##### Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 20-F

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

OF THE SECURITIES EXCHANGE ACT OF 1934
o

OR

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934
x

For the fiscal year ended September 30, 2005

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.
o

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934
o

Date of event requiring this shell company report
____________.

Commission file number: 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:

|                                                                                                             |  |                       |                         | 
|------------------------------------------------------------------------------------------------------------ |  | --------------------- | ----------------------- | 
|                                                                                                             |  | Name of each exchange |                        
|Title of each class                                                                                          |  | on which registered   |                        
|                                                                                                             | 
|American Depositary Shares, each
    representing
    one ordinary share, notional value
    2.00 per share |  |                       | New York Stock Exchange | 
|Ordinary shares, notional value
    2.00 per
    share *                                                    |  |                       | New York Stock Exchange | 
|                                                                                                            



|  |                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Listed, not for trading or quotation purposes, but only in
    connection with the registration of American Depositary Shares
    pursuant to the requirements of the Securities and Exchange
    Commission



















x o




o x










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##### Table of Contents

INFINEON TECHNOLOGIES AG

ANNUAL REPORT ON FORM 20-F

FOR THE FINANCIAL YEAR ENDED

SEPTEMBER 30, 2005



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##### Table of Contents

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                                                    |  |      | 104  | 
|          |  | Risk
    Factors                                                                 |  |      | 36   | 
|Item 4:   |  | Information on the Company                                                       |  |      |      | 
|          |  | History and
    Development of the Company                                       |  |      | 45   | 
|          |  | Business
    Overview                                                            |  |      | 45   | 
|          |  | Organizational
    Structure                                                     |  |      | 102  | 
|          |  | Property,
    Plant and Equipment                                                |  |      | 62   | 
|Item 5:   |  | Operating and
    Financial Review and Prospects                                 |  |      | 2    | 
|          |  | Operating
    Results                                                            |  |      | 9    | 
|          |  | Liquidity and
    Capital Resources                                              |  |      | 20   | 
|          |  | Research and
    Development; Patents and Licenses                               |  |      | 68   | 
|          |  | Trend
    Information                                                            |  |      | 34   | 
|          |  | Off-Balance Sheet Arrangements                                                   |  |      | none | 
|          |  | Contractual
    Obligations                                                      |  |      | 23   | 
|Item 6:   |  | Directors, Senior Management and
    Employees                                   |  |      |      | 
|          |  | Directors and
    Senior Management                                              |  |      | 80   | 
|          |  | Compensation                                                                     |  |      | 89   | 
|          |  | Board
    Practices                                                              |  |      | 86   | 
|          |  | Employees                                                                        |  |      | 26   | 
|          |  | Share
    Ownership                                                              |  |      | 93   | 
|Item 7:   |  | Major Shareholders and Related
    Party Transactions                            |  |      |      | 
|          |  | Major
    Shareholders                                                           |  |      | 93   | 
|          |  | Related Party
    Transactions                                                   |  |      | 94   | 
|Item 8:   |  | Financial
    Information                                                        |  |      | F-1  | 
|          |  | Litigation                                                                       |  |      | 74   | 
|          |  | Dividend
    Policy                                                              |  |      | 102  | 
|Item 9:   |  | The Offer and Listing                                                            |  |      |      | 
|          |  | Price History
    of the Stock                                                   |  |      | 102  | 
|          |  | Markets                                                                          |  |      | 102  | 
|Item 10:  |  | Additional Information                                                           |  |      |      | 
|          |  | Articles of
    Association                                                      |  |      | 96   | 
|          |  | Material
    Contracts                                                           |  |      | 112  | 
|          |  | Exchange
    Controls                                                            |  |      | 110  | 
|          |  | Taxation                                                                         |  |      | 105  | 
|          |  | Documents on
    Display                                                         |  |      | 111  | 
|          |  | Subsidiary
    Information                                                       |  |      | 102  | 
|Item 11:  |  | Quantitative
    and Qualitative Disclosure About Market Risk                    |  |      | 32   | 
|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 and Use of Proceeds |  |      | none | 
|Item 15:  |  | Controls and
    Procedures                                                      |  |      | 111  | 
|Item 16A: |  | Audit
    Committee Financial Expert                                             |  |      | 111  | 
|Item 16B: |  | Code of
    Ethics                                                               |  |      | 111  | 
|Item 16C: |  | Principal
    Accountant Fees and Services                                       |  |      | 112  | 
|Item 16D: |  | Exemption from
    the Listing Standards for Audit Committees                    |  |      | 112  | 
|Item 16E: |  | Purchases of Equity Securities by
    the Issuer and Affiliated Purchasers       |  |      | none | 
|         
|PART III: |  |                                                                                  |  |      |      | 
|Item 18:  |  | Financial
    Statements                                                         |  |      | F-1  | 
|Item 19:  |  | Exhibits (See
    Exhibit Index)                                                 |  |      |     | 

i



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##### Table of Contents

CONTENTS

|                                                    |                                                                     |      |     |     | 
|--------------------------------------------------- | ------------------------------------------------------------------- | ---- | --- | --- | 
|                                                    |                                                                     | Page |    
|                                                    |                                                                     |      |    
|Cross
    References to Form 20-F                   |                                                                     |      | i   |    
|Presentation
    of Financial and Other Information |                                                                     |      | iii |    
|Selected
    Consolidated Financial Data            |                                                                     |      | 1   |    
|Operating and
    Financial Review                  |                                                                     |      | 2   |    
|                                                    | Overview of
    the 2005 Financial Year                             |      |     | 2   | 
|                                                    | Our
    Business                                                    |      |     | 4   | 
|                                                    | The
    Semiconductor Industry and Factors that Impact Our Business |      |     | 4   | 
|                                                    | Results of
    Operations                                           |      |     | 9   | 
|                                                    | Financial
    Condition                                             |      |     | 20  | 
|                                                    | Liquidity                                                           |      |     | 20  | 
|                                                    | Capital
    Requirements                                            |      |     | 22  | 
|                                                    | Other
    Matters                                                   |      |     | 26  | 
|                                                    | Critical
    Accounting Policies                                    |      |     | 27  | 
|                                                    | Quantitative
    and Qualitative Disclosure About Market Risk       |      |     | 32  | 
|                                                    | Subsequent
    Events                                               |      |     | 34  | 
|                                                    | Outlook                                                             |      |     | 34  | 
|Risk
    Factors                                    |                                                                     |      | 36  |    
|Business                                            |                                                                     |      | 45  |    
|                                                    | Industry
    Background                                             |      |     | 46  | 
|                                                    | Strategy                                                            |      |     | 48  | 
|                                                    | Products and
    Applications                                       |      |     | 49  | 
|                                                    | Customers,
    Sales and Marketing                                  |      |     | 58  | 
|                                                    | Competition                                                         |      |     | 61  | 
|                                                    | Manufacturing                                                       |      |     | 62  | 
|                                                    | Research and
    Development                                        |      |     | 68  | 
|                                                    | Intellectual
    Property                                           |      |     | 69  | 
|                                                    | Strategic
    Alliances                                             |      |     | 70  | 
|                                                    | Acquisitions
    and Dispositions                                   |      |     | 72  | 
|                                                    | Employees                                                           |      |     | 73  | 
|                                                    | Legal
    Matters                                                   |      |     | 74  | 
|                                                    | Environmental
    Protection and Sustainable Management             |      |     | 77  | 
|                                                    | Real Estate                                                         |      |     | 79  | 
|Management                                          |                                                                     |      | 80  |    
|Principal
    Shareholders                          |                                                                     |      | 93  |    
|Related Party
    Transactions and Relationships    |                                                                     |      | 94  |    
|Articles of
    Association                         |                                                                     |      | 96  |    
|Additional
    Information                          |                                                                     |      | 102 |    
|                                                    | Organizational
    Structure                                        |      |     | 102 | 
|                                                    | Dividend
    Policy                                                 |      |     | 102 | 
|                                                    | Market
    Information                                              |      |     | 102 | 
|                                                    | Exchange
    Rates                                                  |      |     | 104 | 
|                                                    | Taxation                                                            |      |     | 105 | 
|                                                    | Exchange
    Controls and Limitations Affecting Shareholders        |      |     | 110 | 
|                                                    | Documents on
    Display                                            |      |     | 111 | 
|                                                    | Controls and
    Procedures                                         |      |     | 111 | 
|                                                    | Audit
    Committee Financial Expert                                |      |     | 111 | 
|                                                    | Code of
    Ethics                                                  |      |     | 111 | 
|                                                    | Principal
    Accountant Fees and Services                          |      |     | 112 | 
|                                                    | Exemptions
    from the Listing Standard for Audit Committees       |      |     | 112 | 
|                                                    | Material
    Contracts                                              |      |     | 112 | 
|Glossary                                            |                                                                     |      | 114 |    
|Index to
    Financial Statements                   |                                                                     |      | F-1 |    
|Exhibits Index                                      |                                                                     |      |    |    
|EX-1.1                                             
|EX-1.3                                             
|EX-1.4                                             
|EX-4.19                                            
|EX-4.28                                            
|EX-8                                               
|EX-12.1                                            
|EX-12.2                                            
|EX-13                                              
|EX-14                                              



ii



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##### Table of Contents

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. In this annual report,
references to euro or
 are to
euro 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 = $1.2058, the
noon buying rate of the Federal Reserve Bank of New York for
euro on September 30, 2005. The noon buying rate for euro
on November 22, 2005 was
1.00 = $1.1737.
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:




    our company are to Infineon Technologies AG; and
    we, us or Infineon are to
    Infineon Technologies AG and, unless the context otherwise
    requires, to its subsidiaries and its predecessor, the former
    semiconductor group of Siemens AG.This annual report contains market data that has been prepared
or reported by Gartner Inc. and its unit Dataquest, Inc.
(together Gartner Dataquest), IC Insights, Inc.
(IC Insights), IMS Research Ltd. (IMS
Research), iSuppli Corporation (iSuppli),
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.

Use of Non-U.S. GAAP Financial Measures

This document contains non-U.S. GAAP financial measures.
Non-U.S. GAAP financial measures are measures of our
historical or future performance, financial position or cash
flows that contain adjustments that exclude or include amounts
that are included or excluded, as the case may be, from the most
directly comparable measure calculated and presented in
accordance with U.S. GAAP in our consolidated financial
statements. Earnings before interest and taxes
(EBIT) is an example of a non-U.S. GAAP
financial measure. For descriptions of these non-U.S. GAAP
financial measures and the adjustments made to the most directly
comparable U.S. GAAP financial measures to obtain them,
please refer to Operating and Financial Review.

Registered Address

Our registered address is St.-Martin-Strasse 53, 81669 Munich,
Germany.

iii



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##### Table of Contents

SELECTED 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 2001 through 2005
financial years and the selected consolidated balance sheet data
at September 30, 2001 through 2005 from our consolidated
financial statements, which have been prepared in accordance
with U.S. GAAP and audited by KPMG Deutsche Treuhand
Gesellschaft AG, an independent registered public accounting
firm.

|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |   |        |       |   |   |        |       |  
|-------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------ | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | - | ---- | ------ | ---- | ---------- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                             |                        | For the years ended September 30,(1) |       
|                                                                                             |                        |                                      |       
|                                                                                             |                        | 2001                                 |        |       | 2002 |   |        | 2003  |   |   | 2004   |       |   | 2005 |        |      | 2005(2)(3) |  
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|                                                                                             |                        | (in millions, except per share data) |       
|Selected Consolidated Statement
    of Operations data                                       |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |   |        |       |   |   |        |      
|Net sales                                                                                    |                        |                                     | 5,347  |       |      |  | 4,890  |       |   |  | 6,152  |       |   |     | 7,195  |      |            |  | 6,759  |       |   | $ | 8,150  |      
|Cost of goods sold                                                                           |                        |                                      | 4,580  |       |      |   | 4,289  |       |   |   | 4,614  |       |   |      | 4,670  |      |            |   | 4,909  |       |   |   | 5,919  |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Gross profit                                                                                 |                        |                                      | 767    |       |      |   | 601    |       |   |   | 1,538  |       |   |      | 2,525  |      |            |   | 1,850  |       |   |   | 2,231  |      
|Research and development expenses                                                            |                        |                                      | 1,189  |       |      |   | 1,060  |       |   |   | 1,089  |       |   |      | 1,219  |      |            |   | 1,293  |       |   |   | 1,559  |      
|Selling, general and administrative
    expenses                                             |                        |                                      | 782    |       |      |   | 643    |       |   |   | 679    |       |   |      | 718    |      |            |   | 655    |       |   |   | 790    |      
|Restructuring
    charges(4)                                                                 |                        |                                      | 117    |       |      |   | 16     |       |   |   | 29     |       |   |      | 17     |      |            |   | 78     |       |   |   | 94     |      
|Other operating (income) expense,
    net                                                    |                        |                                      | (200   | )     |      |   | (46    | )     |   |   | 85     |       |   |      | 257    |      |            |   | 92     |       |   |   | 111    |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Operating income (loss)                                                                      |                        |                                      | (1,121 | )     |      |   | (1,072 | )     |   |   | (344   | )     |   |      | 314    |      |            |   | (268   | )     |   |   | (323   | )    
|Interest expense, net                                                                        |                        |                                      | (1     | )     |      |   | (25    | )     |   |   | (52    | )     |   |      | (41    | )    |            |   | (9     | )     |   |   | (11    | )    
|Equity in earnings (losses) of
    associated companies                                      |                        |                                      | 21     |       |      |   | (47    | )     |   |   | 18     |       |   |      | (14    | )    |            |   | 57     |       |   |   | 69     |      
|Gain (loss) on associated company
    share
    issuance(5)                                  |                        |                                      | 11     |       |      |   | 18     |       |   |   | (2     | )     |   |      | 2      |      |            |   |       |       |   |   |       |      
|Other non-operating income
    (expense), net                                                |                        |                                      | 65     |       |      |   | (41    | )     |   |   | 21     |       |   |      | (64    | )    |            |   | 26     |       |   |   | 31     |      
|Minority interests                                                                           |                        |                                      | 6      |       |      |   | 7      |       |   |   | 8      |       |   |      | 18     |      |            |   | 2      |       |   |   | 2      |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Income (loss) before income taxes                                                            |                        |                                      | (1,019 | )     |      |   | (1,160 | )     |   |   | (351   | )     |   |      | 215    |      |            |   | (192   | )     |   |   | (232   | )    
|Income tax (expense) benefit                                                                 |                        |                                      | 427    |       |      |   | 143    |       |   |   | (84    | )     |   |      | (154   | )    |            |   | (120   | )     |   |   | (145   | )    
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Net income (loss) from continuing
    operations                                             |                        |                                      | (592   | )     |      |   | (1,017 | )     |   |   | (435   | )     |   |      | 61     |      |            |   | (312   | )     |   |   | (377   | )    
|Net income (loss) from discontinued
    operation                                            |                        |                                      | 1      |       |      |   | (4     | )     |   |   |       |       |   |      |       |      |            |   |       |       |   |   |       |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Net income (loss)                                                                            |                        |                                     | (591   | )     |      |  | (1,021 | )     |   |  | (435   | )     |   |     | 61     |      |            |  | (312   | )     |   | $ | (377   | )    
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Basic and diluted earnings (loss)
    per share:                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |   |        |       |   |   |        |      
|                                                                                             | Continuing operations  |                                      |       | (0.92 | )    |   |       | (1.46 | ) |   |       | (0.60 | ) |      |       | 0.08 |            |   |       | (0.42 | ) |   | $      | (0.51 | )
|                                                                                             | Discontinued operation |                                      |        |      |      |   |        | (0.01 | ) |   |        |      |   |      |        |     |            |   |        |      |   |   |        |      |  
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|                                                                                             | Net income (loss)      |                                      |       | (0.92 | )    |   |       | (1.47 | ) |   |       | (0.60 | ) |      |       | 0.08 |            |   |       | (0.42 | ) |   | $      | (0.51 | )
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |  
|Weighted average shares
    outstanding  basic (millions)                                   |                        |                                      | 641    |       |      |   | 695    |       |   |   | 721    |       |   |      | 735    |      |            |   | 748    |       |   |   | 748    |      
|Weighted average shares
    outstanding  diluted (millions)                                 |                        |                                      | 641    |       |      |   | 695    |       |   |   | 721    |       |   |      | 737    |      |            |   | 748    |       |   |   | 748    |      
|Selected Consolidated Balance
    Sheet data                                                 |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |   |        |       |   |   |        |      
|Cash and cash equivalents                                                                    |                        |                                     | 757    |       |      |  | 1,199  |       |   |  | 969    |       |   |     | 608    |      |            |  | 1,148  |       |   | $ | 1,384  |      
|Marketable securities                                                                        |                        |                                      | 93     |       |      |   | 738    |       |   |   | 1,784  |       |   |      | 1,938  |      |            |   | 858    |       |   |   | 1,035  |      
|Working capital (deficit),
    excluding cash and cash equivalents and marketable securities |                        |                                      | (177   | )     |      |   | (129   | )     |   |   | 419    |       |   |      | (124   | )    |            |   | 186    |       |   |   | 224    |      
|Total assets                                                                                 |                        |                                      | 9,743  |       |      |   | 10,918 |       |   |   | 10,875 |       |   |      | 10,864 |      |            |   | 10,284 |       |   |   | 12,400 |      
|Short-term debt, including current
    portion of long-term debt                             |                        |                                      | 119    |       |      |   | 120    |       |   |   | 149    |       |   |      | 571    |      |            |   | 99     |       |   |   | 119    |      
|Long-term debt, excluding current
    portion                                                |                        |                                      | 249    |       |      |   | 1,710  |       |   |   | 2,343  |       |   |      | 1,427  |      |            |   | 1,566  |       |   |   | 1,888  |      
|Shareholders equity                                                                         |                        |                                      | 6,900  |       |      |   | 6,158  |       |   |   | 5,666  |       |   |      | 5,978  |      |            |   | 5,629  |       |   |   | 6,787  |      
|Selected Consolidated Cash Flow
    data                                                     |                        |                                      |        |       |      |   |        |       |   |   |        |       |   |      |        |      |            |   |        |       |   |   |        |      
|Net cash provided by operating
    activities                                                |                        |                                      | 221    |       |      |   | 226    |       |   |   | 731    |       |   |      | 1,857  |      |            |   | 1,039  |       |   |   | 1,253  |      
|Net cash used in investing
    activities                                                    |                        |                                      | (1,813 | )     |      |   | (1,244 | )     |   |   | (1,522 | )     |   |      | (1,809 | )    |            |   | (238   | )     |   |   | (287   | )    
|Depreciation and amortization                                                                |                        |                                     | 1,121  |       |      |  | 1,370  |       |   |  | 1,437  |       |   |     | 1,320  |      |            |  | 1,316  |       |   | $ | 1,587  |      





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Columns may not add due to rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Unaudited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(3) | Converted from euro into U.S. dollars at an exchange rate
    of 1 = $1.2058,
    which was the noon buying rate on September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(4) | These charges relate to the implementation of our Impact
    cost-reduction programs and other initiatives taken to
    restructure our organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | In 2001, ProMOS Technologies, Inc. (ProMOS)
    shareholders approved the distribution of employee bonuses in
    the form of shares. In 2002, ProMOS issued Global Depository
    Receipts in a public share offering and in 2003 ProMOS initiated
    a share repurchase program. In 2004, Inotera Memories, Inc.
    (Inotera) distributed employee bonuses in the form
    of shares. As a result of these share issuances (repurchases),
    our interest was diluted (increased), while our proportional
    share of the shareholders equity of these companies
    increased (decreased).

1



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##### Table of Contents

OPERATING AND FINANCIAL REVIEW

This discussion and analysis of our consolidated financial
condition and results 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 Note 1 (Description of Business,
Formation and Basis of Presentation) and Note 2 (Summary of
Significant Accounting Policies) to our audited consolidated
financial statements appearing elsewhere in this annual
report.





Overview of the 2005 Financial Year

In our 2005 financial year, which ended September 30, the
global economy was generally weaker than in the prior year and
the semiconductor market experienced a period of growth
moderation. As a global player on the semiconductor market, we
were impacted by these unfavorable global economic and market
conditions, especially by strong pricing pressure as well as by
a decreased demand in our operating segments. In order to
address the current challenges in the semiconductor market, we
simplified our organization to create shorter and faster
decision paths across the entire company, a stronger customer
orientation, as well as greater efficiency and flexibility. We
also integrated a number of centralized functions such as sales
and manufacturing into the operating segments. In addition, we
reached significant milestones in our joint manufacturing
ventures and the development of new product technologies.

The following were the key developments in our business during
the 2005 financial year:




    The Mobile business and Wireline Communication segment were
    combined into the new Communication segment to align our
    structure with market developments. At the same time, the
    security and chip card activities and the ASIC & Design
    Solutions business were integrated into the extended Automotive,
    Industrial and Multimarket segment.
    Our revenues decreased by 6.1 percent, from
    7,195 million in
    the 2004 financial year to
    6,759 million in
    the 2005 financial year. Our earnings before interest and taxes
    (EBIT) decreased from positive
    256 million in
    the 2004 financial year to negative EBIT of
    183 million in
    the 2005 financial year.
    Our cash flow from operations decreased from
    1,857 million in
    the 2004 financial year to
    1,039 million in
    the 2005 financial year. The reduction was due mainly to
    decreased gross margin and changes in various current
    liabilities.
    We and ProMOS Technologies Inc. (ProMOS) reached an
    agreement regarding ProMOS license of our previously
    transferred technologies, pursuant to which ProMOS may continue
    to produce and sell products using those technologies and to
    develop its own processes and products. As full consideration,
    ProMOS agreed to pay us $156 million in four installments
    through April 30, 2006. The parties agreed to withdraw
    their respective claims.
    We consummated the acquisition of Saifun Semiconductors
    Ltd.s (Saifun) remaining 30 percent share
    in the Infineon Technologies Flash joint venture. As part of
    this acquisition, Saifun granted us a license for the use of
    Saifun NROM® technologies.
    We sold certain assets of our fiber optics business to Finisar
    Corporation (Finisar) in exchange for
    34 million shares of Finisars common stock, which
    were subsequently sold.
    We sold our interest in Infineon Ventures GmbH, including the
    majority of the venture investments held therein.
    We and Rambus Inc. (Rambus) reached an agreement
    settling all claims between us and providing for a worldwide
    license to us of the Rambus patent portfolio for use in our
    current and future memory products.2



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##### Table of Contents


    We agreed upon restructuring measures aimed at reducing costs,
    downsizing our workforce, and consolidating certain functions
    and operations. In connection with these measures, restructuring
    charges of
    78 million were
    recognized during the 2005 financial year.
    We recognized impairment charges
    of 134 million
    in the 2005 financial year, principally related to our remaining
    fiber optics businesses, the reorganization measures within our
    Communication segment and long-term investments.
    We continued to invest heavily in research and development and
    achieved a number of significant milestones during the year,
    including the introduction of:


    E-GOLDradio, the latest member of our successful E-GOLD family,
    integrating the complete functionality of our base band chip,
    E-GOLDlite, and our sophisticated quadband RF transceiver,
    SMARTi SD2;
    90-nanometer DRAM trench technology and demonstration of first
    functional parts on 70-nanometer DRAM trench technology;
    VINAX, our new VDSL2 chip solution, designed for applications
    ranging from low-end Modems to high-end Home Gateways;
    SMARTi 3G, the latest member of our successful UMTS transceiver
    family, designed to be used in mobile applications and
    supporting currently specified UMTS bands I through VI worldwide;
    a new 8/16/32 bit microcontroller with embedded Flash for use in
    industrial and automotive applications;
    the new space-saving production method FCOS (Flip Chip On
    Substrate) developed jointly with Giesecke & Devrient
    GmbH (Giesecke & Devrient); and
    a new Trusted-Platform-Module (TPM), a complete independent
    hard- and software solution according to the specification of
    Trusted Computing Group.


    As part of our ongoing project to improve our production
    processes and expand our production capabilities, we:


    successfully transferred to different production facilities our
    high-performance process technology using structure sizes of
    130-nanometer for logic products, in order to further increase
    our production flexibility;
    successfully introduced the 90-nanometer process technology for
    DRAM products in our 300-millimeter production facility at
    Dresden;
    expanded the scope of our joint development agreement with Nanya
    Technology Corporation (Nanya) to include next
    generation 60-nanometer DRAM trench technology;
    saw our joint venture Inotera ramp up to approximately 60,000
    wafer starts per month several months ahead of schedule;
    saw the 300-millimeter facilities at our plant in Richmond,
    Virginia and at our foundry partner Semiconductor Manufacturing
    International Corporation (SMIC) in Beijing, China
    start commercial production;
    started manufacturing at our memory chip assembly and testing
    facilities in Suzhou, China;
    started the construction of a new front-end production plant in
    Kulim High Tech Park, Malaysia, with a total planned investment
    of approximately $1 billion. The facility will mainly
    produce power and logic chips used in automotive and industrial
    power applications; and
    formed a new development center in Bucharest, Romania, with a
    principal focus on power ICs including analog and digital
    functions.3



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##### Table of Contents

Our Business

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.

Following our internal reorganization in the 2005 financial
year, our business is organized into three principal operating
segments serving various markets in the semiconductor industry:




    Our Automotive, Industrial and Multimarket segment designs,
    develops, manufactures and markets semiconductors and complete
    system solutions for use in automotive, industrial and
    multimarket applications.
    Our Communication segment designs, develops, manufactures and
    markets a wide range of ICs, other semiconductors and complete
    system solutions for wireline and wireless communication
    applications.
    Our Memory Products segment designs, develops, manufactures, and
    markets semiconductor memory products with various packaging and
    configuration options and performance characteristics for
    standard, specialty and embedded memory applications.We have two additional segments for reporting purposes, our
Other Operating Segments, which includes remaining activities
for certain product lines that we have disposed of, as well as
other business activities, and our Corporate and Reconciliation
segment, which contains items not allocated to our operating
segments, such as certain corporate headquarters costs,
strategic investments, unabsorbed excess capacity, restructuring
costs and corporate IT development expenses.





The Semiconductor Industry and Factors that Impact Our
Business

Our business and the semiconductor industry are highly cyclical
and are characterized by constant and rapid technological
change, rapid product obsolescence and price erosion, evolving
standards, short product life-cycles and wide fluctuations in
product supply and demand. Although these factors affect all
segments of our business, they are especially pronounced in our
Memory Products segment, are increasingly true of our
Communication segment, and have the least impact on our
Automotive, Industrial and Multimarket segment.



CyclicalityThe industrys cyclicality results from a complex set of
factors, including, in particular, fluctuations in demand for
the end products that use semiconductors and fluctuations in the
manufacturing capacity available to produce semiconductors. This
cyclicality is especially pronounced in the memory portion of
the industry. Semiconductor manufacturing facilities (so-called
fabrication facilities, or fabs) can take several
years to plan, construct, and begin operations. Semiconductor
manufacturers have in the past made capital investments in plant
and equipment during periods of favorable market conditions, in
response to anticipated demand growth for semiconductors. If
more than one of these newly built fabs comes on-line at about
the same time, the supply of chips to the market can be vastly
increased. Without sustained growth in demand, this cycle has
typically led to manufacturing over-capacity and oversupply of
products, which in turn has led to sharp drops in semiconductor
prices. When prices drop, manufacturers have in the past cut
back on investing in new fabs. As demand for chips grows over
time, without additional fabs coming on line, prices tend to
rise, leading to a new cycle of investment. The semiconductor
industry has generally been slow to react to declines in demand,
due to its capital-

4



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##### Table of Contents

intensive nature and the need to make commitments for equipment
purchases well in advance of planned expansion.

We attempt to mitigate the impact of cyclicality in the memory
business by investing in our manufacturing capacities throughout
the cycle and entering into alliances and foundry manufacturing
arrangements that provide flexibility in responding to changes
in the cycle. We believe that we can improve our gross margin in
the memory business by focusing on two key areas: the continuous
improvement of cost structure and productivity through the
introduction of advanced memory process technologies and the
development and marketing of a broader range of memory products,
focusing particularly on higher margin and less volatile
applications such as infrastructure, high-end graphics, consumer
and mobile applications.



Substantial Capital and R&D ExpendituresSemiconductor manufacturing is very capital-intensive. The
manufacturing capacities that are essential to maintain a
competitive cost position require large investments in
manufacturing assets. The top 10 capital spenders in the
industry, of which we rank number 8 according to IC Insights,
account for more than 50 percent of the industrys
average capital expenditure. Manufacturing processes and product
designs are based on leading-edge technologies that require
considerable research and development expenditures. A high
percentage of the cost of operating a fab is fixed; therefore,
increases or decreases in capacity utilization can have a
significant effect on profitability.

Because pricing, for DRAM products in particular, is
market-driven and largely beyond our control, a key factor for
us in achieving and maintaining profitability is to continually
lower our per-unit costs by reducing our total costs and by
increasing unit production output.

To reduce our total costs, we also aim to share the costs of
research and development and manufacturing facilities with third
parties, either by establishing alliances or through the use of
foundry facilities for manufacturing. We believe that
cooperation in alliances for R&D and manufacturing and
foundry partnerships provide us with a number of important
benefits, including the sharing of risks and costs, reducing our
own capital requirements, allowing us to develop a broader range
of products, acquiring technical know-how, and gaining access to
additional production capacities. We are developing future DRAM
technologies with feature sizes of 70-nanometer and 60-nanometer
together with Nanya. In addition, we have established foundry
relationships with partners in Asia, including SMIC and Winbond
Electronics Corp., Hsinchu, Taiwan (Winbond), to
increase our manufacturing capacities, and therefore our
potential revenues, without investing in additional
manufacturing assets. In our logic area, our principal alliances
are with International Business Machines Corporation
(IBM), Chartered Semiconductor Manufacturing Ltd.
(Chartered Semiconductor) and Samsung Electronics
Co. Ltd. (Samsung) for CMOS development and
manufacturing at 65-nanometer and 45-nanometer process
technologies, with United Microelectronics Corporation
(UMC) for 90-nanometer manufacturing, and with IBM
through our manufacturing joint venture ALTIS Semiconductor
S.N.C. (ALTIS) in Essonnes, France.

We expect to increase unit production output through
improvements in manufacturing, which is achieved by producing
chips with smaller structure sizes (more bits per chip) and by
producing more chips per silicon wafer (by using larger wafers).
For DRAM process technology, the majority of our capacity is
based on 110-nanometer structure sizes. In addition we have
started commercial production based on 90-nanometer structure
sizes, jointly developed with Nanya. We have extended our
300-millimeter capacity share during the 2005 financial year
with the continuous ramp up of our joint venture with Nanya,
Inotera, and the start of ramp-up of foundry capacities at SMIC
in Beijing and our own facility in Richmond. We plan to further
extend the share of our memory production on 300-millimeter
wafers with the continuous ramp-up of our 300-millimeter line in
Richmond and the additions of capacities at our foundry partner
Winbond in the 2006 financial year. In our logic area, the
majority of our capacity is based on 130-nanometer structure
sizes. Our 130-nanometer logic process technology, with up to
eight layers of copper metallization, is in full production at
several manufacturing

5



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##### Table of Contents

sites, including our Dresden facility and our manufacturing
joint venture with IBM in Essonnes, France. We are currently in
the process of ramping up production of several products using
our 90-nanometer logic technology and have also begun
qualification of our 65-nanometer logic process technology.



Technological Development and CompetitionSales prices per unit are volatile and generally decline over
time due to technological developments and competitive pressure.
Memories in particular are commodity-type products. Since most
specifications are standardized, customers can switch between
suppliers on short notice. This leads to strong competition
within the market, and causes manufacturers to pass cost savings
on to their customers in an effort to gain market share. Logic
products are generally not commodities, but rather have a
certain degree of application specification. Although generally
less volatile than those for commodity memory products, unit
sales prices for logic products typically decline over time as
technological developments occur.

We aim to offset the effects of declining unit sales prices on
total revenues by optimizing product mix, and by increasing unit
sales volume and residual effects on gross margin by continually
reducing per-unit production costs. The growth in volumes
depends in part on productivity improvements in the
manufacturing of semiconductor chips. By moving to ever-smaller
structure sizes in manufacturing, the number of functional
elements has historically doubled approximately every two years.
This trend, often called Moores Law, has led to an average
growth rate of bit-volumes of between 40 percent and
45 percent per year and, assuming constant costs per square
inch of silicon, to an approximately 30 percent cost
reduction per bit per year.



SeasonalityOur business is affected by seasonality, with sales historically
strongest in our fourth financial quarter and weakest in our
first financial quarter. The seasonality of our sales reflects
the seasonal demand fluctuations for the products that
incorporate our semiconductors. If anticipated sales or
shipments do not occur when expected, expenses and inventory
levels in that quarter can be disproportionately high, and our
results of operations for that quarter, and potentially for
future quarters, may be adversely affected.



Product Development CyclesFor logic products, the cycle for test, evaluation and adoption
of our products by customers before the start of volume
production can range from several months to more than one year.
Due to this lengthy cycle, we may experience significant delays
from the time we incur expenses for research and development,
marketing efforts, and investments in inventory, to the time we
generate corresponding revenue, if any. Development cycles
affect memory products to a lesser extent due to the higher
degree of standardization for memory products.



Acquisition and Divestiture StrategyA key element of our business strategy involves the acquisition
and divestiture of businesses, assets, products, or technologies
to reduce the time required to develop new technologies and
products and bring them to market, and to optimize our existing
product offerings, market coverage, engineering workforce, or
technological capabilities. We plan to continue to evaluate
strategic opportunities as they arise, including business
combination transactions, strategic relationships, capital
investments, and the purchase or sale of assets.



Intellectual PropertyDue to the high-technology nature of the semiconductor industry,
Intellectual Property (IP), meaning intangible assets relating
to proprietary technology, is of significant importance.
Companies that have their own patented IP often allow third
parties to use their IP in exchange for license fees. It can be

6



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##### Table of Contents

costly and difficult to defend against infringement by third
parties, or to defend the company against claims by third
parties of infringement of their technology. We do not record
assets in our balance sheet for self-developed IP. Only IP
licensed from others or acquired through a business acquisition
is reflected on our balance sheet, and reduced through
amortization over its expected useful life. The value of such
acquired IP is often complex and difficult to estimate.

Challenges that lie Ahead

Going forward, our success will remain highly dependent on our
ability to stay at the leading edge of technology development,
and to continue to optimize our product portfolio. We must
achieve both objectives to ensure that we have the flexibility
to react to fluctuations in market demand for different types of
semiconductor products. We believe that the ability to offer and
flexibly manufacture a broad portfolio of products will be
increasingly important to our long-term success in many markets
within the semiconductor industry. Establishing and maintaining
advantageous technology, development and manufacturing
alliances, including the use of third-party foundries, and
continuing our efforts to broaden our product portfolio will
make it easier for us to respond to changes in market conditions
and to improve our financial performance.

Semiconductor Market Conditions in the 2005 Financial
Year

The growth of the semiconductor market weakened significantly
during the 2005 calendar year following growth of
28 percent in the 2004 calendar year, according to WSTS
(World Semiconductor Trade Statistics). In October 2005, WSTS
predicted a growth rate of 7 percent for the 2005 calendar
year. According to WSTS, sales in the Asia/ Pacific region are
expected to increase by 16 percent in the 2005 calendar
year. The semiconductor market in Japan is expected to decrease
slightly by 3 percent; the European market is expected to
remain stable; the North American market is expected to increase
slightly by 2 percent. Sales of non-memory products (logic
chips, analog, discrete and optical components), which accounted
for 79 percent of the entire market in the first half of
the 2005 calendar year, are predicted to grow by 8 percent
compared with the 2004 calendar year. Sales of memory products
are predicted to grow by 3 percent compared with the 2004
calendar year.

Gartner Dataquest predicts worldwide growth in the 2005 calendar
year of 5 percent for semiconductors in the communications
business (wireless and wireline). Sales of semiconductors for
data processing are predicted to grow by 7 percent, for
consumer electronics by 12 percent and for automotive
electronics by 7 percent.

Plans for a New Set-up of our Company

Our key objective is to achieve profitable growth and to
maximize value for our shareholders. As such, we regularly
consider appropriate steps towards these aims. In furtherance of
these goals, and following extensive analysis of our markets and
our business, in November 2005 our Supervisory Board approved a
plan to restructure our company in order to better prepare us to
exploit market opportunities for our memory products and logic
businesses as and when they arise.

The first step in this process will be a transfer of all the
assets and liabilities of our Memory Products segment into a
separate, wholly owned subsidiary of Infineon (this
drop-down of assets and liabilities, or
Teilbetrieb, is known as an Ausgliederungunder
German law).

We believe that these reorganization measures will position us
quickly to take advantage of appropriate market opportunities
for the memory business as and when they arise. We intend to
monitor and evaluate financial and industry developments
continuously during the 2006 financial year and will consider
further reorganization steps as appropriate. It is our
Management Boards preferred option to reinforce the market
position of the memory products group through an initial public
offering (IPO) of shares in the new legal entity.
Nevertheless, we have not yet decided on any specific steps
following the drop-down of assets and liabilities or any
specific timeframe for such steps. We would, over the medium to
long term, consider reducing our position in the current Memory
Products group to a minority stake.

7



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##### Table of Contents

BackgroundOur business includes both the memory semiconductor activities
of our Memory Products segment and the logic semiconductor
activities of our two applications segments, Automotive,
Industrial and Multimarket, and Communication. The memory and
logic sides of our business have historically benefited from
certain synergies, but we believe that the two lines of business
will diverge in significant respects, reflecting differences in
both technological innovation and economics, and that these
synergies will therefore decrease. In particular, the memory
business continues to be characterized by a highly
capital-intensive drive to continuously update and improve
manufacturing processes and cost position. The logic business,
on the other hand, is evolving into an
application/solution-driven model, which requires continuous
product development and specialized manufacturing. The intense
capital demand of the memory business reflects the need to
invest continuously in very costly, efficient and up-to-date
fabrication facilities and leading-edge manufacturing
technologies. The logic business operates on a smaller
manufacturing scale. Certain parts of it (our advanced
logic business consisting mainly of mobile phone baseband
ICs and a range of chipcard, wired communication,
microcontroller and other customer-specific ICs) are
well-prepared to make use of foundry manufacturing capacity for
standard semiconductor manufacturing processes (so-called CMOS
technology). Certain other parts of it, mainly our power- and
RF-IC businesses, can rely on sophisticated, significantly less
capital-intensive manufacturing processes mastered in-house as
an important competitive differentiator. In addition, the
technologies employed in the two lines of business are expected
to increasingly diverge, resulting among other things in
differing development roadmaps  with memory
disproportionately focused on process technologies 
and the need for strategic and development alliances with
different partners. The synergies in design methodologies and
tools are likewise becoming very limited. Finally, the two lines
of business are subject to very different financial market
dynamics  which may be less than fully transparent to
investors in the combined business.

8



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##### Table of Contents

Results of Operations



Results of Operations as a Percentage of Net SalesThe following table presents the various line items in our
consolidated statements of operations expressed as percentages
of net sales.

|                                                        |  |                                      |       |    |      |  |       |      |  |  |       |   
|------------------------------------------------------- |  | ------------------------------------ | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                                        |  | For the years ended September 30,(1) |      
|                                                        |  |                                      |      
|                                                        |  | 2003                                 |       |    | 2004 |  |       | 2005 | 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Net sales                                               |  |                                      | 100.0 | %  |      |  | 100.0 | %    |  |  | 100.0 | % 
|Cost of goods sold                                      |  |                                      | (75.0 | )  |      |  | (64.9 | )    |  |  | (72.6 | ) 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Gross margin                                            |  |                                      | 25.0  |    |      |  | 35.1  |      |  |  | 27.4  |   
|                                                        |  |                                      |       |    |      |  |       |      | 
|Research and development expenses                       |  |                                      | (17.7 | )  |      |  | (16.9 | )    |  |  | (19.1 | ) 
|Selling, general and administrative
    expenses        |  |                                      | (11.0 | )  |      |  | (10.0 | )    |  |  | (9.7  | ) 
|Restructuring charges                                   |  |                                      | (0.5  | )  |      |  | (0.2  | )    |  |  | (1.2  | ) 
|Other operating expense, net                            |  |                                      | (1.4  | )  |      |  | (3.6  | )    |  |  | (1.4  | ) 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Operating income (loss)                                 |  |                                      | (5.6  | )  |      |  | 4.4   |      |  |  | (4.0  | ) 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Interest expense, net                                   |  |                                      | (0.8  | )  |      |  | (0.6  | )    |  |  | (0.1  | ) 
|Equity in earnings (losses) of
    associated companies |  |                                      | 0.3   |    |      |  | (0.2  | )    |  |  | 0.9   |   
|Gain (loss) on associated company
    share issuance    |  |                                      | (0.0  | )  |      |  | 0.0   |      |  |  | 0.0   |   
|Other non-operating income
    (expense), net           |  |                                      | 0.3   |    |      |  | (0.9  | )    |  |  | 0.4   |   
|Minority interests                                      |  |                                      | 0.1   |    |      |  | 0.3   |      |  |  | 0.0   |   
|                                                        |  |                                      |       |    |      |  |       |      | 
|Income (loss) before income taxes                       |  |                                      | (5.7  | )  |      |  | 3.0   |      |  |  | (2.8  | ) 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Income tax expense                                      |  |                                      | (1.4  | )  |      |  | (2.1  | )    |  |  | (1.8  | ) 
|                                                        |  |                                      |       |    |      |  |       |      | 
|Net income (loss)                                       |  |                                      | (7.1  | )% |      |  | 0.9   | %    |  |  | (4.6  | )%
|                                                        |  |                                      |       |    |      |  |       |      | 



|    |                                    
|--- | -----------------------------------
|(1) | Columns may not add due to rounding



| |               
| | --------------
| | Reorganization









| |          
| | ---------
| | Net Sales



9



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##### Table of Contents

foundry services for divested businesses and the licensing of
our intellectual property. Our semiconductor products include
two main categories of semiconductors:




    Our logic products, which include a wide array of chips and
    components used in electronic applications ranging from wireless
    communication devices (such as mobile phones and Bluetooth
    devices), chip cards, modems and other wireline technologies
    such as DSL, automotive electronics and industrial applications.
    Our memory products, such as dynamic random access memory (DRAM)
    products, which are used in computers and other electronic
    devices. We also offer a limited range of non-volatile flash
    memory products, which are used in consumer applications such as
    digital still cameras or cellular handsets.We make the vast majority of our product sales through our
direct sales force, with approximately 14 percent of our
total revenue in any period derived from sales made through
distributors.

We derive our license revenue from royalties and license fees
earned on technology that we own and license to third parties.
This enables us to recover a portion of our research and
development expenses, and also often allows us to gain access to
manufacturing capacity at foundries through joint licensing and
capacity reservation arrangements. We recognize license income,
primarily in the Memory Products segment, resulting from the
transfer of technology to our current and former alliance
partners, such as Winbond, Nanya and ProMOS.

Our revenues fluctuate in response to a mix of factors,
including the following:




    The market prices for our products, particularly our memory
    products;
    Our overall product mix and sales volumes;
    The stage of our products in their respective life
    cycles; and
    The effects of competition and competitive pricing strategies.

|                                               |                      |                                        |       |     |      |  |       |      |    |  |       |     |   
|---------------------------------------------- | -------------------- | -------------------------------------- | ----- | --- | ---- |  | ----- | ---- | -- |  | ----- | --- | --
|                                               |                      | For the years ended September 30,      |      
|                                               |                      |                                        |      
|                                               |                      | 2003                                   |       |     | 2004 |  |       | 2005 |   
|                                               |                      |                                        |       |     |      |  |       |      |   
|                                               |                      | (Euro in millions, except percentages) |      
|Net Sales                                      |                      |                                        | 6,152 |     |      |  | 7,195 |      |    |  | 6,759 |    
|                                               | Changes year-on-year |                                        |       |     |      |  |       | 17   | %  |  |       | (6  | )%
|                                               | Of which:            |                                        |       |     |      |  |       |      |    |  |       |     |   
|                                               | License income       |                                        |       | 183 |      |  |       | 76   |    |  |       | 175 |   
|                                               | % of net sales       |                                        |       | 3   | %    |  |       | 1    | %  |  |       | 3   | % 
|Effect of foreign exchange over
    prior year |                      |                                        | (317  | )   |      |  | (445  | )    |    |  | (177  | )  
|                                               | % of net sales       |                                        |       | (5  | )%   |  |       | (6   | )% |  |       | (3  | )%
|Impact of acquisitions over prior
    year     |                      |                                        | 126   |     |      |  | 29    |      |    |  | 2     |    
|                                               | % of net sales       |                                        |       | 2   | %    |  |       | 0    | %  |  |       | 0   | % 




10



---



##### Table of Contents

Net Sales by Segment:

|                                           |  |                                        |       |  |      |  |     |      |  |  |       |  |  |  |     |   |  |  |       |  |  |  |     |  
|------------------------------------------ |  | -------------------------------------- | ----- |  | ---- |  | --- | ---- |  |  | ----- |  |  |  | --- | - |  |  | ----- |  |  |  | --- | -
|                                           |  | For the years ended September 30,      |      
|                                           |  |                                        |      
|                                           |  | 2003                                   |       |  | 2004 |  |     | 2005 | 
|                                           |  |                                        |       |  |      |  |     |      | 
|                                           |  | (Euro in millions, except percentages) |      
|Automotive, Industrial and
    Multimarket |  |                                        | 2,186 |  |      |  | 36  | %    |  |  | 2,540 |  |  |  | 35  | % |  |  | 2,516 |  |  |  | 37  | %
|Communication                              |  |                                        | 1,428 |  |      |  | 23  |      |  |  | 1,689 |  |  |  | 24  |   |  |  | 1,391 |  |  |  | 21  |  
|Memory Products                            |  |                                        | 2,485 |  |      |  | 40  |      |  |  | 2,926 |  |  |  | 41  |   |  |  | 2,826 |  |  |  | 42  |  
|Other Operating Segments                   |  |                                        | 21    |  |      |  |    |      |  |  | 11    |  |  |  |    |   |  |  | 12    |  |  |  |    |  
|Corporate and Reconciliation               |  |                                        | 32    |  |      |  | 1   |      |  |  | 29    |  |  |  |    |   |  |  | 14    |  |  |  |    |  
|                                           |  |                                        |       |  |      |  |     |      | 
|Total                                      |  |                                        | 6,152 |  |      |  | 100 | %    |  |  | 7,195 |  |  |  | 100 | % |  |  | 6,759 |  |  |  | 100 | %
|                                           |  |                                        |       |  |      |  |     |      | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial and Multimarket  The
    segment experienced continued growth in the 2004 financial year
    as volume growth, particularly for automotive power applications
    (reflecting the increasing semiconductor content in automotive
    electronics), more than offset ongoing price pressure caused by
    technological developments and competition. Increased net sales
    in the 2004 financial year also resulted from higher volume
    sales of automotive and industrial products, and from increased
    demand for chipcard and security products. We experienced price
    pressure in the market for chipcard ICs throughout the 2003
    financial year, while revenue in the 2004 financial year
    benefited from a slower rate of price decline. Sales in the 2004
    financial year also benefited from the full-year consolidation
    of SensoNor AS (SensoNor), acquired in June 2003,
    and accelerated growth for industrial applications in the second
    half of the 2004 financial year. In the 2005 financial year,
    revenues in this segment decreased slightly compared to the 2004
    financial year, despite a continued volume increase in the
    automotive business. The revenue decline was primarily due to
    strong pricing pressure combined with decreased market volumes
    in the security and chipcard business.                                                                                                                                               
|
| |  | Communication  In the 2003 financial year and
    the first half of the 2004 financial year, we experienced
    increasing demand for digital access products as the need for
    DSL internet-based communication increased, and markets in
    developing countries improved. An offsetting trend was the
    decrease in demand for traditional analog communication
    products, which was more pronounced in the second half of the
    2004 financial year than in prior periods. Sales growth in the
    2004 financial year occurred primarily in the second half of the
    year, as demand for mobile solutions accelerated. In the 2005
    financial year, sales in the Communication segment declined
    year-on-year due to a revenue decrease in the wireless business
    primarily caused by a decline in demand from some customers for
    baseband components beginning in the second quarter of the 2005
    financial year, as well as continued pricing pressure. This
    decline could not be offset by the stable sales trend in the
    wireline business.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Memory Products  The increase in net sales in
    the 2004 financial year was due mainly to higher volumes, which
    more than offset the impact of an unfavorable U.S. dollar/
    Euro exchange rate and lower license income. Sales volumes in
    the 2004 financial year also benefited from the ramp-up of our
    Dresden 300-millimeter facility, from the conversion to
    110-nanometer technology and from access to additional capacity
    made available through our co-operation with Winbond and SMIC,
    which offset the reduced volume of products we purchased from
    ProMOS. Overall megabit volume increased during the 2004
    financial year as a result of increasing market demand for
    personal computers and system memory. Net sales in the 2005
    financial year declined compared to the previous year mainly due
    to price pressure, especially in the first half of the financial
    year, which could not be compensated by increasing bit shipments
    and increased revenues from licenses and Flash memory products.
    In addition, the continued unfavorable U.S. dollar/ Euro
    exchange rate further contributed to the revenue decline.
    Production volumes increased during the 2005 financial year
    primarily as a result of the ramp-up of our manufacturing joint
    venture Inotera and the access to additional capacity through
    our co-operation with Winbond and SMIC. Overall, megabit sales
    volume increased during the 2005 financial year as a conse-

11



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##### Table of Contents

quence of increasing market demand, particularly for personal
    computers and system memory. The majority of our memory products
    sales were based on 256-Mbit DRAMs in the first half of the 2005
    financial year and of 512-Mbit DRAMs in the second half of the
    2005 financial year, as the market shifted to the next
    higher-density product generation.DRAM Price Development

(DRAM LINE GRAPH)

The prices in U.S. dollars of both major products, DDR and
DDR2 memory ICs, declined sharply during the 2005 financial
year, especially during the seasonally weaker period between
January and April. After April, DDR prices stabilized, whereas
DDR2 prices remained under pressure as a result of a supply
overhang and slower than expected conversion to DDR2 as
mainstream memory. Both contract and spot prices followed a
similar trend. Per-bit prices for lower-density SDRAM products
declined during the financial year as well, but remained at a
higher level compared to DDR and DDR2 due to their legacy
character. We plan to diversify our product portfolio and to
optimize our product mix to take advantage of market price
differentials, and especially increase our focus on products for
server, consumer, high-end graphics and mobile applications,
which we believe offer less price volatility and higher margins.
Our average per-megabit selling prices for DRAM products
declined approximately 27 percent in the 2005 financial
year.




    Other Operating Segments  Net sales remained
    relatively unchanged in the 2005 financial year.12



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##### Table of Contents

Net Sales by Region and Customer:

|              |  |                                        |       |  |      |  |     |      |  |  |       |  |  |  |     |   |  |  |       |  |  |  |     |  
|------------- |  | -------------------------------------- | ----- |  | ---- |  | --- | ---- |  |  | ----- |  |  |  | --- | - |  |  | ----- |  |  |  | --- | -
|              |  | For the years ended September 30,      |      
|              |  |                                        |      
|              |  | 2003                                   |       |  | 2004 |  |     | 2005 | 
|              |  |                                        |       |  |      |  |     |      | 
|              |  | (Euro in millions, except percentages) |      
|Germany       |  |                                        | 1,535 |  |      |  | 25  | %    |  |  | 1,675 |  |  |  | 23  | % |  |  | 1,354 |  |  |  | 20  | %
|Other Europe  |  |                                        | 1,112 |  |      |  | 18  |      |  |  | 1,263 |  |  |  | 18  |   |  |  | 1,210 |  |  |  | 18  |  
|North America |  |                                        | 1,393 |  |      |  | 23  |      |  |  | 1,524 |  |  |  | 21  |   |  |  | 1,504 |  |  |  | 22  |  
|Asia/ Pacific |  |                                        | 1,821 |  |      |  | 29  |      |  |  | 2,263 |  |  |  | 32  |   |  |  | 2,223 |  |  |  | 33  |  
|Japan         |  |                                        | 256   |  |      |  | 4   |      |  |  | 364   |  |  |  | 5   |   |  |  | 332   |  |  |  | 5   |  
|Other         |  |                                        | 35    |  |      |  | 1   |      |  |  | 106   |  |  |  | 1   |   |  |  | 136   |  |  |  | 2   |  
|              |  |                                        |       |  |      |  |     |      | 
|Total         |  |                                        | 6,152 |  |      |  | 100 | %    |  |  | 7,195 |  |  |  | 100 | % |  |  | 6,759 |  |  |  | 100 | %
|              |  |                                        |       |  |      |  |     |      | 









| |                                    
| | -----------------------------------
| | Cost of Goods Sold and Gross Margin





| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | Direct materials, which consist principally of raw wafer costs;                                                          
|
| |  | Labor costs;                                                                                                             
|
| |  | Overhead, including maintenance of production equipment,
    indirect materials, utilities and royalties;                
|
| |  | Depreciation and amortization;                                                                                           
|
| |  | Subcontracted expenses for assembly and test services;                                                                   
|
| |  | Production support, including facilities, utilities, quality
    control, automated systems and management functions; and
|
| |  | Foundry production costs.                                                                                                

13



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##### Table of Contents

In addition to factors that affect our revenue, our gross margin
is impacted by:




    Factory utilization and related idle capacity costs;
    Amortization of purchased intangible assets;
    Product warranty costs;
    Provisions for excess or obsolete inventories; and
    Government grants, which are recognized over the remaining
    useful life of the related manufacturing assets.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, Inotera and, through January 1,
2003, ProMOS. Our purchases from these affiliated entities
amounted to
615 million in
the 2005 financial year,
357 million in
the 2004 financial year and
470 million in
the 2003 financial year.

|                   |                      |                                        |       |    |      |  |       |      |   |  |       |    |  
|------------------ | -------------------- | -------------------------------------- | ----- | -- | ---- |  | ----- | ---- | - |  | ----- | -- | -
|                   |                      | For the years ended September 30,      |      
|                   |                      |                                        |      
|                   |                      | 2003                                   |       |    | 2004 |  |       | 2005 |  
|                   |                      |                                        |       |    |      |  |       |      |  
|                   |                      | (Euro in millions, except percentages) |      
|Cost of Goods Sold |                      |                                        | 4,614 |    |      |  | 4,670 |      |   |  | 4,909 |   
|                   | Changes year-on-year |                                        |       |    |      |  |       | 1    | % |  |       | 5  | %
|                   | % of net sales       |                                        |       | 75 | %    |  |       | 65   | % |  |       | 73 | %
|Gross margin       |                      |                                        | 25    | %  |      |  | 35    | %    |   |  | 27    | % 







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial and Multimarket  In the
    2004 financial year, gross margin improved as a result of
    increased productivity and cost reductions attributable to the
    conversion from 5-inch to 6-inch and 8-inch wafer manufacturing.
    Higher sales volumes and increased capacity utilization
    contributed to improved efficiencies and offset the adverse
    effect of pricing pressure on gross margin. In the 2005
    financial year, gross margin deteriorated as a result of higher
    idle capacity costs in the first half of the financial year and
    strong pricing pressure, which could not be fully offset by
    productivity measures.                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Communication  Gross margin for the 2004
    financial year remained stable compared to the 2003 financial
    year, although it decreased from a high in the second quarter.
    This decrease resulted principally from a continuing price
    decline experienced in access products. Gross margin
    deteriorated in the 2005 financial year mainly due to increased
    idle capacity costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Memory Products  Gross margin improved during
    the 2004 financial year mainly due to improved productivity and
    reduced manufacturing costs as a result of the conversion to
    140- and 110-nanometer process technologies and 300-millimeter
    production efficiencies. These more than offset the effects of
    lower average selling prices and led to a significant increase
    in gross margin in the second half of the 2004 financial year.
    The gross margin impact in the 2004 financial year of lower
    license income was partially offset by reduced depreciation
    expense attributable to governmental grants. Gross margin
    decreased in the 2005 financial year, as the improvements of
    productivity and reduced manufacturing costs resulting from the
    110-nanometer process technology conversion and the increasing
    share of 300-millimeter manufacturing could not compensate for
    the effect of lower average selling prices and the unfavorable
    U.S. dollar/ Euro exchange rate.

14



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##### Table of Contents

Research and Development (R&D) ExpensesResearch and development expenses consist primarily of salaries
and fringe benefits for research and development personnel,
materials costs, depreciation and maintenance of equipment used
in our research and development efforts, and contracted
technology development costs. Materials costs include expenses
for development wafers and costs relating to pilot production
activities prior to the commencement of commercial production.
R&D expenses also include our joint technology development
arrangements with partners such as Nanya and IBM.

