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EPCOS Interim Report First Quarter

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EPCOS Interim Report First Quarter Powered By Docstoc
					 Interim Report
First Quarter 2008
                  INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




Contents
1         INTERIM MANAGEMENT REPORT                                                  4

1.1       General                                                                    4

1.2       EPCOS Group                                                                5
1.2.1     Sales – comparison with Q4 2007                                            5
1.2.2     Sales – comparison with Q1 2007                                            5
1.2.3     Earnings                                                                   6

1.3       Business segments                                                          6
1.3.1     Sales – comparison with Q4 2007                                            6
1.3.2     Sales – comparison with Q1 2007                                            7
1.3.3     Earnings                                                                   7

1.4       Assets and financial position                                              8

1.5       Related party and related persons transactions                             9

1.6       Opportunity and risk report                                                9

1.7       Outlook                                                                   10

2         CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS                       11

2.1       Consolidated statements of income, unaudited                              11

2.2       Consolidated balance sheets, unaudited                                    12

2.3       Consolidated changes in equity, unaudited                                 13

2.4       Statements of income and expenses recognized in equity, unaudited         14

2.5       Consolidated statements of cash flow, unaudited                           15

          SELECTIVE NOTES TO THE UNAUDITED CONDENSED INTERIM
3         CONSOLIDATED FINANCIAL STATEMENTS                                         16

3.1       Accounting principles                                                     16

3.2       Basis for presentation                                                    16

3.3       Conversion of Accounting to International Financial Reporting
          Standards (IFRS)                                                          17
3.3.1     Notes on the conversion to IFRS accounting                                17
3.3.2     Notes on the exemptions allowed by IFRS 1 and used by EPCOS               18
3.3.2.1   Business combinations                                                     18
3.3.2.2   Currency translation differences                                          18
3.3.2.3   Share-based payment                                                       18
3.3.3     Changes in the presentation of the consolidated financial statements      18
3.3.4     Significant effects of the conversion from US GAAP to IFRS                19
          (e1/p1) Change in the presentation of minority interest                   20
          (e2/p7) Property, plant and equipment                                     20
          (e3/p7) Capitalization of internally generated intangible assets          20
          (e4/p3) Sale and leaseback transactions                                   20
          (e5/p5) Convertible bond                                                  20
          (e6/p2) Pensions and similar obligations                                  21


                                                                                         2
                                                                                 EPCOS AG
                  INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




          (e7/p4) Other personnel-related provisions                                             21
          (e8/p4) Other short-term and long-term financial liabilities and other short-term
          provisions                                                                             22
          (e9/p7) Deferred taxes                                                                 22
          Impact of difference on the statement of cash flows                                    22

3.4       Summary of significant accounting and measurement policies                             23
3.4.1     Consolidation                                                                          23
3.4.2     Investments in unconsolidated companies/associates                                     23
3.4.3     Foreign currencies                                                                     23
3.4.3.1   Transactions in foreign currencies                                                     23
3.4.3.2   Translation of financial statements into euros                                         23
3.4.4     Revenue recognition                                                                    24
3.4.5     Research and development costs                                                         24
3.4.6     Income taxes                                                                           24
3.4.7     Property, plant and equipment                                                          24
3.4.8     Intangible assets                                                                      25
3.4.9     Impairment of long-lived assets                                                        25
3.4.10    Financial instruments and hedges                                                       26
3.4.11    Securities                                                                             26
3.4.12    Inventories                                                                            26
3.4.13    Cash and cash equivalents                                                              26
3.4.14    Earnings per share                                                                     26
3.4.15    Share-based payment                                                                    27

3.5       Accounting principles that require significant estimates and
          assumptions                                                                            27
3.5.1     Accounts receivable and other receivables                                              27
3.5.2     Goodwill                                                                               27
3.5.3     Pensions and similar obligations                                                       28
3.5.4     Provisions                                                                             28

3.6       Transactions with related parties and related persons                                  28

3.7       Property, plant and equipment                                                          28

3.8       Goodwill and other intangible assets                                                   29

3.9       Inventories, net                                                                       29

3.10      Paid and proposed dividends                                                            29

3.11      Pension plan                                                                           30

3.12      Other financial income and expenses                                                    30

3.13      Share-based payment                                                                    30

3.14      Earnings per share                                                                     31

3.15      Segment reporting                                                                      32

3.16      Non cash transactions                                                                  33

3.17      Contingent liabilities and contingent assets                                           33

3.18      Subsequent events                                                                      33




                                                                                                      3
                                                                                              EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.     Interim management report

1.1    General

EPCOS AG is a leading manufacturer of electronic components, modules and systems and
is headquartered in Munich, Germany. Based on a broad portfolio EPCOS offers one-stop
shopping for a comprehensive range of products and services. EPCOS focuses on fast-
growing, leading-edge technology markets in automotive electronics, information and com-
munication technology, industrial electronics and consumer electronics. The EPCOS Group
has design and manufacturing locations and sales offices in Europe, Asia, and in North and
South America.

EPCOS was floated simultaneously on the Frankfurt and New York Stock Exchanges on Oc-
tober 15, 1999. The listed company emerged from Siemens Matsushita Components, a joint
venture founded in 1989 by Siemens and Matsushita. Since March 2003, EPCOS has been
one of the largest companies in the TecDAX index of German technology stocks. Its shares
are traded on all German stock exchanges. Trading of the company’s American Depositary
Shares on the New York Stock Exchange was discontinued on November 29, 2007.

Unless otherwise specified, the statements and figures presented in this management report
refer to our continuing operations, i.e. excluding tantalum capacitors. EPCOS completed the
sale of its tantalum capacitor activities in fiscal 2006.

Conversion of accounting to IFRS

With the beginning of fiscal 2008 (October 1, 2007, to September 30, 2008), EPCOS has
converted its financial reporting to comply with International Financial Reporting Standards
(IFRS).

IFRS accounting has thus replaced US GAAP accounting at EPCOS. The transition to IFRS
affects both reported earnings and balance sheet figures. EPCOS published detailed infor-
mation in a press release dated January 23, 2008. Further information about the conversion
to IFRS is also posted at www.epcos.com/ir. In this press release, which covers the first
quarter of fiscal 2008 (October 1 to December 31, 2007), the figures for fiscal 2007 are pre-
sented in accordance with IFRS to ensure comparable data.




                                                                                           4
                                                                                   EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.2     EPCOS Group

Sales and earnings rise again significantly year on year

-   Sales: EUR 367 million; up 10 percent year on year; down 2 percent sequentially
-   EBIT: plus EUR 28 million (Q1 2007: plus EUR 21 million; Q4 2007: plus EUR 11 million)

The good demand experienced in preceding quarters continued in the first quarter of fiscal
2008. Double-digit sales growth was recorded year on year. The slight sequential decline in
sales was due to a very large extent to the still weaker US dollar.

Earnings before interest and tax (EBIT) were up significantly both year on year and sequen-
tially.

1.2.1   Sales – comparison with Q4 2007

EUR million                          Q4 2007              ± in %             Q1 2008
Sales                                  376                  –2                 367

After a strong previous quarter, sales dropped 2 percent to EUR 367 million in Q1 2008.

Due to seasonal influences, sales of products to industrial and automotive electronics
customers and to distributors were somewhat lower than in Q4 of fiscal 2007. Slightly higher
sales of products to the telecommunications industry were not enough to fully offset this de-
cline. Sales of components for consumer electronics applications remained more or less sta-
ble.

Regionally, sales declined in Germany. By contrast, sales remained constant at the previous
quarter's levels in other European countries, Asia and the NAFTA region.

1.2.2   Sales – comparison with Q1 2007

EUR million                         Q1 2007               ± in %             Q1 2008
Sales                                334                     +10              367

Year on year, sales rose by 10 percent in Q1 2008.

Almost all industries served contributed to this increase. The sales growth of more than
20 percent for products for automotive electronics is particularly remarkable. Sales to
distributors increased by more than 10 percent. Single-digit sales growth was realized for
products for telecommunications and industrial electronics applications. Sales of components
for consumer electronics applications remained stable overall.

Sales were up in all regions. Because of greatly increased demand from the automotive elec-
tronics industry, growth was strongest in Germany, at around 15 percent. Growth of around
10 percent was recorded in both other European countries and the NAFTA region. In Asia,
negative exchange rate effects could be offset only to a limited degree. As a result, sales in
this region were only slightly up on the figure for the previous year.




                                                                                             5
                                                                                    EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.2.3   Earnings

EUR million                               Q1 2007             Q4 2007               Q1 2008
EBIT                                       +20.9               +11.3*                +28.4
Net income                                  +5.9                +6.7                 +19.0
Earnings per share (in EUR)                +0.09               +0.10                 +0.29
                                         *Including restructuring expenses of about EUR 17 million

Group EBIT was about EUR 28 million in Q1 2008, an improvement both year on year and
sequentially. It should be noted that EBIT for the Capacitors and Inductors segment included
one-time effects (see section 1.3.3).

Net income was EUR 19 million. Earnings per share were EUR 0.29.


1.3     Business segments

1.3.1   Sales – comparison with Q4 2007

EUR million                                      Q4 2007           ± in %          Q1 2008
Capacitors and Inductors                          137                 –2            134
Ceramic Components                                136                 –4            130
SAW Components                                    103                  0            103

In the Capacitors and Inductors segment, sales of aluminum electrolytic capacitors and in-
ductors remained roughly stable. Sales of film capacitors and ferrite cores declined, primarily
because of weaker demand from industrial electronics customers and distributors.

In the Ceramic Components segment, the sequential drop in sales was attributable to weaker
seasonal business with products for the automotive electronics industry, which account for
more than half of this segment's sales. Although sales of sensors and sensor systems rose,
the increase was not enough to completely offset the decline in the sales of piezo actuators
and multilayer ceramic components, among others.

Sales in the Surface Acoustic Wave (SAW) Components segment remained unchanged de-
spite negative effects from exchange rates and above-average price erosion. The trend in
demand for RF modules for mobile phones and wireless LAN applications was especially
positive, as was demand for modules for automotive electronics applications. Sales of SAW
filter products for UMTS mobile phones were likewise up sequentially. This sales growth was
sufficient to make up for lower sales of filters to the entertainment electronics industry.




                                                                                                6
                                                                                       EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.3.2   Sales – comparison with Q1 2007

EUR million                                     Q1 2007           ± in %         Q1 2008
Capacitors and Inductors                         121               +10            134
Ceramic Components                               111               +17            130
SAW Components                                   102                 +1           103

Sales in all business segments rose year on year in Q1 2008.

At 17 percent, growth was strongest at Ceramic Components. All product groups contributed
to the increase in sales to EUR 130 million. Double-digit sales growth was recorded for piezo
actuators and for sensors and sensor systems for applications in the automotive industry.
Surge arresters, which are used mainly to protect telecoms equipment against overvoltage,
also achieved double-digit sales growth.

Sales at Capacitors and Inductors grew by 10 percent to EUR 134 million. All product groups
contributed to this growth, which was strongest for aluminum electrolytic and film capacitors
for industrial electronics applications and for inductors for automotive electronics applica-
tions.

In the SAW Components segment, sales increased slightly by 1 percent to EUR 103 million.
Adjusted for exchange rate effects, growth would in fact have been closer to 10 percent.
Business with RF modules for mobile phones was the mainstay of sales growth in the period
under review. Sales of SAW filters for multimedia applications declined, partly because flat-
screen TVs are increasing their market share. As a rule, these TVs use smaller and lower-
cost multimedia filters than their conventional cathode-ray tube counterparts.

1.3.3   Earnings

EUR million                                 Q1 2007            Q4 2007            Q1 2008
Capacitors and Inductors                     +3.7                –5.0               +9.9
Ceramic Components                           +0.6                +5.0               +7.2
SAW Components                              +16.6               +11.3              +11.3


The Capacitors and Inductors segment posted earnings before interest and tax (EBIT) of
plus EUR 9.9 million in Q1 2008. This figure includes extraordinary proceeds of EUR 2 mil-
lion related to the sales contract of the Málaga site in Spain.

When comparing EBIT for Q1 2008 with EBIT for the previous quarter, one must remember
that the figures in the IFRS accounts for Q4 2007 included restructuring costs totaling
EUR 17 million, mostly relating to headcount adjustments already announced for the Málaga
site. Proceeds of EUR 5 million from the sale of the Heidenheim site in Germany offset part
of this burden. Adjusted for these effects, EBIT for Q4 2007 stood at about plus EUR 7 mil-
lion under IFRS.

Sequentially, operating EBIT therefore improved by about EUR 1 million in Q1 2008 in spite
of a slight decline in sales.

At Ceramic Components, EBIT improved to EUR 7.2 million. This development reflects both
a further gain in production yields and positive effects from the segment's withdrawal from in-
house production of ceramic capacitors.


                                                                                             7
                                                                                     EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




The SAW Components segment posted EBIT of EUR 11.3 million and, thus, a double-digit
EBIT margin. This achievement was all the more remarkable given that the segment was
once again forced to cope with above-average price erosion as a result of the strong euro.
This factor was also largely responsible for the year-on-year decline in EBIT.


1.4    Assets and financial position

Continued good business development in the first quarter of fiscal 2008 had a positive impact
on EPCOS' balance sheet too.

Shareholders' equity increased by EUR 23 million to EUR 627 million (Q1 2007: EUR 604
million), largely due to net income of EUR 19 million. Since total assets remained more or
less constant at EUR 1,386 million, the equity ratio rose to 45 percent (Q1 2007: 44 percent).

Current assets (including cash and cash equivalents) declined from EUR 750 million to
EUR 742 million in the first quarter of 2008. Liquidity too decreased from EUR 235 million a
year ago to EUR 224 million, primarily due to the further repayment of loans. The increase in
inventories stood against a decline in other current assets. Accounts receivable remained
virtually unchanged sequentially. Property, plant and equipment and other non-current assets
rose by EUR 10 million to EUR 644 million.

On the liabilities side, accounts payable was reduced from EUR 138 million to EUR 128 mil-
lion. Financial debt declined by EUR 11 million, from EUR 262 million to EUR 251 million.
Here again, the main reason was the repayment of loan principal.

Net financial debt of EUR 219 million at December 31, 2007, remained practically unchanged
from September 30, 2007. Net financial debt is calculated by adding financial debt
(EUR 251 million) to pension liabilities (EUR 192 million) and deducting cash and cash
equivalents (EUR 224 million). The increase in shareholders' equity nevertheless improved
EPCOS' gearing ratio to 35 percent (Q1 2007: 36 percent). Gearing is defined as the ratio of
net financial debt to shareholders' equity (EUR 627 million). Net borrowings (net financial
debt less pension liabilities) thus came to just EUR 27 million in the first quarter of fiscal
2008.

Net cash flow was slightly negative at minus EUR 2 million in the quarter under review. Both
net income and depreciation had a positive impact on net cash of EUR 24 million provided by
operating activities. On the other hand, the build-up of inventories was the main factor in the
increase in net current assets. Net cash of EUR 26 million was used in investing activities.
This figure includes investments to increase capacity especially at the SAW Components
segment. It also includes payments made to Xindeco relating to the expansion of our Chi-
nese joint venture, EPCOS Xiamen. In addition to its minority interest in Becromal Norway,
EPCOS has extended its interest to include the parent company, which is headquartered in
Milan, Italy. The move reinforces our cooperation with this important supplier for aluminum
electrolytic capacitors. Above-average investments in Q1 2008 were offset to some extent by
the proceeds from the sale of the Heidenheim site in Germany.




                                                                                             8
                                                                                     EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.5    Related party and related persons transactions

Details of the company's transactions with related parties and related persons are provided in
the notes section 3.6.


1.6    Opportunity and risk report

EPCOS is exposed to a variety of risks that are inherent to the nature of its business activi-
ties. The most urgent challenge facing us is to seize opportunities while seeking to limit our
risks.

We align our policy on risk with our business strategy. Within the framework of this strategy,
we continually take steps to avoid inordinate risks wherever possible.

We operate a series of defined procedures to record and monitor these risks. Together, the-
se procedures constitute EPCOS’ Group-wide monitoring and risk management system, of
which regular enterprise-wide planning and reporting is only one aspect.

This system of monitoring and risk management is a vital tool in our business processes and
an important basis for the decisions we make. It enables us to contain not only operating
risks, but also risks associated with foreign exchange and interest rates. The principles for-
mulated in our monitoring and risk management system are binding for the managers of our
operating units and of all corporate departments.

Most of the opportunities and risks described on page 91 ff. of the 2007 Annual Report re-
mained unchanged in the period under review. From a present perspective, it is our assump-
tion that this situation will not change in the remaining months of fiscal 2008.

Recent developments on the financial markets and the expected weakening of the US econ-
omy have added to macroeconomic risks. However, no direct impact on our business devel-
opment is perceivable at the current time.

The risks outlined below could impair our business, our financial resources and our earnings.
They are not the only risks to which we are exposed. Additional risks of which we are cur-
rently unaware or which we currently regard as immaterial could also influence our business.




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                                                                                    EPCOS AG
                        INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




1.7    Outlook

In Q2 2008, EPCOS expects sequential sales to remain stable on the whole. In particular,
however, sales of products for mobile communication devices and consumer electronics
applications will likely decline somewhat due to seasonal influences. However, it is expected
that this reduction will be compensated by stronger sales primarily to manufacturers of auto-
motive and industrial electronics and to distributors. EPCOS expects EBIT to reach the same
operating level as in the quarter just ended.

Although macroeconomic conditions have deteriorated somewhat in recent months, EPCOS
expects sales growth for fiscal 2008 in the mid single-digit range. We also expect the EBIT
figure under IFRS to improve to about EUR 110 million.
                                            -----


       This document may contain forward-looking statements with respect to EPCOS’ financial condition, results
       of operations, business, strategy and plans. In particular, statements using the words “expects”, “antici-
       pates” and similar expressions, and statements with regard to management goals and objectives, ex-
       pected or targeted revenue and expense data, or trends in results of operations or margins are forward-
       looking in nature. Such statements are based on a number of assumptions that could ultimately prove in-
       accurate, and are subject to a number of risk factors, including changes in our customers’ industries,
       slower growth in significant markets, changes in our relationships with our principal shareholders, the abil-
       ity to realize cost reductions and operating efficiencies without unduly disrupting business operations, cur-
       rency fluctuations, unforeseen environmental obligations, and general economic and business conditions.
       EPCOS does not assume any obligation to update publicly any forward-looking statement, whether as a
       result of new information, future events or otherwise.




                                                                                                                       10
                                                                                                                 EPCOS AG
                        INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




2. Condensed interim consolidated financial
   statements
2.1 CONSOLIDATED STATEMENT OF INCOME, UNAUDITED
for the three months ended December 31, 2007 and December 31, 20061)
(EUR thousand, except share data)

                                                                                             3 months ended
                                                                             Note
                                                                                                Dec. 31
                                                                                              2007      2006
Net sales from continuing operations
  Third parties                                                                             366,925       332,911
  Related parties                                                                                546         1,473
Total net sales                                                                4            367,471       334,384
Cost of goods sold                                                                        (294,137)     (270,841)
Gross profit on sales                                                                        73,334        63,543
Marketing and selling expense                                                              (26,160)      (25,094)
Research and development expense                                               4           (19,011)      (16,078)
General and administrative expense                                                           (3,320)       (2,870)
Operating income                                                                             24,843        19,501
Interest income                                                                                2,274         2,321
Interest expenses                                                                            (6,963)       (6,910)
Income from investments accounted for using the equity method                                    198           129
Other financial income/ other financial expenses, net                         12               (232)     (10,710)
Other income/ expenses incl. foreign exchange gains/ losses                                    3,394         1,264
Income from continuing operations before taxes                                               23,514          5,595
Current and deferred income taxes                                              4             (4,484)           289
Net income from continuing operations                                                        19,030          5,884
Loss from discontinued operations, net of income taxes                                             -           (25)
Net income                                                                                   19,030          5,859
Attributable to
  Shareholders of EPCOS AG                                                                   19,009         5,837
  Minority interest                                                                              21            22

Earnings per share (basic)                                                   4, 14
 Net income from continuing operations (EUR)                                                   0.29           0.09
 Net income from discontinued operations (EUR)                                                    -              -
Earnings per share (diluted)
 Net income from continuing operations (EUR)                                                   0.28           0.09
 Net income from discontinued operations (EUR)                                                    -              -

 1)
      Since the beginning of fiscal 2008, EPCOS AG has prepared its consolidated financial statements in accor-
      dance with International Financial Reporting Standards (IFRS). Details of the conversion to IFRS accounting
      and a set of statements reconciling the previous US GAAP figures to IFRS are provided in the notes.
      Through the end of fiscal 2007, EPCOS AG prepared its consolidated financial statements in accordance
      with United States Generally Accepted Accounting Principles (US GAAP). For reasons of comparability the
      reported figures for the first fiscal quarter ending December 31, 2006 and fiscal year ending September 30,
      2007 are presented using the same accounting principles and valuation methodologies as used for this in-
      terim report for first fiscal quarter 2008.




                                                                                                               11
                                                                                                       EPCOS AG
                         INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS




2.2 CONSOLIDATED BALANCE SHEETS, UNAUDITED
at December 31, 2007 and September 30, 2007
(EUR thousand, except share data)

                                                                      Note
                                                                             Dec. 31, 2007 Sept. 30, 2007
ASSETS
Property, plant and equipment                                         4, 7        518,270        506,120
Intangible assets                                                     4, 8         19,560         19,827
Investments accounted for using equity method                                       7,675          5,004
Other long-term financial assets                                                   15,461         17,539
Deferred tax assets                                                                76,723         77,653
Other long-term non-financial assets                                                6,348          7,429
Total non-current assets                                                          644,037        633,572
Inventories                                                           4, 9        238,515        217,855
Trade receivables                                                      5          227,484        231,645
Cash and cash equivalents                                              4          223,633        234,622
Other short-term financial assets                                                  21,514         37,351
Income tax receivables                                                 4            1,606          1,820
Other short-term non-financial assets                                              28,773         26,880
Total current assets                                                              741,525        750,173
Total assets                                                                    1,385,562      1,383,745


LIABILITIES AND EQUITY
Share capital - 96,280,000 shares authorized and 65,317,000 shares
issued and outstanding in December 31, 2007, and September 30, 2007                65,317         65,317
Additional-paid-in-Capital                                                        269,848        269,532
Retained earnings                                                                 277,722        258,713
Other components of equity                                                          6,858          8,146
Total equity without minority interest                                            619,745        601,708
Minority interest                                                                   7,032          1,972
Total equity                                                                      626,777        603,680
Pensions and similar obligations                                      4, 5        183,890        181,032
Other long-term provisions                                                         38,411         39,622
Long-term debt                                                                    168,094        160,246
Other long-term financial liabilities                                  5            2,466          2,652
Other long-term non-financial liabilities                                          11,554         12,949
Deferred tax liabilities                                                            7,948          6,600
Non-current liabilities and provisions                                            412,363        403,101
Pensions and similar obligations                                      4, 5          7,833          7,943
Other current provisions                                                           50,327         52,296
Trade liabilities                                                                 127,844        137,783
Short-term debt                                                                    83,004         99,938
Other current financial liabilities                                    5           16,302         15,217
Other current non-financial liabilities                                            56,213         59,918
Income tax liabilities                                                              4,899          3,869
Current liabilities and provisions                                                346,422        376,964
Total liabilities and equity                                                    1,385,562      1,383,745




                                                                                                     12
                                                                                             EPCOS AG
                                                                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS



2.3 CONSOLIDATED CHANGES IN EQUITY, UNAUDITED
for the three months ended December 31, 2007 and December 31, 2006
(EUR thousand)

                                                                                              Other components of equity
                                                                                                                                                       Total equity
                                                       Additional                 Currency       Derivative Available-for-                              attributable
                                                                     Retained                                                     Pension   Treasury                   Minority
                                       Share capital     paid-in                translation        financial sale financial                            to sharehol-                    Total
                                                                     earnings                                                 adjustments     shares                   interest
                                                          capital               adjustment     instruments           assets                                  ders of
                                                                                                                                                        EPCOS AG
Balances at September 30, 2007               65,317      269,532      258,713       (1,885)           (260)          3,075          7,216          -         601,708     1,972       603,680
Dividends                                         -            -            -             -               -              -              -          -               -     (351)         (351)
Income and expense recognized in
                                                   -            -      19,009       (1,497)            430           (221)              -          -         17,721          5        17,726
equity
Share-based payment                                -         316            -             -               -               -             -          -            316           -         316
Minority effects from the first time
                                                   -            -           -             -               -               -             -          -               -     5,406         5,406
consolidation
Balances at December 31, 2007                65,317      269,848      277,722       (3,382)            170           2,854          7,216          -       619,745       7,032       626,777

Balances at October 1, 2006                  65,300      256,360      220,704             -           (432)          2,586              -          -       544,518       2,055       546,573
Dividends                                          -            -           -             -               -               -             -          -               -      (336)        (336)
Income and expense recognized in
                                                   -            -       5,837          (85)           (442)            131              -          -          5,441        (17)        5,424
equity
Share-based payment                                -         206            -             -               -               -             -          -            206           -         206
Balances at December 31, 2006                65,300      256,566      226,541          (85)           (874)          2,717              -          -       550,165       1,702       551,867




                                                                                                                                                                                        13
                                                                                                                                                                                  EPCOS AG
                        INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS



2.4 CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE RECOGNIZED IN
EQUITY, UNAUDITED
for the three months ended December 31, 2007 and December 31, 2006
(EUR thousand, except share data)

                                                                                           3 months ended
                                                                                              Dec. 31
                                                                                             2007     2006

Net income including minority interest                                                     19,030        5,859
  Currency translation adjustment                                                          (1,513)       (124)
  Available-for-sale financial assets                                                        (221)         131
  Derivative financial instruments                                                             430       (442)
  Actuarial gains/ losses arising from pensions and similar obligations                          -           -
Total income and expense recognized directly in equity, after tax2)                        (1,304)       (435)
Total income and expense recognized in equity                                              17,726        5,424
there of:
  Minority interest                                                                              5         (17)
  EPCOS AG shareholders                                                                     17,721       5,441

 2)
      Includes a minority interest of minus EUR 16 thousand (previous period: minus EUR 39 thousand) due to
      currency translation adjustments.




                                                                                                              14
                                                                                                     EPCOS AG
                       INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS



2.5 CONSOLIDATED STATEMENTS OF CASH FLOW, UNAUDITED
for the three months ended December 31, 2007 and December 31, 2006 (EUR thousand)

                                                                                        3 months ended
                                                                                 Note
                                                                                            Dec. 31
                                                                                           2007       2006
 Cash flows from operating activities
 Net income from continuing operations                                                    19,030            5,884
 Net loss from discontinued operations                                                         -              (25)
 Net income                                                                               19,030            5,859
 Depreciation and amortization                                                   4, 7     29,150           27,965
 Loss on sale of property, plant and equipment                                                49                21
 Deferred tax                                                                              2,016          (3,457)
 Share of net income of non-consolidated affiliates and at equity companies                (198)            (129)
 Other non-cash item                                                                       2,154           12,127
 Increase in inventories                                                         4, 9   (20,760)         (24,496)
 Decrease in trade receivables and other assets                                   5        4,997           34,534
 Decrease in accounts payable and other liabilities                                     (12,461)         (34,272)
 Decrease in short and long term accrued expenses                                 5      (3,052)          (5,666)
 Increase in pension liabilities                                                  5        2,954            2,058
 Net cash provided by operating activities                                                23,879           14,544
 Cash flows from investing activities
 Capital expenditures                                                            4, 7   (34,481)         (24,203)
 Intangible assets, net                                                          4, 8      (168)                -
 (Increase)/ Decrease in financial assets                                                (4,138)           12,280
 Proceeds from sale of equipment                                                          17,905            1,667
 Investments in associates                                                       4, 6    (5,000)                -
 Net proceeds from sale/ disposition of businesses                                             -            6,775
 Net cash used in investing activities                                                  (25,882)          (3,481)
 Cash flows from financing activities
 Net decrease in short-term borrowings                                                  (15,969)          (2,015)
 Proceeds from issuance of long-term debt                                                 16,312              935
 Principal payments on long-term debt                                                    (8,540)          (2,029)
 Principal payments under capital lease obligations                                          (11)               -
 Decrease in other financial liabilities                                                   (244)                -
 Dividends paid to minority shareholders                                                   (351)            (336)
 Net cash provided by (used in) financing activities                                     (8,803)          (3,445)
 Effect of exchange rate changes on cash and cash equivalents                              (317)            (621)
 Increase in cash and cash equivalents based on changes in consolidation group               134                -
 Increase/ (Decrease) in cash and cash equivalents                                      (10,989)            6,997
 Cash and cash equivalents at beginning of fiscal year                            4     234,622          268,851
 Cash and cash equivalents at end of period                                       4     223,633          275,848

                                                                                        3 months ended
                                                                                            Dec. 31
                                                                                           2007       2006
 Additional Information on payments received and made
 Interest received                                                                         1,217            1,496
 Interest paid                                                                           (2,064)          (3,006)
 Dividends received                                                                           77              120
 Cashflow from income taxes, net                                                         (2,137)          (1,950)




                                                                                                    15
                                                                                         EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS



3.     Selective notes to the unaudited condensed
       interim consolidated financial statements

3.1    Accounting principles

Through the end of fiscal 2007, EPCOS prepared its consolidated financial statements in
accordance with United States Generally Accepted Accounting Principles (US GAAP). Effec-
tive fiscal 2008, we have begun reporting in accordance with International Financial Report-
ing Standards (IFRS). These standards deviate from US GAAP in a number of aspects.

Details of the conversion to IFRS accounting and a set of statements reconciling the previous
US GAAP figures to IFRS are provided in the following pages. Until EPCOS publishes its first
full set of IFRS-compliant consolidated financial statements for the fiscal year ending Sep-
tember 30, 2008, the financial information documented in this report can only be regarded as
preliminary in light of possible changes to certain standards.

This interim report was compiled in accordance with German Accounting Standard 16 near
final draft (DRS 16).

The Management Board approved publication of the interim report for the first quarter of fis-
cal 2008 on January 30, 2008.

EBIT is the ratio EPCOS uses to evaluate the operating performance of the three segments
for which we are required by law to submit reports, and for the EPCOS Group as a whole.
We believe that EBIT is a better measure of operating performance than operating income,
since the latter excludes the impact of foreign exchange gains and losses and other income
and expenses. These line items can have a significant impact on the performance of our seg-
ments. We calculate EBIT as net loss/income plus (minus) income tax and financial income/
expense, net.


3.2.   Basis for presentation

The unaudited interim consolidated financial statements cover the three-month periods that
end on December 31, 2007 and December 31, 2006, respectively. They reflect all recurring
adjustments that, in the opinion of management, are necessary for a fair presentation of
earnings in the interim periods presented. All significant intercompany balances and transac-
tions and all significant intra group profits or losses arising from such transactions are elimi-
nated in the consolidated financial statements.

The earnings reported for any interim period are not necessarily indicative of results for the
full year. EPCOS' fiscal year ends on September 30.




                                                                                              16
                                                                                      EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.3     Conversion of Accounting to International Financial Reporting Standards
        (IFRS)

3.3.1   Notes on the conversion to IFRS accounting

European Parliament and European Council Regulation (EC) No. 1606/2002, dated July 19,
2002, requires companies governed by the laws of the European Union (EU) and whose se-
curities are traded on a regulated market to publish their consolidated financial statements
for fiscal years starting on or after January 1, 2005, in compliance with International Financial
Reporting Standards (IFRS). However, EU member states were allowed to exempt such
companies from compulsory adoption of IFRS until 2007, provided that – as in the case of
EPCOS – they have to this point prepared their consolidated financial statements in accor-
dance with United States Generally Accepted Accounting Principles (US GAAP), and pro-
vided that their shares are admitted for public trading in a non-EU member state. Germany
accommodated this optional extension in the Accounting Reform Act (BilReG) passed in Oc-
tober 2004. EPCOS made use of this option of delaying adoption of IFRS.

Accordingly, EPCOS will publish its first full set of IFRS-compliant consolidated financial
statements (as defined by IFRS 1) for the fiscal year to September 30, 2008. The corre-
sponding statements for the fiscal year ending September 30, 2007, will be included in these
consolidated financial statements for the purpose of comparison. The IFRS consolidated
opening balance sheet was prepared at October 1, 2006. Differences between carrying
amounts reported under IFRS at October 1, 2006, and those reported under US GAAP at
September 30, 2006, were recognized in equity in the IFRS opening balance sheet.

In accordance with IFRS 1, the first full set of IFRS consolidated financial statements for the
fiscal year ending September 30, 2008, must use accounting and measurement policies that
are based on those standards and interpretations that, at September 30, 2008 (the time of
first-time adoption of IFRS), are considered to be compulsory, insofar as said policies have
been published and endorsed by the EU in the form of European law. These accounting and
measurement policies must be applied retroactively to the time of transition to IFRS at Octo-
ber 1, 2006, and for all periods presented in this first set of consolidated financial statements.

In line with IAS 34 (Interim Financial Reporting) and IFRS 1 (First-Time Adoption of Interna-
tional Financial Reporting Standards), this consolidated interim report for the three months
ending December 31, 2007, was prepared for the first time in accordance with IFRS. Prepa-
ration of this interim report was based on those IFRSs that had been endorsed in the EU by
the end of the period under review. Those IFRSs that were either compulsory or were
adopted prematurely on a voluntary basis for this interim report for the three months to De-
cember 31, 2007, may yet be amended or complemented by new interpretations between
now and September 30, 2008. As a result, the accounting principles used for this interim re-
port may likewise be modified. They will not be finalized until the time when the first set of
consolidated financial statements are prepared in accordance with IFRS for the fiscal year
ending September 30, 2008. Adoption of IFRS for this interim report has led to changes in
the principles of consolidated accounting compared with the US GAAP consolidated financial
statements prepared for the previous year. The effects of this transition from US GAAP to
IFRS are explained in section 3.3.4.




                                                                                               17
                                                                                       EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.3.2   Notes on the exemptions allowed by IFRS 1 and used by EPCOS

In the IFRS consolidated opening balance sheet prepared at October 1, 2006, the carrying
amounts of assets and liabilities taken from the US GAAP consolidated balance sheet at
September 30, 2006, will be retroactively recognized and measured in line with those IFRSs
that will apply effective September 30, 2008. However, IFRS allows a number of exemptions
and exceptions to this general rule. EPCOS made use of the following exemptions:

3.3.2.1 Business combinations
Business combinations are still presented in line with US GAAP. EPCOS has made use of
the option of waiving retrospective application of the regulations of IFRS 3 to business com-
binations effected before the conversion to IFRS. Essentially, however, only those assets
and liabilities that were purchased or acquired within the framework of business combina-
tions and that meet the IFRS criteria for recognition are to be recognized on the IFRS con-
solidated opening balance sheet. There was no need for adjustments based on the values
recognized for assets or liabilities or, hence, based on any resulting goodwill.

