Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

MICRON TECHNOLOGY, INC.

Consolidated Statements of Operations

(Amounts in millions except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

1

MICRON TECHNOLOGY, INC.

Consolidated Balance Sheets

(Amounts in millions except par value amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

2

MICRON TECHNOLOGY, INC.

Consolidated Statements of Cash Flows

(Amounts in millions)

(Unaudited)

See accompanying notes to consolidated financial statements.

3

MICRON TECHNOLOGY, INC.

Notes to Consolidated Financial Statements

(All tabular amounts in millions except per share amounts)

Unaudited Interim Financial Statements

Basis of presentation:  Micron Technology, Inc., and its subsidiaries (hereinafter referred to collectively as the “Company”) principally design, develop, manufacturemanufactures and marketmarkets DRAMs, Flash memory, CMOS image sensors, other semiconductor products.components and memory modules.  All significant intercompany accounts and transactions have been eliminated.  The Company’s fiscal year is the 52 or 53-week period ending on the Thursday closest to August 31.  The Company’s secondthird quarter of fiscal 2003 and 2002 ended on February 27,May 29, 2003, and February 28,May 30, 2002, respectively.  The Company’s fiscal 2002 ended on August 29, 2002.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company, and its consolidated results of operations and cash flows.  All period references are to the Company’s fiscal periods unless otherwise indicated.

These interim financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Form 10-K for the year ended August 29, 2002.

Recently issued accounting standards:  In JanuaryMay 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  SFAS No. 150 requires that certain financial instruments, which under previous guidance could be accounted for as equity, be classified as liabilities in statements of financial position.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective for the Company in the first quarter of 2004.  The Company does not expect the adoption of SFAS No. 150 to have a significant impact on the Company’s future results of operations or financial condition.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133.  SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003.  The Company does not expect the adoption of SFAS No. 149 to have a significant impact on the Company’s future results of operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” which provides guidance on the identification of and reporting for variable interest entities.  Interpretation No. 46 expands the criteria for consideration in determining whether a variable interest entity should be consolidated.  Interpretation No. 46 is effective immediately for variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date.  TheInterpretation No. 46 is effective for the Company is required to adopt the interpretation in the first quarter of 2004 for variable interest entities acquired before February 1, 2003.  The Company is currently assessing the impact of Interpretation No. 46 on its future results of operations and financial position.

In December 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.”  SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  SFAS No. 148 is effective for the Company in the third quarter of 2003.  The Company does not expect to effect a voluntary change in accounting to the fair value based method, and, accordingly, does not expect the adoption of SFAS No. 148 to have a significant impact on the Company’s future results of operations or financial position.condition.

Segment information:  The Company has determined, based on the nature of its operations and products offered to customers, that its only reportable segment is Semiconductor Operations.  The Semiconductor Operations segment’s primary product is DRAM.

Product warrantywarranty::  The Company generally provides a limited warranty that its products are in compliance with Company specifications existing at the time of delivery.  Under the Company’s general terms and conditions of sale, liability for certain failures of product during a stated warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts paid for such items.  Under certain circumstances the Company may provide more extensive limited warranty coverage and general legal principles

4

may, under certain circumstances, impose upon the Company more extensive liability than that provided under the Company’s general terms and conditions.  The Company’s warranty obligations are not material.

4

Supplemental Balance Sheet Information

In the third, second and first quarters of 2003, the Company recognized write-downs of $14.6 million, $197.4 million and $90.8 million, respectively, to record work in process and finished goods inventories of semiconductor products at their estimated market values.

In the fourth, third, second and first quarters of 2002, the Company recognized write-downs of $173.6 million, $25.9 million, $3.8 million and $172.8 million, respectively, to record work in process and finished goods inventories of semiconductor products at their estimated market values.

Depreciation expense was $297.3$287.8 million and $584.4$872.2 million for the secondthird quarter and first sixnine months of 2003, respectively, and $278.5$281.3 million and $563.3$844.6 million in the secondthird quarter and first sixnine months of 2002, respectively.

As part of a restructure plan announced in the second quarter of 2003, the Company recorded an impairment chargecharges of $53.9$44.6 million in the first nine months of 2003 to write down the carrying value of certain assets consisting primarily of assets used in the Company’s 200 mm production line in Virginia.  Prior toVirginia, which was shut down as part of the charge, these assets had a carrying value of $77.3 million.  These assets arerestructure plan.  Assets classified as held for sale and are included in other assets in the accompanying consolidated balance sheet.  (See “Restructure and Other Charges” note.)

