INFINEON TECHNOLOGIES AG

QUARTERLY REPORT

FOR THE THREE AND NINE MONTHS ENDED

JUNE 30, 2006

INDEX

OVERVIEW OF FINANCIAL RESULTS

Third Quarter of the 2006 Financial Year

      For the third quarter of the 2006 financial year, Infineon Technologies AG reported revenues of Euro 1.97 billion, a slight decrease of 1 percent sequentially and an increase of 23 percent year-on-year. The slight sequential revenue decrease was driven by lower revenues in the two logic segments, which were not entirely offset by increased sales at Qimonda.

      EBIT in the third quarter of the 2006 financial year increased significantly to Euro 49 million from Euro 28 million in the prior quarter and a loss of Euro 234 million in the same quarter last year. The sequential EBIT increase was mainly driven by improved results at Qimonda. EBIT in the third quarter of the 2006 financial year included a dilution gain of Euro 30 million in connection with the initial public offering of Inotera Memories, Inc., which was mostly offset by impairment and restructuring charges during the third quarter.

      Net loss amounted to Euro 23 million in the third quarter of the 2006 financial year, compared to a net loss of Euro 26 million in the previous quarter and Euro 240 million in the same quarter last year.

      Basic and diluted loss per share in the third quarter of the 2006 financial year remained unchanged from the previous quarter at Euro 0.03, but significantly decreased from Euro 0.32 in the same quarter last year.

Business Groups’ 2006 Third Quarter Performance and Outlook

      In the third quarter of the 2006 financial year, Infineon reports for the first time its results of operations under its new organizational structure, which became effective on May 1, 2006, following the legal separation of its memory products segment into a stand-alone legal company called Qimonda AG. The results of prior periods have been reclassified to conform to the current period presentation, as well as to facilitate analysis of current and future operating segment information. As a result of the reorganization, certain corporate overhead expenses are no longer apportioned to Qimonda and are instead allocated to Infineon’s two logic segments.

      Segment revenue developments during the third quarter of the 2006 financial year as compared to the previous quarter and the third quarter of the 2005 financial year were as follows:

      Third quarter revenues in the Other Operating Segments were Euro 73 million, decreasing from Euro 92 million in the prior quarter and from Euro 77 million in the same quarter last year. Effective May 1, 2006, with the completion of the Qimonda carve-out the Other Operating Segments also include revenues that Infineon’s 200-millimeter production facility in Dresden records from the sale of wafers to Qimonda under foundry agreements.

Earnings Before Interest and Tax (EBIT)

      EBIT developments during the third quarter of the 2006 financial year as compared to the previous quarter and the third quarter of the 2005 financial year were as follows:

      The Automotive, Industrial and Multimarket segment’s third quarter EBIT decreased to Euro 57 million from Euro 74 million in the previous quarter, but significantly increased from Euro 23 million in the same quarter last year. As anticipated, revenues and EBIT in the security & ASICs business normalized in the third quarter, causing the slight sequential reduction in EBIT.

      The Communication Solutions segment’s EBIT loss increased to Euro 61 million during the third quarter from Euro 29 million in the previous quarter, but improved from a loss of Euro 88 million in the same quarter last year. The EBIT loss in the third quarter of the 2006 financial year increased sequentially driven by lower revenues and charges of Euro 16 million, resulting primarily from impairments of investments.

      Qimonda’s third quarter EBIT results significantly improved to Euro 100 million from Euro 21 million in the previous quarter and negative Euro 136 million in the same quarter last year. The improvement of Qimonda’s EBIT was driven by an increase in both bit-shipments and average selling prices. In addition, the segment’s EBIT included a dilution gain of Euro 30 million in connection with the initial public offering of Inotera Memories, Inc, the Company’s joint venture with Nanya Technology Corporation.

      Other Operating Segments’ third quarter EBIT results remained relatively unchanged compared to the second quarter. EBIT results decreased to a loss of Euro 2 million in the third quarter from positive Euro 1 in the prior quarter and in the same quarter last year.

Expenses

      Expenditures for Research and Development in the third quarter totaled Euro 329 million, increasing from Euro 306 million in the prior quarter. As a percentage of revenues, research and development expenses increased sequentially to 17 percent of revenues from 15 percent of revenues.

      Expenses for SG&A (Selling, General & Administrative) in the third quarter were Euro 180 million, relatively unchanged from Euro 179 million in the prior quarter. As a percentage of revenues, SG&A remained unchanged from the prior quarter at 9 percent of revenues.

Liquidity

      Free cash flow, representing cash flows from operating and investing activities excluding purchases or sales of marketable securities, improved in the third quarter of the 2006 financial year to a net inflow of Euro 6 million from a net outflow of Euro 113 million in the previous quarter. The primary reason for the increase was higher cash flows provided by operating activities, which increased from Euro 194 million in the previous quarter to Euro 251 million in the third quarter of the 2006 financial year. Gross cash position as of June 30, 2006, representing cash and cash equivalents and marketable securities, slightly decreased sequentially from Euro 2,064 million to Euro 2,035 million. Net cash position, defined as gross cash position less short and long-term debt, slightly increased sequentially from Euro 40 million to Euro 45 million as of the end of the third quarter of the 2006 financial year.

Outlook for the Fourth Quarter of the 2006 Financial Year

      Beginning with the 2006 financial fourth quarter, Infineon will provide guidance for revenues and EBIT for its non-memory businesses. On this basis, Infineon expects such revenues for the fourth quarter to increase, driven in particular by ramp-ups of products for new customers in the Communication Solutions segment. Fourth quarter EBIT for the non-memory businesses is anticipated to improve compared to the third quarter, driven mostly by higher revenues in the Communication Solutions segment.

      In the fourth quarter of the 2006 financial year, Infineon expects revenues and EBIT of its Automotive, Industrial and Multimarket segment to increase slightly. In its automotive business, the Company anticipates a seasonally weaker fourth quarter. After two very strong quarters in the Company’s industrial business, Infineon expects continued demand in the fourth quarter driven predominantly by seasonality. Sales in the security & ASICs business are expected to re-accelerate after a strong second and a weaker third quarter, driven mainly by an anticipated stronger security and chip-card business.

      Infineon expects revenues and EBIT of the Communication Solutions segment to improve in the fourth quarter of the 2006 financial year compared to the third quarter. The improvement is expected to be driven mainly by the ramp-up of shipments to new wireless customers. The fourth quarter EBIT results are expected to improve in line with the revenue increase.

      With respect to Qimonda, on May 10, 2006, Inotera Memories, Inc., the Company’s joint venture with Nanya Technology Corporation, successfully completed a capital increase and follow-on offering on the Luxembourg Stock Exchange by the issuance of 40 million Global Depositary Shares, representing 400 million common shares, for an issuance price of NT dollar 33 per share. In conjunction with this capital increase, the Company realized a dilution gain of Euro 42 million, which will be reflected in Qimonda’s EBIT in the fourth quarter of the 2006 financial year. Infineon’s ownership interest after the capital increase stands at 36 percent.

      Prior to inclusion of potential impairment and restructuring charges, EBIT in Other Operating Segments and Corporate and Eliminations is expected to remain broadly unchanged in the fourth quarter relative to the third quarter. The Corporate and Eliminations segment will continue to reflect the intra-group elimination of sales between Infineon and Qimonda.

Condensed Consolidated Statements of Operations (Unaudited)

For the three months ended June 30, 2005 and 2006

(in millions, except for per share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Operations (Unaudited)

For the nine months ended June 30, 2005 and 2006

(in millions, except for share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Balance Sheets

September 30, 2005 and June 30, 2006

See accompanying notes to the unaudited condensed consolidated financial statements.

Infineon Technologies AG and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

for the nine months ended June 30, 2005 and 2006

(in millions, except for share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Infineon Technologies AG and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the nine months ended June 30, 2005 and 2006

See accompanying notes to the unaudited condensed consolidated financial statements.

Infineon Technologies AG and Subsidiaries

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

1.     Basis of Presentation

      The accompanying condensed consolidated financial statements of Infineon Technologies AG and its subsidiaries (“Infineon” or “the Company”) as of and for the three and nine months ended June 30, 2005 and 2006, have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. In addition, although the condensed consolidated balance sheet as of September 30, 2005 was derived from audited financial statements, it does not include all disclosures required by U.S. GAAP. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows of the interim periods presented. All such adjustments are of a normal recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full financial year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended September 30, 2005. The accounting policies applied in preparing the accompanying condensed consolidated financial statements are consistent with those for the year ended September 30, 2005 (see note 2).

      The preparation of the accompanying condensed 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 periods. Actual results could differ materially from those estimates.

