Title of Each Class		Name of Each Exchange on Which Registered
American Depositary Shares, each representing		New York Stock Exchange
one ordinary share, notional value €2.00 per share
Ordinary shares, notional value €2.00 per share*		New York Stock Exchange

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

TABLE OF CONTENTS

	Item 18. Financial Statements
	Item 19. Exhibits
Report of Independent Registered Public Accounting Firm
BALANCE SHEETS
STATEMENTS OF INCOME
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
SIGNATURES
	Exhibit Index
Exhibit 12.1
Exhibit 12.2
Exhibit 13
Exhibit 14.1

---

Table of Contents

INOTERA MEMORIES, INC.

FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2006 AND 2007
(With Report of Independent Registered Public Accounting Firm)

Report of Independent Registered Public Accounting Firm

The Board of Directors
Inotera Memories, Inc.

We have audited the accompanying balance sheets of Inotera Memories, Inc. (the “Company”) as of December 31, 2006 and 2007, and the related statements of income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Inotera Memories, Inc. as of December 31, 2006 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the Republic of China.

As more fully described in Note 3 to the financial statements, effective January 1, 2006, the Company adopted the Republic of China Statement of Financial Accounting Standard (SFAS) No. 34 “Financial Instruments: Recognition and Measurement”, SFAS No. 36 “Financial Instruments: Disclosure and Presentation” and newly amended SFAS No. 1 “Conceptual Framework for Financial Accounting and Preparation of Financial Statements”.

As more fully described in Note 24(n), the Company did not have a minimum current ratio of 1:1 and a maximum debt to equity ratio of 1:1 at December 31, 2007, as required by its syndicated bank loan agreements. On March 31, 2008 the syndicated banks agreed to waive these two covenant requirements for 2007. The potential consequences if the Company is in violation of any of its covenants pursuant to its syndicated bank loan agreements in 2008 are described in Note 24(n).

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 24 to the financial statements.

The accompanying financial statements as of and for the year ended December 31, 2007, have been translated into United States dollars solely for the convenience of the readers. We have audited the translation, and in our opinion, the financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in Note 2(a) to the accompanying financial statements.

/s/ KPMG
Taipei, Taiwan (the Republic of China)
April 14, 2008

INOTERA MEMORIES, INC.

BALANCE SHEETS

DECEMBER 31, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)

		December 31,
		2006				2007
		NTD				NTD				USD
Assets
Current assets:
Cash and cash equivalents (notes 4 and 16)		$	21,704,854				6,023,517				185,739
Current portion of lease receivables (note 7)			4,912				5,209				160
Accounts receivable — related parties (notes 16 and 17)			8,332,816				6,649,818				205,051
Other receivables			95,125				210,326				6,486
Inventories, net (note 6)			3,927,461				4,738,770				146,123
Prepayments			671,298				965,788				29,781
Deferred income tax assets — current, net (note 13)			79,690				143,008				4,410
Financial assets reported at fair value through profit or loss (notes 5 and 16)			1,654,219				793,963				24,482
Total current assets			36,470,375				19,530,399				602,232
Property, plant and equipment (notes 7, 8, 9, 11, 17 and 18):
Land			2,801,467				4,516,307				139,263
Buildings			2,523,511				5,416,606				167,025
Machinery and equipment			68,124,934				135,166,527				4,167,947
Vehicles			4,915				5,485				169
Leased assets			135,996				135,996				4,194
Miscellaneous equipment			6,942,453				15,546,736				479,394
			80,533,276				160,787,657				4,957,992
Less: accumulated depreciation			(21,743,083	)			(42,245,250	)			(1,302,660	)
Construction in progress			41,597,511				5,326,948				164,260
Prepayment on land purchase			22,772				—				—
Net property, plant and equipment			100,410,476				123,869,355				3,819,592
Other assets:
Refundable deposits			79,219				28,432				877
Deferred charges			118,630				213,480				6,583
Lease receivables — long-term (note 7)			333,876				328,668				10,134
Deferred income tax assets — non-current, net (note 13)			270,624				165,469				5,102
Total other assets			802,349				736,049				22,696
Total Assets		$	137,683,200				144,135,803				4,444,520
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable (note 16)			21,110,779				7,798,323				240,466
Accounts payable — related parties (notes 16 and 17)			405,917				112,755				3,477
Income tax payable			133,571				56,892				1,754
Accrued expenses (note 12)			941,403				1,404,049				43,295
Other payables — related parties (notes 9 and 17)			65,539				69,867				2,154
Current portion of long-term loans (notes 11 and 16)			10,299,107				10,258,408				316,325
Other current liabilities			14,962				28,604				882
Current portion of lease payables (note 9)			3,544				3,705				114
Total current liabilities			32,974,822				19,732,603				608,467
Long-term liabilities:
Bonds payable (notes 10 and 16)			6,000,000				20,000,000				616,713
Long-term loans (notes 11 and 16)			19,392,164				32,358,022				997,781
Lease payable — long-term (note 9)			127,422				123,717				3,815
Total long-term liabilities			25,519,586				52,481,739				1,618,309
Other liabilities:
Accrued pension liabilities (note 12)			46,746				39,347				1,213
Guarantee deposits			4,506				4,573				140
Total other liabilities			51,252				43,920				1,353
Total liabilities			58,545,660				72,258,262				2,228,129
Stockholders’ equity (note 14):
Common stock			31,109,540				33,375,120				1,029,144
Capital surplus			29,317,836				29,317,836				904,034
Legal reserve			684,665				2,271,456				70,042
Special reserve			542,605				542,605				16,732
Unappropriated earnings			17,482,894				6,370,524				196,439
Total stockholders’ equity			79,137,540				71,877,541				2,216,391
Commitments and contingencies (note 19)
Total Liabilities and Stockholders’ Equity		$	137,683,200				144,135,803				4,444,520

See accompanying notes to financial statements.

INOTERA MEMORIES, INC.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars, except for earnings per share)

		For the years ended December 31,
		2005				2006				2007
		NTD				NTD				NTD				USD
Operating revenues
Sales revenue		$	23,044,929				40,866,245				46,018,852				1,419,021
Sales returns			(3,133	)			(7,049	)			(37,590	)			(1,159	)
Sales allowances			(9,593	)			(77,486	)			(116,714	)			(3,599	)
Net operating revenues (note 17)			23,032,203				40,781,710				45,864,548				1,414,263
Cost of goods sold (notes 9 and 17)			(16,350,746	)			(24,316,647	)			(41,822,143	)			(1,289,613	)
Gross profit			6,681,457				16,465,063				4,042,405				124,650
Operating expenses:
Administrative and general expenses			(283,853	)			(321,675	)			(391,227	)			(12,064	)
Research and development expenses			(658,134	)			(254,923	)			(487,131	)			(15,021	)
Total operating expenses			(941,987	)			(576,598	)			(878,358	)			(27,085	)
Operating income			5,739,470				15,888,465				3,164,047				97,565
Non-operating income and gains:
Interest income (note 7)			309,821				981,826				306,983				9,466
Gain on disposal of investment			4,532				—				—				—
Foreign exchange gain, net			676,797				796,785				—				—
Valuation gain on financial instruments, net (note 5)			—				450,596				501,458				15,463
Others (notes 7, 8 and 17)			306,754				114,515				48,620				1,499
Total non-operating income and gains			1,297,904				2,343,722				857,061				26,428
Non-operating expenses and losses:
Interest expenses (notes 8 and 9)			(760,618	)			(1,655,085	)			(1,709,072	)			(52,700	)
Foreign exchange loss, net			—				—				(184,664	)			(5,694	)
Loss on inventory obsolescence and devaluation (note 6)			—				(18,849	)			(1,027,988	)			(31,699	)
Impairment loss (note 8)			—				(32,107	)			(24,630	)			(759	)
Others (note 17)			(9,637	)			(33,823	)			(30,537	)			(942	)
Total non-operating expenses and losses			(770,255	)			(1,739,864	)			(2,976,891	)			(91,794	)
Income before income tax			6,267,119				16,492,323				1,044,217				32,199
Income tax expense (note 13)			(337,361	)			(386,499	)			(117,368	)			(3,619	)
Income before cumulative effect of change in accounting principle			5,929,758				16,105,824				926,849				28,580
Cumulative effect of change in accounting principle (net of income tax benefit of NT$79,305) (note 3)			—				(237,915	)			—				—
Net income		$	5,929,758				15,867,909				926,849				28,580
Earnings per share — retroactively adjusted (note 15)
Before tax
Income before cumulative effect of change in accounting principle		$	2.33				5.26				0.31				0.01
Cumulative effect of change in accounting principle			—				(0.10	)			—				—
Basic earnings per share		$	2.33				5.16				0.31				0.01
After tax
Income before cumulative effect of change in accounting principle		$	2.20				5.14				0.28				0.01
Cumulative effect of change in accounting principle			—				(0.08	)			—				—
Basic earnings per share		$	2.20				5.06				0.28				0.01

See accompanying notes to financial statements.

INOTERA MEMORIES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)

														Retained earnings
																						Unappropriated
						Common stock				Capital surplus				Legal reserve				Special reserve				earnings				Total
Balance as of January 1, 2005		NTD				$	24,976,600				15,548,660				1,559				—				915,333				41,442,152
Appropriation and distribution:
Appropriation for legal reserve							—				—				90,130				—				(90,130	)			—
Appropriation for special reserve							—				—				—				542,605				(542,605	)			—
Remuneration to directors and supervisors							—				—				—				—				(2,686	)			(2,686	)
Bonus to employees							8,057				—				—				—				(16,114	)			(8,057	)
Cash and stock dividends to stockholders							124,883				—				—				—				(249,766	)			(124,883	)
Net income for the year ended December 31, 2005							—				—				—				—				5,929,758				5,929,758
Balance as of December 31, 2005		NTD					25,109,540				15,548,660				91,689				542,605				5,943,790				47,236,284
Increase in capital							6,000,000				13,769,176				—				—				—				19,769,176
Appropriation and distribution:
Legal reserve							—				—				592,976				—				(592,976	)			—
Remuneration to directors and supervisors							—				—				—				—				(3,736	)			(3,736	)
Bonus to employees							—				—				—				—				(298,866	)			(298,866	)
Cash dividends to stockholders							—				—				—				—				(3,433,227	)			(3,433,227	)
Net income for the year ended December 31, 2006							—				—				—				—				15,867,909				15,867,909
Balance as of December 31, 2006		NTD					31,109,540				29,317,836				684,665				542,605				17,482,894				79,137,540
Appropriation and distribution:
Legal reserve							—				—				1,586,791				—				(1,586,791	)			—
Remuneration to directors and supervisors							—				—				—				—				(10,453	)			(10,453	)
Bonus to employees							399,008				—				—				—				(798,018	)			(399,010	)
Cash and stock dividends to stockholders							1,866,572				—				—				—				(9,643,957	)			(7,777,385	)
Net income for the year ended December 31, 2007							—				—				—				—				926,849				926,849
Balance as of December 31, 2007		NTD				$	33,375,120				29,317,836				2,271,456				542,605				6,370,524				71,877,541
Balance as of December 31, 2006		USD				$	959,283				904,034				21,112				16,732				539,096				2,440,257
Appropriation and distribution:
Legal reserve							—				—				48,930				—				(48,930	)			—
Remuneration to directors and supervisors							—				—				—				—				(322	)			(322	)
Bonus to employees							12,304				—				—				—				(24,607	)			(12,303	)
Cash and stock dividends to stockholders							57,557				—				—				—				(297,378	)			(239,821	)
Net income for the year ended December 31, 2007							—				—				—				—				28,580				28,580
Balance as of December 31, 2007		USD				$	1,029,144				904,034				70,042				16,732				196,439				2,216,391

See accompanying notes to financial statements.

INOTERA MEMORIES, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2006 AND 2007
(Expressed in thousands of New Taiwan Dollars and U.S. Dollars)

		For the years ended December 31,
		2005				2006				2007
		NTD				NTD				NTD				USD
Cash flows from operating activities:
Net income		$	5,929,758				15,867,909				926,849				28,580
Adjustments to reconcile net income to net cash from operating activities
Depreciation			8,099,551				11,633,379				20,524,929				632,899
Amortization of deferred charges			6,995				8,454				12,120				374
Amortization of deferred charges — bank loan syndication and underwriter’s charge on debt securities offering			29,170				29,012				56,417				1,740
Loss on inventory obsolescence and devaluation			—				18,849				1,027,988				31,699
Loss (gain) on disposal of property, plant and equipment			—				1,590				(833	)			(26	)
Impairment loss			—				32,107				24,630				759
Unrealized foreign currency exchange gain, net			(280,665	)			(260,716	)			(6,300	)			(194	)
Gain on disposal of short-term investments			(4,532	)			—				—				—
Amortization of deferred forward exchange premium			(287,851	)			—				—				—
Realized interest income from capital lease			(10,133	)			(20,066	)			(19,786	)			(610	)
Realized interest expense from capital lease			1,513				5,920				5,766				178
Cumulative effect of change in accounting principle for financial assets			—				237,915				—				—
Valuation gain on financial instruments, net			—				(450,596	)			(501,458	)			(15,463	)
(Increase) decrease in accounts receivable — related parties			(2,554,838	)			(3,310,868	)			1,700,773				52,444
Net cash (paid on purchase) received from settlement on maturity of financial assets			—				(252,832	)			1,361,714				41,989
Decrease (increase) in other receivables			106,119				(44,427	)			(115,201	)			(3,552	)
Increase in inventories			(1,358,055	)			(460,725	)			(1,839,297	)			(56,716	)
Decrease (increase) in prepayments			395,049				(53,855	)			(294,490	)			(9,081	)
Increase (decrease) in accounts payable			804,060				(266,255	)			811,206				25,014
(Decrease) increase in accounts payable — related parties			(71,320	)			350,705				(293,162	)			(9,040	)
Increase (decrease) in income tax payable			124,357				9,269				(76,679	)			(1,476	)
Increase in accrued expenses			407,478				85,494				463,566				14,294
(Decrease) increase in other payables — related parties			(198,268	)			(20,714	)			3,256				100
Increase in other current liabilities			5,255				874				13,222				408
Increase (decrease) in accrued pension liabilities			19,839				(3,848	)			(7,399	)			(228	)
Decrease in deferred income tax assets, net			185,198				118,154				41,837				402
Net cash provided by operating activities			11,348,680				23,254,729				23,819,668				734,494
Cash flows from investing activities:
Decrease in short-term investments			4,532				—				—				—
Decrease in lease receivable			10,291				26,756				24,698				762
Proceeds from disposal of idle assets and property, plant and equipment			—				600				833				26
Purchases of property, plant and equipment			(28,313,919	)			(28,446,514	)			(58,192,125	)			(1,794,392	)
Increase in deferred charges			(52,728	)			(22,000	)			(163,387	)			(5,038	)
Decrease (increase) in refundable deposits			18,117				(50,675	)			50,787				1,566
Net cash used in investing activities			(28,333,707	)			(28,491,833	)			(58,279,194	)			(1,797,076	)
Cash flows from financing activities:
Decrease in short-term loans			(158,200	)			(2,323,300	)			—				—
Repayment of long-term loans			—				(2,553,123	)			(10,358,972	)			(319,426	)
Proceeds from long-term loans			17,285,096				—				23,300,000				718,471
Increase in bonds payable			—				6,000,000				14,000,000				431,699
Decrease in lease payables			(3,152	)			(9,311	)			(9,310	)			(287	)
Proceeds from capital increase			—				19,769,176				—				—
Increase in guarantee deposits			1,114				2,815				67				2
Cash dividend to stockholders			(124,611	)			(3,433,498	)			(7,776,965	)			(239,808	)
Bonus to employees			(8,057	)			(298,866	)			(399,010	)			(12,303	)
Remuneration to directors and supervisors			(2,686	)			(3,736	)			(10,453	)			(322	)
Net cash provided by financing activities			16,989,504				17,150,157				18,745,357				578,026
Effect of foreign currency exchange translation on cash and cash equivalents			(162,098	)			(30,767	)			32,832				1,012
(Decrease) increase in cash and cash equivalents			(157,621	)			11,882,286				(15,681,337	)			(483,544	)
Cash and cash equivalents at beginning of year			9,980,189				9,822,568				21,704,854				669,283
Cash and cash equivalents at end of year		$	9,822,568				21,704,854				6,023,517				185,739
Supplemental cash flow information:
Income tax paid		$	27,860				259,071				152,211				4,694
Interest paid (excluding capitalized interest)		$	972,201				1,749,036				1,406,914				43,383
Investing activities affecting both cash and non-cash items:
Acquisition of property, plant, and equipment		$	22,928,454				45,915,339				44,008,438				1,357,029
(Decrease) increase in payables to equipment suppliers			5,385,465				(17,468,825	)			14,183,687				437,363
Cash paid		$	28,313,919				28,446,514				58,192,125				1,794,392
Non-cash investing and financing activities:
Current portion of lease receivables		$	6,690				4,912				5,209				160
Current portion of lease payables		$	3,390				3,544				3,705				114
Current portion of long-term loans		$	6,431,636				10,299,107				10,258,408				316,325

See accompanying notes to financial statements.

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2005, 2006 AND 2007

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

(1)		Organization and Principal Activities
		Inotera Memories, Inc. (the “Company”) was legally established with the approval by the Taiwan Ministry of Economic Affairs on January 23, 2003. The Company’s main operating activities are manufacturing and selling semiconductor products. In January 2006, the Company was granted approval of its application to list its shares on the Taiwan Stock Exchange (TSE). The Company’s shares were initially listed on the TSE on March 17, 2006. On May 16, 2006, the Company listed its shares in the form of global depositary shares (GDSs) on the Luxembourg Stock Exchange (LSE).
		As of December 31, 2006 and 2007, the Company had 2,898 and 3,421 employees, respectively.
(2)		Summary of Significant Accounting Policies and Basis of Presentation
		The accompanying financial statements are prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Securities Issuers, Business Entity Accounting Act, Regulation on Handling Business Entity Accounting, and accounting principles generally accepted in the Republic of China (ROC).
		The significant accounting policies followed by the Company are as follows:

(a) Convenience translation into U.S. dollars

The financial statements are stated in New Taiwan Dollars. Translation of the 2007 New Taiwan dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers, using the Federal Reserve exchange rate on December 31, 2007, of NT$32.43 to US$1 uniformly for all the financial statements’ accounts. The convenience translations should not be construed as representations that the New Taiwan Dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this rate or any other rate of exchange.

(b) Foreign currency transactions and translation

The Company’s reporting currency is New Taiwan Dollar. Foreign currency transactions during the period are translated at the exchange rates on the transaction dates. Foreign currency-denominated assets and liabilities are translated into New Taiwan Dollars at the exchange rate prevailing on the balance sheet date, and the resulting translation gains or losses are recognized as non-operating income or expenses.

(Continued)

 2 

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

(c) Basis for classifying assets and liabilities as current or non-current

Current assets include cash, cash equivalents, and those assets held primarily for trading purposes or to be realized, sold or consumed within one year from the balance sheet date. Otherwise, other assets are classified as non-current. Current liabilities are obligations incurred for trading purposes or to be settled within one year from the balance sheet date. Otherwise, other liabilities are classified as non-current.

(d) Asset impairment

In accordance with ROC SFAS No. 35 “Impairment of Assets”, the Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. The Company recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount.

The Company reverses an impairment loss recognized in prior periods for assets if there is any indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods.

(e) Cash equivalents

Government and corporate bonds with agreements to repurchase, commercial paper and corporate notes acquired with maturities of less than three months from the date of purchase are classified as cash equivalents. The carrying amount approximates fair value.

(f) Financial assets reported at fair value through profit or loss

Effective January 1, 2006, the Company adopted the ROC SFAS No. 34 “Financial Instruments: Recognition and Measurement” see note 3. In accordance with the SFAS No. 34, the Company classifies its financial assets and financial liabilities as financial assets or financial liabilities reported at fair value through profit or loss only as it does not have any other types of financial assets or financial liabilities.

Derivatives that do not meet the criteria for hedge accounting are initially recognized at fair value, with transaction costs expensed as incurred. The derivatives are remeasured at fair value subsequently with the changes in fair value recognized in earnings. A regular way purchase or sale of financial assets is accounted for using settlement date accounting.

Fair value is estimated using valuation techniques incorporating estimates and assumptions that are consistent with prevailing market conditions. When the net effect of the fair market valuation of derivatives is positive, the derivative is recognized as a financial asset; but when the net effect is negative, the derivative is recognized as a financial liability.

(Continued)

 3 

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

Prior to January 1, 2006, some of the investments held by the Company were classified, according to the Company’s intention for holding them, as short-term investments, including open-end mutual funds. These short-term investments were evaluated at the lower of cost or market value. Market value of open-end mutual funds was determined based on the net asset value of the mutual funds at the balance sheet date. The aggregate cost of these short-term investments was determined by the weighted-average method. Devaluation losses resulting from a decline in market value were recognized in the income statement.

Prior to January 1, 2006, interest rate swaps and foreign currency forward contracts were accounted for as follows:

(i)  Foreign exchange forward contracts

Foreign exchange forward contracts, which were entered into for the purpose of hedging the risks of exchange rate fluctuation on foreign currency receivables and payables, were translated into New Taiwan Dollars using spot rates on the balance sheet date. The resulting translation difference was recorded as an exchange gain or loss in the accompanying statements of income. The difference between the forward rate and spot rate at the contract date was amortized over the contract period.

(ii) Interest rate swaps

Because there is no physical transfer of principal, only memo entries of notional principals were made for interest rate swaps. For trading swaps, the differences between the present and market values of interest receivables or payables arising thereon were reported as unrealized gains or losses on derivative instruments. For non-trading swaps, interest was accrued based on contract terms, with interest revenue and expense recognized in the same period that the hedged items affect earnings.

(g) Inventories

Inventories are stated at the lower of cost or market value. Cost is determined by using the monthly weighted-average method. Market value represents replacement cost or net realizable value. The market value of raw materials and supplies are determined on the basis of replacement cost. The market value of finished goods and work in process are determined on the basis of net realizable value.

(h) Property, plant and equipment / Depreciation

Property, plant and equipment are stated at cost less accumulated depreciation. Interest costs related to the construction of property, plant and equipment are capitalized and included in the cost of the related asset. Regular maintenance and repairs are expensed when incurred; major addition, improvement and replacement expenditures are capitalized.

(Continued)

 4 

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

Depreciation of property, plant and equipment is provided over their estimated useful lives by using the straight-line method. Assets still in service after reaching the end of their estimated useful lives are depreciated based on the residual value over their re-estimated useful lives. The useful lives of the assets are as follows:

(i)

Buildings: 8 to 50 years.

(ii)

Vehicles: 5 years.

(iii)

Machinery and equipment: 3 to 5 years.

(iv)

Leased assets: 23.7 years.

(v)

Miscellaneous equipment: 3 to 15 years.

Gains or losses on disposal of property, plant and equipment are recorded as non-operating income or expenses.

(i) Leases

A lease is deemed to be a capital lease if it conforms to any one of the following classification criteria:

	(i)		the lease transfers ownership of the leased assets to the lessee by the end of the lease term;
	(ii)		the lease contains a bargain purchase option;
	(iii)		the lease term is equal to 75% of or more of the total estimated economic life of the leased assets; this criterion should not be applied to leases in which the leased asset has been used for more than 75% of its estimated economic life before the lease begins; or
	(iv)		the present value of the rental plus the bargain purchase price or the guaranteed residual value is at least 90% of the fair market value of the leased assets at the inception date of the lease.

For the lessor, a capital lease must also conform to any one of the four classification criteria specified above and both of the following two further criteria:

	(i)		collectibility of the lease payments is reasonably predictable; and
	(ii)		no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor under the lease.

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

			Under a capital lease, the Company, as the lessee, capitalizes the leased assets based on (a) the present value of all future installment rental payments (minus executory cost born by lessor) plus bargain purchase price or lessee’s guaranteed residual value or (b) the fair market value of leased assets at the lease inception date, whichever is lower. The depreciation period is restricted to the lease term, rather than the estimated useful life of the assets, unless the lease provides for transfer of title or includes a bargain purchase option.
			Under a capital lease, the Company, as the lessor, records all installments plus bargain purchase price or guaranteed residual value as the lease receivables. The implicit interest rate is used to calculate the present value of lease receivables as the cost of leased assets transferred. The difference between the total amount of lease receivables and the cost of leased assets transferred is recognized as unrealized interest income and is then recognized as realized interest income using the interest method over the lease term.
	(j)		Employee retirement plan
			The Company has established an employee noncontributory defined benefit retirement plan (the “Plan”) covering full-time employees in the Republic of China. In accordance with the Plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. Payments of retirement benefits are based on years of service and the average salary for the last six months before the employee’s retirement. Each employee gets 2 months’ salary for each service year for the first 15 years, and 1 month’s salary for each service year thereafter. A lump-sum retirement benefit is paid through the retirement fund.
			Starting from July 1, 2005, the enforcement of the newly enacted Labor Pension Act (the “New Act”) stipulates those employees covered by the defined contribution plan as follows:

	(i)		employees who were covered by the Plan and opt to be subject to the pension mechanism under the New Act;
	(ii)		employees who are employed after the enforcement date of the New Act.

In accordance with the New Act, the Company contributes to an individual labor pension fund account per month at the rate of not less than 6% of the worker’s monthly wages. The Plan has not been modified to conform to the New Act. For those provisions of the New Act not currently included in the Plan, the Company follows the New Act.

The Company adopts the SFAS No. 18 “Accounting for Pensions” for its defined benefit retirement plan. SFAS No. 18 requires an actuarial calculation of the Company’s pension obligation at the end of each year. Based on the actuarial calculation, the Company recognizes a minimum pension liability and net periodic pension costs.

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

	(k)		Employee stock option plans
			Employee stock option plans with a grant date on or after January 1, 2004 are accounted for under the interpretations issued by the Accounting Research and Development Foundation (ARDF). The Company adopted the intrinsic value method, under which, compensation cost is recognized on a straight-line basis over the vesting period.
	(l)		Deferred charges

	(i)		Bank charges related to syndicated loans are deferred and amortized over the terms of the loans.
	(ii)		Power line installation costs and royalty paid to the Industrial Technology Research Institute are deferred and amortized over the estimated useful lives or the agreement terms.
	(iii)		Underwriter handling charges on bonds payable are deferred and amortized over the term of the bond.

	(m)		Revenue recognition
			Revenue is generally recognized when it is realized or realizable and earned when all of the following criteria are met:

	(i)		persuasive evidence of an arrangement exists,
	(ii)		shipment has occurred or services have been rendered,
	(iii)		the seller’s price to the buyer is fixed or determinable, and
	(iv)		collectibility is reasonably assured.

Rental income is recognized when services are provided.

	(n)		Income tax
			The Company has adopted the SFAS No. 22 “Income Taxes”. Income taxes are accounted for using the asset and liability method. Deferred income tax is determined based on differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect during the years in which the differences are expected to reverse. The income tax effects of taxable temporary differences are recognized as deferred income tax liabilities. The income tax effects resulting from deductible temporary differences, net operating loss carryforwards, and income tax credits are recognized as deferred income tax assets. The realization of the deferred income tax assets is evaluated, and if it is considered more likely than not that the asset will not be realized, a valuation allowance is recognized accordingly.

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

			The classification of deferred income tax assets and liabilities as current or non-current is based on the classification of the related asset or liability. If the deferred income tax asset or liability is not directly related to a specific asset or liability, then the classification is based on the expected realization date of the asset or liability.
			The 10% surtax on current year’s undistributed earnings, computed according to the ROC Income Tax Law, is charged to current income tax expense in the year when the shareholders decided not to distribute those earnings during their meeting.
	(o)		Earnings per share
			Earnings per common share are computed by dividing net income by weighted-average number of outstanding shares during the year.
			The Company has issued employee stock options, which are potential common shares. Both basic and diluted earnings per share are disclosed if those potential common shares are dilutive, otherwise, only basic earnings per share are disclosed. Diluted earnings per share are computed by taking basic earnings per share into consideration, plus the additional common shares that would have been outstanding if the potentially dilutive shares are issued.
			The number of outstanding shares is retroactively adjusted for common stock issued through the distribution of stock dividends out of unappropriated earnings and capital surplus.

(3)

Reasons for and Cumulative Effect of Accounting Principle Change

(a)

As the Company adopted the SFAS No. 34 “Financial Instruments: Recognition and Measurement”, SFAS No. 36 “Financial Instruments: Disclosure and Presentation”, and newly amended SFAS No. 1 “Conceptual Framework for Financial Accounting and Preparation of Financial Statements” effective January 1, 2006, the net income and earnings per share (after tax) for the year ended December 31, 2006, were affected as follows:

		Decrease in				Decrease in
Nature of change in accounting principle		net income				earnings per share
Accounting for financial instruments		$	27,600				0.01

The financial instruments are recorded in accordance with the SFAS No. 34 and No. 36. The effects of the adoption of these new accounting principles are discussed further in note 5 to the financial statements.

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

(b)

The Company adopted SFAS No. 34 “Financial Instruments: Recognition and Measurement” effective January 1, 2006. Accordingly, the Company measured and reclassified the financial assets based on fair value at the beginning of financial year 2006. As of January 1, 2006, the cumulative effect of this change in accounting principle amounted to NT$237,915 net of tax benefit.

(4)		Cash and Cash Equivalents
		Cash and cash equivalents as of December 31, 2006 and 2007, consisted of the following:

		December 31,
		2006				2007
		NTD				NTD				USD
Cash on hand—petty cash		$	230				210				6
Cash in bank—checking account			19,386				20,644				637
Cash in bank—demand deposit account			287				230				7
Cash in bank—foreign currency account			1,523,104				3,238,712				99,868
Time deposit			500,000				—				—
Time deposit—foreign currency			3,944,973				2,701,721				83,309
Cash equivalents—commercial paper			360,385				—				—
Cash equivalents—repurchase agreements collateralized by corporate bonds			15,356,489				62,000				1,912
		$	21,704,854				6,023,517				185,739

(5)		Financial Assets Reported at Fair Value through Profit or Loss—Current
		Financial assets reported at fair value with changes in fair value recorded through profit or loss as of December 31, 2006 and 2007, consisted of the following:

