INFINEON TECHNOLOGIES AG

QUARTERLY REPORT

FOR THE THREE MONTHS ENDED

DECEMBER 31, 2005

INDEX

OVERVIEW OF FINANCIAL RESULTS

First Quarter of the 2006 Financial Year

      For the first quarter of the 2006 financial year, Infineon Technologies AG reported revenues of Euro 1,674 million, a decrease of 3 percent sequentially and 8 percent year-on-year. The sequential decrease in revenues was primarily driven by a strong decrease in average selling prices of DDR2 memories in the Memory Products segment. Revenues increased sequentially in the Automotive, Industrial and Multimarket and Communication segments.

      The EBIT loss in the first quarter of the 2006 financial year increased sequentially to Euro 122 million from Euro 43 million in the prior quarter, driven primarily by weaker results in the Memory Products segment as a consequence of the strong decrease in average selling prices and higher cost-per-bit. EBIT in the Automotive, Industrial and Multimarket segment increased significantly quarter-over-quarter mainly due to higher EBIT in the automotive business and a reduced EBIT loss in the security and chip-card business. In the company’s Communication segment, EBIT loss decreased significantly in part as a result of impairment charges of Euro 14 million incurred in the prior quarter that did not recur in the first quarter of the 2006 financial year. In addition, the Communication segment’s EBIT loss was positively influenced by increased sales and a further optimization of research and development expenditures.

      Net loss amounted to Euro 183 million in the first quarter of the 2006 financial year, compared to net loss of Euro 100 million in the previous quarter and net income of Euro 142 million in the same quarter last year.

      Basic and diluted loss per share increased to Euro 0.25 in the first quarter of the 2006 financial year from Euro 0.14 in the previous quarter, and earnings per share of Euro 0.19 in the same quarter last year.

Business Groups’ 2006 First Quarter Performance and Outlook

      Infineon began to report its results of operations in accordance with its new organizational structure during the second quarter of the 2005 financial year. The former mobile business and the Wireline Communication segment were combined into the new Communication segment to align the company’s structure with market developments. At the same time, the company’s security and chip-card activities and the ASIC & Design Solutions business were integrated into the extended Automotive, Industrial and Multimarket segment. The results of operations of all periods presented have been reclassified to be consistent with the revised reporting structure and presentation, as well as to facilitate analysis of current and future operating segment information.

Revenues

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

      The Automotive, Industrial and Multimarket segment’s first quarter revenues were Euro 652 million, increasing 4 percent sequentially and 3 percent year-on-year. The sequential increase resulted primarily from increased sales in the automotive business, in particular in automotive power products, and typically high seasonal sales in power management semiconductors and the ASIC & Design Solutions business. In the security and chip-card business, revenues decreased, as anticipated, mainly due to continued strong price declines.

Earnings

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

      The Automotive, Industrial and Multimarket segment’s first quarter EBIT increased to Euro 51 million from Euro 27 million in the previous quarter and Euro 48 million in the same quarter last year. The significant quarter-over-quarter increase was driven mainly by increased EBIT in the automotive business and cost management measures. Despite continued price declines, the EBIT loss in the security and chip-card business decreased due to a reduction of fixed costs, improved cost structure and product mix.

      The Communication segment’s EBIT loss decreased to Euro 21 million during the first quarter from Euro 46 million in the previous quarter, but slightly increased from a loss of Euro 19 million in the same quarter last year. The sequential EBIT loss decrease was due to impairment charges of Euro 14 million incurred in the prior quarter that did not recur in the first quarter of the 2006 financial year. In addition, the segment’s EBIT loss was positively influenced by slightly higher sales, in particular in radio-frequency transceivers and broadband access devices, and a further optimization of research and development expenditures. The company’s wireline broadband-access business continued to contribute positive EBIT results in the first quarter.

      The Memory Products segment’s first quarter EBIT results decreased to a loss of Euro 118 million from positive Euro 34 million in the previous quarter and positive Euro 196 million in the same quarter last year. The significant quarter-over-quarter decrease resulted from a strong decrease in average selling prices. Furthermore, the segment increased research and development expenses and incurred higher manufacturing costs associated with the ramp-up of the production facility in Richmond and product diversification.

      Other Operating Segments’ first quarter EBIT results were at a break-even level, compared to EBIT losses of Euro 12 million in the prior quarter and Euro 2 million in the same quarter last year. The sequential EBIT improvement resulted mainly from the non-recurrence of impairment charges of Euro 10 million incurred in the fourth quarter of the 2005 financial year.

      In Corporate and Reconciliation, EBIT loss in the first quarter decreased to Euro 34 million from Euro 46 million in the prior quarter, but increased from a loss of Euro 12 million in the same quarter last year. During the first quarter, Infineon began to expense the cost of share-based compensation, which aggregated to Euro 7 million. Previous quarter EBIT had been negatively impacted by charges resulting

Expenses

      Expenditures for Research and Development in the first quarter totaled Euro 311 million, increasing sequentially from Euro 290 million, primarily due to an increase in research and development expenses in the Memory Products segment. As a percentage of revenues, research and development expenses increased sequentially to 19 percent of revenues from 17 percent of revenues.

      Expenses for SG&A (Selling, General & Administrative) in the first quarter remained relatively unchanged at Euro 173 million or 10 percent of revenues, in comparison to Euro 172 million or 10 percent of revenues in the prior quarter.

Liquidity

      Free cash flow, representing cash flows from operating and investing activities excluding purchases or sales of marketable securities, decreased significantly in the first quarter of the 2006 financial year to a net outflow of Euro 175 million from a net outflow of Euro 15 million in the previous quarter. The primary reason for the decrease was lower cash flows provided by operating activities, which decreased from Euro 250 million in the previous quarter to Euro 102 million in the first quarter of the 2006 financial year. Gross cash position as of December 31, 2005, representing cash and cash equivalents and marketable securities, decreased sequentially from Euro 2.0 billion to Euro 1.9 billion. In addition, net cash position, defined as gross cash position less short and long-term debt, decreased sequentially from Euro 341 million to Euro 161 million as of the end of the first quarter of the 2006 financial year.

Outlook for the Second Quarter of the 2006 Financial Year

      Infineon expects the Automotive, Industrial and Multimarket segment’s revenues to increase slightly in the second quarter of the 2006 financial year, and anticipates a decline in EBIT compared to the first quarter. The company expects increased revenues in its automotive and security and chip-card businesses, but a seasonal decline in demand for industrial semiconductors. The EBIT decline in the second quarter is expected to be primarily driven by a planned increase in research and development expenses for automotive as well as a seasonal decline in the industrial power management and ASIC & Design Solutions businesses, which are to some extent related to the computing and consumer segment. In addition, the segment’s EBIT will continue to be impacted by planned expenses for the phase-out of production at the Munich-Perlach facility and by increasing start-up costs for the new production site in Kulim, Malaysia.

      In the second quarter of the 2006 financial year, the company expects revenues of its Communication segment to decline compared to the first quarter due to seasonal weakness in the wireless industry. The company expects the segment’s EBIT loss to increase in the second quarter, as previously implemented improvements of cost structures leave operating results to be driven predominantly by revenue development.

      In its Memory Products segment, Infineon expects to increase its bit production by more than 20 percent based on additional capacities at its 300-millimeter production facility in Richmond and from silicon foundries in the second quarter of the 2006 financial year. The company also anticipates higher bit shipments than in the first quarter.

Condensed Consolidated Statements of Operations (Unaudited)

For the three months ended December 31, 2004 and 2005

(in millions, except for per share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Balance Sheets

September 30, 2005 and December 31, 2005

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited)

for the three months ended December 31, 2004 and 2005

(in millions, except for share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended December 31, 2004 and 2005

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)

      The accompanying condensed consolidated financial statements of Infineon Technologies AG and its subsidiaries (“Infineon” or “the Company”) as of and for the three months ended December 31, 2004 and 2005, 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 the opinion of management, the accompanying 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 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 December 31, 2005, the condensed consolidated statements of operations for the three months then ended, and the condensed consolidated statements of cash flows for the three months then ended are also presented in U.S. dollars (“$”), solely for the convenience of the reader, at the rate of one euro = $1.1842, the U.S. Federal Reserve noon buying rate on December 31, 2005.

      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 will be 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 amounts have not been restated and do not reflect the recognition of stock-based compensation. Disclosures are provided in note 11.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      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 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.

      The development of the restructuring liability during the three months ended December 31, 2005, is as follows:

      Income (loss) before income taxes and minority interest is attributable to the following geographic locations for the three months ended December 31, 2004 and 2005:

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      Income tax expense for the three months ended December 31, 2004 and 2005 is as follows:

      At December 31, 2005, the Company had in Germany tax loss carry-forwards of €2,310 (relating to both, trade and corporate tax, plus an additional loss carry-forward applicable only to trade tax of €1,136); in other jurisdictions the Company had tax loss carry-forwards of €263 and tax effected credit carry-forwards of €107. 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 December 31, 2005, the impact of forecasted future taxable income is excluded from such an assessment, pursuant to the provisions of SFAS No. 109. For these tax jurisdictions, the assessment was therefore only based on the benefits that could be realized from available tax strategies and the reversal of temporary differences in future periods.