      All amounts herein are shown in millions of euro (“€”) other than percentages, shares, per share amounts or where otherwise stated. The accompanying condensed consolidated balance sheet as of June 30, 2006, the condensed consolidated statements of operations for the three and nine months then ended, and the condensed consolidated statements of cash flows for the nine months then ended are also presented in U.S. dollars (“$”), solely for the convenience of the reader, at the rate of one euro = $1.2779, the U.S. Federal Reserve noon buying rate on June 30, 2006.

2.     Recent Accounting Pronouncements

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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. 123 (revised 2004) “Share-Based Payments”. SFAS No. 123 (revised 2004) requires public entities to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize the cost over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123 (revised 2004) eliminates the alternative method of accounting for employee share-based payments previously available under Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees”. The Securities and Exchange Commission issued guidance on April 14, 2005 announcing that public companies are required to adopt SFAS No. 123 (revised 2004) by their first financial year beginning after June 15, 2005.

      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

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

amounts have not been restated and do not reflect the recognition of stock-based compensation. Disclosures are provided in note 16.

      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 is required to adopt Interpretation No. 47 prior to the end of its 2006 financial year. The Company is currently evaluating the impact that the adoption of Interpretation No. 47 will have on its consolidated financial position and 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.

3.     Separation of Memory Products Business

      On November 17, 2005, Infineon announced its intention to separate its memory products business from the remainder of its activities and place the memory products business in a stand-alone legal structure, with the preferred goal of conducting a public offering of the shares of the new company (the “Offering”). Effective 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 a contribution agreement and various other service agreements with Qimonda. In cases where physical contribution (ownership transfer) of assets and liabilities are not feasible or cost effective, the monetary value will be 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 three months ending December 31, 2006, 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 of the lock-up provisions under Taiwan securities law (see note 12). 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. In connection with the Formation, Qimonda’s ordinary shares outstanding were increased to 300,000,000, all of which are currently owned by Infineon. The Company anticipates completing the Offering, depending on market conditions, during the three months ending September 30, 2006 (see note 23).

      The contribution agreement includes provisions pursuant to which Qimonda agreed to indemnify Infineon against any claim (including any related expenses) arising in connection with the liabilities, contracts, offers, incompleted 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 agreement provides 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 Module 1 of Infineon Technologies Dresden GmbH & Co. OHG. With the exception of the securities and certain patent infringement and antitrust claims identified in note 21, 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. Qimonda has agreed to indemnify Infineon for 60 percent of any license fee payments to which Infineon may agree in connection with ongoing negotiations relating to licensing and cross-licensing arrangements with a small number of third parties. These payments could be substantial and could remain in effect for lengthy periods.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

4.     Acquisitions

      In April 2001, the Company established the Infineon Technologies Flash joint venture (then called “Ingentix”) in which the Company held a 51 percent ownership interest with Saifun Semiconductors Ltd. (“Saifun”). In the 2003 financial year, the Company increased its ownership interest to 70 percent by contributing additional capital and converting existing shareholder loans to equity. The joint venture operated through two companies, Infineon Technologies Flash GmbH & Co. KG, located in Dresden, Germany, and Infineon Technologies Flash Ltd., located in Netanya, Israel. During December 2004, Saifun and Infineon modified their cooperation agreement. As a consequence, the Company consummated the acquisition of Saifun’s remaining 30 percent share in the Infineon Technologies Flash joint venture in January 2005 and was granted a license for the use of Saifun NROM^® technologies, in exchange for $95 million to be paid in quarterly instalments over 10 years and additional purchase consideration primarily in the form of net liabilities assumed aggregating to €7. The assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed amounted to €7 and was allocated to goodwill. The Company has sole ownership and responsibility for the business and started to account for its entire financial results in the second quarter of the 2005 financial year.

5.     Divestitures

      On December 23, 2004 the Company agreed to sell its venture capital activities, reflected in the Other Operating Segment, 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 during the quarter ended March 31, 2005, which was recorded in other non-operating income.

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

      On January 11, 2005, the Company decided to terminate the agreement with Finisar dated October 11, 2004. On January 25, 2005, Finisar and the Company entered into a new agreement under which Finisar acquired certain assets of the Company’s fiber optics business. Under the terms of the

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

new agreement, the Company received 34 million shares of Finisar’s common stock valued at €40 as consideration for the sale of inventory, fixed assets and intellectual property associated with the design and manufacture of fiber optic transceivers. The Company also agreed to provide Finisar with contract manufacturing services under a separate supply agreement 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 during the quarter ended March 31, 2005, which was recorded in other operating income. Following the transaction, the Company’s equity interest in Finisar was approximately 13%.

