Compal - Capital/Financing Update 2013

IMPORTANT NOTICE

NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES

IMPORTANT: You must read the following before continuing. The following applies to this e-mail and the offering circular following this page, and you are therefore advised to read this carefully before reading, accessing or making any other use of the offering circular. In accessing the offering circular, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information from us as a result of such access.

INVESTING IN THE BONDS INVOLVES RISKS AND YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED UNDER THE CAPTION “RISK FACTORS”, AS WELL AS INFORMATION CONTAINED ELSEWHERE IN THE ATTACHED OFFERING CIRCULAR, BEFORE MAKING AN INVESTMENT DECISION.

NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTIONS AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE U.S. OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.

THE FOLLOWING OFFERING CIRCULAR MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.

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You are reminded that this offering circular has been delivered to you on the basis that you are a person into whose possession this offering circular may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this offering circular to any other person.

The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the offering made by a licensed broker or dealer and the underwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by the underwriters or such affiliate on behalf of the issuer in such jurisdiction.

This offering circular has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently neither ABN AMRO Bank N.V. and NM Rothschild & Sons Limited, each trading as ABN AMRO Rothschild, nor any person who controls them nor any director, officer, employee not agent of them nor affiliate of any such person accepts any liability or responsibility whatsoever in respect of any difference between the offering circular distributed to you in electronic format and the hard copy version.

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This e-mail and the attached offering circular are intended only for use by the addressee named herein and may contain legally privileged and/or confidential information. If you are not the intended recipient of this e-mail or the attached offering circular, you are hereby notified that any dissemination, distribution or copying of this e-mail or the attached offering circular is strictly prohibited. If you have received this e-mail and the attached offering circular in error, please immediately notify us by reply e-mail or contact Rene Mijne or Kelvin Leung of ABN AMRO Rothschild at +852 2700 5140 and destroy any printouts of it.

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Compal Electronics, Inc.

(incorporated as a company limited by shares in Taiwan, the Republic of China)

US$300,000,000 Zero Coupon Convertible Bonds due 2010 Issue Price: 100%

The US$300,000,000 Zero Coupon Convertible Bonds due 2010 (the “Bonds”) will be issued by Compal Electronics, Inc. (the “Company”), a company limited by shares incorporated in Taiwan, the Republic of China (the “ROC” or “Taiwan”). Unless previously redeemed, converted or purchased and cancelled, the Bonds will be redeemed at their principal amount in, US dollars, on August 19, 2010. See “Terms and conditions of the Bonds — Redemption, Purchase and Cancellation”.

The Bonds may be converted (unless previously redeemed, converted or purchased and cancelled and except during a Closed Period (as defined herein)) at any time on or after September 18, 2005 and prior to the close of business (at the place the Bond is deposited for conversion) on July 20, 2010 into Shares of the Company. In addition, the converting Bondholder has the option, subject to compliance with certain conditions, to direct the Shares issuable upon conversion to be delivered to the Depositary (as defined herein) for issuance of Global Depositary Shares (“GDSs”) representing the Shares. The Conversion Price (as defined herein) will initially be NT$38.40 per Share with a fixed rate of exchange on conversion of NT$31.884 = US$1.00 (the “Fixed Exchange Rate”). The conversion price is subject to adjustment in the manner provided herein. The Shares are listed on the Taiwan Stock Exchange (the “TSE”) and application will be made to list the Shares to be issued on conversion of the Bonds on the TSE. See “Terms and conditions of the Bonds — Conversion”.

The Bonds may be redeemed at their principal amount, in US dollars, in whole or in part (being US$10,000,000 in principal amount or an integral multiple thereof), at the option of the Company, at any time on or after August 19, 2007 and prior to August 19, 2010, upon not less than 30 nor more than 60 days’ notice to the holders of the Bonds, provided that the Closing Price (as defined herein) of the common shares, par value NT$10 per share, of the Company (the “Shares”) on the TSE translated into US dollars at the Prevailing Rate (as defined herein), for a period of 20 consecutive Trading Days (as defined herein), the last of which occurs not more than five Trading Days prior to the date upon which notice of such redemption is given, is 130% or above the Conversion Price then in effect, translated into US dollars at the Fixed Exchange Rate. Notwithstanding the foregoing sentence, the Company may, at any time, redeem the Bonds in whole but not in part, upon not less than 30 nor more than 60 days’ notice to the holders of the Bonds, at their principal amount, in US dollars, if at least 90% in principal amount of the Bonds has already been redeemed, converted, or purchased and cancelled. The Bonds may also be redeemed in whole, at the option of the Company at their principal amount, in US dollars, in the event of certain changes in taxation in the ROC which would require the Company to pay additional amounts to the holders of the Bonds, subject to the option of any holder of the Bonds to elect not to have its Bonds redeemed by the Company, in which case, such holder will not be entitled to receive payment of such additional amounts. See “Terms and conditions of the Bonds — Redemption, Purchase and Cancellation”.

The Company will, at the option of the holder of any Bond, redeem such Bond on August 19, 2007 at its principal amount, in US dollars. The Company will also, at the option of the holder of any Bond, redeem all (but not less than all) of the holder’s Bonds at their principal amount, in US dollars, if the Shares cease to be listed or admitted to trading on the TSE or if there is a Change of Control (as defined herein) with respect to the Company. See “Terms and conditions of the Bonds — Redemption, Purchase and Cancellation”.

Approval in-principle has been obtained from the Singapore Exchange Securities Trading Limited (the “SGX-ST”) to list the Bonds on the SGX-ST. Admission of the Bonds to the Official List of the SGX-ST is not to be taken as an indication of the merits of the Bonds or the Company. The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions or reports contained in this Offering Circular. The Company’s Shares are listed on the TSE. The closing price of the Shares on the TSE was NT$33.30 per share on August 17, 2005. The Company’s GDSs are listed on the Luxembourg Stock Exchange. The closing price of the GDSs on the Luxembourg Stock Exchange was US$5.31 per GDS on August 16, 2005.

Investing in the Bonds involves risks. See “Risk factors” beginning on page 9.

The Bonds and the Shares and the GDSs to be issued upon conversion of the Bonds have not been and will not be registered under the US Securities Act of 1933, as amended (the “Securities Act”) and may not be offered or sold within the United States or to, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act (“Regulation S”)) unless registered under the Securities Act or an exemption from the registration requirements under the Securities Act is available. The Bonds and the Shares and the GDSs to be issued upon conversion of the Bonds are being offered and sold pursuant to this Offering Circular only outside the United States to non-US persons in reliance on Regulation S under the Securities Act. For a description of these and certain further restrictions on offers and sales of the Bonds and the Shares and the GDSs to be issued upon conversion of the Bonds, and distribution of this Offering Circular, see “Form of the Bonds and transfer restrictions”, “Form of GDRs and transfer restrictions”, “Description of the GDSs” and “Plan of distribution”.

