##### Table of Contents

UNITED STATES

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, 2006

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to ____________.
o

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934
o

Date of event requiring this shell company report
____________.

Commission file number: 1-15000

Infineon Technologies AG

(Exact name of Registrant as specified in its charter)

Federal Republic of Germany

(Jurisdiction of incorporation or organization)

Am Campeon 1-12,

D-85579 Neubiberg

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
    Ordinary shares, notional value
    2.00 per share * |  | New York Stock ExchangeNew 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






x o




|                             |  |                        |  |                            | 
|---------------------------- |  | ---------------------- |  | -------------------------- | 
|Large accelerated
    filerx |  | Accelerated
    filero |  | Non-accelerated
    filero



o x




o x






o o










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##### Table of Contents

INFINEON TECHNOLOGIES AG

ANNUAL REPORT ON FORM 20-F

FOR THE FINANCIAL YEAR ENDED

SEPTEMBER 30, 2006



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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                                                    |  |      | 111    | 
|          |  | Risk
    Factors                                                                 |  |      | 42     | 
|Item 4:   |  | Information on the Company:                                                      |  |      |        | 
|          |  | History and
    Development of the Company                                       |  |      | 53     | 
|          |  | Business
    Overview                                                            |  |      | 53     | 
|          |  | Organizational
    Structure                                                     |  |      | 109    | 
|          |  | Property,
    Plant and Equipment                                                |  |      | 70; 87 | 
|Item 4A:  |  | Unresolved Staff Comments                                                        |  |      | none   | 
|Item 5:   |  | Operating and
    Financial Review and Prospects                                 |  |      | 2      | 
|          |  | Operating
    Results                                                            |  |      | 8      | 
|          |  | Liquidity and
    Capital Resources                                              |  |      | 21     | 
|          |  | Research and
    Development; Patents and Licenses                               |  |      | 75     | 
|          |  | Trend
    Information                                                            |  |      | 38     | 
|          |  | Off-Balance
    Sheet Arrangements                                               |  |      | 24     | 
|          |  | Contractual
    Obligations                                                      |  |      | 23     | 
|Item 6:   |  | Directors, Senior Management and
    Employees:                                  |  |      |        | 
|          |  | Directors and
    Senior Management                                              |  |      | 88     | 
|          |  | Compensation                                                                     |  |      | 97     | 
|          |  | Board
    Practices                                                              |  |      | 94     | 
|          |  | Employees                                                                        |  |      | 27     | 
|          |  | Share
    Ownership                                                              |  |      | 102    | 
|Item 7:   |  | Major Shareholders and Related
    Party Transactions:                           |  |      |        | 
|          |  | Major
    Shareholders                                                           |  |      | 102    | 
|          |  | Related Party
    Transactions                                                   |  |      | 103    | 
|Item 8:   |  | Financial
    Information                                                        |  |      | F-1    | 
|          |  | Litigation                                                                       |  |      | 80     | 
|          |  | Dividend
    Policy                                                              |  |      | 109    | 
|Item 9:   |  | The Offer and Listing:                                                           |  |      |        | 
|          |  | Price History
    of the Stock                                                   |  |      | 110    | 
|          |  | Markets                                                                          |  |      | 110    | 
|Item 10:  |  | Additional Information:                                                          |  |      |        | 
|          |  | Articles of
    Association                                                      |  |      | 104    | 
|          |  | Material
    Contracts                                                           |  |      | 120    | 
|          |  | Exchange
    Controls                                                            |  |      | 116    | 
|          |  | Taxation                                                                         |  |      | 112    | 
|          |  | Subsidiary
    Information                                                       |  |      | 109    | 
|Item 11:  |  | Quantitative
    and Qualitative Disclosure About Market Risk                    |  |      | 35     | 
|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                                                      |  |      | 117    | 
|Item 16A: |  | Audit
    Committee Financial Expert                                             |  |      | 119    | 
|Item 16B: |  | Code of
    Ethics                                                               |  |      | 120    | 
|Item 16C: |  | Principal
    Accountant Fees and Services                                       |  |      | 120    | 
|Item 16D: |  | Exemption from
    the Listing Standards for Audit Committees                    |  |      | 120    | 
|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



---



##### 

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 2006 Financial Year                             |      |     | 2   | 
|                                                    | Our
    Business                                                    |      |     | 4   | 
|                                                    | The
    Semiconductor Industry and Factors that Impact Our Business |      |     | 4   | 
|                                                    | Results of
    Operations                                           |      |     | 8   | 
|                                                    | Financial
    Condition                                             |      |     | 19  | 
|                                                    | Financial
    Ratios                                                |      |     | 20  | 
|                                                    | Liquidity                                                           |      |     | 21  | 
|                                                    | Capital
    Requirements                                            |      |     | 23  | 
|                                                    | Other
    Matters                                                   |      |     | 27  | 
|                                                    | Critical
    Accounting Policies                                    |      |     | 27  | 
|                                                    | Quantitative
    and Qualitative Disclosure About Market Risk       |      |     | 35  | 
|                                                    | Subsequent
    Events                                               |      |     | 37  | 
|                                                    | Outlook                                                             |      |     | 38  | 
|Risk
    Factors                                    |                                                                     |      | 42  |    
|Business                                            |                                                                     |      | 53  |    
|                                                    | Overview                                                            |      |     | 53  | 
|                                                    | Industry
    Background                                             |      |     | 55  | 
|                                                    | Strategy                                                            |      |     | 55  | 
|                                                    | Products and
    Applications                                       |      |     | 56  | 
|                                                    | Customers,
    Sales and Marketing                                  |      |     | 65  | 
|                                                    | Competition                                                         |      |     | 68  | 
|                                                    | Manufacturing                                                       |      |     | 69  | 
|                                                    | Research and
    Development                                        |      |     | 75  | 
|                                                    | Intellectual
    Property                                           |      |     | 77  | 
|                                                    | Strategic
    Alliances                                             |      |     | 78  | 
|                                                    | Acquisitions
    and Dispositions                                   |      |     | 79  | 
|                                                    | Employees                                                           |      |     | 80  | 
|                                                    | Legal
    Matters                                                   |      |     | 80  | 
|                                                    | Environmental
    Protection and Sustainable Management             |      |     | 85  | 
|                                                    | Real Estate                                                         |      |     | 87  | 
|Management                                          |                                                                     |      | 88  |    
|Principal
    Shareholders                          |                                                                     |      | 102 |    
|Related Party
    Transactions and Relationships    |                                                                     |      | 103 |    
|Articles of
    Association                         |                                                                     |      | 104 |    
|Additional
    Information                          |                                                                     |      | 109 |    
|                                                    | Organizational
    Structure                                        |      |     | 109 | 
|                                                    | Dividend
    Policy                                                 |      |     | 110 | 
|                                                    | Market
    Information                                              |      |     | 110 | 
|                                                    | Exchange
    Rates                                                  |      |     | 111 | 
|                                                    | Taxation                                                            |      |     | 112 | 
|                                                    | Exchange
    Controls and Limitations Affecting Shareholders        |      |     | 116 | 
|                                                    | Documents on
    Display                                            |      |     | 117 | 
|                                                    | Controls and
    Procedures                                         |      |     | 117 | 
|                                                    | Audit
    Committee Financial Expert                                |      |     | 119 | 
|                                                    | Code of
    Ethics                                                  |      |     | 120 | 
|                                                    | Principal
    Accountant Fees and Services                          |      |     | 120 | 
|                                                    | Exemptions
    from the Listing Standards for Audit Committees      |      |     | 120 | 
|                                                    | Material
    Contracts                                              |      |     | 120 | 
|Glossary                                            |                                                                     |      | 122 |    
|Index to
    Consolidated Financial Statements      |                                                                     |      | F-1 |    
|EX-1.1                                             
|EX-4.19.1                                          
|EX-4.25.1                                          
|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 = $1.2687,
the noon buying rate of the Federal Reserve Bank of New York for
euro on September 29, 2006. The noon buying rate for euro
on November 28, 2006 was
1.00 = $1.3162.
Our financial year ends on September 30 of each year.
References to any financial year 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 including Qimonda, and its
    predecessor, the former semiconductor group of Siemens AG; and
    Qimonda are to Qimonda AG and its subsidiaries,
    and its predecessor, the former memory products segment of
    Infineon.This annual report contains market data that has been prepared
or reported by Gartner Inc. and its unit Dataquest, Inc.
(together Gartner Dataquest), Frost & Sullivan,
IC Insights, Inc. (IC Insights), IMS Research Ltd.
(IMS Research), iSuppli Corporation
(iSuppli), Strategy Analytics, Inc. (Strategy
Analytics), and World Semiconductor Trade Statistics
(WSTS).

Figures presented in tabular format may not add up due to
rounding.

Special terms used in the semiconductor industry are defined in
the glossary.

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.

Principal Business Address

Our principal business address is Am Campeon 1-12, D-85579
Neubiberg, Federal Republic of Germany

iii



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##### Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

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

We have derived the selected consolidated statement of
operations and cash flow data for the 2002 through 2006
financial years and the selected consolidated balance sheet data
at September 30, 2002 through 2006 from our consolidated
financial statements, which have been prepared in accordance
with U.S. GAAP and audited by KPMG Deutsche
Treuhand-Gesellschaft Aktiengesellschaft
Wirtschaftsprüfungsgesellschaft, an independent registered
public accounting firm.

|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |   |        |       |   |   |        |       |  
|-------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------ | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ---- |  | ---- | ------ | ----- | ---------- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                             |                        | For the years ended September 30,(1) |       
|                                                                                             |                        |                                      |       
|                                                                                             |                        | 2002                                 |        |       | 2003 |   |        | 2004  |   |   | 2005   |      |  | 2006 |        |       | 2006(2)(3) |  
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|                                                                                             |                        | (in millions, except per share data) |       
|Selected Consolidated Statement
    of Operations data                                       |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |   |        |       |   |   |        |      
|Net sales                                                                                    |                        |                                     | 4,890  |       |      |  | 6,152  |       |   |  | 7,195  |      |  |     | 6,759  |       |            |  | 7,929  |       |   | $ | 10,060 |      
|Cost of goods sold                                                                           |                        |                                      | 4,289  |       |      |   | 4,614  |       |   |   | 4,670  |      |  |      | 4,909  |       |            |   | 5,854  |       |   |   | 7,427  |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Gross profit                                                                                 |                        |                                      | 601    |       |      |   | 1,538  |       |   |   | 2,525  |      |  |      | 1,850  |       |            |   | 2,075  |       |   |   | 2,633  |      
|Research and development expenses                                                            |                        |                                      | 1,060  |       |      |   | 1,089  |       |   |   | 1,219  |      |  |      | 1,293  |       |            |   | 1,249  |       |   |   | 1,585  |      
|Selling, general and administrative
    expenses                                             |                        |                                      | 643    |       |      |   | 679    |       |   |   | 718    |      |  |      | 655    |       |            |   | 751    |       |   |   | 953    |      
|Restructuring
    charges(4)                                                                 |                        |                                      | 16     |       |      |   | 29     |       |   |   | 17     |      |  |      | 78     |       |            |   | 23     |       |   |   | 29     |      
|Other operating (income) expense,
    net                                                    |                        |                                      | (46    | )     |      |   | 85     |       |   |   | 257    |      |  |      | 92     |       |            |   | 108    |       |   |   | 137    |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Operating income (loss)                                                                      |                        |                                      | (1,072 | )     |      |   | (344   | )     |   |   | 314    |      |  |      | (268   | )     |            |   | (56    | )     |   |   | (71    | )    
|Interest expense, net                                                                        |                        |                                      | (25    | )     |      |   | (52    | )     |   |   | (41    | )    |  |      | (9     | )     |            |   | (92    | )     |   |   | (117   | )    
|Equity in earnings (losses) of
    associated companies, net                                 |                        |                                      | (47    | )     |      |   | 18     |       |   |   | (14    | )    |  |      | 57     |       |            |   | 78     |       |   |   | 99     |      
|Gain (loss) on subsidiaries and
    associated company share issuance, net
    (5)           |                        |                                      | 18     |       |      |   | (2     | )     |   |   | 2      |      |  |      |       |       |            |   | 19     |       |   |   | 24     |      
|Other non-operating income
    (expense), net                                                |                        |                                      | (41    | )     |      |   | 21     |       |   |   | (64    | )    |  |      | 26     |       |            |   | (33    | )     |   |   | (42    | )    
|Minority interests                                                                           |                        |                                      | 7      |       |      |   | 8      |       |   |   | 18     |      |  |      | 2      |       |            |   | (23    | )     |   |   | (29    | )    
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Income (loss) before income taxes                                                            |                        |                                      | (1,160 | )     |      |   | (351   | )     |   |   | 215    |      |  |      | (192   | )     |            |   | (107   | )     |   |   | (136   | )    
|Income tax (expense) benefit                                                                 |                        |                                      | 143    |       |      |   | (84    | )     |   |   | (154   | )    |  |      | (120   | )     |            |   | (161   | )     |   |   | (204   | )    
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Net income (loss) from continuing
    operations                                             |                        |                                      | (1,017 | )     |      |   | (435   | )     |   |   | 61     |      |  |      | (312   | )     |            |   | (268   | )     |   |   | (340   | )    
|Net loss from discontinued operation                                                         |                        |                                      | (4     | )     |      |   |       |       |   |   |       |      |  |      |       |       |            |   |       |       |   |   |       |      
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Net income (loss)                                                                            |                        |                                     | (1,021 | )     |      |  | (435   | )     |   |  | 61     |      |  |     | (312   | )     |            |  | (268   | )     |   | $ | (340   | )    
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Basic and diluted earnings (loss)
    per share:                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |   |        |       |   |   |        |      
|                                                                                             | Continuing operations  |                                      |       | (1.46 | )    |   |       | (0.60 | ) |   |       | 0.08 |  |      |       | (0.42 | )          |   |       | (0.36 | ) |   | $      | (0.46 | )
|                                                                                             | Discontinued operation |                                      |        | (0.01 | )    |   |        |      |   |   |        |     |  |      |        |      |            |   |        |      |   |   |        |      |  
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|                                                                                             | Net (loss) income      |                                      |       | (1.47 | )    |   |       | (0.60 | ) |   |       | 0.08 |  |      |       | (0.42 | )          |   |       | (0.36 | ) |   | $      | (0.46 | )
|                                                                                             |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |  
|Weighted average shares
    outstanding  basic (millions)                                   |                        |                                      | 695    |       |      |   | 721    |       |   |   | 735    |      |  |      | 748    |       |            |   | 748    |       |   |   | 748    |      
|Weighted average shares
    outstanding  diluted (millions)                                 |                        |                                      | 695    |       |      |   | 721    |       |   |   | 737    |      |  |      | 748    |       |            |   | 748    |       |   |   | 748    |      
|Selected Consolidated Balance
    Sheet data                                                 |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |   |        |       |   |   |        |      
|Cash and cash equivalents                                                                    |                        |                                     | 1,199  |       |      |  | 969    |       |   |  | 608    |      |  |     | 1,148  |       |            |  | 2,040  |       |   | $ | 2,587  |      
|Marketable securities                                                                        |                        |                                      | 738    |       |      |   | 1,784  |       |   |   | 1,938  |      |  |      | 858    |       |            |   | 615    |       |   |   | 780    |      
|Working capital (deficit),
    excluding cash and cash equivalents and marketable securities |                        |                                      | (129   | )     |      |   | 419    |       |   |   | (124   | )    |  |      | 186    |       |            |   | (279   | )     |   |   | (353   | )    
|Total assets                                                                                 |                        |                                      | 10,918 |       |      |   | 10,875 |       |   |   | 10,864 |      |  |      | 10,284 |       |            |   | 11,185 |       |   |   | 14,190 |      
|Short-term debt, including current
    portion of long-term debt                             |                        |                                      | 120    |       |      |   | 149    |       |   |   | 571    |      |  |      | 99     |       |            |   | 797    |       |   |   | 1,011  |      
|Long-term debt, excluding current
    portion                                                |                        |                                      | 1,710  |       |      |   | 2,343  |       |   |   | 1,427  |      |  |      | 1,566  |       |            |   | 1,208  |       |   |   | 1,533  |      
|Shareholders equity                                                                         |                        |                                      | 6,158  |       |      |   | 5,666  |       |   |   | 5,978  |      |  |      | 5,629  |       |            |   | 5,315  |       |   |   | 6,743  |      
|Selected Consolidated Cash Flow
    data                                                     |                        |                                      |        |       |      |   |        |       |   |   |        |      |  |      |        |       |            |   |        |       |   |   |        |      
|Net cash provided by operating
    activities                                                |                        |                                      | 226    |       |      |   | 731    |       |   |   | 1,857  |      |  |      | 1,039  |       |            |   | 974    |       |   |   | 1,236  |      
|Net cash used in investing
    activities                                                    |                        |                                      | (1,244 | )     |      |   | (1,522 | )     |   |   | (1,809 | )    |  |      | (238   | )     |            |   | (824   | )     |   |   | (1,045 | )    
|Depreciation and amortization
    expenses                                                   |                        |                                     | 1,370  |       |      |  | 1,437  |       |   |  | 1,320  |      |  |     | 1,316  |       |            |  | 1,405  |       |   | $ | 1,783  |      

Notes




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Columns may not add due to rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Unaudited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | Converted from euro into U.S. dollars at an exchange rate of
    1 = $1.2687, which was
    the noon buying rate on September 29, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(4) | These charges relate to the implementation of our cost-reduction
    programs and initiatives taken to restructure our organization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | 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). In 2006, Inotera completed an initial public
    offering on the Taiwanese Stock Exchange and a public offering
    on the Luxembourg Stock Exchange. As a result of these
    transactions, we recognized a non-operating gain of
    72 million. This
    gain was partially offset by a non-operating loss of
    53 million
    resulting from the dilution of our interest in Qimonda following
    its initial public offering on the New York Stock Exchange.

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 2006 Financial Year

In our 2006 financial year, which ended September 30, both
the global economy and the semiconductor market were slightly
stronger than in the prior year. As a global player in the
semiconductor market, we were influenced by these more favorable
macroeconomic and market conditions. In spite of these improved
market conditions, we were also impacted by ongoing strong
pricing pressure in all of our operating segments.

The following were the key developments in our business during
the 2006 financial year:




    Our net sales increased by 17%, from
    6,759 million in
    the 2005 financial year to
    7,929 million in
    the 2006 financial year. Our earnings before interest and taxes
    (EBIT) increased from negative
    183 million in
    the 2005 financial year to negative
    15 million in the
    2006 financial year. Our cash flow from operations decreased
    from
    1,039 million in
    the 2005 financial year to
    974 million in
    the 2006 financial year.
    In August 2006, Qimonda, our memory business, successfully
    completed an initial public offering on the New York Stock
    Exchange of 42 million new ordinary shares, together with
    6.3 million existing shares from Infineon in an
    over-allotment option, at a price of $13 per share. We incurred
    aggregate charges of approximately
    80 million
    primarily in connection with the formation of Qimonda, the
    dilution of our interest in Qimonda following its initial public
    offering, as well as our sale of Qimonda shares upon exercise of
    the underwriters over-allotment option.
    In March and May 2006, our joint venture Inotera Memories, Inc.
    (Inotera) successfully completed an initial public
    offering on the Taiwanese Stock Exchange of 200 million
    ordinary shares and a public offering on the Luxembourg Stock
    Exchange of 40 million global depositary shares
    (representing 400 million ordinary shares), each at an
    issuance price of NT$33 per ordinary share. As a result of these
    transactions, we recognized non-operating gains of
    72 million.
    In June 2006, we and MOSAID Technologies Inc.
    (MOSAID) reached agreements settling all claims
    between us and licensing to us the MOSAID patent portfolio for
    use in our current and future products. Under the terms of the
    settlement agreements, MOSAID purchased fifty patents from us.
    We retain royalty-free lives of the patents licenses
    to use these patents in the manufacturing and sale of any
    products. In addition, MOSAID granted us a six year license to
    use any MOSAID patents in the manufacturing and sale of
    semiconductor products, as well as a lives of
    patents license to those MOSAID patent families that had
    been in dispute.
    In August 2006, Infineon and Qimonda entered into settlement
    agreements with Tessera Inc. (Tessera) with respect
    to all of Tesseras patent-infringement and
    anti-trust-related claims. Pursuant to the settlement, Infineon
    and Qimonda entered into six-year license agreements with
    Tessera that provide Infineon and Qimonda a world-wide,
    non-exclusive, non-transferable and non-sub licensable license
    to use a portfolio of Tessera patents.
    We recognized charges of
    91 million in the
    2006 financial year within the Communication Solutions segment,
    primarily in connection with the insolvency of BenQs
    German subsidiary.
    We continued to invest heavily in research and development and
    achieved a number of significant milestones during the year,
    including the introduction of:

2



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##### Table of Contents


    highly-secure identification chips for the new United States
    government electronic passport, designed to facilitate
    international travel by allowing automatic identity
    verification, faster immigration inspections and greater border
    protection and security;
    the most advanced 32-bit embedded flash microcontrollers for
    automotive applications in series production, making us the
    first semiconductor manufacturer worldwide to achieve
    high-volume output of embedded flash products using
    130-nanometer technology;
    a family of 100V MOSFET devices that can reduce the parts count
    in switched mode power supplies (SMPSs) by 30%, and reduces
    losses of up to 20%, compared to solutions based on standard
    technologies.
    OptiMOS®
    2 offers optimum performance in AC/DC and DC/DC power conversion
    applications in computer servers, and telecommunications and
    networking systems;
    SMARTi 3GE, the worlds first one-chip, six-band WCDMA
    (Wideband Code Division Multiple Access) and quad-band EDGE
    radio frequency transceiver for mobile phones manufactured in RF
    CMOS technology;
    S-GOLD3H, a baseband processor for mobile phones supporting
    next-generation HSDPA (High-Speed Downlink Packet Access) data
    rates of up to 7.2 megabits per second (Mbit/s);
    E-GOLDvoice, a GSM single-chip for mobile phones which
    integrates a baseband processor, radio frequency transceiver,
    power management unit and RAM, achieving a new record level of
    silicon integration for mobile communications; and
    Danube, a single-chip solution for ADSL2+ broadband IAD
    (integrated access device) and home gateway applications
    enabling services such as VoIP, video-conferencing and IPTV.


    Qimonda likewise achieved a number of significant milestones
    during the year, including:


    the introduction of DDR2 Fully-Buffered DIMMs in high volume as
    a new technology for Intels Bensley server platforms;
    the introduction of the industrys first DDR3 SO-DIMM
    samples to ATI for future notebook designs; and
    becoming the preferred supplier of GDDR3 Graphics RAM for
    Microsofts game console XBox 360.

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


    opened our first Asia-based front-end power fab located in Kulim
    Hi-Tech Park, Malaysia. We plan to invest approximately
    $1 billion in this production facility. Maximum capacity
    will be approximately 100,000 wafer starts per month using
    200-millimeter wafers. The new facility will produce power and
    logic chips used in industrial and automotive power applications;
    developed additional 130-nanometer process options to fulfill
    the needs of specialty applications;
    achieved significant progress in our advanced 65-nanometer logic
    technology, with the successful manufacture of our first
    cell-phone chips;
    are developing a 45-nanometer logic technology, with the first
    working circuits in 45-nanometer logic technology already proven
    in silicon;
    signed an agreement with Chartered Semiconductor Manufacturing
    Ltd. (Chartered Semiconductor) regarding the
    manufacturing of
    65-nanometer logic
    products;
    finalized the first phase of the ramp-up of the new
    300-millimeter manufacturing module at Richmond with a capacity
    of 25,000 wafer starts per month;

3



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##### Table of Contents


    announced with Nanya Technology Corporation (Nanya)
    that we have successfully qualified the next generation
    75-nanometer DRAM trench technology and the first 512M DDR2
    product that has been jointly developed at Qimondas
    R&D centers in Dresden and Munich, Germany; and
    expanded our foundry relationship with Winbond Electronics
    Corp., Hsinchu, Taiwan (Winbond) to include the
    transfer of next generation
    80-nanometer DRAM
    trench technology.



Our Business

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

Our business is organized into three principal operating
segments serving various markets in the semiconductor industry:




    Our Automotive, Industrial & Multimarket segment designs,
    develops, manufactures and markets semiconductors and complete
    system solutions primarily for use in automotive, industrial and
    security applications, and applications with customer-specific
    product requirements.
    Our Communication Solutions segment designs, develops,
    manufactures and markets a wide range of ICs, other
    semiconductors and complete system solutions for wireline and
    wireless communication applications.
    Our majority-owned subsidiary Qimonda designs memory
    technologies and develops, manufactures, markets and sells a
    large variety of memory products on a module, component and chip
    level.We have two additional segments for reporting purposes, our
Other Operating Segments, which includes remaining activities
for certain product lines that have been disposed of, as well as
other business activities, and our Corporate and Eliminations
segment, which contains items not allocated to our operating
segments, such as certain corporate headquarters costs,
strategic investments, unabsorbed excess capacity and
restructuring costs.





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 for
Qimonda, are increasingly true for our Communication Solutions
segment, and have the least impact on our Automotive, Industrial
& Multimarket segment.

Cyclicality

The 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

4



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##### Table of Contents

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

We and Qimonda attempt to mitigate the impact of cyclicality by
investing in 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 Qimonda, in particular, can improve its gross
margin 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 Expenditures

Semiconductor 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 nearly 50% of the industrys projected 2006
capital spending budgets. 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, particularly at Qimonda.

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. Qimonda, for example, is
developing future DRAM technologies with feature sizes of
58-nanometer together with Nanya. In addition, Qimonda has
established foundry relationships with partners in Asia,
including Semiconductor Manufacturing International Corporation,
Shanghai, China (SMIC), and Winbond Electronics
Corp., Hsinchu, Taiwan (Winbond), to increase its
manufacturing capacities, and therefore its potential revenues,
without investing in additional manufacturing assets. In our
logic area, our principal alliances are with International
Business Machines Corporation (IBM), New York,
United States of America, Chartered Semiconductor Manufacturing
Ltd., Singapore (Chartered Semiconductor) and
Samsung Electronics Co. Ltd., Seoul, Korea (Samsung)
for CMOS development and manufacturing at 65-nanometer and
45-nanometer process technologies, with United Microelectronics
Corporation, Taipei, Taiwan (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 Qimondas
capacity is based on 110-nanometer structure sizes. In addition,
90-nanometer technology is currently in ramp-up and Qimonda has
already started commercial production based on 75-nanome-

5



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##### Table of Contents

ter structure sizes, jointly developed with Nanya. Qimonda has
extended its 300-millimeter capacity share during the 2006
financial year with the continuous ramp up of the facilities of
Inotera, its joint venture with Nanya, and the ramp-up of
foundry capacities at SMIC in Beijing, Winbond in Taichung and
Qimondas own facility in Richmond. Qimonda plans to
further extend the share of its memory production on
300-millimeter wafers with the continuous ramp-up of the
300-millimeter line in Richmond and at the joint venture
Inotera. 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
sites, including our Dresden facility and our manufacturing
joint venture with IBM in Essonnes, France. Additional
130-nanometer process options have been developed to fulfill the
needs of specialty applications. Our 90-nanometer logic
technology is in production and our first cell-phone chips in
our advanced 65-nanometer logic technology have been
successfully manufactured. In addition, we are in the process of
developing a 45-nanometer logic technology. The first working
circuits in 45-nanometer logic technology were proven in silicon
in financial year 2006.

With our planned investment of approximately $1 billion in
the Kulim power manufacturing facility, we will increase our
manufacturing capacity mainly for automotive and industrial
power products by up to 100,000 wafer starts per month using
200-millimeter wafers. At full capacity, this manufacturing
facility is expected to employ about 1,700 people.

Technological
Development and Competition

Sales 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 net sales by optimizing product mix, by increasing unit
sales volume and by continually reducing per-unit production
costs. The growth in volumes depends in part on productivity
improvements in manufacturing. By moving to ever-smaller
structure sizes, 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% and 45% per year and, assuming
constant costs per square inch of silicon, to an approximately
30% cost reduction per bit per year.

Seasonality

Our 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 Cycles

For 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

6



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##### Table of Contents

any. Development cycles affect memory products to a lesser
extent due to the higher degree of standardization for memory
products.

Acquisition
and Divestiture Strategy

A 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
Property

Due to the high-technology nature of the semiconductor industry,
intellectual property (IP), meaning intangible assets relating
to proprietary technology, is of significant importance. 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. We
also derive modest revenues from the licensing of our IP,
generally pursuant to cross licensing arrangements.

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
the flexibility to 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 2006 Financial Year

The growth of the semiconductor market accelerated only slightly
through the first three quarters of the 2006 calendar year
following growth of 7% in the 2005 calendar year, according to
WSTS (World Semiconductor Trade Statistics). In October 2006,
WSTS predicted a growth rate of 8% for the full 2006 calendar
year. According to WSTS, sales in North America are expected to
increase by 11% in the 2006 calendar year. The semiconductor
market in Asia-Pacific is expected to increase by 11%; the
Japanese market is expected to grow by 7%; the European market
is expected to increase slightly by 1%. Sales of non-memory
products (logic chips, analog, discrete and optical components),
which accounted for 78% of the entire market in the first half
of the 2006 calendar year, are predicted to grow by 6% compared
with the 2005 calendar year. Sales of memory products are
predicted to grow by 17% compared with the 2005 calendar year.

Gartner Dataquest predicts worldwide growth in the 2006 calendar
year of 12% for semiconductors in the communications business
(wireless and wireline). Sales of semiconductors for industrial
electronics are predicted to grow by 15%, for automotive
electronics by 6%, for data processing by 8% and for consumer
electronics by 17%.

7



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##### Table of Contents

Results of Operations

Results of Operations as a Percentage of Net Sales

The 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) |       
|                                                                    |  |                                      |       
|                                                                    |  | 2004                                 |        |   | 2005 |  |        | 2006 | 
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Net sales                                                           |  |                                      | 100.0  | % |      |  | 100.0  | %    |  |  | 100.0  | %
|Cost of goods sold                                                  |  |                                      | (64.9) |   |      |  | (72.6) |      |  |  | (73.8) |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Gross profit                                                        |  |                                      | 35.1   |   |      |  | 27.4   |      |  |  | 26.2   |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Research and development expenses                                   |  |                                      | (16.9) |   |      |  | (19.1) |      |  |  | (15.8) |  
|Selling, general and administrative
    expenses                    |  |                                      | (10.0) |   |      |  | (9.7)  |      |  |  | (9.5)  |  
|Restructuring charges                                               |  |                                      | (0.2)  |   |      |  | (1.2)  |      |  |  | (0.3)  |  
|Other operating expense, net                                        |  |                                      | (3.6)  |   |      |  | (1.4)  |      |  |  | (1.4)  |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Operating income (loss)                                             |  |                                      | 4.4    |   |      |  | (4.0)  |      |  |  | (0.8)  |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Interest expense, net                                               |  |                                      | (0.6)  |   |      |  | (0.1)  |      |  |  | (1.2)  |  
|Equity in earnings (losses) of
    associated companies, net        |  |                                      | (0.2)  |   |      |  | 0.9    |      |  |  | 1.0    |  
|Gain on subsidiaries and associated
    company share issuance, net |  |                                      | 0.0    |   |      |  | 0.0    |      |  |  | 0.2    |  
|Other non-operating income
    (expense), net                       |  |                                      | (0.9)  |   |      |  | 0.4    |      |  |  | (0.4)  |  
|Minority interests                                                  |  |                                      | 0.3    |   |      |  | 0.0    |      |  |  | (0.3)  |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Income (loss) before income
    taxes                               |  |                                      | 3.0    |   |      |  | (2.8)  |      |  |  | (1.5)  |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Income tax expense                                                  |  |                                      | (2.1)  |   |      |  | (1.8)  |      |  |  | (2.0)  |  
|                                                                    |  |                                      |        |   |      |  |        |      | 
|Net income (loss)                                                   |  |                                      | 0.9    | % |      |  | (4.6)% |      |  |  | (3.5)% |  
|                                                                    |  |                                      |        |   |      |  |        |      | 



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

Reorganization








8



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##### Table of Contents

Net Sales

We generate our revenues primarily from the sale of our
semiconductor products and systems solutions. In addition, on
average we generated more than 1% of the last three years of our
sales from activities such as 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
    and wireline communication systems, chip cards, 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 made the vast majority of our product sales in the 2006
financial year through our direct sales force, with
approximately 24% of net sales from our logic segments and
approximately 13% of Qimondas net sales 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 Qimonda, resulting from the transfer of technology
to our current and former alliance partners, such as Winbond,
Nanya and ProMOS.

Our net sales 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,      |      
|                                               |                      |                                        |      
|                                               |                      | 2004                                   |       |     | 2005 |  |       | 2006 |  
|                                               |                      |                                        |       |     |      |  |       |      |  
|                                               |                      | (Euro in millions, except percentages) |      
|Net sales                                      |                      |                                        | 7,195 |     |      |  | 6,759 |      |   |  | 7,929 |   
|                                               | Changes year-on-year |                                        |       |     |      |  |       | (6)  | % |  |       | 17 | %
|                                               | Of which:            |                                        |       |     |      |  |       |      |   |  |       |    |  
|License income                                 |                      |                                        | 76    |     |      |  | 175   |      |   |  | 29    |   
|                                               | % of net sales       |                                        |       | 1   | %    |  |       | 3    | % |  |       | 0  | %
|Effect of foreign exchange over
    prior year |                      |                                        | (445) |     |      |  | (177) |      |   |  | 142   |   
|                                               | % of net sales       |                                        |       | (6) | %    |  |       | (3)  | % |  |       | 2  | %
|Impact of acquisitions over prior
    year     |                      |                                        | 29    |     |      |  | 2     |      |   |  | 40    |   
|                                               | % of net sales       |                                        |       | 0   | %    |  |       | 0    | % |  |       | 0  | %




9



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##### Table of Contents

financial year were negatively impacted by the effect of foreign
exchange rates. The effect of foreign exchange over the prior
year is calculated as the estimated change in current year sales
if the average exchange rate for the preceding year is applied
as a constant rate in the current year. The increase in net
sales from entities we acquired since the beginning of the prior
year reflects primarily the inclusion of a full-year
consolidation of sales in the year after the initial
acquisition. The main effect in the 2006 financial year resulted
from the initial consolidation of ALTIS as of December 31,
2005.

Net Sales by Segment

|                                         |  |                                        |       |   |      |  |     |      |  |  |       |   |  |  |     |   |  |  |       |   |  |  |     |  
|---------------------------------------- |  | -------------------------------------- | ----- | - | ---- |  | --- | ---- |  |  | ----- | - |  |  | --- | - |  |  | ----- | - |  |  | --- | -
|                                         |  | For the years ended September 30,      |      
|                                         |  |                                        |      
|                                         |  | 2004                                   |       |   | 2005 |  |     | 2006 | 
|                                         |  |                                        |       |   |      |  |     |      | 
|                                         |  | (Euro in millions, except percentages) |      
|Automotive, Industrial &
    Multimarket |  |                                        | 2,540 |   |      |  | 35  | %    |  |  | 2,516 |   |  |  | 37  | % |  |  | 2,839 |   |  |  | 36  | %
|Communication Solutions                  |  |                                        | 1,689 |   |      |  | 23  |      |  |  | 1,391 |   |  |  | 21  |   |  |  | 1,205 |   |  |  | 15  |  
|Other Operating
    Segments(1)          |  |                                        | 16    |   |      |  |    |      |  |  | 285   |   |  |  | 4   |   |  |  | 310   |   |  |  | 4   |  
|Corporate and
    Eliminations(2)        |  |                                        | (58   | ) |      |  |    |      |  |  | (258  | ) |  |  | (4) |   |  |  | (240  | ) |  |  | (3) |  
|                                         |  |                                        |       |   |      | 
|Subtotal                                 |  |                                        | 4,187 |   |      |  | 58  |      |  |  | 3,934 |   |  |  | 58  |   |  |  | 4,114 |   |  |  | 52  |  
|                                         |  |                                        |       |   |      | 
|Qimonda                                  |  |                                        | 3,008 |   |      |  | 42  |      |  |  | 2,825 |   |  |  | 42  |   |  |  | 3,815 |   |  |  | 48  |  
|                                         |  |                                        |       |   |      | 
|Total                                    |  |                                        | 7,195 |   |      |  | 100 | %    |  |  | 6,759 |   |  |  | 100 | % |  |  | 7,929 |   |  |  | 100 | %
|                                         |  |                                        |       |   |      | 



|    |                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes inter-segment sales of
    273 million and
    256 million for
    financial years ended September 30, 2005 and 2006,
    respectively, from sales of wafers from Infineons
    200-millimeter facility in Dresden to Qimonda under foundry
    agreements.                   
|   
|(2) | Includes the elimination of inter-segment sales of
    273 million and
    256 million for
    financial years ended September 30, 2005 and 2006,
    respectively, from sales of wafers from Infineons
    200-millimeter facility in Dresden to Qimonda under foundry
    agreements.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial & Multimarket  In
    the 2005 financial year, net sales in this segment decreased
    slightly compared to the 2004 financial year, despite a
    continued volume increase in the automotive business. The
    decline was primarily due to strong pricing pressure combined
    with decreased market volumes in the security and chipcard
    business. The segment experienced healthy growth in the 2006
    financial year as volume grew, particularly for automotive and
    industrial power applications, more than offsetting ongoing
    pricing pressure caused by technological developments and
    competition. We experienced continued strong pricing pressure in
    the market for chipcard ICs throughout the 2006 financial year.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Communication Solutions  In the 2005 financial
    year, net sales in the Communication Solutions segment declined
    year-on-year due to a revenue decrease in the wireless business
    primarily caused by lower demand for baseband products 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 net sales trend in the wireline business. The decline
    in net sales in the 2006 financial year was also caused by a
    revenue decrease in the wireless business mainly due to a
    continued decline in demand for baseband products, as well as
    ongoing pricing pressure. This decline was partly compensated by
    a strong revenue increase in the wireline business.                                                                                                                                                                                                                                                                                                                                      
|
| |  | Qimonda  Net sales in the 2005 financial year
    declined compared to the previous year mainly due to pricing
    pressure, particularly 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 consequence
    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

10



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##### Table of Contents

higher-density product generation. Net sales in the 2006
    financial year increased compared to the previous year mainly
    due to increased bit shipments and a favorable U.S. dollar/
    Euro exchange rate. The higher bit shipments resulted from the
    ramp-up of our 300-millimeter manufacturing facility in
    Richmond, the conversion of an increasing share of our
    capacities to our
    90-nanometer
    technology, our access to additional capacities of our joint
    venture partners and our foundries as well as the overall demand
    growth in the DRAM market and our successful diversification in
    new market segments, particularly with our graphic DRAM
    products. These positive effects were partly offset by price
    declines in the DRAM market. The majority of our memory products
    sales were based in 512-Mbit DRAMs in the 2006 financial year.DRAM Price Development

(DRAM LINE GRAPH)

DRAM prices were under substantial pressure during the first
quarter of our 2006 financial year after which they recovered
over the remaining three quarters. Our average per-megabit
selling prices for DRAM products (expressed in U.S. dollars)
were approximately 20% less in 2006 financial year compared with
the 2005 financial year. The per-megabit selling prices in U.S.
dollars at the spot market of our major products with DDR2
interfaces declined sharply at the start of our financial year,
declining around 26% over the first three months. During this
quarter, we produced an excess of DDR2 chips because the
corresponding DDR2 logic chipsets, which are produced by logic
semiconductor manufacturers, were not available in quantities
sufficient for PC manufacturers to absorb the supply of DDR2s in
the market. A portion of the DDR2 chips that we produced
remained unsold and in our inventory until supply of appropriate
logic chipsets caught up. Starting January 2006 prices recovered
quickly for DDR2 chips, gaining around 26% in the next three
months. After a period of strong and stable pricing until May
2006, DDR2 pricing experienced some modest short-lived price
erosion until July 2006 before again rising through to financial
year end due to tight market supply. DDR recovered steadily,
albeit more slowly from the December 2005 low points, continuing
to increase through to the end of our financial year.




    Other Operating Segments  The increase of net
    sales in the 2005 and 2006 financial years resulted mainly from
    the inter-segment sales of wafers from Infineons
    200-millimeter facility
    in Dresden to Qimonda under foundry agreements. Prior to the
    2005 financial year the
    200-millimeter facility
    in Dresden was part of the Qimonda segment and related sales
    were reported within Qimonda.

11



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##### Table of Contents

Net Sales by Region and Customer

|              |  |                                        |       |  |      |  |     |      |  |  |       |  |  |  |     |   |  |  |       |  |  |  |     |  
|------------- |  | -------------------------------------- | ----- |  | ---- |  | --- | ---- |  |  | ----- |  |  |  | --- | - |  |  | ----- |  |  |  | --- | -
|              |  | For the years ended September 30,      |      
|              |  |                                        |      
|              |  | 2004                                   |       |  | 2005 |  |     | 2006 | 
|              |  |                                        |       |  |      |  |     |      | 
|              |  | (Euro in millions, except percentages) |      
|Germany       |  |                                        | 1,675 |  |      |  | 23  | %    |  |  | 1,354 |  |  |  | 20  | % |  |  | 1,327 |  |  |  | 17  | %
|Other Europe  |  |                                        | 1,263 |  |      |  | 18  |      |  |  | 1,210 |  |  |  | 18  |   |  |  | 1,360 |  |  |  | 17  |  
|North America |  |                                        | 1,524 |  |      |  | 21  |      |  |  | 1,504 |  |  |  | 22  |   |  |  | 2,126 |  |  |  | 27  |  
|Asia/Pacific  |  |                                        | 2,263 |  |      |  | 32  |      |  |  | 2,223 |  |  |  | 33  |   |  |  | 2,498 |  |  |  | 31  |  
|Japan         |  |                                        | 364   |  |      |  | 5   |      |  |  | 332   |  |  |  | 5   |   |  |  | 461   |  |  |  | 6   |  
|Other         |  |                                        | 106   |  |      |  | 1   |      |  |  | 136   |  |  |  | 2   |   |  |  | 157   |  |  |  | 2   |  
|              |  |                                        |       |  |      | 
|Total         |  |                                        | 7,195 |  |      |  | 100 | %    |  |  | 6,759 |  |  |  | 100 | % |  |  | 7,929 |  |  |  | 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;                                                                           

12



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##### Table of Contents


    Subcontracted expenses for assembly and test services;
    Production support, including facilities, utilities, quality
    control, automated systems and management functions; and
    Foundry production costs.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 (consolidated since December 31,
2005) and Inotera. Our purchases from these associated and
related companies amounted to
575 million in
the 2006 financial year,
615 million in
the 2005 financial year and
357 million in
the 2004 financial year.

|                   |                      |                                        |       |    |      |  |       |      |   |  |       |    |  
|------------------ | -------------------- | -------------------------------------- | ----- | -- | ---- |  | ----- | ---- | - |  | ----- | -- | -
|                   |                      | For the years ended September 30,      |      
|                   |                      |                                        |      
|                   |                      | 2004                                   |       |    | 2005 |  |       | 2006 |  
|                   |                      |                                        |       |    |      |  |       |      |  
|                   |                      | (Euro in millions, except percentages) |      
|Cost of goods sold |                      |                                        | 4,670 |    |      |  | 4,909 |      |   |  | 5,854 |   
|                   | Changes year-on-year |                                        |       |    |      |  |       | 5    | % |  |       | 19 | %
|                   | % of net sales       |                                        |       | 65 | %    |  |       | 73   | % |  |       | 74 | %
|Gross margin       |                      |                                        | 35    | %  |      |  | 27    | %    |   |  | 26    | % 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial & Multimarket  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. In the 2006 financial year, our
    gross margin recovered mainly due to a reduction of idle
    capacity costs.                                                                                                                                                                                                                                                                                                                        
|
| |  | Communication Solutions  Gross margin
    deteriorated in the 2005 financial year mainly due to increased
    idle capacity costs. In the 2006 financial year, gross margin
    improved mainly as a result of lower idle capacity costs and the
    successful implementation of productivity measures, which more
    than offset the inventory write-downs resulting from the
    insolvency of BenQs German subsidiary.                                                                                                                                                                                                                                                                                                 
|
| |  | Qimonda  Gross margin decreased in the 2005
    financial year, as the improvements of productivity and reduced
    manufacturing costs resulting from the conversion to
    110-nanometer process
    technology and our 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. The gross margin decreased slightly during the
    2006 financial year, falling to 20% from 23% in the 2005
    financial year, primarily as a result of the lower level of
    license income. Excluding the changes in license income,
    Qimondas gross margin would have remained nearly unchanged.

13



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##### Table of Contents

The Qimonda gross margin was under particular pressure early in
    the 2006 financial year when price pressures were higher, and
    improved later in the financial year.Research and Development (R&D) Expenses

Research 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,      |      
|                                  |                      |                                        |      
|                                  |                      | 2004                                   |       |    | 2005 |  |       | 2006 |  
|                                  |                      |                                        |       |    |      |  |       |      |  
|                                  |                      | (Euro in millions, except percentages) |      
|Research and development expenses |                      |                                        | 1,219 |    |      |  | 1,293 |      |   |  | 1,249 |    
|                                  | Changes year-on-year |                                        |       |    |      |  |       | 6    | % |  |       | (3) | %
|                                  | % of net sales       |                                        |       | 17 | %    |  |       | 19   | % |  |       | 16  | %
|Government subsidies              |                      |                                        | 74    |    |      |  | 50    |      |   |  | 67    |    
|                                  | % of net sales       |                                        |       | 1  | %    |  |       | 1    | % |  |       | 1   | %





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial & Multimarket 
    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
    businesses. During the 2006 financial year, R&D expenses
    remained approximately on the same level as in 2005 financial
    year in absolute terms and slightly decreased as a percentage of
    sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Communication Solutions  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. In
    the 2006 financial year, R&D expenses further declined in
    absolute terms and remained stable as a percentage of net sales
    compared to the 2005 financial year as the effect of previously
    implemented efficiency programs was realized during the 2006
    financial year.
|
| |  | Qimonda  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.
    In the 2006 financial year, R&D expenses increased again in
    absolute terms due to our effort to strengthen our development
    capabilities with respect to next-generation memory technologies
    and the further diversification of our portfolio of memory
    products. They decreased as a percentage of net sales due to
    increased net sales.                                                                                                                                                                                                                                                                                                                                                                          

14



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##### Table of Contents

Selling, General and Administrative (SG&A)
Expenses

Selling 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,             |    
|                                                 |                      |                           |    
|                                                 |                      | 2004                      |     |    | 2005 |  |     | 2006 |  
|                                                 |                      |                           |     |    |      |  |     |      |  
|                                                 |                      | (Euro in millions, except |    
|                                                 |                      | percentages)              |    
|Selling, general and administrative
    expenses |                      |                           | 718 |    |      |  | 655 |      |   |  | 751 |   
|                                                 | Changes year-on-year |                           |     |    |      |  |     | (9)  | % |  |     | 15 | %
|                                                 | % of net sales       |                           |     | 10 | %    |  |     | 10   | % |  |     | 9  | %

  


Other Items Affecting Earnings


|                                                                    |                |                           |      |     |      |  |    |      |   |  |      |     |  
|------------------------------------------------------------------- | -------------- | ------------------------- | ---- | --- | ---- |  | -- | ---- | - |  | ---- | --- | -
|                                                                    |                | For the years ended       |     
|                                                                    |                | September 30,             |     
|                                                                    |                |                           |     
|                                                                    |                | 2004                      |      |     | 2005 |  |    | 2006 |  
|                                                                    |                |                           |      |     |      |  |    |      |  
|                                                                    |                | (Euro in millions, except |     
|                                                                    |                | percentages)              |     
|Restructuring charges                                               |                |                           | 17   |     |      |  | 78 |      |   |  | 23   |    
|                                                                    | % of net sales |                           |      | 0   | %    |  |    | 1    | % |  |      | 0   | %
|Other operating expense, net                                        |                |                           | 257  |     |      |  | 92 |      |   |  | 108  |    
|                                                                    | % of net sales |                           |      | 4   | %    |  |    | 1    | % |  |      | 1   | %
|Equity in (losses) earnings of
    associated companies, net        |                |                           | (14) |     |      |  | 57 |      |   |  | 78   |    
|                                                                    | % of net sales |                           |      | (0) | %    |  |    | 1    | % |  |      | 1   | %
|Gain on subsidiaries and associated
    company share issuance, net |                |                           | 2    |     |      |  |   |      |   |  | 19   |    
|                                                                    | % of net sales |                           |      | 0   | %    |  |    | 0    | % |  |      | 0   | %
|Other non-operating
    (expense) income, net                       |                |                           | (64) |     |      |  | 26 |      |   |  | (33) |    
|                                                                    | % of net sales |                           |      | (1) | %    |  |    | 0    | % |  |      | (0) | %

Restructuring Charges.


Other Operating Expense, Net. 


15



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##### Table of Contents

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. In the 2006 financial year, other
operating expenses consisted mainly of goodwill and intangible
assets impairment charges of
38 million,
antitrust related charges of
23 million, the
settlement of Tessera litigation of
37 million, and a
loss of
12 million from
our sale of Qimonda shares due to the exercise of the
underwriters over-allotment option in connection with the
initial public offering of Qimonda.

Equity in (Losses) Earnings of Associated Companies.Our
principal associated company is currently Inotera, as ALTIS has
been fully consolidated as of December 31, 2005. Inotera is
a DRAM manufacturer and is reflected in the results of Qimonda;
our equity in its earnings has been sensitive to fluctuations in
the price of DRAM and is reflected in the results of Qimonda.

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 and 2006 financial years, Inotera
contributed the majority of our equity in earnings from
associated companies, reflecting the start of volume production
by that joint venture in the 2005 financial year.

Gain on subsidiaries and associated company share issuance,
net  In August 2006, Qimonda successfully
completed an initial public offering on the New York Stock
Exchange of 42 million new ordinary shares, together with
6.3 million ordinary shares from Infineon in an
over-allotment option, at a price of $13 per share. We realized
a non-operating loss of
53 million from
the dilution of our interest in Qimonda following its initial
public offering.

In March and May 2006, our joint venture Inotera successfully
completed an initial public offering on the Taiwanese Stock
Exchange of 200 million ordinary shares and a public
offering on the Luxembourg Stock Exchange of 40 million
global depositary shares (representing 400 million common
shares), each at an issuance price of NT$33 per ordinary share.
As a result of these transactions, we recognized a non-operating
gain of
72 million.

Other Non-Operating (Expense) Income, Net.Other
non-operating income and expense consists of various items in
different periods 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. In
the 2006 financial year, the non-operating expenses consisted
mainly of
31 million
related to net losses from foreign currency derivatives and
foreign currency transactions and investment-related impairment
charges of
13 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

16



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##### Table of Contents

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, |    
|                        |                       |                                   |    
|                        |                       | 2004                              |     |    | 2005 |  |      | 2006 | 
|                        |                       |                                   |     |    |      |  |      |      | 
|                        |                       | (Euro in millions)                |    
|Net income (loss)       |                       |                                   | 61  |    |      |  | (312 | )    |  |  | (268 | ) 
|Add: Income tax expense |                       |                                   | 154 |    |      |  | 120  |      |  |  | 161  |   
|                        | Interest expense, net |                                   |     | 41 |      |  |      | 9    |  |  |      | 92 | 
|                        |                       |                                   |     |    |      |  |      |      | 
|EBIT                    |                       |                                   | 256 |    |      |  | (183 | )    |  |  | (15  | ) 
|                        |                       |                                   |     |    |      |  |      |      | 



|                                         |  |                                   |      |  |      |  |       |      |  |  |       | 
|---------------------------------------- |  | --------------------------------- | ---- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                         |  | For the years ended September 30, |     
|                                         |  |                                   |     
|                                         |  | 2004                              |      |  | 2005 |  |       | 2006 | 
|                                         |  |                                   |      |  |      |  |       |      | 
|                                         |  | (Euro in millions)                |     
|Automotive, Industrial &
    Multimarket |  |                                   | 252  |  |      |  | 134   |      |  |  | 246   | 
|Communication Solutions                  |  |                                   | (44) |  |      |  | (295) |      |  |  | (231) | 
|Other Operating Segments                 |  |                                   | (75) |  |      |  | 4     |      |  |  | 4     | 
|Corporate and Eliminations               |  |                                   | (39) |  |      |  | (137) |      |  |  | (236) | 
|                                         |  |                                   |      |  |      |  |       |      | 
|Subtotal                                 |  |                                   | 94   |  |      |  | (294) |      |  |  | (217) | 
|                                         |  |                                   |      |  |      |  |       |      | 
|Qimonda(1)                               |  |                                   | 162  |  |      |  | 111   |      |  |  | 202   | 
|                                         |  |                                   |      |  |      |  |       |      | 
|Total                                    |  |                                   | 256  |  |      |  | (183) |      |  |  | (15)  | 
|                                         |  |                                   |      |  |      |  |       |      | 



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | EBIT results of Qimonda for the period following its IPO are
    reported net of minority interest results.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automotive, Industrial & Multimarket  The
    EBIT decline in the 2005 financial year resulted primarily from
    the deterioration of the gross margin. The EBIT improvement in
    the 2006 financial year was mainly due to higher sales volumes
    and improved gross margin, partially offset by continued strong
    price pressure especially in the automotive and chipcard
    businesses. In the 2005 and 2006 financial years, 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 Solutions  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. In the 2006 financial year,
    EBIT was negatively impacted by charges aggregating
    91 million,
    primarily in connection with the insolvency of BenQs
    German subsidiary. Despite these charges, EBIT improved in the
    2006 financial year mainly due to lower idle capacity costs and
    the implementation of cost reduction measures.                                         
|
| |  | Qimonda  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 was not entirely offset by productivity
    improvements and increasing license revenue. In the 2006
    financial year, EBIT increased primarily due to sales volume
    growth, higher bit shipments and a favorable
    U.S dollar/Euro exchange rate compared to the 2005
    financial year.                      