At the time of transition to IFRS, goodwill was also tested for impairment. This test revealed
no need for write-off.

3.3.2.2 Currency translation differences
In line with the option allowed by IFRS 1, all unrealized cumulative currency translation
differences that arose in earlier periods from translation of financial statements into EPCOS'
reporting currency and that were recognized as other comprehensive income were
recognized in equity and netted against retained earnings at the balance sheet date for the
consolidated opening balance sheet.

When a company is disposed of at a later date, only those currency translation differences
that are incurred and recognized in equity after preparation of the consolidated opening bal-
ance sheet will be included in the results of such a disposal.

3.3.2.3 Share-based payment
In accordance with the simplification option allowed by IFRS 1, the prescriptions of IFRS 2
(Share-based payment) were not applied retrospectively to all share-based payment com-
mitments. This simplification option was applied to all commitments that are to be settled by
equity instruments that were vested before January 1, 2005. All such commitments that are
to be settled by equity instruments and that are covered by the simplification option permitted
by IFRS 2 are still reported at their intrinsic value as under US GAAP.

3.3.3   Changes in the presentation of the consolidated financial statements

The structure of the various components of the financial statements has been brought into
line with IAS 1 (Presentation of Financial Statements). Under IFRS, minority interest is re-
ported within equity. Since EPCOS uses the option granted by IAS 19 and recognizes actu-
arial gains and losses directly in equity, a statement of income and expense recognized in
group equity must also be presented in the consolidated financial statements.




                                                                                            18
                                                                                     EPCOS AG
                       INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.3.4   Significant effects of the conversion from US GAAP to IFRS

The following reconciliation and explanatory notes give an overview of the significant effects
of the transition to IFRS:
      •      Shareholders' equity at October 1, 2006
      •      Shareholders' equity at December 31, 2006
      •      Shareholders' equity at September 30, 2007
      •      Net income for the three months from October 1, 2006, through December 31,
             2006
      •      Net income for the fiscal year from October 1, 2006, through September 30, 2007

  RECONCILIATION OF SHAREHOLDERS' EQUITY, UNAUDITED
  (EUR thousand)

                                                                                               Opening
                                                                                                 balance
                                                         Note    Sept. 30,      Dec. 31,        sheet at
                                                                    2007          2006       Oct. 1, 2006
  Shareholders' equity in accordance with US
                                                                  621,961       588,515          575,694
  GAAP
  Change in the presentation of minority interests       e1            1,972       1,702           2,055
  Shareholders' equity in accordance with US
  GAAP, including minority interests                              623,933       590,217          577,749
  Property, plant and equipment                          e2        (5,683)       (6,348)          (6,561)
  Capitalization of internally generated intangible
                                                         e3            1,025       1,175           1,169
  assets
  Sale and leaseback transactions                        e4         1,711              -               -
  Convertible bond                                       e5        10,700        (5,038)           6,006
  Pensions                                               e6           (83)      (14,330)        (14,955)
  Other personnel-related provisions                     e7      (16,286)        (6,464)         (6,953)
  Other short-term and long-term financial liabilities
  and other short-term provisions                        e8      (14,936)       (16,807)        (16,662)
  Deferred taxes                                         e9         3,298          9,458           6,781
  Total adjustments                                              (20,253)       (38,354)        (31,175)
  Shareholders' equity in accordance with IFRS                   603,680        551,863         546,574



  RECONCILIATION OF NET INCOME, UNAUDITED
  (EUR thousand)

                                                                Note           Fiscal 2007        Q1 2007
  Net income in accordance with US GAAP                                             63,737         13,080
  Change in the presentation of minority interests              p1                     359             22
  Net income in accordance with US GAAP, including minority
                                                                                   64,096           13,102
  interests
  Pensions and similar obligations                              p2                   2,548             530
  Sale and leaseback transactions                               p3                   1,711               -
  Other short-term and long-term provisions                     p4                (12,605)             349
  Convertible bond                                              p5                (11,022)        (11,044)
  Deferred taxes                                                p6                   5,832           2,720
  Other items                                                   p7                     868             202
  Total adjustments                                                               (12,668)         (7,243)
  Net income (after tax) in accordance with IFRS                                    51,428           5,859




                                                                                                     19
                                                                                             EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


(e1/p1) Change in the presentation of minority interest

IFRS requires third-party minority interest to be recognized in equity. By contrast, under US
GAAP minority interest must be reported separately from equity.

(e2/p7) Property, plant and equipment

US GAAP (per Statement of Financial Accounting Standard (SFAS) 34) requires the interest
expense directly associated with the purchase or manufacture of a qualified asset to be capi-
talized and then amortized over the expected useful life of the asset. Under IFRS such inter-
est expenses are recorded as period expenses pursuant to EPCOS’ decision on IAS 23.
Through this election equity was reduced by EUR 5.7 million as of September 30, 2007, EUR
6.3 million as of December 31, 2006 and EUR 6.6 million as of September 30, 2006. Income
(before tax) increased compared to US GAAP by EUR 0.9 million for the fiscal year ending
September 30, 2007 and EUR 0.2 million for the fiscal quarter ending December 31, 2006.

Under IFRS, the impairment of property, plant and equipment must be tested to determine
whether a partial or full reversal may be necessary as soon as indications arise that the rea-
sons for impairment no longer exist. Under US GAAP, the reversal of earlier impairments is
prohibited. The revaluation of fixed assets under IFRS resulted in a EUR 0.1 million increase
in equity for the fiscal year ending September 30, 2007.

(e3/p7) Capitalization of internally generated intangible assets

Under IFRS development costs are capitalized to the extent specific requirements are satis-
fied. Under US GAAP, with the exception of self-developed software, development costs are
recorded as period expenses. As a result of the additional capitalization of development
costs equity increased by EUR 1.0 million (before tax) as of September 30, 2007, EUR 1.2
million (before tax) as of December 31, 2006, and EUR 1.2 million (before tax) as of Sep-
tember 30, 2006. Income (before tax) for the fiscal period ending December 31, 2006 was
EUR 0.1 million less compared to US GAAP.

(e4/p3) Sale and leaseback

The increased equity and income (before tax) of EUR 1.7 million as of and for the fiscal year
ending September 30, 2007 results from the difference in accounting treatment for sale and
leaseback transaction between US GAAP and IFRS.

(e5/p5) Convertible bond

For convertible bonds, US GAAP does not require bifurcation of the conversion feature and
the underlying debt instrument, or record the former separately at fair value. Under IFRS, a
composite (hybrid) financial instrument whose terms allow the issuer to choose cash settle-
ment to satisfy conversion feature at the time of conversion must be divided at issue into
separate debt components. The conversion feature component is a derivative financial in-
strument that must be recognized at fair value as a liability, affecting income.

The valuation of the attributable fair value resulted in a decrease in income (before tax) of
EUR 7.6 million for the fiscal year ending September 30, 2007, and a decrease in income
(before tax) of EUR 10.2 million for the fiscal quarter ending December 31, 2006, respec-
tively.




                                                                                           20
                                                                                    EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


In the fourth quarter of fiscal 2007, EPCOS elected to waive the cash settlement option
granted for its convertible bond. Accordingly, it reclassified the corresponding conversion
feature, which now constitutes an equity component, to additional paid-in capital.

The remaining debt component represents a financial liability, which must be measured at
fair value at the time of issue. In subsequent periods the valuation was performed at amor-
tized cost using the effective interest method. This resulted in an additional interest expense
(before tax) of EUR 3.4 million in the fiscal year ending September 30, 2007, and EUR 0.9
million for the fiscal quarter ending December 31, 2006, respectively.

This accounting for the convertible bond led to an increase in equity of EUR 10.7 million at
September 30, 2007, a decrease in equity of EUR 5.0 million at December 31, 2006, and an
increase in equity of EUR 6.0 million at September 30, 2006 under IFRS compared to US
GAAP.

(e6/p2) Pensions and similar obligations

Provisions for pension obligations must be set up under both US GAAP and IFRS. Under
IFRS, actuarial gains and losses arising from changes in the actuarial assumptions used for
the calculation of pension obligations are recognized directly in equity in the period in which
they occur, in accordance with the new option granted by the amended version of IAS 19. At
October 1, 2006 (i.e. at the time of transition to IFRS), all actuarial gains and losses and
vested past service costs historically not recognized in profit and loss under US GAAP were
recognized in retained earnings. Under US GAAP, previously unrealized actuarial gains and
losses that exceed the defined "corridor" will continue to be amortized over the average re-
sidual service period of active plan participants. Vested past service costs will be treated in
the same way. Since actuarial gains and losses are recognized directly in equity under IFRS,
net income (before tax) for fiscal 2007 was EUR 2.5 million higher under IFRS than under US
GAAP (and EUR 0.5 million higher in Q1 2007) because under US GAAP, the amortization of
such actuarial losses has been recognized in profit and loss. In the course of the conversion
to IFRS, intangible assets resulting from pensions under US GAAP were netted against eq-
uity. The additional minimum liability, which was previously reported under a separate cap-
tion within equity (other comprehensive income), was reclassified. In total, the transition to
IFRS reduced equity as reported in the consolidated opening balance sheet by EUR 15.0
million (at December 31, 2006: EUR 14.3 million; at September 30, 2007: EUR 0.1 million).
The reduction in the difference reported at September 30, 2007, is due to first-time adoption
of SFAS 158, "Employers’ Accounting for Defined Benefit Pensions and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)", according to
which actuarial gains and losses are also recognized in equity under US GAAP.

(e7/p4) Other personnel-related provisions

Differences between US GAAP and IFRS in the area of other personnel-related provisions
contributed to a reduction in equity of EUR 16.3 million (before tax) at September 30, 2007, a
reduction of EUR 6.4 million (before tax) at December 31, 2006, and a reduction of EUR 6.9
million (before tax) at September 30, 2006, respectively. The differences were largely due to
the more restrictive criteria under US GAAP compared to IFRS. Compared to US GAAP,
IFRS necessitates recording of restructuring provisions as soon as the obligation exists,
whereas US GAAP requires certain additional formal requirements to be met. Early retire-
ment is also treated differently. Therefore, EPCOS was required to record restructuring pro-
visions in fiscal year 2007 for planned restructuring measures, mainly at its Málaga, Spain
location. Due to other personnel-related provisions, income (before tax) decreased by a total
of EUR 14.4 for fiscal year 2007.




                                                                                            21
                                                                                     EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


(e8/p4) Other short-term and long-term financial liabilities and other short-term
provisions

Under US GAAP, provisions for onerous sales contracts may be set up only if the contracts
concerned are governed by a special US GAAP ruling. Under IFRS, all provisions for such
contracts must be recognized if the corresponding criteria are met. The requirement to rec-
ognize provisions for onerous sales contracts led to a reduction in equity (before tax) under
IFRS of EUR 14.9 million at September 30, 2006, a reduction of EUR 16.8 million at Decem-
ber 31, 2006, and a reduction of EUR 16.7 million at September 30, 2007, respectively, rela-
tive to the US GAAP figures. Income (before tax) increased as the result of the criteria for
setting up provisions for onerous sales contracts by EUR 1.8 million for fiscal year 2007, and
EUR 0.2 million for the first fiscal quarter of 2007, respectively, under IFRS compared to US
GAAP.

(e9/p7) Deferred taxes

The necessary adjustments of the book basis in IFRS, compared to US GAAP, have led to
different temporary differences between IFRS carrying amounts for assets and liabilities in
the consolidated statements and tax-basis values and, accordingly, to changes in deferred
taxes.

The item „deferred taxes“ in the reconciliation of shareholders’ equity and net income in-
cludes adjustments arising from differences in regulations regarding deferred taxes under US
GAAP and IFRS. This mainly affects the different calculation of deferred taxes regarding
intercompany profit elimination and the effect of tax rate changes. The impact on the effec-
tive tax rate of the Company is minimal though; the majority of the difference has been gen-
erated by changes in temporary differences. In this respect the tax effect from the different
treatment under IFRS of the convertible bond (see number e5/p5) has to be mentioned, as
this had a significant impact on the effective tax rate of the Company.

In total, the above issues resulted in an increase in equity of EUR 6.8 million at September
30, 2006 (at December 31, 2006: EUR 9.5 million; at September 30, 2007: EUR 3.3 million).
Net income decreased in fiscal 2007 by EUR 12.7 million (Q1 2007: EUR 7.2 million) relative
to the US GAAP figure. Deferred taxes contributed to this amount with an additional deferred
tax benefit in IFRS compared to US GAAP in fiscal year 2007 of EUR 5.8 million (Q1 2007:
EUR 2.7 million).

Impact of difference on the statement of cash flows

The adjustments represent insignificant reclassifications within the statement of cash flows,
which have no impact on cash or cash equivalents.




                                                                                           22
                                                                                    EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.4     Summary of significant accounting and measurement policies

3.4.1   Consolidation

All significant companies over which EPCOS AG exercises effective control in accordance
with law are consolidated in line with the regulations of IFRS. Control is deemed to exist if
EPCOS can govern the financial and operating policies of a company in order to obtain
benefits from its activities.

Where necessary, the financial statements of subsidiaries are adjusted to adhere to the ac-
counting and valuation principles used in the EPCOS Group.

All significant balances and transactions within the Group and all significant intercompany
profits arising from such transactions are eliminated from the consolidated financial state-
ments.

3.4.2   Investments in unconsolidated companies/associates

Companies that EPCOS does not control but over whose operating and financial policies
EPCOS can exercise a significant influence (associates) are stated at equity in the consoli-
dated financial statements.

Significant influence is generally assumed if EPCOS directly or indirectly controls more than
20% but less than 50% of the voting rights in a company.

Indications of impairment lead to an examination of the recognized value followed, if neces-
sary, by impairment. Where the reasons for an earlier impairment no longer exist, the im-
pairment is reversed and the write-up is recognized in profit and loss.

The appropriate share of equity of companies accounted for under the equity method is re-
ported in the consolidated financial statements. Intercompany profits arising from transac-
tions with these companies are not eliminated in the consolidated financial statements.
Transactions with these companies are conducted at arm's-length at prevailing market rates.
These inventories were insignificant at the balance sheet date.

3.4.3   Foreign currencies

3.4.3.1 Transactions in foreign currencies
Purchases and sales effected in foreign currencies are translated at the exchange rate valid
at the time of the transaction. Assets and liabilities denominated in foreign currencies are
translated to the functional currency at the exchange rate valid on the balance sheet date.
The resulting foreign currency gains and losses are recognized in consolidated profit and
loss.

3.4.3.2 Translation of financial statements into euros
EPCOS presents its financial statements in euros. Balance sheet items reported by subsidi-
aries for which the euro is not the functional currency are translated at the spot-rate on the
balance sheet date. Items in the income statement are translated at the weighted average
rate for the respective fiscal period. The resulting translation adjustments are recognized in
equity.




                                                                                           23
                                                                                    EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.4.4   Revenue recognition

Sales are recorded when they are realized or become realizable. They are recognized inde-
pendent of the date of payment. Sales are defined net of discounts, customer incentives,
rebates and returns.

3.4.5   Research and development costs

Research costs are distinguished from development costs. Both items are recognized in the
period in which they are incurred.

Where the criteria for recognition specified by IAS 38 are met, development costs are capital-
ized. These capitalized costs are then included in other internally generated intangible as-
sets, a subset of intangible assets. In subsequent periods, depreciation of capitalized devel-
opment costs is recognized in profit and loss as cost of sales. Where capitalized develop-
ment costs can be assigned to a specific production operation, depreciation is spread across
the costs of the products concerned.

Where the criteria for capitalization of development costs are not met, development costs are
recorded under "Research and development costs" as an expense in the appropriate period.

3.4.6   Income taxes

The Company applies IAS 12 („income taxes“) accounting for income taxes. According to
IAS 12 deferred taxes have to be recognized for temporary differences between the values of
the tax balance sheet and the IFRS balance sheet (liability method).

The impact on deferred taxes of changes in tax rates affects income in the period in which
the legislative process underpinning the change in the tax rate is largely completed, except in
cases where the impact relates to items that are recognized in equity. Deferred tax assets
are recognized to the extent to which it is probable that future taxable profits will be earned
against which deductible temporary differences, loss carryforwards and unused tax credits
can be offset.

For the fiscal year 2007 and 2008 a total income tax rate of 31.5% has been used for
EPCOS AG for the calculation of deferred taxes. This is comprised of the corporate income
tax rate of 15.8% (including solidarity surcharge) and the trade tax rate of 15.7%.

3.4.7   Property, plant and equipment

Property, plant and equipment is recognized at historic cost less cumulative depreciation.
Cost includes closure and restoration costs that must be capitalized. It also includes the ma-
terial cost of improvements that extend the useful life or increase the capacity of the assets
concerned. Maintenance and repair costs are recognized as an expense when they are in-
curred. Capital expenditure for expansion is capitalized insofar as it increases the value of an
asset. Interest on borrowings that is incurred during construction of an asset is not capital-
ized.

When property, plant or equipment is disposed of, the associated historic cost and accumu-
lated depreciation are derecognized. The difference between these amounts and the pro-
ceeds from the sale are recognized as income or expense in the consolidated statements of
income.




                                                                                             24
                                                                                      EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


As a general rule, the following useful lives are estimated for depreciable items of property,
plant and equipment:

  Buildings, exterior fixtures and leasehold improvements              5 to 50 years
  Machinery and other equipment                                        5 to 10 years
  Other assets, office fixtures and fittings                           3 to 5 years

3.4.8   Intangible assets

With the exception of goodwill, intangible assets are recognized at cost less accumulated
depreciation. Scheduled depreciation is recorded straight line over the useful life of an asset.

Goodwill is defined as the difference between the purchase price and the fair value of the net
assets of an "acquired" company. Beyond that, intangible assets consist primarily of the ac-
quired customer base, patents and licenses. Patents are amortized over a maximum of ten
years in accordance with the patent certificate. The same period applies to amortization of
the customer base. Licenses are amortized in accordance with the terms of the relevant
agreements.

Pursuant to IAS 36, goodwill is not subject to scheduled amortization. The goodwill assigned
to business units is tested for impairment at least once a year, or where events indicate an
impairment may exist, and written down accordingly as and when necessary. Goodwill im-
pairments cannot be reversed in subsequent periods.

3.4.9   Impairment of long-lived assets

The Company tests long-lived assets (including intangible assets) for impairment whenever
certain events or changes in circumstances indicate that an asset's carrying amount may no
longer be recoverable.

In accordance with IAS 36, "Impairment of Assets", the carrying amount of such assets is
compared with their recoverable amount, which is defined as the higher of their value in use
and their fair value less cost to sell.

Normally, expert reports are prepared or discounted future net cash flows are estimated to
determine the recoverable amount of an asset. Estimates of future net cash flows require
management to make assumptions. Actual values may, however, deviate from the estimated
values.

If an asset's carrying amount is higher than its recoverable amount, the asset is written down
by the difference between the carrying amount and the recoverable amount. If the reasons
for an earlier impairment no longer apply, assets impairments (with the exception of goodwill)
are reversed again. However, any such reversal must not exceed the carrying amount of the
asset that would have applied if impairment had not been effected in previous periods.




                                                                                                 25
                                                                                       EPCOS AG
                     INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.4.10 Financial instruments and hedges

IAS 39, "Financial Instruments: Recognition and Measurement", contains regulations govern-
ing the accounting and reporting treatment of derivative financial instruments, including cer-
tain derivative financial instruments that are embedded in other contracts.

EPCOS uses derivative financial instruments to contain the exchange rate risks, interest rate
risks and risks associated with fluctuations in the market price of precious metals. The Com-
pany neither uses nor issues derivative financial instruments for trading or speculative pur-
poses. However, to minimize certain risks that are inherent to the nature of its business ac-
tivities, EPCOS does engage in forward exchange contracts, forward rate agreements and
commodity futures transactions.

Derivative financial instruments are recognized at fair value both when they are reported for
the first time and in subsequent periods. Gains and losses arising from fluctuations in fair
value are recognized immediately in profit and loss.

If a derivative financial instrument is used as a cash flow hedge in accordance with IAS 39,
the effective portion of the change in the fair value of the hedge is recognized in equity. The
ineffective portion of the change in the fair value of a cash flow hedge is recognized immedi-
ately in profit and loss.

Reclassification to profit and loss takes place in the period in which the hedged item is rec-
ognized in profit and loss. Where a hedged item ceases to exist, the hedging result is imme-
diately reclassified to profit and loss.

3.4.11 Securities

EPCOS classifies its securities as available-for-sale securities. These securities are recog-
nized at their market value on the balance sheet date. Cumulative unrealized gains and
losses are recognized in equity. Realized gains or losses and impairments that are probably
of a permanent nature are recognized in consolidated profit and loss.

3.4.12 Inventories

Inventories are measured at the lower of cost or net realizable value. Cost is determined pri-
marily using the weighted average method. Cost includes directly attributable material and
labor cost and a share of material and production overheads, plus depreciation based on the
assumption of normal capacity utilization.

3.4.13 Cash and cash equivalents

For the purposes of the consolidated statements of cash flows, EPCOS recognizes all highly
liquid financial instruments with original maturities of up to three months as cash and cash
equivalents. These items include balances in bank accounts and short-term investments for
periods of less than three months at the time of initial investment.

3.4.14 Earnings per share

Basic (i.e. undiluted) earnings per share are calculated by dividing net income for the period
by the weighted average number of shares outstanding in a given period. To calculate diluted
earnings per share, the weighted average number of shares outstanding is increased by the
number of additional ordinary shares that would have been added if the issue of additional
shares had diluted the original number in a given period.



                                                                                            26
                                                                                     EPCOS AG
                    INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.4.15 Share-based payment

In the shareholders’ meeting of February 11, 2004, the shareholders approved the EPCOS
Stock Option Plan 2004. Under this plan a maximum of 2,480,000 options may be issued to
the members of the Management Board of EPCOS AG, to managing directors of EPCOS
affiliates and to other selected executives until February 10, 2007. The Supervisory Board of
EPCOS AG decided on the number of options to be granted to the Management Board, and
the Management Board on the number of options to be granted to the other eligible persons.

The exercise price amounts to 115% of the base price, i. e. the average opening market pri-
ce of EPCOS AG shares on the five trading days before the grant date. The exercise price is
also the performance hurdle. The options may only be exercised after the expiration of a
vesting period. This vesting period begins one week after the grant date and runs for at least
two years.

The option rights may be exercised during the five years following the vesting period. Instead
of shares issued from Conditional Capital 2004 II of originally EUR 2.480 million created for
this purpose, the eligible persons may, at the discretion of the Company, be granted treasury
shares repurchased from the stock market or paid cash settlement. The shares, to be issued
from the Conditional Capital 2004 II, have no par value and their nominal amount is EUR 1
each. In the event of extraordinary, unforeseen developments, the Supervisory Board and
the Management Board are authorized to introduce a cap on possible gains from stock op-
tions.

As of September 30, 2007 the Company had two share-based incentive plans, both of which
have since expired. Their key features are presented in the 2007 annual report (pages 152
through 156). Additional notes regarding the values and the development (status September
30, 2007) of the stock-option plans can be found there. These stock-option plans were re-
placed by a stock appreciation rights plan in December 2007.


3.5     Accounting principles that require significant estimates and assumptions

Some accounting principles require the use of significant estimates and assumptions. These
principles include complex and subjective evaluations and assessments on the basis of is-
sues that exposes them to uncertainty and change. Accounting principles that require signifi-
cant estimates and assumptions can change over time and significantly influence the presen-
tation of EPCOS' assets, financial situation and earnings. These principles can also include
the use of management assumptions that, for equally persuasive reasons, could have been
different in the same period. The Management Board expressly points out that future events
often differ from forecasts, and that estimates routinely have to be adapted in light of the ac-
tual developments.

3.5.1   Accounts receivable and other receivables

Allowances for doubtful receivables include estimates and assessments of individual receiv-
ables. These estimates and assessments are based on the creditworthiness of the individual
customer, current economic developments and analysis of historic default records within the
portfolio. Country-specific ratings are also taken into account.

3.5.2   Goodwill

EPCOS tests goodwill for impairment at least once a year. Calculating the recoverable
amount for a business unit to which goodwill is assigned requires management to make es-
timates and assumptions. EPCOS uses measurement methods that are based on discounted


                                                                                             27
                                                                                      EPCOS AG
                     INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


cash flows. Cash flow forecasts take account of past experience and are based on manage-
ment's best estimates of future developments. These assumptions can have a significant
influence.

3.5.3   Pensions and similar obligations

Expenses and income arising from pension commitments are calculated using actuarial
methods that are based on a number of key assumptions, including discount factors and the
projected return on plan assets. The plan assets for all pension plans are recognized at their
market value at the balance sheet date. This value serves as the basis on which the return
on plan assets is calculated. Expenses and income arising from similar obligations are like-
wise calculated using actuarial methods that are based on a number of key assumptions,
including discount factors. The discount factors assumed reflect the rates of interest that
could be realized on high-grade fixed-income bonds with appropriate maturities at the bal-
ance sheet date. The projected return on plan assets is calculated on a uniform basis, taking
into account historic long-term returns, the structure of the portfolio and estimates of long-
term returns in the future. Some of the other key assumptions to calculate projected ex-
penses and income arising from pension and similar obligations are based on current market
conditions. Expenses and income arising from pension and similar obligations can vary if
these underlying assumptions change.

3.5.4   Provisions

Estimates are an important factor in the calculation of all provisions, especially those set up
to cover losses from onerous sales contracts, possible warranty claims and the cost of legal
disputes.


3.6     Transactions with related parties and related persons

Panasonic Electronic Devices Europe GmbH sold its 12.5% (plus one share) stake in
EPCOS AG in October 2006. Panasonic is included in the related party transactions only for
the period up to its sale of the EPCOS shares.

In December 2007 EPCOS acquired a 49% ownership interest in Becromal S.p.A., Italy, for
EUR 5.0 million. At the same time, EPCOS sold its interest of 25% in Becromal A.S., Norway
to Becromal S.p.A. The proceeds of EUR 2.4 million were subsequently granted as a loan to
Becromal S.p.A. In total Becromal S.p.A. received loans in the amount of EUR 5.9 million. A
final purchase price allocation has yet to be performed. Becromal S.p.A. and Becromal A.S.
are included in the related party transactions only for the period up to their sale and or acqui-
sition.

On February 14th, 2007 the term of a member of the Supervisory Board ended. Transactions
with companies directly or indirectly owned by this person are included in the related party
transactions only for the period up to this date.


3.7     Property, plant and equipment

Additions and disposals
In the first quarter of fiscal 2008 (2007), EPCOS purchased assets EUR 41.8 million
(EUR 24.1 million). In the first quarter of fiscal 2008 (2007), EPCOS sold assets with carrying
amounts totaling EUR 0.8 million (EUR 1.7 million).




                                                                                              28
                                                                                      EPCOS AG
                       INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


Depreciation
Depreciation expense for property, plant and equipment was EUR 28.4 million (EUR 27.1
million) for the first quarter of fiscal 2008 (2007).


3.8     Goodwill and other intangible assets

The following categories of intangible assets are included in the consolidated financial state-
ments at December 31, 2007, and September 30, 2007:


  INTANGIBLE ASSETS
  (EUR thousand)

                                                Dec. 31, 2007               Sept. 30, 2007
                                                Gross             Net        Gross             Net
  Goodwill                                       26,507         11,616        26,273         11,382
  Patents, licenses and similar rights           36,408          5,704        36,353          6,059
  Customer lists                                  3,891          1,573         3,891          1,684
  Other                                           1,852            667         1,845            702
  Total intangible assets                        68,658         19,560        68,362         19,827


Amortization related to intangible assets (finite lives) amounted to EUR 0.7 million (EUR 0.9
million) for the first quarter 2008 (2007). There were no changes to such useful lives and
there are no expected residual values associated with these intangible assets. Patents are
amortized over the term of the patents, or as in the case of customer lists, over a maximum
of ten years. Licenses are amortized over the term of the licensing agreement.


3.9     Inventories, net

  INVENTORIES, NET
  (EUR thousand)
                                                          Dec. 31, 2007            Sept. 30, 2007
  Raw materials and supplies                                     63,675                      53,802
  Work in process                                                64,675                      61,965
  Finished products                                             110,165                   102,088
  Total inventories, net                                        238,515                   217,855


Total inventories as of December 31, 2007 and September 30, 2007, are net of valuation
allowances of EUR 21.8 million and EUR 21.5 million, respectively.


3.10    Paid and proposed dividends

The Management Board and Supervisory Board will propose to the General Meeting a divi-
dend payment for the fiscal year ended September 30, 2007 of EUR 0.30 per entitled share.
Payment of dividends follows approval at the General Meeting, which typically takes place in
the second fiscal quarter. In this regard, payments occurred neither in the first quarter of fis-
cal 2008, nor in the first quarter of fiscal 2007.




                                                                                                29
                                                                                       EPCOS AG
                     INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.11   Pension plan

The table below lists the components of net pension costs for the three months ending
December 31, 2007, and the three months ending December 31, 2006:

  PENSION COSTS, NET
  for the quarters to December 31, 2007, and December 31, 2006
  (EUR thousand)

                                                                           3 months ended
                                                                               Dec. 31
                                                                                2007           2006
  Current service costs                                                          1,389         1,319
  Interest costs                                                                 2,720         2,264
  Expected return on plan assets                                                 (470)         (310)
  Pension cost for the period, net                                               3,639         3,273



3.12   Other financial income and expense

Under IFRS the conversion feature contained in the convertible bond is treated as an option
and marked to market at each balance sheet date. The effect in profit and loss of the re-
valuation of the financial derivative component at December 31, 2006 was minus EUR 10.1
million. EPCOS waived its right to a cash settlement in August 2007, thereby avoiding poten-
tial income effects for the period ended December 31, 2007.


3.13   Share-based payment

For a description of the EPCOS stock-based compensation plan see our Annual Report for
the year ended September 30, 2007.

The following table summarizes the share option activity:

  STOCK OPTION ACTIVITY


                                                                        Weighted average exercise
                                                    Number of options     price per share (in EUR)
  Balance at September 30, 2007                             3,010,000                         34.83
  Granted                                                           -                             -
  Exercised                                                         -                             -
  Forfeited                                                   363,000                       105.04
  Balance at December 31, 2007                              2,647,000                         25.21




                                                                                               30
                                                                                         EPCOS AG
                      INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.14   Earnings per share

Basic earnings (loss) per share are computed by dividing net income/loss by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss)
per share reflect the potential dilution that would occur if the potentially dilutive common
shares, such as on the exercise of options, had been issued. The following table sets forth
the computation of basic and diluted earnings (loss) per share for the three-month periods
ended December 31, 2007 and 2006:

  EARNINGS PER SHARE FROM CONTINUING OPERATIONS
  for the quarters to December 31, 2007, and December 31, 2006
  (EUR thousand, except share data)
                                                                        3 months ended
                                                                            Dec. 31
                                                                          2007       2006
  Net income from continuing operations (basic)                           19,009        5,862
  Interest expense on convertible bond (net of tax)                        1,285            -
  Net income (diluted)                                                    20,294        5,862
  Weighted average no. of shares outstanding (undiluted)              65,317,000   65,300,000
  Effect of dilutive shares – stock options                                    -        6,568
  Effect of dilutive shares – convertible bond                         6,500,000            -
  Weighted average no. of shares outstanding (diluted)                71,817,000   65,306,568
  Basic (undiluted) earnings per share, in EUR
    Continuing operations                                                   0.29         0.09
  Diluted earnings per share, in EUR
   Continuing operations                                                    0.28         0.09


  LOSS PER SHARE FROM DISCONTINUED OPERATIONS
  for the quarters to December 31, 2007, and December 31, 2006
  (EUR thousand, except share data)

                                                                        3 months ended
                                                                            Dec. 31
                                                                          2007       2006
  Net income from continuing operations (basic)                                -          (25)
  Interest expense on convertible bond (net of tax)                            -             -
  Net income (diluted)                                                         -          (25)
  Weighted average no. of shares outstanding (undiluted)                       -   65,300,000
  Effect of dilutive shares – stock options                                    -             -
  Effect of dilutive shares – convertible bond                                 -             -
  Weighted average no. of shares outstanding (diluted)                         -   65,300,000
  Basic (undiluted) earnings per share, in EUR
    Discontinued operations                                                    -         0.00
  Diluted earnings per share, in EUR
   Discontinued operations                                                     -         0.00


In determining the dilutive effect for continuing operations at December 31, 2007, 6,500,0000
shares related to the convertible bond issuance were included. A dilutive effect from stock
options was not considered since no options were in the money. In determining the dilutive
effect for continuing operations at December 31, 2006, 6,568 shares related to stock options
were included. The stock options were not considered for discontinued operations since their
inclusion would have had an anti-dilutive effect. For continuing as well as discontinued op-
erations the convertible bond was not considered as inclusion would have had an anti-
dilutive effect.


                                                                                           31
                                                                                   EPCOS AG
                      INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.15   Segment reporting

  FINANCIAL INFORMATION ON BUSINESS SEGMENTS, UNAUDITED
  (EUR million)


                               Capacitors and
                                                Ceramic Com-         SAW     Elimi-   Consolidated
                                   Inductors
                                                     ponents   Components   nations           total
  3 months ended
  December 31, 2007
  Net sales from continuing
                                        134.3          130.1        103.1                    367.5
  operations
  EBIT                                    9.9            7.2         11.3                      28.4
  Financial result                                                                            (4.9)
  Income before taxes                                                                         23.5
  Provision for income taxes                                                                  (4.5)
  Net income                                                                                  19.0
  Depreciation and amorti-
  zation                                  8.0            9.1         12.0                      29.1
  Capital expenditures                   12.2            7.0         15.9     (0.5)            34.6

  3 months ended
  December 31, 2006
  Net sales from continuing
                                        121.6          111.0        101.8                    334.4
  operations
  EBIT                                    3.7            0.6         16.6                      20.9
  Financial result                                                                           (15.3)
  Income before taxes                                                                           5.6
  Provision for income taxes                                                                    0.3
  Net income                                                                                    5.9
  Depreciation and amorti-
                                          7.6            8.4         12.0                      28.0
  zation
  Capital expenditures                    2.8            6.8         13.2       1.4            24.2




                                                                                                32
                                                                                       EPCOS AG
                   INTERIM REPORT CONSOLIDATED FINANCIAL STATEMENTS


3.16   Non cash transactions

The sales price for EPCOS’ ownership interest in Becromal A.S, Norway, in the amount of
EUR 2.4 million was converted into a long-term loan to Becromal S.p.A., Italy (see trans-
action details under 3.6).


3.17   Contingent liabilties and contingent assets

There have been no significant changes compared to the notes for contingent liabilities as of
September 30, 2007.


3.18   Subsequent events

There were no subsequent events of note after December 31, 2007.




                                                                                          33
                                                                                   EPCOS AG

				
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