      On April 8, 2005, the Company sold to VantagePoint Venture Partners its entire 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 financial year 2005, 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 at January 25, 2005. Accordingly, the Company recognized an impairment charge of €34 in other operating expenses during the three months ended March 31, 2005.

      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.

6.     Licenses

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

      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 instalments 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, the Company would make additional quarterly payments which may accumulate up to a maximum of an additional $100 million. The agreement also provides the Company an option for acquiring certain other licenses. All licenses

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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 second quarter of the 2005 financial year, the Company recorded the license of €58 and a corresponding liability in the amount of €58, representing the estimated fair value of the license and minimum future license payments, respectively. The Company retained the option to terminate the entire license or parts thereof at any time without penalty. During the quarter ended June 30, 2005, the Company exercised its termination option and cancelled the portion of the license encompassing NROM^® Code Flash products. As a result of the partial termination, the license asset and related liability were reduced to €28 and €29, respectively, as of June 30, 2005.

      On June 14, 2006, the Company and MOSAID Technologies Inc. (“MOSAID”) reached agreements 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, 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 retains 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 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 agreed to make license payments commencing on July 1, 2006 over a six-year term.

7.     Restructuring

      During the third quarter of the 2005 financial year, the Company agreed upon measures to restructure its chip manufacturing within the manufacturing sites Munich-Perlach, Regensburg and Villach. Production from Munich-Perlach is being largely transferred to Regensburg and to a lesser extent to Villach. Manufacturing at Munich-Perlach is expected to be phased out by early 2007 as numerous products are running out of their production life span. As part of the restructuring, the Company agreed upon plans to terminate approximately 640 employees. It is expected that the terminations will be completed in the 2007 financial year.

      During the third quarter of the 2006 financial year, restructuring plans were announced to downsize the workforce at ALTIS and the Company’s Chip Card back-end activities in order to maintain competitiveness and reduce cost. As part of the restructurings, it is expected that a total of 490 employees will be terminated. The exact amount of the restructuring charges can not be estimated at this time due to the early stage of negotiations with the respective works councils.

      In connection with the restructuring initiatives taken by the Company, restructuring charges of €13 and €18 were recognized during the three and nine months ended June 30, 2006, respectively.

      The development of the restructuring liability during the nine months ended June 30, 2006, is as follows:

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

8.     Income Taxes

      Income (loss) before income taxes and minority interest is attributable to the following geographic locations for the three and nine months ended June 30, 2005 and 2006:

      Income tax expense for the three and nine months ended June 30, 2005 and 2006 is as follows:

      At June 30, 2006, the Company had in Germany tax loss carry-forwards of €2,434 (relating to both trade and corporate tax, plus an additional loss carry-forward applicable only to trade tax of €1,116); in other jurisdictions the Company had tax loss carry-forwards of €210 and tax effected credit carry-forwards of €110. Such tax loss carry-forwards and tax effected credit carry-forwards are generally limited to use by the particular entity that generated the loss or credit and do not expire under current law. The benefit for tax credits is accounted for on the flow-through method when the individual legal entity is entitled to the claim.

      Pursuant to SFAS No. 109, the Company has assessed its deferred tax asset and the need for a valuation allowance. Such an assessment considers whether it is more likely than not that some portion or all of the deferred tax assets may not be realized. The assessment requires considerable judgment on the part of management, with respect to, among other factors, benefits that could be realized from available tax strategies and future taxable income, as well as other positive and negative factors. The ultimate realization of deferred tax assets is dependent upon the Company’s ability to generate the appropriate character of future taxable income sufficient to utilize loss carry-forwards or tax credits before their expiration. Since the Company had incurred a cumulative loss in certain tax jurisdictions over a three-year period as of June 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.

9.     Loss Per Share

      Basic loss per share (“EPS”) is calculated by dividing net loss by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is calculated by dividing net income by the sum of the weighted average number of ordinary shares outstanding plus all

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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

      The computation of basic and diluted EPS for the three and nine months ended June 30, 2005 and 2006, is as follows (shares in million):

      The weighted average of potentially dilutive instruments that were excluded from the diluted loss per share computations, because the exercise price was greater than the average market price of the ordinary shares during the period or were otherwise not dilutive, include 40.7 million and 46.6 million shares underlying employee stock options for the three months ended June 30, 2005 and 2006, respectively, and include 39.2 million and 46.9 million shares underlying employee stock options for the nine months ended June 30, 2005 and 2006, respectively. Additionally, 86.5 million ordinary shares issuable upon the conversion of the subordinated convertible notes at June 30, 2005 and 2006, were not included in the computation of diluted loss per share as their impact would have been antidilutive.

10.     Trade Accounts Receivable, net

      Trade accounts receivable, net at September 30, 2005 and June 30, 2006 consist of the following:

11.     Inventories

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

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

12.     Long-term Investments, net

      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 Corp.) 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 second phase was completed in the 2005 financial year, while the third phase is anticipated to be completed in the fourth quarter of the 2006 financial year. The first 300-millimeter wafer memory products using the new 58-nanometer process are expected to leave the production line in 2008. The joint venture partners are obliged to each purchase one-half of the facility’s production based, in part, on market prices. At June 30, 2006, the Company’s direct and indirect ownership interest in Inotera was 36.0%.

      On March 17, 2006 Inotera successfully completed an initial public offering (“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 common 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 common share. As a result, the Company’s ownership interest was diluted to 36.0% while its proportional share of Inotera’s equity increased by €42, which gain the Company will reflect 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 earlier this year. Infineon may only transfer these shares to Qimonda gradually over the four years following Inotera’s IPO. The Company is currently negotiating with the Taiwanese authorities to receive 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.

      In December 2005, the Company further amended its agreements with International Business Machines Corporation (“IBM”) in respect of its joint venture ALTIS Semiconductor S.N.C. (”ALTIS”) in Essonnes, France, 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

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

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 to 87.5% in 2006 and 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.

      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 first consolidation of ALTIS during the quarter ended December 31, 2005:

      During the quarter ended March 31, 2006, the Company engaged an independent third party to assist in the valuation of net assets consolidated of ALTIS. As a result of the valuation, assets and liabilities consolidated were adjusted to the amounts presented in the table above.

      Pro forma financial information relating to the consolidation of ALTIS is not material to the results of operations and financial position of the Company and has been omitted.

      The Company recognized impairment charges related to certain investments for which the carrying value exceeded the fair value on an other-than-temporary basis, of €16 and €12 for the three months ended June 30, 2005 and 2006, respectively, and €18 and €12 for the nine months ended June 30, 2005 and 2006, respectively.

13.     Other Assets

      During the three months ended March 31, 2005, as a result of the combination of sustained negative cash flows and updated market expectations, the Company revised the forecasted returns for the Customer Premises Equipment (“CPE”) reporting unit within the Communication Solutions’ segment. Accordingly, the Company tested the reporting unit’s goodwill for impairment using a present value technique based on discounted estimated future cash flows pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets”, and recognized an impairment charge of €12 in other operating expenses during the second quarter of the 2005 financial year to reduce the reporting unit’s goodwill to its estimated fair value.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      During the third quarter of 2005, the Company reorganized its Wireless Infrastructure reporting unit within the Communication Solutions segment. In connection with the reorganization, the Company tested the reporting unit’s goodwill for impairment using a present value technique based on discounted estimated future cash flows pursuant to SFAS No. 142, and recognized an impairment charge of €2 in other operating expenses to reduce the reporting unit’s goodwill to its estimated fair value. The Company also concluded that sufficient indicators existed to require an assessment of whether the carrying values of certain other intangible assets in the Wireless Infrastructure, Short Range Wireless, and RF Engine reporting units within the Communication Solutions segment may not be recoverable. Recoverability of other 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 €25 were recognized during the quarter ended June 30, 2005 in other operating expenses, representing the amount by which the carrying amount of the assets exceeded their fair value, measured by discounted estimated future cash flows.

14.     Trade Accounts Payable

      Trade accounts payable at September 30, 2005 and June 30, 2006 consist of the following:

15.     Debt

      Debt at September 30, 2005 and June 30, 2006 consists of the following:

      On January 24, 2006, the Company drew down $345 million from one of its existing long-term credit facilities. The proceeds were primarily drawn to refinance the ramp-up of the Company’s 300-millimeter production facility in Richmond.

Notes to the Unaudited Condensed 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.

16.     Stock-based Compensation

      A summary of the Company’s stock option plans as of June 30, 2006, and changes during the nine months then ended is presented below (options in million, exercise prices in Euro):

      Changes in the Company’s unvested options for the nine months ended June 30, 2006 are summarized as follows (options in million, fair values in Euro):

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      The following table summarizes information about stock options outstanding and exercisable at June 30, 2006: