse
Comparable external positionsMember of the board of administration of
    Siemens Employees Health Insurance, Munich                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------- |  | -- |  | ---- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Karl Heinz Midunsky(2)(3)        |  | 59 |  | 2005 |    | Corporate Vice President and Treasurer of Siemens AG
Additional external positionsMember of the supervisory board of
    Hanover Rückversicherungs-AG, Hanover
Company positionsChairman of the supervisory board of
    Krauss-Maffei Wegmann Verwaltungs-GmbH, Munich
Deputy Chairman of the supervisory boards of:
    Risicom Rückversicherung AG, Grünwald near Munich
    Siemens Dematic AG, Munich
    Siemens VDO Automotive AG, Munich
Member of the supervisory board of
    BSH Bosch und Siemens Hausgeräte GmbH, Munich
Comparable company positionsMember of the board of
    Fujitsu Siemens Computers (Holding) B.V., Amsterdam,
    the Netherlands
Member of the board of administration of
    Siemens Building Technologies AG, Zurich, Switzerland
|Wolfgang Müller*                 |  | 55 |  | 2004 | ** | Director of Organization; IT Industry, IG Metall Bavaria
Additional external positionsMember of the supervisory board of
    Siemens AG, Munich                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Univ.-Prof. Dr.-Ing. Ingolf Ruge |  | 68 |  | 2005 |    | Professor at the Technical University Munich                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Michael Ruth*                    |  | 43 |  | 2004 | ** | Vice President, Business Administration, Secure Mobile Solutions; Representative of senior management
Comparable company positionsMember of the boards of shareholders' representatives of:
    Comneon GmbH&Co. OHG, Nuremberg
    Comneon electronic technology GmbH&Co. OHG, Linz,
        Austria
Member of the advisory board of
    DICE Danube Integrated Circuit Engineering GmbH &
    Co. KG, Linz, Austria
Member of the board of directors of
    Infineon Technologies Wireless Design Denmark A/S,
    Aalborg, Denmark                                                                                                                                                                                                                                   
|Gerd Schmidt*(2)                 |  | 49 |  | 2004 | ** | Deputy Chairman of the central works council
Chairman of the works council Regensburg-West                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                 |  |    |  |      |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

81

|Dr. rer. nat. Martin Winterkorn |  | 56 |  | 2005 |  | Chairman of the management board of Audi AG
Member of the management board of Volkswagen AG
Additional external positionsMember of the supervisory boards of:
    Salzgitter AG, Salzgitter
    FC Bayern München AG, Munich
Comparable company positionsMember of the supervisory boards of:
    SEAT S.A., Barcelona, Spain
    Lamborghini Holding S. p. A., Italy                                                                                                                                                                                                                                                           
|------------------------------- |  | -- |  | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Prof. Dr. Ing. Klaus Wucherer   |  | 59 |  | 2005 |  | Member of the management board of Siemens AG
Additional external positionsMember of the supervisory board of
    Deutsche Messe AG, Hanover
Company positionsMember of the supervisory board of
    BSH Bosch and Siemens Hausgeräte GmbH, Munich
Comparable company positionsChairman of the boards of administration of:
    Siemens Ltd., Beijing, PR China
    Siemens E&A, Atlanta, USA
    Siemens K.K., Tokyo, Japan
    Siemens S.A., Lisbon, Portugal
Member of the boards of administration of:
    Eviop-Tempo, Athens, Greece
    Siemens Building Technologies, Zurich, Switzerland
    Siemens Ltd., Mumbai, India

Neither we nor any of our subsidiaries have entered into special service contracts with the members of the supervisory board that provide for
benefits during or upon termination of their board membership other than as described under "Compensation".

The
members of our supervisory board, individually or in the aggregate, do not own, directly or indirectly, more than one percent of our company's outstanding share capital.

The
business address of each of the members of our supervisory board is Infineon Technologies AG, St.-Martin-Strasse 53, D-81669, Munich, Germany.

82



Management Board

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

Under
the Articles of Association of our company and German law, 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.

Our
management board has adopted rules of procedure for the management board. Our supervisory board approved these rules and resolved that the following decisions of the management board
require the consent of the supervisory board:



In
addition, the rules of procedure provide that the chairman of the management board must notify the chairman of the supervisory board of any pending matter that is significant. The
chairman of the supervisory board must, at the next meeting of the supervisory board, notify the other members of the supervisory board of such matter, and the supervisory board may, on a
case-by-case basis, designate such matter as one requiring supervisory board approval.

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
rules of procedure provide that the management board shall take action by unanimous vote.

The
chairman of the management board must propose a plan that allocates responsibilities among the management board members and obtain the consent of the supervisory board without delay
once the management board has adopted the plan. This consent has been obtained.

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 such member's term for good cause, for example, in the case of a serious breach of duty or a
bona fide vote of no confidence by the shareholders' general meeting. A member of the management board may not deal with, or vote on, matters that relate to proposals, arrangements or contracts
between such member and our company.

83

The
present members of our management board, their ages, the year in which their term expires and their positions as of September 30, 2003 are as follows:

Management Board Members

|Name                      |  | Age |  | Term
expires |  | Position and Outside Directorships                                                                                                                                
|------------------------- |  | --- |  | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Dr. Ulrich Schumacher     |  | 45  |  | 2008         |  | Chairman, President and Chief Executive OfficerMember of the supervisory board of
    Deutsche Bahn AG, Berlin                                                    
|Peter Bauer               |  | 43  |  | 2008         |  | Executive Vice President and Chief Sales and Marketing OfficerMember of the supervisory boards of:
    Siemens VDO Automotive AG, Munich
    Astron AG, Osterwieck
|Peter J. Fischl           |  | 57  |  | 2008         |  | Executive Vice President and Chief Financial Officer                                                                                                              
|Dr. Andreas von Zitzewitz |  | 43  |  | 2008         |  | Executive Vice President and Chief Operating OfficerMember of the supervisory board of
    Steag Hamatech AG, Sternenfels                                         

All
current members have served in their positions since April 1, 1999, when our company was established as a legal entity.

Dr. Ulrich Schumacherhas been our Chief Executive Officer since the inception of our company in April 1999. He was a member
of the Managing Board of Siemens from January 1998 until May 1999. From October 1996 until the inception of our company, he was President and Chief Executive Officer of Siemens
Semiconductor Group. From 1992 to 1996, he served as General Manager, Standard ICs Division of Siemens Semiconductor Group. He is a member of the supervisory board of Deutsche Bahn AG, the German
railway. Dr. Schumacher began his career at Siemens Components Group in 1986 and was responsible for equipment and test engineering. Dr. Schumacher received a Ph.D. in engineering from
the Technical University of Aachen.

Peter Bauerhas been our Executive Vice President, Sales and Marketing since the inception of our company in April 1999, and he was
President and Chief Executive Officer of Siemens Microelectronics, Inc. from 1998 to April 1999. From 1997 to 1999, Mr. Bauer was also President, Sales and Solution Centers for
Siemens Semiconductor Group. Prior to that, he held other executive positions at Siemens Semiconductor Group. He is a member of the supervisory board of Siemens VDO Automotive AG. Mr. Bauer
began his career with Siemens Semiconductor Group in 1986 as a development engineer. Mr. Bauer received a diploma in electrical engineering from the Technical University of Munich.

Peter J. Fischlhas been our Executive Vice President and Chief Financial Officer since the inception of our company in April 1999.
From October 1996 to March 1999, Mr. Fischl served as Executive Vice President and Chief Financial Officer of Siemens Semiconductor Group. From 1995 to 1996, Mr. Fischl was
General Manager and Vice President of Siemens Mobile Network Division. Prior to that, he was Vice President, Finance and Business Administration at other Siemens divisions. He started working at
Siemens Telecommunications Group in 1971 as a project manager.

Dr. Andreas von Zitzewitzhas been our Executive Vice President and Chief Operating Officer since the inception of our company in
April 1999. He was President, Memory Products Division of Siemens Semiconductor Group from June 1995 until January 2000. Dr. von Zitzewitz was Director,

84

Research
and Development of the Standard ICs Division of Siemens Semiconductor Group from 1992 to 1995. From 1990 to 1992, he was head of product definition, systems engineering and product
management, Telecom ICs Division of Siemens Semiconductor Group. He is a member of the supervisory board of STEAG Hamatech AG, a manufacturer of equipment for the optical disk and photomask industry.
Dr. von Zitzewitz began his career with Siemens Semiconductor Group in 1986 working on product definition and project management of telecom ICs. Dr. von Zitzewitz received his Ph.D. in
electrical engineering from the University of Bochum.

In
addition, Dr. Sönke Mehrgardt served as our Executive Vice President and Chief Technology Officer since the inception of our company in April 1999 until
September 30, 2003.

The
members of our management board, individually or in the aggregate, do not own, directly or indirectly, more than one percent of our company's outstanding share capital.

The
business address of each of the members of our management board is Infineon Technologies AG, St.-Martin-Strasse 53, D-81669 Munich, Germany.

Compensation

Under our articles of association, the annual compensation for each member of the supervisory board is €25,000. The chairman of the supervisory
board receives 200% of this amount and each of the deputy chairman and each member of certain committees receive 150% of this amount. The aggregate compensation of the members of our supervisory board
for the 2003 financial year was €0.5 million (consisting of fixed components of €0.5 million, variable components of €0 and consideration
for other personally rendered services of €0). In addition, all members of the supervisory board receive 1,500 share appreciation rights (Wertsteigerungsrechte) per year, which are
granted and may be exercised for cash under the same conditions as options granted under the then current long-term incentive plan.

During
the 2003 financial year, we made the standard annual grant of 1,500 share appreciation rights to each member of our supervisory board, as described above, but did not grant any
stock options to the members of our supervisory board.

The
total remuneration of the management board for the 2003 financial year consisted of fixed salary of €2.0 million and 750,000 stock options. The stock options
were granted in connection with the 2001 International Long-Term Incentive Plan. The fair value of each stock option at their grant date was €4.45. These options have an
exercise price of €8.98 per share; will become exercisable no earlier than November 23, 2004, subject to the condition that the trading price of our ordinary shares on the
Frankfurt Stock Exchange will have reached the exercise price on at least one trading day; and will expire on November 15, 2009. During the 2003 financial year a provision was established for
variable bonuses of the management board of €4.2 million.

The
total income of the members of our management board consists of the annual target income in cash, stock options and other benefits.

Of
the annual target income:



Stock
options on Infineon Technologies AG shares serve as variable compensation component with a long term incentive as well as risk character.

85

Other
benefits comprise pension awards, continued remuneration sickness payment and a company car.

We
have entered into service contracts with each of the members of the management board. Pursuant to these contracts, board members are entitled to receive certain transitional payments
upon termination of their board membership. These payments generally consist of an amount equal to the
respective board member's twelve most recent monthly salary payments plus a lump sum equal to the average bonus, if any, received by the member in each of the last three financial years. If a board
member dies subsequent to the termination of membership, the then-outstanding benefits will be paid to such member's heirs. No transitional payments are payable with respect to board
members whose membership is terminated for cause or who resign before the age of 60. In addition, board members who are unable to continue to fulfill their duties, including because the supervisory
board fails to renew their board membership, or who retire after the age of 60 are entitled to certain pension benefits. The amount of the chairman's monthly pension is equal to 70 percent of
his most recent monthly salary. The amounts of the other members' pensions are agreed on an individual basis. A board member's pension may be reduced in certain circumstances, including if the member
receives income from certain other occupations or if our economic situation changes so substantially that we cannot reasonably be expected to continue to grant the benefits. Upon a board member's
death, benefits may be payable to the deceased's spouse or orphaned children.

We
have not extended any loans to the members of our supervisory or management boards.

Long-Term Incentive Plans

1999 Share Option Plan.Under our 1999 Share Option Plan we granted non-transferable
share options to members of our management board, directors of subsidiaries and affiliates, managers and key employees.

As
of September 30, 2003, options to purchase an aggregate of 9,518,154 shares were outstanding under the 1999 plan, of which options to purchase 1,302,000 shares were held by
members of our management board. The 1999 plan was discontinued and, accordingly, we no longer grant options under that plan.

The
exercise price of the options granted under the 1999 plan is 120% of the average closing price of our company's shares on the Frankfurt Stock Exchange over the five trading days
preceding the date of grant. Holders of options may exercise them during the seven-year period following the date of grant but only if the share price of our company has reached the
exercise price at least once during a trading day in Xetra or its successor during the duration of the option and only after the second anniversary of the date of grant. In addition, holders may not
exercise an option within fixed time periods prior to or following publication of our quarterly or annual results.

When
options are exercised, our company may either issue new shares from its conditional capital or deliver previously issued shares.

2001 International Long-Term Incentive Plan.In April 2001, we adopted the
Infineon Technologies AG 2001 International Long-Term Incentive Plan, which we refer to as the 2001 plan. Under the 2001 plan, we have the authority over a five-year period to
grant non-transferable share options to members of our management board, to the members of the top management of our subsidiaries, and to other senior level executives and employees with
exceptional performance of Infineon Technologies AG and our subsidiaries. We may grant options covering up to 2.5 million shares to members of our management board, 6.3 million shares to
members of the top management of our German and foreign subsidiaries, and 42.7 million shares to senior level executives and employees with exceptional performance below management board level
of Infineon Technologies AG and below top management level of domestic and foreign subsidiaries. We may not grant options under the 2001 plan covering

86

more
than 51.5 million shares in our company in the aggregate. As of September 30, 2003, options to purchase an aggregate of 20,371,330 shares were outstanding under the 2001 plan, of
which options to purchase 1,040,000 shares were held by members of our management board.

Under
the 2001 plan, the supervisory board will decide annually within a period of 45 days after publication of the results for the financial year then ended, but no later than
two weeks before the end of the quarter, how many options to grant to the management board. During that same period the management board may grant options to other eligible persons. In addition, the
2001 plan provides that options may be granted at specified times throughout the year. Each year up to a maximum of 30% of the plan options may be granted.

The
exercise price of the options granted under the 2001 plan is 105% of the average opening share price of our company's shares on the Frankfurt Stock Exchange over the five trading
days preceding the date of grant. Options granted under the 2001 plan have a term of seven years after the date of grant and may be exercised after the second anniversary of the date of grant at the
earliest, but only if the share price of our company has reached the exercise price at least once during a trading day. In addition, holders may not exercise an option within fixed time periods prior
to or following publication of our quarterly or annual results.

When
options are exercised, our company may either issue new shares from its conditional capital, deliver previously issued shares or elect to settle the options in cash.

Employee Share Purchase Program

We have implemented an employee share purchase program, or ESPP, under which most of our employees (including employees of designated subsidiaries) will be
offered the opportunity to purchase our shares at a discount. The ESPP is administered by a committee of our management board. The
committee has broad discretion to determine the terms upon which our shares will be offered under the ESPP. For example, the committee may determine the timing and length of offering periods, the
total number of shares to be made available in any offering period, the number of shares that may be purchased by any participating employee and the discount, if any, that will be offered to
participating employees. It is generally contemplated that our shares will be offered to employees at a discount of 15% from the then current market price of our company's shares on the Frankfurt
Stock Exchange. The terms of the ESPP, as implemented in each of the countries in which there are participating employees, will vary to some extent to comply with local laws and regulations. We expect
that there would be offerings under the ESPP in each financial year, but in the 2003 financial year no offering was made.

Employees
of any of our participating U.S. subsidiaries who purchase shares under the ESPP will receive ADSs. A separate plan intended to qualify as an "employee stock purchase plan"
under Section 423 of the United States Internal Revenue Code of 1986 applies to the employees of our United States subsidiaries. The purchase price for shares offered to U.S. employees under
this plan will not be lower than 85% of the closing price of our ADSs on the New York Stock Exchange on the first or the last day of the relevant offering period, whichever is lower.

We
have also adopted two separate plans that allow our eligible employees who are based in Germany, as well as eligible employees of our participating German subsidiaries, to purchase
additional shares under the ESPP.

The
first plan, which we refer to as the General Supplemental Offer, provides that all of our employees who are based in Germany, as well as all employees of our German subsidiaries, may
purchase shares at a discounted price determined by the committee. The maximum number of shares that a participant may purchase under the General Supplemental Offer is subject to limits set forth in
the German Income Tax Act. In order to benefit from certain advantageous German tax treatment,

87

employees
who purchased shares under the General Supplemental Offer in connection with the ESPP's initial offering period may not transfer those shares until December 31, 2006.

The
second plan, which we refer to as our Exempt Staff Offer, provides that our highly skilled and management level employees, as well as the highly skilled and management level
employees of some of our German subsidiaries, may purchase additional shares at a discounted price determined by the committee. Employees who purchased shares under the Exempt Staff Offer in
connection with the ESPP's first offering period may not transfer those shares until December 31, 2002.

A
total of 3 million shares were reserved for issuance under the ESPP. Employees who purchase shares under the ESPP may not transfer those shares for a period of time to be
determined by the committee
prior to each offering period. We issued 355,460 shares under the ESPP in the 2002 financial year. There was no plan offering during the 2003 financial year.

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PRINCIPAL SHAREHOLDERS

The following table shows the beneficial ownership, as of September 30, 2003, of our company's share capital by (1) the principal
shareholders (each person or entity who owns beneficially 5% or more of our shares) and (2) the members of our management board and supervisory board, each as a group. We are not directly or
indirectly owned or controlled by any foreign government.

|                                                   |  | Shares owned
|-------------------------------------------------- |  | ------------
|
|Wachovia Trust Company, National Association(1)(2) |  | 200,000,000 
|Siemens Nederland N.V.(2)(3)                       |  | 86,292,363  
|Capital Group Companies, Inc.                      |  | 36,534,489  
|Members of the management board as a group         |  | *           
|Members of the supervisory board as a group        |  | *           

None of the members of either our management board or supervisory board owns, directly or indirectly, more than one percent of our company's
outstanding share capital.

In
August 2000, Siemens Nederland N.V. issued 25,000 bonds with a nominal value of €100,000 each, each of which is exchangeable at the option of the holders
thereof into 1,000 of our company's shares at an exchange price of €100 per share. The exchange feature may be exercised on any business day during the exchange period, which commenced
on August 10, 2001 and ends on July 27, 2005 or, in the event of early redemption by the issuer on and including the fourth business day immediately preceding the day fixed for such
early redemption.

Under
German law, any person or group of persons that holds more than 25% of the shares in our company represented at a shareholders' general meeting would be in a position to block
shareholder action on a variety of matters, including the exclusion of preemptive rights in a capital increase, or any capital decrease, merger, consolidation, spin-off, sale or other
transfer of all or substantially all of our assets, a change in the corporate form or business purpose of our company or the dissolution of our company.

Siemens
AG has the right to direct the voting of 12.0% of our company's shares held by its subsidiary Siemens Nederland N.V. However, because 27.7% of our company's shares are currently
held in a non-voting trust, the shares held by Siemens Nederland N.V. represent 16.6% of the shares that may be voted at any general shareholders' meeting of our company. This no longer
gives Siemens AG the blocking powers, described in the preceding paragraph, that it would have as the holder of 25% of the shares of our company represented at a shareholders' general meeting.

89

The
business address of Wachovia Trust Company, National Association, is One Wachovia Center, 301 S. College Street, Charlotte, North Carolina, 28288-0137, USA. The business
address of Siemens Nederland N.V. is Prinses Beatrixlaan 26, 2595 AL, The Hague, The Netherlands. The business address of Siemens AG is Wittelsbacherplatz 2, D-80333
München, Germany. The business address of The Capital Group Companies, Inc. is 333 South Hope Street, Los Angeles, California, 90071, USA.

To
our knowledge, as of September 30, 2003, there were outstanding approximately 28,692,100 of our American Depositary Shares (representing an equivalent number of our ordinary
shares), which represented approximately 4% of our issued and outstanding share capital, and there were approximately 163 holders of record of our American Depositary Shares.

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TRANSACTIONS AND RELATIONSHIP BETWEEN INFINEON AND THE SIEMENS GROUP

Formation and Control

In November 1998, Siemens announced its intention to covert its semiconductor activities into a separate legal entityInfineonand
its plans for the initial public offering
and listing of our shares. In March 2000, as part of our initial public offering, Siemens' affiliate, Siemens Nederland N.V., sold 173,475,000 of our shares.

Siemens
and Siemens Nederland N.V. have stated on a number of occasions that they intend to reduce their ownership stake and/or voting interest in our company as and when business and
market conditions permit. Siemens and Siemens Nederland N.V. have in the past taken several steps to reduce their holdings of our company's shares. First, in July 2000, Siemens Nederland N.V.
issued bonds exchangeable into 25 million of our company's shares. The current exchange price of these bonds is €100 per share, with the exchange period commencing on
August 10, 2001. Second, in April 2001, Siemens transferred 93,825,225 of our company's shares to the Siemens Pension Trust e.V., which we understand was done in order to rebalance the
trust's net asset value in light of increased obligations resulting from Siemens' acquisition of Mannesmann ATECS AG. According to a notice, dated March 20, 2003, given by the Siemens Pension
Trust e.V. to us, all these shares were sold prior to March 18, 2003.

In
December 2001, Siemens transferred 200,000,000 of our shares to the (then) First Union Trust Company, National Association, as trustee under a trust agreement between it and
Siemens. In a schedule 13G filed by First Union with the SEC, First Union states that under the trust agreement it has been granted the exclusive power to vote the shares that it holds but that
it has also agreed to refrain from voting such shares. It also reports that Siemens has retained the economic rights of ownership of such shares, including the right to receive any dividends paid on
such shares and the exclusive right to direct First Union to sell such shares. Upon completion of transfer of the shares to First Union, Siemens announced that it would no longer consolidate our
company's financial results for purposes of its own financial reporting. Subsequently, the First Union Trust Company changed its name to Wachovia Trust Company.

Subsequently,
Siemens Nederland N.V. has sold more of our shares into the open market and may continue to do so without giving prior notice. We will only obtain knowledge of such
disposal if Siemens informs us or the general public of such transactions.

We
understand that Siemens and Siemens Nederland N.V. continually consider further measures to reduce their ownership stake in our company. Among other things, Siemens has received
authorization from its shareholders to offer shares of our company in exchange for shares of Siemens as a means for Siemens to repurchase its own shares. Siemens has to date not provided any
indication of the timing of any such exchange program, nor has it specified the total number of our company's shares that it might make available to holders of Siemens shares in such an exchange
program.

Other
than the above-mentioned measures that we understand are currently under consideration, we are not aware of what any further steps in the Siemens program to reduce its ownership of
our company's shares may be or when such steps may occur. Siemens and Siemens Nederland N.V. have, however, indicated that they are considering a wide range of potential alternative techniques and
timetables for disposing of their remaining shares in our company. Any such transaction could occur at any time or from time to time.

We
have granted to Siemens and Siemens Nederland N.V. certain rights to have our company's shares that they own registered for resale under the Securities Act. We have agreed to
indemnify

91

Siemens
against certain liabilities that might arise in connection with such a registration, including certain liabilities under the Securities Act.

Services

We historically relied on the Siemens group to provide us with a wide range of administrative, financial, information technology and other services. The Siemens
group continues to provide some of these services on the basis of IT framework agreements and individual service agreements. The IT framework agreements specify the general framework conditions for
the separation of IT/voice networks and resources, the joint running of a firewall system and the security requirements for access to purchased services. Each of these services (including payroll,
travel management, export control, patent administration and library services) are then purchased on the basis of individual service agreements, with no access to Siemens' internal data. We believe
all services from the Siemens group companies are purchased at market prices and on arms'-length terms and conditions.

The
Siemens group also provides office equipment and leases real estate to us.

During
the 2003 financial year, purchased services from Siemens include information technology services of €96 million, facility rental of
€48 million, and administrative services of €85 million.

Sales

The Siemens group is our largest customer. In the 2001, 2002 and 2003 financial years, 14%, 12% and 13%, respectively, of our net sales resulted from direct sales
to the Siemens group. An additional 2%, 2% and 1%, respectively, of our net sales in each of the three years resulted from sales through the Siemens group's sales organization for resale to third
parties. We believe that these transactions are on terms no less favorable to us than we could obtain from third parties.

More
details about our sales through Siemens' sales organization can be found under "Operating and Financial ReviewResults of Operations" and more details about our sales
generally can
be found under "BusinessCustomers, Sales and MarketingSales and Marketing".

Non-competition

Siemens has entered into a non-competition agreement with us. Under this agreement, Siemens has agreed that no member of the Siemens group will engage
in or carry out any research or development, production or distribution of semiconductor devices or license or sublicense any of our patents to any party for use in research or development, production
or distribution of semiconductor devices. The agreement is subject to certain exceptions relating to such matters as application-specific semiconductor devices designed specifically for use in or in
connection with Siemens group products, spare parts for those products, and the application in equipment and systems of circuitry of Dual Use Patents, as well as to variousde
minimisexceptions.

These
general non-competition restrictions will remain in force until March 13, 2004. After that time, should it ever decide to re-enter the semiconductor
business, Siemens could use these patent rights to compete against us.

Patent Cross-License Agreement

We have entered into a patent cross-license agreement with Siemens that grants Siemens the right to use our patents and grants us the right to use Siemens'
patents. This agreement is described under "BusinessIntellectual Property".

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Divestiture

Pursuant to an agreement reached between us and Osram GmbH ("Osram"), a Siemens subsidiary, we transitioned all of our opto-electronic activities to
Osram as of March 31, 2003. The agreement provides for the transfer of all customer relationships and related backlog, the cancellation of our opto-electronic distribution
agreements, as well as providing us with certain rights of return related to unsold inventory as of March 31, 2003. We did not incur a loss on the discontinuation of our
opto-electronic business.

Acquisition

On October 8, 2003, we announced that we have agreed to purchase assets, assume certain liabilities and take over other parts of the Protocol Software
operations of Siemens, in exchange for €13 million and the employment of approximately 145 of Siemens' mobile communication software engineers. In addition, we entered into a
license agreement and amended our product supply agreement with Siemens. The finalization of these transactions is subject to a variety of conditions prior to closing.

93



ARTICLES OF ASSOCIATION

This section summarizes the material rights of holders of the shares of our company under German law and the material provisions of the Articles
of Association of our company. This description is only a summary and does not describe everything that the Articles of Association contain. Copies of the Articles of Association are publicly
available at our website, www.infineon.com, and from the Commercial Register in Munich, and an English translation has been filed with the Securities and Exchange Commission in the United States.

Share Capital

The issued share capital of our company consists of €1,441,761,208 divided into 720,880,604 individual shares in registered form with a notional
value of €2.00 each. According to German law, our individual shares do not have a par value but they do have a notional value that can be determined by dividing the share capital
amount by the number of shares. Since our formation, changes in our share capital have been as follows:



94



Registrar
Services GmbH, the transfer agent and registrar of our company in Germany, registers record holders of shares in the share register on our behalf pursuant to a transfer agency
agreement. The transfer agent also maintains the register of our shareholders.

Authorized Capital

Under the German Stock Corporation Act, a stock corporation's shareholders can authorize the management board to issue shares in a specified aggregate nominal
amount of up to 50% of the issued share capital at the time the resolution is passed. The shareholders' authorization may extend for a period of no more than five years.

The
Articles of Association of our company authorize the management board to increase the share capital with the supervisory board's consent. The management board may use these
authorizations to issue new shares in one or more tranches:



Conditional Capital

Our company also has conditional capital in an aggregate nominal amount of €96 million that may be used to issue up to 48 million
new registered shares in connection with our 1999 and our 2001 long-term incentive plans and additional conditional capital in an aggregate nominal amount of
€29 million that may be used to issue up to 14.5 million new registered shares in connection with our 2001 long-term incentive plan. These shares will have
dividend rights from the beginning of the financial year in which they are issued.

Our
company also has conditional capital in an aggregate nominal amount of €50 million that may be used to issue up to 25 million new registered shares upon
conversion of debt securities issued in

95

February 2002.
These shares will have dividend rights from the beginning of the financial year in which they are issued.

Our
company also has conditional capital in an aggregate nominal amount of €350 million that may be used to issue up to 175 million new registered shares
upon conversion of debt securities, which we may issue at any time prior to January 2007. Of these 175 million shares, 68.4 million have been reserved for issue upon conversion of
debt securities we have issued in June 2003. All these shares will have dividend rights from the beginning of the financial year in which they are issued.

Preemptive Rights

Under the German Stock Corporation Act, an existing shareholder in a stock corporation has a preferential right to subscribe for issues of new shares by that
corporation in proportion to the number of shares he holds in the corporation's existing share capital. These rights do not apply to shares issued out of conditional capital. Preemptive rights also
apply to securities that may be converted into shares, securities with warrants, profit-sharing certificates and securities with dividend rights. The German Stock Corporation Act only allows the
exclusion of this preferential right in limited circumstances. At least three fourths of the share capital represented at the relevant shareholders' meeting must vote for exclusion. In addition to
approval by the shareholders, the exclusion of preemptive rights requires a justification. The justification must be based on the principle that the interest of the company in excluding preemptive
rights outweighs the shareholders' interest in their preemptive rights.

Preemptive
rights resulting from a capital increase may generally be transferred and may be traded on any of the German stock exchanges upon which our shares are traded for a limited
number of days prior to the final date on which the preemptive rights may be exercised.

