HYNIX SEMICONDUCTOR INC. NON-CONSOLIDATED FINANCIAL STATEMENTS. Years ended December 31, 2007 and with INDEPENDENT AUDITORS REPORT

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1 NON-CONSOLIDATED FINANCIAL STATEMENTS Years ended with INDEPENDENT AUDITORS REPORT

2 Contents Page Independent Auditors Report 1-3 Non-Consolidated Balance Sheets 4-5 Non-Consolidated Statements of Income 6 Non-Consolidated Statements of Appropriations of Retained Earnings 7 Non-Consolidated Statement of Changes in Equity 8 Non-Consolidated Statements of Cash Flows 9-10 Notes to Non-Consolidated Financial Statements Internal Accounting Control System Review Report 56 Report on the Operations of the Internal Accounting Control System 57

3 g g Phone: ~8Floor Taeyoung Building, Fax : , Yeoido-dong, Youngdeungpo-gu, Seoul, , Korea Independent Auditors Report The Board of Directors and Stockholders Hynix Semiconductor Inc. We have audited the accompanying non-consolidated balance sheets of Hynix Semiconductor Inc. (the Company ) as of, and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the years then ended, and the related non-consolidated statement of changes in equity for the year ended December 31, These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. 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 non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of, and the results of its operations, its changes in retained earnings and its cash flows for the years then ended, and its changes in equity for the year ended December 31, 2007, in conformity with accounting principles generally accepted in the Republic of Korea. Without qualifying our opinion, we draw attention to the following matters: (1) As discussed in Note 23 (1) to the non-consolidated financial statements, on July 12, 2005, the Creditor Financial Institutions ( Creditor Council ) s operational control over the Company since October 4, 2001, was terminated by entering into a special agreement between the Company and the Share Management Council (formerly, the Creditor Council). Under the special agreement, the Company is required to consult with the Share Management Council in advance events that could have significant influence on the Company s management including (a) appointment and dismissal of directors, (b) adoption of annual budgets, (c) investments in subsidiaries, (d) mergers, acquisitions or other strategic projects, and (e) organization and operation of corporate controlling structures. The special agreement remains in effect until the members of the Share Management Council substantially sell their equity shares in the Company. 1

4 The Board of Directors and Stockholders Hynix Semiconductor Inc. (2) As discussed in Note 23 (3) to the non-consolidated financial statements, in June 2002, the United States Department of Justice ( DOJ ) notified the Company that the DOJ had commenced an investigation if certain DRAM manufacturers had breached the U.S. Anti-Trust Act. In order to settle the investigation commenced by the DOJ, on April 22, 2005, the Company entered a plea agreement with the DOJ to pay a fine in the amount of US$185 million in installments over the next five years without interest. Meanwhile, DRAM product users in the United States filed lawsuits claiming damages from the breach of the U.S. Anti-Trust Act by the Company and Hynix Semiconductor America Inc. ( HSA ), its sales subsidiary located in the United States. In relation to the lawsuits, the Company has reached settlements through separate negotiations with several major DRAM product OEM users, and on April 29, 2006, the Company reached an agreement with the direct purchasers involved in a class lawsuit against the Company to pay US$73 million. As of December 31, 2007, the Company continues to negotiate the settlements with the indirect purchaser class, 41 state governments in the United States and the direct and indirect purchaser classes of 3 provinces in Canada. In addition, as of December 31, 2007, there is an investigation in progress commenced by the European Union Commission whether the Company had breached the Anti-Trust Act. In this regard, the Company recorded a non-operating expense of \346,561 million (US$332 million) through December 31, 2007, which consisted of the fine and estimated future losses expected to be incurred from settlements. On October 11, 2006, the DOJ also commenced a separate investigation suspecting an unfair transaction among certain SRAM manufacturers and sellers including the Company. In connection with this investigation, several civil lawsuits have been brought against the Company by the direct and indirect purchaser classes. In January 2007, the direct and indirect purchasers filed additional civil class actions against the Company alleging anti-trust violations and unfair competition in relation to flash memory products. As of December 31, 2007, the ultimate outcome of the lawsuits described above cannot be predicted and it could have a material effect on the Company s nonconsolidated financial statements. (3) As discussed in 1 of Note 23 (4) to the non-consolidated financial statements, the Company is a defendant to certain litigations brought by Rambus Inc. ( Rambus ), a developer of highbandwidth chip connection technologies, with respect to the alleged infringements of Rambus s patents by the Company s manufacture, sale, offer for sale, use or otherwise disposal of Single Data Rate ( SDR ) Synchronous Dynamic Random Access Memory ( SDRAM ) and Double Data Rate ( DDR ) SDRAM products. These litigations have been brought in Germany, France, the United Kingdom and the United States. In 2004, the European Patent Office revoked Rambus s certain key patents asserted against the Company in the European Union territory. Accordingly, in 2005, the litigation in the United Kingdom was dismissed, the litigation in France stopped proceeding further, and the litigation in Germany has been deferred without any progress. Meanwhile, in connection with the litigation in the United States, a trial was held in March and April 2006 to hear if the Company infringed on Rambus s patents. Apart from the above trials, another subsequent trial, which had been scheduled for August 2006 to hear the Company s antitrust and fraud claim against Rambus, was stayed until the issuance of the Federal Trade Commission s final order on the breach of U.S. Anti-Trust Act by Rambus. As the Federal Trade Commission issued the final order in February 2007, the trial has been scheduled to recommence 2

5 The Board of Directors and Stockholders Hynix Semiconductor Inc. in January 2008 and is in progress as of date of February In 2005, Rambus also brought another lawsuit against the Company and its subsidiary in the United States by alleging that the Company and its subsidiary s DDR2 and Graphic DDR SDRAM products have infringed on Rambus s patents. Also, back in 2004, Rambus filed a lawsuit against the Company, its subsidiary in the United States, and other major memory chip manufacturers, alleging that these companies kept Rambus DRAM products from entering the market. As of December 31, 2007, the ultimate outcome of the lawsuits described above cannot be predicted and it could have a material effect on the Company s non-consolidated financial statements. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations, changes in equity and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use by those who are knowledgeable about Korean accounting principles and auditing standards and their application in practice. February 1, 2008 This audit report is effective as of February 1, 2008, the auditors report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report. 3

6 NON-CONSOLIDATED BALANCE SHEETS As of (Korean won in thousands) ASSETS Current assets: Cash and cash equivalents (Notes 3 and 21) \ 1,358,798,659 \ 1,646,904,414 Short-term financial instruments (Notes 3, 4, 8, 21 and 23) 326,540, ,121,760 Trade accounts and notes receivable less allowance for doubtful accounts of \2,763,151 in 2007 (\5,045,549 in 2006) (Notes 5, 9 and 21) 549,879,830 1,431,112,119 Other accounts receivable less allowance for doubtful accounts of \10,306,935 in 2007 (\23,898,026 in 2006) (Notes 9 and 21) 56,710,304 87,261,303 Inventories (Notes 6, 12 and 23) 701,892, ,082,238 Prepaid expenses 35,727,927 40,101,072 Deferred income tax assets (Note 31) 268,454, ,722,926 Other current assets (Notes 7, 9 and 21) 248,820,234 29,097,305 Total current assets 3,546,824,057 4,520,403,137 Non-current assets: Long-term financial instruments (Notes 3 and 4 ) 322,360 4,042,477 Available-for-sale securities (Notes 8 and 23) 11,423,458 11,727,604 Equity method investments (Notes 8 and 9) 2,073,894, ,648,618 Long-term loans, net of allowance for doubtful accounts (Notes 9 and 21) 28,064, ,305,274 Long-term accrued revenues, net of allowance for doubtful accounts (Notes 9 and 21) - 20,358,212 Long-term derivatives receivable (Note 24) 4,229,632 - Long-term advance payments 184,420, ,577,302 Deferred income tax assets (Note 31) 76,252, ,910,074 Property, plant and equipment, net (Notes 9, 10, 11, 12 and 18) 8,397,453,599 6,983,463,702 Intangible assets, net (Note 13) 528,756, ,699,378 Other assets (Notes 14 and 21) 15,170,111 28,670,752 Total investments and other assets 11,319,988,100 9,105,403,393 Total assets \ 14,866,812,157 \ 13,625,806,530 (Continued) See accompanying notes. 4

7 NON-CONSOLIDATED BALANCE SHEETS (CONT'D) As of (Korean won in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts and notes payable (Notes 9 and 21) \ 645,921,719 \ 648,435,361 Short-term borrowings (Notes 9, 16 and 21) 224,252,986 24,149,160 Other accounts and notes payable, net of discount on present value (Notes 9, 17, 21, 22 and 23) 970,177, ,656,099 Accrued expenses (Notes 9, 21 and 23) 391,433, ,932,646 Current portion of long-term borrowings, net of discount on bonds, discount on present value, conversion right adjustment and addition of redemption premium (Notes 11, 12, 17, 18 and 21) 424,977, ,285,351 Other current liabilities (Note 15) 136,444,401 58,247,380 Total current liabilities 2,793,207,313 2,341,705,997 Non-current liabilities: Long-term borrowings, net of discount on bonds, discount on present value, conversion right adjustment and addition of redemption premium (Notes 11, 12, 17, 18, 21 and 24) 2,373,850,609 1,888,986,898 Other long-term accounts and notes payable, net of discount on present value (Notes 17, 21, 22 and 23) 247,716, ,618,337 Long-term advances received 84,391, ,175,000 Severance and retirement benefits (Note 19) 313,694, ,396,906 Other long-term liabilities (Notes 20, 21, 23 and 24) 17,664,441 6,501,777 Total non-current liabilities 3,037,317,313 2,750,678,918 Total liabilities 5,830,524,626 5,092,384,915 Stockholders' equity: Capital stock (Note 25) 2,313,783,365 2,312,750,170 Capital surplus (Notes 17, 25, 26 and 31) 852,386, ,734,275 Capital adjustments (Notes 9, 25 and 27) 14,660,920 4,267,731 Accumulated other comprehensive loss (Notes 8, 28, 31 and 37) (53,496,800) (138,894,300) Retained earnings (Notes 29 and 31) 5,908,953,435 5,568,563,739 Total stockholders' equity 9,036,287,531 8,533,421,615 Total liabilities and stockholders' equity \ 14,866,812,157 \ 13,625,806,530 See accompanying notes. 5

8 NON-CONSOLIDATED STATEMENTS OF INCOME Years ended (Korean won in thousands, except per share amounts) Sales (Notes 9, 23 and 33) \ 8,433,754,559 \ 7,569,201,963 Cost of sales (Notes 9, 23, 32 and 40) 7,138,899,194 4,834,121,064 Gross profit 1,294,855,365 2,735,080,899 Selling and administrative expenses (Notes 9, 10, 11, 13, 19, 27, 30, 35, 36 and 40) 1,037,401, ,588,370 Operating income 257,454,343 1,872,492,529 Other income (expenses): Interest income (Note 9) 85,931,208 62,912,611 Interest expense (Notes 9 and 10) (145,483,894) (163,086,720) Rental income (Note 9) 32,318,925 33,254,361 Bad debt expenses - other (24,267) (50,884,987) Reversal of allowance for doubtful accounts (Note 9) 2,965,790 20,728,376 Gain (loss) on foreign currency transactions, net 26,982,627 (660,696) Gain (loss) on foreign currency translation, net (Note 21) (28,074,854) 123,812,357 Equity in earnings (losses) of equity method investments, net (Note 8) 169,693,887 (37,652,022) Gain on disposal of available-for-sale securities (Note 8) 4,348,429 9,122,658 Gain on disposal of property, plant and equipment, net (Note 10) 3,163,392 1,689,646 Impairment loss on property, plant and equipment (Note 10) (999,947) (59,026,638) Depreciation of idle assets (Note 10) (2,392,220) (5,325,771) Gain on disposal of other assets, net - 135,667,517 Loss on redemption of bonds (Note 17) (57,943,082) - Loss on repayments of long-term borrowings (Note 17) (12,992,332) - Miscellaneous income (loss), net (Note 23) 92,176,776 (113,988,130) Others, net (Notes 9 and 24) (10,294,826) 702, ,375,612 (42,734,931) Income before provision for (benefit from) income taxes 416,829,955 1,829,757,598 Provision for (benefit from) income taxes (Note 31) 88,235,077 (182,632,376) Net income (Note 37) \ 328,594,878 \ 2,012,389,974 Earning per share (Note 34): Basic \ 716 \ 4,430 Diluted \ 715 \ 4,415 See accompanying notes. 6

9 NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS Years ended (Korean won in thousands) Retained earnings before appropriations: Unappropriated retained earnings carried forward from the prior year \ 5,333,057,560 \ 3,556,173,765 Retained earnings adjustment arising from equity method investments (Note 8) 12,623,724 - Deferred income taxes recognized directly to equity (Note 31) (828,906) - Net income 328,594,878 2,012,389,974 5,673,447,256 5,568,563,739 Appropriations: Reserve for research and human resource development - 235,506, ,506,179 Unappropriated retained earnings to be carried forward to the next year \ 5,673,447,256 \ 5,333,057,560 See accompanying notes. 7

10 NON-CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2007 (Korean won in thousands) Capital stock Capital surplus Capital adjustments Accumulated other comprehensive loss Retained earnings Total As of January 1, 2007 \ 2,312,750,170 \ 786,734,275 \ 4,267,731 \ (138,894,300) \ 5,568,563,739 \ 8,533,421,615 Stock option exercise 1,033, ,683 (549,274) - - 1,027,604 Forfeiture of stock option - 175,950 (175,950) Consideration for conversion rights in capital surplus - 89,562, ,562,350 Net Income ,594, ,594,878 Changes in retained earnings of equity method investments ,623,724 12,623,724 Deferred income taxes recognized directly to equity - (24,629,647) - 331,792 (828,906) (25,126,761) Compensation expenses associated with stock options ,118, ,118,413 Capital adjustments arising from equity method investments ,142,737-85,142,737 Gain on valuation of available-for-sale securities (77,029) - (77,029) As of December 31, 2007 \ 2,313,783,365 \ 852,386,611 \ 14,660,920 \ (53,496,800) \ 5,908,953,435 \ 9,036,287,531 See accompanying notes. 8

11 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended (Korean won in thousands) Cash flows from operating activities: Net income \ 328,594,878 \ 2,012,389,974 Adjustments to reconcile net income to net cash provided by operating activities: Provision for severance and retirement benefits 97,008,671 67,780,525 Depreciation 1,694,061,190 1,290,729,519 Depreciation of idle assets 2,392,220 5,325,771 Amortization of intangible assets 51,485,093 50,265,644 Research and development costs 24,326,251 32,355,263 Loss (gain) on foreign currency translation, net 28,160,854 (123,812,357) Interest expense 51,328,547 48,075,918 Bad debt expense - other 24,267 50,884,987 Equity in losses (earnings) of equity method investments (169,693,887) 37,652,022 Gain on disposal of available-for-sale securities, net (4,348,429) (9,122,658) Gain on disposal of property, plant and equipment, net (3,163,392) (1,689,646) Impairment loss on property, plant and equipment 999,947 59,026,638 Gain on disposal of other assets, net - (135,667,517) Reversal of allowance for doubtful accounts (2,965,790) (20,728,376) Loss on valuation of inventories 98,756,272 8,055,373 Loss on redemption of bonds 57,943,082 - Loss on repayments of long-term borrowings 12,992,332 - Provision for (benefit from) income taxes 87,799,239 (182,632,376) Others, net (36,403,610) 135,956,879 Changes in operating assets and liabilities: Trade accounts and notes receivable 799,882,389 (440,119,963) Other accounts receivable 46,008,095 57,490,186 Inventories (176,566,975) (197,703,593) Prepaid expenses (8,326,377) (873,657) Long-term accrued revenues (12,823,527) (10,295,785) Long-term advance payments (41,265,831) (47,520,053) Trade accounts and notes payable (5,193,120) 345,559,823 Other accounts and notes payable (24,462,386) 48,966,200 Accrued expenses (149,612,105) (5,048,126) Other long-term accounts and notes payable 37,057,353 30,624,467 Payment of severance and retirement benefits, net (29,711,028) (27,529,748) Others, net 11,554,872 32,565,083 Total adjustments 2,437,244,217 1,098,570,443 Net cash provided by operating activities 2,765,839,095 3,110,960,417 (Continued) See accompanying notes. 9

12 NON-CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) Years ended (Korean won in thousands) Cash flows from investing activities: Decrease (increase) in short-term financial instruments (16,418,296) 9,228,921 Decrease in long-term financial instruments 3,720,117 4,207,126 Proceeds from disposal of available-for-sale securities 5,583,315 10,401,486 Proceeds from disposal of equity method investments - 1,800,630 Dividends on equity method investments 6,615,000 - Proceeds from disposal of property, plant and equipment 31,959,669 32,864,742 Acquisition of available-for-sale securities (938,172) (1,008,885) Acquisition of equity method investments (814,992,260) (321,413,617) Increase in long-term loans, net (14,030,008) (13,164,962) Acquisition of property, plant and equipment (3,140,708,784) (2,955,824,078) Acquisition of intangible assets (18,436,021) (15,806,558) Others, net (4,035,386) 14,375,472 Net cash used in investing activities (3,961,680,826) (3,234,339,723) Cash flows from financing activities: Proceeds from disposal of treasury stock - 634,682 Drawdown of short-term borrowings 196,338,350 - Proceeds from issuance of bonds 826,483, ,054,360 Proceeds from issuance of covertible bonds 533,959,767 - Proceeds from long-term borrowings 782,322, ,456,055 Increase paid in capital - 287,490,019 Proceeds from stock option exercise 1,033,195 2,190,005 Payment of short-term borrowings - (102,097,895) Payment of current portion of long-term borrowings (174,679,233) (72,426,103) Redemption of bonds (509,230,874) - Payment of long-term borrowings (748,485,415) - Stock issuance costs (5,591) (3,965,223) Net cash provided by financing activities 907,735, ,335,900 Net increase (decrease) in cash and cash equivalents (288,105,755) 749,956,594 Cash and cash equivalents at the beginning of the year 1,646,904, ,947,820 Cash and cash equivalents at the end of the year \ 1,358,798,659 \ 1,646,904,414 See accompanying notes. 10

13 1. Corporate information Hynix Semiconductor Inc. (the Company ) was incorporated on October 15, 1949 under the laws of the Republic of Korea. The Company is engaged in the manufacturing and marketing of semiconductors and the Company s shares have been listed on the Korea Stock Exchange since The Company has its headquarters in I-cheon and a branch office in Seoul. Production facilities of the Company are located in I-cheon and Cheong-ju. As of December 31, 2007, the stockholders of the Company and their shareholdings are as follows: Stockholder Number of shares Percentage of ownership (%) Share Management Council: Korea Exchange Bank 37,742, Woori Bank 36,877, Korea Development Bank 28,572, Shinhan Bank 27,979, Other financial institutions 34,310, ,480, Individual investors 293,748, ,228, In accordance with the voluntary resolution of the Share Management Council, the members of the Share Management Council are restricted from selling their respective shares to the public. 2. Summary of significant accounting policies Basis of financial statement preparation The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea ( Korean GAAP ). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. Certain supplementary information attached to the Korean language financial statements, but not required for a fair presentation of the Company s financial position, results of operations, cash flows and changes in equity, is not presented in the accompanying non-consolidated financial statements. 11

14 2. Summary of significant accounting policies (cont d) Adoption of new Statements of Korea Accounting Standards The Korea Accounting Standards Board has issued new Statements of Korea Accounting Standards ( SKAS ) to revise the existing Korea accounting standards with the intention to meet international practices and disclosure rules. The following new SKAS have become effective for accounting periods beginning on or after January 1, 2007: SKAS 11 Discontinuing Operations SKAS 21 Preparation and Presentation of Financial Statements I SKAS 22 Share-based Payments SKAS 23 Earnings per Share The Company has adopted these new standards in its financial statements for the year ended December 31, Adoption of these new standards did not have any material effect on the Company s financial statements, except for the effects of SKAS 21 as described below. The adoption of SKAS 21 has resulted in the addition of a statement of changes in equity in the 2007 financial statements. A statement of changes in equity is not required to be presented for the comparative 2006 financial statements according to the transitional provision of SKAS 21 on application of retrospective application. Cash equivalents Highly liquid deposits and marketable securities with original maturities of three months or less, and which have no significant risk of loss in value by interest rate fluctuations, are considered as cash equivalents. Financial instruments Financial instruments, such as time deposits and restricted bank deposits, which are traded by financial institutions and are held for short-term cash management purposes or which will mature within one year, are accounted for as short-term financial instruments. Financial instruments other than cash equivalents and short-term financial instruments are recorded as long-term financial instruments. Allowance for doubtful accounts The Company provides an allowance for doubtful accounts in consideration of the estimated losses that may arise from non-collection of its receivables. The estimate of losses, if any, is based on a review of the aging and current status of the outstanding receivables. Inventories Inventories are stated at the lower of cost or net realizable value, with cost being determined using the total average method for finished goods and work-in-process; the specific identification method for materials in-transit; and the moving average cost method for all other inventories. Perpetual inventory system is used to record inventories, in which inventories are adjusted to physical inventory counts that are performed at the end of the year. When a decline in the value of an inventory indicates that its cost exceeds net realizable value, a valuation loss will be recognized to write the inventory down to its net realizable value. The loss on valuation is recognized in cost of sales when it is incurred in the ordinary course of business, whereas such losses incurred otherwise are classified as a non-operating expense. 12

15 2. Summary of significant accounting policies (cont d) Investments in securities Investments in securities within the scope of SKAS 8 Investments in Securities are classified as either trading, held-to-maturity and available-for-sale securities, as appropriate, and are initially measured at cost, including incidental expenses, with cost being determined using the moving average method. The Company determines the classification of its investments after initial recognition, and, where allowed and appropriate, re-evaluates this designation at each financial year end. Securities that are acquired and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities which carry fixed or determinable payments and fixed maturity are classified as held-to-maturity if the Company has the positive intention and ability to hold to maturity. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale securities. After initial measurement, available-for-sale securities are measured at fair value with unrealized gains or losses being recognized directly in equity as other comprehensive income or loss. Likewise, trading securities are also measured at fair value after initial measurement, but with unrealized gains or losses reported as part of net income. Held-to-maturity securities are measured at amortized cost after initial measurement. The cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount and the maturity amount. The fair value of trading and available-for-sale securities that are traded actively in the open market (marketable securities) is measured at the closing price of those securities at the balance sheet date, except for non-marketable equity securities which are measured at cost subsequent to initial measurement if their fair values cannot be reliably estimated. Non-marketable debt securities are carried at a value using the present value of future cash flows discounted using an appropriate interest rate which reflects the issuer s credit rating announced by a public independent credit rating agency. If the application of such measurement method is not feasible, estimates of fair values may be made using a reasonable valuation model or quoted market prices of similar debt securities issued by entities conducting business in similar industries. Beneficiary certificates which are securities indicating beneficiary right in certain investment securities held by the investment management companies are recorded at fair value as determined by the investment management companies. Trading securities are classified as current assets. Availablefor-sale and held-to-maturity securities are classified as long-term investments, except that securities maturing within one year or are certain to be disposed of within one year from the balance sheet date are classified as short-term investments. The Company recognizes an impairment loss on its investments in securities if there is objective evidence that the securities are impaired. The impairment loss is charged to statement of income. Equity method investments Investments in entities over which the Company has control or significant influence are accounted for using the equity method. 13

16 2. Summary of significant accounting policies (cont d) Equity method investments (cont d) Under the equity method of accounting, the Company s initial investment in an investee is recorded at acquisition cost. Subsequently, the carrying amount of the investment is adjusted to reflect the Company s share of income or loss of the investee in the statement of income and share of changes in equity that have been recognized directly in the equity of the investee in the related equity account of the Company on the balance sheet. If the Company s share of losses of the investee equal or exceed its interest in the investee, it discontinues recognizing its share of further losses. However, if the Company has other long-term interests in the investee, it continues recognizing its share of further losses to the extent of the carrying amount of such long-term interests. On the date of acquisition, the excess of the cost of the investment over the Company s share of the net fair value of the investee s identifiable assets and liabilities is accounted for as goodwill which is amortized over its useful life of 20 years using the straight-line method. The amortization is recorded against the equity income (loss) of equity method investments. When events or circumstances indicate that the carrying amount may not be recoverable, the Company recognizes an impairment loss. The Company s share in the investee s unrealized profits and losses resulting from transactions between the Company and its investee are eliminated. In translating the financial statements of foreign investees into Korean won, assets and liabilities are translated at the exchange rate on the balance sheet date and income and expenses are translated at the weighted-average exchange rate for the period. All resulting exchange differences are recognized as foreign currency translation adjustments in other comprehensive income within equity. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation, except for certain assets which were revalued in accordance with the Korean Assets Revaluation Law and are stated at revalued amount less accumulated depreciation. The revaluation is no longer allowed effective from January 1, When an asset is acquired by means of capital contributions in-kind, donations and/or other forms of unilateral transfers, the cost shall be recorded at its fair value. When the estimated cost of dismantling and removing the asset and restoring the site, after the termination of the asset s useful life, meets the criteria for recognition of provisions, the present value of the estimated expenditure shall be included in the cost of the asset. Maintenance and repairs are expensed in the year in which they are incurred. Expenditures which enhance the value or extend the useful life of the related assets are capitalized. Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful life of the assets as follows: Years Buildings 10 ~ 60 Structures 5 ~ 40 Machinery and equipment 5 ~ 20 Vehicles 5 Others 5 ~ 10 14

17 2. Summary of significant accounting policies (cont d) Property, plant and equipment (cont d) The Company recognizes depreciation expense on idle property, plant and equipment, which are temporarily not in operation, as part of non-operating expenses. The Company records an impairment loss on the carrying amount of an item of property, plant and equipment when there is an indication that the asset is impaired. Impairment is measured by comparing the carrying amount of the asset with its recoverable amount. An impairment loss is charged to the statement of income immediately. Impairment of an asset that is subsequently recovered is recognized as a recovery on impairment losses. The book value of an asset subsequent to such recovery may not exceed the carrying amount of an asset prior to the impairment, net of depreciation expense to be applied during the period an asset had been impaired. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalized as part of the cost of those assets. Leases A lease is accounted for as either a capital lease or an operating lease. A lease is recognized as a capital lease if it transfers substantially to the Company all the risks and rewards incidental to ownership of the leased asset. A lease other than capital lease is classified as an operating lease. Situations that individually or in combination would normally lead to a lease being classified as a capital lease are when: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has a bargain purchase option at the inception of the lease and it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the useful life of the asset even if title is not transferred; (d) the present value of the minimum lease payments at the inception of the lease amounts to at least substantially all the fair value of the leased asset; and (e) the leased asset is of such a specialized nature that only the lessee can use it without major modification. An asset acquired by way of a capital lease arrangement is stated in the balance sheet at the lower of the fair value or the present value of minimum lease payments at the inception of the lease. The corresponding liability is included in the balance sheet as a capital lease obligation. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Capitalized lease assets are depreciated in the same manner as other depreciable property, plant and equipment. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Government subsidy Government subsidy, which is used for the acquisition of certain assets, is accounted for as a deduction from the acquisition cost of the acquired assets. Such subsidy amount is offset against the depreciation or amortization of the acquired assets during such assets useful life. Government subsidy, which is required to be repaid, is recorded as a liability in the balance sheet. Government subsidy with no repayment obligation, which is used to purchase a designated asset or to develop a certain technology, is presented as a deduction of the related asset and is amortized against the depreciation or amortization expense of the related asset. Government subsidy, contributed to compensate for specific expenses, is offset against the related expenses as incurred. 15

18 2. Summary of significant accounting policies (cont d) Intangible assets Intangible assets are stated at cost less accumulated amortization and impairment losses. Goodwill represents costs in excess over the fair value of net identifiable assets of businesses acquired or merged. Goodwill is amortized using the straight-line method over 20 years. Other intangible assets are amortized using the straight-line method over periods ranging from 5 to 10 years, based on the nature of the assets. However, when the recoverable value of intangible assets falls below their book value, the difference between the recoverable value and the book value is charged to statement of income. Accrual for loss on purchase commitments The Company is committed to purchase wafers from overseas subsidiaries, Hynix Semiconductor Manufacturing America, Hynix-ST Semiconductor Ltd. and Hynix Semiconductor (Wuxi) Ltd. For finished goods and work-in process of the subsidiaries at period end, if the total manufacturing costs, consisting of purchase price and additional processing cost on purchased wafers, are expected to be greater than the sales price of finished products, the Company recognizes the expected sales loss as cost of sales which is accrued as other current liabilities. Allowance for sales return The anticipated sales returns are adjusted to sales and cost of sales and related gross profit and estimated expenses are recorded as accrued expenses. Convertible bonds When issuing convertible bonds, the value of the conversion rights is recognized separately. The portion allocable to the conversion rights is measured by deducting the present value of the debt at time of issuance from the gross proceeds from issuance of convertible bonds, with the present value of the debt being computed by discounting the expected future cash flow using the effective interest rate applied to ordinary debt of the Company at the issue date. The portion allocable to the conversion rights is accounted for as capital surplus and the redemption premium payable at maturity of the bonds is accounted for as an addition to the face value of the bond with a corresponding conversion rights adjustment which is deducted from the related bonds. Such conversion rights adjustment is amortized to interest expense using the effective-interest-rate method over the redemption period of the convertible bonds. Discount (premium) on bonds Discount (premium) on bonds is presented as a direct deduction from (addition to) the nominal value of the bonds and is amortized using the effective-interest-rate method over the life of the bonds. Severance and retirement benefits In accordance with the Korean Law on Guarantee of Employee s Severance and Retirement Benefits and the Company s regulations, employees terminating their employment with at least one year of service are entitled to severance and retirement benefits, based on the rates of pay in effect at the time of termination, years of service and certain other factors. The provision for the years ended is sufficient to state the liability at the estimated obligation arising from services performed to and at rates of pay in effect as of. Funding of this liability is not required by Korean law. 16

19 2. Summary of significant accounting policies (cont d) Severance and retirement benefits (cont d) The lesser of 5% of annual payroll expense or 35% of the accumulated severance and retirement benefits provision is deductible for corporate income tax reporting purposes unless benefits are actually paid or the non tax-deducted portion is deposited with financial institutions. Accordingly, the Company has deposited a portion of its severance and retirement benefits obligation with an insurance company. Since the Company s employees are individually nominated as the vested beneficiaries of the deposit in respect of what is due to them as of, such deposit has been offset against the Company s liability for severance and retirement benefits as of such dates. In accordance with the Korean National Pension Law prior to revision, the Company had prepaid a portion of its severance and retirement benefits obligation to the Korean National Pension Service ( KNPS, formerly the Korean National Pension Corporation) at the rate of 3% of payroll expense up through March 31, Such prepayments have been offset against the Company s liability for severance and retirement benefits. In accordance with a revision in the Korean National Pension Law, additions to these prepayments are no longer required effective from April 1, Valuation of receivables (payables) at present value Receivables (payables) arising from long-term installment transactions are stated at present value. The difference between the carrying amount and present value of the receivables (payables) is amortized using the effective-interest-rate method and credited (charged) to statement of income over the installment period. Foreign currency translation Transactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the balance sheet date. The resulting unrealized foreign currency translation gains or losses are credited or charged to current operations. Derivative financial instruments Derivative financial instruments are presented as assets or liabilities valued principally at the fair value of the rights or obligations associated with the derivative contracts. The unrealized gain or loss from a derivative transaction with the purpose of hedging the exposure to changes in the fair value of a recognized asset or liability or unrecognized firm commitment is recognized in current operations. 17

20 2. Summary of significant accounting policies (cont d) Share-based payment transactions For equity-settled share-based payment transactions, the Company measures the goods or services received, and the corresponding increase in equity at the fair value of the goods or services received or the equity instruments granted over the vesting period. For cash-settled share-based payment transactions, the Company measures the goods or services acquired and the liability incurred at the fair value of the liability, and re-measures the fair value of the liability at each reporting date, with any changes in value recognized in profit or loss for the period. For share-based payment transactions in which the terms of the arrangement provide the supplier of goods or services with a choice of whether the Company settles the transaction in cash or by issuing equity instruments, the Company accounts for that transaction, or the components of that transaction, as a cash-settled sharebased payment transaction if, and to the extent that, the Company has incurred a liability to settle in cash (or other assets), or as an equity-settled share-based payment transaction if, and to the extent that, no such liability has been incurred. Share-based payment transactions implemented before the effective date of SKAS 22 are accounted in accordance with Korea Financial Accounting Standards Interpretations Accounting for Stock Options. Revenue recognition The Company recognizes revenue from sale of products upon transfer of the significant risks and rewards of ownership of the goods to the buyer. Product sales are reported net of allowance for estimated discounts and product returns. Revenue from other than the sale of products is recognized when the Company s revenue-earning activities have been substantially completed, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the Company. Income taxes Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered or paid to the tax authorities. Deferred income taxes are provided using the liability method for the tax effect of (1) temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, (2) tax loss carryforwards and (3) tax credit carryforwards. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences, tax loss carryforwards and tax credit carryforwards are expected to reverse, and are classified as current or non-current, respectively, based on the classification of the related asset or liability in the balance sheet. In addition, tax loss carryforwards and tax credit carryforwards are classified based on when they are expected to expire. Current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity. Per share amounts Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the year plus the weighted average number of common shares that would have been outstanding assuming the conversion of all dilutive potential common shares. 18

21 2. Summary of significant accounting policies (cont d) Use of estimates The preparation of financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain amounts in the 2006 financial statements have been reclassified to conform with the 2007 presentation. Such reclassifications had no effect on the Company s net income and retained earnings as previously reported. 3. Cash and cash equivalents, and financial instruments Cash and cash equivalents, and financial instruments as of consist of the following (Korean won in millions): Cash and cash equivalents: Cash on hand \ 8 \ 8 Checking accounts - 10,368 Passbook accounts 1 57 Time deposits 194, ,534 Money market wrap - 50,000 Specified money trust account 1,090, ,000 Repurchase agreement 20, ,000 Cash management account 4,071 4,937 Certificate of deposit 20,000 50,000 Money market deposit accounts 30,014 - \ 1,358,798 \ 1,646,904 Short-term financial instruments: Passbook accounts \ 65 \ 12,026 Time deposits 113,454 83,434 Money market deposit accounts 2,979 4,662 Specified money trust account 180, ,000 Repurchase agreement - 10,000 Certificate of deposit 30,000 10,000 \ 326,540 \ 310,122 Long-term financial instruments: Time deposits \ 308 \ 1,602 Specified money trust account - 2,422 Deposits for checking accounts \ 322 \ 4,042 19

22 4. Restricted deposits Restricted deposits as of consist of the following (Korean won in millions): Short-term financial instruments: Provided as collateral for long-term debt \ - \ 14,042 Escrow deposits related to disposal of equity securities of Hyundai Autonet Co., Ltd. (Note 23 (4) 3) 43,354 43,354 Others 3,186 2,726 46,540 60,122 Long-term financial instruments: Provided as collateral related to disposal of water business unit (Note 23 (7)) - 2,422 Lawsuit deposits - 1,602 Maintenance of checking accounts Provided as collateral for long-term debt ,042 \ 46,862 \ 64, Accounts receivable factored Outstanding accounts receivables factored with financial institutions as of December 31, 2007 and 2006 are as follows (Korean won in millions): Factoring terms Trade accounts and notes receivable \ 13,433 \ 21,959 Without recourse Trade accounts and notes receivable 249,370 - With recourse \ 262,803 \ 21, Inventories Inventories as of are as follows (Korean won in millions): Finished goods \ 247,932 \ 184,590 Work in-process 428, ,893 Raw materials 128,268 43,529 Supplies 5,416 3,756 Materials in-transit 34,678 25, , ,719 Less: valuation allowance (143,393) (44,637) \ 701,893 \ 624,082 20

23 7. Other current assets Other current assets as of are as follows (Korean won in millions): Short-term loans, net of allowance for doubtful accounts of \1 in 2007 and \2 in 2006 \ 187,709 \ 185 Advance payments 17,900 17,096 Accrued income, net of allowance for doubtful accounts of \10 in 2007 and \3 in ,211 11,816 \ 248,820 \ 29, Investment in securities (a) Available-for-sale securities as of consist of the following (Korean won in millions): 2007 Fair value/ Number Ownership Acquisition proportionate Book of shares (%) cost net asset value value Equity securities: Hyundai Information Technology Co., Ltd. 464, \ 6,962 \ 2,854 \ 2,854 Hyundai Unicorns Co., Ltd. (*1) 91, ,290 (9,322) - Hyundai Digital Entertainment Co., Ltd. 75, (52) 75 Hyundai Logistics Co., Ltd. 30, Novelis Korea Limited , ,699 T.on Telecom 108, ,700 (326) - U.P.D. Co., Ltd. 1,874, , Itest Co., Ltd. 48, ,166 1,679 1,166 Hyundai IT Corp. (*2) 25, BOE Hydis Technology Co., Ltd. (*2) 68, ,957 - Hyundai LCD Inc. (*2) 9, Trigem Computer Inc. (*2) (1) 1 ZMOS Technology Inc. 2,000, Hynix Semiconductor Indian Subcontinent Private Ltd. (HSIS) (*1) Anhui Wanyan Electronics Certificate System Inc. of investment , Globalstar Thailand Limited. Gsj (*3) 34, Pak Globalstar (Private) Ltd. (*3) Certificate of investment Others ,930 (270) 7,064 Debt securities: Government and municipal bonds 4,359 4,359 4,359 4,359 4,359 4,359 \ 64,289 \ 4,089 \ 11,423 (*1) This equity security was not accounted for using the equity method of accounting in accordance with Korean GAAP, as the investee s total assets were immaterial, less than \7,000 million as of the prior year-end. 21