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##### Table of Contents


    Other Operating Segments  EBIT in the 2005
    financial year was positively impacted by a gain of
    13 million
    realized on the sale of our venture capital activities, which
    were impaired in the 2004 financial year. The EBIT in the 2006
    financial year remained unchanged compared to the 2005 financial
    year.
    Corporate and Elimination  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. The EBIT decline in the 2006 financial year was
    mainly due to aggregate charges of approximately
    80 million
    incurred in connection with the formation of Qimonda, the
    dilution of our interest in Qimonda following its IPO, as
    well as our sale of Qimonda shares upon exercise of the
    underwriters over-allotment option.Interest Expense, Net

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

|                      |                |                                        |      |      |   |      |     |   |   |  |      |     |  
|--------------------- | -------------- | -------------------------------------- | ---- | ---- | - | ---- | --- | - | - |  | ---- | --- | -
|                      |                | For the years ended September 30,     
|                      |                |                                       
|                      |                | 2004                                   |      | 2005 |   | 2006
|                      |                |                                        |      |      |   |     
|                      |                | (Euro in millions, except percentages)
|Interest expense, net |                |                                        | (41) |      |   |      | (9) |   |   |  | (92) |    
|                      | % of net sales |                                        |      | (1)  | % |      |     | 0 | % |  |      | (1) | %

 


Income Taxes


|                   |                |                                        |       |     |      |  |       |      |   |  |       |     |  
|------------------ | -------------- | -------------------------------------- | ----- | --- | ---- |  | ----- | ---- | - |  | ----- | --- | -
|                   |                | For the years ended September 30,      |      
|                   |                |                                        |      
|                   |                | 2004                                   |       |     | 2005 |  |       | 2006 |  
|                   |                |                                        |       |     |      |  |       |      |  
|                   |                | (Euro in millions, except percentages) |      
|Income tax expense |                |                                        | (154) |     |      |  | (120) |      |   |  | (161) |    
|                   | % of net sales |                                        |       | (2) | %    |  |       | (2)  | % |  |       | (2) | %
|Effective tax rate |                |                                        | (72)  | %   |      |  | (63)  | %    |   |  | (150) | %  

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##### Table of Contents

tion. We expect to continue to recognize no tax benefits in
these jurisdictions until we have ceased to be in a cumulative
loss position for the preceding three-year period.

Net Income (Loss)

In the 2004 financial year, we were profitable due to sales
volume growth, manufacturing efficiencies and cost reduction
efforts, although the impact was reduced through increased
charges for impairments, antitrust-related matters and tax
expense. In the 2005 financial year, the net loss incurred
resulted primarily from the combination of lower revenues and
gross margin, long-term asset impairments, restructuring
measures and tax expense. In the 2006 financial year, the net
loss incurred was primarily due to charges resulting from the
insolvency of BenQs German subsidiary, the initial public
offering of Qimonda, as well as the settlement of litigation. In
addition, in the 2006 financial year our company began to
recognize the fair value of employee stock options in earnings,
which further contributed to the net loss incurred.





Financial Condition

|                        |  |                                        |  |          |  |              |     |   
|----------------------- |  | -------------------------------------- |  | -------- |  | ------------ | --- | --
|                        |  | As of September 30,                    | 
|                        |  |                                        | 
|                        |  |                                        |  | % Change | 
|                        |  | 2005                                   |  | 2006     |  | year-on-year |    
|                        |  |                                        |  |          |  |              |    
|                        |  | (Euro in millions, except percentages) | 
|Current assets          |  | 4,574                                  |  | 5,681    |  |              | 24  | % 
|Non-current assets      |  | 5,710                                  |  | 5,504    |  |              | (4  | )%
|                        |  |                                        |  |          |  |              |    
|Total assets            |  | 10,284                                 |  | 11,185   |  |              | 9   | % 
|                        |  |                                        |  |          |  |              |    
|Current liabilities     |  | 2,382                                  |  | 3,305    |  |              | 39  | % 
|Non-current liabilities |  | 2,192                                  |  | 1,725    |  |              | (21 | )%
|                        |  |                                        |  |          |  |              |    
|Total liabilities       |  | 4,574                                  |  | 5,030    |  |              | 10  | % 
|                        |  |                                        |  |          |  |              |    
|Minority Interests      |  | 81                                     |  | 840      |  |              | +++ |   
|                        |  |                                        |  |          |  |              |    
|Shareholders equity    |  | 5,629                                  |  | 5,315    |  |              | (6  | )%
|                        |  |                                        |  |          |  |              |    

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##### Table of Contents

Financial Ratios

|                                         |  |                     |     |   |      |  |     |      |  |  |     |  
|---------------------------------------- |  | ------------------- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                         |  | As of September 30, |    
|                                         |  |                     |    
|                                         |  | 2004                |     |   | 2005 |  |     | 2006 | 
|                                         |  |                     |     |   |      |  |     |      | 
|Non-current asset
    intensity(1)       |  |                     | 51  | % |      |  | 56  | %    |  |  | 49  | %
|Current asset
    intensity(2)           |  |                     | 49  | % |      |  | 44  | %    |  |  | 51  | %
|Degree of wear of fixed
    assets(3)    |  |                     | 67  | % |      |  | 67  | %    |  |  | 72  | %
|Depreciation rate of fixed
    assets(4) |  |                     | 11  | % |      |  | 11  | %    |  |  | 10  | %
|Inventory
    intensity(5)               |  |                     | 9   | % |      |  | 10  | %    |  |  | 11  | %
|Inventory
    turnover(6)                |  |                     | 7.5 |   |      |  | 6.8 |      |  |  | 7.1 |  
|Inventory turnover in
    days(7)        |  |                     | 48  |   |      |  | 53  |      |  |  | 50  |  
|Days sales
    outstanding(8)            |  |                     | 48  |   |      |  | 53  |      |  |  | 50  |  
|Equity
    ratio(9)                      |  |                     | 55  | % |      |  | 55  | %    |  |  | 48  | %
|Return on
    equity(10)                 |  |                     | 1   | % |      |  | (5) | %    |  |  | (5) | %
|Return on
    assets(11)                 |  |                     | 1   | % |      |  | (3) | %    |  |  | (2) | %
|Equity-to-fixed-assets
    ratio(12)     |  |                     | 167 | % |      |  | 150 | %    |  |  | 141 | %
|Debt-to-equity
    ratio(13)             |  |                     | 33  | % |      |  | 30  | %    |  |  | 38  | %





| |     |                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Non-current asset intensity = non-current assets / total assets                                                                                      
|
| | (2) | Current asset intensity = current assets / total assets                                                                                              
|
| | (3) | Degree of wear of fixed assets = accumulated depreciation on
    fixed assets / historical costs of fixed assets at the end of
    the financial year
|
| | (4) | Depreciation rate of fixed assets = annual depreciation of fixed
    assets / historical costs of fixed assets at the end of the
    financial year  
|
| | (5) | Inventory intensity = inventory / total assets                                                                                                       
|
| | (6) | Inventory turnover = annual net sales / average inventory                                                                                            
|
| | (7) | Inventory turnover in days = average inventory x 360 days /
    annual net sales                                                                     
|
| | (8) | Days sales outstanding = average accounts receivable x
    360 days / annual net sales                                                               
|
| | (9) | Equity ratio = shareholders equity / total assets                                                                                                   



| |      |                                                                             
| | ---- | ----------------------------------------------------------------------------
| | (10) | Return on equity = net income (loss) for the year / average
    equity      
|
| | (11) | Return on assets = net income (loss) for the year / average
    total assets
|
| | (12) | Equity-to-fixed-assets ratio = equity / property, plant and
    equipment   
|
| | (13) | Debt-to-equity ratio = (short-term debt + long-term debt) /
    equity      



| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The average of a balance sheet position is calculated as the
    arithmetic average of the amount as of the balance sheet date of
    the current and the prior years.







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##### Table of Contents

increased to 38% primarily due to the drawdown under the
$400/400 million
syndicated credit facility in the amount of $345 million to
finance the expansion of our Richmond manufacturing facility.





Liquidity

Cash Flow

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

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

|                                                                      |  |                                   |         |  |      |  |       |      |  |  |       | 
|--------------------------------------------------------------------- |  | --------------------------------- | ------- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                                      |  | For the years ended September 30, |        
|                                                                      |  |                                   |        
|                                                                      |  | 2004                              |         |  | 2005 |  |       | 2006 | 
|                                                                      |  |                                   |         |  |      |  |       |      | 
|                                                                      |  | (Euro in millions)                |        
|Net cash provided by operating
    activities  continuing operations |  |                                   | 1,857   |  |      |  | 1,039 |      |  |  | 974   | 
|Net cash used in investing
    activities                             |  |                                   | (1,809) |  |      |  | (238) |      |  |  | (824) | 
|Net cash provided by (used in)
    financing activities               |  |                                   | (402)   |  |      |  | (266) |      |  |  | 762   | 
|Cash and cash equivalents at year
    end                             |  |                                   | 608     |  |      |  | 1,148 |      |  |  | 2,040 | 

     


  


  


Free Cash Flow




21



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##### Table of Contents

expenditures are not deducted. The free cash flow is determined
as follows from the consolidated statements of cash flows:

|                                                      |  |                                   |         |  |      |  |         |      |  |  |       | 
|----------------------------------------------------- |  | --------------------------------- | ------- |  | ---- |  | ------- | ---- |  |  | ----- | 
|                                                      |  | For the years ended September 30, |        
|                                                      |  |                                   |        
|                                                      |  | 2004                              |         |  | 2005 |  |         | 2006 | 
|                                                      |  |                                   |         |  |      |  |         |      | 
|                                                      |  | (Euro in millions)                |        
|Net cash provided by operating
    activities  total |  |                                   | 1,857   |  |      |  | 1,039   |      |  |  | 974   | 
|Net cash used in investing
    activities(1)          |  |                                   | (1,809) |  |      |  | (238)   |      |  |  | (824) | 
|Purchases (sales) of marketable
    securities, net   |  |                                   | 158     |  |      |  | (1,082) |      |  |  | (238) | 
|                                                      |  |                                   |         |  |      |  |         |      | 
|Free cash flow                                        |  |                                   | 206     |  |      |  | (281)   |      |  |  | (88)  | 
|                                                      |  |                                   |         |  |      |  |         |      | 



|    |                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------
|(1) | In the 2006 financial year the amount is net of
    119 million cash
    increase from the initial consolidation of ALTIS.

Net Cash Position




|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         |  |  |      |    |  |  |      |    | 
|------------------------- | ------------------------------------------ | ---------------------- | ----- | ----- | ------ |  | ----- | ----- |  | --- | ----- | --- | --- | ----- | ----- | --- | ----- |  | ----- | ------- |  |  | ---- | -- |  |  | ---- | -- | 
|                          |                                            | Payments due by period |      
|                          |                                            |                        |      
|                          |                                            |                        |       | Less  |        |  |      
|As of September 30, 2006  |                                            |                        |       | 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 |                                            |                        | 2,040 |       |        |  | 2,040 |       |  |     |      |     |     |       |      |     |       |  |      |         |  |  |     |    |  |  |     |   
|Marketable securities     |                                            |                        | 615   |       |        |  | 615   |       |  |     |      |     |     |       |      |     |       |  |      |         |  |  |     |    |  |  |     |   
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         | 
|Gross cash position       |                                            |                        | 2,655 |       |        |  | 2,655 |       |  |     |      |     |     |       |      |     |       |  |      |         |  |  |     |    |  |  |     |   
|Less                      |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         |  |  |      |    |  |  |      |   
|                          | Long-term debt                             |                        |       | 1,208 |        |  |       |      |  |     |       | 157 |     |       |       | 181 |       |  |       | 744     |  |  |      | 55 |  |  |      | 71 | 
|                          | Short-term debt and current
    maturities |                        |       | 797   |        |  |       | 797   |  |     |       |    |     |       |       |    |       |  |       |        |  |  |      |   |  |  |      |   | 
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         | 
|Total financial debt      |                                            |                        | 2,005 |       |        |  | 797   |       |  |     | 157   |     |     |       | 181   |     |       |  | 744   |         |  |  | 55   |    |  |  | 71   |   
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         | 
|Net cash position         |                                            |                        | 650   |       |        |  | 1,858 |       |  |     | (157) |     |     |       | (181) |     |       |  | (744) |         |  |  | (55) |    |  |  | (71) |   
|                          |                                            |                        |       |       |        |  |       |       |  |     |       |     |     |       |       |     |       |  |       |         | 

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##### Table of Contents

at their principal outstanding amount using available cash to
the extent that they have not previously been redeemed,
converted or purchased and cancelled.

Our net cash position  meaning cash and cash
equivalents, plus marketable securities, less total financial
debt  increased by
309 million to
650 million at
September 30, 2006, compared with
341 million at
September 30, 2005, principally due to the net proceeds of
464 million from
the initial public offering of Qimonda and the sale of Qimonda
shares upon exercise of the underwriters
over-allotment option.

To secure our cash position and to keep flexibility with regards
to liquidity, we have implemented a policy with risk limits for
the amounts deposited with respect to the counterparty, credit
rating, sector, duration, credit support and type of instrument.





Capital Requirements

We require capital in our
2007 financial year to:



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




    Cash flows generated from operations;
    Cash on hand and securities we can sell; and
    Available credit facilities.As of September 30, 2006, we require funds for the 2007
financial year aggregating
2,138 million,
consisting of
797 million for
short-term debt payments and
1,341 million for
commitments. In addition, we may need up to
162 million for
currently known contingencies. We also plan to invest up to an
additional
900 million in
capital expenditures that have not been otherwise committed. We
have a gross cash position of
2,655 million as
of September 30, 2006, and also the ability to draw funds
from available credit facilities of
903 million.

As of September 30, 2006, we had debt of
797 million
scheduled to become due within one year.





Commitments and Contingencies

|                               |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |    |    |  |  |     |     | 
|------------------------------ | ----------------------------------- | ---------------------------------- | ----- | ----- | ------ |  | ----- | ----- |  | --- | ----- | --- | --- | ----- | --- | --- | ----- |  | ----- | ------- |  |  | -- | -- |  |  | --- | --- | 
|                               |                                     | Payments Due/Expirations by Period |      
|                               |                                     |                                    |      
|                               |                                     |                                    |       | Less  |        |  |      
|As of September 30, 2006(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            |                                    |       | 959   |        |  |       | 104   |  |     |       | 91  |     |       |     | 85  |       |  |       | 66      |  |  |    | 64 |  |  |     | 549 | 
|                               | Unconditional purchase commitments  |                                    |       | 1,396 |        |  |       | 1,171 |  |     |       | 153 |     |       |     | 25  |       |  |       | 15      |  |  |    | 11 |  |  |     | 21  | 
|                               | Other commitments                   |                                    |       | 132   |        |  |       | 66    |  |     |       | 66  |     |       |     |    |       |  |       |        |  |  |    |   |  |  |     |    | 
|                               |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Total commitments              |                                     |                                    | 2,487 |       |        |  | 1,341 |       |  |     | 310   |     |     |       | 110 |     |       |  | 81    |         |  |  | 75 |    |  |  | 570 |    
|                               |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Other contingencies:           |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         |  |  |    |    |  |  |     |    
|                               | Guarantees(3)                       |                                    |       | 198   |        |  |       | 6     |  |     |       | 20  |     |       |     | 12  |       |  |       |        |  |  |    | 14 |  |  |     | 146 | 
|                               | Contingent government
    grants(4) |                                    |       | 548   |        |  |       | 156   |  |     |       | 129 |     |       |     | 36  |       |  |       | 55      |  |  |    | 27 |  |  |     | 145 | 
|                               |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 
|Total contingencies            |                                     |                                    | 746   |       |        |  | 162   |       |  |     | 149   |     |     |       | 48  |     |       |  | 55    |         |  |  | 41 |    |  |  | 291 |    
|                               |                                     |                                    |       |       |        |  |       |       |  |     |       |     |     |       |     |     |       |  |       |         | 



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(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, 2006.
    Purchases under these agreements aggregated
    1,204 million for
    the year ended September 30, 2006.(3)
    Guarantees are mainly issued for the payment of import duties,
    rentals of buildings and contingent obligations related to
    government grants received.(4)
    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.



Off-Balance Sheet Arrangements

We issue guarantees in the normal course of business, mainly for
the payment of import duties, rentals of buildings and
contingent obligations related to government grants received. As
of September 30, 2006, the undiscounted amount of potential
future payments for guarantees was
198 million.

Capital Expenditures

|                             |  |                                   |       |  |      |  |       |      |  |  |       | 
|---------------------------- |  | --------------------------------- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                             |  | For the years ended September 30, |      
|                             |  |                                   |      
|                             |  | 2004                              |       |  | 2005 |  |       | 2006 | 
|                             |  |                                   |       |  |      |  |       |      | 
|                             |  | (Euro in millions)                |      
|Non-memory
    businesses(1) |  |                                   | 393   |  |      |  | 442   |      |  |  | 567   | 
|Qimonda                      |  |                                   | 770   |  |      |  | 926   |      |  |  | 686   | 
|                             |  |                                   |       |  |      |  |       |      | 
|Total                        |  |                                   | 1,163 |  |      |  | 1,368 |      |  |  | 1,253 | 
|                             |  |                                   |       |  |      |  |       |      | 



|    |                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes elimination of inter-segment transfers of
    23 million,
    149 million and
    37 million for
    financial years ended September 30, 2004, 2005 and 2006,
    respectively.

  


24



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##### Table of Contents

Credit Facilities

We have established both short- and long-term credit facilities
with a number of different financial institutions in order to
meet our anticipated funding requirements. These facilities,
which aggregate
1,578 million, of
which 903 million
remained available at September 30, 2006, comprise the
following:

|             |  |                        |       |                                  |  |                          |     |  |       |  |     |           |  |  |     | 
|------------ |  | ---------------------- | ----- | -------------------------------- |  | ------------------------ | --- |  | ----- |  | --- | --------- |  |  | --- | 
|             |  |                        |       |                                  |  | As of September 30, 2006 |    
|             |  |                        |       |                                  |  |                          |    
|             |  | Nature of financial    |       |                                  |  | Aggregate                |     |  |      
|Term         |  | institution commitment |       | Purpose/intended use             |  | facility                 |     |  | Drawn |  |     | Available | 
|             |  |                        |       |                                  |  |                          |     |  |       |  |     |           | 
|             |  |                        |       |                                  |  | (Euro in millions)       |    
|Short-term   |  | firm commitment        |       | working capital, guarantees      |  |                          | 95  |  |       |  | 51  |           |  |  | 44  | 
|Short-term   |  | no firm commitment     |       | cash management, working capital |  |                          | 309 |  |       |  |    |           |  |  | 309 | 
|Long-term    |  | firm commitment        |       | working capital                  |  |                          | 823 |  |       |  | 273 |           |  |  | 550 | 
|Long-term(1) |  | firm commitment        |       | project finance                  |  |                          | 351 |  |       |  | 351 |           |  |  |    | 
|             |  |                        |       |                                  |  |                          |     |  |       |  |     |           | 
|Total        |  |                        | 1,578 |                                  |  |                          | 675 |  |       |  | 903 |          
|             |  |                        |       |                                  |  |                          |     |  |      



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

   











25



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##### Table of Contents

Pension Plan Funding

Our projected benefit obligation, which considers future
compensation increases, amounted to
518 million at
September 30, 2006, compared to
477 million at
September 30, 2005. The fair value of plan assets as of
September 30, 2006 was
320 million,
compared to
243 million as of
September 30, 2005.

The actual return on plan assets between the last measurement
dates amounted to 6.7% or
14 million for
domestic (German) plans and 5.7% or
2 million for
foreign plans, compared to the expected return on plan assets
for that period of 6.5% for domestic plans and 6.9% for foreign
plans. We have estimated the return on plan assets for the next
financial year to be 6.1% or
18 million for
domestic plans and 6.9% or
3 million for
foreign plans.

At September 30, 2005 and 2006, the combined funding status
of our pension plans reflected an underfunding of
234 million and
198 million,
respectively. We intend to make contributions to our pension
plans during the year ending September 30, 2007, in a
similar range of those made during the year ended
September 30, 2006.

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 Infineon or Qimonda shares.

Financial Instruments

We periodically enter into derivatives, including foreign
currency forward and option contracts as well as interest rate
swap agreements. The objective of these transactions is to
reduce the impact of interest rate and exchange rate
fluctuations on our foreign currency denominated net future cash
flows. We do not enter into derivatives for trading or
speculative purposes.

26



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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, | 
|          |                        |                     | 
|          |                        | 2004                |  |        | 2005 |  |  | 2006   | 
|          |                        |                     |  |        |      |  |  |        | 
|Function: |                        |                     |  |        |      |  |  |        |  |  |  |       
|          | Production             |                     |  | 24,540 |      |  |  | 25,114 |  |  |  | 29,641 | 
|          | Research & Development |                     |  | 7,160  |      |  |  | 7,401  |  |  |  | 7,745  | 
|          | Sales & Marketing      |                     |  | 1,948  |      |  |  | 2,016  |  |  |  | 2,101  | 
|          | Administrative         |                     |  | 1,922  |      |  |  | 1,909  |  |  |  | 2,164  | 
|          |                        |                     |  |        |      |  |  |        | 
|          | Total                  |                     |  | 35,570 |      |  |  | 36,440 |  |  |  | 41,651 | 
|          |                        |                     |  |        |      |  |  |        | 
|Region:   |                        |                     |  |        |      |  |  |        |  |  |  |       
|          | Germany                |                     |  | 16,387 |      |  |  | 16,119 |  |  |  | 15,736 | 
|          | Europe                 |                     |  | 5,631  |      |  |  | 5,482  |  |  |  | 7,244  | 
|          | North America          |                     |  | 2,982  |      |  |  | 3,193  |  |  |  | 3,295  | 
|          | Asia/ Pacific          |                     |  | 10,340 |      |  |  | 11,451 |  |  |  | 15,148 | 
|          | Japan                  |                     |  | 133    |      |  |  | 158    |  |  |  | 187    | 
|          | Other                  |                     |  | 97     |      |  |  | 37     |  |  |  | 41     | 
|          |                        |                     |  |        |      |  |  |        | 
|          | Total                  |                     |  | 35,570 |      |  |  | 36,440 |  |  |  | 41,651 | 
|          |                        |                     |  |        |      |  |  |        | 





Campeon







Critical Accounting Policies




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##### Table of Contents

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 2006 financial year, we spent
1,253 million to
purchase property, plant and equipment. At September 30,
2006, the carrying value of our property, plant and equipment
was
3,764 million. We
have acquired other businesses, which resulted in the generation
of significant amounts of long-lived intangible assets,
including goodwill. At September 30, 2006 we had long-lived
intangible assets of
230 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
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
18 million and
7 million during
the financial years ended September 30, 2005 and 2006,
respectively. The goodwill impairment charges in the 2006
financial year related primarily to our acquisition of Savan and
Sci-worx, while the
impairment charges in 2005 financial year related primarily to
goodwill arising from our acquisition of ADMtek Inc. in 2004.

28



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##### Table of Contents

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 a drop of nearly 40% in two months. The
average spot market price for 512Mb DDR2 DRAM
fell from $5.07 at October 3, 2005 to $3.71 at
December 14, 2005, a drop of nearly 27% in two and a half
months.

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, 2006, total inventory was
1,202 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, 2006, the carrying value of our long-term
investments totaled
659 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
13 million during
the 2006 financial year as a result of such impairment tests.

At September 30, 2006, our most significant long-term
investment was our investment in 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.

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.

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##### Table of Contents

Realization of Deferred Tax Assets

At September 30, 2006, total net deferred tax assets were
638 million.
Included in this amount are the tax benefits of net operating
loss and credit carry-forwards of approximately
463 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, 2006, 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 2005 and 2006
financial years by
192 million and
292 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 2007 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 ADMtek in the 2004
financial year and the remaining 30% 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 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.

30



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##### Table of Contents

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 benefit
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 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 financial year if, as of the beginning of the
financial 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.

31



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##### Table of Contents

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, 2004, 2005 and 2006, accumulated
to 28 million,
28 million and
37 million,
respectively.

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

|                                                                |  |                     |     |      |  |  |     | 
|--------------------------------------------------------------- |  | ------------------- | --- | ---- |  |  | --- | 
|                                                                |  | As of September 30,
|                                                                |  |                    
|                                                                |  | 2005                |     | 2006
|                                                                |  |                     |     |     
|                                                                |  | (Euro in millions) 
|Accumulated other comprehensive
    income                      |  |                     | 85  |      |  |  | 87  | 
|Less income tax effect                                          |  |                     | (1  | )    |  |  |    | 
|                                                                |  |                     |     |      |  |  |     | 
|Accumulated other comprehensive
    income, net of income taxes |  |                     | 84  |      |  |  | 87  | 
|                                                                |  |                     |     |      |  |  |     | 
|Accrued pension liabilities                                     |  |                     | 162 |      |  |  | 134 | 

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                  |  |                                      | 10   |                |  |  | (9) | 
|Rate of projected future pension
    increases |  |                                      | 9    |                |  |  | (9) | 
|Expected return on plan assets                 |  |                                      | (3)  |                |  |  | 2   | 





Contingencies




32



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##### Table of Contents

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.

Recent Accounting Pronouncements

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. We adopted SFAS No. 151 with
effect from October 1, 2005, which did not have a
significant impact on our companys 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. We
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 our
companys consolidated financial position or results of
operations.

In March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations, which clarifies that an entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value can be
reasonably estimated even though uncertainty exists about the
timing and (or) method of settlement. We adopted
Interpretation No. 47 during the 2006 financial year, which
did not have a significant impact on our companys
consolidated financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the
accounting and reporting of a change in accounting principle. We
are required to adopt SFAS No. 154 for accounting
changes and error corrections that occur after
September 30, 2006. Our companys results of
operations and financial condition will only be impacted
following the adoption of SFAS No. 154 if it
implements changes in accounting principle that are addressed by
the standard or corrects accounting errors in future periods.

In July 2006, the FASB issued Interpretation No. 48,
Accounting for Income Tax Uncertainties,
which defines the threshold for recognizing the benefits of tax
return positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income
tax uncertainties, along with any related interest and
penalties. Interpretation No. 48 also includes guidance
concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with
any recorded income tax uncertainties. Interpretation
No. 48 is effective for fiscal years beginning after
December 15, 2006. The differences between the amounts
recognized in the state-

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ments of financial position prior to the adoption of
Interpretation No. 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. We are
in the process of determining the impact, if any, that the
adoption of Interpretation No. 48 will have on our
companys consolidated financial position and results of
operations.

In September 2006, the FASB released SFAS No. 157,
Fair Value Measurements, which provides
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. The standard also responds to investors
requests for more information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect that fair
value measurements have on earnings. SFAS No. 157 will
apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. The standard does not
expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for financial statements
issued for financial years beginning after November 15,
2007, and interim periods within those financial years.
SFAS No. 157 is effective for our company for
financial years beginning after October 1, 2008, and
interim periods within those financial years. We are in the
process of evaluating the impact that the adoption of
SFAS No. 157 will have on our companys
consolidated financial position and results of operations.

In September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106, and 132(R), which
requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization
(Recognition Provision). SFAS No. 158 also
requires an employer to measure the funded status of a plan as
of the date of its year-end statement of financial position,
with limited exceptions (Measurement Date
Provision). We currently measure the funded status of our
companys plans annually on June 30. The Recognition
Provision of SFAS No. 158 is effective for our company
as of the end of the financial year ending September 30,
2007, and the Measurement Date Provision is effective for our
company as of the end of the financial year ending
September 30, 2009. We do not expect the change in the
annual measurement date to September 30 to have a significant
impact on our companys consolidated financial position and
results of operations. As of September 30, 2006 the
application of the Recognition Provision of
SFAS No. 158 would have resulted in an increase in
other long-term liabilities of
66 million, a
recognized pension asset of
2 million, and an
increase in accumulated other comprehensive loss of
60 million.

In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB No. 108 provides interpretive guidance on how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in the current year
financial statements. SAB No. 108 requires registrants
to quantify misstatements using both an income statement
(rollover) and balance sheet (iron
curtain) approach and evaluate whether either approach
results in a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial are
now considered material based on either approach, no restatement
is required so long as management properly applied its previous
approach and all relevant facts and circumstances were
considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated earnings
(deficit) as of the beginning of the year of adoption.
SAB No. 108 is effective for fiscal years ending on or
after November 15, 2006, with earlier adoption encouraged.
We do not expect that the adoption of SAB No. 108 will
have a significant impact on our companys consolidated
financial position and results of operations.

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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 for the year
ended September 30, 2008.

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.





Quantitative and Qualitative Disclosure about Market Risk

The following discussion should be read in conjunction with
Notes 2, 31 and 32 to our consolidated financial statements.

Market risk is the risk of loss related to adverse changes in
market prices, including commodity prices, foreign exchange
rates and interest rates, of financial instruments. We are
exposed to various financial market risks in the ordinary course
of business transactions, primarily from changes in commodity
prices, foreign exchange rates and interest rates. We enter into
diverse financial transactions with several counterparties to
limit our risk. Derivative instruments are only used for hedging
purposes and not for speculative purposes.



Commodity Price RiskA significant portion of our business, primarily the sales of
Qimonda, is exposed to fluctuations in market prices for
standard DRAM products. For these products, the sales price
responds to market forces in a way similar to that of other
commodities. This price volatility can be extreme and has
resulted in significant fluctuations within relatively short
time-frames. We attempt to mitigate the effects of volatility by
continuously improving our cost positions, by entering into new
strategic partnerships and by focusing our product portfolio on
application-specific products that are subject to less
volatility, such as DRAM products for infrastructure, graphics,
mobile and consumer applications.

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 use derivative financial instruments to
manage any exposure to fluctuations in commodity prices
remaining after the operating measures we describe above.

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

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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,
2006. 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, 2006, our foreign currency
forward contracts and currency options mainly had terms up to
one year. Our interest rate swaps expire in 2007 and 2008. 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 |  |                    | 2006          | 
|                                    |                     |                    |       |             |               |  |                    |               | 
|                                    |                     | (Euro in millions) |       |             |               |  | (Euro in millions) |              
|Foreign currency forward contracts: |                     |                    |       |             |               |  |                    |               |  |  |    |    
|                                    | U.S. dollar         |                    |       | 209         |               |  |                    | 1.27693       |  |  |    | (1) | 
|                                    | U.S. dollar         |                    |       | (682)       |               |  |                    | 1.27113       |  |  |    | 1   | 
|                                    | Japanese yen        |                    |       | 24          |               |  |                    | 148.32045     |  |  |    |    | 
|                                    | Japanese yen        |                    |       | (30)        |               |  |                    | 147.77208     |  |  |    |    | 
|                                    | Singapore dollar    |                    |       | 27          |               |  |                    | 2.01698       |  |  |    |    | 
|                                    | Great Britain pound |                    |       | 7           |               |  |                    | 0.67560       |  |  |    |    | 
|                                    | Great Britain pound |                    |       | (1)         |               |  |                    | 0.68240       |  |  |    |    | 
|                                    | Malaysian Ringgit   |                    |       | 35          |               |  |                    | 4.69800       |  |  |    |    | 
|                                    | Malaysian Ringgit   |                    |       | (6)         |               |  |                    | 4.67910       |  |  |    |    | 
|Currency options:                   |                     |                    |       |             |               |  |                    |               |  |  |    |    
|                                    | U.S. dollar         |                    |       | 252         |               |  |                    | 1.31125       |  |  |    | 2   | 
|                                    | U.S. dollar         |                    |       | (259)       |               |  |                    | 1.27343       |  |  |    | (5) | 
|Interest rate swaps                 |                     |                    | 1,200 |             |               |  | n/a                |               |  |  | 5  |    
|Other                               |                     |                    | 218   |             |               |  | n/a                |               |  |  | 9  |    
|                                    |                     |                    |       |             |               |  |                    |               | 
|Fair value, net                     |                     |                    |       |             |               |  |                    |               |  |  | 11 |    
|                                    |                     |                    |       |             |               |  |                    |               | 



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



Accounting for Derivative
Instruments and Hedging Activities


    


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cies 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 2004, 2005 and
2006 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).





Subsequent Events

During October 2006,
following the insolvency of one of our largest mobile phone
customers, BenQ Mobile GmbH & Co OHG, Infineon announced
restructuring plans to downsize its workforce. As part of the
restructuring, it is expected that a total of approximately 400
employees will be terminated worldwide, thereof almost 200
employees in the German locations of Munich, Salzgitter and
Nuremberg. We anticipate that the planned restructuring will
result in charges of approximately
30 million during
the first quarter of the 2007 financial year, although the exact
amount of the restructuring charges can not be estimated at this
time due to the early stage of the negotiations with works
councils.

In connection with the formation of Qimonda, Infineon and
Qimonda entered into a trust agreement under which Infineon
holds shares in Inotera in trust for Qimonda until the shares
can legally be transferred. This trust agreement provides for
Infineon to transfer the shares to Qimonda as and when Infineon
receives an exemption from the statutory lock-up. On
October 14, 2006, exemption from the lock-up was received
from the Taiwanese Stock Exchange. Accordingly, we are in the
process of finalizing the administrative steps necessary to
complete the transfer of the Inotera shares to Qimonda.

On October 11, 2006, the plaintiffs filed a second amended
complaint in the U.S. securities class action litigation in the
Northern District of California. Our companys claim
against one D&O insurance carrier was dismissed on
November 13, 2006. We intend to file an appeal against this
decision.

On October 23, 2006, the action filed on July 13, 2006
by the New York state attorney general in the U.S. District
Court for the Southern District of New York case was made part
of the multi district litigation proceeding pending in the
Northern District of California.

The settlement agreement with counsel to a class of direct
purchasers of DRAM in the United States was approved by the
U.S. District Court for the Northern District of California
in the hearing held on November 1, 2006.

In November 2006, Qimonda sold its investment in Ramtron through
a private placement. As a result of the sale, Qimonda expects to
record a gain of 3
during the three months ending December 31, 2006.

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Outlook

World Economy

Economists generally expect a slight slowdown in economic growth
in 2007 compared with 2006. The International Monetary Fund
forecasts in its current world economy outlook report gross
domestic product growth of 3.5% in 2007, compared with 3.8% in
2006. For 2008, economists anticipate a slight improvement in
world economic growth. The slight weakening in the coming year
is expected to be cyclical, as the interest rate increases of
the last several quarters had a slowdown effect, and primarily
reflects activity in developed economies. The high-growth
economies  in particular China  are
expected to continue to experience dynamic growth in 2007. The
aggregate risk potential has not been reduced but rather
increased; the list of risks include oil and natural gas
shortages, inflation fears, and a cooling-off in the property
market, particularly in the U.S. Nevertheless, there are
currently no signs of a global recession. In fact, solid
world-wide economic growth is expected next year and in the year
thereafter.

Semiconductor Industry

The market development in 2007 and 2008 will not only be
strongly dependent on the overall economic situation, but will
also be impacted by the degree of market saturation in certain
industry segments as a result of the extraordinarily strong
growth rates experienced in previous years. Most experts expect
moderate growth acceleration in 2007. In 2008, further
acceleration of market growth is expected. WSTS forecasts market
growth of 9% for 2007 (2006: 8%) followed by market growth of
12% in 2008 (WSTS forecast, October 2006). In the automotive
electronics business, the increase in comfort and safety
applications, as well as to a smaller extent infotainment
applications, are expected to be among the growth drivers during
the next two years. Within the wireless communication business,
market growth is expected to be driven by mobile telephones
despite predictions of a slowdown in unit sales growth. A
positive contribution to market growth is also expected from the
wireline communication business driven by broadband services
that need high data rates (IPTV, video on demand). Likewise,
above average growth is expected in the industrial business. The
data processing technology business should also benefit from the
strong demand for portable PCs in the coming two years. In the
consumer electronics business, growth is expected to
significantly decelerate from the high growth rates experienced
in previous years, but will continue to contribute to overall
growth.

Significant Planning Assumptions

In order to estimate our expected earnings development we have
made certain important planning assumptions. In particular, we
have assumed a U.S. dollar to euro exchange rate of 1.30 in our
business without Qimonda. Furthermore, our projections exclude
the effect of any non-ordinary gains or losses that may be
incurred, since the amount of such non-ordinary gains or losses
cannot be reliably estimated. Non-ordinary gains and losses in
the 2007 financial year may arise, for example, from potential
sales of Qimonda shares, as well as gains or losses resulting
from general restructuring measures. Specifically, we have
already defined a cost reduction program following the
insolvency of one of our largest mobile phones customers, BenQ
Mobile GmbH & Co OHG, which is expected to result in
restructuring costs of approximately
30 million to be
recognized in the Corporate & Eliminations segment in the
first quarter of the 2007 financial year. We cannot give any
assurance that additional restructuring costs will not be
incurred. Finally, it should be noted that subsequent to the
initial public offering of our majority-owned subsidiary Qimonda
we are no longer in a position to make forecasts for this
subsidiary. Such forecasts are now prepared by Qimonda, and are
separately presented in this report. We believe that the
individual analysis of our memory business is also meaningful
with respect to the price development of our shares. We believe
that subsequent to Qimondas initial public offering,
Infineons market capitalization reflects the sum of the
market capitalization of our subsidiary Qimonda plus the value
of our remaining business activities. We believe that will
continue to be the case for at least as long as we maintain a
significant equity interest in Qimonda.

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Net Sales of Infineon Excluding Qimonda

Based on our current plans, we expect net sales for Infineon
excluding Qimonda, consisting of the Automotive, Industrial
& Multimarket, Communication Solutions, Other Operating
Segments and the Corporate and Eliminations segments, to remain
unchanged or slightly increase compared with the 2006 financial
year. This takes into account the negative effect on net sales
resulting from the insolvency of our main customer in the area
of processors for mobile telephones, which is expected to be
reflected in the first quarter of the 2007 financial year.
Therefore, we expect a sales decline in our Communication
Solutions segment compared with the 2006 financial year. The
Automotive, Industrial & Multimarket segment should
positively contribute to net sales growth, driven primarily by
sales of power semiconductors.

Beyond the current financial year we anticipate increasing sales
volumes in a positive industry environment. Our fabrication
plant for power semiconductors in Kulim, Malaysia, will make a
positive contribution through further production ramp-up and
generation of sales within the Automotive, Industrial &
Multimarket segment during the full financial year. The expected
ramp-ups at new customers in the wireless division of the
Communication Solutions segment in the 2007 financial year may
also positively contribute to sales growth in the subsequent
year.

EBIT of Infineon Excluding Qimonda

We expect EBIT before non-ordinary gains and losses for Infineon
excluding Qimonda to improve in the current financial year
compared with the 2006 financial year.

In the Automotive, Industrial & Multimarket segment we
expect EBIT results to remain unchanged or slightly improve in
the 2007 financial year compared with the 2006 financial year.
The unusually strong demand experienced in the first half of the
2006 financial year will probably not repeat itself in the
current financial year. In the current financial year, the
Automotive, Industrial & Multimarkets EBIT results
will continue to be negatively impacted by costs in the mid
double-digit million range incurred in connection with the
ramp-up of production at our production facility in Kulim,
Malaysia, as well charges related to the ramp-down of our
production facility in Munich, Germany. Furthermore, following
the separation of Qimonda into a stand-alone legal entity, the
Automotive, Industrial & Multimarket segment is expected to
bear additional costs allocated from central activities during
the first half of the financial year. This effect should be
compensated in the second half of the financial year by cost
cutting measures introduced by the Infineon Complexity Reduction
program (ICoRe), as further described below. The
anticipated savings resulting from the ICoRe program have not
been considered in the outlook of the Automotive, Industrial
& Multimarket segment described above. Production ramp-ups
at new customers in the Communication Solutions segment will
have a positive effect on EBIT before non-ordinary gains and
losses. In addition, we anticipate a positive effect in the
current financial year from the implementation of cost reduction
measures which are expected to have a
40 million annual
cost-saving impact. We expect EBIT before non-ordinary gains and
losses in the wireless communication business to break-even by
the end of the 2007 calendar year. On the other hand, we expect
a negative impact from the insolvency of our main customer for
baseband processors. In addition, EBIT results of the
Communication Solutions segment include expenditures in
connection with the fabrication facilities referred to above. On
a net basis, EBIT before non-ordinary gains and losses is
expected to remain negative for the 2007 financial year. The
execution of all customer projects within the wireless
communication business as currently planned and the timing of
completion of ongoing cost reduction programs will determine
whether the segments EBIT remains at approximately prior
year levels or improves. As with the Automotive, Industrial
& Multimarket segment, cost cutting measures introduced by
the ICoRe program, as further described below, are expected to
contribute to the improvement of EBIT before non-ordinary gains
and losses in the current financial year compared with the 2006
financial year. The anticipated savings resulting from the ICoRe
program have not been considered in the outlook of the
Communication Solutions segment described above. In the 2007
financial year, the non-recurrence of expenditures incurred
during the 2006 financial year in connection with the separation
of the memory products segment into a standalone legal entity
and costs related to the move to our new corporate

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headquarters, Campeon, are expected to positively impact EBIT
results prior to inclusion of potential restructuring charges in
the Corporate and Eliminations segment.

The implementation of the ICoRe program, which is currently in
its planning phase, is expected to positively impact EBIT
results in all segments. We expect to finalize the planning
phase of the program in the 2006 calendar year and to implement
it in the 2007 financial year. As a result of the ICoRe program,
annual savings of at least
50 million are
anticipated, which will impact results partially in the current
financial year and fully in the next financial year.

Beyond the 2007 financial year, we expect EBIT before
non-ordinary gains and losses to improve as a result of a
positive industry environment and further sales growth in the
logic business. In the Automotive, Industrial & Multimarket
and Communication Solutions segments, the non-recurrence of
expenditures incurred in connection with the ramp-down of the
production facility in Munich/Perlach and the ramp-up of the
production facility in Kulim, Malaysia will be a driver of the
improvement. In addition, both segments will fully benefit from
the cost-saving measures of the ICoRe program. Furthermore, the
cost reduction measures to be implemented in the 2007 financial
year in the Communication Solutions segment should positively
impact results.

Fixed Assets Investment and Depreciation for Infineon
Excluding Qimonda

We are pursuing a differentiated manufacturing strategy for our
Automotive, Industrial & Multimarket and Communication
Solutions segments. In the context of this strategy, we will
continue to invest in manufacturing capacities for special
processes, in particular in the power semiconductor arena. In
contrast, we do not plan to invest in our own manufacturing
capacities for the standard semiconductor manufacturing process,
so called CMOS technology, for structure sizes below
65-nanometers, but will
outsource this capacity to foundry partners. In the context of
this manufacturing strategy we anticipate that our annual fixed
assets capital investment will be approximately
500 million.
Compared with the 2006 financial year, depreciation expense is
expected to be reduced to approximately
600 million in
the 2007 financial year and to continue to decrease in line with
capital investment in the years thereafter. In the subsequent
financial years we expect annual depreciation expense to be
approximately
500 million.

Expenditures for Research & Development for Infineon
Excluding Qimonda

We expect expenditures for research and development for Infineon
excluding Qimonda to slightly decrease in the current financial
year compared with the 2006 financial year. This is primarily
due to the cost reduction measures already initiated within the
Communication Solutions segment. By streamlining internal
organization structures and reducing fixed costs, we believe
that we will be able to reduce development expenditures while
retaining our sales potential. In Automotive, Industrial &
Multimarket, the introduction of new products and the broadening
of the existing product portfolio in automotive power,
microcontrollers and power management are examples of areas of
emphasis in research and development. In Communication
Solutions, we are working, for example, on new system-on-a-chip
products for wireless and wireline communication. Beyond the
2007 financial year, a slight increase in expenditures for
research & development is possible.

Qimonda Segment

Qimondas revenues are a function of the bit volume it
ships and the selling price it achieves for its products. While
Qimonda has an influence over its production growth, through
capacity additions and productivity improvements, its sales
volume depends on the extent to which its product offerings
match market demand. Qimondas selling prices are a
function of the supply and demand relationship in the DRAM
market. These market forces are beyond Qimondas control
and, accordingly, it cannot reliably estimate what these future
sales prices, and the resulting revenues and the contribution to
its earnings, will be.

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For the 2007 financial year, Qimonda expects bit demand to be
driven in part by the introduction of the Windows Vista
operating system and the continued strong growth for DRAM in
consumer and communication applications. More specifically,
Qimonda expects the overall DRAM market, measured in bits, to
grow between 55% and 65%. Qimonda intends to increase its bit
production in line with overall market growth based on its
investment in additional capacities in the Richmond
300-millimeter manufacturing facility and the ramp-up of the
second 300-millimeter module at the Inotera joint venture. In
addition, during the 2007 financial year, Qimonda aims to
realize productivity improvements in manufacturing as it
converts further production to 90-nanometer technology and
begins the transition to next generation 80-nanometer and
75-nanometer technologies. Qimonda is continuously taking steps
to reduce its cost-per-bit in manufacturing, such as the
introduction of advanced process technologies featuring smaller
die-sizes, the ramp-up of more productive 300-millimeter
capacities and other cost savings and productivity improvement
measures.

Qimonda expects to make capital expenditures in the 2007
financial year ranging between
750 million and
850 million. In
the years thereafter, its aim is to have capital expenditures of
approximately 15% to 25% of revenues on average over the DRAM
cycle.

Depreciation and amortization during the 2007 financial year is
estimated to range between
650 million and
750 million, and
for the years thereafter to be in line with capital expenditures.

Research and development expenses are anticipated to be between
430 million and
460 million for
the 2007 financial year, and approximate 10% of sales on average
for the years thereafter.

Historically, Qimonda has received financing from us. Depending
on market conditions and Qimondas financial performance in
the coming year, it may redeem a portion or all of this debt
through repayment and/or external refinancing.

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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

We operate in a highly cyclical industry and 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.

Sales decreased in 1996, 1998 and 2001, with a decrease of
approximately 32% in 2001. Sales grew by 1% in the 2002
calendar year, 18% in 2003, 28% in 2004, and 7% in 2005.
WSTS estimates growth of approximately 8% for the full 2006
calendar year. In addition, average selling prices for our
products, particularly our standard memory products, can
fluctuate significantly from quarter to quarter or month to
month.

There can be no assurance that the market will continue to grow
in the near term, that the growth rates experienced in recent
past periods will be attainable again in the coming years, or
that we will be successful in managing any future downturn or
substantial decline in average selling prices, any of which
could have a material adverse effect on our results of
operations and financial condition.

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 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 2006 calendar year, the average selling price for DRAM
decreased by 16% compared with the same period in 2005.
Downturns have severely hurt the profitability of the industry
generally, including the DRAM business of Qimonda. Given the
volatility of the semiconductor industry, we are likely to face
downturns in the future, which would likely 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.

The semiconductor industry, particularly in the memory
products arena, is characterized by intense competition, which
could reduce our sales or put continued pressure on our
prices.

The semiconductor industry is highly competitive, particularly
in the memory products arena, and has been characterized by
rapid technological change, short product lifecycles, high
capital expenditures, intense pricing pressure from major
customers, periods of oversupply and continuous advancements in
process technologies and manufacturing facilities. Our
subsidiary Qimonda competes globally with other major DRAM
suppliers, including Samsung Electronics, Micron Technology,
Hynix Semiconductor, Elpida Memory and Nanya, which is its joint
venture partner in Inotera. Some of Qimondas competitors
have substantially greater capital, human and other resources
and manufacturing capacities, more efficient cost structures,
higher brand recognition, larger customer bases and more
diversified product lines than Qimonda has. Competitors with
greater resources and more diversified operations may have
long-term advantages, including the ability to better withstand
future downturns in the DRAM market and to finance research and
development activities. In addition, unfair price competi-

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tion, government support or trade barriers by or for the benefit
of our competitors would adversely affect Qimondas
competitive position.

To compete successfully in the DRAM market, Qimonda must:




    design and develop new products and introduce them in a timely
    manner;
    develop and successfully implement improved manufacturing
    process technologies to reduce its per-megabit costs; and
    broaden its DRAM customer base, to reduce its dependence on a
    small number of customers and position itself to increase its
    market share.Other factors affecting Qimondas ability to compete
successfully are largely beyond Qimondas control. These
include:




    the extent to which and the pace at which customers incorporate
    its memory products into their devices;
    whether electronics manufacturers design their products to use
    DRAM configurations or new types of memory products that Qimonda
    does not offer;
    the number and nature of its competitors; and
    general economic conditions.Increased competitive pressure or the relative weakening of
Qimondas competitive position caused by these factors, or
other developments Qimonda has not anticipated, could materially
and adversely affect Qimondas and our business financial
condition and 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 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 description of the recent claims and
proceedings.

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

It is difficult to predict future growth in the markets we
serve, making it hard to estimate requirements for production
capacity. If the market does not grow as we have anticipated, we
risk underutiliza-

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tion 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, straining relationships
with affected customers. 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.

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 in many
cases resulted in significant expenditures. 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, including semiconductor foundry manufacturers and
assembly and test facilities. 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.

In October 2005, we experienced a one-week labor strike at our
manufacturing site in Munich-Perlach. Further strikes at any of
our production locations could negatively impact our results of
operations and our capabilities to respond to customer
requirements, which may limit our future ability to develop
business opportunities.

If we fail to successfully implement an optimum
make-or-buy strategy, our business could suffer from higher
costs

We intend to continue to invest in leading-edge process
technologies such as power, embedded flash and RF technologies.
At the same time, in standard CMOS below 90-nanometers, we will
continue to share risks and expand our access to leading-edge
technology through long-term strategic partnerships with other
leading industry participants and by making more extensive use
of manufacturing at silicon foundries. However, the decisions
whether to develop an own solution or to cooperate with
third party suppliers could result in disadvantages if the
assumptions for cost developments were later proved as incorrect.

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

Our sales volume significantly depends on the market success of
our customers in developing and selling end-products that
incorporate our products. The fast pace of technological change,
difficulties in the execution of individual projects and other
factors may limit the market success of our customers, resulting
in a decrease in the volume of demand for our products and
adversely affecting our results of operations. This risk is
particularly acute in our Communication Solutions segment, in
which we also face significant pricing and margin pressures.

New business is often subject to a competitive selection
process that can be lengthy and uncertain and that requires us
to incur significant expense. Even after we win and begin a
product design, a customer may decide to cancel or change its
product plans, which could cause us to generate no sales from a
product and adversely affect our results of operations

In several of our business areas we focus on winning competitive
bid selection processes, known as design wins, to
develop products for use in our customers products. These
selection processes can be lengthy and can require us to incur
significant design and development expenditures. We may not win
the competitive selection process and may never generate any
revenue despite incurring significant design and development
expenditures.

After winning a product design for one of our customers, we may
still experience delays in generating revenue from our products
as a result of the lengthy development and design cycle. In
addition, a delay or cancellation of a customers plans
could significantly adversely affect our financial results, as
we may have incurred significant expense and generated no
revenue. Finally, if our customers fail to successfully market
and sell their equipment this could materially adversely affect
our business, financial condition and results of operations as
the demand for our products falls.

We have a limited number of suppliers of manufacturing
equipment and raw materials, 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
1,809 million in
the 2004 financial year,
238 million in
the 2005 financial year and
824 million in
the 2006 financial year. Our research and development expenses
were
1,219 million in
the 2004 financial year,
1,293 million in
the 2005 financial year and
1,249 in the 2006
financial year. Our capital expenditures in the 2004, 2005, and
2006 financial years were
1,163 million,
1,368 million and
1,253 million,
respectively. 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.

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We believe that our carve-out of our memory products business
into the separate legal entity Qimonda, and that companys
recent initial public offering, will allow both companies to
gain direct access to additional sources of capital.
Nevertheless, we or Qimonda may experience difficulties in
raising the amount of capital required for our businesses 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 or Qimonda are not able to make necessary capital
expenditures and finance necessary research and development
endeavors.

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 develop and qualify new
technologies and products, or if we devote resources to the
pursuit of technologies or products that fail to be accepted in
the marketplace or that fail to be commercially viable, our
business may suffer.

We rely on our strategic partners and other third parties,
and our business could be harmed if they fail to perform as
expected or relationships 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. To the extent we rely on alliances and
third-party design and/or manufacturing relationships, we face
the risks of:




    reduced control over delivery schedules and product costs;
    manufacturing costs that are higher than anticipated;
    the inability of our manufacturing partners to develop
    manufacturing methods appropriate for our products and their
    unwillingness to devote adequate capacity to produce our
    products;
    a decline in product reliability;
    an inability to maintain continuing relationships with our
    suppliers; and
    limited ability to meet customer demand when faced with product
    shortages.If any of these risks materialize, we could experience an
interruption in our supply chain or an increase in costs, which
could delay or decrease our revenue or adversely affect our
business, financial condition and results of operations.

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 three that we
operate jointly with partners. In the 2006 financial year, 83%
of our

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revenues were generated outside Germany and 66% 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.

Threats of disease outbreaks or pandemics, such as the recent
avian flu and Severe Acute Respiratory Syndrome
(SARS) outbreaks, in regions where we have manufacturing
sites may negatively effect our operations by limiting the
productivity of our workforce, inhibiting transportation or the
shipment of products or reducing the ability 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 operating results may fluctuate significantly from
quarter to quarter, and as a result we may fail to meet the
expectations of securities analysts and investors, which could
cause our stock price to decline

Our operating results have fluctuated significantly from quarter
to quarter in the past and are likely to continue to do so due
to a number of factors, many of which are not within our
control. If our operating results do not meet the expectations
of securities analysts or investors, the market price of our
ordinary shares and ADSs will likely decline. Our reported
results can be affected by numerous factors including those
described in this Risk Factors section, among them:




    changes in accounting rules, such as the change requiring the
    recording of expenses for employee shares options and other
    stock-based compensation expense commencing in the first quarter
    of the 2006 financial year;
    the overall cyclicality of, and changing economic and market
    conditions in, the semiconductor industry, as well as
    seasonality in sales of consumer products into which our
    products are incorporated;
    our ability to scale our operations in response to changes in
    demand for our existing products and services or demand for new
    products requested by our customers;
    intellectual property disputes, customer indemnification claims
    and other types of litigation risks;
    the gain or loss of a key customer, design win or order; and
    the timing, rescheduling or cancellation of significant customer
    orders and our ability, as well as the ability of our customers,
    to manage inventory.Due to the foregoing factors, and the other risks discussed in
this annual report, you should not rely on quarter-to-quarter
comparisons of our operating results as an indicator of future
performance.

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Our results of operations and financial condition can be
adversely impacted 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. In addition, the balance sheet impact of
currency translation adjustments has been, and may continue to
be, material.

Further information on foreign currency derivative and
transaction gains and losses could be found in section headed
Operating and Financial Review  Qualitative and
Quantitative Disclosure about Market Risk Foreign
Exchange and Interest Risk.

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 interpretations and only
partial implementation in national legislation in individual
member states, we are unable at this time to determine in detail
the consequences for our company. Additional European
legislation has restricted the use of lead and other hazardous
substances in electrical and electronic equipment from July
2006. Another EU directive describes ecodesign requirements for
energy-using products, including information requirements for
components and sub-assemblies. The European Commission could
restrict the use of PFOS (Perfluoroctane sulphonate) in
the EU. PFOS is an important constituent of key
chemicals used in the semiconductor industry. Furthermore, in
June 2006, the European Council adopted a Common Position on a
new European Union regulatory framework for chemicals, called
REACH, dealing with the registration, evaluation and
authorization of chemicals. These directives and proposals 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 addition, in 2004, an 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.

The Chinese government restricts the use of lead and other
hazardous substances in electronic and IT products. Because
not all implementing measures are in place and because a number
of statutory definitions and interpretations remain unclear, the
consequences for our company cannot currently be determined in
detail.

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.

In recent years, there have been media reports of a potential
link between working in semiconductor manufacturing clean room
environments and certain illnesses, primarily different types of
cancers. Regulatory agencies and industry associations have
begun to study the issue to see if any actual correlation
exists. Although we have monitored our employees since 1990, we
cannot be certain that in the future no such link will be
established. We may become subject to liability claims, which
could result in litigation or settlement expense regardless of
their merit. In addition, these reports may affect our ability
to recruit and retain employees.

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

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Products that do not meet customer specifications or that
contain, or are perceived to contain, defects or errors or that
are otherwise incompatible with their intended end use could
impose significant costs on us

The design and production processes for our products are highly
complex. It is possible that we may produce products that do not
meet customer specifications, contain or are perceived to
contain defects or errors, or are otherwise incompatible with
their intended uses. We may incur substantial costs in remedying
such defects or errors, which could include material inventory
write-downs. Moreover,
if actual or perceived problems with nonconforming, defective or
incompatible products occur after we have shipped the products,
we might not only bear direct liability for providing
replacements or otherwise compensating customers but could also
suffer from long-term damage to our relationship with important
customers or to our reputation in the industry generally. This
could have a material adverse effect on our business, financial
condition and results of operations.

We are subject to the risk of loss due to explosion and
fire because some of the materials we use in our manufacturing
processes are highly combustible

We use highly combustible materials such as silane and hydrogen
in our manufacturing processes and are therefore subject to the
risk of loss arising from explosion and fire which cannot be
completely eliminated. Although we maintain comprehensive fire
and casualty insurance up to policy limits, including insurance
for loss of property and loss of profit resulting from business
interruption, our insurance coverage may not be sufficient to
cover all of our potential losses. If any of our fabs were to be
damaged or cease operations as a result of an explosion and
fire, it could reduce our manufacturing capacity and may cause
us to lose important customers.

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 160 million in
the 2004 financial year,
171 million in
the 2005 financial year and
153 million in
the 2006 financial year. In addition, we reduced the carrying
value of fixed assets by
0 million
and 49 million
during the 2005 and 2006 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.

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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 we received a request for information regarding
DRAM industry practices from the European Commission (the
Commission) and in May 2004 we received a notice of
a formal inquiry into alleged DRAM industry competition law
violations from the Canadian Competition Bureau. We are
cooperating with the Commission and the Canadian Competition
Bureau in their inquiries.

Subsequent to the commencement of the DOJ 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 July 2006 the state
attorneys general of a number of U.S. states filed actions
against us and other DRAM suppliers in U.S. federal courts.
The claims involve allegations of DRAM price fixing and
artificial price inflation and seek to recover three times
actual damages and other relief.

In connection with these matters and in accordance with U.S.
GAAP, as of September 30, 2006 we had accrued liabilities
in the amount of
139 million
related to these DOJ and European anti-trust investigations.
Because these 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, including our
Automotive Excellence program in that business group, there
remains a risk that defects may occur in our products. The
occurrence of such defects  particularly in consumer
areas and areas in which physical injury could result, such as
our automotive business group  could give rise to
warranty claims or to liability for damages caused by such
defects and for consequential damages and could, moreover, limit
the acceptance of our products in the market. Both could have a
material adverse effect on our business and financial condition.
Also,

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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.

We may be unable to successfully integrate businesses we
acquire

We have acquired other companies, businesses and technologies
from time to time. 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.

We review the goodwill associated with our acquisitions 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 company 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 companys
formation to do so.

Siemens also retained the right to assert infringement claims
against third parties with respect to approximately 15% 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.

As the majority shareholder in Qimonda we may be
negatively impacted by adverse developments in the business of
Qimonda or declines in the market price of its securities

Because we will continue to fully consolidate the financial
results of Qimonda in our financial statements for so long as
Infineon remains the majority shareholder of that company,
fluctuations in Qimondas results of operations will be
reflected in our operating results. Our companys results
of operations will therefore be significantly affected by the
success or failure of the management of Qimonda and, although we
will have control over Qimonda for so long as we remain its
majority shareholder, we will not have the ability to direct its
operations on a day-to-day basis. The value of our holding in
Qimonda and our ability to realize significant cash from any
further sales of Qimonda securities held by Infineon will be
substantially dependent on the market performance of
Qimondas stock, which will in turn depend on the business
success of Qimonda and the development of the market for
semiconductor memory products, both of which are substantially
outside our control.

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The carve-out of Qimonda and its subsequent public listing
may fail to produce the strategic, operational and financing
benefits we envision

We and Qimonda believe that the carve-out of Qimonda will result
in a number of strategic benefits for both companies, including:




    increased marked responsiveness through an exclusive focus on
    our respective customers;
    access to separate and distinct investor bases;
    employee incentives more directly tied to the performance of the
    individual companies; and
    increased flexibility to pursue strategic options.This restructuring may not produce these anticipated benefits,
which could negatively affect our results of operations or our
ability to achieve maximum value from our remaining equity
interest in Qimonda. It may also result in unanticipated
disadvantages, including a loss of synergies and economies of
scale, that are not fully offset by any resulting benefits.

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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.

We design, develop, manufacture and market a broad range of
semiconductors and complete system solutions used in a wide
variety of microelectronic applications. Our logic
semiconductors business is conducted through our Automotive,
Industrial & Multimarket segment and our Communication
Solutions segment. Our memory products business is conducted
through our majority-owned subsidiary, Qimonda. According to
market research company iSuppli, we were the fourth-largest
semiconductor company worldwide in the first half of
2006  with our logic businesses alone ranked number
11 in that period and Qimonda alone ranked number 14.

The principal developments during our 2006 financial year
included the following:



Corporate Developments


    In November 2005, we signed an agreement with Chartered
    Semiconductor regarding the manufacturing of 65-nanometer logic
    products.
    In March and May 2006, our joint venture Inotera successfully
    completed an initial public offering on the Taiwanese Stock
    Exchange of 200 million ordinary shares and a public
    offering on the Luxembourg Stock Exchange of 40 million
    global depositary shares (representing 400 million ordinary
    shares), each at an issuance price of NT$33 per ordinary share.
    As a result of these transactions, we recognized non-operating
    gains of
    72 million.
    In May 2006, we completed the carve-out of our memory products
    business into a separate legal entity, Qimonda AG, and in August
    2006, Qimonda completed an initial public offering on the New
    York Stock Exchange. The net proceeds resulting from the initial
    public offering of Qimonda and the sale of Qimonda shares upon
    exercise of the underwriters over-allotment option were
    464 million. We
    continue to hold 85.9% of the shares of Qimonda.
    In June 2006, we and MOSAID reached agreements settling all
    claims between us and licensing the MOSAID patent portfolio for
    use in our current and future products. Under the terms of the
    settlement agreements, MOSAID purchased fifty patents from us.
    We retain royalty-free lives of the patents licenses
    to use these patents in the manufacturing and sale of any
    products. In addition, MOSAID granted us a six year license to
    use any MOSAID patents in the manufacturing and sale of
    semiconductor products, as well as a lives of the
    patents license to those MOSAID patent families that had
    been in dispute.
    In August 2006, Infineon and Qimonda entered into settlement
    agreements with Tessera with respect to all of Tesseras
    patent-infringement and antitrust related claims. Pursuant to
    the settlement, Infineon and Qimonda entered into six year
    license agreements with Tessera that provide Infineon and
    Qimonda a world-wide, non-exclusive, non-transferable and
    non-sub licensable license to use a portfolio of Tessera patents.
    In August 2006, Winbond and Qimonda expanded their foundry
    relationship to include the transfer of next generation
    80-nanometer DRAM
    trench technology.
    In September 2006, one of our largest mobile phones customers,
    BenQ Mobile GmbH & Co OHG became insolvent. We
    recognized charges of
    91 million in the
    2006 financial year primarily as a result of this event.

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
    In September 2006, we opened our new front-end manufacturing
    site in Kulim, Malaysia for the production of power
    semiconductors for industrial and automotive applications.Technical and Product Developments

Infineon
Logic Businesses




    We introduced our second-generation silicon carbide Schottky
    diodes, enabling greater efficiency and higher reliability for
    power management applications. This technology is expected also
    to be key in the development of HEV (hybrid electronic vehicle)
    cars.
    Our TriCore TC 1796 for automotive applications is the
    first 32-Bit controller
    in 130-nanometer
    technology with embedded Flash. Developed for use with engine
    and gearbox control systems in light vehicles, trucks, and
    motorcycles, it will help combine improved performance,
    reliability and safety with minimum fuel consumption and
    emissions.
    We introduced the air pressure sensor KP106, a device that
    is integrated in passenger doors of automobiles to ignite the
    airbag in case of a side-impact event. Compared to acceleration
    sensors, this pressure sensor has the advantage of a faster
    response time, which can save lives in case of an accident and
    makes travel by car safer. Technology development on the
    semiconductor level now allows the integration of the micro
    controller into the sensor device.
    CoolMOS in flat panel displays. The most important advantage of
    our CoolMOS products (power semiconductors for voltage regimes
    above 300 Volt) lies in their low power dissipation. This
    allows power efficient designs without extra cooling. In
    addition to the classical applications in the industrial area,
    we also regard consumer equipment as an attractive market for
    these power efficient CoolMOS devices.
    Light triggered thyristors in power plants and transformer
    stations. In many cases high voltage DC transmission is more
    efficient than AC based transmission for long distance power
    transmission lines. To improve power efficiency of the DC/ AC
    conversion at the receiving end, our light triggered thyristors
    are used. Compared to conventional, electrically triggered
    thyristors, the light triggered versions need less space and are
    more robust.
    We are starting to sample SMARTi 3GE, the worlds most
    highly integrated single chip dual mode WCDMA/ EDGE RF
    transceiver for mobile devices. It is based on a quad-band GSM/
    EDGE transceiver and a six-band WCDMA transceiver with HSDPA
    functionality.
    Our latest highly integrated S-GOLD3H is the first baseband
    processor which offers download data rates of up to
    7.2 Mbps for mid-range multimedia phones. Combined with
    SMARTi 3GE and our HSDPA protocol stack it comprises the heart
    of our HSDPA/ WCDMA/ EDGE multimedia platform, MP-EH.
    We introduced E-GOLDvoice, a GSM single-chip which integrates a
    baseband processor, radio frequency transceiver, power
    management unit and RAM, achieving a new record level of silicon
    integration for mobile communications.
    We introduced Danube, a single-chip solution for ADSL2+
    broadband IAD (integrated access device) and home gateway
    applications enabling services such as VoIP, video-conferencing
    and IPTV.Qimonda




    Launched DDR2 Fully-Buffered DIMMs in high volume for
    Intels Bensley server platforms.
    Delivered the industrys first DDR3 SO-DIMM samples to ATI
    for future notebook designs.
    Announced that it had become the preferred supplier of GDDR3
    Graphics RAM for Microsofts XBox 360 games console.

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
    Finalized the first phase of the ramp-up of the new
    300-millimeter
    manufacturing module at its Richmond manufacturing site with a
    capacity of 25,000 wafer starts per month.
    Qimonda and Nanya announced that they had successfully qualified
    the next generation
    75-nanometer DRAM
    trench technology and a first 512M DDR2 product that had been
    jointly developed at Qimondas R&D centers in Dresden
    and Munich, Germany.The address of our principal executive offices is Am
Campeon 1-12,
D-85579, Neubiberg,
Germany, and our main telephone number is
+49-89-234-0.





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, digital cameras, digital audio devices, digital TVs,
chip cards and security applications, and games consoles.

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 2005, global
semiconductor market growth slowed significantly to 7% according
to WSTS. For the 2006 calendar year WSTS anticipates a growth
rate of 8% for the global semiconductor market.





Strategy

Following the carve-out of our memory products business into the
separately listed company Qimonda, we will now focus on our
non-memory core businesses: automotive, industrial electronics,
mobile phone platforms, RF solutions, broadband access, and
chipcard & security applications. In particular, we
strive to achieve profitable growth in these businesses by
maintaining and expanding our leadership position in
semiconductor solutions for energy efficiency,
mobility & connectivity and security & safety.

To achieve these goals, in our non-memory business we seek to:




    Build on our market leadership position in the field of
    power management semiconductors, both power discretes and ICs.We believe that our success to date has been based on a
    deep understanding of a wide range of applications in the
    automotive and industrial area as well as for PCs and consumer
    devices. Our leading position in these areas is built on
    high-performance products, superior process technologies and
    optimized in-house manufacturing capabilities. We see
    significant growth potential for our power business, driven by
    high energy costs and the need for ever longer battery lifetimes
    in mobile devices.
    Provide the technology to be connected every
    day & everywhere  from home, in the office
    or on the way.We will seek to profit from our key
    strengths in areas such as RF technology and wireline access. In
    order to benefit from the ever-increasing need for mobility and
    communication in all aspects of our day-to-day life, we intend
    to broaden our customer base and to focus on the most promising
    solutions for future profitable growth.
    Strengthen our leadership position in security &
    safety solutions.We intend to leverage our know-how for
    applications in new areas, and believe we are well positioned to
    benefit from future trends like the transition to e-passports
    and the implementation of digital rights manage-

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ment in consumer devices. We believe that the ever-increasing
    digitalization and increasing mobility in daily life will be a
    key driver for our security & safety business.
    Manage carefully the mix of make-versus-buy in
    manufacturing and process technology development.We
    intend to continue to invest in leading-edge process
    technologies such as power, embedded flash and RF technologies.
    At the same time, in standard CMOS below
    90-nanometer, we will
    continue to share risks and expand our access to leading-edge
    technology through long-term strategic partnerships with other
    leading industry participants. We do not intend to invest in
    in-house capacity for standard-CMOS processes below the
    90-nanometer node, and expect to make more extensive use of
    manufacturing at silicon foundries.Regarding our memory business, we strive to benefit as Qimonda
implements its strategy, including its plans to:




    Improve its average selling price by increasing its focus on
    DRAM products for advanced infrastructure, graphics, mobile and
    consumer applications.
    Leverage its technology leadership and increase its presence in
    low-cost regions to continue to reduce unit costs.
    Improve profitability and return on capital throughout the
    memory product industrys business cycle.We do not anticipate that we will continue to hold a majority
stake in Qimonda over the long term. We expect that any proceeds
from future sales of Qimonda shares will enable us to generate
additional cash to expand and further strengthen our non-memory
core operations.





Products and 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 three segments in the 2006 financial
year.

Principal Products, Applications and Customers

|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  |                                                                        
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  | Four                                                                   
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  | Largest                                                                
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  | Customers                                                              
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  | in the 2006                                                            
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  | Financial                                                              
|Segment                                  |  | Principal Products                                                                                                                                                                                                                                                              |  | Principal Applications                                                                                                                                                                                                                                                       |  | Year                                                                   
|                                         |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                              |  |                                                                        
|Automotive, Industrial &
    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 including
    secure ASICs, Trusted Platform Modules |  | Automotive: Powertrain (engine
    control, transmission control, hybrid) body and convenience
    (comfort electronics, air conditioning) safety and vehicle
    dynamics (ABS, airbag, stability control) infotainment (wireless
    communication, telematics/navigation) |  | Avnet
    Bosch
    Siemens
    Silicon
    Application
    Corporation
|                                        
|                                         |  |                                                                                                                                                                                                                                                                                 |  | Industrial & Multimarket: Power
    management & supplies, drives and power distribution,
    industrial control, discrete commodity products
    (e.g. handsets)                                                                                                            |  |                                                                        
|                                        
|                                         |  |                                                                                                                                                                                                                                                                                 |  | Security & ASICs: Chip card and
    security ICs (e.g., for mobile communication,
    identification, finance), Platform security for computers and in
    networks (TPM), hard disks, game consoles, hearing aids,
    computer peripherals                                 |  |                                                                        

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|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  |                                     
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  | Four                                
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  | Largest                             
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  | Customers                           
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  | in the 2006                         
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  | Financial                           
|Segment                 |  | Principal Products                                                                                                                                                                                                                                                                                                                                                  |  | Principal Applications                                                                                                                                                                                                                                                                                                                                                                |  | Year                                
|                        |  |                                                                                                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                                                                                                       |  |                                     
|Communication Solutions |  | Baseband ICs; RF transceivers;
    mobile phone system solutions including software; DECT chipsets;
    tuner ICs; RF-power transistors; ICs for voice access and core
    access (e.g., CODECs, SLICs, ISDN, T/E); broadband access
    ICs for xDSL CO/CPE, VoIP, switch and PHY; system solutions for
    DSL-modems; routers; home-gateways; WLAN access points |  | Mobile telephone systems for major
    standards (GSM, GPRS, EDGE, UMTS), cordless telephone systems
    for major standards (WDCT, DECT), RF connectivity solutions
    (e.g., Bluetooth, GPS), cellular base stations, voice
    access and core access, broadband access solutions for central
    office, broadband customer premises equipment and home
    networking equipment |  | BenQ
    Nokia
    Siemens
    Avnet
|                       
|Qimonda                 |  | 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,
    and computer peripherals                                                                                                                                                                                                                                                     |  | HP
    Dell
    Microsoft
    Sony  
|                       
|                        |  | Graphics RAM components with
    densities of 256-Mbit and 512-Mbit and DDR, DDR2 and GDDR3
    interfaces                                                                                                                                                                                                                                                          |  | Graphic cards, motherboards, and
    game consoles                                                                                                                                                                                                                                                                                                                                    |  |                                     
|                       
|                        |  | Mobile-RAM with densities from
    128-Mbit to 512-Mbit and SDRAM and DDR interface                                                                                                                                                                                                                                                                                 |  | Portable consumer devices, e.g.,
    MP3 players, digital still cameras, PDAs, and mobile phones                                                                                                                                                                                                                                                                                      |  |                                     
|                       
|                        |  | NAND-compatible Flash components,
    Flash Cards (SD, MMC, mini SD, RS MMC), USB-sticks                                                                                                                                                                                                                                                                            |  | Portable consumer devices,
    e.g., MP3 players, digital still cameras, PDAs, mobile
    phones, and PC upgrades                                                                                                                                                                                                                                                                     |  |                                     

Automotive, Industrial & Multimarket






| |           
| | ----------
| | Automotive



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Our automotive team offers customers semiconductors and complete
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.

Our automotive 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,
our power competencies across all of our business units are
bundled in order to better enable us to provide semiconductor
and power module solutions for hybrid vehicles.

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.

We strongly emphasize high quality in our products. We have
implemented a group wide program, called Automotive
Excellencetm,
through which we aim for the goal of zero defects in
our automotive semiconductors and solutions.

Industrial
& Multimarket

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

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. With
global energy demand continuing to rise and supplies generally
tightening, power semiconductors can make a major contribution
to addressing the increasing need for energy

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savings. We have a strong position in power applications within
industrial and automotive segments. According to market research
firm IMS Research, we have been the global market leader for
power semiconductors for three consecutive years, with 9.4%
market share in 2005.

Our broad portfolio comprises power modules, small signal and
discrete power semiconductors, power management ICs and
microcontrollers. Our industrial products are used in a wide
range of applications, such as:




    Power supplies (AC/DC), divided into two main categories:
    uninterruptible power supplies, such as power backbones for
    Internet servers; and switched-mode power supplies for PCs,
    servers and consumer electronics (LCD/PDP TVs and gaming
    consoles), as well as battery chargers for mobile phones,
    notebook computers and other handheld devices;
    DC/DC converters for computing and communication applications,
    for example, for motherboards, telecommunications equipment and
    graphic cards;
    Drives for machine tools, motor controls, pumps, fans and
    heating, ventilation, consumer products (for example, washing
    machines), air-conditioning systems and transportation as well
    as power suppliers for further consumer appliances such as
    inductive cooking;
    Industrial automation, meters and sensors; and
    Other industrial applications such as power distribution systems
    and medical equipment.Our portfolio of semiconductor discretes includes:




    AF (audio frequency) discretes (general purpose diodes and
    transistors, switching diodes, digital transistors);
    RF (radio frequency) discretes (diodes, transistors, Small Scale
    Integrated Circuits (SSICs), Monolithic ICs); and
    HIPACtm
    (High Performance Active and Passive Integration) devices
    offering ESD/EMI (ElectroStatic Discharge/Electro Magnetic
    Interference) protection and high integration in advanced
    applications (e.g. in mobile communication devices).Security
& ASICs

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 Frost &
Sullivan, in the 2005 calendar year we remained the market
leader in ICs for smart card applications, with a market share
of 29%, compared with 35% in 2004.

Our products include security memory ICs, security
microcontroller ICs for SIM cards, payment cards, identification
cards, prepaid telecom cards, transportation cards 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.

Within our ASIC design & security business we focus on
customer-specific products integrating intellectual property
from our customers with our own IP.

These products are used in a variety of markets, with a special
focus on systems for mobility, data storage and security.

The main products of this segment include:




    Systems on Chip (SoC) for hard disk drive (HDD) applications;
    Products for computer and gaming peripherals (e.g. in wireless
    control pads or memory sticks);

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
    Secure ASICs, taking advantage of our security know-how, e.g.
    for authentication or copy protection;
    Trusted Platform Module products (Hardware based security for
    trusted computing); and
    Customer designs manufactured by us on a foundry basis.Many of these products are made to customer specifications, and
are often provided by us on a sole-source basis. As a result, we
are often able to establish a long-term relation with our
customers in this business area, in some cases actively
supporting the customers roadmap.

Communication Solutions

Our Communication Solutions segment designs, develops,
manufactures and markets a wide range of ICs, other
semiconductors and complete system solutions for wireline and
wireless communication applications. We are among the leading
players in the markets for semiconductor solutions for mobile
phones as well as wireline access networks.



Wireless CommunicationsIn wireless communications, our principal products include
baseband ICs and RF transceivers for the major standards (GSM,
GPRS, EDGE, UMTS and DECT), power management ICs and
radio-frequency products such as Bluetooth devices, GPS ICs,
tuner ICs and RF-power
components for wireless infrastructure (base stations). Our
principal solutions include hardware system design and software
solutions for 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 the 2005 we held the number
six position in wireless application-specific semiconductors,
with a worldwide market share of 5%. In subscriber RF ICs in
2005 we held the number one position, with a market share of
11%, according to Gartner Dataquest.

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, 812 million cellular handsets were produced in
the 2005 calendar year compared with 674 million units in
2004. 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 the wireless mobile
    telecommunication standards that includes General Packet Radio
    Service (GPRS), Enhanced Data rate for GSM Evolution (EDGE), and
    Universal Mobile Telecommunications System (UMTS). We offer
    products and solutions such as baseband ICs,
    RF transceivers, single-chip ICs integrating the baseband
    and RF transceiver, mobile software, power management ICs
    and reference designs addressing all of these wireless
    communication standards. In the 2006 financial year, we started
    volume shipments of
    E-GOLDradio, a GSM/GPRS
    single-chip integrating the baseband IC and RF transceiver,
    and of SMARTi PM, our CMOS EDGE RF transceiver. In
    addition, we introduced
    E-GOLDvoice, a GSM
    single-chip that integrates a baseband processor, radio
    frequency transceiver, power management unit and RAM, achieving
    a new record level of silicon integration for mobile
    communications. We also launched a

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reference design for ultra low-cost cellular handsets, based on
    E-GOLDvoice, enabling
    handset production costs of less than $16.
    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. In the 2006 financial year, we started volume
    shipments of our dual-mode GSM/UMTS mobile phone platform
    solution MP-EU.
    Furthermore, we introduced SMARTi 3GE, the worlds first
    one-chip, six-band WCDMA (Wideband Code Division Multiple
    Access) and quad-band EDGE radio frequency transceiver
    manufactured in RF CMOS technology. In addition, we
    launched S-GOLD3H, a
    baseband processor supporting next generation HSDPA (High-Speed
    Downlink Packet Access) data rates of up to 7.2 Mbps. We
    also introduced a reference design for HSDPA cellular handsets
    based on S-GOLD3H,
    SMARTi 3GE and our mobile software enabling broadband multimedia
    applications, such as video streaming or high-speed audio/video
    download.
    DECT (Digital Enhanced Cordless Telecommunications) and WDCT
    (Worldwide Digital Cordless Telecommunications) standards for
    digital cordless phones. We offer complete WDCT system solutions
    for the 2.4 GHz ISM frequency band, which is available
    worldwide, 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 base station controllers. In the 2006
    financial year, we introduced our eighth generation DECT
    baseband controller and unveiled the development of an industry
    first single-chip DECT solution that will integrate the
    baseband, RF transceiver, and power amplifier.
    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 Video 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 Assistants). 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 U.S., Japanese, Korean and Chinese
    standards for digital television. We have introduced tuner ICs
    for mobile digital television reception according to the
    DVB-T standard.
    Global Positioning System (GPS), a location system based on a
    network of satellites. GPS is widely used in automotive,
    wireless, mobile computing and consumer applications. 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. We offer
    BlueMoon UniCellular, a fast and energy-efficient Bluetooth-chip
    which supports the new Bluetooth enhanced data rate (EDR)
    protocol.
    Wireless Local Area Network (WLAN), a local computer network
    that connects computers with each other or the Internet via a
    radio connection. In 2005, we introduced WILDPASS, a highly
    integrated secure dual- band 802.11 a/g wireless network
    processor system-on-chip (SoC) solution.

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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 creates
    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/digital loop carrier (DLC) integrated
    voice and data (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
application-specific wireline communication ICs worldwide in
2005, with a 5.3% market share. We held the number three
position in the wireline access network ICs market segment in
2005, with a market share of 14%, according to Gartner
Dataquest. During the 2006 financial year, we leveraged our
strong position in the DSL central office market to ramp up
shipments into the customer premises equipment market. This
includes complete system solutions comprising DSL transceivers,
VoIP ICs, switch/PHY, and application software.

The primary applications for our wireline communication devices
include:




    voice access, core access and enterprise applications, e.g.
    analog line cards, ISDN, T/E, ATM and PBX;
    broadband access solutions for the central office, such as xDSL,
    and access network processor; and
    broadband customer premises equipment (CPE) and home
    networking equipment such as DSL/VoIP routers, gateways, and
    WLAN access points.We are a leading supplier of voice and core access solutions
including analog line cards, ISDN, T/E, as well as broadband
access solutions. This portfolio of products allows a complete,
end-to-end access solution that enables the triple
play of voice, video, and data applications.

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, VINAX and VINETIC ICs. In
the 2006 financial year, we started volume shipments of VINAX, a
fully standard-compliant VDSL2/ADSL2+ end-to-end solution; 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 CPE market we provide low cost Ethernet switches and
Ethernet PHYs, wired and wireless LAN NICs, low power
consumption network processors and controllers, VoIP ICs and
xDSL transceivers. In the 2006 financial year, we introduced
Danube, a single-chip solution for ADSL2+ broadband IAD
(integrated access device) and home gateway applications
enabling services such as VoIP, video-conferencing and IPTV.
Featuring the industrys highest level of integration, the
new Danube chip allows manufacturers of residential broadband
IAD products to deliver systems supporting
triple-play services using up to 60% fewer chips
compared to competing solutions. We also introduced Spinacer, a
new software suite for a wide range of broadband CPE
applications such as ADSL2+ gateway, IP phone and router
solutions. In addition, we launched Vinetic-Plus, the
worlds first single-chip digital and analog VoIP engine
enabling small VoIP adapters for global use. Furthermore, we
introduced Inca IP2 our second generation
IP-phone
system-on-a-chip.

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Qimonda

Qimonda designs memory technologies and develops, manufactures,
markets and sells a large variety of memory products on a
module, component and chip level. Qimonda currently offers
standard DRAM products for PCs, notebooks and workstations, as
well as technologically more advanced DRAM products for
infrastructure, graphics, mobile and consumer applications. In
its 2006 financial year, it also offered a small number of
non-volatile NAND-compatible flash memory products.

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%. 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 |     |    | 2005 | 
|                                                   |  |      |     |    |      |  |     |      |  |  |      |    |  |      |     |    |      | 
|DRAM market in billion $                           |  |      | 29  |    |      |  | 11  |      |  |  | 15   |    |  |      | 17  |    |      |  | 27    |   |  |  | 26    |   
|DRAM market in billion megabits                    |  |      | 246 |    |      |  | 400 |      |  |  | 563  |    |  |      | 785 |    |      |  | 1,260 |   |  |  | 1,912 |   
|Year over year change in average
    price per bit |  |      | (12 | )% |      |  | (76 | )%   |  |  | (3   | )% |  |      | (22 | )% |      |  | 0     | % |  |  | (37   | )%





| |                                                                 
| | ----------------------------------------------------------------
| | Standard DRAMs for PC, Notebook and Workstation
    Applications





| |                                                                         
| | ------------------------------------------------------------------------
| | DRAMs for Infrastructure, Graphics, Mobile and Consumer
    Applications



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Infrastructure
Applications.Qimondas current portfolio of DRAMs
for use in servers, networking and storage equipment includes
FB-DIMMs, which we believe will serve as the next generation of
memory used in high-end servers, and very-low-profile-DIMMs,
intended for the blade server market. DRAM consumption in blade
servers is expected to experience compound annual growth of 79%
CAGR (based on bits shipped) from 2005 to 2010, according to
Gartner Dataquest. We believe Qimonda is the only
FB-DIMM supplier that
has in-house capabilities to design a key component of this
module, a logic chip called Advanced Memory Buffer, or AMB. This
allows Qimonda to customize the AMB design specifically for its
memory modules, providing it better know-how transfer from chip
to system level and vice versa. Qimonda also provides customized
modules to server manufacturers, in each case specifically
designed to meet the individual customers unique platform
requirements. Qimonda expects the markets for servers to grow
substantially in the next few years, and Qimonda is currently
engaged in the development of products we believe will address
that growth. For example, Qimonda is developing new generations
of standard DRAM with 2 gigabits of capacity for use in future
IT infrastructure applications.

Graphics
Applications.Qimonda offers a broad portfolio of
graphics DRAMs that support applications with performance
ranging from entry, to very advanced levels. Due to their speed,
low power consumption and limited heat generation,
Qimondas graphics DRAM components are used in game
consoles, graphics cards and PC and notebook computers. In some
cases, Qimonda makes customized products for use in handheld
game consoles and other handheld products. Qimonda believes that
the trend towards the extensive use of sophisticated graphics
applications will result in strong growth in high performance
graphics systems which it believes will in turn drive the demand
for its graphics DRAM products.

Mobile
and Consumer Applications.We offer low-power specialty
DRAM products, such as Mobile-RAM and CellularRAM that are
suited for use in a variety of mobile and consumer applications,
such as:




    mobile phones;
    mobile consumer products, such as digital still cameras and
    digital audio players; and
    stationary consumer products, such as digital televisions and
    DVD recorders.Qimondas Mobile-RAM is specifically designed for the need
for ultra-low power consumption increasingly demanded by
todays battery powered mobile communication and consumer
products. Qimonda intends to focus further on driving
technological innovations in this area and it believes it was
the first to produce chips with a temperature sensor integrated
onto the chip as well as the first to introduce a DDR interface
for a Mobile-RAM to further reduce power consumption or
alternatively offer higher performance. Qimonda also expects
that new consumer products that combine more features will
require DRAMs that consume very low power, yet operate at
adequate speeds. Qimonda believes that the
trench-architecture-based products it currently offers allow for
a significantly longer battery life and reduced heat
dissipation, both important features for potential customers and
their end users.

Qimondas
CellularRAMTM
is designed to meet the growing memory density and bandwidth
demands of future 2.5G and 3G mobile phone handset designs.
Qimonda is also a founding member of the
CellularRAMTM
specification co-development team and, together with six other
industry members creates common specifications for
high-performance pseudo-SRAM devices, enabling it to take an
active role in the development of DRAM memory products for one
of the fastest-growing technology sectors.

Both Qimondas Mobile-RAM and
CellularRAMTM
products are offered as components and as so-called
Known-Good-Dies, or KGDs, for use in Multi-Chip-Packages, or
MCPs. MCPs combine different memory chips, usually a
non-volatile flash chip, and a faster, volatile RAM, and are
increasingly used in mobile communication and consumer devices
due to their lower space consumption. Qimonda supplies its
Mobile-RAM and
CellularRAMTM
as KGDs on wafer level to MCP manufacturers.

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Qimonda also offers standard DRAM products for consumer
applications, some of which are of smaller memory densities or
older interface generations, such as SDRAM. These are often
referred to as legacy DRAM products. For example,
the manufacturers of printers do not require large amounts of
DRAM per printer, but do require a DRAM product that is
guaranteed to be available for the printers entire life
cycle, which may be many years. In many cases, the DRAM products
used in these devices are older DRAM products that were
previously state-of-the-art but are no longer widely used. These
factors cause demand for legacy DRAM products to be relatively
less volatile and prices to be relatively steadier compared to
other standard DRAM prices.



Other Products and Technology LicensingIn the 2006 financial year, Qimonda offered data flash memory
products, primarily in the form of cards and to a lesser extent
in component form, for use in digital still cameras, USB flash
drives, digital audio players and mobile phones. Due to the
significant price decline for data flash memories since the
beginning of the 2006 calendar year, Qimonda decided to ramp
down the production of its flash products in the 2007 financial
year and to convert the capacities to DRAM products. Qimonda
continues to be engaged in technology development for
non-volatile memories to address a potential future system flash
market with a competitive platform.

Qimonda conducts its non-volatile memory development activities
at facilities in Dresden and Munich, Germany and Padua, Italy.
Qimonda has stopped the development of NAND-compatible flash
memory products based on proprietary NROM technology that was
licensed from Saifun Semiconductors when it purchased its
remaining interest in its former joint venture with that
company. Qimonda continues to develop non-volatile memory
technologies based on alternative technology platforms,
including MRAMs, PCRAMs, CBRAMs and charge trapping technologies.

Qimonda also sells a small volume of embedded memories, which
are systems on a chip designed for special applications.

In the 2006 financial year, Qimonda had license income from
licensing its DRAM trench technology to partners, such as
Winbond and Nanya.





Customers, Sales and Marketing

Customers

We sell our products to customers located mainly in 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 470 direct customers worldwide (including
distributor and Electronic Manufacturing Services (EMS)
accounts), of which approximately 80 are solely customers of
Qimonda. On a group wide basis, no customer accounted for more
than 10% of our sales in the 2006 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 & 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.
Our two largest customers in the 2006 financial year were Bosch
and the Siemens group. 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 & multimarket businesses, the Siemens
group is the largest OEM 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
like Avnet or Silicon Application Corporation. 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
wide variety of discrete commodity products is targeted at
customers in all major fields of applications, including
consumer, computing and communication.

Our chip card business derives a large portion of its revenues
from large scale projects. Within the chip card business, three
card manufacturers  Gemalto, Giesecke &
Devrient and Oberthur Card Systems  accounted for the
majority of sales. We maintained our strong worldwide position
in the security business during the 2006 financial year.

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 Solutions

Wireless
Communications

In the field of wireless communications we sell a wide variety
of products addressing applications such as cellular
communication, cordless phones, Bluetooth, WLAN, GPS, DVB 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 2006 financial year was BenQ, while Nokia was our largest
customer for radio-frequency (RF) ICs. In the 2006 financial
year, we announced that LG Electronics Inc. has selected our
multimedia platform MP-E for new EDGE mobile phones and that
Panasonic has chosen our multimedia platform MP-EU for new 3G
mobile phones. In addition, we announced that Samsung has
selected the single-chip SMARTi PM CMOS radio frequency
transceiver for new EDGE mobile phones. 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.

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 voice and core access solutions (CODECs,

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SLICs, ISDN, T/E, etc.), broadband access system solutions for
xDSL and VoIP and system solutions for broadband customer
premises equipment (CPE) and home networking equipment.

In the 2006 financial year, the Siemens group was the largest
OEM customer of the wireline communications business. Our
leading telecommunications and data communications customers
also include ECI, Ericsson and Huawei. 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 focuses its 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.

Qimonda

Qimondas customers include the worlds largest
suppliers of computers and electronic devices, including HP,
Dell, IBM, Sun Microsystems and Sony. To expand customer
coverage and breadth, Qimonda also sells a wide range of
products to memory module manufacturers that have diversified
customer bases such as Kingston, and to a number of
distributors. More recently and in connection with the ongoing
expansion of its product portfolio, especially into graphics
applications, Qimonda has added game console manufacturers such
as Microsoft to its customer base as well as customers with a
strong focus on enabling graphics applications, such as nVidia
and ATI. By having close relationships with these customers we
believe Qimonda can benefit in the development of future memory
generations.

Sales and Marketing

As of September 30, 2006, we had approximately 2,100 sales
and marketing employees worldwide.

Infineon Logic

We create and fulfil our logic product sales either directly or
through our network of distributors and EMS (Electronic
Manufacturing Services) partners.

A team of Corporate Account Executives is assigned to develop
business relationships with our most important strategic
customers. Furthermore, dedicated Account Managers foster our
relationships with all other important direct customers.
Regional sales units offer additional support for global
accounts based in these regions, as well as local accounts that
are key players in these specific markets. In three smaller
markets we still have contractual arrangements with the Siemens
group sales organizations to provide defined sales support.

To serve the broader market and expand our indirect sales, our
Sales Channels & Services (SCS) Organization
develops, maintains and interacts with a strong network of
distribution partners. This optimized network contains globally
active distributors, strong regional partners and dedicated
niche specialists. In addition, third-party sales
representatives help to identify and create business,
particularly in the United States.

A number of our important direct customers increasingly
outsource activities ranging from product design, procurement to
manufacturing and logistics to global EMS. In order to take
advantage of this trend, we have established a dedicated EMS
sales team within SCS. Focusing on the market leaders within the
EMS industry, our EMS global account managers and dedicated
support personnel follow up on manufacturing transfers from OEM
to EMS and conclude strategic partnerships for design and
technology to increase our market share within the EMS channel.

Within each of our business units, we have product- and
applications-oriented marketing employees. These employees are
responsible for understanding the markets of their business
units and developing market share. They define, develop,
optimize and position the products and provide product support
up to the end-of-life stage.

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

Qimonda

Qimonda makes memory sales primarily through direct sales
channels and, in order to ensure the best possible customer
coverage and reach, makes use of distributors. It focuses its
principal sales and marketing efforts on the technology leaders
in each of the DRAM markets it serves. We believe Qimonda has
strong customer relationships and that its customers, many of
which are leaders in their respective fields, provide Qimonda
with special insights into the current state of their respective
markets. Qimondas engineering experts work directly with
its customers to tailor products to each of their specific needs
as well as to the needs of their quality and supply chain
experts.

Qimondas regional sales teams are located in Europe, North
America, the Asia/ Pacific region and Japan, and are supported
by staff headquartered in Germany. These regional sales centers
enable Qimonda to bring its business to its customer base and to
provide local contact and support to the teams in those regions.

Qimondas marketing teams work closely with its customers
and with its sales and R&D organizations. The product
marketing groups help plan Qimondas product roadmap, to
enable it to develop and manufacture products that will meet
customers changing requirements.

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 becoming increasingly important
players in the semiconductor market, and semiconductor foundry

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companies have expanded significantly. Competitors include
manufacturers of standard semiconductors, application-specific
ICs and fully customized ICs, including both chip and
board-level products, as well as customers that develop their
own integrated circuit products and foundry operations. We also
cooperate in some areas with companies that are our competitors
in other areas.

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

Key Competitors by Segment

|                                         |  |                                                                                                                                               
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Automotive, Industrial &
    Multimarket |  | Freescale, Renesas, Samsung, ST
    Microelectronics, Toshiba                                                                                 
|Communication Solutions                  |  | Broadcom, Conexant, Freescale, NXP,
    Qualcomm, Texas Instruments                                                                           
|Qimonda                                  |  | Elpida Memory, Hynix Semiconductor,
    Micron Technology, Nanya Technology (with which we also have a
    joint venture), Samsung Electronics







| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 that 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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size of the memory products of Qimonda is as small as
75-nanometers and we are currently developing production
processes for memory products with structure sizes as small as
58-nanometers.

High-end mask technology is a prerequisite for achieving small
feature sizes. Since May 2002, the Advanced Mask Technology
Center (AMTC), our joint venture with Advanced Micro
Devices and Toppan Photomasks in Dresden, Germany, has developed
advanced masks. Since 2004, the joint ventures mask
foundry has produced high-end masks at AMTCs pilot
production Dresden facility. Qimonda expects to continue to
purchase most of its masks from AMTC and Toppan Photomasks under
a cooperative arrangement with the company.

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 new international environmental
requirements for lead-and/or halogen-free green
packages continued in the 2006 financial year.





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 |                                |                 |  |                                 |     | 
|Infineon
    Logic:                                 |                                |                 |  |                                 |     | 
|                                                    | 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                                                                        
|                                                    | Kulim, Malaysia                |                 |  | 2006                            |     |  | Power, smart power                                                          
|                                                    | Munich-Perlach,
    Germany(3) |                 |  | 1987                            |     |  | High frequency; sensors                                                     
|                                                    | Regensburg, Germany            |                 |  | 1986                            |     |  | Non-volatile memory, power and logic                                        
|                                                    | Villach, Austria               |                 |  | 1979                            |     |  | Power, smart power and discretes                                            
|                                                    | Warstein, Germany              |                 |  | 1965                            | (2) |  | High power                                                                  

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|                                                            |                                                |                 |  |                                 |     |  |                                                  
|----------------------------------------------------------- | ---------------------------------------------- | --------------- |  | ------------------------------- | --- |  | -------------------------------------------------
|                                                            |                                                | Year of         |  |                                
|                                                            |                                                | commencement    |  |                                
|                                                            |                                                | of first        |  |                                
|                                                            |                                                | production line |  | Principal products or functions
|                                                            |                                                |                 |  |                                
|Qimonda:                                                    |                                                |                 |  |                                 |     | 
|                                                            | Dresden 300mm, Germany                         |                 |  | 2001                            |     |  | DRAM                                             
|                                                            | Richmond 200mm, Virginia                       |                 |  | 1998                            |     |  | DRAM                                             
|                                                            | Richmond 300mm, Virginia                       |                 |  | 2005                            |     |  | DRAM                                             
|                                                            | Taoyuan,
    Taiwan(4)                         |                 |  | 2004                            |     |  | DRAM                                             
|Back-end facilities 
    assembly and final testing plants |                                                |                 |  |                                 |     | 
|Infineon
    Logic:                                         |                                                |                 |  |                                 |     | 
|                                                            | Batam, Indonesia                               |                 |  | 1996                            |     |  | Leaded Power and Non-Power ICs                   
|                                                            | Cegled, Hungary                                |                 |  | 1997                            |     |  | High power                                       
|                                                            | Morgan Hill, California                        |                 |  | 2002                            |     |  | RF-power                                         
|                                                            | Regensburg, Germany                            |                 |  | 2000                            |     |  | Chip card modules, sensors and
    pilot lines   
|                                                            | Singapore                                      |                 |  | 1970                            |     |  | Leadless and leaded non-power ICs,
    wafer test
|                                                            | Skoppum, Norway                                |                 |  | 1991                            |     |  | Sensors                                          
|                                                            | Warstein, Germany                              |                 |  | 1965                            | (2) |  | High power                                       
|                                                            | Wuxi, Peoples Republic of
    China           |                 |  | 1996                            |     |  | Discretes, chip card modules                     
|                                                            | Malacca, Malaysia                              |                 |  | 1973                            |     |  | Discretes, power packages, logic ICs             
|Qimonda:                                                    |                                                |                 |  |                                 |     | 
|                                                            | Dresden, Germany                               |                 |  | 1996                            |     |  | DRAM components and modules                      
|                                                            | Malacca, Malaysia                              |                 |  | 1973                            |     |  | DRAM components and modules                      
|                                                            | Porto, Portugal                                |                 |  | 1997                            |     |  | DRAM components and modules                      
|                                                            | Suzhou, Peoples Republic of
    China
    (5) |                 |  | 2004                            |     |  | DRAM components and modules                      



|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | ALTIS, our joint venture with IBM in which we own 50% plus one
    share. We have agreed with IBM to increase our share of the
    production ratably from 50% in 2004 to 100% by 2007. Our share
    of the production in the 2006 financial year was 87.5%.
|   
|(2) | The current main production line began operations in 1991.                                                                                                                                                                                                   
|   
|(3) | We are in the process of phasing out production at
    Munich-Perlach, and expect to shut down the plant in the
    beginning of calendar year 2007.                                                                                                         
|   
|(4) | Inotera Memories, Qimondas joint venture with Nanya.                                                                                                                                                                                                        
|   
|(5) | Qimonda Technologies Suzhou Co., Ltd., Qimondas joint
    venture with CSVC.                                                                                                                                                                                



Logic Manufacturing


Front-End






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with IBM, Chartered Semiconductor and Samsung, to accelerate the
move to 65-nanometer process technology. In November 2005, we
signed an agreement with Chartered Semiconductor regarding the
manufacturing of 65-nanometer logic products.

We began the ramp up of our new power-logic plant in the Kulim
Hi-Tech Park in the north of Malaysia ahead of plan in mid 2006.
This will allow us to further expand our presence in the growing
Asian market, as well as to strengthen our cost position and
competitive position.

Back-End

We have a number of logic back-end facilities, located primarily
in Europe and Asia. We also use assembly and test subcontractors
to assist us in meeting demand flexibly, as well as managing
investment expenditures. For assembly services, we have further
intensified our partnership with AMKOR Technology on leadless
and flip-chip technologies.

Qimonda Manufacturing

Front-End

In the 2006 financial year, Qimonda continued to increase the
share of its DRAM manufacturing on
300-millimeter diameter
wafers. Qimondas
300-millimeter facility
in Dresden began commercial production using 75-nanometer
technology in September 2006. The ramp-up of Inotera,
Qimondas
300-millimeter
manufacturing joint venture with Nanya, continued, with a
capacity of approximately 62,000 wafer starts per month reached
by September 2006. The construction of a second manufacturing
module for Inotera was completed in the 2006 financial year and
the move in of equipment has started. Qimonda and Nanya each are
entitled to 50% of Inoteras capacity. In addition,
Qimondas
300-millimeter facility
at Richmond ramped up production to a capacity of approximately
25,000 wafer starts per month by June 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. Qimondas foundry and development partner
Winbond has officially opened its new
300-millimeter facility
in Taiwan in April 2006 and has been ramping up production since
then. The increasing share of
300-millimeter
production and the conversion to
90-nanometer as well as
80-nanometer and
75-nanometer
technologies should substantially reduce Qimondas overall
per-unit cost for memory chips.

The current production capacity for memory products of
Infineons Dresden 200-millimeter fab is approximately
7,500 wafer starts per week, of which a declining share of wafer
starts per week relate to Flash memory products. Infineon and
Qimonda have entered into an agreement for the production of
wafers in the Dresden 200-millimeter fab. Pursuant to the
agreement, Infineon has agreed to manufacture certain specified
semiconductor memory products at the Dresden 200-millimeter fab,
using Qimondas manufacturing technologies and masks, and
to sell them to Qimonda at prices specified in the agreement.
Qimonda is required under this agreement to pay for idle costs
resulting from Qimonda purchasing fewer wafers from Infineon
than agreed upon, if Infineon cannot otherwise utilize the
capacity. Qimonda is obliged to indemnify Infineon against any
third party claims based on or related to any products
manufactured for Qimonda under this agreement. In addition,
Qimonda will have to indemnify Infineon against any intellectual
property infringement claims related to the products covered by
the agreement. The agreement terminates on September 30,
2007 unless extended by a written mutual agreement between
Infineon and Qimonda.

We currently are in negotiations with Qimonda regarding their
use or acquisition, after September 30, 2007, of capacity
at the 200-millimeter manufacturing facility in Dresden. We and
Qimonda have already agreed in principle that we will share any
potential restructuring costs arising in connection with one
module equally. Restructuring costs may include severance
payments and costs relating to lower levels of production in one
module. Restructuring costs will depend on the extent of
Qimondas capacity usage after September 30, 2007 and
the point in time when Qimonda stops purchasing products
completely.

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Qimonda has structured and organized its memory fabrication
facilities worldwide in its so-called fab cluster.
Through this organizational approach, Qimonda seeks to use best
processes to maximize quality and consistency across facilities.
This allows it to ship many products from multiple sites, and
therefore supply products to anywhere in the world from multiple
facilities. In addition, by locating facilities in different
areas, Qimonda can also recruit talent globally. The fab cluster
includes Qimondas front-end facilities in Dresden and
Richmond and corresponding back-end sites in Dresden, Malacca,
Porto and Suzhou, as well as its front-end manufacturing joint
venture Inotera, front-end foundry partners Winbond and SMIC,
and back-end subcontractors EEMS Italia S.p.A. and UTAC.

Back-End

Qimonda has own back-end operations at its lead fab in Dresden
as well as in Porto, Portugal, Malacca, Malaysia and Suzhou,
China. In addition, Qimonda uses third party subcontractors for
part of the back-end volumes to balance the load in its own
fabs. Package development is mainly done at Dresden, whereas the
back-end sites in Porto, Malacca and Suzhou focus on volume
manufacturing of components as well as DRAM modules.

Manufacturing joint ventures and partnerships

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

Infineon
Logic Joint Ventures and Partnerships

ALTIS.In 1991 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% 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% 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.

In December 2005, we further amended the agreements with IBM in
respect of our joint venture ALTIS, and extended our product
purchase agreement with ALTIS through 2009. Pursuant to the
December 2005 amendment, we granted to IBM an option to require
us to acquire four-fifths of IBMs 50% interest in the
joint venture (or a total of 40% of the outstanding shareholding
of ALTIS) at any time after April 1, 2006 and prior to
January 1, 2009. In connection with the exercise of such
option, IBM would be required to make a payment to us to settle
the respective interests of the parties. In addition, we granted
to IBM a second option to require us to acquire up to
four-fifths of IBMs 50% interest in the joint venture (or
a total of 40% of the outstanding shareholding of ALTIS) in
increments of 10% after April 2006 and prior to January 1,
2009. The amendment also permits IBM to sell its interest in
ALTIS to a third party meeting certain specified criteria.

Under the December 2005 amendment, we also agreed with IBM a
number of administrative matters regarding the governance and
management of ALTIS, as well as related cost-allocation and
accounting matters. We continue to evaluate the future business
model of ALTIS with IBM, and we have both agreed that we will
reach a decision on this matter no later than January 1,
2009. As previously agreed, we have increased the percentage of
the output of ALTIS to 87.5% in 2006, and will increase our
purchase to 100% in 2007 and beyond. We began to fully
consolidate ALTIS following the Decem-

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ber 19, 2005 amendment whereby IBMs 50% ownership
interest has been reflected as a minority interest.

During the 2006 financial year, restructuring plans were
announced to downsize the workforce at ALTIS.

Qimonda
Joint Ventures and Partnerships

CSVC.Qimonda Technologies (Suzhou) Co., Ltd. is
Qimondas consolidated joint venture with China-Singapore
Suzhou Industrial Park Venture Co., Ltd. (CSVC) in Suzhou,
China, which has constructed a back-end facility for the
assembly and testing of our products. The joint venture
agreement was entered into in July 2003 and has an initial term
of 50 years. It can generally be terminated upon material
breach by the other party, a partys bankruptcy or
insolvency and various other events relating to a partys
financial condition. The facility officially opened in September
2004 and is scheduled to have capacity of up to one billion
chips per year. The facility will be ramped in a number of
stages as dictated by growth and trends in the global
semiconductor memory market. Qimonda is required to purchase the
entire output of the facility. In the 2005 financial year we
invested $29 million in the venture and Qimonda is
contractually required to invest an additional $167 million
through 2008. Qimonda plans to increase its investment in this
venture such that it will hold approximately 72.5% of its share
capital by the end of 2008, with CSVC owning the remaining
27.5%. Qimonda has the option to acquire the remaining CSVC
stake at the nominal investment value plus accrued and unpaid
return. The joint venture intends to arrange external financing
for any further investment required to purchase additional
equipment. There can be no assurance that this external
financing can be obtained at favorable terms or at all.

SMIC.In December 2002, we entered into a Product
Purchase and Capacity Reservation Agreement, as most recently
amended in November 2006, with Semiconductor Manufacturing
International Corporation (SMIC), a Chinese foundry. As amended,
this agreement provides Qimonda access to additional DRAM
manufacturing capacity. Under the terms of this agreement, SMIC
agreed to manufacture, and Qimonda has agreed to purchase, up to
20,000 wafers per month at SMICs
200-millimeter
production facility in Shanghai at least until 2007 and up to
15,000 wafers per month at SMICs
300-millimeter
production facility in Beijing at least until 2009. The
agreement remains in effect until December 31, 2009 and may
be extended. Qimonda has the unilateral right to terminate this
agreement in the event that one of our semiconductor competitors
acquires 50% of SMICs voting shares. In addition, either
party may terminate the agreement upon material breach by the
other party of any obligation under this or the ancillary
know-how transfer agreement or upon bankruptcy or insolvency of
the other party.

Winbond.In May 2002, we entered into a Product
Purchase and Capacity Reservation Agreement with Winbond, a
Taiwanese foundry. This agreement provides Qimonda access to
additional DRAM production capacity. Under the terms of this
agreement, Winbond agreed to manufacture, and Qimonda has agreed
to purchase, up to 19,000 wafer starts per month from
Winbonds
200-millimeter
production facility in Hsinchu, Taiwan until 2007.

In August 2004, we entered into an extended Product Purchase and
Capacity Reservation Agreement, as most recently amended in
August 2006, with Winbond. This agreement gives Qimonda access
to additional DRAM production capacity of up to 15,000 wafers
per month in Winbonds
300-millimeter facility
in Taiwan until 2009. Winbond agreed to manufacture DRAMs for
computing applications exclusively for us. Furthermore, Qimonda
develops specialty memories for mobile applications jointly with
Winbond.

Each agreement remains in effect until the last shipment of, and
payment for, products manufactured under the agreement unless it
is earlier terminated for breach.

Inotera.We had entered into agreements with Nanya
relating to a strategic cooperation in the development of DRAM
products and assigned these agreements to Qimonda. We have also
estab-

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lished a joint venture, Inotera Memories, with Nanya. Inotera
has constructed and operates a
300-millimeter
manufacturing facility in Taiwan. Pursuant to the agreements, we
and Nanya developed advanced
90-nanometer and
75-nanometer technology
and have begun development of
58-nanometer
technology. Research is conducted in Dresden and Munich, and
manufacturing is conducted in Taoyuan, Taiwan.

Inoteras 300-millimeter manufacturing facilities in Taiwan
employ the production technology developed under our joint
development agreement with Nanya. Ramp up of manufacturing at
the first facility was completed during the 2006 financial year,
with capacity of 62,000 wafer starts per month in September
2006. The construction of the second manufacturing module was
completed in the 2006 financial year and the move in of
equipment has started. Qimonda is entitled to half of the
production capacity of Inotera. Inotera has been listed on the
Taiwanese Stock Exchange since March 2006 and has conducted a
capital increase based on global depositary receipts in May
2006. We currently own a 36% share of Inotera in trust for
Qimonda and will transfer our stake in Inotera to Qimonda as
soon as legal restrictions for such transfer are cleared. During
October 2006, the Taiwanese authorities granted us an exemption
to transfer the shares, which is expected to be finalized during
the three months ending December 31, 2006.





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,      |      
|                                             |  |                                        |      
|                                             |  | 2004                                   |       |   | 2005 |  |       | 2006 | 
|                                             |  |                                        |       |   |      |  |       |      | 
|                                             |  | (Euro in millions, except percentages) |      
|Expenditures (net of subsidies
    received) |  |                                        | 1,219 |   |      |  | 1,293 |      |  |  | 1,249 |  
|As a percentage of net sales                 |  |                                        | 17    | % |      |  | 19    | %    |  |  | 16    | %





| |                                        
| | ---------------------------------------
| | Infineon Logic Research and Development





130-nanometer


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in full production at several manufacturing sites and we have
developed additional
130-nanometer process
options to fulfill the needs of specialty applications. Our
90-nanometer logic
technology is in production. In 2006, we successfully
manufactured our first cell-phone chips in our advanced
65-nanometer technology
and we are in the process of developing a
45-nanometer logic
technology, with the first working circuits proven in silicon in
the 2006 financial year. We have defined a roadmap to minimum
feature sizes of 32 nanometers. Our process technologies
benefit from many modular characteristics, including special
low-power variants, analog options and high-voltage capabilities.



Qimonda Research and DevelopmentIn the area of memory process technology, Qimonda started
commercial production of DRAM products based on 75-nanometer
technology during the 2006 financial year. A strategic
development alliance with Nanya for trench-based DRAM technology
allows Qimonda to share development costs and resources. The
development alliance has successfully finalized the development
of 75-nanometer process technology for DRAM products and is
currently developing 58-nanometer process technologies for DRAM
products.



LocationsOur 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                                                                                                                                                                                            
|                                         |  |                                                                                                                                                                                                                
|Infineon Logic:                          |  |                                                                                                                                                                                                                
|Bangalore, India                         |  | Software and system development for
    wireless and wireline systems, design flow and library, hardware
    development                                                                                       
|Bucharest, Romania                       |  | Analog/Mixed signal power
    semiconductors, chip card ICs, transceiver for mobile phones                                                                                                                     
|Dresden, Germany                         |  | Advanced 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 connectivity systems                                                                                                                                                                                  
|Linz, Austria                            |  | RF design and software development                                                                                                                                                                             
|Morgan Hill, USA                         |  | RF power development                                                                                                                                                                                           
|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 and system development for
    wireless products                                                                                                                                                      
|Regensburg, Germany                      |  | Packaging, testing                                                                                                                                                                                             
|Shanghai, Peoples Republic of
    China |  | System development for
    communications                                                                                                                                                                      
|Singapore                                |  | System-on-chip and software
    development for communications products, packaging development                                                                                                                 

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|                                      |  |                                                                                                                                     
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|Location                              |  | Areas of Competence                                                                                                                 
|                                      |  |                                                                                                                                     
|Sophia Antipolis, France              |  | Wireless baseband products, digital
    signal processing, library, design flow                                                     
|Taipei, Taiwan                        |  | Chip design and system development
    for communication products                                                                   
|Villach, Austria                      |  | Power semiconductor products, mixed
    signal for deep submicron structure sizes, automotive and
    telecommunication applications
|Xian, Peoples Republic
    of China |  | System-on-chip design & product
    implementation, implementation of digital product designs in
    standard CMOS technology       
|Qimonda:                              |  |                                                                                                                                     
|Burlington, Vermont                   |  | Low power and mobile and consumer
    DRAMs                                                                                         
|Dresden, Germany                      |  | DRAM technology, flash technology
    and package technology development                                                            
|Munich, Germany                       |  | Computing and graphic DRAMs, as
    well as emerging memory research; flash product development                                     
|Padua, Italy                          |  | Flash product development                                                                                                           
|Raleigh, North Carolina               |  | Product development for standard
    and specialty DRAM                                                                             
|Xian, Peoples Republic
    of China |  | Computing and legacy DRAMs                                                                                                          






Intellectual Property








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ing 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.

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. In the 2006 financial year,
we settled several pending disputes, including those with
Tessera Technologies, Inc. and MOSAID Technologies. For a
description of these matters, see Legal Matters.





Strategic Alliances



Infineon Logic Strategic AlliancesAs a part of our long-term strategy, we have entered into a
number of strategic alliances with other leaders in the
semiconductor industry, primarily in the areas of research and
development of manufacturing process technologies and joint
manufacturing facilities, as well as cooperative product design
and development.

For R&D it is often the case that these alliances are
multi-party, such as the current alliance among our company,
IBM, Samsung and Chartered Semiconductor to develop logic
manufacturing processes at the
65-nanometer and
45-nanometer nodes.

For manufacturing it is usually a two-party arrangement, and
works best between partners who have complementary process
technologies (e.g., copper and aluminum) and product types. Our
manufacturing joint ventures and foundry partnerships have
generally been with partners with whom we developed
manufacturing processes, e.g., IBM, UMC and Chartered.

Strategic alliances with foundries provide not only
manufacturing capacity in addition to that provided by joint
ventures and internal facilities, but also increasingly
represent an alternative to them, allowing an economical and
efficient use of capital-intensive manufacturing resources. In
many cases a strategic relationship with a foundry is more
flexible and more efficient than a separate legal entity joint
venture.

As a result, we have developed a balanced set of internal
manufacturing sites, joint ventures and strategic foundry
relationships, all supported by jointly developed manufacturing
processes.

Our experience has demonstrated that, by pooling their
respective human and technological resources, alliance partners
can access a high level of innovation coupled with mutual
learning and fast feedback which in turn increase efficiencies,
improve economies of scale and reduces time to market for new
products.

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Currently our principal alliances in the logic area are with
(1) IBM, Samsung and Chartered Semiconductor for research
and development of CMOS manufacturing processes at
65-nanometer and
45-nanometer nodes,
(2) with Chartered Semiconductor for manufacturing of
300-millimeter logic
wafers at the
65-nanometer node and
below, (3) with UMC for manufacturing 200- and
300-millimeter wafers
at 90-nanometers, and
(4) with IBM for manufacturing
200-millimeter wafers
above 90-nanometers
through our joint venture ALTIS.



Qimonda Strategic AlliancesIn 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.

In November 2002, we entered into agreements with Nanya to
establish a strategic cooperation in the development of DRAM
products and to form Inotera Memories Inc., a joint venture to
construct and operate a
300-millimeter
manufacturing facility with two manufacturing modules in Taiwan.

Inoteras 300-millimeter manufacturing facility in Taiwan
employs the production technology developed under our separate
joint development agreement with Nanya. The construction of the
first Inotera module was completed and mass production began in
the 2004 financial year. The capacity ramp of this first module
was completed in three phases through the end of our 2006
financial year. The total manufacturing capacity of the first
manufacturing module reached 62,000 wafer starts per month.
Under the terms of the venture, Qimonda and Nanya each purchase
50% of Inoteras output.

If we were to reduce our shareholding in Qimonda to a minority
level before the earlier of the fifth anniversary of
Qimondas carve-out from Infineon and the achievement of
early mass production using 58-nanometer process technology at
our manufacturing site in Dresden, the joint venture agreement
with Nanya, as amended, could require Qimonda to transfer these
Inotera shares back to Infineon.





Acquisitions and Dispositions

As part of our continuing commitment to improve our
profitability, we disposed of certain non-core assets in the
2006 financial year:



New Logic Technologies AGIn December 2005, we sold our 24.9% interest in New Logic
Technologies AG (New Logic) to WiPro Ltd in
connection with its acquisition of that company. New Logic is a
provider of silicon intellectual property and integrated circuit
design services in which we had invested in 2001.



AEMtec GmbHIn February 2006, we sold our 44% interest in AEMtec GmbH
(AEMtec) to a financial investor. AEMtec is an
Electronic Manufacturing Services (EMS) company that
was founded as a spin-off of our Fiber Optic Components business
unit. Following our exit from the fiber optics business in 2005,
we are no longer an AEMtec customer and therefore have no
further strategic interest in owning shares of the company.



Trutnov FacilityIn July 2006, our production facility in Trutnov, Czech Republic
was taken over by Siemens VDO. The facility was used for the
manufacturing and assembly of fiber optics products. The sale
was a consequence of our withdrawal from the fiber optics
transceiver business in 2005. More than 150 of our former
employees accepted offers to work at Siemens VDO.

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Employees

We employed a total of 41,651 employees as of September 30,
2006. For a further description of our workforce by location and
function over the past three years, see Operating and
Financial Review  Other Matters 
Employees.

A significant percentage of our employees, especially in
Germany, are covered by collective bargaining agreements
determining remuneration, working hours and other conditions of
employment, and are represented by works councils. Works
councils are employee-elected bodies established at each
location in Germany and also at the parent company-wide level
(Infineon Technologies AG). Furthermore, works councils exist at
our subsidiaries in Austria and France (including ALTIS). In
Germany, 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).

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.

Other than this incident, we have not experienced any labor
disputes resulting in major work stoppages in the last three
financial years.





Legal Matters

Allocation of Litigation Exposure between Infineon and
Qimonda

We are the subject of a number of governmental investigations
and civil lawsuits that relate to the operations of our memory
products business prior to the carve-out of Qimonda. Under the
contribution agreement between us and Qimonda, Qimonda is
required to indemnify us, in whole or in part as specified
below, for any liability we incur in connection with the matters
described below (other than the disputes with
Dr. Schumacher).

All potential liabilities and risks in connection with legal
matters existing as of the carve-out date are generally to be
borne by the business unit which caused the risk or liability or
where the risk or liability arose. Except to the limited extent
described below for the securities class action litigation and
the settled Tessera litigation (for which we have different
arrangements), Qimonda has agreed to indemnify us for all
liabilities arising in connection with all legal matters
specifically described below (other than the disputes with
Dr. Schumacher), including court costs and legal fees. We
will not settle or otherwise agree to any of these liabilities
without Qimondas prior consent.

Liabilities and risks relating to the securities class action
litigation, including court costs, will be equally shared by us
and Qimonda, but only with respect to the amount by which the
total amount payable exceeds the amount of the corresponding
accrual that we transferred to Qimonda. Any expenses incurred in
connection with the assertion of claims against the provider of
directors and officers (D&O)
insurance covering our two current or former officers named as
defendants in the suit will also be equally shared. The D&O
insurance provider has so far refused coverage. Qimonda has
agreed to indemnify us for 80% of the court costs and legal fees
relating to the recently settled antitrust and competition
litigation with Tessera.

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Antitrust Matters

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 into alleged antitrust violations in the DRAM
industry. Pursuant to this plea agreement, we agreed to plead
guilty to a single count of conspiring with other unspecified
DRAM manufacturers to fix the prices of DRAM products between
July 1, 1999 and June 15, 2002, and to pay a fine of
$160 million. The fine plus accrued interest is being paid
in equal annual installments through 2009. We have a continuing
obligation to cooperate with the DOJ in its ongoing
investigation of other participants in the DRAM industry. The
price fixing charges related to DRAM sales to six Original
Equipment Manufacturer (OEM) customers that manufacture
computers and servers. We have entered into settlement
agreements with five of these 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.

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

Direct Purchaser Litigation.Sixteen cases were filed
between June and September 2002 in several
U.S. federal district courts, purporting to be on behalf of
a class of individuals and entities who purchased DRAM directly
from the various DRAM suppliers during a specified time period
(the Direct U.S. Purchaser Class), alleging
price-fixing in violation of the Sherman Act and seeking 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 ordered that these federal cases be transferred to
the U.S. District Court for the Northern District of
California for coordinated or consolidated pre-trial proceedings
as part of a Multi District Litigation (MDL).

In September 2005, we and our principal U.S. subsidiary
entered into a definitive settlement agreement with counsel to
the Direct U.S. Purchaser Class (subject to approval by the
U.S. District Court and to an opportunity for individual
class members to opt out of the settlement). Under the terms of
the settlement agreement we agreed to pay approximately
$21 million. In addition to this settlement payment, we
agreed to pay an additional amount if it is proven that sales of
DRAM products to the settlement class (after opt-outs) during
the settlement period exceeded $208.1 million. The
additional amount payable would be calculated by multiplying the
amount by which these sales exceed $208.1 million by
10.53%. We do not currently expect that any such additional
amount will have a material adverse effect on our financial
condition or results of operations. The settlement was approved
on November 1, 2006. On October 3, 2006, a number of
individuals and entities gave notice that they were opting out
of the class and settlements. Apart from Unisys Corporation and
Honeywell International, Inc. (as described below), none of the
other opt-outs has filed suit against us. In addition, as of
September 30, 2006, we had secured individual settlements
with eight direct customers in addition to those OEMs identified
by the DOJ.

On April 28, 2006, Unisys Corporation filed a complaint
against us and our principal U.S. subsidiary, among other
DRAM suppliers, alleging state and federal claims for price
fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International,
Inc. filed a complaint against us and our principal U.S.
subsidiary, among other DRAM suppliers, alleging a claim for
price fixing under federal law, and seeking recovery as a direct
purchaser of DRAM. Both of these complaints were filed in the
Northern District of California, and have been related to the
MDL described above. Both Unisys and Honeywell opted out of the
direct purchaser class and settlement, so their claims are not
barred by our settlement with the Direct U.S. Purchaser Class.

Indirect Purchaser Litigation.Sixty-four additional
cases (including a lawsuit discussed separately under
 Foreign Purchaser Litigation below) were
filed between August and October 2005 in numerous federal
and state courts throughout the United States. Each of these
state and federal cases

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(except the Foreign Purchaser Litigation) purports
to be on behalf of a class of individuals and entities who
indirectly purchased DRAM in the United States during specified
time periods commencing in or after 1999. 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 generally unspecified amounts, restitution, costs,
attorneys fees and injunctions against the allegedly
unlawful conduct.

Twenty-three of the state and federal court cases were
subsequently ordered transferred to the U.S. District Court
for the Northern District of California for coordinated and
consolidated pretrial proceedings as part of the multi-district
litigation described above. Nineteen of the 23 transferred
cases are currently pending in the MDL litigation. The pending
California state cases were coordinated and transferred to San
Francisco County Superior Court for pretrial proceedings. The
plaintiffs in the indirect purchaser cases outside California
agreed to stay proceedings in those cases in favor of
proceedings on the indirect purchaser cases pending as part of
the MDL pretrial proceedings. The defendants have filed
two motions for judgment on the pleadings directed at
several of the claims; these motions are pending. After these
have been decided the indirect purchaser plaintiffs in the MDL
proceedings will have the opportunity to file any motion for
class certification. We intend to vigorously defend against the
indirect purchaser cases.

Foreign Purchaser Litigation.A lawsuit filed in
May 2005 in the Eastern District of Pennsylvania,
purporting to be on behalf of a class of foreign individuals and
entities who directly purchased DRAM outside of the United
States from July 1999 through at least June 2002, was dismissed
with prejudice and without leave to amend on March 1, 2006.
The plaintiffs have filed a notice of appeal and defendants have
filed their joint opening brief. No hearing date has yet been
scheduled for the appeal. We intend to itself vigorously defend
against this action if the court of appeals remands this lawsuit.

State Investigations.On July 13, 2006, the New York
state attorney general filed an action in the U.S. District
Court for the Southern District of New York against us, our
principal U.S. subsidiary and several other DRAM manufacturers
on behalf of New York governmental entities and
New York consumers who purchased products containing DRAM
beginning in 1998. The plaintiffs allege violations of state and
federal antitrust laws arising out of the same allegations of
DRAM price-fixing and artificial price inflation practices
discussed above, and seek recovery of actual and treble damages
in unspecified amounts, penalties, costs (including
attorneys fees) and injunctive and other equitable relief.
On October 23, 2006, the New York case was made part of the
MDL proceeding. On July 14, 2006, the attorneys general of
California, Alaska, Arizona, Arkansas, Colorado, Delaware,
Florida, Hawaii, Idaho, Illinois, Iowa, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Nebraska,
Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont,
Virginia, Washington, West Virginia and Wisconsin filed a
lawsuit in the U.S. District Court for the Northern
District of California against us, our principal
U.S. subsidiary and several other DRAM manufacturers on
behalf of governmental entities, consumers and businesses in
each of those states who purchased products containing DRAM
beginning in 1998. On September 8, 2006, the complaint was
amended to add claims by the attorneys general of Kentucky,
Maine, New Hampshire, North Carolina, the Northern Mariana
Islands and Rhode Island. This action is based on state and
federal law claims relating to the same alleged anticompetitive
practices in the sale of DRAM and plaintiffs seek recovery of
actual and treble damages in unspecified amounts, penalties,
costs (including attorneys fees) and injunctive and other
relief. On October 10, 2006, we joined the other defendants
in filing motions to dismiss several of the claims alleged in
these two actions. We intend to vigorously defend against both
of these actions.

European Commission Investigation. In April 2003, we
received a request for information from the European Commission
in connection with its investigation of practices in the
European market for DRAM ICs. We are fully cooperating with the
European Commission in its investigation.

Canadian Competition Bureau Investigation. In May 2004,
the Canadian Competition Bureau advised our U.S. subsidiary
that it, its affiliates and present and past directors, officers
and employees

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are among the targets of a formal inquiry into an alleged
conspiracy to prevent or lessen competition unduly in the
production, manufacture, sale or supply of DRAM, contrary to the
Canadian Competition Act. We are fully cooperating with the
Canadian Competition Bureau in its inquiry.

Canadian Civil Litigation. Between December 2004 and
February 2005 two putative class proceedings were filed in the
Canadian province of Quebec, and one was filed in each of
Ontario and British Columbia against us, our principal
U.S. subsidiary and other DRAM manufacturers on behalf of
all direct and indirect purchasers resident in Canada who
purchased DRAM or products containing DRAM between July 1999 and
June 2002, seeking damages, investigation and administration
costs, as well as interest and legal costs. Plaintiffs primarily
allege conspiracy to unduly restrain competition and to
illegally fix the price of DRAM. We intend to vigorously defend
against these proceedings.

U.S. Securities Class Action. Between September and
November 2004, seven securities class action complaints
were filed against us and current or former officers in U.S.
federal district courts, later consolidated in the Northern
District of California, on behalf of a putative class of
purchasers of the our publicly-traded securities who purchased
them during the period from March 2000 to July 2004. The
consolidated amended complaint alleges violations of the
U.S. securities laws and asserts that the defendants made
materially false and misleading public statements about our
historical and projected financial results and competitive
position because they did not disclose our alleged participation
in DRAM price-fixing activities and that, by fixing the price of
DRAM, defendants manipulated the price of our securities,
thereby injuring our shareholders. The plaintiffs seek
unspecified compensatory damages, interest, costs and
attorneys fees. In September 2006, the court dismissed the
complaint with leave to amend. On October 11, 2006, the
plaintiffs filed a second amended complaint.

We believe these claims are without merit and are vigorously
defending us in this action. Because this action is in its early
stages, we are unable to provide an estimate of the likelihood
of an unfavorable outcome to us or of the amount or range of
potential loss arising from the action. If the outcome of this
action is unfavorable, or if we incur substantial legal fees in
defending this action regardless of outcome, it may have a
material adverse effect on our financial condition and results
of operations. Our directors and officers insurance
carriers have denied coverage in the class action and we filed
suit against the carriers in December 2005 and August 2006. Our
claim against one insurance carrier was dismissed on
November 13, 2006. We intend to file an appeal against this
decision.

German shareholder litigation.In March 2006, two of our
shareholders filed a lawsuit in the district court
(Landgericht)of Munich seeking a declaratory judgment
(Feststellungsurteil)that we should have had our
shareholders meeting resolve on, and consent to, the
carve-out of our memory products business and the planned
offering of the shares of Qimonda AG. Among other things, the
plaintiffs based their claim on a German corporate law doctrine
pursuant to which a stock corporation (such as Infineon) must
obtain shareholder approval for fundamental structural decisions
that materially affect the position of shareholders. The
district court, in a decision handed down on June 8, 2006,
rejected the plaintiffs arguments and dismissed the claim.
The plaintiffs did not file an appeal and the decision rendered
by the district court has therefore become final.

Litigation with our former CEO Dr. Ulrich Schumacher.At the end of March 2004, Dr. Ulrich Schumacher
resigned his position as CEO and Chairman of our Management
Board. Following his resignation, a cancellation agreement was
signed in December 2004 that entitled Dr. Schumacher to a
severance payment in the gross amount of
5.3 million,
payable in two equal installments at the end of March and
October 2005. The first installment was paid to
Dr. Schumacher in accordance with the cancellation
agreement.

During 2005, German public prosecutors started an investigation
against the owner of a motor sport sponsoring agency with which
we had a business relationship, Dr. Andreas von Zitzewitz,
a former member of our Management Board, and others for bribery,
corruption and other criminal offenses. When we became aware
that the public prosecutors had also started an investigation
against Dr. Schumacher in connection with our former motor
sport sponsoring activities, we decided to withhold the second
installment of Dr. Schumachers severance payment.
Based on further facts that came to

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light during the course of subsequent internal investigations,
we decided to terminate the cancellation agreement with
Dr. Schumacher. In December 2005, Dr. Schumacher filed
a lawsuit against us for the payment of the second installment
under the cancellation agreement. In September 2006, a court
ruled that Dr. Schumacher was entitled to receive the
second installment. In October 2006, we filed an appeal and
sought other judicial remedies against the judgment.

In addition, in March 2006, Dr. Schumacher filed a lawsuit
against us alleging that three statements made by the Chairman
of our Supervisory Board in the media were incorrect and
applying for a declaratory judgment that Dr. Schumacher was
entitled to damages. This lawsuit is still pending.

Patent Litigation

MOSAID.In late 2002, MOSAID filed suit alleging that we
were violating eleven of its DRAM-related U.S. patents.
Subsequently, we sought a declaratory judgment that we did not
violate these patents, MOSAID filed certain counterclaims, we
won summary judgment with respect to most of these patents, and
MOSAID alleged infringement of additional patents.

On June 14, 2006, the parties announced that they had
settled all pending litigation and appeals, and the outstanding
suit was subsequently dismissed with prejudice. As part of the
settlement, we and Qimonda have taken a worldwide license to the
MOSAID patent portfolio.

Tessera.Tessera Inc. filed a lawsuit in March 2005
alleging that some of our products were infringing five Tessera
patents, and later amended its complaint to allege that we had
violated U.S. antitrust law, Texas unfair competition law, and
Texas business tort law by conspiring to harm the sale of Rambus
DRAM (RDRAM) chips, thereby injuring Tesseras
ability to license chip packaging technology for RDRAM chips.

On August 1, 2006, Infineon and Qimonda entered into
settlement agreements with Tessera Inc. in respect of all of
Tesseras patent infringement and antitrust claims and all
counterclaims and other claims Infineon and Qimonda raised
against Tessera. As part of the settlement, Infineon and Qimonda
have entered into license agreements with Tessera, effective
July 1, 2006, that provide Infineon and Qimonda world-wide,
nonexclusive, non-transferable and non-sublicensable licenses to
use a portfolio of Tessera patents relating to packaging for
integrated circuits in Infineon and Qimondas production.
The license agreements will be effective until May 2012, when
they will automatically expire unless Infineon or Qimonda notify
Tessera by November 2011 that Infineon or Qimonda elect to
extend the agreements for an additional five years until May
2017. Upon expiration of the extended term, if any, Infineon and
Qimondas licenses to use the patents covered by the
licenses will become fully paid-up and perpetual.

Under the license agreements, Infineon and Qimonda paid Tessera
$10 million and $40 million in license fees in August
2006, respectively, and will pay additional royalty payments
over a six-year period based on the volume of components
Infineon and Qimonda sell that are subject to the licenses. In
the event Infineon or Qimonda elect to extend the agreements
past their initial term, Infineon or Qimonda will continue to
pay royalties at 50% of the rates agreed to for the initial term
of the license agreements. Pursuant to the contribution
agreement, Qimonda entered into with Infineon, Qimonda is
required to indemnify Infineon with respect to 80% of the court
costs and legal fees that Infineon faces in respect of the
Tessera suits.

Accruals and the Potential Effect of these Lawsuits on Our
Business

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, 2006, we had accrued liabilities in the
amount of
139 million
related to the DOJ and European antitrust investigations and the
direct and indirect purchaser litigation and settlements
described above, as well as for legal

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expenses for the DOJ and securities class action complaints. The
accrued liabilities, other current and non-current liabilities,
and other commitments and contingencies related to legal
proceedings are further reported in notes 19, 20, 22 and 33
to our Consolidated Financial Statements.

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 our financial condition and results
of operations.

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 on, us, which would have a
material adverse effect on our results of operations, financial
condition and cash flows. 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 condition and cash flows.

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 or settlement of various
asserted and unasserted claims existing as of the balance sheet
date. Based upon information presently known to management, we
do not believe that the ultimate resolution of such other
pending matters will have a material adverse effect on our
financial position, although the final resolution of such
matters could have a material adverse effect on our results of
operations or cash flows in the year of settlement.





Environmental Protection and Sustainable Management

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 our company.

IMPRES 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 according to EN ISO 14001 and
OHSAS 18001.

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 IMPRES, 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 (perfluorinated compounds) 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% from the emission level
of 1995, calculated in
CO2
equivalents. We have signed a similar commitment for Germany,
with a normalized target of 8% emission reduction on basis of
CO2
equivalents.

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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 and interpretations remain
unclear and are still pending, 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, has
restricted the use of lead and other hazardous substances in
electrical and electronic equipment since July 1, 2006.
Because exemptions of this directive are an ongoing process,
financial resources or additional compliance expenditures could
be required in the future.

Directive 2005/32/EC on the eco-design of Energy-using Products
(EuP) establishes ecologically sound development for electrical
and electronic devices. It also provides for the possibility
that manufacturers of components and sub-assemblies may be
subject to specific information requirements regarding
environmentally relevant product characteristics. Because the
Directive defines conditions and criteria for setting such
requirements through subsequent implementing measures, but does
not introduce directly binding requirements for specific
products, 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.

A new European Union regulatory framework for chemicals, called
REACH, dealing with the registration, evaluation and
authorization of chemicals, is currently under consideration.
This proposal could 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 future costs in
connection with this proposal if it is adopted, but we are not
currently able to estimate these expenditures.

The European Commission intends to restrict the use of PFOS
(Perfluoroctane sulphonate) in the EU. PFOS is an important
constituent of key chemicals used in the semiconductor industry.
Any restriction affecting its use may adversely impact our
production and cost position.

The Chinese government restricts the use of lead and other
hazardous substances in electronic and IT products. Because not
all implementing measures are in place and because a number of
statutory definitions and interpretations remain unclear, the
consequences to our company cannot

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currently be determined. As a result, we are not able to
estimate the amount of additional costs that may be incurred in
connection with this legislation.

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.
This also applies to Joint Ventures.





Real Estate

We own approximately 3.0 million square meters of land
(including approximately 1.0 million square meters of
building space) at our facilities at Batam (Indonesia), Cegled
(Hungary), Dresden (Germany), Essonnes (France), Horten
(Norway), Kulim (Malaysia), Malacca (Malaysia), Munich
(Germany), Porto (Portugal), Regensburg (Germany), Richmond
(Virginia, USA), Singapore (Singapore), Suzhou (PR China),
Villach (Austria), Warstein (Germany) and Wuxi (PR China).

In addition, we have long-term rental and lease arrangements
covering approximately 510,000 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, has enabled us to centralize
most of our Munich-area employees, who were previously 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 and
moved employees to this new location during the 2006 financial
year.

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MANAGEMENT

Supervisory Board Members

The current members of our Supervisory Board, the supervisory
board position held by them, their individual compensation in
the 2006 financial year, their principal external positions and
their ages as of September 30, 2006 are as follows:

|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  |                                                                                                                                                                                                                  
|------------------------------------------ |  | --- | -- | ------- |  | --------------- | ---- | ---------------------------------------- |  |  | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                           |  |     |    | Term    |  |                 |      | External positions during the year ended
|Name                                       |  | Age |    | expires |  | Compensation(2) |      | September 30, 2006                      
|                                           |  |     |    |         |  |                 |      |                                         
|Max Dietrich Kley,Chairman                 |  |     | 66 |         |  |                 | 2010 |                                          |  |  | 59,500 |  |  | Member of the Supervisory Board
    of
    BASF AG, Ludwigshafen                                                                                                                                                 
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Supervisory Board
    of
    SGL Carbon AG, Wiesbaden                                                                                                                                            
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Schott AG, Mainz
    HeidelbergCement AG, Heidelberg
    Bayerische Hypo- und Vereinsbank AG,  Munich
    (until November 28, 2005)                                   
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Board of Directors
    of
    UniCredit S.p.A., Milan, Italy
    (since  January 11, 2006)                                                                                                         
|                                          
|Klaus Luschtinetz,Deputy
    Chairman(1)   |  |     | 63 |         |  |                 | 2007 |                                          |  |  | 44,625 |  |  | Chairman of the Infineon central
    Works Council until June 30, 2006                                                                                                                                           
|                                          
|Wigand
    Cramer(1)(since April 20, 2006) |  |     | 53 |         |  |                 | 2009 |                                          |  |  | 12,396 |  |  | Labor union clerk of IG Metall,
    Berlin                                                                                                                                                                       
|                                          
|Alfred
    Eibl(1)                         |  |     | 57 |         |  |                 | 2009 |                                          |  |  | 35,948 |  |  | Member of the Infineon Works
    Council, Munich                                                                                                                                                                 
|                                          
|Prof. Johannes Feldmayer                   |  |     | 50 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Member of the Corporate Executive
    Committee of Siemens AG, Munich                                                                                                                                            
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Board of
    Administration of
    Siemens A.E., Athens, Greece                                                                                                                                  
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Supervisory Board
    of
    Siemens Rt. Budapest, Hungary
    Siemens Sp. zo.o., Warsaw, Poland  (since October
    1, 2005)                                                                    
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of shareholders
    representatives of Siemens s.r.o., Prague, Czech Republic                                                                                                                          
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Deputy Chairman of the Board of
    Administration of
    Siemens S.A., Madrid, Spain
    Siemens S.p.A., Milan, Italy
    Siemens Schweiz AG, Zurich, Switzerland                                               
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Board of
    Administration of Siemens France S.A., Saint-Denis, France
    Siemens A.S., Istanbul, Turkey
    Siemens A.S., Copenhagen, Denmark                                                   
|                                           |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Siemens Holdings plc, Bracknell, Great Britain
    Siemens AB, Stockholm, Sweden
    Siemens AG, Vienna, Austria
    Exxon Mobil Central Europe Holding GmbH,  Hamburg
|                                          
|Jakob
    Hauser(1)                        |  |     | 54 |         |  |                 | 2009 |                                          |  |  | 35,948 |  |  | Chairman of the Works Council
    Qimonda AG                                                                                                                                                                     
|                                          

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|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  |                                                                                                                                                                  
|------------------------------------------------ |  | --- | -- | ------- |  | --------------- | ---- | ---------------------------------------- |  |  | ------- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                 |  |     |    | Term    |  |                 |      | External positions during the year ended
|Name                                             |  | Age |    | expires |  | Compensation(2) |      | September 30, 2006                      
|                                                 |  |     |    |         |  |                 |      |                                         
|Dr. Stefan Jentzsch                              |  |     | 45 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Member of the Management Board
    of
    Bayerische Hypo- und Vereinsbank AG,
    Munich  (until November 18, 2005)                                             
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Management Board
    of
    Dresdner Bank AG, Frankfurt  (since November 24,
    2005)                                                             
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Premiere AG, Munich                                                                                                   
|                                                
|Prof. Dr. Renate Köcher                          |  |     | 54 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Managing Director of
    Institut für Demoskopie Allensbach                                                                                                      
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Allianz AG, Munich
    BASF AG, Ludwigshafen
    MAN AG, Munich                                                       
|                                                
|Dr. Siegfried Luther(since February 16, 2006)    |  |     | 62 |         |  |                 | 2010 |                                          |  |  | 29,750 |  |  | Managing Director of
    Reinhard Mohn Verwaltungs GmbH, Guetersloh                                                                                              
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Druck- und Verlagshaus Gruner & Jahr AG,
    Hamburg                                                                  
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | WestLB AG,
    Duesseldorf/ Muenster                                                                                                                             
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Board of RTL Group
    S.A.,
    Luxembourg                                                                                                      
|                                                
|Michael
    Ruth(1)                              |  |     | 46 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Corporate Vice President Planning
    and Controlling,
    Infineon Technologies AG                                                                              
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Representative of Senior Management                                                                                                                              
|                                                
|Gerd
    Schmidt(1)                              |  |     | 52 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Chairman of the Infineon Works
    Council
    (since June 30, 2006)                                                                                             
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Infineon Works
    Council,
    Regensburg                                                                                                       
|                                                
|Prof. Dr. rer. nat.
    Doris Schmitt-Landsiedel |  |     | 53 |         |  |                 | 2009 |                                          |  |  | 35,948 |  |  | Professor at the Technical
    University Munich                                                                                                                 
|                                                
|Kerstin
    Schulzendorf(1)                      |  |     | 44 |         |  |                 | 2009 |                                          |  |  | 29,750 |  |  | Member of the Infineon Works
    Council, Dresden                                                                                                                
|                                                
|Alexander
    Trüby(1)                           |  |     | 36 |         |  |                 | 2009 |                                          |  |  | 35,948 |  |  | Member of the Infineon Works
    Council, Dresden                                                                                                                
|                                                
|Prof. Dr. rer. nat.
    Martin Winterkorn        |  |     | 59 |         |  |                 | 2009 |                                          |  |  | 44,625 |  |  | Chairman of the Management Board of
    Audi AG,
    Ingolstadt                                                                                                  
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Management Board
    of
    Volkswagen AG, Wolfsburg                                                                                               
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Boards
    of
    Salzgitter AG, Salzgitter
    FC Bayern München AG, Munich
    TÜV Süddeutschland Holding AG, Munich                 
|                                                 |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Board of
    Administration of
    SEAT S.A., Barcelona, Spain
    Automobili Lamborghini Holding
    S.p.A.,  SantAgata Bolognese, Bologna, Italy
|                                                

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|                                                                       |  |     |    |         |  |                 |      |                                          |  |  |         |  |  |                                                                                                                                                                                                                                            
|---------------------------------------------------------------------- |  | --- | -- | ------- |  | --------------- | ---- | ---------------------------------------- |  |  | ------- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                       |  |     |    | Term    |  |                 |      | External positions during the year ended
|Name                                                                   |  | Age |    | expires |  | Compensation(2) |      | September 30, 2006                      
|                                                                       |  |     |    |         |  |                 |      |                                         
|Prof. Dr.-Ing. Dr.-Ing.
    E.h. Klaus Wucherer                        |  |     | 62 |         |  |                 | 2009 |                                          |  |  | 35,948 |  |  | Member of the Corporate Executive
    Committee of
    Siemens AG, Munich                                                                                                                                                                  
|                                                                       |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of the Supervisory Board
    of
    Deutsche Messe AG, Hanover
    BSH Bosch und Siemens Hausgeräte GmbH,  Munich                                                                                                                   
|                                                                       |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of the Board of
    Administration of
    Siemens Ltd., Beijing, Peoples Republic
    of  China
    Siemens K.K., Tokyo, Japan
    Siemens S.A., Lisbon, Portugal
    Siemens Ltd., Mumbai, India                                
|                                                                      
|Dr. Joachim Faber(resigned February 16, 2006)                          |  |     |    |         |  |                 |      |                                          |  |  | 18,594 |  |  | Member of the Management
    Board of Allianz AG, Munich                                                                                                                                                                                   
|                                                                       |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Chairman of Supervisory Board of
    Allianz Dresdner Global Investor  Deutschland
    GmbH, Munich
    DIT Deutscher Investment Trust
    Gesellschaft  für Wertpapieranlagen mbH,
    Frankfurt                                          
|                                                                       |  |     |    |         |  |                 |      |                                          |  |  |         |  |  | Member of Supervisory Board of
    Bayerische Börse AG, Munich
    AGF Assecurances Generales de France,  Paris,
    France
    ART Allianz Risk Transfer, Zurich, Switzerland
    RAS Riunione Adriatica Sicurta S.p.A.,  Milan,
    Italy
|                                                                      
|Diplom-Physiker
    Dieter
    Scheitor(1)(resigned February 28, 2006) |  |     |    |         |  |                 |      |                                          |  |  | 12,396 |  |  | Head of the Electrical and
    Electronics Group
    of IG Metall, Frankfurt                                                                                                                                                               



|    |                         
|--- | ------------------------
|(1) | Employee representative.
|   
|(2) | Includes VAT.           



|                                            |  |                                                                                                                                              
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Committee                                   |  | Members                                                                                                                                      
|                                            |  |                                                                                                                                              
|Executive Committee                         |  | Max Dietrich Kley
    Klaus Luschtinetz
    Prof. Dr. rer. nat. Martin Winterkorn                                                            
|                                           
|Investment, Finance and Audit
    Committee |  | Max Dietrich Kley
    Dr. Joachim Faber (resigned February 16, 2006)
    Dr. Siegfried Luther (since February 16, 2006)
    Klaus Luschtinetz
|                                           
|Mediation Committee                         |  | Max Dietrich Kley
    Klaus Luschtinetz
    Alexander Trüby
    Prof. Dr. rer. nat. Martin Winterkorn (since November 17, 2005)              

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|                                  |  |                                                                                                                                                                                            
|--------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Committee                         |  | Members                                                                                                                                                                                    
|                                  |  |                                                                                                                                                                                            
|Strategy and Technology Committee |  | Alfred Eibl
    Jakob Hauser
    Alexander Trüby
    Prof. Dr. rer. nat. Doris Schmitt-Landsiedel
    Prof. Dr. rer. nat. Martin Winterkorn
    Prof. Dr.-Ing. Dr.-Ing. E.h. Klaus Wucherer

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Management Board Members

The members of our Management Board, their positions, and their
ages as of September 30, 2006 are as follows:

|                      |  |     |    |      |         |  |                                                      |                                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------- |  | --- | -- | ---- | ------- |  | ---------------------------------------------------- | ---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |     |    | Term |         |  | Position on the Management Board and other positions
|Name                  |  | Age |    |      | expires |  |                                                      | during the year ended September 30, 2006
|                      |  |     |    |      |         |  |                                                      |                                         
|Dr. Wolfgang Ziebart  |  |     | 56 |      |         |  | August 31, 2009                                      |                                          |  | Chairman, President and Chief
    Executive OfficerMember of the Board of
    Directors of Infineon Technologies China Co.,
    Ltd.,  Shanghai, Peoples Republic of
    China Infineon Technologies Asia Pacific Pte,
    Ltd.,  Singapore Infineon Technologies
    Japan K.K., Tokyo,  Japan Infineon
    Technologies North America Corp.,  Wilmington,
    Delaware, USA                                                      
|Peter Bauer           |  |     | 46 |      |         |  | September 30, 2008                                   |                                          |  | Executive Vice PresidentMember of the
    Supervisory Board of Siemens VDO Automotive AG, Munich
    (until  March 15, 2006) Infineon
    Technologies Austria AG, Villach,  Austria                                                                                                                                                                                                                                                
|                      |  |     |    |      |         |  |                                                      |                                          |  | Deputy Chairman of the Board of
    Directors of Infineon Technologies Japan K.K.,
    Tokyo,  Japan (until May 18, 2006)                                                                                                                                                                                                                                                                                                           
|                      |  |     |    |      |         |  |                                                      |                                          |  | Member of the Board of Directors
    of Infineon Technologies Asia Pacific Pte.,
    Ltd.,  Singapore (until May 8,
    2006) Infineon Technologies China Co.,
    Ltd.,  Shanghai, Peoples Republic of China
    (until   May 8, 2006) Infineon
    Technologies North America Corp.,  Wilmington,
    Delaware, USA (until   March 31,
    2006) Infineon Technologies Savan Ltd.,
    Netanya,  Israel (until February 15, 2006)
|Prof. Dr. Hermann Eul |  |     | 47 |      |         |  | July 31, 2008                                        |                                          |  | Executive Vice PresidentMember of the
    Supervisory Board of 7Layers AG, Ratingen                                                                                                                                                                                                                                                                                                                                                 
|                      |  |     |    |      |         |  |                                                      |                                          |  | Member of the Board of Directors of                                                                                                                                                                                                                                                                                                                                                                                                 
|                      |  |     |    |      |         |  |                                                      |                                          |  | Infineon Technologies Asia
    Pacific Pte., Ltd.,   Singapore (until May 8,
    2006) Infineon Technologies China Co.,
    Ltd.,  Shanghai, Peoples Republic of
    China   (until May 8, 2006)                                                                                                                                                                                                                                   

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|                              |  |     |    |      |         |  |                                                      |                                          |  |                                                                                                                                                                                                                                                                                                                              
|----------------------------- |  | --- | -- | ---- | ------- |  | ---------------------------------------------------- | ---------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                              |  |     |    | Term |         |  | Position on the Management Board and other positions
|Name                          |  | Age |    |      | expires |  |                                                      | during the year ended September 30, 2006
|                              |  |     |    |      |         |  |                                                      |                                         
|Peter J. Fischl               |  |     | 60 |      |         |  | May 31, 2008                                         |                                          |  | Executive Vice President and
    Chief Financial  OfficerChairman of the
    Supervisory Board of  Qimonda AG, Munich                                                                                                                                                                                                        
|                              |  |     |    |      |         |  |                                                      |                                          |  | Member of the Supervisory Board
    of Infineon Technologies Austria AG,
    Villach,  Austria                                                                                                                                                                                                                               
|                              |  |     |    |      |         |  |                                                      |                                          |  | Member of the Board of Directors
    of Infineon Technologies Asia Pacific Pte.,
    Ltd.,   Singapore Infineon Technologies China
    Co., Ltd.,  Shanghai, Peoples Republic of
    China Infineon Technologies North America
    Corp.,  Wilmington, Delaware,
    USA Infineon Technologies Japan K.K.,
    Tokyo,  Japan
|Kin Wah Loh                   |  |     | 51 |      |         |  |                                                      |                                          |  | Executive Vice President until
    April 15, 2006                                                                                                                                                                                                                                                                            
|(resigned April 15,
    2006) |  |     |    |      |         |  |                                                      |                                          |  | Chairman of the Management Board
    of Qimonda AG (since April 15, 2006)                                                                                                                                                                                                                                                    
|                              |  |     |    |      |         |  |                                                      |                                          |  | Member of the Board of Directors
    of Infineon Technologies Asia Pacific Pte,
    Ltd.  Singapore (until May 8,
    2006) Infineon Technologies China Co,
    Ltd.,  Shanghai, Peoples Republic of
    China   (until May 8, 2006) Infineon
    Technologies Japan K.K., Tokyo,  Japan                                    
|                              |  |     |    |      |         |  |                                                      |                                          |  | Director of Accton
    Technologies Corp., Hsinchu,  Taiwan, Republic of
    China (until June 8,     2006)                                                                                                                                                                                                                  

Dr. Wolfgang Ziebart


Peter Bauer


Prof. Dr. Hermann Eul


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Professor and Faculty Chair for RF-Technology and Radio-Systems
at Hanover University. 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
Solutions segment. Professor Eul studied electrical engineering
and has a doctorate in engineering.

Peter J. Fischlhas been our Executive Vice President and
Chief Financial Officer since the inception of our company in
April 1999. Since May 2006, he has also served as the Chairman
of the Supervisory Board of our majority-owned subsidiary
Qimonda AG, which has been listed on the New York Stock
Exchange since August 2006. 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.

The members of our Management Board, individually or in the
aggregate, do not own, directly or indirectly, more than 1% of
our companys outstanding share capital.

The business address of each of the members of our Management
Board is Infineon Technologies AG, Am Campeon 1-12, D-85579
Neubiberg, 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
neglected their duties in dealing with a controlling enterprise
are jointly and severally liable to our company for damages
together with the controlling entity.

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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. Seven current shareholder representatives on
the Supervisory Board were elected at the general
shareholders meeting held on January 25, 2005, one
was elected at the general shareholders meeting held on
February 16, 2006, 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 a deputy chairman 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 decisions of our Management Board in relation to any
    investment or disposition that exceeds 10% of our total
    investment budget or in relation to the taking of any financial
    risk vis-à-vis third parties in an amount exceeding 5% of
    our share capital plus capital reserves;
    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

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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 independent auditors;
    reviewing the interim financial statements of our company that
    are made public or otherwise filed with any securities
    regulatory authority;
    issuing to our independent auditors terms of reference for their
    audit of our annual financial statements; and
    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.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 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 1% of
our companys outstanding share capital.

The business address of each of the members of our Supervisory
Board is Infineon Technologies AG,
Am Campeon 1-12,
D-85579 Neubiberg,
Germany.

Management Board

Our Management Board currently consists of four members. Under
the Articles of Association of our company, our Supervisory
Board determines the Management Boards size, although it
must have at least two members.

Under the Articles of Association of our company and German law,
the Management Board adopts rules of procedure for the conduct
of its affairs, and may amend them at any time. The adoption and
amendment of these rules require the unanimous vote of the
Management Board and the consent of the Supervisory Board. The
Supervisory Board may, however, decide to adopt rules of
procedure for the Management Board instead.

Our Management Board has adopted rules of procedure. 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
    10% of our total investment budget; and

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
    Decisions relating to the taking of any financial risk
    vis-à-vis third parties in an amount exceeding 5% of our
    share capital plus capital reserves.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 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

This section outlines the principles used for determining the
compensation of the members of our Management Board and sets out
the level and structure of Management Board compensation during
the 2006 financial year. In addition, this section describes the
policies and levels of compensation paid to our Supervisory
Board members.

Our disclosure concerning compensation is based on the
recommendations and suggestions of the German Corporate
Governance Code (the Codex).

Management Board Compensation

The Executive Committee of the Supervisory Board is responsible
for determining the compensation of members of our Management
Board. Such compensation reflects our companys size and
global orientation, its financial position, and the level and
structure of management compensation at compara-

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ble companies in and outside Germany. In addition, the
compensation reflects each members responsibilities and
contributions. In particular, this compensation consists of the
following principal components:




    An annual base salary, which is paid out partly in
    12 monthly installments and partly at the beginning of the
    following financial year, net of statutory deductions.
    An annual variable bonus, which is based on several success
    related measures. In the 2006 financial year, this was linked to
    the return on capital employed, which we define as
    earnings after taxes, adjusted for extraordinary items, divided
    by capital employed. By this means we seek to assure that
    bonuses are only payable in the event of positive business
    progress. The bonus is paid out after the financial year end. In
    addition to this bonus, the employment agreements of the members
    of the Management Board provide for the award of extraordinary
    bonuses for special services rendered. Wolfgang Ziebart and Kin
    Wah Loh each received an extraordinary bonus of
    100,000 in the 2006
    financial year for special services rendered in the 2005
    financial year.
    Stock options, which were granted under the terms of our 2001
    plan (prior to the adoption of our new 2006 plan by our
    shareholders in February 2006), and which serve as a form of
    long-term incentive compensation with a risk component. Half of
    the options granted vest after two years, 25% after three years
    and 25% after four years. The options are exercisable until
    December 12, 2012 at an exercise price of
    8.20 per share. The
    fair value of the options on the date of grant was
    3.19 per share,
    based on the Black-Scholes valuation model.
    See Long-Term Incentive Plans below.The services agreements with certain members of our management
board in effect in the 2006 financial year provide for certain
transitional payments upon expiration of their board membership
term. These payments would generally consist of an amount equal
to the members 12 most recent monthly salary payments plus
a lump sum equal to the average bonus, if any, received by the
member in each of the prior three financial years. If a board
member were to die subsequent to the termination of membership,
the then-outstanding benefits would be paid to such
members heirs. No transitional payments were payable with
respect to members whose membership was terminated for cause or
who resigned before the age of 60. In addition, members who were
unable to continue to fulfill their duties, including where the
Supervisory Board fails to renew their board membership, or who
retired after the age of 60, would be entitled to certain
pension benefits. The amount of the chairmans monthly
pension is equal to 70% of his most recent monthly salary. The
amounts of the other members pensions are agreed on an
individual basis. A board members pension may be reduced
in certain circumstances, including if the member receives
income from certain other occupations or if our economic
situation changes so substantially that we cannot reasonably be
expected to continue to grant the benefits. Upon a board
members death, benefits may be payable to the
deceaseds spouse or orphaned children.

The following table outlines the gross cash compensation of the
members of our Management Board for the 2006 financial year:

|                      |  |                   |            |  |              |           |              |                 |  |   |            |  |       |              |         |  |  |   |           | 
|--------------------- |  | ----------------- | ---------- |  | ------------ | --------- | ------------ | --------------- |  | - | ---------- |  | ----- | ------------ | ------- |  |  | - | --------- | 
|                      |  | Base Compensation |            |  |              |           |             
|                      |  |                   |            |  |              |           |             
|                      |  |                   |            |  |              | Incentive |              |                 | 
|                      |  | Base Salary       |            |  |              |           | Compensation |                 |  |  
|                      |  |                   |            |  |              |           |              |                 |  |  
|                      |  | Amount paid       |            |  | Amount paid  |           |              |                 |  |   |            | 
|                      |  | in monthly        |            |  | after fiscal |           |              | Additional      |  |   |            |  | Total |             
|Member                |  | installments      |            |  | year end     |           |              | Compensation(1) |  |   | Bonus(6)   |  |       | compensation |        
|                      |  |                   |            |  |              |           |              |                 |  |   |            |  |       |              |        
|Dr. Wolfgang Ziebart  |  |                  | 800,000    |  |              |          | 800,000      |                 |  |  | 35,563     |  |       |             | 100,000 |  |  |  | 1,735,563 | 
|Peter Bauer           |  |                  | 360,000    |  |              |          | 540,000      |                 |  |  | 16,438     |  |       |              |        |  |  |  | 916,438   | 
|Prof. Dr. Hermann Eul |  |                  | 350,000    |  |              |          | 58,333(2)    |                 |  |  | 9,058      |  |       |              |        |  |  |  | 417,391   | 
|Peter J. Fischl       |  |                  | 400,000    |  |              |          | 600,000      |                 |  |  | 30,379     |  |       |              |        |  |  |  | 1,030,379 | 
|Kin Wah Loh           |  |                  | 243,750(3) |  |              |          | 450,000(4)   |                 |  |  | 111,769(5) |  |       |             | 100,000 |  |  |  | 905,519   | 
|                      |  |                   |            |  |              |           |              |                 |  |   |            |  |       |              |        
|Total                 |  |                  | 2,153,750  |  |              |          | 2,448,333    |                 |  |  | 203,207    |  |       |             | 200,000 |  |  |  | 5,005,290 | 
|                      |  |                   |            |  |              |           |              |                 |  |   |            |  |       |              |        



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Generally consists of perquisites, including the provision of
    company cars and payment of insurance premiums.

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(2)
    This amount includes the one time payment paid-out in the 2006
    financial year for the 2005 financial year.(3)
    This amount includes prorated monthly installments until
    15 April, 2006, the day on which Mr. Loh resigned from
    the Management Board.(4)
    This amount includes the one time payment paid-out in the 2006
    financial year for the 2005 financial year and the prorated one
    time payment for the 2006 financial year.(5)
    One time payment to Mr. Loh in compensation for higher
    personal income tax rates caused by the length of his stay in
    Germany as compared to tax rates in Singapore where Mr. Loh
    is resident.(6)
    During the 2005 financial year, our company established a
    provision for variable bonuses of the Management Board of
    0.5 million, of
    which 0.3 million
    was released and
    0.2 million was
    paid during the 2006 financial year. During the 2006 financial
    year, our company established a provision for variable bonuses
    of the Management Board of
    0.8 million.The following option grants were made to members of the
Management Board during the 2006 financial year:

|                      |  |                |         | 
|--------------------- |  | -------------- | ------- | 
|                      |  | Number of      |        
|                      |  | Shares subject |        
|Member                |  | to options     |        
|                      |  |                |        
|Dr. Wolfgang Ziebart  |  |                | 160,000 | 
|Peter Bauer           |  |                | 80,000  | 
|Prof. Dr. Hermann Eul |  |                | 80,000  | 
|Peter J. Fischl       |  |                | 80,000  | 
|Kin Wah Loh           |  |                | 80,000  | 
|                      |  |                |        
|Total                 |  |                | 480,000 | 
|                      |  |                |        

Pension Commitments and Retirement Benefits





Fringe Benefits and Other Commitments








Payments to Former Members of the Management Board


 





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year. The commercial court has ruled in favor of
Dr. Schumacher, but we have filed an appeal and have sought
other judicial remedies against this decision. See
Business  Legal Matters.

Supervisory Board Compensation

The compensation of the members of our Supervisory Board is
determined by the annual general meeting of shareholders, upon
the recommendation of the Management Board and the Supervisory
Board. This compensation reflects our companys size, the
tasks and responsibilities of each member, and our financial
condition and performance. The compensation of the Supervisory
Board is set out in Article 11 of our Articles of
Association (Satzung), and consists of two components:




    a base retainer of
    25,000 per year (with
    the chairman receiving 200% of this amount and the deputy
    chairmen and each member of certain committees (excluding those
    required by law) receiving 150% of this amount), and
    a variable component consisting of the grant of 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 our then current long-term
    incentive plan. These share appreciation rights may only be
    settled in cash, not through the issuance of shares. Half of the
    rights vest after two years, 25% after three years and 25% after
    four years. The rights are exercisable at an exercise price of
    8.20 per share. The
    fair value of the rights on the date of grant was
    3.19 per share, based
    on the Black-Scholes valuation model.The aggregate cash compensation of the members of our
Supervisory Board for the 2006 financial year was
0.6 million. The
individual cash compensation of each member of the Supervisory
Board is provided in the table of Supervisory Board members,
above.

Members of the Supervisory Board are also reimbursed for all
documented expenses arising in connection with the exercise of
their duties, as well as for income tax incurred on their
compensation from Infineon.

Other Compensation




    We do not make loans to members of our Supervisory Board.
    We maintain directors and officers insurance, which
    we renegotiate and renew annually. The policy limits the
    personal liability of the members of the Supervisory Board in
    the event that the member is sued in his capacity as a member of
    the Supervisory Board for damages caused to us, to the extent
    that such claimed damages exceed 100% of such members
    annual base retainer (such amount representing a personal
    deductible within the meaning of Section 3.8,
    paragraph 2 of the German Corporate Governance Code).Long-Term Incentive Plans

2006 Stock Option Plan.In February 2006, we
adopted and our shareholders approved the Infineon Technologies
AG 2006 Stock Option Plan, which we refer to as the 2006 plan.
Under the 2006 plan, we have the authority over a three-year
period to grant non-transferable share options to members of our
Management Board, members of senior management of our
subsidiaries, and other key managers and employees at Infineon
Technologies AG and our domestic and foreign subsidiaries. We
may grant options covering up to 1.625 million shares to
members of our Management Board, 1.3 million shares to
senior management of our domestic and foreign subsidiaries, and
10.075 million shares to other key managers and employees
at levels below the Management Board of Infineon
Technologies AG and senior management of our domestic and
foreign subsidiaries. No more than 40% of the options available
for grant to one of those three groups may be issued during one
financial year, and we may not grant options under the 2006 plan
covering more than 13 million shares in the aggregate. No
options had been granted under the 2006 plan as of
September 30, 2006.

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Under the 2006 plan, the Supervisory Board will decide annually
within a period of 45 days after publication of the results
for the financial year then ended or of the first or second
quarter of a current fiscal year, 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.

The exercise price of the options granted under the 2006 plan is
120% of the average opening share price of our shares on the
Frankfurt Stock Exchange over the five trading days preceding
the date of grant. Options granted under the 2006 plan have a
term of six years after the date of grant and may be exercised
after the third anniversary of the date of grant, at the
earliest. In addition, options may be exercised only if both the
share price of our company has reached the exercise price at
least once during a trading day, and if the share price of our
company has exceeded for at least three consecutive days, on at
least one occasion since the date of grant, the trend of the
Philadelphia Semiconductor Stock Index, a comparative index of
the share price of companies in a similar sector to Infineon
Technologies AG. If the Philadelphia Semiconductor Stock Index
is discontinued or is fundamentally altered so as not to provide
an appropriate means for comparison, then the Management Board
will either select another index to serve as a comparative index
or use a new index including as many as possible of the
individual prices previously tracked by the Philadelphia
Semiconductor Stock Index. In addition, holders may not exercise
an option within a fixed time period prior to or following
publication of our quarterly or annual results.

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 granted 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. As of
September 30, 2006, options to purchase an aggregate of
37.3 million shares were outstanding under the 2001 plan,
of which options to purchase 1.5 million shares were held
by members of our Management Board. No further options will be
granted under the 2001 plan.

The exercise price of the options granted under the 2001 plan is
105% of the average closing 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.

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, 2006, options to purchase an aggregate
of 7.5 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% 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.

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PRINCIPAL SHAREHOLDERS

The following table shows the beneficial ownership, as of
September 30, 2006, of our companys share capital by
(1) the principal shareholders (each person or entity that
has reported to us, as required by applicable German law, that
it beneficially owns 5% or more of our shares) and (2) the
members of our Management Board and Supervisory Board, each as a
group. We are not directly or indirectly owned or controlled by
any foreign government.

|                                                       |  |              |            |  |   |  |     | 
|------------------------------------------------------ |  | ------------ | ---------- |  | - |  | --- | 
|                                                       |  | Shares owned |           
|                                                       |  |              |           
|                                                       |  | Number       |            |  | % | 
|                                                       |  |              |            |  |   | 
|Brandes Investment Partners,
    L.P.(1)               |  |              | 38,371,696 |  |   |  | 5.1 | 
|Dodge & Cox Investment
    Managers(2)                 |  |              | 37,927,800 |  |   |  | 5.1 | 
|Members of the Management Board as
    a
    group(3)  |  |              | *          |  |   |  | *   | 
|Members of the Supervisory Board as
    a
    group(3) |  |              | *          |  |   |  | *   | 



|    |                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The business address of Brandes Investment Partners, L.P. is
    11988 El Camino Real, Suite 500, San Diego, California
    92130, USA.    
|   
|(2) | The business address of Dodge & Cox Investment Managers
    is 555 California Street, 40th Floor, San Francisco,
    California 94104, USA.
|   
|(3) | Represents less than 1% of our outstanding share capital.                                                                                  





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RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

Qimonda

In connection with the formation of Qimonda as a separate legal
entity, Infineon and Qimonda entered into a number of agreements
governing the carve-out of the memory products business, the
licensing of intellectual property, the use of Infineons
200-millimeter fabrication facility in Dresden, and ongoing
support services in the areas of general support, IT services
and research and development services. These agreements are
described in detail in the annual report of Qimonda on
Form 20-F
(Commission File
No. 001-32972),
filed with the Securities and Exchange Commission on
November 21, 2006, under the heading Related Party
Transactions and Relationships  With Infineon,
which section is hereby incorporated herein by reference.

Siemens

Until 1999, the entire business of Infineon formed the
Semiconductor Group of Siemens AG, a large German electronics
conglomerate. In 1999, Siemens formed Infineon as a separate
legal entity, transferred its semiconductor business to us, and
conducted an initial public offering of our ordinary shares with
listing on the Frankfurt Stock Exchange and the New York
Stock Exchange. Siemens subsequently took a variety of steps to
further reduce its ownership interest in Infineon. On
April 3, 2006, Siemens sold all of its remaining shares in
Infineon and is therefore no longer deemed an affiliate of our
company. Transactions between our company and Siemens subsequent
to this date are no longer reflected as Related Party
transactions.

Services

The Siemens group provides us with some administrative,
financial, information technology and other services. 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, and library services) are
then purchased on the basis of individual service agreements. We
believe all services from the Siemens group companies are
purchased at market prices and on arms length terms and
conditions.

During the 2006 financial year, we purchased services from
Siemens, including information technology services, of
44 million,
facility rental of
20 million, and
administrative services of
53 million. We
also purchased raw materials, products and fixed and other
assets aggregating
18 million during
the 2006 financial year.

Sales

The Siemens group was our largest customer in the 2005 and 2006
financial years, representing 12% and 7%, respectively, of our
net sales. We believe that these transactions are on terms no
less favorable to us than we could obtain from third parties.

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.

Dispositions

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. This
sale was completed in the 2006 financial year.

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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

The issued share capital of our company consists of
1,495,218,588 divided
into 747,609,294 individual shares in registered form with a
notional value of 2.00
each. 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.
    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 connec-

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tion 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.
    During the 2006 financial year, our share capital increased by
    79,870 as a result of
    the exercise of 39,935 employee stock options. After these
    exercises our companys share capital consisted of
    1,495,218,588.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% 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.

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Conditional Capital

Under the German Stock Corporation Act, a stock
corporations shareholders can authorize conditional
capital of up to 50% of the issued share capital at the time of
the resolution. Our company has a 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, 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 and 2006 long-term incentive
plan and additional capital in an aggregate nominal amount of
24.5 million that
may be used to issue up to 12.3 million new registered
shares in connection with our 2006 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% of our issued
share capital may also require the Management Board to call a
meeting. The annual general meeting must take place within the
first eight months of the financial year. The Management Board
calls this meeting upon the receipt of the Supervisory
Boards report on the annual financial statements.

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

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

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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 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% of the
share capital represented in connection with the vote taken on
that resolution. The majority required for some of these
resolutions may be lowered by the Articles of Association. The
shareholders of our company have lowered the majority
requirements to the extent permitted by law.

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

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




    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

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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 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 our 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 our company, they are liable for damages to
our 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.

Disclosure Requirement

The German Securities Trading Act requires each person whose
shareholding of a listed company reaches, exceeds or, after
exceeding, falls below 5%, 10%, 25%, 50% or 75% 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 disclosure requirement. In addition, the German
Securities Trading Act contains various rules designed to ensure
the attribution of shares to the person who has effective
control over the exercise of the voting rights attached to those
shares.

Repurchase of Our Own Shares

We may not acquire our own shares unless authorized by the
shareholders general meeting or in other very limited
circumstances set out in the German Stock Corporation Act.
Shareholders may not grant a share repurchase authorization
lasting for more than 18 months. The rules in the German
Stock Corporation Act generally limit repurchases to 10% of our
share capital and resales must be made either on the stock
exchange, in a manner that treats all shareholders equally or in
accordance with the rules that apply to preemptive rights
relating to a capital increase. We are not currently authorized
by the shareholders general meeting to repurchase our own
shares.

Corporate Purpose of Our Company

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

Registration of our company with the 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, including Qimonda, with subsidiaries incorporated in
jurisdictions throughout Europe and Asia, as well as in the
United States. Our most significant subsidiaries are set out
below. Unless otherwise indicated, all of the subsidiaries in
the Infineon group (including Qimonda) are directly or
indirectly 100% owned by Infineon Technologies AG, and all of
the subsidiaries in the Qimonda group are directly or indirectly
100% owned by Qimonda AG.

Principal Subsidiaries as of September 30, 2006

|                                                     |  |                                          |  |                                                                                                                 
|---------------------------------------------------- |  | ---------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|Corporate name                                       |  | Registered office                        |  | Principal activity                                                                                              
|                                                     |  |                                          |  |                                                                                                                 
|Infineon Group:                                      |  |                                          |  |                                                                                                                 
|ALTIS Semiconductor
    S.N.C(1)                     |  | Essonnes, France                         |  | Production                                                                                                      
|Infineon Technologies Asia Pacific
    Pte. Ltd.     |  | Singapore                                |  | Production, Distribution                                                                                        
|Infineon Technologies Austria AG                     |  | Villach, Austria                         |  | Production                                                                                                      
|Infineon Technologies China Co.
    Ltd.             |  | Shanghai, Peoples Republic of
    China |  | Holding                                                                                                         
|Infineon Technologies Dresden
    GmbH & Co. OHG     |  | Dresden, Germany                         |  | Production                                                                                                      
|Infineon Technologies Finance GmbH                   |  | Munich, Germany                          |  | Financial services                                                                                              
|Infineon Technologies France S.A.S                   |  | Saint Denis, France                      |  | Distribution                                                                                                    
|Infineon Technologies Holding
    B.V.               |  | Rotterdam, The Netherlands               |  | Holding                                                                                                         
|Infineon Technologies Holding North
    America Inc. |  | Delaware, USA                            |  | Holding                                                                                                         
|Infineon Technologies Investment
    B.V.            |  | Rotterdam, The Netherlands               |  | Holding                                                                                                         
|Infineon Technologies Japan
    K.K.                 |  | Tokyo, Japan                             |  | Distribution                                                                                                    
|Infineon Technologies North America
    Corp.        |  | Delaware, USA                            |  | Research, development and
    distribution                                                                      
|Infineon Technologies SensoNor AS                    |  | Horten, Norway                           |  | Production                                                                                                      
|Infineon Technologies (Advanced
    Logic) Sdn. Bhd  |  | Malacca, Malaysia                        |  | Production                                                                                                      
|Infineon Technologies (Kulim) Sdn.
    Bhd           |  | Kulim, Malaysia                          |  | Production                                                                                                      
|Infineon Technologies (Malaysia)
    Sdn. Bhd        |  | Malacca, Malaysia                        |  | Production                                                                                                      
|Qimonda Group:                                       |  |                                          |  |                                                                                                                 
|Qimonda
    AG(2)                                    |  | Munich, Germany                          |  | Research, development, production
    and distribution of semiconductor memory products and related
    services
|Qimonda (Melaka) Sdn. Bhd                            |  | Malacca, Malaysia                        |  | Production                                                                                                      
|Qimonda Asia Pacific Pte.
    Ltd.                   |  | Singapore                                |  | Distribution                                                                                                    
|Qimonda Dresden GmbH & Co.
    OHG                   |  | Dresden, Germany                         |  | Production                                                                                                      
|Qimonda Flash GmbH                                   |  | Dresden, Germany                         |  | Research and development                                                                                        
|Qimonda Holding B.V.                                 |  | Rotterdam, The Netherlands               |  | Holding                                                                                                         
|Qimonda North America
    Corp.                      |  | Delaware, USA                            |  | Distribution, sales and marketing,
    research and development                                                 
|Qimonda Portugal S.A.                                |  | Vila do Conde, Portugal                  |  | Production                                                                                                      
|Qimonda Richmond, LLC                                |  | Delaware, USA                            |  | Production                                                                                                      
|Qimonda Technologies (Suzhou) Co.,
    Ltd(3)        |  | Suzhou, Peoples Republic of
    China   |  | Production                                                                                                      



|    |                                            
|--- | -------------------------------------------
|(1) | 50.01% interest held by Infineon.          
|   
|(2) | 85.88% ownership interest held by Infineon.
|   
|(3) | 45.00% interest held by Qimonda.           

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Dividend Policy

Under 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, Infineon
Technologies AG, as determined in accordance with HGB, the
German Commercial Code. All dividends must be approved by the
shareholders. The ordinary shareholders meeting held in February
2006 did not authorize a dividend. No earnings are available for
distribution as a dividend for the 2006 financial year, since
Infineon Technologies AG on a stand-alone basis as the ultimate
parent incurred a cumulative loss (Bilanzverlust) as of
September 30, 2006. Subject to market conditions, we intend
to retain future earnings for investment in the development and
expansion of our business.





Market Information

General

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

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, 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 | 
|Financial year ended
    September 30, 2006 |  |                         | 9.95  |  |     |  | 7.60 | 
|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 | 
|October 2005 through December 2005          |  |                         | 8.51  |  |     |  | 7.60 | 
|January 2006 through March 2006             |  |                         | 8.93  |  |     |  | 7.62 | 
|April 2006 through June 2006                |  |                         | 9.95  |  |     |  | 8.22 | 
|July 2006 through
    September 30, 2006    |  |                         | 9.76  |  |     |  | 8.21 | 
|June 2006                                   |  |                         | 9.13  |  |     |  | 8.22 | 
|July 2006                                   |  |                         | 8.98  |  |     |  | 8.21 | 
|August 2006                                 |  |                         | 9.24  |  |     |  | 8.28 | 
|September 2006                              |  |                         | 9.76  |  |     |  | 9.05 | 
|October 2006                                |  |                         | 10.24 |  |     |  | 9.25 | 
|November
    2006(1)                        |  |                         | 9.96  |  |     |  | 9.26 | 



|    |                                       
|--- | --------------------------------------
|(1) | Up to and including November 28, 2006.




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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, 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  | 
|Financial year ended
    September 30, 2006 |  |                  | 12.68 |  |     |  | 8.95  | 
|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  | 
|October 2005 through December 2005          |  |                  | 10.03 |  |     |  | 8.95  | 
|January 2006 through March 2006             |  |                  | 10.28 |  |     |  | 9.18  | 
|April 2006 through June 2006                |  |                  | 12.68 |  |     |  | 10.24 | 
|July 2006 through
    September 30, 2006    |  |                  | 12.49 |  |     |  | 10.37 | 
|June 2006                                   |  |                  | 11.81 |  |     |  | 10.24 | 
|July 2006                                   |  |                  | 11.34 |  |     |  | 10.37 | 
|August 2006                                 |  |                  | 11.94 |  |     |  | 10.53 | 
|September 2006                              |  |                  | 12.49 |  |     |  | 11.57 | 
|October 2006                                |  |                  | 12.92 |  |     |  | 11.77 | 
|November
    2006(1)                        |  |                  | 12.93 |  |     |  | 11.80 | 

(1)







Exchange Rates




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


|                                   |  |         |        | 
|---------------------------------- |  | ------- | ------ | 
|Financial Year Ended September 30, |  | Average |       
|                                   |  |         |       
|2002                               |  |         | 0.9192 | 
|2003                               |  |         | 1.0839 | 
|2004                               |  |         | 1.2174 | 
|2005                               |  |         | 1.2714 | 
|2006                               |  |         | 1.2316 | 

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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 2006 through September 2006:

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

|               |  |      |        |  |     |  |        | 
|-------------- |  | ---- | ------ |  | --- |  | ------ | 
|               |  | High |        |  | Low | 
|               |  |      |        |  |     | 
|April 2006     |  |      | 1.2624 |  |     |  | 1.2091 | 
|May 2006       |  |      | 1.2888 |  |     |  | 1.2607 | 
|June 2006      |  |      | 1.2953 |  |     |  | 1.2522 | 
|July 2006      |  |      | 1.2822 |  |     |  | 1.2500 | 
|August 2006    |  |      | 1.2914 |  |     |  | 1.2735 | 
|September 2006 |  |      | 1.2833 |  |     |  | 1.2648 | 

 





Taxation


Taxation in the Federal Republic of Germany


(Non-German


Taxation of our Company






  (so-called


Taxation of Dividends






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withholding tax permitted by an applicable tax treaty is
refunded to the shareholder by the German Federal Tax Office
(Bundeszentralamt für Steuern,An der Küppe 1,
D-53221 Bonn, Germany) upon application. Forms for a refund
application are available from the German Federal Tax Office or
German embassies and consulates. A further reduction applies
pursuant to most tax treaties if the shareholder is a
corporation which holds a stake of 25% or more, and in some
cases of 10% or more, of the registered share capital (or
according to some tax treaties of the votes) of a company.

Withholding Tax Refund for U.S. Holders

U.S. Holders (as defined below in  United
States Taxation) who are eligible for treaty benefits
under the income tax treaty between Germany and the United
States (the Treaty) are entitled to claim a refund
of a portion of the German withholding tax.

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
within four years from the end of the financial 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
of residency on IRS Form 6166. 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 who holds the
shares as private assets, 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% 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. 5% of the capital gain is considered as nondeductible
expenses, i.e. effectively 95% of the capital gain is
exempted from tax.

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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% or more of a companys
    registered share capital at the time of the transfer.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% 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.

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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.

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 therefrom) 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% will
apply to qualified dividend income received by
individuals (as well as certain trusts and estates) in taxable
years beginning before January 1, 2011, 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.

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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. However, recently enacted legislation will
modify the foreign tax credit rules by reducing the number of
classes of foreign source income to two for taxable years
beginning after December 31, 2006. Under such legislation,
dividends distributed by us would generally constitute
passive category income, but could, in the case of
certain U.S. Holders, constitute general category
income.

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 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, and will be long-term capital
gain or loss if you have held the shares or ADSs for more than
one year. If a U.S. Holder is an individual, trust or
estate, long-term capital gain realized upon a disposition of
shares or ADSs before the end of a taxable year that begins
before January 1, 2011 generally will be subject to a
maximum United States federal income tax rate of 15%. Capital
gain on the disposition 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, Rwanda, Sierra Leone, Somalia, Sudan, Uzbekistan and
Zimbabwe. Germany also imposes certain restrictions on the
movement of capital to Iraq, as well as the provision of
financial aid or capital to the Taliban and Al Qaeda. Similar
provisions have been imposed with regard to

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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.





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 100 F Street, N.E., Washington, DC 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

Disclosure 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,
2006. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of September 30,
2006, 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.

Managements Annual Report on Internal Control over
Financial Reporting

Our management is also responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in
Rule 13a-15(f) or
15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the
supervision of, our chief executive and chief financial officers
and effected by our board, management and other personnel, to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of

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financial statements for external purposes in accordance with
U.S. generally accepted accounting principles, and includes
those policies and procedures that:




    pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of our company;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of our company are being made
    only in accordance with authorizations of management and board
    of our company; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of our
    companys assets that could have a material effect on our
    financial statements.Our management assessed the effectiveness of our internal
control over financial reporting as of September 30, 2006.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment,
management concluded that, as of September 30, 2006, our
internal control over financial reporting is effective based on
those criteria.

Our independent auditors have issued an audit report on our
assessment of our companys internal control over financial
reporting. This report appears below.

Attestation Report of Independent Registered Public
Accounting Firm

The Supervisory Board

Infineon Technologies AG:

We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Infineon Technologies AG
maintained effective internal control over financial reporting
as of September 30, 2006, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Infineon Technologies AGs management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of Infineon Technologies AGs
internal control over financial reporting based on our audit.

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

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance

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with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.

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

In our opinion, managements assessment that Infineon
Technologies AG maintained effective internal control over
financial reporting as of September 30, 2006, is fairly
stated, in all material respects, based on criteria established
in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Also, in our opinion, Infineon Technologies
AG maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2006,
based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Infineon Technologies AG and
subsidiaries as of September 30, 2005 and 2006, 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, 2006, and our
report dated November 15, 2006 expressed an unqualified
opinion on those consolidated financial statements.

Munich, Germany

November 15, 2006

KPMG Deutsche Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

Changes in Internal Controls Over Financial
Reporting

No change in our internal control over financial reporting
occurred during the financial year ended September 30, 2006
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Limitations

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

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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
may obtain a copy of our code of ethics, at no cost, by writing
to us at Infineon Technologies AG, Am Campeon 1-12,
D-85579 Neubiberg, Germany, Attention: Legal Department.





Principal Accountant Fees and Services

Audit Fees. KPMG, our independent auditors,
charged us an aggregate of
3.0 million in
the 2005 financial year and
7.3 million in
the 2006 financial year in connection with professional services
rendered for the audit of our annual consolidated financial
statements and of internal control over financial reporting as
required for the 2006 financial year and services normally
provided by them in connection with statutory and regulatory
filings or other compliance engagements. These services
consisted of quarterly review engagements, the annual audit and
the carve-out audit of Qimonda.

Audit-Related Fees. In addition
to the amounts described above, KPMG charged us an aggregate of
1.7 million in
the 2005 financial year and
1.0 million in
the 2006 financial year for assurance and related services in
connection with the performance of our audit. These services
consisted of transaction and accounting advisory services, IT
system audits, the assessment of internal controls over
financial reporting in the 2005 financial year and services
related to the transition to IFRS.

Tax Fees. In addition to the
amounts described above, KPMG charged us an aggregate of
0.3 million in
the 2005 financial year and
0.1 million in
the 2006 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 each of the 2005 and 2006 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 audits 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 Committees

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 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

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filed as exhibits to this Annual Report on
Form 20-F. Our
Annual Reports on
Form 20-F for the
2000 to 2005 financial years contain summaries of additional
material contracts entered into prior to October 1, 2005,
some of which may still be in effect.

Commercial Agreements

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

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.AMB
    
    Advanced Memory Buffer. This is a dedicated logic chip used on
    FB-DIMMs (see FB-DIMM). The AMB operates as the
    interface between the system bus and the memory chips.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 or mixed-signal
    circuit designed for a specific use and for a specific customer.ASSP
    
    Application Specific Standard Product. A logic or mixed-signal
    circuit designed for a specific application market, and sold to
    more than one customer, and thus, standard.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.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.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.

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Chip cards
    
    Cards that contain an IC. Frequently used for telephone cards,
    debit cards or SIM 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
    
    Central Office. A common carrier switching office in which
    users lines terminate. The nerve center of a telephone
    system.CODEC
    
    Coder/ Decoder. Hardware used to code and decode digital signals.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.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 (single in-line memory module).Discrete semiconductors
    
    Semiconductor devices that involve only a single device like a
    transistor or a diode.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
    electrical charge in a storage cell consisting of a capacitor
    and a transistor. The capacitor discharges gradually due to
    leakage and the memory cell loses the information stored. To
    preserve the information, the memory has to be refreshed
    periodically and is therefore referred to as
    dynamic. DRAM is a widespread memory technology
    because of its high packing density and consequently low price.DSL
    
    See xDSL.DSLAM
    
    Digital Subscriber Line Access 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
    
    Digital Video Broadcasting  Cable.DVB-H
    
    Digital Video Broadcasting  Handheld.DVB-S
    
    Digital Video Broadcasting  Satellite.

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DVB-T
    
    Digital Video Broadcasting  Terrestrial.E-GOLDradio
    
    Trademark of Infineon Technologies AG for a GSM/GPRS single-chip
    which combines a radiofrequency transceiver part with a baseband
    processor.E1/T1
    
    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 rate for GSM Evolution.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 Service.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 In-line 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.Flash memory
    
    A type of non-volatile 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 is 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  Third 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; precisely 2 to the power of 30
    bits.Gigabyte
    
    Approximately one billion bytes; precisely 2 to the power of 30
    bytes.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. GPRS is based on GSM
    communication and complements Bluetooth and existing services on
    circuit-switched cellular phone connections.GraphicsRAM
    
    See GDDR3.

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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, SECAM, 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.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.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; precisely 2 to the power of 20
    bits.Megabyte (MB)
    
    Approximately one million bytes; precisely 2 to the power of 20
    bytes.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.

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Micron (mm)
    
    A metric unit of linear measure which equals one millionth of a
    meter. 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
    
    MultiMediaCard. 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.Non-volatile 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.ODM
    
    Original Device 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).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
    
    Per FluoroCarbons. Compounds derived from hydrocarbons by
    replacement of hydrogen atoms by fluovine 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.

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PSRAM
    
    Pseudo-static RAM. It combines the advantages of the SRAM and
    DRAM by using dynamic storage cells to retain memory, and by
    implementing an SRAM-like interface so that the device functions
    similarly to an SRAM.Radio-frequency IC
    
    High-frequency IC such as those used in mobile
    telecommunications. See also RF.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 electromagnetic
    (EM) field is generated suitable for wireless broadcasting
    and/or communications.RFID
    
    Radio Frequency Identification. Systems that read or write data
    to RF tags that are present in a radio frequency field projected
    from RF reading/writing equipment. Data may be contained in one
    or more bits for the purpose of providing identification and
    other information relevant to the object to which the tag is
    attached. It incorporates the use of electromagnetic, or
    electrostatic coupling in the radio frequency portion of the
    spectrum to communicate to or from a tag through a variety of
    modulation schemes.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 3GE
    
    CMOS-HF-transceiver with worldwide compatibility.SO-DIMM
    
    Small Outline Dual In-line Memory Module. A type of computer
    memory integrated circuit.

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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.SRAM
    
    Static RAM. A memory cell consisting of several transistors that
    are switched as two feedback inverters.Structure size
    
    A measurement (generally in micron or nanometers) of the width
    of the smallest patterned feature or circuit on a semiconductor
    chip.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.T-DMB
    
    Terrestrial Digital Multimedia Broadcasting. A system for
    broadcasting a variety of digital content to mobile devices,
    such as cellular phones.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.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 customer premises
    equipment (CPE) 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.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.

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INFINEON TECHNOLOGIES AG AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                              |  |      |     | 
|------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                              |  | Page
|                                                                                                              |  |     
|Report of
    Independent Registered Public Accounting Firm                                                   |  |      | F-2 | 
|Consolidated
    Statements of Operations for the years ended
    September 30, 2004, 2005 and 2006           |  |      | F-3 | 
|Consolidated
    Balance Sheets as of September 30, 2005 and 2006                                             |  |      | F-4 | 
|Consolidated
    Statements of Shareholders Equity for the years ended
    September 30, 2004, 2005 and 2006 |  |      | F-5 | 
|Consolidated
    Statements of Cash Flows for the years ended
    September 30, 2004, 2005 and 2006           |  |      | 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

Infineon Technologies AG:

We have audited the accompanying consolidated balance sheets of
Infineon Technologies AG and subsidiaries (the
Company) as of September 30, 2005 and 2006, 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, 2006. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the 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, 2005 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2006, in conformity
with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Infineon Technologies AGs internal
control over financial reporting as of September 30, 2006,
based on criteria established in Internal Control 
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated November 15, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.

Munich, Germany

November 15, 2006

KPMG Deutsche
Treuhand-Gesellschaft

Aktiengesellschaft

Wirtschaftsprüfungsgesellschaft

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##### Table of Contents

Infineon Technologies AG and Subsidiaries





Consolidated Statements of Operations

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

(in millions, except for share data)

|                                                                    |                 |              |    |    |              |  |       |              |  |  |              |       |  |      |        |       |  |  |        |       | 
|------------------------------------------------------------------- | --------------- | ------------ | -- | -- | ------------ |  | ----- | ------------ |  |  | ------------ | ----- |  | ---- | ------ | ----- |  |  | ------ | ----- | 
|                                                                    |                
|                                                                    |                 | Notes        |    |    | 2004         |  |       | 2005         |  |  | 2006         |       |  | 2006 |       
|                                                                    |                
|                                                                    |                 | ( millions) |    |    | ( millions) |  |       | ( millions) |  |  | ($ millions) |      
|Net sales:                                                          |                 |              |    |    |              |  |       |              |  |  |              |       |  |      |        |       |  |  |        |      
|                                                                    | Third parties   |              |    | 6  |              |  |       | 6,169        |  |  |              | 5,843 |  |      |        | 7,546 |  |  |        | 9,574 | 
|                                                                    | Related parties |              |    | 29 |              |  |       | 1,026        |  |  |              | 916   |  |      |        | 383   |  |  |        | 486   | 
|                                                                   
|Total net sales                                                     |                 |              |    |    |              |  | 7,195 |              |  |  | 6,759        |       |  |      | 7,929  |       |  |  | 10,060 |      
|                                                                   
|Cost of goods sold                                                  |                 |              | 8  |    |              |  | 4,670 |              |  |  | 4,909        |       |  |      | 5,854  |       |  |  | 7,427  |      
|                                                                   
|Gross profit                                                        |                 |              |    |    |              |  | 2,525 |              |  |  | 1,850        |       |  |      | 2,075  |       |  |  | 2,633  |      
|                                                                   
|Research and development expenses                                   |                 |              |    |    |              |  | 1,219 |              |  |  | 1,293        |       |  |      | 1,249  |       |  |  | 1,585  |      
|Selling, general and administrative
    expenses                    |                 |              |    |    |              |  | 718   |              |  |  | 655          |       |  |      | 751    |       |  |  | 953    |      
|Restructuring charges                                               |                 |              | 9  |    |              |  | 17    |              |  |  | 78           |       |  |      | 23     |       |  |  | 29     |      
|Other operating expense, net                                        |                 |              | 8  |    |              |  | 257   |              |  |  | 92           |       |  |      | 108    |       |  |  | 137    |      
|                                                                   
|Operating income (loss)                                             |                 |              |    |    |              |  | 314   |              |  |  | (268)        |       |  |      | (56)   |       |  |  | (71)   |      
|                                                                   
|Interest expense, net                                               |                 |              |    |    |              |  | (41)  |              |  |  | (9)          |       |  |      | (92)   |       |  |  | (117)  |      
|Equity in earnings (losses) of
    associated companies, net        |                 |              | 17 |    |              |  | (14)  |              |  |  | 57           |       |  |      | 78     |       |  |  | 99     |      
|Gain on subsidiaries and associated
    company share issuance, net |                 |              | 17 |    |              |  | 2     |              |  |  |             |       |  |      | 19     |       |  |  | 24     |      
|Other non-operating
    (expense) income, net                       |                 |              |    |    |              |  | (64)  |              |  |  | 26           |       |  |      | (33)   |       |  |  | (42)   |      
|Minority interests                                                  |                 |              | 24 |    |              |  | 18    |              |  |  | 2            |       |  |      | (23)   |       |  |  | (29)   |      
|                                                                   
|Income (loss) before income
    taxes                               |                 |              |    |    |              |  | 215   |              |  |  | (192)        |       |  |      | (107)  |       |  |  | (136)  |      
|                                                                   
|Income tax expense                                                  |                 |              | 10 |    |              |  | (154) |              |  |  | (120)        |       |  |      | (161)  |       |  |  | (204)  |      
|                                                                   
|Net income (loss)                                                   |                 |              |    |    |              |  | 61    |              |  |  | (312)        |       |  |      | (268)  |       |  |  | (340)  |      
|                                                                   
|Basic and diluted income
    (loss) per share                       |                 |              | 11 |    |              |  | 0.08  |              |  |  | (0.42)       |       |  |      | (0.36) |       |  |  | (0.46) |      
|                                                                   



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##### Table of Contents

Infineon Technologies AG and Subsidiaries

Consolidated Balance Sheets

September 30, 2005 and 2006

|                                               |                                            |              |    |    |              |  |        |              |  |  |        |         |  |  |        |         |  |  | 
|---------------------------------------------- | ------------------------------------------ | ------------ | -- | -- | ------------ |  | ------ | ------------ |  |  | ------ | ------- |  |  | ------ | ------- |  |  | 
|                                              
|                                               |                                            | Notes        |    |    | 2005         |  |        | 2006         |  |  | 2006   |         |  | 
|                                              
|                                               |                                            | ( millions) |    |    | ( millions) |  |        | ($ millions) |  |  |       
|Assets:                                        |                                            |              |    |    |              |  |        |              |  |  |        |         |  |  |        |         |  | 
|Current assets:                                |                                            |              |    |    |              |  |        |              |  |  |        |         |  |  |        |         |  | 
|                                               | Cash and cash equivalents                  |              |    |    |              |  |        | 1,148        |  |  |        | 2,040   |  |  |        | 2,587   |  |  | 
|                                               | Marketable securities                      |              |    | 12 |              |  |        | 858          |  |  |        | 615     |  |  |        | 780     |  |  | 
|                                               | Trade accounts receivable, net             |              |    | 13 |              |  |        | 952          |  |  |        | 1,245   |  |  |        | 1,580   |  |  | 
|                                               | Inventories                                |              |    | 14 |              |  |        | 1,022        |  |  |        | 1,202   |  |  |        | 1,525   |  |  | 
|                                               | Deferred income taxes                      |              |    | 10 |              |  |        | 125          |  |  |        | 97      |  |  |        | 123     |  |  | 
|                                               | Other current assets                       |              |    | 15 |              |  |        | 469          |  |  |        | 482     |  |  |        | 612     |  |  | 
|                                              
|Total current assets                           |                                            |              |    |    |              |  | 4,574  |              |  |  | 5,681  |         |  |  | 7,207  |         |  | 
|                                              
|Property, plant and equipment, net             |                                            |              | 16 |    |              |  | 3,751  |              |  |  | 3,764  |         |  |  | 4,776  |         |  | 
|Long-term investments                          |                                            |              | 17 |    |              |  | 779    |              |  |  | 659    |         |  |  | 836    |         |  | 
|Restricted cash                                |                                            |              |    |    |              |  | 88     |              |  |  | 78     |         |  |  | 99     |         |  | 
|Deferred income taxes                          |                                            |              | 10 |    |              |  | 550    |              |  |  | 627    |         |  |  | 795    |         |  | 
|Other assets                                   |                                            |              | 18 |    |              |  | 542    |              |  |  | 376    |         |  |  | 477    |         |  | 
|                                              
|Total assets                                   |                                            |              |    |    |              |  | 10,284 |              |  |  | 11,185 |         |  |  | 14,190 |         |  | 
|                                              
|                                              
|Liabilities and shareholders
    equity:     
|Current liabilities:                           |                                            |              |    |    |              |  |        |              |  |  |        |         |  |  |        |         |  | 
|                                               | Short-term debt and current
    maturities |              |    | 22 |              |  |        | 99           |  |  |        | 797     |  |  |        | 1,011   |  |  | 
|                                               | Trade accounts payable                     |              |    | 19 |              |  |        | 1,069        |  |  |        | 1,245   |  |  |        | 1,580   |  |  | 
|                                               | Accrued liabilities                        |              |    | 20 |              |  |        | 497          |  |  |        | 562     |  |  |        | 713     |  |  | 
|                                               | Deferred income taxes                      |              |    | 10 |              |  |        | 17           |  |  |        | 26      |  |  |        | 33      |  |  | 
|                                               | Other current liabilities                  |              |    | 21 |              |  |        | 700          |  |  |        | 675     |  |  |        | 856     |  |  | 
|                                              
|Total current liabilities                      |                                            |              |    |    |              |  | 2,382  |              |  |  | 3,305  |         |  |  | 4,193  |         |  | 
|                                              
|Long-term debt                                 |                                            |              | 22 |    |              |  | 1,566  |              |  |  | 1,208  |         |  |  | 1,533  |         |  | 
|Deferred income taxes                          |                                            |              | 10 |    |              |  | 65     |              |  |  | 60     |         |  |  | 76     |         |  | 
|Other liabilities                              |                                            |              | 23 |    |              |  | 561    |              |  |  | 457    |         |  |  | 580    |         |  | 
|                                              
|Total liabilities                              |                                            |              |    |    |              |  | 4,574  |              |  |  | 5,030  |         |  |  | 6,382  |         |  | 
|                                              
|Minority interests                             |                                            |              | 24 |    |              |  | 81     |              |  |  | 840    |         |  |  | 1,065  |         |  | 
|                                              
|Shareholders equity:                          |                                            |              |    |    |              |  |        |              |  |  |        |         |  |  |        |         |  | 
|                                               | Ordinary share capital                     |              |    | 25 |              |  |        | 1,495        |  |  |        | 1,495   |  |  |        | 1,897   |  |  | 
|                                               | Additional paid-in capital                 |              |    |    |              |  |        | 5,800        |  |  |        | 5,828   |  |  |        | 7,394   |  |  | 
|                                               | Accumulated deficit                        |              |    |    |              |  |        | (1,512)      |  |  |        | (1,780) |  |  |        | (2,258) |  |  | 
|                                               | Accumulated other comprehensive loss       |              |    | 27 |              |  |        | (154)        |  |  |        | (228)   |  |  |        | (290)   |  |  | 
|                                              
|Total shareholders equity                     |                                            |              |    |    |              |  | 5,629  |              |  |  | 5,315  |         |  |  | 6,743  |         |  | 
|                                              
|Total liabilities and
    shareholders equity |                                            |              |    |    |              |  | 10,284 |              |  |  | 11,185 |         |  |  | 14,190 |         |  | 
|                                              



F-4



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##### Table of Contents

Infineon Technologies AG and Subsidiaries





Consolidated Statements of Shareholders Equity

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

(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, 2003         |                                   |                 |    |    |            |  | 720,880,604 |             |  |            | 1,442       |    |            |         | 5,573 |             |            |  | (1,261)        |           |  |  | (81)       |   |  |       | (18) |   |       |  | 11  |   |  |  |     |   |  |  | 5,666 |    
|                                     
|Net income                            |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  | 61             |           |  |  |           |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  | 61    |    
|Other comprehensive
    (loss) income |                                   |                 | 27 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | (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)     |                                   |                 | 27 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | 64         |   |  |       | (84) |   |       |  | 8   |   |  |  | (25) |   |  |  | (37)  |    
|                                     
|Total comprehensive loss              |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |      |   |       |  |     |   |  |  |      |   |  |  | (349) |    
|                                     
|Issuance of ordinary shares:          |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |      |   |       |  |     |   |  |  |      |   |  |  |       |    
|                                      | Exercise of stock options         |                 |    | 26 |            |  |             | 9,500       |  |            |             |   |            |         |       |            |            |  |                |          |  |  |            |  |  |       |      |  |       |  |     |  |  |  |      |  |  |  |       |    | 
|                                     
|Balance as of September 30,
    2005  |                                   |                 |    |    |            |  | 747,569,359 |             |  |            | 1,495       |    |            |         | 5,800 |             |            |  | (1,512)        |           |  |  | (58)       |   |  |       | (84) |   |       |  | 12  |   |  |  | (24) |   |  |  | 5,629 |    
|                                     
|Net loss                              |                                   |                 |    |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  | (268)          |           |  |  |           |   |  |       |     |   |       |  |    |   |  |  |      |   |  |  | (268) |    
|Other comprehensive income (loss)     |                                   |                 | 27 |    |            |  |            |             |  |            |            |    |            |         |      |             |            |  |               |           |  |  | (69)       |   |  |       | (3)  |   |       |  | (7) |   |  |  | 5    |   |  |  | (74)  |    
|                                     
|Total comprehensive loss              |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |      |   |       |  |     |   |  |  |      |   |  |  | (342) |    
|                                     
|Issuance of ordinary shares:          |                                   |                 |    |    |            |  |             |             |  |            |             |    |            |         |       |             |            |  |                |           |  |  |            |   |  |       |      |   |       |  |     |   |  |  |      |   |  |  |       |    
|                                      | Exercise of stock options         |                 |    | 26 |            |  |             | 39,935      |  |            |             |   |            |         |       |            |            |  |                |          |  |  |            |  |  |       |      |  |       |  |     |  |  |  |      |  |  |  |       |    | 
|Stock-based compensation              |                                   |                 | 26 |    |            |  |            |             |  |            |            |    |            |         | 28    |             |            |  |               |           |  |  |           |   |  |       |     |   |       |  |    |   |  |  |     |   |  |  | 28    |    
|                                     
|Balance as of September 30,
    2006  |                                   |                 |    |    |            |  | 747,609,294 |             |  |            | 1,495       |    |            |         | 5,828 |             |            |  | (1,780)        |           |  |  | (127)      |   |  |       | (87) |   |       |  | 5   |   |  |  | (19) |   |  |  | 5,315 |    
|                                     



F-5



---



##### Table of Contents

Infineon Technologies AG and Subsidiaries

Consolidated Statements of Cash Flows

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

|                                                                                         |                                                                     |              |  |          |              |  |         |              |  |  |              |         |  |      |       |         |  |  |         |         |  |  | 
|---------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------ |  | -------- | ------------ |  | ------- | ------------ |  |  | ------------ | ------- |  | ---- | ----- | ------- |  |  | ------- | ------- |  |  | 
|                                                                                        
|                                                                                         |                                                                     | Notes        |  |          | 2004         |  |         | 2005         |  |  | 2006         |         |  | 2006 |       |         | 
|                                                                                        
|                                                                                         |                                                                     | ( millions) |  |          | ( millions) |  |         | ( millions) |  |  | ($ millions) |         |  |     
|Net income (loss)                                                                        |                                                                     |              |  |          |              |  | 61      |              |  |  | (312)        |         |  |      | (268) |         |  |  | (340)   |         |  | 
|Adjustments to reconcile net income
    (loss) to cash provided by operating activities: |                                                                     |              |  |          |              |  |         |              |  |  |              |         |  |      |       |         |  |  |         |         |  | 
|                                                                                         | Depreciation and amortization                                       |              |  | 16/18    |              |  |         | 1,320        |  |  |              | 1,316   |  |      |       | 1,405   |  |  |         | 1,783   |  |  | 
|                                                                                         | Acquired in-process research and
    development                    |              |  | 4        |              |  |         | 9            |  |  |              |        |  |      |       |        |  |  |         |        |  |  | 
|                                                                                         | Deferred compensation                                               |              |  |          |              |  |         | 2            |  |  |              |        |  |      |       |        |  |  |         |        |  |  | 
|                                                                                         | Provision for doubtful accounts                                     |              |  | 13       |              |  |         | 15           |  |  |              | 3       |  |      |       | 23      |  |  |         | 29      |  |  | 
|                                                                                         | Gain on sale of marketable
    securities                           |              |  | 12       |              |  |         | (9)          |  |  |              | (8)     |  |      |       | (3)     |  |  |         | (4)     |  |  | 
|                                                                                         | Loss (gain) on sale of
    businesses and interests in subsidiaries |              |  | 5        |              |  |         | 2            |  |  |              | (39)    |  |      |       | 10      |  |  |         | 13      |  |  | 
|                                                                                         | Gain on disposal of property,
    plant, and equipment              |              |  |          |              |  |         | (5)          |  |  |              | (8)     |  |      |       | (9)     |  |  |         | (11)    |  |  | 
|                                                                                         | Equity in losses (earnings) of
    associated companies, net        |              |  | 17       |              |  |         | 14           |  |  |              | (57)    |  |      |       | (78)    |  |  |         | (99)    |  |  | 
|                                                                                         | Gain on subsidiaries and associated
    company share issuance, net |              |  | 17       |              |  |         | (2)          |  |  |              |        |  |      |       | (19)    |  |  |         | (24)    |  |  | 
|                                                                                         | Minority interests                                                  |              |  | 24       |              |  |         | (18)         |  |  |              | (2)     |  |      |       | 23      |  |  |         | 29      |  |  | 
|                                                                                         | Impairment charges                                                  |              |  | 16/17/18 |              |  |         | 136          |  |  |              | 134     |  |      |       | 57      |  |  |         | 72      |  |  | 
|                                                                                         | Stock-based compensation                                            |              |  | 26       |              |  |         |             |  |  |              |        |  |      |       | 28      |  |  |         | 36      |  |  | 
|                                                                                         | Deferred income taxes                                               |              |  | 10       |              |  |         | 96           |  |  |              | 88      |  |      |       | (6)     |  |  |         | (8)     |  |  | 
|Changes in operating assets and
    liabilities:                                         |                                                                     |              |  |          |              |  |         |              |  |  |              |         |  |      |       |         |  |  |         |         |  | 
|                                                                                         | Trade accounts receivable                                           |              |  | 13       |              |  |         | (219)        |  |  |              | 119     |  |      |       | (334)   |  |  |         | (424)   |  |  | 
|                                                                                         | Inventories                                                         |              |  | 14       |              |  |         | (40)         |  |  |              | (25)    |  |      |       | (145)   |  |  |         | (184)   |  |  | 
|                                                                                         | Other current assets                                                |              |  | 15       |              |  |         | 154          |  |  |              | (2)     |  |      |       | 31      |  |  |         | 39      |  |  | 
|                                                                                         | Trade accounts payable                                              |              |  | 19       |              |  |         | 228          |  |  |              | (52)    |  |      |       | 222     |  |  |         | 282     |  |  | 
|                                                                                         | Accrued liabilities                                                 |              |  | 20       |              |  |         | 92           |  |  |              | (114)   |  |      |       | 89      |  |  |         | 113     |  |  | 
|                                                                                         | Other current liabilities                                           |              |  | 21       |              |  |         | (22)         |  |  |              |        |  |      |       | 48      |  |  |         | 61      |  |  | 
|                                                                                         | Other assets and liabilities                                        |              |  | 18/23    |              |  |         | 43           |  |  |              | (2)     |  |      |       | (100)   |  |  |         | (127)   |  |  | 
|                                                                                        
|Net cash provided by operating
    activities                                            |                                                                     |              |  |          |              |  | 1,857   |              |  |  | 1,039        |         |  |      | 974   |         |  |  | 1,236   |         |  | 
|                                                                                        
|Cash flows from investing
    activities:                                                |                                                                     |              |  |          |              |  |         |              |  |  |              |         |  |      |       |         |  |  |         |         |  | 
|                                                                                         | Purchases of marketable securities
    available for sale           |              |  |          |              |  |         | (2,678)      |  |  |              | (2,228) |  |      |       | (492)   |  |  |         | (623)   |  |  | 
|                                                                                         | Proceeds from sale of marketable
    securities available for sale  |              |  |          |              |  |         | 2,520        |  |  |              | 3,310   |  |      |       | 730     |  |  |         | 926     |  |  | 
|                                                                                         | Proceeds from sale of businesses
    and interests in subsidiaries  |              |  |          |              |  |         | 9            |  |  |              | 101     |  |      |       | 72      |  |  |         | 91      |  |  | 
|                                                                                         | Business interests, net of cash
    acquired                        |              |  |          |              |  |         | (29)         |  |  |              |        |  |      |       |        |  |  |         |        |  |  | 
|                                                                                         | Investment in associated and
    related companies                  |              |  | 17       |              |  |         | (386)        |  |  |              | (135)   |  |      |       | (6)     |  |  |         | (8)     |  |  | 
|                                                                                         | Cash increase from initial
    consolidation of ALTIS               |              |  | 17       |              |  |         |             |  |  |              |        |  |      |       | 119     |  |  |         | 151     |  |  | 
|                                                                                         | Dividends received from equity
    investments                      |              |  |          |              |  |         |             |  |  |              | 51      |  |      |       | 29      |  |  |         | 37      |  |  | 
|                                                                                         | Purchases of intangible assets                                      |              |  | 18       |              |  |         | (125)        |  |  |              | (27)    |  |      |       | (44)    |  |  |         | (56)    |  |  | 
|                                                                                         | Purchases of property, plant and
    equipment                      |              |  | 16       |              |  |         | (1,163)      |  |  |              | (1,368) |  |      |       | (1,253) |  |  |         | (1,590) |  |  | 
|                                                                                         | Proceeds from sales of property,
    plant and equipment            |              |  | 16       |              |  |         | 43           |  |  |              | 58      |  |      |       | 21      |  |  |         | 27      |  |  | 
|                                                                                        
|Net cash used in investing
    activities                                                |                                                                     |              |  |          |              |  | (1,809) |              |  |  | (238)        |         |  |      | (824) |         |  |  | (1,045) |         |  | 
|                                                                                        
|Cash flows from financing
    activities:                                                |                                                                     |              |  |          |              |  |         |              |  |  |              |         |  |      |       |         |  |  |         |         |  | 
|                                                                                         | Net change in short-term debt                                       |              |  | 22       |              |  |         | 62           |  |  |              | (20)    |  |      |       |        |  |  |         |        |  |  | 
|                                                                                         | Net change in related party
    financial receivables and payables  |              |  | 29       |              |  |         | 75           |  |  |              | 18      |  |      |       | 7       |  |  |         | 9       |  |  | 
|                                                                                         | Proceeds from issuance of long-term
    debt                        |              |  | 22       |              |  |         |             |  |  |              | 192     |  |      |       | 400     |  |  |         | 507     |  |  | 
|                                                                                         | Principal repayments of long-term
    debt                          |              |  | 22       |              |  |         | (549)        |  |  |              | (500)   |  |      |       | (56)    |  |  |         | (71)    |  |  | 
|                                                                                         | Change in restricted cash                                           |              |  |          |              |  |         | (43)         |  |  |              | 21      |  |      |       | 10      |  |  |         | 13      |  |  | 
|                                                                                         | Proceeds from issuance of shares to
    minority interest           |              |  |          |              |  |         | 53           |  |  |              | 23      |  |      |       |        |  |  |         |        |  |  | 
|                                                                                         | Proceeds from issuance of shares of
    Qimonda                     |              |  | 3        |              |  |         |             |  |  |              |        |  |      |       | 406     |  |  |         | 515     |  |  | 
|                                                                                         | Capital distributions to minority
    interests                     |              |  |          |              |  |         |             |  |  |              |        |  |      |       | (5)     |  |  |         | (6)     |  |  | 
|                                                                                        
|Net cash (used in) provided by
    financing activities                                  |                                                                     |              |  |          |              |  | (402)   |              |  |  | (266)        |         |  |      | 762   |         |  |  | 967     |         |  | 
|                                                                                        
|Effect of foreign exchange rate
    changes on cash and cash equivalents                 |                                                                     |              |  |          |              |  | (7)     |              |  |  | 5            |         |  |      | (20)  |         |  |  | (25)    |         |  | 
|Net increase (decrease) in
    cash and cash equivalents                                 |                                                                     |              |  |          |              |  | (361)   |              |  |  | 540          |         |  |      | 892   |         |  |  | 1,133   |         |  | 
|Cash and cash equivalents at
    beginning of period                                     |                                                                     |              |  |          |              |  | 969     |              |  |  | 608          |         |  |      | 1,148 |         |  |  | 1,454   |         |  | 
|                                                                                        
|Cash and cash equivalents at end of
    period                                           |                                                                     |              |  |          |              |  | 608     |              |  |  | 1,148        |         |  |      | 2,040 |         |  |  | 2,587   |         |  | 
|                                                                                        



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
    PresentationDescription of
Business

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

Formation

Infineon Technologies AG was formed as a legal entity as of
April 1, 1999 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 under the symbol IFX, and is one of the DAX
30 companies on the Frankfurt Stock Exchange.

Basis of Presentation

The 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 German
Commercial Code Implementation Act
(Einführungsgesetz zum HGB-EGHGB ),
Article 58, paragraph 5, 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, 2006, 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 = $1.2687, the
Federal Reserve noon buying rate on September 29, 2006. 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
Consolidation

The 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 and that are
not controlled by the Company (Associated

F-7



---



##### 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 17). The equity in earnings of
Associated Companies with financial year ends that differ by not
more than three months from the Companys financial year
are 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. In addition, the Company evaluates its relationships
with entities to identify whether they are variable interest
entities as defined by Financial Accounting Standards Board
(FASB) Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest
Entities  an interpretation of ARB
No. 51, and to assess whether it is the primary
beneficiary of such entities. If the determination is made that
the Company is the primary beneficiary, then that entity is
included in the consolidated financial statements.

The Company group consists of the following numbers of entities:

|                   |           |              |    |    |            |  |    |       |   |  |    |    |  
|------------------ | --------- | ------------ | -- | -- | ---------- |  | -- | ----- | - |  | -- | -- | -
|                   |           | Consolidated |    |    | Associated |  |    |      
|                   |           | subsidiaries |    |    | companies  |  |    | Total |  
|                   |           |              |    |    |            |  |    |       |  
|September 30, 2005 |           |              | 56 |    |            |  | 11 |       |   |  | 67 |   
|                   | Additions |              |    | 14 |            |  |    |      |   |  |    | 14 |  
|                   | Disposals |              |    | (4 | )          |  |    | (4    | ) |  |    | (8 | )
|                   |           |              |    |    |            |  |    |       |  
|September 30, 2006 |           |              | 66 |    |            |  | 7  |       |   |  | 73 |   
|                   |           |              |    |    |            |  |    |       |  

Reporting and Foreign
Currency








|                    |  |         |  |   |  |               |        |                |               |  |        |      |  |  |        |  |  |  |        | 
|------------------- |  | ------- |  | - |  | ------------- | ------ | -------------- | ------------- |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                    |  |         |  |   |  |               |        | Annual average |              
|                    |  |         |  |   |  | Exchange rate |        |                | exchange rate | 
|                    |  |         |  |   |  |               |        |                |               | 
|                    |  |         |  |   |  | September 30, |        |                | September 29, |  |        | 2005 |  |  | 2006   | 
|                    |  |         |  |   |  | 2005 euro     |        |                | 2006 euro     |  |        | euro |  |  | euro   | 
|Currency:           |  |         |  |   |  |               |        |                |               |  |        |      |  |  |        | 
|U.S. dollar         |  | 1$      |  | = |  |               | 0.8290 |                |               |  | 0.7899 |      |  |  | 0.7869 |  |  |  | 0.8117 | 
|Japanese yen        |  | 100 JPY |  | = |  |               | 0.7357 |                |               |  | 0.6696 |      |  |  | 0.7331 |  |  |  | 0.6978 | 
|Great Britain pound |  | 1 GBP   |  | = |  |               | 1.4650 |                |               |  | 1.4756 |      |  |  | 1.4507 |  |  |  | 1.4595 | 
|Singapore dollar    |  | 1 SGD   |  | = |  |               | 0.4911 |                |               |  | 0.4981 |      |  |  | 0.4749 |  |  |  | 0.5016 | 

Revenue Recognition


Sales


Revenue Recognition


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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 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 or
distributors whereby the customer or distributor 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 Income

License income is recognized when earned and realizable (see
note 6). 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 are recognized as each element is earned based on the
relative fair value of each element and when there are no
undelivered elements that are essential to the functionality of
the delivered elements and when the amount is not contingent
upon delivery of the undelivered elements. Royalties are
recognized as earned.

Grants

Grants for capital expenditures include both tax-free government
grants (Investitionszulage) and taxable grants for
investments in property, plant and equipment
(Investitionszuschüsse). Grants receivable are
established when a legal right for the grant exists and the
criteria for receiving the grant have been met. Tax-free
government grants are deferred and recognized over the remaining
useful life of the related asset. Taxable grants are deducted
from the acquisition costs of the related asset and thereby
reduce depreciation expense in future periods. Other taxable
grants reduce the related expense (see notes 7, 21 and 23).

Product-related
Expenses

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

Income Taxes

Income taxes are accounted for under the asset and liability
method pursuant to 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 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

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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)

that includes the enactment date. Investment tax credits are
accounted for under the flow-through method.

Stock-based
Compensation

Prior to the adoption of SFAS No. 123 (revised 2004)
Share-Based Payment, the Company accounted
for stock-based compensation using the intrinsic value method
pursuant to Accounting Principles Board (APB)
Opinion 25, Accounting for Stock Issued to
Employees, recognized compensation cost over the pro
rata vesting period, and 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.

Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method. Under this application, the
Company records stock-based compensation expense for all awards
granted on or after the date of adoption and for the portion of
previously granted awards that remained unvested at the date of
adoption. Stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as
expense over the period during which the 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. Prior period amounts
have not been restated and do not reflect the recognition of
stock-based compensation (see note 26).

Issuance of shares by
Subsidiaries or Associated Companies

Gains or losses arising from the issuances of shares by
subsidiaries or Associated Companies, due to changes in the
Companys proportionate share of the value of the
issuers equity, are recognized in earnings pursuant to
SAB Topic 5:H, Accounting for Sales of Stock by a
Subsidiary(see notes 3 and 17).

Cash and Cash
Equivalents

Cash 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, 2005 and 2006
were 1,093 and
1,926, respectively,
and consisted mainly of bank term deposits and fixed income
securities with original maturities of three months or less.

Restricted Cash

Restricted cash includes collateral deposits used as security
under arrangements for deferred compensation, business
acquisitions, construction projects, leases and financing (see
note 33).

Marketable Securities

The Companys marketable securities are classified as
available-for-sale and are stated at fair value as determined by
the most recently traded price of each security at the balance
sheet date. Unrealized gains and losses are included in
accumulated other comprehensive income, net of applicable 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.

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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)

Inventories

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





Property, Plant and
Equipment

Property, plant and equipment are 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 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,
2005 and 2006 capitalized interest was
9 and
0, 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


Goodwill and Other
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)

that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Estimated fair
value is generally based on either appraised value or discounted
estimated future cash flows. Considerable management judgment is
necessary to estimate discounted future cash flows.

Long-term Investments

The 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 Instruments

The Company operates internationally, giving rise to exposure to
changes in foreign currency exchange rates. The Company uses
financial instruments, including derivatives such as foreign
currency forward and option contracts 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, net. 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 31.

Pension Plans

The measurement of pension-benefit liabilities is based on
actuarial computations using the projected-unit-credit method in
accordance with SFAS No. 87, Employers
Accounting for Pensions. The assumptions used to
calculate pension liabilities and costs are shown in
Note 30. Changes in the amount of the projected benefit
obligation or plan assets resulting from experience different
from that assumed and from changes in assumptions can result in
gains or losses not yet recognized in the Companys
consolidated financial statements. Amortization of an
unrecognized net gain or loss is included as a component of the
Companys net periodic benefit plan cost for a year if, as
of the beginning of the year, that unrecognized net gain or loss
exceeds 10% of the greater of the projected benefit obligation
or the fair value of that plans assets. In that case, the
amount of amortization recognized by the Company is the
resulting excess divided by the average remaining service period
of

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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 active employees expected to receive benefits under the
plan. The Company also records a liability for amounts payable
under the provisions of its various defined contribution plans.

Use of Estimates

The preparation of the accompanying consolidated 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
Pronouncements

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. The Company adopted
SFAS No. 151 with effect from October 1, 2005,
which did not 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 March 2005, the FASB issued Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations, which clarifies that an entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value can be
reasonably estimated even though uncertainty exists about the
timing and (or) method of settlement. The Company adopted
Interpretation No. 47 during the 2006 financial year, which
did not have a significant impact on its consolidated financial
position or results of operations.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 replaces APB Opinion No. 20,
Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial
Statements, and changes the requirements for the
accounting and reporting of a change in accounting principle.
The Company is required to adopt SFAS No. 154 for
accounting changes and error corrections that occur after
September 30, 2006. The Companys results of
operations and financial condition will only be impacted
following the adoption of SFAS No. 154 if it
implements changes in accounting principle that are addressed by
the standard or corrects accounting errors in future periods.

In July 2006, the FASB issued Interpretation No. 48,
Accounting for Income Tax Uncertainties,
which defines the threshold for recognizing the benefits of tax
return positions in the financial statements as
more-likely-than-not to be sustained by the taxing
authority. The recently issued literature also provides guidance
on the derecognition, measurement and classification of income
tax uncertainties, along with any related interest and
penalties. Interpretation No. 48 also includes guidance
concerning accounting for income tax uncertainties in interim
periods and increases the level of disclosures associated with
any recorded income tax uncertainties. Interpretation
No. 48 is effective for fiscal years beginning after
December 15, 2006. The differences between the amounts
recognized in the state-

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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)

ments of financial position prior to the adoption of
Interpretation No. 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. The
Company is in the process of determining the impact, if any,
that the adoption of Interpretation No. 48 will have on its
consolidated financial position and results of operations.

In September 2006, the FASB released SFAS No. 157,
Fair Value Measurements, which provides
guidance for using fair value to measure assets and liabilities.
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements. The standard also responds to investors
requests for more information about the extent to which
companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect that fair
value measurements have on earnings. SFAS No. 157 will
apply whenever another standard requires (or permits) assets or
liabilities to be measured at fair value. The standard does not
expand the use of fair value to any new circumstances.
SFAS No. 157 is effective for financial statements
issued for financial years beginning after November 15,
2007, and interim periods within those financial years.
SFAS No. 157 is effective for the Company for
financial years beginning after October 1, 2008, and
interim periods within those financial years. The Company is in
the process of evaluating the impact that the adoption of
SFAS No. 157 will have on its consolidated financial
position and results of operations.

In September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106, and 132(R), which
requires an employer to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity or changes in
unrestricted net assets of a not-for-profit organization
(Recognition Provision). SFAS No. 158 also
requires an employer to measure the funded status of a plan as
of the date of its year-end statement of financial position,
with limited exceptions (Measurement Date
Provision). The Company currently measures the funded
status of its plans annually on June 30. The Recognition
Provision of SFAS No. 158 is effective for the Company
as of the end of the financial year ending September 30,
2007, and the Measurement Date Provision is effective for the
Company as of the end of the financial year ending
September 30, 2009. The Company does not expect the change
in the annual measurement date to September 30 to have a
significant impact on its consolidated financial position and
results of operations. As of September 30, 2006 the
application of the Recognition Provision of
SFAS No. 158 would have resulted in an increase in
other long-term liabilities of
66, a recognized
pension asset of 2,
and an increase in accumulated other comprehensive loss of
60.

In September 2006, the SEC issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB No. 108 provides interpretive guidance on how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in the current year
financial statements. SAB No. 108 requires registrants
to quantify misstatements using both an income statement
(rollover) and balance sheet (iron
curtain) approach and evaluate whether either approach
results in a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial are
now considered material based on either approach, no restatement
is required so long as management properly applied its previous
approach and all relevant facts and circumstances were
considered. If prior years are not restated, the cumulative
effect adjustment is recorded in opening accumulated earnings
(deficit) as of the beginning of the year of adoption.
SAB No. 108 is effective for fiscal years ending on or
after November 15, 2006,

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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)

with earlier adoption encouraged. The Company does not expect
that the adoption of SAB No. 108 will have a
significant impact on its consolidated financial position and
results of operations.



3.
    Separation of Memory Products BusinessEffective May 1, 2006, substantially all the memory
products-related assets and liabilities, operations and
activities of Infineon were contributed to Qimonda AG
(Qimonda), a stand-alone legal company (the
Formation). In conjunction with the Formation, the
Company entered into contribution agreements and various other
service agreements with Qimonda. In cases where physical
contribution (ownership transfer) of assets and liabilities was
not feasible or cost effective, the monetary value was
transferred in the form of cash or debt. The Companys
operations in Japan and Korea are expected to be legally
transferred to Qimonda during the 2007 financial year, and are
to be held for Qimondas benefit until such transfer
occurs. The Companys investment in Inotera Memories Inc.
(Inotera) is held in trust by Infineon subject to
the expiration or release of applicable lock-up provisions under
Taiwan securities law (see note 17 and 35). The
Companys investment in Advanced Mask Technology Center
GmbH & Co. (AMTC) is intended to be
transferred to Qimonda after approval by the other shareholders
in the venture. The Company completed an initial public offering
of the ordinary shares of Qimonda during the three months ended
September 30, 2006 (see note 24).

The contribution agreements include provisions pursuant to which
Qimonda agreed to indemnify Infineon against any claim
(including any related expenses) arising in connection with the
liabilities, contracts, offers, incomplete transactions,
continuing obligations, risks, encumbrances, guarantees and
other matters relating to the memory products business that were
transferred to it as part of the Formation. In addition, the
contribution agreements provide for indemnification of Infineon
with respect to certain existing and future legal claims and
potential restructuring costs incurred in connection with the
rampdown of production in one module of Infineon Technologies
Dresden GmbH & Co. OHG. With the exception of the
securities and certain patent infringement and antitrust claims
identified in note 33, Qimonda is obligated to indemnify
Infineon against any liability arising in connection with the
claims relating to the memory products business described in
that section. Liabilities and risks relating to the securities
class action litigation, including court costs, will be equally
shared by Infineon and Qimonda, but only with respect to the
amount by which the total amount payable exceeds the amount of
the corresponding accrual that Infineon transferred to Qimonda
at the formation. Qimonda has agreed to indemnify Infineon for
60% of any license fee payments to which Infineon may agree in
connection with ongoing negotiations relating to licensing and
cross-licensing arrangements with a third party. These payments
could be substantial and could remain in effect for lengthy
periods.

On July 18, 2006, under the Companys Master Loan
Agreement with Qimonda, Qimonda extended the terms of its loans
due to Infineon with an aggregate principal amount outstanding
of $565 million at that date, with original maturities in
July and August 2007. In this agreement, Qimonda agreed not to
draw further amounts under the agreement, and to repay all
outstanding amounts by no later than two years after the date of
its IPO. An amount of
107 was repaid during
the quarter ended September 30, 2006.

On August 9, 2006 Qimonda completed its IPO on the New York
Stock Exchange through the issuance of 42 million ordinary
shares which are traded as American Depositary Shares (ADSs)
under the symbol QI, for an offering price of $13
per ADS. As a result, the Companys ownership interest in
Qimonda was diluted to 87.7% and its proportional share of
Qimondas equity decreased by
53, which loss the
Company reflected as part of non-operating expenses under gain
on subsidiaries and associated company share issuance, net
during the quarter ended September 30, 2006. The net
offering proceeds amounted to
406 (before tax
benefits available to Qimonda of
9) and are classified
as proceeds from issuance of shares from subsidiaries within
cash flows from financing activities in 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)

accompanying consolidated statement of cash flows for the year
ended September 30, 2006. Qimonda intends to use the
offering proceeds to finance investments in its manufacturing
facilities and for research and development.

In addition, Infineon sold 6.3 million shares upon exercise
of the underwriters over-allotment option. As a result,
the Companys ownership interest in Qimonda decreased to
85.9% and the Company recognized a loss of
12, which was
reflected as part of other operating expenses, net during the
quarter ended September 30, 2006. The net over-allotment
proceeds amounted to
58 and are classified
as proceeds from sale of businesses and interests in
subsidiaries within cash flows from investing activities in the
accompanying consolidated statement of cash flows for the year
ended September 30, 2006.



4.
    AcquisitionsDuring December 2004, Saifun Semiconductors
Ltd. (Saifun) and the Company modified their
existing flash memory 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 (subsequently
reduced to $46 million) to be paid in quarterly
installments over 10 years and additional purchase
consideration primarily in the form of net liabilities assumed
aggregating 7 (see
note 6). 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. Qimonda has sole ownership and
responsibility for the business and started to account for its
entire financial results in the three months ended
March 31, 2005. In light of the weak market conditions for
commodity NAND Flash memories in the three months ended
September 30, 2006, Qimonda decided to ramp down its Flash
production and stop the current development of NAND compatible
flash memory products based on Saifuns proprietory
NROM®
technology. Qimonda and Saifun amended the above license
agreement to terminate the payment of quarterly installments as
of December 31, 2006. As a result of the above, Qimonda
reduced payables, goodwill and other intangible assets, and
recognized an impairment charge of
9 related to license
and fixed assets that were not considered to be recoverable as
of September 30, 2006.

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 was
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, was contingent upon employee
retention and the achievement of certain performance and
development milestones over a two-year period, and was to be
recognized as the milestones were achieved. As of
September 30, 2006,
10 has been paid to
former shareholders or employees of ADMtek and
22 was released to the
Company since certain performance and development milestones
were not achieved. The remaining balance held in escrow amounted
to 2 as of
September 30, 2006. 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

F-16



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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)

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, 2006, all
contingent purchase consideration was forfeited since certain
performance criteria were not achieved.

The following table summarizes the Companys acquisitions
during the years ended September 30, 2004, and 2005 (there
were no significant acquisitions during the 2006 financial year):

|                                             |                                 |            |               |              |       |  |         |      | 
|-------------------------------------------- | ------------------------------- | ---------- | ------------- | ------------ | ----- |  | ------- | ---- | 
|                                             |                                 | 2004       |               |              | 2005  | 
|                                             |                                 |            |               |              |       | 
|                                             |                                 | ADMtek     |               |              | Flash | 
|                                             |                                 |            |               |              |       | 
|Acquisition Date                             |                                 | April 2004 |               | January 2005
|Segment                                      |                                 |            | Communication |              |       |  | Qimonda |     
|                                             |                                 |            | Solutions     |              |       |  |         |     
|Cash                                         |                                 |            | 18            |              |       |  | 1       |     
|Other current assets                         |                                 |            | 10            |              |       |  | 16      |     
|Property, plant and equipment                |                                 |            | 2             |              |       |  | 4       |     
|Intangible assets                            |                                 |            |               |              |       |  |         |     
|                                             | Current product technology      |            |               | 14           |       |  |         |     | 
|                                             | Core technology                 |            |               | 5            |       |  |         | 58   | 
|                                             | Patents (Customer Relationship) |            |               | 2            |       |  |         |     | 
|                                             | In process R&D                  |            |               | 9            |       |  |         |     | 
|Goodwill                                     |                                 |            | 23            |              |       |  | 7       |     
|Other non-current assets                     |                                 |            | 1             |              |       |  | 3       |     
|                                             |                                 |            |               |              |       | 
|                                             | Total assets acquired           |            |               | 84           |       |  |         | 89   | 
|Current liabilities                          |                                 |            | (8            | )            |       |  | (45)    |     
|Non-current liabilities (including
    debt) |                                 |            | (1            | )            |       |  | (2)     |     
|                                             |                                 |            |               |              |       | 
|                                             | Total liabilities assumed       |            |               | (9           | )     |  |         | (47) | 
|                                             |                                 |            |               |              |       | 
|Net assets acquired                          |                                 |            | 75            |              |       |  | 42      |     
|                                             |                                 |            |               |              |       | 
|                                             |                                 |            |               |              |       | 
|Cash paid (Purchase Consideration)           |                                 |            | 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)



5.
    DivestituresOn December 23, 2004, the Company agreed to sell its
venture capital activities, reflected in the Other Operating
Segments, to Cipio Partners, a venture capital company. Under
the terms of the agreement, the Company sold its interest in
Infineon Ventures GmbH including the majority of the venture
investments held therein. The transaction closed on
February 23, 2005. As a result of the sale, the Company
realized a gain before tax of
13 which was recorded
in other non-operating income in the 2005 financial year.

On January 25, 2005, Finisar Corporation
(Finisar) and the Company entered into an agreement
under which Finisar acquired certain assets of the
Companys fiber optics business. Under the terms of the
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 in the 2005 financial year.

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 in the 2005 financial year, and
deferred 1 which was
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 sale proceeds. The sale of the assets
was consummated during the third quarter of the 2005 financial
year.

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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)

Summary financial information for the divested businesses
(through the date of divestiture) for the years ended
September 30, 2004, 2005 and 2006, are as follows:

|                                |                        |      |       |      |      |  |      |      |  |  |   |   | 
|------------------------------- | ---------------------- | ---- | ----- | ---- | ---- |  | ---- | ---- |  |  | - | - | 
|                                |                        | 2004 |       |      | 2005 |  |      | 2006 | 
|                                |                        |      |       |      |      |  |      |      | 
|Sales:                          |                        |      |       |      |      |  |      |      |  |  |   |  
|                                | Fiber Optics           |      |       | 35   |      |  |      | 23   |  |  |   |  | 
|                                | BIDI                   |      |       | 10   |      |  |      | 6    |  |  |   |  | 
|                                |                        |      |       |      |      |  |      |      | 
|Total                           |                        |      | 45    |      |      |  | 29   |      |  |  |  |  
|                                |                        |      |       |      |      |  |      |      | 
|EBIT:                           |                        |      |       |      |      |  |      |      |  |  |   |  
|                                | Infineon Ventures GmbH |      |       | (52) |      |  |      | (3)  |  |  |   |  | 
|                                | Fiber Optics           |      |       | (33) |      |  |      | (27) |  |  |   |  | 
|                                | BIDI                   |      |       | (28) |      |  |      | (20) |  |  |   |  | 
|                                |                        |      |       |      |      |  |      |      | 
|Total                           |                        |      | (113) |      |      |  | (50) |      |  |  |  |  
|                                |                        |      |       |      |      |  |      |      | 
|Gain (loss) on sale before tax: |                        |      |       |      |      |  |      |      |  |  |   |  
|                                | Infineon Ventures GmbH |      |       |     |      |  |      | 13   |  |  |   |  | 
|                                | Fiber Optics           |      |       |     |      |  |      | 21   |  |  |   |  | 
|                                | BIDI                   |      |       |     |      |  |      | 2    |  |  |   |  | 
|                                | Other                  |      |       | (2)  |      |  |      | 3    |  |  |   |  | 
|                                |                        |      |       |      |      |  |      |      | 
|Total (note 8)                  |                        |      | (2)   |      |      |  | 39   |      |  |  |  |  
|                                |                        |      |       |      |      |  |      |      | 



|   |         
|-- | --------
|6. | Licenses

     









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)

Company. On August 29, 2006, Qimonda signed agreements with
Winbond to expand their existing cooperation and capacity
reservation. Under the terms of the agreements, Qimonda will
transfer its
80-nanometer DRAM
trench technology to Winbonds
300-millimeter wafer
facility. In return, Winbond will manufacture DRAMs for
computing applications using this technology exclusively for
Qimonda. The license income was deferred and is being recognized
over the life of the capacity reservation agreements.

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. As of March 31, 2005, the Company
recorded a 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, Qimonda would make additional quarterly
payments which may accumulate up to a maximum of an additional
$100 million. Because Rambus ability to conclude the
agreements is not within the Companys control, the Company
is not able to estimate whether additional payment obligations
may arise. 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. In addition
to the licenses, the two companies agreed to the immediate
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 4). During the three months ended
March 31, 2005, 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 three months 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. Effective September 30, 2006, the
Company and Saifun amended the license agreement (see
note 4). As a result of the amendment, the related
liability was reduced to
3 as of
September 30, 2006.

On June 14, 2006, Infineon and Qimonda reached agreements
with MOSAID Technologies Inc. (MOSAID) settling all
claims between them and licensing the MOSAID patent portfolio
for use in current and future Company products. MOSAID purchased
fifty patents from Infineon and Qimonda, including patents
related to a range of technologies such as DRAM memory, power
management ICs, semiconductor process technology and digital
radio applications. Under the terms of the settlement
agreements, Infineon and Qimonda retain royalty-free lives
of the patents licenses to use these patents in the
manufacturing and sale of any products. In addition, MOSAID
granted to Infineon and Qimonda a six-year license to use any
MOSAID patents in the manufacturing and sale of semiconductor
products, as well as a lives of the patents license
to those MOSAID patent families that had been in dispute. In
exchange for these licenses, the Company and Qimonda agreed to
make license payments commencing on July 1, 2006 over a
six-year term (see note 18).

On August 1, 2006, Infineon and Qimonda entered into
settlement agreements with Tessera
Inc. (Tessera) in respect of all of
Tesseras patent infringement and antitrust claims and all
counterclaims and other claims Infineon and Qimonda raised
against Tessera. As part of the settlement,

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)

Infineon and Qimonda have entered into license agreements with
Tessera, effective July 1, 2006, that provide the companies
world-wide, nonexclusive, non-transferable and non-sublicensable
licenses to use a portfolio of Tessera patents relating to
packaging for integrated circuits in Infineons and
Qimondas production. The license agreements have a
six-year term and can be extended. Under the license agreement,
Infineon and Qimonda agreed to pay Tessera an initial upfront
fee and additional royalty payments over a six year period
based on the volume of components it sells that are subject to
the license. The Company recognized the litigation settlement
portion of 37 as other
operating expense during the year ended September 30, 2006.
The remaining license portion is amortized over the term of the
agreement and the royalty payments are recognized as the related
sales are made.



7.
    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, 2004, 2005 and 2006, are as follows:

|                                                                         |                          |      |     |    |      |  |     |      |  |  |     |    | 
|------------------------------------------------------------------------ | ------------------------ | ---- | --- | -- | ---- |  | --- | ---- |  |  | --- | -- | 
|                                                                         |                          | 2004 |     |    | 2005 |  |     | 2006 | 
|                                                                         |                          |      |     |    |      |  |     |      | 
|Included in the consolidated
    statements of operations:               |                          |      |     |    |      |  |     |      |  |  |     |   
|                                                                         | Research and development |      |     | 74 |      |  |     | 50   |  |  |     | 67 | 
|                                                                         | Cost of sales            |      |     | 86 |      |  |     | 121  |  |  |     | 86 | 
|                                                                         |                          |      |     |    |      |  |     |      | 
|                                                                         |                          |      | 160 |    |      |  | 171 |      |  |  | 153 |   
|                                                                         |                          |      |     |    |      |  |     |      | 
|Construction grants deducted from
    the cost of fixed assets (note 28) |                          |      | 49  |    |      |  |    |      |  |  | 49  |   

   




|   |                                        
|-- | ---------------------------------------
|8. | Supplemental Operating Cost Information



|                                                |  |      |       |  |      |  |       |      |  |  |       | 
|----------------------------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                                                |  | 2004 |       |  | 2005 |  |       | 2006 | 
|                                                |  |      |       |  |      |  |       |      | 
|Raw materials, supplies and
    purchased goods |  |      | 1,621 |  |      |  | 1,867 |      |  |  | 2,244 | 
|Purchased services                              |  |      | 1,232 |  |      |  | 1,166 |      |  |  | 1,330 | 
|                                                |  |      |       |  |      |  |       |      | 
|Total                                           |  |      | 2,853 |  |      |  | 3,033 |      |  |  | 3,574 | 
|                                                |  |      |       |  |      |  |       |      | 



|                          |  |      |       |  |      |  |       |      |  |  |       | 
|------------------------- |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- | 
|                          |  | 2004 |       |  | 2005 |  |       | 2006 | 
|                          |  |      |       |  |      |  |       |      | 
|Wages and salaries        |  |      | 1,532 |  |      |  | 1,664 |      |  |  | 1,827 | 
|Social levies             |  |      | 280   |  |      |  | 285   |      |  |  | 319   | 
|Pension expense (note 30) |  |      | 28    |  |      |  | 28    |      |  |  | 37    | 
|                          |  |      |       |  |      |  |       |      | 
|Total                     |  |      | 1,840 |  |      |  | 1,977 |      |  |  | 2,183 | 
|                          |  |      |       |  |      |  |       |      | 

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)

Other operating expense, net is as follows for the years ended
September 30:

|                                                                |  |      |       |  |      |  |      |      |  |  |       | 
|--------------------------------------------------------------- |  | ---- | ----- |  | ---- |  | ---- | ---- |  |  | ----- | 
|                                                                |  | 2004 |       |  | 2005 |  |      | 2006 | 
|                                                                |  |      |       |  |      |  |      |      | 
|Gain (loss) from sale of businesses                             |  |      | (2)   |  |      |  | 39   |      |  |  |      | 
|Goodwill and intangible assets
    impairment charges (note 18) |  |      | (71)  |  |      |  | (57) |      |  |  | (38)  | 
|Long-lived asset impairment charges                             |  |      |      |  |      |  | (39) |      |  |  | (6)   | 
|Litigation settlement charges
    (note 33)                     |  |      | (194) |  |      |  | (20) |      |  |  | (60)  | 
|Amortization of debt issuance costs                             |  |      | (8)   |  |      |  | (4)  |      |  |  | (3)   | 
|Other                                                           |  |      | 18    |  |      |  | (11) |      |  |  | (1)   | 
|                                                                |  |      |       |  |      |  |      |      | 
|Other operating expense, net                                    |  |      | (257) |  |      |  | (92) |      |  |  | (108) | 
|                                                                |  |      |       |  |      |  |      |      | 



  




|              |  |      |        |  |      |  |        |      |  |  |        | 
|------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|              |  | 2004 |        |  | 2005 |  |        | 2006 | 
|              |  |      |        |  |      |  |        |      | 
|Germany       |  |      | 16,340 |  |      |  | 16,334 |      |  |  | 15,822 | 
|Other Europe  |  |      | 5,507  |  |      |  | 5,606  |      |  |  | 7,455  | 
|North America |  |      | 2,822  |  |      |  | 3,108  |      |  |  | 3,283  | 
|Asia/Pacific  |  |      | 9,220  |  |      |  | 10,919 |      |  |  | 14,285 | 
|Japan         |  |      | 126    |  |      |  | 147    |      |  |  | 180    | 
|Other         |  |      | 112    |  |      |  | 44     |      |  |  | 41     | 
|              |  |      |        |  |      |  |        |      | 
|Total         |  |      | 34,127 |  |      |  | 36,158 |      |  |  | 41,066 | 
|              |  |      |        |  |      |  |        |      | 





|   |              
|-- | -------------
|9. | Restructuring





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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)

lesser extent to Villach. Manufacturing at Munich-Perlach is
expected to be phased out by early 2007 as numerous products
complete their production life span. As part of the
restructuring, the Company agreed upon plans to terminate
approximately 600 employees. It is expected that the
terminations will be completed in the 2007 financial year.

During the 2006 financial year, restructuring plans were
announced to downsize the workforce at ALTIS Semiconductor
S.N.C., Essonnes, France (ALTIS) and the
Companys chip card back-end activities in order to
maintain competitiveness and reduce cost. As of
September 30, 2006, the Companys expectation is that
a total of 450 employees would be terminated. The exact
amount of the restructuring charges can not be estimated at this
time due to ongoing negotiations with works councils.

During the years ended September 30, 2004, 2005 and 2006,
charges of 17,
78 and
23, respectively, were
recognized as a result of the above mentioned restructuring
initiatives undertaken by the Company.

The development of the restructuring liability during the year
ended September 30, 2006 is as follows:

|                      |  |               |  |               |  |          |      |               |             |   
|--------------------- |  | ------------- |  | ------------- |  | -------- | ---- | ------------- | ----------- | --
|                      |  | September 30, |  |               |  |          |      | September 30,
|                      |  | 2005          |  |               |  |          |      | 2006         
|                      |  |               |  | Restructuring |  |          |      |              
|                      |  | Liabilities   |  | Charges       |  | Payments |      |               | Liabilities
|                      |  |               |  |               |  |          |      |               |            
|Employee terminations |  | 64            |  | 22            |  |          | (29) |               |             | 57
|Other exit costs      |  | 8             |  | 1             |  |          | (3)  |               |             | 6 
|                      |  |               |  |               |  |          |      |               |            
|Total                 |  | 72            |  | 23            |  |          | (32) |               |             | 63
|                      |  |               |  |               |  |          |      |               |            



|    |             
|--- | ------------
|10. | Income Taxes



|        |  |      |     |  |      |  |       |      |  |  |       | 
|------- |  | ---- | --- |  | ---- |  | ----- | ---- |  |  | ----- | 
|        |  | 2004 |     |  | 2005 |  |       | 2006 | 
|        |  |      |     |  |      |  |       |      | 
|Germany |  |      | 153 |  |      |  | (298) |      |  |  | (378) | 
|Foreign |  |      | 44  |  |      |  | 104   |      |  |  | 294   | 
|        |  |      |     |  |      |  |       |      | 
|Total   |  |      | 197 |  |      |  | (194) |      |  |  | (84)  | 
|        |  |      |     |  |      |  |       |      | 



|                   |         |      |     |      |      |  |     |      |  |  |     |      | 
|------------------ | ------- | ---- | --- | ---- | ---- |  | --- | ---- |  |  | --- | ---- | 
|                   |         | 2004 |     |      | 2005 |  |     | 2006 | 
|                   |         |      |     |      |      |  |     |      | 
|Current taxes:     |         |      |     |      |      |  |     |      |  |  |     |     
|                   | Germany |      |     | 53   |      |  |     | 31   |  |  |     | 126  | 
|                   | Foreign |      |     | 5    |      |  |     | 1    |  |  |     | 41   | 
|                   |         |      |     |      |      |  |     |      | 
|                   |         |      | 58  |      |      |  | 32  |      |  |  | 167 |     
|                   |         |      |     |      |      |  |     |      | 
|Deferred taxes:    |         |      |     |      |      |  |     |      |  |  |     |     
|                   | Germany |      |     | 129  |      |  |     | 66   |  |  |     | (21) | 
|                   | Foreign |      |     | (33) |      |  |     | 22   |  |  |     | 15   | 
|                   |         |      |     |      |      |  |     |      | 
|                   |         |      | 96  |      |      |  | 88  |      |  |  | (6) |     
|                   |         |      |     |      |      |  |     |      | 
|Income tax expense |         |      | 154 |      |      |  | 120 |      |  |  | 161 |     
|                   |         |      |     |      |      |  |     |      | 

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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)

Total income taxes for the years ended September 30, 2004,
2005 and 2006 were allocated as follows:

|                                                                                                                                                               |  |      |     |   |      |  |     |      |  |    
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | - | ---- |  | --- | ---- |  | ---
|                                                                                                                                                               |  | 2004 |     |   | 2005 |  |     | 2006
|                                                                                                                                                               |  |      |     |   |      |  |     |     
|Income taxes from continuing
    operations                                                                                                                    |  |      | 154 |   |      |  | 120 |      |  | 161
|Goodwill and intangible assets, for
    initial recognition of acquired tax benefits that previously
    were included in the valuation allowance (see note 4) |  |      | (8  | ) |      |  | (30 | )    |  |   
|Shareholders equity, for
    unrealized holding gains (losses), unrealized gains (losses) on
    cash flow hedges and additional minimum pension liabilities  |  |      | (10 | ) |      |  |    |      |  |   
|                                                                                                                                                               |  |      |     |   |      |  |     |     
|                                                                                                                                                               |  |      | 136 |   |      |  | 90  |      |  | 161
|                                                                                                                                                               |  |      |     |   |      |  |     |     





|                                                          |  |      |     |   |      |  |     |      |  |  |     |  
|--------------------------------------------------------- |  | ---- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                                          |  | 2004 |     |   | 2005 |  |     | 2006 | 
|                                                          |  |      |     |   |      |  |     |      | 
|Expected expense (benefit) for
    income taxes           |  |      | 77  |   |      |  | (76 | )    |  |  | (31 | )
|Increase in available tax credits                         |  |      | (26 | ) |      |  | (5  | )    |  |  | (36 | )
|Non-taxable investment (income) loss                      |  |      | 6   |   |      |  | (26 | )    |  |  | (31 | )
|Foreign tax rate differential                             |  |      | (51 | ) |      |  | (18 | )    |  |  | (50 | )
|Non deductible expenses                                   |  |      | 69  |   |      |  | 29  |      |  |  | 13  |  
|Change in German tax
    rate  effect on opening balance |  |      |    |   |      |  |    |      |  |  | 3   |  
|Increase in valuation allowance                           |  |      | 54  |   |      |  | 192 |      |  |  | 292 |  
|In-process research and development                       |  |      | 3   |   |      |  |    |      |  |  |    |  
|Other                                                     |  |      | 22  |   |      |  | 24  |      |  |  | 1   |  
|                                                          |  |      |     |   |      |  |     |      | 
|Actual provision for income taxes                         |  |      | 154 |   |      |  | 120 |      |  |  | 161 |  
|                                                          |  |      |     |   |      |  |     |      | 

 





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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)

Deferred income tax assets and liabilities as of
September 30, 2005 and 2006 relate to the following:

|                          |                                                      |      |       |       |      |  |         |       | 
|------------------------- | ---------------------------------------------------- | ---- | ----- | ----- | ---- |  | ------- | ----- | 
|                          |                                                      | 2005 |       |       | 2006 | 
|                          |                                                      |      |       |       |      | 
|Deferred tax assets:      |                                                      |      |       |       |      |  |         |      
|                          | Intangible assets                                    |      |       | 26    |      |  |         | 95    | 
|                          | Property, plant and equipment                        |      |       | 203   |      |  |         | 264   | 
|                          | Deferred income                                      |      |       | 111   |      |  |         | 94    | 
|                          | Net operating loss and tax credit
    carry-forwards |      |       | 1,065 |      |  |         | 1,350 | 
|                          | Other items                                          |      |       | 169   |      |  |         | 179   | 
|                          |                                                      |      |       |       |      | 
|Gross deferred tax assets |                                                      |      | 1,574 |       |      |  | 1,982   |      
|Valuation allowance       |                                                      |      | (740) |       |      |  | (1,091) |      
|                          |                                                      |      |       |       |      | 
|Deferred tax assets       |                                                      |      | 834   |       |      |  | 891     |      
|                          |                                                      |      |       |       |      | 
|Deferred tax liabilities: |                                                      |      |       |       |      |  |         |      
|                          | Intangible assets                                    |      |       | 11    |      |  |         | 4     | 
|                          | Property, plant and equipment                        |      |       | 81    |      |  |         | 103   | 
|                          | Accounts receivable                                  |      |       | 36    |      |  |         | 17    | 
|                          | Accrued liabilities and pensions                     |      |       | 72    |      |  |         | 118   | 
|                          | Other items                                          |      |       | 41    |      |  |         | 11    | 
|                          |                                                      |      |       |       |      | 
|Deferred tax liabilities  |                                                      |      | 241   |       |      |  | 253     |      
|                          |                                                      |      |       |       |      | 
|Deferred tax assets, net  |                                                      |      | 593   |       |      |  | 638     |      
|                          |                                                      |      |       |       |      | 



|                          |             |      |     |      |      |  |     |      | 
|------------------------- | ----------- | ---- | --- | ---- | ---- |  | --- | ---- | 
|                          |             | 2005 |     |      | 2006 | 
|                          |             |      |     |      |      | 
|Deferred tax assets:      |             |      |     |      |      |  |     |     
|                          | Current     |      |     | 125  |      |  |     | 97   | 
|                          | Non-current |      |     | 550  |      |  |     | 627  | 
|Deferred tax liabilities: |             |      |     |      |      |  |     |     
|                          | Current     |      |     | (17) |      |  |     | (26) | 
|                          | Non-current |      |     | (65) |      |  |     | (60) | 
|                          |             |      |     |      |      | 
|Deferred tax assets, net  |             |      | 593 |      |      |  | 638 |     
|                          |             |      |     |      |      | 

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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)

ultimate realization of deferred tax assets is dependent upon
the Companys ability to generate the appropriate character
of future taxable income sufficient to utilize loss
carry-forwards or tax credits before their expiration. Since the
Company had incurred a cumulative loss in certain tax
jurisdictions over a three-year period as of September 30,
2006, the impact of forecasted future taxable income is excluded
from such an assessment, pursuant to the provisions of SFAS
No. 109. For these tax jurisdictions, the assessment was
therefore only based on the benefits that could be realized from
available tax strategies and the reversal of temporary
differences in future periods. As a result of this assessment,
the Company increased the deferred tax asset valuation allowance
as of September 30, 2004, 2005 and 2006 by
54,
192, and
292, respectively, to
reduce the deferred tax asset to an amount that is more likely
than not expected to be realized in future.

On December 27, 2003, the German government enacted new tax
legislation which limits the application of a German
corporations tax loss carry-forwards to 60% of the annual
taxable income of the corporation in any given year. The new
legislation did not limit the length of the carry-forward
period, which is unlimited. For the Company, the new tax law was
effective starting in the 2004 financial year.

The changes in valuation allowance for deferred tax assets
during the years ended September 30, 2004, 2005 and 2006
were as follows:

|                               |                                                                  |      |     |    |      |  |     |      |   |  |       |     | 
|------------------------------ | ---------------------------------------------------------------- | ---- | --- | -- | ---- |  | --- | ---- | - |  | ----- | --- | 
|                               |                                                                  | 2004 |     |    | 2005 |  |     | 2006 |  
|                               |                                                                  |      |     |    |      |  |     |      |  
|Balance, beginning of the year |                                                                  |      | 521 |    |      |  | 567 |      |   |  | 740   |    
|                               | Applicable to continuing operations                              |      |     | 54 |      |  |     | 192  |   |  |       | 292 | 
|                               | Purchase accounting adjustments
    (note 4)                     |      |     | (8 | )    |  |     | (30  | ) |  |       |    | 
|                               | Adjustment in corresponding net
    operating loss carry-forward |      |     |   |      |  |     | 11   |   |  |       | 59  | 
|                               |                                                                  |      |     |    |      |  |     |      |  
|Balance, end of the year       |                                                                  |      | 567 |    |      |  | 740 |      |   |  | 1,091 |    
|                               |                                                                  |      |     |    |      |  |     |      |  

 




   




|    |                          
|--- | -------------------------
|11. | Earnings (Loss) Per Share



F-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 computation of basic and diluted EPS for the years ended
September 30, 2004, 2005 and 2006, is as follows (shares in
million):

|                                         |                                                 |      |  |       |      |  |  |        |       |  |  |        | 
|---------------------------------------- | ----------------------------------------------- | ---- |  | ----- | ---- |  |  | ------ | ----- |  |  | ------ | 
|                                         |                                                 | 2004 |  |       | 2005 |  |  | 2006   |      
|                                         |                                                 |      |  |       |      |  |  |        |      
|Numerator:                               |                                                 |      |  |       |      |  |  |        |       |  |  |       
|                                         | Net income (loss)                               |      |  | 61    |      |  |  | (312)  |   |  |  | (268)  | 
|Denominator:                             |                                                 |      |  |       |      |  |  |        |       |  |  |       
|                                         | Weighted-average shares
    outstanding-basic   |      |  | 734.7 |      |  |  | 747.6  |   |  |  | 747.6  | 
|                                         | Effect of dilutive instruments                  |      |  | 1.9   |      |  |  |       |   |  |  |       | 
|                                         |                                                 |      |  |       |      |  |  |        |      
|                                         | Weighted-average shares
    outstanding-diluted |      |  | 736.6 |      |  |  | 747.6  |   |  |  | 747.6  | 
|                                         |                                                 |      |  |       |      |  |  |        |      
|Earnings (loss) per share (in
    euro): |                                                 |      |  |       |      |  |  |        |       |  |  |       
|                                         | Basic and diluted                               |      |  | 0.08  |      |  |  | (0.42) |   |  |  | (0.36) | 
|                                         |                                                 |      |  |       |      |  |  |        |      



12.     Marketable Securities




|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            |  |     | 
|----------------------------- |  | ---- |  | ----- | ---- | ---------- |  | ---------- | --- |  | ---- | --- | ----- | --- | ---------- | -- | ---------- |  | --- | 
|                              |  | 2005 |  |       | 2006 |           
|                              |  |      |  |       |      |           
|                              |  |      |  | Fair  |      | Unrealized |  | Unrealized |     |  |      |     | Fair  |     | Unrealized |    | Unrealized | 
|                              |  | Cost |  | Value |      | Gains      |  | Losses     |     |  | Cost |     | Value |     | Gains      |    | Losses     | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 
|Foreign government securities |  | 9    |  | 11    |      | 2          |  |            |    |  |      | 9   |       | 11  |            | 2  |            |  |    | 
|Floating rate notes           |  | 260  |  | 268   |      | 8          |  |            |    |  |      | 156 |       | 162 |            | 6  |            |  |    | 
|Other debt securities         |  | 16   |  | 18    |      | 2          |  |            |    |  |      | 14  |       | 18  |            | 4  |            |  |    | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 
|Total debt securities         |  | 285  |  | 297   |      | 12         |  |            |    |  |      | 179 |       | 191 |            | 12 |            |  |    | 
|Equity securities             |  | 4    |  | 5     |      | 1          |  |            |    |  |      | 4   |       | 5   |            | 1  |            |  |    | 
|Fixed term deposits           |  | 590  |  | 590   |      | 2          |  |            | (2) |  |      | 460 |       | 453 |            |   |            |  | (7) | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 
|Total marketable securities   |  | 879  |  | 892   |      | 15         |  |            | (2) |  |      | 643 |       | 649 |            | 13 |            |  | (7) | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 
|Reflected as follows          |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            |  |     | 
|Current assets                |  | 850  |  | 858   |      | 10         |  |            | (2) |  |      | 616 |       | 615 |            | 6  |            |  | (7) | 
|Non-current assets (note 18)  |  | 29   |  | 34    |      | 5          |  |            |    |  |      | 27  |       | 34  |            | 7  |            |  |    | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 
|Total marketable securities   |  | 879  |  | 892   |      | 15         |  |            | (2) |  |      | 643 |       | 649 |            | 13 |            |  | (7) | 
|                              |  |      |  |       |      |            |  |            |     |  |      |     |       |     |            |    |            | 

 


F-27



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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)

Realized (losses) gains, net are reflected as other
non-operating income (expense), net and were as follows for the
years ended September 30:

|                    |  |      |  |      |  |     
|------------------- |  | ---- |  | ---- |  | ----
|                    |  | 2004 |  | 2005 |  | 2006
|                    |  |      |  |      |  |     
|Realized gains      |  | 10   |  | 8    |  | 3   
|Realized losses     |  | (1)  |  |     |  |    
|                    |  |      |  |      |  |     
|Realized gains, net |  | 9    |  | 8    |  | 3   
|                    |  |      |  |      |  |     






|                      |  |      |  |           
|--------------------- |  | ---- |  | ----------
|                      |  | Cost |  | Fair Value
|                      |  |      |  |           
|Less than 1 year      |  | 2    |  | 2         
|Between 1 and 5 years |  | 159  |  | 167       
|More than 5 years     |  | 18   |  | 22        
|                      |  |      |  |           
|Total debt securities |  | 179  |  | 191       
|                      |  |      |  |           



13.     Trade Accounts Receivable,
net




|                                                       |  |      |      |  |      |  |       | 
|------------------------------------------------------ |  | ---- | ---- |  | ---- |  | ----- | 
|                                                       |  | 2005 |      |  | 2006 | 
|                                                       |  |      |      |  |      | 
|Third party  trade                                    |  |      | 839  |  |      |  | 1,304 | 
|Siemens group  trade
    (note 29)                    |  |      | 145  |  |      |  |      | 
|Associated and Related
    Companies  trade (note 29) |  |      | 12   |  |      |  | 8     | 
|                                                       |  |      |      |  |      | 
|Trade accounts receivable, gross                       |  |      | 996  |  |      |  | 1,312 | 
|Allowance for doubtful accounts                        |  |      | (44) |  |      |  | (67)  | 
|                                                       |  |      |      |  |      | 
|Trade accounts receivable, net                         |  |      | 952  |  |      |  | 1,245 | 
|                                                       |  |      |      |  |      | 



|                                                         |  |      |    |       |      |  |    |      
|-------------------------------------------------------- |  | ---- | -- | ----- | ---- |  | -- | -----
|                                                         |  | 2005 |    |       | 2006 | 
|                                                         |  |      |    |       |      | 
|Allowance for doubtful accounts at
    beginning of year |  |      | 41 |       |      |  | 44 |      
|Provision for bad debt, net                              |  |      | 3  |       |      |  | 23 |      
|                                                         |  |      |    |       |      | 
|Allowance for doubtful accounts at
    end of year       |  |      | 44 |   |      |  | 67 |  
|                                                         |  |      |    |       |      | 

F-28



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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)

14.     Inventories

Inventories at September 30, 2005 and 2006 consist of the
following:

|                           |  |      |       |       |      |  |       |      
|-------------------------- |  | ---- | ----- | ----- | ---- |  | ----- | -----
|                           |  | 2005 |       |       | 2006 | 
|                           |  |      |       |       |      | 
|Raw materials and supplies |  |      | 87    |       |      |  | 125   |      
|Work-in-process            |  |      | 569   |       |      |  | 777   |      
|Finished goods             |  |      | 366   |       |      |  | 300   |      
|                           |  |      |       |       |      | 
|Total Inventories          |  |      | 1,022 |   |      |  | 1,202 |  
|                           |  |      |       |       |      | 

15.     Other Current Assets




|                                                                                     |  |      |     |       |      |  |     |      
|------------------------------------------------------------------------------------ |  | ---- | --- | ----- | ---- |  | --- | -----
|                                                                                     |  | 2005 |     |       | 2006 | 
|                                                                                     |  |      |     |       |      | 
|Financial instruments (note 31)                                                      |  |      | 73  |       |      |  | 22  |      
|Grants receivable (note 7)                                                           |  |      | 122 |       |      |  | 125 |      
|VAT and other tax receivables                                                        |  |      | 84  |       |      |  | 189 |      
|License fees receivable                                                              |  |      | 19  |       |      |  | 14  |      
|Associated and Related
    Companies  financial and other receivables
    (note 29) |  |      | 5   |       |      |  | 1   |      
|Third party  financial
    and other receivables                                    |  |      | 68  |       |      |  | 61  |      
|Siemens group  financial
    and other receivables (note 29)                        |  |      | 18  |       |      |  |    |      
|Prepaid expenses                                                                     |  |      | 26  |       |      |  | 36  |      
|Employee receivables (note 29)                                                       |  |      | 8   |       |      |  | 7   |      
|Intangible pension asset
    (note 30)                                               |  |      | 14  |       |      |  | 13  |      
|Other                                                                                |  |      | 32  |       |      |  | 14  |      
|                                                                                     |  |      |     |       |      | 
|Total other current assets                                                           |  |      | 469 |   |      |  | 482 |  
|                                                                                     |  |      |     |       |      | 

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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)

16.     Property, Plant and
Equipment, net

A summary of activity for property, plant and equipment for the
year ended September 30, 2006 is as follows:

|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |     |     |       |  |       |         |         | 
|----------------------------- | ------------------ | ------------------------ | --- | --------- | --------- |  | ----------- | ---------- | ------- |  | ------------ | ------- | ----- | ----- | --- | --- | ----- |  | ----- | ------- | ------- | 
|                              |                    |                          |     | Technical |           |  |             |            |         |  |             
|                              |                    |                          |     | equipment |           |  | Other plant |            |         |  |              |        
|                              |                    | Land and                 |     |           | and       |  |             | and office |         |  | Construction |         |       |      
|                              |                    | buildings                |     |           | machinery |  |             | equipment  |         |  | in progress  |         |       | Total |    
|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |    
|Cost                          |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |     |     |       |  |       |        
|                              | September 30, 2005 |                          |     | 1,427     |           |  |             | 7,549      |         |  |              | 2,232   |       |       |     | 253 |       |  |       | 11,461  |        
|                              |                    | Additions                |     |           | 57        |  |             |            | 561     |  |              |         | 130   |       |     |     | 462   |  |       |         | 1,210   | 
|                              |                    | Impairments              |     |           |          |  |             |            | (6)     |  |              |         |      |       |     |     |      |  |       |         | (6)     | 
|                              |                    | Disposals                |     |           | (20)      |  |             |            | (253)   |  |              |         | (126) |       |     |     | (2)   |  |       |         | (401)   | 
|                              |                    | Reclassifications        |     |           | 15        |  |             |            | 458     |  |              |         | 58    |       |     |     | (513) |  |       |         | 18      | 
|                              |                    | Transfers(1)             |     |           | 101       |  |             |            | 951     |  |              |         | 24    |       |     |     | 20    |  |       |         | 1,096   | 
|                              |                    | Foreign currency effects |     |           | (26)      |  |             |            | (87)    |  |              |         | (9)   |       |     |     | (2)   |  |       |         | (124)   | 
|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |    
|                              | September 30, 2006 |                          |     | 1,554     |           |  |             | 9,173      |         |  |              | 2,309   |       |       |     | 218 |       |  |       | 13,254  |        
|Accumulated depreciation      |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |     |     |       |  |       |        
|                              | September 30, 2005 |                          |     | (622)     |           |  |             | (5,175)    |         |  |              | (1,913) |       |       |     |    |       |  |       | (7,710) |        
|                              |                    | Depreciation             |     |           | (103)     |  |             |            | (1,015) |  |              |         | (220) |       |     |     |      |  |       |         | (1,338) | 
|                              |                    | Disposals                |     |           | 19        |  |             |            | 202     |  |              |         | 126   |       |     |     |      |  |       |         | 347     | 
|                              |                    | Reclassifications        |     |           |          |  |             |            | (23)    |  |              |         | 5     |       |     |     |      |  |       |         | (18)    | 
|                              |                    | Transfers(1)             |     |           | (32)      |  |             |            | (790)   |  |              |         | (14)  |       |     |     |      |  |       |         | (836)   | 
|                              |                    | Foreign currency effects |     |           | 6         |  |             |            | 52      |  |              |         | 7     |       |     |     |      |  |       |         | 65      | 
|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |    
|                              | September 30, 2006 |                          |     | (732)     |           |  |             | (6,749)    |         |  |              | (2,009) |       |       |     |    |       |  |       | (9,490) |        
|Book value September 30, 2005 |                    |                          | 805 |           |           |  | 2,374       |            |         |  | 319          |         |       |       | 253 |     |       |  | 3,751 |        
|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |    
|Book value September 30, 2006 |                    |                          | 822 |           |           |  | 2,424       |            |         |  | 300          |         |       |       | 218 |     |       |  | 3,764 |        
|                              |                    |                          |     |           |           |  |             |            |         |  |              |         |       |       |    



|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(1) | Transfers during the financial year ended September 30,
    2006 are primarily related to the initial consolidation of ALTIS.




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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)

17.     Long-term Investments

A summary of activity for long-term investments for the years
ended September 30, 2005 and 2006, 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    | 
|                              | Reclassifications        |               |     | (16)  |               |  |    | 3     |  |  |     | (13)  | 
|                              | Foreign currency effects |               |     | 44    |               |  |    |      |  |  |     | 44    | 
|                              |                          |               |     |       |               |  |    |       | 
|Balance at September 30, 2005 |                          |               | 758 |       |               |  | 21 |       |  |  | 779 |      
|                              |                          |               |     |       |               |  |    |       | 
|                              | Additions                |               |     | 5     |               |  |    | 1     |  |  |     | 6     | 
|                              | Disposals                |               |     |      |               |  |    | (3)   |  |  |     | (3)   | 
|                              | Dividend payments        |               |     | (29)  |               |  |    |      |  |  |     | (29)  | 
|                              | Capitalized interest     |               |     | (1)   |               |  |    |      |  |  |     | (1)   | 
|                              | Impairments              |               |     | (13)  |               |  |    |      |  |  |     | (13)  | 
|                              | Equity in earnings       |               |     | 78    |               |  |    |      |  |  |     | 78    | 
|                              | Consolidation of ALTIS   |               |     | (202) |               |  |    | 4     |  |  |     | (198) | 
|                              | Gain on share issuance   |               |     | 72    |               |  |    |      |  |  |     | 72    | 
|                              | Reclassifications        |               |     | 10    |               |  |    | 1     |  |  |     | 11    | 
|                              | Foreign currency effects |               |     | (43)  |               |  |    |      |  |  |     | (43)  | 
|                              |                          |               |     |       |               |  |    |       | 
|Balance at September 30, 2006 |                          |               | 635 |       |               |  | 24 |       |  |  | 659 |      
|                              |                          |               |     |       |               |  |    |       | 





|                                                                             |  |              |       | 
|---------------------------------------------------------------------------- |  | ------------ | ----- | 
|                                                                             |  | Direct and   |      
|                                                                             |  | indirect     |      
|Name of the Associated Company                                               |  | ownership(1) |      
|                                                                             |  |              |      
|Advanced Mask Technology Center
    GmbH & Co. KG, Dresden, Germany (AMTC) |  |              | 28.6% | 
|Hwa-Keng Investment Inc., Taipei,
    Taiwan (Hwa-Keng)                    |  |              | 43.0% | 
|Inotera Memories Inc., Taoyuan,
    Taiwan (Inotera)                       |  |              | 30.9% | 
|Ramtron International Corp.,
    Colorado Springs, Colorado, USA (Ramtron) |  |              | 15.5% | 



|    |                                                                                      
|--- | -------------------------------------------------------------------------------------
|(1) | Direct and indirect ownership percentages are net of
    Qimondas minority interest.





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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)

developing and manufacturing advanced photo masks. In addition,
the Company agreed to sell specified photomask equipment to
DuPont, and entered into a long-term purchase agreement through
2011. Accordingly, as of September 30, 2006,
15 was deferred which
is being recognized over the term of 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.

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-Keng Investment Inc.) to
construct and operate a 300-millimeter manufacturing facility in
Taiwan. Pursuant to several agreements, the Company and Nanya
had developed advanced 90-nanometer and have been developing 75-
and 58-nanometer
technology. 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 third and last
phase was completed in the 2006 financial year. In May 2005 the
groundbreaking for the second manufacturing module took place.
The manufacturing ramp is expected to take place through
calendar year 2007. The second module is fully funded by
Inotera. The joint venture partners are obliged to each purchase
one-half of the facilitys production based, in part, on
market prices.

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. No further
investments were made during the year ended September 30,
2006.

On March 17, 2006 Inotera successfully completed an IPO on
the Taiwanese stock exchange of 200 million ordinary
shares, representing 7.97% of its outstanding share capital
before IPO, for an issuance price of NT$33 per share. As a
result, the Companys ownership interest was diluted to
41.4% while its proportional share of Inoteras equity
increased by approximately
30, which gain the
Company recognized as part of non-operating income during the
three months ended June 30, 2006.

On May 10, 2006, Inotera successfully completed a public
offering on the Luxembourg Stock Exchange of 40 million
global depositary shares (representing 400,000,000 ordinary
shares) which are traded on the Euro MTF market and represent
14.8% of its outstanding share capital before the offering, for
an issuance price of NT$33 per ordinary share. As a result, the
Companys ownership interest was diluted to 36.0% (30.9%
net of Qimondas minority interest) while its proportional
share of Inoteras equity increased by
42, which gain the
Company reflected as part of non-operating income during the
three months ending September 30, 2006.

The agreement governing the joint venture with Nanya allows
Infineon to transfer its shares in Inotera to Qimonda. However,
under Taiwanese law, Infineons shares in Inotera are
subject to a compulsory restriction on transfer (lock-up) as a
result of Inoteras IPO. Infineon may only transfer these
shares to Qimonda gradually over the four years following
Inoteras IPO. The Company has sought an exemption from
this restriction that would permit the immediate transfer of all
of these shares to Qimonda. In connection with the Formation,
Infineon and Qimonda entered into a trust agreement under which
Infineon holds its Inotera shares in trust for Qimonda until the
shares can be transferred. This trust agreement provides for
Infineon to transfer the shares to Qimonda as and when the
transfer restrictions expire or Qimonda receives the exemption
from the lock-up (see note 35).

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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)

Hwa-Keng, a Taiwanese company, was formed for the purpose of
facilitating the distribution of Inotera shares to
Inoteras employees. Hwa-Keng is in the process of being
dissolved since its business purpose has been fulfilled with the
Inotera IPO. The dissolution will not cause any loss for the
Company.

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 financial
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.

In December 2005, the Company further amended its agreements
with IBM in respect of ALTIS, and extended its product purchase
agreement with ALTIS through 2009. Pursuant to the December 2005
amendment, the Company granted to IBM an option to require the
Company to acquire
four-fifths of
IBMs 50% interest in the joint venture (or a total of 40%
of the outstanding shares of ALTIS) at any time after
April 1, 2006 and prior to January 1, 2009. In
connection with the exercise of such option, IBM would be
required to make a payment to the Company to settle the
respective interests of the parties. In addition, the Company
granted to IBM a second option to require the Company to acquire
up to four-fifths of
IBMs 50% interest in the joint venture (or a total of 40%
of the outstanding shares of ALTIS) in increments of 10% after
April 1, 2006 and prior to January 1, 2009. The
amendment also permits IBM to sell its interest in ALTIS to a
third party meeting certain specified criteria.

Under the December 2005 amendment, the Company and IBM also
agreed a number of administrative matters regarding the
governance and management of ALTIS, as well as related
cost-allocation and accounting matters. The Company and IBM
continue to evaluate the future business model of ALTIS, and
have agreed that they will reach a decision on this matter no
later than January 1, 2009. As previously agreed, the
Company will increase the percentage of the output of ALTIS that
it purchases from 87.5% in 2006 to 100% in 2007 and beyond.

The Company evaluated the amendment in accordance with FASB
Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities 
an interpretation of ARB No. 51 and concluded
that it held an interest in a variable interest entity in which
the Company is determined to be the primary beneficiary.
Accordingly, the Company began to fully consolidate ALTIS
following the December 19, 2005 amendment whereby
IBMs 50% ownership interest has been reflected as a
minority interest.

F-33



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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 following table summarizes the elimination of the investment
in ALTIS as previously accounted for under the equity method of
accounting, and the Companys initial consolidation of
ALTIS during first quarter of the 2006 financial year:

|                                             |                                |               |       |     | 
|-------------------------------------------- | ------------------------------ | ------------- | ----- | --- | 
|                                             |                                | ALTIS         |      
|                                             |                                |               |      
|                                             |                                | December 2005 |      
|Consolidation Date                           |                                | Communication |      
|Segment                                      |                                | Solutions     |      
|                                             |                                |               |      
|Cash                                         |                                |               | 119   |    
|Inventories                                  |                                |               | 45    |    
|Other current assets                         |                                |               | 10    |    
|                                             | Property, plant and equipment  |               |       | 212 | 
|Long-term investment                         |                                |               | (202) |    
|Other non-current assets                     |                                |               | (47)  |    
|                                             |                                |               |      
|                                             | Total assets consolidated      |               |       | 137 | 
|Current liabilities                          |                                |               | (79)  |    
|Non-current liabilities (including
    debt) |                                |               | 6     |    
|Deferred tax liabilities                     |                                |               | 3     |    
|Minority Interests                           |                                |               | 207   |    
|                                             |                                |               |      
|                                             | Total liabilities consolidated |               |       | 137 | 
|                                             |                                |               |      
|Net assets consolidated                      |                                |               |      |    
|                                             |                                |               |      
|Cash paid                                    |                                |               |      |    



 





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F-34



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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)

Companys venture capital activities, an impairment charge
of 28 was recognized
in the 2004 financial year, to reduce the carrying value of the
Companys venture investment portfolio to the expected
realizable value (see note 5).

Goodwill of 15 and
0 is included in the
amount of long-term investments at September 30, 2005 and
2006, respectively.

For the Associated Companies as of September 30, 2006, the
aggregate summarized financial information for the financial
years 2004, 2005 and 2006, is as follows:

|                  |  |      |  |      |  |     
|----------------- |  | ---- |  | ---- |  | ----
|                  |  | 2004 |  | 2005 |  | 2006
|                  |  |      |  |      |  |     
|Sales             |  | 60   |  | 482  |  | 918 
|Gross profit      |  | (2)  |  | 158  |  | 328 
|Net income (loss) |  | (43) |  | 74   |  | 215 
|                  |  |      |  |      |  |     

|                        |  |       |  |       |  |      
|----------------------- |  | ----- |  | ----- |  | -----
|                        |  | 2004  |  | 2005  |  | 2006 
|                        |  |       |  |       |  |      
|Current assets          |  | 236   |  | 535   |  | 1,128
|Non-current assets      |  | 1,013 |  | 1,924 |  | 1,827
|Current liabilities     |  | (211) |  | (341) |  | (530)
|Non-current liabilities |  | (328) |  | (898) |  | (645)
|                        |  |       |  |       |  |      
|Shareholders equity    |  | 710   |  | 1,220 |  | 1,780
|                        |  |       |  |       |  |      



|    |             
|--- | ------------
|18. | Other Assets



|                                                                           |  |     |  |      |  |     
|-------------------------------------------------------------------------- |  | --- |  | ---- |  | ----
|                                                                           |  |     |  | 2005 |  | 2006
|                                                                           |  |     |  |      |  |     
|Intangible assets, net                                                     |  | 315 |  | 230 
|Grants receivable                                                          |  |    |  | 13  
|Deferred tax expense (note 10)                                             |  | 71  |  | 56  
|Long-term receivables                                                      |  | 23  |  | 20  
|Marketable securities (note 12)                                            |  | 34  |  | 34  
|Associated and Related
    Companies  financial and
    other(1)(note 29) |  | 67  |  |    
|Employee receivables (note 29)                                             |  | 2   |  | 2   
|Other                                                                      |  | 30  |  | 21  
|                                                                           |  |     |  |     
|Total                                                                      |  | 542 |  | 376 
|                                                                           |  |     |  |     



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | The decrease during the financial year ended September 30,
    2006 is primarily related to the initial consolidation of ALTIS.

F-35



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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, 2005 and 2006 is as follows:

|                                      |                    |                                              |     |       |             |  |     |       |      |  |     |       |      | 
|------------------------------------- | ------------------ | -------------------------------------------- | --- | ----- | ----------- |  | --- | ----- | ---- |  | --- | ----- | ---- | 
|                                      |                    |                                              |     | Other |             |  |    
|                                      |                    | Goodwill                                     |     |       | Intangibles |  |     | Total |     
|                                      |                    |                                              |     |       |             |  |     |       |     
|Cost                                  |                    |                                              |     |       |             |  |     |       |      |  |     |      
|                                      | September 30, 2004 |                                              |     | 172   |             |  |     | 414   |      |  |     | 586   |     
|                                      |                    | Additions                                    |     |       |            |  |     |       | 64   |  |     |       | 64   | 
|                                      |                    | Impairment charges (note 8)                  |     |       | (18)        |  |     |       | (39) |  |     |       | (57) | 
|                                      |                    | Disposals                                    |     |       | (6)         |  |     |       | (36) |  |     |       | (42) | 
|                                      |                    | Acquisitions (note 4)                        |     |       | 7           |  |     |       | 58   |  |     |       | 65   | 
|                                      |                    | Purchase accounting adjustments
    (note 4) |     |       | (14)        |  |     |       | (16) |  |     |       | (30) | 
|                                      |                    | Foreign currency effects                     |     |       | 2           |  |     |       | 3    |  |     |       | 5    | 
|                                      |                    |                                              |     |       |             |  |     |       |     
|                                      | September 30, 2005 |                                              |     | 143   |             |  |     | 448   |      |  |     | 591   |     
|                                      |                    | Additions                                    |     |       |            |  |     |       | 56   |  |     |       | 56   | 
|                                      |                    | Impairment charges (note 8)                  |     |       | (7)         |  |     |       | (31) |  |     |       | (38) | 
|                                      |                    | Disposals                                    |     |       | (11)        |  |     |       | (26) |  |     |       | (37) | 
|                                      |                    | Foreign currency effects                     |     |       | (7)         |  |     |       | (1)  |  |     |       | (8)  | 
|                                      |                    |                                              |     |       |             |  |     |       |     
|                                      | September 30, 2006 |                                              |     | 118   |             |  |     | 446   |      |  |     | 564   |     
|Accumulated amortization              |                    |                                              |     |       |             |  |     |       |      |  |     |      
|                                      | September 30, 2004 |                                              |     | (21)  |             |  |     | (167) |      |  |     | (188) |     
|                                      |                    | Amortization                                 |     |       |            |  |     |       | (96) |  |     |       | (96) | 
|                                      |                    | Disposals                                    |     |       |            |  |     |       | 5    |  |     |       | 5    | 
|                                      |                    | Foreign currency effects                     |     |       | 3           |  |     |       |     |  |     |       | 3    | 
|                                      |                    |                                              |     |       |             |  |     |       |     
|                                      | September 30, 2005 |                                              |     | (18)  |             |  |     | (258) |      |  |     | (276) |     
|                                      |                    | Amortization                                 |     |       |            |  |     |       | (67) |  |     |       | (67) | 
|                                      |                    | Disposals and reductions                     |     |       |            |  |     |       | 5    |  |     |       | 5    | 
|                                      |                    | Foreign currency effects                     |     |       | 1           |  |     |       | 3    |  |     |       | 4    | 
|                                      |                    |                                              |     |       |             |  |     |       |     
|                                      | September 30, 2006 |                                              |     | (17)  |             |  |     | (317) |      |  |     | (334) |     
|                                      |                    |                                              |     |       |             |  |     |       |     
|Carrying value September 30,
    2004 |                    |                                              | 151 |       |             |  | 247 |       |      |  | 398 |      
|                                      |                    |                                              |     |       |             |  |     |       |     
|Carrying value September 30,
    2005 |                    |                                              | 125 |       |             |  | 190 |       |      |  | 315 |      
|                                      |                    |                                              |     |       |             |  |     |       |     
|Carrying value September 30,
    2006 |                    |                                              | 101 |       |             |  | 129 |       |      |  | 230 |      
|                                      |                    |                                              |     |       |             |  |     |       |     

    


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F-36



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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 (see note 6).

On June 14, 2006, Infineon and Qimonda reached agreements
with MOSAID settling all claims between them and licensing the
MOSAID patent portfolio for use in current and future Company
products. The license of
32 is being amortized
over the expected useful life of the related technologies of six
years (see note 6).

During the years ended September 30, 2004, 2005 and 2006,
the Company recognized intangible assets impairment charges of
71,
57 and
38, respectively.

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
Optical Networking 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 Solutions segment might 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.

During the year ended September 30, 2006, partially as a
result of the insolvency of one of the Companys largest
mobile phone customers, BenQ Mobile GmbH & Co OHG, the
Company concluded that sufficient indicators existed to require
an assessment of whether the carrying values of goodwill and
certain other intangible assets principally in reporting units
within the Communication Solutions segment might 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
38 were recognized in
other operating expenses, representing the amount by which the
carrying amount of the assets exceeded their fair value.



19.
    Trade Accounts PayableTrade accounts payable at September 30, 2005 and 2006
consist of the following:

|                                                             |  |       |  |      
|------------------------------------------------------------ |  | ----- |  | -----
|                                                             |  | 2005  |  | 2006 
|                                                             |  |       |  |      
|Third party  trade                                          |  | 868   |  | 1,165
|Siemens group  trade
    (note 29)                          |  | 61    |  |     
|Associated and Related
    Companies 
    trade(1)(note 29) |  | 140   |  | 80   
|                                                             |  |       |  |      
|Total                                                        |  | 1,069 |  | 1,245
|                                                             |  |       |  |      



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | The decrease during the financial year ended September 30,
    2006 is primarily related to the initial consolidation of ALTIS.

F-37



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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)



20.
    Accrued LiabilitiesAccrued liabilities at September 30, 2005 and 2006 consist
of the following:

|                                                       |  |      |  |     
|------------------------------------------------------ |  | ---- |  | ----
|                                                       |  | 2005 |  | 2006
|                                                       |  |      |  |     
|Personnel costs                                        |  | 274  |  | 353 
|Warranties and licenses                                |  | 53   |  | 54  
|Settlement for antitrust related
    matters (note 33) |  | 31   |  | 53  
|Interest                                               |  | 34   |  | 37  
|Other                                                  |  | 105  |  | 65  
|                                                       |  |      |  |     
|Total                                                  |  | 497  |  | 562 
|                                                       |  |      |  |     

  




|    |                          
|--- | -------------------------
|21. | Other Current Liabilities



|                                                                     |  |      |  |     
|-------------------------------------------------------------------- |  | ---- |  | ----
|                                                                     |  | 2005 |  | 2006
|                                                                     |  |      |  |     
|VAT and other taxes payable                                          |  | 202  |  | 212 
|Payroll obligations to employees                                     |  | 130  |  | 128 
|Deferred government grants
    (note 7)                              |  | 106  |  | 95  
|Other deferred income                                                |  | 22   |  | 62  
|Restructuring (note 9)                                               |  | 72   |  | 63  
|Financial instruments (note 31)                                      |  | 74   |  | 11  
|Associated and Related
    Companies  financial and other (note 29) |  | 4    |  | 9   
|Settlement for anti-trust related
    matters (note 33)              |  | 31   |  | 24  
|Other                                                                |  | 59   |  | 71  
|                                                                     |  |      |  |     
|Total                                                                |  | 700  |  | 675 
|                                                                     |  |      |  |     



F-38



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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.
    DebtDebt at September 30, 2005 and 2006 consists of the
following:

|                                                 |                                                                       |                                                                          |     |       |     |    
|------------------------------------------------ | --------------------------------------------------------------------- | ------------------------------------------------------------------------ | --- | ----- | --- | ---
|                                                 |                                                                       | 2005                                                                     |     | 2006 
|                                                 |                                                                       |                                                                          |     |      
|Short-term debt:                                 |                                                                       |                                                                          |     |      
|                                                 | Loans payable to banks, weighted
    average rate 2.46%               |                                                                          | 51  |       | 51 
|                                                 | Convertible subordinated notes,
    4.25%, due 2007                   |                                                                          |    |       | 638
|                                                 | Current portion of long-term debt                                     |                                                                          | 48  |       | 108
|                                                 |                                                                       |                                                                          |     |      
|Total short-term debt and current
    maturities |                                                                       | 99                                                                       |     | 797  
|                                                 |                                                                       |                                                                          |     |      
|Long-term debt:                                  |                                                                       |                                                                          |     |      
|                                                 | Convertible subordinated notes,
    4.25%, due 2007                   |                                                                          | 633 |       |   
|                                                 | Convertible subordinated notes,
    5.0%, due 2010                    |                                                                          | 690 |       | 692
|                                                 | Loans payable to banks:                                               |                                                                          |     |       |    
|                                                 |                                                                       | Unsecured term loans, weighted
    average rate 4.62%,
    due 2008-2013 |     | 206   |     | 458
|                                                 |                                                                       | Secured term loans, weighted
    average rate 1.57%, due 2013            |     | 9     |     | 7  
|                                                 | Other loans payable, weighted
    average rate 4.35%, due 2011        |                                                                          |    |       | 3  
|                                                 | Notes payable to governmental
    entity, rate 2.52%, due 2010  2027 |                                                                          | 28  |       | 48 
|                                                 |                                                                       |                                                                          |     |      
|Total long-term debt                             |                                                                       | 1,566                                                                    |     | 1,208
|                                                 |                                                                       |                                                                          |     |      



 





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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)

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. On
September 29, 2006, the Company (through the issuer)
irrevocably waived its option to pay a cash amount in lieu of
the delivery of shares upon conversion. These convertible notes
are due on the February 6, 2007, and the Company expects to
redeem the notes at their principal outstanding amount using
available cash to the extent that they have not previously been
redeemed, converted or purchased and cancelled. On
September 30, 2006, the outstanding notional amount was
640 and unamortized
debt issuance costs were
2.

In September 2004 the Company executed a
$400/400 million
syndicated credit facility with a five-year term. The facility
consisted of two tranches: Tranche A was a
$400 million term loan intended to finance the expansion of
the Richmond, Virginia, manufacturing facility. In January 2006,
the Company drew $345 million under this Tranche A,
the amount being equal to the maximum outstanding amount
permitted as of September 30, 2006. The loan will decrease
on the basis of a repayment schedule that foresees equal
installments, falling due in March and September each year.
Tranche B was a
400 multicurrency
revolving facility to be used for general corporate purposes. In
connection with the arrangement of the Qimonda credit facility
described below, the Company voluntarily cancelled an amount of
100 in August 2006, so
that 300 remains
available. At September 30, 2006, no amounts were
outstanding under Tranche B. The facility has customary
financial covenants, and drawings bear interest at
market-related rates that are linked to financial performance.
The lenders of this credit facility have been granted a negative
pledge relating to the future financial indebtedness of the
Company with certain permitted encumbrances.

In August 2006, Qimonda entered into a multicurrency revolving
loan facility in an aggregate principal amount of
250. The facility
matures three years from the date of the Qimondas initial
public offering, and may be extended for one additional year at
the option of the lenders at the end of the facilitys
first year of operation. Qimonda entered into this facility
primarily as a source of backup liquidity. Loans made under the
facility, which may be used for working capital requirements
and/or general corporate purposes, may have various maturities,
ranging from one to twelve months, or longer as agreed by the
parties. The facility contains several covenants, agreements and
financial ratios customary for such transactions including
negative pledge, limitation on indebtedness, restriction on
asset dispositions; limitations on mergers and reorganizations,
required maintenance of minimum liquidity levels and financial
ratios; and limitation on dividend payments. Qimonda was in
compliance with these covenants as of September 30, 2006.
As of September 30, 2006, no amounts were outstanding under
this facility.

A 124 non-recourse
project financing facility for the expansion of the Qimonda
Portugal manufacturing facility was fully drawn as of
September 30, 2006.

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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 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, 2006
|             |  | Nature of financial |  |                                      |  |                         
|             |  | Institution         |  | Purpose/intended                     |  | Aggregate                |  |      
|Term         |  | Commitment          |  | use                                  |  | facility                 |  | Drawn |  | Available
|             |  |                     |  |                                      |  |                          |  |       |  |          
|short-term   |  | firm commitment     |  | working capital,
    guarantees      |  | 95                       |  | 51    |  | 44       
|            
|short-term   |  | no firm commitment  |  | working capital,
    cash management |  | 309                      |  |      |  | 309      
|            
|long-term    |  | firm commitment     |  | working capital                      |  | 823                      |  | 273   |  | 550      
|            
|long-term(1) |  | firm commitment     |  | project finance                      |  | 351                      |  | 351   |  |         
|             |  |                     |  |                                      |  |                          |  |       |  |          
|Total        |  | 1,578               |  | 675                                  |  | 903                     
|             |  |                     |  |                                      |  |                         



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



  




|                          |  |        |       | 
|------------------------- |  | ------ | ----- | 
|                          |  | Amount |      
|Year ending September 30, |  |        |      
|2007                      |  |        | 797   | 
|2008                      |  |        | 157   | 
|2009                      |  |        | 181   | 
|2010                      |  |        | 744   | 
|2011                      |  |        | 55    | 
|Thereafter                |  |        | 71    | 
|                          |  |        |      
|Total                     |  |        | 2,005 | 
|                          |  |        |      

23.     Other Liabilities




|                                                       |  |      |  |     
|------------------------------------------------------ |  | ---- |  | ----
|                                                       |  | 2005 |  | 2006
|                                                       |  |      |  |     
|Deferred government grants
    (note 7)                |  | 182  |  | 117 
|Settlement for antitrust related
    matters (note 33) |  | 88   |  | 62  
|Pension liabilities (note 30)                          |  | 162  |  | 134 
|Deferred income, (note 6)                              |  | 38   |  | 40  
|Post-retirement benefits
    (note 30)                 |  | 5    |  | 4   
|License fees payable                                   |  | 54   |  | 41  
|Other                                                  |  | 32   |  | 59  
|                                                       |  |      |  |     
|Total                                                  |  | 561  |  | 457 
|                                                       |  |      |  |     

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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)

24.     Minority Interest

On July 28, 2003, the Company entered into a joint venture
agreement with China-Singapore Suzhou Industrial Park Venture
Company (CSVC) for the construction of a back-end
manufacturing facility in the Peoples Republic of China.
Pursuant the joint venture agreement, the capital invested by
CSVC earns an annual return and has a liquidation preference,
while all accumulated earnings and dividend rights accrue to the
benefit of the Company. Accordingly, the Company has
consolidated 100% of the results of operations of the joint
venture from inception, and the capital invested and annual
return of the minority investor is reflected as minority
interest.

ALTIS is a joint venture between the Company and IBM, with each
having equal voting representation. In December 2005, the
Company further amended its agreements with IBM in respect of
the ALTIS joint venture and began to fully consolidate ALTIS,
whereby IBMs 50% ownership interest is reflected as
minority interest (see note 17).

Effective May 1, 2006, the Company contributed
substantially all of the operations of its Memory Products
segment, including the assets and liabilities that were used
exclusively for these operations, to Qimonda, a stand-alone
legal company. On August 9, 2006, Qimonda completed an
initial public offering on the New York Stock Exchange through
the issuance of 42 million ordinary shares which are traded
as ADSs under the symbol QI, for an offering price
of $13 per ADS. In addition, the Company sold 6.3 million
Qimonda shares upon exercise of the underwriters
over-allotment option, which reduced its shareholding in Qimonda
to 85.9%. The minority investors 14.1% ownership interest
is reflected as minority interest (see note 3).

25.     Ordinary Share Capital

As of September 30, 2006 the Company had 747,609,294
registered ordinary shares, notional value of euro 2.00 per
share, outstanding. During the year ended September 30,
2006 the Company increased its share capital by
0.08 by issuing 39,935
shares in connection with the Companys Long-Term Incentive
Plan. During the year ended September 30, 2004 the Company
increased its share capital by
53 by issuing
26,679,255 shares valued at
278 in connection with
the acquisition of the remaining interests of other investors in
SC300 GmbH & Co. KG (SC300).

Authorized and Conditional
Share Capital

In addition to the issued share capital, the Companys
Articles of Association authorize the Management Board to
increase the ordinary share capital with the Supervisory
Boards consent by issuing new shares. As of
September 30, 2006, the Management Board may use these
authorizations to issue new shares as follows:




    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 pre-emptive rights of shareholders may be
    partially excluded, or in connection with business combinations
    (contributions in kind), where the pre-emptive 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 pre-emptive rights of existing
    shareholders are excluded).The Company has conditional capital of up to an aggregate
nominal amount of 96
(Conditional Share Capital I), of up to an aggregate nominal
amount of 29
(Conditional Share Capital III) and up to an aggregate nominal
amount of 24.5
(Conditional Share Capital IV/2006) that may be used to issue up
to 74.7 million new registered shares in connection with
the Companys long-term incentive plans

F-42



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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 26). 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 50
(Conditional Share Capital II) that may be used to issue up to
25 million new registered shares upon conversion of debt
securities, issued in February 2002 and which may be converted
at any time until January 23, 2007 (see note 22).
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 22). 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.

Dividends

Under 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 February 2006 did not
authorize a dividend. No earnings are available for distribution
as a dividend for the 2006 financial year, since Infineon
Technologies AG on a stand-alone basis as the ultimate parent
incurred a cumulative loss (Bilanzverlust) as of
September 30, 2006.

26.     Stock-based Compensation

Fixed Stock Option
Plans

In 1999, the shareholders approved a share option plan
(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 Plan (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 could 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.

F-43



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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)

Under the LTI 2001 Plan, the Companys Supervisory Board
decided annually within three months after publication of the
financial results how many options to grant to the Management
Board. The Management Board, within the same three-month period,
decided how many options to grant to eligible employees.

In 2006, the Companys shareholders approved the Stock
Option Plan 2006 (SOP 2006) which replaced the LTI
2001 Plan. Under the terms of SOP 2006, the Company can grant up
to 13 million options over a three-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 are only exercisable if
the price of a share exceeds the trend of the comparative index
Philadelphia Semiconductor Index for at least three
consecutive days on at least one occasion during the life of the
option. Granted options have a vesting period of three years,
subject to the Companys stock reaching the exercise price
on at least one trading day, and expire six years from the grant
date. During the 2006 financial year, no options were granted
under the SOP 2006.

In 2006, the Qimonda shareholders approved a stock option plan
(the Qimonda 2006 SOP). Under the terms of the
Qimonda 2006 SOP, Qimonda can grant up to 6 million
non-transferable option rights over a three-year period which
grant the holder the right to receive ordinary shares issued by
Qimonda. The exercise price of each option equals 100% of the
average closing price of Qimondas ADSs on the New York
Stock Exchange during the five trading days prior to the grant
date. Granted options are only exercisable if the price of
Qimonda ADSs as quoted on the New York Stock Exchange exceeds
the trend of the comparative index Philadelphia
Semiconductor Index for at least three consecutive days on
at least one occasion during the life of the option. Granted
options have a vesting period of three years, subject to
Qimondas ADSs reaching the exercise price on at least one
trading day, and expire six years from the grant date. During
the 2006 financial year, no options were granted under the
Qimonda 2006 SOP.

Effective October 1, 2005, the Company adopted
SFAS No. 123 (revised 2004) under the modified
prospective application method. Under this application, the
Company records stock-based compensation expense for all awards
granted on or after the date of adoption and for the portion of
previously granted awards that remained unvested at the date of
adoption. Stock-based compensation cost is measured at the grant
date, based on the fair value of the award, and is recognized as
expense over the period during which the employee is required to
provide service in exchange for the award. Prior period amounts
have not been restated and do not reflect the recognition of
stock-based compensation.

A summary of the status of the LTI 1999 Plan and the LTI 2001
Plan as of September 30, 2006, and changes during the three
years then ended is presented below (options in millions,
exercise price in euro, intrinsic value in millions of euro):

|                                                                             |  |           |       |           |          |           |                |            |           |   
|---------------------------------------------------------------------------- |  | --------- | ----- | --------- | -------- | --------- | -------------- | ---------- | --------- | --
|                                                                             |  |           |       | Weighted- |          | Weighted- |                |           
|                                                                             |  |           |       | average   |          | average   |                | Aggregated
|                                                                             |  | Number of |       |           | exercise |           | remaining life |            | Intrinsic
|                                                                             |  | options   |       |           | price    |           | (in years)     |            | Value    
|                                                                             |  |           |       |           |          |           |                |            |          
|Outstanding at beginning of year                                             |  |           | 40.9  |           |          | 20.33    |                | 4.02       |           |  
|Granted                                                                      |  |           | 7.5   |           |          | 8.20     |                |            |           |   
|Exercised                                                                    |  |           |      |           |          |          |                |            |           |  
|Forfeited and expired                                                        |  |           | (3.6) |           |          | 22.65    |                |            |           |   
|                                                                             |  |           |       |           |          |           |                |            |          
|Outstanding at end of year                                                   |  |           | 44.8  |           |          | 18.12    |                | 3.54       |           | 14
|                                                                             |  |           |       |           |          |           |                |            |          
|Vested and expected to vest, net of
    estimated forfeitures at end of year |  |           | 44.4  |           |          | 18.21    |                | 3.52       |           | 13
|Exercisable at end of year                                                   |  |           | 25.6  |           |          | 24.68    |                | 2.37       |           | 3 

F-44



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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)

Options with an aggregated fair value of
51 completed vesting
during the financial year ended September 30, 2006.

Changes in the Companys unvested options for the financial
year ended September 30, 2006 are summarized as follows
(options in million, fair values in euro, intrinsic value in
millions of euro):

|                                  |  |           |       |           |            |           |                |            |           |   
|--------------------------------- |  | --------- | ----- | --------- | ---------- | --------- | -------------- | ---------- | --------- | --
|                                  |  |           |       | Weighted- |            | Weighted- |                |           
|                                  |  |           |       | average   |            | average   |                | Aggregated
|                                  |  | Number of |       |           | grant date |           | remaining life |            | Intrinsic
|                                  |  | options   |       |           | fair value |           | (in years)     |            | Value    
|                                  |  |           |       |           |            |           |                |            |          
|Unvested at beginning of year     |  |           | 21.2  |           |            | 5.28     |                |            |           |   
|Granted                           |  |           | 7.5   |           |            | 3.19     |                |            |           |   
|Vested                            |  |           | (8.2) |           |            | 6.22     |                |            |           |   
|Forfeited                         |  |           | (1.3) |           |            | 4.51     |                |            |           |   
|                                  |  |           |       |           |            |           |                |            |          
|Unvested at end of year           |  |           | 19.2  |           |            | 4.11     |                | 1.72       |           | 11
|                                  |  |           |       |           |            |           |                |            |          
|Unvested options expected to vest |  |           | 18.8  |           |            | 4.13     |                | 1.72       |           | 11

Fair value
disclosures






|                                                                 |                         |      |      |       |      |  |      |       |  |  |      |       | 
|---------------------------------------------------------------- | ----------------------- | ---- | ---- | ----- | ---- |  | ---- | ----- |  |  | ---- | ----- | 
|                                                                 |                         | 2004 |      |       | 2005 |  |      | 2006  | 
|                                                                 |                         |      |      |       |      |  |      |       | 
|Weighted-average assumptions:                                    |                         |      |      |       |      |  |      |       |  |  |      |      
|                                                                 | Risk-free interest rate |      |      | 3.68% |      |  |      | 3.02% |  |  |      | 3.08% | 
|                                                                 | Expected volatility     |      |      | 59%   |      |  |      | 58%   |  |  |      | 43%   | 
|                                                                 | Dividend yield          |      |      | 0%    |      |  |      | 0%    |  |  |      | 0%    | 
|                                                                 | Expected life in years  |      |      | 4.50  |      |  |      | 4.50  |  |  |      | 5.07  | 
|Weighted-average fair value per
    option at grant date in euro |                         |      | 5.88 |       |      |  | 4.03 |       |  |  | 3.19 |      
|                                                                 |                         |      |      |       |      |  |      |       | 

F-45



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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)

Stock-Based Compensation
Expense

Stock-based compensation expense was allocated as follows for
the financial year ended September 30, 2006:

|                                                                        |                                                  |      |        |    | 
|----------------------------------------------------------------------- | ------------------------------------------------ | ---- | ------ | -- | 
|                                                                        |                                                  | 2006 |       
|                                                                        |                                                  |      |       
|Compensation expense recognized:                                        |                                                  |      |        |   
|                                                                        | Cost of sales                                    |      |        | 7  | 
|                                                                        | Selling, general and administrative
    expenses |      |        | 12 | 
|                                                                        | Research and development expenses                |      |        | 9  | 
|                                                                        |                                                  |      |       
|Total stock-based compensation
    expense                              |                                                  |      | 28     |   
|                                                                        |                                                  |      |       
|Stock-based compensation effect on
    basic and diluted loss per share |                                                  |      | (0.04) |   
|                                                                        |                                                  |      |       




Accounting for Stock-Based
Compensation  Transition and Disclosure an amendment
of SFAS No. 123


Accounting for
Stock-Based Compensation pro forma


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

F-46



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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)

27.     Other Comprehensive Income
(Loss)

The changes in the components of other comprehensive income
(loss) for the years ended September 30, 2004, 2005
and 2006 are as follows:

|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |       |      |  |  |   |     |  |  |       |      | 
|--------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------ | ----- | ---- | ------ |  | ---- | ---- |  |  | ------ | ---- |  | ------ | ----- | --- | --- | --- | --- | ------ |  |  | ------ | --- |  | --- | ----- | ---- |  |  | - | --- |  |  | ----- | ---- | 
|                                                                      |                                                                                  | 2004   |       |      | 2005   |  |      | 2006 | 
|                                                                      |                                                                                  |        |       |      |        |  |      |      | 
|                                                                      |                                                                                  |        |       | Tax  |        |  |      |      |  |  | Tax    |      |  |        |       |     |     | Tax |     |        | 
|                                                                      |                                                                                  | Pretax |       |      | effect |  |      | Net  |  |  | Pretax |      |  | effect |       |     | Net |     |     | Pretax |  |  | effect |     |  | Net |      
|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |      
|Unrealized (losses) gains on
    securities:                          |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |       |      |  |  |   |     |  |  |       |     
|                                                                      | Unrealized holding (losses) gains                                                |        |       | 4    |        |  |      |     |  |  |        | 4    |  |        |       | 13  |     |     |     | (1)    |  |  |        | 12  |  |     |       | 6    |  |  |   | (1) |  |  |       | 5    | 
|                                                                      | Reclassification adjustment for
    losses (gains) included in net income (loss) |        |       | (11) |        |  |      |     |  |  |        | (11) |  |        |       | (4) |     |     |     |       |  |  |        | (4) |  |     |       | (13) |  |  |   | 1   |  |  |       | (12) | 
|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |      
|Net unrealized (losses) gains                                         |                                                                                  |        | (7)   |      |        |  |     |      |  |  | (7)    |      |  |        | 9     |     |     |     | (1) |        |  |  | 8      |     |  |     | (7)   |      |  |  |  |     |  |  | (7)   |     
|Unrealized gains (losses) on
    cash flow hedges                     |                                                                                  |        | 1     |      |        |  |     |      |  |  | 1      |      |  |        | (25)  |     |     |     |    |        |  |  | (25)   |     |  |     | 5     |      |  |  |  |     |  |  | 5     |     
|Additional minimum pension liability                                  |                                                                                  |        | 28    |      |        |  | (10) |      |  |  | 18     |      |  |        | (85)  |     |     |     | 1   |        |  |  | (84)   |     |  |     | (3)   |      |  |  |  |     |  |  | (3)   |     
|Foreign currency translation
    adjustment                           |                                                                                  |        | (41)  |      |        |  |     |      |  |  | (41)   |      |  |        | 64    |     |     |     |    |        |  |  | 64     |     |  |     | (69)  |      |  |  |  |     |  |  | (69)  |     
|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |      
|Other comprehensive (loss) income                                     |                                                                                  |        | (19)  |      |        |  | (10) |      |  |  | (29)   |      |  |        | (37)  |     |     |     |    |        |  |  | (37)   |     |  |     | (74)  |      |  |  |  |     |  |  | (74)  |     
|Accumulated other comprehensive
    income (loss)  beginning of year |                                                                                  |        | (98)  |      |        |  | 10   |      |  |  | (88)   |      |  |        | (117) |     |     |     |    |        |  |  | (117)  |     |  |     | (154) |      |  |  |  |     |  |  | (154) |     
|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |      
|Accumulated other comprehensive
    income (loss)  end of year       |                                                                                  |        | (117) |      |        |  |     |      |  |  | (117)  |      |  |        | (154) |     |     |     |    |        |  |  | (154)  |     |  |     | (228) |      |  |  |  |     |  |  | (228) |     
|                                                                      |                                                                                  |        |       |      |        |  |      |      |  |  |        |      |  |        |       |     |     |     |     |        |  |  |        |     |  |     |      

28.     Supplemental Cash Flow
Information


|                                                 |                                                                     |      |     |      |    |      |    
|------------------------------------------------ | ------------------------------------------------------------------- | ---- | --- | ---- | -- | ---- | ---
|                                                 |                                                                     | 2004 |     | 2005 |    | 2006
|                                                 |                                                                     |      |     |      |    |     
|Cash paid for:                                   |                                                                     |      |     |      |    |     
|                                                 | Interest                                                            |      | 144 |      | 91 |      | 116
|                                                 | Income taxes                                                        |      | 59  |      | 79 |      | 117
|Non-cash investing and financing
    activities: |                                                                     |      |     |      |    |     
|                                                 | Construction grants deducted from
    cost of fixed assets (note 7) |      | 49  |      |   |      | 49 




29.     Related Parties




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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 between the Company and ALTIS subsequent to the
consolidation of ALTIS during the first quarter of the 2006
financial year are no longer reflected as Related Party
transactions (see note 17).

On April 3, 2006, Siemens disposed of its remaining
shareholding in the Company. Transactions between the Company
and Siemens subsequent to this date are no longer reflected as
Related Party transactions.

Related Party receivables at September 30, 2005 and 2006
consist of the following:

|                                |                                                                             |      |     |      |  
|------------------------------- | --------------------------------------------------------------------------- | ---- | --- | ---- | -
|                                |                                                                             | 2005 |     | 2006
|                                |                                                                             |      |     |     
|Current:                        |                                                                             |      |     |     
|                                | Siemens group  trade
    (note 13)                                         |      | 145 |      | 
|                                | Associated and Related
    Companies  trade (note 13)                      |      | 12  |      | 8
|                                | Siemens group  financial
    and other (note 15)                           |      | 18  |      | 
|                                | Associated and Related
    Companies  financial and other (note 15)        |      | 5   |      | 1
|                                | Employee receivables (note 15)                                              |      | 8   |      | 7
|                                |                                                                             |      |     |     
|                                |                                                                             | 188  |     | 16  
|                                |                                                                             |      |     |     
|Non-current:                    |                                                                             |      |     |     
|                                | Associated and Related
    Companies  financial and other
    (1)(note 18) |      | 67  |      | 
|                                | Employee receivables (note 18)                                              |      | 2   |      | 2
|                                |                                                                             |      |     |     
|                                |                                                                             | 69   |     | 2   
|                                |                                                                             |      |     |     
|Total Related Party receivables |                                                                             | 257  |     | 18  
|                                |                                                                             |      |     |     



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | The decrease during the financial year ended September 30,
    2006 is primarily related to the initial consolidation of ALTIS.



|                                                                     |  |      |  |     
|-------------------------------------------------------------------- |  | ---- |  | ----
|                                                                     |  | 2005 |  | 2006
|                                                                     |  |      |  |     
|Siemens group  trade
    (note 19)                                  |  | 61   |  |    
|Associated and Related
    Companies 
    trade(1)(note 19)         |  | 140  |  | 80  
|Associated and Related
    Companies  financial and other (note 21) |  | 4    |  | 9   
|                                                                     |  |      |  |     
|Total Related Party payables                                         |  | 205  |  | 89  
|                                                                     |  |      |  |     



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | The decrease during the financial year ended
    September 30, 2006 is primarily related to the initial
    consolidation of ALTIS.



F-48



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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, 2004, 2005 and 2006, include the
following:

|                                     |                                         |       |     |      |     |      |    
|------------------------------------ | --------------------------------------- | ----- | --- | ---- | --- | ---- | ---
|                                     |                                         | 2004  |     | 2005 |     | 2006
|                                     |                                         |       |     |      |     |     
|Sales to Related Parties:            |                                         |       |     |      |     |     
|                                     | Siemens group companies                 |       | 957 |      | 861 |      | 322
|                                     | Associated and Related Companies        |       | 69  |      | 55  |      | 61 
|                                     |                                         |       |     |      |     |     
|Total sales to Related Parties       |                                         | 1,026 |     | 916  |     | 383 
|                                     |                                         |       |     |      |     |     
|Purchases from Related Parties:      |                                         |       |     |      |     |     
|                                     | Siemens group companies                 |       | 264 |      | 226 |      | 73 
|                                     | Associated and Related
    Companies(1) |       | 357 |      | 615 |      | 575
|                                     |                                         |       |     |      |     |     
|Total purchases from Related Parties |                                         | 621   |     | 841  |     | 648 
|                                     |                                         |       |     |      |     |     



|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | The decrease during the financial year ended September 30,
    2006 is primarily related to the initial consolidation of ALTIS.





|                                     |  |   |  |   |  |  
|------------------------------------ |  | - |  | - |  | -
|Interest income from Related Parties |  | 2 |  | 2 |  | 1
|Interest expense to Related Parties  |  |  |  |  |  | 
|                                     |  |   |  |   |  |  
|                                     |  | 2 |  | 2 |  | 1
|                                     |  |   |  |   |  |  

  









|    |              
|--- | -------------
|30. | Pension Plans



F-49



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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)

Information with respect to the Companys pension plans for
the years ended September 30, 2004, 2005 and 2006 is
presented for German (Domestic) plans and
non-German
(Foreign) plans:

|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |      | 
|----------------------------------------------- | --------------------------------------------------- | -------- | ----- | ----- | ------- |  | ---- | -------- |  |  | ------- | ----- |  | -------- | ---- | ---- | ------- |  | ----- | ----- |  |  | ---- | ---- | 
|                                                |                                                     | 2004     |       |       | 2005    |  |      | 2006     | 
|                                                |                                                     |          |       |       |         |  |      |          | 
|                                                |                                                     | Domestic |       |       | Foreign |  |      | Domestic |  |  | Foreign |       |  | Domestic |      |      | Foreign | 
|                                                |                                                     | plans    |       |       | plans   |  |      | plans    |  |  | plans   |       |  | plans    |      |      | plans   | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Accumulated benefit obligations end
    of year |                                                     |          | (226) |       |         |  | (56) |          |  |  | (337)   |       |  |          | (64) |      |         |  | (378) |       |  |  | (61) |     
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Change in projected benefit
    obligations:    |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |     
|                                                | Projected benefit obligations
    beginning of year |          |       | (243) |         |  |      | (70)     |  |  |         | (271) |  |          |      | (78) |         |  |       | (392) |  |  |      | (85) | 
|                                                | Service cost                                        |          |       | (14)  |         |  |      | (7)      |  |  |         | (16)  |  |          |      | (7)  |         |  |       | (24)  |  |  |      | (5)  | 
|                                                | Interest cost                                       |          |       | (13)  |         |  |      | (4)      |  |  |         | (15)  |  |          |      | (4)  |         |  |       | (17)  |  |  |      | (4)  | 
|                                                | Actuarial gains (losses)                            |          |       |      |         |  |      | 3        |  |  |         | (89)  |  |          |      | (2)  |         |  |       | (13)  |  |  |      | 8    | 
|                                                | Business combinations                               |          |       | (1)   |         |  |      | (1)      |  |  |         |      |  |          |      |     |         |  |       |      |  |  |      |     | 
|                                                | Divestitures                                        |          |       | 1     |         |  |      |         |  |  |         | 1     |  |          |      | 4    |         |  |       |      |  |  |      |     | 
|                                                | New plan created                                    |          |       |      |         |  |      | (2)      |  |  |         |      |  |          |      |     |         |  |       |      |  |  |      |     | 
|                                                | Plan amendments                                     |          |       | (3)   |         |  |      |         |  |  |         | (8)   |  |          |      |     |         |  |       |      |  |  |      |     | 
|                                                | Benefits paid                                       |          |       | 2     |         |  |      | 1        |  |  |         | 2     |  |          |      | 2    |         |  |       | 3     |  |  |      | 2    | 
|                                                | Curtailment gain                                    |          |       |      |         |  |      |         |  |  |         | 4     |  |          |      | 1    |         |  |       |      |  |  |      | 7    | 
|                                                | Foreign currency effects                            |          |       |      |         |  |      | 2        |  |  |         |      |  |          |      | (1)  |         |  |       |      |  |  |      | 2    | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|                                                | Projected benefit obligations end
    of year       |          |       | (271) |         |  |      | (78)     |  |  |         | (392) |  |          |      | (85) |         |  |       | (443) |  |  |      | (75) | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Change in fair value of plan assets:            |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         |  |       |       |  |  |      |     
|                                                | Fair value at beginning of year                     |          |       | 143   |         |  |      | 27       |  |  |         | 174   |  |          |      | 30   |         |  |       | 208   |  |  |      | 35   | 
|                                                | Contributions and transfers                         |          |       | 19    |         |  |      | 2        |  |  |         | 17    |  |          |      | 4    |         |  |       | 63    |  |  |      | 4    | 
|                                                | Actual return on plan assets                        |          |       | 14    |         |  |      | 3        |  |  |         | 19    |  |          |      | 2    |         |  |       | 14    |  |  |      | 2    | 
|                                                | Benefits paid                                       |          |       | (2)   |         |  |      | (1)      |  |  |         | (2)   |  |          |      | (2)  |         |  |       | (3)   |  |  |      | (2)  | 
|                                                | Foreign currency effects                            |          |       |      |         |  |      | (1)      |  |  |         |      |  |          |      | 1    |         |  |       |      |  |  |      | (1)  | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|                                                | Fair value at end of year                           |          |       | 174   |         |  |      | 30       |  |  |         | 208   |  |          |      | 35   |         |  |       | 282   |  |  |      | 38   | 
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Funded status                                   |                                                     |          | (97)  |       |         |  | (48) |          |  |  | (184)   |       |  |          | (50) |      |         |  | (161) |       |  |  | (37) |     
|Unrecognized actuarial
    (gains) losses       |                                                     |          | 59    |       |         |  | 2    |          |  |  | 138     |       |  |          | 4    |      |         |  | 144   |       |  |  | (8)  |     
|Unrecognized prior service cost
    (benefit)   |                                                     |          | 7     |       |         |  | (2)  |          |  |  | 14      |       |  |          | (2)  |      |         |  | 13    |       |  |  |     |     
|Post measurement date contributions             |                                                     |          | 1     |       |         |  | 1    |          |  |  | 16      |       |  |          | 1    |      |         |  | 16    |       |  |  | 1    |     
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 
|Net asset
    (liability) recognized            |                                                     |          | (30)  |       |         |  | (47) |          |  |  | (16)    |       |  |          | (47) |      |         |  | 12    |       |  |  | (44) |     
|                                                |                                                     |          |       |       |         |  |      |          |  |  |         |       |  |          |      |      |         | 



|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         |  |      |  |  |  |      | 
|------------------------------------------ |  | -------- | ---- |  | ------- |  | ---- | -------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ---- |  |  |  | ---- | 
|                                           |  | 2004     |      |  | 2005    |  |      | 2006     | 
|                                           |  |          |      |  |         |  |      |          | 
|                                           |  | Domestic |      |  | Foreign |  |      | Domestic |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                                           |  | plans    |      |  | plans   |  |      | plans    |  |  | plans   |  |  | plans    |      |  | plans   | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Prepaid pension cost                       |  |          | 27   |  |         |  |     |          |  |  |        |  |  |          |     |  |         |  |     |  |  |  | 1    | 
|Intangible asset (note 15)                 |  |          |     |  |         |  |     |          |  |  | 14      |  |  |          |     |  |         |  | 13   |  |  |  |     | 
|Accumulated other comprehensive
    income |  |          |     |  |         |  |     |          |  |  | 85      |  |  |          |     |  |         |  | 88   |  |  |  |     | 
|Accrued pension liabilities
    (note 23)  |  |          | (51) |  |         |  | (47) |          |  |  | (115)   |  |  |          | (47) |  |         |  | (89) |  |  |  | (45) | 
|Other current liabilities                  |  |          | (6)  |  |         |  |     |          |  |  |        |  |  |          |     |  |         |  |     |  |  |  |     | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Net liability recognized                   |  |          | (30) |  |         |  | (47) |          |  |  | (16)    |  |  |          | (47) |  |         |  | 12   |  |  |  | (44) | 
|                                           |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 

F-50



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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 current liabilities of
6 at
September 30, 2004 related to pension liabilities of the
fiber optic business which was held for sale.

Information for pension plans with projected benefit obligations
and accumulated benefit obligations in excess of plan assets are
as follows:

|                                |  |          |  |         |  |          |  |         |  |          |  |        
|------------------------------- |  | -------- |  | ------- |  | -------- |  | ------- |  | -------- |  | -------
|                                |  | 2004     |  | 2005    |  | 2006    
|                                |  |          |  |         |  |         
|                                |  | Domestic |  | Foreign |  | Domestic |  | Foreign |  | Domestic |  | Foreign
|                                |  | plans    |  | plans   |  | plans    |  | plans   |  | plans    |  | plans  
|                                |  |          |  |         |  |          |  |         |  |          |  |        
|Projected benefit obligation    |  | 271      |  | 78      |  | 392      |  | 85      |  | 443      |  | 64     
|Fair value of plan assets       |  | 174      |  | 30      |  | 208      |  | 35      |  | 282      |  | 26     
|Accumulated benefit obligations |  | 53       |  | 51      |  | 337      |  | 57      |  | 378      |  | 54     
|Fair value of plan assets       |  |         |  | 23      |  | 208      |  | 26      |  | 282      |  | 26     



|                                   |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         |  |      |  |  |  |      | 
|---------------------------------- |  | -------- | ---- |  | ------- |  | ---- | -------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ---- |  |  |  | ---- | 
|                                   |  | 2004     |      |  | 2005    |  |      | 2006     | 
|                                   |  |          |      |  |         |  |      |          | 
|                                   |  | Domestic |      |  | Foreign |  |      | Domestic |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                                   |  | plans    |      |  | plans   |  |      | plans    |  |  | plans   |  |  | Plans    |      |  | plans   | 
|                                   |  |          |      |  |         |  |      |          |  |  |         |  |  |          |      |  |         | 
|Discount rate                      |  |          | 5.8% |  |         |  | 5.6% |          |  |  | 4.5%    |  |  |          | 4.8% |  |         |  | 4.8% |  |  |  | 5.3% | 
|Rate of compensation increase      |  |          | 3.0% |  |         |  | 3.7% |          |  |  | 2.5%    |  |  |          | 3.1% |  |         |  | 2.5% |  |  |  | 1.8% | 
|Projected future pension increases |  |          | 1.3% |  |         |  | 2.6% |          |  |  | 1.3%    |  |  |          | 2.2% |  |         |  | 1.8% |  |  |  | 2.2% | 
|Expected return on plan assets     |  |          | 6.8% |  |         |  | 7.0% |          |  |  | 7.3%    |  |  |          | 6.9% |  |         |  | 6.5% |  |  |  | 6.9% | 



Investment strategies






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

long-term long-term


F-51



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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 reviews the expected long-term rate of return
annually and revises it as appropriate. Also, the Company
periodically commissions detailed asset/liability studies to be
performed by
third-party
professional investment advisors and actuaries.



Plan asset allocationAs of September 30, 2005 and 2006 the percentage of
plan assets invested and the targeted allocation in major asset
categories are as follows:

|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         |  |      |  |  |  |      | 
|----------------- |  | -------- | ---- |  | ------- |  | ---- | ------------------- |  |  | ------- |  |  | -------- | ---- |  | ------- |  | ---- |  |  |  | ---- | 
|                  |  | 2005     |      |  | 2006    |  |      | Targeted Allocation | 
|                  |  |          |      |  |         |  |      |                     | 
|                  |  | Domestic |      |  | Foreign |  |      | Domestic            |  |  | Foreign |  |  | Domestic |      |  | Foreign | 
|                  |  | Plans    |      |  | plans   |  |      | plans               |  |  | plans   |  |  | plans    |      |  | plans   | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 
|Equity securities |  |          | 44%  |  |         |  | 57%  |                     |  |  | 33%     |  |  |          | 59%  |  |         |  | 52%  |  |  |  | 59%  | 
|Debt securities   |  |          | 51%  |  |         |  | 35%  |                     |  |  | 33%     |  |  |          | 26%  |  |         |  | 18%  |  |  |  | 26%  | 
|Other             |  |          | 5%   |  |         |  | 8%   |                     |  |  | 34%     |  |  |          | 15%  |  |         |  | 30%  |  |  |  | 15%  | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 
|Total             |  |          | 100% |  |         |  | 100% |                     |  |  | 100%    |  |  |          | 100% |  |         |  | 100% |  |  |  | 100% | 
|                  |  |          |      |  |         |  |      |                     |  |  |         |  |  |          |      |  |         | 





|                                                    |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         |  |      |  |  |  |     | 
|--------------------------------------------------- |  | -------- | ---- |  | ------- |  | --- | -------- |  |  | ------- |  |  | -------- | --- |  | ------- |  | ---- |  |  |  | --- | 
|                                                    |  | 2004     |      |  | 2005    |  |     | 2006     | 
|                                                    |  |          |      |  |         |  |     |          | 
|                                                    |  | Domestic |      |  | Foreign |  |     | Domestic |  |  | Foreign |  |  | Domestic |     |  | Foreign | 
|                                                    |  | plans    |      |  | plans   |  |     | plans    |  |  | plans   |  |  | plans    |     |  | plans   | 
|                                                    |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         | 
|Service cost                                        |  |          | (14) |  |         |  | (7) |          |  |  | (16)    |  |  |          | (7) |  |         |  | (24) |  |  |  | (5) | 
|Interest cost                                       |  |          | (13) |  |         |  | (4) |          |  |  | (15)    |  |  |          | (4) |  |         |  | (17) |  |  |  | (4) | 
|Expected return on plan assets                      |  |          | 11   |  |         |  | 2   |          |  |  | 13      |  |  |          | 2   |  |         |  | 13   |  |  |  | 3   | 
|Amortization of unrecognized prior
    service cost |  |          |     |  |         |  |    |          |  |  |        |  |  |          |    |  |         |  | (1)  |  |  |  | 2   | 
|Amortization of unrecognized losses                 |  |          | (3)  |  |         |  |    |          |  |  | (3)     |  |  |          |    |  |         |  | (7)  |  |  |  |    | 
|Curtailment gain recognized                         |  |          |     |  |         |  |    |          |  |  | 1       |  |  |          | 1   |  |         |  |     |  |  |  | 3   | 
|                                                    |  |          |      |  |         |  |     |          |  |  |         |  |  |          |     |  |         | 
|Net periodic pension cost
    (note 8)              |  |          | (19) |  |         |  | (9) |          |  |  | (20)    |  |  |          | (8) |  |         |  | (36) |  |  |  | (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)

year was primarily the result of the reduction of the discount
rate used to determine the benefit obligation and new mortality
tables used in the actuarial calculations for the domestic plans.

On September 25, 2000, the Company established the Infineon
Technologies Pension Trust e.V. (the Pension
Trust) for the purpose of funding future pension benefit
payments for employees in Germany in order to reduce the
Companys exposure to certain risks associated with defined
benefit 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.

In September 2006, Qimonda established a pension trust for the
purpose of funding future pension benefit payments for its
employees in Germany. A portion of the Companys pension
plan assets have been allocated to Qimonda for periods prior to
its formation based on the proportion of Qimondas
projected benefit obligation to the total Companys
projected benefit obligation. Accordingly, the Company
transferred 26 in cash
from its Pension Trust into the Qimonda pension trust.

The effect of employee terminations, in connection with the
Companys restructuring plans (see note 9), on
the Companys pension obligation is reflected as a
curtailment in the years ended September 30, 2005 and
2006 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  
|                           |  |          |  |        
|2007                       |  | 10       |  | 2      
|2008                       |  | 8        |  | 2      
|2009                       |  | 9        |  | 2      
|2010                       |  | 12       |  | 2      
|2011                       |  | 13       |  | 2      
|2012 - 2016                |  | 80       |  | 18     

 


  




|    |                      
|--- | ---------------------
|31. | 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, 2005 and 2006 are as follows:

|                                    |                     |          |     |       |      |      |          |       |       |  |    |     | 
|----------------------------------- | ------------------- | -------- | --- | ----- | ---- | ---- | -------- | ----- | ----- |  | -- | --- | 
|                                    |                     | 2005     |     |       | 2006 |     
|                                    |                     |          |     |       |      |     
|                                    |                     | Notional |     | Fair  |      |      | Notional |       | Fair  | 
|                                    |                     | amount   |     | value |      |      | amount   |       | value | 
|                                    |                     |          |     |       |      |      |          |       |       | 
|Forward contracts sold:             |                     |          |     |       |      |      |          |       |       |  |    |    
|                                    | U.S. dollar         |          | 838 |       |      | (20) |          |       | 682   |  |    | 1   | 
|                                    | Japanese yen        |          | 9   |       |      |     |          |       | 30    |  |    |    | 
|                                    | Singapore dollar    |          | 2   |       |      |     |          |       |      |  |    |    | 
|                                    | Great Britain pound |          |    |       |      |     |          |       | 1     |  |    |    | 
|                                    | Malaysian Ringgit   |          |    |       |      |     |          |       | 6     |  |    |    | 
|Forward contracts purchased:        |                     |          |     |       |      |      |          |       |       |  |    |    
|                                    | U.S. dollar         |          | 195 |       |      | 4    |          |       | 209   |  |    | (1) | 
|                                    | Japanese yen        |          | 42  |       |      |     |          |       | 24    |  |    |    | 
|                                    | Singapore dollar    |          | 23  |       |      |     |          |       | 27    |  |    |    | 
|                                    | Great Britain pound |          | 5   |       |      |     |          |       | 7     |  |    |    | 
|                                    | Czech Koruna        |          | 1   |       |      |     |          |       |      |  |    |    | 
|                                    | Malaysian Ringgit   |          | 32  |       |      | 1    |          |       | 35    |  |    |    | 
|                                    | Other currencies    |          | 23  |       |      | (1)  |          |       |      |  |    |    | 
|Currency Options sold:              |                     |          |     |       |      |      |          |       |       |  |    |    
|                                    | U.S. dollar         |          | 527 |       |      | (21) |          |       | 259   |  |    | (5) | 
|Currency Options purchased:         |                     |          |     |       |      |      |          |       |       |  |    |    
|                                    | U.S. dollar         |          | 522 |       |      | 3    |          |       | 252   |  |    | 2   | 
|Cross currency interest rate swaps: |                     |          |     |       |      |      |          |       |       |  |    |    
|                                    | U.S. dollar         |          | 389 |       |      | 21   |          |       |      |  |    |    | 
|Interest rate swaps                 |                     | 1,442    |     |       | 14   |      |          | 1,200 |       |  | 5  |    
|Other                               |                     | 259      |     |       | (2)  |      |          | 218   |       |  | 9  |    
|                                    |                     |          |     |       |      |      |          |       |       | 
|Fair value, net                     |                     |          |     |       | (1)  |      |          |       |       |  | 11 |    
|                                    |                     |          |     |       |      |      |          |       |       | 

   de-designated 


 


  


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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)

Gains and losses on derivative financial instruments included in
determining net income (loss), with those related to operations
included primarily in cost of goods sold, and those related to
financial activities included in other non-operating income
(expense), were as follows for the years ended September 30:

|                                                                  |                                          |      |      |      |      |  |      |      |  |  |      |      | 
|----------------------------------------------------------------- | ---------------------------------------- | ---- | ---- | ---- | ---- |  | ---- | ---- |  |  | ---- | ---- | 
|                                                                  |                                          | 2004 |      |      | 2005 |  |      | 2006 | 
|                                                                  |                                          |      |      |      |      |  |      |      | 
|Gains (losses) from foreign
    currency derivatives:             |                                          |      |      |      |      |  |      |      |  |  |      |     
|                                                                  | Cost of sales                            |      |      | 44   |      |  |      | (14) |  |  |      | 50   | 
|                                                                  | Other non-operating
    (expense) income |      |      | 3    |      |  |      | (10) |  |  |      | 15   | 
|                                                                  |                                          |      |      |      |      |  |      |      | 
|                                                                  |                                          |      | 47   |      |      |  | (24) |      |  |  | 65   |     
|                                                                  |                                          |      |      |      |      |  |      |      | 
|Gains (losses) from foreign
    currency transactions:            |                                          |      |      |      |      |  |      |      |  |  |      |     
|                                                                  | Cost of sales                            |      |      | (50) |      |  |      | (5)  |  |  |      | (19) | 
|                                                                  | Other non-operating
    (expense) income |      |      | (12) |      |  |      | 50   |  |  |      | (46) | 
|                                                                  |                                          |      |      |      |      |  |      |      | 
|                                                                  |                                          |      | (62) |      |      |  | 45   |      |  |  | (65) |     
|                                                                  |                                          |      |      |      |      |  |      |      | 
|Net losses from foreign currency
    derivatives and transactions |                                          |      | (15) |      |      |  | 21   |      |  |  |     |     
|                                                                  |                                          |      |      |      |      |  |      |      | 

short-term




|    |      
|--- | -----
|32. | Risks

pre-established non-performance




high-technology self-developed,


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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)

intellectual property rights. Conversely, the Company is exposed
to assertions by others of infringement by the Company of their
intellectual property rights.

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 9,000 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
4,700 employees), Austria (affecting approximately
2,300 employees) and France (affecting approximately
2,000 employees including ALTIS). The agreement in Germany
is perpetual, but can be terminated by the trade union with a
notice of one month prior to March 31, 2007. The
agreement in Austria expires on May 1, 2007. The
minimum salaries stipulated in the agreement in France are
subject to yearly revision coming into effect on
January 1st
each year. 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.

33.     Commitments and
Contingencies

Litigation

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
into alleged antitrust violations in the DRAM industry. Pursuant
to this plea agreement, the Company agreed to plead guilty to a
single count of conspiring with other unspecified DRAM
manufacturers to fix the prices of DRAM products between
July 1, 1999 and June 15, 2002, and to pay a fine of
$160 million. The fine plus accrued interest is being paid
in equal annual installments through 2009. The Company has a
continuing obligation to cooperate with the DOJ in its ongoing
investigation of other participants in the DRAM industry. The
price fixing charges related to DRAM sales 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 putative class action lawsuits were filed against the
Company, its principal U.S. subsidiary and other DRAM suppliers.

Sixteen cases were filed between June and September 2002 in
several U.S. federal district courts, purporting to be on behalf
of a class of individuals and entities who purchased DRAM
directly from the various DRAM suppliers during a specified time
period (the Direct U.S. Purchaser Class), alleging
price-fixing in
violation of the Sherman Act and seeking 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 ordered
that these federal cases be transferred to the
U.S. District Court for the Northern District of California
for coordinated or consolidated pretrial proceedings as part of
a Multi District Litigation (MDL).

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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 September 2005, the Company and its principal U.S.
subsidiary entered into a definitive settlement agreement with
counsel to the Direct U.S. Purchaser Class (subject to approval
by the U.S. District Court and to an opportunity for
individual class members to opt out of the settlement). Under
the terms of the settlement agreement the Company agreed to pay
approximately $21 million. In addition to this settlement
payment, the Company agreed to pay an additional amount if it is
proven that sales of DRAM products to the settlement class
(after opt-outs) during the settlement period exceeded
$208.1 million. The additional amount payable would be
calculated by multiplying the amount by which these sales exceed
$208.1 million by 10.53%. The Company does not currently
expect that any such additional amount will have a material
adverse effect on its financial condition or results of
operations. The settlement was provisionally approved on
May 10, 2006, and the final hearing for approval of the
settlement was scheduled for November 1, 2006. As of
September 30, 2006, the Company had secured individual
settlements with eight direct customers in addition to those
OEMs identified by the DOJ (see note 35).

On April 28, 2006, Unisys Corporation filed a complaint
against the Company and its principal U.S. subsidiary, among
other DRAM suppliers, alleging state and federal claims for
price fixing and seeking recovery as both a direct and indirect
purchaser of DRAM. On May 5, 2006, Honeywell International
Inc. filed a complaint against the Company and its principal
U.S. subsidiary, among other DRAM suppliers, alleging a claim
for price fixing under federal law, and seeking recovery as a
direct purchaser of DRAM. Both of these complaints were filed in
the Northern District of California, and have been related to
the MDL described above. Both Unisys and Honeywell opted out of
the direct purchaser class and settlement, so their claims are
not barred by the Companys settlement with the Direct U.S.
Purchaser Class.

Sixty-four additional cases were filed between August and
October 2005 in numerous federal and state courts throughout the
United States. Each of these state and federal cases (except for
one relating to foreign purchasers, which was subsequently
dismissed with prejudice) purports to be on behalf of a class of
individuals and entities who indirectly purchased DRAM in the
United States during specified time periods commencing in or
after 1999. 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 generally unspecified amounts,
restitution, costs, attorneys fees and injunctions against
the allegedly unlawful conduct.

Twenty-three of the
state and federal court cases were subsequently ordered
transferred to the U.S. District Court for the Northern District
of California for coordinated and consolidated pretrial
proceedings as part of the MDL described above. Nineteen of the
23 transferred cases are currently pending in the MDL
litigation. The pending California state cases were coordinated
and transferred to San Francisco County Superior Court for
pretrial proceedings. The plaintiffs in the indirect purchaser
cases outside California agreed to stay proceedings in those
cases in favor of proceedings on the indirect purchaser cases
pending as part of the MDL pretrial proceedings. The defendants
have filed two motions for judgment on the pleadings directed at
several of the claims; these motions are pending. After these
have been decided the indirect purchaser plaintiffs in the MDL
proceedings will have the opportunity to file any motion for
class certification. No trial date has yet been scheduled in the
MDL. The Company intends to vigorously defend against the
indirect purchaser cases.

On July 13, 2006, the New York state attorney
general filed an action in the U.S. District Court for the
Southern District of New York against the Company, its
principal U.S. subsidiary and several other DRAM
manufacturers on behalf of New York governmental entities
and New York consumers who purchased products containing
DRAM beginning in 1998. The plaintiffs allege violations of
state and federal antitrust laws arising out of the same
allegations of DRAM
price-fixing and
artificial price inflation practices discussed above, and seek
recovery of actual and treble damages in unspecified amounts,
penalties, costs (including attorneys fees) and injunctive
and other equitable relief. On July 14, 2006,

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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 attorneys general of California, Alaska, Arizona, Arkansas,
Colorado, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa,
Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Nebraska, Nevada, New Mexico, North Dakota, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Utah, Vermont, Virginia, Washington, West Virginia and
Wisconsin filed a lawsuit in the U.S. District Court for
the Northern District of California against the Company, its
principal U.S. subsidiary and several other DRAM
manufacturers on behalf of governmental entities, consumers and
businesses in each of those states who purchased products
containing DRAM beginning in 1998. On September 8,
2006, the complaint was amended to add claims by the attorneys
general of Kentucky, Maine, New Hampshire, North Carolina,
the Northern Mariana Islands and Rhode Island. This action is
based on state and federal law claims relating to the same
alleged anticompetitive practices in the sale of DRAM and
plaintiffs seek recovery of actual and treble damages in
unspecified amounts, penalties, costs (including attorneys
fees) and injunctive and other relief. The Company intends to
vigorously defend against both of these actions.

In April 2003, the Company received a request for
information from the European Commission in connection with its
investigation of practices in the European market for DRAM ICs.
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, its affiliates and
present and past directors, officers and employees are among the
targets of a formal inquiry into an alleged conspiracy to
prevent or lessen competition unduly in the production,
manufacture, sale or supply of DRAM, contrary to the Canadian
Competition Act. The Company is fully cooperating with the
Competition Bureau in its inquiry.

Between December 2004 and February 2005
two putative class proceedings were filed in the Canadian
provinces of Quebec, and one was filed in each of Ontario and
British Columbia against the Company, its principal U.S.
subsidiary and other DRAM manufacturers on behalf of all direct
and indirect purchasers resident in Canada who purchased DRAM or
products containing DRAM between July 1999 and
June 2002, seeking damages, investigation and
administration costs, as well as interest and legal costs.
Plaintiffs primarily allege conspiracy to unduly restrain
competition and to illegally fix the price of DRAM. In the
British Columbia action, the certification motion has been
scheduled for May 2007. In one Quebec class action
preliminary motions are to be scheduled early in 2007; the
other Quebec action has been stayed pending developments in the
one that is going forward. The Company intends to vigorously
defend against these proceedings.

Between September and November 2004 seven securities class
action complaints were filed against the Company and current or
former officers in U.S. federal district courts, later
consolidated in the Northern District of California, on behalf
of a putative class of purchasers of the Companys
publicly-traded securities who purchased them during the period
from March 2000 to July 2004. The consolidated amended
complaint alleges violations of the U.S. securities laws
and asserts that the defendants made materially false and
misleading public statements about the Companys historical
and projected financial results and competitive position because
they did not disclose the Companys alleged participation
in DRAM price-fixing
activities and that, by fixing the price of DRAM, defendants
manipulated the price of the Companys securities, thereby
injuring its shareholders. The plaintiffs seek unspecified
compensatory damages, interest, costs and attorneys fees.
In September 2006, the court dismissed the complaint with
leave to amend (see note 35).

The Company believes these claims are without merit and is
vigorously defending itself in this action. Because this action
is in its early stages, the Company is unable to provide an
estimate of the likelihood of an unfavorable outcome to the
Company or of the amount or range of potential loss arising from
the action. If the outcome of this action is unfavorable, or if
the Company incurs substantial legal

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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)

fees in defending this action regardless of outcome, it may have
a material adverse effect on the Companys financial
condition and results of operations. The Companys
directors and officers insurance carriers have
denied coverage in the class action and the Company filed suit
against the carriers in December 2005 and August 2006.

In late 2002, MOSAID filed suit alleging that the Company was
violating eleven of its
DRAM-related
U.S. patents. Subsequently, the Company sought a
declaratory judgment that it did not violate these patents,
MOSAID filed certain counterclaims, the Company won summary
judgment with respect to most of these patents, and MOSAID
alleged infringement of additional patents.

On June 14, 2006, the parties announced that they had
settled all pending litigation and appeals, and the outstanding
suit was subsequently dismissed with prejudice. As part of the
settlement, Infineon and Qimonda have taken a worldwide license
to the MOSAID patent portfolio (note 6).

Tessera Inc. filed a lawsuit in March 2005 alleging that some of
the Companys products were infringing five Tessera
patents, and later amended its complaint to allege that the
Company had violated U.S. antitrust law, Texas unfair
competition law, and Texas business tort law by conspiring to
harm the sale of Rambus DRAM (RDRAM) chips, thereby
injuring Tesseras ability to license chip packaging
technology for RDRAM chips.

On August 1, 2006, Infineon and Qimonda entered into
settlement agreements with Tessera Inc. in respect of all of
Tesseras patent infringement and antitrust claims and all
counterclaims and other claims Infineon and Qimonda raised
against Tessera. As part of the settlement, Infineon and Qimonda
have entered into license agreements with Tessera, effective
July 1, 2006, that provide the companies
world-wide,
nonexclusive, non-transferable and
non-sublicensable
licenses to use a portfolio of Tessera patents relating to
packaging for integrated circuits in Infineon and Qimondas
production. The license agreements will be effective until
May 2012, when they will automatically expire unless the
companies notify Tessera by November 2011 that they elect
to extend the agreements for an additional five years until
May 2017. Upon expiration of the extended term, if any, the
companies licenses to use the patents covered by the
licenses will become fully
paid-up and perpetual.

Under the license agreements, Infineon and Qimonda paid Tessera
$10 million and $40 million in license fees in
August 2006, respectively, and will pay additional royalty
payments over a
six-year period based
on the volume of components Infineon and Qimonda sell that are
subject to the licenses. In the event the companies elect to
extend the agreements past their initial term, they will
continue to pay royalties at 50% of the rates agreed to for the
initial term of the license agreements. Pursuant to the
contribution agreement Qimonda entered into with Infineon,
Qimonda is required to indemnify Infineon with respect to 80% of
the court costs and legal fees that Infineon faces in respect of
the Tessera suits (note 6).



Accruals and the Potential Effect of these LawsuitsLiabilities 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, 2006, the Company had accrued
liabilities in the amount of
139 related to
the DOJ and European antitrust investigations and the direct and
indirect purchaser litigation and settlements described above,
as well as for legal expenses for the DOJ related and securities
class action complaints.

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

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Infineon Technologies AG and Subsidiaries

Notes to the Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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 financial condition and results of
operations.

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 on, the Company, which would have
a material adverse effect on its results of operations,
financial condition and cash flows. Irrespective of the validity
or the successful assertion of the claims described above, 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 condition
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.



Contractual CommitmentsThe following table summarizes
the Companys commitments with respect to external parties
as of
September 30, 2006(1)(2):

|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|---------------------------------- |  | ---------------------- |  | ------ |  | ----- |  | ----- |  | ----- |  | ----- |  | -------
|                                   |  | Payments Due by 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           |  | 959                    |  | 104    |  | 91    |  | 85    |  | 66    |  | 64    |  | 549    
|Unconditional purchase commitments |  | 1,396                  |  | 1,171  |  | 153   |  | 25    |  | 15    |  | 11    |  | 21     
|Other long-term commitments        |  | 132                    |  | 66     |  | 66    |  |      |  |      |  |      |  |       
|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        
|Total Commitments                  |  | 2,487                  |  | 1,341  |  | 310   |  | 110   |  | 81    |  | 75    |  | 570    
|                                   |  |                        |  |        |  |       |  |       |  |       |  |       |  |        



|    |                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2006. Purchases under these arrangements
    aggregated 1,204 for
    the year ended September 30, 2006.

five-year


back-end


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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)

Company. Accordingly, the Company has consolidated 100% of the
results of operations of the joint venture from inception.

The Company has capacity reservation agreements with certain
Associated Companies and external foundry suppliers for the
manufacturing and testing of semiconductor products. These
agreements generally are greater than one year in duration and
are renewable. Under the terms of these agreements, the Company
has agreed to purchase a portion of their production output
based, in part, on market prices.

Purchases under these agreements are recorded as incurred in the
normal course of business. The Company assesses its anticipated
purchase requirements on a regular basis to meet customer demand
for its products. An assessment of losses under these agreements
is made on a regular basis in the event that either budgeted
purchase quantities fall below the specified quantities or
market prices for these products fall below the specified prices.



Other ContingenciesThe following table summarizes
the Companys contingencies with respect to external
parties, other than those related to litigation, as of
September 30, 2006(1):

|                                   |                                     |                       |     |        |     |       |     |       |    |       |    |       |    |         |    
|---------------------------------- | ----------------------------------- | --------------------- | --- | ------ | --- | ----- | --- | ----- | -- | ----- | -- | ----- | -- | ------- | ---
|                                   |                                     | Expirations by Period
|                                   |                                     |                      
|                                   |                                     |                       |     | Less   |     |      
|                                   |                                     |                       |     | than   |     | 1-2   |     | 2-3   |    | 3-4   |    | 4-5   |    | After 5
|                                   |                                     | Total                 |     | 1 year |     | years |     | years |    | years |    | years |    | years  
|                                   |                                     |                       |     |        |     |       |     |       |    |       |    |       |    |        
|Maximum potential future payments: |                                     |                       |     |        |     |       |     |       |    |       |    |       |    |        
|                                   | Guarantees(2)                       |                       | 198 |        | 6   |       | 20  |       | 12 |       |   |       | 14 |         | 146
|                                   | Contingent government
    grants(3) |                       | 548 |        | 156 |       | 129 |       | 36 |       | 55 |       | 27 |         | 145
|                                   |                                     |                       |     |        |     |       |     |       |    |       |    |       |    |        
|Total contingencies                |                                     | 746                   |     | 162    |     | 149   |     | 48    |    | 55    |    | 41    |    | 291    
|                                   |                                     |                       |     |        |     |       |     |       |    |       |    |       |    |        



|    |                                                                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Guarantees are mainly issued for the payment of import duties,
    rentals of buildings, and contingent obligations related to
    government grants received.                                                                                                                                                                         
|   
|(3) | 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)

On December 23, 2003, the Company 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, enables the Company to centralize the majority of its
Munich-area employees in one central physical working
environment. MoTo was responsible for the construction, which
was completed in the second half of 2005. The Company has no
obligations with respect to financing MoTo and has provided no
guarantees related to the construction. The Company occupied
Campeon under an operating lease arrangement in
October 2005 and completed the gradual move of its
employees to this new location in the 2006 financial year. The
complex was leased for a period of 20 years. After year 15,
the Company has a non-bargain purchase option to acquire the
complex or otherwise continue the lease for the remaining period
of five years. Pursuant to the agreement, the Company placed a
rental deposit of 75
in escrow, which was included in restricted cash as of
September 30, 2006. Lease payments are subject to limited
adjustment based on specified financial ratios related to the
Company. The agreement was accounted for as an operating lease,
in accordance with SFAS No. 13, with monthly lease
payments expensed on a straight-line basis over the lease term.

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, 2006 is
as follows:

|                                     |                              |      |    |      | 
|------------------------------------ | ---------------------------- | ---- | -- | ---- | 
|                                     |                              | 2006 |   
|                                     |                              |      |   
|Balance as of September 30,
    2005 |                              |      | 50 |     
|                                     | Accrued during the year, net |      |    | 39   | 
|                                     | Settled during the year      |      |    | (38) | 
|                                     |                              |      |   
|Balance as of September 30,
    2006 |                              |      | 51 |     
|                                     |                              |      |   



|    |                                             
|--- | --------------------------------------------
|34. | 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)

meet the requirements of a reportable segment as specified in
SFAS No. 131. Accordingly, these segments are combined
and disclosed in the Other Operating Segments
category pursuant to SFAS No. 131.

Following the completion of the Qimonda carve-out the Other
Operating Segments for the 2005 and 2006 financial years include
net sales that Infineons
200-millimeter
production facility in Dresden records from the sale of wafers
to Qimonda under foundry agreements. The Corporate and
Eliminations segment reflects the elimination of these
intra-group net sales. For the 2004 financial year, the Infineon
200-millimeter
production facility in Dresden was part of the Qimonda
organization.

The accounting policies of the segments are substantially the
same as described in the summary of significant accounting
policies (see note 2). Each of the segments has a segment
manager reporting directly to the Chief Executive Officer and
Chief Financial Officer, who have been collectively identified
as the Chief Operating Decision Maker (CODM). The
CODM makes decisions about resources to be allocated to the
segments and assesses their performance using revenues and EBIT.
The CODM does not review asset information by segment nor does
he evaluate the segments on these criteria on a regular basis,
except that the CODM is provided information regarding certain
inventories on an operating segment basis. The Company does,
however, allocate depreciation expense to the operating segments
based on production volume and product mix using standard costs.
Information with respect to the Companys operating
segments follows:



Automotive, Industrial & MultimarketThe Automotive, Industrial & Multimarket segment designs,
develops, manufactures and markets semiconductors and complete
system solutions primarily for use in automotive, industrial and
security applications, and applications with customer-specific
product requirements.



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



QimondaQimonda designs memory technologies and develops, manufactures,
markets and sells a large variety of memory products on a
module, component and chip level.



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.

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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)

Selected segment data for the years ended
September 30, 2004, 2005 and 2006 is as follows:

|               |                                          |      |       |       |      |  |       |       |  |  |       |       | 
|-------------- | ---------------------------------------- | ---- | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|               |                                          | 2004 |       |       | 2005 |  |       | 2006  | 
|               |                                          |      |       |       |      |  |       |       | 
|Net sales:     |                                          |      |       |       |      |  |       |       |  |  |       |      
|               | Automotive, Industrial &
    Multimarket |      |       | 2,540 |      |  |       | 2,516 |  |  |       | 2,839 | 
|               | Communication Solutions                  |      |       | 1,689 |      |  |       | 1,391 |  |  |       | 1,205 | 
|               | Other Operating
    Segments(1)          |      |       | 16    |      |  |       | 285   |  |  |       | 310   | 
|               | Corporate and
    Eliminations(2)        |      |       | (58)  |      |  |       | (258) |  |  |       | (240) | 
|               |                                          |      |       |       |      |  |       |       | 
|Subtotal       |                                          |      | 4,187 |       |      |  | 3,934 |       |  |  | 4,114 |      
|               |                                          |      |       |       |      |  |       |       | 
|Qimonda        |                                          |      | 3,008 |       |      |  | 2,825 |       |  |  | 3,815 |      
|               |                                          |      |       |       |      |  |       |       | 
|Infineon Group |                                          |      | 7,195 |       |      |  | 6,759 |       |  |  | 7,929 |      
|               |                                          |      |       |       |      |  |       |       | 



|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes inter-segment sales of
    273 and
    256 for financial
    years ended September 30, 2005 and 2006, respectively,
    from sales of wafers from Infineons
    200-millimeter facility
    in Dresden to Qimonda under foundry agreements.                       
|   
|(2) | Includes the elimination of
    inter-segment sales of
    273 and
    256 for financial
    years ended September 30, 2005 and 2006, respectively,
    from sales of wafers from Infineons
    200-millimeter facility
    in Dresden to Qimonda under foundry agreements.

|               |                                          |      |     |      |      |  |       |       |  |  |       |       | 
|-------------- | ---------------------------------------- | ---- | --- | ---- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|               |                                          | 2004 |     |      | 2005 |  |       | 2006  | 
|               |                                          |      |     |      |      |  |       |       | 
|EBIT:          |                                          |      |     |      |      |  |       |       |  |  |       |      
|               | Automotive, Industrial &
    Multimarket |      |     | 252  |      |  |       | 134   |  |  |       | 246   | 
|               | Communication Solutions                  |      |     | (44) |      |  |       | (295) |  |  |       | (231) | 
|               | Other Operating Segments                 |      |     | (75) |      |  |       | 4     |  |  |       | 4     | 
|               | Corporate and Eliminations               |      |     | (39) |      |  |       | (137) |  |  |       | (236) | 
|               |                                          |      |     |      |      |  |       |       | 
|Subtotal       |                                          |      | 94  |      |      |  | (294) |       |  |  | (217) |      
|               |                                          |      |     |      |      |  |       |       | 
|Qimonda(1)     |                                          |      | 162 |      |      |  | 111   |       |  |  | 202   |      
|               |                                          |      |     |      |      |  |       |       | 
|Infineon Group |                                          |      | 256 |      |      |  | (183) |       |  |  | (15)  |      
|               |                                          |      |     |      |      |  |       |       | 



|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | EBIT results of Qimonda for the period following its IPO are
    reported net of minority interest results.

|                               |                                          |       |     |       |     |       |    
|------------------------------ | ---------------------------------------- | ----- | --- | ----- | --- | ----- | ---
|                               |                                          | 2004  |     | 2005  |     | 2006 
|                               |                                          |       |     |       |     |      
|Depreciation and Amortization: |                                          |       |     |       |     |      
|                               | Automotive, Industrial &
    Multimarket |       | 370 |       | 431 |       | 411
|                               | Communication Solutions                  |       | 192 |       | 309 |       | 246
|                               | Other Operating Segments                 |       | 6   |       | 48  |       | 45 
|                               | Corporate and Eliminations               |       |    |       |    |       |   
|                               |                                          |       |     |       |     |      
|Subtotal                       |                                          | 568   |     | 788   |     | 702  
|                               |                                          |       |     |       |     |      
|Qimonda                        |                                          | 752   |     | 528   |     | 703  
|                               |                                          |       |     |       |     |      
|Infineon Group                 |                                          | 1,320 |     | 1,316 |     | 1,405
|                               |                                          |       |     |       |     |      

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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)

|                                                         |                                          |      |     |      |     |      |    
|-------------------------------------------------------- | ---------------------------------------- | ---- | --- | ---- | --- | ---- | ---
|                                                         |                                          | 2004 |     | 2005 |     | 2006
|                                                         |                                          |      |     |      |     |     
|Equity in earnings (losses) of
    Associated Companies: |                                          |      |     |      |     |     
|                                                         | Automotive, Industrial &
    Multimarket |      |    |      |    |      |   
|                                                         | Communication Solutions                  |      | 5   |      | 4   |      | (2)
|                                                         | Other Operating Segments                 |      | (4) |      | (2) |      |   
|                                                         | Corporate and Eliminations               |      | 1   |      | 10  |      |   
|                                                         |                                          |      |     |      |     |     
|Subtotal                                                 |                                          | 2    |     | 12   |     | (2) 
|                                                         |                                          |      |     |      |     |     
|Qimonda                                                  |                                          | (16) |     | 45   |     | 80  
|                                                         |                                          |      |     |      |     |     
|Infineon Group                                           |                                          | (14) |     | 57   |     | 78  
|                                                         |                                          |      |     |      |     |     

|               |                                          |      |     |       |     |       |    
|-------------- | ---------------------------------------- | ---- | --- | ----- | --- | ----- | ---
|               |                                          | 2004 |     | 2005  |     | 2006 
|               |                                          |      |     |       |     |      
|Inventories:   |                                          |      |     |       |     |      
|               | Automotive, Industrial &
    Multimarket |      | 359 |       | 336 |       | 365
|               | Communication Solutions                  |      | 232 |       | 201 |       | 214
|               | Other Operating Segments                 |      | 1   |       | 1   |       | 1  
|               | Corporate and Eliminations               |      |    |       |    |       |   
|               |                                          |      |     |       |     |      
|Subtotal       |                                          | 592  |     | 538   |     | 580  
|               |                                          |      |     |       |     |      
|Qimonda        |                                          | 368  |     | 484   |     | 622  
|               |                                          |      |     |       |     |      
|Infineon Group |                                          | 960  |     | 1,022 |     | 1,202
|               |                                          |      |     |       |     |      

|               |                                          |      |    |      |   
|-------------- | ---------------------------------------- | ---- | -- | ---- | --
|               |                                          | 2005 |    | 2006
|               |                                          |      |    |     
|Goodwill:      |                                          |      |    |     
|               | Automotive, Industrial &
    Multimarket |      |   |      |  
|               | Communication Solutions                  |      | 27 |      | 22
|               | Other Operating Segments                 |      | 8  |      | 6 
|               | Corporate and Eliminations               |      | 2  |      | 1 
|               |                                          |      |    |     
|Subtotal       |                                          | 37   |    | 29  
|               |                                          |      |    |     
|Qimonda        |                                          | 88   |    | 72  
|               |                                          |      |    |     
|Infineon Group |                                          | 125  |    | 101 
|               |                                          |      |    |     

work-in front-end work-in back-end back-end


non-recurring


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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)

stock-based
compensation expense are included in corporate and eliminations
and not allocated to the logic 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 eliminations. 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 eliminations. Significant
components of corporate and elimination EBIT for the years ended
September 30, 2004, 2005 and 2006 are as follows:

|                            |                                  |      |      |      |      |  |       |      |  |  |       |       | 
|--------------------------- | -------------------------------- | ---- | ---- | ---- | ---- |  | ----- | ---- |  |  | ----- | ----- | 
|                            |                                  | 2004 |      |      | 2005 |  |       | 2006 | 
|                            |                                  |      |      |      |      |  |       |      | 
|Corporate and Eliminations: |                                  |      |      |      |      |  |       |      |  |  |       |      
|                            | Unabsorbed excess capacity costs |      |      | (35) |      |  |       | (12) |  |  |       | (33)  | 
|                            | Restructuring charges            |      |      | (17) |      |  |       | (78) |  |  |       | (23)  | 
|                            | Stock-based compensation expense |      |      |     |      |  |       |     |  |  |       | (25)  | 
|                            | Other,
    net(1)                |      |      | 13   |      |  |       | (47) |  |  |       | (155) | 
|                            |                                  |      |      |      |      |  |       |      | 
|Total                       |                                  |      | (39) |      |      |  | (137) |      |  |  | (236) |      
|                            |                                  |      |      |      |      |  |       |      | 



|    |                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes aggregate charges of approximately
    80 in the 2006
    financial year incurred primarily in connection with the
    formation of Qimonda, the dilution of the Companys
    interest in Qimonda following its IPO, as well as the
    Companys sale of Qimonda shares upon exercise of the
    underwriters over-allotment option.



|           |               |       |       |       |       |       |      
|---------- | ------------- | ----- | ----- | ----- | ----- | ----- | -----
|           |               | 2004  |       | 2005  |       | 2006 
|           |               |       |       |       |       |      
|Net sales: |               |       |       |       |       |      
|           | Germany       |       | 1,675 |       | 1,354 |       | 1,327
|           | Other Europe  |       | 1,263 |       | 1,210 |       | 1,360
|           | North America |       | 1,524 |       | 1,504 |       | 2,126
|           | Asia/Pacific  |       | 2,263 |       | 2,223 |       | 2,498
|           | Japan         |       | 364   |       | 332   |       | 461  
|           | Other         |       | 106   |       | 136   |       | 157  
|           |               |       |       |       |       |      
|Total      |               | 7,195 |       | 6,759 |       | 7,929
|           |               |       |       |       |       |      

|                               |               |       |       |       |       |       |      
|------------------------------ | ------------- | ----- | ----- | ----- | ----- | ----- | -----
|                               |               | 2004  |       | 2005  |       | 2006 
|                               |               |       |       |       |       |      
|Property, plant and equipment: |               |       |       |       |       |      
|                               | Germany       |       | 1,962 |       | 1,625 |       | 1,279
|                               | Other Europe  |       | 514   |       | 516   |       | 638  
|                               | North America |       | 619   |       | 1,093 |       | 1,105
|                               | Asia/Pacific  |       | 490   |       | 515   |       | 737  
|                               | Japan         |       | 1     |       | 2     |       | 4    
|                               | Other         |       | 1     |       |      |       | 1    
|                               |               |       |       |       |       |      
|Total                          |               | 3,587 |       | 3,751 |       | 3,764
|                               |               |       |       |       |       |      

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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)

Revenues from external customers are based on the
customers billing location. Regional employment data is
provided in note 8.

Except for sales to Siemens, which are discussed in
note 29, no single customer accounted for more than 10% of
the Companys sales during the financial years ended
September 30, 2004 and 2005. Sales to Siemens were made
primarily by the logic segments. No single customer accounted
for more than 10% of the Companys sales during the
financial year ended September 30, 2006.

The Company defines EBIT as earnings (loss) before interest
and taxes. The Companys management uses EBIT, among other
measures, to establish budgets and operational goals, to manage
the Companys business and to evaluate its performance. The
Company reports EBIT information because it believes that it
provides investors with meaningful information about the
operating performance of the Company and especially about the
performance of its separate operating segments.

For the financial years ended September 30, 2004, 2005 and
2006, EBIT is determined as follows from the consolidated
statements of operations, without adjustment to the U.S. GAAP
amounts presented:

|                           |                       |      |    |      |       |   |      |  |       |    | 
|-------------------------- | --------------------- | ---- | -- | ---- | ----- | - | ---- |  | ----- | -- | 
|                           |                       | 2004 |    | 2005 |       |   | 2006 | 
|                           |                       |      |    |      |       |   |      | 
|Net (loss) income          |                       | 61   |    |      | (312) |   |      |  | (268) |   
|Adjust: Income tax expense |                       | 154  |    |      | 120   |   |      |  | 161   |   
|                           | Interest expense, net |      | 41 |      |       | 9 |      |  |       | 92 | 
|                           |                       |      |    |      |       |   |      | 
|EBIT                       |                       | 256  |    |      | (183) |   |      |  | (15)  |   
|                           |                       |      |    |      |       |   |      | 



|    |                  
|--- | -----------------
|35. | Subsequent Events










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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 settlement agreement with counsel to the Direct U.S.
Purchaser Class was approved by the U.S. District Court for the
Northern District of California in the hearing held on
November 1, 2006 (see note 33).

In November 2006, Qimonda sold its investment in Ramtron
through a private placement. As a result of the sale, Qimonda
expects to record a gain of
3 during the three
months ending December 31, 2006.

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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 30, 2006

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



---



##### 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
    February 2006) (English translation)                                                                                                                                                                                           |  |                                                                                                                                                     | Filed herewith. |         |  |             |       |          |  |  |                   |  |  |  |           | 
|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)                                                                                                                                                                                            |  |                                                                                                                                                     | 20-F            |         |  |             | 1.3   |          |  |  | November 23, 2005 |  |  |  | 1-15000   | 
|1.4     |  | Rules of Procedure for the
    Investment Finance and Audit Committee of the Supervisory Board
    (English translation)                                                                                                                                          |  |                                                                                                                                                     | 20-F            |         |  |             | 1.4   |          |  |  | November 23, 2005 |  |  |  | 1-15000   | 
|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 | 
|4.9     |  | 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 | 
|4.13    |  | 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   | 
|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                                                                                                                  |  |                                                                                                                                                     | 20-F            |         |  |             | 4.19  |          |  |  | November 23, 2005 |  |  |  | 1-15000   | 
|4.19.1 |  | Amendment No. 4 to the Joint
    Venture Agreement between Infineon and Nanya Technology
    Corporation, executed on November 13, 2002                                                                                                                           |  | Filed as exhibit 10(i)(I) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|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   | 



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##### Table of Contents



|        |  |                                                                                                                                                                                                             |  |                                                                                                                                                     |                 |         |  |             |      |          |  |  |                   |  |  |  |         | 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- | --------------- | ------- |  | ----------- | ---- | -------- |  |  | ----------------- |  |  |  | ------- | 
|Exhibit |  |                                                                                                                                                                                                             |  |                                                                                                                                                     |                 | Exhibit |  | Filing Date |      | SEC File
|Number  |  | Description of Exhibit                                                                                                                                                                                      |  | Form                                                                                                                                                |                 | Number  |  | with SEC    |      | Number  
|        |  |                                                                                                                                                                                                             |  |                                                                                                                                                     |                 |         |  |             |      |         
|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 | 
|4.25.1 |  | Amendment 2 effective as of
    December 31, 2005 to Shareholder Agreement of ALTIS
    Semiconductor between Infineon Technologies Holding France and
    IBM XXI SAS dated as of June 24, 1999.           |  | Filed herewith.                                                                                                                                    
|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 | 
|4.27.1  |  | Contribution Agreement
    (Einbringungsvertrag) between Infineon Technologies AG
    and Qimonda AG, dated as of April 25, 2006, and addendum
    thereto, dated as of June 2, 2006 (English translation). |  | Filed as exhibit 10(i)(A) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|4.27.2  |  | Contribution Agreement
    (Einbringungsvertrag) between Infineon Holding B.V. and
    Qimonda AG, dated as of May 4, 2006 (English translation).                                                           |  | Filed as exhibit 10(i)(B) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|4.27.3  |  | Addenda No. 2 and 3 to Contribution
    Agreement (Einbringungsvertrag) between Infineon
    Technologies AG and Qimonda AG, dated as of April 25, 2006
    (English translation).                          |  | Filed as exhibit 4(i)(W) to
    the annual report on form 20-F of Qimonda AG dated
    November 21, 2006 and incorporated herein by reference      
|4.27.4  |  | Trust Agreement between
    Infineon Technologies AG and Qimonda AG, dated as of
    April 25, 2006, as amended (English translation).                                                                      |  | Filed as exhibit 4(i)(C) to
    the annual report on form 20-F of Qimonda AG dated
    November 21, 2006 and incorporated herein by reference      
|4.27.5  |  | Master Loan Agreement between
    Qimonda AG and Infineon Technologies Holding B.V., dated
    April 28, 2006.                                                                                              |  | Filed as exhibit 10(i)(D) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|4.27.6  |  | Global Services Agreement between
    Infineon Technologies AG and Qimonda AG, effective May 1,
    2006.                                                                                                   |  | Filed as exhibit 10(i)(E) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|4.27.7  |  | Master IT Cost Sharing Agreement by
    and between Infineon Technologies AG and Qimonda AG, effective
    May 1, 2006                                                                                      |  | Filed as exhibit 10(i)(Q) to
    the registration statement on form F-1 of Qimonda AG dated
    August 8, 2006 and incorporated herein by reference
|8       |  | List of Significant Subsidiaries
    and Associated Companies of Infineon                                                                                                                                   |  |                                                                                                                                                     | Filed herewith. |         |  |             |      |          |  |  |                   |  |  |  |         | 
|12.1    |  | Certification of chief executive
    officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                        |  |                                                                                                                                                     | Filed herewith. |         |  |             |      |          |  |  |                   |  |  |  |         | 
|12.2    |  | Certification of chief financial
    officer pursuant to Exchange Act Rule 13a-14(a)                                                                                                                        |  |                                                                                                                                                     | Filed herewith. |         |  |             |      |          |  |  |                   |  |  |  |         | 
|13      |  | Certificate pursuant to 18 U.S.C.
    section 1350, as adopted pursuant to section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                |  |                                                                                                                                                     | Filed herewith. |         |  |             |      |          |  |  |                   |  |  |  |         | 
|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