The Company’s Lehi, Utah facility, the construction of which was initiated in 1995, is at present only partially utilized by the Company for component test operations.  Timing for completion of the Lehi facility is dependent

5

upon market conditions, including, but not limited to, worldwide market supply of, and demand for, semiconductor products and the Company’s operations, cash flows and alternative capacity utilization opportunities.  As of February 27,May 29, 2003, construction in progress included costs of $197.1$196.7 million related to certain assets in Lehi, which were not ready for their intended use and were not being depreciated.  As of February 27,May 29, 2003, the Company had assets in Lehi with a net book value of approximately $179.9$178.3 million, which were not in use but were being depreciated.

5

As of February 27,May 29, 2003, notes payable and capital lease obligations of $187.2$157.1 million and $18.6$14.7 million, respectively, were denominated in Japanese Yen and had weighted average interest rates of 1.5% and 1.8%, respectively.

In February 2003, the Company issued $632.5 million of 2.5% Convertible Subordinated Notes due February 1, 2010 (the “Notes”).  The issuance costs associated with the Notes totaled approximately $16.5$16.6 million and the net proceeds to the Company from the offering of the Notes were $616.0$615.9 million.  Holders of the Notes may convert all or some of their Notes at any time prior to maturity, unless previously redeemed or repurchased, into the Company’s common stock at a conversion rate of 84.8320 shares for each $1,000 principal amount of Notes.  This conversion rate is equivalent to a conversion price of approximately $11.79 per share.  The Company may redeem the notes at any time after February 6, 2006, at declining premiums to par.

Concurrent with the issuance of the Notes, the Company purchased call spread options (the “Call Spread Options”) covering 53.7 million shares of the Company’s common stock, which is the number of shares issuable upon conversion of the Notes in full.  The Call Spread Options have a lower strike price of $11.79, a higher strike price of $18.19, may be settled at the Company’s option either in cash or net shares and expire on January 29, 2008.  The maximum benefit to the Company from the Call Spread Options is a cash amount of $343.4 million or 18.9 million shares.  The Call Spread Options therefore have the potential of limiting the dilution associated with the conversion of the Notes from 53.7 million shares to as few as 34.8 million shares, depending upon market conditions. The Call Spread Option transactions, including fees and costs of $109.1 million, are accounted for as capital transactions.

The Call Spread Options are designed to mitigate dilution from conversion of the Notes in the event that the market price per share of the Company’s common stock upon exercise of the Call Spread Options is greater than $11.79.  Settlement of the Call Spread Options in cash on January 29, 2008, the expiration date, would result in the

6

Company receiving an amount ranging from zero if the market price per share of the Company’s common stock is at or below $11.79 to a maximum of $343.4 million if the market price per share of the Company’s common stock wereis at or above $18.19.  Settlement of the Call Spread Options in net shares on the expiration date would result in the Company

6

receiving a number of shares of the Company’s common stock, not to exceed 18.9 million shares, of the Company’s common stock with a value equal to the amount otherwise receivable on cash settlement.  Should there be an early unwind of the Call Spread Options, the amount of cash or net shares potentially received by the Company will be dependent upon then existing overall market conditions, and on the Company’s stock price, the volatility of the Company’s stock and the amount of time remaining on the Call Spread Options.  The Call Spread Options therefore have the potential of limiting the dilution associated with the conversion of the Notes from 53.7 million shares to as few as 34.8 million shares.  The Call Spread Option transactions, including fees and costs of $109.1 million, are accounted for as capital transactions.

Intangible Assets

During the first sixnine months of 2003, the Company expended $17.8$25.8 million for product and process technology and $2.5 million for other intangible assets with weighted average useful lives of nineten and three years, respectively.  During the first sixnine months of 2002, the Company expended $31.5$44.5 million for product and process technology and $3.8$9.3 million for other intangible assets with weighted average useful lives of nineeight and twofive years, respectively.  As part of a restructure plan announced in the second quarter of 2003, the Company wrote off $16.1 million of product and process technology and $2.5 million of other intangible assets associated with discontinued products.  (See “Restructure and Other Charges” note.)

The Company has guaranteed a portion of the credit facility of its joint venture, TECH Semiconductor Singapore Pte. Ltd. (“TECH”).  In accordance with FASB Interpretation No. 45, the Company estimated the fair value of its guarantee of TECH’s credit facility to be $7.0 million, which was recorded in other noncurrent liabilities in the third quarter of 2003 with an offsetting amount as an increase in the value of the TECH supply arrangement.  The amount recorded pursuant to Interpretation No. 45 is being amortized using the straight-line method through the June 2006 term of the new TECH credit facility.  (See “Joint Venture” note.)

Amortization expense for intangible assets was $13.0$12.7 million and $25.6$38.3 million for the secondthird quarter and first sixnine months of 2003, respectively, and $11.5$12.1 million and $22.5$34.6 million for the secondthird quarter and first sixnine months of 2002, respectively.  Annual amortization expense for intangible assets held as of February 27,May 29, 2003, is estimated to be $49.7$51.0 million for 2003, $45.2$48.1 million in 2004, $42.0$44.9 million in 2005, $40.7$43.2 million in 2006 and $40.6$41.4 million in 2007.

Contingencies

As is typical in the semiconductor and other high technology industries, from time to time, others have asserted, and may in the future assert, that the Company’s products or its processes infringe their product or process technology rights.  The Company is currently engaged in litigation with Rambus, Inc. (“Rambus”) relating to certain patents of Rambus and certain of the Company’s claims and defenses.  Lawsuits between Rambus and the Company are pending in the United States, Germany, France, the United Kingdom and Italy.  The Company is unable to predict the outcome of the Rambus suits or of other assertions of infringements made against the Company.  A court determination that the Company’s manufacturing processes or products infringe the product or process rights of others could result in significant liability and/or require the Company to make material changes to its products and/or manufacturing processes.  Any of the foregoing results could have a material adverse effect on the Company’s business, results of operations or financial condition.

7

On June 17, 2002, the Company received a grand jury subpoena from the U.S. District Court for the Northern District of California seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the “Dynamic Random Access Memory” or “DRAM” industry.  The Company is cooperating fully and actively with the DOJ in its investigation.  Subsequent to the commencement of the DOJ investigation, 24twenty-four purported class action lawsuits were filed against the Company and other DRAM suppliers in various federal and state courts alleging violations of the Federal Sherman Antitrust Act or

7

California’s Cartwright Antitrust Act and Unfair Competition Law relating to the sale and pricing of DRAM products.  The complaints seek treble damages for the alleged damages sustained by purported class members, in addition to restitution, costs and attorneys’ fees, as well as an injunction against the allegedly unlawful conduct.  The Company is unable to predict the outcome of these suits.  Based upon the Company’s analysis of the claims made and the nature of the DRAM industry, the Company believes that class treatment of these cases is not appropriate and that any purported injury alleged by plaintiffs would be more appropriately resolved on a customer-by-customer basis.  There can be no assurance that the final resolution of these alleged violations of federal or state antitrust laws will not result in significant liability and will not have a material adverse effect on the Company’s results of operations and financial condition.

The Company has accrued a liability and charged operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date.  The Company is currently a party to various other legal actions arising out of the normal course of business, none of which is expected to have a material adverse effect on the Company’s financial position or results of operations.operations or financial condition.

TheIn the normal course of business, the Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters.  Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company may agree to hold the other party harmless against losses arising from a breach of representations or under which the Company may have an indemnity obligation to the counterparty with respect to certain intellectual property matters or certain tax related matters.  Customarily, payment by the Company with respect to such matters is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party’s claims.  Further, the Company’s obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company.party.  It is not possible to predict the maximum potential amount of future payments under these or similartypes of agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement.  Historically, payments made by the Company under these types of agreements have not had a material effect on the Company’s financial position or results of operations.  The Company believes if it were to incur a loss in any of these matters, such loss should not have a material effect on the Company’soperations or financial position or results of operations.condition.

Redeemable Common Stock

In connection with the issuance of the 1.5 million shares of common stock for the Toshiba DRAM Acquisition, the Company granted Toshiba Corporation (“Toshiba”) an option to require the Company to repurchase on October 21, 2003, all of these shares for $67.5 million in cash.  The option expires if the closing price of the Company’s common stock is at or above $45.05 per share for 20 consecutive trading days.  The carrying value of the redeemable common stock is accreted to its redemption amount of $67.5 million by a charge directly to retained earnings and is included in the computations of earning per share.  Accretion of redeemable common stock was $1.6 million and $3.1$4.7 million in the secondthird quarter and first sixnine months of 2003.2003, respectively, and was $0.6 million for both the third quarter and first nine months of 2002, respectively.  (See “Acquisition of Toshiba Corporation DRAM Assets” note.)

Income Taxes

The income tax provision for the secondthird quarter and first sixnine months of 2003 was $17.6$23.9 million and $39.0$62.9 million, respectively, which primarily reflects taxes on foreign operations.  Income tax benefit for the secondthird quarter and first sixnine months of 2002 was $20.3$16.1 million and $197.5$213.6 million, respectively.  The Company recognized no tax benefit on its domestic net operating losses in 2003.

As of February 27,May 29, 2003, the Company had outstanding domesticaggregate U.S. tax net operating loss carryforwards of approximately $2.0 billion.  Until the$2,561.0 million and unused U.S. tax credits of $90.4 million, which expire in various years through 2023.  The Company utilizes thesealso has state tax net operating loss carryforwards the incomeof $1,818.9 million which expire through 2023 and unused state tax provision will only reflect modest levelscredits of taxes from the Company’s foreign operations.$127.8 million which expire through 2017.

8

Earnings (Loss) Per Share

Basic earnings per share is computed based on the weighted average number of common shares outstanding.  Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the dilutive effects of stock options, stock warrants and convertible notes.  Potential common shares that would increase earnings per share amounts or decrease loss per share amounts are antidilutive and are therefore excluded from earnings per share calculations.  The potential common shares that were antidilutive for the secondthird quarter and first sixnine months of 2003 amounted to 128.9125.0 million shares and 124.8124.9 million shares, respectively, and for the secondthird quarter and first sixnine months of 2002 amounted to 109.3 million shares and 107.1107.9 million shares, respectively.  Basic and diluted earnings per share computations reflect the effect of accretion of redeemable common stock.

Stock-Based Compensation

The Company accounts for its employee stock plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”  The following presents pro forma loss and per share data as if a fair value-based accounting method (using the Black-Scholes option valuation model) had been used to account for stock-based compensation:

9

Comprehensive Income (Loss)

Comprehensive loss for the secondthird quarter and first sixnine months of 2003 was $620.2$215.0 million and $935.7$1,150.7 million, respectively, and included $1.0$0.1 million and $0.6$0.7 million net of tax, respectively, of unrealized losses on investments.  Comprehensive loss for the secondthird quarter and first sixnine months of 2002 was $32.2$24.0 million and $292.6$316.6 million, respectively, and included $1.8$0.2 million of unrealized losses and $3.7$3.9 million of unrealized gains net of tax, respectively, on investments.

Restructure and Other Charges

As a result of the prolonged downturn in the semiconductor memory industry and the Company’s eight consecutivesuccessive quarters of operating losses, in the second quarter of 2003 the Company announced a plan to restructure its operations.  The restructure plan includesincluded the shutdown of the Company’s 200 mm production line in Virginia, the discontinuance of certain memory products, including SRAM and TCAM products, and a 10% reduction of the Company’s worldwide workforce.  The Company expects the restructure to result in a lower overall cost structure, to provide better focus on products with greater potential for growth and profitability and to allow continuing investment in new technology.  In connection with the plan, the Company recordedCompany’s results of operations included a restructure charge of $107.9$102.5 million in the second quarterfirst nine months of 2003.  In addition, the Company recorded other restructure-related charges of $7.8$7.1 million which are included in cost of goods sold in the accompanying consolidated statements of operation, to write-down the carrying value of raw materials and work-in-process inventories associated with discontinued products.  These other charges are included in cost of goods sold in the accompanying consolidated statements of operation.  The Company expects to substantially complete the restructure plan by the end of 2003 and estimates that it will incur additional restructure related charges of approximately $15 million inover the second half of 2003,next several quarters, primarily for the redeployment of equipment from its Virginia site to Boise and to certain of its internationalother facilities.  The components of the restructure and other charges arewere as follows:

9

Through February 27,May 29, 2003, the Company had paid essentially none$25.4 million of the severance and other termination costs related to the restructure.and $0.7 million of other costs.  As of February 27,May 29, 2003, the Company’s accounts payable and accrued expenses included $30.0$5.0 million for remaining costs accrued in connection with the restructure plan, consisting primarily of severance and other termination benefits.plan.

Acquisition of Toshiba Corporation DRAM Assets

On April 22, 2002, the Company acquired substantially all of the assets of Toshiba Corporation’s (“Toshiba”) DRAM business as conducted by Dominion Semiconductor L.L.C., a wholly-owned subsidiary of Toshiba located in Virginia (the “Toshiba DRAM Acquisition”).  The total purchase price of $327.9 million included cash and 1.5 million shares of the Company’s common stock, which was valued at $58.1 million on the date of acquisition.  The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values.  In connection with the purchase, the Company recorded total assets of $363.3 million, including property, plant and

10

equipment of $292.8 million and intangible assets of $7.8 million, and total liabilities of $35.4 million.  (See “Redeemable Common Stock” note.)

Joint Venture

TECH Semiconductor Singapore Pte. Ltd. (“TECH”) is a memory manufacturing joint venture in Singapore among Micron Technology, Inc., the Singapore Economic Development Board, Canon Inc. and Hewlett-Packard Company.  TECH’s semiconductor manufacturing facilities use the Company’s product and process technology.  Subject to specific terms and conditions, the Company has agreed to purchase all of the products manufactured by TECH.  The Company generally purchases semiconductor memory products from TECH at prices determined quarterly, based on a discount from average selling prices realized by the Company for the immediately preceding quarter.  The Company performs assembly and test services on product manufactured by TECH.  The Company also provides certain technology, engineering and training to support TECH.  All of these transactions with TECH are recognized as part of the net cost of products purchased from TECH.  The net cost of products purchased from TECH amounted to $86.9$77.5 million and $147.5$225.0 million for the secondthird quarter and first sixnine months of 2003, respectively, and ($3.7)$55.2 million and $22.3$77.5 million for the secondthird quarter and first sixnine months of 2002, respectively.  In 2000, as part of an equity capital infusion by the majority of TECH’s shareholders, the Company funded TECH with $98.0 million as support for continuing the TECH supply arrangement.  The Company amortizes the value of the TECH supply arrangement on a straight-line basis over the remaining contractual life of the TECH shareholders’ agreement.  Amortization expense resulting from the TECH supply arrangement, included in the cost of productproducts purchased from TECH, was $2.4 million and $4.8$7.2 million for the secondthird quarter and first sixnine months of 2003, respectively, and $2.5$2.6 million and $5.1$7.7 million for the secondthird quarter and first sixnine months of 2002, respectively.  Receivables from TECH were $31.7$33.8 million and payables to TECH were $46.1$54.2 million as of February 27,May 29, 2003.  Receivables from TECH were $10.5 million and payables to TECH were $52.8 million as of August 29, 2002.

10

As of February 27, 2003, the Company had pledged $50.0 million, which is included in other noncurrent assets in the accompanying consolidated balance sheet, as cash collateral for a fully-drawn revolving line of credit for TECH.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”  Interpretation No. 45 requires an entity, at the time it issues a guarantee, to recognize an initial liability for the fair value of obligations assumed under the guarantee and elaborates on existing disclosure requirements.  The initial recognition requirements of Interpretation No. 45 are effective for guarantees issued or modified after December 31, 2002, and the disclosure requirements became effective for the Company in its second quarter of 2003.  Subsequent to the end of the second quarter of 2003, onOn March 13, 2003, TECH enteredrefinanced its then existing credit facility by entering into a new $250 million term loan credit facility, the proceeds of which were used to refinance amounts borrowed under its former facility.  In connection therewith, the $50$50.0 million originallypreviously pledged by the Company as cash collateral with respect to TECH’s previous credit facility was re-pledged and supplemented bywith an additional $50 million by$50.0 million.  In the Company.  With respect to this $100 million in cash collateral, certain shareholders in TECH have agreed, in the event all or a portion of the cash collateral is required to be used to meet TECH’s principal loan payments,discharge obligations of TECH that are unpaid and due under the TECH credit facility, certain shareholders of TECH have agreed to indemnify the Company for approximately one-half of the amount of the cash collateral used to satisfy such amounts.  Additionally,obligations.  In accordance with Interpretation No. 45, the Company and these indemnifying shareholders are entitledestimated the fair value of its guarantee of TECH’s credit facility to proceed against TECH and its assetsbe $7.0 million, which was recorded in other noncurrent liabilities in the third quarter of 2003 with an offsetting amount recorded as an addition to the extent such cash collateral is required to be used to meet TECH’s principal loan payments.  However, such rights are subordinated to the rightsvalue of the banks participating inTECH supply arrangement.  The amount recorded pursuant to Interpretation No. 45 is being amortized using the straight-line method through the June 2006 term of the new TECH credit facility.

11

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Micron Technology, Inc., and its subsidiaries (hereinafter referred to collectively as the “Company”) principally design, develop, manufacture and market semiconductor products.

The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties.  Forward-looking statements include, but are not limited to, statements such as those made in “Critical Accounting Policies – Income Taxes” and “Income Taxes” regarding the modest levels of taxes from the Company foreign operations; in “Net Sales” regarding DDR SDRAM sales in future periods; in “Gross Margin” regarding the Company’s transition to .13µ technology, manufacturing costs in the remaining two quarters of 2003, the estimated amount of write-down remaining in inventory at the end of the thirdfourth quarter of 2003 and relative gross margins on TECH products in the remainderfourth quarter of 2003; in “Research and Development” regarding expenses related to the level of research and development expense in future periods;Company’s 300 mm production line; in “Restructure and Other Charges” regarding timing and additional costs to complete the restructure and the estimated cost savings in future periods and in “Liquidity and Capital Resources” regarding capital spending in 2003 and 2004.  The Company’s actual results could differ materially from the Company’s historical results and those discussed in the forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, those identified in “Certain Factors.”  This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes and with the Company’s Annual Report on Form 10-K for the year ended August 29, 2002.  All period references are to the Company’s fiscal periods unless otherwise indicated.  All per share amounts are presented on a diluted basis.  All tabular dollar amounts are in millions.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  Estimates and judgments are based on historical experience, forecasted future events and various other assumptions that the Company believes to be reasonable under the circumstances.  Estimates and judgments may vary under different assumptions or conditions.  The Company evaluates its estimates and judgments on an ongoing basis.  Management believes the accounting policies below are critical in the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments.

Income taxes:  The Company has recorded a valuation allowance against its deferred tax assets arising from net operating loss carryforwards of its domestic operations.  The Company expects that until it utilizes these operating loss carryforwards the consolidated income tax provision will only reflect modest levels of taxes from the Company’s foreign operations.  The Company evaluates the realizability of its deferred tax assets on an ongoing basis in accordance with U.S. GAAP, which requires the assessment of the Company’s performance and other relevant factors when determining the need for a valuation allowance with respect to these deferred tax assets.  The Company’s ability to realize deferred tax assets is dependent on its ability to generatethe level of future taxable income being sufficient to utilize loss carryforwards or tax credits before their expiration.  In the evaluation of realizability of deferred tax assets, factors such as recent losses are given substantially more weight than forecasted future profitability.

The Company is required to estimate its provision for income taxes and amounts ultimately payable or recoverable in numerous jurisdictions around the world.  Such estimates involve interpretations of regulations and are inherently complex.  Resolution of income tax treatments in individual jurisdictions may not be known for many years after completion of any fiscal year.

Inventories:  Inventories are stated at the lower of average cost or market value.  Cost includes labor, material and overhead costs, including product and process technology costs.  Determining market value of inventories involves judgment in that it requires the Company to projectnumerous judgments including projecting average selling prices and sales volumes for future periods and completion costs forto complete products in work in process inventories.  To project average selling prices and sales volumes, for future periods, the Company reviews recent sales volumes, existing customer orders, current contract prices, industry analysis of supply and demand, seasonal factors, general economic trends and other information.  When these analyses reflect estimated market values that are below the Company’s costs, the Company records a charge to

12

cost of goods sold in advance of when the inventory is actually sold.  Differences in forecasted average selling prices used in calculating lower of cost or market adjustments can result in significant changes in the estimated net realizable value of product

12

inventories and accordingly the amount of write-down recorded.  Due to the volatile nature of the semiconductor memory industry, actual selling prices and volumes often vary significantly from projected prices and volumes and as a result, the timing of when product costs are charged to operations can vary significantly.  For example, a 5% variance in the estimated average selling prices used to calculate the inventory write-down of $197 million in the second quarter of 2003 would have changed the recorded write-downestimated fair value of the Company’s inventory by $28 million.$29 million at the end of the third quarter of 2003.

U.S. GAAP provides for products to be grouped into categories in order to compare costs to market values.  The amount of any inventory write-down can vary significantly depending on the determination of inventory categories.  A majority of the Company’s inventory has been categorized as volatile (DRAM and SRAM)(primarily DRAM) or non-volatile (Flash).  The major characteristics the Company considers in determining inventory categories are product type and markets.

Product and process technology:  Costs incurred to acquire product and process technology or to patent technology developed by the Company are capitalized and amortized on a straight-line basis over periods currently ranging up to 10 years.  The Company capitalizes a portion of costs incurred based on its analysis of historical and projected patents issued as a percent of patents filed.  Capitalized product and process technology costs are amortized over the shorter of (i) the estimated useful life of the technology, (ii) the patent term or (iii) the term of the technology agreement.

Property, plant and equipment:  The Company reviews for impairment the carrying value of property, plant and equipment for impairment when events and circumstances indicate that the carrying value of an individual asset or groups of assets may not be recoverable from the estimated future cash flows expected to result from their use and/or eventual disposition.  In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would beis recognized equal to an amount by which the carrying value exceeds the estimated fair value of the assets.  The estimation of future cash flows involves numerous assumptions which require judgment by the Company, including, but not limited to, future use of the assets for Company operations versus sale or disposal of the assets, future selling prices for the Company’s products and future sales and production volumes.

Research and development:  Costs related to the conceptual formulation and design of products and processes are expensed as research and development when incurred.  Determining when product development is complete requires judgment by the Company.  The Company deems development of a product complete once the product has been thoroughly reviewed and tested for performance and reliability and is internally qualified for sale to customers.  Subsequent to product qualification, product costs are valued in inventory.

Contingencies:  The Company is subject to the possibility of various loss contingencies.  Considerable judgment is necessary to estimate the probability and amounts of such contingencies.  An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.  The Company accrues a liability and charges operations for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the balance sheet date.  The Company regularly evaluates current information available to determine whether such accruals should be adjusted.

13

Results of Operations

The Company’s operating results in recent periods have been significantly affected by the timing of inventory write-downs and restructure charges.  On February 18, 2003, the Company announced a series of cost-reduction initiatives including the shut-down of its 200 mm wafer fabrication line in Virginia, the discontinuance of certain product lines and a 10% reduction in its worldwide workforce.  In connection therewith,with its restructure plan, the

13

Company’s operating results of operations for the second quarter and first sixnine months of 2003 include a restructure charge of $108$103 million and a write-downother restructure-related charges of $8$7 million, which are included in cost of goods sold to write down the carrying value of raw materials and work in process inventories associated with discontinued products. (See “Restructure and Other Charges” and “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Restructure and Other Charges.”)

Results of operations include charges of $197 million and $288 million for the second quarter and first six months of 2003, respectively, and $4 million and $177 million for the second quarter and first six months of 2002, respectively, for write-downs of inventories to their estimated market values.

Results of operations for the second quarter and first six months of 2002 do not reflect Toshiba Corporation’s (“Toshiba”) DRAM operations at Dominion Semiconductor L.L.C. in Virginia, the assets of which were acquired on April 22, 2002.  The total purchase price of $328 million included cash and 1.5 million shares of the Company’s common stock.  (See “Item 1. Financial Statements – Notes to Consolidated Financial Statements – Acquisition of Toshiba Corporation DRAM Assets.”)

Absent the restructure and other charges of $116 million in the second quarter of 2003 and the aggregate effects of current and prior quarters’ inventory write-downs, which were unfavorable by $99 million and favorable by $48 million for the second and first quarters of 2003, respectively,following table summarizes the Company’s operating loss would have been $386 millionabsent the inventory write-downs and $345 million for the secondestimated aggregate effects of previous write-downs and first quarters of 2003, respectively.restructure charges.  These adjusted amounts have not been prepared in accordance with generally accepted accounting principles, however the Company believes this information may be useful in assessing the effects of inventory write-downs and the restructure and otherrelated charges and inventory write-downs on the Company’s operating loss and analyzing the Company’s operating costloss trends.