The Bonds will be represented by beneficial interests in a permanent global certificate (the “Global Certificate”) in registered form, which will be registered in the name of a nominee of, and shall be deposited on or about the Closing Date with a common depositary for Euroclear Bank S.A./N.V., as operator of the Euroclear System (“Euroclear”) and Clearstream Banking, socie´te´ anonyme (“Clearstream, Luxembourg”). Beneficial interests in the Global Certificate will be shown on, and transfer thereof will be effected only through, the records maintained by Euroclear and Clearstream, Luxembourg and their respective accountholders. The Bonds have been accepted for clearance through Euroclear and Clearstream, Luxembourg.

The Purchasers (as defined herein) expect to deliver the Bonds against payment therefor on or about August 19, 2005 (the “Closing Date”).

Sole Global Coordinator and Bookrunner

ABN AMRO Rothschild

Co-Managers

JS Cresvale Securities TIS Securities (HK) Limited International Company Limited

Yuanta Core Pacific Securities

Offering Circular dated August 17, 2005

You should rely only on the information contained in this offering circular (the “Offering Circular”). The Company has not authorized anyone to provide you with different information. The Company is not, and the Purchasers (as defined in “Plan of distribution”) are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this Offering Circular is accurate as of any date other than the date of this Offering Circular.

The Company, having made all reasonable enquiries, confirms that this Offering Circular contains all information with respect to the Company, its subsidiaries and affiliates (together with the Company, the “Group”), the Group taken as a whole, the Bonds, the Shares and the GDSs, which is material in the context of the issue and offering of the Bonds, that the information contained herein (save as set out below) is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the Bonds, make this Offering Circular as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respect and that all reasonable enquiries have been made by the Company to verify the accuracy of such information. The Company accepts responsibility accordingly.

Each purchaser of securities offered hereby in making its purchase will be deemed to have made certain acknowledgements, representations and agreements as set forth under “Form of the Bonds and transfer restrictions”, “Form of the GDRs and transfer restrictions” and “Plan of distribution”. The Bonds, the Shares and the GDSs issuable upon conversion of the Bonds have not been registered under the Securities Act or any US state securities laws and may not be offered or sold in the United States or to or for the account or benefit of US persons unless registered under the Securities Act or an exemption from the registration requirements of the Securities Act and applicable state securities laws is available. Hedging transactions involving the Bonds, the Shares and the GDSs issuable upon conversion of the Bonds may not be conducted, directly or indirectly, unless in compliance with the Securities Act and other relevant laws and regulations.

This Offering Circular has been prepared by the Company solely for use in connection with the proposed offering of the securities described herein. This Offering Circular is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Bonds, the Shares or the GDSs issuable upon conversion of the Bonds. Distribution of this Offering Circular to any person other than the prospective investor and any person retained to advise such prospective investor with respect to its purchase is unauthorized, and any disclosure of any of its contents, without the Company’s prior written consent, is prohibited. Each prospective investor, by accepting delivery of this Offering Circular, agrees to the foregoing and to make no photocopies of this Offering Circular or any documents referred to in this Offering Circular.

The Purchasers, the Trustee (as defined in “The offering”) and the Agents (as defined in “Terms and conditions of the Bonds”) make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this Offering Circular. Nothing contained in this Offering Circular is, or shall be relied upon as, a promise or representation by the Purchasers, the Trustee or the Agents as to the past or future. The Company has furnished the information contained in this Offering Circular. The Purchasers, the Trustee or the Agents have not independently verified any of the information contained herein (financial, legal or otherwise) and assume no responsibility for the accuracy or completeness of any such information.

Neither the US Securities and Exchange Commission, any US state securities commission nor any other US regulatory authority, has approved or disapproved the Bonds, the Shares or the GDSs issuable upon conversion of the Bonds, nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy or adequacy of this Offering Circular. Any representation to the contrary is a criminal offense.

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The Bonds, the Shares and the GDSs issuable upon conversion of the Bonds are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and the applicable securities laws of other jurisdictions pursuant to registration or exemption therefrom. As a prospective purchaser, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in this Offering Circular entitled “Form of the Bonds and transfer restrictions”, “Form of the GDRs and transfer restrictions” and “Plan of distribution”.

In making an investment decision, prospective investors must rely on their own examination of the Company and the terms of the offering, including the merits and risks involved. Prospective investors should not construe anything in this Offering Circular as legal, business or tax advice. Each prospective investor should consult its own advisors as needed to make its investment decision and to determine whether it is legally permitted to purchase the securities under applicable legal investment or similar laws or regulations.

In this Offering Circular, the Company relies on and refers to information and statistics regarding its industry. The Company obtained this market data from independent industry publications or other publicly available information. Although the Company believes that these sources are reliable, the Company has not independently verified and does not guarantee the accuracy and completeness of this information.

This Offering Circular contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. All such summaries are qualified in their entirety by such reference.

Payment in respect of the Bonds will be made after withholding for or on account of certain taxes of the ROC and the Company will pay additional amounts in respect of such withholding to the extent set forth under “Terms and conditions of the Bonds — Taxation”.

In this Offering Circular, references to the “PRC” and “China” are to the People’s Republic of China and do not include Hong Kong, Macau or Taiwan. References to the “ROC”, “Taiwan” and the “Republic of China” are to the island of Taiwan and other areas under the effective control of the Republic of China.

The Company has prepared audited non-consolidated financial statements as of and for the six-month periods ended June 30, 2004 and 2005 and audited consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004, both of which are included in this Offering Circular. The term “Group”, when used in connection with such audited consolidated financial information, shall mean the Company and its subsidiaries. These financial statements were prepared in conformity with the “Rules Governing Preparation of Financial Statements of Securities Issuers” and generally accepted accounting principles in the ROC (together referred to herein as “ROC GAAP”), which differ in certain material respects from generally accepted accounting principles in the United States (“US GAAP”). See “Summary of significant differences between ROC GAAP and US GAAP”.

Unless otherwise specified or the context requires, references to “US dollars” and “US$” are to the lawful currency of the United States of America, references to “New Taiwan dollars”, “NT dollars” and “NT$” are to the lawful currency of the ROC and references to “Renminbi” and “RMB” are to the lawful currency of the PRC. Unless otherwise specified, where financial information in relation to the Company has been translated into US dollars, it has been so translated, for convenience only, at the exchange rate of NT$31.71 = US$1.00 (the noon buying rate provided by the Bank of Taiwan (the “Noon Buying Rate”) on December 31, 2004). All amounts translated into US dollars as described above are provided solely for the convenience of the reader and no representation is made that the NT dollar or US dollar amounts referred to herein could have been or could be converted into US dollars or NT dollars, as the case may be, at any particular rate or at all. For further information relating to exchange rates, see “Exchange rate information”.

Any discrepancies in any table between totals and the sums of the amounts listed are due to rounding.

— ii —

FORWARD-LOOKING STATEMENTS

Certain statements under “Summary”, “Risk factors”, “Business” and “Management’s discussion and analysis of financial condition and results of operations” and elsewhere in this Offering Circular constitute “forward-looking statements”. All statements other than statements of historical facts included in this Offering Circular, including, without limitation, those regarding the Company’s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Company’s products), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company, or industry results, to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. The important factors that could cause the Company’s actual results or performance to differ materially from those in the forward-looking statements include, among others, changes in political, social and economic conditions in the ROC and the PRC; changes in currency exchange rates; changes in market prices for the Company’s products; changes in the availability or prices of raw materials and components; changes in customer preferences; changes in competitive conditions; and changes in technology. Additional factors that could cause actual results or performance to differ materially include, but are not limited to, those discussed in “Risk factors”. These forward-looking statements are made only as of the date of this Offering Circular. The Company expressly disclaims any obligation or undertaking to publicly release updates or revisions to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

The Company is a company limited by shares and incorporated under the Company Law of the ROC (the “Company Law”). Substantially all of the Company’s directors and executive officers, its supervisors and certain other parties named herein are residents of the ROC and a substantial portion of the assets of the Company and such persons are located in the ROC. As a result, it may not be possible for investors to effect service of process upon the Company or such persons outside the ROC, or to enforce against any of them judgments obtained in courts outside the ROC, including those predicated upon the civil liability provisions of the securities laws of the United States or any State or territory within the United States.

The Company has been advised by Tsar & Tsai, its legal advisor in the ROC, that any final judgment obtained against the Company or such persons in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the Bonds, the Shares or GDSs issuable upon conversion of the Bonds, will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that: (i) the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC; (ii) the judgment and the court procedures based on which such judgment was rendered are not contrary to the public order or good morals of the ROC; (iii) the judgment is a final judgment for which the period for appeal has expired or from which no appeal can be made; (iv) if the judgment was rendered by default by the court rendering the judgment, (x) the Company or such persons were duly served during a reasonable time within the jurisdiction of such court in accordance with the laws and regulations of such jurisdiction, or (y) process was served on the Company or such persons with the judicial assistance of the ROC; and (v) judgments of the courts of the ROC are recognized and enforceable in the jurisdiction of the court rendering the judgment on a reciprocal basis. Moreover, a party seeking to enforce a foreign judgment in the ROC would, except under limited circumstances, be required to obtain foreign exchange approval from the Central Bank of China (the “CBC”) for the remittance out of the ROC of any amounts recovered in respect of such judgment denominated in a currency other than NT dollars.

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			Page
Summary . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
The offering . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5
Risk factors . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	9
Use of proceeds . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	22
Market price of the Shares . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Market price of the GDSs . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Dividends and dividend policy		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Exchange rate information . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Capitalization . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Selected financial information		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	29
Management’s discussion and analysis of financial condition and results of operations . . . . . .			32
Business . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	48
Management . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	79
Principal shareholders . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	82
Changes in issued share capital		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	83
Terms and conditions of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			85
Global certificate . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	119
Conversion into GDSs . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	122
Form of the Bonds and transfer		restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	125
Description of the Shares . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	127
Information relating to the Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			131
Description of the GDSs . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	132
Form of the GDRs and transfer		restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	144
Taxation . . . . . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	147
Plan of distribution . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	150
Legal matters . . . . . . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	154
Independent public accountants		. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	154
General information . . . . . . .	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	155
Summary of significant differences between ROC GAAP and US GAAP . . . . . . . . . . . . . . . .			156
Index to financial statements	.	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-1
APPENDIX A — Foreign investment and exchange controls in the ROC . . . . . . . . . . . . . . .			A-1
APPENDIX B — The securities markets of the ROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			B-1

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SUMMARY

The following summary is qualified in its entirety by the information contained elsewhere in this Offering Circular.

Overview

The Group is a leading manufacturer of notebook PCs and the Group believes that it is one of the largest notebook PC manufacturers worldwide in terms of annual shipment volumes and sales. Between the year ended December 31, 2002 and the year ended December 31, 2004, the number of notebook PCs sold by the Group increased from 4.0 million units per year to 7.7 million units per year, including in each case both complete system and bare bone system notebook PCs.

Notebook PC sales constitute the major revenue source of the Group. Notebook PCs accounted for 60.5%, 65.8% and 72.5% of the Group’s consolidated net sales in the years ended December 31, 2002, 2003 and 2004, respectively.

The Group is actively developing and diversifying its products, through its own research and development and cooperation with its strategic customers, to take advantage of new business opportunities arising from the further convergence of the computer, communication and consumer electronics (“3C”) technologies and the emerging digital home market and to leverage on its manufacturing and R&D capabilities. The Group’s display products include LCD monitors, CRT monitors, LCD TVs, PDP TVs and projectors. The Group’s mobile communications devices include mobile handsets, PDAs and smart phones.

The Group sells substantially all of its products on an ODM basis, and its major customers include leading global 3C vendors such as Dell, HP, Toshiba, Acer, NEC, Mitsubishi, Hitachi and Motorola. Leading 3C vendors have increasingly outsourced their manufacturing orders to reduce costs, respond more quickly to customer needs and changes in product cycles and focus on building their brands. The Group has been a major beneficiary of this outsourcing trend. As a leading ODM manufacturer, the Group focuses on its core competencies in product design, production and global logistics and primarily sells its products to prominent vendors who distribute these products under their own brand names. The Group views its customers as partners and typically works closely with them to jointly develop new products. The Group’s innovative product designs have won numerous awards for its customers.

The Group manufactures its products primarily in its production facilities in China. The Group’s plants in Taiwan and China, located in Kunshan and Nanjing, Jiangsu Province, have the combined capacity to produce approximately 1 million notebook PCs, 0.8 million display products and 2.6 million mobile communications devices per month. The Group was one of the first Taiwanese notebook PC manufacturers to shift its production to China following the elimination by the ROC government, in December 2001, of restrictions which prohibited Taiwanese manufacturers from producing notebook PCs in China. The Group currently produces all of its notebook PCs, display products and most of its mobile communications devices in its production facilities in China and it expects to continue to shift its mobile communications device production to China.

As of the date of this Offering Circular, the Group had a 48.2% interest in Compal Communications Inc. (“CCI”), a company that develops and manufactures mobile handsets. See “Business — Description of Consolidated Subsidiaries”. The Company, in association with Kinpo Electronics, Inc. (“Kinpo”), Uni-President Group and Teco, established a joint venture company, Toppoly Optoelectronics Corp. (“Toppoly”), to engage in the development and production of LTPS TFT-LCD panels. These panels are used primarily in mobile communications devices. See “Business — Toppoly Optoelectronics Corp”.

For the six months ended June 30, 2005, the Company had non-consolidated net sales of NT$101,759.6 million (US$3,209.1 million) and non-consolidated net income of NT$3,813.4 million

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(US$120.3 million) compared to NT$92,154.9 million and NT$3,602.0 million for the six months ended June 30, 2004. For the year ended December 31, 2004, the Company had consolidated net sales of NT$229,793.4 million (US$7,246.7 million) and consolidated net income of NT$6,573.1 million (US$207.3 million) compared to NT$176,995.7 million and NT$11,311.6 million for the year ended December 31, 2003.

The Shares have been listed on the TSE since 1992, and the GDSs have been listed on the Luxembourg Stock Exchange since 1999. As of August 17, 2005, the Company had a market capitalization of approximately NT$117,097.1 million (US$3,692.7 million).

The Company is a Taiwan registered company and was incorporated as a company limited by shares under ROC Company Law in June 1984. Its registered office is located at No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC.

Strategy

The Company’s primary objective is to enhance its position as one of the world’s leading manufacturers of notebook PCs, display products and mobile communications devices. The key components of its strategy are as follows:

Be the ODM manufacturing partner of choice in the notebook PC, display product and mobile communications device industries;
Foster product innovation and improve product quality through R&D;
Expand relationships with existing customers, improve cross-selling and diversify its customer base;
Build a diversified product portfolio to capitalize on opportunities arising from the convergence of the 3C industries and diversify its income sources; and
Pursue selective long-term strategic investments to secure stable and preferred access to key input components.

Competitive strengths

With its manufacturing and service infrastructure and ability to provide total solutions to leading global notebook PC, display product and mobile communications device customers, the Group believes that it is well-positioned to capitalize on the growth in such sectors, outsourcing by leading global branded notebook PC, display product and mobile communications device companies and the growth of the customers that it targets. The following are the Company’s key competitive strengths:

Proven design and manufacturing track record;
Premium customer base driving future growth;
Depth of customer relationships which increases switching costs and barriers to entry;
Differentiated product design and value added R&D expertise;
Competitive cost structure due to global market leadership, economies of scale and effective cost management;
Scalability supports further expansion; and
Customer-focused global logistics and fulfillment network.

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Recent developments — Proposed restructuring of the mobile communications business

On June 28, 2005, the Group announced a restructuring of its mobile communications business, pursuant to which the Company will transfer the business of its Personal Mobile Computing and Communications division and the related assets and liabilities to CCI for a consideration of NT$1,453 million. Completion of the restructuring is subject to the obtaining of various regulatory and other approvals by each of the Company and CCI, including shareholders’ approval, and approval from the Fair Trade Commission, Executive Yuan, ROC (the “Fair Trade Commission”), the ROC Securities and Futures Bureau Financial Supervisory Commission (the “FSC”) and the TSE. See “Business — Recent developments � Proposed restructuring of the mobile communications business”.

Summary financial information

The following tables set out summary financial information derived from the Company’s audited non-consolidated financial statements as of and for the six-month periods ended June 30, 2004 and 2005 and audited consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular. The summary financial information is qualified in its entirety by, and should be read in conjunction with, such financial statements, including the notes thereto. The financial statements of the Company are prepared in conformity with ROC GAAP, which differ in certain material aspects from US GAAP. See “Summary of significant differences between ROC GAAP and US GAAP”. The audited non-consolidated financial statements as of and for the six-month periods ended June 30, 2004 and 2005 and the audited consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 have been audited by KPMG in accordance with auditing standards generally accepted in the ROC and the “ Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants ”. The amounts expressed in US dollars do not form part of any of the audited non-consolidated financial statements or the audited consolidated financial statements of the Company and are provided solely for the convenience of the reader.

Non-consolidated financial information

2004	2005	2005
NT$92,154.9 85,925.1	NT$101,759.6 95,653.5 6,125.6 2,426.6 3,699.0 489.3 375.0 3,813.4 352.2 3,461.2	US$3,209.1 3,016.5
6,218.1 2,169.3		193.2 76.5
4,048.8 609.8 1,056.6		116.7 15.4 11.7
3,602.0 224.6 3,377.4		120.3 11.1 109.2
0.99 0.97	1.01 0.98	0.03 0.03

Notes:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits in the amounts of NT$(11.7) million and NT$19.5 million (US$0.62 million) for the six months ended June 30, 2004 and 2005, respectively. Profit and losses resulting from sales of products by the Company to its subsidiaries and investee companies accounted for using the equity method are deferred as “change in unrealized inter-company profits” in the balance sheet, until such products are sold by the subsidiaries or investee companies. (2) Based on the weighted average number of Shares outstanding before any retroactive adjustments. See note 15 of the notes to non-consolidated financial statements for the six-month periods ended June 30, 2004 and 2005 included elsewhere in this Offering Circular.

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As of June 30, (in millions) 2004 2005 Balance sheet data: Current assets .............................................................. NT$71,090.4 NT$65,091.5 US$2,052.7 Long-term investments under equity method ............... 28,844.4 32,355.0 1,020.3 Total assets .................................................................. 109,335.7 106,381.0 3,354.8 Current liabilities......................................................... 40,749.0 44,382.1 1,400.0 Non-current liabilities .................................................. 10,795.3 4,651.3 146.7 Total liabilities............................................................. 51,544.4 49,033.3 1,546.3 Total stockholders’ equity ............................................ 57,791.3 57,347.7 1,808.5 Consolidated financial information Year ended December 31, (in millions except per Share amounts) 2002 2003 2004 Statement of income data: Net sales ............................................... NT$122,555.8 NT$176,995.7 NT$229,793.4 US$7,246.7 Cost of sales ......................................... 108,884.0 158,891.6 212,776.7 6,710.1 Gross profit(1) ....................................... 13,659.8 18,092.3 17,011.9 536.5 Operating expenses................................ 4,677.5 6,449.0 6,370.5 200.9 Operating income .................................. 8,982.3 11,643.3 10,641.4 335.6 Non-operating income ........................... 476.9 2,656.2 1,198.9 37.8 Non-operating expenses and losses ........ 557.9 2,061.0 3,698.7 116.6 Income before income taxes and minority interest loss ......................... 8,901.3 12,238.5 8,141.6 256.8 Income tax expense ............................... (490.3) (28.1) (688.2) (21.7 Minority interest in net income of subsidiaries and preacquisition income .............................................. (492.4) (898.8) (880.3) (27.8 Net income............................................ 7,918.6 11,311.6 6,573.1 207.3 Basic net income per Share(2)................ 3.21 3.80 1.95 0.06 Diluted net income per Share(2)............. 3.10 3.51 1.84 0.06	2004		2005	2005
	NT$71,090.4 28,844.4 109,335.7 40,749.0 10,795.3 51,544.4		NT$65,091.5 32,355.0 106,381.0 44,382.1 4,651.3 49,033.3	US$2,052.7 1,020.3
				3,354.8
				1,400.0 146.7
				1,546.3
	57,791.3 2003		57,347.7 1,808.5 2004
NT$122,555.8 NT$176,995.7 NT$229,793.4 108,884.0 158,891.6 212,776.7 13,659.8 18,092.3 17,011.9 4,677.5 6,449.0 6,370.5 8,982.3 11,643.3 10,641.4 476.9 2,656.2 1,198.9 557.9 2,061.0 3,698.7 8,901.3 12,238.5 8,141.6 (490.3) (28.1) (688.2) (492.4) (898.8) (880.3) 7,918.6 11,311.6 6,573.1	NT$176,995.7 158,891.6			US$7,246.7 6,710.1
	18,092.3 6,449.0			536.5 200.9
	11,643.3 2,656.2 2,061.0			335.6 37.8 116.6
				256.8 (21.7 (27.8
	11,311.6			207.3
3.21 3.10	3.80 3.51	1.95 1.84		0.06 0.06

Notes:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits in the amounts of NT$12.0 million, NT$11.8 million and NT$4.8 million (US$0.1 million) for the years ended December 31, 2002, 2003 and 2004, respectively. Profit and losses resulting from sales of products by the Company to its subsidiaries and investee companies accounted for using the equity method are deferred as “change in unrealized inter-company profits” in the balance sheet, until such products are sold by the subsidiaries or investee companies. (2) Based on the weighted average number of Shares outstanding before any retroactive adjustments. See note 15 of the notes to consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular.

2002	2003	2004	2004
NT$67,346.3 10,100.2 96,824.0 27,383.3 22,721.8 50,105.1	NT$97,052.7 16,125.2 130,542.9 49,947.1 17,056.6 67,003.7	NT$93,409.6 16,725.3 128,408.0 62,300.8 8,729.9 71,030.7	US$2,945.7 527.4
			4,049.4
			1,964.7 275.3
			2,240.0
46,718.9	63,539.2	57,377.3	1,809.4

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THE OFFERING

The following is only a summary and is qualified in its entirety by reference to the “Terms and conditions of the Bonds”, the “Description of the Shares” and the “Description of the GDSs”. Capitalized terms used and not defined have the meanings given to them in “Terms and conditions of the Bonds”.

Issuer ...........................	Compal Electronics, Inc.
The Offering ................	US$300,000,000 Zero Coupon Convertible Bonds due 2010.
Issue Price ...................	100% of principal amount.
Closing Date ................	August 19, 2005
Maturity Date .............	August 19, 2010
Interest ........................	The Bonds will not bear interest except in the limited circumstances set
	forth under “Terms and conditions of the Bonds —	Payments — Default
	interest”.
Status ...........................	The Bonds will be direct, unconditional, unsubordinated and unsecured
	obligations of the Company and rank pari passu among themselves and
	subject to certain conditions, shall at all times rank	at least equally with
	all other present and future direct, unconditional, unsubordinated and
	unsecured obligations of the Company (other than any obligations
	preferred by mandatory provisions of law).
Conversion Rights .......	Subject to prior permitted redemption and subject as otherwise provided
	herein, the Bonds are convertible at any time on or after September 18,
	2005 and prior to the close of business (at the place the Bond is deposited
	for conversion) on July 20, 2010, except during any Closed Period, into
	Shares. For a more complete description, see “Terms	and conditions of the
	Bonds — Conversion”.
	Any converting Bondholder shall have the option, subject to compliance
	with certain conditions, to direct the Shares issuable upon conversion of
	the Bonds to be delivered to the Depositary (as	defined herein) for
	issuance of GDSs. See “Conversion into GDSs”.
Conversion Price..........	The initial conversion price will be NT$38.40 per Share. The initial
	Conversion Price will be subject to adjustment for, among other things,
	division, consolidation or reclassification of the Shares, rights issues,
	capital distributions and other dilutive events. See “Terms and conditions
	of the Bonds — Conversion — Adjustments to Conversion Price”.
Fixed Exchange Rate....	NT$31.884 = US$1.00
Redemption at	Unless previously redeemed or converted or purchased and cancelled, the
Maturity .......................	Company will redeem each Bond at their principal amount, in US dollars,
	on the Maturity Date. See “Terms and conditions of the Bonds —
	Redemption, Purchase and Cancellation — Redemption at maturity”.

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Redemption at the		The Company may redeem the Bonds, (i) in whole or in part, at any time
Option of the		on or after August 19, 2007 and prior to the Maturity Date, at their
Company .....................		principal amount, in US dollars, if the Closing Price of the Shares on the
		TSE, translated into US dollars at the Prevailing Rate, for a period of 20
		consecutive Trading Days, the last of which occurs not more than five
		Trading Days prior to the date upon which notice of such redemption is
		given, is 130% or above the Conversion Price then in effect, translated
		into US dollars at the Fixed Exchange Rate; or (ii) in whole but not in part
		at their principal amount, in US dollars, if at least 90% in principal
		amount of the Bonds has already been redeemed, converted or purchased
		and cancelled. See “Terms and conditions of the Bonds — Redemption,
		Purchase and Cancellation — Redemption at the option of the Company”.
Redemption at the		The Company will, at the option of the holder of any Bond, redeem such
Option of		Bond on August 19, 2007 at its principal amount, in US dollars. See
Bondholders..................		“Terms and conditions of the Bonds — Redemption, Purchase and
		Cancellation — Redemption at the option of the Bondholders”.
Tax Redemption ..........		The Company may redeem all, but not some only, of the Bonds at any time
		at their principal amount, in US dollars, in the event of certain changes in
		taxation in the ROC which would require the Company to pay Additional
		Amounts. See “Terms and conditions of the Bonds — Redemption,
		Purchase and Cancellation — Redemption for taxation reasons”.
		Each Bondholder will have the right to elect that all or a portion of its
		Bonds shall not be redeemed in such event, in which case, such holder will
		not be entitled to receive payment of such Additional Amounts. See
		“Terms and conditions of the Bonds — Redemption, Purchase and
		Cancellation — Redemption for taxation reasons”.
Redemption upon		A Bondholder shall have the right, at such Bondholder’s option, to require
Delisting or Change	of	the Company to redeem all (but not less than all) of such Bondholder’s
Control ........................		Bonds at their principal amount, in US dollars, (i) if the Shares ceased to
		be listed or admitted to trading on the TSE; or (ii) upon the occurrence of
		a Change of Control with respect to the Company. See “Terms and
		conditions of the Bonds — Redemption, Purchase and Cancellation —
		Delisting Put Right” and “— Redemption for Change of Control”.
Negative Pledge ...........		So long as any Bond remains outstanding the Company will not, and will
		procure that none of its Principal Subsidiaries other than a Listed
		Subsidiary will, create or permit to subsist any Encumbrance upon the
		whole or any part of its property, assets or revenues, present or future, to
		secure for the benefit of the holders of any International Investment
		Securities (i) payment of any sum due in respect of any such International
		Investment Securities; (ii) any payment under any guarantee of any such
		International Investment Securities; or (iii) any payment under any
		indemnity or other like obligation relating to any such International
		Investment Securities without, in any such case, at the same time or prior
		thereto providing to the Bondholders, to the satisfaction of the Trustee,
		either the same security as is granted to or is outstanding in respect of
		such International Investment Securities, guarantee, indemnity or other
		like obligation or such other security as the Trustee in its absolute
		discretion shall deem to be not materially less beneficial to the
		Bondholders or as shall be approved by an Extraordinary Resolution of
		the Bondholders. See “Terms and conditions of the Bonds — Negative
		Pledge”.

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	Form and		The Bonds will be issued in registered form in the denomination of
	Denomination of the		US$1,000 each. The Bonds will be offered and sold in principal amounts
	Bonds ...........................		of US$1,000 or an integral multiple thereof and will be transferable in
			principal amounts of US$1,000 or an integral multiple thereof. The Bonds
			will be represented by beneficial interests in the Global Certificate,
			deposited on or about the Closing Date with a common depositary for, and
			registered in the name of a nominee of, Euroclear and Clearstream,
			Luxembourg. Except in the limited circumstances described in the Global
			Certificate, owners of interests in the Bonds represented by the Global
			Certificate will not be entitled to receive definitive Certificates in respect
			of their individual registered holdings of Bonds.
			The securities codes for the Bonds are as follows:
			ISIN Common Code
			XS0217950541 021795054
	Further Issues .............		The Company may from time to time without the consent of the holders
			of the Bonds create and issue further bonds having the same terms and
			conditions as the Bonds in all respects so that such further issue shall be
			consolidated and form a single series with the respective Bonds. See
			“Terms and conditions of the Bonds — Further Issues”.
	Withholding Tax ..........		Payments of interest (if any) or premium (if any) on the Bonds to a
			Non-ROC Holder (as defined in “Taxation — ROC taxation”) constitute
			interest income and are subject to ROC withholding tax, currently at the
			rate of 20%. The Company has agreed to pay Additional Amounts in
			respect of such withholding tax on the payments of interest and to be
			responsible for withholding such taxes at source. See “Terms and
			conditions of the Bonds — Taxation”.
	Lock-up .......................		The Company agrees that during the period beginning from the date of the
			Purchase Agreement (as defined in “Plan of Distribution”) and continuing
			to and including the date 90 days after the Closing Date, not to, and to
			cause its subsidiaries not to, offer, sell, contract to sell, pledge, grant any
			option to purchase, make any short sale or otherwise dispose of (or
			announce any plan or otherwise make public any intention to do any of the
			foregoing), any Bonds (or securities that are substantially similar to the
			Bonds), GDSs, Shares, or GDRs, or any options or warrants to purchase
			any securities, GDSs or Shares, or any securities convertible into,
			exchangeable for or that represent the right to receive the Bonds, GDSs,
			Shares or GDRs (other than stock dividends or employee stock bonuses or
			shares issued or transferred pursuant to employee stock option or share
			purchase plans existing on, or upon the conversion or exchange of
			convertible or exchangeable securities outstanding as of, the date of this
			Agreement), without the prior written consent of the Lead Manager (as
			defined in “Plan of Distribution”). The Company will procure Kinpo to
			execute an undertaking prior to the Closing Date, pursuant to which Kinpo
			will undertake not to effect any similar transactions during the same
			period.
	Use of proceeds ...........		The net proceeds of this offering (after deduction of fees, commissions
			and estimated transaction expenses) are expected to amount to
			approximately US$297,275,000 and will be used by the Company to
			purchase raw materials overseas.

— 7 —

Trustee .........................	Trustee .........................	Citibank, N.A.
Paying, Conversion
and Transfer Agent	.....	Citibank, N.A.
Registrar .....................		Citigroup Global Markets Deutschland AG & Co. KGaA
Transfer Restrictions ..		The Bonds, Shares issuable upon conversion thereof and GDSs
		representing such Shares have not been registered under the Securities Act
		and are subject to certain restrictions on transfer. See “Form of the Bonds
		and transfer restrictions”, “Form of the GDRs and transfer restrictions”
		and “Plan of distribution”.
Listing .........................		Approval in-principle has been obtained from the SGX-ST to list the
		Bonds on the SGX-ST. The Bonds will be traded on the SGX-ST in a
		minimum board lot size of US$200,000 for so long as the Bonds are listed
		on the SGX-ST. The Shares are listed and traded on the TSE and the GDSs
		are listed and traded on the Luxembourg Stock Exchange. Applications
		will be made for the Shares and GDSs to be issued upon conversion of the
		Bonds to be listed on the TSE and the Luxembourg Stock Exchange,
		respectively.
Governing Law ............		The Indenture, the Agency Agreement and the Bonds will be governed by,
		and construed in accordance with, the laws of the State of New York.

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RISK FACTORS

You should pay particular attention to the fact that the Company is governed in the ROC, and certain of its operations are governed in the PRC, by legal and regulatory environments which in some respects may be different from those which prevail in other countries. Before making an investment decision regarding the Bonds being offered hereby, you should carefully consider all of the information contained in this Offering Circular, including the following information:

Risks relating to the Group and its business

The Group depends on key ODM and OEM customers

The Group depends on a small group of customers for a substantial portion of its sales revenue and a small number of customers account for a large portion of its business. The Group’s consolidated net sales to its top five customers amounted to 69.5%, 72.2% and 77.1% of its total consolidated net sales for the years ended December 31, 2002, 2003 and 2004, respectively.

Maintaining close relationships with key customers is essential to the Group’s strategy and to the ongoing growth of its business. There is no guarantee that the Group will retain the business of its existing key customers or the desired level of business from them. The loss of any key customer’s business would seriously affect the Group’s revenues. Also, the Group would have difficulty securing comparable levels of business from other customers to offset any loss of revenue from the loss of any of its key customers. In addition, the Group generates significant accounts receivables in connection with providing manufacturing services to its key customers. If one or more of its customers were to become insolvent or otherwise were unable to pay for the products supplied by the Group, this could have a materially adverse effect on the Group’s business. It would not only lose profits, but it might not be able to recoup the production costs expended in providing the unpaid-for manufacturing services.

The Group’s profitability also depends on the performance and business of its key customers. Accordingly, risks that could seriously harm its key customers could harm the Group as well, including:

loss of market share for its key customers’ products;
recession in its key customers’ markets;
failure of their products to gain widespread commercial acceptance; and
its key customers’ inability to manage their operations efficiently and effectively.

As is customary in the industry, the Group is not a party to any long-term sale and purchase agreements with its original design manufacturer (“ODM”) and original equipment manufacturer (“OEM”) customers. The loss of one or more of these customers or reduction or delay in their orders could have a material adverse effect on the Group’s results of operations. In addition, because of the significance of such key customers to the Group, such customers may place demands on its resources or require special services, which have the effect of increasing its operating costs. These customers may also ask for reductions in the price of the Group’s products, which has the effect of decreasing sales.

The Group’s gross margins are subject to downward pressure

The highly competitive environment and cyclical nature of the notebook personal computer (“PC”), display product and mobile communications device industries have subjected the Group to pressure on prices and margins. The principal factors which affect the Group’s gross margins include price competition among ODM/OEM manufacturers of notebook PCs, display products and mobile

— 9 —

communications devices, fluctuations of foreign exchange rates, reductions in average sale prices of the Group’s products during the life cycles of such products, fluctuations in the supply and demand for principal components and raw materials for such products, the Group’s trend towards manufacturing and delivering more complete notebook PC systems and its ability to reduce unit manufacturing costs. The Group has experienced periodic shortages of certain key components and raw materials as well as pressure from its customers to reduce unit prices of its products. In addition, the Group faces downward pressure on the average selling prices of its products as such products may become commoditized as they move through their life cycles. Accordingly, the Group’s gross margins may continue to be subject to downward pressure as a result of the factors mentioned above, which could have a material adverse effect on the Group’s results of operations and prospects. The Group’s gross margins were 11.1%, 10.2% and 7.4% for the years ended December 31, 2002, 2003 and 2004, respectively.

The Group operates in a highly competitive environment

The markets for the Group’s major products are highly competitive, and it has experienced considerable pressure on its average selling prices and margins. The notebook PC, display product and mobile communications device industries have been characterized by periodic oversupply of products, price erosion, rapid technological change, short product life cycles and cyclical market patterns. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on the Group’s business, financial condition and results of operations. The Group’s ability to compete depends on factors both within and outside of its control, including product pricing, product functionality, performance and reliability, successful and timely product development, success or failure of its customers in marketing their brands and products, component and supply costs and general economic conditions. There can be no assurance that the Group will be able to compete successfully in the future, and its failure to compete successfully in these or other areas could have a material adverse effect on its business, results of operations and financial condition.

The Group’s principal competitors include Taiwanese, Japanese and Korean electronic manufacturing service (“EMS”) providers and OEM/ODM providers in the notebook PC, display product and mobile communications device industries. Some of the Group’s competitors may have substantially greater financial, marketing, manufacturing, research and development (“R&D”) and technological resources, greater brand name recognition and larger customer bases than the Group. There can be no assurance that the Group will be able to compete successfully with such competitors.

If the Group does not effectively manage its product transitions, its revenue may suffer

Many of the industry sectors in which the Group competes are characterized by rapid technological advances in hardware performance, software functionality and features; frequent introduction of new products; short product life cycles; and continual improvement in product price relative to product performance. If the Group does not make an effective transition from existing products to the introduction of new products, its revenues may decline. Among the risks associated with the introduction of new products are delays in development or manufacturing, variations in costs, delays in customer purchases in anticipation of new introductions, difficulty in predicting customer demand for the new products and effectively managing inventory levels in line with anticipated demand, risks associated with customer qualification and evaluation of new products and the risk that new products may have quality or other defects or may not be supported adequately by application software. The Group’s revenues and margins may also suffer due to the timing of product or service introductions by its suppliers and competitors. Furthermore, sales of new products may replace sales, or result in discounting, of some of the Group’s current products, offsetting the benefit of even the successful introduction of new products. In addition, it may be difficult to ensure performance of new customer contracts in accordance with the Group’s revenues, margins and cost estimates, and to achieve operational efficiencies embedded in its estimates. Given the competitive nature of the industry, if any of these risks materialize, future demand for the Group’s products and its results of operations may suffer.

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The Group’s results of operations are subject to exchange rate fluctuations

In the year ended December 31, 2004, overseas sales, as to which payments are primarily in US dollars, accounted for approximately 99% of the Group’s consolidated net sales. In addition, approximately 94% of the Group’s purchases of raw materials were paid for in US dollars with 5% being paid for in NT dollars and the balance being paid for in other currencies. The Group also has borrowings in NT dollars and a significant portion of the Group’s operating expenses are paid in NT dollars. Accordingly, fluctuations in exchange rates, in particular between the US dollar and the NT dollar, affect the Group’s margins and may reduce overall competitiveness. In addition, foreign exchange fluctuations could result in foreign exchange losses in respect of the Group’s assets and liabilities denominated in foreign currencies. The Group recorded a net foreign exchange loss of NT$19.8 million in the year ended December 31, 2002 due to the appreciation of the NT dollar against the US dollar as compared to a foreign exchange gain of NT$569.1 million in the year ended December 31, 2003 due to the depreciation of the NT dollar against the US dollar. The Group also recorded a net foreign exchange loss of NT$1,250.6 million (US$39.4 million) in the year ended December 31, 2004 due to the appreciation of the NT dollar against the US dollar. The impact of future exchange rate fluctuations cannot be predicted. Although the impact of exchange rate fluctuations has in the past been partially mitigated by the Group’s natural hedging between its foreign currency receivables and payables, there can be no assurance that the Group will be able to offset the overall impact of any exchange rate fluctuations in the future.

In addition, as a result of the Group’s manufacturing operations in the PRC, some of its expenses in the PRC, such as labor costs, are denominated in Renminbi. Prior to 1994, the Renminbi experienced a significant net devaluation against most major currencies and, during certain periods, significant volatility in the market-based exchange rate. Since 1994, the conversion of the Renminbi into foreign currencies, including US dollars, has been based on rates set by People’s Bank of China (“PBOC”). These rates are set daily based on the previous day’s interbank foreign exchange market rates and current exchange rates on the world financial markets. Since 1994, the official exchange rate for the conversion of Renminbi into US dollars has generally been stable.