      Basic earnings (loss) per share (“EPS”) is calculated by dividing net income (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 additional ordinary shares that would have been outstanding if potentially dilutive instruments or ordinary share equivalents had been issued.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      The computation of basic and diluted EPS for the three months ended December 31, 2004 and 2005, is as follows (shares in million):

      The weighted average of potentially dilutive instruments that were excluded from the diluted earnings (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 37.9 million and 41.0 million shares underlying employee stock options for the three months ended December 31, 2004 and 2005, respectively. Additionally, 86.5 million ordinary shares issuable upon the conversion of the subordinated convertible notes at December 31, 2004 and 2005, were not included in the computation of diluted earnings (loss) per share as their impact would have been antidilutive.

6.     Trade Accounts Receivable, net

      Trade accounts receivable, net at September 30, and December 31, 2005 consist of the following:

7.     Inventories

      Inventories at September 30, and December 31, 2005 consist of the following:

8.     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 are developing 70- and 60-nanometer technology. The new 300-millimeter manufacturing facility is funded by Inotera and employs the

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

technology developed under the aforementioned agreements to manufacture DRAM products and its capacity is anticipated to be completed in three phases. During the year ended September 30, 2004 Inotera completed the construction and started mass production. The second phase was completed in the 2005 financial year, while the third phase is anticipated to be completed in the 2006 financial year. The first 300-millimeter wafer memory products using the new 60-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 December 31, 2005, the Company’s direct and indirect ownership interest in Inotera was 45.9%.

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

      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 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 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 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, 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 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.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      The following table summarizes the Company’s consolidation of ALTIS during the quarter ended December 31, 2005:

      The Company is in the process of obtaining an appraisal of the estimated fair value of the assets and liabilities of ALTIS which will result in an adjustment to the amounts recorded, the exact amount of which is not currently determinable. 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.

      Trade accounts payable at September 30, and December 31, 2005 consist of the following:

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      Debt at September 30, and December 31, 2005 consists of the following:

      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 (see note 18).

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

11.     Stock-based Compensation

      A summary of the Company’s stock option plans as of December 31, 2005, and changes during the three month period then ended is presented below (options in million, exercise prices in Euro):

      Changes in the Company’s unvested options for the three months ended December 31, 2005 are summarized as follows (options in million, fair values in Euro):

      The following table summarizes information about stock options outstanding and exercisable at December 31, 2005:

      The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. Prior to the adoption of SFAS No. 123 (revised 2004), the Company relied on historical volatility measures when estimating the fair value of stock options granted to employees. Following the implementation of SFAS No. 123 (revised 2004), the Company uses a combination of implied volatilities

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

from traded options on the Company’s stock and historical volatility when estimating the fair value of stock options granted to employees, as it believes that this methodology better reflects the expected future volatility of its stock. The expected life of options granted is estimated based on historical experience. Beginning on the date of adoption of SFAS No. 123 (revised 2004), forfeitures are estimated based on historical experience; prior to the date of adoption, forfeitures were recorded as they occurred. The risk-free rate is based on treasury note yields at the time of grant for the estimated life of the option. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future.

      The following weighted-average assumptions were used in the Black-Scholes option-pricing model for the three months ended December 31:

      Total compensation cost for the Company’s stock option plans in the three months ended December 31, 2005 was €7. Cost of goods sold, SG&A (selling, general and administrative expenses), and research and development expenses in the first quarter of the 2006 financial year included stock-based compensation of €2, €3 and €2, respectively. The amount of stock-based compensation cost which was capitalized and remained in inventory as of December 31, 2005 was immaterial. Stock-based compensation expense does not reflect any significant income taxes and did not have a cash flow effect in the three months ended December 31, 2005, since no stock options were exercised during the period. As of December 31, 2005, there was a total of €47 in unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average period of 2.11 years.

      Prior to the first quarter of the 2006 financial year, the Company applied the provisions of APB No. 25, as permitted under SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of SFAS No. 123”.

      If the Company had accounted for stock option grants and employee stock purchases under its plans according to the fair value method of SFAS No. 123, and thereby recognized compensation expense based on the above fair values over the respective option vesting periods, net income and

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

earnings per share would have been reduced to the pro forma amounts indicated below, pursuant to the provision of SFAS No. 148:

      The changes in the components of other comprehensive loss for the three months ended December 31, 2004 and 2005 are as follows:

13.     Related Parties

      The Company has transactions in the normal course of business with Siemens group companies and with Related and Associated Companies (together, “Related Parties”). The Company purchases certain of its raw materials, especially chipsets, from, and sells certain of its products to, Related Parties. Purchases and sales to Related Parties are generally based on market prices or manufacturing cost plus a mark-up.

Notes to the Unaudited Condensed Consolidated Financial Statements

(euro in millions, except where otherwise stated)

      Related Party receivables at September 30, and December 31, 2005 consist of the following:

     Related Party payables at September 30, and December 31, 2005 consist of the following: