Faced with a DRAM oversupply followed by a global economy downturn, the DRAM market experienced an acute price slump – including sharp declines in PC DRAM prices – that lasted longer than two years. As a result, Elpida suffered a negative earnings performance, which we recognize was a disappointment to our shareholders.

But we now believe the business road ahead looks more favorable.

Since summer 2009, the global economy has been showing signs of recovery. Global sales of notebook PCs, digital TVs, smart phones and other electronic equipment have turned favorable, leading in turn to higher demand for DRAMs and a quickly revitalized market. Also, as the prolonged slump in market prices discouraged DRAM makers from making large capital investments, manufacturing volumes have only slightly risen. As a result, the balance of supply and demand has tightened, opening the door to considerable improvement in DRAM selling prices.

During the slump in market prices, Elpida did not let up on R&D. We continued to develop advanced processes and optimize chip design. As a result, we were able to improve productivity through such measures as implementing new technologies and boosting yields, both of which helped reduce costs. This put us in a position to enjoy much more robust earnings when market prices started to recover. Thus, in the third quarter of FY2009 we had net sales of 151.0 billion yen, up 2.4 fold versus a year ago, and operating income turned into the black after posting a loss of 30.4 billion yen a year ago.

Strengthening our financial position and boosting competitiveness

In order to improve our financial position, which had been hard hit by the prolonged slump in market prices, and solidify our competitive position in the DRAM industry, Elpida last year made an application to the Japanese government under the Act on Special Measures for Industrial Revitalization and Innovation of Industrial Activities. After a business restructuring plan was submitted to and approved by the Ministry of Economy, Trade and Industry ("METI"), Elpida arranged for a private placement of 30 billion yen in preferred stock to the Development Bank of Japan Inc. (the "DBJ").

In addition, based on indications since last September of a full-scale recovery of DRAM market prices, we decided to make our business restructuring plan more aggressive by procuring yet more capital through a public offering of 55 million shares of common stock, which raised 60.4 billion yen. At around the same time, with the help of our core banks we arranged a loan facility consisting of 100 billion yen in syndicated loans from financial institutions and obtained a 10 billion yen loan from the DBJ.

Elpida is now using these proceeds to develop new Premier DRAMs, TSV technology and other advanced technologies, purchase advanced manufacturing equipment for use in 40nm process production and pay down interest-bearing debt. These financing actions are intended to substantially bolster our competitiveness and strengthen our financial foundation.

Expanding ties with Taiwanese makers

In addition to the manufacturing partnership we established with Taiwan's Powerchip in 2002, followed later by Rexchip, a manufacturing joint venture with Powerchip, in the current business year we have entered into basic agreements with ProMOS and Winbond. These latter two Taiwanese companies will supply us with DRAM products starting later this year. These partners provide us with a greater product supply capacity, enabling us to respond more effectively to the demands of our customers.

Also, Elpida and Rexchip are now preparing to create an R&D center at Rexchip to enable us to work jointly on new technologies. By combining the technology capabilities available in Japan and Taiwan, the new center will support more rapid development of advanced technology and create new methods for lowering development costs, which will help both companies to grow.

As we take on the business challenges ahead of us, we greatly appreciate your continued support and encouragement.

Sincerely,
Yukio Sakamoto
President & CEO of Elpida

January 2010