We continue to focus our investments on the development of
leading-edge manufacturing technologies and products with high
potential for growth and profitability.

|                                  |                      |                                        |       |    |      |  |       |      |   |  |       |    |  
|--------------------------------- | -------------------- | -------------------------------------- | ----- | -- | ---- |  | ----- | ---- | - |  | ----- | -- | -
|                                  |                      | For the years ended September 30,      |      
|                                  |                      |                                        |      
|                                  |                      | 2003                                   |       |    | 2004 |  |       | 2005 |  
|                                  |                      |                                        |       |    |      |  |       |      |  
|                                  |                      | (Euro in millions, except percentages) |      
|Research and development expenses |                      |                                        | 1,089 |    |      |  | 1,219 |      |   |  | 1,293 |   
|                                  | Changes year-on-year |                                        |       |    |      |  |       | 12   | % |  |       | 6  | %
|                                  | % of net sales       |                                        |       | 18 | %    |  |       | 17   | % |  |       | 19 | %
|In-process R&D charges            |                      |                                        | 6     |    |      |  | 9     |      |   |  | 0     |   
|                                  | % of net sales       |                                        |       | 0  | %    |  |       | 0    | % |  |       | 0  | %
|Government subsidies              |                      |                                        | 59    |    |      |  | 74    |      |   |  | 50    |   
|                                  | % of net sales       |                                        |       | 1  | %    |  |       | 1    | % |  |       | 1  | %







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial and Multimarket  During
    the 2004 financial year, R&D expenses increased in absolute
    terms and remained constant as a percentage of sales, as a
    result of increased R&D spending in the fields of
    microcontrollers and automotive applications. R&D expenses
    increased slightly both in absolute terms and as a percentage of
    sales in the 2005 financial year. The increase took place mainly
    in the automotive and power business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Communication  R&D expenses increased in
    the 2004 financial year in absolute terms and remained
    relatively stable as a percentage of sales. This increase was
    mainly the result of in-process R&D charges in connection
    with the ADMtek acquisition and additional R&D expenses
    resulting from our intensified focus on software and solutions
    activities and third-generation mobile phone semiconductors.
    R&D expenses in the 2005 financial year remained relatively
    stable in absolute terms and increased relative to sales
    compared to the 2004 financial year. The high level of R&D
    expenses was maintained in the first half of the 2005 financial
    year, with a focus on software and solution activities for
    third-generation mobile phone semiconductors as well as for
    broadband semiconductor solutions. In the second half of the
    2005 financial year, R&D expenses were reduced in absolute
    terms, reflecting the successful implementation of efficiency
    programs initiated in the second quarter of the 2005 financial
    year.
|
| |  | Memory Products  In the 2004 financial year,
    R&D expenses increased in absolute terms, although they
    remained constant relative to sales, reflecting in particular
    the development of commodity DRAM and flash technologies, which
    were not entirely offset by the benefits of the joint
    development of DRAM technologies with Nanya. In the 2005
    financial year, R&D expenses increased in absolute terms due
    to increased spending on the acceleration of the development of
    next generation memory technologies and the broadening of the
    overall memory portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

15



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##### Table of Contents

Selling, General and Administrative (SG&A)
    ExpensesSelling expenses consist primarily of salaries and fringe
benefits for personnel engaged in sales and marketing
activities, costs of customer samples, costs related to
prototyping activities, other marketing incentives, and related
marketing expenses.

General and administrative expenses consist primarily of
salaries and benefits for administrative personnel,
non-manufacturing related overhead costs, consultancy, legal and
other fees for professional services, recruitment and training
expenses.

|                                                 |                      |                                        |     |    |      |  |     |      |   |  |     |    |   
|------------------------------------------------ | -------------------- | -------------------------------------- | --- | -- | ---- |  | --- | ---- | - |  | --- | -- | --
|                                                 |                      | For the years ended September 30,      |    
|                                                 |                      |                                        |    
|                                                 |                      | 2003                                   |     |    | 2004 |  |     | 2005 |  
|                                                 |                      |                                        |     |    |      |  |     |      |  
|                                                 |                      | (Euro in millions, except percentages) |    
|Selling, general and administrative
    expenses |                      |                                        | 679 |    |      |  | 718 |      |   |  | 655 |   
|                                                 | Changes year-on-year |                                        |     |    |      |  |     | 6    | % |  |     | (9 | )%
|                                                 | % of net sales       |                                        |     | 11 | %    |  |     | 10   | % |  |     | 10 | % 









| |                               
| | ------------------------------
| | Other items affecting earnings

|                                                        |                |                                        |    |   |      |  |     |      |    |  |    |   |  
|------------------------------------------------------- | -------------- | -------------------------------------- | -- | - | ---- |  | --- | ---- | -- |  | -- | - | -
|                                                        |                | For the years ended September 30,      |   
|                                                        |                |                                        |   
|                                                        |                | 2003                                   |    |   | 2004 |  |     | 2005 |   
|                                                        |                |                                        |    |   |      |  |     |      |   
|                                                        |                | (Euro in millions, except percentages) |   
|Restructuring charges                                   |                |                                        | 29 |   |      |  | 17  |      |    |  | 78 |  
|                                                        | % of net sales |                                        |    | 0 | %    |  |     | 0    | %  |  |    | 1 | %
|Other operating expense, net                            |                |                                        | 85 |   |      |  | 257 |      |    |  | 92 |  
|                                                        | % of net sales |                                        |    | 1 | %    |  |     | 4    | %  |  |    | 1 | %
|Equity in (losses) earnings of
    associated companies |                |                                        | 18 |   |      |  | (14 | )    |    |  | 57 |  
|                                                        | % of net sales |                                        |    | 0 | %    |  |     | (0   | )% |  |    | 1 | %
|Other non-operating
    (expense) income, net           |                |                                        | 21 |   |      |  | (64 | )    |    |  | 26 |  
|                                                        | % of net sales |                                        |    | 0 | %    |  |     | (1   | )% |  |    | 0 | %

Restructuring Charges.


16



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##### Table of Contents

ing in the front-end area within the manufacturing cluster
Perlach, Regensburg and Villach. Production activities at
Munich-Perlach will be transferred principally to Regensburg
and, to a lesser extent, to Villach.

Other Operating Expense, Net. Other net operating
expense, net in the 2004 financial year related principally to
charges from our settlement of an antitrust investigation by the
U.S. Department of Justice, related settlements with
customers and a similar ongoing investigation in Europe, as well
as a goodwill impairment charge of
71 million
related to our 2001 acquisition of Catamaran. In the 2005
financial year, other operating expense included a net charge of
96 million
resulting primarily from the reorganization of certain
communication businesses and goodwill and other intangible
assets impairment charges.

Equity in (Losses) Earnings of Associated Companies. Our
principal associated companies are ALTIS, Inotera (since the
2003 financial year) and ProMOS (through part of the 2003
financial year). Both ProMOS and Inotera are DRAM manufacturers
and our equity in their earnings has been sensitive to
fluctuations in the price of DRAM and is reflected in the
results of the Memory Products segment.

In the 2003 financial year, the recovery in DRAM prices resulted
in improved earnings at ProMOS prior to our withdrawal from the
venture. Start-up losses at Inotera during the ramp-up phase of
production contributed to the losses incurred in the 2004
financial year. In the 2005 financial year, Inotera contributed
the majority of our equity in earnings from associated
companies, reflecting the start of volume production by that
joint venture.

Other Non-Operating (Expense) Income, Net. Other
non-operating income and expense can consist of various items
from period to period not directly related to our principal
operations, including gains and losses on sales of marketable
securities. Other non-operating expense, net in the 2004
financial year mainly consisted of
65 million of
investment-related impairment charges. In the 2005 financial
year, non-operating income, net included
40 million
related to net gains from foreign currency derivatives and
foreign currency transactions and a gain of
13 million
realized on the sale of our venture capital activities,
partially offset by investment related impairment charges of
29 million.

Earnings Before Interest and Taxes (EBIT)

We define EBIT as earnings (loss) before interest and taxes. Our
management uses EBIT as a measure to establish budgets and
operational goals, to manage our business and to evaluate its
performance. We report EBIT information because we believe that
it provides investors with meaningful information about our
operating performance and especially about the performance of
our separate operating segments. EBIT is determined from the
consolidated statements of operations as follows:

|                          |  |                                   |      |   |      |  |     |      |  |  |      |  
|------------------------- |  | --------------------------------- | ---- | - | ---- |  | --- | ---- |  |  | ---- | -
|                          |  | For the years ended September 30, |     
|                          |  |                                   |     
|                          |  | 2003                              |      |   | 2004 |  |     | 2005 | 
|                          |  |                                   |      |   |      |  |     |      | 
|                          |  | (Euro in millions)                |     
|Net income (loss)         |  |                                   | (435 | ) |      |  | 61  |      |  |  | (312 | )
|Add: Income tax expense   |  |                                   | 84   |   |      |  | 154 |      |  |  | 120  |  
|Interest
    expense, net |  |                                   | 52   |   |      |  | 41  |      |  |  | 9    |  
|                          |  |                                   |      |   |      |  |     |      | 
|EBIT                      |  |                                   | (299 | ) |      |  | 256 |      |  |  | (183 | )
|                          |  |                                   |      |   |      |  |     |      | 

17



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##### Table of Contents

The EBIT amounts of our separate reporting segments were as
follows(1):

|                                           |  |                                   |      |   |      |  |     |      |  |  |      |  
|------------------------------------------ |  | --------------------------------- | ---- | - | ---- |  | --- | ---- |  |  | ---- | -
|                                           |  | For the years ended September 30, |     
|                                           |  |                                   |     
|                                           |  | 2003                              |      |   | 2004 |  |     | 2005 | 
|                                           |  |                                   |      |   |      |  |     |      | 
|                                           |  | (Euro in millions)                |     
|Automotive, Industrial and
    Multimarket |  |                                   | 148  |   |      |  | 252 |      |  |  | 134  |  
|Communication                              |  |                                   | (213 | ) |      |  | (44 | )    |  |  | (295 | )
|Memory Products                            |  |                                   | 31   |   |      |  | 169 |      |  |  | 122  |  
|Other Operating Segments                   |  |                                   | (50  | ) |      |  | (75 | )    |  |  | (4   | )
|Corporate and Reconciliation               |  |                                   | (215 | ) |      |  | (46 | )    |  |  | (140 | )
|                                           |  |                                   |      |   |      |  |     |      | 
|Total                                      |  |                                   | (299 | ) |      |  | 256 |      |  |  | (183 | )
|                                           |  |                                   |      |   |      |  |     |      | 



|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(1) | Amounts in prior periods have been conformed to the current year
    presentation.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial and Multimarket  The
    EBIT improvement in the 2004 financial year was mainly due to
    higher sales volumes and improved manufacturing efficiency,
    partially offset by continued pricing pressure. The EBIT decline
    in the 2005 financial year resulted primarily from the
    deterioration of the gross margin. As part of that, EBIT was
    negatively impacted by costs related to product transfers in
    connection with the planned phase-out of production at
    Munich-Perlach and costs incurred in connection with our new
    production site in Kulim, Malaysia.                                                                                                                         
|
| |  | Communication  The EBIT loss decreased in the
    2004 financial year, primarily due to lower operating costs,
    which were partially offset by losses associated with the
    acquisition of ADMtek. EBIT for the 2004 financial year included
    goodwill impairments
    of 71 million
    related to our Catamaran acquisition. The EBIT decrease in the
    2005 financial year resulted mainly from charges in connection
    with the reorganization of certain communication businesses and
    impairment charges
    aggregating 96 million,
    as well as a decline in gross margin.                                                                                                                                       
|
| |  | Memory Products  The EBIT improvement in the
    2004 financial year was primarily due to increased sales volumes
    and productivity improvements, which offset the impact of the
    weak U.S. dollar/ Euro exchange rate, lower license income
    and antitrust related charges. The EBIT decline in the 2005
    financial year resulted primarily from a decline of average
    selling prices for DRAM products and the weak U.S. dollar/
    Euro exchange rate, as well as the increase in R&D expenses
    resulting from the acceleration of our technology development
    and the broadening of our product portfolio, which could not be
    entirely offset by productivity improvements and increasing
    license revenue.
|
| |  | Other Operating Segments  The EBIT losses in
    the 2003 and 2004 financial years mainly reflected
    investment-related impairment charges. EBIT in the 2005
    financial year was positively impacted by a gain of
    13 million
    realized on the sale of our venture capital activities.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Corporate and Reconciliation  The EBIT loss
    decreased in the 2004 financial year, principally reflecting
    reduced idle-capacity costs resulting from improved utilization.
    The EBIT deterioration in the 2005 financial year resulted
    primarily from restructuring charges
    of 78 million
    in connection with the planned phase-out of production at our
    Munich-Perlach facility and the restructuring of our fiber
    optics business.                                                                                                                                                                                                                                                                          

18



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##### Table of Contents

Interest Expense, NetWe derive interest income primarily from cash and cash
equivalents and marketable securities. Interest expense is
primarily attributable to bank loans and convertible notes, and
excludes interest capitalized on manufacturing facilities under
construction.

|                      |                |                                        |     |    |      |  |     |      |    |  |    |   |  
|--------------------- | -------------- | -------------------------------------- | --- | -- | ---- |  | --- | ---- | -- |  | -- | - | -
|                      |                | For the years ended September 30,      |    
|                      |                |                                        |    
|                      |                | 2003                                   |     |    | 2004 |  |     | 2005 |   
|                      |                |                                        |     |    |      |  |     |      |   
|                      |                | (Euro in millions, except percentages) |    
|Interest expense, net |                |                                        | (52 | )  |      |  | (41 | )    |    |  | (9 | )
|                      | % of net sales |                                        |     | (1 | )%   |  |     | (1   | )% |  |    | 0 | %






| |             
| | ------------
| | Income Taxes

|                   |                |                                        |     |    |      |  |      |      |    |  |      |    |   
|------------------ | -------------- | -------------------------------------- | --- | -- | ---- |  | ---- | ---- | -- |  | ---- | -- | --
|                   |                | For the years ended September 30,      |    
|                   |                |                                        |    
|                   |                | 2003                                   |     |    | 2004 |  |      | 2005 |   
|                   |                |                                        |     |    |      |  |      |      |   
|                   |                | (Euro in millions, except percentages) |    
|Income tax expense |                |                                        | (84 | )  |      |  | (154 | )    |    |  | (120 | ) 
|                   | % of net sales |                                        |     | (1 | )%   |  |      | (2   | )% |  |      | (2 | )%
|Effective tax rate |                |                                        | (24 | )% |      |  | 72   | %    |    |  | (63  | )%

  




| |                  
| | -----------------
| | Net Income (Loss)



19



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##### Table of Contents

Financial Condition

|                        |  |                                        |        |          |      |  |        |              |  |  |     |   
|----------------------- |  | -------------------------------------- | ------ | -------- | ---- |  | ------ | ------------ |  |  | --- | --
|                        |  | As of September 30, 2005               |       
|                        |  |                                        |       
|                        |  |                                        |        | % Change |     
|                        |  | 2004                                   |        |          | 2005 |  |        | year-on-year | 
|                        |  |                                        |        |          |      |  |        |              | 
|                        |  | (Euro in millions, except percentages) |       
|Current assets          |  |                                        | 5,292  |          |      |  | 4,574  |              |  |  | (14 | )%
|Non-current assets      |  |                                        | 5,572  |          |      |  | 5,710  |              |  |  | 3   | % 
|                        |  |                                        |        |          |      |  |        |              | 
|Total assets            |  |                                        | 10,864 |          |      |  | 10,284 |              |  |  | (5  | )%
|                        |  |                                        |        |          |      |  |        |              | 
|Current liabilities     |  |                                        | 2,870  |          |      |  | 2,382  |              |  |  | (17 | )%
|Non-current liabilities |  |                                        | 2,016  |          |      |  | 2,273  |              |  |  | 13  | % 
|                        |  |                                        |        |          |      |  |        |              | 
|Total liabilities       |  |                                        | 4,886  |          |      |  | 4,655  |              |  |  | (5  | )%
|                        |  |                                        |        |          |      |  |        |              | 
|Shareholders equity    |  |                                        | 5,978  |          |      |  | 5,629  |              |  |  | (6  | )%
|                        |  |                                        |        |          |      |  |        |              | 






   













Liquidity


Cash Flow






20



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##### Table of Contents

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.

|                                                                                 |  |                                   |        |   |      |  |        |      |  |  |       |  
|-------------------------------------------------------------------------------- |  | --------------------------------- | ------ | - | ---- |  | ------ | ---- |  |  | ----- | -
|                                                                                 |  | For the years ended September 30, |       
|                                                                                 |  |                                   |       
|                                                                                 |  | 2003                              |        |   | 2004 |  |        | 2005 | 
|                                                                                 |  |                                   |        |   |      |  |        |      | 
|                                                                                 |  | (Euro in millions)                |       
|Net cash provided by operating
    activities  continuing operations            |  |                                   | 731    |   |      |  | 1,857  |      |  |  | 1,039 |  
|Net cash used in investing
    activities                                        |  |                                   | (1,522 | ) |      |  | (1,809 | )    |  |  | (238  | )
|Net cash provided by (used in)
    financing activities                          |  |                                   | 566    |   |      |  | (402   | )    |  |  | (266  | )
|Net cash provided by (used in)
    operating activities  discontinued operation |  |                                   | (1     | ) |      |  |       |      |  |  |      |  
|Cash and cash equivalents at end of
    year                                     |  |                                   | 969    |   |      |  | 608    |      |  |  | 1,148 |  

     


   





Free Cash Flow




|                                                      |  |                                   |        |   |      |  |        |      |  |  |        |  
|----------------------------------------------------- |  | --------------------------------- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | -
|                                                      |  | For the years ended September 30, |       
|                                                      |  |                                   |       
|                                                      |  | 2003                              |        |   | 2004 |  |        | 2005 | 
|                                                      |  |                                   |        |   |      |  |        |      | 
|                                                      |  | (Euro in millions)                |       
|Net cash provided by operating
    activities  total |  |                                   | 730    |   |      |  | 1,857  |      |  |  | 1,039  |  
|Net cash used in investing
    activities             |  |                                   | (1,522 | ) |      |  | (1,809 | )    |  |  | (238   | )
|Purchases of marketable securities,
    net           |  |                                   | 739    |   |      |  | 158    |      |  |  | (1,082 | )
|                                                      |  |                                   |        |   |      |  |        |      | 
|Free cash flow                                        |  |                                   | (53    | ) |      |  | 206    |      |  |  | (281   | )
|                                                      |  |                                   |        |   |      |  |        |      | 

21



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##### Table of Contents

Net Cash Position

The following table presents our gross and net cash positions
and the maturity of debt. It is not intended to be a forecast of
cash available in future periods.

|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |      |     |  |  |     |    | 
|------------------------- | ------------------------------------------ | ---------------------- | ----- | ----- | ------ |  | ----- | ----- |  | --- | ----- | --- | --- | ----- | --- | --- | ----- |  | ----- | ------- |  |  | ---- | --- |  |  | --- | -- | 
|                          |                                            | Payments due by period |      
|                          |                                            |                        |      
|                          |                                            |                        |       | Less  |        |  |      
|As of September 30, 2005  |                                            |                        |       | than  |        |  | 1-2   |       |  | 2-3 |       |     | 3-4 |       |     | 4-5 |       |  | After |        
|                          |                                            | Total                  |       |       | 1 year |  |       | years |  |     | years |     |     | years |     |     | years |  |       | 5 years | 
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|                          |                                            | (Euro in millions)     |      
|Cash and cash equivalents |                                            |                        | 1,148 |       |        |  | 1,148 |       |  |     |      |     |     |       |    |     |       |  |      |         |  |  |     |     |  |  |    |   
|Marketable securities     |                                            |                        | 858   |       |        |  | 858   |       |  |     |      |     |     |       |    |     |       |  |      |         |  |  |     |     |  |  |    |   
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Gross cash position       |                                            |                        | 2,006 |       |        |  | 2,006 |       |  |     |      |     |     |       |    |     |       |  |      |         |  |  |     |     |  |  |    |   
|Less:                     |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |      |     |  |  |     |   
|                          | Long-term debt                             |                        |       | 1,566 |        |  |       |      |  |     |       | 650 |     |       |     | 51  |       |  |       | 64      |  |  |      | 733 |  |  |     | 68 | 
|                          | Short-term debt and current
    maturities |                        |       | 99    |        |  |       | 99    |  |     |       |    |     |       |     |    |       |  |       |        |  |  |      |    |  |  |     |   | 
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Total financial debt      |                                            |                        | 1,665 |       |        |  | 99    |       |  |     | 650   |     |     |       | 51  |     |       |  | 64    |         |  |  | 733  |     |  |  | 68  |   
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Net cash position         |                                            |                        | 341   |       |        |  | 1,907 |       |  |     | (650  | )   |     |       | (51 | )   |       |  | (64   | )       |  |  | (733 | )   |  |  | (68 | ) 
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 

  





 


   


   







Capital Requirements






| |   |                        
| | - | -----------------------
| |  | Finance our operations;

22



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##### Table of Contents


    Make scheduled debt payments;
    Settle contingencies if they occur; and
    Make planned capital expenditures.We can meet these requirements through:




    Cash flow generated from operations;
    Cash on hand and securities we can sell; and
    Available credit facilities.As of September 30, 2005, we require funds for the 2006
financial year
aggregating 1,618 million,
consisting
of 99 million
for short-term debt payments
and 1,519 million
for commitments. In addition, we may need up to
166 million for
currently known contingencies. We also plan to invest up to an
additional 700 million
in capital expenditures that have not been otherwise committed.
The aggregate capital required for such commitments,
contingencies and planned capital expenditures during the 2006
financial year
is 2,484 million
as of September 30, 2005. We have a gross cash position
of 2,006 million
as of September 30, 2005, and also the ability to draw
funds from available credit facilities
of 1,149 million.

As of September 30, 2005, we had debt
of 99 million
scheduled to become due within one year.





Commitments and Contingencies

|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |    |    |  |  |     |     | 
|------------------------------ | ----------------------------------- | --------------------------------- | ----- | ----- | ------ |  | ----- | ----- |  | --- | ----- | --- | --- | ----- | --- | --- | ----- |  | ----- | ------- |  |  | -- | -- |  |  | --- | --- | 
|                               |                                     | Payment due/expirations by period |      
|                               |                                     |                                   |      
|                               |                                     |                                   |       | Less  |        |  |      
|As of September 30, 2005(1)(2) |                                     |                                   |       | than  |        |  | 1-2   |       |  | 2-3 |       |     | 3-4 |       |     | 4-5 |       |  | After |        
|                               |                                     | Total                             |       |       | 1 year |  |       | years |  |     | years |     |     | years |     |     | years |  |       | 5 years | 
|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|                               |                                     | (Euro in millions)                |      
|Contractual commitments:       |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |    |    |  |  |     |    
|                               | Operating lease payments            |                                   |       | 850   |        |  |       | 94    |  |     |       | 71  |     |       |     | 61  |       |  |       | 56      |  |  |    | 54 |  |  |     | 514 | 
|                               | Unconditional purchase commitments  |                                   |       | 1,505 |        |  |       | 1,379 |  |     |       | 45  |     |       |     | 24  |       |  |       | 9       |  |  |    | 9  |  |  |     | 39  | 
|                               | Other long-term commitments         |                                   |       | 138   |        |  |       | 46    |  |     |       | 46  |     |       |     | 46  |       |  |       |        |  |  |    |   |  |  |     |    | 
|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Total commitments              |                                     |                                   | 2,493 |       |        |  | 1,519 |       |  |     | 162   |     |     |       | 131 |     |       |  | 65    |         |  |  | 63 |    |  |  | 553 |    
|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Other contingencies:           |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |    |    |  |  |     |    
|                               | Guarantees                          |                                   |       | 462   |        |  |       | 99    |  |     |       | 204 |     |       |     | 23  |       |  |       | 5       |  |  |    |   |  |  |     | 131 | 
|                               | Contingent government
    grants(3) |                                   |       | 516   |        |  |       | 67    |  |     |       | 101 |     |       |     | 128 |       |  |       | 42      |  |  |    | 55 |  |  |     | 123 | 
|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Total contingencies            |                                     |                                   | 978   |       |        |  | 166   |       |  |     | 305   |     |     |       | 151 |     |       |  | 47    |         |  |  | 55 |    |  |  | 254 |    
|                               |                                     |                                   |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 





|    |                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain payments of obligations or expiration of commitments
    that are based on the achievement of milestones or other events
    that are not date-certain are included for purposes of this
    table, based on our estimate of the reasonably likely timing of
    payments or expirations in each particular case. Actual outcomes
    could differ from those estimates.     
|   
|(2) | Product purchase commitments associated with capacity
    reservation agreements are not included in this table, since the
    purchase prices are based, in part, on future market prices, and
    are accordingly not quantifiable at September 30, 2005.
    Purchases under these agreements aggregated approximately
    950 million for
    the year ended September 30, 2005.
|   
|(3) | Contingent government grants refer to amounts previously
    received, related to the construction and financing of certain
    production facilities, which are not guaranteed otherwise and
    could be refundable if the total project requirements are not
    met.                                                                                                             

23



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##### Table of Contents

Capital Expenditures

|                |  |                                   |     |  |      |  |       |      |  |  |       | 
|--------------- |  | --------------------------------- | --- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                |  | For the years ended September 30, |    
|                |  |                                   |    
|                |  | 2003                              |     |  | 2004 |  |       | 2005 | 
|                |  |                                   |     |  |      |  |       |      | 
|                |  | (Euro in millions)                |    
|Memory products |  |                                   | 576 |  |      |  | 716   |      |  |  | 921   | 
|Logic products  |  |                                   | 296 |  |      |  | 447   |      |  |  | 447   | 
|                |  |                                   |     |  |      |  |       |      | 
|Total           |  |                                   | 872 |  |      |  | 1,163 |      |  |  | 1,368 | 
|                |  |                                   |     |  |      |  |       |      | 

  


Credit Facilities


 


|             |  |                        |       |                                  |  |                          |     |  |       |  |       |           |  |  |     | 
|------------ |  | ---------------------- | ----- | -------------------------------- |  | ------------------------ | --- |  | ----- |  | ----- | --------- |  |  | --- | 
|             |  |                        |       |                                  |  | As of September 30, 2005 |    
|             |  |                        |       |                                  |  |                          |    
|             |  | Nature of financial    |       |                                  |  | Aggregate                |     |  |      
|Term         |  | institution commitment |       | Purpose/intended use             |  | facility                 |     |  | Drawn |  |       | Available | 
|             |  |                        |       |                                  |  |                          |     |  |       |  |       |           | 
|             |  |                        |       |                                  |  | (Euro in millions)       |    
|short-term   |  | firm commitment        |       | working capital, guarantees      |  |                          | 120 |  |       |  | 51    |           |  |  | 69  | 
|short-term   |  | no firm commitment     |       | working capital, cash management |  |                          | 305 |  |       |  |      |           |  |  | 305 | 
|long-term    |  | firm commitment        |       | working capital                  |  |                          | 731 |  |       |  |      |           |  |  | 731 | 
|long-term(1) |  | firm commitment        |       | project finance                  |  |                          | 335 |  |       |  | 291   |           |  |  | 44  | 
|             |  |                        |       |                                  |  |                          |     |  |       |  |       |           | 
|Total        |  |                        | 1,491 |                                  |  |                          | 342 |  |       |  | 1,149 |          
|             |  |                        |       |                                  |  |                          |     |  |      



|    |                              
|--- | -----------------------------
|(1) | Including current maturities.

 


 


24



---



##### Table of Contents

At September 30, 2005, we were in compliance with our debt
covenants under the relevant facilities.

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
debt or equity securities. We have also applied for governmental
subsidies in connection with certain capital expenditure
projects, but can provide no assurance that such subsidies will
be granted on a timely basis or at all. We can provide no
assurance 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.

Taking into consideration the financial resources available to
us, including our internally generated funds and currently
available banking facilities, we believe that we will be in a
position to fund our capital requirements in the 2006 financial
year.

Pension Plan Funding

Our companys projected benefit obligation, which considers
future compensation increases, amounted to
477 million at
September 30, 2005, compared to
349 million at
September 30, 2004. The fair value of plan assets as of
September 30, 2005 was
243 million,
compared to
204 million as of
September 30, 2004.

We have estimated the return on plan assets for the next
financial year to be 6.5% or
14 million for
domestic plans and 6.7% or
2 million for
foreign plans. The actual return on plan assets between the last
measurement dates amounted to 10.9% or
19 million for
domestic plans and 6.7% or
2 million for
foreign plans, compared to the expected return on plan assets
for that period of 7.3% for domestic plans and 6.9% for foreign
plans.

At September 30, 2004 and 2005, the combined funding status
of our pension plans reflected an underfunding of
145 million and
234 million,
respectively. The company expects that contributions to its
pension plans during the year ending September 30, 2006,
would significantly exceed the level of contributions made
during the year ended September 30, 2005.

Our investment approach with respect to the pension plans
involves employing a sufficient level of flexibility to capture
investment opportunities as they occur, while maintaining
reasonable parameters to ensure that prudence and care are
exercised in the execution of the investment program. The
pension plans assets are invested with several investment
managers. The plans employ a mix of active and passive
investment management programs. Considering the duration of the
underlying liabilities, a portfolio of investments of plan
assets in equity securities, debt securities and other assets is
targeted to maximize the long-term return on plan assets for a
given level of risk. Investment risk is monitored on an ongoing
basis through periodic portfolio reviews, meetings with
investment managers and liability measurements. Investment
policies and strategies are periodically reviewed to ensure the
objectives of the plans are met considering any changes in
benefit plan design, market conditions or other material items.

Our asset allocation targets for pension plan assets are based
on our assessment of business and financial conditions,
demographic and actuarial data, funding characteristics, related
risk factors, market sensitivity analyses and other relevant
factors. The overall allocation is expected to help protect the
plans level of funding while generating sufficiently
stable real returns (i.e., net of inflation) to meet current and
future benefit payment needs. Due to active portfolio
management, the asset allocation may differ from the target
allocation up to certain limits. As a matter of policy, our
pension plans do not invest in our company shares.

25



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##### Table of Contents

Other Matters





Employees

The following table indicates the composition of our workforce
by function and region at the end of the financial years
indicated.

|          |                        |                     |  |        |      |  |  |        |  |  |  |        | 
|--------- | ---------------------- | ------------------- |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|          |                        | As of September 30, | 
|          |                        |                     | 
|          |                        | 2003                |  |        | 2004 |  |  | 2005   | 
|          |                        |                     |  |        |      |  |  |        | 
|Function: |                        |                     |  |        |      |  |  |        |  |  |  |       
|          | Production             |                     |  | 22,405 |      |  |  | 24,540 |  |  |  | 25,114 | 
|          | Research & Development |                     |  | 5,935  |      |  |  | 7,160  |  |  |  | 7,401  | 
|          | Sales & Marketing      |                     |  | 2,048  |      |  |  | 1,948  |  |  |  | 2,016  | 
|          | Administrative         |                     |  | 1,920  |      |  |  | 1,922  |  |  |  | 1,909  | 
|          |                        |                     |  |        |      |  |  |        | 
|          | Total                  |                     |  | 32,308 |      |  |  | 35,570 |  |  |  | 36,440 | 
|          |                        |                     |  |        |      |  |  |        | 
|Region:   |                        |                     |  |        |      |  |  |        |  |  |  |       
|          | Germany                |                     |  | 16,166 |      |  |  | 16,387 |  |  |  | 16,119 | 
|          | Europe                 |                     |  | 5,034  |      |  |  | 5,631  |  |  |  | 5,482  | 
|          | North America          |                     |  | 2,757  |      |  |  | 2,982  |  |  |  | 3,193  | 
|          | Asia/Pacific           |                     |  | 8,116  |      |  |  | 10,340 |  |  |  | 11,451 | 
|          | Japan                  |                     |  | 118    |      |  |  | 133    |  |  |  | 158    | 
|          | Other                  |                     |  | 117    |      |  |  | 97     |  |  |  | 37     | 
|          |                        |                     |  |        |      |  |  |        | 
|          | Total                  |                     |  | 32,308 |      |  |  | 35,570 |  |  |  | 36,440 | 
|          |                        |                     |  |        |      |  |  |        | 



Campeon




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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. We establish reserves for
sales discounts, price protection allowances and product returns
based upon our evaluation of a variety of factors, including
industry demand. This process requires the exercise of
substantial judgments in evaluating the above-mentioned factors
and requires material estimates, including forecasted demand,
returns and industry pricing assumptions.

In future periods, we may decide to accrue additional provisions
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 or other 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, any new licensing
arrangements may include capacity reservation agreements with
the licensee. Such transactions could represent multiple element
arrangements pursuant to SEC Staff Accounting Bulletin
(SAB) 104, Revenue
Recognition, and Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Elements. The process of
determining the appropriate revenue recognition in such
transactions is highly complex and requires significant
judgment, which includes evaluating material estimates in the
determination of fair value and the level of our 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 2005 financial year, we spent
1,368 million to
purchase property, plant and equipment. At September 30,
2005, the carrying value of our property, plant and equipment
was
3,751 million. We
have acquired other businesses, which resulted in the generation
of significant amounts of long-lived intangible assets,
including goodwill. At September 30, 2005 we had long-lived
intangible assets of
315 million.

We adopted the provisions of Financial Accounting Standards
Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, as of
October 1, 2001. 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 circumstances 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

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the fair value of the assets. Estimated fair value is generally
based on either appraised value or discounted estimated future
cash flows. Considerable management judgment is necessary to
estimate discounted future cash flows.

We tested goodwill for impairment pursuant to
SFAS No. 142 and recognized impairment charges of
71 million and
18 million during
the years ended September 30, 2004 and 2005, respectively.
The goodwill impairment charges in the 2004 financial year
related primarily to goodwill arising from our acquisition of
Catamaran in 2001, while the impairment charges in the 2005
financial year related primarily to our acquisition of ADMtek in
2004.

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 DDR DRAM fluctuated
from $4.00 at January 26, 2005 to $2.42 at March 30,
2005.

As a matter of policy, we value inventory at the lower of cost
or market price. We review the recoverability of inventory based
on regular monitoring of the size and composition of 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. At September 30, 2005, total inventory was
1,022 million.

In future periods, 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) technological obsolescence due to rapid
developments of new products and technological improvements, or
(3) 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 and related products. At
September 30, 2005, the carrying value of our long-term
investments totaled
779 million.

Our accounting policy is to record an impairment of investments
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 for a period of time sufficient to allow
for any anticipated recovery in market value. We recognized
impairment charges of
29 million during
the 2005 financial year as a result of such impairment tests.

At September 30, 2005, our two most significant long-term
investments were our investments in ALTIS, which is a joint
venture with IBM, and Inotera, which is a joint venture with
Nanya.

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.

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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, 2005, total net deferred tax assets were
593 million.
Included in this amount are the tax benefits of net operating
loss and credit carry-forwards of approximately
325 million, net
of the valuation allowance. These tax loss and credit
carry-forwards generally do not expire under current law.

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, 2005, 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 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 increased the
deferred tax asset valuation allowance in the 2004 and 2005
financial years by
54 million and
192 million,
respectively, in order 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. We expect to continue to recognize low
levels of deferred tax benefits in the 2006 financial year,
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.

Purchase Accounting

We have acquired other businesses, including SensoNor in the
2003 financial year, ADMtek in the 2004 financial year and the
remaining 30 percent share in the Infineon Technologies
Flash joint venture during the 2005 financial year. These
acquisitions resulted in aggregate in-process research and
development costs of
15 million that
were immediately recorded 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 allocation of
the purchase price 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.

Pension Plan Accounting

Our pension benefit costs are determined in accordance with
actuarial computations using the projected-unit-credit method,
which rely on assumptions including discount rates and expected
return on plan assets. Discount rates are established based on
prevailing market rates for high-quality fixed-income
instruments that, if the pension benefit obligation were settled
at the measurement date, would

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provide the necessary future cash flows to pay the benefit
obligation when due. The expected return on plan assets
assumption is determined on a uniform basis, considering
long-term historical returns, asset allocation, and future
estimates of long-term investment returns. Other key assumptions
for our pension costs are based on current market conditions. A
significant variation in one or more of these underlying
assumptions could have a material effect on the measurement of
our long-term obligation.

We account for our pension-benefit liabilities and related
postretirement benefit costs pursuant SFAS No. 87
Employers Accounting for Pensions. We
offer defined benefit pension plans, which generally specify the
amount of pension benefit that each employee will receive for
services performed during a specified period of employment. The
amount of the employers periodic contribution to a defined
benefit pension plan is based on the total pension benefits that
could be earned by all eligible participants.

If our total contribution to our pension plans for the period is
not equal to the amount of net periodic pension cost as
determined by the provisions of SFAS No. 87, we recognize
the difference either as a liability or as an asset.

Consolidated Balance Sheets.Defined benefit plans
determine the entitlements of their beneficiaries. The net
present value of the total fixed benefits for service already
rendered is represented by the actuarially calculated
accumulated benefit obligation (ABO).

An employees final benefit entitlement at regular
retirement age may be higher than the fixed benefits at the
measurement date due to future compensation or benefits
increases. The net present value of this ultimate future benefit
entitlement for service already rendered is represented by the
projected benefit obligation (PBO), which is
actuarially calculated with consideration for future
compensation increases.

The pension liabilities are equal to the PBO when the
assumptions used to calculate the PBO such as discount rate,
compensation increase rate and projected future pension
increases are achieved. In the case of funded plans, the market
value of the external assets is offset against the benefit
obligations. The net liability or asset recorded on the
consolidated balance sheets is equal to the under- or
overfunding of the PBO in this case, when the expected return on
plan assets is subsequently realized.

Differences between actual experience and assumptions made for
the compensation increase rate and projected future pension
increases, as well as the differences between actual and
expected returns on plan assets, result in the asset or
liability related to pension plans being different than the
under-or overfunding of the PBO. Such a difference also occurs
when the assumptions used to value the PBO are adjusted at the
measurement date. If the difference is so significant that the
current benefit obligation represented by the ABO (or the amount
thereof not funded by plan assets) exceeds the liability
recorded on the balance sheet, such liability must be increased.
The unfunded portion of the ABO is referred to as the minimum
pension liability and an accrued pension liability that is at
least equal to this minimum pension liability amount should be
recognized without affecting the consolidated statements of
operations. The required increase in the liability is referred
to as the additional minimum pension liability and its
offsetting adjustment results in the recognition of either an
intangible asset or as a component of shareholders equity.
The treatment as a separate component of shareholders
equity is recorded, net of tax, as a reduction of
shareholders equity. The recognition of the minimum
pension liability results in the elimination of any existing
prepaid pension asset balance on a plan-by-plan basis.

Consolidated Statements of Operations.The
recognized expense related to pension plans and similar
commitments in the consolidated statements of operations is
referred to as net periodic pension cost (NPPC) and
consists of several separately calculated and presented
components, including service cost, which is the actuarial net
present value of the part of the PBO for the service rendered in
the respective financial year; the interest cost for the expense
derived from the addition of accrued interest on the PBO at the
end of the preceding financial year on the basis of the
identified discount rate; and the expected return on plan assets
in the case of funded benefit plans. Actuarial gains and losses,
resulting for example from an adjustment of the discount rate,
and asset gains and losses, resulting

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from a deviation of actual and expected return on plan assets,
are not recognized in the consolidated statements of operations
as they occur. Unrecognized gains or losses are included in the
net pension cost for the year if, as of the beginning of the
year, the unrecognized net gains or losses exceed 10% of the
greater of the projected benefit obligation or the market value
of the plan assets. The amortization is the excess divided by
the average remaining service period of active employees
expected to receive benefits under the plan.

In the consolidated statements of operations, NPPC is allocated
among functional costs (cost of sales, research and development
expenses, selling and general administrative expenses),
according to the function of the employee groups accruing
benefits.

In the consolidated statements of operations, NPPC expenses
before income taxes for our pension plans for the financial
years ended September 30, 2003, 2004 and 2005, accumulated
to 27 million,
28 million and
28 million,
respectively.

The consolidated balance sheets include the following
significant components related to pension plans and similar
commitments based upon the situation at:

|                                                                |  |                     |     |  |      |  |     |  
|--------------------------------------------------------------- |  | ------------------- | --- |  | ---- |  | --- | -
|                                                                |  | As of September 30, |    
|                                                                |  |                     |    
|                                                                |  | 2004                |     |  | 2005 | 
|                                                                |  |                     |     |  |      | 
|                                                                |  | (Euro in millions)  |    
|Accumulated other comprehensive
    income                      |  |                     |    |  |      |  | 85  |  
|Less income tax effect                                          |  |                     |    |  |      |  | (1  | )
|                                                                |  |                     |     |  |      | 
|Accumulated other comprehensive
    income, net of income taxes |  |                     |    |  |      |  | 84  |  
|                                                                |  |                     |     |  |      | 
|Accrued pension liabilities                                     |  |                     | 104 |  |      |  | 162 |  

Consolidated Statements of Cash Flows.


  


Pension benefits  Sensitivity Analysis.


|                                               |  |                                      |      |  |                |  |    |  
|---------------------------------------------- |  | ------------------------------------ | ---- |  | -------------- |  | -- | -
|                                               |  | Effect on net periodic pension costs |     
|                                               |  |                                      |     
|                                               |  | One percentage                       |      |  | One percentage | 
|                                               |  | increase                             |      |  | decrease       | 
|                                               |  |                                      |      |  |                | 
|                                               |  | (Euro in millions)                   |     
|Discount rate                                  |  |                                      | (12) |  |                |  | 16 |  
|Rate of compensation increase                  |  |                                      | 9    |  |                |  | (9 | )
|Rate of projected future pension
    increases |  |                                      | 10   |  |                |  | (9 | )
|Expected return on plan assets                 |  |                                      | (2)  |  |                |  | 2  |  





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Contingencies

We are subject to various legal actions and claims, including
intellectual property matters, that arise in the normal course
of business.

On September 15, 2004 we entered into a plea agreement with
the U.S. Department of Justice in connection with its
ongoing investigations of alleged antitrust violations in the
DRAM industry. We agreed to pay a fine of $160 million over
a five-year period. We are also subject to similar
investigations by the European Commission and the Canadian
Competition Bureau. 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, including accruals for significant litigation
costs, 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. Where the
estimated amount of loss is within a range of amounts and no
amount within the range is a better estimate than any other
amount or the range cannot be estimated, the minimum amount is
accrued. 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.

International Financial Reporting Standards (IFRS)

Pursuant to a regulation of the European Union (the
EU), we will be required to report our consolidated
financial statements in accordance with International Financial
Reporting Standards (IFRS, formerly known as
International Accounting Standards) no later than with effect
from October 1, 2007.

We are in the process of determining the impact of adopting IFRS
with regard to:




    The analysis of key differences between IFRS and U.S. GAAP;
    The changes in disclosure requirements;
    The effect of new reporting requirements on previously reported
    figures and future results; and
    The impact on current business and procedures.The objective of this process is to identify and establish
accounting policies and practices that give a true and fair view
of our company and its results of operations in accordance with
IFRS.

We are not yet able to provide a quantitative analysis of the
impact that the adoption of IFRS would have on our consolidated
financial statements. The ultimate impact of adopting IFRS is
further affected by the future issuance of final versions of
IFRS standards that currently have draft status, and the degree
of convergence achieved between U.S. GAAP and IFRS by the
date of adoption. We expect to be able to meet the timetable set
by the EU.









Qualitative and Quantitative Disclosure about Market Risk

The following discussion should be read in conjunction with
Notes 2, 30 and 31 to our consolidated financial statements.

Commodity Price Risk

A significant portion of our business, primarily the sales of
our Memory Products segment, is exposed to fluctuations in DRAM
market prices. DRAM is a highly standardized product and the
sales price responds to market forces in a way similar to that
of other commodities. DRAM price volatility can be extreme and
has resulted in significant fluctuations within relatively short
time-frames. We attempt to

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mitigate the effects of volatility by continually improving our
cost position, by entering into new strategic partnerships and
by focusing our product portfolio on application-specific
products that are subject to less volatility, such as high-end
GraphicsRAM.

We are also 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 (including
the use of multiple sources, where possible) and our operating
procedures. We do not utilize derivative financial instruments
to manage any remaining exposure to fluctuations in commodity
prices.

Foreign Exchange and Interest Risk

Although we prepare our consolidated financial statements in
euro, major portions of our sales volumes as well as costs
relating to the design, production and manufacturing of products
are denominated in U.S. dollars. Our activities in markets
around the world create cash flows in a number of different
currencies. Exchange rate fluctuations may have substantial
effects on our sales, our costs and our overall results of
operations.

The table below provides information about our derivative
financial instruments that are sensitive to changes in foreign
currency exchange and interest rates as of September 30,
2005. 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, 2005, our foreign currency
forward contracts and currency options mainly had terms up to
one year. Our cross-currency interest rate swap expires in
December 2005 and our interest rate swaps expire in 2007, 2008
and 2015. We do not enter into derivatives for trading or
speculative purposes.

Derivative Financial
Instruments(1)

|                                    |                     |                    |       |             |               |  |                    |               |  |  |    |     |  
|----------------------------------- | ------------------- | ------------------ | ----- | ----------- | ------------- |  | ------------------ | ------------- |  |  | -- | --- | -
|                                    |                     |                    |       | Average     |               |  |                   
|                                    |                     |                    |       | contractual |               |  | Fair value         |              
|                                    |                     | Contract amount    |       |             | forward       |  |                    | September 30, | 
|                                    |                     | buy/(sell)         |       |             | exchange rate |  |                    | 2005          | 
|                                    |                     |                    |       |             |               |  |                    |               | 
|                                    |                     | (Euro in millions) |       |             |               |  | (Euro in millions) |              
|Foreign currency forward contracts: |                     |                    |       |             |               |  |                    |               |  |  |    |    
|                                    | U.S. dollar         |                    |       | 195         |               |  |                    | 1.27438       |  |  |    | 4   |  
|                                    | U.S. dollar         |                    |       | (838        | )             |  |                    | 1.24186       |  |  |    | (20 | )
|                                    | Japanese yen        |                    |       | 42          |               |  |                    | 136.74168     |  |  |    |    |  
|                                    | Japanese yen        |                    |       | (9          | )             |  |                    | 137.11000     |  |  |    |    |  
|                                    | Singapore dollar    |                    |       | 23          |               |  |                    | 2.04993       |  |  |    |    |  
|                                    | Singapore dollar    |                    |       | (2          | )             |  |                    | 2.03986       |  |  |    |    |  
|                                    | Great Britain pound |                    |       | 5           |               |  |                    | 0.68720       |  |  |    |    |  
|                                    | Czech Koruna        |                    |       | 1           |               |  |                    | 29.35610      |  |  |    |    |  
|                                    | Malaysian Ringgit   |                    |       | 32          |               |  |                    | 4.62775       |  |  |    | 1   |  
|                                    | Other currencies    |                    |       | 23          |               |  |                    |              |  |  |    | (1  | )
|Currency options:                   |                     |                    |       |             |               |  |                    |               |  |  |    |    
|                                    | U.S. dollar         |                    |       | 522         |               |  |                    | 1.20670       |  |  |    | 3   |  
|                                    | U.S. dollar         |                    |       | (527        | )             |  |                    | 1.19493       |  |  |    | (21 | )
|Cross-currency interest rate swap:  |                     |                    |       |             |               |  |                    |               |  |  |    |    
|                                    | U.S. dollar         |                    |       | 389         |               |  |                    | 1.15000       |  |  |    | 21  |  
|Interest rate swaps                 |                     |                    | 1,442 |             |               |  | n/a                |               |  |  | 14 |    
|Other                               |                     |                    | 259   |             |               |  | n/a                |               |  |  | (2 | )  
|                                    |                     |                    |       |             |               |  |                    |               | 
|Fair value, net                     |                     |                    |       |             |               |  |                    |               |  |  | (1 | )  
|                                    |                     |                    |       |             |               |  |                    |               | 



|    |                                                                                        
|--- | ---------------------------------------------------------------------------------------
|(1) | Euro equivalent, in millions except for average contractual
    forward exchange rates.

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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 generally not considered
hedges under SFAS No. 133. Under our economic hedging
strategy we report derivatives at fair value in our consolidated
financial statements, with changes in fair values recorded in
earnings.

In the 2005 financial year foreign exchange transaction gains
were 45 million
and were partially offset by losses from our economic hedge
transactions of
24 million,
resulting in net gain of
21 million. This
compares to foreign exchange losses of
62 million,
offset by hedging gains of
47 million,
resulting in net losses of
15 million in the
2004 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 effect on profitability in the 2003, 2004 and 2005
financial years.

Interest Rate Risk

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, we keep a substantial amount of cash
and marketable securities. These assets are mainly invested in
instruments with contractual maturities ranging from three to
twelve months, bearing interest at short-term rates. To reduce
the risk caused by changes in market interest rates, we attempt
to align the duration of the interest rates of our debts and
current assets by the use of interest rate derivatives.

Fluctuating interest rates have an impact on parts of both our
marketable securities as well as our debt obligations and
standby lines of credit. We make use of derivative instruments
such as interest rate swaps to hedge against adverse interest
rate developments. We have entered into interest rate swap
agreements that mainly convert the fixed interest rate on our
convertible bonds to a variable interest rate based on the
relevant European Interbank Offering Rate (EURIBOR).

During the 2005 financial year we de-designated interest rate
swap agreements with a notional amount of
500 million from
a fair value hedge of
500 million of
our convertible notes due 2007.









Subsequent Events

In November 2005, our Supervisory Board approved a plan to
transfer the assets and liabilities of our Memory Products
segment into a separate, wholly owned subsidiary of our company
(this drop-down of assets and liabilities, or
Teilbetrieb, is known as an Ausgliederung under
German law).





Outlook

Industry experts forecast mid-single-digit growth for the
worldwide semiconductor market in the 2006 calendar year. For
the 2006 financial year, we expect to develop at least in line
with the market. In our Automotive, Industrial and Multimarket
segment, we anticipate further growth due to increasing demand
for electronics in cars, power conversion and energy-saving
technologies. In addition, we

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expect further business opportunities in the Communication
segment, mainly due to our capability in radio frequency
technologies. In our Memory Products segment, we will continue
to focus our portfolio on higher margin growth businesses.

In the first quarter of the 2006 financial year, we expect
revenues to increase slightly compared to the fourth quarter of
the 2005 financial year. We will continue to phase-out the
production at Munich-Perlach, to build the new production site
in Kulim, Malaysia, and to ramp-up the 300-millimeter production
facility in Richmond. In addition, in the first quarter of the
2006 financial year we will begin to recognize stock-based
compensation expense in our consolidated statement of operations.

In November 2005, our Supervisory Board approved a plan to
separate the memory products business and to form a wholly owned
subsidiary of our Company effective July 1, 2006. It is the
preferred plan of our management to subsequently move towards a
public offering of shares in this business.

For the first quarter of the 2006 financial year, we anticipate
the following with respect to our three operating segments:




    In our Automotive, Industrial and Multimarket segment, we expect
    revenues and EBIT to increase slightly in the automotive and
    industrial business in the first quarter of the 2006 financial
    year compared to the fourth quarter of the 2005 financial year,
    despite annual price reductions at major customers that take
    effect for the first time in the first quarter of the 2006
    financial year. We anticipate revenues and EBIT in the security
    and chip-card business to remain under pressure, but expect the
    trend to reverse beginning with the second quarter of the 2006
    financial year, due to the cost reduction measures put in place.
    In the overall Automotive, Industrial and Multimarket segment,
    we expect revenues to increase slightly and EBIT margin to
    remain stable compared to the fourth quarter of the 2005
    financial year, despite the mentioned price reductions, the
    anticipated expenses in connection with the planned phase-out of
    production at Munich-Perlach and expenses for the new production
    site in Kulim, Malaysia.
    In the first quarter of the 2006 financial year, we expect
    revenues in our Communication segment to remain stable compared
    to the fourth quarter of the 2005 financial year. We anticipate
    the segments EBIT loss to stay in the range of the EBIT
    loss in the fourth quarter of the 2005 financial year.
    In our Memory Products segment, we expect seasonal strength in
    demand for computers to drive bit-growth in the DRAM market in
    the first quarter of the 2006 financial year. On the supply
    side, capacity and productivity in the industry are expected to
    grow, offset only partially by capacity shifts to non-DRAM
    products by some of our competitors. This, coupled with pricing
    pressure and uncertainties regarding chipset availability in the
    PC segment, makes price development difficult to predict. We
    expect to further grow our bit production based on additional
    capacities at our joint venture Inotera and our 300-millimeter
    production facility in Richmond. We continue to focus our
    portfolio on higher margin growth businesses, including
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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. The markets for memory products
have been especially volatile.

According to WSTS, worldwide sales of all semiconductor products
have fluctuated significantly over the past calendar years.
Sales decreased in 1996, 1998 and 2001, with a decrease of
approximately 32 percent in 2001. Sales grew by
1 percent in 2002 and a further 18 percent in 2003 and
28 percent in 2004 with expected growth of 7 percent
for the full calendar year 2005. Recent growth has, however, so
far been accompanied by downward price pressure in some of our
businesses, especially for automotive, chip card and
communication devices.

There can be no assurance that the market will continue to grow
in the near term or that the growth rates experienced in recent
past periods will be attainable again in the coming years.

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

Both semiconductor companies with their own manufacturing
facilities and semiconductor foundries, which 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.

According to WSTS market data, during the first nine months of
the 2005 calendar year, the average selling price for DRAM
decreased by approximately 37 percent compared to the same
period in 2004. Downturns in the industry, including the most
recent severe downturn period of 2001-2002, have severely hurt
the profitability of the 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.

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

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us only on unfavorable terms and conditions. Litigation, which
could require significant 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.
Lawsuits may have a material adverse effect on our business. We
may be forced either to stop producing substantially all or some
of our products or to license the underlying technology upon
economically unfavorable terms and conditions, and possibly to
pay damages for prior use of third party intellectual property.
See Business  Legal Matters for a more
detailed description of the current claims and 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, 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, such as in
the 2003 and 2004 financial years. We therefore experience lower
levels of backlog during such downturns, which makes it more
difficult to forecast production levels and revenues.

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 underutilization of our facilities. This
may also in the future result in write-offs of inventories and
losses on products for which demand is lower than current
forecasts may indicate.

During periods of increased demand we may not have sufficient
capacity to meet customer orders. Such constraints affect our
customers ability to deliver products in accordance with
their planned manufacturing schedules, making relationships with
affected customers difficult.

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, which resulted
in high costs. We have also purchased an increasing number of
processed wafers from semiconductor foundries to meet higher
levels of demand and have incurred higher cost of goods sold 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 as a
result of such problems we may on occasion not be able to
deliver products on time or in a cost-effective, competitive
manner.

We cannot foresee and prepare for every contingency. 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.

Increasing our production capacity to reduce our exposure to
potential production interruptions would increase our fixed
costs. If the demand for our products does not increase
proportionally to the increase in production capacity, our
operating results could be harmed.

We 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.

On October 25, 2005 a labor strike was declared by the
local union at our manufacturing site in Munich-Perlach. This
strike was a reaction to our decision to ramp down this
production site in 2007, as

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our manufacturing activities there are no longer economically
viable. We and the union reached an agreement on
October 31, 2005 and the strike came to an end. A prolonged
strike at this or any other of our production locations would
negatively impact our results of operations and our capabilities
to respond to customer requirements, which may limit our future
ability to develop business opportunities.

Our business could suffer due to the volume of demand of
our customers

We face significant volume risk particularly in our
Communication segment. The fast change in technology in
combination with execution risks in individual projects can lead
to a decrease in the volume of demand which potentially could
result in the loss of a customer relationship. In addition, we
face high price pressure and high margin pressure in this
segment. Our sales volume highly depends on the market success
of our customers. In addition, our sales volume can be
influenced by changes in the competitive landscape of our
customers.

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 are not able to 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
1,522 million in
the 2003 financial year,
1,809 million in
the 2004 financial year and
238 million in
the 2005 financial year. Our research and development expenses
were
1,089 million in
the 2003 financial year,
1,219 million in
the 2004 financial year and
1,293 million in
the 2005 financial year. We increased our capital expenditures
in the 2004 financial year by 33 percent to
1,163 million and
in the 2005 financial year by a further 18 percent to
1,368 million. We
intend to continue to invest heavily in research and development
and manufacturing facilities, while continuing our 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 have
ramped up production of a 300-millimeter manufacturing facility
for memory products using the most modern technology available.

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
necessary capital expenditures and finance necessary research
and development endeavors.

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Our business could suffer if we are not able to secure the
development of new technologies or if we cannot keep pace with
the technology development of our competition

The semiconductor industry is characterized by rapid
technological changes. New process technologies using smaller
feature sizes and offering better performance characteristics
are introduced every one to two years. The introduction of new
technologies allows us to increase the functions per chip while
at the same time optimizing performance parameters, such as
decreasing power consumption or increasing processing speed. In
addition, the reduction of feature sizes allows us to produce
smaller chips offering the same functionality and thereby
considerably reduce the costs per function. In order to remain
competitive, it is essential that we secure the capabilities to
develop and qualify new technologies for the manufacturing of
new products. If we are unable to secure our capabilities to
develop and qualify new technologies and products, our business
may suffer.

The Siemens group continues to be one of our largest
customer and our results could suffer if it were to reduce its
level of purchases from us

In the 2003, 2004 and 2005 financial years 13 percent,
13 percent and 12 percent, respectively, of our net
sales resulted from direct sales to the Siemens group. Even
though the mobile phone division of Siemens was sold to BenQ
Corporation, a Taiwanese company during 2005, we still expect
the Siemens group to continue to be one of our largest
customers, although we expect that overall sales volumes with
Siemens will significantly decline due to the sale of this
division. Our results could be harmed if the Siemens group
purchases less 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 our business could
be harmed if our alliances with them were to be
terminated

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 or change
their business strategies, they may no longer be able or willing
to participate in these alliances. Some of the agreements
governing our strategic alliances allow our partners to
terminate the agreement if our equity ownership changes so that
a third party 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 or if the alliance were to
otherwise terminate.