Shareholders' Meetings and Voting Rights

A general meeting of the shareholders of our company may be called by the management board or the supervisory board. Shareholders holding in the aggregate at
least 5% of our issued share capital may also require the management board to call a meeting. The annual general meeting must take place within the first eight months of the financial year. The
management board calls this meeting upon the receipt of the supervisory board's report on the annual financial statements.

Under
German law and the Articles of Association of our company, our company must publish notices of shareholder meetings in the German Federal Gazette (Bundesanzeiger)at least one month before the last day
on which the shareholders must notify our company that they intend to attend the meeting.

A
shareholder or group of shareholders holding a minimum of either 5% of the share capital of our company or shares representing at least €500,000 of its registered
capital may require that additional or modified proposals be made at our shareholders' general meeting.

Shareholders
who are registered in the share register may participate in and vote at the shareholders' general meeting. A notice by a shareholder of his intention to attend a
shareholders' general meeting must be given to our company at least six days (or a shorter period, if so determined by management) before the meeting, not counting the day of notice and the day of the
meeting. Following receipt of a notice of this type, our company will not enter a transfer of the related shares in the share register until after the conclusion of the shareholders' general meeting.
In certain cases, a shareholder can be prevented from exercising his voting rights. This would be the case, for instance, for resolutions on the waiver or assertion of a claim by our company against
the shareholder.

Each
share carries one vote at general meetings of the shareholders. Resolutions are generally passed with a simple majority of the votes cast. Resolutions that require a capital
majority are passed with a simple majority of the issued capital, unless statutory law or the Articles of Association of our

96

company
require otherwise. Under the German Stock Corporation Act, a number of significant resolutions must be passed by a majority of the votes cast and at least 75% of the share capital represented
in connection with the vote taken on that resolution. The majority required for some of these resolutions may be lowered by the Articles of Association. The shareholders of our company have lowered
the majority requirements to the extent permitted by law.

Although
our company must notify shareholders of an ordinary or extraordinary shareholders' meeting as described above, neither the German Stock Corporation Act nor the Articles of
Association of our company fixes a minimum quorum requirement. This means that holders of a minority of our shares could control the outcome of resolutions not requiring a specified majority of the
outstanding share capital of our company.

According
to the Articles of Association of our company, a resolution that amends the Articles of Association must be passed by a majority of the votes cast and at least a majority of
the nominal capital represented at the meeting of shareholders at which the resolution is considered. However, resolutions to amend the business purpose stated in the Articles of Association of our
company also
require a majority of at least three-quarters of the share capital represented at the meeting. The 75% majority requirement also applies to the following matters:



Dividend Rights

Shareholders participate in profit distributions in proportion to the number of shares they hold.

Under
German law, our company may declare and pay dividends only from balance sheet profits as they are shown in our company's unconsolidated annual financial statements prepared in
accordance with applicable German law. In determining the distributable balance sheet profits, the management
board and the supervisory board may allocate to profit reserves up to one half of the annual surplus remaining after allocations to statutory reserves and losses carried forward.

The
shareholders, in determining the distribution of profits, may allocate additional amounts to profit reserves and may carry forward profits in part or in full.

Dividends
approved at a shareholders' general meeting are payable on the first stock exchange trading day after that meeting, unless otherwise decided at the shareholders' general
meeting. Where shareholders hold physical certificates, we will pay dividends to those shareholders who present us, or the paying agent or agents that we may appoint from time to time, with the
appropriate dividend coupon. If you hold shares that are entitled to dividends in a clearing system, the dividends will be paid according to that clearing system's rules. We will publish notice of
dividends paid and the paying agent or agents that we have appointed in the German Federal Gazette.

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Liquidation Rights

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

Disclosure Requirement

The German Securities Trading Act requires each person whose shareholding reaches, exceeds or, after exceeding, falls below the 5%, 10%, 25%, 50% or 75% voting
rights thresholds of a listed corporation to notify the corporation and the German Federal Supervisory Authority for Financial Services in writing within seven calendar days after they have reached,
exceeded or fallen below such a threshold. In their notification, they must also state the number of shares they hold. Such holders cannot exercise any rights associated with those shares until they
have satisfied this disclosure requirement. In addition, the German Securities Trading Act 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.

Repurchase of Our Own Shares

We may not acquire our own shares unless authorized by the shareholders' general meeting or in other very limited circumstances set out in the German Stock
Corporation Act. Shareholders may not grant a share repurchase authorization lasting for more than 18 months. The rules in the German Stock Corporation Act generally limit repurchases to 10% of
our share capital and resales must be made either 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. We are not currently authorized by the shareholders' general meeting to repurchase our own shares.

Corporate Purpose of Our Company

The corporate purpose of our company, described in section 2 of the Articles of Association, is direct or indirect activity in the field of research,
development, manufacture and marketing of electronic components, electronic systems and software, as well as the performance of related services.

Registration of the Company with Commercial Register

Our company was entered into the commercial register of Munich, Germany, as a stock corporation on July 14, 1999 under the number HRB 126492.

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ADDITIONAL INFORMATION

ORGANIZATIONAL STRUCTURE

The following table shows information relating to those of our subsidiaries that either had a book value representing at least 10% of our equity on either a
consolidated or non-consolidated basis at September 30, 2003 or contributed at least 10% of our net loss on either a consolidated or non-consolidated basis during our
2003 financial year:

Principal Subsidiaries as of September 30, 2003(1)

|Corporate name,
registered office                                           |  | Field of
activity      |  | Subscribed
capital |  | Equity
Participation |        | Book value of
shares held |  | Reserves(2) |   | Profit/loss
in FY 2003 |   | Revenues
from
shares
held in
FY 2003 |     | Receivables/
Liabilities of
Infineon
Technologies
AG from/due
to Subsidiaries |  
|--------------------------------------------------------------------------- |  | ---------------------- |  | ------------------ |  | -------------------- | ------ | ------------------------- |  | ----------- | - | ---------------------- | - | ------------------------------------ | --- | ----------------------------------------------------------------------------- | -
|
|Infineon Technologies Dresden GmbH & Co. OHG, Dresden, Germany              |  | Production             |  | 736                |  | 100                  | (3)    | 736                       |  | (251        | ) | 18                     |   | 0                                    |     | 101                                                                           |  
|Infineon Technologies Holding B.V., Rotterdam, The Netherlands              |  | Holding                |  | 1                  |  | 100                  | (3)(4) | 3,792                     |  | 3,711       |   | 89                     |   | 248                                  | (6) | (2,557                                                                        | )
|Infineon Technologies Holding North America Inc., Wilmington, Delaware, USA |  | Holding                |  | 0                  |  | 100                  | (5)    | 625                       |  | 611         |   | 2                      |   | 0                                    |     | 0                                                                             |  
|Infineon Technologies Catamaran, Inc. Wilmington, Delaware, USA             |  | Research & Development |  | 14                 |  | 100                  | (8)    | 318                       |  | 166         |   | (71                    | ) | 0                                    |     | (2                                                                            | )
|Infineon Technologies Austria AG, Villach, Austria                          |  | Production             |  | 17                 |  | 100                  | (5)    | 878                       |  | 865         |   | 46                     |   | 0                                    |     | (28                                                                           | )
|Infineon Technologies Asia Pacific Pte. Ltd., Singapore                     |  | Production             |  | 52                 |  | 100                  | (5)    | 583                       |  | 65          |   | 53                     |   | 36                                   | (7) | 210                                                                           |  

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DIVIDEND POLICY

Under German company law (Aktiengesetz), the amount of dividends available for distribution to shareholders is
based on the level of earnings (Bilanzgewinn) of the ultimate parent, Infineon Technologies AG, as determined in accordance with the HGB, the
German Commercial Code. All dividends must be approved by shareholders. The ordinary shareholders meeting held in January 2003 did not authorize a dividend. No dividend will be proposed by management
to shareholders for the 2003 financial year. Subject to market conditions, we intend to retain future earnings for investment in the development and expansion of our business.

MARKET INFORMATION

General

The principal trading market for our company's shares is the Frankfurt Stock Exchange. Options on the shares trade on the German options exchange (Eurex
Deutschland) and other exchanges. All of our company's shares are in registered form. ADSs, each representing one share, are listed on the New York Stock Exchange and trade under the symbol IFX. The
depositary for the ADSs is JPMorgan Chase.

Trading on the Frankfurt Stock Exchange

Deutsche Börse AG operates the Frankfurt Stock Exchange. Securities listed on the Frankfurt Stock Exchange generally trade in the auction market,
but also change hands in interbank dealer markets. Publicly commissioned stockbrokers who are members of the Frankfurt Stock Exchange, but who do not as a rule deal with the public, note prices, which
are determined by out-cry. The prices of actively traded securities, including the shares of large corporations, are continuously quoted during trading hours. For all securities, a fixed
price (Einheitskurs) is established at approximately midday on each day the Frankfurt Stock Exchange is open for business. Deutsche Börse
publishes an official daily list of quotations containing the fixed prices for all traded securities. The list is available on the internet at http:/ /www.deutsche-boerse.com under the heading
"Information Services". Transactions on the Frankfurt Stock Exchange (including transactions through the Xetra system) settle on the second business day following the trade. Transactions off the
Frankfurt Stock Exchange (such as, for example, large trades or transactions in which one of the parties is foreign) generally also settle on the second business day following the trade, although a
different period may be agreed to by the parties. Under standard terms and conditions for securities transactions employed by German banks, customers' orders for listed securities must be executed on
a stock exchange unless the customer gives specific instructions to the contrary. The Frankfurt Stock Exchange can suspend a quotation if orderly trading is temporarily endangered or if a suspension
is deemed to be necessary to protect the public. The Federal Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht) monitors trading activities on the German stock exchanges.

Our
company's shares have traded on the Frankfurt Stock Exchange since March 13, 2000. The table below sets forth, for the periods indicated, the high and low closing sales prices
for our company's

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shares
on the Frankfurt Stock Exchange, as reported by the Frankfurt Stock Exchange Xetra trading system:

Price per shareHigh

LowFinancial year ended September 30, 2000 (from March 13)

€92.50

€51.56Financial year ended September 30, 2001

56.42

12.21Financial year ended September 30, 2002

29.11

5.61Financial year ended September 30, 2003

13.79

5.34October 2001 through December 2001

28.24

12.65January 2002 through March 2002

29.11

22.85April 2002 through June 2002

25.02

14.61July 2002 through September 30, 2002

17.50

5.61October 2002 through December 2002

11.71

5.34January 2003 through March 2003

8.56

5.55April 2003 through June 2003

9.04

6.24July 2003 through September 30, 2003

13.79

8.20April 2003

7.53

6.24May 2003

7.61

6.33June 2003

9.04

7.85July 2003

11.53

8.20August 2003

13.34

10.26September 2003

13.79

11.22


On
November 19, 2003, the closing sales price per share on the Frankfurt Stock Exchange, as reported by the Xetra trading system, was €11.82, equivalent to $14.08
per share (translated at the noon buying rate on November 19, 2003).

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Trading on the New York Stock Exchange

ADSs representing our company's shares have traded on the New York Stock Exchange since March 13, 2000. The table below sets forth, for the periods
indicated, the high and low closing sales prices for the ADSs on the New York Stock Exchange:

Price per ADSHigh

LowFinancial year ended September 30, 2000 (from March 13)

$
87.31

$
47.44Financial year ended September 30, 2001


48.75


11.07Financial year ended September 30, 2002


25.57


5.70Financial year ended September 30, 2003


15.35


5.25October 2001 through December 2001


25.57


11.51January 2002 through March 2002


25.24


19.83April 2002 through June 2002


22.83


14.20July 2002 through September 30, 2002


17.31


5.70October 2002 through December 2002


11.58


5.25January 2003 through March 2003


9.08


6.08April 2003 through June 2003


10.83


6.85July 2003 through September 30, 2003


15.35


9.75April 2003


8.38


6.85May 2003


8.96


7.40June 2003


10.83


9.31July 2003


13.18


9.75August 2003


14.70


11.50September 2003


15.35


12.89


On
November 19, 2003, the closing sales price per ADS on the New York Stock Exchange was $14.05.

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 ADSs 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. In addition, 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. The annual average rate is
computed by using the Federal Reserve noon buying rate for the euro on the last business day of each month during the period indicated.

Annual average exchange rates of the U.S. dollar per euro

Financial year ended September 30,

Average1999

1.09542000

0.95642001

0.88862002

0.91922003

1.0839


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The
table below shows the high and low Federal Reserve noon buying rates for euro in U.S. dollars per euro for each month from April 2003 through September 2003:

Recent high and low exchange rates of the U.S. dollar per euro

High

LowApril 2003

1.1142

1.0589May 2003

1.1918

1.1195June 2003

1.1858

1.1439July 2003

1.1556

1.1162August 2003

1.1390

1.0822September 2003

1.1707

1.0816


The
noon buying rate on September 30, 2003 was €1.00 = $1.165.

USE OF PROCEEDS

In July 2001, we completed a secondary public offering of 60 million of our ordinary shares in Germany and the United States, in conjunction with
private offerings to institutions elsewhere. The shares sold in the U.S. portion of that offering were registered under the U.S. Securities Act of 1933 on a Registration Statement on
Form F-3 (registration number 333-13590).

The
net proceeds to us from the July 2001 offering, after deduction of expenses, totaled approximately €1.48 billion. In the 2003 financial year, we used
€850 million of these proceeds to fund the development of our 300-millimeter (principally in Dresden) and other manufacturing facilities, as well as to repay
short-term debt, to fund working capital needs and for other corporate purposes. As of the end of the 2003 financial year, we had used all of the proceeds of this offering.

TAXATION

Taxation in the Federal Republic of Germany

The following is a summary discussion of material German tax consequences for shareholders who are not resident in Germany for income tax purposes and who do not
hold shares or ADSs as business assets of a permanent establishment or fixed base in Germany ("Non-German Shareholders"). The discussion does not purport to be a comprehensive description
of all the tax considerations which may be relevant to a decision to invest in or hold our shares. The discussion is based on the tax laws of Germany as in effect on the date of this annual report,
which may be subject to change at short notice and within certain limits, possibly also with retroactive effect. As a result of the so-called "Tax Reduction Act"
(Steuersenkungsgesetz), dated October 23, 2000, substantial tax law changes have occurred in particular with regard to the taxation of
corporations and their shareholders. In principle, these changes came into force on January 1, 2001. However, pursuant to transition rules certain changes will become effective at a later date.
To the extent that these transition rules are of relevance, they will be described in this section of this annual report. You are advised to consult your tax advisors in relation to the tax
consequences of the acquisition, holding and disposition or transfer of shares or ADSs and in relation to the procedure which needs to be observed in the event of a possible reduction or refund of
German withholding taxes. Only these advisors are in a position to duly consider your specific tax situation.

Taxation of the Company

In principle, since January 1, 2001, German corporations are subject to corporate income tax at a rate of 25%. This tax rate applies irrespective of
whether profits are distributed or retained. Solidarity surcharge of 5.5% is levied on the assessed corporate income tax liability, so that the combined

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effective
tax burden of corporate income tax and solidarity surcharge is 26.375%. For corporations which, like us, have a financial year which is not the calendar year, the new law applies only with
effect of the first day of the financial year 2001/2002, i.e. in our case, from October 1, 2001. The following analysis assumes that our financial year will not be changed. Certain foreign
source income is exempt from corporate income tax. In principle and in most cases, since October 1, 2002, any dividends received by us and capital gains realized by us on the sale of shares in
other corporations will also be exempt from corporate income tax.

In
addition, German corporations are subject to a profit-based trade tax, the exact amount of which depends on the municipality in which the corporation conducts its business. Trade tax
is a deductible item in calculating the corporation's tax base for corporate income and trade tax purposes.

On
September 19, 2002, the German government enacted new tax legislation which increases the corporate statutory tax rate from 25% to 26.5%, and which is applicable only for our
financial year
ended September 30, 2003. The legislation was enacted to provide assistance to flood victims in Germany.

Income
earned prior to October 1, 2001 is still subject to corporate income tax at a rate of 40% if the income is retained and 30% if the income is distributed, and subject in
each case, to a solidarity surcharge. Exemptions apply to certain foreign-source income, to dividends received as distributions out of tax-exempt foreign-source income and distributions
treated as repayment of paid-in capital for tax purposes. German shareholders (shareholders resident in Germany and foreign shareholders holding the shares as business assets of a
permanent establishment or a fixed base in Germany) are in principle entitled to a refundable tax credit in the amount of 3/7 of the gross amount (before dividend withholding tax) of
dividends received in distribution of income that has been subject to corporate income tax. This tax credit also reduces the basis for the solidarity surcharge on the German taxpayer's personal or
corporate income tax liability. The credit or refund is not available to Non-German Shareholders.

Upon
any ordinary dividend distribution in the time from September 30, 2002 until April 11, 2003 and after January 1, 2006 paid out of income that has been subject
to corporate income tax before October 1, 2001, we will receive in principle a reduction of our corporate income tax in the amount of 1/6 of the declared dividend for the tax
year in which the dividend is distributed. If the dividend is paid between April 11, 2003 and January 1, 2006 there will be no reduction of our corporate income tax. As a result, the
corporate income tax burden on income which was taxed in accordance with the previous law is reduced for a dividend paid before April 11, 2003 and after January 1, 2006 to 30% (plus
solidarity surcharge) upon distribution, but otherwise it remains 40%. After the end of the financial year 2019/2020, no such tax reduction will be provided. If certain tax-exempt income
earned before October 1, 2001 is distributed during the financial years 2002/2003 to 2019/2020 we will be taxed at a rate of 30% (plus solidarity surcharge) on such income.

Taxation of Dividends

Tax must be withheld at a rate of 20% plus solidarity surcharge of 5.5% (effective tax rate 21.1%) on dividends paid after September 30, 2002.

Pursuant
to most German tax treaties, the German withholding tax may not exceed 15% of the dividends received by Non-German Shareholders which are eligible for treaty
benefits. The difference between the withholding tax including solidarity surcharge which was levied and the maximum rate of withholding tax permitted by an applicable tax treaty is refunded to the
shareholder by the German Federal Tax Office (Bundesamt für Finanzen, Friedhofstrasse 1, D-53225 Bonn, Germany) upon
application. Forms for a refund application are available from the German Federal Tax Office or the German embassies and consulates in the various countries. A further reduction applies pursuant to
most tax treaties if the shareholder is a corporation which holds a stake of 25% or more, and in some

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cases
of 10% or more, of the registered share capital (or according to some tax treaties of the votes) of a company. If the shareholder is a parent company resident in the European Union as defined in
Directive No. 90/435/EEC of the Council of July 23, 1990 (so-called "Parent-Subsidiary Directive"), upon application and subject to further requirements, the tax can be
withheld at the applicable lower rate or no tax be withheld at all.

Withholding Tax Refund for U.S. Holders.U.S. Holders (as defined below in "United
States Taxation") who are eligible for treaty benefits under the income tax treaty between Germany and the United States (the "Treaty") are entitled to claim a refund of a portion of the German
withholding tax and will be treated as receiving additional dividend income.

For
dividends paid after September 30, 2002, U.S. Holders who qualify for Treaty benefits will no longer be entitled to a further withholding tax reduction beyond the maximum rate
of 15% under the Treaty.

For
shares and ADSs kept in custody with the Depositary 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 solidarity surcharge thereon on a trial basis. Under this procedure, the Depositary Trust Company may submit claims for refunds payable to U.S.
Holders under the Treaty collectively to the German tax authorities on behalf of these U.S. Holders. The German Federal Tax Office will pay the refund amounts on a preliminary basis to the Depositary
Trust Company, which will redistribute these amounts to the U.S. Holders according to the regulations governing the procedure. The Federal Tax Office may review whether the refund was made in
accordance with the law within four years after making the payment to the Depositary Trust Company. Details of this collective procedure are available from the Depositary Trust Company. This procedure
is currently permitted by German tax authorities but that permission may be revoked, or the procedure may be amended, at any time in the future.

Individual
claims for refunds may be made on a special German form, which must be filed with the German Federal Tax Office (Bundesamt für Finanzen, Friedhofstrasse 1,
D-53225 Bonn, Germany) within four years from the end of the calendar year in which the dividend is received. Copies of the required forms may be obtained from the German tax authorities
at the same address or from the Embassy of the Federal Republic of Germany, 4645 Reservoir Road, NW, Washington D.C.
20007-1998. As part of the individual refund claim, a U.S. Holder must submit to the German tax authorities the original withholding certificate (or a certified copy thereof) issued by the
paying agent documenting the tax withheld and an official certification on IRS Form 6166 of the last United States federal income tax return. IRS Form 6166 may be obtained by filing a
written request with the Internal Revenue Service Center, Foreign Certificate Request, P.O. Box 16347, Philadelphia, PA 19114-0447. Requests for certification must include the U.S.
Holder's name, Social Security Number or Employer Identification Number, the number of the form on which the tax return was filed and the tax period for which the certification is requested. Requests
for certification 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 the certification on IRS Form 6166 to the U.S. Holder who then must submit the certification with his claim for refund. The issued IRS Form 6166 will be valid for a period of three
years from the date of the last filed return to which it relates.

Taxation of Capital Gains

If the Non-German Shareholder is an individual, capital gains from the disposition of shares or ADSs are only subject to German tax if such
shareholder at any time during the five years preceding the disposition, directly or indirectly, held an interest of 1% or more in a company's issued share capital. If the shareholder has acquired the
shares without consideration, the previous owner's holding period and size of shareholding will also be taken into account. Only one half of the capital gain will be taxable. Most German tax treaties,
including the Treaty, provide that Non-German Shareholders who are beneficiaries under the respective treaty are generally not subject to German tax even in that case.

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Capital gains from the sale of shares received by a corporation are exempt from corporation income tax under German domestic law.

Inheritance and Gift Tax

Under German law, the transfer of shares or ADSs will be subject to German inheritance or gift tax on a transfer by reason of death or as a gift if:



The
few presently existing German estate tax treaties (e.g. the Estate Tax Treaty with the United States) usually provide that German inheritance or gift tax may only be imposed
in cases (a) and (b) above.

Other Taxes

There are no transfer, stamp or similar taxes which would apply to the sale or transfer of the shares or ADSs in Germany. Net worth tax is no longer levied in
Germany.

United States Taxation

The following discussion is a summary of the material United States federal tax consequences of the purchase, ownership and disposition of shares or ADSs. This
summary addresses only U.S. Holders (as defined below) that hold shares or ADSs as capital assets for United States federal income tax purposes and that use the U.S. dollar as their functional
currency.

As
used in this document, the term "U.S. Holder" means a beneficial owner of shares or ADSs that is for United States federal income tax purposes:



The
tax consequences to a partner in a partnership holding shares or ADSs will generally depend on the status of the partner and the activities of the partnership. If you are a partner
in a partnership that holds shares or ADSs, you are urged to consult your own tax adviser regarding the specific tax consequences of the purchase, ownership and disposition by the partnership of
shares or ADSs.

The
following summary is of a general nature and does not address all of the tax consequences that may be relevant to you if you are a member of a special class of holders, some of which
may be subject to special rules, such as banks or other financial institutions, insurance companies, regulated investment companies, securities brokers-dealers, traders in securities that elect to use
a mark-to-market method of accounting for security holdings, persons who are owners of an interest in a partnership or other pass-through entity that is a holder of
shares or ADSs, tax-exempt entities, holders

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owning
directly, indirectly or by attribution 10% or more of our voting shares, persons holding shares or ADSs as part of a hedging, straddle, conversion or constructive sale transaction or other
integrated investment, persons who receive shares or ADSs as compensation, or persons who are resident in Germany for German tax purposes, hold the shares or ADSs in connection with the conduct of
business through a permanent establishment in Germany, or perform personal services through a fixed base in Germany. In addition, this summary does not discuss the tax consequences of the exchange or
other disposition of foreign currency in connection with the purchase or disposition of shares or ADSs.

This
summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, as
well as on the Treaty, all as currently in effect and all subject to change at any time, possibly with retroactive effect, or to different interpretation. There can be no assurance that the U.S.
Internal Revenue Service (the "IRS") will not challenge one or more of the tax consequences described in this summary, and we have not obtained, nor do we intend to obtain, a ruling from the IRS or an
opinion of counsel with respect to the United States federal income tax consequences of the purchase, ownership or disposition of shares or ADSs. In addition, this discussion is based in part upon the
representations of the depositary and the assumption that each obligation in the deposit agreement and any related agreement will be performed in accordance with its terms.

In
general, and taking into account the earlier assumptions, for United States federal tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of shares
represented by those ADSs. Exchanges of shares for ADSs, and ADSs for shares, generally will not be subject to United States federal income tax.

The summary of United States federal tax consequences set forth below is for general information only. You should consult your own tax adviser as to the
particular tax consequences to you of purchasing, owning and disposing of the shares or ADSs, including the applicability and effect of state, local, foreign and other tax laws and possible changes in
tax law.

Taxation of Dividends

You will be required to include in gross income as dividend income the amount of any distributions (including constructive distributions) paid on the shares or
ADSs (including any German taxes withheld from the amount received) on the date such distribution is includable in your income to the extent such distributions are paid out of our current or
accumulated earnings and profits as determined for United States federal income tax purposes. Subject to the discussion below under the heading "Recent United States Tax Law Changes," dividend income
is generally taxed as ordinary income. Distributions in excess of our current or accumulated earnings and profits will be applied against and will reduce your tax basis in the shares or ADSs and, to
the extent in excess of such tax basis, will be treated as gain from the sale or exchange of the shares or ADSs. Dividends paid on the shares or ADSs generally will not qualify for the
dividends-received deduction available to corporations. Dividends paid in foreign currency will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate on the
date the dividends are includable in your income. If the foreign currency received as a dividend is not converted into U.S. dollars on the date that the dividends are includable in your income, any
gain or loss realized on a subsequent conversion or other disposition will be treated as ordinary income or loss.

Generally,
you will have the option of claiming the amount of German tax withheld at source on distributions to you as either a deduction from adjusted gross income or as a
dollar-for-dollar credit against your United States federal income tax liability. If you elect to claim a credit for such taxes, the election will be binding for all foreign
taxes paid or accrued by you for such taxable year. If you claim the standard deduction rather than itemized deductions, you may not claim a deduction for foreign taxes withheld, but may claim such
amount as a credit against your United States federal income tax

107

liability.
The U.S. foreign tax credit in any taxable year may not offset more than 90% of your liability for U.S. individual or corporate alternative minimum tax.

Dividends
paid by us generally will be treated as foreign source income and likely will constitute "passive" or "financial services" income for foreign tax credit purposes. The amount of
foreign income taxes for which a U.S. Holder may claim a credit in any year is subject to complex limitations and restrictions that must be determined on an individual basis by each U.S. Holder. You
should consult your own tax adviser with regard to the availability of a U.S. foreign tax credit and the application of the U.S. foreign tax credit limitations to your particular situation.

Recent United States Tax Law Changes

Recent U.S. tax legislation has reduced the rates of tax payable by individuals (as well as certain trusts and estates) on various items of income. Under the Jobs
and Growth Tax Reconciliation Act of 2003
(the "2003 Act"), the marginal tax rates applicable to ordinary income generally have been lowered with effect from January 1, 2003. Furthermore, "qualified dividend income" received by
individuals in taxable years beginning after December 31, 2002 and before January 1, 2009, generally will be taxed at a maximum U.S. federal rate of 15% (rather than the higher tax rates
generally applicable to items of ordinary income) provided certain holding period requirements are met. For this purpose, "qualified dividend income" generally includes dividends paid on shares in
U.S. corporations as well as dividends paid on shares in certain non-U.S. corporations if, among other things: (i) the shares of the non-U.S. corporation (including ADSs
backed by such shares) are readily tradable on an established securities market in the United States; or (ii) the non-U.S. corporation is eligible with respect to substantially all
of its income for the benefits of a comprehensive income tax treaty with the United States which contains an exchange of information program (a "qualifying treaty"). ADSs backed by our shares are
readily tradable on an established securities market in the United States. In addition, the Treaty is a qualifying treaty. Accordingly, we believe that dividends paid by us with respect to shares or
ADSs should constitute "qualified dividend income" for United States federal income tax purposes and that U.S. Holders who are individuals (as well as certain trusts and estates) should be entitled to
the reduced rates of tax, as applicable. However, the precise extent to which dividends paid by non-U.S. corporations will constitute "qualified dividend income" and the effect of such
status on the ability of taxpayers to utilize associated foreign tax credits is not entirely clear at present. It is anticipated that there will be administrative pronouncements concerning these
provisions in the future. In the meantime, you are urged to consult your own tax adviser regarding the impact of the provisions of the 2003 Act on your particular situation, including related
restrictions and special rules.

Taxation of Capital Gains

If you are a U.S. Holder and sell or otherwise dispose of your shares or ADSs, you will recognize 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 adjusted tax basis, determined in U.S. dollars, in your shares or ADSs. Such gain or loss will generally be
capital gain or loss. Capital gain of a non-corporate U.S. Holder is generally taxed at a maximum rate of 15% for property held more than one year. Capital gain on the sale of shares or
ADSs held for one year or less will be treated as short-term capital gain and taxed as ordinary income at the U.S. Holder's marginal income tax rate. Capital losses may only be used to
offset capital gains, except that U.S. individuals may deduct up to $3,000 of net capital losses against ordinary income.

United States Information Reporting and Backup Withholding

Dividend payments with respect to shares and proceeds from the sale, exchange or redemption of shares may be subject to information reporting to the IRS and
possible U.S. backup withholding. Backup withholding will generally not apply to you, however, if you furnish a correct taxpayer

108

identification
number or certificate of foreign status and make any other required certification, or if you are otherwise exempt from backup withholding. If you are required to establish your exempt
status, you generally must provide such certification on IRS Form W-9 in the case of U.S. persons and on the appropriate IRS Form W-8 in the case of
non-U.S. persons.

Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your United States federal income tax liability, and you may obtain a refund
of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information.

United States Gift and Estate Tax

An individual U.S. Holder will be subject to United States gift and estate taxes with respect to the shares or ADSs in the same manner and to the same extent as
with respect to other types of personal property. The Estate Tax Treaty also provides a credit against United States federal estate and gift tax liability for the amount of inheritance and gift tax
paid to Germany, subject to certain limitations, in a case where the shares or ADSs are subject to German inheritance or gift tax and the United States federal estate or gift tax.

EXCHANGE CONTROLS AND  LIMITATIONS AFFECTING SHAREHOLDERS

Germany does not currently restrict the movement of capital between Germany and other countries except for a prohibition on the provision of financial aid or
capital in connection with banned weapons related transactions to Somalia and the Democratic Republic of Congo. These restrictions were established to coincide with resolutions adopted by the United
Nations and the European Union. More information can be found at www.bundesbank.de/finanz/index.en.php

For
statistical purposes, with some exceptions, every corporation or individual residing in Germany must report to the German Central Bank any payment received from or made to a
non-resident corporation or individual if the payment exceeds €12,500 (or the equivalent in a foreign currency). Additionally, corporations and individuals residing in
Germany must report to the German Central Bank any claims of a resident corporation or individual against, or liabilities payable to, a non-resident corporation or individual exceeding an
aggregate of €1.5 million (or the equivalent in a foreign currency) at the end of any calendar month.

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

DOCUMENTS ON DISPLAY

Our company is subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file
reports and other information with the U.S. Securities and Exchange Commission. These materials, including this annual report and the exhibits thereto, may be inspected and copied at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices in Chicago, Illinois and New York, NY. The public may obtain information on the operation of the
SEC's Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. The SEC also maintains a web site at http://www.sec.gov that contains reports
and other information regarding registrants that file electronically with the SEC. In addition, material filed by us with the SEC can be inspected at the offices of the New York Stock Exchange at 20
Broad Street, New York, New York 10005 and at the offices of JPMorgan Chase, as depositary for our ordinary shares, at 60 Wall Street, New York, NY 10260.

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CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this evaluation, our chief
executive officer and chief financial officer concluded that, as of September 30, 2003, our company's disclosure controls and procedures were (1) designed to ensure that material
information relating to Infineon, including its consolidated subsidiaries, is made known to our chief executive officer and chief financial officer by others within
those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by
Infineon in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

No
change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
financial year ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

CODE OF ETHICS

Infineon has adopted a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal
accounting officer within the meaning of Item 16B of Form 20-F. You may obtain a copy of our code of ethics, at no cost, by writing to us at Infineon Technologies AG,
St.-Martin-Strasse 53, D-81669 Munich, Germany, Attention: Legal Department.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees.KPMG, our auditors, charged us an aggregate of €3.0 million in the 2002 financial year and
an aggregate of €2.6 million in the 2003 financial year in connection with professional services rendered for the audit of our annual financial statements and services normally
provided by them in connection with statutory and regulatory filings or engagements. These services consisted of quarterly review engagements, the annual audit, as well as acquisition and divestiture
related audit work.

Audit-Related Fees.In addition to the amounts described above, KPMG charged us an aggregate of
€0.6 million in the 2002 financial year and an aggregate of €0.5 million in the 2003 financial year for assurance and related services reasonably related
to the performance of our audit. These services consisted of merger and acquisition due diligence and accounting advice on transactions.

Tax Fees.In addition to the amounts described above, KPMG charged us an aggregate of €0.6 million in
the 2002 financial year and an aggregate of
€0.3 million in the 2003 financial year for professional services for tax compliance, tax advice and tax planning. These services consisted of tax strategy consultations and tax
compliance work.

All Other Fees.KPMG invoiced us an aggregate of €0.1 million in the 2002 financial year for other
services, which consisted primarily of actuarial services costs, and no such fees in the 2003 financial year.

The
above services fall within the scope of audit and permitted non-audit services as regulated by section 201 of the Sarbanes-Oxley Act of 2002. Our Investment,
Finance and Audit Committee has pre-approved KPMG's performance of these audit and permitted non-audit services and set limits on the types of services and the maximum cost of
these services in any financial year. KPMG reports to our Investment, Finance and Audit Committee on a quarterly basis on the type and extent of non-audit services provided during the period and
compliance with these criteria.

110

MATERIAL CONTRACTS

This section provides a summary of all material contracts not in the ordinary course of business to which we are a party and that have been entered into during
the two immediately preceding financial years. The agreements described below, or English translations thereof, where applicable, have been filed as exhibits to this Annual Report on
Form 20-F or our Annual Report on Form 20-F for the 2002 financial year. Our Annual Reports on Form 20-F for the 2000 and 2001 financial years
contain summaries of additional material contracts entered into prior to October 1, 2001, some of which may still be in effect.

2003 Convertible Note Offering

Terms and Conditions of 5% Guaranteed Subordinated Convertible Notes due 2010 in the aggregate nominal amount of €700,000,000 issued on
June 5, 2003 by Infineon Technologies Holding B.V.Infineon Technologies Holding B.V. (the "Issuer"), a wholly-owned subsidiary of Infineon Technologies AG,
issued guaranteed subordinated convertible notes in the aggregate nominal amount of €700,000,000, each bearer note being in the nominal amount of €50,000 (the "2010
Notes"). The 2010 Notes bear interest at the rate of 5% per
annum. The 2010 Notes rankpari passuamong themselves and at leastpari passuwith all other present
and future unsecured and subordinated obligations of the Issuer. The 2010 Notes were issued at 100% of the nominal amount and will be redeemed at their principal amount together with accrued interest
on June 5, 2010, to the extent that they have not previously been redeemed, converted or repurchased and cancelled. Subject to adjustments, each holder of a 2010 Note will have the right to
convert each 2010 Note into 4,885.3888 ordinary shares of Infineon Technologies AG, yielding a conversion price of €10.2346 per share.

Undertaking for Granting of Conversion Rights from Infineon Technologies AG to JPMorgan Chase Bank for the benefit of the holders of the 2010 Notes, dated
June 2, 2003.By this Undertaking, Infineon Technologies AG undertakes to convert the 2010 Notes into shares of Infineon Technologies AG or to pay a cash
amount in lieu of delivery of shares upon conversion if insufficient shares are available to deliver to holders of the 2010 Notes in satisfaction of their conversion right.

Subordinated Guarantee of Infineon Technologies AG, as Guarantor, in favor of the holders of 2010 Notes, dated June 2,
2003.By this Subordinated Guarantee, Infineon Technologies AG unconditionally and irrevocably guarantees the due and punctual payment of any and all sums payable
by Infineon Technologies Holding B.V., as Issuer of the 2010 Notes.

Loan Agreement dated June 2, 2003, between Infineon Technologies Holding B.V., as Issuer, and Infineon Technologies
AG.By this Loan Agreement, Infineon Technologies Holding B.V. loaned to Infineon Technologies AG the proceeds from the sale of the 2010 Notes. The due dates for
payments under the loan correspond to the due dates for payments under the 2010 Notes; in the event of an early redemption of the 2010 Notes, the loan is likewise subject to early repayment.

Assignment Agreement dated June 2, 2003, among Infineon Technologies Holding B.V., Infineon Technologies AG and JPMorgan Chase Bank for the benefit of the
holders of the 2010 Notes.By this Assignment Agreement, Infineon Technologies Holding B.V. assigned the claims against Infineon Technologies AG under the Guaranty
for payment of principal under the Loan Agreement to JPMorgan Chase Bank, acting on account of the holders of the 2010 Notes for purposes of securing the claims for payment of principal of the 2010
Notes.

2002 Convertible Note Offering

Terms and Conditions of 4.25% Guaranteed Subordinated Convertible Notes due 2007 in the aggregate nominal amount of €1,000,000,000 issued on
February 1, 2002 by Infineon Technologies Holding B.V.Infineon Technologies Holding B.V. (the "Issuer"), a wholly-owned subsidiary of Infineon Technologies

111

AG,
issued guaranteed subordinated convertible notes in the aggregate nominal amount of €1,000,000,000, each bearer note being in the nominal amount of €50,000 (the
"2007 Notes"). The 2007 Notes bear interest at the rate of 4.25% per annum. The 2007 Notes rankpari passuamong themselves and at least pari passuwith
all other present and future unsecured and subordinated obligations of the Issuer. The 2007 Notes were issued at 100% of the nominal
amount and will be redeemed at their principal amount together with accrued interest on February 6, 2007, to the extent that they have not previously been redeemed, converted or repurchased and
cancelled. Subject to adjustments, each holder of a 2007 Note will have the right to convert each 2007 Note into 1,411.2334 shares of Infineon Technologies AG, yielding a conversion price of
€35.43 per share.

Undertaking for Granting of Conversion Rights from Infineon Technologies AG to JPMorgan Chase Bank for the benefit of the holders of the 2007 Notes, dated
February 1, 2002.By this Undertaking, Infineon Technologies AG undertakes to convert the 2007 Notes into shares of Infineon Technologies AG or to pay a
cash amount in lieu of delivery of shares upon conversion if insufficient shares are available to deliver to holders of the 2007 Notes in satisfaction of their conversion right.

Subordinated Guarantee of Infineon Technologies AG, as Guarantor, in favor of the holders of Subordinated Convertible Notes, dated February 1,
2002.By this Subordinated Guarantee, Infineon Technologies AG unconditionally and irrevocably guarantees the due and punctual payment of any and all sums payable
by Infineon Technologies Holding B.V., as Issuer of the 2007 Notes.

Loan Agreement dated February 1, 2002, between Infineon Technologies Holding B.V., as Issuer, and Infineon Technologies
AG.By this Loan Agreement, Infineon Technologies Holding B.V. loaned to Infineon Technologies AG the proceeds from the sale of the 2007 Notes. The due dates for
payments under the loan correspond to the due dates for payments under the 2007 Notes; in the event of an early redemption of the 2007 Notes, the loan is likewise subject to early repayment.

Assignment Agreement dated February 1, 2002, among Infineon Technologies Holding B.V., Infineon Technologies AG and JPMorgan Chase Bank for the benefit of
the holders of the 2007 Notes.By this Assignment Agreement, Infineon Technologies Holding B.V. assigned the claims against Infineon Technologies AG under the
Guaranty for payment of principal under the Loan Agreement to JPMorgan Chase Bank, acting on account of the holders of the 2007 Notes for purposes of securing the claims for payment of principal of
the 2007 Notes.

Commercial Agreements

Joint Venture Agreement between Infineon and Nanya Technology Corporation.On November 13, 2002, we entered into a
joint venture agreement with the Taiwanese company Nanya Technology Corporation relating to the establishment of a 50:50 joint venture for the production of DRAM chips and the construction by the
joint venture of a new 300-millimeter production facility in Taiwan. The total financing requirements of the construction of the 300-millimeter manufacturing facility will be
approximately €2.2 billion. Of that amount, each joint venture partner will contribute €550 million through the end of the 2005 calendar year. The joint
venture anticipates financing the remaining €1.1 billion through external financing. The timing of the construction and related financing may be subject to revision based on
then existing market conditions. The agreement outlines the plan for construction and operation of the joint venture facility. The agreement generally requires that shares in the joint venture be
subscribed for on an equal basis and includes restrictions on the rights of each party to sell, transfer, pledge or otherwise dispose of shares in the joint venture. It also sets out the details of
the management and operational structure of the joint venture and contains extensive provisions for the resolution of disputes and the termination of the joint venture.

In
June 2003, we and IBM amended the original shareholders agreement of ALTIS. Pursuant to the amendment, we will ratably increase our capacity reservation in the production output of
ALTIS

112

from
the existing level of 50% to 100% during calendar years 2004 through 2007. We and IBM have agreed that the both of us will decide about the future business model of ALTIS not later than
January 1, 2007. Additionally, we were granted an option through July 1, 2007 to acquire IBM's interest in ALTIS.

Related-Party Transactions

In addition, please see "Transactions and Relationships Between Infineon and the Siemens Group" for a summary of contracts with certain of our related parties.

113



GLOSSARY

|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10BaseS                               |  | A highly integrated solution for Ethernet communications over VDSL technology, using copper wires with low power consumption.                                                                                                                                                                                                                                                                                              
|ADSL                                  |  | Asymmetric Digital Subscriber Line. A form of Digital Subscriber Line (see "xDSL") in which the bandwidth available for downloading data is significantly larger than for uploading data. This technology is well suited for web browsing and
client-server applications as well as for emerging applications such as video on demand.                                                                                     
|ADSs                                  |  | American Depositary Shares. ADSs are securities issued by a depositary that represent ownership interests in underlying ordinary shares held by the depositary. Infineon's ADSs are issued by JPMorgan Chase, as depositary; each ADS represents one
ordinary share. ADSs are evidenced by American Depositary Receipts (ADRs). Infineon's ADSs are listed on the New York Stock Exchange (NYSE) and trade in U.S. dollars.
|analog                                |  | A continuous representation of phenomena in terms of points along a scale, each point merging imperceptibly into the next. Analog signals vary continuously over a range of values. Real world phenomena, such as heat and pressure, are
analog.                                                                                                                                                                           
|application-specific standard product |  | A (standard) product that has been designed to implement a specific application function, as opposed to a general purpose product such as DRAM.                                                                                                                                                                                                                                                                            
|ASIC                                  |  | Application-specific Integrated Circuit. A logic circuit designed for a specific use and implemented in an integrated circuit.                                                                                                                                                                                                                                                                                             
|ATM                                   |  | Asynchronous Transfer Mode. A standard for transmitting information on a network.                                                                                                                                                                                                                                                                                                                                          
|baseband                              |  | Baseband is the original frequency range of a signal before it is transformed into a higher or more efficient frequency. See "broadband".                                                                                                                                                                                                                                                                                  
|BiCMOS                                |  | Bipolar-Complementary Metal Oxide Semiconductor technology. A process technology that combines bipolar and CMOS technologies, developed for mixed-signal applications.                                                                                                                                                                                                                                                     
|bipolar                               |  | A process technology used to create chips that utilize the junction between positive and negative semiconducting materials. Bipolar chips are used in high-speed devices.                                                                                                                                                                                                                                                  
|bit                                   |  | A unit of information; a computational quantity (binary pulse) that can take one of two values, such as true and false or 0 and 1; also the smallest unit of storage sufficient to hold one bit.                                                                                                                                                                                                                           
|                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                            

114

|Bluetooth               |  | A computing and telecommunications industry specification that describes how mobile phones, computers, and personal digital assistants (PDAs) can easily interconnect with each other and with home and business phones and computers using a short-range
wireless radio connections instead of wired connections.                                                                                                                          
|----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|broadband               |  | Any network technology that combines and sorts multiple, independent network frequencies onto a single cable. See "baseband".                                                                                                                                                                                                                                                                                                               
|byte                    |  | A unit of measurement equal to eight bits.                                                                                                                                                                                                                                                                                                                                                                                                  
|CAD                     |  | Computer Aided Design.                                                                                                                                                                                                                                                                                                                                                                                                                      
|capacitor               |  | An electronic device that stores energy. Capacitors help to maintain information stored by memory.                                                                                                                                                                                                                                                                                                                                          
|CDMA                    |  | Code Division Multiple Access. A standard that is being developed for cellular telephones. A form of multiplexing (or sorting of signals over telephone lines) where the transmitter encodes the signal using a pseudo-random sequence (a random sequence
generated by a computer) which the receiver also knows and can use to decode the received signal. Each different random sequence corresponds to a different communication channel.
|chip cards              |  | Cards that contain an IC. Frequently used for telephone cards or debit cards.                                                                                                                                                                                                                                                                                                                                                               
|client                  |  | When used in connection with a server, a program that accesses information across a network, such as a Web browser or newsreader.                                                                                                                                                                                                                                                                                                           
|CMOS                    |  | Complementary Metal Oxide Semiconductor technology. A process technology that uses complementary metal oxide transistors to make a chip that will consume relatively low power and permit a high level of integration.                                                                                                                                                                                                                      
|codecs                  |  | An acronym for coder/decoder. Codecs are integrated circuits or chips that perform data conversion. This may include analog-to-digital conversion and digital-to-analog conversion on a single chip.                                                                                                                                                                                                                                        
|CPU                     |  | Central Processing Unit.                                                                                                                                                                                                                                                                                                                                                                                                                    
|database                |  | Any file or set of files containing data stored in an organized format.                                                                                                                                                                                                                                                                                                                                                                     
|DDR DRAM                |  | Double data rate DRAM. It activates output on both the rising and falling edge of the system clock rather than on just the rising edge, potentially doubling output.                                                                                                                                                                                                                                                                        
|DECT                    |  | Digital European Cordless Telecommunications. A standard used for pan-European digital cordless telephones.                                                                                                                                                                                                                                                                                                                                 
|digital                 |  | The representation of data by a series of bits or discrete values such as 0 and 1.                                                                                                                                                                                                                                                                                                                                                          
|discrete semiconductors |  | Semiconductor devices that involve only a single device.                                                                                                                                                                                                                                                                                                                                                                                    
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             

115

|DRAM                    |  | Dynamic Random Access Memory. The most common type of random access memory. Each bit of information is stored as an amount of electrical charge in a storage cell consisting of a capacitor and a transistor. The capacitor discharges gradually due to
leakage and the memory cell loses the information stored. To preserve the information, the memory has to be refreshed periodically and is therefore referred to as "dynamic". DRAM is a widespread memory technology because of its high packing density
and consequently low price.
|----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DSL                     |  | See "xDSL".                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|DSLAM                   |  | Digital Subscriber Line Multiplexers. A network device, usually located in a telephone company central office, that receives signals from multiple customers' digital subscriber line connections (see "xDSL") and puts the signals on a high-speed
backbone line using multiplexing technologies (see "multiplexing").                                                                                                                                                                                                                     
|DSP                     |  | Digital Signal Processor. A specialized computer circuit designed to perform speedy and complex operations on digitized waveforms. Used in processing audio and video signals.                                                                                                                                                                                                                                                                                                                                                              
|E1                      |  | A transmission speed of data across fiber-optic lines in the E-carrier system, a European digital transmission format. It is similar to the North American T-carrier system. See "T1"                                                                                                                                                                                                                                                                                                                                                       
|EEPROM                  |  | Electrically Erasable Programmable Read-Only Memory. A read-only memory that can be erased and reprogrammed by the user repeatedly through the application of higher-than-normal electrical voltage.                                                                                                                                                                                                                                                                                                                                        
|embedded DRAM           |  | A process technology that combines DRAM and logic functions on a single chip.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Ethernet                |  | A protocol for high-speed communications, principally used for LAN networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|FeRAM                   |  | Ferro magnetic random access memory. A type of memory that stores information using ferro magnetic effects. This type of memory is nonvolatile and electronically reprogrammable, like flash memory and EEPROMs.                                                                                                                                                                                                                                                                                                                            
|flash memory            |  | A type of nonvolatile memory that can be erased and reprogrammed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|gallium arsenide (GaAs) |  | A semiconductor material used to produce optoelectronic devices and high-frequency devices. Gallium arsenide has a higher charge carrier mobility than silicon and produces higher-speed devices.                                                                                                                                                                                                                                                                                                                                           
|gigabit (Gbit)          |  | Approximately one billion bits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|gigabyte                |  | Approximately one billion bytes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

116

|GPRS    |  | General Packet Radio Services. A packet-based wireless communication service that promises data rates from 56 up to 114 Kbps and continuous connection to the Internet for mobile phone and computer users. The higher data rates allow users to take
part in video conferences and interact with multimedia Web sites and similar applications using mobile handheld devices as well as notebook computers. GPRS is based on GSM communication and complements Bluetooth and existing services on
circuit-switched cellular phone connections.
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|GSM     |  | Global System for Mobile communication. A digital mobile telephone system that is the de facto wireless telephone standard in Europe and widely used in other parts of the world. GSM digitizes and compresses data, then sends it down a channel with two
other streams of user data, each in its own time slot. It operates at either the 900 MHz or 1800 MHz frequency band.                                                                                                                                                                
|IC      |  | Integrated Circuit. A semiconductor device consisting of many interconnected transistors and other components.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|ISDN    |  | Integrated Services Digital Network. A type of online connection that speeds up data transmission by handling information in a digital form. Traditional modem communications translate a computer's digital data into an analog wave form and send the
signal, which then must be converted back to an analog signal. ISDN can be thought of as a direct digital connection.                                                                                                                                                                  
|ISO     |  | International Standards Organization. The international organization responsible for developing and maintaining worldwide standards for manufacturing, environmental protection, computers, data communications, and many other fields.                                                                                                                                                                                                                                                                                                        
|LAN     |  | Local Area Network. A data communications network covering a small area, usually within the confines of a building or floors within a building.                                                                                                                                                                                                                                                                                                                                                                                                
|LED     |  | Light emitting diode.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|library |  | The collection of representations required by various design tools. The representations, such as symbol, simulation model, layout abstract, and transistor schematic, are used by different tools in the design system to create or analyze some portion
of an IC or otherwise aid in the design process. Creating a design library requires inserting the fabrication technologies in the design system in a form that allows designers to create circuits in the most efficient manner.                                                      
|logic   |  | Mathematical treatment of formal logic in which a system of symbols is used to represent quantities and relationships. AND, OR and NOT are examples of symbols of logical functions. Each function can be translated into a switching circuit, or gate.
Since a switch (or gate) has only two states  open or closed  it makes possible the application of binary numbers for solutions of problems. The basic logic functions obtained from gate circuits are the foundation of computing
machines.                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

117

|mainframe                                      |  | A large computer typically kept in a separate room.                                                                                                                                                                                                                                                                                                                                                        
|---------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|MAN                                            |  | Metropolitan Area Network. A data communications network covering a relatively small geographic area, such as a single city.                                                                                                                                                                                                                                                                               
|mask                                           |  | A transparent (glass or quartz) plate covered with an array of patterns used in making an IC. Each pattern consists of opaque and transparent areas that define the size and shape of all circuit and device elements. The mask is used to expose selected
areas, and defines the areas to be processed. Masks may use emulsion, chrome, iron oxide, silicon or other material to produce the opaque areas.
|megabit (Mbit)                                 |  | Approximately one million bits.                                                                                                                                                                                                                                                                                                                                                                            
|memory                                         |  | Any device that can store data in machine-readable format. Usually used synonymously with random access memory and read-only memory.                                                                                                                                                                                                                                                                       
|microcontroller                                |  | A microprocessor combined with memory and interfaces integrated on a single circuit and intended to operate as an embedded system.                                                                                                                                                                                                                                                                         
|micron                                         |  | A metric unit of linear measure which equals one millionth of a meter. Symbol:. A human hair is about 100 microns in diameter.                                                                                                                                                                                                                                                                             
|multiplexing                                   |  | Combining several signals for transmission on some shared medium (e.g., a telephone line). The signals are combined at the transmitter by a multiplexer and split at the receiver by a de-mulitplexer. The communications channel may be shared between
the independent signals in different ways.                                                                                                         
|nanometer (nm)                                 |  | A metric unit of linear measure which equals one billionth of a meter.                                                                                                                                                                                                                                                                                                                                     
|nonvolatile memory                             |  | A memory storage device whose contents are preserved when its power is off.                                                                                                                                                                                                                                                                                                                                
|ODM                                            |  | Original design manufacturer. An ODM both designs and manufactures its own products. To make use of the distribution and sales channels of companies with established brand names, an ODM often sells its products to another company who puts on its logo
and sell the products as its own products.                                                                                                      
|OEM                                            |  | Original equipment manufacturer. A company that acquires a product or component and reuses or incorporates it into a new product with its own brand name.                                                                                                                                                                                                                                                  
|ONO                                            |  | Oxide-nitride-oxide. A material used as insulator or dielectric material in various wafer processing routes including DRAM and flash manufacturing to prohibit charge leakage between electrodes.                                                                                                                                                                                                          
|opto components, opto couplers or opto devices |  | Components that function by reacting to or creating light signals. An opto coupler is a device designed to transfer electrical signals using light waves to provide coupling with electrical isolation between input and output.                                                                                                                                                                           
|                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                            

118

|parallel optical link |  | A high bandwidth link between a system and multiple fiber-optic lines.                                                                                                                                                                                                                                                                                                                                                            
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PDAs                  |  | Personal digital assistants.                                                                                                                                                                                                                                                                                                                                                                                                      
|protocol              |  | The standard or set of rules that two computers use to communicate with each other.                                                                                                                                                                                                                                                                                                                                               
|radio frequency IC    |  | A high-frequency IC such as those used in mobile telecommunications.                                                                                                                                                                                                                                                                                                                                                              
|Rambus                |  | A DRAM architecture that offers transfer rates approximately five times faster than the ordinary DRAM.                                                                                                                                                                                                                                                                                                                            
|random access memory  |  | RAM. A type of data storage device for which the order of access to different locations does not affect the speed of access. This is in contrast to, for example, a magnetic disk or magnetic tape where it is much quicker to access data sequentially
because accessing a non-sequential location requires physical movement of the storage medium rather than electronic switching.                                            
|read-only memory      |  | ROM. A type of data storage device that is manufactured with fixed contents. The term is most often applied to semiconductor integrated circuit memories, of which there are several types, and CD-ROM. ROM is inherently non-volatile storageit
retains its contents even when the power is switched off, in contrast to DRAM. ROM is often used to hold programs for embedded systems since these usually have a fixed purpose.
|SDRAM                 |  | Synchronous DRAM. A generic name for various kinds of DRAM that are synchronized with the clock speed that the microprocessor is optimized for. This tends to increase the number of instructions that the processor can perform in a given
time.                                                                                                                                                                                 
|SDSL                  |  | Symmetric DSL. A method for transmission of data at T1 speeds over a single line of telephone wires.                                                                                                                                                                                                                                                                                                                              
|semiconductor         |  | A material, typically crystalline, that can be altered to allow electrical current to flow or not flow in a pattern. Common semiconductors are silicon, germanium and gallium arsenide. The term is also used to apply to ICs made from these
materials.                                                                                                                                                                          
|server                |  | A computer that provides some service for other computers connected to it via a network. The most common example is a file server which has a local disk and services requests from remote clients to read and write files on that disk.                                                                                                                                                                                          
|silicon               |  | A type of semiconducting material used to make a wafer. Silicon is widely used in the semiconductor industry as a base material.                                                                                                                                                                                                                                                                                                  
|SiGe                  |  | Silicon-germanium.                                                                                                                                                                                                                                                                                                                                                                                                                
|SLIC                  |  | Subscriber Line Interface Circuit. A circuit in a telephone company switch to which a customer's telephone line is connected.                                                                                                                                                                                                                                                                                                     
|                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   

119

|SoC             |  | System-on-chip. System-on-chip (SoC) technology is the packaging of all the necessary electronic circuits and parts for a "system" (such as a cell phone or digital camera) on a single integrated circuit (IC), generally known as a
microchip.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|switch          |  | An analog IC that, on command, either passes or blocks an electrical signal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|T1              |  | A North American standard for the digital transmission of data across fiber-optic lines. A digital carrier facility used to transmit a digital signal. A T1 carrier uses multiplexing to transmit large volumes of information across great distances at
high speeds at a (potentially) lower cost than that provided by traditional analog service.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|T/E             |  | High-speed digital data transmission technology using various rates or levels of the North American T-carrier system and/or the European E-carrier system of transmission. The digital signal is what is carried inside the carrier system. See "T1" and
"E1".                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|telematics      |  | The combination of telecommunications and data processing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|UMTS            |  | Universal Mobile Telecommunications Service. A so-called "third-generation (3G)," broadband, packet-based transmission of text, digitized voice, video, and multimedia at data rates up to two megabits per second (Mbps), that is based on the GSM
communication standard and aims to offer a consistent set of services to mobile computer and phone users no matter where they are located in the world. Today's cellular telephone systems are mainly circuit-switched, with connections always dependent
on circuit availability. A packet-switched connection, using the Internet Protocol, means that a virtual connection is always available to any other end point in the network, allowing computer and phone users to be constantly attached to the Internet
as they travel.
|VDSL            |  | Very high bit-rate Digital Subscriber Line. A form of Digital Subscriber Line (See "xDSL") similar to ADSL but providing higher speeds at reduced distances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|volatile memory |  | Memory that loses stored information if the power source is removed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|wafer           |  | A disc made of a semiconducting material such as silicon or gallium arsenide, usually between 75-millimeter (3") and 300-millimeter (12") in diameter, used to form the substrate of a device. A wafer may contain several thousand
devices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|WAN             |  | Wide Area Network. A data communications network covering a large geographic area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|WDCT            |  | Worldwide Digital Cordless Telecommunications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

120

|xDSL  |  | Digital Subscriber Line (where "x" represents the type of technology). A family of digital telecommunications protocols designed to allow high speed data communication over existing copper telephone lines between end-users and the telephone
company.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|yield |  | When used in connection with manufacturing, the ratio of the number of usable products to the total number of produced products.                                                                                                                         

121



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES      INDEX TO FINANCIAL STATEMENTS



|                                                                                                     
|-----------------------------------------------------------------------------------------------------
|Infineon Technologies AG and Subsidiaries                                                            
|Independent Auditors' Report                                                                         
|Consolidated Statements of Operations for the years ended September 30, 2001, 2002 and 2003          
|Consolidated Balance Sheets as of September 30, 2002 and 2003                                        
|Consolidated Statements of Shareholders' Equity for the years ended September 30, 2001, 2002 and 2003
|Consolidated Statements of Cash Flows for the years ended September 30, 2001, 2002 and 2003          
|Notes to the Consolidated Financial Statements                                                       

F-1



INDEPENDENT AUDITORS' REPORT

The
Supervisory Board and Shareholders of
Infineon Technologies AG:

We
have audited the accompanying consolidated balance sheets of Infineon Technologies AG and subsidiaries as of September 30, 2002 and 2003, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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 Infineon Technologies AG and subsidiaries as
of September 30, 2002 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2003 in conformity
with accounting principles generally accepted in the United States of America.

Munich,
Germany
November 7, 2003

KPMG DEUTSCHE TREUHAND-GESELLSCHAFT
AKTIENGESELLSCHAFT
WIRTSCHAFTSPRÜFUNGSGESELLSCHAFT

F-2



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES      CONSOLIDATED STATEMENTS OF OPERATIONS      For the years ended September 30, 2001, 2002 and 2003      (in millions, except per share
data)

|                                                    |                                          | Notes |    | 2001   |       | 2002   |       | 2003  |       | 2003
(Note 1) |      
|--------------------------------------------------- | ---------------------------------------- | ----- | -- | ------ | ----- | ------ | ----- | ----- | ----- | ------------- | -----
|
|Net sales:                                          |                                          |       |    |        |       |        |       |       |       |               |      
|                                                    | Third parties                            |       | 5  |        | 4,352 |        | 4,035 |       | 5,153 |               | 6,003
|                                                    | Related parties                          |       | 27 |        | 995   |        | 855   |       | 999   |               | 1,164
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Total net sales                                     |                                          |       |    | 5,347  |       | 4,890  |       | 6,152 |       | 7,167         |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Cost of goods sold                                  |                                          | 7     |    | 4,580  |       | 4,289  |       | 4,614 |       | 5,375         |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Gross profit                                        |                                          |       |    | 767    |       | 601    |       | 1,538 |       | 1,792         |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Research and development expenses                   |                                          |       |    | 1,189  |       | 1,060  |       | 1,089 |       | 1,269         |      
|Selling, general and administrative expenses        |                                          |       |    | 782    |       | 643    |       | 679   |       | 791           |      
|Restructuring charges                               |                                          | 8     |    | 117    |       | 16     |       | 29    |       | 34            |      
|Other operating (income) expense, net               |                                          |       |    | (200   | )     | (46    | )     | 85    |       | 99            |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Operating loss                                      |                                          |       |    | (1,121 | )     | (1,072 | )     | (344  | )     | (401          | )    
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Interest expense, net                               |                                          |       |    | (1     | )     | (25    | )     | (52   | )     | (61           | )    
|Equity in earnings (losses) of associated companies |                                          |       |    | 21     |       | (47    | )     | 18    |       | 21            |      
|Gain (loss) on associated company share issuance    |                                          | 16    |    | 11     |       | 18     |       | (2    | )     | (2            | )    
|Other non-operating income (expense), net           |                                          |       |    | 65     |       | (41    | )     | 21    |       | 25            |      
|Minority interests                                  |                                          |       |    | 6      |       | 7      |       | 8     |       | 9             |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Loss before income taxes                            |                                          |       |    | (1,019 | )     | (1,160 | )     | (351  | )     | (409          | )    
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Income tax benefit (expense)                        |                                          | 9     |    | 427    |       | 143    |       | (84   | )     | (98           | )    
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Net loss from continuing operations                 |                                          |       |    | (592   | )     | (1,017 | )     | (435  | )     | (507          | )    
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Net income (loss) from discontinued operation       |                                          | 4     |    | 1      |       | (4     | )     |      |       |              |      
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Net loss                                            |                                          |       |    | (591   | )     | (1,021 | )     | (435  | )     | (507          | )    
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|Loss per share:                                     |                                          | 10    |    |        |       |        |       |       |       |               |      
|                                                    | Basic and dilutedcontinuing operations  |       |    |        | (0.92 | )      | (1.46 | )     | (0.60 | )             | (0.70
|                                                    | Basic and diluteddiscontinued operation |       |    |        |      |        | (0.01 | )     |      |               |     
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      
|                                                    | Basic and dilutednet loss               |       |    |        | (0.92 | )      | (1.47 | )     | (0.60 | )             | (0.70
|                                                    |                                          |       |    |        |       |        |       |       |       |               |      

See
accompanying notes to the consolidated financial statements.

F-3



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES      CONSOLIDATED BALANCE SHEETS      September 30, 2002 and 2003

|                                      |                                        | Notes                                      |    | 2002  |       | 2003   |        | 2003
(Note 1) |       
|------------------------------------- | -------------------------------------- | ------------------------------------------ | -- | ----- | ----- | ------ | ------ | ------------- | ------
|
|ASSETS:                               |                                        |                                            |    |       |       |        |        |               |       
|Current assets:                       |                                        |                                            |    |       |       |        |        |               |       
|                                      | Cash and cash equivalents              |                                            |    |       | 1,199 |        | 969    |               | 1,129 
|                                      | Marketable securities                  |                                            | 11 |       | 738   |        | 1,784  |               | 2,078 
|                                      | Trade accounts receivable, net         |                                            | 12 |       | 758   |        | 876    |               | 1,021 
|                                      | Inventories                            |                                            | 13 |       | 891   |        | 959    |               | 1,116 
|                                      | Deferred income taxes                  |                                            | 9  |       | 82    |        | 113    |               | 132   
|                                      | Other current assets                   |                                            | 14 |       | 523   |        | 605    |               | 705   
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total current assets                       |    |       |       | 4,191  |        | 5,306         |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|Property, plant and equipment, net    |                                        | 15                                         |    | 4,491 |       | 3,817  |        | 4,448         |       
|Long-term investments, net            |                                        | 16                                         |    | 708   |       | 425    |        | 495           |       
|Restricted cash                       |                                        |                                            |    | 70    |       | 67     |        | 78            |       
|Deferred income taxes                 |                                        | 9                                          |    | 787   |       | 705    |        | 821           |       
|Other assets                          |                                        | 17                                         |    | 671   |       | 485    |        | 565           |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total assets                               |    |       |       | 10,918 |        | 10,805        |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|LIABILITIES AND SHAREHOLDERS' EQUITY: |                                        |                                            |    |       |       |        |        |               |       
|Current liabilities:                  |                                        |                                            |    |       |       |        |        |               |       
|                                      | Short-term debt and current maturities |                                            | 21 |       | 120   |        | 149    |               | 174   
|                                      | Trade accounts payable                 |                                            | 18 |       | 1,197 |        | 877    |               | 1,022 
|                                      | Accrued liabilities                    |                                            | 19 |       | 473   |        | 644    |               | 750   
|                                      | Deferred income taxes                  |                                            | 9  |       | 21    |        | 39     |               | 45    
|                                      | Other current liabilities              |                                            | 20 |       | 572   |        | 425    |               | 495   
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total current liabilities                  |    |       |       | 2,383  |        | 2,134         |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|Long-term debt                        |                                        | 21                                         |    | 1,710 |       | 2,343  |        | 2,730         |       
|Deferred income taxes                 |                                        | 9                                          |    | 58    |       | 32     |        | 37            |       
|Other liabilities                     |                                        | 22                                         |    | 609   |       | 630    |        | 734           |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total liabilities                          |    |       |       | 4,760  |        | 5,139         |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|Shareholders' equity:                 |                                        |                                            |    |       |       |        |        |               |       
|                                      | Ordinary share capital                 |                                            | 23 |       | 1,442 |        | 1,442  |               | 1,680 
|                                      | Additional paid-in capital             |                                            |    |       | 5,569 |        | 5,573  |               | 6,493 
|                                      | Accumulated deficit                    |                                            |    |       | (826  | )      | (1,261 | )             | (1,469
|                                      | Accumulated other comprehensive loss   |                                            | 25 |       | (27   | )      | (88    | )             | (103  
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total shareholders' equity                 |    |       |       | 6,158  |        | 5,666         |       
|                                      |                                        |                                            |    |       |       |        |        |               |       
|                                      |                                        | Total liabilities and shareholders' equity |    |       |       | 10,918 |        | 10,805        |       
|                                      |                                        |                                            |    |       |       |        |        |               |       

See
accompanying notes to the consolidated financial statements.

F-4



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY      For the years ended September 30, 2001, 2002 and 2003    (euro in millions, except
share data)

|                                                |                                                         | Issued
ordinary shares |            |       |     |       |       |        |   |     |   |     |   |    |  
|----------------------------------------------- | ------------------------------------------------------- | ---------------------- | ---------- | ----- | --- | ----- | ----- | ------ | - | --- | - | --- | - | -- | -
|
|
|
|Balance as of October 1, 2000                   |                                                         | 625,501,507            |            | 1,251 |     | 3,251 |       | 1,192  |   | 106 |   |    |   | 6  |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Net loss                                        |                                                         |                       |            |      |     |      |       | (591   | ) |    |   |    |   |   |  
|Other comprehensive loss                        |                                                         |                       |            |      |     |      |       |       |   | (19 | ) | (12 | ) | (8 | )
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Total comprehensive income                              |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Issuance of ordinary shares:                    |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Proceeds from public offering, net of offering expenses |                        | 60,000,000 |       | 120 |       | 1,355 |        |  |     |  |     |  |    | 
|                                                | Acquisition of Ardent                                   |                        | 706,714    |       | 1   |       | 38    |        |  |     |  |     |  |    | 
|                                                | Acquisition of Catamaran                                |                        | 5,730,866  |       | 12  |       | 240   |        |  |     |  |     |  |    | 
|                                                | Investment in associated company                        |                        | 443,488    |       | 1   |       | 20    |        |  |     |  |     |  |    | 
|Ordinary shares held by associated company      |                                                         |                       |            |      |     | (4    | )     |       |   |    |   |    |   |   |  
|Deferred compensation, net                      |                                                         |                       |            |      |     | (19   | )     |       |   |    |   |    |   |   |  
|Dividend payment                                |                                                         |                       |            |      |     |      |       | (406   | ) |    |   |    |   |   |  
|Sale of joint venture interest to Siemens Group |                                                         |                       |            |      |     | 392   |       |       |   |    |   |    |   |   |  
|Equity transactions with Siemens Group          |                                                         |                       |            |      |     | (26   | )     |       |   |    |   |    |   |   |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Balance as of September 30, 2001                |                                                         | 692,382,575            |            | 1,385 |     | 5,247 |       | 195    |   | 87  |   | (12 | ) | (2 | )
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Net loss                                        |                                                         |                       |            |      |     |      |       | (1,021 | ) |    |   |    |   |   |  
|Other comprehensive loss                        |                                                         |                       |            |      |     |      |       |       |   | (92 | ) | (8  | ) |   |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Total comprehensive loss                                |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Issuance of ordinary shares:                    |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Employee Stock Purchase Plan                            |                        | 355,460    |       | 1   |       | 7     |        |  |     |  |     |  |    | 
|                                                | Acquisition of Catamaran                                |                        | 546,183    |       | 1   |       | 8     |        |  |     |  |     |  |    | 
|                                                | Acquisition of MIC                                      |                        | 27,500,000 |       | 55  |       | 270   |        |  |     |  |     |  |    | 
|Ordinary shares held by associated company      |                                                         |                       |            |      |     | 4     |       |       |   |    |   |    |   |   |  
|Deferred compensation, net                      |                                                         |                       |            |      |     | 23    |       |       |   |    |   |    |   |   |  
|Equity transaction with Siemens Group           |                                                         |                       |            |      |     | 10    |       |       |   |    |   |    |   |   |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Balance as of September 30, 2002                |                                                         | 720,784,218            |            | 1,442 |     | 5,569 |       | (826   | ) | (5  | ) | (20 | ) | (2 | )
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Net loss                                        |                                                         |                       |            |      |     |      |       | (435   | ) |    |   |    |   |   |  
|Other comprehensive (loss) income               |                                                         |                       |            |      |     |      |       |       |   | (76 | ) | 2   |   | 13 |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Total comprehensive loss                                |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Issuance of ordinary shares:                    |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|                                                | Acquisition of Catamaran                                |                        | 96,386     |       |    |       | 1     |        |  |     |  |     |  |    | 
|Deferred compensation, net                      |                                                         |                       |            |      |     | 7     |       |       |   |    |   |    |   |   |  
|Other equity transactions                       |                                                         |                       |            |      |     | (4    | )     |       |   |    |   |    |   |   |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  
|Balance as of September 30, 2003                |                                                         | 720,880,604            |            | 1,442 |     | 5,573 |       | (1,261 | ) | (81 | ) | (18 | ) | 11 |  
|                                                |                                                         |                        |            |       |     |       |       |        |   |     |   |     |   |    |  

See accompanying notes to the consolidated financial statements.

F-5



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES      CONSOLIDATED STATEMENTS OF CASH FLOWS      For the years ended September 30, 2001, 2002 and 2003

|                                                                                 |                                                                 | 2001   |        | 2002   |       | 2003   |        | 2003
(Note 1) |       
|-------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------ | ------ | ------ | ----- | ------ | ------ | ------------- | ------
|
|Net loss                                                                         |                                                                 | (591   | )      | (1,021 | )     | (435   | )      | (507          | )     
|Less: net income (loss) from discontinued operation                              |                                                                 | 1      |        | (4     | )     |       |        |              |       
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Net loss from continuing operations                                              |                                                                 | (592   | )      | (1,017 | )     | (435   | )      | (507          | )     
|Adjustments to reconcile net loss to cash provided by operating activities:      |                                                                 |        |        |        |       |        |        |               |       
|                                                                                 | Depreciation and amortization                                   |        | 1,121  |        | 1,370 |        | 1,437  |               | 1,675 
|                                                                                 | Acquired in-process research and development                    |        | 69     |        | 37    |        | 6      |               | 7     
|                                                                                 | Deferred compensation                                           |        | 25     |        | 23    |        | 7      |               | 8     
|                                                                                 | Provision for (recovery of) doubtful accounts                   |        | 19     |        | (5    | )      | (16    | )             | (19   
|                                                                                 | Write-down of inventory                                         |        | 358    |        |      |        |       |               |      
|                                                                                 | Loss (gain) on sale of marketable securities                    |        | (1     | )      | 1     |        | (56    | )             | (65   
|                                                                                 | Loss (gain) on sale of businesses                               |        | (235   | )      | (39   | )      | 10     |               | 12    
|                                                                                 | Loss on disposal of property, plant, and equipment              |        |       |        | 2     |        | 3      |               | 3     
|                                                                                 | Equity in (earnings) losses of associated companies             |        | (21    | )      | 47    |        | (18    | )             | (21   
|                                                                                 | Loss (gain) on associated company share issuance                |        | (11    | )      | (18   | )      | 2      |               | 2     
|                                                                                 | Minority interests                                              |        | (6     | )      | (7    | )      | (8     | )             | (9    
|                                                                                 | Impairment charges                                              |        | 51     |        | 51    |        | 98     |               | 114   
|                                                                                 | Deferred income and other non-cash charges                      |        | (26    | )      | (87   | )      | (93    | )             | (108  
|                                                                                 | Deferred income taxes                                           |        | (493   | )      | (282  | )      | 16     |               | 19    
|Changes in operating assets and liabilities:                                     |                                                                 |        |        |        |       |        |        |               |       
|                                                                                 | Trade accounts receivable                                       |        | 681    |        | (131  | )      | (227   | )             | (264  
|                                                                                 | Inventories                                                     |        | (394   | )      | (28   | )      | (112   | )             | (130  
|                                                                                 | Other current assets                                            |        | (76    | )      | 39    |        | 156    |               | 182   
|                                                                                 | Trade accounts payable                                          |        | 49     |        | 40    |        | (217   | )             | (253  
|                                                                                 | Accrued liabilities                                             |        | (322   | )      | 86    |        | 164    |               | 191   
|                                                                                 | Other current liabilities                                       |        | 36     |        | (37   | )      | (17    | )             | (20   
|                                                                                 | Other assets and liabilities                                    |        | (11    | )      | 181   |        | 31     |               | 36    
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Net cash provided by operating activities                                        |                                                                 | 221    |        | 226    |       | 731    |        | 852           |       
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Cash flows from investing activities:                                            |                                                                 |        |        |        |       |        |        |               |       
|                                                                                 | Purchases of marketable securities available for sale           |        | (82    | )      | (709  | )      | (2,752 | )             | (3,205
|                                                                                 | Proceeds from sales of marketable securities available for sale |        | 474    |        | 62    |        | 2,013  |               | 2,345 
|                                                                                 | Proceeds from sales of businesses                               |        | 346    |        | 96    |        | 164    |               | 191   
|                                                                                 | Cash acquired in business combination                           |        |       |        | 50    |        | 3      |               | 3     
|                                                                                 | Investment in associated and related companies                  |        | (214   | )      | (88   | )      | (73    | )             | (85   
|                                                                                 | Purchases of intangible assets                                  |        | (82    | )      | (39   | )      | (58    | )             | (68   
|                                                                                 | Purchases of property, plant and equipment                      |        | (2,282 | )      | (643  | )      | (872   | )             | (1,016
|                                                                                 | Proceeds from sales of property, plant and equipment            |        | 27     |        | 27    |        | 53     |               | 62    
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Net cash used in investing activities                                            |                                                                 | (1,813 | )      | (1,244 | )     | (1,522 | )      | (1,773        | )     
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Cash flows from financing activities:                                            |                                                                 |        |        |        |       |        |        |               |       
|                                                                                 | Net change in short-term debt                                   |        | (14    | )      | 4     |        | (36    | )             | (42   
|                                                                                 | Net change in related party financial receivables and payables  |        | 70     |        | (40   | )      | (76    | )             | (89   
|                                                                                 | Proceeds from issuance of long-term debt                        |        | 128    |        | 1,482 |        | 700    |               | 816   
|                                                                                 | Principal repayments of long-term debt                          |        | (21    | )      | (21   | )      | (25    | )             | (29   
|                                                                                 | Change in restricted cash                                       |        | 45     |        | 15    |        | 3      |               | 3     
|                                                                                 | Proceeds from issuance of shares to minority interest           |        | 20     |        |      |        |       |               |      
|                                                                                 | Proceeds from issuance of ordinary shares                       |        | 1,475  |        | 8     |        |       |               |      
|                                                                                 | Dividend payments                                               |        | (406   | )      |      |        |       |               |      
|                                                                                 | Sale of joint venture interest to Siemens Group                 |        | 564    |        |      |        |       |               |      
|                                                                                 | Capital distributions                                           |        | (15    | )      |      |        |       |               |      
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Net cash provided by financing activities                                        |                                                                 | 1,846  |        | 1,448  |       | 566    |        | 659           |       
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Effect of foreign exchange rate changes on cash and cash equivalents             |                                                                 | 2      |        | 1      |       | (4     | )      | (5            | )     
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Net increase (decrease) in cash and cash equivalents from continuing operations  |                                                                 | 256    |        | 431    |       | (229   | )      | (267          | )     
|Net (decrease) increase in cash and cash equivalents from discontinued operation |                                                                 | (10    | )      | 11     |       | (1     | )      | (1            | )     
|Cash and cash equivalents at beginning of period                                 |                                                                 | 511    |        | 757    |       | 1,199  |        | 1,397         |       
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       
|Cash and cash equivalents at end of period                                       |                                                                 | 757    |        | 1,199  |       | 969    |        | 1,129         |       
|                                                                                 |                                                                 |        |        |        |       |        |        |               |       

See accompanying notes to the consolidated financial statements.

F-6



INFINEON TECHNOLOGIES AG AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(euro in millions, except where otherwise stated)

1.     Description of Business, Formation and Basis of Presentation



Infineon Technologies AG and its subsidiaries (collectively, the "Company") design, develop, manufacture and market a broad range of semiconductors and complete
systems solutions used in a wide variety of microelectronic applications, including computer systems, telecommunications systems, consumer goods, automotive products, industrial automation and control
systems, and chip card applications. The Company's products include standard commodity components, full-custom devices, semi-custom devices and application-specific components
for memory, analog, digital and mixed-signal applications. The Company has operations, investments and customers located mainly in Europe, Asia and North America. The financial year-end
for the Company is September 30.



Infineon Technologies AG was formed as a legal entity as of April 1, 1999 (the "Formation") through the contribution by Siemens Aktiengesellschaft
("Siemens") of substantially all of its semiconductor-related investments, operations and activities. The Company had its initial public offering ("IPO") on March 13, 2000, and is listed on the
New York Stock Exchange and is one of the DAX 30 companies on the Frankfurt Stock Exchange.



The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
("US-GAAP"). Infineon Technologies AG is incorporated in Germany. The German Commercial Code ("Handelsgesetzbuch" or "HGB") requires the Company to prepare consolidated financial
statements in accordance with the HGB accounting principles and regulations ("German GAAP"). Pursuant to HGB Section 292a the Company is exempt from this requirement, if consolidated financial
statements are prepared and issued in accordance with a body of internationally accepted accounting principles (such as U.S. GAAP). Accordingly, the Company presents the U.S. GAAP consolidated
financial statements contained herein.

All
amounts herein are shown in millions of euro (or "€") except where otherwise stated. The accompanying balance sheet as of September 30, 2003, and the
statements of operations and cash flows for the year then ended are also presented in U.S. dollar ("$"), solely for the convenience of the reader, at the rate of €1 = $1.165,
the Federal Reserve noon buying rate on September 30, 2003. The U.S. dollar convenience translation amounts have not been audited.

Certain
amounts in prior year consolidated financial statements and notes have been reclassified to conform to the current year presentation. Net operating results have not been affected
by these reclassifications.

F-7

2.     Summary of Significant Accounting Policies

The following is a summary of significant accounting policies followed in the preparation of the accompanying financial statements.



The accompanying financial statements include the accounts of the Company and its significant subsidiaries on a consolidated basis. Investments in companies in
which the Company has an ownership interest of 20% or more but which are not controlled by the Company ("Associated Companies") are principally accounted for using the equity method of accounting (see
note 16). The equity in earnings of Associated Companies with different fiscal year ends are principally recorded on a three month lag. Other equity investments ("Related Companies"), in which
the Company has an ownership interest of less than 20%, are recorded at cost. The effects of all significant intercompany transactions are eliminated.

The
Company group consists of the following number of entities in addition to the Company:

Consolidated
subsidiaries

Associated
Companies

TotalSeptember 30, 2002

44

11

55Additions

8

3

11Mergers

(1
)


(1
)Disposals



(2
)
(2
)Transfers

1

(1
)
September 30, 2003

52

11

63


Additionally,
the consolidated financial statements include 30 (2002: 32) subsidiaries and 8 (2002: 9) Associated Companies that are accounted for at cost and recorded
under investments in Related Companies, as these companies are not material to the respective presentation of the financial position, results of operations or cash flows of the Company. The effect of
these companies for all years presented on consolidated assets, revenues and net income (loss) of the Company was less than 1%.



The Company's reporting currency is the euro, and therefore the accompanying financial statements are presented in euro.

The
assets and liabilities of foreign subsidiaries with functional currencies other than the euro are translated using period-end exchange rates, while the revenues and
expenses of such subsidiaries are translated using average exchange rates during the period. Differences arising from the translation of assets and liabilities in comparison with the translation of
the previous periods are included in other comprehensive income (loss) and reported as a separate component of shareholders' equity.

F-8

The
exchange rates of the more important currencies used in the preparation of the accompanying financial statements are as follows:

Currency:



Exchange rate
September 30,

Annual average
exchange rate2002
euro

2003
euro

2002
euro

2003
euroU.S. dollar

1$ =

1.0208

0.8762

1.0910

0.9234Japanese yen

100 JPY =

0.8318

0.7852

0.8661

0.7760Great Britain pound

1 GBP =

1.5939

1.4428

1.6017

1.4797Singapore dollar

1 SGD =

0.5722

0.5060

0.6029

0.5276




Cash and cash equivalents represent cash, deposits and liquid short-term investments with original maturities of three months or less.



Restricted cash includes collateral deposits used as security under borrowing arrangements.



The Company's marketable securities are classified as available-for-sale and are stated at fair value as determined by the most recently
traded price of each security at the balance sheet date. Unrealized gains and losses are included in accumulated other comprehensive income, net of applicable deferred taxes. Realized gains or losses
and declines in value, if any, judged to be other-than-temporary on available-for-sale securities are reported in other income or expense. For the purpose of determining
realized gains and losses, the cost of securities sold is based on specific identification.



Inventories are valued at the lower of cost or market, cost being generally determined on the basis of an average method. Cost consists of purchased component
costs and manufacturing costs, which are comprised of direct material and labor costs and applicable indirect costs.



Property, plant and equipment is valued at cost less accumulated depreciation. Spare parts, maintenance and repairs are expensed as incurred. Depreciation expense
is generally recognized using an accelerated or straight-line method. Construction in progress includes advance payments for construction of fixed assets. Land and construction in progress
are not depreciated. The cost of construction of certain long-term assets includes capitalized interest, which is amortized over the

F-9

estimated
useful life of the related asset. For the years ended September 30, 2001, 2002 and 2003 capitalized interest was €27, €0 and €0,
respectively. The estimated useful lives of assets are as follows:

YearsBuildings

10-25Technical equipment and machinery

3-10Other plant and office equipment

1-10




The Company is a lessee of property, plant and equipment. All leases where the Company is lessee that meet certain specified criteria intended to represent
situations where the substantive risks and rewards of ownership have been transferred to the lessee are accounted for as capital leases pursuant to Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 13,"Accounting for Leases."All other
leases are accounted for as operating leases.



The Company accounts for business combinations using the purchase method of accounting pursuant to SFAS No. 141,"Business
Combinations". Intangible assets acquired in a purchase method business combination are recognized and reported apart from goodwill, pursuant to the criteria specified by SFAS
No. 141.

The
Company adopted SFAS No. 142,"Goodwill and Other Intangible Assets", effective October 1, 2001. Upon adoption of SFAS
No. 142, pursuant to SFAS No. 141, the Company evaluated its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and reclassified amounts
previously allocated to assemble workforce of €1 to goodwill in order to conform with the new criteria in SFAS No. 141. Upon adoption of SFAS No. 142, the Company
reassessed the useful lives and residual values of all intangible assets acquired, and had no significant amortization period adjustments. The Company did not identify any intangible assets with
indefinite useful lives. In connection with SFAS No. 142's transitional goodwill impairment evaluation, no indication existed that the reporting units' goodwill was impaired as of the date of
adoption.

Intangible
assets primarily consist of purchased intangible assets, such as licenses and purchased technology, which are recorded at acquisition cost, and goodwill resulting from
business acquisitions, representing the excess of purchase price over fair value of net assets acquired. Intangible assets other than goodwill are amortized on a straight-line basis over
the estimated useful lives of the assets ranging from 3 to 10 years. Pursuant to SFAS No. 142, goodwill is not amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. The Company normally tests goodwill annually for impairment in the fourth quarter of the financial year, whereby if the carrying amount of a
reporting unit with goodwill exceeds its fair value, the amount of impairment is determined by the excess of recorded goodwill over the fair value of goodwill. The determination of fair value of the
reporting units and related goodwill requires considerable judgment by management.

Prior
to the adoption of SFAS No. 142, goodwill was amortized over its estimated useful life. Amortization expense related to goodwill was €21 for the year ended
September 30, 2001. Had the provisions of SFAS No. 141 and 142 applied for the year ended September 30, 2001, and net loss

F-10

therefore
excluded amortization of goodwill, net loss and loss per share would have been decreased to the pro forma amounts indicated below:

|                          |                               | For the year ended
September 30, 2001 |      
|------------------------- | ----------------------------- | ------------------------------------- | -----
|Net loss:                 |                               |                                       |      
|                          | As reported                   |                                       | (591 
|                          | Pro forma                     |                                       | (570 
|Loss per share (in euro): |                               |                                       |      
|                          | As reportedbasic and diluted |                                       | (0.92
|                          | Pro formabasic and diluted   |                                       | (0.89



The Company reviews long-lived assets, including property, plant and equipment and intangible assets subject to amortization, 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 to future net cash flows expected to be generated by the asset. 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 based on either appraised value or measured by discounted estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future cash flows.



The Company operates internationally, giving rise to exposure to changes in foreign currency exchange rates. The Company uses financial instruments, including
derivatives such as foreign currency forward and option contracts, to reduce this exposure based on the net exposure to the respective currency. The Company applies SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, SFAS No. 138 and SFAS No. 149, which
provides guidance for accounting for all derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Derivative financial instruments are
recorded at their fair value and included in other current assets or other current liabilities. Changes in fair value are recorded in current earnings or other comprehensive income, depending on
whether the derivative is designated as part of a hedge
transaction and the type of hedge transaction. The fair value of derivative and other financial instruments is discussed in note 29.



Revenue from products sold to customers is recognized, pursuant to SEC Staff Accounting Bulletin ("SAB") 101, when persuasive evidence of an arrangement exists,
the price is fixed or determinable, shipment is made and collectibility is reasonably assured. The Company records reductions to revenue for estimated product returns and allowances for discounts and
price protection, based on actual historical experience, at the time the related revenue is recognized.

F-11



License and technology transfer fees are recognized when earned and realizable (see note 5). Lump sum payments are deferred where applicable and recognized
over the period the Company is obliged to provide additional service. Pursuant to EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables",revenues from contracts entered into after
July 1, 2003 with multiple element arrangements are recognized as each element is earned based on the relative fair value of
each element and when there are no undelivered elements that are essential to the functionality of the delivered elements and when the amount is not contingent upon delivery of the undelivered
elements. Royalties are recognized as earned.



Grants for capital expenditures include both tax-free government grants (Investitionszulage) and
taxable grants for investments in property, plant and equipment
(Investitionszuschüsse). Grants receivable are established when a legal right for the grant exists and the criteria for receiving the
grant have been met. Tax-free government grants are deferred (see note 22) and recognized over the remaining useful life of the related asset. Taxable grants are deducted from the
acquisition costs of the related asset (see note 6) and thereby reduce depreciation expense in future periods. Other taxable grants reduce the related expense (see notes 6 and 22).



Shipping and handling costs associated with product sales are included in cost of sales. Expenditures for advertising, sales promotion and other sales-related
activities are expensed as incurred. Provisions for estimated costs related to product warranties are generally made at the time the related sale is recorded. Research and development costs are
expensed as incurred.



Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured 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.



The Company accounts for stock-based compensation using the intrinsic value method pursuant to Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees", and has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for Stock-Based
CompensationTransition and Disclosure an Amendment of FASB Statement No. 123".

F-12



Gains or losses arising from the issuances of shares by subsidiaries or Associated Companies, due to changes in the Company's proportionate share of the value of
the issuer's equity, are recognized in earnings pursuant to SAB Topic 5:H, "Accounting for Sales of Stock by a Subsidiary" (see note 16).



The preparation of the accompanying financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent amounts and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could
differ materially from such estimates made by management.



In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), many of which were previously classified as equity. It
also addresses questions about the classification of certain financial instruments that embody obligations to issue equity shares. The changes in this Statement will result in a more complete
depiction of an entity's liabilities and equity and will, thereby, assist investors and creditors in assessing the amount, timing, and likelihood of potential future cash outflows and equity share
issuances. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, except for mandatorily redeemable financial instruments of non-public entities. The adoption of SFAS No. 150 did not have a material impact on the
Company's financial statements.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities", which addresses
consolidation by business enterprises of variable interest entities which have one or both of the following characteristics: (1) The equity investment at risk is not sufficient to permit the
entity to finance its activities without support from other parties and (2) the equity investors lack one or more of the defined essential characteristics of a controlling financial interest.
This Interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the
participating parties. This Interpretation applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an
interest after that date. On October 9, 2003,
FASB Staff Position FIN 46-6 "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities" was issued.
This delayed the effective date of this Interpretation for variable interest entities created before February 1, 2003 for the Company until December 31, 2003. The Company has evaluated
the impact of the provisions of Interpretation 46, and it believes it will not have a material impact on the Company's financial statements.

In
July 2003, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-5, "Applicability of AICPA Statement of
Position 97-2("SOP 97-2")to Non-Software Deliverables"
("EITF 03-5"). The consensus was reached that SOP 97-2 is applicable to non-software deliverables if

F-13

they
are included in an arrangement that contains software that is essential to the non-software deliverables' functionality. This consensus is to be applied to Company's financial year
beginning October 1, 2003. The Company has not yet evaluated the impact that EITF 03-5 will have on its financial statements.

3.     Acquisitions

The Company acquired 92.5% of the outstanding shares of SensoNor AS on June 18, 2003 following a public tender offer, and the remaining 7.5% by
June 30, 2003, for total cash consideration of €34. In addition the Company contributed capital of €13 in connection with the consummation of the transaction.
SensoNor, which was previously a listed publicly company in Norway, develops, produces and markets tire pressure and acceleration sensors. With this acquisition the Company aims to strengthen its
position in semiconductor sensors for the automotive business.

On
April 1, 2003, the Company completed the acquisition of the net assets of MorphICs Technology Inc. ("MorphICs"), a developer of digital baseband circuits of third
generation wireless communications for €6 in cash. The acquisition agreement also provides for contingent consideration of €9 upon the achievements of specified events.

In
April 2001, the Company established a joint venture (Infineon Technologies Flash, previously Ingentix), in which it held a 51% ownership interest. Infineon Technologies Flash
develops flash memory products. The operations of Infineon Technologies Flash were consolidated from that date. In February 2003, the Company increased its ownership interest in Infineon
Technologies Flash to 70%. The additional ownership interest was effected through a capital contribution and the conversion of existing shareholder loans into equity, which resulted in goodwill of
€4 and a corresponding increase in minority interest.

On
September 9, 2002, the Company acquired all the shares of Ericsson Microelectronics AB ("MIC"). MIC, based in Sweden, a supplier of Radio Frequency (RF) microelectronic
components for wireless applications, high end power amplifiers, Bluetooth components and broadband communications. MIC is a strategic supplier to Ericsson, a market leader in base stations, Bluetooth
solutions and RF components for mobile phones and wireless infrastructure. The Company also entered into a strategic supply agreement with Ericsson for a period of two years with certain specified
purchase thresholds, pursuant to which €50 was recorded as a liability as of September 30, 2002.

In
June 2003, the Company and Ericsson signed an amendment to the MIC acquisition agreement. The companies intend to strengthen their strategic co-operation in various
areas of mobile phone technology and wireless infrastructure, including Bluetooth solutions, RF ICs, RF Power and other applications. Furthermore, the companies agreed to eliminate the remaining
acquisition indebtedness, as well as the historic and future purchase thresholds of Ericsson and related penalties. In addition, the Company received €50 million from Ericsson.
These amounts have been reflected as an adjustment, principally to the originally recorded goodwill, as well as to intangible assets and deferred taxes. Additionally, as a result of the restructured
MIC business, the Company recorded a purchase accounting adjustment reversing the previously established deferred tax asset valuation allowance in the amount of €16.

F-14

The
following table summarizes the Company's acquisitions during the years ended September 30, 2002 and 2003:

|                                         |                            | 2002       |     | 2003 |     | 2003 |   
|---------------------------------------- | -------------------------- | ---------- | --- | ---- | --- | ---- | --
|
|
|Cash                                     |                            | 50         |     | 3    |     |     |   
|Other current assets                     |                            | 120        |     | 6    |     | 1    |   
|Property, plant and equipment            |                            | 60         |     | 25   |     | 1    |   
|Intangible assets                        |                            |            |     |      |     |      |   
|                                         | Current product technology |            | 15  |      | 21  |      | 5 
|                                         | Core technology            |            | 42  |      |    |      |  
|                                         | Patents                    |            | 24  |      |    |      | 2 
|                                         | In process R&D             |            | 37  |      | 4   |      | 2 
|Goodwill                                 |                            |           |     | 22   |     | 6    |   
|Other non-current assets                 |                            | 45         |     |     |     |     |   
|                                         |                            |            |     |      |     |      |   
|                                         | Total assets acquired      |            | 393 |      | 81  |      | 17
|                                         |                            |            |     |      |     |      |   
|Current liabilities                      |                            | (38        | )   | (11  | )   | (9   | ) 
|Non-current liabilities (including debt) |                            | (28        | )   | (36  | )   |     |   
|                                         |                            |            |     |      |     |      |   
|                                         | Total liabilities assumed  |            | (66 | )    | (47 | )    | (9
|                                         |                            |            |     |      |     |      |   
|Net assets acquired                      |                            | 327        |     | 34   |     | 8    |   
|                                         |                            |            |     |      |     |      |   
|Cash paid                                |                            |           |     | 34   |     | 8    |   
|Shares issued                            |                            | 27,500,000 |     |     |     |     |   

The
above acquisitions have been accounted for by the purchase method of accounting and, accordingly, the consolidated statement of operations include the results of the acquired
companies from their respective acquisition dates. The value of the shares issued for purchase consideration was determined based on the average market price of the Company's shares over the
two-day period before and after the date the number of shares to be issued became fixed.

Shares
issued and held in escrow for employees subject to continued employment and the achievement of certain performance milestones are accounted for as deferred compensation at their
intrinsic value.
Deferred compensation is reflected as a reduction of additional paid-in capital in the statement of shareholders' equity, and amortized on a straight-line basis over the
related employment or milestone periods, ranging from two to four years.

Shares
issued and held in escrow for the acquired company's shareholders subject to the acquired company achieving certain performance milestones, principally related to the Company's
August 2001 acquisition of Catamaran Communications, Inc. ("Catamaran"), represent contingent purchase consideration. The shares representing contingent purchase consideration are not
reflected as issued and outstanding shares in the statement of shareholders' equity. Should these milestones be achieved, the purchase price will be adjusted to reflect the issuance of the shares at
their fair value at the date

F-15

the
milestones are achieved. During the years ended September 30, 2002 and 2003, due to the achievement of certain milestones, 546,183 and 96,386 shares, respectively, were released from
escrow, which resulted in the recognition of €9 and €1, respectively, of additional goodwill related to the Catamaran acquisition.

For
each significant acquisition the Company engaged an independent third party to assist in the valuation of net assets acquired. As a result of these valuations, amounts allocated to
purchased in-process research and development of €69, €37 and €6 were expensed as research and development in the years ended
September 30, 2001, 2002 and 2003, respectively, because the technological feasibility of products under development had not been established and no future alternative uses existed. The amounts
allocated to purchased in-process research and development were determined through established valuation techniques in the high-technology industry and related guidance
provided by the SEC.

The
core technology and patents acquired in these acquisitions are amortized over their estimated useful life of five years, and the current production technology is being amortized over
its estimated useful life ranging two to eight years.

Proforma
financial information relating to these acquisitions is not material either individually nor in the aggregate to the results of operations and financial position of the Company
and has been omitted.

4.     Discontinued Operation and Divestitures



Pursuant to an agreement reached between the Company and Osram GmbH ("Osram"), the Company transitioned all its opto-electronic activities to Osram as
of March 31, 2003. The agreement provides for the transfer of all customer relationships and related backlog, the cancellation by the Company of all of its opto-electronic
distribution agreements, as well as providing the Company with certain rights of return related to unsold inventory as of March 31, 2003. The Company did not incur a loss on the discontinuation
of the opto-electronic business. Accordingly, the results of the opto-electronics business are presented as a discontinued operation in the accompanying financial statements.

F-16

The
following table presents comparative information of the discontinued operation, which was previously reported as part of the other operating segments, for the years ended
September 30, 2001, 2002 and 2003, respectively:

September 30,Opto-electronics2001

2002

2003Sales:Third parties

271

241

113Related parties

53

76

32Net sales

324

317

145Income from discontinued operation before tax





Income tax benefit (expense)

1

(4
)
Net income (loss) from discontinued operation

1

(4
)



The selected items of the balance sheets of the discontinued operation as of September 30, 2002 and September 30, 2003 consist of the following:

September 30,
2002

September 30,
2003Current assets:Trade accounts receivable, net

52

Inventories

7

Total current assets

59

Current liabilities:



Trade accounts payable

60

Total current liabilities

60






In August 2003, the Company sold its investment in UMCi and incurred a pre-tax loss on disposal of €9, which is reflected in
other operating income (expense).

On
July 1, 2002, the Company completed the sale of its gallium arsenide business, reflected in the Secure Mobile Solutions segment, including specified
non-manufacturing tangible and intangible assets, as well as specified customer contracts and liabilities. The Company received initial cash proceeds of €50. Contingent
purchase price adjustments are based on the level of gallium arsenide related product sales generated by the purchaser through September 30, 2004 and other adjustments. Contingent adjustments
range between a payment of €5 and proceeds of €74 and will be recognized if the contingency has passed and the amounts are realizable. The Company was required to
supply the purchaser with a minimum quantity of gallium arsenide products substantially below market prices through June 2003. Accordingly, €44 of the proceeds was deferred at
the divestiture date and will be recognized over the term of the supply agreement as products are sold and purchase price contingencies pass. The Company recognized revenue of €45 (of
which €29 was previously deferred)

F-17

and
earnings before interest and taxes ("EBIT") of €5, respectively, during the year ended September 30, 2003 in fulfillment of the supply agreement.

On
December 31, 2001 the Company completed the sale of its remaining 81% interest in Infineon Technologies Krubong Sdn. Bhd., representing its infrared components business unit,
previously reflected in the other operating segment.

On
December 19, 2000 the Company sold the Image & Video business unit, previously included in the Wireline Communications segment.

In
addition, the Company disposed of certain other, non-core business during the years ended September 30, 2001, 2002 and 2003.

Summarized
financial information for the divested businesses (through the date of divestiture) for the years ending September 30, 2001, 2002 and 2003, are as follows:

September 30,2001

2002

2003Sales:Gallium Arsenide

36

24

45Infrared Components

110

11

Image & Video

38



Total

184

35

45EBIT:Gallium Arsenide

(44
)
(18
)
5Infrared Components

(22
)
(7
)
Image & Video

10



UMCi



(1
)
(11
)Total

(56
)
(26
)
(6
)Gain (loss) on sale before tax:Gallium Arsenide



2

Infrared Components

26

39

Image & Video

202



UMCi





(9
)Other

7

(2
)
(1
)Total

235

39

(10
)


5.     License and Technology Transfer Fees

During the years ended September 30, 2001, 2002 and 2003, the Company recognized revenues related to license and technology transfer fees of
€88, €147 and €183, respectively, which are included in net sales in the accompanying statements of operations. Included therein are previously deferred
license fees of €36, €85 and €135, which were recognized as revenue pursuant to SEC SAB 101, in the years ended September 30, 2001, 2002 and
2003, respectively, since the Company had fulfilled all of its obligations and all such amounts were realized.

F-18

At September 30, 2002 previously received license fees from ProMOS of €60 were deferred and offset against the related investment (see note 16) in the accompanying
consolidated balance sheet pursuant to SEC SAB No. 5:H.

In
February 2003, the Company, ProMOS and MVI agreed to extinguish third party indebtedness of €60, which was subject to a guarantee by the Company, as well as
offset other indebtness between the parties. As a result the Company recognized previously deferred license income of €60 related to this guaranteed indebtedness during the year ended
September 30, 2003, since the amounts had been earned and realized.

Due
to the termination of the technology transfer agreement between the Company and ProMOS, an additional €36 of previously deferred license income was recognized as
revenue during the year ended September 30, 2003, as the Company had fulfilled all of its obligations.

In
March 2002, the Company further modified its capacity reservation agreements with ProMOS (see note 31) and further restructured the payment terms of the existing
licensing agreements with MVI. The agreement extended the repayment of the outstanding licensing fees of $54 million through January 2004 (which is recognized on the cash basis) and
extended the dating on other amounts due to the Company. In exchange for these provisions, MVI placed 56,330,000 shares of ProMOS in an escrow to secure the amounts outstanding under the licensing
agreement in the event of a payment default.

In
connection with the joint technology development with Nanya Technology Corporation ("Nanya") (see note 16), the Company has granted Nanya a license to use its 110 nanometer
technology in Nanya's existing operations. License income related to the technology is to be recognized over the estimated life of the technology. The Company recognized license income from Nanya of
€32 during the year ended September 30, 2003.

6.     Grants and Subsidies

The Company has received economic development funding from various governmental entities, including grants for the construction of manufacturing facilities, as
well as grants to subsidize research and development activities and employee training. Grants and subsidies included in the accompanying financial statements during the years ended
September 30, 2001, 2002 and 2003, are as follows:

|                                                           |                          | 2001 |    | 2002 |    | 2003
|---------------------------------------------------------- | ------------------------ | ---- | -- | ---- | -- | ----
|Included in the consolidated statements of operations:     |                          |      |    |      |    |     
|                                                           | Research and development |      | 71 |      | 59 |     
|                                                           | Cost of sales            |      | 10 |      | 34 |     
|                                                           |                          |      |    |      |    |     
|                                                           |                          | 81   |    | 93   |    | 113 
|                                                           |                          |      |    |      |    |     
|Construction grants deducted from the cost of fixed assets |                          | 11   |    | 83   |    | 17  
|                                                           |                          |      |    |      |    |     
|Deferred government grants (note 22)                       |                          | 37   |    | 230  |    | 223 
|                                                           |                          |      |    |      |    |     

F-19

7.     Supplemental Operating Cost Information

The cost of services and materials are as follows for the years ended September 30:

|                                            |  | 2001  |  | 2002  |  | 2003 
|------------------------------------------- |  | ----- |  | ----- |  | -----
|Raw materials, supplies and purchased goods |  | 1,731 |  | 1,380 |  | 1,675
|Purchased services                          |  | 1,357 |  | 926   |  | 1,126
|                                            |  |       |  |       |  |      
|Total                                       |  | 3,088 |  | 2,306 |  | 2,801
|                                            |  |       |  |       |  |      

Personnel
expenses are as follows for the years ended September 30:

|                   |  | 2001  |  | 2002  |  | 2003 
|------------------ |  | ----- |  | ----- |  | -----
|Wages and salaries |  | 1,441 |  | 1,349 |  | 1,483
|Social levies      |  | 229   |  | 254   |  | 259  
|Pension expense    |  | 11    |  | 29    |  | 27   
|                   |  |       |  |       |  |      
|Total              |  | 1,681 |  | 1,632 |  | 1,769
|                   |  |       |  |       |  |      

The
average number of employees by geographic region is as follows for the years ended September 30:

|              |  | 2001   |  | 2002   |  | 2003  
|------------- |  | ------ |  | ------ |  | ------
|Germany       |  | 16,279 |  | 15,773 |  | 16,043
|Other Europe  |  | 4,921  |  | 4,376  |  | 4,753 
|North America |  | 3,101  |  | 2,818  |  | 2,779 
|Asia/Pacific  |  | 9,095  |  | 7,189  |  | 7,833 
|Other         |  | 7      |  | 24     |  | 115   
|              |  |        |  |        |  |       
|Total         |  | 33,403 |  | 30,180 |  | 31,523
|              |  |        |  |        |  |       

Total
rental expenses under operating leases amounted to €130, €133 and €138 for the years ended September 30, 2001, 2002, and
2003, respectively.

8.     Restructuring

In 2003, the Company announced restructuring measures that are aimed at further reducing costs, including downsizing its workforce, outsourcing and decentralizing
certain functions and operations. As part of the restructuring, the Company currently plans to terminate up to approximately 550 employees mainly in corporate functions and logic manufacturing
operations, as well as through the outsourcing of certain functions to external providers. In connection with these measures, restructuring charges of €29 were recognized during the
year ended September 30, 2003 pursuant to SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities".

In
addition, €11, which had previously been accrued under restructuring, was forgiven in partial consideration for the execution of a service agreement and accordingly,
has been deferred, included in accrued liabilities, and will be recognized over the term of the service agreement.

F-20

The
development of the restructuring liability during the year ended September 30, 2003, is as follows:

|                      |  | September 30, 2002 |  |     |   |    |   |     |   | September 30, 2003
|--------------------- |  | ------------------ |  | --- | - | -- | - | --- | - | ------------------
|
|
|Employee terminations |  | 6                  |  |    |   | 32 |   | (20 | ) | 18                
|Other exit costs      |  | 29                 |  | (11 | ) | (3 | ) | (6  | ) | 9                 
|                      |  |                    |  |     |   |    |   |     |   |                   
|Total                 |  | 35                 |  | (11 | ) | 29 |   | (26 | ) | 27                
|                      |  |                    |  |     |   |    |   |     |   |                   

The
restructuring liability is included in other current liabilities (see note 20) with the prior period balance reclassified to conform to current period presentation.

During
the year ended September 30, 2002, in executing the restructuring plan additional charges of €16 were taken relating to non-cancelable
commitments.

Restructuring
charges of €117 were expensed during the year ended September 30, 2001 in connection with the Company's "Impact "program, aimed at streamlining its
procurement and logistics processes, as well as reducing information technology and manufacturing costs. This charge is comprised of €57 for involuntary employee terminations,
€44 relating to both previously capitalized expenditures (€27) and related exit costs (€17) associated with the discontinuance of a
world-wide information technology project and €16 of other exit costs.

9.     Income Taxes

Income (loss) before income taxes and minority interest is attributable to the following geographic locations for the years ended September 30, 2001, 2002
and 2003:

2001

2002

2003Germany

(1,184
)
(1,403
)
(506
)Foreign

159

236

147(1,025
)
(1,167
)
(359
)


F-21

Income
tax (benefit) expense for the years ended September 30, 2001, 2002 and 2003 is as follows:

2001

2002

2003Current taxesGermany

23

15

18Foreign

43

124

5066

139

68Deferred taxesGermany

(489
)
(236
)
40Foreign

(4
)
(46
)
(24
)(493
)
(282
)
16Income tax (benefit) expense from continuing operations

(427
)
(143
)
84Income tax (benefit) expense from discontinued operation

(1
)
4

Income tax (benefit) expense

(428
)
(139
)
84


In
October 2000, the German government enacted new tax legislation which reduced the Company's statutory tax rate in Germany to a uniform 25%, effective for the Company's year
ended September 30, 2002. Additionally, a solidarity surcharge of 5.5% and trade tax of 13% is levied, for a combined statutory tax rate of 39%. Prior to October 1, 2001, a split rate
imputation system was applied of 40% on retained earnings and 30% on distributed earnings, for a combined statutory rate of 52%. The impact of the reduced tax rate on the Company's deferred tax
balances relating to continuing operations of €29 was recorded in the year ended September 30, 2001.

A
reconciliation of income taxes for the years ended September 30, 2001, 2002 and 2003, determined using the German corporate tax rate plus trade taxes, net of federal benefit,
for a combined statutory rate of 52% for 2001, and 39% for 2002 and 41% (which includes a one year flood victim relief levy of 2%) for 2003 is as follows:

2001

2002

2003Expected benefit for income taxes

(533
)
(455
)
(147
)Decrease (increase) in available tax credits

(13
)
30

(35
)Non-taxable investment (income) loss

(14
)
(39
)
14Foreign tax rate differential

(78
)
(46
)
1Non deductible expenses and other provisions

41

99

58Change in German tax rateeffect on opening balance

(29
)


2Change in German tax rateeffect on current year

154

(2
)
7Increase in valuation allowance

18

271

182In-process research and development

29

10

1Other

(2
)
(11
)
1Actual (benefit) provision for income taxes

(427
)
(143
)
84


F-22

Deferred
income tax assets and liabilities as of September 30, 2002 and 2003 relate to the following:

2002

2003Assets:Intangible assets

232

115Fixed assets

43

105Investments

10

8Inventories

27

15Deferred income

148

117Net operating loss and tax credit carry-forwards

820

1,029Other items

117

172Gross deferred tax assets

1,397

1,561Valuation allowances

(310
)
(521
)Deferred tax assets

1,087

1,040Liabilities:Intangible assets

59

58Property, plant and equipment

190

148Accrued liabilities

8

31Other items

40

56Deferred tax liabilities

297

293Deferred tax assets, net

790

747


Net
deferred income tax assets and liabilities are presented in the accompanying balance sheets as of September 30, 2002 and 2003 as follows:

2002

2003Deferred tax assetsCurrent

82

113Non-current

787

705Deferred tax liabilitiesCurrent

(21
)
(39
)Non-current

(58
)
(32
)790

747


At
September 30, 2003, the Company had tax loss carry-forwards of €2,195 (relating to both trade and corporate tax, plus an additional loss carry-forward
applicable only to trade tax of €1,132), and tax credit carry-forwards of €100. Such tax loss and credit carry-forwards are mainly from German operations, are generally
limited to use by the particular entity that generated the loss or credit and do not expire under current law, except for tax loss carry-forwards from non-German operations of
€91 which expire in 2020 and 2021.

Pursuant
to SFAS No. 109, the Company has assessed its deferred tax asset and the need for a valuation allowance. Such an assessment considers whether it is more likely than not
that some portion

F-23

or
all of the deferred tax assets may not be realized. The assessment requires considerable judgment on the part of management, with respect to, amongst others, benefits that could be realized from
available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon the Company's ability to generate
the appropriate character of future taxable income sufficient to utilize loss carry-forwards or tax credits before their expiration. Since the Company had incurred a cumulative loss in certain tax
jurisdictions over a three year period as of September 30, 2003, the impact of forecasted future taxable income is excluded from such an assessment, pursuant to the provisions of SFAS
No. 109. For these tax jurisdictions, the assessment was therefore only based on the benefits that could be realized from available tax strategies and the reversal of temporary differences in
future periods. As a result of this assessment, the Company increased the deferred tax asset valuation allowance as of September 30, 2003 by €182, to reduce the deferred tax
asset to an amount that is more likely than not expected to be realized in future. During the year ended September 30, 2001 and 2002 valuation allowances relating to continuing operations in
the amount of €18 and €271, respectively, were established for tax loss carry-forwards which, on a more likely than not basis, would not be fully utilized.

The
changes in valuation allowance for deferred tax assets during the years ended September 30, 2002 and 2003 were the follows:

2002

2003Balance, beginning of the year

19

310Applicable to continuing operations

271

182Applicable to discontinued operation

4

Deferred tax assets acquired in business combinations

16

45Purchase accounting adjustments



(16
)Balance, end of the year

310

521


As
of September 30, 2003 the valuation allowance includes €45 established in connection with business combinations, which if reversed in future periods will be
applied to the carrying value of intangible assets acquired in such business combinations.

The
Company did not provide for income taxes or foreign withholding taxes on cumulative earnings of foreign subsidiaries as of September 30, 2003, because these earnings are
intended to be indefinitely reinvested in those operations. It is not practicable to estimate the amount of unrecognized deferred tax liabilities for these undistributed foreign earnings.

The
income tax (benefit) expense for the 2001, 2002 and 2003 financial years was allocated to continuing operations and accumulated other comprehensive income. The aggregate amounts
allocated to equity, for unrealized gains (losses) on securities and minimum pension liabilities, was €(15), €(6) and €4 for 2001, 2002 and 2003,
respectively.

10.   Earnings (Loss) Per Share

Basic earnings (loss) per share ("EPS") is calculated by dividing net income (loss) by the weighted average number of ordinary shares outstanding during the year.
Diluted EPS is calculated by dividing adjusted net income by the sum of the weighted average number of ordinary shares outstanding plus all

F-24

additional
ordinary shares that would have been outstanding if potentially dilutive securities or ordinary share equivalents had been issued.

The
computation of basic and diluted EPS for the years ended September 30, 2001, 2002 and 2003, is as follows:

|                          |                                               | For the year ended September 30, |            
|------------------------- | --------------------------------------------- | -------------------------------- | -----------
|
|Numerator:                |                                               |                                  |            
|                          | Net loss from continuing operations           |                                  | (592       
|                          |                                               |                                  |            
|                          | Net income (loss) from discontinued operation |                                  | 1          
|                          |                                               |                                  |            
|                          | Net loss                                      |                                  | (591       
|                          |                                               |                                  |            
|Denominator:              |                                               |                                  |            
|                          | Weighted-average shares outstanding-basic     |                                  | 640,566,801
|                          | Effect of dilutive instruments                |                                  |           
|                          |                                               |                                  |            
|                          | Weighted-average shares outstanding-diluted   |                                  | 640,566,801
|                          |                                               |                                  |            
|Loss per share (in euro): |                                               |                                  |            
|                          | Basic and dilutedfrom continuing operations  |                                  | (0.92      
|                          |                                               |                                  |            
|                          | Basic and dilutedfrom discontinued operation |                                  |           
|                          |                                               |                                  |            
|                          | Basic and dilutednet loss                    |                                  | (0.92      
|                          |                                               |                                  |            

Potentially
dilutive instruments include employee stock options and the convertible subordinated notes. The effects of the assumed exercise conversion of these instruments are
anti-dilutive to loss per share, and are therefore excluded from the calculation of dilutive loss per share for the years ended September 30, 2001, 2002 and 2003.

F-25

11.   Marketable Securities

Marketable securities at September 30, 2002 and 2003 consist of the following:

|                               |  | September 30, 2002 |  | September 30, 2003 | 
|------------------------------ |  | ------------------ |  | ------------------ | 
|
|Foreign governments securities |  | 10                 |  | 10                 | 
|Floating rate notes            |  | 299                |  | 299                | 
|Other debt securities          |  | 23                 |  | 21                 | 
|                               |  |                    |  |                    | 
|Total debt securities          |  | 332                |  | 330                | 
|Equity securities              |  | 9                  |  | 7                  | 
|Fixed term deposits            |  | 413                |  | 413                | 
|                               |  |                    |  |                    | 
|Total marketable securities    |  | 754                |  | 750                | 
|                               |  |                    |  |                    | 
|Reflected as follows:          |  |                    |  |                    | 
|Current asset                  |  | 742                |  | 738                | 
|Non-current asset (note 17)    |  | 12                 |  | 12                 | 
|                               |  |                    |  |                    | 
|Total marketable securities    |  | 754                |  | 750                | 
|                               |  |                    |  |                    | 

At
September 30, 2003 equity securities include shares held in ProMOS of €17, which are subject to a short-term sale restriction. The Company intends
to dispose of its remaining shares in ProMOS in the short-term subject to regulatory approvals. The Company accounts for its investment in ProMOS as marketable securities available for
sale effective April 1, 2003 (see note 16). The Company realized a gain of €60 during the year ended September 30, 2003 on the sale of ProMOS shares.

Realized
gains (losses) were €1, €(1) and €56 for the years ended September 30, 2001, 2002 and 2003, respectively, and are
reflected as other non-operating income (expense), net in the accompanying consolidated statements of operations.

As
of September 30, 2003 all fixed term deposits had contractual maturities between three and twelve months.

Debt
securities at September 30, 2003 had the following remaining contractual maturities:

Cost

Fair ValueLess than 1 year

168

172Between 1 and 5 years

150

150More than 5 years

180

179498

501


Actual
maturities may differ due to call or prepayment rights.

F-26

12.   Trade Accounts Receivable, net

Trade accounts receivable at September 30, 2002 and 2003 consist of the following:

2002

2003Third partytrade

696

700Siemens grouptrade (note 27)

97

194Associated and Related Companiestrade (note 27)

8

8Trade accounts receivable, gross

801

902Allowance for doubtful accounts

(43
)
(26
)Trade accounts receivable, net

758

876


Activity
in the allowance for doubtful accounts for the years ended September 30, 2002 and 2003 is as follows:

2002

2003Allowance for doubtful accounts at beginning of year

48

43Bad debt recovery, net

(5
)
(16
)Foreign currency effects



(1
)Allowance for doubtful accounts at end of year

43

26


13.   Inventories

Inventories at September 30, 2002 and 2003 consist of the following:

2002

2003Raw materials and supplies

105

85Work-in-process

463

489Finished goods

323

385891

959


14.   Other Current Assets

Other current assets at September 30, 2002 and 2003 consist of the following:

2002

2003Financial instruments (note 29)

138

154Associated and Related Companiesfinancial and other receivables (note 27)

28

125Grants receivable

100

98Miscellaneous receivables

116

94VAT and other tax receivables

54

28Siemens groupfinancial and other receivables (note 27)

23

18Employee receivables

8

7Intangible pension asset (note 28)



4Other

56

77523

605


F-27

15.   Property, Plant and Equipment, net

A summary of activity for property, plant and equipment for the year ended September 30, 2003 is as follows:

|                         |                    | Land and buildings            |       | Technical equipment and machinery |        | Other plant and office equipment |        | Construction in progress |     | Total |       
|------------------------ | ------------------ | ----------------------------- | ----- | --------------------------------- | ------ | -------------------------------- | ------ | ------------------------ | --- | ----- | ------
|Cost                     |                    |                               |       |                                   |        |                                  |        |                          |     |       |       
|                         | September 30, 2002 |                               | 1,055 |                                   | 6,254  |                                  | 2,077  |                          | 364 |       | 9,750 
|                         |                    | Additions                     |       | 14                                |        | 530                              |        | 131                      |     | 197   |       
|                         |                    | Disposals                     |       | (1                                | )      | (132                             | )      | (98                      | )   | (7    | )     
|                         |                    | Consolidations                |       | 6                                 |        | 18                               |        | 2                        |     |      |       
|                         |                    | Transfers                     |       | 34                                |        | 168                              |        | 24                       |     | (226  | )     
|                         |                    | Foreign currency effects      |       | (43                               | )      | (188                             | )      | (57                      | )   | (30   | )     
|                         |                    |                               |       |                                   |        |                                  |        |                          |     |       |       
|                         | September 30, 2003 |                               | 1,065 |                                   | 6,650  |                                  | 2,079  |                          | 298 |       | 10,092
|Accumulated depreciation |                    |                               |       |                                   |        |                                  |        |                          |     |       |       
|                         | September 30, 2002 |                               | (418  | )                                 | (3,372 | )                                | (1,469 | )                        |    |       | (5,259
|                         |                    | Additions                     |       | (67                               | )      | (948                             | )      | (353                     | )   |      |       
|                         |                    | Disposals                     |       | 1                                 |        | 89                               |        | 92                       |     |      |       
|                         |                    | Transfers                     |       | (15                               | )      | 11                               |        | 4                        |     |      |       
|                         |                    | Foreign currency effects      |       | 11                                |        | 119                              |        | 40                       |     |      |       
|                         |                    |                               |       |                                   |        |                                  |        |                          |     |       |       
|                         | September 30, 2003 |                               | (488  | )                                 | (4,101 | )                                | (1,686 | )                        |    |       | (6,275
|                         |                    | Book value September 30, 2002 |       | 637                               |        | 2,882                            |        | 608                      |     | 364   |       
|                         |                    |                               |       |                                   |        |                                  |        |                          |     |       |       
|                         |                    | Book value September 30, 2003 |       | 577                               |        | 2,549                            |        | 393                      |     | 298   |       
|                         |                    |                               |       |                                   |        |                                  |        |                          |     |       |       

The
Company is the lessor of technical equipment (see note 27) of €215 and €191 with related accumulated depreciation of €183 and
€179 as of September 30, 2002 and 2003, respectively.

At
September 30, 2003, construction in progress includes €165 relating to the construction of a 300-millimeter wafer fabrication facility in Richmond,
Virginia, USA, which is temporarily suspended and not depreciated. The Company expects to continue construction in the near term subject to market conditions.

F-28

16.   Long-term Investments, net

A summary of activity for long-term investments for the year ended September 30, 2003 is as follows:

Investment in Associated Companies

Investment in Related Companies

TotalBalance at September 30, 2002

583

125

708Additions

54

22

76Deferred income (note 5)

60



60Disposals

(185
)
(11
)
(196
)Transfers to Marketable Securities

(213
)


(213
)Impairments

(8
)
(22
)
(30
)Equity in earnings

18



18Reclassification

6

(6
)
Loss on share issuance

(2
)


(2
)Foreign currency effects

7

(3
)
4Balance at September 30, 2003

320

105

425


Investments
in Related Companies principally relate to investment activities aimed at strengthening the Company's future intellectual property potential.

The
following Associated Companies at September 30, 2003 are accounted for using the equity method of accounting:

|Name of the Associated Company                                            |  | Direct and indirect
ownership |  
|------------------------------------------------------------------------- |  | ----------------------------- | -
|Advanced Mask Technology Center GmbH & Co. KG, Dresden, Germany ("AMTC")  |  | 33.3                          | %
|ALTIS Semiconductor S.N.C., Essonnes, France ("ALTIS")                    |  | 50.1                          | %
|Cryptomathic Holding ApS, Arhus, Denmark ("Cryptomathic")                 |  | 25.4                          | %
|Enhanced Memory Systems Inc., Wilmington, Delaware, USA ("EMS")           |  | 20.0                          | %
|Hwa-Ken Investment Inc., Taipei, Taiwan ("Hwa-Ken")                       |  | 50.0                          | %
|Inotera Memories Inc., Taoyuan, Taiwan ("Inotera")                        |  | 50.0                          | %
|Maskhouse Building Administration GmbH & Co. KG, Dresden, Germany ("BAC") |  | 33.3                          | %
|MICRAM Microelectronic GmbH, Bochum, Germany ("MICRAM")                   |  | 25.1                          | %
|Newlogic Technologies AG, Lustenau, Austria ("Newlogic")                  |  | 24.9                          | %
|Ramtron International Corp., Colorado Springs, Colorado, USA ("Ramtron")  |  | 20.0                          | %
|StarCore LLC, Austin, Texas, USA ("StarCore")                             |  | 35.7                          | %

The
Company has accounted for these investments under the equity method of accounting due to the lack of unilateral control (see note 2). The above companies are principally
engaged in the research and development, design and manufacture of semiconductors and related products.

On
May 16, 2002, the Company entered into the AMTC joint venture with the partners Advanced Micro Devices, Inc., USA, (AMD) and DuPont Photomasks, Inc., USA,
(DuPont) with the purpose to develop and manufacture advanced photo masks. In addition the Company agreed to sell specified

F-29

photomask
equipment to DuPont, and entered into a long-term purchase agreement through 2011. Accordingly at September 30, 2003, €28 was deferred which is to be
recognized over the term of the purchase agreement.

ALTIS
is a joint venture between Infineon and IBM, with each having equal voting representation.

Effective
July 1, 2001, the Company acquired a 25.4% interest in Cryptomathic for €10 in cash.

On
January 12, 2001, the Company obtained a 25.1% interest in MICRAM. MICRAM develops high-speed integrated circuits with rates of more than 40 Gigabit per second.

During
the year ended September 30, 2001 the Company acquired an aggregate 24.9% interest in Newlogic for a total consideration of €21.

In
March 2001, the Company acquired a 20.1% interest (subsequently diluted to 20.0%) in Ramtron for total consideration of €31, consisting of 443,488 ordinary
shares and cash of €11. Ramtron is a leading developer of specialty semiconductor memory products, based in Colorado Springs, Colorado, and listed on the Nasdaq exchange under the
symbol RMTR. During the year ended September 30, 2002 the Company recorded an €9 impairment charge related to its investment because the decline in the market value of Ramtron
shares since the initial investment was considered to be other-than-temporary.

On
November 13, 2002, the Company entered into agreements with Nanya relating to a strategic cooperation in the development of DRAM products and the foundation of a 50:50 joint
venture (Inotera, directly and indirectly through our investment in Hwa-Ken Investment Inc.) to construct and operate a 300-millimeter manufacturing facility in Taiwan.
Pursuant to the agreements, the Company and Nanya are developing advanced 90-nanometer and 70-nanometer technology, the cost of which will be borne two-thirds by
the Company and one-third by Nanya. The new 300-millimeter manufacturing facility will be funded by the Inotera joint venture and employ the technology developed under the
aforementioned agreements to manufacture DRAM products and is anticipated to be completed in two phases. The first phase is projected to be completed by the second half of the 2004
calendar year. The second phase is anticipated to be completed in the 2006 financial year. The joint venture partners are obligated to each purchase one-half of the facility's production
based in part on market prices.

On
October 4, 2002, the Company announced that it has cancelled its shareholders' agreement with Mosel Vitelic Inc. ("MVI") relating to their ProMOS joint venture,
effective January 1, 2003, due to material breaches of the terms of the shareholders' agreement by MVI. The product purchase and capacity reservation agreement, which establishes the rights and
obligations of both shareholders to purchase product from ProMOS, also terminated on January 1, 2003. On January 27, 2003, the Company terminated its technology license agreement with
ProMOS. ProMOS subsequently terminated this same technology license agreement. The technology license agreement provides for the use of an arbitration proceeding to resolve certain disputes. In
May 2003, ProMOS initiated an arbitration proceeding relating to this dispute pursuant to International Chamber of Commerce (ICC) regulations which is to be conducted in Munich, Germany.

During
the years ended September 30, 2001 and 2002, ProMOS distributed employee bonuses in the form of shares and issued shares, which diluted the Company's shareholding at that
time while increasing its proportional share of ProMOS shareholders' equity by €11 and €18, respectively. During the year ended September 30, 2003 ProMOS
repurchased shares in the open market which increased

F-30

the
Company's shareholding at that time while decreasing its proportional share of ProMOS shareholders' equity by €2.

In
January 2003, the Company announced its intention to liquidate its investment in ProMOS, depending on market conditions, and in accordance with Taiwanese securities
regulations. Effective April 1, 2003, due to the lack of significant influence, the investment was no longer accounted for on the equity method, and is treated as marketable securities
available for sale (see note 11).

On
October 1, 2002, the Company, Agere Systems Inc. and Motorola Inc., incorporated StarCore LLC, based in Austin, Texas. As of September 30, 2003, the
Company holds a 35.7% ownership interest with an aggregate value of €23. StarCore focuses on developing, standardizing and proliferating Digital Signal Processor (DSP) core technology.

The
Company recognized impairment charges related to certain investments for which the carrying value exceeded the fair value on an other-than-temporary basis, of €6,
€39 and €30 for the years ended September 30, 2001, 2002 and 2003, respectively.

Included
in the amount of long-term investments at September 30, 2003 is goodwill of €38.

For
the Associated Companies as of September 30, 2003 the aggregate summarized financial information for the fiscal years 2001, 2002 and 2003, is as follows:

2001

2002

2003Sales

538

541

600Gross profit

45

62

67Net income (loss)

12

6

(6
)


2001

2002

2003Current assets

329

269

243Non-current assets

659

650

682Current liabilities

(530
)
(442
)
(324
)Non-current liabilities

(8
)
(13
)
(15
)Shareholders' equity

450

464

586


17.   Other Assets

Other non-current assets at September 30, 2002 and 2003 consist of the following:

2002

2003Intangible assets, net

554

411Notes receivable

9

43Marketable securities (note 11)

12

13Associated and Related Companiesfinancial and other (note 27)

92

11Employee receivables

2

2Other, net

2

5671

485


F-31

A
summary of activity for intangible assets for the year ended September 30, 2003 is as follows:

Goodwill

Other intangibles

TotalCostSeptember 30, 2002

387

301

688Additions



58

58Impairments and write-offs

(68
)


(68
)Disposals



(30
)
(30
)Acquisitions

29

34

63Adjustments

(70
)
(20
)
(90
)Foreign currency effects

(35
)
(4
)
(39
)September 30, 2003

243

339

582Accumulated amortizationSeptember 30, 2002

(31
)
(103
)
(134
)Additions



(69
)
(69
)In-process R&D



(6
)
(6
)Disposals



30

30Foreign currency effects

4

4

8September 30, 2003

(27
)
(144
)
(171
)Book value September 30, 2002

356

198

554Book value September 30, 2003

216

195

411


The
estimated aggregate amortization expense relating to other intangible assets for each of the five succeeding financial years is as follows: 2004 €64; 2005
€48; 2006 €34; 2007 €27; 2008 €10.

In
June 2003, the Company entered into technology development and license agreements with IBM and Chartered Semiconductor for advanced logic process manufacturing technology.
Licenses of €43 are amortized over the expected life of the related technology of five years.

As
a result of the combination of below forecasted operating results and moderated market expectations, the Company, taking the technical milestones achieved to date into account,
revised the forecasted returns for the optical networking reporting unit of the Wireline Communications segment. Accordingly, the Company tested the reporting unit's goodwill for impairment using a
present value technique based on discounted estimated future cash flows pursuant to SFAS No.142, "Goodwill and Other Intangible Assets", and recognized
an impairment charge of €68 during the year ended September 30, 2003.

During
the years ended September 30, 2001 and 2002, the Company recognized impairment charges of €42 and €12, respectively.

F-32

18.   Trade Accounts Payable

Trade accounts payable at September 30, 2002 and 2003 consist of the following:

2002

2003Third partytrade

837

750Siemens grouptrade (note 27)

154

73Associated and Related Companiestrade (note 27)

206

541,197

877


19.   Accrued Liabilities

Accrued liabilities at September 30, 2002 and 2003 consist of the following:

2002

2003Personnel costs

187

257Warranties and licenses

103

169Taxes

93

67Interest

31

42Other

59

109473

644


20.   Other Current Liabilities

Other current liabilities at September 30, 2002 and 2003 consist of the following:

2002

2003Deferred income

126

152Payroll obligations and other liabilities to employees

162

121VAT and other taxes payable

108

100Restructuring (note 8)

35

27Financial instruments (note 29)

3

11Associated and Related Companiesfinancial and other (note 27)

62

5Other

76

9572

425


Deferred
income includes amounts relating to licenses and technology transfer fees (see note 5), gain associated with sale of a business (see note 4) and government grants
(see note 6).

F-33

21.   Debt

Debt at September 30, 2002 and 2003 consists of the following:

2002

2003Short-term debt:Notes payable to banks, weighted average rate 3.6%

96

8Current portion of long-term debt

23

138Capital lease obligations

1

3Total short-term debt and current maturities

120

149Long-term debt:Convertible subordinated notes, 4.25%, due 2007

981

987Convertible subordinated notes, 5.0%, due 2010



688Loans payable to banks:Unsecured term loans, weighted average rate 2.35%, due 20042008

595

566Secured term loans, weighted average rate 6.31%, due 20042013

2

28Loans payable, weighted average rate 4.0%, due 2004

6

6Interest-free loan due 2004

51

Notes payable to governmental entity, rate 0.97%, due 20272031

70

60Capital lease obligations

5

8Total long-term debt

1,710

2,343


Short-term
notes payable to banks consist primarily of borrowings under the terms of short-term borrowing arrangements.

On
June 5, 2003, the Company (as guarantor) through its subsidiary Infineon Technologies Holding B.V. (as issuer), issued €700 in subordinated convertible
notes due 2010 at par in an underwritten offering to institutional investors in Europe. The notes are convertible, at the option of the holders of the notes, into a maximum of 68.4 million
ordinary shares of the Company, at a conversion price of euro 10.23 per share. Upon conversion, the Company may pay a cash amount in lieu of delivery of all or part of the shares. The notes accrue
interest at 5.0% per year. The notes are unsecured andpari passuwith all present and future unsecured subordinated obligations of the issuer, and
cannot be converted for the first three years. The note holders have a negative pledge relating to future capital market indebtedness, as defined. The note holders have an early redemption option in
the event of a change of control, as defined. A corporate reorganization resulting in a substitution of the guarantor shall not be regarded as a change of control, as defined. The Company may redeem
the convertible notes after three years at their principal amount plus interest accrued thereon, if the Company's share price exceeds 125% of the conversion price on 15 trading days during a period of
30 consecutive trading days. The convertible notes are listed on the Luxembourg Stock Exchange. At September 30, 2003, unamortized debt issuance costs were €12.

On
February 6, 2002, the Company (as guarantor), through its subsidiary Infineon Technologies Holding B.V. (as issuer), issued €1,000 in subordinated convertible
notes due 2007 at par in an underwritten offering to institutional investors in Europe. The notes are convertible, at the option of the holders of the notes, into a maximum of 28.2 million of
the Company's ordinary shares at a

F-34

conversion
price of euro 35.43 per share. Upon conversion, the Company may pay a cash amount in lieu of delivery of all or part of the shares. The convertible notes accrue interest at 4.25% per year.
The notes are unsecured and pari passu with all present and future unsecured subordinated obligations of the issuer. The note holders have a negative pledge relating to any future capital market
indebtedness, as defined. The note holders have an early redemption option in the event of a change of control, as defined. The Company may redeem the convertible notes after three years at their
principal amount plus interest accrued thereon, if the Company's share price exceeds 115% of the conversion price on 15 trading days during a period of 30 consecutive trading days. The convertible
notes are listed on the Luxembourg Stock Exchange. At September 30, 2003, unamortized debt issuance costs were €13.

Included
in unsecured term loans is a €450 syndicated credit facility relating to the expansion of the Dresden manufacturing facility, which was fully drawn as of
September 30, 2002 and 2003. The credit facility is supported by a partial guarantee of the Federal Republic of Germany and another governmental entity. The credit facility contains specified
financial covenants, provides for annual payments of interest and matures on September 30, 2005.

The
interest-free loan, due September 2004, which is included in current portion of long-term debt as of September 30, 2003, consists of borrowings under an
arrangement whereby a governmental entity has agreed to pay all interest thereon. Additionally, should the Company meet certain stipulations, the governmental entity has agreed to reimburse the
Company for the outstanding balance of the loan. The Company has complied with the stipulations through September 30, 2003.

Notes
payable to governmental entity consist of unsecured Industrial Revenue Bonds associated with the construction at the Infineon Richmond facility.

The
Company has established independent financing arrangements with several financial institutions, in the form of both short and long-term credit facilities, which are
available for anticipated funding purposes.

|             |  |                    |  |                                              |  | As of September 30, 2003
|------------ |  | ------------------ |  | -------------------------------------------- |  | ------------------------
|
|short-term   |  | firm commitment    |  | working capital,
guarantees, cash
management |  | 612                     
|short-term   |  | no firm commitment |  | working capital                              |  | 91                      
|long-term    |  | firm commitment    |  | working capital                              |  | 378                     
|long-term(1) |  | firm commitment    |  | project finance                              |  | 751                     
|             |  |                    |  |                                              |  |                         
|             |  |                    |  |                                              |  | 1,832                   
|             |  |                    |  |                                              |  |                         

At
September 30, 2003, the Company is in compliance with its debt covenants under the relevant facilities. The Company has a €375 syndicated multicurrency
revolving credit facility, which expires in September 2005. The facility has customary financial covenants and drawings bear market related interest. At September 30, 2003 no amounts
were outstanding under this facility. The Company had an additional €375 short-term component to the revolving credit facility available at September 30, 2002,
however in September 2003 elected not to extend this component due to available cash resources.

F-35

Interest
expense for the years ended September 30, 2001, 2002 and 2003 was €42, €89 and €126, respectively.

Aggregate
amounts of long-term debt maturing subsequent to September 30, 2003 are as follows:

Year ending
September 30,

Amount2005

5302006

492007

1,0082008

4thereafter

7522,343


22.   Other Liabilities

Other non-current liabilities at September 30, 2002 and 2003 consist of the following:

2002

2003Redeemable interest

218

242Deferred government grants (note 6)

230

223Accrued pension liabilities (note 28)

82

87Deferred income, other



28Deferred license and technology transfer fees (note 5)

39

22Accrued post-retirement benefits (note 28)

6

5Minority interest

12

5Other

22

18609

630


Under
the Company's agreements with the other investors in the SC300 venture, each of them has the right to sell their interest in the venture to the Company on September 30, 2005
and every third anniversary thereafter, and the Company has the right to purchase their interests in the venture once every three years, commencing March 31, 2004. In addition, each of the
other investors has the right to sell their interest in the venture to the Company under certain conditions. The carrying amount of this redeemable interest represents their contributed capital and is
increased by amounts representing accretion of interest, which could be payable under the redemption feature, so that the carrying amount of the liability will equal the redemption amount at any
redemption date.

23.   Ordinary Share Capital

As of September 30, 2003 the Company had 720,880,604 registered ordinary shares of euro 2.00 notional value per share outstanding. During the year ended
September 30, 2003, due to the achievement of certain milestones, 96,386 shares representing contingent purchase consideration in connection with the Catamaran acquisition (see note 3),
were released from third party escrow, and are reflected as issued in the accompanying statement of shareholders' equity.

F-36

INFINEON TECHNOLOGIES AG AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS --(Continued)

(euro in millions, except where otherwise stated)



In addition to the issued share capital, the Company's Articles of Association authorize the Management Board to increase the ordinary share capital with the
Supervisory Board's consent by issuing new shares. As of September 30, 2003, the Management Board may use these authorizations to issue new shares as follows:



The
Company has conditional capital of up to an aggregate nominal amount of €96 (Conditional Share Capital I) and of up to an aggregate nominal amount of
€29 (Conditional Share Capital III) that may be used to issue up to 62.5 million new registered shares in connection with the Company's long-term incentive
plans (see note 24). These shares will have dividend rights from the beginning of the fiscal year in which they are issued.

The
Company has conditional capital of up to an aggregate nominal amount of €50 (Conditional Share Capital II) that may be used to issue up to 25 million
new registered shares upon conversion of debt securities, which have been issued in February 2002 and may be converted until January 23, 2007 (see note 21). These shares will have
dividend rights from the beginning of the fiscal year in which they are issued.

The
Company has conditional capital of up to an aggregate nominal amount of €136.8 (Conditional Share Capital II/2002) that may be used to issue up to
68.4 million new registered shares upon conversion of debt securities, which have been issued in June 2003 and may be converted until May 22, 2010 (see note 21). These
shares will have dividend rights from the beginning of the fiscal year in which they are issued.

The
Company has further conditional capital of up to an aggregate nominal amount of €213.2 (Conditional Share Capital II/2002) that may be used to issue up to
106.6 million new registered shares upon conversion of debt securities which may be issued before January 21, 2007. These shares will have dividend rights from the beginning of the year
in which they are issued.



Following the Formation, the Company was capitalized through the issuance of 600,000,000 ordinary shares with an aggregate nominal value of
€1,200. On March 13, 2000, the Company successfully completed its initial public offering ("IPO") of 16,700,000 ordinary shares, in the form of American Depository Shares which
are listed on the New York Stock Exchange and ordinary shares which are listed on the Frankfurt Stock Exchange, raising €562, net of offering expenses.

In
April 2000, pursuant to a private placement, the Company sold 7,592,430 ordinary shares, raising €259.

F-37

On
June, 2000, the Company issued 1,209,077 ordinary shares from Authorized Share Capital III to acquire the net assets of Savan.

In
March 2001, the Company issued 443,488 ordinary shares from Authorized Share Capital III as partial consideration to acquire an interest in Ramtron International Corp.

In
April 2001, the Company issued 706,714 ordinary shares from Authorized Share Capital III to acquire Ardent.

In
July 2001, the Company successfully completed a secondary public offering of 60,000,000 ordinary shares, raising €1,475, net of offering expenses.

In
August 2001, the Company issued 6,373,435 ordinary shares from Authorized Share Capital III to acquire Catamaran.

In
September 2002, the Company issued 27,500,000 ordinary shares from Authorized Share Capital I/2002 to acquire MIC (see note 3).

Under
German commercial law (Aktiengesetz), the amount of dividends available for distribution to shareholders is based on the level of
earnings (Bilanzgewinn) of the ultimate parent, as determined in accordance with the HGB. All dividends must be approved by shareholders. The ordinary
shareholders meeting held in January 2003 did not authorize a dividend. No dividend will be proposed by management to the shareholders for the 2003 financial year, since Infineon Technologies
AG as the ultimate parent incurred a loss (Bilanzverlust) for the year ended September 30, 2003.

24.   Stock-based Compensation



On April 6, 2001, the Company's shareholders approved the International Long-Term Incentive Plan (the "LTI 2001 Plan") which replaced the LTI
1999 Plan. Options previously issued under the LTI 1999 Plan remain unaffected as to terms and conditions, however, no additional options may be issued under the LTI 1999 Plan. Under the terms of the
LTI 2001 Plan, the Company can grant up to 51.5 million options over a five-year period. The exercise price of each option equals 105% of the average closing price of the Company's
stock during the five trading days prior to the grant date. Granted options have a vesting period of between two and four years and expire seven years from the grant date.

In
1999, the shareholders approved a share option plan (the "LTI 1999 Plan"), which provided for the granting of non-transferable options to acquire ordinary shares over a
future period. Under the terms of the LTI 1999 Plan, the Company could grant up to 48 million options over a five-year period. The exercise price of each option equals 120% of the
average closing price of the Company's stock during the five trading days prior to the grant date. Granted options vest at the latter of two years from the grant date or the date on which the
Company's stock reaches the exercise price for at least one trading day. Options expire seven years from the grant date.

Under
the LTI 2001 Plan, the Company's Supervisory Board will decide annually within three months after publication of the financial results how many options to grant to the Management
Board. The Management Board will, within the same three-month period, decide how many options to grant to eligible employees.

F-38

A
summary of the status of the LTI 1999 Plan and the LTI 2001 Plan as of September 30, 2003, and changes during the three years then ended is presented below:

|                                 |  | 2001       |   | 2002 |       | 2003
|-------------------------------- |  | ---------- | - | ---- | ----- | ----
|
|Outstanding at beginning of year |  | 5,469,468  |   | €    | 42.15 |     
|Granted                          |  | 6,013,060  |   | €    | 54.15 |     
|Exercised                        |  |           |   |      |      |     
|Forfeited                        |  | (214,650   | ) | €    | 43.82 |     
|                                 |  |            |   |      |       |     
|Outstanding at end of year       |  | 11,267,878 |   | €    | 48.56 |     
|                                 |  |            |   |      |       |     
|Exercisable at end of year       |  |           |   |      |      |     

The
following table summarizes information about stock options outstanding and exercisable at September 30, 2003:

|                                |  | Outstanding |  | Exercisable
|------------------------------- |  | ----------- |  | -----------
|
|€5€10                          |  | 11,072,740  |  | 6.14       
|€10€15                         |  | 1,616,400   |  | 6.00       
|€15€20                         |  | 176,750     |  | 5.84       
|€20€25                         |  | 7,361,690   |  | 5.18       
|€25€30                         |  | 143,750     |  | 4.99       
|€40€45                         |  | 4,675,214   |  | 3.46       
|€50€55                         |  | 103,700     |  | 4.51       
|€55€60                         |  | 4,739,240   |  | 4.16       
|                                |  |             |  |            
|Total outstanding & exercisable |  | 29,889,484  |  | 5.15       
|                                |  |             |  |            



The Company has a worldwide employee stock purchase plan which provides employees with the opportunity to purchase ordinary shares of the Company at a discount of
15%, subject to a certain maximum per employee and a one year holding period. Pursuant to the provisions of this plan,
employees purchased 355,460 shares during the year ended September 30, 2002. There was no plan offering during the year ended September 30, 2003.



As described in note 2, the Company applies APB Opinion 25 and its related interpretations to account for stock-based compensation. SFAS No. 123
establishes an alternative to determine compensation expense based on the fair value of the options at the grant date calculated through the use of option pricing models. Option pricing models were
developed to estimate the fair value of freely

F-39

tradable,
fully transferable options without vesting restrictions, which differ significantly from the options granted to the Company's employees with their exercise restrictions. These models also
require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company estimated the fair value of each option
grant at the date of grant using a Black-Scholes option-pricing model based on a single-option valuation approach with forfeitures recognized as they occur. The following weighted-average assumptions
were used for grants in each year ended September 30:

2001

2002

2003Weighted-average assumptions:Risk-free interest rate

5.35
%
4.19
%
3.85
%Expected volatility

50
%
52
%
59
%Dividend yield

0
%
0
%
0
%Expected life in years

4.50

4.50

4.50Weighted-average fair value per option at grant date in Euro

24.18

9.09

4.41


If
the Company had accounted for stock option grants and employee stock purchases under its plans, according to the fair value method of SFAS No. 123, and thereby recognized compensation
expense based on the above fair values over the respective option vesting periods, net income (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts
indicated below, pursuant to the provision of SFAS No. 148"Accounting for Stock-Based CompensationTransition and Disclosure":

2001

2002

2003Net loss:As reported


(591
)

(1,021
)

(435
)Deduct: Stock-based employee compensation expense included in reported net income, net of related tax effects


25


23


7Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(72
)

(92
)

(43
)Pro forma


(638
)

(1,090
)

(471
)Basic and diluted loss per share:As reported

€
(0.92
)
€
(1.47
)
€
(0.60
)Pro forma

€
(1.00
)
€
(1.57
)
€
(0.65
)


F-40

25.   Other Comprehensive Income (Loss)

The changes in the components of other comprehensive income (loss) for the years ended September 30, 2001, 2002 and 2003 are as follows:

|                                                                |                                                                              | 2001 |     | 2002 |   | 2003 |   
|--------------------------------------------------------------- | ---------------------------------------------------------------------------- | ---- | --- | ---- | - | ---- | --
|
|Unrealized (losses) gains on securities:                        |                                                                              |      |     |      |   |      |   
|                                                                | Unrealized holding (losses) gains                                            |      | (3  | )    | 1 |      | (2
|                                                                | Reclassification adjustment for losses (gains) included in net income (loss) |      | (13 | )    | 7 |      | (6
|                                                                |                                                                              |      |     |      |   |      |   
|Net unrealized (losses) gains                                   |                                                                              | (16  | )   | 8    |   | (8   | ) 
|Additional minimum pension liability                            |                                                                              | (19  | )   | 7    |   | (12  | ) 
|Foreign currency translation adjustment                         |                                                                              | (19  | )   |     |   | (19  | ) 
|                                                                |                                                                              |      |     |      |   |      |   
|Other comprehensive (loss) income                               |                                                                              | (54  | )   | 15   |   | (39  | ) 
|Accumulated other comprehensive income (loss)beginning of year |                                                                              | 119  |     | (7   | ) | 112  |   
|                                                                |                                                                              |      |     |      |   |      |   
|Accumulated other comprehensive income (loss)end of year       |                                                                              | 65   |     | 8    |   | 73   |   
|                                                                |                                                                              |      |     |      |   |      |   

26.   Supplemental Cash Flow Information

2001

2002

2003Cash paid for:Interest

52

55

91Income taxes

282

46

53Operating activities:Cash received for tax-free government grants

22

86

34Non-cash investing and financing activities:Contributions from (to) Siemens

(11
)
10

(6
)Acquisition of intangible assets

10

16

8Assets acquired through capital lease transactions



2

5


On
August 14, 2001 the Company entered into an agreement to sell its 49% interest in the OSRAM Opto Semiconductors GmbH & Co. OHG joint venture ("OSRAM Opto") for
€565 to OSRAM GmbH ("OSRAM"), a wholly owned subsidiary of Siemens. Pursuant to the provisions of Accounting Interpretation No. 39 of APB Opinion 16,
"Transfers and Exchanges Between Companies under Common Control", transfers of long-lived assets between entities under common control are
to be accounted for at their historic costs and any excess of consideration received should be accounted for as a capital contribution. Accordingly, since the Company was a subsidiary of Siemens at
the transaction date, the excess purchase price, net of tax, of €392 is reflected as a direct increase to additional paid-in capital at September 30, 2001.

F-41

27.   Related Parties

The Company has transactions in the normal course of business with Siemens group companies and with Related and Associated Companies (together, "Related
Parties"). The Company purchases certain of its raw materials, especially chipsets, from, and sells a considerable portion of its products, to Related Parties. Purchases and sales to Related Parties
are generally based on market prices or manufacturing cost plus a mark-up.

Related
Party receivables at September 30, 2002 and 2003 consist of the following:

2002

2003Current:Siemens grouptrade

97

194Associated and Related Companiestrade

8

8Siemens groupfinancial and other

23

18Associated and Related Companiesfinancial and other

28

125Employee receivables

8

7164

352Non-current:Associated and Related Companiesfinancial and other

92

11Employee receivables

2

294

13Total Related Party receivables

258

365


Related
Party payables at September 30, 2002 and 2003 consist of the following:

2002

2003Siemens grouptrade

154

73Associated and Related Companiestrade

206

54Associated and Related Companiesfinancial and other

62

5Total Related Party payables

422

132


Related
Party receivables and payables have been segregated (1) between amounts owed by or to Siemens group companies and companies in which the Company has an ownership interest
and (2) based on the underlying nature of the transactions. Trade receivables and payables include amounts for the purchase and sale of product. Financial and other receivables and payables
represent amounts owed relating to loans and advances and accrue interest at interbank rates.

The
Company and IBM have both extended revolving term loans to ALTIS. As of September 30, 2003, the outstanding balance of the Company's loan to ALTIS was €61 and
is included in current Associated and Related Companiesfinancial and other receivables.

At
September 30, 2003, current Associated and Related Companiesfinancial and other receivables include an unsecured loan of €58 to Inotera, which
bears interest at market rates and was converted to equity in October 2003.

F-42

At
September 30, 2002 current Associated and Related Companiesfinancial and other payables include a loan of $55 million from UMCi, which bears interest at
market rates and was due and repaid during the year ended September 30, 2003.

Transactions
with Related Parties during the years ended September 30, 2001, 2002 and 2003, include the following:

2001

2002

2003Sales to Related Parties:Siemens group companies

848

685

836Associated and Related Companies

147

170

163995

855

999Purchases from Related Parties:Siemens group companies

417

681

413Associated and Related Companies

1,040

686

470Interest income from Related Parties

9

5

4Interest expense to Related Parties

10

2

1


Sales
to Siemens group companies include sales to the Siemens group sales organizations for resale to third parties of €89, €77 and €86
for the years ended September 30, 2001, 2002 and 2003, respectively. Sales are principally conducted through the Company's own independent sales organization directly to third parties. Where
the Company has not
established its own independent sales organization in a certain country, a commission is paid to the Siemens group sales organizations where they assist in making sales directly to third parties.

Purchases
from Siemens group companies primarily include purchases of inventory, IT services, and administrative services.

Technical
equipment is leased to ALTIS (see note 15). The non-cancelable future lease payments due under this lease at September 30, 2003 amount to
€17 for the year ending September 30, 2004.

On
August 10, 2000, Siemens issued a guaranteed exchangeable note with an aggregate nominal amount of €2,500 (representing 4% of the Company's ordinary share
capital), which is divided into bearer notes with a nominal amount of €0.1 each. The notes bear a 1% fixed annual interest rate and are to be redeemed by Siemens on August 10,
2005. Each note can be exchanged, in certain circumstances, through August 10, 2005 for 1,000 the Company's shares.

On
December 5, 2001, Siemens transferred 200 million of the Company shares, or approximately 28.9% of the Company's then outstanding share capital, to an
non-voting trust, not related to the Siemens group, under a trust agreement. The trustee has legal title to the shares held in trust and Siemens has irrevocably relinquished all voting
rights in the shares. However, the trustee is not permitted to vote any of the Company shares it holds in trust under the trust agreement. Siemens continues to be entitled to all the benefits of
economic ownership of the shares held in trust, including the right to receive cash dividends and any proceeds resulting from a permitted sale of the Company shares held in trust under the trust
agreement. Under the trust agreement, the trustee holds the shares in trust for the benefit of the beneficiaries under the trust agreement, which include Siemens as trustor

F-43

and
third-party shareholders of the Company. The trust agreement will terminate when the Siemens group, on a consolidated basis, has held, directly or indirectly, less than 50% of the voting share
capital of the Company, including the shares held in trust by the trustee, for a period of two consecutive years. Certain provisions of the trust agreement, including those relating to voting and
transfer of the shares held in trust, may not be amended without the approval of the Company's shareholders.

Siemens
Pension Trust e.V., Munich informed the Company, by letter dated December 12, 2002, that their share of the voting rights of Infineon Technologies AG had fallen below the
threshold of 10% on December 2, 2002. The Company assumes that the shareholding of the Siemens group on a consolidated basis had fallen below 50% at the same time.

The
transfer of the Company's shares to the non-voting trust by Siemens on December 5, 2001, reduced Siemens' voting interest in the Company by an amount corresponding
to the number of shares transferred. Accordingly, while Siemens' ownership interest in the Company at September 30, 2003 is 39.7%, its voting interest approximates 12.0%. Since shareholders of
the Company other than Siemens and the non-voting trust own approximately 60.3% of the Company's share capital, they control a majority of the shares that may be voted at the Company's shareholders'
meeting. The effect of the transfer of the Company's shares into the non-voting trust is that the other shareholders in the Company have a disproportionate voting interest.

28.   Pension Plans

The Company provides pension benefits to a significant portion of its employees. Plan benefits are principally based upon years of service. Certain pension plans
are based on salary earned in the last year or last five years of employment while others are fixed plans depending on ranking (both salary level and position).

F-44

Information
with respect to the Company's pension plans for the years ended September 30, 2001, 2002 and 2003 is presented by German ("Domestic") plans and non-German
("Foreign") plans.

|                                          |                                                 | 2001 |      | 2002 |     | 2003 |     
|----------------------------------------- | ----------------------------------------------- | ---- | ---- | ---- | --- | ---- | ----
|
|Change in projected benefit obligations:  |                                                 |      |      |      |     |      |     
|                                          | Projected benefit obligations beginning of year |      | (170 | )    | (50 | )    | (197
|                                          | Service cost                                    |      | (12  | )    | (2  | )    | (13 
|                                          | Interest cost                                   |      | (11  | )    | (3  | )    | (12 
|                                          | Actuarial (losses) gains                        |      | (6   | )    | (1  | )    |    
|                                          | Business combinations                           |      |     |      |    |      |    
|                                          | Divestitures                                    |      |     |      |    |      | 1   
|                                          | New plan created                                |      |     |      |    |      | (1  
|                                          | Plan amendments                                 |      |     |      | 4   |      |    
|                                          | Settlement of pension obligations               |      |     |      | 1   |      |    
|                                          | Benefits paid                                   |      | 2    |      | 1   |      | 2   
|                                          | Curtailment                                     |      |     |      |    |      | 2   
|                                          | Foreign currency effects                        |      |     |      | 3   |      |    
|                                          |                                                 |      |      |      |     |      |     
|                                          | Projected benefit obligations end of year       |      | (197 | )    | (47 | )    | (218
|                                          |                                                 |      |      |      |     |      |     
|Change in fair value of plan assets:      |                                                 |      |      |      |     |      |     
|                                          | Fair value at beginning of year                 |      | 155  |      | 9   |      | 133 
|                                          | Contributions and transfers                     |      | 2    |      | 16  |      | 2   
|                                          | Actual return on plan assets                    |      | (22  | )    | 1   |      | (13 
|                                          | Benefits paid                                   |      | (2   | )    | (1  | )    | (2  
|                                          | Business combination                            |      |     |      |    |      |    
|                                          | New plan created                                |      |     |      |    |      |    
|                                          | Foreign currency effects                        |      |     |      | (1  | )    |    
|                                          |                                                 |      |      |      |     |      |     
|                                          | Fair value at end of year                       |      | 133  |      | 24  |      | 120 
|                                          |                                                 |      |      |      |     |      |     
|Funded status                             |                                                 | (64  | )    | (23  | )   | (98  | )   
|Unrecognized actuarial loss               |                                                 | 52   |      | 4    |     | 68   |     
|Unrecognized prior service cost (benefit) |                                                 |     |      |     |     |     |     
|Unrecognized net obligation               |                                                 | 2    |      |     |     |     |     
|Post measurement date contributions       |                                                 |     |      |     |     | 10   |     
|                                          |                                                 |      |      |      |     |      |     
|Net liability recognized                  |                                                 | (10  | )    | (19  | )   | (20  | )   
|                                          |                                                 |      |      |      |     |      |     

F-45

The above net liability is recognized as follows in the accompanying balance sheets as of September 30:

2001

2002

2003Domestic plans

Foreign plans

Domestic plans

Foreign plans

Domestic plans

Foreign plansPrepaid pension cost











1Intangible asset (note 14)









4

Accumulated other comprehensive income

19



33



29

Accrued pension liability (note 22)

(29
)
(19
)
(53
)
(29
)
(47
)
(40
)Net liability recognized

(10
)
(19
)
(20
)
(29
)
(14
)
(39
)


The
assumptions used in calculating the actuarial values for the principal pension plans are as follows:

2001

2002

2003Domestic
plans

Foreign
plans

Domestic
plans

Foreign
plans

Domestic
plans

Foreign
plansDiscount rate

6.0
%
7.5
%
6.0
%
5.5% - 7.0
%
5.8
%
5.3% - 6.0
%Rate of compensation increase

3.0
%
4.5
%
3.0
%
3.0% - 4.5
%
3.0
%
3.0% - 4.5
%Expected return on plan assets

10.0
%
8.0
%
5.4
%
6.0% - 8.0
%
4.9
%
6.0% - 7.0
%


Discount
rates are established based on prevailing market rates for high-quality fixed-income instruments that, if the pension benefit obligation was settled at the
measurement date, would provide the necessary future cash flows to pay the benefit obligation when due. The Company believes short-term changes in interest rates should not affect the
measurement of the Company's long-term obligation.

The
components of net periodic pension cost for the years ended September 30, 2001, 2002 and 2003 are as follows:

2001

2002

2003Domestic
plans

Foreign
plans

Domestic
plans

Foreign
plans

Domestic
plans

Foreign
plansService cost

(12
)
(2
)
(13
)
(5
)
(13
)
(5
)Interest cost

(11
)
(3
)
(12
)
(3
)
(13
)
(4
)Expected return on plan assets

15

1

5

1

6

2Amortization of unrecognized losses



3

(2
)


(3
)
Amortization of unrecognized net obligation

(2
)


(2
)




Curtailment gain recognized





2





3Net periodic pension cost

(10
)
(1
)
(22
)
(7
)
(23
)
(4
)


On
September 25, 2000, the Company established the Infineon Technologies Pension Trust e.V. (the "Pension Trust") for the purpose of funding future pension benefit payments for
employees in Germany. The Company contributed €155 of cash and marketable debt and equity securities, which

F-46

qualify
as plan assets under SFAS No. 87, to the Pension Trust for use in funding these pension benefit obligations, thereby reducing accrued pension liabilities.

The
effect of the employee terminations, in connection with the Company's restructuring plan (see note 8), on the Company's pension obligation is reflected as a curtailment in the
years ended September 30, 2002 and 2003 pursuant to the provisions of SFAS No. 88 "Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits."

During
the years ended September 30, 2002 and 2003, the Company made contributions of €12 and €28, respectively, to fund its pension plan in
Germany.

During
the year ended September 30, 2002, the Company established a deferred savings plan for its German employees, whereby a portion of the employee's salary is invested for a
lump sum benefit payment including interest upon retirement. The liability for such future payments is actuarially determined and accounted for on the same basis as the Company's other pension plans.

Following
the Company's spin-off from Siemens, the Company established a pension plan for its US employees separate from the Siemens US pension plan. At the time of the
spin-off, the funded status of the Company's allocated portion of the Siemens US pension plan relating to the transferred employees was reflected as an accrued pension liability.
Subsequently, Siemens transferred assets to fund this liability based on an actuarial determination. The difference between the actuarial valuation at the funding date and the originally allocated
liability of €10 and €(6) is reflected as an equity transaction during the years ended September 30, 2002 and 2003, respectively.

The
Company provides post-retirement health care benefits to eligible employees in the United States. The Company recognized net periodic benefit cost of €1,
€0 and €0 for the years ended September 30, 2001, 2002 and 2003, respectively. The net liability recognized in the balance sheet was €6 at
September 30, 2001 and 2002, respectively, and €5 at September 30, 2003.

As
a matter of policy, the Company's pension plans do not invest in the Company's shares.

29.   Financial Instruments

The Company periodically enters into derivatives including foreign currency forward and option contracts. The objective of these transactions is to reduce the
market risk of exchange rate fluctuations to its foreign currency denominated net future cash flows. The Company does not enter into derivatives for trading or speculative purposes.

F-47

The
euro equivalent notional amounts in millions and fair values of the Company's derivative instruments as of September 30, 2002 and 2003 are as follows:

2002

2003Notional
amount

Fair
value

Notional
amount

Fair
valueForward contracts sold:U.S. dollar

313

6

306

5Japanese yen





8

Great Britain pound





2

Forward contracts purchased:U.S. dollar

148



54

(1
)Japanese yen

75

(2
)
29

1Singapore dollar

33

(1
)
20

Great Britain pound

7



4

Other currencies

52



15

1Currency Options sold:U.S. dollar





175

(10
)Currency Options purchased:U.S. dollar





186

7Cross currency interest rate swap:U.S. dollar

616

106

547

113Interest rate swap:

500

26

1,200

27Forward rate agreements:

150





Fair value, net



135



143


At
September 30, 2002 and 2003, all derivative financial instruments are recorded at fair value.

Gains
related to foreign currency derivatives and foreign currency transactions amounted to €34 for the year ended September 30, 2001 and losses related to foreign
currency derivatives and foreign currency transactions amounted to €16 and €35 for the years ended September 30, 2002 and 2003, respectively. Gains and losses on
derivative financial instruments are included in determining net income, with those related to operations included primarily in cost of goods sold, and those related to financial activities included
in other income or expense.

Fair
values of financial instruments are determined using quoted market prices or discounted cash flows. The fair value of the Company's unsecured term loans and interest-bearing notes
payable approximate their carrying values as their interest rates approximate those which could be obtained currently. Due to the restrictions on transferability under the interest free arrangement, a
fair value other than the carrying value of the interest-free loan is not meaningful. At September 30, 2003 the convertible notes due 2007 and the convertible notes due 2010 were
trading at a 6.9% discount to par and a 36.8% premium to par, respectively, based on quoted market values on the Luxembourg Stock Exchange. The fair values of the Company's cash and cash equivalents,
receivables, related-party

F-48

receivables
and payables and other financial instruments approximate their carrying values due to their short-term nature. Marketable securities are recorded at fair value (see
note 11).

30.   Risks

Financial instruments that expose the Company to credit risk consist primarily of trade receivables, cash equivalents, marketable securities and foreign currency
derivatives. Concentrations of credit risks with respect to trade receivables are limited by the large number of geographically diverse customers that make up Company's customer base. The Company
controls credit risk through credit approvals, credit limits and monitoring procedures, as well as comprehensive credit evaluations for all customers.
Related Parties account for a considerable portion of sales and trade receivables. The credit risk with respect to cash equivalents, marketable securities and foreign currency derivatives is limited
by transactions with a number of large international financial institutions up to pre-established limits. The Company does not believe that there is significant risk of
non-performance by these counterparties because the Company monitors their credit risk and limits the financial exposure and the amount of agreements entered into with any one financial
institution.

In
order to remain competitive, the Company must continue to make substantial investments in process technology and research and development. Portions of these investments might not be
recoverable if these research and development efforts fail to gain market acceptance or if markets significantly deteriorate.

31.   Commitments and Contingencies



On August 7, 2000 and August 8, 2000, Rambus Inc. ("Rambus"), filed separate actions against the Company in the U.S. and Germany. Rambus
alleges that the Company's SDRAM and DDR DRAM products infringe patents owned by Rambus.

On
May 4, 2001 and May 9, 2001, the Federal District Court for the Eastern District of Virginia (the "District Court") dismissed all 57 of Rambus' patent infringement
claims against us. In addition, the court found that Rambus committed fraud by its conduct in the JEDEC standard setting organization and awarded damages to us. On January 29, 2003 the U.S.
Court of Appeals for the Federal Circuit ("CAFC") revised the District Court's claim construction on 4 claim terms, and remanded the infringement case back to the District Court for a jury trial. The
CAFC also reversed the District Court's finding that Rambus had committed fraud by its conduct in JEDEC. The Company appealed the CAFC's decision unsuccessfully to the U.S. Supreme Court. The retrial
in the District Court on the patent infringement claims is in the early stages. We believe we have meritorious defenses to the allegations of infringement.

Court
proceedings in the German court began in December 2000 and are still active. An expert report commissioned by the court was rendered in May 2002 but the court has not
yet made its decision on the basis of this report. In September 2002, the European Patent Office (EPO) declared that the Rambus patent had been unduly broadened, thus making it easier for us to
defend against allegations of direct infringement. Rambus has appealed the EPO's declaration, and the EPO is expected to decide on the appeal following a hearing in February 2004. The Court has
scheduled a

F-49

hearing
in the infringement matter for May 2004 subsequent to the then expected decision of the EPO. We believe we have meritorious defenses to the allegations of infringement.

SDRAM
and DDR DRAM products incorporating the technology that is the subject of the Rambus claims currently constitute substantially all of the products of our Memory Products segment.
This segment contributed net sales of €2,485 and earnings before interest and taxes of €31 during the year ended September 30, 2003. If the Company were to be
enjoined from producing SDRAM and DDR DRAM products, its financial position and results of operations would be materially and adversely affected, since the Company would have to discontinue the SDRAM
and DDR DRAM product lines or enter into a licensing arrangement with Rambus, which could require the payment of substantial licensing fees.

We
currently license certain RDRAM technology from Rambus. The Company's use of this technology is not in dispute in the proceedings described above.

On
June 17, 2002, our U.S. subsidiary received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an
investigation by the Antitrust Division of the Department of Justice (the "DOJ") into possible antitrust violations in the DRAM industry. The Company is cooperating with the DOJ in its investigation.

Subsequent
to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against us and other DRAM suppliers. Sixteen cases were filed between
June 21, 2002 and September 19, 2002 in the following federal district courts: one in the Southern District of New York, five in the District of Idaho, and ten in the Northern District
of California. Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased DRAM directly from the various DRAM suppliers during a specified
time period commencing on or after October 1, 2001. The complaints allege price-fixing in violation of the Sherman Act and seek treble damages in unspecified amounts, costs, attorneys' fees,
and an injunction against the allegedly unlawful conduct. On September 26, 2002, the Judicial Panel on Multi-District Litigation held a hearing and subsequently ordered that the foregoing
federal cases be transferred to the U.S. District Court for the Northern District of California (San Francisco) for coordinated or consolidated pretrial proceedings.

Eight
additional cases were filed between August 2, 2002 and March 11, 2003 in the following California state superior courts: five in San Francisco County, one in Santa
Clara County, one in Los Angeles County, and one in Humboldt County. Each of the California state cases purports to be on behalf of a class of individuals and entities who indirectly purchased DRAM
during a specified time period commencing December 1, 2001. The complaints allege violations of California's Cartwright Act and Unfair Competition Law and unjust enrichment and seek treble
damages in unspecified amounts, restitution, costs, attorneys' fees, and an injunction against the allegedly unlawful conduct. In response to a petition filed by one of the plaintiffs, a judge
appointed by the Judicial Council of California subsequently ordered that the then-pending state cases be coordinated for pretrial purposes and recommended that they be transferred to San
Francisco County Superior Court for coordinated or consolidated pretrial proceedings.

Liabilities
related to legal proceedings are recorded when it is probable that a liability has been incurred and the associated amount can be reasonably estimated. Accordingly, as of
September 30, 2003, the Company has accrued a liability and charged operating income in the amount of €28 related

F-50

to
the DOJ investigation and civil antitrust claims. As additional information becomes available, the potential liability related to these matters would be reassessed and the estimates revised, if
necessary. These accrued liabilities would be subject to change in the future based on new developments in each matter, or changes in circumstances, which could have a material impact on the Company's
results of operations and financial position.

In
April 2003, the Company received a request for information from the European Commission (the "Commission") to enable the Commission to assess the compatibility with the
Commission's rules on competition of certain practices of which the Commission has become aware in the European market for DRAM memory products. The Company is in cooperation with the Commission in
its investigation and is unable to predict the outcome of this matter.

An
adverse final resolution of the Rambus claims, the DOJ or Commission investigations or the civil antitrust claims described above would result in substantial financial liability to,
and other adverse effects upon, the Company, which would have a material adverse effect on its business, results of operations and financial condition. Irrespective of the validity or the successful
assertion of the above-referenced claims, the Company could incur significant costs with respect to defending against or settling such claims, which could have a material adverse effect on its results
of operations or financial condition or cash flows.

In
October 1999, Deutsche Telekom AG notified us of a potential contractual warranty claim in respect of chips supplied by us for Deutsche Telekom calling cards. The claim relates
to damages allegedly suffered by Deutsche Telekom as a result of such cards being fraudulently reloaded by third parties. Deutsche Telekom originally alleged damages of approximately
€90 as a result of these activities, reflecting damages suffered and the cost of remedial measures, and sought
compensation from both Siemens and the Company. In September 2001, however, Deutsche Telekom brought an action in the State Court (Landgericht) in Darmstadt, Germany against Siemens alone, and
increased the alleged amount of damages to approximately €125. Siemens served third party notice on the Company on December 21, 2001. In 2003, Deutsche Telekom increased its
claim to €150. On July 15, 2003, the State Court ruled that Deutsche Telekom did not have a valid claim for damages against Siemens and the Company. Deutsche Telekom has
appealed the decision. Should Siemens be found liable, the Company could be responsible for payments to Siemens in connection with certain indemnifications provided to Siemens at our formation. The
Company has investigated the Deutsche Telekom claim and believes that it is without merit.

One
of the Company customers notified it on May 18, 2000 that the customer had received a letter from Rambus alleging that one of the components of its product violates Rambus'
patents. The Company supplied this customer with the relevant component, and the customer has requested that the Company indemnify it for any damages it may incur as a result of Rambus' claims. The
customer's notice to the Company does not specify any figure for such damages. Accordingly, the Company cannot predict at this time what the Company's exposure, if any, is likely to be if this
customer's claim against the Company is found to be valid.

On
May 7, 2003 ProMOS filed arbitration proceedings against the Company in Munich under the ICC Arbitration Rules. The Company had licensed certain DRAM technologies to ProMOS
under a license agreement, which the Company subsequently terminated due to ProMOS' breach. ProMOS is seeking an affirmative judgment that ProMOS was entitled to terminate the license agreement due to
the Company's material breach, but to be allowed to continue to use the licensed technology. ProMOS

F-51

is
also seeking payment of approximately $31 million for DRAM products sold to the Company. The Company has denied the alleged material breach and requested the arbitration tribunal to dismiss
all of ProMOS' claims. The Company has also filed counterclaims seeking an affirmative judgment that the Company was entitled to terminate the license agreement due to a material breach by ProMOS,
that ProMOS be required to cease using the Company's DRAM technologies and that the Company is entitled to damages for the misappropriation of the Company's DRAM technologies in an amount exceeding
$31 million. The Company does not believe that the ultimate resolution of these proceedings will have a material adverse effect on its results of operations or financial condition.

In
late 2002, MOSAID Technologies Inc. alleged that the Company is violating eleven DRAM-related U.S. patents of MOSAID. In December 2002, the Company filed an
action in the U.S. Federal District Court for the Northern District of California seeking a declaratory judgment that the Company does not violate such patents. On February 7, 2003, MOSAID
filed a counter-suit opposing the Company's motion for declaratory judgment and seeking damages for the alleged patent infringement. On November 3, 2003 MOSAID announced that it has
filed an amended counterclaim to add two new patents to its previous claims. This matter is at an early stage. An adverse final resolution could result in significant financial liability to, and other
adverse effects upon, the Company, which would have a material adverse effect on the Company's business, results of operations and financial condition.

The
Company through certain of its sales and other agreements may, in the normal course of business, be obligated to indemnify its counterparties under certain conditions for warranties,
patent infringement or other matters. The maximum amount of potential future payments under these types of agreements is not predictable with any degree of certainty, since the potential obligation is
contingent on conditions that may or may not occur in future, and depends on specific facts and circumstances related to each agreement. Historically, payments made by the Company under these types of
agreements have not had a material adverse effect on the Company's business, results of operations or financial condition.

At
September 30, 2003, the Company has recorded a provision, net of anticipated insurance recoveries, relating to a specific product performance matter, against operating income
in the accompanying consolidated financial statements. Management believes that based upon currently available information, such estimate will adequately provide for the exposure related to this
matter.

The
Company is subject to various other lawsuits, legal actions, claims and proceedings related to products, patents and other matters incidental to its businesses. Accruals for
significant litigation costs related to such matters are recorded when it is probable that a liability has been incurred and the associated amount of the assessment can be reasonably estimated. Based
upon information presently known to management, the Company does not believe that the ultimate resolution of such other pending matters will have a material adverse effect on the Company's financial
position, although the final resolution of such matters could have a material effect on the Company's results of operations or cash flows in the year of settlement.

In
connection with the Formation, Siemens retained certain facilities located in the U.S. and certain related environmental liabilities. Businesses contributed to the Company by Siemens
have conducted operations at certain of these facilities and, under applicable law, could be required to contribute to the environmental remediation of these facilities despite their retention by
Siemens. Siemens has provided guarantees to certain third parties and governmental agencies, and all involved

F-52

parties
have recognized Siemens as the responsible party for all applicable sites. No assessments have been made of the extent of environmental remediation, if any, that could be required, and no
claims have been made against the Company in this regard. The Company believes its potential exposure, if any, to liability for remediating the U.S. facilities retained by Siemens is therefore low.



The following table summarizes the Company's commitments with respect to external parties as of September 30, 2003(1)(2)(3):

|                        |                                    |       |       | Payments Due by Period
|----------------------- | ---------------------------------- | ----- | ----- | ----------------------
|
|Contractual commitments |                                    |       |       |                       
|                        | Operating lease payments           |       | 391   |                       
|                        | Unconditional purchase commitments |       | 1,062 |                       
|                        | Other long-term commitments        |       | 636   |                       
|                        |                                    |       |       |                       
|Total Commitments       |                                    | 2,089 |       | 836                   
|                        |                                    |       |       |                       

Included in the above table:



In
December 2002, the Company and Semiconductor Manufacturing Industrial Corporation ("SMIC") entered into a technology transfer and capacity reservation agreement, as amended. In
exchange for the technology transfer, SMIC will reserve specified capacity over a five-year period, with product purchases based on a market price formula.

On
July 28, 2003, the Company entered into a joint venture agreement with China-Singapore Suzhou Industrial Park Venture, Company ("CSVC") for the construction of a
back-end manufacturing facility in the Peoples Republic of China. The capital invested by CSVC earns an annual return on its invested capital and has a liquidation preference. All
accumulated earnings and dividend rights accrue to the benefit of the Company. Accordingly, the Company will consolidate 100% of the joint venture from inception.

The
Company has capacity reservation agreements with certain Associated Companies and external foundry suppliers for the manufacturing and testing of semiconductor products. These
agreements generally are greater than one year in duration and are renewable. Under the terms of these

F-53

agreements,
the Company has agreed to purchase a portion of their production output based on market prices.

During
the year ended September 30, 2003, the Company and IBM amended the original shareholders agreement of their ALTIS Semiconductor joint venture (ALTIS). Pursuant to the
amendment, the Company will ratably increase its capacity reservation in the production output of ALTIS from the existing level of 50% to 100% during calendar years 2004 through 2007. IBM and the
Company agreed that they will decide about the future business model of ALTIS not later than January 1, 2007. Additionally, the Company was granted an option through July 1, 2007 to
acquire IBM's interest in ALTIS.

In
May 2002, the Company entered into a licensing and product purchase agreement with Winbond Electronics Corp. ("Winbond"). Under the terms of the licensing agreement, the
Company transferred know-how related to specific DRAM technology during the year ended September 30, 2003. The licensing agreement also provides for the payment of royalties on
specific products sold by Winbond to third parties during the five-year term of the agreement. License fees are deferred and recognized on a straight-line basis over the term
pursuant to the product purchase agreement with Winbond, the Company has committed to purchase specified quantities of DRAM products, as defined, at prices based in part on market prices.
Additionally, the Company will assume responsibilities for supplying a major customer of Winbond with DRAM products over the term of the agreement.

Purchases
under these agreements are recorded as incurred in the normal course of business. The Company assesses its anticipated purchase requirements on a regular basis to meet customer
demand for its products. An assessment of losses under these agreements is made on a regular basis in the event that either budgeted purchase quantities fall below the specified quantities or market
prices for these products fall below the specified prices. ALTIS and Winbond form an important part of the Company's product procurement process.



The following table summarizes the Company's contingencies with respect to external parties, other than those related to litigation, as of September 30,
2003(1)(2):

|                                   |                                 |     |     | Expirations by Period
|---------------------------------- | ------------------------------- | --- | --- | ---------------------
|
|Maximum potential future payments: |                                 |     |     |                      
|                                   | Guarantees                      |     | 380 |                      
|                                   | Contingent government grants(3) |     | 357 |                      
|                                   |                                 |     |     |                      
|Total Contingencies                |                                 | 737 |     | 45                   
|                                   |                                 |     |     |                      

F-54

The Company has received government grants and subsidies related to the construction and financing of certain of its production facilities. These
amounts are recognized upon the attainment of specified criteria for receipt of the grant. Certain of these grants have been received contingent upon the Company maintaining compliance with certain
project-related requirements for a specified period after receipt. The Company is committed to maintaining these requirements. Nevertheless, should such requirements not be met, as of
September 30, 2003 up to €357 of these subsidies could be refundable.

In
July 2003, the European Commission announced an inquiry into whether proposed state subsidies (aggregating €77) applied for, but not yet received, by the
Company for the extension of its manufacturing plant in Portugal are in accordance with European Commission directives.

A
tabular reconciliation of the changes of the aggregate product warranty liability for the year ended September 30, 2003 is as follows:

2003Balance as of October 1, 2002

77Additions due to existing warranties

7Additions due to new warranties, net

89Payments

(34
)Balance as of September 30, 2003

139


The
Company, as parent company, has in certain circumstances as is customary, guaranteed the settlement of certain of its consolidated subsidiaries' obligations to third parties. Such
obligations are reflected as liabilities in the consolidated financial statements by virtue of consolidation. As of September 30, 2003, such inter-company guarantees principally relate to
certain consolidated subsidiaries' third party debt and aggregated €2,333, of which €1,700 relates to the convertible notes issued.

32.   Operating Segment and Geographic Information

The Company has reported its operating segment and geographic information in accordance with SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information".

Effective
October 1, 2002, the Company reorganized certain of its business units to better reflect its customer and market profiles. Further, the Company decided to merge the
activities of the Wireless Solutions and Security & Chipcard ICs segments into one operating segment called Secure Mobile Solutions and report it as such with effect from October 1,
2002. In addition, the results of operations of the opto-electronics business are presented as a discontinued operation for all periods presented. Minority interest is now part of the
calculation of EBIT. Accordingly, the segment results for the 2001 and 2002 financial years have been reclassified to be consistent with the revised reporting structure and presentation, and to
facilitate analysis of current and future operating segment information.

The
Company operates primarily in four major operating segments, three of which are application focused: Wireline Communications, Secure Mobile Solutions and Automotive &
Industrial; and one of which is product focused: Memory Products. Further, certain of the Company's remaining activities for product lines sold, for which there are no continuing contractual
commitments subsequent to the divestiture date, as well as new business activities also meet the SFAS No. 131 definition of an

F-55

operating
segment, but do not meet the requirements of a reportable segment as specified in SFAS No. 131. Accordingly, these segments are combined and disclosed in the "Other Operating
Segments" category pursuant to SFAS No. 131.

Each
of these segments has a segment manager reporting directly to the Chief Operating Officer and Chief Financial Officer, who have been identified as the Chief Operating Decision Maker
("CODM"). The CODM makes decisions about resources to be allocated to the segments and assesses their performance using revenues and EBIT. The Company does not identify or allocate assets to the
operating segments nor does the CODM evaluate the segments on these criteria on a regular basis, except that the CODM is provided information regarding certain inventories on an operating segment
basis.

The
accounting policies of the segments are substantially the same as described in the summary of significant accounting policies (see note 2). As stated above, fixed assets are
not identified by individual operating segments for management reporting purposes on a regular basis and accordingly are not allocated to the operating segment. The Company does, however, allocate
depreciation expense to the operating segments based on production volume and product mix using standard costs in order to obtain a measure EBIT on a segment basis.

Information
with respect to the Company's operating segments follows:



The Wireline Communications segment designs, develops, manufactures and markets semiconductors and fiber-optic components for the communications access, WAN (Wide
Area Network), MAN (Metropolitan Area Network) and Carrier Access (both Broadband and traditional Access) sectors of the wireline communications market.



The Secure Mobile Solutions segment designs, develops, manufactures and markets a wide range of ICs for wireless applications, security controllers, memory
controllers and other semiconductors and complete system solutions for security and wireless applications.



The Automotive & Industrial segment designs, develops, manufactures and markets semiconductors and complete systems solutions for use in automotive and
industrial applications.



The Memory Products segment designs, develops, manufactures and markets semiconductor memory products with various packaging and configuration options and
performance characteristics for use in standard, specialty and embedded memory applications.



Remaining activities for certain sold product lines, as well as other business activities, are included in the Other Operating Segments.

F-56

The
following tables present selected segment data for the years ended September 30, 2001, 2002 and 2003:

2001

2002

2003Net salesWireline Communications

766

386

459Secure Mobile Solutions

1,522

1,278

1,645Automotive & Industrial

1,153

1,201

1,392Memory Products

1,614

1,861

2,485Other Operating Segments

236

117

139Corporate and Reconciliation

56

47

32Total

5,347

4,890

6,152


2001

2002

2003EBITWireline Communications

(93
)
(245
)
(188
)Secure Mobile Solutions

(142
)
(116
)
(64
)Automotive & Industrial

143

111

186Memory Products

(938
)
(630
)
31Other Operating Segments

192

9

(49
)Corporate and Reconciliation

(180
)
(264
)
(215
)Total

(1,018
)
(1,135
)
(299
)


2001

2002

2003Depreciation and AmortizationWireline Communications

98

97

61Secure Mobile Solutions

226

303

327Automotive & Industrial

186

226

246Memory Products

589

709

768Other Operating Segments

22

35

35Corporate and Reconciliation





Total

1,121

1,370

1,437


2001

2002

2003Equity in earnings (losses) of Associated CompaniesWireline Communications





(2
)Secure Mobile Solutions





(2
)Automotive & Industrial





Memory Products

12

(56
)
22Other Operating Segments

(3
)
(1
)
(1
)Corporate and Reconciliation

12

10

1Total

21

(47
)
18


F-57

2001

2002

2003InventoriesWireline Communications

101

62

59Secure Mobile Solutions

179

188

160Automotive & Industrial

181

162

194Memory Products

270

360

452Other Operating Segments

41

21

21Corporate and Reconciliation

110

98

73Total

882

891

959


At
September 30, 2003 goodwill is reflected in the following segments:

2003GoodwillWireline Communications

98Secure Mobile Solutions

2Automotive & Industrial

22Memory Products

90Other Operating Segments

6Corporate and Reconciliation

Total

218


Due
to the specific application and product-based nature of the operating segments, there are no sales transactions between operating segments. Accordingly, net sales by operating
segment represents sales to external customers.

Raw
material and work-in-process of the common logic production front-end facilities, and work-in-process of the common
back-end facilities, are not under the control or responsibility of any of the operating segment managers, but rather of the site management. The site management is responsible for the
execution of the production schedule, volume and units. Accordingly, this inventory is not attributed to any operating segment, but is included in the "corporate and reconciliation" column. Only
unstarted wafers of the back-end facilities ("chip stock") and finished goods are attributable to the operating segments and included in the segment information reported to the CODM.

Certain
items are included in corporate and reconciliation and are not allocated to the segments. These include certain corporate headquarters' cost, certain incubator and early stage
technology investment costs, non-recurring gains and specific strategic technology initiatives. Additionally, legal costs associated with intellectual property and product matters are
recognized by the segments when paid, which can differ from the period originally recognized by corporate and reconciliation. The Company allocates excess capacity costs based on a foundry model,
whereby such allocations are reduced based upon the lead time of order cancellation or modification. Any unabsorbed excess

F-58

capacity
costs are included in corporate and reconciliation. Significant components of corporate and reconciliation for the years ended September 30, 2001, 2002 and 2003 are as follows:

2001

2002

2003Corporate and Reconciliation:Unallocated excess capacity costs

27

211

101Restructuring charges

117

16

29Corporate information technology development costs

71

36

13Other, net

(35
)
1

72Total

180

264

215


The
following is a summary of operations by geographic area for 2001, 2002 and 2003:

2001

2002

2003Net salesGermany

1,636

1,266

1,535Other Europe

1,172

943

1,112North America

1,208

1,158

1,393Asia/Pacific

1,247

1,446

2,077Other

84

77

35Total

5,347

4,890

6,152


2001

2002

2003Long-lived assetsGermany

3,454

3,113

2,628Other Europe

1,006

1,172

936North America

1,551

1,211

785Asia/Pacific

350

374

377Other

8



1Total

6,369

5,870

4,727


Revenues
from external customers are based on the customers' billing location. Long-lived assets are those assets located in each geographic area. Long-lived
assets consist of property, plant and equipment, long-term investments and other non-current assets. Regional employment data is provided in note 7.

Except
for sales to Siemens, which are discussed in note 27, no single customer accounted for more than 10% of the Company's sales during the years ended September 30,
2001, 2002 and 2003. Sales to Siemens are made primarily by the non-memory product segments.

The
Company defines EBIT as earnings (loss) before interest and taxes. The Company's management uses among other measures EBIT to establish budgets and operational goals, to manage the
Company's business and to evaluate its performance. The Company reports EBIT information because it believes that it provides investors with meaningful information about the operating

F-59

performance
of the Company and especially about the performance of its separate business segments. EBIT is determined as follows from the statement of operations, without adjustment to the US GAAP
amounts presented:

For the year ended September 30,2001

2002

2003Net loss from continuing operations

(592
)
(1,017
)
(435
)Adjust: Income tax (benefit) expense

(427
)
(143
)
84Interest expense, net

1

25

52EBIT

(1,018
)
(1,135
)
(299
)


33.   Subsequent Events

On October 8, 2003, the Company announced that it has agreed to purchase assets, assume certain liabilities and take over other parts of the Protocol
Software operations of Siemens, in exchange for €13 and the employment of approximately 145 of Siemens' mobile communication software engineers. In addition, the Company entered into a
license agreement and amended its product supply agreement with Siemens. The finalization of these transactions is subject to a variety of conditions prior to closing.

In
conjunction with the Company's ongoing restructuring efforts, on October 16, 2003, the Company executed an agreement with Electronic Data Services (EDS) to outsource parts of
the Company's worldwide human resources function. The scope of the outsourcing arrangement is currently being negotiated, which would include the transfer of current employees of the Company to EDS.
The agreement contains specified cancellation provisions.

F-60

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the
undersigned to sign this annual report on its behalf.

Date:
November 21, 2003
Munich, Germany

| |  | INFINEON TECHNOLOGIES AG
| |  | ------------------------
| |  | /s/DR. ULRICH SCHUMACHER
| |  | Name:                   
| |  | Title:                  
| |  | /s/PETER J. FISCHL      
| |  | Name:                   
| |  | Title:                  

Exhibit Index

|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1            |  | Articles of Association of Infineon Technologies AG (English translation) (incorporated by reference to Exhibit 1.1 to Infineon's Annual Report on Form 20-F for Financial Year 2002 (File No. 1-15000))                                                                                                                                                                                                                                                                                                                                                       
|1.2            |  | Rules of Procedure for the Management Board of Infineon Technologies AG (English translation) (incorporated by reference to Exhibit 1.2 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))                                                                                                                                                                                                                                                                                                                                   
|1.3            |  | Rules of Procedure for the Supervisory Board of Infineon Technologies AG (English translation) (incorporated by reference to Exhibit 1.3 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))                                                                                                                                                                                                                                                                                                                                  
|4.1            |  | Einbringungsvertrag zwischen der Siemens Aktiengesellschaft und der Infineon Technologies AG i.Gr., dated as of March 23, 1999 (Contribution Agreement between Siemens Aktiengesellschaft and Infineon Technologies AG i.Gr., dated as of
March 2, 1999) (incorporated by reference to Exhibit 10.1 of Infineon's Registration Statement on Form F-1 (File No. 333-11508), dated as of March 10, 2000)                                                                                                                                                         
|4.2            |  | Einbringungsvertrag zwischen Siemens Nederland N.V. und Infineon Technologies AG i.Gr., dated as of March 31, 1999 (Contribution Agreement between Siemens Nederland N.V. and Infineon Technologies AG i.Gr., dated as of March 31, 1999)
(incorporated by reference to Exhibit 10.2 of Infineon's Registration Statement on Form F-1 (File No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                        
|4.3            |  | Gestionsvertrag- und Dienstleistungsvertrag zwischen Siemens Aktiengesellschaft und Infineon Technologies AG i.Gr., effective as of April 1, 1999 (Management and Services Agreement between Siemens Aktiengesellschaft and Infineon Technologies AG
i.Gr., effective as of April 1, 1999) (incorporated by reference to Exhibit 10.3 of Infineon's Registration Statement on Form F-1 (File No. 333-11508), dated as of March 10, 2000)                                                                                                                       
|4.4            |  | Rahmenvertrag zwischen Siemens Aktiengesellschaft und Infineon Technologies AG über technische Entwicklung der Zentralabtellung Technik von Siemens, effective as of April 1, 1999 (Framework Agreement between Siemens Aktiengesellschaft and
Infineon Technologies AG regarding technical development by Siemens' Central Technical Division, effective as of April 1, 1999) (incorporated by reference to Exhibit 10.4 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)                                   
|4.5            |  | Non-Competition Agreement between Infineon Technologies AG and Siemens Aktiengesellschaft, dated as of February 11, 2000 (incorporated by reference to Exhibit 10.6 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                                                                                                                                         
|4.6            |  | Patent Cross-License Agreement between Infineon Technologies AG and Siemens Aktiengesellschaft, dated as of February 11, 2000 (incorporated by reference to Exhibit 10.7 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                                                                                                                                    
|4.7            |  | Rahmenmietvertrag über gewerbliche Flächen zwischen der Siemens Aktiengesellschaft und der Infineon Technologies Aktiengesellschaft i.Gr., dated as of August 10, 1999 (Framework lease regarding commercial property between Siemens
Aktiengesellschaft and Infineon Technologies Aktiengesellschaft i.Gr., dated as of August 10, 1999) (Otto-Hahn-Ring 6, Sankt-Martin-Strasse 76 and Sankt-Martin-Strasse 53) (incorporated by reference to Exhibit 10.9 of Infineon's
Registration Statement on Form F-1 (File No. 333-11508), dated as of March 10, 2000)
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|4.8  |  | Einzelmietvertrag zum Rahmenmietvertrag über gewerbliche Flächen zwischen der Siemens Aktiengesellschaft und Infineon Technologies AG i. Gr., dated as of September 29, 1999 (Individual lease under a framework lease regarding commercial
property between Siemens Aktiengesellschaft and Infineon Technologies AG, dated as of September 29, 1999) (Sankt-Martin-Str. 53) (incorporated by reference to Exhibit 10.10 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.9  |  | Einzelmietvertrag zum Rahmenmietvertrag über gewerbliche Flächen zwischen der Siemens Aktiengesellschaft und Infineon Technologies AG i. Gr., dated as of August 12, 1999 (Individual lease under a framework lease regarding commercial
property between Siemens Aktiengesellschaft and Infineon Technologies AG, dated as of August 12, 1999) (Sankt-Martin-Str. 76) (incorporated by reference to Exhibit 10.11 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)      
|4.10 |  | Einzelmietvertrag zum Rahmenmietvertrag über gewerbliche Flächen zwischen der Siemens Aktiengesellschaft und Infineon Technologies AG i. Gr., dated as of October 14, 1999 (Individual lease under a framework lease regarding commercial
property between Siemens Aktiengesellschaft and Infineon Technologies AG, dated as of October 14, 1999) (Otto-Hahn-Ring 6) (incorporated by reference to Exhibit 10.12 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)        
|4.11 |  | Mietvertrag über gewerbliche Flächen zwischen der SIM 12, Grundstücks GmbH & Co. KG und der Infineon Technologies Aktiengesellschaft dated as of July 29, 1999 (Lease regarding commercial property between SIM 12,
Grundstücks GmbH & Co. KG and Infineon Technologies Aktiengesellschaft, dated as of July 29, 1999) (Balanstrasse 73) (incorporated by reference to Exhibit 10.13 of Infineon's Registration Statement on Form F-1 (File
No. 333-11508), dated as of March 10, 2000)                                    
|4.12 |  | Shareholder Agreement of ALTIS Semiconductor between Infineon Technologies Holding France and Compagnie IBM France, dated as of June 24, 1999 (incorporated by reference to Exhibit 10.15 of Infineon's Registration Statement on Form F-1
(File No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                                                                               
|4.13 |  | 256M Shrink I, III and IV Agreement among International Business Machines Corporation and Siemens Aktiengesellschaft and Toshiba Corporation, dated as of January 1, 1997 (incorporated by reference to Exhibit 10.22 of Infineon's
Registration Statement on Form F-1 (File No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                                                   
|4.14 |  | IG Shrink I and II Agreement among International Business Machines Corporation and Infineon Technologies AG, dated as of October 1, 1999 (incorporated by reference to Exhibit 10.23 of Infineon's Registration Statement on Form F-1
(File No. 333-11508), dated as of March 10, 2000)                                                                                                                                                                                                                                    
|4.15 |  | Investment Agreement by and between Infineon Technologies AG and Intel Corporation, dated as of February 14, 2000 (incorporated by reference to Exhibit 10.24 of Infineon's Registration Statement on Form F-1 (File No. 333-11508),
dated as of March 10, 2000)                                                                                                                                                                                                                                                           
|4.16 |  | Commercial Agreement between Intel Corporation and Infineon Technologies AG, dated as of February 14, 2000 (incorporated by reference to Exhibit 10.25 of Infineon's Registration Statement on Form F-1 (File No. 333-11508), dated as
of March 10, 2000)                                                                                                                                                                                                                                                                  
|4.17 |  | Draft Konzeptpapier of the Free State of Saxony, dated as of August 4, 1999 (Draft Concept Paper, dated as of August 4, 1999) (incorporated by reference to Exhibit 4.28 to Infineon's Annual Report on Form 20-F for Financial Year
2000 (File No. 1-15000))                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|4.18 |  | Kooperationsvertrag zwischen Freistaat Sachsen, Infineon Technologies AG und M+W Zander Facility Engineering GmbH, effective as of May 10, 2000 (Cooperation Agreement between the Free State of Saxony, Infineon Technologies AG and M+W Zander
Facility Engineering GmbH, effective as of May 10, 2000) (incorporated by reference to Exhibit 4.29 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.19 |  | Generalübernehmervertrag für das Vorhaben DRAM 300 zwischen SC 300 GmbH & Co. KG und M+W Zander Facility Engineering GmbH, dated as of August 18, 2000 (General Contracting Agreement for the DRAM 300 Project between SC 300
GmbH & Co. KG and M+W Zander Facility Engineering GmbH, dated as of August 18, 2000) (incorporated by reference to Exhibit 4.30 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))                                                                                                                                                
|4.20 |  | Atypischer Unterbeteiligungsvertrag zwischen Infineon Technologies AG, Leipziger-Messe GmbH und SC300 Beteiligungs GmbH, effective as of May 10, 2000 (Atypical Sub-Participation Agreement between Infineon Technologies AG, Leipziger-Messe GmbH
and SC300 Beteiligungs GmbH, effective as of May 10, 2000) (incorporated by reference to Exhibit 4.31 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))                                                                                                                                                     
|4.21 |  | Gesellschaftsvertrag der Infineon Technologies SC300 GmbH & Co. KG zwischen Leipziger-Messe GmbH, Infineon Technologies AG, SC 300 Beteiligungs GmbH und Semiconductor 300 Verwaltungsgesellschaft mbH, dated as of May 10, 2000
(Partnership Agreement of Infineon Technologies SC300 GmbH & Co. KG between Leipziger-Messe GmbH, Infineon Technologies AG, SC 300 Beteiligungs GmbH and Semiconductor 300 Verwaltungsgesellschaft mbH, dated as of May 10, 2000)
(incorporated by reference to Exhibit 4.32 to Infineon's Annual Report on Form 20-F for Financial Year 2000 (File No. 1-15000))
|4.22 |  | Registration Rights Agreement dated as of June 29, 2001, among Infineon Technologies AG, Siemens Aktiengesellschaft, Siemens Nederland N.V. and Siemens Pension Trust e.V. (incorporated by reference to Exhibit 10.2 to Infineon's Registration
Statement on Form F-3 (File No. 333-3590), dated July 10, 2000)                                                                                                                                                                                                                                                                                  
|4.23 |  | Rahmendarlehensvertrag (Framework Loan Agreement) dated April 3, 2001, between Infineon and Siemens AG (incorporated by reference to Exhibit 10.2 of Infineon's Registration Statement on Form F-3 (File No. 333-3590), dated
July 10, 2000)                                                                                                                                                                                                                                                                                                                                                      
|4.24 |  | Terms and Conditions of 4.25% Guaranteed Subordinated Convertible Notes due 2007 in the aggregate nominal amount of EUR 1,000,000,000 (the "Subordinated Convertible Notes") issued on February 1, 2002 by Infineon Technologies Holding B.V.
(incorporated by reference to Exhibit 4.33 to Infineon's Annual Report on Form 20-F for Financial Year 2001 (File No. 1-15000))                                                                                                                                                                                                                     
|4.25 |  | Undertaking for Granting of Conversion Rights from Infineon Technologies AG to JPMorgan Chase Bank for the benefit of the holders of the Subordinated Convertible Notes, dated February 1, 2002 (incorporated by reference to Exhibit 4.34 to
Infineon's Annual Report on Form 20-F for Financial Year 2001 (File No. 1-15000))                                                                                                                                                                                                                                                                   
|4.26 |  | Subordinated Guarantee of Infineon Technologies AG, as Guarantor, in favor of the holders of Subordinated Convertible Notes, dated February 1, 2002 (incorporated by reference to Exhibit 4.35 to Infineon's Annual Report on Form 20-F for
Financial Year 2001 (File No. 1-15000))                                                                                                                                                                                                                                                                                                               
|4.27 |  | Loan Agreement dated February 1, 2002, between Infineon Technologies Holding B.V., as Issuer, and Infineon Technologies AG (incorporated by reference to Exhibit 4.36 to Infineon's Annual Report on Form 20-F for Financial Year 2001
(File No. 1-15000))                                                                                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|4.28 |   | Assignment Agreement dated February 1, 2002, among Infineon Technologies Holding B.V., Infineon Technologies AG and JPMorgan Chase Bank for the benefit of the holders of the Subordinated Convertible Notes (incorporated by reference to
Exhibit 4.37 to Infineon's Annual Report on Form 20-F for Financial Year 2001 (File No. 1-15000))
|---- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.29 |  | Joint Venture Agreement between Infineon and Nanya Technology Corporation, executed on November 13, 2002 (incorporated by reference to Exhibit 4.38 to Infineon's Annual Report on Form 20-F for Financial Year 2001 (File No. 1-15000)
)                                                                                                   
|4.30 |   | Terms and Conditions of 5% Guaranteed Subordinated Convertible Notes due 2010 in the aggregate nominal amount of EUR 700,000,000 (the "Subordinated Convertible Notes") issued on June 5, 2003 by Infineon Technologies Holding B.V.                                                                                                        
|4.31 |   | Undertaking for Granting of Conversion Rights from Infineon Technologies AG to JPMorgan Chase Bank for the benefit of the holders of the Subordinated Convertible Notes, dated June 2, 2003                                                                                                                                                 
|4.32 |   | Subordinated Guarantee of Infineon Technologies AG, as Guarantor, in favor of the holders of Subordinated Convertible Notes, dated June 2, 2003                                                                                                                                                                                             
|4.33 |   | Loan Agreement dated June 2, 2003, between Infineon Technologies Holding B.V., as Issuer, and Infineon Technologies AG                                                                                                                                                                                                                      
|4.34 |   | Assignment Agreement dated June 2, 2003, among Infineon Technologies Holding B.V., Infineon Technologies AG and JPMorgan Chase Bank for the benefit of the holders of the Subordinated Convertible Notes                                                                                                                                    
|4.35 |  | Amendment 1, dated June 26, 2003, to Shareholder Agreement of ALTIS Semiconductor between Infineon Technologies Holding France and Compagnie IBM France, dated as of June 24, 1999                                                                                                                                                          
|8    |   | List of Significant Subsidiaries and Associated Companies of Infineon                                                                                                                                                                                                                                                                       
|12.1 |   | Certification of chief executive officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                            
|12.2 |   | Certification of chief financial officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                                                                                                                                                            
|13   |   | Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                      
|14   |   | Consent of KPMG Deutsche Treuhand-Gesellschaft AG                                                                                                                                                                                                                                                                                           

---