		December 31,
		2006								2007
		Carrying				Notional				Carrying				Carrying				Notional
		amount				amount				amount				amount				amount
		NTD				USD				NTD				USD				USD
For trading purposes—Financial assets
Foreign exchange forward contracts		$	941,480				520,000				776,995				23,959				334,000
Interest rate swaps			52,255				92,857				16,968				523				55,714
Mutual bond fund			660,484				—				—				—				—
		$	1,654,219								793,963				24,482

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

	(a)		The Company entered into foreign exchange forward contracts with several banks to hedge the risk from foreign currency exchange rate fluctuations for foreign currency long-term loans. If the Company had continued adopting the accounting treatment for forward contracts under the old SFAS No. 14, which was effective prior to January 1, 2006, amortization of deferred forward exchange premium and unrealized foreign currency exchange gain would have amounted to NT$267,216, and net income would have decreased by NT$38,552 (after tax) for the year ended December 31, 2006.
	(b)		The Company entered into several interest rate swaps agreements (IRS) with banks to hedge the risk from fluctuations of interest rates for foreign long-term loans. If the Company had continued adopting the old accounting treatment for IRS which was effective prior to January 1, 2006, there would have been no gain or loss based on mark-to-market revaluation of IRS, and net income would have increased by NT$10,214 (after tax) for the year ended December 31, 2006.
	(c)		In 2006, the Company purchased 197,396.36 units of a mutual bond fund for NT$659,500; the fund was disposed in 2007.
	(d)		For the years ended December 31, 2006 and 2007, the Company recognized net gain on valuation of financial instruments as follows:

		December 31,
		2006								2007
		Realized				Unrealized				Realized				Realized				Unrealized				Unrealized
		NTD				NTD				NTD				USD				NTD				USD
Foreign exchange forward contracts		$	217,335				215,813				338,356				10,433				171,774				5,297
Interest rate swaps			2,846				13,618				9,687				299				(24,836	)			(766	)
Mutual bond fund			—				984				6,477				200				—				—
		$	220,181				230,415				354,520				10,932				146,938				4,531

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

(6) Inventories, net

     As of December 31, 2006 and 2007, inventories consisted of the following:

		December 31,
		2006				2007
		NTD				NTD				USD
Raw materials		$	736,290				944,318				29,119
Supplies			579,913				1,023,301				31,554
Work in process			2,624,819				3,811,242				117,522
Finished goods			5,288				5,228				161
Materials and supplies in transit			—				1,518				47
			3,946,310				5,785,607				178,403
Less: allowance for inventory obsolescence and devaluation			(18,849	)			(1,046,837	)			(32,280	)
		$	3,927,461				4,738,770				146,123

(7) Lease Receivables

	(a)		The Company signed a long-term lease agreement with Nanya Technology Corp. (NTC) to lease out a portion of the building and land (including supplemental equipment) located at No. 667, Fuhsing 3rd Road, Hwa-Ya Technology Park, Kueishan Valley, Taoyuan County. The lease took effect on July 1, 2005, and remains effective until December 31, 2034 (including the period when the lease is automatically extended), a total of 354 months. The lease agreement for the building is treated as a capital lease because the present value of the periodic rental payments at inception date was at least 90% of the market value of the leased assets. The rental for the land is treated as an operating lease. The monthly rentals for the lease of building and land were NT$2,058 and $310, respectively.
	(b)		The initial total amount of lease receivables for the capital lease of the building was NT$728,587; the implicit interest rate was 5.88%. The cost of leased assets transferred was NT$345,637 (including the net book value of the building and miscellaneous equipment of NT$277,372 and NT$68,265, respectively). The difference between the total amount of lease receivables and the cost of leased assets transferred amounted to NT$382,950, which was recognized as unrealized interest income and is amortized over the lease period. Interest income (classified under non-operating income and gains—interest income) of NT$10,133, NT$20,066 and NT$19,786 was recognized for the years ended December 31, 2005, 2006 and 2007, respectively.

(Continued)

INOTERA MEMORIES, INC.

NOTES TO FINANCIAL STATEMENTS

(All amounts are expressed in thousands of New Taiwan Dollars and U.S. Dollars,
except for per share information or unless otherwise specified)

(c)

The details of lease receivables as of December 31, 2006 and 2007, were as follows:

		December 31,
		2006								2007
		Current				Non-current				Current				Current				Non-current				Non-current
		NTD				NTD				NTD				USD				NTD				USD
Gross lease receivables		$	24,698				666,842				24,698				761				642,144				19,800
Less: unrealized interest income			(19,786	)			(332,966	)			(19,489	)			(601	)			(313,476	)			(9,666	)
Net lease receivables		$	4,912				333,876				5,209				160				328,668				10,134