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

We operate globally, with numerous manufacturing, assembly and
testing facilities on three continents, including four that we
operate jointly with partners. In the 2005 financial year,
80 percent of our revenues were generated outside Germany
and 62 percent were generated outside Europe. Our business
is therefore subject to risks involved in international
business, including:




    negative economic developments in foreign economies and
    instability of foreign governments, including the threat of war,
    terrorist attacks, epidemic or civil unrest;
    changes in laws and policies affecting trade and
    investment; and
    varying practices of the regulatory, tax, judicial and
    administrative bodies in the jurisdictions where we operate.Substantial changes in any of these conditions could have an
adverse effect on our business and results of operations. For
example the worldwide economic downturn from 2001 to 2003
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.

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Threats of pandemics, such as SARS or the avain flu, within
regions where we have manufacturing sites may have negative
effects on our operations as this may influence the resilience
of our workforce and the ability to maintain production as well
as the capabilities of local suppliers to provide adequate goods
and services. Furthermore, the purchasing patterns of our
customers located in these regions may suffer if there is an
epidemic outbreak. This could negatively impact our operations.

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 or
the Japanese yen. Many of our receivables are denominated in
U.S. dollars, while our payables are denominated to a
lesser extend in euro. In addition, the balance sheet impact of
currency translation adjustments has been, and may continue to
be, material.

We had foreign currency derivative and transaction losses of
32 million in the
2003 financial year and
15 million in the
2004 financial year. In the 2005 financial year, foreign
currency derivative and transaction gains totaled
21 million. Since
its introduction in 1999, the euro has fluctuated in value
against the U.S. dollar, ranging from a high of
1.00 = $1.3625 in
December 2004 to a low of
1.00 = $0.8252 in
October 2000. On November 22, 2005, the exchange rate was
1.00 = $1.1737. Since
the beginning of 2003, the U.S. dollar has weakened sharply
against the euro, which has had a substantial negative effect on
our revenues and profitability. Any further weakening of the
U.S. dollar against the euro would further 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 directive in the EU imposes a take-back obligation
on manufacturers to finance the collection, recovery and
disposal of electrical and electronic equipment. Because of
unclear statutory definitions and only partial implementation in
national legislation in individual member states, the
consequences for our company can currently not be determined in
detail. Additional European legislation will ban the use of lead
and other hazardous substances in electrical and electronic
equipment beginning in July 2006. Another EU directive describes
ecodesign requirements for energy-using products, including
information requirements for components and sub-assemblies.
Furthermore, a legislative proposal by the European Commission,
approved by the European parliament in November 2005, deals with
the registration, evaluation and authorization of chemicals
(REACH). These directives, and the REACH proposal,
may complicate our research and development activities and may
require us to change certain of our manufacturing processes, to
utilize more costly materials or to incur substantial additional
costs. In 2004, the EU directive on environmental liability with
regard to the prevention and remedying of environmental damage
came into force. After implementation in the member states we
could face increased environmental liability, which may result
in higher insurance costs and potential damage claims.

As with other companies engaged in similar activities, we face
inherent risks of environmental liability in our current and
historical manufacturing locations. 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.

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Reductions in the amount of government subsidies we
receive or demands for repayment could increase our reported
expenses or limit 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 expenses and cost of sales in an aggregate amount of
113 million in
the 2003 financial year,
160 million in
the 2004 financial year and
171 million in
the 2005 financial year. In addition, we reduced the carrying
value of fixed assets by
49 million and
0 during the 2004 and
2005 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 that 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 to be most cost effective.

We are a subject of investigations in several
jurisdictions in connection with pricing practices in the DRAM
industry, and are a defendant in civil antitrust claims in
connection with these matters

In September 2004, we entered into a plea agreement with the
Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its ongoing investigation
of alleged antitrust violations in the DRAM industry. Pursuant
to this plea agreement, we agreed to plead guilty to a single
count relating to the pricing of DRAM products and to pay a fine
of $160 million, payable in equal annual installments
through 2009.

In April 2003, following the opening of the DOJs
investigation, 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. In May 2004, the Canadian Competition
Bureau advised our U.S. subsidiary that it and its
affiliated companies are among the targets of a formal inquiry
into alleged violations of the Canadian Competition Act in the
DRAM industry. No compulsory process (such as subpoenas) has
been commenced. We are cooperating with the Commission and the
Canadian Competition Bureau in their inquiries.

Also following the opening of the DOJs investigation, a
number of purported class action lawsuits were filed against us
and other DRAM suppliers in U.S. federal courts and in
state courts in various U.S. states, as well as in the
Canadian provinces of British Columbia, Ontario and Quebec. The
complaints allege violations of U.S. federal and state or
Canadian antitrust and competition laws and seek significant
damages on behalf of the plaintiffs.

In connection with these matters and in accordance with
U.S. GAAP, we established an accrual of
28 million in the
fourth quarter of the 2003 financial year and made further
accruals aggregating
209 million in
the 2004 financial year and
20 million in the
2005 financial year. As noted above, we

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have agreed to pay a fine of $160 million in connection
with the DOJ investigation. Because the other matters remain
ongoing, we cannot predict at this time whether the reserves
will be adequate to cover any further potential liabilities that
we may incur.

An adverse final resolution of the civil antitrust claims or the
Commission or Canadian Competition Bureau investigations
described above 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. 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 for a
description of these matters.

Purported class action lawsuits have been filed against us
alleging securities fraud

Following our announcement in September 2004 of our agreement to
plead guilty in connection with the DOJs antitrust
investigation and to pay a fine of $160 million, several
purported class action lawsuits have been brought against us in
the U.S. district courts. These suits allege, among other
things, that we fraudulently overstated our revenues in
connection with the practices investigated by the DOJ. Although
we are defending against these suits vigorously, a significant
settlement or negative outcome at trial could have a material
adverse effect on our financial results. See
Business  Legal Matters 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  particularly in consumer areas such as
automotive  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 for a description of these and other
proceedings.

We may be unable to successfully integrate businesses we
acquire

We have acquired other businesses, including SensoNor in June
2003 and ADMtek in April 2004, and have consummated the
acquisition of the remaining 30 percent share in the
Infineon Technologies Flash joint venture in January 2005. We
intend to continue to make 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 associated with our acquisition of Catamaran
Communications because the amount of cash we expect to receive
in the future from this business is less than what we expected
at the time we made the acquisition. We reduced our expectations
because of changes in the market environment and their effects
over the period for which we can reasonably forecast the future
development in the market. In the 2004 financial year we
expensed an additional
71 million as a
further reduction of goodwill because our expectations of the
future market development had changed. In the 2005 financial
year we expensed
18 million
related to acquired goodwill, primarily related to our
acquisition of ADMtek.

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We review acquired goodwill for impairment at least once a year.
Changes in our expectations due to changes in market
developments which we cannot foresee have in the past resulted
in our writing off amounts associated with the goodwill of
acquired companies, and future changes may similarly require
further write-offs in future periods.

Siemens exercises partial control over some of our
intellectual property rights and could use these rights to
compete with us

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. A non-competition agreement
between us and Siemens, entered into in connection with our
formation as a separate company, expired in March 2004. Siemens
is no longer prevented from competing with us, and may utilize
the patent rights it retained at the time of our formation to do
so.

Siemens also retained the right to assert infringement claims
against third parties with respect to approximately
15 percent of the 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 by Siemens of substantial number of our
companys shares in the public market could adversely
affect the market price of the shares and ADSs

Siemens AG owns 136,292,363 shares of our company,
representing approximately 18 percent of our currently
issued shares. Siemens has publicly announced its intention to
divest its ownership interest in our company 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.

Changes in the accounting treatment of stock-based
compensation will adversely affect our results of
operations

We currently account for employee stock-based compensation using
the intrinsic value method pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued
to Employees  and, as such, generally recognize
no compensation cost for employee stock-based compensation. In
December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payments,
(SFAS 123(R)). SFAS 123(R) requires public entities to
measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair
value of the award and recognize the cost over the period during
which an employee is required to provide service in exchange for
the award. SFAS 123(R) eliminates the alternative method of
accounting for employee share-based payments previously
available under Accounting Principles Board Opinion No. 25.
The adoption of SFAS 123(R) is not expected to have a
significant effect on our consolidated financial position and
cash flows but is expected to have a significant adverse on our
results of operations, the exact amount of which is not
currently determinable. Furthermore, adoption of
SFAS 123(R) will require us to make certain assumptions and
judgments in the valuation of stock options that we may grant in
the future. A change in any of those assumptions or

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judgments could change the compensation expense that is charged
against our earnings and, consequently, adversely affect our
results of operations or cause our reported results to differ
from those anticipated by us or market analysts.

The proposed reorganization of our Memory Products
segment  and any follow-up steps we may
take  may impose unexpected burdens on our business
and may not produce the benefits we expect

In November 2005 our Supervisory Board approved a plan to
restructure our company in order to better prepare us to exploit
market opportunities for our memory and logic businesses as and
when they arise. The first step in this process will be a
transfer of all of the assets and liabilities of our Memory
Products segment into a separate, wholly owned subsidiary of
Infineon (this drop-down of assets and liabilities,
or Teilbetrieb, is known as an Ausgliederung under
German law). We intend to monitor and evaluate financial and
industry developments continuously during the 2006 financial
year and will consider further reorganization steps as
appropriate.

The drop-down of the memory products business may be more
difficult or expensive than we anticipate, and may require
greater management time and other resources than expected, any
of which could adversely affect out business or results of
operations. These transactions will be extremely complex, and we
may not be successful in executing them in the most efficient
and cost-effective manner. In addition, any additional steps we
may take following this initial reorganization may prove not to
be the most strategically advantageous options available to us.
This reorganization and related follow up steps, if any, could
adversely impact both our memory and our logic businesses. In
any event, we may not realize all the benefits for each of our
business lines that we intend to realize from these transactions.

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BUSINESS

Overview

We are one of the worlds leading semiconductor companies.
We have been at the forefront in the development, manufacture
and marketing of semiconductors for more than fifty years, first
as the Siemens Semiconductor Group and, since 1999, as an
independent company. We have been a publicly traded company
since March 2000. According to IC Insights, we were the seventh
largest semiconductor company in the first half of the 2005
calendar year.

The principal developments during our 2005 financial year
included the following:



Corporate Developments


    Effective January 1, 2005, we simplified our organization
    to create shorter and faster decision paths across the entire
    company, a stronger customer orientation, as well as greater
    efficiency and flexibility. We integrated a number of
    centralized functions such as sales and manufacturing into the
    operating segments. The Mobile business and Wireline
    Communication segment were combined in the new Communication
    segment to reflect market developments. At the same time, the
    security and chip card activities were integrated into the
    extended Automotive, Industrial and Multimarket segment. The
    financial position and results of operations of prior periods
    have been reclassified to be consistent with the revised
    reporting structure and presentation, as well as to facilitate
    analysis of current and future operating segment information.
    We reached an agreement with Rambus, settling all intellectual
    property infringement claims between the companies and providing
    for the licensing to us of the Rambus patent portfolio for use
    in our current and future products. We will pay $50 million
    in license fees in quarterly installments through November 2007.
    After November 2007 and only if Rambus enters into additional
    specified licensing agreements with certain other DRAM
    manufacturers, we would make additional payments up to a maximum
    of an additional $100 million.
    We acquired the 30 percent interest in our joint venture
    Infineon Technologies Flash that was still owned by our joint
    venture partner, Saifun. In conjunction with our purchase of
    Saifuns remaining interest, we also entered into a license
    agreement with Saifun with respect to its NROM flash technology,
    based on which we are continuing to develop NAND-compatible
    Flash products.
    We entered into a settlement agreement with ProMOS, our former
    joint venture partner in Taiwan, settling all intellectual
    property disputes between us and resulting in licensing payments
    to us of $156 million.
    We began construction of a power-logic plant in Kulim, Malaysia,
    which will allow us to further expand our presence in the
    growing Asian market, as well as to strengthen our cost position
    and competitive position.
    We sold our principal fiber optics business assets to Finsar in
    exchange for Finisar shares valued at approximately
    40 million, which
    we subsequently sold for cash.
    We sold our venture capital subsidiary realizing a net gain of
    approximately
    13 million.
    We sold a significant portion of our optical networking business
    to Exar Corporation (Exar) for approximately
    11 million in
    cash.
    We agreed upon certain restructuring measures aimed at reducing
    costs, including downsizing our workforce and consolidating
    certain functions and operations.45



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Technical Developments


    We introduced our 90-nanometer process technology node for
    memory and logic manufacturing.
    We have extended our 300-millimeter capacity share during the
    2005 financial year with the continuous ramp up of our joint
    venture with Nanya, Inotera, and the start of ramp-up of foundry
    capacities at SMIC in Beijing, China and our own facility at
    Richmond. We plan to further extend our 300-millimeter share
    with the continuous ramp-up of our 300-millimeter line at
    Richmond and the upcoming capacities of our foundry partner
    Winbond in the 2006 financial year.
    The groundbreaking of a second manufacturing module at Inotera,
    our joint venture with Nanya, took place in May 2005. The
    production site is currently under construction and expected to
    be finalized in the 2006 calendar year. Infineon and Nanya each
    are entitled to 50 percent of Inoteras capacity.
    Our 300-millimeter facility at Richmond started commercial
    production in September 2005 and is expected to ramp to a
    capacity of more than 20,000 wafer starts per month by mid
    calendar year 2006. The maximum capacity of this facility is
    expected to amount to 50,000 wafer starts per month and is
    planned to be ramped up depending on market developments.
    We introduced our E-GOLDradio chip, a GSM/GPRS single-chip which
    combines a quad-band radio transceiver with a base band
    processor, allowing us to provide the worlds most
    integrated mobile phone platform.
    We introduced SMARTi 3G, the worlds first RF transceiver
    supporting all six frequency bands for the Universal Mobile
    Telecommunications System (UMTS) worldwide.
    We introduced our VINAX chip set, which fully supports the VDSL2
    specification for broadband wireline communications and is one
    of the most complex chips Infineon has ever developed.
    As a pioneer in FB-DIMM (Fully Buffered Dual Inline Memory
    Module) development, we introduced the industrys first AMB
    (Advanced Memory Buffer) in August 2004, and successfully
    demonstrated system boot-up on DDR2 platforms during 2005.



Industry Background

Semiconductors power, control and enable an increasing variety
of electronic products and systems. Improvements in
semiconductor process and design technologies continue to result
in 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 common
components in products used in everyday life, including personal
computers, telecommunications systems, wireless handheld
devices, automotive products, industrial automation and control
systems and security applications.

According to IC Insights, the percentage of semiconductor
content in electronic equipment increased from approximately
11 percent in 1989 to approximately 21 percent in
2004. 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. In 2003 and in particular in 2004, the
semiconductor market showed stronger performance. During our
2005 financial year, global semiconductor market growth slowed
significantly.

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

(CHART)

Semiconductors can generally be categorized as employing analog,
digital or mixed-signal technology.

Analog semiconductors deal with 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.
Analog semiconductors collect, monitor, condition or transform
analog signals into electrical signals and vice versa.

Digital semiconductors store digital information or perform
functions on digital signals. Digital signals are created by
switching electrical current on or off, and vary based on the
sequence of these on and off electrical pulses (frequently
represented by ones and zeros). Digital semiconductors include
memory chips and 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

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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.





Strategy

Our corporate strategy is based on four pillars: Profitable
Growth, Customer Focus, Operational Excellence and Collaborative
Leadership. We think of our customers first, seeking to deliver
innovative semiconductor solutions to meet their needs both
today and in the future. We are committed to being the
best-in-class on cost, quality and time-to-market, focusing on
profitable growth in the interest of our shareholders and
employees. Based on this strategic framework, we intend to:




    Build on our leadership in fast-growing areas served by
    our different segments. Our goal is to achieve
    profitable revenue growth that is greater than that experienced
    by the semiconductor industry. We seek to do this by increasing
    market share and exploiting opportunities that allow us to
    achieve a leadership position in rapidly growing segments of
    each of the markets we serve. We believe that our strong
    relationships with leading customers in all of our business
    areas give us significant competitive advantages. Customer
    familiarity and trust are the most sustainable competitive
    advantages.
    Share risk and expand our access to leading-edge
    technology through long-term strategic partnerships with other
    leading industry participants. We believe that close
    relationships with other semiconductor companies allow us to
    share risks, reduce development costs and improve
    time-to-market. They also enable us to enhance our portfolio of
    intellectual property through worldwide access to the expertise
    of other industry participants. We intend to continue to develop
    long-term strategic relationships with leading industry
    participants, both to manufacture products and to develop new
    process technologies and products.
    Enhance our position in significant global
    markets. We seek to further penetrate those
    international markets that we believe have the greatest business
    potential over the coming years. We intend to position Infineon
    as one of the leading suppliers in China and the United States,
    to strengthen our position in Japan, and to further strengthen
    our leading position in Europe and the rest of the Asia/Pacific
    region.
    Enhance our position as an innovation and technology
    leader by continuing to invest in research and
    development. We believe that research and development is
    integral to the implementation of our overall strategy and
    essential to maintaining close relationships with our customers.
    Innovation will remain one of our top priorities for the future.In addition, we permanently review our position in the market
and the competitive environment and will adjust our business
portfolio and setup accordingly, if necessary.

In furtherance of these goals, and following extensive analysis
of our markets and our business, in November 2005 our
Supervisory Board approved a plan to restructure our company in
order to better prepare us to exploit market opportunities for
our memory products and logic businesses as and when they arise.

The first step in this process will be a transfer of all the
assets and liabilities of our Memory Products segment into a
separate, wholly owned subsidiary of Infineon (this
drop-down of assets and liabilities, or
Teilbetrieb, is known as an Ausgliederung under
German law).

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We believe that these reorganization measures will position us
quickly to take advantage of appropriate market opportunities
for the memory business as and when they arise. We intend to
monitor and evaluate financial and industry developments
continuously during the 2006 financial year and will consider
further reorganization steps as appropriate. It is our
Management Boards preferred option to reinforce the market
position of the memory products group through an initial public
offering (IPO) of shares in the new legal entity. Nevertheless,
we have not yet decided on any specific steps following the
drop-down of assets and liabilities or any specific timeframe
for such steps. We would, over the medium to long term, consider
reducing our position in the current Memory Products group to a
minority stake.





Products and Applications

Through calendar year 2004, we were organized in four principal
segments  Wireline Communications, Secure Mobile
Solutions, Automotive & Industrial, and Memory
Products. Beginning January 1, 2005, we simplified our
organizational structure to create shorter and faster decision
paths across the company and a stronger customer orientation, as
well as greater efficiency and flexibility. The Wireline
Communications segment and the Mobile business were combined
into the new Communication segment to align the companys
structure with market developments. At the same time, the
security and chip card activities and the ASIC & Design
Solutions business were integrated into the extended Automotive,
Industrial and Multimarket segment.

Consequently, we are now organized into three principal
segments, two of which are application focused 
Automotive, Industrial and Multimarket, and Communication; and
one of which is product focused  Memory Products.
These groups design, develop, manufacture and market a broad
range of semiconductors and complete system solutions used in a
wide variety of microelectronic applications.

The following table gives an overview of some of the more
significant products and applications and the four largest
customers of each of our segments.

Principal Products, Applications and Customers

|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                        
|------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Four                                   
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Largest                                
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Customers                              
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | in the 2005                            
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | Financial                              
|Segment                                    |  | Principal Products                                                                                                                                                                                                         |  | Principal Applications                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | Year                                   
|                                           |  |                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                        
|Automotive, Industrial and
    Multimarket |  | Power semiconductors (discretes,
    ICs and modules), sensors and microcontrollers (8-bit, 16-bit,
    32-bit) with and without embedded memory, silicon discretes,
    chip card and security ICs, ASIC design solutions |  | Automotive: Powertrain (engine
    control, transmission control), body and convenience (comfort
    electronics, air conditioning), safety and vehicle dynamics
    (ABS, airbag, stability control), infotainment (wireless
    communication, telematics/navigation)
    Industrial: Power management & supplies, drives and
    power distribution, industrial control
    Multimarket (consumer, computing, communication): Discrete
    commodity products (e.g. handsets), chip card and security
    ICs (e.g. for mobile communication, identification,
    finance), ASIC design solutions |  | Avnet
    Bosch
    Gemplus
    Siemens

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|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                              
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  | Four                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  | Largest                                      
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  | Customers                                    
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  | in the 2005                                  
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  | Financial                                    
|Segment         |  | Principal Products                                                                                                                                                                                                                                                                                                                                                         |  | Principal Applications                                                                                                                                                                                                                                                                                                                                                                     |  | Year                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                              
|               
|Communication   |  | Baseband ICs; RF transceivers;
    mobile phone system solutions including software; DECT chipsets;
    tuner ICs; RF-power transistors; ICs for traditional telecom
    solutions (CODECs, SLICs, ISDN, T/E, etc.); broadband access
    system solutions for xDSL CO/CPE and VoIP; system solutions for
    DSL-modems; routers; home-gateways; WLAN access points; NICs |  | Mobile telephone systems for major
    standards (GSM, GPRS, EDGE, UMTS), cordless telephone systems
    for major standards (WDCT, DECT), RF connectivity solutions
    (Bluetooth, GPS, etc.), cellular basestations, traditional
    telecom and enterprise equipment, broadband access solutions for
    central office and customer premises equipment, home networking
    equipment |  | Ericsson
    Matsushita
    Nokia
    Siemens
|               
|Memory Products |  | Commodity DRAM components with
    densities from 128-Mbit to 1-Gbit and SDRAM, DDR and DDR2
    interfaces; mainstream modules for desktop and notebook PCs;
    special modules for workstations and servers                                                                                                                                                             |  | Desktop and notebook computers, PC
    upgrades, workstations and servers, communications equipment,
    computer peripherals                                                                                                                                                                                                                                                              |  | Dell
    HP
    IBM
    Kingston             
|               
|                |  | Graphics RAM components with
    densities of 256-Mbit and 512-Mbit and DDR, DDR2 and GDDR3
    interfaces, Mobile-RAM with densities from 128-Mbit to 512-Mbit
    and SDRAM and DDR interface                                                                                                                                                                            |  | Graphic cards, motherboards, game
    consoles, PDAs, mobile phones, digital still cameras                                                                                                                                                                                                                                                                                                 |  |                                              
|               
|                |  | NAND-compatible Flash components,
    Flash Cards (SD, MMC, mini SD, RS MMC), USB-sticks                                                                                                                                                                                                                                                                                   |  | Mobile phones, digital still
    cameras, PC upgrades                                                                                                                                                                                                                                                                                                                                      |  |                                              

Automotive, Industrial and Multimarket






Automotive




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electronic content in 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 with semiconductors in order to meet more
demanding reliability, space, weight and power-reduction
requirements.

Our automotive team offers customers complete semiconductor
system solutions in the engine management, safety and chassis,
body and convenience and infotainment markets, in some cases
including software. Our principal automotive products include:




    Semiconductors for power train applications, which perform
    functions such as engine and transmission control and hybrid
    power trains;
    Semiconductors for safety management, which manage tasks such as
    the operations of airbags, anti-lock braking systems, electronic
    stability systems and power steering systems;
    Semiconductors for body and convenience systems, which include
    light modules, heating, ventilation and air conditioning
    systems, door modules (power windows, door locks, mirror
    control) and electrical power distribution systems; and
    Semiconductors for infotainment, such as those used for wireless
    communication and navigation/ telematics.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 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. To take advantage of expected growth
in the market for green vehicles, we have bundled
our power competencies across all of our business units in order
to better enable us to provide semiconductor and power module
solutions for hybrid vehicles.

We have also begun to work with European OEMs and
Tier 1 automotive manufacturers to develop
radar-based Adaptive Cruise Control systems.

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.

We seek to further develop our strong relationships with
world-wide leading car manufacturers and their suppliers, with a
particular focus on those at the forefront in using electronic
components in cars, to strengthen our position in all areas 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 semiconductor 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 and MultimarketThe 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 industries such as
transportation, factory automation and power supply.

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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:




    Power supplies, divided into two main categories:
    uninterruptible power supplies, such as power backbones for
    Internet servers; and switched-mode power supplies for PCs, as
    well as battery chargers for mobile phones, notebook computers
    and other handheld devices;
    Drives for machine tools, motor controls, pumps, fans and
    heating, ventilation, consumer products (for example, TVs and
    DVD players), air-conditioning systems and transportation;
    Industrial automation, meters and sensors; and
    Other industrial applications such as power distribution systems
    and medical equipment.Within the industrial business, we focus on two major
applications, power management & supply and power
conversion. We provide differentiated products combining diverse
technologies to meet our customers specific needs. We have
identified applications for home appliances (so called
white goods) as an area of future growth. With our
discrete semiconductor portfolio we are able to deliver:




    AF (audio frequency) discretes (general purpose diodes and
    transistors, switching diodes, digital transistors);
    RF (radio frequency) discretes (diodes, transistors, Small Scale
    Integrated Circuits (SSICs)); and
    HIPACtm
    (High Performance Active and Passive Integration) chips.With our broad and complementary IP portfolio, system
integration skills and manufacturing expertise we provide
dedicated solutions to customers across diverse markets.

Our chip card and security unit designs, develops, manufactures
and markets a wide range of security controllers, security
memories and other semiconductors and complete system solutions
for security applications. According to Gartner Dataquest, in
the 2004 calendar year we remained the market leader in ICs for
smart card applications, with a market share of 38 percent.

Our products include security memory ICs, security
microcontroller ICs for SIM cards, payment cards, identification
cards, prepaid telecom cards and transportation cards, Trusted
Platform Modules (TPM) for computers and radio frequency
identification (RFID) ICs for object identification and access.

The markets for our security products are characterized by
trends towards lower prices, higher demand for embedded
non-volatile memory in SIM cards and increasing security
requirements, especially in payment and identification
applications.

Communication

Our Communication segment designs, develops, manufactures and
markets a wide range of ICs, other semiconductors and complete
system solutions for wireless and wireline communication
applications. We are among the leading players in the markets
for semiconductor solutions for both mobile phones and
traditional telecom equipment. According to Gartner Dataquest,
in 2004 we held the number three position in
application-specific semiconductors (ASICs) for communications
systems, with a worldwide market share of 7 percent.



Wireless CommunicationsIn wireless communications, our principal products include
baseband ICs and RF transceivers for the major standards (GSM,
GPRS, EDGE, UMTS and DECT), and customized radio-frequency
products such as Bluetooth devices and GPS ICs and RF-power
components for wireless infrastructure (basestations). Our
principal solutions include hardware system design and software
solutions for

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mobile telephone systems (addressing primarily the GSM, GPRS,
EDGE, and UMTS standards) and Bluetooth as well as DECT/WDCT
systems.

According to Gartner Dataquest, in 2004 we remained the market
leader for RF transceiver devices in wireless communication,
with a market share of 18 percent. According to Gartner
Dataquest, we increased our market share in application-specific
integrated circuits (ASICs) and application specific standard
products (ASSPs) for wireless communication systems to
8 percent in 2004, making us the number three supplier in
this market segment worldwide.

The markets for products in which our cellular communication ICs
and systems are utilized are characterized by trends towards
lower cost, increasingly rapid succession of product generations
and increased system integration. According to Gartner
Dataquest, 674 million cellular handsets were sold in
calendar year 2004, compared with 520 million units in
2003. The growth was to a large extent driven by a strong demand
in emerging markets. Increasing demand for add-on applications
such as multimedia capability is expected to increase the IC
content of mobile phones. However, average selling prices for
cellular communication ICs have declined in recent years. We
expect that a further price decline of entry-level handset
models, often referred to as Ultra Low Cost
telephones, will generate additional demand in emerging
countries. We expect these trends to create both opportunities
and threats for suppliers of cellular communication
semiconductors and systems.

We offer products and solutions to customers in the following
principal application areas:




    GSM, or Global System for Mobile communication, which is the de
    facto wireless telephone standard in Europe and is available in
    more than 120 countries. GSM is part of an evolution of wireless
    mobile telecommunication that includes General Packet Radio
    System (GPRS), Enhanced Data GSM Environment (EDGE), and
    Universal Mobile Telecommunications Service (UMTS). We offer
    products and solutions addressing all of these wireless
    communication standards. In 2005, we introduced E-GOLDradio, a
    GSM/GPRS single-chip which combines a quadband radio transceiver
    with a baseband processor on a single piece of silicon.
    E-GOLDradio provides the highest one-chip integration level of
    all available GSM/GPRS solutions in the market. We also
    introduced a new multimedia phone platform, offering flexible
    support to GPRS and EDGE cellular standards. The MP-E platform
    includes all hardware and software components required for
    high-performance wireless phones with advanced multimedia
    functionality such as video streaming, video recording and
    playback. We launched a reference design for low-cost cellular
    handsets, enabling handset production costs of below $20.
    UMTS, a GSM-based standard for third-generation (3G) broadband,
    packet-based transmission of text, digitized voice, video, and
    multimedia at data rates up to 2 megabits per second (Mbps). We
    offer a complete 3G multimedia mobile phone platform for
    UMTS/EDGE/GPRS. We introduced SMARTi 3G, SMARTi PM and SMARTi
    SD2 transceivers in the 2005 financial year. SMARTi 3G, a
    multi-band single chip CMOS transceiver, is the first RF
    transceiver supporting all six frequency bands for UMTS for
    operation in different parts of the world. SMARTi SD2 is our
    single chip CMOS GPRS transceiver, while SMARTi PM is our single
    chip CMOS EDGE transceiver.
    DECT (Digital Enhanced Cordless Telecommunications) and WDCT
    (Worldwide Digital Cordless Telecommunications) standards for
    digital cordless phones. We offer complete WDCT system solutions
    for the worldwide free available 2.4 GHz ISM frequency band
    as well as complete DECT system solutions for the whole range of
    telephone models required from the market  from
    low-featured entry models to high-featured comfort models. This
    includes all necessary RF components such as low-noise
    transceivers and power amplifiers as well as all baseband
    components such as residential handset and basestation
    controllers.
    DVB (Digital Video Broadcasting), covering a number of generally
    accepted protocol standards for digital television. Formerly, it
    was not possible to receive stable television pictures on mobile
    devices with analog transmission technology due to physical
    limitations. DVB-T (Digital Video53



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Broadcasting  Terrestrial) and DVB-H (Digital Video
    Broadcasting  Handhelds) are television protocol
    standards that enable digital transmission of digital content
    for moving reception devices, such as mobile phones and PDAs
    (Personal Digital Assistant). We offer tuner ICs for stationary,
    portable and mobile television receivers for the analog (PAL,
    NTSC) and digital (DVB-C/T, ISDB, ATSC, DAB, DVB-H, T-DMB,
    ISDB-T) TV standards. Our high-frequency digital receiver
    systems process digital signals according to the European DVB
    standard, as well as according to the American, Japanese, Korean
    and Chinese standards for digital television. We have introduced
    tuner ICs for mobile digital television reception according to
    the DVB-T standard.
    The Global Positioning System (GPS), a location system based on
    a network of satellites. GPS is widely used for automotive and
    naval navigation. Together with a development partner we have
    introduced Hammerhead, a single-chip Assisted Global Positioning
    System (A-GPS) receiver for mobile telephones, smart phones and
    PDAs. The Hammerhead chip incorporates radio frequency and
    baseband GPS functionality, enabling emergency assistance and
    location-based services for mobile phones.
    Bluetooth, a computing and telecommunications industry
    specification that allows mobile phones, computers and PDAs to
    connect with each other and with home and business phones and
    computers using a short-range wireless connection. In 2004, we
    introduced Blue Moon Unicellular, a fast and energy-efficient
    Bluetooth-chip which supports the new enhanced data rate
    protocol.
    Wireless infrastructure applications. We provide RF power
    components for mobile base stations. In 2004 we introduced an RF
    power transistor in new GOLDMOS technology for base stations for
    leading mobile phone standards, including UMTS/WCDMA/GSM/CDMA.

Wireline CommunicationsThe market for wireline communications is currently
characterized by:




    a growing demand for a single network offering voice, video and
    data (triple play) applications, which we believe
    will create increasing demand for high performance broadband
    access products;
    the convergence of voice and data networks into a single
    Internet Protocol network infrastructure, which we believe will
    drive demand for DSLAM/ DLC IVD line-card products, particularly
    in the North American market; and
    increased investment by carriers in MAN (Metropolitan Area
    Network) core infrastructure to support increased data bandwidth
    requirements.We focus on broadband access solutions for both the central
office and the customer premises. According to Gartner
Dataquest, we were the number five supplier of wireline
communication ICs worldwide in 2004, with a 5.3 percent
market share.

The primary applications for our wireline communication devices
include:




    traditional telecom and enterprise applications, e.g., analog
    line cards, ISDN, T/E and PBX;
    broadband access solutions for central office and customer
    premises equipment, such as xDSL; and
    home networking equipment such as routers, gateways, WLAN access
    points and NICs.We are a leading supplier of traditional telecom solutions
including analog line cards, ISDN, T/E, and our broadband access
solutions enable combined voice and data applications. This
portfolio of products allows a complete, end-to-end access
solution that enables the triple play of voice,
video, and data applications.

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We focus our efforts on providing complete wireline
communication solutions. We offer high-performance integrated
voice and data (IVD) solutions and high-quality voice
applications implementing our Geminax-Max and VINETIC ICs. We
introduced the ADSL2+ central office chip GEMINAX PRO in 2005,
which sets new standards for power consumption and system costs.
Consisting of a 16-channel ADSL2+ Digital Front End (DFE) and a
4-channel Analog Front End (AFE), with integrated low-power
Class D line drivers, the GEMINAX PRO chipset significantly
reduces power dissipation, footprint and overall system costs.
We also introduced VINAX, a fully standard-compliant
VDSL2/ADSL2+ end-to-end solution, extending our comprehensive
DSL-portfolio; VINAX is fully compliant with the VDSL2/ G.993.2
(Very-High-Bit-Rate Digital Subscriber Line 2) standard of
the International Telecommunications Union (ITU). VDSL2 is a key
enabling technology for triple play services such as
multi-channel HDTV, on-line/on-demand gaming and video
applications, VoIP and high-speed Internet access.

In the customer premises equipment (CPE) market we provide low
cost Ethernet switches and Ethernet PHYs, wired and wireless LAN
NICs, low power consumption network processors and controllers,
and xDSL modems. We introduced WILDPASS, a highly integrated
secure dual-band 802.11 a/g wireless network processor
system-on-chip (SoC) solution, in 2005.

Memory Products

Our 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. According
to Gartner Dataquest, the DRAM business had the largest revenue
share in 2004 providing 54 percent of total semiconductor
memory revenues. We were the fourth largest producer of DRAM in
terms of revenues in the 2004 calendar year, with a worldwide
market share of approximately 14 percent, according to
iSuppli, compared to a 16 percent market share in the 2003
calendar year. The principal reasons for the loss in market
share during this period were bit-growth and development of the
average selling price below the industry average in 2004.

The global market for DRAM has experienced strong cyclicality in
the past and is expected to continue to do so in the future.
Historically, the average price per bit of DRAM experienced an
annual decrease of approximately 30 percent. Price and
therefore revenue volatility depends on the relation between
supply and demand, leading to strong price 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 market development is difficult to predict. The
table below presents revenue and bit data as well as calendar
year-over-year price-per-bit development for the DRAM market
since 2000 (source: WSTS).

|                                                |  |      |     |    |      |  |     |      |  |  |      |    |  |      |     |    |  |  |       |  
|----------------------------------------------- |  | ---- | --- | -- | ---- |  | --- | ---- |  |  | ---- | -- |  | ---- | --- | -- |  |  | ----- | -
|Calendar Year                                   |  | 2000 |     |    | 2001 |  |     | 2002 |  |  | 2003 |    |  | 2004 |    
|                                                |  |      |     |    |      |  |     |      |  |  |      |    |  |      |    
|DRAM market in billion $                        |  |      | 29  |    |      |  | 11  |      |  |  | 15   |    |  |      | 17  |    |  |  | 27    |  
|DRAM market in billion megabits                 |  |      | 246 |    |      |  | 400 |      |  |  | 563  |    |  |      | 785 |    |  |  | 1,260 |  
|Year over year change average price
    per bit |  |      | (12 | )% |      |  | (76 | )%   |  |  | (3   | )% |  |      | (22 | )% |  |  | 0     | %



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

The largest volume of our DRAM products is sold to the personal
computer segment, which includes desktop and notebook computers
as well as workstations. The second largest market segment by
volume is the infrastructure segment, including networking,
storage and servers. We expect markets for the latter segment to
grow substantially in the next few years, whereas we expect the
market for personal computers to decline as a proportion of the
total market. We expect mobile applications, especially mobile
phones, even though currently representing only a small portion
of DRAM demand, to show strong growth rates in the coming years.
Other applications for memory products include consumer products
and graphics applications.

Our principal memory products are commodity DRAM components,
available in memory densities from 128-Mbit to 1-Gbit and in
SDRAM, DDR and DDR2 interfaces. We sell the majority of these
components to our customers mounted on modules. Our module
portfolio comprises standard desktop modules (unbuffered DIMMs),
standard notebook modules (SO-DIMMs), modules for sub-notebooks
(Micro-DIMMs), standard modules for workstations and servers
(registered DIMMs), next generation server modules (FB-DIMMs),
special modules for blade-servers (Very-low-profile DIMMs) as
well as customized modules. We also manufacture specialty DRAM
products with high performance for graphics applications, and
others with low power consumption for mobile applications, as
well as embedded DRAM products. Since the beginning of the 2004
calendar year, we have also offered NAND-compatible Flash
products such as Flash Cards and USB-Sticks based on our
512-Mbit TwinFlash chip.

The majority of our memory products sales were based on 256-Mbit
DRAMs in the first half of the 2005 financial year and 512-Mbit
DRAMs in the second half of the 2005 financial year, as the
market shifted to the next higher-density product generation. We
expect that in the 2006 financial year our leading products will
continue to be based on 512-Mbit DRAMs. We believe that offering
high-end products, such as 1-Gbit DRAMs, highly integrated
modules and specialty DRAMs, as well as having the ability to
shift between DRAM and Flash memories, depending on market
conditions, can offer opportunities to mitigate some of the
negative effects of the cyclicality of the memory products
market.

Most of our DRAM products, commodities as well as specialties,
are manufactured using our state-of-the-art 110-nanometer DRAM
technology. In addition, we introduced our next generation
90-nanometer DRAM technology during the 2005 financial year. All
of our NAND-compatible Flash products are manufactured using our
170-nanometer TwinFlash technology. In addition, we introduced
our next-generation 110-nanometer TwinFlash technology by the
end of the 2005 financial year.

Our application-specific specialty DRAM portfolio includes
products with low power features, such as Mobile-RAM and
CellularRam, and products with high performance with respect to
bandwidth and access times, such as Graphics RAM:




    Mobile-RAM is a low-power SDRAM mounted in a small chip-size
    package and is dedicated to the markets for smart phones,
    Personal Digital Assistants (PDAs) and palm-size computers. Our
    128-Mbit, 256-Mbit and 512-Mbit Mobile-RAM ICs are available
    with SDR and DDR interfaces.
    CellularRAM is a low-power pseudostatic RAM targeted at high
    data rate 2.5G and 3G cellular phones. It is also pin compatible
    to SRAM solutions, thus providing SRAM performance with the
    higher densities of DRAMs. We are a member of the CellularRAM
    specification co-development team together with Cypress
    Semiconductor Corporation, Micron Technology Inc.
    (Micron), Renesas Technology Corp. and recent
    new members Hynix Semiconductor Inc. (Hynix),
    NanoAmp Solutions Inc. and Winbond. The team creates common
    specifications for high-performance pseudo-SRAM (PSRAM) devices
    designed to meet the growing memory density and bandwidth
    demands of future 2.5G and 3G handset designs. In the 2005
    financial year we56



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offered products with memory densities of 16-Mbit and 32-Mbit
    and started the market introduction of 64-Mbit and 128-Mbit
    CellularRAMs.
    Graphics RAM are a type of DRAM offering high clock frequencies
    of up to 800MHz together with large interface widths of up to
    x32 to provide the highest possible data bandwidth for graphics
    memory applications such as graphic cards, motherboards or game
    consoles. In the 2005 financial year we offered Graphics RAMs
    with densities of 256-Mbit and 512-Mbit and DDR, DDR2 and GDDR3
    interfaces.
    Reduced Latency DRAM (RLDRAM) is used for networking
    applications in high-end servers and routers. This type of DRAM
    offers high bandwidth and fast random SRAM-like data access. We
    decided in the 2004 financial year to suspend the development of
    future RLDRAM generations due to substantially reduced demand
    projections. Nevertheless, we are committed to fulfilling our
    contracts and obligations in this area.We are also engaged in the development of future DRAM interface
architectures such as DDR3 and beyond.

In addition to standard DRAM technology, we also sell
system-on-chip products with embedded DRAM. These products
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.

During the second quarter of the 2005 financial year, we
acquired the 30 percent interest in Infineon Technologies
Flash that was still owned by our joint venture partner, Saifun.
We had established this joint venture (originally called
Ingentix) with Saifun in April 2001. In conjunction with our
purchase of Saifuns remaining interest, we also entered
into a license agreement with Saifun with respect to its NROM
flash technology. Since our acquisition of Saifuns
remaining interest in Infineon Technologies Flash, we have
reduced the remaining operations in Israel, while continuing to
conduct technology and product development, marketing and
manufacturing operations at our facilities in Dresden, Germany.
Infineon Technologies Flash is developing NAND-compatible Flash
products based on Saifuns proprietary NROM flash
technology.

Since the majority of memory products are highly standardized
and offered by more than one supplier, the size of the portfolio
offered, the product quality, the logistics service and above
all the cost of the product are key parameters in the
customers selection process for a supplier. The reduction
of chip sizes through the introduction of leading edge process
technologies and the increasing production on wafers with a
diameter of 300-millimeters are key factors in reducing
manufacturing costs. During the 2005 financial year, we started
commercial production based on our next generation 90-nanometer
DRAM technology. We have also achieved first prototypes of our
next generation 70-nanometer DRAM technology. Start of DRAM
production based on 70-nanometer technology is anticipated for
the second half of the 2006 calendar year.

In the NAND-compatible Flash business we are focusing on the
rapid shrinking of our process technology to introduce higher
density Flash products and improve our cost position. We started
sales of our NAND-compatible Flash products based on our
170-nanometer TwinFlash technology in early 2004. We skipped the
140-nanometer technology node and introduced our 110-nanometer
TwinFlash technology at the end of the 2005 financial year. We
intend to skip the following 90-nanometer technology node as
well and are currently engaged in the development of the next
generation 70-nanometer TwinFlash technology.

To further reduce per-unit manufacturing costs, we have further
increased the volume of production from 300-millimeter wafers
based on the ramp-up of capacity of Inotera, our manufacturing
joint venture with Nanya, and the ramp-up of foundry capacity
negotiated with SMIC. In addition, in September 2005 we started
the ramp-up of our 300-millimeter facility at Richmond. We have
entered into agreements with Winbond for additional
300-millimeter foundry capacity, which we expected to ramp-up
during the 2006 financial year.

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The semiconductor memory industry is highly capital intensive.
The Memory Products segment maintains a wide network of
co-operations and alliances in order to further reduce costs by
improving economies of scale and to limit risks and investments.
See Strategic Alliances  Memory Products.

In the area of research and development, the segments
principal alliance is with Nanya on the joint development of
90-nanometer, 70-nanometer and, since September 2005,
60-nanometer DRAM technology, including first products utilizing
the new technologies (see Strategic Alliances 
Memory Products). We also co-operate with Advanced Micro
Devices Inc. (AMD) and Toppan Photomasks Inc.
(Toppan) in our joint venture, Advanced Mask
Technology Center (AMTC), regarding the development
of next-generation lithographic masks, as well as the production
of masks. In addition, Winbond and we have agreed to co-operate
in the future development of specialty DRAM products for low
power applications. See Manufacturing 
Manufacturing ventures and partnerships.

In the area of manufacturing, we have established a number of
joint venture and foundry relationships. Together with Nanya, we
established the 300-millimeter manufacturing joint venture
Inotera in Taiwan. We have established a venture with China
Singapore Suzhou Industrial Park Venture Co. Ltd., Suzhou,
China, and have constructed a backend facility there for the
assembly and testing of memory ICs. We have entered into
agreements with SMIC in China regarding the supply of DRAM
wafers based on their 200-millimeter and 300-millimeter
manufacturing lines. We also entered into agreements with
Winbond in Taiwan regarding the supply of DRAM wafers based on
their 200-millimeter and future 300-millimeter manufacturing
lines.

The memory markets are characterized by a high level of
competition among suppliers regarding cost, product portfolio
and quality. Demand for DRAM products in the next years is
expected to be driven principally by infrastructure applications
such as servers, networking, storage, and above all by mobile
communication products. The market for NAND-compatible Flash
products is expected to see significant growth rates, mainly
driven by the strong demand for non-volatile memory content from
applications like digital still cameras, MP3 players and mobile
phones. We believe that our expertise in high-end and
high-performance DRAM products provides us with opportunities in
the market for workstations and servers, as well as graphics and
mobile applications.





Customers, Sales and Marketing

Customers

We sell our products to customers located mainly in Germany, the
rest of Europe, the United States, the Asia/Pacific region and
Japan. We target our sales and marketing efforts in the field of
demand creation at approximately 440 direct customers
worldwide (including distributor and Electronic Manufacturing
Services (EMS) accounts). Of these direct customers, 10 are
currently deemed corporate accounts and up to an additional 47
are deemed key accounts. The Siemens group was the only customer
that accounted for 10 percent or more of our net sales in
the 2005 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 also
position us to be an effective partner.

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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.

Below we provide more detailed information on the customers of
each of our principal segments:

Automotive, Industrial and Multimarket

In the automotive business, 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 2005 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, in the United States, China, Korea and Japan.

In the industrial business, the Siemens group is the single
largest customer, but the bulk of our sales of industrial
products 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.

Our chip card business derives a large portion of its revenues
from large scale projects. Within the chip card business, four
card manufacturers  Axalto, Gemplus,
Giesecke & Devrient and Oberthur Card
Systems  accounted for the majority of sales. We
maintained our strong worldwide position in the security
business during the 2005 financial year.

Our wide variety of discrete commodity products are targeted at
customers in all major fields of applications, including
consumer, computing and communication. With our broad and
complementary IP portfolio, system integration skills and
manufacturing expertise we seek to leverage our IP into
ASIC-based system solutions. We concentrate on customized
designs for customers such as Hitachi Global Storage and
Microsoft Corporation.

Communication

Wireless Communications.In the field of wireless
communications we sell a wide variety of products addressing
applications such as cellular communication, cordless phones,
Bluetooth, GPS, tuner and wireless infrastructure. Customers for
cellular telephone applications purchase products that range
from ASSPs and customized ASSPs that we produce to customer
design and specifications to complete system solutions including
mobile software. With complete system solutions, we target OEMs
as well as design houses and ODMs. Our largest customer for
baseband ICs in the 2005 financial year was Siemens, while Nokia
purchases radio-frequency (RF) ICs from us. Our cordless
telephone customers typically purchase complete system IC kits
including baseband ICs, RF ICs and power amplifiers. To our
wireless infrastructure customers, such as Ericsson, we supply
RF-power products.

We maintained our strong position in Europe and Asia/Pacific in
the 2005 financial year.

Wireline Communications.The wireline
communication business sells IC products for telecommunication
and data communication applications to a world-wide customer
base, targeted at system providers of broadband communication
applications. Our product portfolio includes ICs for traditional
telecom solutions (CODECs, SLICs, ISDN, T/E, etc.), broadband
access system solutions for xDSL CO/CPE and VoIP, system
solutions for DSL-modems, routers, home-gateways, WLAN access
points and NICs.

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In the 2005 financial year, the Siemens group was the largest
OEM customer of the wireline communications business. Our
leading telecommunications and data communications customers
also include Alcatel, Ericsson, Huawei and Nortel. We deliver
our semiconductor solutions to our customers either directly,
via distributors such as Avnet or via system manufacturers such
as Flextronics.

The wireline communications business focused sales and marketing
efforts on the rollout of complementary end-to-end system
solutions enabling IP communication all the way from the metro
ring to the customer premises.

Memory Products

The Memory Products segment sells memory devices, primarily
DRAMs and NAND-compatible Flash in the United States, Europe,
the Asia/Pacific region and Japan. Sales and deliveries are
generally conducted through a global network of sales offices
and logistics centers in order to support our customers at the
locations of their manufacturing operations. We also use third
party distributors to reach our customers.

We focus our marketing efforts on a number of major customers
that exhibit faster than average growth, stable demand,
extensive end customer access and strong innovative
capabilities. For each of these major customers, the segment
seeks to be among its top three suppliers of DRAMs in terms of
service, quality and volume. In the 2005 financial year, our
major customers included the leading PC and server manufacturers
worldwide, such as Dell, HP and IBM, as well as module
manufacturers and distributors, such as Kingston.

We have increased our efforts to diversify our product portfolio
and extend our marketing focus on DRAM products for graphics,
consumer and mobile applications. In addition we have set up a
second brand called Aeneon to better address the
fragmented but strongly growing whitebox market in emerging
economies in Southeast Asia, Eastern Europe and Latin America.
Due to the large number of end customers, sales of our
Aeneon products are concluded through a worldwide
network of distributors.

Sales and Marketing

We create and fulfill the majority of our net sales directly,
although we increasingly make sales through our global network
of distributors and partners in the EMS (Electronic
Manufacturing Services) segment.

To better serve our customers, our Account Managers
develop, maintain, manage and coordinate all aspects of our
relationship and activities with each major customer. 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 global accounts based in their
regions, as well as regional accounts that are the key players
in their markets. In four smaller markets we still have
contractual arrangements with the Siemens group sales
organizations to sell our products.

Within the indirect sales channel, our global Channel Partner
organization manages relations with our third-party sales
representatives, which are located primarily in the United
States. In addition, we increasingly cover indirect accounts
through our worldwide network of independent distributors, with
whom we have regional or global distribution agreements. This
distribution network is also managed by our Channel Partner
organization, which coordinates all aspects of distribution
channel management and increases our market activities in the
broader market.

While many of our customers in newer industries have always
outsourced their production, many of our traditional customers
are also relying increasingly on EMS providers to manufacture
their products. 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 high levels of
service and facilitate smooth transfers of manufacturing from
OEM to

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EMS. The EMS sales organization is also charged with securing a
significant share of the standard product purchases of these
customers, servicing our largest users in the industry, and
concluding strategic partnerships for design and technology
projects.

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

As of September 30, 2005, we had approximately 2,020 sales
and marketing employees worldwide.

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 these products, fluctuate very
significantly from period to period. 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 a 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 well in advance of delivery. Quantities and prices of 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.





Competition

The markets for many of our products are intensely competitive,
and 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 research, development,
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.

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##### Table of Contents

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

Key Competitors by Segment

|                                           |  |                                                                
|------------------------------------------ |  | ---------------------------------------------------------------
|Automotive, Industrial and
    Multimarket |  | Fairchild, Freescale, Samsung, ST
    Microelectronics, Toshiba
|Communication                              |  | Broadcom, Conexant, Freescale,
    Qualcomm, Texas Instruments 
|Memory Products                            |  | ELPIDA, Hynix, Micron, Powerchip,
    Samsung                  









| |   |                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | successful and timely development of new products, services and
    manufacturing processes;                                                                                                               
|
| |  | product performance and quality;                                                                                                                                                                           
|
| |  | manufacturing costs, yields and product availability;                                                                                                                                                      
|
| |  | pricing;                                                                                                                                                                                                   
|
| |  | our ability to meet changes in our customers demands by
    altering production at our facilities;                                                                                                        
|
| |  | our ability to provide solutions that meet our customers
    specific needs;                                                                                                                              
|
| |  | the competence and agility of our sales, technical support and
    marketing organizations; and                                                                                                            
|
| |  | the resilience of our supply chain for services which we
    outsource and the delivery of products, raw materials and
    services by third party providers needed for our manufacturing
    capabilities.






Manufacturing




Front-end.




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##### Table of Contents

wiring. The structure size of our current memory products is as
small as 90-nanometers and we are currently developing
production processes for memory products with structure sizes as
small as 60-nanometers.

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. We develop high-end masks at the Advanced
Mask Technology Center in Dresden, a joint venture with AMD Inc.
and Toppan Photomasks Inc. At the same location, Toppan
Photomasks Inc. is operating a high-end volume mask production
facility, which  together with other Toppan
Photomasks Inc. locations  supplies us with masks
under a long-term mask supply agreement. Toppan Printing Co.
acquired DuPont Photomasks in April 2005 which led to a name
change; former DuPont Photomasks Inc. is now named Toppan
Photomasks Inc.

In the 2005 financial year, we further increased the share of
our DRAM manufacturing on 300-millimeter diameter wafers. Our
300-millimeter facility at Dresden has started commercial
production using 90-nanometer technology. The ramp-up of
Inotera, our 300-millimeter manufacturing joint venture with
Nanya, continued during the 2005 financial year, with a capacity
of approximately 60,000 wafer starts per month reached by August
2005. The capacity of the first manufacturing module of Inotera
is expected to reach a maximum of 62,000 wafer starts per month
in the 2006 financial year. The building of a second
manufacturing module for Inotera is currently under construction
and expected to be finalized in the 2006 calendar year. Infineon
and Nanya each are entitled to 50 percent of Inoteras
capacity. The 300-millimeter facility of our foundry partner
SMIC started to ramp-up in the first quarter of our 2005
financial year. In addition, our 300-millimeter facility at
Richmond started commercial production in September 2005 and is
expected to ramp to a capacity of more than 20,000 wafer starts
per month by mid calendar year 2006. The maximum capacity of
this facility is expected to amount to 50,000 wafer starts per
month and is planned to be ramped up depending on market
developments. Our foundry and development partner Winbond is
currently preparing the ramp-up of its new 300-millimeter
facility in Taiwan. Start of production is expected during our
2006 financial year. The increasing share of 300-millimeter
production and the conversion to 90-nanometer technology should
substantially reduce our overall per-unit cost for memory chips.

Back-end. In the second step of semiconductor
production, the back-end process (also known as the packaging,
assembly and test phase), 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. One or
multiple individual chips are removed from the foil and fixed
onto a substrate or lead-frame base, which will enable the
physical connection of the product to the electronic board. The
next step is creating electrical links between the chip and the
base by soldering or wiring. Subsequently, the chips and
electrical links are molded with plastic compounds for
stabilization and protection. Depending on the package type, the
molded chips undergo a separation and pin bending process.
Finally, the semiconductor is subject to functional tests.

We believe that our back-end facilities are equipped with
state-of-the-art equipment and highly automated manufacturing
technology, enabling us to perform assembly and test on a
cost-effective basis. We have improved our cost position by
moving significant production volumes into lower-cost countries
such as Malaysia and China. Our back-end facilities also provide
us with the flexibility needed to customize products according
to individual customer specifications (giving us System in
Package capabilities). The process of converting our
packages to comply with upcoming international environmental
requirements for lead- and/or halogen-free green
packages continued in the 2005 financial year.

We had no significant unplanned production stoppages during the
2005 financial year. As a result of a decision to ramp down the
production site in Munich-Perlach in 2007, we experienced work
stoppages within parts of our workforces in Munich-Perlach,
particularly in the week of October 25, 2005. We and the
union reached an agreement on October 31, 2005 and the work
stoppages came to an end.

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##### Table of Contents

Manufacturing Facilities

We operate manufacturing facilities around the world, including
through 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                                            |  |                 | 1996 |                                 |  | DRAM, NAND-compatible Flash, ASICs
    with embedded Flash memory, logic ICs
|Essonnes,
    France(1)                                     |  |                 | 1963 | (2)                             |  | Logic ICs and ASICs with embedded
    Flash memory                          
|Horten, Norway                                              |  |                 | 1985 |                                 |  | MEMS                                                                        
|Munich-Perlach,
    Germany(3)                              |  |                 | 1987 |                                 |  | High frequency; sensors                                                     
|Regensburg, Germany                                         |  |                 | 1986 |                                 |  | Non-volatile memory, power and
    logic ICs; High Frequency ICs            
|Richmond, Virginia                                          |  |                 | 1998 |                                 |  | DRAM                                                                        
|Taoyuan,
    Taiwan(4)                                      |  |                 | 2004 |                                 |  | DRAM                                                                        
|Villach, Austria                                            |  |                 | 1979 |                                 |  | Power, smart power and discretes                                            
|Warstein, Germany                                           |  |                 | 1965 | (2)                             |  | High power                                                                  
|                                                            |  |                 |      |                                 |  |                                                                             
|Back-end facilities 
    assembly and final testing plants |  |                 |      |                                 |  |                                                                             
|Batam, Indonesia                                            |  |                 | 1996 |                                 |  | Leaded Power and Non-Power ICs                                              
|Cegled, Hungary                                             |  |                 | 1997 |                                 |  | High power                                                                  
|Dresden, Germany                                            |  |                 | 1996 |                                 |  | DRAM components and modules                                                 
|Malacca, Malaysia                                           |  |                 | 1973 |                                 |  | DRAM components and modules,
    discretes and power packages, logic ICs    
|Morgan Hill, California                                     |  |                 | 2002 |                                 |  | RF-power                                                                    
|Porto, Portugal                                             |  |                 | 1997 |                                 |  | DRAM components and modules                                                 
|Regensburg, Germany                                         |  |                 | 2000 |                                 |  | Chip card modules, sensors and
    pilot lines                              
|Singapore                                                   |  |                 | 1970 |                                 |  | Leadless and leaded non-power ICs,
    wafer test                           
|Skoppum, Norway                                             |  |                 | 1991 |                                 |  | Sensors                                                                     
|Suzhou,
    China(5)                                        |  |                 | 2004 |                                 |  | DRAM components and modules                                                 
|Warstein, Germany                                           |  |                 | 1965 | (2)                             |  | High power                                                                  
|Wuxi, China                                                 |  |                 | 1996 |                                 |  | Discretes, chip card modules                                                



|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | ALTIS, our joint venture with IBM in which we own
    50 percent plus one share. We have agreed with IBM to
    increase our share of the production ratably from 50 in 2004 to
    100 percent by 2007.
|   
|(2) | The current main production line began operations in 1991.                                                                                                                                              
|   
|(3) | We have announced plans to phase out production at
    Munich-Perlach and to shut down the plant in the beginning of
    calendar year 2007.                                                            
|   
|(4) | Inotera, our joint venture with Nanya.                                                                                                                                                                  
|   
|(5) | Infineon Technologies Suzhou, our joint venture with CSVC.                                                                                                                                              



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us access to substantial additional manufacturing capacity,
allowing us to more flexibly meet variable demand for both
memory and logic products over market cycles. These arrangements
are described below under Manufacturing ventures and
partnerships and Strategic Alliances.

We have devoted substantial resources to reducing our production
costs over the past several years. For instance we have been the
pioneer regarding the introduction of more productive
300-millimeter wafers in manufacturing. In addition the size and
layout of our manufacturing facilities are designed to meet
economy of scale requirements to allow for cost efficient wafer
production. As a consequence we believe that costs at our
leading edge DRAM manufacturing facilities are competitive with
those of our lowest-cost competitors.

Generally, we use foundries as well as assembly and test
subcontractors to assist us in meeting demand flexibly, as well
as managing investment expenditures. In recent years, we have
enhanced our manufacturing cooperation with United
Microelectronics Corporation (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 our
jointly developed 90-nanometer technology node. We have entered
into a joint development agreement with IBM, Chartered
Semiconductor and Samsung, to accelerate the move to
65-nanometer process technology. For assembly services, we have
further intensified our partnership with AMKOR Technology on
leadless and flip-chip technologies.

We have structured and organized our memory fabrication
facilities worldwide in what we call our fab
cluster. Through this organizational approach, we seek to
use best processes to maximize quality and consistency across
facilities. This allows us to ship many of our products from
multiple sites, and therefore supply products to anywhere in the
world from multiple facilities. In addition, by locating our
facilities in different areas, we can also recruit talent
globally. Our fab cluster includes our own front-end facilities
in Dresden and Richmond and corresponding back-end sites in
Dresden, Malacca, Porto and Suzhou, as well as our front-end
manufacturing joint venture Inotera, our front-end foundry
partners Winbond and SMIC, and our back-end subcontractors EEMS
Italia SpA and UTAC.

Effective January 2005 we closed our DRAM backend operations at
Richmond and transferred those activities to our volume back-end
facilities at Porto, Malacca and Suzhou. By concentrating the
back-end activities within large-scale manufacturing facilities
we expect to benefit from improved overall economies of scale.

In view of the strong and stable growth of our automotive and
industrial businesses, we believe it will be necessary to
increase our power-logic capacities within the next years.
Accordingly, we began construction of a power-logic plant in the
Kulim High-Tech Park in the north of Malaysia in 2005. This will
also allow us to further expand our presence in the growing
Asian market, as well as to strengthen our cost position and
competitive position. The ramp-up is expected to begin by
mid-2006.

Manufacturing ventures and partnerships

We have established the following manufacturing ventures and
arrangements with partners:

AMTC. In May 2002, we entered into agreements with
AMD Inc. and the former DuPont Photomasks Inc. to establish our
strategic cooperation in the field of advanced lithographic
photomasks. Under the terms of these agreements, we co-develop
photomasks and share development costs. For this purpose, the
three partners established an equally owned joined venture
called Advanced Mask Technology Center GmbH & Co. KG in
Dresden, Germany, to operate a photomask manufacturing facility
(mask center). The mask center, which started operations in
2004, develops and produces next generation lithographic and
engineering photomasks. Toppan Printing Co., Ltd. acquired DuPont

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##### Table of Contents

Photomasks Inc. in April 2005 which led to a name change; former
DuPont Photomasks Inc. is now named Toppan Photomasks Inc., Ltd.

CSVC. We have established a venture with China
Singapore Suzhou Industrial Park Venture Co. Ltd.
(CSVC), Suzhou, China, and constructed a back-end
facility for the assembly and testing of memory ICs. The
facility is located in the Suzhou Industrial Park, near
Shanghai, and was officially opened in September 2004. The
maximum output capacity of this facility will reach up to one
billion chips per year. Capacity will be developed in a number
of stages as dictated by growth and trends in the global
semiconductor market. In the 2005 financial year we invested
$29 million in the venture and plan to invest additional
$166 million through 2008. It is anticipated that any
further investment required to purchase additional equipment
would be financed externally by the joint venture.

SMIC. In December 2002, we entered into a Know-How
Transfer Agreement and a Product Purchase and Capacity
Reservation Agreement with SMIC which give us access to
additional DRAM production capacity. Under the terms of these
agreements, we have transferred our 140-nanometer DRAM
technology to SMIC. In return, SMIC is manufacturing and we are
purchasing up to 20,000 wafers per month from SMICs
200-millimeter production facility in Shanghai. We revised our
agreement with SMIC during the 2004 financial year to include
next-generation 110-nanometer technology.

In March 2003, we entered into extended Know-How Transfer and
Product Purchase and Capacity Reservation Agreements with SMIC,
which give us access to additional DRAM production capacity in
SMICs 300-millimeter facility in Beijing, which started
volume manufacturing in the 2005 financial year. Under the terms
of these agreements, we have transferred our 110-nanometer DRAM
trench technology and some 300-millimeter manufacturing know-how
to SMIC. In return, SMIC manufactures and we purchase up to
15,000 wafers per month out of SMICs 300-millimeter
facility. Our foundry portion of SMICs 200-millimeter
production facility was completely converted to our
110-nanometer technology in the 2005 financial year.

In March 2004 we entered into to a Disclosure and License
Agreement, which allows SMIC to use our 140-nanometer and
110-nanometer technology in their 200-millimeter facility for
foundry services to a limited number of customers.

Winbond. In May 2002, we entered into a Know-How
Transfer and License Agreement and a Product Purchase and
Capacity Reservation Agreement with Winbond, which give us
access to additional DRAM production capacity. Under the terms
of these agreements, we have transferred and licensed our
110-nanometer DRAM trench technology to Winbond. In return,
Winbond manufactures and we 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 specialty DRAMs.

In August 2004, we entered into an extended Know-How Transfer
and License Agreement and an extended Product Purchase and
Capacity Reservation Agreement with Winbond, which give us
access to additional DRAM production capacity in Winbonds
300-millimeter facility in Taiwan. Under the terms of these
agreements, we have transferred our 90-nanometer DRAM trench
technology and some 300-millimeter manufacturing know-how to
Winbond. In return, Winbond manufactures DRAMs for computing
applications exclusively for us. Furthermore, we intend to
develop specialty memories for mobile applications jointly with
Winbond.

Inotera. In November 2002, we entered into
agreements with Nanya relating to a strategic cooperation in the
development of DRAM products and the foundation of a joint
venture (Inotera, held 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, we and Nanya developed advanced 90-nanometer and
are currently developing 70-nanometer technology. Research is
conducted in Dresden and Munich, and manufacturing is conducted
in Taoyuan, Taiwan. By June 2005 we and Nanya had already
qualified the 90-nanometer DRAM technology and achieved
validation by Intel.

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On September 29, 2005, we entered into an agreement with
Nanya to expand our joint development cooperation on DRAM
process technology. The agreement provides for the joint
development of advanced 60-nanometer production technologies for
300-millimeter wafers, starting immediately. The extension of
the existing co-development of the 90-nanometer and 70-nanometer
technologies will help us expand our position in the DRAM market
while sharing development costs.

It is envisioned that, when completed, Inoteras
300-millimeter manufacturing facilities in Taiwan will employ
the production technology developed under our joint development
agreement with Nanya. The construction of the first
manufacturing facility was completed and mass production started
in the 2004 financial year. The capacity of the first
manufacturing facility is expected to be completed in three
phases. The first two phases have been completed. The capacity
reached approximately 60,000 wafer starts per month by August
2005. The third phase, with a capacity of about 62,000 wafer
starts per month, is expected to be reached in the 2006
financial year. In May 2005 the groundbreaking for the second
manufacturing facility took place. Construction of the
manufacturing module is expected to be finalized in the 2006
financial year. We are entitled to half of the production
capacity of Inotera. In September 2005, the shareholder meeting
of Inotera approved the plan to apply for a listing of Inotera
on the Taiwan Stock Exchange. In October 2005, the Management
Board of Inotera filed an application for listing on the
Taiwanese Stock Exchange.

Altis. In 1991 when we entered into an arrangement
with IBM, under which IBM manufactured DRAM products in its
facility in Essonnes, France and we received a share of the
production. Later we agreed with IBM to convert the Essonnes
facility to the production of logic devices and to convert the
existing production cooperation arrangement into a joint venture
called ALTIS. We own 50 percent of the joint ventures
shares plus one share and IBM owns the rest. We each have one
vote at the joint ventures shareholders meeting, and we
are each entitled to nominate one of the joint ventures
two chairmen; we have each 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 percent 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. We and IBM may
acquire each 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.

We have agreed to ratably increase our capacity reservation in
the production output of ALTIS from 50 percent in calendar
year 2004 to 100 percent by 2007. We and IBM have agreed
that we will decide the future business model of ALTIS no later
than January 1, 2007. Additionally, we were granted an
option through July 1, 2007 to acquire IBMs interest
in ALTIS. We are currently in negotiations with IBM regarding
the future business model of ALTIS.

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##### Table of Contents

Research and Development

Research and development (R&D) is critical to our continuing
success, and we are committed to maintaining high levels of
R&D over the long term. The table below sets forth
information with respect to our research and development
expenditures for the periods shown:

Research and Development Expenditures

|                                             |  |                                        |       |   |      |  |       |      |  |  |       |  
|-------------------------------------------- |  | -------------------------------------- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                                             |  | For the years ended September 30,      |      
|                                             |  |                                        |      
|                                             |  | 2003                                   |       |   | 2004 |  |       | 2005 | 
|                                             |  |                                        |       |   |      |  |       |      | 
|                                             |  | (Euro in millions, except percentages) |      
|Expenditures (net of subsidies
    received) |  |                                        | 1,089 |   |      |  | 1,219 |      |  |  | 1,293 |  
|As a percentage of net sales                 |  |                                        | 18    | % |      |  | 17    | %    |  |  | 19    | %













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Our 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:

Principal Research and Development Locations

|                         |  |                                                                                                                                                                                                                 
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Location                 |  | Areas of Competence                                                                                                                                                                                             
|                         |  |                                                                                                                                                                                                                 
|Bangalore, India         |  | Software development,
    system-on-chip development for wireline systems, library, design
    flow                                                                                                             
|Dresden, Germany         |  | Flash and DRAM technology
    development                                                                                                                                                                       
|Duisburg, Germany        |  | System-on-chip development for
    wireless systems, radio frequency, customer support for wireline
    systems                                                                                                 
|Graz, Austria            |  | Contactless systems, automotive
    power systems                                                                                                                                                               
|Hanover, Germany         |  | IP development for wireless
    communication ICs                                                                                                                                                               
|Kista, Sweden            |  | Wireless systems                                                                                                                                                                                                
|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, flash
|Nuremberg, Germany       |  | Software for wireless systems                                                                                                                                                                                   
|Raleigh, North Carolina  |  | Product development for commodity
    and specialty DRAM                                                                                                                                                        
|Regensburg, Germany      |  | Packaging, testing                                                                                                                                                                                              
|Singapore                |  | System-on-chip and software
    development for communications products                                                                                                                                         
|Sophia Antipolis, France |  | Wireless baseband products,
    contactless products, digital signal processing, library, design
    flow                                                                                                       
|Taipei, Taiwan           |  | Wireline access design                                                                                                                                                                                          
|Villach, Austria         |  | Power semiconductor products, mixed
    signal for deep submicron, automotive and telecommunication
    applications                                                                                            
|Xian, China             |  | System-on-chip and DRAM
    design & product implementation, implementation of
    digital product designs in standard CMOS technology                                                                          






Intellectual Property






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##### Table of Contents

during the 2005 financial year. National and regional patent
offices examine whether our patent applications meet the
necessary requirements. Owing the complex nature of our patent
applications this examination process typically takes several
years until grant of a patent. As of September 30, 2005,
approximately 6,600 patent families included at least one patent
granted in the United States or Europe.

It is common industry practice for semiconductor companies to
enter into patent cross licensing 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 licensing
agreements, including agreements with other major semiconductor
companies. We believe that our own substantial patent portfolio
enables us to enter into patent cross licensing agreements on
favorable terms and conditions. We are currently in patent cross
licensing negotiations with several major industry participants.
Depending on new developments, new products or other business
necessities, we may initiate additional patent cross licensing
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 a 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 Tessera Technologies, Inc. and MOSAID
Technologies Inc. Other disputes were settled in 2005,
particularly that with Rambus. For a description of these
matters, see Legal Matters.





Strategic Alliances

Alliances with other semiconductor manufacturers permit costly
research and development and manufacturing resources to be
shared to mutual advantage for joint technology and product
development. Alliances with foundry manufacturing companies
provide alternative manufacturing capacities in addition to
internal and joint-venture manufacturing resources.

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




    worldwide access to the expertise of other industry leaders in
    their respective areas, including manufacturing competence in
    new locations and additional experienced research and
    development employees;
    the sharing of risks inherent in the development and manufacture
    of new products;70



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##### Table of Contents


    the sharing of costs, including production ramp-up costs and
    research and development costs; and
    efficiency gains, including reduced time to market of new
    generations of semiconductor devices and economies of scale.Memory Products

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

Currently, our principal strategic memory alliance is with
Nanya, entailing both R&D collaboration in the areas of
70-nanometer and 60-nanometer DRAM process technology, and
manufacturing collaboration through our DRAM joint venture,
called Inotera. Research is conducted in Dresden and Munich, and
manufacturing is conducted in Taoyuan, Taiwan. By June 2005 we
and Nanya had already qualified the 90-nanometer DRAM technology
and achieved validation by Intel. On September 29, 2005, we
entered into an agreement with Nanya to expand our joint
development cooperation on DRAM process technology. The
agreement provides for the joint development of advanced
60-nanometer production technologies for 300-millimeter wafers,
starting immediately. The extension of the existing
co-development of the 90-nanometer and 70-nanometer technologies
will help us expand our position in the DRAM market while
sharing development costs.

It is envisioned that, when completed, Inoteras
300-millimeter manufacturing facilities in Taiwan will employ
the production technology developed under our joint development
agreement with Nanya. The construction of the first
manufacturing facility was completed and mass production started
in the 2004 financial year. The capacity of the first
manufacturing facility is expected to be completed in three
phases. The first two phases have been completed. The capacity
reached approximately 60,000 wafer starts per month by August
2005. The third phase, with a capacity of about 62,000 wafer
starts per month, is expected to be reached in the 2006
financial year. In May 2005 the groundbreaking for the second
manufacturing facility took place. Construction of the
manufacturing module is expected to be finalized in the 2006
financial year. We are entitled to half of the production
capacity of Inotera. In September 2005, the shareholder meeting
of Inotera approved the plan to apply for a listing of Inotera
on the Taiwan Stock Exchange. In October 2005, the Management
Board of Inotera filed an application for listing on the
Taiwanese Stock Exchange.

Logic Products

In order to remain at the forefront of technological advancement
and to share the initial costs inherent in launching 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.

Currently, our principal alliances in the logic area are with
(1) IBM, Samsung and Chartered Semiconductor for CMOS
development and manufacturing at 65-nanometer and 45-nanometer
process technologies, (2) UMC for 90-nanometer
manufacturing, and (3) IBM through our manufacturing joint
venture ALTIS.

Development History

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 180-nanometers and
130-nanometers. Later we extended this cooperation to include
110-nanometer technologies.

In 1999 we signed an agreement to continue this partnership for
90-nanometer technology, and included UMC in the alliance. UMC
later withdrew from this effort. Following this, we entered into
an

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agreement with UMC to jointly develop 90-nanometer CMOS
manufacturing technology in Taiwan. In addition, 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 130-nanometers. Both of these programs have been
completed successfully.

Beginning in 2003, we entered into a series of agreements with
IBM, Samsung and Chartered Semiconductor which resulted in our
current four-way alliance to jointly develop 60-nanometer and
45-nanometer CMOS manufacturing technologies.

Joint
Manufacturing

Our principal manufacturing cooperation with IBM began in 1991,
when we entered into an arrangement under which IBM manufactured
DRAM products in its facility in Essonnes, France and we
received a share of the production. Later we agreed with IBM to
convert the Essonnes facility to the production of logic devices
and to convert the existing production cooperation arrangement
into a joint venture called ALTIS. We own 50 percent of the
joint ventures shares plus one share and IBM owns the
rest. We each have one vote at the joint ventures
shareholders meeting, and we are each entitled to nominate one
of the joint ventures two chairmen; we have each 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 percent 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. We and IBM may
acquire each 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.

We have agreed to ratably increase our capacity reservation in
the production output of ALTIS from 50 percent in calendar
year 2004 to 100 percent by 2007. We and IBM have agreed
that we will decide the future business model of ALTIS no later
than January 1, 2007. Additionally, we were granted an
option through July 1, 2007 to acquire IBMs interest
in ALTIS. We are currently in negotiations with IBM regarding
the future business model of ALTIS.

In 2003, we entered into a joint development agreement with
ALTIS to jointly develop emerging non-volatile MRAM
(Magnetoresistive Random Access Memory) technology.

Logic
Foundry Manufacturing

UMC continues to be the prime manufacturing foundry partner for
our logic products utilizing 90-nanometer process technologies.





Acquisitions and Dispositions

Following our commitment to improve our profitability, we
disposed of a variety of non-core assets in the 2005 financial
year, while making only limited, strategic acquisitions. The
main transactions completed in the 2005 financial year were as
follows:

Infineon
Technologies Flash

In April 2001, we established the Infineon Technologies Flash
joint venture (then called Ingentix) in which we
held a 51 percent ownership interest with Saifun. In the
2003 financial year, we increased our ownership interest to
70 percent by contributing additional capital and
converting existing shareholder loans to equity. The joint
venture operated through two companies, Infineon Technologies
Flash GmbH & Co. KG, located in Dresden, Germany, and
Infineon Technologies Flash Ltd., located in

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Netanya, Israel. During December 2004, we modified the
cooperation agreement with Saifun. As a consequence, we
consummated the acquisition of Saifuns remaining
30 percent share in the Infineon Technologies Flash joint
venture in January 2005 and were granted a license for the use
of Saifun NROM® technologies, in exchange for
$95 million to be paid in quarterly installments over
10 years and additional purchase consideration primarily in
the form of net liabilities assumed aggregating
7 million. We
retained the option to terminate the entire license or parts
thereof at any time without penalty. During the quarter ended
June 30, 2005, we exercised our termination option and
cancelled the portion of the license encompassing NROM®
Code Flash products. As a result of the partial termination, the
license asset and related liability were reduced to
28 and
29, respectively, as
of June 30, 2005.

Fiber
Optics Divestiture

In January 2005, Finisar acquired our fiber optics transceiver
business in exchange for 34 million shares of
Finisars common stock, valued at approximately
40 million at the
time of closing. We are providing Finisar with contract
manufacturing services under separate supply agreements for up
to one year following the closing.

Following the Finisar transaction, we retained ownership of our
remaining fiber optics businesses, consisting of bi-directional
fiber transmission (BIDI) components for Fiber-To-The-Home
(FTTH) applications, parallel optical components (PAROLI) and
plastic optical fiber (POF) components that are used in
automotive applications.

We subsequently sold our BIDI business to EZConn Corporation in
August 2005. We have put our PAROLI products on end-of-life
status and have reached agreements with key customers regarding
their further requirements. The POF business has been integrated
into our Automotive, Industrial and Multimarket segment.

Termination
of Venture Capital Unit

Beginning in the 1999 financial year, we initiated a program of
minority investments in start-up companies through Infineon
Ventures, our venture capital unit. We also made investments in
three venture capital funds active in areas related to our
business. As a result of changes in market conditions and as
part of our effort to focus on our core strengths, we decided in
our 2004 financial year to terminate our venture investing
activities and to sell our venture investments.

In December 2004 we agreed to sell our venture capital arm,
Infineon Ventures GmbH, including its 26 direct investments and
several fund investments, to Cipio Partners, a venture capital
company. The transaction closed in February 2005. As a result of
the sale, we realized a gain before tax of
13 million which
was recorded in other operating income.

Sale of Optical Network Business

On April 7, 2005, we and Exar entered into an agreement
whereby Exar acquired for $11 million cash a significant
portion of our optical networking business unit. The acquisition
included assets relating to multi-rate TDM framer products,
Fiber Channel over SONET/ SDH, Resilent Packet Ring (RPR), as
well as certain intellectual property for Data Over SONET
products. As a result of the sale, we reclassified related
non-current assets into assets held for sale during the second
quarter of the 2005 financial year and reduced their carrying
value to the net sale proceeds. The sale of the assets was
consummated during the third quarter of the 2005 financial year.





Employees

We employed a total of 36,440 employees as of September 30,
2005. For a further description of our workforce by location and
function over the past three years, see Operating and
Financial Review  Other Matters 
Employees.

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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 the parent company-wide level
(Infineon Technologies AG). Works councils have extensive 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. The members of the
senior management of Infineon Technologies AG are represented by
a senior management committee (Sprecherausschuss).

The collective bargaining agreements pertain to certain of our
non-management employees in Germany (affecting approximately
6,400 employees), the Czech Republic (affecting
approximately 400 employees) and Austria (affecting
approximately 2,300 employees). The agreement in Germany is
perpetual, but can be terminated by the trade union with a
notice of one month prior to February 28, 2006. The
agreement in Austria expires on May 1, 2006. The provisions
of these agreements generally remain in effect until replaced by
a subsequent agreement. Agreements for periods after expiration
are to be negotiated with the respective trade unions through a
process of collective negotiations. The agreement in the Czech
Republic only covers employees of our fiber optics business. We
expect to close our fiber optics business during 2006.

In the last three financial years we have not experienced any
major labor disputes resulting in work stoppages. In October
2005, the relevant union organized a work stoppage in connection
with our plans to shut down our Munich-Perlach facility. This
work stoppage lasted one week and was ended following an
agreement to financially compensate those employees whose
contract will not be continued following the closure of this
manufacturing facility in 2007, see Risk
Factors  Problems with manufacturing.









Legal Matters

Rambus. In March 2005, we reached an agreement
with Rambus settling all claims between us and licensing the
Rambus patent portfolio for use in current and future Infineon
products. Rambus has granted to Infineon a worldwide license to
existing and future Rambus patents and patent applications for
use in Infineon memory products. In exchange for this worldwide
license, we agreed to pay $50 million in quarterly
installments of $6 million between November 15, 2005
and November 15, 2007. After November 15, 2007, and
only if Rambus enters into additional specified licensing
agreements with certain other DRAM manufacturers, Infineon will
make additional quarterly payments which may accumulate up to a
maximum of an additional $100 million. The agreement also
provides Infineon an option for acquiring certain other
licenses. All licenses provide for Infineon to be treated as a
most-favored customer of Rambus. Infineon has
simultaneously granted to Rambus a fully-paid perpetual license
for memory interfaces.

U.S. Department of Justice Investigation. In
September 2004, we entered into a plea agreement with the
Antitrust Division of the U.S. Department of Justice
(DOJ) in connection with its ongoing investigation
of alleged antitrust violations in the DRAM industry. Pursuant
to this plea agreement, we agreed to plead guilty to a single
count related to the pricing of DRAM products between
July 1, 1999 and June 15, 2002. Under the terms of the
agreement, we agreed to pay a fine of $160 million. The
fine plus accrued interest is to be paid in equal annual
installments through 2009. On October 25, 2004, the plea
agreement was accepted by the U.S. District Court for the
Northern District of California. Therefore, the matter has been
fully resolved between us and the DOJ, subject to our obligation
to cooperate with the DOJ in its ongoing investigation of other
participants in the DRAM industry. The wrongdoing charged by the
DOJ was limited to six Original Equipment Manufacturer
(OEM) customers that manufacture computers and
servers. We have entered into settlement agreements with five of
these

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OEM customers and are considering the possibility of a
settlement with the remaining OEM customer, which purchased only
a very small volume of DRAM products from us.

Civil antitrust claims. Subsequent to the
commencement of the DOJ investigation, a number of purported
class action lawsuits were filed against us, our U.S. subsidiary
and other DRAM suppliers.

Sixteen cases were filed between June 2002 and September 2002 in
the following U.S. 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
various DRAM suppliers in the United States of America during a
specified time period commencing on or after October 1,
2001 (Direct U.S. Purchaser Class). 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. In September 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 as part of a Multi-District Litigation
(MDL). In June 2005, with the permission of the
U.S. District Court for the Northern District of
California, the plaintiffs filed a second amended complaint
alleging that the unlawful conduct commenced on approximately
April 1, 1999 and continued through at least June 30,
2002. The Company has reached a settlement agreement with the
Direct U.S. Purchaser Class (subject to approval by the
U.S. District Court for the Northern District of
California) and has secured individual settlements with seven
direct customers in addition to those OEMs identified by the DOJ.

Sixty-three additional cases were filed between August 2,
2002 and September 16, 2005 in numerous federal and state
courts throughout the United States of America. Each of these
state and federal cases (except a case filed in the
U.S. District Court for the Eastern District of
Pennsylvania) purports to be on behalf of a class of individuals
and entities who indirectly purchased DRAM in the United States
of America during specified time periods commencing in or after
1999 (Indirect U.S. Purchaser Class). The
Eastern District of Pennsylvania case purports to be on behalf
of a class of foreign individuals and entities who directly
purchased DRAM outside of the United States of America between
April 1999 and June 2000 (Direct Foreign Purchaser
Class). The complaints variously allege violations of the
Sherman Act, Californias Cartwright Act, various other
state laws, 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 California
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.
Subsequently 12 of the state court cases and the
U.S. District Court for the Eastern District of
Pennsylvania case were ordered transferred to the
U.S. District Court for the Northern District of California
(San Francisco) for coordinated and consolidated pretrial
proceedings as part of the MDL described above. After this
transfer, the plaintiffs dismissed two of the transferred state
court cases. Two additional transferred state court cases were
subsequently remanded back to their relevant state courts. We
are defending against these actions vigorously.

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 products. We
reassessed the matter after our plea agreement with the DOJ and
made an accrual during the 2004 financial year for a probable
minimum fine that may be imposed as a result of the
Commissions investigation. Any fine actually imposed by
the Commission may be significantly higher than the reserve
established, although we cannot more accurately estimate the
amount of such actual fine. We are fully cooperating with the
Commission in its investigation.

Canadian Competition Bureau Investigation. In May
2004, the Canadian Competition Bureau advised our
U.S. subsidiary that it and its affiliated companies are
among the targets of a formal inquiry

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into alleged violations of the Canadian Competition Act in the
DRAM industry. No compulsory process (such as subpoenas) has
been commenced. We are cooperating with the Competition Bureau
in its inquiry.

Canadian Class Action Proceeding. In October
2004, a proposed class proceeding was commenced in the Canadian
province of Quebec on behalf of indirect purchasers, who
purchased products in Quebec from certain OEM customers which
contained DRAM during the period from July 1999 to June 2002,
seeking damages in unspecified amounts, investigation costs,
interest and legal costs in respect of activities which are the
subject of our September 15, 2004 plea agreement with the
DOJ. In the period from December 2004 to February 2005, three
other proposed class proceedings were commenced in the provinces
of Ontario, Quebec and British Columbia on behalf of all direct
and indirect purchasers resident, respectively, in Canada (in
the case commenced in the province of Ontario), Quebec and
British Columbia, who purchased DRAM or products which contained
DRAM during the period from July 1999 to June 2002, seeking
damages, punitive damages, investigation and administration
costs, in unspecified amounts, interest and legal costs.

Securities Class Actions. Between
September 30, 2004 and November 4, 2004 a total of
seven securities class action complaints were filed against us
in the U.S. District Courts for the Northern District of
California and the Southern District of New York. The plaintiffs
voluntarily dismissed the New York cases, and on June 30,
2005 filed a Consolidated Amended Complaint in California,
effectively combining all the lawsuits. The Consolidated Amended
Complaint alleges violations of the U.S. federal securities
laws and seeks damages on behalf of a purported class of
purchasers of Infineon Technologies AG publicly traded
securities during the period from March 13, 2000 to
July 19, 2004. We are vigorously defending against
allegations of U.S. securities laws violations.

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. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
September 30, 2005, we had accrued liabilities in the
amount of
144 million
related to the antitrust investigations and related antitrust
and securities claims described above. As additional information
becomes available, the potential liability related to these
matters will 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 adverse
impact on our results of operations, financial position and cash
flows.

An adverse final resolution of the antitrust investigations or
related civil claims or the securities class action lawsuits
described above 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. Irrespective of the validity or the
successful assertion of the claims described above, 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, financial position and cash flows.

ProMOS. On May 7, 2003, ProMOS filed
arbitration proceedings against us seeking payment of
approximately $36 million for DRAM products sold to us,
damages in the amount of approximately $338 million for
non-delivery of our technology and an affirmative judgment that
ProMOS be allowed to continue to use the technology already
transferred by us. We filed counterclaims seeking a judgment
that ProMOS be required to cease using our technology and pay
damages of approximately $568 million, after deduction of
$36 million for DRAM products sold to us.

On November 10, 2004, we and ProMOS reached an agreement
regarding ProMOS license of our DRAM technology
transferred to ProMOS. The S17 to S12 license agreement of 2000
was amended and remains in effect. ProMOS has been, and
continues to be, licensed to produce and sell products using the
technology transferred by us, and to develop its own processes
and products. As full consideration for the ongoing license for
use of our technology, ProMOS agreed to pay us $156 million
in four installments over a period through April 30, 2006,
against which our accrued payable for DRAM

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products purchased from ProMOS of $36 million was offset.
All claims (including litigation, arbitration or other
complaints) raised by both sides have been withdrawn. Infineon
recognized the relevant license income in the first quarter of
the 2005 financial year.

MOSAID. In late 2002, MOSAID Technologies Inc.
(MOSAID) alleged that we were violating
11 DRAM-related U.S. patents of MOSAID. In December
2002, we filed an action in the U.S. District Court for the
Northern District of California seeking a declaratory judgment
that we were not violating 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
had filed an amended counterclaim to add two new patents to its
previous claims. This matter has since been consolidated under
the federal multidistrict litigation rules with another lawsuit
filed by MOSAID against Samsung Electronics Co. Ltd.
(Samsung) in the U.S. District Court for the
District of New Jersey. On April 1, 2005, this District
Court issued a summary judgement order finding that our products
did not infringe most of MOSAIDs asserted claims, leaving
the infringement of only two claims in one patent still to be
determined. A trial date for these claims has not yet been
scheduled. On April 6, 2005, MOSAID filed an additional
lawsuit in the U.S. District Court for the Eastern District
of Texas, alleging that our DRAM products infringe one or more
claims of three MOSAID patents. A trial on this issue has been
scheduled for October 2006. We intend to vigorously defend
against MOSAIDs claims. An adverse final resolution could
result in significant financial liabilities to, and other
adverse effects upon us, which would have a material adverse
effect on our results of operations, financial position and cash
flows.

Tessera. On March 5, 2005, Tessera
Technologies, Inc. (Tessera) filed a lawsuit in the
U.S. District Court for the Eastern District of Texas,
alleging that our products containing ball grid array packages
infringe five Tessera patents. On April 13, 2005, Tessera
amended its complaint to allege that we and Micron violated
U.S. antitrust law, Texas unfair competition law, and Texas
business tort law by conspiring to harm the sale of Rambus
RDRAM chips, thereby injuring Tesseras ability to sell
chip packaging for RDRAM chips. A trial has been scheduled for
August 2006. We intend to vigorously defend against
Tesseras claims.

Other. We are subject to various other lawsuits,
legal actions, claims and proceedings related to products,
patents and other matters incidental to our businesses. We have
accrued a liability for the estimated costs of adjudication of
various asserted and unasserted claims existing as of the
balance sheet date. Based upon information presently known to
our 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
minimize or eliminate the possible negative impact of our
manufacturing processes on the environment, our employees and
third parties. Most of our production sites worldwide are
already included in our multi-site certification under
EN ISO 14001. We are currently in the process of
moving the occupational safety systems that have been developed
over the years at our various sites into a harmonized management
system that complies with the Occupational Health and Safety
Assessment Series (OHSAS) 18001. We expect that most of our
production sites will be certified according to OHSAS 18001 by
the end of the 2005 calendar year within a multi-site
certification.

In 2005, we instituted IMPRES  the Infineon
Integrated Management Program for Environment, Safety and
Health. IMPRES is a dynamic framework integrating our safety,
health, and environmental protection processes, strategy, and
objectives, using high standards and at a global scale. IMPRES
fulfills the requirements of OHSAS 18001 and
EN ISO 14001, while enabling synergies throughout the
company.

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Hazardous substances or materials are to a certain extent
necessary in the production of semiconductors. However, 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 and the environment. 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 our Environmental Management System, we
train our employees in the proper handling of hazardous
substances.

Where we are not able to eliminate adverse environmental impact
entirely, we aim to minimize the impact. For example, we need to
utilize PFCs (perflurocarbons) 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 the Memorandum of Agreement, a voluntary
commitment by the European Semiconductor Industry, and also to
the Memorandum of Understanding (in the United States of
America) both of which have the goal of reducing overall PFC
emissions by 2010 by approximately 10 percent from the
emission level of 1995, calculated in CO2
equivalents. We have signed a similar commitment for Germany,
with a normalized target of 8 percent emission reduction on
basis of CO2 equivalents.

Some of our facilities are within the scope of European
Commission Directive 2003/87/EC and the related national
implementing legislation. Based on these requirements, emissions
allowances have been allocated and emissions trading has been
introduced. Currently we do not expect to purchase any emissions
allowances. Nevertheless financial resources or additional
compliance expenditures could be required in the future due to
changes in law or our manufacturing processes.

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.

National legislation enacted pursuant to European Commission
Directive 2002/96/EC creates significant new obligations
regarding the collection, recovery and disposal of waste
electrical and electronic equipment. This directive obligates
manufacturers to finance the collection, recovery and disposal
of such products at the end of their life cycle. Our products
could constitute electrical and 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. Because not all
national implementing legislation is in place and because a
number of statutory definitions remain unclear, the consequences
for our company cannot currently be determined in detail. As a
result, we are not able at this time to estimate the amount of
additional costs that we may incur in connection with this
legislation.

Another relevant European Commission Directive, 2002/95/EC,
restricts the use of lead and other hazardous substances in
electrical and electronic equipment beginning July 1, 2006.
In response to market requirements, we started conversion in
2004. Most of our package families are already compliant with
this directive. We believe that our environmental management
system meets the requirements of major customers in terms of the
necessary compliance procedures.

A new European Union regulatory framework for chemicals, called
REACH, dealing with the registration, evaluation and
authorization of chemicals, was approved by the European
parliament in November 2005. 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 significantly reduced in the European Union, which
could have a negative impact on our production as well as
research and development activities. We expect to incur
significant

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future costs in connection with this proposal if it is adopted,
but we are not currently able to estimate these expenditures.

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 U.S. and certain related environmental
liabilities. Businesses contributed to us by Siemens
historically 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
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 us in this regard. We believe
our potential exposure, if any, to liability for remediating the
U.S. facilities retained by Siemens therefore to be low.

Because some of our facilities are located close to or even
shared with those of other companies, including members of the
Siemens group, we may need to respond to claims and certain
liabilities relating to environmental issues, such as
contamination, not entirely originating from our own operations.
We are not aware of any pending or potential liabilities in this
regard.





Real Estate

We own approximately 2.1 million square meters of land
(including approximately 1.0 million square meters of
building space) at our facilities in Bangalore (India), Batam
(Indonesia), Cegled (Hungary), Dresden (Germany), Horten
(Norway), Malacca (Malaysia), Munich (Germany), Porto
(Portugal), Regensburg (Germany), Richmond (Virginia, USA),
Singapore (Singapore), Suzhou (PR China), Villach
(Austria), Warstein (Germany), Wuxi (PR China), and Xian
(PR China).

In addition, we have long-term rental and lease arrangements
covering approximately 540,000 square meters of office
space in various locations in Asia/Pacific, Europe and North
America. We believe that these properties are rented or leased
on ordinary market terms and conditions.

We entered into a long-term operating lease agreement with MoTo
Objekt Campeon GmbH & Co. KG (MoTo) to
lease an office complex constructed by MoTo south of Munich,
Germany. The office complex, called Campeon, will enable us to
centralize most of our Munich-area employees, who are currently
situated in various locations throughout Munich, in one central
physical working environment. MoTo was responsible for the
construction, which was completed in the second half of
2005. We have no obligations with respect to financing
MoTo, and have provided no guarantees related to the
construction. We occupied Campeon under an operating lease
arrangement in October 2005 and have begun the gradual move of
our employees to this new location.

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MANAGEMENT

Supervisory Board Members

The current members of our Supervisory Board, their ages, the
year in which their current term expires and their principal
occupations and other positions as of September 30, 2005
are as follows:

|                                                               |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                                         |  |  |         | 
|-------------------------------------------------------------- |  | --- | -- | ---- | ------- |  | ---- | -------------------------------------------- | -------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                               |  |     |    |      |         |  |      | Compensation as                              |               
|                                                               |  |     |    |      |         |  |      | Supervisory Board                            |               
|                                                               |  |     |    |      |         |  |      | Member for the                               |               
|                                                               |  |     |    | Term |         |  |      |                                              | 2005 financial |                                                                                                                                                                                        
|Name                                                           |  | Age |    |      | expires |  |      | Principal occupations and other positions(1) |                | year                                                                                                                                                                                    | 
|                                                               |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                                         | 
|Max Dietrich KleyChairman                                      |  |     | 65 |      |         |  | 2010 |                                              |                | Member of the Supervisory Board of
    BASF AG                                                                                                                                          |  |  | 58,000 | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Additional external
    positions                                                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Chairman of the Supervisory Board
    of SGL Carbon AG, Wiesbaden                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Boards
    of
    Schott AG, Mainz
    Heidelberg Cement, Heidelberg
    Bayerische Hypo- und Vereinsbank AG,  Munich                                         |  |  |         | 
|                                                              
|Klaus Luschtinetz*Deputy Chairman
    (since January 20, 2004) |  |     | 62 |      |         |  | 2009 |                                              |                | Chairman of the Infineon central
    works council
    Deputy Chairman of the Infineon works  council,
    Munich Balan-/ St.-Martin-Strasse                                            |  |  | 43,500 | 
|                                                              
|                                                               |  |     |    |      |         |  |      |                                              |                | Comparable external
    positions                                                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Member of the board of
    administration of
    Siemens Employees Health Insurance,  Munich (until
    June 2005)                                                                      |  |  |         | 
|                                                              
|Alfred Eibl*Deputy Chairman
    (until January 20, 2004)       |  |     | 56 |      |         |  | 2009 |                                              |                | Member of the Infineon works
    council, Munich Balan-/ St.-Martin-Strasse                                                                                                             |  |  | 37,458 | 
|                                                              
|Dr. Joachim Faber                                              |  |     | 55 |      |         |  | 2010 |                                              |                | Member of the Management Board of
    Allianz AG                                                                                                                                        |  |  | 35,041 | 
|                                                              
|                                                               |  |     |    |      |         |  |      |                                              |                | Company positions                                                                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Chairman of the Supervisory Board
    of
    Allianz Dresdner Global Investor  Deutschland GmbH                                                                                         |  |  |         | 
|                                                              
|                                                               |  |     |    |      |         |  |      |                                              |                | Additional external
    Positions                                                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Chairman of the Supervisory Board
    of
    DEGI Deutsche Gesellschaft
    für  Immobilienfonds mbH
    DIT Deutscher Investment
    Trust Gesellschaft  für
    Wertpapieranlagen mbH |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    Bayerische Börse, Munich                                                                                                                     |  |  |         | 
|                                                              
|                                                               |  |     |    |      |         |  |      |                                              |                | Comparable external
    positions                                                                                                                                                       |  |  |         | 
|                                                               |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    AGF Asset Management S.A. Paris, France
    ART Allianz Risk Transfer, Zurich, Switzerland                                                   |  |  |         | 

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|                    |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                      |  |  |         | 
|------------------- |  | --- | -- | ---- | ------- |  | ---- | -------------------------------------------- | -------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                    |  |     |    |      |         |  |      | Compensation as                              |               
|                    |  |     |    |      |         |  |      | Supervisory Board                            |               
|                    |  |     |    |      |         |  |      | Member for the                               |               
|                    |  |     |    | Term |         |  |      |                                              | 2005 financial |                                                                                                                                                                     
|Name                |  | Age |    |      | expires |  |      | Principal occupations and other positions(1) |                | year                                                                                                                                                                 | 
|                    |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                      | 
|Johannes Feldmayer  |  |     | 49 |      |         |  | 2010 |                                              |                | Member of the Central Management
    Board of Siemens AG                                                                                                             |  |  | 19,333 | 
|                   
|                    |  |     |    |      |         |  |      |                                              |                | Company positions                                                                                                                                                    |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the board of
    administration of Siemens A.E., Athens, Greece                                                                                            |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Chairman of the Supervisory Board
    of Siemens Rt., Budapest, Hungary                                                                                              |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Chairman of shareholders
    representatives of Siemens sro, Prague, Czech Republic                                                                                 |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Deputy Chairman of the boards of
    administration of
    Siemens S.A., Madrid, Spain
    Siemens S.p.A., Milan, Italy
    Siemens Schweiz AG, Zurich, Switzerland  |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the boards of
    administration of
    Siemens France S.A., Saint-Denis, France
    Siemens A.S., Istanbul, Turkey
    Siemens A.S, Copenhagen, Denmark   |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Boards
    of
    Siemens Holdings plc, Bracknell, Great Britain
    Siemens AB, Stockholm, Sweden
    Siemens AG, Vienna, Austria         |  |  |         | 
|                   
|                    |  |     |    |      |         |  |      |                                              |                | Additional external
    positions                                                                                                                                    |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    Exxon Mobil Central Europe Holding GmbH,   Hamburg                                                                        |  |  |         | 
|                   
|Jacob Hauser*       |  |     | 53 |      |         |  | 2009 |                                              |                | Member of the Infineon central
    works council                                                                                                                     |  |  | 37,458 | 
|                    |  |     |    |      |         |  |      |                                              |                | Chairman of the Infineon works
    council,
    Munich/Perlach                                                                                                       |  |  |         | 
|                   
|Dr. Stefan Jentzsch |  |     | 44 |      |         |  | 2010 |                                              |                | Member of the Management Board
    of
    Bayerische Hypo- und Vereinsbank AG                                                                                        |  |  | 29,000 | 
|                   
|                    |  |     |    |      |         |  |      |                                              |                | Additional external
    positions                                                                                                                                    |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Boards
    of
    Deutsche Börse AG, Frankfurt
    Premiere AG, Munich (since March 9, 2005)
    DAB Bank AG, Munich (until March 8, 2005) |  |  |         | 
|                   
|                    |  |     |    |      |         |  |      |                                              |                | Company positions                                                                                                                                                    |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    HVB Systems AG, Munich                                                                                                    |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Chairman of the board of
    administration of
    HVB Wealth Management Holding GmbH,   Munich                                                                      |  |  |         | 
|                    |  |     |    |      |         |  |      |                                              |                | Deputy chairman of the Supervisory
    Boards of
    Vereins und Westbank AG, Hamburg
    HVB Info AG, Munich (until May 31, 2005)                                   |  |  |         | 

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|                                                 |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                               |  |  |         | 
|------------------------------------------------ |  | --- | -- | ---- | ------- |  | ---- | -------------------------------------------- | -------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                 |  |     |    |      |         |  |      | Compensation as                              |               
|                                                 |  |     |    |      |         |  |      | Supervisory Board                            |               
|                                                 |  |     |    |      |         |  |      | Member for the                               |               
|                                                 |  |     |    | Term |         |  |      |                                              | 2005 financial |                                                                                                                                                              
|Name                                             |  | Age |    |      | expires |  |      | Principal occupations and other positions(1) |                | year                                                                                                                                                          | 
|                                                 |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                               | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Comparable external
    positions                                                                                                                             |  |  |         | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    Bank Austria Creditanstalt AG, Vienna, Austria                                                                     |  |  |         | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Chairman of the Supervisory Boards
    of
    HVB Alternative Financial Products AG,  Vienna,
    Austria
    HVB Alternative Investment AG,  Vienna, Austria |  |  |         | 
|                                                
|Prof. Dr. Renate Köcher                          |  |     | 53 |      |         |  | 2010 |                                              |                | Director
    Institut für Demoskopie Allensbach                                                                                                               |  |  | 19,333 | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Boards
    of
    Allianz AG, Munich
    BASF AG, Ludwigshaven
    MAN AG, Munich                                                   |  |  |         | 
|                                                
|Michael Ruth*                                    |  |     | 45 |      |         |  | 2009 |                                              |                | Infineon Technologies Senior Vice
    President Strategy Planning and Controlling  Advanced
    Logic                                                        |  |  | 29,000 | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Representative of senior management                                                                                                                           |  |  |         | 
|                                                
|                                                 |  |     |    |      |         |  |      |                                              |                | Comparable company
    positions                                                                                                                              |  |  |         | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Member of the board of
    administration of
    ALTIS Semiconductor S.N.C., Essonnes,   France                                                               |  |  |         | 
|                                                
|Dieter Scheitor*                                 |  |     | 54 |      |         |  | 2009 |                                              |                | Head of the Electrical and
    Electronics Group of IG Metall, Frankfurt                                                                                      |  |  | 29,000 | 
|                                                
|Gerd Schmidt*                                    |  |     | 51 |      |         |  | 2009 |                                              |                | Deputy Chairman of the Infineon
    central works council                                                                                                     |  |  | 29,000 | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Chairman of the Infineon works
    council, Regensburg West                                                                                                   |  |  |         | 
|                                                
|Prof. Dr. rer. nat.
    Doris Schmitt-Landsiedel |  |     | 52 |      |         |  | 2010 |                                              |                | Professor at the Munich Technical
    University                                                                                                              |  |  | 22,958 | 
|                                                
|Kerstin Schulzendorf*                            |  |     | 43 |      |         |  | 2009 |                                              |                | Deputy Chairman of the Infineon
    works council, Dresden                                                                                                    |  |  | 29,000 | 
|                                                
|Alexander Trüby*                                 |  |     | 35 |      |         |  | 2009 |                                              |                | Member of the Infineon works
    council, Dresden                                                                                                             |  |  | 37,458 | 
|                                                
|Prof. Dr. rer. nat.
    Martin Winterkorn        |  |     | 58 |      |         |  | 2010 |                                              |                | Chairman of the Management Board
    of
    Audi AG                                                                                                           |  |  | 39,875 | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Member of the Management Board
    of
    Volkswagen AG                                                                                                       |  |  |         | 
|                                                
|                                                 |  |     |    |      |         |  |      |                                              |                | Additional external
    positions                                                                                                                             |  |  |         | 
|                                                 |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Boards
    of
    Salzgitter AG, Salzgitter
    FC Bayern München AG, Munich
    TÜV Süddeutsche Holding AG, Munich                 |  |  |         | 

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|                                                |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                                    |  |  |         | 
|----------------------------------------------- |  | --- | -- | ---- | ------- |  | ---- | -------------------------------------------- | -------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------- | 
|                                                |  |     |    |      |         |  |      | Compensation as                              |               
|                                                |  |     |    |      |         |  |      | Supervisory Board                            |               
|                                                |  |     |    |      |         |  |      | Member for the                               |               
|                                                |  |     |    | Term |         |  |      |                                              | 2005 financial |                                                                                                                                                                                   
|Name                                            |  | Age |    |      | expires |  |      | Principal occupations and other positions(1) |                | year                                                                                                                                                                               | 
|                                                |  |     |    |      |         |  |      |                                              |                |                                                                                                                                                                                    | 
|                                                |  |     |    |      |         |  |      |                                              |                | Comparable external
    positions                                                                                                                                                  |  |  |         | 
|                                                |  |     |    |      |         |  |      |                                              |                | Member of the administrative boards
    of
    SEAT S.A., Barcelona, Spain
    Automobili Lamborghini Holding SpA,  Sant
    Agata Bolognese, Bologna, Italy                      |  |  |         | 
|                                               
|Prof. Dr.-Ing. Dr.-Ing E. h.
    Klaus Wucherer |  |     | 61 |      |         |  | 2010 |                                              |                | Member of the Management Board of
    Siemens AG                                                                                                                                   |  |  | 37,458 | 
|                                                |  |     |    |      |         |  |      |                                              |                | Additional external
    positions                                                                                                                                                  |  |  |         | 
|                                                |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    Deutsche Messe AG, Hanover                                                                                                              |  |  |         | 
|                                               
|                                                |  |     |    |      |         |  |      |                                              |                | Company positions                                                                                                                                                                  |  |  |         | 
|                                                |  |     |    |      |         |  |      |                                              |                | Member of the Supervisory Board
    of
    BSH Bosch and Siemens Hausgeräte GmbH, Munich                                                                                           |  |  |         | 
|                                               
|                                                |  |     |    |      |         |  |      |                                              |                | Comparable company
    positions                                                                                                                                                   |  |  |         | 
|                                                |  |     |    |      |         |  |      |                                              |                | Chairman of the boards of
    administration of
    Siemens Ltd., Beijing, China
    Siemens K.K., Tokyo, Japan
    Siemens S.A., Lisbon, Portugal
    Siemens Ltd., Mumbai, India |  |  |         | 



|  |                         
|- | ------------------------
|* | Employee representative.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Lists the principal occupation of the Supervisory Board member.
    Additional external positions refers to board
    positions of entities outside of the group of companies where
    the member has his principal occupation. Comparable
    external positions refers to board positions that are
    similar but not identical to the additional external positions.
    Company positions refers to board positions of
    companies within the group of companies where the member has his
    principal occupation. Comparable company positions
    refers to board positions that are similar but not identical to
    the company positions.





|  |                    
|- | -------------------
| | Mediation Committee



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Max Dietrich Kley (since September 1, 2004) 
     Klaus Luschtinetz (since January 20, 2004) 
     Alexander Trüby (since January 20, 2004) 
     Prof. Dr.-Ing. Dr.-Ing. E. h. Klaus Wucherer (until
    April 29, 2005)



|  |                    
|- | -------------------
| | Executive Committee



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Max Dietrich Kley (since September 1, 2004) 
     Klaus Luschtinetz (since January 20, 2004) 
     Prof. Dr. Martin Winterkorn (since August 1, 2005)



|  |                                        
|- | ---------------------------------------
| | Investment, Finance and Audit Committee



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Max Dietrich Kley (since September 1, 2004) 
     Dr. Joachim Faber (since April 29, 2005) 
     Klaus Luschtinetz (since January 20, 2004) 
     Prof. Dr.-Ing. Dr.-Ing. E. h. Klaus Wucherer (from
    October 1, 2004 until January 25, 2005)

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
    Strategy and Technology Committee (in existence until
    April 30, 2005)

Alfred Eibl 
     Jakob Hauser 
     Alexander Trüby 
     Prof. Dr. rer. nat. Schmitt-Landsiedel (since
    January 25, 2005) 
     Prof. Dr. rer. nat. Martin Winterkorn 
     Univ.-Prof. Dr.-Ing. Ingolf Ruge (from October 1, 2004
    until January 31, 2005) 
     Prof. Dr.-Ing. Dr.-Ing. E. h. Klaus Wucherer (from
    October 1, 2004 until April 20, 2005)During the 2005 financial year Günther Fritsch,
Dr. h.c. Martin Kohlhaussen and Univ.-Prof. Dr.-Ing. Ingolf
Ruge left our Supervisory Board at the end of their terms of
office.

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##### Table of Contents

Management Board Members

Effective December 1, 2004, Mr. Kin Wah Loh joined the
companys Management Board with a five year term.

On July 16, 2005 Dr. Andreas von Zitzewitz, resigned
from the Management Board with immediate effect. The Supervisory
Board accepted the resignation of Dr. Andreas von Zitzewitz
on July 28, 2005.

On July 28, 2005, the Supervisory Board approved a
reorganization of the responsibilities within the Management
Board and the appointment of Prof. Dr. Hermann Eul.
Mr. Kin Wah Loh, member of the Management Board and until
then responsible for the Communication segment, assumed
responsibility for the Memory Products segment. Professor Eul,
until then Group Vice President and General Manager of the
Communication segment, was appointed Deputy Executive Vice
President of our Management Board and in this capacity he took
over the responsibilities of Mr. Kin Wah Loh.

The current members of our Management Board, their ages, the
year in which their term expires and their positions as of
September 30, 2005 are as follows:

|                      |  |     |    |      |         |  |      |                                    |  |                                                                                                   
|--------------------- |  | --- | -- | ---- | ------- |  | ---- | ---------------------------------- |  | --------------------------------------------------------------------------------------------------
|                      |  |     |    | Term |         |  |     
|Name                  |  | Age |    |      | expires |  |      | Position and Outside Directorships
|                      |  |     |    |      |         |  |      |                                   
|Dr. Wolfgang Ziebart  |  |     | 55 |      |         |  | 2009 |                                    |  | Chairman, President and Chief
    Executive Officer                                               
|Peter Bauer           |  |     | 45 |      |         |  | 2008 |                                    |  | Executive Vice PresidentMember of the
    Supervisory Board of Siemens VDO Automotive AG, Munich  
|Prof. Dr. Hermann Eul |  |     | 46 |      |         |  | 2008 |                                    |  | Deputy Executive Vice
    PresidentMember of the
    Supervisory Board of 7Layers AG, Ratingen    
|Peter J. Fischl       |  |     | 59 |      |         |  | 2008 |                                    |  | Executive Vice President and
    Chief Financial Officer                                          
|Kin Wah Loh           |  |     | 50 |      |         |  | 2009 |                                    |  | Executive Vice PresidentDirector Accton
    Technologies Corp., Hsinchu, Taiwan, Republic of China

Dr. Wolfgang Ziebart


Peter Bauer


Prof. Dr. Hermann Eul


85



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In 2004 he returned to Infineon where he first co-managed the
Wireline Communications segment as Senior Vice President and
then, following a reorganization, became the Vice President and
General Manager of the Communication segment. Professor Eul
studied electrical engineering and has a doctorate in
engineering.

Peter J. Fischl has 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.

Kin Wah Loh has served on our Management Board since
December 2004, serving from January to July 2005 as the Head of
our Communication segment, and since July 28, 2005, as the
Executive Vice President of our Memory Products segment. From
1999 until 2004 he served as President and Managing Director of
Infineon Technologies Asia Pacific, Singapore. Previously,
Mr. Loh served in a variety of capacities at Siemens. He
holds an honors degree in chemical engineering and certified
diploma in business administration from the University of
Malaya, Kuala Lumpur.

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.





Overview of Corporate Governance Structure

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 exercise functions and serve as 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

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##### Table of Contents

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 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 the general shareholders
meeting held on January 25, 2005 and the term of all
shareholder representatives ends with the annual general meeting
for the 2010 financial year. Shareholders vote upon new
representatives who will, if not elected for a shorter term,
serve a regular term of five years on the Supervisory Board. The
employees elected new employee members of the Supervisory Board
in 2004, who took office on January 20, 2004 and who we
expect will serve a regular five-year term.

The shareholders, by a majority of the votes cast 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 a quarter. Its main
functions are:




    to monitor our management;
    to appoint our Management Board;
    to approve matters in areas that the Supervisory Board has made
    generally subject to its approval; and
    to approve matters that the Supervisory Board decides on a case
    by case basis to make subject to its approval.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
including, among other duties:




    preparing the decisions of the Supervisory Board regarding
    approval of our companys annual financial statements,
    including review of the financial statements, our annual
    reports, the proposed application of earnings and the reports of
    our auditors;87



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
    reviewing the interim financial statements of our company that
    are made public or otherwise filed with any securities
    regulatory authority;
    issuing to our auditors terms of reference for their audit of
    our annual financial statements;
    approving decisions of our Management Board or a committee
    thereof regarding increases of our companys capital
    through the issuance of new shares out of authorized or
    conditional capital, to the extent they are not issued to
    employees or used for the disapplication of pre-emptive rights
    as part of a share option plan; and
    approving decisions of our Management Board in relation to any
    investment or disposition that exceeds five percent of our total
    investment budget or in relation to the taking of any financial
    risk vis-à-vis third parties in an amount exceeding five
    percent of our share capital plus capital reserves.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.

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.

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.

Management Board

Our Management Board currently consists of five 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. Our
Supervisory Board approved these rules and resolved that the
following decisions of the Management Board require the consent
of the Supervisory Board:




    Decisions relating to financial and investment planning,
    including both budgets and the establishment of limits for
    financial indebtedness;
    Decisions relating to any investment or disposition that exceeds
    five percent of our total investment budget; and
    Decisions relating to the taking of any financial risk
    vis-à-vis third parties in an amount exceeding five percent
    of our share capital plus capital reserves.88



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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 annual financial statements;
    the calling of the shareholders general meeting;
    matters for which the consent of the shareholders general
    meeting or of the Supervisory Board must be obtained; and
    matters involving basic organizational, business policy and
    investment and financial planning questions for our company.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.

Significant Differences between our Corporate Governance
Practices and those of U.S. Companies Listed on the New
York Stock Exchange

A brief, general summary of the significant differences between
our corporate governance practices under German law and the
practices applicable to U.S. companies listed on the New
York Stock Exchange is available in the corporate governance
section of our website, www.infineon.com, and directly at
www.infineon.com/significant-differences.





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 percent of this
amount and each of the deputy chairmen and each member of
certain committees receive 150 percent of this amount. The
aggregate compensation of the members of our Supervisory Board
for the 2005 financial year was
0.6 million
(consisting of fixed components of
0.6 million,
variable components of
0 and other
consideration of 0).
The individual compensation of each member of the Supervisory
Board is provided in the table of Supervisory Board members,
above. 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 2005 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.

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The total remuneration of the Management Board for the year
ended September 30, 2005 consisted of fixed salary of
5.2 million and
other compensation of
0.2 million.
During the year ended September 30, 2005, the company
established a provision for variable bonus of the Management
Board of
0.5 million,
which is linked to the realization of the return on
capital employed, which is defined as earnings before
interest, taxes, other operating expense (income) and other
non-operating expense (income), divided by capital employed.
Additionally the Management Board members received 475,000 stock
options granted at an exercise price of
9.18. The stock
options were granted to the Management Board in connection with
the Long-Term-Incentive-Plan 2001, which is also the basis for
the share appreciation rights. The fair value of each stock
option and stock appreciation right at their grant date, if
measured under the same conditions as stock options, was
4.07.

The individual compensation of our Chairman Dr. Ziebart
consisted of fixed components of
1.6 million,
variable components of
0.1 million and
other compensation of
0.03. Furthermore,
Dr. Ziebart received 190,000 stock options granted at
an exercise price of
9.18.

Former members of the Management Board received remuneration of
4.7 million
during the 2005 financial year. This amount had been accrued as
of September 30, 2004. As of September 30, 2005,
accrued pension liabilities for former members of the Management
Board amounted to
10.4 million. A
severance agreement with Dr. Schumacher was concluded which
provided for the payment of
5.25 million to
settle all possible claims Dr. Schumacher may have had
under his employment contract. Half of this amount was paid in
the 2005 financial year. No definitive agreement has been
reached with Dr. Andreas von Zitzewitz, who left the
Management Board of the company in July 2005, with respect to
his possible claims under his employment contract. Although we
believe that no further payments (with the possible exception of
pension payments) are warranted, any such agreement could
involve further payments to Dr. von Zitzewitz.

The total compensation of the members of our Management Board
consists of the annual target income in cash, stock options and
other benefits.

Of the annual target compensation:




    One part is fixed and paid out partly in 12 monthly
    installments and partly after the end of the financial year, all
    after statutory deductions; and
    Another part is an annual bonus which is variable and subject to
    performance. In the 2005 financial year, this bonus was linked
    to the realization of the return on capital
    employed, which is defined as earnings before interest,
    taxes, other operating expense (income) and other non-operating
    expense (income), divided by capital employed. The bonus is
    therefore linked to performance. The bonus is paid out within
    five months after the financial year end.Stock options on Infineon Technologies AG shares serve as a
variable compensation component with a long-term incentive as
well as risk character.

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

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 where 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

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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.

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, 2005, options to purchase an aggregate
of 8.4 million shares were outstanding under the 1999 plan,
of which options to purchase 0.5 million 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 percent 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. 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 more than 51.5 million shares
in our company in the aggregate. As of September 30, 2005,
options to purchase an aggregate of 32.5 million shares
were outstanding under the 2001 plan, of which options to
purchase 1.1 million 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 percent of the plan options may be granted.

The exercise price of the options granted under the 2001 plan is
105 percent 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.

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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 an employee share purchase program pursuant to which our
employees may purchase our shares at a discount during
designated offering periods. We reserved a total of
3 million shares for issuance under the program, and have
issued 355,460 of these shares to date. We have not made an
offering under this program since our 2002 financial year. We do
not anticipate making an offering during the 2006 financial year.

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PRINCIPAL SHAREHOLDERS

The following table shows the beneficial ownership, as of
September 30, 2005, of our companys share capital by
(1) the principal shareholders (each person or entity who
owns beneficially 5 percent 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 |            
|                                                |  |              |            
|                                                |  | Number       |             |  | Percent | 
|                                                |  |              |             |  |         | 
|Siemens AG                                      |  |              | 136,292,363 |  |         |  | 18.2 | 
|Capital Group International,
    Inc.(1)        |  |              | 74,774,410  |  |         |  | 10.0 | 
|Members of the Management Board as
    a group  |  |              | *           |  |         |  | *    | 
|Members of the Supervisory Board as
    a group |  |              | *           |  |         |  | *    | 



|    |                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | According to Amendment No. 5 to a Schedule 13G filed
    by Capital Group International, Inc. with the SEC, dated as of
    May 20, 2005, Capital Group International, Inc. disclaims
    beneficial ownership of such shares. The business address of
    Capital Group International, Inc. is 11100 Santa Monica Blvd.,
    Los Angeles, California, 90025, USA.



|  |                                                                       
|- | ----------------------------------------------------------------------
|* | Represents less than one percent of our outstanding share
    capital.

 






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RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

Formation

In April 1999, Infineon was formed as a separate legal entity
and a directly and indirectly wholly owned subsidiary of Siemens
AG. In March 2000, as part of our initial public offering,
Siemens affiliate, Siemens Nederland N.V., sold
approximately 173 million of our shares. Since that time,
Siemens and its affiliates have taken a number of steps to
substantially reduce their ownership interest in our company,
including further public and block sales of shares and the
issuance of securities convertible into our shares. Siemens
continues to control the disposition of approximately
18 percent of our shares. Siemens has stated on a number of
occasions that it intends to continue to reduce its ownership
stake in our company as and when business and market conditions
permit.

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
not provided any indication to date 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.

We have granted to Siemens certain rights to have our
companys shares registered for resale under the Securities
Act. We have agreed to indemnify Siemens against certain
liabilities that might arise in connection with such a
registration, including certain liabilities under the Securities
Act.

We are not aware of any further steps in the Siemens program to
reduce its ownership of our companys shares or when such
steps may occur.

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 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 2005 financial year, purchased services from Siemens
include information technology services of
72 million,
facility rental of
40 million, and
administrative services of
78 million. We
also purchased raw materials, products and fixed and other
assets aggregating
38 million during
the 2005 financial year.

Sales

The Siemens group is our largest customer. In the 2003, 2004 and
2005 financial years, 13 percent, 13 percent and
12 percent, respectively, of our net sales resulted from
direct sales to the Siemens group. 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 channels can be found under
Business  Customers, Sales and
Marketing  Sales and Marketing.

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Patent Cross-Licensing Agreement

We have entered into a patent cross licensing agreement with
Siemens that grants Siemens the right to use our patents and
grants us the right to use Siemens patents.

Acquisitions and Dispositions

In February 2004, we completed the acquisition of assets and
assumption of certain liabilities 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.

In May 2005, we completed the sale of assets of our electronic
biochip activities to Siemens, in exchange for
1.3 million in
cash.

In November 2005, we agreed to transfer our fiber optics
manufacturing facility in Trutnov, Czech Republic, to Siemens
VDO for an aggregate purchase price of approximately
5 million. We
expect this sale to be completed in the summer of 2006.

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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,
Germany. An English translation has been filed with the
Securities and Exchange Commission in the United States.

Equity position and financial flexibility

The issued share capital of our company consists of
1,495,138,718 divided
into 747,569,359 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:




    At our formation, our share capital consisted of
    400,000,000,
    represented by 200,000,000 shares.
    On January 26, 2000, we increased our share capital from
    400,000,000 to
    800,000,000 by issuing
    200,000,000 shares for a
    400,000,000 transfer
    of corporate funds to capital. The new shares were issued to
    Siemens and Siemens Nederland N.V. in proportion to their
    respective ownership interests in our company at that time.
    On February 14, 2000, we increased our share capital from
    800,000,000 to
    1,200,000,000 by
    issuing 200,000,000 shares for a
    400,000,000 transfer
    of corporate funds to capital. The new shares were issued to
    Siemens and Siemens Nederland N.V. in proportion to their
    respective ownership interests in our company at that time.
    On March 8, 2000, we increased our share capital by
    33,400,000 to
    1,233,400,000 for cash
    contributions by issuing 16,700,000 shares with full
    dividend entitlement for the 2000 financial year. The shares
    were sold in our initial public offering.
    On April 28, 2000, we increased our share capital by
    15,184,860 by issuing
    to Intel Corporation 7,592,430 shares with full dividend
    entitlement for the 2000 financial year. After the execution of
    the capital increase, our share capital consisted of
    1,248,584,860.
    On June 28, 2000, we increased our share capital by
    2,418,154 against a
    contribution in kind by issuing 1,209,077 shares with full
    dividend entitlement for the 2000 financial year to Savan
    Communications Ltd. After execution of the capital increase our
    share capital consisted of
    1,251,003,014.
    On March 16, 2001, we increased our share capital by
    886,976 against a
    contribution in kind by issuing 443,488 shares with full
    dividend entitlement for the 2001 financial year in connection
    with our investment in Ramtron International Corporation. After
    execution of the capital increase our share capital consisted of
    1,251,889,990.
    On April 11, 2001, we increased our share capital by
    1,413,428 against
    a contribution in kind by issuing 706,714 shares with full
    dividend entitlement for the 2001 financial year in connection
    with our acquisition of Ardent Technologies Incorporated. After
    the execution of the capital increase our companys share
    capital consisted of
    1,253,303,418.
    In July 2001, we increased our share capital by
    120,000,000 by issuing
    60,000,000 shares (with full dividend entitlement for the
    2001 financial year) in our secondary public offering. After the
    execution of the capital increase our companys share
    capital consisted of
    1,373,303,418.96



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##### Table of Contents


    On July 25, 2001, we increased our share capital by
    12,746,870 against a
    contribution in kind by issuing 6,373,435 shares with full
    dividend entitlement for the 2001 financial year in connection
    with our acquisition of Catamaran Communications Incorporated.
    After the execution of the capital increase, our companys
    share capital consisted of
    1,386,050,288.
    On November 29, 2001, we increased our share capital by
    24,000 by issuing
    12,000 shares with full dividend entitlement for the 2002
    financial year to group employees in connection with our 2001
    employee share purchase program. After the execution of the
    capital increase, our companys share capital consisted of
    1,386,074,288.
    On July 24, 2002, we increased our share capital by
    686,920 by issuing
    343,460 shares with full dividend entitlement for the 2002
    financial year to group employees in connection with our 2002
    employee share purchase program. After the execution of the
    capital increase, our companys share capital consisted of
    1,386,761,208.
    On August 30, 2002, we increased our share capital by
    55,000,000 against a
    contribution in kind by issuing 27,500,000 shares with full
    dividend entitlement for the 2002 financial year in connection
    with our acquisition of Ericsson Microelectronics AB, Stockholm,
    Sweden. After the execution of the capital increase, our
    companys share capital consisted of
    1,441,761,208.
    On March 23, 2004, we increased our share capital by
    53,358,510 against a
    contribution in kind by issuing 26,679,255 shares with full
    dividend entitlement for the 2004 financial year in connection
    with the acquisition of the remaining interest in Infineon
    Technologies SC300 GmbH & Co. KG, Dresden. After the
    execution of the capital increase our companys share
    capital consisted of
    1,495,119,718.
    During the 2005 financial year, our share capital increased by
    19,000 as a result of
    the exercise of 9,500 employee stock options. After these
    exercises our companys share capital consisted of
    1,495,138,718.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 agent
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 percent 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:




    in an aggregate nominal amount of up to
    30 million to
    issue shares to employees of the Infineon group companies (in
    which case preemptive rights of the existing shareholders are
    excluded) until January 19, 2009; or
    in an aggregate nominal amount of up to
    296.6 million to
    issue shares for cash (in which case preemptive rights of
    existing shareholders may be excluded under certain
    circumstances by the Management Board with the consent of the
    Supervisory Board) or in exchange for contributions in kind (in
    which case preemptive rights of the existing shareholders may be
    excluded by the Management Board with the consent of the
    Supervisory Board) until January 21, 2007.97



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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 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 issuance upon
conversion of debt securities we issued in June 2003. All of
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
issuances 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 percent 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 percent 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 or her 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

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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 or her 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 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 percent 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 percent majority requirement also applies
to the following matters:




    the exclusion of preemptive rights in a capital increase;
    capital decreases;
    a creation of authorized capital or conditional capital;
    a dissolution;
    a merger or a consolidation with another stock corporation or
    another corporate transformation;
    a transfer of all or virtually all of the assets of our
    company; and
    the conclusion of any direct control, profit and loss pooling or
    similar inter-company agreements.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 a shareholder
holds shares that are entitled to dividends in a clearing
system, the dividends will be

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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.

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.

Shareholders Other Rights and Obligations

Our shareholders have other rights and obligations, for example
the right to participate in the general discussion at the annual
meeting of shareholders and ask questions of our management. If
shareholders believe that the company has been harmed by members
of the Management Board or Supervisory Board they can initiate
proceedings against those persons under certain conditions. If a
competent German court finally determines that members of the
Management Board or Supervisory Board have violated their
obligations towards the company, they are liable for damages to
the company, but generally not to the shareholders directly.
Such direct claims would be successful under very rare
circumstances, for example upon a finding that the member of the
Management Board or the Supervisory Board has engaged in willful
misconduct with the intention of harming shareholders.

Under German corporate law, shareholders also have certain
obligations towards the company and towards each other. They owe
a fiduciary duty to the company and to other shareholders which
obliges them to foster the common purpose of the company and to
refrain from measures and actions that could have detrimental
effects on that purpose. They also owe a fiduciary duty to the
other shareholders, which obliges them take into account the
rights and investments of other shareholders and the interests
of the company. The 2005 annual general meeting resolved upon
inserting a clause into the articles of association which
explicitly mentions this fiduciary duty owed by each shareholder
to their fellow shareholders. Both duties have to be observed
while exercising shareholders rights or making claims
against the company, for example when initiating legal action
against the company. This may have the effect of requiring that
a claim be brought in Germany rather than another forum and also
that a way for bringing such claims must be chosen which, while
providing relief to justified claims of the shareholder, does as
little harm as possible to the company and other shareholders.
These features of German corporate law may make it difficult or
impossible for a shareholder to enforce in Germany a judgment
rendered against our company by a foreign court.

The 2005 annual general meeting also resolved to add a special
clause to the articles of association which obliges all
shareholders to bring any legal action arising out of their
participation in the company or its purchase, holding or sale,
against the company and their fellow shareholders at the place
of incorporation of the company in Munich, Germany, if no
mandatory provision of German law provides otherwise. This,
together with a new provision of the German Code for Civil
procedure, will lead to the effect that non-German judgments
rendered by non-German courts in such matters will not be
enforced in Germany, because such courts lack jurisdiction from
a German point of view; this point of view may not be shared by
the courts in other jurisdictions.

We seek to treat shareholders and the holders of our ADSs
equally to the extent legally possible, so they have the same
rights and obligations towards the company and each other.

Disclosure Requirement

The German Securities Trading Act requires each person whose
shareholding of a listed company reaches, exceeds or, after
exceeding, falls below 5 percent, 10 percent,
25 percent, 50 percent or 75 percent voting
rights thresholds 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

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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 percent 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

Infineon Technologies AG is the parent company of the Infineon
group, with subsidiaries incorporated in jurisdictions
throughout Europe and Asia, as well as in the United States. Our
most significant subsidiaries are set out below, all of which
are, unless otherwise indicated, directly or indirectly
100 percent owned by Infineon Technologies AG:

Principal Subsidiaries as of September 30, 2005

|                                                                      |  |                            |  |                             
|--------------------------------------------------------------------- |  | -------------------------- |  | ----------------------------
|Corporate name                                                        |  | Registered office          |  | Principal activity          
|                                                                      |  |                            |  |                             
|Infineon Technologies Dresden
    GmbH & Co. OHG                      |  | Dresden, Germany           |  | Production                  
|Infineon Technologies SC300
    GmbH & Co. OHG                        |  | Dresden, Germany           |  | Production                  
|Infineon Technologies Finance GmbH                                    |  | Munich, Germany            |  | Financial Services          
|Infineon Technologies Flash
    GmbH & Co. KG                         |  | Dresden, Germany           |  | Research and
    Development
|EUPEC Europäische Gesellschaft
    für
    Leistungshalbleiter mbH(1) |  | Warstein, Germany          |  | Production                  
|Infineon Technologies Holding
    B.V.                                |  | Rotterdam, The Netherlands |  | Holding                     
|Infineon Technologies Fabrico des
    Semicondutores Portugal S.A.    |  | Vila do Conde, Portugal    |  | Production                  
|Infineon Technologies France
    S.A.S.                               |  | Saint Denis, France        |  | Distribution                
|SensoNor AS                                                           |  | Horten, Norway             |  | Production                  
|Infineon Technologies Austria AG                                      |  | Villach, Austria           |  | Production                  
|Infineon Technologies Holding North
    America Inc.                  |  | Wilmington, Delaware, USA  |  | Holding                     
|Infineon Technologies Richmond LP                                     |  | Wilmington, Delaware, USA  |  | Production                  
|Infineon Technologies Asia Pacific
    Pte. Ltd.                      |  | Singapore                  |  | Production                  
|Infineon Technologies China Co.
    Ltd.                              |  | Shanghai, China            |  | Holding                     
|Infineon Technologies Suzhou Co.,
    Ltd.(2)                         |  | Suzhou, China              |  | Production                  
|Infineon Technologies Japan
    K.K.                                  |  | Tokyo, Japan               |  | Distribution                
|Infineon Technologies (Malaysia)
    Sdn. Bhd.                        |  | Malacca, Malaysia          |  | Production                  
|Infineon Technologies (Advanced
    Logic) Sdn. Bhd.                  |  | Malacca, Malaysia          |  | Production                  
|Infineon Technologies (Integrated
    Circuit) Sdn. Bhd.              |  | Malacca, Malaysia          |  | Production                  



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On September 30, 2005, Eupec and Infineon signed a merger
    agreement (Verschmelzungsvertrag) according to which
    Eupec will cease to exist as a legal entity. As a consequence,
    Eupecs assets and liabilities will be transferred to
    Infineon. The merger will only become effective upon entry of
    the merger agreement in the respective commercial registers,
    which is expected to occur before the end of the 2005 calendar
    year.
|   
|(2) | 72.5 percent ownership interest.                                                                                                                                                                                                                                                                                                                                                                                                                               







Dividend Policy


Aktiengesetz Bilanzgewinn Bilanzverlust








Market Information


General




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Trading on the Frankfurt Stock Exchange

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

|                                            |  |                         |       |  |     |  |       | 
|------------------------------------------- |  | ----------------------- | ----- |  | --- |  | ----- | 
|                                            |  | Price per share in euro |      
|                                            |  |                         |      
|                                            |  | High                    |       |  | Low | 
|                                            |  |                         |       |  |     | 
|Financial year ended
    September 30, 2001 |  |                         | 56.42 |  |     |  | 12.21 | 
|Financial year ended
    September 30, 2002 |  |                         | 29.11 |  |     |  | 5.61  | 
|Financial year ended
    September 30, 2003 |  |                         | 13.79 |  |     |  | 5.34  | 
|Financial year ended
    September 30, 2004 |  |                         | 13.65 |  |     |  | 7.80  | 
|Financial year ended
    September 30, 2005 |  |                         | 9.00  |  |     |  | 6.43  | 
|October 2003 through December 2003          |  |                         | 13.65 |  |     |  | 10.38 | 
|January 2004 through March 2004             |  |                         | 12.44 |  |     |  | 10.65 | 
|April 2004 through June 2004                |  |                         | 12.89 |  |     |  | 10.18 | 
|July 2004 through
    September 30, 2004    |  |                         | 10.91 |  |     |  | 7.80  | 
|October 2004 through December 2004          |  |                         | 9.00  |  |     |  | 7.90  | 
|January 2005 through March 2005             |  |                         | 8.12  |  |     |  | 6.95  | 
|April 2005 through June 2005                |  |                         | 7.95  |  |     |  | 6.43  | 
|July 2005 through
    September 30, 2005    |  |                         | 8.56  |  |     |  | 7.48  | 
|April 2005                                  |  |                         | 7.47  |  |     |  | 6.43  | 
|May 2005                                    |  |                         | 7.29  |  |     |  | 6.58  | 
|June 2005                                   |  |                         | 7.95  |  |     |  | 7.23  | 
|July 2005                                   |  |                         | 8.56  |  |     |  | 7.53  | 
|August 2005                                 |  |                         | 8.28  |  |     |  | 7.57  | 
|September 2005                              |  |                         | 8.18  |  |     |  | 7.48  | 




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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 ADS in |      
|                                            |  | U.S. dollars     |      
|                                            |  |                  |      
|                                            |  | High             |       |  | Low | 
|                                            |  |                  |       |  |     | 
|Financial year ended
    September 30, 2001 |  |                  | 48.75 |  |     |  | 11.07 | 
|Financial year ended
    September 30, 2002 |  |                  | 25.57 |  |     |  | 5.70  | 
|Financial year ended
    September 30, 2003 |  |                  | 15.35 |  |     |  | 5.25  | 
|Financial year ended
    September 30, 2004 |  |                  | 15.87 |  |     |  | 9.39  | 
|Financial year ended
    September 30, 2005 |  |                  | 11.74 |  |     |  | 8.40  | 
|October 2003 through December 2003          |  |                  | 15.70 |  |     |  | 13.08 | 
|January 2004 through March 2004             |  |                  | 15.87 |  |     |  | 13.14 | 
|April 2004 through June 2004                |  |                  | 15.74 |  |     |  | 12.17 | 
|July 2004 through
    September 30, 2004    |  |                  | 13.31 |  |     |  | 9.39  | 
|October 2004 through December 2004          |  |                  | 11.74 |  |     |  | 10.18 | 
|January 2005 through March 2005             |  |                  | 10.84 |  |     |  | 8.97  | 
|April 2005 through June 2005                |  |                  | 9.60  |  |     |  | 8.40  | 
|July 2005 through
    September 30, 2005    |  |                  | 10.47 |  |     |  | 9.15  | 
|April 2005                                  |  |                  | 9.60  |  |     |  | 8.40  | 
|May 2005                                    |  |                  | 9.26  |  |     |  | 8.44  | 
|June 2005                                   |  |                  | 9.47  |  |     |  | 8.88  | 
|July 2005                                   |  |                  | 10.47 |  |     |  | 9.15  | 
|August 2005                                 |  |                  | 10.19 |  |     |  | 9.30  | 
|September 2005                              |  |                  | 10.05 |  |     |  | 9.34  | 









Exchange Rates




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


|                                   |  |         |        | 
|---------------------------------- |  | ------- | ------ | 
|Financial Year Ended September 30, |  | Average |       
|                                   |  |         |       
|2001                               |  |         | 0.8886 | 
|2002                               |  |         | 0.9192 | 
|2003                               |  |         | 1.0839 | 
|2004                               |  |         | 1.2174 | 
|2005                               |  |         | 1.2714 | 

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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 2005 through September 2005:

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

|               |  |      |        |  |     |  |        | 
|-------------- |  | ---- | ------ |  | --- |  | ------ | 
|               |  | High |        |  | Low | 
|               |  |      |        |  |     | 
|April 2005     |  |      | 1.3093 |  |     |  | 1.2819 | 
|May 2005       |  |      | 1.2936 |  |     |  | 1.2349 | 
|June 2005      |  |      | 1.2320 |  |     |  | 1.2035 | 
|July 2005      |  |      | 1.2200 |  |     |  | 1.1917 | 
|August 2005    |  |      | 1.2434 |  |     |  | 1.2147 | 
|September 2005 |  |      | 1.2538 |  |     |  | 1.2011 | 

 








Taxation


Taxation in the Federal Republic of Germany


Steuersenkungsgesetz


Taxation of the Company






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Starting in the 2004 financial year, not more than
1 million plus
60 percent of the amount exceeding
1 million of the
income of a financial year may be offset against losses brought
forward (so-called minimum taxation).

On September 19, 2002, the German government enacted new
tax legislation which increases the corporate statutory tax rate
from 25 percent to 26.5 percent, and which was
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 percent if the income
is retained, and 30 percent if the income is distributed
(generally prior to October 1, 2002), 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 from
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 after
April 11, 2003 and before 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
on or before April 11, 2003 and on or after January 1,
2006 to 30 percent (plus solidarity surcharge) upon
distribution, but otherwise it remains 40 percent (plus
solidarity surcharge). After the end of the 2020 financial year,
no such tax reduction will be provided. If certain tax-exempt
income earned before October 1, 2001 is distributed during
the 2003 to 2020 financial years we will be taxed at a rate of
30 percent (plus solidarity surcharge) on such income.

Taxation of Dividends

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

Pursuant to most German tax treaties, the German withholding tax
may not exceed 15 percent 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 percent or more, and in some cases of 10 percent 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

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a refund of a portion of the German withholding tax and will be
treated as receiving additional dividend income.

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 an application on IRS Form 8802 with the
Internal Revenue Service Center, U.S. Residency
Certification Request, PO Box 16347, Philadelphia, PA
19114-0447.

Taxation of Capital Gains

If the Non-German Shareholder is an individual, capital gains
from the disposition of shares or ADSs are subject to German tax
only if such shareholder at any time during the five years
preceding the disposition, directly or indirectly, held an
interest of 1 percent or more in the 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.

Capital gains from the sale of shares realized by a corporation
are exempt from corporation income tax under German domestic
law. Five percent of the capital gain is considered as
nondeductible expenses.

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:



(a)
    the donor or transferor or the heir, donee or other beneficiary
    is resident in Germany at the time of the transfer, or, if a
    German citizen, was not continuously outside of Germany and
    without German residence for more than five years; or(b)
    at the time of the transfer, the shares or ADSs are held by the
    decedent or donor as assets of a business for which a permanent
    establishment is maintained or a permanent representative is
    appointed in Germany; or(c)
    the decedent or donor has held, alone or together with related
    persons, directly or indirectly, 10 percent or more of a
    companys registered share capital at the time of the
    transfer.107



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##### Table of Contents

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:




    an individual who is a citizen or resident of the United States;
    a corporation, or other entity taxable as a corporation, formed
    under the laws of the United States or any state thereof or the
    District of Columbia; or
    an estate or trust, the income of which is subject to United
    States federal income taxation regardless of its source.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 advisor 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 owning
directly, indirectly or by attribution 10 percent 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 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.

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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 advisor 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

For United States federal income tax purposes, the gross amount
of cash distributions (including the amount of foreign taxes, if
any, withheld there from) paid out of our current or accumulated
earnings and profits (as determined for United States federal
income tax purposes) will be includible in your gross income as
dividend income on the date of receipt. Dividends paid by us
will be treated as foreign source income and will not be
eligible for the dividends received deduction generally allowed
to corporate shareholders under United States federal income tax
law. Distributions in excess of our earnings and profits will be
treated, for United States federal income tax purposes, first as
a nontaxable return of capital to the extent of your tax basis
in the shares or ADSs, and thereafter as capital gain. The
amount of any dividend paid in a non-United States currency will
be equal to the United States dollar value of the non-United
States currency on the date of receipt, regardless of whether
you convert the payment into United States dollars. You will
have a tax basis in the non-United States currency distributed
equal to such United States dollar amount. Gain or loss, if any,
recognized by you on the sale or disposition of the non-United
States currency generally will be United States source ordinary
income or loss.

Dividend income is generally taxed as ordinary income. However,
a maximum United States federal income tax rate of
15 percent will apply to qualified dividend
income received by individuals (as well as certain trusts
and estates) in taxable years beginning before January 1,
2009, provided that certain holding period requirements are met.
Qualified dividend income includes dividends paid on
shares of United States corporations as well as dividends paid
on shares of qualified foreign corporations if,
among other things: (i) the shares of the foreign
corporation are readily tradable on an established securities
market in the United States; or (ii) the foreign
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 our shares and ADSs should constitute qualified
dividend income for United States federal income tax
purposes, provided that the holding period requirements are
satisfied and none of the other special exceptions applies.

Any foreign tax withheld from a distribution will generally be
treated as a foreign income tax that you may elect to deduct in
computing your United States federal taxable income or, subject
to certain complex conditions and limitations which must be
determined on an individual basis by each U.S. Holder,
credit against your United States federal income tax liability.
The limitations include, among others, rules that may limit
foreign tax credits allowable with respect to specific classes
of income to the United States federal income taxes otherwise
payable with respect to each such class of income. Dividends
paid by us generally will be foreign source passive
income or financial services income for United
States foreign tax credit purposes.

Taxation of Capital Gains

Unless a nonrecognition provision applies, if you 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

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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 percent 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 or ADSs and proceeds
from the sale, exchange or redemption of shares or ADSs 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
identification number 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.

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 Taxes

An individual U.S. Holder generally 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.









Exchange Controls and Limitations Affecting Shareholders

Germany does not currently restrict the movement of capital
between Germany and other countries, except for prohibitions on
the provision of financial aid or capital to certain individuals
and in connection with banned weapons related transactions to
Burma/ Myanmar, Ivory Coast, Democratic Republic of the Congo,
Liberia, Somalia, Sudan and Zimbabwe. Germany also imposes
certain restrictions on the movement of capital to Iraq and the
Federal Republic of Yugoslavia, as well as the provision of
financial aid or capital to the Taliban. Similar provisions have
been imposed with regard to certain individuals in order to
support the mandate of the International Criminal Tribunal for
the Former Yugoslavia (ICTY). These restrictions were
established to coincide with resolutions adopted by the United
Nations and the European Union. More information can be found in
German at: http://www.bundesbank.de/finanzsanktionen/
finanzsanktionen.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
5.0 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.

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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. Material filed by us with the SEC can
also 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 Deutsche Bank as depositary for our ordinary
shares, at 60 Wall Street, New York, NY 10005.









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, 2005. Based on this evaluation,
our chief executive officer and chief financial officer
concluded that, as of September 30, 2005, 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,
2005 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

There are inherent limitations to the effectiveness of any
system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple
error or mistake, fraud, the circumvention of controls by
individual acts or the collusion of two or more people, or
management override of controls. Accordingly, even an effective
disclosure and internal control system can provide only
reasonable assurance with respect to disclosures and financial
statement preparation. Furthermore, because of changes in
conditions, the effectiveness of a disclosure and internal
control system may vary over time.









Audit Committee Financial Expert

Our Supervisory Board has determined that Mr. Kley is an
audit committee financial expert, as such term is
defined by the regulations of the Securities and Exchange
Commission issued pursuant to Section 407 of the
Sarbanes-Oxley Act of 2002, and is independent, as
such term is defined in Rule 10A-3 under the Exchange Act.









Code of Ethics

We have adopted a code of ethics (as a part of our
Business Conduct Guidelines) that applies to all of
our employees worldwide, including our principal executive
officer, principal financial officer and principal accounting
officer within the meaning of Item 16B of Form 20-F.
These guidelines provide rules and conduct guidelines aimed at
ensuring high ethical standards throughout our organization. You

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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
4.3 million in
the 2004 financial year and
3.0 million in
the 2005 financial year in connection with professional services
rendered for the audit of our annual consolidated 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
0.3 million in
the 2004 financial year and
1.7 million in
the 2005 financial year for assurance and related services in
connection with the performance of our audit. These services
consisted of accounting advisory services, and the review of
internal controls over financial reporting.

Tax Fees. In addition to the amounts described
above, KPMG charged us an aggregate of
0.4 million in
the 2004 financial year and
0.3 million in
the 2005 financial year for professional services related
primarily to tax compliance.

All Other Fees. Fees of less than
0.1 million were
charged by KPMG, in the 2004 or 2005 financial years for other
services.

The above services fall within the scope of audit and permitted
non-audit services within the meaning of 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.









Exemptions from the Listing Standards for Audit Committee

As permitted by the rules of the Securities and Exchange
Commission, our audit committee includes one or more members who
are non-executive employees of our company and who are named to
our Supervisory Board pursuant to the German law on employee
co-determination.









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. Our Annual
Reports on Form 20-F for the 2000 to 2004 financial years
contain summaries of additional material contracts entered into
prior to October 1, 2004, some of which may still be in
effect.

Commercial Agreements

The description of the ProMOS settlement agreement set out under
the heading Business  Legal Matters is
incorporated herein by reference.

The descriptions of our joint venture agreement with Nanya set
out under the heading Business  Strategic
Alliances  Memory Products and at Note 16
(Long-term Investments, net) to our consolidated financial
statements are incorporated herein by reference.

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Related Party Transactions

In addition, please see Related-Party Transactions and
Relationships for a summary of contracts with certain of our
related parties.

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GLOSSARY



A-GPS
    
    Assisted Global Positioning System. GPS uses a network of
    satellites to triangulate a receivers position and provide
    latitude and longitude coordinates. Assisted GPS, or A-GPS, is a
    technology that uses an assistance server to cut down the time
    needed to find the location.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.AFE
    
    Analog Front-end. AFEs are chips used in imaging applications to
    condition the analog signal received from the image sensor and
    perform the analog-to-digital (A/D) conversion.AMB
    
    Advanced Memory Buffer. A memory devise used to temporarily
    store output or input data.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.ASIC
    
    Application Specific Integrated Circuit. A logic circuit
    designed for a specific use and implemented in an integrated
    circuit.ASSP
    
    Application Specific Standard Product. A semiconductor
    integrated circuit product that is that is dedicated to a
    specific application market, and sold to more than one user, and
    thus, standard.ATSC
    
    Advanced Television Systems Committee. An international
    organization establishing broadcasting standards for digital
    television.Back-end
    
    The packaging, assembly and testing stages of the semiconductor
    manufacturing process, which take place after electronic
    circuits are imprinted on silicon wafers in the front-end
    process.Baseband
    
    Baseband is the original frequency range of a signal before it
    is transformed into a higher or more efficient frequency. See
    broadband.BIDI
    
    Bidirectional module. Bidirectional is the ability of switches
    to transfer streams in two directions.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.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 storage measurement equal to eight bits.114



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CAD
    
    Computer Aided Design. CAD is the use of a wide range of
    computer-based tools that assist engineers, architects and other
    design professionals in their design activities.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.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.CO/CPE
    
    Central Office/ Customer Premises Equipment. A common carrier
    switching office in which users lines terminate. The nerve
    center of a telephone system.CODEC
    
    Compressor/ Decompressor. Software or hardware used to compress
    and decompress digital media.CPE
    
    Customer Premises Equipment. CPE is telephone or other service
    provider equipment that is located on the customers
    premises (physical location) rather than on the providers
    premises or in between.DAB
    
    Digital Audio Broadcasting. DAB is a developing technology for
    broadcasting audio programming in digital form.DDR DRAM
    
    Double data rate DRAM. DDR in theory transfers twice the speed
    of SDRAM.DDR SDRAM
    
    Double data rate SDRAM. 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.DIMM
    
    Dual In-line Memory Module. A memory module with contact rows on
    both sides and more bandwidth than a single in-line memory
    module SIMM. It is a small circuit board filled with RAM chips,
    and its data path is 128 bits wide, making it up to 10% faster
    than a SIMM.Discrete semiconductors
    
    Semiconductor devices that involve only a single device.DLC
    
    Digital Loop Carriers. A technology that makes use of digital
    techniques to bring a wide range of services to users via
    twisted-pair copper phone lines.DRAM
    
    Dynamic Random Access Memory. The most common type of random
    access memory. Each bit of information is stored as an amount of
    electri-115



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cal 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).DVB-C/T
    
    Digital Video Broadcasting  Cable/ Terrestrial.DVB-H
    
    Digital Video Broadcasting  Handhelds.DVB-T
    
    Digital Video Broadcasting  Terrestrial.E-GOLDradio chip
    
    Trademark of Infineon Technologies AG for a GSM/GPRS single-chip
    which combines a quadband radio transceiver part with a base
    band processor.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EDGE
    
    Enhanced Data GSM Environment.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.EMS
    
    Electronic Manufacturing Services. EMS is a control unit/system
    for the combustion engine including sensors, computation and
    actuators.Ethernet
    
    A protocol for high speed communications, principally used for
    LAN networks.Fab
    
    A semiconductor fabrication facility, in which the front-end
    manufacturing process takes place.FB-DIMM
    
    Fully Buffered Dual Inline Memory Module. A variant of standard
    DDR2 memory designed for server applications where both large
    amounts of memory and memory coordination and accuracy at high
    speeds are essential.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.Front-end
    
    The wafer processing stage of the semiconductor manufacturing
    process, in which electronic circuits are imprinted onto raw
    silicon wafers. This is116



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followed by the packaging, assembly and testing stages, which
    comprise the back-end process.Foundry
    
    A semiconductor manufacture that makes chips for third parties.GDDR3
    
    Graphic Double Data Rate  3rd Generation.Geminax-Max
    
    GEMINAX MAX is an 8-channel ADSL/ADSL2 and ADSL2+ solution for
    Central Office, DSLAM, and DLC (Digital Loop Carrier)
    applications. GEMINAX MAX allows downstream data rates up to
    24 Mbit/s over each of its eight channels and fully
    supports the latest international standards for ADSL, ADSL2, and
    ADSL2+.Gigabit (Gbit)
    
    Approximately one billion bits.Gigabyte
    
    Approximately one billion bytes.GOLD
    
    Gigabit Optical Lithography Development.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.GraphicsRAM
    
    See GDDR3.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.HDTV
    
    High Definition TV. A means of television broadcast with a
    higher resolution than traditional formats (NTSC, SÉCAM,
    PAL) allow.IC
    
    Integrated Circuit. A semiconductor device consisting of many
    interconnected transistors and other components.ISDB
    
    Integrated Services Digital Broadcasting. The digital television
    (DTV) and digital audio broadcasting (DAB) format that Japan has
    created to allow local radio and television stations to convert
    to digital technology.ISDB-T
    
    Integrated Services Digital Broadcasting  Terrestrial.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.117



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ITU
    
    International Telecommunication Union. The ITU is an
    international organization established to standardize and
    regulate international radio and telecommunications.LAN
    
    Local Area Network. A data communications network covering a
    small area, usually within the confines of a building or floors
    within a building.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 the IC manufacturing process to create
    circuitry patterns on a wafer. 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.Mini SD
    
    A Mini SD card is an ultra-small form factor extension to the SD
    card standard.MMC
    
    MultiMedia Card. A flash memory card standard.MRAM
    
    Magnetoresistive Random Access Memory. A method of storing data
    bits using magnetic charges instead of the electrical charges
    used by DRAM. Conventional computer chips store information as
    long as electricity flows through them. MRAM, however, retains
    data after a power supply is cut off.NAND
    
    NAND flash architecture is one of two flash technologies (the
    other being NOR) used in memory cards. It is also used in USB
    flash drives, MP3 players, and provides the image storage for
    digital cameras. NAND is best suited to flash devices requiring
    high capacity data storage.Nanometer (nm)
    
    A metric unit of linear measure which equals one billionth of a
    meter. There are 1000 nanometers in 1 micron.NIC
    
    Network Interface Card. A computer circuit board or card that is
    installed in a computer so that it can be connected to a
    network, such as LAN.Nonvolatile memory
    
    A memory storage device whose contents are preserved when its
    power is off.NROM
    
    Flash technology developed by Saifun Semiconductors Ltd.NTSC
    
    NTSC is the analog television system in use in Japan, United
    States, Canada and certain other places, mostly in the Americas.118



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ODM
    
    Original Design Manufacturer. A company which manufactures a
    product which ultimately will be branded by another firm for
    sale.OHSAS
    
    Occupational Health and Safety Assessment Series. The discipline
    concerned with protecting the safety, health and welfare of
    employees, organisations, and others affected by the work they
    undertake (such as customers, suppliers, and members of the
    public).PAROLI
    
    Parallel Optical Link. The PAROLI® high-performance fiber
    optic system is used in telecommunications and data
    communications equipment, for board-to-board, rack-to-rack and
    box-to-box applications.PAL
    
    Phase-alternating line. A color encoding system used in
    broadcast television systems.PBX
    
    Private Branch eXchange. A telephone exchange that is owned by a
    private business, as opposed to one owned by a common carrier or
    by a telephone company.PDA
    
    Personal Digital Assistant. A term used to refer to any small
    mobile hand-held device that provides computing and information
    storage and retrieval capabilities for personal or business use,
    often for keeping schedule calendars and address book
    information handy.PFC
    
    PerFluoroCarbons. Compounds derived from hydrocarbons by
    replacement of hydrogen atoms by fluorine atoms.PHY
    
    Physical Layer. A part of the electrical or mechanical interface
    to the physical medium. For example, the PHY determines how to
    put a stream of bits from the upper (data link) layer on to the
    pins for a parallel printer interface or network line card.POF
    
    Plastic Optical Fiber.Process technology
    
    The procedures used in the front-end process to convert raw
    silicon wafers into finished wafers containing hundreds or
    thousands of chips.PSRAM
    
    Pseudo-static RAM. It combines the advantages of the SRAM and
    DRAM by using dynamic storage cells to retain memory, and by
    placing all the required refresh logic on-chip so that the
    device functions similarly to an SRAM.Radio frequency IC
    
    High frequency IC such as those used in mobile
    telecommunications.RAM
    
    Random access memory. 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.RDRAM
    
    Rambus DRAM is a type of synchronous dynamic RAM, created by the
    Rambus Corporation.REACH
    
    Registration, Evaluation and Authorization of Chemicals. A
    framework for regulation of chemicals in the European Union.RF
    
    Radio Frequency. A high frequency used in mobile
    telecommunications. The term radio frequency refers to
    alternating current having characteristics such that, if the
    current is input to an antenna, an electromagnetic119



---



##### Table of Contents

(EM) field is generated suitable for wireless broadcasting
    and/or communications.RFID
    
    Radio Frequency Identification. A chip read out via radio
    frequency.RLDRAM
    
    Reduced Latency DRAM. An ultra-high speed double data rate (DDR)
    SDRAM that combines fast, random access with high bandwidth and
    density. This technology is designed for high-speed networking
    and fast cache applications.SD
    
    Secure Digital memory cards are a popular and convenient way to
    store and share information between devices including digital
    cameras, palmtop computers, voice recorders and MP3 players.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.Semiconductor
    
    Generic name for devices, such as transistors and integrated
    circuits, that control the flow of electrical signals. More
    generally, a material, typically crystalline, that can be
    altered to allow electrical current to flow or not flow in a
    pattern. The most common semiconductor material for use in
    integrated circuits is silicon.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.SLIC
    
    Subscriber Line Interface Circuit. A circuit in a telephone
    company switch to which a customers telephone line is
    connected.SMARTi 3G
    
    CMOS-HF-transceiver with worldwide compatibility.SO-DIMM
    
    Small Outline Dual In-line Memory Module. A type of computer
    memory integrated circuit.SoC
    
    System-on-a-chip. The packaging of all the necessary electronic
    circuit and parts for a system (such as a call phone
    or digital camera) on a single IC.SONET/SDH
    
    Synchronous Optical Network/ Synchronous Digital Hierarchy.
    SONET is the U.S. (American National Standards Institute)
    standard for synchronous data transmission on optical media. SDH
    (Synchronous Digital Hierarchy) is a standard technology for
    synchronous data transmission on optical media. It is the
    international equivalent of SONET (Synchronous Optical Network).
    Both technologies provide faster and less expensive network
    interconnections than traditional PDH (Plesinchronous Digital
    Hierarchy) equipment.SRAM
    
    Static RAM. A memory cell consisting of several transistors that
    are switched as two feedback inverters.SSIC
    
    Small Scale Integrated Circuit. Contain a maximum of ten
    elementary circuits on one IC.120



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Structure size
    
    A measurement (generally in micron or nanometers) of the width
    of the smallest patterned feature or circuit on a semiconductor
    chip.Switch
    
    An analog IC that, on command, either passes or blocks an
    electrical signal.T/E
    
    T1  E1  T3  E3. A data
    transmission technology based on copper wires. Various speed
    classes are available: T1: 1,544 Mbit/s; E1: 2,048 Mbit/s; T3:
    44,736 Mbit/s; E3: 34,368 Mbit/s. The T standards are prevalent
    in NAFTA. The E standards are European standards.T1
    
    A North American standard for the digital transmission of data
    across fiber optic lines. 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-DMB
    
    Terrestrial  Digital Multimedia Broadcasting. A
    system for broadcasting a variety of digital content to mobile
    devices, such as cellular phones.TDM
    
    Time Division/ Domain Multiplex. A device which derives multiple
    channels on a single transmission facility by connecting bit
    streams one at a time at regular intervals.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.USB
    
    Universal Serial Bus provides a serial bus standard for
    connecting devices, usually to a computer, but it also is in use
    on other devices such as set-top boxes, game consoles and PDAs.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.VINAX chip set
    
    VINAX chip set addresses Central Office and Remote Terminal (RT)
    applications.VINETIC IC
    
    Voice and InterNet Enhanced Telephony Interface Circuit. The
    first telephony chipset family that integrates a full-powered
    DSP directly into the codec/SLIC, thereby offering a unique set
    of features for Voice over Packet (VoDSL, VoATM, VoIP)
    applications.VoIP
    
    Voice Over Internet Protocol. The routing of voice conversations
    over the Internet or any other IP-based network.wafer
    
    A disk made of a semiconducting material such as silicon,
    currently usually either 200 millimeters or 300 millimeters in
    diameter, used to form the substrate of a chip. A finished wafer
    may contain several thousand chips.121



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WAN
    
    Wide Area Network. A data communications network covering a
    large geographic area.WDCT
    
    Worldwide Digital Cordless Telecommunications.WILDPASS
    
    An integrated secure dual-band 802.11 a/g wireless network
    processor system-on-chip (SoC) solution.WLAN
    
    Wireless LAN.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.122



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INFINEON TECHNOLOGIES AG AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

|                                                                                                              |  |      |     | 
|------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                              |  | Page |    
|                                                                                                              |  |      |    
|Report of Independent Registered
    Public Accounting Firm                                                   |  |      | F-2 | 
|Consolidated Statements of
    Operations for the years ended
    September 30, 2003, 2004 and 2005           |  |      | F-3 | 
|Consolidated Balance Sheets as of
    September 30, 2004 and 2005                                             |  |      | F-4 | 
|Consolidated Statements of
    Shareholders Equity for the years ended
    September 30, 2003, 2004 and 2005 |  |      | F-5 | 
|Consolidated Statements of Cash
    Flows for the years ended
    September 30, 2003, 2004 and 2005           |  |      | F-6 | 
|Notes to the Consolidated Financial
    Statements                                                            |  |      | F-7 | 

F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Supervisory Board of

Infineon Technologies AG:

We have audited the accompanying consolidated balance sheets of
Infineon Technologies AG and subsidiaries as of
September 30, 2004 and 2005, 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, 2005. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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, 2004 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2005, in conformity
with U.S. generally accepted accounting principles.

Munich, Germany

October 31, 2005, except for Note 33, which is as of
November 17, 2005

KPMG Deutsche
Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

F-2



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##### Table of Contents

Infineon Technologies AG and Subsidiaries





Consolidated Statements of Operations

For the years ended September 30, 2003, 2004 and 2005

(in millions, except for share data)

|                                                        |                 |              |    |    |              |  |       |              |  |  |              |       |  |      |       |       |  |  |       |       |  |  | 
|------------------------------------------------------- | --------------- | ------------ | -- | -- | ------------ |  | ----- | ------------ |  |  | ------------ | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- |  |  | 
|                                                       
|                                                        |                 | Notes        |    |    | 2003         |  |       | 2004         |  |  | 2005         |       |  | 2005 |       |       | 
|                                                       
|                                                        |                 | ( millions) |    |    | ( millions) |  |       | ( millions) |  |  | ($ millions) |       |  |     
|Net sales:                                              |                 |              |    |    |              |  |       |              |  |  |              |       |  |      |       |       |  |  |       |       |  | 
|                                                        | Third parties   |              |    | 5  |              |  |       | 5,153        |  |  |              | 6,169 |  |      |       | 5,843 |  |  |       | 7,045 |  |  | 
|                                                        | Related parties |              |    | 27 |              |  |       | 999          |  |  |              | 1,026 |  |      |       | 916   |  |  |       | 1,105 |  |  | 
|                                                       
|Total net sales                                         |                 |              |    |    |              |  | 6,152 |              |  |  | 7,195        |       |  |      | 6,759 |       |  |  | 8,150 |       |  | 
|                                                       
|Cost of goods sold                                      |                 |              | 7  |    |              |  | 4,614 |              |  |  | 4,670        |       |  |      | 4,909 |       |  |  | 5,919 |       |  | 
|                                                       
|Gross profit                                            |                 |              |    |    |              |  | 1,538 |              |  |  | 2,525        |       |  |      | 1,850 |       |  |  | 2,231 |       |  | 
|                                                       
|Research and development expenses                       |                 |              |    |    |              |  | 1,089 |              |  |  | 1,219        |       |  |      | 1,293 |       |  |  | 1,559 |       |  | 
|Selling, general and administrative
    expenses        |                 |              |    |    |              |  | 679   |              |  |  | 718          |       |  |      | 655   |       |  |  | 790   |       |  | 
|Restructuring charges                                   |                 |              | 8  |    |              |  | 29    |              |  |  | 17           |       |  |      | 78    |       |  |  | 94    |       |  | 
|Other operating expenses, net                           |                 |              | 7  |    |              |  | 85    |              |  |  | 257          |       |  |      | 92    |       |  |  | 111   |       |  | 
|                                                       
|Operating (loss) income                                 |                 |              |    |    |              |  | (344  | )            |  |  | 314          |       |  |      | (268  | )     |  |  | (323  | )     |  | 
|                                                       
|Interest expense, net                                   |                 |              |    |    |              |  | (52   | )            |  |  | (41          | )     |  |      | (9    | )     |  |  | (11   | )     |  | 
|Equity in earnings (losses) of
    associated companies |                 |              | 16 |    |              |  | 18    |              |  |  | (14          | )     |  |      | 57    |       |  |  | 69    |       |  | 
|Gain (loss) on associated company
    share issuance    |                 |              | 16 |    |              |  | (2    | )            |  |  | 2            |       |  |      |      |       |  |  |      |       |  | 
|Other non-operating income
    (expense), net           |                 |              |    |    |              |  | 21    |              |  |  | (64          | )     |  |      | 26    |       |  |  | 31    |       |  | 
|Minority interests                                      |                 |              |    |    |              |  | 8     |              |  |  | 18           |       |  |      | 2     |       |  |  | 2     |       |  | 
|                                                       
|Income (loss) before income taxes                       |                 |              |    |    |              |  | (351  | )            |  |  | 215          |       |  |      | (192  | )     |  |  | (232  | )     |  | 
|                                                       
|Income tax expense                                      |                 |              | 9  |    |              |  | (84   | )            |  |  | (154         | )     |  |      | (120  | )     |  |  | (145  | )     |  | 
|                                                       
|Net (loss) income                                       |                 |              |    |    |              |  | (435  | )            |  |  | 61           |       |  |      | (312  | )     |  |  | (377  | )     |  | 
|                                                       
|Basic and diluted (loss) earnings
    per share         |                 |              | 10 |    |              |  | (0.60 | )            |  |  | 0.08         |       |  |      | (0.42 | )     |  |  | (0.51 | )     |  | 
|                                                       



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Consolidated Balance Sheets

September 30, 2004 and 2005

| |                                                |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   |  | 
| | ---------------------------------------------- | ------------------------------------------ |  | -- | ------------ |  |  | ------------ | ------ | - | ---- | ------ | ------ | - |  | ------ | ------ | - |  | 
|
| |                                                | Notes                                      |  |    | 2004         |  |  | 2005         |        |   | 2005 |        |        |  
|
| |                                                | ( millions)                               |  |    | ( millions) |  |  | ($ millions) |        |   |     
| | Assets:                                        |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   | 
| | Current assets:                                |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   | 
| |                                                | Cash and cash equivalents                  |  |    |              |  |  |              | 608    |   |      |        | 1,148  |   |  |        | 1,384  |   |  | 
| |                                                | Marketable securities                      |  |    | 11           |  |  |              | 1,938  |   |      |        | 858    |   |  |        | 1,035  |   |  | 
| |                                                | Trade accounts receivable, net             |  |    | 12           |  |  |              | 1,056  |   |      |        | 952    |   |  |        | 1,148  |   |  | 
| |                                                | Inventories                                |  |    | 13           |  |  |              | 960    |   |      |        | 1,022  |   |  |        | 1,232  |   |  | 
| |                                                | Deferred income taxes                      |  |    | 9            |  |  |              | 140    |   |      |        | 125    |   |  |        | 151    |   |  | 
| |                                                | Other current assets                       |  |    | 14           |  |  |              | 590    |   |      |        | 469    |   |  |        | 565    |   |  | 
|
| | Total current assets                           |                                            |  |    |              |  |  | 5,292        |        |   |      | 4,574  |        |   |  | 5,515  |        |   | 
|
| | Property, plant and equipment, net             |                                            |  | 15 |              |  |  | 3,587        |        |   |      | 3,751  |        |   |  | 4,523  |        |   | 
| | Long-term investments, net                     |                                            |  | 16 |              |  |  | 708          |        |   |      | 779    |        |   |  | 939    |        |   | 
| | Restricted cash                                |                                            |  |    |              |  |  | 109          |        |   |      | 88     |        |   |  | 106    |        |   | 
| | Deferred income taxes                          |                                            |  | 9  |              |  |  | 541          |        |   |      | 550    |        |   |  | 663    |        |   | 
| | Other assets                                   |                                            |  | 17 |              |  |  | 627          |        |   |      | 542    |        |   |  | 654    |        |   | 
|
| | Total assets                                   |                                            |  |    |              |  |  | 10,864       |        |   |      | 10,284 |        |   |  | 12,400 |        |   | 
|
|
| | Liabilities and shareholders
    equity:      |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   | 
| | Current liabilities:                           |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   | 
| |                                                | Short-term debt and current
    maturities |  |    | 21           |  |  |              | 571    |   |      |        | 99     |   |  |        | 119    |   |  | 
| |                                                | Trade accounts payable                     |  |    | 18           |  |  |              | 1,098  |   |      |        | 1,069  |   |  |        | 1,289  |   |  | 
| |                                                | Accrued liabilities                        |  |    | 19           |  |  |              | 555    |   |      |        | 497    |   |  |        | 599    |   |  | 
| |                                                | Deferred income taxes                      |  |    | 9            |  |  |              | 16     |   |      |        | 17     |   |  |        | 20     |   |  | 
| |                                                | Other current liabilities                  |  |    | 20           |  |  |              | 630    |   |      |        | 700    |   |  |        | 845    |   |  | 
|
| | Total current liabilities                      |                                            |  |    |              |  |  | 2,870        |        |   |      | 2,382  |        |   |  | 2,872  |        |   | 
|
| | Long-term debt                                 |                                            |  | 21 |              |  |  | 1,427        |        |   |      | 1,566  |        |   |  | 1,888  |        |   | 
| | Deferred income taxes                          |                                            |  | 9  |              |  |  | 21           |        |   |      | 65     |        |   |  | 78     |        |   | 
| | Other liabilities                              |                                            |  | 22 |              |  |  | 568          |        |   |      | 642    |        |   |  | 775    |        |   | 
|
| | Total liabilities                              |                                            |  |    |              |  |  | 4,886        |        |   |      | 4,655  |        |   |  | 5,613  |        |   | 
|
| | Shareholders equity:                          |                                            |  |    |              |  |  |              |        |   |      |        |        |   |  |        |        |   | 
| |                                                | Ordinary share capital                     |  |    | 23           |  |  |              | 1,495  |   |      |        | 1,495  |   |  |        | 1,802  |   |  | 
| |                                                | Additional paid-in capital                 |  |    |              |  |  |              | 5,800  |   |      |        | 5,800  |   |  |        | 6,994  |   |  | 
| |                                                | Accumulated deficit                        |  |    |              |  |  |              | (1,200 | ) |      |        | (1,512 | ) |  |        | (1,823 | ) |  | 
| |                                                | Accumulated other comprehensive loss       |  |    | 25           |  |  |              | (117   | ) |      |        | (154   | ) |  |        | (186   | ) |  | 
|
| | Total shareholders equity                     |                                            |  |    |              |  |  | 5,978        |        |   |      | 5,629  |        |   |  | 6,787  |        |   | 
|
| | Total liabilities and
    shareholders equity |                                            |  |    |              |  |  | 10,864       |        |   |      | 10,284 |        |   |  | 12,400 |        |   | 
|



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##### Table of Contents

Infineon Technologies AG and Subsidiaries





Consolidated Statements of Shareholders Equity

For the years ended September 30, 2003, 2004 and 2005

(in millions, except for share data)

|                                     |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  |       |     | 
|------------------------------------ | --------------------------------- | --------------- | -- | -- | ---------- |  | ----------- | ----------- |  | ---------- | ----------- | -- | ---------- | ------- | ----- | ----------- | ---------- |  | -------------- | --------- |  |  | ---------- | - |  | ----- | --- | - | ----- |  | -- | - |  |  | --- | - |  |  | ----- | --- | 
|                                     |                                  
|                                     |                                   | Issued          |    |    |            |  | Foreign     |             |  | Additional |             |    | Unrealized |         |       | Unrealized  |            |  |               
|                                     |                                   | Ordinary shares |    |    | Additional |  |             |             |  | currency   |             |    | minimum    |         |       | gain/(loss) |            |  | gain/(loss) on |           |  | 
|                                     |                                   |                 |    |    | paid-in    |  |             | Accumulated |  |            | translation |    |            | pension |       |             | on         |  |                | cash flow |  |  |           
|                                     |                                   | Notes           |    |    | Shares     |  |             | Amount      |  |            | capital     |    |            | deficit |       |             | adjustment |  |                | liability |  |  | securities |   |  | hedge |     |   | Total | 
|                                     |                                   |                 |   
|Balance as of October 1, 2002        |                                   |                 |    |    |            |  | 720,784,218 |             |  |            | 1,442       |    |            |         | 5,569 |             |            |  | (826           | )         |  |  | (5         | ) |  |       | (20 | ) |       |  | (2 | ) |  |  |    |   |  |  | 6,158 |    
|Net loss                             |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  | (435           | )         |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | (435  | )  
|Other comprehensive (loss) income    |                                   |                 | 25 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | (76        | ) |  |       | 2   |   |       |  | 13 |   |  |  |    |   |  |  | (61   | )  
|                                    
|Total comprehensive loss             |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  | (496  | )  
|                                    
|Issuance of ordinary shares:         |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  |       |    
|                                     | Acquisition of Catamaran          |                 |    |    |            |  |             | 96,386      |  |            |             |   |            |         |       | 1           |            |  |                |          |  |  |            |  |  |       |     |  |       |  |    |  |  |  |     |  |  |  |       | 1   | 
|Deferred compensation, net           |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         | 7     |             |            |  |               |           |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | 7     |    
|Other equity transactions            |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         | (4    | )           |            |  |               |           |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | (4    | )  
|                                    
|                                    
|Balance as of September 30,
    2003 |                                   |                 |    |    |            |  | 720,880,604 |             |  |            | 1,442       |    |            |         | 5,573 |             |            |  | (1,261         | )         |  |  | (81        | ) |  |       | (18 | ) |       |  | 11 |   |  |  |    |   |  |  | 5,666 |    
|                                    
|Net income                           |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  | 61             |           |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | 61    |    
|Other comprehensive (loss) income    |                                   |                 | 25 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | (41        | ) |  |       | 18  |   |       |  | (7 | ) |  |  | 1   |   |  |  | (29   | )  
|                                    
|Total comprehensive income           |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  | 32    |    
|                                    
|Issuance of ordinary shares:         |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  |       |    
|                                     | Settlement of redeemable interest |                 |    |    |            |  |             | 26,679,255  |  |            |             | 53 |            |         |       | 225         |            |  |                |          |  |  |            |  |  |       |     |  |       |  |    |  |  |  |     |  |  |  |       | 278 | 
|Deferred compensation, net           |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         | 2     |             |            |  |               |           |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | 2     |    
|                                    
|Balance as of September 30,
    2004 |                                   |                 |    |    |            |  | 747,559,859 |             |  |            | 1,495       |    |            |         | 5,800 |             |            |  | (1,200         | )         |  |  | (122       | ) |  |       |    |   |       |  | 4  |   |  |  | 1   |   |  |  | 5,978 |    
|                                    
|Net loss                             |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  | (312           | )         |  |  |           |   |  |       |    |   |       |  |   |   |  |  |    |   |  |  | (312  | )  
|Other comprehensive income (loss)    |                                   |                 | 25 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | 64         |   |  |       | (84 | ) |       |  | 8  |   |  |  | (25 | ) |  |  | (37   | )  
|                                    
|Total comprehensive loss             |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  | (349  | )  
|                                    
|Issuance of ordinary shares:         |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  |       |    
|                                     | Exercise of stock options         |                 |    | 24 |            |  |             | 9,500       |  |            |             |   |            |         |       |            |            |  |                |          |  |  |            |  |  |       |     |  |       |  |    |  |  |  |     |  |  |  |       |    | 
|                                    
|Balance as of September 30,
    2005 |                                   |                 |    |    |            |  | 747,569,359 |             |  |            | 1,495       |    |            |         | 5,800 |             |            |  | (1,512         | )         |  |  | (58        | ) |  |       | (84 | ) |       |  | 12 |   |  |  | (24 | ) |  |  | 5,629 |    
|                                    



F-5



---



##### Table of Contents

Infineon Technologies AG and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended September 30, 2003, 2004 and 2005

|                                                                                         |                                                                    |              |  |       |              |  |        |              |   |  |              |        |   |      |       |        |   |  |       |        |   |  | 
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------ |  | ----- | ------------ |  | ------ | ------------ | - |  | ------------ | ------ | - | ---- | ----- | ------ | - |  | ----- | ------ | - |  | 
|                                                                                        
|                                                                                         |                                                                    | Notes        |  |       | 2003         |  |        | 2004         |   |  | 2005         |        |   | 2005 |       |        |  
|                                                                                        
|                                                                                         |                                                                    | ( millions) |  |       | ( millions) |  |        | ( millions) |   |  | ($ millions) |        |   |     
|Net income (loss)                                                                        |                                                                    |              |  |       |              |  | (435   | )            |   |  | 61           |        |   |      | (312  | )      |   |  | (376  | )      |   | 
|Adjustments to reconcile net income
    (loss) to cash provided by operating activities: |                                                                    |              |  |       |              |  |        |              |   |  |              |        |   |      |       |        |   |  |       |        |   | 
|                                                                                         | Depreciation and amortization                                      |              |  | 15/17 |              |  |        | 1,437        |   |  |              | 1,320  |   |      |       | 1,316  |   |  |       | 1,587  |   |  | 
|                                                                                         | Acquired in-process research and
    development                   |              |  | 3     |              |  |        | 6            |   |  |              | 9      |   |      |       |       |   |  |       |       |   |  | 
|                                                                                         | Deferred compensation                                              |              |  |       |              |  |        | 7            |   |  |              | 2      |   |      |       |       |   |  |       |       |   |  | 
|                                                                                         | Provision for (recovery of)
    doubtful accounts                  |              |  | 12    |              |  |        | (16          | ) |  |              | 15     |   |      |       | 3      |   |  |       | 4      |   |  | 
|                                                                                         | Gain on sale of marketable
    securities                          |              |  | 11    |              |  |        | (56          | ) |  |              | (9     | ) |      |       | (8     | ) |  |       | (10    | ) |  | 
|                                                                                         | Loss (gain) on sale of
    businesses                              |              |  | 4     |              |  |        | 10           |   |  |              | 2      |   |      |       | (39    | ) |  |       | (47    | ) |  | 
|                                                                                         | Loss (gain) on disposal of
    property, plant, and equipment      |              |  |       |              |  |        | 3            |   |  |              | (5     | ) |      |       | (8     | ) |  |       | (10    | ) |  | 
|                                                                                         | Equity in (earnings) losses of
    associated companies            |              |  | 16    |              |  |        | (18          | ) |  |              | 14     |   |      |       | (57    | ) |  |       | (69    | ) |  | 
|                                                                                         | Loss (gain) on associated
    company share issuance               |              |  | 16    |              |  |        | 2            |   |  |              | (2     | ) |      |       |       |   |  |       |       |   |  | 
|                                                                                         | Minority interests                                                 |              |  |       |              |  |        | (8           | ) |  |              | (18    | ) |      |       | (2     | ) |  |       | (2     | ) |  | 
|                                                                                         | Impairment charges                                                 |              |  | 16/17 |              |  |        | 98           |   |  |              | 136    |   |      |       | 134    |   |  |       | 162    |   |  | 
|                                                                                         | Deferred income taxes                                              |              |  | 9     |              |  |        | 16           |   |  |              | 96     |   |      |       | 88     |   |  |       | 106    |   |  | 
|Changes in operating assets and
    liabilities:                                         |                                                                    |              |  |       |              |  |        |              |   |  |              |        |   |      |       |        |   |  |      |        |   | 
|                                                                                         | Trade accounts receivable                                          |              |  | 12    |              |  |        | (227         | ) |  |              | (219   | ) |      |       | 119    |   |  |       | 143    |   |  | 
|                                                                                         | Inventories                                                        |              |  | 13    |              |  |        | (112         | ) |  |              | (40    | ) |      |       | (25    | ) |  |       | (30    | ) |  | 
|                                                                                         | Other current assets                                               |              |  | 14    |              |  |        | 156          |   |  |              | 154    |   |      |       | (2     | ) |  |       | (2     | ) |  | 
|                                                                                         | Trade accounts payable                                             |              |  | 18    |              |  |        | (217         | ) |  |              | 228    |   |      |       | (52    | ) |  |       | (63    | ) |  | 
|                                                                                         | Accrued liabilities                                                |              |  | 19    |              |  |        | 164          |   |  |              | 92     |   |      |       | (114   | ) |  |       | (138   | ) |  | 
|                                                                                         | Other current liabilities                                          |              |  | 20    |              |  |        | (17          | ) |  |              | (22    | ) |      |       |       |   |  |       |       |   |  | 
|                                                                                         | Other assets and liabilities                                       |              |  | 17/22 |              |  |        | (62          | ) |  |              | 43     |   |      |       | (2     | ) |  |       | (2     | ) |  | 
|                                                                                        
|Net cash provided by operating
    activities                                            |                                                                    |              |  |       |              |  | 731    |              |   |  | 1,857        |        |   |      | 1,039 |        |   |  | 1,253 |        |   | 
|                                                                                        
|Cash flows from investing
    activities:                                                |                                                                    |              |  |       |              |  |        |              |   |  |              |        |   |      |       |        |   |  |       |        |   | 
|                                                                                         | Purchases of marketable securities
    available for sale          |              |  |       |              |  |        | (2,752       | ) |  |              | (2,678 | ) |      |       | (2,228 | ) |  |       | (2,687 | ) |  | 
|                                                                                         | Proceeds from sale of marketable
    securities available for sale |              |  |       |              |  |        | 2,013        |   |  |              | 2,520  |   |      |       | 3,310  |   |  |       | 3,991  |   |  | 
|                                                                                         | Proceeds from sale of businesses                                   |              |  |       |              |  |        | 164          |   |  |              | 9      |   |      |       | 101    |   |  |       | 122    |   |  | 
|                                                                                         | Business interests, net of cash
    acquired                       |              |  |       |              |  |        | 6            |   |  |              | (29    | ) |      |       |       |   |  |       |       |   |  | 
|                                                                                         | Investment in associated and
    related companies                 |              |  | 16    |              |  |        | (76          | ) |  |              | (386   | ) |      |       | (135   | ) |  |       | (163   | ) |  | 
|                                                                                         | Dividends received from equity
    investments                     |              |  |       |              |  |        |             |   |  |              |       |   |      |       | 51     |   |  |       | 61     |   |  | 
|                                                                                         | Purchases of intangible assets                                     |              |  | 17    |              |  |        | (58          | ) |  |              | (125   | ) |      |       | (27    | ) |  |       | (33    | ) |  | 
|                                                                                         | Purchases of property, plant and
    equipment                     |              |  | 15    |              |  |        | (872         | ) |  |              | (1,163 | ) |      |       | (1,368 | ) |  |       | (1,650 | ) |  | 
|                                                                                         | Proceeds from sales of property,
    plant and equipment           |              |  | 15    |              |  |        | 53           |   |  |              | 43     |   |      |       | 58     |   |  |       | 72     |   |  | 
|                                                                                        
|Net cash used in investing
    activities                                                |                                                                    |              |  |       |              |  | (1,522 | )            |   |  | (1,809       | )      |   |      | (238  | )      |   |  | (287  | )      |   | 
|                                                                                        
|Cash flows from financing
    activities:                                                |                                                                    |              |  |       |              |  |        |              |   |  |              |        |   |      |       |        |   |  |       |        |   | 
|                                                                                         | Net change in short-term debt                                      |              |  | 21    |              |  |        | (36          | ) |  |              | 62     |   |      |       | (20    | ) |  |       | (24    | ) |  | 
|                                                                                         | Net change in related party
    financial receivables and payables |              |  | 27    |              |  |        | (76          | ) |  |              | 75     |   |      |       | 18     |   |  |       | 22     |   |  | 
|                                                                                         | Proceeds from issuance of long-term
    debt                       |              |  | 21    |              |  |        | 700          |   |  |              |       |   |      |       | 192    |   |  |       | 232    |   |  | 
|                                                                                         | Principal repayments of long-term
    debt                         |              |  | 21    |              |  |        | (25          | ) |  |              | (549   | ) |      |       | (500   | ) |  |       | (603   | ) |  | 
|                                                                                         | Change in restricted cash                                          |              |  |       |              |  |        | 3            |   |  |              | (43    | ) |      |       | 21     |   |  |       | 25     |   |  | 
|                                                                                         | Proceeds from issuance of shares to
    minority interest          |              |  |       |              |  |        |             |   |  |              | 53     |   |      |       | 23     |   |  |       | 27     |   |  | 
|                                                                                        
|Net cash provided by (used in)
    financing activities                                  |                                                                    |              |  |       |              |  | 566    |              |   |  | (402         | )      |   |      | (266  | )      |   |  | (321  | )      |   | 
|                                                                                        
|Effect of foreign exchange rate
    changes on cash and cash equivalents                 |                                                                    |              |  |       |              |  | (4     | )            |   |  | (7           | )      |   |      | 5     |        |   |  | 6     |        |   | 
|Net increase (decrease) in cash and
    cash equivalents                                 |                                                                    |              |  |       |              |  | (229   | )            |   |  | (361         | )      |   |      | 540   |        |   |  | 651   |        |   | 
|Net increase (decrease) in cash and
    cash equivalents from discontinued operation     |                                                                    |              |  |       |              |  | (1     | )            |   |  |             |        |   |      |      |        |   |  |      |        |   | 
|Cash and cash equivalents at
    beginning of year                                       |                                                                    |              |  |       |              |  | 1,199  |              |   |  | 969          |        |   |      | 608   |        |   |  | 733   |        |   | 
|                                                                                        
|Cash and cash equivalents at end of
    year                                             |                                                                    |              |  |       |              |  | 969    |              |   |  | 608          |        |   |      | 1,148 |        |   |  | 1,384 |        |   | 
|                                                                                        



F-6



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##### Table of Contents

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

Description of BusinessInfineon 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.



FormationInfineon 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, is listed on
the New York Stock Exchange and is one of the DAX
30 companies on the Frankfurt Stock Exchange.



Basis of PresentationThe accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America
(U.S. 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 the
transitional regulation of the German
BilanzrechtsreformgesetzArticle 58,
paragraph 3 EGHGB, 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 consolidated balance
sheet as of September 30, 2005, and the consolidated
statements of operations and cash flows for the year then ended
are also presented in U.S. dollars ($), solely
for the convenience of the reader, at the rate of
1 = $1.2058,
the Federal Reserve noon buying rate on September 30, 2005.
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. Results of operations have not been affected by
these reclassifications.



2.
    Summary of Significant Accounting PoliciesThe following is a summary of significant accounting policies
followed in the preparation of the accompanying consolidated
financial statements.



Basis of ConsolidationThe accompanying consolidated 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

F-7



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

Companies) are accounted for using the equity method of
accounting (see note 16). The equity in earnings of
Associated Companies with different financial year ends is
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 numbers of entities
in addition to the Company:

|                   |           |              |    |    |            |  |    |       |   |  |    |    |  
|------------------ | --------- | ------------ | -- | -- | ---------- |  | -- | ----- | - |  | -- | -- | -
|                   |           | Consolidated |    |    | Associated |  |    |      
|                   |           | subsidiaries |    |    | companies  |  |    | Total |  
|                   |           |              |    |    |            |  |    |       |  
|September 30, 2004 |           |              | 56 |    |            |  | 15 |       |   |  | 71 |   
|                   | Additions |              |    | 2  |            |  |    |      |   |  |    | 2  |  
|                   | Disposals |              |    | (2 | )          |  |    | (4    | ) |  |    | (6 | )
|                   |           |              |    |    |            |  |    |       |  
|September 30, 2005 |           |              | 56 |    |            |  | 11 |       |   |  | 67 |   
|                   |           |              |    |    |            |  |    |       |  





| |                               
| | ------------------------------
| | Reporting and Foreign Currency







|                    |  |         |  |   |  |               |        |  |                |  |        |      |  |  |        |  |  |  |        | 
|------------------- |  | ------- |  | - |  | ------------- | ------ |  | -------------- |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                    |  |         |  |   |  | Exchange rate |        |  | Annual average | 
|                    |  |         |  |   |  | September 30, |        |  | exchange rate  | 
|                    |  |         |  |   |  |               |        |  |                | 
|                    |  |         |  |   |  | 2004          |        |  | 2005           |  |        | 2004 |  |  | 2005   | 
|                    |  |         |  |   |  | euro          |        |  | euro           |  |        | euro |  |  | euro   | 
|Currency:           |  |         |  |   |  |               |        |  |                |  |        |      |  |  |        | 
|U.S. dollar         |  | 1$      |  | = |  |               | 0.8115 |  |                |  | 0.8290 |      |  |  | 0.8209 |  |  |  | 0.7869 | 
|Japanese yen        |  | 100 JPY |  | = |  |               | 0.7320 |  |                |  | 0.7357 |      |  |  | 0.7545 |  |  |  | 0.7331 | 
|Great Britain pound |  | 1 GBP   |  | = |  |               | 1.4667 |  |                |  | 1.4650 |      |  |  | 1.4704 |  |  |  | 1.4507 | 
|Singapore dollar    |  | 1 SGD   |  | = |  |               | 0.4793 |  |                |  | 0.4911 |      |  |  | 0.4808 |  |  |  | 0.4749 | 



| |                    
| | -------------------
| | Revenue Recognition



| |      
| | -----
| | Sales

Revenue Recognition


F-8



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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. In general, returns are
permitted only for quality related reasons within the applicable
warranty period, which is typically 12 months. Distributors
can, in certain cases, apply for stock rotation or scrap
allowances and price protection. Allowances for stock rotation
returns are accrued based on expected stock rotation as per the
contractual agreement. Distributor scrap allowances are accrued
based on the contractual agreement and, upon authorization of
the claim, reimbursed up to a certain maximum of the average
inventory value. Price protection programs allow distributors to
apply for a price protection credit on unsold inventory in the
event the Company reduces the standard list price of the
products included in such inventory. In some cases, rebate
programs are offered to specific customers whereby the customer
may apply for a rebate upon achievement of a defined sales
volume. Distributors are also partially compensated for commonly
defined cooperative advertising on a case-by-case basis.



License IncomeLicense income is recognized when earned and realizable (see
note 5). Lump sum payments are generally non-refundable and
are deferred where applicable and recognized over the period in
which the Company is obliged to provide additional service.
Pursuant to Emerging Issues Task Force (EITF) Issue
No. 00-21, Revenue Arrangements with Multiple
Deliverables, revenues from contracts with multiple
elements entered into after July 1, 2003 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.



GrantsGrants 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, 20 and 22).



Product-related ExpensesShipping 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, based on estimated failure rates and claim history.
Research and development costs are expensed as incurred.



Income TaxesIncome taxes are accounted for under the asset and liability
method pursuant to Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income
Taxes. 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

F-9



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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. Investment tax credits are accounted for under
the flow-through method.



Stock-based CompensationThe 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 recognizes compensation cost
over the pro ratavesting period. The Company 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 (see
note 24).



Issuance of shares by Subsidiaries or Associated
    CompaniesGains 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).



Cash and Cash EquivalentsCash and cash equivalents represent cash, deposits and liquid
short-term investments with original maturities of three months
or less. Cash equivalents as of September 30, 2004 and 2005
were 541 and
1,093, respectively,
and consisted mainly of bank term deposits and fixed income
securities with original maturities of three months or less.



Restricted CashRestricted cash includes collateral deposits used as security
under arrangements for deferred compensation, business
acquisitions, construction projects, leases and financing (see
notes 31).



Marketable SecuritiesThe 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 income
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 non-operating income or
expense. For the purpose of determining realized gains and
losses, the cost of securities sold is based on specific
identification.



InventoriesInventories 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 comprise direct material and labor costs and
applicable indirect costs.



Property, Plant and EquipmentProperty, plant and equipment is valued at cost less accumulated
depreciation. Spare parts, maintenance and repairs are expensed
as incurred. Depreciation expense is recognized using the
straight-line method. Construction in progress includes advance
payments for construction of fixed

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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 estimated
useful life of the related asset. During the years ended
September 30, 2004 and 2005 capitalized interest was
9 and
9, respectively. The
estimated useful lives of assets are as follows:

|                                  |  |       |       | 
|--------------------------------- |  | ----- | ----- | 
|                                  |  | Years |      
|                                  |  |       |      
|Buildings                         |  |       | 10-25 | 
|Technical equipment and machinery |  |       | 3-10  | 
|Other plant and office equipment  |  |       | 1-10  | 



| |       
| | ------
| | Leases

Accounting for Leases




| |                  
| | -----------------
| | Intangible Assets

Business
Combinations.


Goodwill
and Other Intangible Assets




| |                                
| | -------------------------------
| | Impairment of Long-lived Assets



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



Long-term InvestmentsThe Company assesses declines in the value of investments
accounted for under the equity and cost methods to determine
whether such decline is other-than-temporary, thereby rendering
the investment impaired. This assessment is made by considering
available evidence including changes in general market
conditions, specific industry and individual company data, the
length of time and the extent to which the market value has been
less than cost, the financial condition and near-term prospects
of the individual company, and the Companys intent and
ability to hold the investment for a period of time sufficient
to allow for any anticipated recovery in market value.



Financial InstrumentsThe 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 as well as interest rate
swap agreements, 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 on accounting
for 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. Generally the Company does not designate
its derivative instruments as hedge transactions. Changes in
fair value of undesignated derivatives that relate to operations
are recorded as part of cost of sales, while undesignated
derivatives relating to financing activities are recorded in
other non-operating expense. Changes in fair value of
derivatives designated as fair value hedges and the related
hedged items are reflected in earnings. Changes in the fair
value of derivatives designated as cash flow hedges are, to the
extent effective, deferred in accumulated other comprehensive
income and subsequently reclassified to earnings when the
hedging transaction is reflected in earnings and, to the extent
ineffective, included in earnings immediately. The fair value of
derivative and other financial instruments is discussed in
note 29.



Pension PlansIn December 2003, the FASB issued SFAS No. 132
(revised 2003), Employers Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88, and 106, which revises
employers disclosures about pension plans and other
postretirement benefit plans. SFAS No. 132 (revised
2003) requires additional disclosures to those in the original
SFAS No. 132, which it replaces. During the year ended
September 30, 2004, the Company adopted
SFAS No. 132 (revised 2003) with disclosures provided
in note 28.



Use of EstimatesThe 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.



Recent Accounting PronouncementsIn June 2004, EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments, was issued which includes new guidance
for evaluating and

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

recording other-than-temporary impairment losses on debt and
equity securities accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity
Securities and cost method investments, as well as new
disclosure requirements for investments that are deemed to be
temporarily impaired. While the disclosure requirements for
specified debt and equity securities and cost method investments
were effective for annual periods ending after December 15,
2003, the FASB has directed the FASB staff to delay the
effective date for the measurement and recognition guidance
contained in EITF Issue No. 03-1. This delay does not
suspend the requirement to recognize other-than-temporary
impairments as required by existing authoritative literature.
The Company does not expect the adoption of EITF Issue
No. 03-1 to have a significant impact on its consolidated
financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151,
Inventory Costs  an amendment of ARB
No. 43, Chapter 4, which clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage),
requiring that such costs be recognized as current period
charges and requiring the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. SFAS No. 151 is effective for
the Companys financial year beginning October 1,
2005. The Company does not expect the implementation of
SFAS No. 151 to have a significant impact on its
consolidated financial position or results of operations.

In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets  an
Amendment of APB Opinion No. 29, which eliminates
the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. The
Company adopted SFAS No. 153 for nonmonetary asset
exchanges occurring on or after July 1, 2005. The adoption
SFAS No. 153 did not have a significant impact on the
Companys consolidated financial position or results of
operations.

In December 2004, the FASB issued SFAS No. 123
(revised 2004) Share-Based Payments.
SFAS No. 123 (revised 2004) requires public entities
to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair
value of the award and recognize the cost over the period during
which an employee is required to provide service in exchange for
the award. SFAS No. 123 (revised 2004) eliminates the
alternative method of accounting for employee share-based
payments previously available under APB No. 25. The
Securities and Exchange Commission issued guidance on
April 14, 2005 announcing that public companies will be
required to adopt SFAS No. 123 (revised 2004) by their
first financial year beginning after June 15, 2005.
Accordingly, the Company will adopt SFAS No. 123
(revised 2004) in the first quarter of the 2006 financial year.
The adoption of SFAS No. 123 (revised 2004) is not
expected to have a significant effect on the Companys
consolidated financial position or cash flows but is expected to
have an adverse effect on its results of operations, the exact
amount of which is not currently determinable.



3.
    AcquisitionsThe Company established the Infineon Technologies Flash joint
venture (then called Ingentix) in which the Company
initially held a 51% ownership interest with Saifun
Semiconductors Ltd. (Saifun) in April 2001. In the
2003 financial year, the Company increased its ownership
interest to 70% by contributing additional capital and
converting existing shareholder loans to equity. The joint
venture operated through two companies, Infineon Technologies
Flash GmbH & Co. KG, located in Dresden, Germany, and
Infineon Technologies Flash Ltd., located in Netanya, Israel.
During December 2004, Saifun and the Company modified their
cooperation agreement. As a consequence, the Company consummated
the acquisition of Saifuns remaining 30% share in the
Infineon Technologies Flash joint venture in January 2005 and
was granted a license for the use of Saifun NROM®
technologies, in exchange for $95 million to be paid in
quarterly installments over 10 years and additional purchase

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

consideration primarily in the form of net liabilities assumed
aggregating 7 (see
note 5). The assets acquired and liabilities assumed were
recorded in the accompanying consolidated balance sheet based
upon their estimated fair values as of the date of the
acquisition. The excess of the purchase price over the estimated
fair values of the underlying assets acquired and liabilities
assumed amounted to 7
and was allocated to goodwill. The preliminary purchase price
allocation may be adjusted within one year of the purchase date
for changes in estimates of the fair value of assets acquired
and liabilities assumed. The Company has sole ownership and
responsibility for the business and started to account for its
entire financial results in the second quarter of the 2005
financial year (see note 21).

On April 30, 2004, the Company completed its acquisition of
100% of ADMtek Inc., Hsinchu, Taiwan (ADMtek) in
exchange for 75 in
cash (of which 6 is
held in escrow subject to the accuracy of the sellers
representations and warranties). Payment of an additional
28, held in escrow and
reflected as restricted cash, is contingent upon employee
retention and the achievement of certain performance and
development milestones over a two-year period, and is to be
recognized as the milestones are achieved. As of
September 30, 2005,
8 has been paid to
ADMtek and 13 was
released to the Company since certain performance and
development milestones were not achieved. Accordingly, the
remaining balance held in escrow amounted to
13 as of
September 30, 2005. This acquisition was designed to enable
access to the Home-Gateway-Systems market for the wireline
communications business.

The Company acquired 92.5% of the outstanding shares of SensoNor
AS (SensoNor) on June 18, 2003, following a
public tender offer, and acquired 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 develops, produces
and markets tire pressure and acceleration sensors. With this
acquisition the Company aimed to strengthen its position in
semiconductor sensors for the automotive business. During the
year ended September 30, 2004, following the restructuring
of the SensoNor business, the Company recorded a purchase
accounting adjustment reducing the previously established
deferred tax asset valuation allowance by
8 and decreasing
goodwill correspondingly. During the year ended
September 30, 2005, the Company increased its share capital
of SensoNor and recorded a purchase accounting adjustment
reducing the previously established deferred tax asset valuation
allowance by 30 and
decreasing goodwill and other intangible assets by
14 and
16, respectively.

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 provided for the payment of contingent
purchase consideration of
9 upon the achievement
of specified events. As of September 30, 2005,
6 of contingent
purchase consideration was forfeited since certain performance
criteria were not achieved. The remaining contingent purchase
consideration balance of
3 is subject to the
achievement of certain performance criteria during the 2006
financial year.

On September 9, 2002, the Company acquired all of the
shares of Ericsson Microelectronics AB (MIC). MIC,
based in Sweden, is 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 intended to
strengthen their strategic co-operation in various areas of
mobile phone

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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
from Ericsson. These amounts were recorded as an adjustment,
principally to the originally recorded goodwill, as well as to
intangible assets and deferred taxes. Additionally, following
the restructuring of the MIC business, the Company recorded a
purchase accounting adjustment reversing the previously
established deferred tax asset valuation allowance in the amount
of 16 during the year
ended September 30, 2003.

The following table summarizes the Companys acquisitions
during the years ended September 30, 2003, 2004 and 2005:

|                                             |                                 |                |     |     |         |  |    |               |   |  |              |    |          |  |     |     |  
|-------------------------------------------- | ------------------------------- | -------------- | --- | --- | ------- |  | -- | ------------- | - |  | ------------ | -- | -------- |  | --- | --- | -
|                                             |                                 | 2003           |     |     | 2003    |  |    | 2004          |   |  | 2005         |   
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|                                             |                                 | SensoNor       |     |     | Other   |  |    | ADMtek        |   |  | Flash        |   
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|Acquisition Date                             |                                 | June 2003      |     |     | 2003    |  |    | April 2004    |   |  | January 2005 |   
|Segment                                      |                                 | Automotive,    |     |     | Various |  |    | Communication |   |  | Memory       |   
|                                             |                                 | Industrial and |     |     |         |  |    |               |   |  |              |    | Products | 
|                                             |                                 | Multimarket    |     |     |         |  |    |               |   |  |              |    |          |  |    
|Cash                                         |                                 |                | 3   |     |         |  |   |               |   |  | 18           |    |          |  | 1   |    
|Other current assets                         |                                 |                | 6   |     |         |  | 1  |               |   |  | 10           |    |          |  | 16  |    
|Property, plant and equipment                |                                 |                | 25  |     |         |  | 1  |               |   |  | 2            |    |          |  | 4   |    
|Intangible assets                            |                                 |                |     |     |         |  |    |               |   |  |              |    |          |  |     |    
|                                             | Current product technology      |                |     | 5   |         |  |    | 5             |   |  |              | 14 |          |  |     |    |  
|                                             | Core technology                 |                |     |    |         |  |    |              |   |  |              | 5  |          |  |     | 58  |  
|                                             | Patents (Customer Relationship) |                |     |    |         |  |    | 2             |   |  |              | 2  |          |  |     |    |  
|                                             | In process R&D                  |                |     | 4   |         |  |    | 2             |   |  |              | 9  |          |  |     |    |  
|Goodwill                                     |                                 |                |    |     |         |  | 6  |               |   |  | 23           |    |          |  | 7   |    
|Other non-current assets                     |                                 |                | 38  |     |         |  |   |               |   |  | 1            |    |          |  | 3   |    
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|                                             | Total assets acquired           |                |     | 81  |         |  |    | 17            |   |  |              | 84 |          |  |     | 89  |  
|Current liabilities                          |                                 |                | (11 | )   |         |  | (9 | )             |   |  | (8           | )  |          |  | (45 | )  
|Non-current liabilities (including
    debt) |                                 |                | (36 | )   |         |  |   |               |   |  | (1           | )  |          |  | (2  | )  
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|                                             | Total liabilities assumed       |                |     | (47 | )       |  |    | (9            | ) |  |              | (9 | )        |  |     | (47 | )
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|Net assets acquired                          |                                 |                | 34  |     |         |  | 8  |               |   |  | 75           |    |          |  | 42  |    
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|                                             |                                 |                |     |     |         |  |    |               |   |  |              |   
|Cash paid (Purchase Consideration)           |                                 |                | 34  |     |         |  | 8  |               |   |  | 75           |    |          |  |    |    



 


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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

years ended September 30, 2003 and 2004, respectively,
because the technological feasibility of products under
development had not been established and no future alternative
uses existed.

Pro forma financial information relating to these acquisitions
is not material either individually or in the aggregate to the
results of operations and financial position of the Company and
has been omitted.



4.
    Discontinued Operation and Divestitures

Discontinued operationPursuant to an agreement reached between the Company and OSRAM
GmbH (Osram), the Company transitioned all of 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-electronics business.

The following table presents comparative information of the
discontinued operation, which was previously reported as part of
the Other Operating Segments, for the year ended
September 30, 2003:

|                                                  |                 |      |     |     | 
|------------------------------------------------- | --------------- | ---- | --- | --- | 
|Opto-electronics                                  |                 | 2003 |    
|                                                  |                 |      |    
|Sales:                                            |                 |      |     |    
|                                                  | Third parties   |      |     | 113 | 
|                                                  | Related parties |      |     | 32  | 
|                                                  |                 |      |    
|Net sales                                         |                 |      | 145 |    
|                                                  |                 |      |    
|Income from discontinued operation
    before tax |                 |      |    |    
|Income tax benefit (expense)                      |                 |      |    |    
|                                                  |                 |      |    
|Net income (loss) from discontinued
    operation |                 |      |    |    
|                                                  |                 |      |    





| |             
| | ------------
| | Divestitures




 





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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

On April 29, 2004, the Company entered into an agreement
with Finisar Corporation (Finisar) to sell the fiber
optics business, reflected in the Communication segment. The
agreement was amended on October 11, 2004, pursuant to
which the Company would receive 110 million shares of
Finisars common stock in exchange for its fiber optics
business and financial assistance with restructuring measures to
be taken in future periods. The final number of Finisar shares
that the Company would receive would have been subject to
adjustment for changes in working capital of the fiber optics
business. Additionally, the agreement contained a three-year
non-compete clause and limited the aggregate indemnification
liability to 20% of the consideration paid by Finisar. The
purchase agreement would be terminated by mutual consent if the
transaction were not to be consummated by March 31, 2005.

On January 11, 2005, the Company decided to terminate the
agreement with Finisar dated October 11, 2004. On
January 25, 2005, Finisar and the Company entered into a
new agreement under which Finisar acquired certain assets of the
Companys fiber optics business. Under the terms of the new
agreement, the Company received 34 million shares of
Finisars common stock valued at
40 as consideration
for the sale of inventory, fixed assets and intellectual
property associated with the design and manufacture of fiber
optic transceivers. The Company also committed to provide
Finisar with contract manufacturing services under separate
supply agreements for up to one year following the closing. The
transaction did not require shareholder or regulatory approval
and closed on January 31, 2005. As a result of the
transaction, the Company realized a gain before tax of
21 which was recorded
in other operating income.

On April 8, 2005, the Company sold to VantagePoint Venture
Partners its entire share interest in Finisars common
stock. As a result of the sale, the Company recorded an
other-than-temporary impairment of
8 in other
non-operating expense during the second quarter of the 2005
financial year, to reduce the investments carrying value
to the net sale proceeds.

The Company retained ownership of its remaining fiber optics
businesses consisting of bi-directional fiber transmission
(BIDI) components for Fiber-To-The-Home (FTTH) applications,
parallel optical components (PAROLI) and plastic optical
fiber (POF) components that are used in automotive applications,
which were reclassified from held for sale to held and used
during the second quarter of the 2005 financial year, and were
restructured. The reclassification of the retained fiber optic
businesses into the held and used category was measured at the
lower of their carrying amount before they were classified as
held for sale, adjusted for depreciation expense that would have
been recognized had the retained fiber optic businesses been
continuously classified as held and used, or the fair value of
the assets on January 25, 2005. Accordingly, the Company
recognized an impairment charge of
34 in other operating
expenses during the second quarter of the 2005 financial year.

On August 2, 2005, the Company sold the long-term assets
utilized in the design and manufacture of BIDI components to
EZConn Corporation (EZConn) for cash consideration
of 3. The Company also
committed to provide EZConn with contract manufacturing services
through March 2006. As a result of the transaction, the Company
realized a gain before tax of
2, which was recorded
in other operating income, and deferred
1 which will be
realized over the term of the contract manufacturing agreement.

On April 7, 2005 the Company and Exar Corporation
(Exar) entered into an agreement whereby Exar
acquired for $11 million cash a significant portion of the
Companys optical networking business unit. The acquisition
included assets relating to multi-rate TDM framer products,
Fiber Channel over SONET/ SDH, Resilent Packet Ring (RPR), as
well as certain intellectual property for Data Over SONET
products. As a result of the sale, the Company reclassified
related non-current assets into assets held for sale during the
second quarter of the 2005 financial year and reduced their
carrying value to the net

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

sale proceeds. The sale of the assets was consummated during the
third quarter of the 2005 financial year.

Summary financial information for the divested businesses
(through the date of divestiture) for the years ended
September 30, 2003, 2004 and 2005, are as follows:

|                                |                        |      |     |     |      |  |      |      |   |  |     |     |  
|------------------------------- | ---------------------- | ---- | --- | --- | ---- |  | ---- | ---- | - |  | --- | --- | -
|                                |                        | 2003 |     |     | 2004 |  |      | 2005 |  
|                                |                        |      |     |     |      |  |      |      |  
|Sales:                          |                        |      |     |     |      |  |      |      |   |  |     |    
|                                | Gallium Arsenide       |      |     | 45  |      |  |      |     |   |  |     |    |  
|                                | Fiber Optics           |      |     | 41  |      |  |      | 35   |   |  |     | 23  |  
|                                | BIDI                   |      |     | 7   |      |  |      | 10   |   |  |     | 6   |  
|                                |                        |      |     |     |      |  |      |      |  
|Total                           |                        |      | 93  |     |      |  | 45   |      |   |  | 29  |    
|                                |                        |      |     |     |      |  |      |      |  
|EBIT:                           |                        |      |     |     |      |  |      |      |   |  |     |    
|                                | Gallium Arsenide       |      |     | 5   |      |  |      |     |   |  |     |    |  
|                                | UMCi                   |      |     | (11 | )    |  |      |     |   |  |     |    |  
|                                | Infineon Ventures GmbH |      |     | (25 | )    |  |      | (52  | ) |  |     | (3  | )
|                                | Fiber Optics           |      |     | (25 | )    |  |      | (33  | ) |  |     | (27 | )
|                                | BIDI                   |      |     | (9  | )    |  |      | (28  | ) |  |     | (20 | )
|                                |                        |      |     |     |      |  |      |      |  
|Total                           |                        |      | (65 | )   |      |  | (113 | )    |   |  | (50 | )  
|                                |                        |      |     |     |      |  |      |      |  
|Gain (loss) on sale before tax: |                        |      |     |     |      |  |      |      |   |  |     |    
|                                | Gallium Arsenide       |      |     |    |      |  |      |     |   |  |     |    |  
|                                | UMCi                   |      |     | (9  | )    |  |      |     |   |  |     |    |  
|                                | Infineon Ventures GmbH |      |     |    |      |  |      |     |   |  |     | 13  |  
|                                | Fiber Optics           |      |     |    |      |  |      |     |   |  |     | 21  |  
|                                | BIDI                   |      |     |    |      |  |      |     |   |  |     | 2   |  
|Other                           |                        |      | (1  | )   |      |  | (2   | )    |   |  | 3   |    
|                                |                        |      |     |     |      |  |      |      |  
|Total (note 7)                  |                        |      | (10 | )   |      |  | (2   | )    |   |  | 39  |    
|                                |                        |      |     |     |      |  |      |      |  



|   |         
|-- | --------
|5. | Licenses

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

Due to a revision 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
its respective obligations.

On November 10, 2004, the Company and ProMOS reached an
agreement regarding ProMOS license of the Companys
previously transferred technologies, pursuant to which ProMOS
may continue to produce and sell products using those
technologies and to develop its own processes and products. The
Company has no continuing involvement with the licensing of
these products to ProMOS. As full consideration, ProMOS agreed
to pay the Company $156 million in four installments
through April 30, 2006, against which the Companys
accrued payable for DRAM products from ProMOS of
$36 million was offset. The parties agreed to withdraw
their respective claims, including arbitration. The present
value of the settlement amounted to
118 and was recognized
as license income during the first quarter of the 2005 financial
year.

In connection with the joint technology development with Nanya
Technology Corporation (Nanya) (see note 16),
in 2003 the Company granted Nanya a license to use its
110-nanometer technology in Nanyas existing operations.
License income related to the technology is recognized over the
estimated life of the technology.

In connection with the extension of a capacity reservation
agreement with Winbond Electronics Corp., Hsinchu, Taiwan
(Winbond) in August 2004, the Company granted
Winbond a license to use its 110-nanometer technology in
Winbonds production process for the manufacture of
products for the Company. The license income was deferred and is
being recognized over the life of the capacity reservation
agreement.

On March 18, 2005, the Company and Rambus Inc.
(Rambus) reached an agreement settling all claims
between them and licensing the Rambus patent portfolio for use
in current and future Company products. Rambus granted to the
Company a worldwide license to existing and future Rambus
patents and patent applications for use in the Companys
memory products. In exchange for this worldwide license, the
Company agreed to pay $50 million in quarterly installments
of $6 million between November 15, 2005 and
November 15, 2007. During the second quarter of the 2005
financial year, the Company recorded the license and
corresponding liability in the amount of
37, representing the
estimated present value of the minimum future license payments.
After November 15, 2007, and only if Rambus enters into
additional specified licensing agreements with certain other
DRAM manufacturers, the Company would make additional quarterly
payments which may aggregate a maximum of an additional
$100 million. The agreement also provides the Company with
an option for acquiring certain other licenses. All licenses
provide for the Company to be treated as a most-favored
customer of Rambus. The Company has simultaneously granted
Rambus a fully-paid perpetual license for memory interfaces. In
addition to the licenses, the two companies agreed to the
dismissal of all pending litigation and released each other from
all existing legal claims.

In connection with the acquisition of Saifuns remaining
30% share in the Infineon Technologies Flash joint venture
during January 2005, the Company was granted a license for the
use of Saifun NROM® technologies (see note 3). During
the second quarter of the 2005 financial year, the Company
recorded the license of
58 and a corresponding
liability in the amount of
58, representing the
estimated fair value of the license and minimum future license
payments, respectively. The Company retained the option to
terminate the entire license or parts thereof at any time
without penalty. During the quarter ended June 30, 2005,
the Company exercised its termination option and cancelled the
portion of the license encompassing NROM® Code Flash
products. As a result of the partial termination, the license
asset and related liability were reduced to
28 and
29, respectively, as
of June 30, 2005.

F-19



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



6.
    GrantsThe 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
consolidated financial statements during the years ended
September 30, 2003, 2004 and 2005, are as follows:

|                                                               |                          |      |     |    |      |  |     |      |  |  |     |     | 
|-------------------------------------------------------------- | ------------------------ | ---- | --- | -- | ---- |  | --- | ---- |  |  | --- | --- | 
|                                                               |                          | 2003 |     |    | 2004 |  |     | 2005 | 
|                                                               |                          |      |     |    |      |  |     |      | 
|Included in the consolidated
    statements of operations:     |                          |      |     |    |      |  |     |      |  |  |     |    
|                                                               | Research and development |      |     | 59 |      |  |     | 74   |  |  |     | 50  | 
|                                                               | Cost of sales            |      |     | 54 |      |  |     | 86   |  |  |     | 121 | 
|                                                               |                          |      |     |    |      |  |     |      | 
|                                                               |                          |      | 113 |    |      |  | 160 |      |  |  | 171 |    
|                                                               |                          |      |     |    |      |  |     |      | 
|Construction grants deducted from
    the cost of fixed assets |                          |      | 17  |    |      |  | 49  |      |  |  |    |    
|Deferred government grants
    (notes 20 and 22)               |                          |      | 303 |    |      |  | 281 |      |  |  | 288 |    



|   |                                        
|-- | ---------------------------------------
|7. | Supplemental Operating Cost Information



|                                                |  |      |       |  |      |  |       |      |  |  |       | 
|----------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                |  | 2003 |       |  | 2004 |  |       | 2005 | 
|                                                |  |      |       |  |      |  |       |      | 
|Raw materials, supplies and
    purchased goods |  |      | 1,675 |  |      |  | 1,621 |      |  |  | 1,867 | 
|Purchased services                              |  |      | 1,126 |  |      |  | 1,232 |      |  |  | 1,166 | 
|                                                |  |      |       |  |      |  |       |      | 
|Total                                           |  |      | 2,801 |  |      |  | 2,853 |      |  |  | 3,033 | 
|                                                |  |      |       |  |      |  |       |      | 



|                          |  |      |       |  |      |  |       |      |  |  |       | 
|------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                          |  | 2003 |       |  | 2004 |  |       | 2005 | 
|                          |  |      |       |  |      |  |       |      | 
|Wages and salaries        |  |      | 1,490 |  |      |  | 1,532 |      |  |  | 1,664 | 
|Social levies             |  |      | 268   |  |      |  | 280   |      |  |  | 285   | 
|Pension expense (note 28) |  |      | 27    |  |      |  | 28    |      |  |  | 28    | 
|                          |  |      |       |  |      |  |       |      | 
|Total                     |  |      | 1,785 |  |      |  | 1,840 |      |  |  | 1,977 | 
|                          |  |      |       |  |      |  |       |      | 



|                                                 |                                                                 |      |     |     |      |  |      |      |   |  |     |     |  
|------------------------------------------------ | --------------------------------------------------------------- | ---- | --- | --- | ---- |  | ---- | ---- | - |  | --- | --- | -
|                                                 |                                                                 | 2003 |     |     | 2004 |  |      | 2005 |  
|                                                 |                                                                 |      |     |     |      |  |      |      |  
|Gain (loss) from sale of businesses
    (note 4) |                                                                 |      | (10 | )   |      |  | (2   | )    |   |  | 39  |    
|                                                 | Goodwill and intangible assets
    impairment charges (note 17) |      |     | (68 | )    |  |      | (71  | ) |  |     | (57 | )
|                                                 | Long-lived asset impairment charges                             |      |     |    |      |  |      |     |   |  |     | (39 | )
|                                                 | Antitrust related charges
    (note 31)                         |      |     | (20 | )    |  |      | (194 | ) |  |     | (20 | )
|                                                 | Amortization of debt issuance costs                             |      |     | (4  | )    |  |      | (8   | ) |  |     | (4  | )
|                                                 | Other                                                           |      |     | 17  |      |  |      | 18   |   |  |     | (11 | )
|                                                 |                                                                 |      |     |     |      |  |      |      |  
|Other operating expense, net                     |                                                                 |      | (85 | )   |      |  | (257 | )    |   |  | (92 | )  
|                                                 |                                                                 |      |     |     |      |  |      |      |  

F-20



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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

|              |  |      |        |  |      |  |        |      |  |  |        | 
|------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|              |  | 2003 |        |  | 2004 |  |        | 2005 | 
|              |  |      |        |  |      |  |        |      | 
|Germany       |  |      | 16,043 |  |      |  | 16,340 |      |  |  | 16,334 | 
|Other Europe  |  |      | 4,753  |  |      |  | 5,507  |      |  |  | 5,606  | 
|North America |  |      | 2,779  |  |      |  | 2,822  |      |  |  | 3,108  | 
|Asia/ Pacific |  |      | 7,725  |  |      |  | 9,220  |      |  |  | 10,919 | 
|Japan         |  |      | 108    |  |      |  | 126    |      |  |  | 147    | 
|Other         |  |      | 115    |  |      |  | 112    |      |  |  | 44     | 
|              |  |      |        |  |      |  |        |      | 
|Total         |  |      | 31,523 |  |      |  | 34,127 |      |  |  | 36,158 | 
|              |  |      |        |  |      |  |        |      | 

  




|   |              
|-- | -------------
|8. | Restructuring







   


F-21



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The development of the restructuring liability during the year
ended September 30, 2005 is as follows:

September 30,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    September 30,2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005RestructuringLiabilities
    
    
    Reclassification
    
    
    charges
    
    
    Payments
    
    
    LiabilitiesEmployee
terminations
    
    
    10
    
    
    
    2
    
    
    
    74
    
    
    
    (22
    )
    
    64Other exit costs
    
    
    6
    
    
    
    
    
    
    
    4
    
    
    
    (2
    )
    
    8Total
    
    
    16
    
    
    
    2
    
    
    
    78
    
    
    
    (24
    )
    
    729.     Income TaxesIncome (loss) before income taxes and minority interest is attributable to the following
geographic locations for the years ended September 30, 2003, 2004 and 2005:2003
    
    
    2004
    
    
    2005Germany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (506
    )
    
    
    153
    
    
    
    (298
    )Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    44
    
    
    
    104Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (359
    )
    
    
    197
    
    
    
    (194
    )Income tax expense (benefits) for the years ended September 30, 2003, 2004 and 2005 is as
follows:2003
    
    
    2004
    
    
    2005Current taxes:Germany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    53
    
    
    
    31Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    5
    
    
    
    168
    
    
    
    58
    
    
    
    32Deferred taxes:Germany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    129
    
    
    
    66Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (33
    )
    
    
    2216
    
    
    
    96
    
    
    
    88Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    154
    
    
    
    120Total income taxes for the years ended September 30, 2003, 2004 and 2005 were allocated as
follows:2003
    
    
    2004
    
    
    2005Income taxes from continuing operations
    
    
    84
    
    
    
    154
    
    
    
    120Goodwill and intangible assets, for initial recognition
of acquired tax benefits that previously were
included in the valuation allowance (see note 3)
    
    
    (16
    )
    
    
    (8
    )
    
    
    (30
    )Shareholders equity, for unrealized holding gains
(losses), unrealized gains (losses) on cash flow
hedges and additional minimum pension liabilities
    
    
    (4
    )
    
    
    (10
    )
    
    
    64
    
    
    
    136
    
    
    
    90



F-22



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The Companys statutory tax rate in Germany is 25%.
Additionally, a solidarity surcharge of 5.5% and trade tax of
13% is levied, for a combined statutory tax rate of 39%.

A reconciliation of income taxes for the years ended
September 30, 2003, 2004 and 2005, determined using the
German corporate tax rate plus trade taxes, net of federal
benefit, for a combined statutory rate of 41% (which includes a
one year flood victim relief levy of 2%) for 2003 and 39% for
2004 and 2005 is as follows:

|                                                          |  |      |       |  |      |  |      |      |  |  |      | 
|--------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ---- | ---- |  |  | ---- | 
|                                                          |  | 2003 |       |  | 2004 |  |      | 2005 | 
|                                                          |  |      |       |  |      |  |      |      | 
|Expected (benefit) expense for
    income taxes           |  |      | (147) |  |      |  | 77   |      |  |  | (76) | 
|Increase in available tax credits                         |  |      | (35)  |  |      |  | (26) |      |  |  | (5)  | 
|Non-taxable investment (income) loss                      |  |      | 14    |  |      |  | 6    |      |  |  | (26) | 
|Foreign tax rate differential                             |  |      | 1     |  |      |  | (51) |      |  |  | (18) | 
|Non deductible expenses and other
    provisions          |  |      | 58    |  |      |  | 69   |      |  |  | 29   | 
|Change in German tax
    rate  effect on opening balance |  |      | 2     |  |      |  |     |      |  |  |     | 
|Change in German tax
    rate  effect on current year    |  |      | 7     |  |      |  |     |      |  |  |     | 
|Increase in valuation allowance                           |  |      | 182   |  |      |  | 54   |      |  |  | 192  | 
|In-process research and development                       |  |      | 1     |  |      |  | 3    |      |  |  |     | 
|Other                                                     |  |      | 1     |  |      |  | 22   |      |  |  | 24   | 
|                                                          |  |      |       |  |      |  |      |      | 
|Actual provision for income taxes                         |  |      | 84    |  |      |  | 154  |      |  |  | 120  | 
|                                                          |  |      |       |  |      |  |      |      | 



|                          |                                                      |      |       |     |      |  |       |       | 
|------------------------- | ---------------------------------------------------- | ---- | ----- | --- | ---- |  | ----- | ----- | 
|                          |                                                      | 2004 |       |     | 2005 | 
|                          |                                                      |      |       |     |      | 
|Deferred tax assets:      |                                                      |      |       |     |      |  |       |      
|                          | Intangible assets                                    |      |       | 100 |      |  |       | 26    | 
|                          | Property, plant and equipment                        |      |       | 155 |      |  |       | 203   | 
|                          | Deferred income                                      |      |       | 109 |      |  |       | 111   | 
|                          | Net operating loss and tax credit
    carry-forwards |      |       | 919 |      |  |       | 1,065 | 
|                          | Other items                                          |      |       | 227 |      |  |       | 169   | 
|                          |                                                      |      |       |     |      | 
|Gross deferred tax assets |                                                      |      | 1,510 |     |      |  | 1,574 |      
|Valuation allowance       |                                                      |      | (567) |     |      |  | (740) |      
|                          |                                                      |      |       |     |      | 
|Deferred tax assets       |                                                      |      | 943   |     |      |  | 834   |      
|                          |                                                      |      |       |     |      | 
|Deferred tax liabilities: |                                                      |      |       |     |      |  |       |      
|                          | Intangible assets                                    |      |       | 49  |      |  |       | 11    | 
|                          | Property, plant and equipment                        |      |       | 125 |      |  |       | 81    | 
|                          | Accounts receivable                                  |      |       | 11  |      |  |       | 36    | 
|                          | Accrued liabilities and pensions                     |      |       | 75  |      |  |       | 72    | 
|                          | Other items                                          |      |       | 39  |      |  |       | 41    | 
|                          |                                                      |      |       |     |      | 
|Deferred tax liabilities  |                                                      |      | 299   |     |      |  | 241   |      
|                          |                                                      |      |       |     |      | 
|Deferred tax assets, net  |                                                      |      | 644   |     |      |  | 593   |      
|                          |                                                      |      |       |     |      | 

F-23



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

Net deferred income tax assets and liabilities are presented in
the accompanying consolidated balance sheets as of
September 30, 2004 and 2005 as follows:

|                          |             |      |     |      |      |  |     |      | 
|------------------------- | ----------- | ---- | --- | ---- | ---- |  | --- | ---- | 
|                          |             | 2004 |     |      | 2005 | 
|                          |             |      |     |      |      | 
|Deferred tax assets:      |             |      |     |      |      |  |     |     
|                          | Current     |      |     | 140  |      |  |     | 125  | 
|                          | Non-current |      |     | 541  |      |  |     | 550  | 
|Deferred tax liabilities: |             |      |     |      |      |  |     |     
|                          | Current     |      |     | (16) |      |  |     | (17) | 
|                          | Non-current |      |     | (21) |      |  |     | (65) | 
|                          |             |      |     |      |      | 
|Deferred tax assets, net  |             |      | 644 |      |      |  | 593 |     
|                          |             |      |     |      |      | 

   


  


 


F-24



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The changes in valuation allowance for deferred tax assets
during the years ended September 30, 2004 and 2005 were as
follows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |   |  |     |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---- | --- | ----- | ---- |  | --- | ----- | - |  | --- | ----- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  | 2003 |     |       | 2004 |  |     | 2005  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|Balance, beginning of the year                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                  |      | 310 |       |      |  | 521 |       |   |  | 567 |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Applicable to continuing operations                              |      |     | 182   |      |  |     | 54    |   |  |     | 192   |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Deferred tax assets acquired in
    business combinations        |      |     | 45    |      |  |     |      |   |  |     |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Purchase accounting adjustments                                  |      |     | (16   | )    |  |     | (8    | ) |  |     | (30   | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Adjustment in corresponding net
    operating loss carry-forward |      |     |      |      |  |     |      |   |  |     | 11    |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|Balance, end of the year                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                  |      | 521 |       |      |  | 567 |       |   |  | 740 |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|The Company did not provide for income taxes or foreign
withholding taxes on cumulative earnings of foreign subsidiaries
as of September 30, 2005, 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 Company reorganized certain businesses in different tax
jurisdictions which resulted in deferred intercompany
transactions. Therefore, tax expense for the years ended
September 30, 2004 and 2005 of
54 and
85, respectively, have
been deferred of which
39 and
71, respectively, are
non-current (see note 17).                                                                                                                          
|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 net income by the sum of the weighted
average number of ordinary shares outstanding plus all
additional ordinary shares that would have been outstanding if
potentially dilutive instruments or ordinary share equivalents
had been issued.
|The computation of basic and diluted EPS for the year ended
September 30, 2003, 2004 and 2005, is as follows (shares in
million):                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  | 2003 |     |       | 2004 |  |     | 2005  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|Numerator:                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                  |      |     |       |      |  |     |       |   |  |     |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Net income (loss)                                                |      |     | (435  | )    |  |     | 61    |   |  |     | (312  | )
|Denominator:                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                  |      |     |       |      |  |     |       |   |  |     |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Weighted-average shares
    outstanding-basic                    |      |     | 720.9 |      |  |     | 734.7 |   |  |     | 747.6 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Effect of dilutive instruments                                   |      |     |      |      |  |     | 1.9   |   |  |     |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Weighted-average shares
    outstanding-diluted                  |      |     | 720.9 |      |  |     | 736.6 |   |  |     | 747.6 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  
|Earnings (loss) per share (in euro):                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                  |      |     |       |      |  |     |       |   |  |     |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Basic and diluted                                                |      |     | (0.60 | )    |  |     | 0.08  |   |  |     | (0.42 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                  |      |     |       |      |  |     |       |  



F-25



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

respectively, were not included in the computation of diluted
earnings (loss) per share as their impact would have been
antidilutive.



11.
    Marketable SecuritiesMarketable securities at September 30, 2004 and 2005
consist of the following:

|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            |  |    |  
|----------------------------- |  | ----- |  | ----- | ---- | ---------- |  | ---------- | -- | - | ---- | --- | ----- | --- | ---------- | -- | ---------- |  | -- | -
|                              |  | 2004  |  |       | 2005 |           
|                              |  |       |  |       |      |           
|                              |  |       |  | Fair  |      | Unrealized |  | Unrealized |    |   |      |     | Fair  |     | Unrealized |    | Unrealized | 
|                              |  | Cost  |  | value |      | gain       |  | loss       |    |   | Cost |     | value |     | gain       |    | loss       | 
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 
|Foreign government securities |  | 9     |  | 10    |      | 1          |  |            |   |   |      | 9   |       | 11  |            | 2  |            |  |   |  
|Floating rate notes           |  | 548   |  | 551   |      | 7          |  |            | (4 | ) |      | 260 |       | 268 |            | 8  |            |  |   |  
|Other debt securities         |  | 271   |  | 272   |      | 1          |  |            |   |   |      | 16  |       | 18  |            | 2  |            |  |   |  
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 
|Total debt securities         |  | 828   |  | 833   |      | 9          |  |            | (4 | ) |      | 285 |       | 297 |            | 12 |            |  |   |  
|Equity securities             |  | 13    |  | 12    |      | 1          |  |            | (2 | ) |      | 4   |       | 5   |            | 1  |            |  |   |  
|Fixed term deposits           |  | 1,112 |  | 1,112 |      |           |  |            |   |   |      | 590 |       | 590 |            | 2  |            |  | (2 | )
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 
|Total marketable securities   |  | 1,953 |  | 1,957 |      | 10         |  |            | (6 | ) |      | 879 |       | 892 |            | 15 |            |  | (2 | )
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 
|Reflected as follows          |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            |  |    |  
|Current assets                |  | 1,935 |  | 1,938 |      | 9          |  |            | (6 | ) |      | 850 |       | 858 |            | 10 |            |  | (2 | )
|Non-current assets (note 17)  |  | 18    |  | 19    |      | 1          |  |            |   |   |      | 29  |       | 34  |            | 5  |            |  |   |  
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 
|Total marketable securities   |  | 1,953 |  | 1,957 |      | 10         |  |            | (6 | ) |      | 879 |       | 892 |            | 15 |            |  | (2 | )
|                              |  |       |  |       |      |            |  |            |    |   |      |     |       |     |            |    |            | 

 




|                             |  |      |    |   |      |  |    |      |  |  |   | 
|---------------------------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | - | 
|                             |  | 2003 |    |   | 2004 |  |    | 2005 | 
|                             |  |      |    |   |      |  |    |      | 
|Realized gains               |  |      | 60 |   |      |  | 10 |      |  |  | 8 | 
|Realized losses              |  |      | (4 | ) |      |  | (1 | )    |  |  |  | 
|                             |  |      |    |   |      |  |    |      | 
|Realized gains (losses), net |  |      | 56 |   |      |  | 9  |      |  |  | 8 | 
|                             |  |      |    |   |      |  |    |      | 






|                      |  |      |     |  |            |  |     | 
|--------------------- |  | ---- | --- |  | ---------- |  | --- | 
|                      |  | Cost |     |  | Fair value | 
|                      |  |      |     |  |            | 
|Less than 1 year      |  |      | 262 |  |            |  | 270 | 
|Between 1 and 5 years |  |      | 4   |  |            |  | 5   | 
|More than 5 years     |  |      | 19  |  |            |  | 22  | 
|                      |  |      |     |  |            | 
|Total debt securities |  |      | 285 |  |            |  | 297 | 
|                      |  |      |     |  |            | 



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



12.
    Trade Accounts Receivable, netTrade accounts receivable at September 30, 2004 and 2005
consist of the following:

|                                                                                                               |  |      |       |   |      |  |       |  
|-------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | - | ---- |  | ----- | -
|                                                                                                               |  | 2004 |       |   | 2005 | 
|                                                                                                               |  |      |       |   |      | 
|Third party  trade                                                                                            |  |      | 879   |   |      |  | 839   |  
|Siemens group  trade
    (note 27)                                                                            |  |      | 206   |   |      |  | 145   |  
|Associated and Related
    Companies  trade (note 27)                                                         |  |      | 12    |   |      |  | 12    |  
|                                                                                                               |  |      |       |   |      | 
|Trade accounts receivable, gross                                                                               |  |      | 1,097 |   |      |  | 996   |  
|Allowance for doubtful accounts                                                                                |  |      | (41   | ) |      |  | (44   | )
|                                                                                                               |  |      |       |   |      | 
|Trade accounts receivable, net                                                                                 |  |      | 1,056 |   |      |  | 952   |  
|                                                                                                               |  |      |       |   |      | 
|Activity in the allowance for doubtful accounts for the years
ended September 30, 2004 and 2005 is as follows:
|                                                                                                              
|                                                                                                               |  | 2004 |       |   | 2005 | 
|                                                                                                               |  |      |       |   |      | 
|Allowance for doubtful accounts at
    beginning of year                                                       |  |      | 26    |   |      |  | 41    |  
|Provision for bad debt, net                                                                                    |  |      | 15    |   |      |  | 3     |  
|                                                                                                               |  |      |       |   |      | 
|Allowance for doubtful accounts at
    end of year                                                             |  |      | 41    |   |      |  | 44    |  
|                                                                                                               |  |      |       |   |      | 
|                                                                                                              
|13.          Inventories                                                                                      
|Inventories at September 30, 2004 and 2005 consist of the
following:                                          
|                                                                                                              
|                                                                                                               |  | 2004 |       |   | 2005 | 
|                                                                                                               |  |      |       |   |      | 
|Raw materials and supplies                                                                                     |  |      | 84    |   |      |  | 87    |  
|Work-in-process                                                                                                |  |      | 560   |   |      |  | 569   |  
|Finished goods                                                                                                 |  |      | 316   |   |      |  | 366   |  
|                                                                                                               |  |      |       |   |      | 
|Total inventories                                                                                              |  |      | 960   |   |      |  | 1,022 |  
|                                                                                                               |  |      |       |   |      | 
|                                                                                                              
|14.          Other Current Assets                                                                             
|Other current assets at September 30, 2004 and 2005 consist
of the following:                                 
|                                                                                                              
|                                                                                                               |  | 2004 |       |   | 2005 | 
|                                                                                                               |  |      |       |   |      | 
|Financial instruments (note 29)                                                                                |  |      | 106   |   |      |  | 73    |  
|Assets held for sale                                                                                           |  |      | 88    |   |      |  |      |  
|Grants receivable                                                                                              |  |      | 84    |   |      |  | 122   |  
|VAT and other tax receivables                                                                                  |  |      | 147   |   |      |  | 84    |  
|License fees receivable                                                                                        |  |      |      |   |      |  | 19    |  
|Associated and Related
    Companies  financial and other receivables
    (note 27)                           |  |      | 49    |   |      |  | 5     |  
|Third party  financial
    and other receivables                                                              |  |      | 40    |   |      |  | 68    |  
|Siemens group  financial
    and other receivables (note 27)                                                  |  |      | 18    |   |      |  | 18    |  
|Prepaid expenses                                                                                               |  |      | 19    |   |      |  | 26    |  
|Employee receivables (note 27)                                                                                 |  |      | 9     |   |      |  | 8     |  
|Intangible pension asset
    (note 28)                                                                         |  |      |      |   |      |  | 14    |  
|Other                                                                                                          |  |      | 30    |   |      |  | 32    |  
|                                                                                                               |  |      |       |   |      | 
|Total other current assets                                                                                     |  |      | 590   |   |      |  | 469   |  
|                                                                                                               |  |      |       |   |      | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

At September 30, 2004, other current assets included assets
held for sale relating to the Companys fiber optics
business (see note 4).

Summarized balance sheet information for the fiber optics
business is set forth below:

|                        |                                                                 |               |   
|----------------------- | --------------------------------------------------------------- | ------------- | --
|                        |                                                                 | September 30,
|                        |                                                                 | 2004         
|                        |                                                                 |              
|Current assets          |                                                                 | 47           
|Non-current assets      |                                                                 | 41           
|                        |                                                                 |              
|                        | Total assets held for sale                                      |               | 88
|                        |                                                                 |              
|Current liabilities     |                                                                 | 23           
|Non-current liabilities |                                                                 | 8            
|                        |                                                                 |              
|                        | Total liabilities related to assets
    held for sale (note 20) |               | 31
|                        |                                                                 |              





|    |                                   
|--- | ----------------------------------
|15. | Property, Plant and Equipment, net



|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       |  |     |         |  |  |         |         | 
|------------------------ | ------------------ | ----------------------------- |  | --------- | --------- |  | ----------- | ---------- | ----- |  | ------------ | ------- | ----- | ----- |  | --- | ------- |  |  | ------- | ------- | 
|                         |                    |                               |  | Technical |           |  |             |            |       |  |             
|                         |                    |                               |  | equipment |           |  | Other plant |            |       |  |              |        
|                         |                    | Land and                      |  |           | and       |  |             | and office |       |  | Construction |         |       |      
|                         |                    | buildings                     |  |           | machinery |  |             | equipment  |       |  | in progress  |         |       | Total | 
|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       | 
|Cost                     |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       |  |     |         |  |  |        
|                         | September 30, 2004 |                               |  | 1,101     |           |  |             | 7,002      |       |  |              | 2,176   |       |       |  | 484 |         |  |  | 10,763  |        
|                         |                    | Additions                     |  |           | 30        |  |             |            | 385   |  |              |         | 151   |       |  |     | 832     |  |  |         | 1,398   | 
|                         |                    | Impairments                   |  |           | (15)      |  |             |            | (19)  |  |              |         | (5)   |       |  |     |        |  |  |         | (39)    | 
|                         |                    | Disposals                     |  |           | (3)       |  |             |            | (558) |  |              |         | (212) |       |  |     |        |  |  |         | (773)   | 
|                         |                    | Reclassifications             |  |           |          |  |             |            | (2)   |  |              |         | 34    |       |  |     |        |  |  |         | 32      | 
|                         |                    | Transfers                     |  |           | 292       |  |             |            | 685   |  |              |         | 80    |       |  |     | (1,057) |  |  |         |        | 
|                         |                    | Foreign currency effects      |  |           | 22        |  |             |            | 56    |  |              |         | 8     |       |  |     | (6)     |  |  |         | 80      | 
|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       | 
|                         | September 30, 2005 |                               |  | 1,427     |           |  |             | 7,549      |       |  |              | 2,232   |       |       |  | 253 |         |  |  | 11,461  |        
|Accumulated depreciation |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       |  |     |         |  |  |        
|                         | September 30, 2004 |                               |  | (548)     |           |  |             | (4,752)    |       |  |              | (1,876) |       |       |  |    |         |  |  | (7,176) |        
|                         |                    | Depreciation                  |  |           | (73)      |  |             |            | (910) |  |              |         | (237) |       |  |     |        |  |  |         | (1,220) | 
|                         |                    | Disposals                     |  |           | 3         |  |             |            | 513   |  |              |         | 205   |       |  |     |        |  |  |         | 721     | 
|                         |                    | Transfers                     |  |           |          |  |             |            |      |  |              |         |      |       |  |     |        |  |  |         |        | 
|                         |                    | Foreign currency effects      |  |           | (4)       |  |             |            | (26)  |  |              |         | (5)   |       |  |     |        |  |  |         | (35)    | 
|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       | 
|                         | September 30, 2005 |                               |  | (622)     |           |  |             | (5,175)    |       |  |              | (1,913) |       |       |  |    |         |  |  | (7,710) |        
|                         |                    | Book value September 30, 2004 |  |           | 553       |  |             |            | 2,250 |  |              |         | 300   |       |  |     | 484     |  |  |         | 3,587   | 
|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       | 
|                         |                    | Book value September 30, 2005 |  |           | 805       |  |             |            | 2,374 |  |              |         | 319   |       |  |     | 253     |  |  |         | 3,751   | 
|                         |                    |                               |  |           |           |  |             |            |       |  |              |         |       |       | 



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

pleted during the 2005 financial year and commercial production
began during the fourth quarter of the 2005 financial year. The
total investment in the expansion of the Richmond plant amounted
to 787.

On December 8, 2004, the Company announced plans to build a
new front-end production plant in Kulim High Tech Park,
Malaysia. The facility will mainly produce power and logic chips
used in automotive and industrial power applications. The
Company plans to invest in total approximately $1 billion.
The construction started in early 2005 and the start of
production is scheduled for 2006. As of September 30, 2005,
the Company had invested a total of
39 in this new
front-end production plant.



16.
    Long-term Investments, netA summary of activity for long-term investments for the year
ended September 30, 2005 is as follows:

|                              |                          |               |     |      |               |  |    |       |  |  |     |      | 
|----------------------------- | ------------------------ | ------------- | --- | ---- | ------------- |  | -- | ----- |  |  | --- | ---- | 
|                              |                          | Investment in |     |      | Investment in |  |    |      
|                              |                          | associated    |     |      | related       |  |    |      
|                              |                          | companies     |     |      | companies     |  |    | Total | 
|                              |                          |               |     |      |               |  |    |       | 
|Balance at September 30, 2004 |                          |               | 664 |      |               |  | 44 |       |  |  | 708 |     
|                              | Additions                |               |     | 87   |               |  |    | 48    |  |  |     | 135  | 
|                              | Disposals                |               |     |     |               |  |    | (71)  |  |  |     | (71) | 
|                              | Dividend payments        |               |     | (51) |               |  |    |      |  |  |     | (51) | 
|                              | Capitalized interest     |               |     | (1)  |               |  |    |      |  |  |     | (1)  | 
|                              | Impairments              |               |     | (26) |               |  |    | (3)   |  |  |     | (29) | 
|                              | Equity in earnings       |               |     | 57   |               |  |    |      |  |  |     | 57   | 
|                              | Reclassification         |               |     | (16) |               |  |    | 3     |  |  |     | (13) | 
|                              | Foreign currency effects |               |     | 44   |               |  |    |      |  |  |     | 44   | 
|                              |                          |               |     |      |               |  |    |       | 
|Balance at September 30, 2005 |                          |               | 758 |      |               |  | 21 |       |  |  | 779 |     
|                              |                          |               |     |      |               |  |    |       | 





|                                                                             |  |            |       | 
|---------------------------------------------------------------------------- |  | ---------- | ----- | 
|                                                                             |  | Direct and |      
|                                                                             |  | indirect   |      
|Name of the associated company                                               |  | ownership  |      
|                                                                             |  |            |      
|Advanced Mask Technology Center
    GmbH & Co. KG, Dresden, Germany (AMTC) |  |            | 33.3% | 
|ALTIS Semiconductor S.N.C.,
    Essonnes, France (ALTIS)                   |  |            | 50.1% | 
|Hwa-Ken Investment Inc., Taipei,
    Taiwan (Hwa-Ken)                      |  |            | 50.0% | 
|Inotera Memories Inc., Taoyuan,
    Taiwan (Inotera)                       |  |            | 45.9% | 
|StarCore LLC, Austin, Texas, USA
    (StarCore)                            |  |            | 41.1% | 






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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

the purchase agreement. Toppan Printing Co., Ltd. acquired
DuPont in April 2005 which led to a name change; former DuPont
is now named Toppan Photomasks Inc., Ltd.

ALTIS is a joint venture between the Company and International
Business Machines Corporation (IBM), with each
having equal voting representation. During the year ended
September 30, 2003, the Company and IBM amended the
original shareholders agreement. Pursuant to the amendment, the
Company will ratably increase its capacity reservation in the
production output of ALTIS from 50% to 100% during calendar
years 2004 through 2007. IBM and the Company agreed that they
will decide 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. The Company is currently in negotiations with IBM
regarding the future business model of ALTIS.

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 joint
venture (Inotera, held directly and indirectly through the
Companys 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 had
developed advanced 90-nanometer and are developing 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 is funded by Inotera and employs the
technology developed under the aforementioned agreements to
manufacture DRAM products and its capacity is anticipated to be
completed in three phases. During the year ended
September 30, 2004 Inotera completed the construction and
started mass production. The second phase was completed in the
2005 financial year, while the third phase is anticipated to be
completed in the 2006 financial year. The joint venture partners
are obliged to each purchase one-half of the facilitys
production based, in part, on market prices. On
September 29, 2005, the Company and Nanya signed an
agreement to expand their development cooperation in respect of
DRAM products. The agreement provides for the joint development
of advanced 60-nanometer production technologies for
300-millimeter wafers, starting September 2005. The cost of the
development will be borne two-thirds by the Company and
one-third by Nanya. The cooperation is the extension of the
existing co-development of 90- and 70-nanometer production
technologies and is expected to help each partner expand its
position in the DRAM market while sharing development costs. The
first 300-millimeter wafer memory products using the new
60-nanometer process are expected to leave the production line
in 2008.

The Company invested
342 and
83 in Inotera during
the years ended September 30, 2004 and 2005, respectively.
The investment includes interest capitalization of
7 and
6 during the years
ended September 30, 2004 and 2005, respectively. During the
year ended September 30, 2004, Inotera issued shares to
employees which diluted the Companys shareholding at that
time while increasing its proportional share of Inotera
shareholders equity by
2. At
September 30, 2005, the Companys direct and indirect
ownership interest in Inotera was 45.9%.

On October 7, 2004, Inoteras application for public
company status was accepted by the Taiwanese Securities and
Futures Bureau. Since April 2005, Inotera has been listed on the
Gre-Tai market in Taiwan. On October 26, 2005, Inotera
submitted an application for an initial public offering of its
common stock to the Taiwanese stock exchange.

In November 2003 the Company, together with United Epitaxy
Company, Ltd. (UEC), Hsinchu, Taiwan, founded a
joint venture company ParoLink. The Company initially invested
6, held a 56%
ownership interest in ParoLink and accounted for its investment
in ParoLink using the equity method, since substantive
participating minority rights prevented the exercise of
unilateral control. In connection with the Companys
disposal of its fiber optics business (see note 4), the
Company acquired the minority

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

interest in ParoLink, terminated the joint venture with UEC and
recorded an impairment to reduce the investment to its estimated
fair value of 3.

On October 1, 2002, the Company, Agere Systems Inc. and
Motorola Inc. incorporated StarCore, based in Austin, Texas.
StarCore focuses on developing, standardizing and promoting
Digital Signal Processor (DSP) core technology. As of
September 30, 2005, the Company held a 41.1% ownership
interest with an aggregate value of
15.

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
30,
65 and
29 for the years ended
September 30, 2003, 2004 and 2005, respectively. In
connection with the termination of the Companys venture
capital activities, an impairment charge of
28 was recognized as
of September 30, 2004, to reduce the carrying value of the
Companys venture investment portfolio to the expected
realizable value (see note 4).

Goodwill of 32 and
15 is included in the
amount of long-term investments at September 30, 2004 and
2005, respectively.

For the Associated Companies as of September 30, 2005, the
aggregate summarized financial information for the financial
years 2003, 2004 and 2005, is as follows:

|                  |  |      |     |  |      |  |     |      |  |  |     | 
|----------------- |  | ---- | --- |  | ---- |  | --- | ---- |  |  | --- | 
|                  |  | 2003 |     |  | 2004 |  |     | 2005 | 
|                  |  |      |     |  |      |  |     |      | 
|Sales             |  |      | 596 |  |      |  | 539 |      |  |  | 969 | 
|Gross profit      |  |      | 65  |  |      |  | 26  |      |  |  | 187 | 
|Net income (loss) |  |      | 2   |  |      |  | (25 | )    |  |  | 90  | 
|                  |  |      |     |  |      |  |     |      | 

|                        |  |      |      |   |      |  |       |      |  |  |       |  
|----------------------- |  | ---- | ---- | - | ---- |  | ----- | ---- |  |  | ----- | -
|                        |  | 2003 |      |   | 2004 |  |       | 2005 | 
|                        |  |      |      |   |      |  |       |      | 
|Current assets          |  |      | 243  |   |      |  | 400   |      |  |  | 744   |  
|Non-current assets      |  |      | 679  |   |      |  | 1,492 |      |  |  | 2,234 |  
|Current liabilities     |  |      | (302 | ) |      |  | (383  | )    |  |  | (452  | )
|Non-current liabilities |  |      | (15  | ) |      |  | (338  | )    |  |  | (908  | )
|                        |  |      |      |   |      |  |       |      | 
|Shareholders equity    |  |      | 605  |   |      |  | 1,171 |      |  |  | 1,618 |  
|                        |  |      |      |   |      |  |       |      | 



|    |             
|--- | ------------
|17. | Other Assets



|                                                                     |  |      |     |  |      |  |     | 
|-------------------------------------------------------------------- |  | ---- | --- |  | ---- |  | --- | 
|                                                                     |  | 2004 |     |  | 2005 | 
|                                                                     |  |      |     |  |      | 
|Intangible assets, net                                               |  |      | 398 |  |      |  | 315 | 
|Grants receivable                                                    |  |      | 92  |  |      |  |    | 
|Deferred tax expense (note 9)                                        |  |      | 39  |  |      |  | 71  | 
|Prepaid pension cost (note 28)                                       |  |      | 27  |  |      |  |    | 
|Long-term receivables                                                |  |      | 24  |  |      |  | 23  | 
|Marketable securities (note 11)                                      |  |      | 19  |  |      |  | 34  | 
|Associated and Related
    Companies  financial and other (note 27) |  |      | 10  |  |      |  | 67  | 
|Notes receivable                                                     |  |      | 3   |  |      |  |    | 
|Employee receivables (note 27)                                       |  |      | 2   |  |      |  | 2   | 
|Other                                                                |  |      | 13  |  |      |  | 30  | 
|                                                                     |  |      |     |  |      | 
|Total                                                                |  |      | 627 |  |      |  | 542 | 
|                                                                     |  |      |     |  |      | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

A summary of activity for intangible assets for the years ended
September 30, 2004 and 2005 is as follows:

|                                      |                    |                                              |     |       |             |   |     |       |     |   |     |      |     |  
|------------------------------------- | ------------------ | -------------------------------------------- | --- | ----- | ----------- | - | --- | ----- | --- | - | --- | ---- | --- | -
|                                      |                    |                                              |     | Other |             |   |    
|                                      |                    | Goodwill                                     |     |       | intangibles |   |     | Total |    
|                                      |                    |                                              |     |       |             |   |     |       |    
|Cost                                  |                    |                                              |     |       |             |   |     |       |     |   |     |     
|                                      | September 30, 2003 |                                              |     | 243   |             |   |     | 339   |     |   |     | 582  |    
|                                      |                    | Additions                                    |     |       |            |   |     |       | 125 |   |     |      | 125 |  
|                                      |                    | Impairment charges (note 7)                  |     |       | (71         | ) |     |       |    |   |     |      | (71 | )
|                                      |                    | Disposals                                    |     |       |            |   |     |       | (75 | ) |     |      | (75 | )
|                                      |                    | Acquisitions (note 3)                        |     |       | 23          |   |     |       | 30  |   |     |      | 53  |  
|                                      |                    | Purchase accounting adjustments
    (note 3) |     |       | (8          | ) |     |       |    |   |     |      | (8  | )
|                                      |                    | Foreign currency effects                     |     |       | (15         | ) |     |       | (5  | ) |     |      | (20 | )
|                                      |                    |                                              |     |       |             |   |     |       |    
|                                      | September 30, 2004 |                                              |     | 172   |             |   |     | 414   |     |   |     | 586  |    
|                                      |                    | Additions                                    |     |       |            |   |     |       | 64  |   |     |      | 64  |  
|                                      |                    | Impairment charges (note 7)                  |     |       | (18         | ) |     |       | (39 | ) |     |      | (57 | )
|                                      |                    | Disposals                                    |     |       | (6          | ) |     |       | (36 | ) |     |      | (42 | )
|                                      |                    | Acquisitions (note 3)                        |     |       | 7           |   |     |       | 58  |   |     |      | 65  |  
|                                      |                    | Purchase accounting adjustments
    (note 3) |     |       | (14         | ) |     |       | (16 | ) |     |      | (30 | )
|                                      |                    | Foreign currency effects                     |     |       | 2           |   |     |       | 3   |   |     |      | 5   |  
|                                      |                    |                                              |     |       |             |   |     |       |    
|                                      | September 30, 2005 |                                              |     | 143   |             |   |     | 448   |     |   |     | 591  |    
|Accumulated amortization              |                    |                                              |     |       |             |   |     |       |     |   |     |     
|                                      | September 30, 2003 |                                              |     | (25   | )           |   |     | (146  | )   |   |     | (171 | )  
|                                      |                    | Amortization                                 |     |       |            |   |     |       | (89 | ) |     |      | (89 | )
|                                      |                    | In-process R&D                               |     |       |            |   |     |       | (9  | ) |     |      | (9  | )
|                                      |                    | Disposals                                    |     |       |            |   |     |       | 75  |   |     |      | 75  |  
|                                      |                    | Foreign currency effects                     |     |       | 4           |   |     |       | 2   |   |     |      | 6   |  
|                                      |                    |                                              |     |       |             |   |     |       |    
|                                      | September 30, 2004 |                                              |     | (21   | )           |   |     | (167  | )   |   |     | (188 | )  
|                                      |                    | Amortization                                 |     |       |            |   |     |       | (96 | ) |     |      | (96 | )
|                                      |                    | Disposals                                    |     |       |            |   |     |       | 5   |   |     |      | 5   |  
|                                      |                    | Foreign currency effects                     |     |       | 3           |   |     |       |    |   |     |      | 3   |  
|                                      |                    |                                              |     |       |             |   |     |       |    
|                                      | September 30, 2005 |                                              |     | (18   | )           |   |     | (258  | )   |   |     | (276 | )  
|                                      |                    |                                              |     |       |             |   |     |       |    
|Carrying value September 30,
    2003 |                    |                                              | 218 |       |             |   | 193 |       |     |   | 411 |     
|                                      |                    |                                              |     |       |             |   |     |       |    
|Carrying value September 30,
    2004 |                    |                                              | 151 |       |             |   | 247 |       |     |   | 398 |     
|                                      |                    |                                              |     |       |             |   |     |       |    
|Carrying value September 30,
    2005 |                    |                                              | 125 |       |             |   | 190 |       |     |   | 315 |     
|                                      |                    |                                              |     |       |             |   |     |       |    

    








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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

In March 2005, the Company and Rambus reached an agreement
settling all claims between them and licensing the Rambus patent
portfolio. The license of
37 is being amortized
over the expected useful life of the related technologies of ten
years.

During the years ended September 30, 2003, 2004 and 2005,
the Company recognized intangible assets impairment charges of
68,
71 and
57, respectively.

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 Communication 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 and recognized an
impairment charge of
68 during the year
ended September 30, 2003.

As part of the Companys annual goodwill impairment test
for the year ended September 30, 2004, the Company
recognized an impairment charge of
71 to reduce the
reporting units goodwill to its estimated fair value,
principally as a result of a decline in revenue and lowered
market development expectations during the 2004 financial year.

During the year ended September 30, 2005, the Company
concluded that sufficient indicators existed to require an
assessment of whether the carrying values of goodwill and
certain other intangible assets in the Customer Premises
Equipment, Wireless Infrastructure, Short Range Wireless, RF
Engine and Optical Networking reporting units within the
Communication segment may not be recoverable. Recoverability of
these intangible assets was measured by a comparison of the
carrying amount of the assets to the future net cash flows
expected to be generated by the assets. Impairments of
57 were recognized in
other operating expenses, representing the amount by which the
carrying amount of the assets exceeded their fair value.



18.
    Trade Accounts PayableTrade accounts payable at September 30, 2004 and 2005
consist of the following:

|                                                       |  |       |  |      
|------------------------------------------------------ |  | ----- |  | -----
|                                                       |  | 2004  |  | 2005 
|                                                       |  |       |  |      
|Third party  trade                                    |  | 969   |  | 868  
|Siemens group  trade
    (note 27)                    |  | 61    |  | 61   
|Associated and Related
    Companies  trade (note 27) |  | 68    |  | 140  
|                                                       |  |       |  |      
|Total                                                  |  | 1,098 |  | 1,069
|                                                       |  |       |  |      



|    |                    
|--- | -------------------
|19. | Accrued Liabilities



|                                                       |  |      |  |     
|------------------------------------------------------ |  | ---- |  | ----
|                                                       |  | 2004 |  | 2005
|                                                       |  |      |  |     
|Personnel costs                                        |  | 279  |  | 274 
|Warranties and licenses                                |  | 78   |  | 53  
|Settlement for antitrust related
    matters (note 31) |  | 67   |  | 31  
|Interest                                               |  | 33   |  | 34  
|Other                                                  |  | 98   |  | 105 
|                                                       |  |      |  |     
|Total                                                  |  | 555  |  | 497 
|                                                       |  |      |  |     

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

On September 15, 2004 the Company entered into a plea
agreement with the United States Department of Justice in
connection with its antitrust investigation (see note 31)
and agreed to pay a fine aggregating $160 million over a
five-year period. The related amount due within one year is
included in accrued and other current liabilities, and the
long-term portion is reflected as other non-current liabilities
(see note 22).



20.
    Other Current LiabilitiesOther current liabilities at September 30, 2004 and 2005
consist of the following:

|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | 
|                                                                                                                                                                                                                                                                                                   |  | 2004 |       |  | 2005 | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|VAT and other taxes payable                                                                                                                                                                                                                                                                        |  |      | 272   |  |      |  | 202   | 
|Payroll obligations to employees                                                                                                                                                                                                                                                                   |  |      | 124   |  |      |  | 130   | 
|Deferred government grants
    (note 6)                                                                                                                                                                                                                                                            |  |      | 90    |  |      |  | 106   | 
|Other deferred income                                                                                                                                                                                                                                                                              |  |      | 58    |  |      |  | 22    | 
|Restructuring (note 8)                                                                                                                                                                                                                                                                             |  |      | 16    |  |      |  | 72    | 
|Financial instruments (note 29)                                                                                                                                                                                                                                                                    |  |      | 17    |  |      |  | 74    | 
|Associated and Related
    Companies  financial and other (note 27)                                                                                                                                                                                                                               |  |      | 2     |  |      |  | 4     | 
|Liabilities related to assets held
    for sale (note 14)                                                                                                                                                                                                                                          |  |      | 31    |  |      |  |      | 
|Settlement for anti-trust related
    matters (note 31)                                                                                                                                                                                                                                            |  |      |      |  |      |  | 31    | 
|Other                                                                                                                                                                                                                                                                                              |  |      | 20    |  |      |  | 59    | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|Total                                                                                                                                                                                                                                                                                              |  |      | 630   |  |      |  | 700   | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|Other deferred income includes amounts relating to license
income (see note 5) and deferred revenue. The non-current
portion is included in other liabilities (see note 22).                                                                                                                      
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|21.Debt                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|Debt at September 30, 2004 and 2005 consists of the
following:                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|                                                                                                                                                                                                                                                                                                   |  | 2004 |       |  | 2005 | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|Short-term debt:                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|Loans payable to banks, weighted
    average rate 2.21%                                                                                                                                                                                                                                            |  |      | 53    |  |      |  | 51    | 
|Loans payable, weighted average
    rate 4.5%                                                                                                                                                                                                                                                      |  |      | 18    |  |      |  |      | 
|Current portion of long-term debt                                                                                                                                                                                                                                                                  |  |      | 498   |  |      |  | 48    | 
|Capital lease obligations                                                                                                                                                                                                                                                                          |  |      | 2     |  |      |  |      | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|Total short-term debt and current
    maturities                                                                                                                                                                                                                                                   |  |      | 571   |  |      |  | 99    | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|Long-term debt:                                                                                                                                                                                                                                                                                    |  |      |       |  |      |  |       | 
|Convertible subordinated notes,
    4.25%, due 2007                                                                                                                                                                                                                                                |  |      | 636   |  |      |  | 633   | 
|Convertible subordinated notes,
    5.0%, due 2010                                                                                                                                                                                                                                                 |  |      | 688   |  |      |  | 690   | 
|Loans payable to banks:                                                                                                                                                                                                                                                                            |  |      |       |  |      |  |       | 
|Unsecured term loans, weighted
    average rate 2.58%, due 2006-2013                                                                                                                                                                                                                               |  |      | 69    |  |      |  | 206   | 
|Secured term loans, weighted
    average rate 1.50%, due 2006-2010                                                                                                                                                                                                                                 |  |      | 7     |  |      |  | 9     | 
|Notes payable to governmental
    entity, rate 3.18%, due 2027                                                                                                                                                                                                                                     |  |      | 27    |  |      |  | 28    | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|Total long-term debt                                                                                                                                                                                                                                                                               |  |      | 1,427 |  |      |  | 1,566 | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      | 
|                                                                                                                                                                                                                                                                                                   |  |      |       |  |      |  |       | 
|Short-term loans payable to banks consist primarily of
borrowings under the terms of short-term borrowing arrangements.
The loans payable, representing working capital advances to the
Companys flash memory subsidiaries in the amount of
18 as of
September 30, 2004, were netted against the

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

purchase price as part of the acquisition of the minority
interest in the Companys Flash joint venture (see
note 3).

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 through maturity. 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 and pari 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, 2005, unamortized debt
issuance costs were 10.

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 conversion price of
euro 35.43 per share through maturity. 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 passuwith 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. During the financial year ended
September 30, 2004, the Company redeemed a notional amount
of 360 of the
convertible subordinated notes due 2007, which resulted in a net
gain of 6 before tax.
At September 30, 2005 the outstanding notional amount was
640 and unamortized
debt issuance costs were
3.

A 450 syndicated
credit facility relating to the expansion of the Dresden
manufacturing facility, which was fully drawn as of
September 30, 2004 and had been reported under current
portion of long-term debt, was repaid as of September 30,
2005.

In September 2004 the Company executed a
$400/400 syndicated
credit facility with a five year term. The facility consists of
two tranches: Tranche A is a $400 million term loan
intended to finance the expansion of its Richmond, Virginia,
manufacturing facility. Tranche B is a
400 multicurrency
revolving facility to be used for general corporate purposes.
The maximum outstanding amount of Tranche A will decrease
on the basis of a repayment schedule that foresees equal
installments starting from September 30, 2006. The facility
has customary financial covenants, and drawings bear interest at
market-related rates that are linked to financial performance.
The lenders have been granted a negative pledge relating to the
Companys future financial indebtedness with certain
permitted encumbrances. At September 30, 2005, no amounts
were outstanding under this facility.

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

A 124 non-recourse
project financing facility for the expansion of the Porto,
Portugal manufacturing facility was executed in May 2005. At
September 30, 2005 an amount of
80 has been drawn
under this facility. The Company anticipates satisfying the
repayment schedule starting 2008 and ending 2013 from available
funds.

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, 2005
|             |  |                        |  |                                      |  |                         
|             |  | Nature of financial    |  | Purpose/intended                     |  | Aggregate                |  |      
|Term         |  | institution commitment |  | use                                  |  | facility                 |  | Drawn |  | Available
|             |  |                        |  |                                      |  |                          |  |       |  |          
|             |  |                        |  |                                      |  | (Euro in million)       
|short-term   |  | firm commitment        |  | working capital,
    guarantees      |  | 120                      |  | 51    |  | 69       
|            
|short-term   |  | no firm commitment     |  | working capital,
    cash management |  | 305                      |  |      |  | 305      
|            
|long-term    |  | firm commitment        |  | working capital                      |  | 731                      |  |      |  | 731      
|            
|long-term(1) |  | firm commitment        |  | project finance                      |  | 335                      |  | 291   |  | 44       
|             |  |                        |  |                                      |  |                          |  |       |  |          
|Total        |  | 1,491                  |  | 342                                  |  | 1,149                   
|             |  |                        |  |                                      |  |                         



|    |                              
|--- | -----------------------------
|(1) | Including current maturities.

  




|                          |  |        |      
|------------------------- |  | ------ | -----
|                          |  | Amount |      
|Year ending September 30, |  |        |      
|2006                      |  |        | 99   
|2007                      |  |        | 650  
|2008                      |  |        | 51   
|2009                      |  |        | 64   
|2010                      |  |        | 733  
|Thereafter                |  |        | 68   
|                          |  |       
|Total                     |  |        | 1,665
|                          |  |       

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



22.
    Other LiabilitiesOther non-current liabilities at September 30, 2004 and
2005 consist of the following:

|                                                       |  |      |  |     
|------------------------------------------------------ |  | ---- |  | ----
|                                                       |  | 2004 |  | 2005
|                                                       |  |      |  |     
|Deferred government grants
    (note 6)                |  | 191  |  | 182 
|Settlement for antitrust related
    matters (note 31) |  | 109  |  | 88  
|Pension liabilities (note 28)                          |  | 98   |  | 162 
|Long-term advance                                      |  | 45   |  |    
|Minority interest                                      |  | 39   |  | 81  
|Deferred income, (note 5)                              |  | 18   |  | 38  
|Post-retirement benefits
    (note 28)                 |  | 5    |  | 5   
|Other                                                  |  | 63   |  | 86  
|                                                       |  |      |  |     
|Total                                                  |  | 568  |  | 642 
|                                                       |  |      |  |     



|    |                       
|--- | ----------------------
|23. | Ordinary Share Capital

 




| |                                         
| | ----------------------------------------
| | Authorized and Conditional Share Capital





| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Through January 21, 2007, Authorized Share Capital
    I/2002  in an aggregate nominal amount of up to
    297 to issue shares
    for cash, where the preemptive rights of shareholders may be
    partially excluded, or in connection with business combinations
    (contributions in kind), where the preemptive rights of
    shareholders may be excluded for all shares.
|
| |  | Through January 19, 2009, Authorized Share
    Capital II/2004  in an aggregate nominal amount
    of up to 30 to issue
    shares to employees (in which case the preemptive rights of
    existing shareholders are excluded).                                                                                                                                                

 





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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

(see note 21). These shares will have dividend rights from
the beginning of the financial 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, issued in June 2003 and which may be converted at
any time until May 22, 2010 (see note 21). These
shares will have dividend rights from the beginning of the
financial 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
financial year in which they are issued.



DividendsUnder the German Stock Corporation Act (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 2005 did not
authorize a dividend. No earnings are available for distribution
as a dividend for the 2005 financial year, since Infineon
Technologies AG on a stand-alone basis as the ultimate parent
incurred a cumulative loss (Bilanzverlust) as of
September 30, 2005.



24.
    Stock-based Compensation

Fixed Stock Option PlansIn 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.

In 2001, the Companys shareholders approved the
International Long-Term Incentive (LTI) 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, subject to the Companys stock reaching
the exercise price on at least one trading day, and 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.

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

A summary of the status of the LTI 1999 Plan and the LTI 2001
Plan as of September 30, 2005, and changes during the three
years then ended is presented below (options in millions,
exercise price in euro):

|                                 |  |           |       |           |          |        |           |           |       |          |  |           |  |  |          |  |  |       
|-------------------------------- |  | --------- | ----- | --------- | -------- | ------ | --------- | --------- | ----- | -------- |  | --------- |  |  | -------- |  |  | ------
|                                 |  | 2003      |       | 2004      |          | 2005  
|                                 |  |           |       |           |          |       
|                                 |  |           |       | Weighted- |          |        |           | Weighted- |       |          |  | Weighted-
|                                 |  |           |       | average   |          |        |           | average   |       |          |  | average  
|                                 |  | Number of |       |           | exercise |        | Number of |           |       | exercise |  | Number of |  |  | exercise
|                                 |  | options   |       |           | price    |        | options   |           |       | price    |  | options   |  |  | price   
|                                 |  |           |       |           |          |        |           |           |       |          |  |           |  |  |         
|Outstanding at beginning of year |  |           | 19.9  |           |          | 35.96 |           |           | 29.9  |          |  | 25.56    |  |  | 36.0     |  |  | 22.59
|Granted                          |  |           | 11.7  |           |          | 8.97  |           |           | 8.1   |          |  | 12.32    |  |  | 6.7      |  |  | 9.10 
|Exercised                        |  |           |      |           |          |       |           |           |      |          |  |          |  |  |         |  |  |      
|Forfeited and expired            |  |           | (1.7) |           |          | 32.80 |           |           | (2.0) |          |  | 25.17    |  |  | (1.8)    |  |  | 24.07
|                                 |  |           |       |           |          |        |           |           |       |          |  |           |  |  |         
|Outstanding at end of year       |  |           | 29.9  |           |          | 25.56 |           |           | 36.0  |          |  | 22.59    |  |  | 40.9     |  |  | 20.33
|                                 |  |           |       |           |          |        |           |           |       |          |  |           |  |  |         
|Exercisable at end of year       |  |           | 9.6   |           |          | 48.56 |           |           | 13.2  |          |  | 39.89    |  |  | 19.6     |  |  | 29.93



|                         |  |             |  |             |  |           |  |           |  |          
|------------------------ |  | ----------- |  | ----------- |  | --------- |  | --------- |  | ---------
|                         |  | Outstanding |  | Exercisable
|                         |  |             |  |            
|                         |  |             |  | Weighted-   |  |           |  |          
|                         |  |             |  | average     |  | Weighted- |  |           |  | Weighted-
|                         |  |             |  | remaining   |  | average   |  |           |  | average  
|                         |  | Number of   |  | life        |  | exercise  |  | Number of |  | exercise 
|Range of exercise prices |  | options     |  | (in years)  |  | price     |  | options   |  | price    
|                         |  |             |  |             |  |           |  |           |  |          
|5 -
    10             |  | 16.6        |  | 4.95        |  | 8.99     |  | 5.0       |  | 8.93    
|10 -
    15            |  | 8.9         |  | 4.98        |  | 12.41    |  | 1.0       |  | 12.63   
|15 -
    20            |  | 0.2         |  | 3.84        |  | 15.75    |  | 0.1       |  | 15.75   
|20 -
    25            |  | 6.7         |  | 3.18        |  | 23.70    |  | 5.0       |  | 23.70   
|25 -
    30            |  | 0.1         |  | 3.02        |  | 27.40    |  | 0.1       |  | 27.43   
|40 -
    45            |  | 4.2         |  | 1.46        |  | 42.03    |  | 4.2       |  | 42.03   
|50 -
    55            |  | 0.1         |  | 2.50        |  | 53.26    |  | 0.1       |  | 53.26   
|55 -
    60            |  | 4.1         |  | 2.16        |  | 55.18    |  | 4.1       |  | 55.18   
|                         |  |             |  |             |  |           |  |           |  |          
|Total                    |  | 40.9        |  | 4.02        |  | 20.33    |  | 19.6      |  | 29.93   
|                         |  |             |  |             |  |           |  |           |  |          



| |                       
| | ----------------------
| | Fair value disclosures



F-39



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

forfeitures recognized as they occur. The following
weighted-average assumptions were used for grants for the years
ended September 30:

|                                                                 |                         |      |      |       |      |  |      |       |  |  |      |       | 
|---------------------------------------------------------------- | ----------------------- | ---- | ---- | ----- | ---- |  | ---- | ----- |  |  | ---- | ----- | 
|                                                                 |                         | 2003 |      |       | 2004 |  |      | 2005  | 
|                                                                 |                         |      |      |       |      |  |      |       | 
|Weighted-average assumptions:                                    |                         |      |      |       |      |  |      |       |  |  |      |      
|                                                                 | Risk-free interest rate |      |      | 3.85% |      |  |      | 3.68% |  |  |      | 3.02% | 
|                                                                 | Expected volatility     |      |      | 59%   |      |  |      | 59%   |  |  |      | 58%   | 
|                                                                 | Dividend yield          |      |      | 0     |      |  |      | 0%    |  |  |      | 0%    | 
|                                                                 | Expected life in years  |      |      | 4.50  |      |  |      | 4.50  |  |  |      | 4.50  | 
|Weighted-average fair value per
    option at grant date in euro |                         |      | 4.41 |       |      |  | 5.88 |       |  |  | 4.03 |      
|                                                                 |                         |      |      |       |      |  |      |       | 

pro forma


|                                 |                                                                                                                                                  |      |  |         |      |  |  |       |  |  |  |         | 
|-------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | ------- | ---- |  |  | ----- |  |  |  | ------- | 
|                                 |                                                                                                                                                  | 2003 |  |         | 2004 |  |  | 2005  | 
|                                 |                                                                                                                                                  |      |  |         |      |  |  |       | 
|Net (loss) income:               |                                                                                                                                                  |      |  |         |      |  |  |       |  |  |  |        
|                                 | As reported                                                                                                                                      |      |  | (435)   |      |  |  | 61    |  |  |  | (312)   | 
|                                 | Deduct: Stock-based employee
    compensation expense included in reported net (loss) income, net
    of related tax effects                     |      |  | 7       |      |  |  | 2     |  |  |  |        | 
|                                 | Add: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects |      |  | (43)    |      |  |  | (37)  |  |  |  | (39)    | 
|                                 |                                                                                                                                                  |      |  |         |      |  |  |       | 
|                                 | Pro forma                                                                                                                                        |      |  | (471)   |      |  |  | 26    |  |  |  | (351)   | 
|                                 |                                                                                                                                                  |      |  |         |      |  |  |       | 
|Basic earnings (loss) per share: |                                                                                                                                                  |      |  |         |      |  |  |       |  |  |  |        
|                                 | As reported                                                                                                                                      |      |  | (0.60) |      |  |  | 0.08 |  |  |  | (0.42) | 
|                                 | Pro forma                                                                                                                                        |      |  | (0.65) |      |  |  | 0.03 |  |  |  | (0.47) | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



25.
    Other Comprehensive Income (Loss)The changes in the components of other comprehensive income
(loss) for the years ended September 30, 2003, 2004 and
2005 are as follows:

|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |       |     |  |  |     |     |  |  |       |     | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------ | ---- | --- | ------ |  | --- | ---- |  |  | ------ | -- |  | ------ | ----- | ---- | --- | --- | ---- | ------ |  |  | ------ | ---- |  | --- | ----- | --- |  |  | --- | --- |  |  | ----- | --- | 
|                                                                      |                                                                                  | 2003   |      |     | 2004   |  |     | 2005 | 
|                                                                      |                                                                                  |        |      |     |        |  |     |      | 
|                                                                      |                                                                                  |        |      | Tax |        |  |     |      |  |  | Tax    |    |  |        |       |      |     | Tax |      |        | 
|                                                                      |                                                                                  | Pretax |      |     | effect |  |     | Net  |  |  | Pretax |    |  | effect |       |      | Net |     |      | Pretax |  |  | effect |      |  | Net |      
|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |      
|Unrealized (losses) gains on
    securities:                          |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |       |     |  |  |     |     |  |  |       |    
|                                                                      | Unrealized holding (losses) gains                                                |        |      | 11  |        |  |     |     |  |  |        | 11 |  |        |       | 4    |     |     |      |       |  |  |        | 4    |  |     |       | 13  |  |  |     | (1) |  |  |       | 12  | 
|                                                                      | Reclassification adjustment for
    losses (gains) included in net income (loss) |        |      | 4   |        |  |     | (2)  |  |  |        | 2  |  |        |       | (11) |     |     |      |       |  |  |        | (11) |  |     |       | (4) |  |  |     |    |  |  |       | (4) | 
|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |      
|Net unrealized (losses) gains                                         |                                                                                  |        | 15   |     |        |  | (2) |      |  |  | 13     |    |  |        | (7)   |      |     |     |     |        |  |  | (7)    |      |  |     | 9     |     |  |  | (1) |     |  |  | 8     |    
|Unrealized gains (losses) on cash
    flow hedges                     |                                                                                  |        |     |     |        |  |    |      |  |  |       |    |  |        | 1     |      |     |     |     |        |  |  | 1      |      |  |     | (25)  |     |  |  |    |     |  |  | (25)  |    
|Additional minimum pension liability                                  |                                                                                  |        | 4    |     |        |  | (2) |      |  |  | 2      |    |  |        | 28    |      |     |     | (10) |        |  |  | 18     |      |  |     | (85)  |     |  |  | 1   |     |  |  | (84)  |    
|Foreign currency translation
    adjustment                           |                                                                                  |        | (76) |     |        |  |    |      |  |  | (76)   |    |  |        | (41)  |      |     |     |     |        |  |  | (41)   |      |  |     | 64    |     |  |  |    |     |  |  | 64    |    
|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |      
|Other comprehensive (loss) income                                     |                                                                                  |        | (57) |     |        |  | (4) |      |  |  | (61)   |    |  |        | (19)  |      |     |     | (10) |        |  |  | (29)   |      |  |     | (37)  |     |  |  |    |     |  |  | (37)  |    
|Accumulated other comprehensive
    income (loss)  beginning of year |                                                                                  |        | (41) |     |        |  | 14  |      |  |  | (27)   |    |  |        | (98)  |      |     |     | 10   |        |  |  | (88)   |      |  |     | (117) |     |  |  |    |     |  |  | (117) |    
|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |      
|Accumulated other comprehensive
    income (loss)  end of year       |                                                                                  |        | (98) |     |        |  | 10  |      |  |  | (88)   |    |  |        | (117) |      |     |     |     |        |  |  | (117)  |      |  |     | (154) |     |  |  |    |     |  |  | (154) |    
|                                                                      |                                                                                  |        |      |     |        |  |     |      |  |  |        |    |  |        |       |      |     |     |      |        |  |  |        |      |  |     |      



|    |                                   
|--- | ----------------------------------
|26. | Supplemental Cash Flow Information

|                                             |                                                        |  |      |  |      |  |     
|-------------------------------------------- | ------------------------------------------------------ |  | ---- |  | ---- |  | ----
|                                             |                                                        |  | 2003 |  | 2004 |  | 2005
|                                             |                                                        |  |      |  |      |  |     
|Cash paid for:                              
|                                             | Interest                                               |  | 104  |  | 144  |  | 91  
|                                             | Income taxes                                           |  | 53   |  | 59   |  | 79  
|Operating activities:                       
|                                             | Cash received for tax-free government grants           |  | 34   |  | 65   |  | 33  
|Non-cash investing and financing activities:
|                                             | Contributions to Siemens                               |  | (6)  |  |     |  |    
|                                             | Assets acquired through capital
    lease transactions |  | 5    |  |     |  |    






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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

fund this liability based on an actuarial determination. The
difference between the actuarial valuation at the funding date
and the originally allocated liability of
(6) is reflected as an
equity transaction during the year ended September 30, 2003.



27.
    Related PartiesThe 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 certain 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, 2004 and 2005
consist of the following:

|                                |                                                                      |      |     |      |    
|------------------------------- | -------------------------------------------------------------------- | ---- | --- | ---- | ---
|                                |                                                                      | 2004 |     | 2005
|                                |                                                                      |      |     |     
|Current:                        |                                                                      |      |     |     
|                                | Siemens group  trade                                                |      | 206 |      | 145
|                                | Associated and Related
    Companies  trade                         |      | 12  |      | 12 
|                                | Siemens group  financial
    and other (note 14)                    |      | 18  |      | 18 
|                                | Associated and Related
    Companies  financial and other (note 14) |      | 49  |      | 5  
|                                | Employee receivables (note 14)                                       |      | 9   |      | 8  
|                                |                                                                      |      |     |     
|                                |                                                                      | 294  |     | 188 
|                                |                                                                      |      |     |     
|Non-current:                    |                                                                      |      |     |     
|                                | Associated and Related
    Companies  financial and other (note 17) |      | 10  |      | 67 
|                                | Employee receivables (note 17)                                       |      | 2   |      | 2  
|                                |                                                                      |      |     |     
|                                |                                                                      | 12   |     | 69  
|                                |                                                                      |      |     |     
|Total Related Party receivables |                                                                      | 306  |     | 257 
|                                |                                                                      |      |     |     



|                                                                     |  |      |  |     
|-------------------------------------------------------------------- |  | ---- |  | ----
|                                                                     |  | 2004 |  | 2005
|                                                                     |  |      |  |     
|Siemens group  trade
    (note 18)                                  |  | 61   |  | 61  
|Associated and Related
    Companies  trade (note 18)               |  | 68   |  | 140 
|Associated and Related
    Companies  financial and other (note 20) |  | 2    |  | 4   
|                                                                     |  |      |  |     
|Total Related Party payables                                         |  | 131  |  | 205 
|                                                                     |  |      |  |     



 


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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

Transactions with Related Parties during the years ended
September 30, 2003, 2004 and 2005, include the following:

|                                |                                  |      |     |     |      |  |       |      |  |  |     |     | 
|------------------------------- | -------------------------------- | ---- | --- | --- | ---- |  | ----- | ---- |  |  | --- | --- | 
|                                |                                  | 2003 |     |     | 2004 |  |       | 2005 | 
|                                |                                  |      |     |     |      |  |       |      | 
|Sales to Related Parties:       |                                  |      |     |     |      |  |       |      |  |  |     |    
|                                | Siemens group companies          |      |     | 836 |      |  |       | 957  |  |  |     | 861 | 
|                                | Associated and Related Companies |      |     | 163 |      |  |       | 69   |  |  |     | 55  | 
|                                |                                  |      |     |     |      |  |       |      | 
|                                |                                  |      | 999 |     |      |  | 1,026 |      |  |  | 916 |    
|                                |                                  |      |     |     |      |  |       |      | 
|Purchases from Related Parties: |                                  |      |     |     |      |  |       |      |  |  |     |    
|                                | Siemens group companies          |      |     | 413 |      |  |       | 264  |  |  |     | 226 | 
|                                | Associated and Related Companies |      |     | 470 |      |  |       | 357  |  |  |     | 615 | 
|                                |                                  |      |     |     |      |  |       |      | 
|                                |                                  |      | 883 |     |      |  | 621   |      |  |  | 841 |    
|                                |                                  |      |     |     |      |  |       |      | 

|                                                       |                                      |      |   |     |      |  |   |      |  |  |   |   | 
|------------------------------------------------------ | ------------------------------------ | ---- | - | --- | ---- |  | - | ---- |  |  | - | - | 
|                                                       |                                      | 2003 |   |     | 2004 |  |   | 2005 | 
|                                                       |                                      |      |   |     |      |  |   |      | 
|Interest income from (expense to)
    Related Parties: |                                      |      |   |     |      |  |   |      |  |  |   |  
|                                                       | Interest income from Related Parties |      |   | 4   |      |  |   | 2    |  |  |   | 2 | 
|                                                       | Interest expense to Related Parties  |      |   | (1) |      |  |   |     |  |  |   |  | 
|                                                       |                                      |      |   |     |      |  |   |      | 
|                                                       |                                      |      | 3 |     |      |  | 2 |      |  |  | 2 |  
|                                                       |                                      |      |   |     |      |  |   |      | 

  







  




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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



28.
    Pension PlansPension benefits provided by the Company are currently organized
primarily through defined benefit pension plans which cover a
significant portion of the Companys 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). The
measurement date for the Companys pension plans is
June 30.

Information with respect to the Companys pension plans for
the years ended September 30, 2003, 2004 and 2005 is
presented for German (Domestic) plans and non-German
(Foreign) plans:

|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |      | 
|----------------------------------------------- | --------------------------------------------------- | -------- | ----- | ----- | ------- |  | ---- | -------- |  |  | ------- | ----- |  | -------- | ---- | ---- | ------- |  | ----- | ----- |  |  | ---- | ---- | 
|                                                |                                                     | 2003     |       |       | 2004    |  |      | 2005     | 
|                                                |                                                     |          |       |       |         |  |      |          | 
|                                                |                                                     | Domestic |       |       | Foreign |  |      | Domestic |  |  | Foreign |       |  | Domestic |      |      | Foreign | 
|                                                |                                                     | plans    |       |       | plans   |  |      | plans    |  |  | plans   |       |  | plans    |      |      | plans   | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Accumulated benefit obligations end
    of year |                                                     |          | (205) |       |         |  | (52) |          |  |  | (226)   |       |  |          | (56) |      |         |  | (337) |       |  |  | (64) |     
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Change in projected benefit
    obligations:    |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |     
|                                                | Projected benefit obligations
    beginning of year |          |       | (218) |         |  |      | (58)     |  |  |         | (243) |  |          |      | (70) |         |  |       | (271) |  |  |      | (78) | 
|                                                | Service cost                                        |          |       | (13)  |         |  |      | (5)      |  |  |         | (14)  |  |          |      | (7)  |         |  |       | (16)  |  |  |      | (7)  | 
|                                                | Interest cost                                       |          |       | (13)  |         |  |      | (4)      |  |  |         | (13)  |  |          |      | (4)  |         |  |       | (15)  |  |  |      | (4)  | 
|                                                | Actuarial gains (losses)                            |          |       | 3     |         |  |      | (5)      |  |  |         |      |  |          |      | 3    |         |  |       | (89)  |  |  |      | (2)  | 
|                                                | Business combinations                               |          |       |      |         |  |      | (7)      |  |  |         | (1)   |  |          |      | (1)  |         |  |       |      |  |  |      |     | 
|                                                | Divestitures                                        |          |       |      |         |  |      |         |  |  |         | 1     |  |          |      |     |         |  |       | 1     |  |  |      | 4    | 
|                                                | New plan created                                    |          |       |      |         |  |      |         |  |  |         |      |  |          |      | (2)  |         |  |       |      |  |  |      |     | 
|                                                | Plan amendments                                     |          |       | (4)   |         |  |      |         |  |  |         | (3)   |  |          |      |     |         |  |       | (8)   |  |  |      |     | 
|                                                | Benefits paid                                       |          |       | 2     |         |  |      | 1        |  |  |         | 2     |  |          |      | 1    |         |  |       | 2     |  |  |      | 2    | 
|                                                | Curtailment                                         |          |       |      |         |  |      | 3        |  |  |         |      |  |          |      |     |         |  |       | 4     |  |  |      | 1    | 
|                                                | Foreign currency effects                            |          |       |      |         |  |      | 5        |  |  |         |      |  |          |      | 2    |         |  |       |      |  |  |      | (1)  | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|                                                | Projected benefit obligations end
    of year       |          |       | (243) |         |  |      | (70)     |  |  |         | (271) |  |          |      | (78) |         |  |       | (392) |  |  |      | (85) | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Change in fair value of plan assets:            |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |     
|                                                | Fair value at beginning of year                     |          |       | 120   |         |  |      | 26       |  |  |         | 143   |  |          |      | 27   |         |  |       | 174   |  |  |      | 30   | 
|                                                | Contributions and transfers                         |          |       | 22    |         |  |      | 2        |  |  |         | 19    |  |          |      | 2    |         |  |       | 17    |  |  |      | 4    | 
|                                                | Actual return on plan assets                        |          |       | 3     |         |  |      |         |  |  |         | 14    |  |          |      | 3    |         |  |       | 19    |  |  |      | 2    | 
|                                                | Benefits paid                                       |          |       | (2)   |         |  |      | (1)      |  |  |         | (2)   |  |          |      | (1)  |         |  |       | (2)   |  |  |      | (2)  | 
|                                                | Business combination                                |          |       |      |         |  |      | 4        |  |  |         |      |  |          |      |     |         |  |       |      |  |  |      |     | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

|                                              |                           |          |       |     |         |  |      |          |  |  |         |     |  |          |      |     |         |  |       |     |  |  |      |    | 
|--------------------------------------------- | ------------------------- | -------- | ----- | --- | ------- |  | ---- | -------- |  |  | ------- | --- |  | -------- | ---- | --- | ------- |  | ----- | --- |  |  | ---- | -- | 
|                                              |                           | 2003     |       |     | 2004    |  |      | 2005     | 
|                                              |                           |          |       |     |         |  |      |          | 
|                                              |                           | Domestic |       |     | Foreign |  |      | Domestic |  |  | Foreign |     |  | Domestic |      |     | Foreign | 
|                                              |                           | plans    |       |     | plans   |  |      | plans    |  |  | plans   |     |  | plans    |      |     | plans   | 
|                                              |                           |          |       |     |         |  |      |          |  |  |         |     |  |          |      |     |         | 
|                                              | New plan created          |          |       |    |         |  |      |         |  |  |         |    |  |          |      |    |         |  |       |    |  |  |      |   | 
|                                              | Foreign currency effects  |          |       |    |         |  |      | (4)      |  |  |         |    |  |          |      | (1) |         |  |       |    |  |  |      | 1  | 
|                                              | Fair value at end of year |          |       | 143 |         |  |      | 27       |  |  |         | 174 |  |          |      | 30  |         |  |       | 208 |  |  |      | 36 | 
|Funded status                                 |                           |          | (100) |     |         |  | (43) |          |  |  | (97)    |     |  |          | (48) |     |         |  | (184) |     |  |  | (50) |   
|Unrecognized actuarial loss                   |                           |          | 66    |     |         |  | 6    |          |  |  | 59      |     |  |          | 2    |     |         |  | 138   |     |  |  | 4    |   
|Unrecognized prior service cost
    (benefit) |                           |          | 4     |     |         |  | (2)  |          |  |  | 7       |     |  |          | (2)  |     |         |  | 14    |     |  |  | (2)  |   
|Post measurement date contributions           |                           |          | 16    |     |         |  |     |          |  |  | 1       |     |  |          | 1    |     |         |  | 16    |     |  |  | 1    |   
|Net liability recognized                      |                           |          | (14)  |     |         |  | (39) |          |  |  | (30)    |     |  |          | (47) |     |         |  | (16)  |     |  |  | (47) |   
|                                              |                           |          |       |     |         |  |      |          |  |  |         |     |  |          |      |     |         | 



|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         |  |       |  |  |  |      | 
|------------------------------------------ |  | -------- | ---- |  | ------- |  | ---- | -------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ----- |  |  |  | ---- | 
|                                           |  | 2003     |      |  | 2004    |  |      | 2005     | 
|                                           |  |          |      |  |         |  |      |          | 
|                                           |  | Domestic |      |  | Foreign |  |      | Domestic |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                                           |  | plans    |      |  | plans   |  |      | plans    |  |  | plans   |  |  | plans    |      |  | plans   | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Prepaid pension cost (note 17)             |  |          |     |  |         |  | 1    |          |  |  | 27      |  |  |          |     |  |         |  |      |  |  |  |     | 
|Intangible asset (note 14)                 |  |          | 4    |  |         |  |     |          |  |  |        |  |  |          |     |  |         |  | 14    |  |  |  |     | 
|Accumulated other comprehensive
    income |  |          | 29   |  |         |  |     |          |  |  |        |  |  |          |     |  |         |  | 85    |  |  |  |     | 
|Accrued pension liabilities
    (note 22)  |  |          | (47) |  |         |  | (40) |          |  |  | (51)    |  |  |          | (47) |  |         |  | (115) |  |  |  | (47) | 
|Other current liabilities                  |  |          |     |  |         |  |     |          |  |  | (6)     |  |  |          |     |  |         |  |      |  |  |  |     | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Net liability recognized                   |  |          | (14) |  |         |  | (39) |          |  |  | (30)    |  |  |          | (47) |  |         |  | (16)  |  |  |  | (47) | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 






|                                |  |          |     |  |         |  |    |          |  |  |         |  |  |          |    |  |         |  |     |  |  |  |    | 
|------------------------------- |  | -------- | --- |  | ------- |  | -- | -------- |  |  | ------- |  |  | -------- | -- |  | ------- |  | --- |  |  |  | -- | 
|                                |  | 2003     |     |  | 2004    |  |    | 2005     | 
|                                |  |          |     |  |         |  |    |          | 
|                                |  | Domestic |     |  | Foreign |  |    | Domestic |  |  | Foreign |  |  | Domestic |    |  | Foreign | 
|                                |  | plans    |     |  | plans   |  |    | plans    |  |  | plans   |  |  | plans    |    |  | plans   | 
|                                |  |          |     |  |         |  |    |          |  |  |         |  |  |          |    |  |         | 
|Projected benefit obligation    |  |          | 243 |  |         |  | 70 |          |  |  | 271     |  |  |          | 78 |  |         |  | 393 |  |  |  | 85 | 
|Fair value of plan assets       |  |          | 143 |  |         |  | 27 |          |  |  | 174     |  |  |          | 30 |  |         |  | 208 |  |  |  | 35 | 
|Accumulated benefit obligations |  |          | 205 |  |         |  | 48 |          |  |  | 53      |  |  |          | 51 |  |         |  | 337 |  |  |  | 57 | 
|Fair value of plan assets       |  |          | 143 |  |         |  | 22 |          |  |  |        |  |  |          | 23 |  |         |  | 208 |  |  |  | 26 | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The weighted-average assumptions used in calculating the
actuarial values for the pension plans are as follows:

|                                   |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         |  |      |  |  |  |      | 
|---------------------------------- |  | -------- | ---- |  | ------- |  | ---- | -------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ---- |  |  |  | ---- | 
|                                   |  | 2003     |      |  | 2004    |  |      | 2005     | 
|                                   |  |          |      |  |         |  |      |          | 
|                                   |  | Domestic |      |  | Foreign |  |      | Domestic |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                                   |  | plans    |      |  | plans   |  |      | plans    |  |  | plans   |  |  | Plans    |      |  | plans   | 
|                                   |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Discount rate                      |  |          | 5.8% |  |         |  | 5.9% |          |  |  | 5.8%    |  |  |          | 5.6% |  |         |  | 4.5% |  |  |  | 4.8% | 
|Rate of compensation increase      |  |          | 3.0% |  |         |  | 3.9% |          |  |  | 3.0%    |  |  |          | 3.7% |  |         |  | 2.5% |  |  |  | 3.1% | 
|Projected future pension increases |  |          | 1.3% |  |         |  | 2.6% |          |  |  | 1.3%    |  |  |          | 2.6% |  |         |  | 1.3% |  |  |  | 2.2% | 
|Expected return on plan assets     |  |          | 4.9% |  |         |  | 6.8% |          |  |  | 6.8%    |  |  |          | 7.0% |  |         |  | 7.3% |  |  |  | 6.9% | 





| |                      
| | ---------------------
| | Investment strategies





| |                                                 
| | ------------------------------------------------
| | Expected long-term rate of return on plan assets





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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



Plan asset allocationAs of September 30, 2004 and 2005 the percentage of plan
assets invested and the targeted allocation in major asset
categories are as follows:

|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         |  |      |  |  |  |      | 
|----------------- |  | -------- | ---- |  | ------- |  | ---- | ------------------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ---- |  |  |  | ---- | 
|                  |  | 2004     |      |  | 2005    |  |      | Targeted allocation | 
|                  |  |          |      |  |         |  |      |                     | 
|                  |  | Domestic |      |  | Foreign |  |      | Domestic            |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                  |  | plans    |      |  | plans   |  |      | plans               |  |  | plans   |  |  | plans    |      |  | plans   | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 
|Equity securities |  |          | 45%  |  |         |  | 60%  |                     |  |  | 44%     |  |  |          | 57%  |  |         |  | 45%  |  |  |  | 59%  | 
|Debt securities   |  |          | 46%  |  |         |  | 38%  |                     |  |  | 51%     |  |  |          | 35%  |  |         |  | 52%  |  |  |  | 35%  | 
|Other             |  |          | 9%   |  |         |  | 2%   |                     |  |  | 5%      |  |  |          | 8%   |  |         |  | 3%   |  |  |  | 6%   | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 
|Total             |  |          | 100% |  |         |  | 100% |                     |  |  | 100%    |  |  |          | 100% |  |         |  | 100% |  |  |  | 100% | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 





|                                       |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         |  |      |  |  |  |     | 
|-------------------------------------- |  | -------- | ---- |  | ------- |  | --- | -------- |  |  | ------- |  |  | -------- | --- |  | ------- |  | ---- |  |  |  | --- | 
|                                       |  | 2003     |      |  | 2004    |  |     | 2005     | 
|                                       |  |          |      |  |         |  |     |          | 
|                                       |  | Domestic |      |  | Foreign |  |     | Domestic |  |  | Foreign |  |  | Domestic |     |  | Foreign | 
|                                       |  | plans    |      |  | plans   |  |     | plans    |  |  | plans   |  |  | plans    |     |  | plans   | 
|                                       |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         | 
|Service cost                           |  |          | (13) |  |         |  | (5) |          |  |  | (14)    |  |  |          | (7) |  |         |  | (16) |  |  |  | (7) | 
|Interest cost                          |  |          | (13) |  |         |  | (4) |          |  |  | (13)    |  |  |          | (4) |  |         |  | (15) |  |  |  | (4) | 
|Expected return on plan assets         |  |          | 6    |  |         |  | 2   |          |  |  | 11      |  |  |          | 2   |  |         |  | 13   |  |  |  | 2   | 
|Amortization of unrecognized losses    |  |          | (3)  |  |         |  |    |          |  |  | (3)     |  |  |          |    |  |         |  | (3)  |  |  |  |    | 
|Curtailment gain recognized            |  |          |     |  |         |  | 3   |          |  |  |        |  |  |          |    |  |         |  | 1    |  |  |  | 1   | 
|                                       |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         | 
|Net periodic pension cost
    (note 7) |  |          | (23) |  |         |  | (4) |          |  |  | (19)    |  |  |          | (9) |  |         |  | (20) |  |  |  | (8) | 
|                                       |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         | 





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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

plans. The Company contributed
155 of cash and
marketable debt and equity securities, which qualify as plan
assets under SFAS No. 87 Employers
Accounting for Pensions, to the Pension Trust for use
in funding these pension benefit obligations, thereby reducing
accrued pension liabilities.

The effect of employee terminations, in connection with the
Companys restructuring plans (see note 8), on the
Companys pension obligation is reflected as a curtailment
in the years ended September 30, 2003 and 2005 pursuant to
the provisions of SFAS No. 88 Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits.

The future benefit payments, which reflect future service, as
appropriate, that are expected to be paid from the
Companys pension plan for the next five financial years
and thereafter are as follows:

|                           |  |          |  |        
|-------------------------- |  | -------- |  | -------
|                           |  | Domestic |  | Foreign
|Years ending September 30, |  | plans    |  | plans  
|                           |  |          |  |        
|2006                       |  | 7        |  | 1      
|2007                       |  | 7        |  | 1      
|2008                       |  | 8        |  | 2      
|2009                       |  | 10       |  | 2      
|2010                       |  | 13       |  | 2      
|2011 - 2015                |  | 77       |  | 18     

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|    |                      
|--- | ---------------------
|29. | Financial Instruments



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The euro equivalent notional amounts in millions and fair values
of the Companys derivative instruments as of
September 30, 2004 and 2005 are as follows:

|                                   |                     |          |     |       |      |      |          |       |       |  |     |      | 
|---------------------------------- | ------------------- | -------- | --- | ----- | ---- | ---- | -------- | ----- | ----- |  | --- | ---- | 
|                                   |                     | 2004     |     |       | 2005 |     
|                                   |                     |          |     |       |      |     
|                                   |                     | Notional |     | Fair  |      |      | Notional |       | Fair  | 
|                                   |                     | amount   |     | value |      |      | amount   |       | value | 
|                                   |                     |          |     |       |      |      |          |       |       | 
|Forward contracts sold:            |                     |          |     |       |      |      |          |       |       |  |     |     
|                                   | U.S. dollar         |          | 371 |       |      | 8    |          |       | 838   |  |     | (20) | 
|                                   | Japanese yen        |          | 4   |       |      |     |          |       | 9     |  |     |     | 
|                                   | Singapore dollar    |          |    |       |      |     |          |       | 2     |  |     |     | 
|Forward contracts purchased:       |                     |          |     |       |      |      |          |       |       |  |     |     
|                                   | U.S. dollar         |          | 56  |       |      | (1)  |          |       | 195   |  |     | 4    | 
|                                   | Japanese yen        |          | 55  |       |      |     |          |       | 42    |  |     |     | 
|                                   | Singapore dollar    |          | 29  |       |      |     |          |       | 23    |  |     |     | 
|                                   | Great Britain pound |          | 4   |       |      |     |          |       | 5     |  |     |     | 
|                                   | Czech Koruna        |          |    |       |      |     |          |       | 1     |  |     |     | 
|                                   | Malaysian Ringgit   |          |    |       |      |     |          |       | 32    |  |     | 1    | 
|                                   | Other currencies    |          | 5   |       |      |     |          |       | 23    |  |     | (1)  | 
|Currency Options sold:             |                     |          |     |       |      |      |          |       |       |  |     |     
|                                   | U.S. dollar         |          | 520 |       |      | (16) |          |       | 527   |  |     | (21) | 
|Currency Options purchased:        |                     |          |     |       |      |      |          |       |       |  |     |     
|                                   | U.S. dollar         |          | 514 |       |      | 9    |          |       | 522   |  |     | 3    | 
|Cross currency interest rate swap: |                     |          |     |       |      |      |          |       |       |  |     |     
|                                   | U.S. dollar         |          | 406 |       |      | 60   |          |       | 389   |  |     | 21   | 
|Interest rate swaps                |                     | 1,442    |     |       | 29   |      |          | 1,442 |       |  | 14  |     
|Other                              |                     |         |     |       |     |      |          | 259   |       |  | (2) |     
|                                   |                     |          |     |       |      |      |          |       |       | 
|Fair value, net                    |                     |          |     |       | 89   |      |          |       |       |  | (1) |     
|                                   |                     |          |     |       |      |      |          |       |       | 

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

activities included in other non-operating income (expense),
were as follows for the years ended September 30:

|                                                                  |                                          |      |       |       |      |  |      |      |  |  |      |      | 
|----------------------------------------------------------------- | ---------------------------------------- | ---- | ----- | ----- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                                                                  |                                          | 2003 |       |       | 2004 |  |      | 2005 | 
|                                                                  |                                          |      |       |       |      |  |      |      | 
|Gains (losses) from foreign
    currency derivatives:             |                                          |      |       |       |      |  |      |      |  |  |      |     
|                                                                  | Cost of sales                            |      |       | 8     |      |  |      | 44   |  |  |      | (14) | 
|                                                                  | Other non-operating
    (expense) income |      |       | 106   |      |  |      | 3    |  |  |      | (10) | 
|                                                                  |                                          |      |       |       |      |  |      |      | 
|                                                                  |                                          |      | 114   |       |      |  | 47   |      |  |  | (24) |     
|                                                                  |                                          |      |       |       |      |  |      |      | 
|Gains (losses) from foreign
    currency transactions:            |                                          |      |       |       |      |  |      |      |  |  |      |     
|                                                                  | Cost of sales                            |      |       | (40)  |      |  |      | (50) |  |  |      | (5)  | 
|                                                                  | Other non-operating
    (expense) income |      |       | (106) |      |  |      | (12) |  |  |      | 50   | 
|                                                                  |                                          |      |       |       |      |  |      |      | 
|                                                                  |                                          |      | (146) |       |      |  | (62) |      |  |  | 45   |     
|                                                                  |                                          |      |       |       |      |  |      |      | 
|Net losses from foreign currency
    derivatives and transactions |                                          |      | (32)  |       |      |  | (15) |      |  |  | 21   |     
|                                                                  |                                          |      |       |       |      |  |      |      | 





|    |      
|--- | -----
|30. | Risks







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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

The Company, through its use of third-party foundry and joint
venture arrangements, uses a significant portion of
manufacturing capacity that is outside of its direct control. As
a result, the Company is reliant upon such other parties for the
timely and uninterrupted supply of products and is exposed, to a
certain extent, to fluctuations in product procurement cost.

The Company has established policies and procedures which serve
as business conduct guidelines for its employees. Should these
guidelines not be adhered to, the Company could be exposed to
risks relating to wrongful actions by its employees.

Approximately 10,000 of the Companys employees are covered
by collective bargaining agreements. The collective bargaining
agreements pertain primarily to certain of the Companys
non-management employees in Germany (affecting approximately
6,400 employees), the Czech Republic (affecting approximately
400 employees) and Austria (affecting approximately 2,300
employees). The agreement in Germany is perpetual, but can be
terminated by the trade union with a notice of one month prior
to February 28, 2006. The agreement in Austria expires on
May 1, 2006. The provisions of these agreements generally
remain in effect until replaced by a subsequent agreement.
Agreements for periods after expiration are to be negotiated
with the respective trade unions through a process of collective
negotiations.

31.     Commitments and
Contingencies



LitigationIn March 2005, the Company and Rambus reached an agreement
settling all claims between them and licensing the Rambus patent
portfolio for use in current and future Company products. Rambus
has granted to the Company a worldwide license to existing and
future Rambus patents and patent applications for use in its
memory products. In exchange for this worldwide license, the
Company agreed to pay $50 million in quarterly installments
of $6 million from November 15, 2005 through
November 15, 2007. After November 15, 2007, and only
if Rambus enters into additional specified licensing agreements
with certain other DRAM manufacturers, the Company will make
additional quarterly payments which may aggregate a maximum of
an additional $100 million. The agreement also provides the
Company an option for acquiring certain other licenses. All
licenses provide for the Company to be treated as a
most-favored customer of Rambus. The Company
simultaneously granted to Rambus a fully-paid perpetual license
for memory interfaces.

On May 7, 2003, ProMOS filed arbitration proceedings
against the Company seeking payment of approximately
$36 million for DRAM products sold to the Company, damages
in the amount of approximately $338 million for
non-delivery of technology and an affirmative judgment that
ProMOS be allowed to continue to use the technology already
transferred by the Company. The Company filed counterclaims
seeking a judgment that ProMOS be required to cease using the
Companys technology and pay damages of approximately
$568 million, after deduction of $36 million for DRAM
products sold to the Company.

On November 10, 2004 the Company and ProMOS reached an
agreement regarding ProMOS license of the Companys
DRAM technology transferred to ProMOS. The S17 to
S12 License Agreement of 2000 was amended and remains in
effect. ProMOS has been, and continues to be, licensed to
produce and sell products using the technology transferred by
the Company, and to develop its own processes and products. As
full consideration for the ongoing license for use of the
Companys technology, ProMOS agreed to pay the Company
$156 million in four installments over a period through
April 30, 2006, against which the Companys accrued
payable for DRAM products purchased from ProMOS of
$36 million was offset. All claims (including litigation,
arbitration or other complaints) raised

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

by both sides have been withdrawn. The Company recognized the
relevant license income in the first quarter of the 2005
financial year.

In September 2004, the Company entered into a plea agreement
with the Antitrust Division of the U.S. Department of
Justice (DOJ) in connection with its ongoing
investigation of alleged antitrust violations in the DRAM
industry. Pursuant to this plea agreement, the Company agreed to
plead guilty to a single count related to the pricing of DRAM
products between July 1, 1999 and June 15, 2002. Under
the terms of the agreement, the Company agreed to pay a fine of
$160 million. The fine plus accrued interest is to be paid
in equal annual installments through 2009. On October 25,
2004 the plea agreement was accepted by the U.S. District
Court for the Northern District of California. Therefore, the
matter has been fully resolved between the Company and the DOJ,
subject to the Companys obligation to cooperate with the
DOJ in its ongoing investigation of other participants in the
DRAM industry. The wrongdoing charged by the DOJ was limited to
six Original Equipment Manufacturer (OEM) customers
that manufacture computers and servers. The Company has entered
into settlement agreements with five of these OEM customers and
is considering the possibility of a settlement with the
remaining OEM customer, which purchased only a very small volume
of DRAM-products from the Company.

Subsequent to the commencement of the DOJ investigation, a
number of purported class action lawsuits were filed against the
Company, its U.S. subsidiary and other DRAM suppliers.

Sixteen cases were filed between June 2002 and September 2002 in
the following U.S. 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
various DRAM suppliers in the United States of America during a
specified time period commencing on or after October 1,
2001 (Direct U.S. Purchaser Class). 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. In September 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 as part of a Multi-District Litigation
(MDL). In June 2005, with the permission of the
U.S. District Court for the Northern District of
California, the plaintiffs filed a second amended complaint
alleging that the unlawful conduct commenced on approximately
April 1, 1999 and continued through at least June 30,
2002. The Company has reached a settlement agreement with the
Direct U.S. Purchaser Class (subject to approval by the
U.S. District Court for the Northern District of
California) and has secured individual settlements with seven
direct customers in addition to those OEMs identified by the DOJ.

Sixty-three additional cases were filed between August 2,
2002 and September 16, 2005 in numerous federal and state
courts throughout the United States of America. Each of these
state and federal cases (except a case filed in the
U.S. District Court for the Eastern District of
Pennsylvania) purports to be on behalf of a class of individuals
and entities who indirectly purchased DRAM in the United States
of America during specified time periods commencing in or after
1999 (Indirect U.S. Purchaser Class). The
Eastern District of Pennsylvania case purports to be on behalf
of a class of foreign individuals and entities who directly
purchased DRAM outside of the United States of America between
April 1999 and June 2000 (Direct Foreign Purchaser
Class). The complaints variously allege violations of the
Sherman Act, Californias Cartwright Act, various other
state laws, 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 California
state cases be coordinated for pretrial purposes and recommended
that they be transferred to San Francisco County Superior
Court for coordinated or consolidated pretrial proceed-

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

ings. Subsequently 12 of the state court cases and the
U.S. District Court for the Eastern District of
Pennsylvania case were ordered transferred to the
U.S. District Court for the Northern District of California
(San Francisco) for coordinated and consolidated pretrial
proceedings as part of the MDL described above. After this
transfer, the plaintiffs dismissed two of the transferred state
court cases. Two additional transferred state court cases were
subsequently remanded back to their relevant state courts. The
Company is defending against these actions vigorously.

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 products. The Company has reassessed the matter after its
plea agreement with the DOJ and made an accrual during the 2004
financial year for a probable minimum fine that may be imposed
as a result of the Commissions investigation. Any fine
actually imposed by the Commission may be significantly higher
than the reserve established, although the Company cannot more
accurately estimate the amount of such actual fine. The Company
is fully cooperating with the Commission in its investigation.

In May 2004, the Canadian Competition Bureau advised the
Companys U.S. subsidiary that it and its affiliated
companies are among the targets of a formal inquiry into alleged
violations of the Canadian Competition Act in the DRAM industry.
No compulsory process (such as subpoenas) has been commenced.
The Company is cooperating with the Competition Bureau in its
inquiry.

In October 2004, a proposed class proceeding was commenced
against the Company in the Canadian province of Quebec on behalf
of indirect purchasers, who purchased products in Quebec from
certain OEM customers which contained DRAM during the period
from July 1999 to June 2002, seeking damages in unspecified
amounts, investigation costs, interest and legal costs in
respect of activities which are the subject of the
Companys September 15, 2004 plea agreement with the
DOJ. In the period from December 2004 to February 2005, three
other proposed class proceedings were commenced in the provinces
of Ontario, Quebec and British Columbia on behalf of all direct
and indirect purchasers resident, respectively, in Canada (in
the case commenced in the province of Ontario), the province of
Quebec and British Columbia, who purchased DRAM or products
which contained DRAM during the period from July 1999 to June
2002, seeking damages, punitive damages, investigation and
administration costs, in unspecified amounts, interest and legal
costs.

Between September 30, 2004 and November 4, 2004 a
total of seven securities class action complaints were filed
against the Company in the U.S. District Courts for the
Northern District of California and the Southern District of New
York. The plaintiffs voluntarily dismissed the New York cases,
and on June 30, 2005 filed a Consolidated Amended Complaint
in California, effectively consolidating all the lawsuits. The
Consolidated Amended Complaint alleges violations of the
U.S. federal securities laws and seeks damages on behalf of
a purported class of purchasers of the Companys publicly
traded securities during the period from March 13, 2000 to
July 19, 2004. The Company is vigorously defending against
allegations of U.S. securities laws violations.

In late 2002, MOSAID Technologies Inc. (MOSAID)
alleged that the Company was violating 11 DRAM-related
U.S. patents of MOSAID. In December 2002, the Company filed
an action in the U.S. District Court for the Northern
District of California seeking a declaratory judgment that the
Company was not violating 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 had filed an amended counterclaim to add two
new patents to its previous claims. This matter has since been
consolidated under the federal multidistrict litigation rules
with another lawsuit filed by MOSAID against Samsung Electronics
Co. Ltd. (Sam-

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

sung) in the U.S. District Court for the District of
New Jersey. On April 1, 2005, the U.S. District Court
issued a summary judgment order that the Companys products
did not infringe most of MOSAIDs asserted claims, leaving
the infringement of only two claims in one patent still to be
determined. A trial date for these claims has not yet been
scheduled. On April 6, 2005, MOSAID filed an additional
lawsuit in the U.S. District Court for the Eastern District
of Texas, alleging that the Companys DRAM products
infringe one or more claims of three MOSAID patents. A trial on
this issue has been scheduled for October 2006. The Company
intends to vigorously defend against MOSAIDs claims.

On March 5, 2005, Tessera Technologies, Inc.
(Tessera) filed a lawsuit in the U.S. District
Court for the Eastern District of Texas, alleging that the
Companys products containing ball grid array packages
infringe five Tessera patents. On April 13, 2005, Tessera
amended its complaint to allege that the Company and Micron
violated U.S. antitrust law, Texas unfair competition law,
and Texas business tort law by conspiring to harm the sale of
Rambus RDRAM chips, thereby injuring Tesseras
ability to sell chip packaging for RDRAM chips. A trial has been
scheduled for August 2006. The Company intends to vigorously
defend against Tesseras claims.

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. Where the estimated amount
of loss is within a range of amounts and no amount within the
range is a better estimate than any other amount or the range
cannot be estimated, the minimum amount is accrued. As of
September 30, 2005, the Company had accrued liabilities in
the amount of 144
related to the antitrust investigations and related antitrust
and securities civil claims described above. As additional
information becomes available, the potential liability related
to these matters will 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 adverse
effect on the Companys results of operations, financial
position and cash flows.

An adverse final resolution of the antitrust investigations or
related civil claims or the securities class action lawsuits
described above could 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, financial position and cash
flows.

An adverse final resolution in the MOSAID or Tessera lawsuits
could result in significant financial liabilities to, and other
adverse effects upon the Company, which would have a material
adverse effect on the Companys results of operations,
financial position and cash flows.

The Company is subject to various other lawsuits, legal actions,
claims and proceedings related to products, patents and other
matters incidental to its businesses. The Company has accrued a
liability for the estimated costs of adjudication of various
asserted and unasserted claims existing as of the balance sheet
date. 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 adverse effect on the
Companys results of operations or cash flows in the year
of settlement.

In connection with the Companys formation, Siemens
retained certain facilities located in the U.S. and certain
related environmental liabilities. Businesses contributed to the
Company by Siemens historically 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

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

involved 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.



Contractual CommitmentsThe following table summarizes the Companys commitments
with respect to external parties as of September 30,
2005(1)(2):

|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|---------------------------------- |  | ---------------------- |  | ------ |  | ----- |  | ----- |  | ----- |  | ----- |  | -------
|                                   |  | Payments due to period
|                                   |  |                       
|                                   |  |                        |  | Less   |  |      
|                                   |  |                        |  | than   |  | 1-2   |  | 2-3   |  | 3-4   |  | 4-5   |  | After  
|                                   |  | Total                  |  | 1 year |  | years |  | years |  | years |  | years |  | 5 years
|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|Contractual commitments:           |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|Operating lease payments           |  | 850                    |  | 94     |  | 71    |  | 61    |  | 56    |  | 54    |  | 514    
|Unconditional purchase commitments |  | 1,505                  |  | 1,379  |  | 45    |  | 24    |  | 9     |  | 9     |  | 39     
|Other long-term commitments        |  | 138                    |  | 46     |  | 46    |  | 46    |  |      |  |      |  |       
|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|Total commitments                  |  | 2,493                  |  | 1,519  |  | 162   |  | 131   |  | 65    |  | 63    |  | 553    
|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        



|    |                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain payments of obligations or expirations of commitments
    that are based on the achievement of milestones or other events
    that are not date-certain are included for purposes of this
    table based on estimates of the reasonably likely timing of
    payments or expirations in the particular case. Actual outcomes
    could differ from those estimates.                             
|   
|(2) | Product purchase commitments associated with continuing capacity
    reservation agreements are not included in this table, since the
    purchase prices are based, in part, on future market prices, and
    are accordingly not accurately quantifiable at
    September 30, 2005. Purchases under these arrangements
    aggregated approximately
    950 for the year ended
    September 30, 2005.









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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)



Other ContingenciesThe following table summarizes the Companys contingencies
with respect to external parties, other than those related to
litigation, as of September 30,
2005(1):

|                                   |                                     |                       |     |        |    |       |     |       |     |       |    |       |    |         |    
|---------------------------------- | ----------------------------------- | --------------------- | --- | ------ | -- | ----- | --- | ----- | --- | ----- | -- | ----- | -- | ------- | ---
|                                   |                                     | Expirations by period
|                                   |                                     |                      
|                                   |                                     |                       |     | Less   |    |      
|                                   |                                     |                       |     | than   |    | 1-2   |     | 2-3   |     | 3-4   |    | 4-5   |    | After  
|                                   |                                     | Total                 |     | 1 year |    | years |     | years |     | years |    | years |    | 5 years
|                                   |                                     |                       |     |        |    |       |     |       |     |       |    |       |    |        
|Maximum potential future payments: |                                     |                       |     |        |    |       |     |       |     |       |    |       |    |        
|                                   | Guarantees                          |                       | 462 |        | 99 |       | 204 |       | 23  |       | 5  |       |   |         | 131
|                                   | Contingent government
    grants(2) |                       | 516 |        | 67 |       | 101 |       | 128 |       | 42 |       | 55 |         | 123
|                                   |                                     |                       |     |        |    |       |     |       |     |       |    |       |    |        
|Total contingencies                |                                     | 978                   |     | 166    |    | 305   |     | 151   |     | 47    |    | 55    |    | 254    
|                                   |                                     |                       |     |        |    |       |     |       |     |       |    |       |    |        



|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Certain expirations of contingencies that are based on the
    achievement of milestones or other events that are not
    date-certain are included for purposes of this table based on
    estimates of the reasonably likely timing of expirations in the
    particular case. Actual outcomes could differ from those
    estimates.
|   
|(2) | Contingent government grants refer to amounts previously
    received, related to the construction and financing of certain
    production facilities, which are not otherwise guaranteed and
    could be refundable if the total project requirements are not
    met.                                                               

  








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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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.

A tabular reconciliation of the changes in the aggregate product
warranty liability for the year ended September 30, 2005 is
as follows:

|                                     |                              |      |    |      | 
|------------------------------------ | ---------------------------- | ---- | -- | ---- | 
|                                     |                              | 2005 |   
|                                     |                              |      |   
|Balance as of October 1, 2004        |                              |      | 68 |     
|                                     | Accrued during the year, net |      |    | 33   | 
|                                     | Settled during the year      |      |    | (51) | 
|                                     |                              |      |   
|Balance as of September 30,
    2005 |                              |      | 50 |     
|                                     |                              |      |   



|    |                                             
|--- | --------------------------------------------
|32. | Operating Segment and Geographic Information

Disclosure about Segments of an Enterprise and Related
Information








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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

segments based on production volume and product mix using
standard costs. Information with respect to the Companys
operating segments follows:



Automotive, Industrial and MultimarketThe Automotive, Industrial and Multimarket segment designs,
develops, manufactures and markets semiconductors and complete
system solutions for use in automotive, industrial and
multimarket applications.



CommunicationThe Communication segment designs, develops, manufactures and
markets a wide range of ICs, other semiconductors and complete
system solutions for wireline and wireless communication
applications.



Memory ProductsThe Memory Products segment designs, develops, manufactures and
markets semiconductor memory products with various packaging and
configuration options and performance characteristics for
standard, specialty and embedded memory applications.



Other Operating SegmentsRemaining activities for certain product lines that have been
disposed of, as well as other business activities, are included
in the Other Operating Segments.

Selected segment data for the years ended September 30,
2003, 2004 and 2005 is as follows:

|           |                                            |      |       |       |      |  |       |       |  |  |       |       | 
|---------- | ------------------------------------------ | ---- | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|           |                                            | 2003 |       |       | 2004 |  |       | 2005  | 
|           |                                            |      |       |       |      |  |       |       | 
|Net sales: |                                            |      |       |       |      |  |       |       |  |  |       |      
|           | Automotive, Industrial and
    Multimarket |      |       | 2,186 |      |  |       | 2,540 |  |  |       | 2,516 | 
|           | Communication                              |      |       | 1,428 |      |  |       | 1,689 |  |  |       | 1,391 | 
|           | Memory Products                            |      |       | 2,485 |      |  |       | 2,926 |  |  |       | 2,826 | 
|           | Other Operating Segments                   |      |       | 21    |      |  |       | 11    |  |  |       | 12    | 
|           | Corporate and Reconciliation               |      |       | 32    |      |  |       | 29    |  |  |       | 14    | 
|           |                                            |      |       |       |      |  |       |       | 
|Total      |                                            |      | 6,152 |       |      |  | 7,195 |       |  |  | 6,759 |      
|           |                                            |      |       |       |      |  |       |       | 

|      |                                            |      |       |       |      |  |     |      |  |  |       |       | 
|----- | ------------------------------------------ | ---- | ----- | ----- | ---- |  | --- | ---- |  |  | ----- | ----- | 
|      |                                            | 2003 |       |       | 2004 |  |     | 2005 | 
|      |                                            |      |       |       |      |  |     |      | 
|EBIT: |                                            |      |       |       |      |  |     |      |  |  |       |      
|      | Automotive, Industrial and
    Multimarket |      |       | 148   |      |  |     | 252  |  |  |       | 134   | 
|      | Communication                              |      |       | (213) |      |  |     | (44) |  |  |       | (295) | 
|      | Memory Products                            |      |       | 31    |      |  |     | 169  |  |  |       | 122   | 
|      | Other Operating Segments                   |      |       | (50)  |      |  |     | (75) |  |  |       | (4)   | 
|      | Corporate and Reconciliation               |      |       | (215) |      |  |     | (46) |  |  |       | (140) | 
|      |                                            |      |       |       |      |  |     |      | 
|Total |                                            |      | (299) |       |      |  | 256 |      |  |  | (183) |      
|      |                                            |      |       |       |      |  |     |      | 

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Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

|                               |                                            |       |     |       |     |       |    
|------------------------------ | ------------------------------------------ | ----- | --- | ----- | --- | ----- | ---
|                               |                                            | 2003  |     | 2004  |     | 2005 
|                               |                                            |       |     |       |     |      
|Depreciation and Amortization: |                                            |       |     |       |     |      
|                               | Automotive, Industrial and
    Multimarket |       | 356 |       | 398 |       | 400
|                               | Communication                              |       | 305 |       | 232 |       | 185
|                               | Memory Products                            |       | 768 |       | 683 |       | 724
|                               | Other Operating Segments                   |       | 8   |       | 7   |       | 7  
|                               | Corporate and Reconciliation               |       |    |       |    |       |   
|                               |                                            |       |     |       |     |      
|Total                          |                                            | 1,437 |     | 1,320 |     | 1,316
|                               |                                            |       |     |       |     |      

|                                                         |                                            |      |     |      |      |      |    
|-------------------------------------------------------- | ------------------------------------------ | ---- | --- | ---- | ---- | ---- | ---
|                                                         |                                            | 2003 |     | 2004 |      | 2005
|                                                         |                                            |      |     |      |      |     
|Equity in earnings (losses) of
    Associated Companies: |                                            |      |     |      |      |     
|                                                         | Automotive, Industrial and
    Multimarket |      |    |      |     |      |   
|                                                         | Communication                              |      | 4   |      | 5    |      | 4  
|                                                         | Memory Products                            |      | 22  |      | (16) |      | 54 
|                                                         | Other Operating Segments                   |      | (1) |      | (4)  |      | (2)
|                                                         | Corporate and Reconciliation               |      | (7) |      | 1    |      | 1  
|                                                         |                                            |      |     |      |      |     
|Total                                                    |                                            | 18   |     | (14) |      | 57  
|                                                         |                                            |      |     |      |      |     

|             |                                            |      |     |      |     |       |    
|------------ | ------------------------------------------ | ---- | --- | ---- | --- | ----- | ---
|             |                                            | 2003 |     | 2004 |     | 2005 
|             |                                            |      |     |      |     |      
|Inventories: |                                            |      |     |      |     |      
|             | Automotive, Industrial and
    Multimarket |      | 332 |      | 359 |       | 336
|             | Communication                              |      | 209 |      | 266 |       | 201
|             | Memory Products                            |      | 415 |      | 334 |       | 484
|             | Other Operating Segments                   |      | 3   |      | 1   |       | 1  
|             | Corporate and Reconciliation               |      |    |      |    |       |   
|             |                                            |      |     |      |     |      
|Total        |                                            | 959  |     | 960  |     | 1,022
|             |                                            |      |     |      |     |      



|          |                                            |      |    |      |   
|--------- | ------------------------------------------ | ---- | -- | ---- | --
|          |                                            | 2004 |    | 2005
|          |                                            |      |    |     
|Goodwill: |                                            |      |    |     
|          | Automotive, Industrial and
    Multimarket |      | 13 |      |  
|          | Communication                              |      | 51 |      | 27
|          | Memory Products                            |      | 81 |      | 88
|          | Other Operating Segments                   |      | 6  |      | 8 
|          | Corporate and Reconciliation               |      |   |      | 2 
|          |                                            |      |    |     
|Total     |                                            | 151  |    | 125 
|          |                                            |      |    |     





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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

included in the corporate and reconciliation column.
Only unstarted wafers of the back-end facilities (chip
stock) and finished goods were attributable to the
operating segments and included in the segment information
reported to the CODM. As of September 30, 2005, all
inventory was attributed to the respective operating segment,
since it was under the direct control and responsibility of the
respective operating segment managers. Prior periods have been
reclassified to conform to the current year presentation.

Certain items are included in corporate and reconciliation and
are not allocated to the segments, consistent with the
Companys internal management reporting. These include
certain corporate headquarters costs, certain incubator
and early stage technology investment costs, non-recurring gains
and specific strategic technology initiatives. Additionally,
restructuring charges are included in corporate and
reconciliation and not allocated to the segments for internal or
external reporting purposes, since they arise from corporate
directed decisions not within the direct control of segment
management. Furthermore, 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
capacity costs are included in corporate and reconciliation.
Significant components of corporate and reconciliation EBIT for
the years ended September 30, 2003, 2004 and 2005 are as
follows:

|                              |                                                        |       |       |      |      |       |     
|----------------------------- | ------------------------------------------------------ | ----- | ----- | ---- | ---- | ----- | ----
|                              |                                                        | 2003  |       | 2004 |      | 2005 
|                              |                                                        |       |       |      |      |      
|Corporate and Reconciliation: |                                                        |       |       |      |      |      
|                              | Unabsorbed excess capacity costs                       |       | (101) |      | (34) |       | (12)
|                              | Restructuring charges                                  |       | (29)  |      | (17) |       | (78)
|                              | Corporate information technology
    development costs |       | (13)  |      |     |       |    
|                              | Other, net                                             |       | (72)  |      | 5    |       | (50)
|                              |                                                        |       |       |      |      |      
|Total                         |                                                        | (215) |       | (46) |      | (140)
|                              |                                                        |       |       |      |      |      



|           |               |       |       |       |       |       |      
|---------- | ------------- | ----- | ----- | ----- | ----- | ----- | -----
|           |               | 2003  |       | 2004  |       | 2005 
|           |               |       |       |       |       |      
|Net sales: |               |       |       |       |       |      
|           | Germany       |       | 1,535 |       | 1,675 |       | 1,354
|           | Other Europe  |       | 1,112 |       | 1,263 |       | 1,210
|           | North America |       | 1,393 |       | 1,524 |       | 1,504
|           | Asia/ Pacific |       | 1,821 |       | 2,263 |       | 2,223
|           | Japan         |       | 256   |       | 364   |       | 332  
|           | Other         |       | 35    |       | 106   |       | 136  
|           |               |       |       |       |       |      
|Total      |               | 6,152 |       | 7,195 |       | 6,759
|           |               |       |       |       |       |      

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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

|                               |               |       |       |       |       |       |      
|------------------------------ | ------------- | ----- | ----- | ----- | ----- | ----- | -----
|                               |               | 2003  |       | 2004  |       | 2005 
|                               |               |       |       |       |       |      
|Property, plant and equipment: |               |       |       |       |       |      
|                               | Germany       |       | 2,152 |       | 1,962 |       | 1,625
|                               | Other Europe  |       | 652   |       | 514   |       | 516  
|                               | North America |       | 641   |       | 619   |       | 1,093
|                               | Asia/ Pacific |       | 369   |       | 490   |       | 515  
|                               | Japan         |       | 1     |       | 1     |       | 2    
|                               | Other         |       | 2     |       | 1     |       |     
|                               |               |       |       |       |       |      
|Total                          |               | 3,817 |       | 3,587 |       | 3,751
|                               |               |       |       |       |       |      









|                        |                           |                                   |    |      |    |       |  
|----------------------- | ------------------------- | --------------------------------- | -- | ---- | -- | ----- | -
|                        |                           | For the years ended September 30,
|                        |                           |                                  
|                        |                           | 2003                              |    | 2004 |    | 2005 
|                        |                           |                                   |    |      |    |      
|Net (loss) income       |                           | (435)                             |    | 61   |    | (312)
|Add: Income tax expense |                           | 84                                |    | 154  |    | 120  
|                        | Interest expense,
    net |                                   | 52 |      | 41 |       | 9
|                        |                           |                                   |    |      |    |      
|EBIT                    |                           | (299)                             |    | 256  |    | (183)
|                        |                           |                                   |    |      |    |      



|    |                  
|--- | -----------------
|33. | Subsequent Events

Teilbetrieb Ausgliederung


F-61



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##### Table of Contents

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 23, 2005

Munich, Germany



Infineon Technologies AG

By:
    /s/ DR. WOLFGANG ZIEBARTDr. Wolfgang ZiebartMember of the Management Board andChief Executive Officer

By:
    /s/ PETER J. FISCHLPeter J. FischlMember of the Management Board andChief Financial Officer



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##### Table of Contents

Exhibit Index

|        |   |     |                        |                                                                                                                                                                                                                                                                   |      |  |         |        |  |             |          |  |          |        |                   |  |  |  |           | 
|------- | - | --- | ---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | ------- | ------ |  | ----------- | -------- |  | -------- | ------ | ----------------- |  |  |  | --------- | 
|Exhibit |   |     |                        |                                                                                                                                                                                                                                                                   |      |  | Exhibit |        |  | Filing Date |          |  | SEC File |       
|Number  |   |     | Description of Exhibit |                                                                                                                                                                                                                                                                   | Form |  |         | Number |  |             | with SEC |  |          | Number |                  
|        |   |     |                        |                                                                                                                                                                                                                                                                   |      |  |         |        |  |             |          |  |          |        |                  
|        | 1 | .1* |                        | Articles of Association (as of
    October 2005) (English translation)                                                                                                                                                                                            |      |  |         |        |  |             |          |  |          |        |                   |  |  |  |           | 
|        | 1 | .2  |                        | Rules of Procedure for the
    Management Board (English translation)                                                                                                                                                                                             |      |  | 20-F    |        |  |             | 1.2      |  |          |        | December 21, 2000 |  |  |  | 1-15000   | 
|        | 1 | .3* |                        | Rules of Procedure for the
    Supervisory Board (English translation)                                                                                                                                                                                            |      |  |         |        |  |             |          |  |          |        |                   |  |  |  |           | 
|        | 1 | .4* |                        | Rules of Procedure for the
    Investment Finance and Audit Committee of the Supervisory Board
    (English translation)                                                                                                                                          |      |  |         |        |  |             |          |  |          |        |                   |  |  |  |           | 
|        | 4 | .1  |                        | Management and Services Agreement
    between Siemens AG and Infineon Technologies AG
    (Infineon), effective as of April 1, 1999
    (English translation)                                                                                                   |      |  | F-1     |        |  |             | 10.3     |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .2  |                        | Framework Agreement between Siemens
    AG and Infineon regarding technical development by Siemens
    Central Technical Division, effective as of April 1, 1999
    (English translation)                                                                       |      |  | F-1     |        |  |             | 10.4     |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .3  |                        | Patent Cross License Agreement
    between Infineon and Siemens AG, dated as of February 11,
    2000                                                                                                                                                             |      |  | F-1     |        |  |             | 10.7     |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .4  |                        | Framework lease regarding
    commercial property between Siemens AG and Infineon, dated as of
    August 10, 1999 (Otto-Hahn-Ring 6,
    Sankt-Martin-Strasse 76 and Sankt-Martin-Str. 53)
    (English translation)                                             |      |  | F-1     |        |  |             | 10.9     |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .5  |                        | Individual lease under a framework
    lease regarding commercial property between Siemens AG and
    Infineon, dated as of September 29, 1999)
    (Sankt-Martin-Str. 53) (English translation)                                                                  |      |  | F-1     |        |  |             | 10.10    |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .6  |                        | Individual lease under a framework
    lease regarding commercial property between Siemens AG and
    Infineon, dated as of August 12, 1999)
    (Sankt-Martin-Str. 76) (English translation)                                                                     |      |  | F-1     |        |  |             | 10.11    |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .7  |                        | Individual lease under a framework
    lease regarding commercial property between Siemens AG and
    Infineon, dated as of October 14, 1999)
    (Otto-Hahn-Ring 6) (English translation)                                                                        |      |  | F-1     |        |  |             | 10.12    |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .8  |                        | Lease regarding commercial property
    between SIM 12, Grundstücks GmbH & Co. KG and
    Infineon, dated as of July 29, 1999 (Balanstrasse 73)
    (English translation)                                                                                         |      |  | F-1     |        |  |             | 10.13    |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .9  |                        | Shareholder Agreement of ALTIS
    Semiconductor between Infineon Technologies Holding France and
    Compagnie IBM France, dated as of June 24, 1999                                                                                                             |      |  | F-1     |        |  |             | 10.15    |  |          |        | February 18, 2000 |  |  |  | 333-11508 | 
|        | 4 | .10 |                        | Registration Rights Agreement dated
    as of June 29, 2001, among Infineon, Siemens AG, Siemens
    Nederland N.V. and Siemens Pension Trust e.V.                                                                                                                |      |  | F-3     |        |  |             | 10.2     |  |          |        | July 10, 2001     |  |  |  | 333-3590  | 
|        | 4 | .11 |                        | Framework Loan Agreement, dated
    April 3, 2001, between Infineon and Siemens AG
    (English translation)                                                                                                                                                      |      |  | F-3     |        |  |             | 10.1     |  |          |        | July 10, 2001     |  |  |  | 333-3590  | 
|        | 4 | .12 |                        | Non Compete Agreement between OSRAM
    GmbH and Infineon dated as of April 3, 2001                                                                                                                                                                               |      |  | 20-F    |        |  |             | 4.32     |  |          |        | December 4, 2001  |  |  |  | 1-15000   | 
|        | 4 | .13 |                        | 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. |      |  | 20-F    |        |  |             | 4.33     |  |          |        | December 4, 2002  |  |  |  | 1-15000   | 



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##### Table of Contents



|        |   |                                                                                      |                        |                                                                                                                                                                                                                                  |      |                     |         |        |       |             |          |  |                |        |                   |  |           |  |         | 
|------- | - | ------------------------------------------------------------------------------------ | ---------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------- | ------- | ------ | ----- | ----------- | -------- |  | -------------- | ------ | ----------------- |  | --------- |  | ------- | 
|Exhibit |   |                                                                                      |                        |                                                                                                                                                                                                                                  |      |                     | Exhibit |        |       | Filing Date |          |  | SEC File       |       
|Number  |   |                                                                                      | Description of Exhibit |                                                                                                                                                                                                                                  | Form |                     |         | Number |       |             | with SEC |  |                | Number |                  
|        |   |                                                                                      |                        |                                                                                                                                                                                                                                  |      |                     |         |        |       |             |          |  |                |        |                  
|        | 4 | .14                                                                                  |                        | Undertaking for Granting of
    Conversion Rights from Infineon to JPMorgan Chase Bank for the
    benefit of the holders of the Subordinated Convertible Notes,
    dated February 1, 2002                                      |      |                     | 20-F    |        |       |             | 4.34     |  |                |        | December 4, 2002  |  |           |  | 1-15000 | 
|        | 4 | .15                                                                                  |                        | Subordinated Guarantee of Infineon,
    as Guarantor, in favor of the holders of Subordinated
    Convertible Notes, dated February 1, 2002                                                                                      |      |                     | 20-F    |        |       |             | 4.35     |  |                |        | December 4, 2002  |  |           |  | 1-15000 | 
|        | 4 | .16                                                                                  |                        | Loan Agreement dated
    February 1, 2002, between Infineon Technologies Holding
    B.V., as Issuer, and Infineon                                                                                                               |      |                     | 20-F    |        |       |             | 4.36     |  |                |        | December 4, 2002  |  |           |  | 1-15000 | 
|        | 4 | .17                                                                                  |                        | Assignment Agreement dated
    February 1, 2002, among Infineon Technologies Holding B.V.,
    Infineon and JPMorgan Chase Bank for the benefit of the holders
    of the Subordinated Convertible Notes                         |      |                     | 20-F    |        |       |             | 4.37     |  |                |        | December 4, 2002  |  |           |  | 1-15000 | 
|        | 4 | .18                                                                                 |                        | Joint Venture Agreement between
    Infineon and Nanya Technology Corporation, executed on
    November 13, 2002                                                                                                                 |      |                     | 20-F    |        |       |             | 4.38     |  |                |        | December 4, 2002  |  |           |  | 1-15000 | 
|        | 4 | .19*                                                                                |                        | Amendments No 1, 2 and 3 to
    the Joint Venture Agreement between Infineon and Nanya
    Technology Corporation, executed on November 13, 2002                                                                                 |      |                     |         |        |       |             |          |  |                |        |                   |  |           |  |         | 
|        | 4 | .20                                                                                  |                        | Terms and Conditions of 5%
    Guaranteed Subordinated Convertible Notes due 2010 in the
    aggregate nominal amount of EUR 700,000,000 (the 2010
    Notes) issued on June 5, 2003 by Infineon
    Technologies Holding B.V. |      |                     | 20-F    |        |       |             | 4.30     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .21                                                                                  |                        | Undertaking for Granting of
    Conversion Rights from Infineon to JPMorgan Chase Bank for the
    benefit of the holders of the 2010 Notes, dated June 2, 2003                                                                  |      |                     | 20-F    |        |       |             | 4.31     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .22                                                                                  |                        | Subordinated Guarantee of Infineon,
    as Guarantor, in favor of the holders of 2010 Notes, dated
    June 2, 2002                                                                                                              |      |                     | 20-F    |        |       |             | 4.32     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .23                                                                                  |                        | Loan Agreement dated June 2,
    2003, between Infineon Technologies Holding B.V., as Issuer, and
    Infineon                                                                                                                   |      |                     | 20-F    |        |       |             | 4.33     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .24                                                                                  |                        | Assignment Agreement dated
    June 2, 2003, among Infineon Technologies Holding B.V.,
    Infineon and JPMorgan Chase Bank for the benefit of the holders
    of the 2010 Notes                                                 |      |                     | 20-F    |        |       |             | 4.34     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .25                                                                                 |                        | 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                                   |      |                     | 20-F    |        |       |             | 4.35     |  |                |        | November 21, 2003 |  |           |  | 1-15000 | 
|        | 4 | .26                                                                                 |                        | Real Estate Leasing Contract
    between MoTo Object CAMPEON GmbH & Co. KG and Infineon
    dated as of December 23, 2003, with Supplementary
    Agreements No 1 and 2 (English translation)                                    |      |                     | 20-F    |        |       |             | 4.28     |  |                |        | November 26, 2004 |  |           |  | 1-15000 | 
|        | 4 | .27                                                                                 |                        | Settlement and License Agreement by
    and among Rambus Inc., Infineon, Infineon Technologies North
    America Corp. and Infineon Technologies Holding North America
    Inc. dated as of March 21, 2005                       |      | 10-Q of Rambus Inc. |         |        | 10.17 |             |          |  | April 29, 2005 |        |                   |  | 000-22339 | 
|        | 4 | .28*                                                                                |                        | Settlement Agreement and Mutual
    General Release by and between Infineon and ProMOS Technologies
    Inc. dated as of November 10, 2004                                                                                       |      |                     |         |        |       |             |          |  |                |        |                   |  |           |  |         | 
|        | 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) |                        |                                                                                                                                                                                                                                  |      |                     |         |        |       |             |          |  |                |        |                   |  |           | 



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##### Table of Contents



|        |     |  |                        |                                                                                                                              |      |  |         |        |  |             |          |  |          |        |  |  |  |  |  | 
|------- | --- |  | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---- |  | ------- | ------ |  | ----------- | -------- |  | -------- | ------ |  |  |  |  |  | 
|Exhibit |     |  |                        |                                                                                                                              |      |  | Exhibit |        |  | Filing Date |          |  | SEC File |       
|Number  |     |  | Description of Exhibit |                                                                                                                              | Form |  |         | Number |  |             | with SEC |  |          | Number | 
|        |     |  |                        |                                                                                                                              |      |  |         |        |  |             |          |  |          |        | 
|        | 13* |  |                        | Certificate 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                                                                        |      |  |         |        |  |             |          |  |          |        |  |  |  |  |  | 



|  |               
|- | --------------
|* | Filed herewith



|  |                                                                                                                                                        
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment requested as to certain portions, which
    portions have been filed separately with the Securities and
    Exchange Commission.