On July 21, 2005, PBOC announced changes to the Renminbi exchange rate regime. From that date onwards, the PRC reformed its exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies and the Renminbi will no longer be pegged specifically to US dollars. The new exchange rate regime will not constitute a strict peg of the Renminbi to the basket of currencies but instead, the Renminbi will be allowed to fluctuate with a narrow +/-0.3% range around a central parity rate — defined as the previous day’s closing RMB/US dollar rate. The reference basket will be used as a guide as to whether the RMB/US dollar rate should rise or fall. At 7pm on July 21, 2005, PBOC announced an initial appreciation of the Renminbi by 2.0% against the US dollar.

Any future appreciation of the Renminbi against the US dollar for the NT dollar will increase the Group’s production costs in China. As the exchange rate is no longer fixed, and is now allowed to fluctuate within a range around a central parity rate, any volatility of the Renminbi exchange rate in the future may materially affect the Group’s business, financial condition and results of operations.

The Group relies on key personnel

The Group’s success depends on its ability to attract and retain highly qualified management, engineering and technical personnel. Competition for experienced management and technical, sales, marketing and support personnel in the information technology (“IT”) industry can be intense. The process of hiring employees with the combination of skills and attributes required to implement the Group’s strategy can be extremely competitive and time-consuming. In particular, expansion into the production of mobile communications devices and the Group’s efforts through Toppoly to manufacture low temperature polysilicon thin film transistor liquid crystal display (“LTPS TFT-LCD”) panels have required it to employ additional employees with specific sets of skills. Such skilled workers, especially engineers with expertise in the third generation of wireless networks (“3G”) technologies,

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are in high demand, and there can be no assurance that the Group will be able to attract and retain the necessary personnel. The loss of the services of key personnel (including through unexpected death or disability), or the inability to attract additional qualified personnel, could have a material adverse effect on the Group’s business.

The Group relies on technology provided by third parties

The success of the Group’s investment in the manufacture of LTPS TFT-LCD panels and mobile communications devices is dependent in part upon technology provided by third parties. For example, Qualcomm provides certain code-division multiple access (“CDMA”) technology for the Group’s mobile handsets. There can be no assurance that third parties will license or transfer additional advanced technologies to the Group in the future on terms satisfactory or acceptable to it, or at all. In the event that the Group is unable to license or obtain the transfer of advanced technologies from third parties, the Group may be required to develop such technologies internally. There can be no assurance that the Company will be able to develop such technologies internally.

The Group’s business depends on intellectual property and it may become involved in intellectual property litigation

The Group’s success will depend in part on its ability to protect its proprietary rights and to operate without infringing on the proprietary rights of third parties. As of December 31, 2004, approximately 700 patents were issued to the Group. In addition, the Group had a number of patent applications pending in different countries covering various aspects of its products, and the Group may apply for additional patents in the future. There can be no assurance that any of the Group’s current or future patent applications will result in issued patents, that the scope of the claims in any patents that are currently held by it or will be issued to it will prevent competitors from introducing competing products or that any patents that are currently held by it or will be issued to the Group would be enforceable if challenged. In addition, other parties may hold or receive patents that contain claims covering other technology included in the Group’s current or future products that could hinder or prevent the sale of the Group’s products or require it to obtain licenses for such technology, which might not be available on acceptable terms or at all.

Disputes over intellectual property frequently occur in the computer, telecommunications and technology industries. The Group may in the future be required to defend its intellectual property rights against infringement, duplication, discovery and misappropriation by third parties or to defend itself against third-party claims of infringement. Disputes may also arise in the future with respect to ownership of technology developed by employees who were previously employed by other companies or with respect to the terms and conditions of any licensing agreement the Group enters into. In addition, the contracts the Group enters into with its customers typically include provisions obligating it to indemnify and hold harmless such customers from all claims relating to products sold by the Group to such customers.

The Group is currently involved in intellectual property disputes which could result in the incurrence of substantial costs and the diversion of its management’s attention. See “Business — Litigation and legal issues”. An adverse determination in these disputes and any other intellectual property dispute or litigation in the future could subject the Group to significant liabilities to third parties, require it to seek licenses from or pay royalties to third parties or require it to develop appropriate alternative technology. There can be no assurance that any such licenses would be available on acceptable terms or at all, or that the Company could develop alternate technology at an acceptable cost or at all. Any of these events could have a material adverse effect on its business, financial condition and results of operations.

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The Group depends on access to key components, the supply of which can be volatile

The Group’s production depends on obtaining adequate supplies of components on a timely basis. The Group purchases its main components from a limited number of component manufacturers which can satisfy its quality standards and meet its volume requirements. In addition, in certain circumstances, the Group is required to source certain key components from suppliers on approved vendor lists (“AVLs”), who have been approved by its customers and it may not be able to obtain alternative sources of supply should such approved suppliers be unable to supply its requirements in the future. Given the wide variety of systems, products and services that the Group offers, the large number of its suppliers that are dispersed across the globe and the long lead times that may be required to manufacture, assemble and deliver certain components and products, problems could arise in planning production and managing inventory levels that could seriously harm the Group’s business, financial condition and results of operations.

The key components for notebook PCs are LCD panels, central processing units (“CPUs”), hard-disk drives (“HDDs”), optical disk drives (“ODDs”) and batteries. The key components for LCD monitors and cathode-ray tube (“CRT”) monitors are LCD panels and CRTs, respectively. The key components for mobile handsets are chip sets, passive components, batteries and LCD panels. The key components for mobile communications devices include CPUs, LCD panels, flash memory chips, passive components and batteries. From time to time, periodic shortages and oversupply of such components occur. A shortage of any of these components generally increases their prices, and may depress the Group’s margins to the extent that it is unable to pass these higher component prices on to its customers. These shortages, however, can quickly end and result in oversupply as suppliers ramp up production following capital expenditures to increase capacity. If the Group fails to anticipate customer demand properly, a temporary oversupply could result in excess or obsolete components which could adversely affect its gross margin. For example, there was a shortage of LCD panels from the end of the year ended December 31, 2003 to the second quarter of 2004, which resulted in higher costs of this key component. However, the prices of LCD panels have declined significantly since the second half of 2004 following the increase in supply as suppliers ramp up production. Such volatility in supply of LCD panels as well as other components may adversely affect the Group’s business if it cannot manage its supply of such components and react quickly to market changes. In addition, any shortage in a key component could limit the number of units the Group is able to produce. The Group believes that shortages and oversupply are cyclical, and there can be no assurance that shortages or oversupply of key components will not occur in the future or that any such shortages or oversupply will not have a material adverse effect on the Group’s results of operations.

The Group may face potential liability with respect to product defects

The contracts the Group enters into with its major customers typically include warranties that the products it delivers will be free from defects and perform in accordance with agreed-upon specifications. To the extent that products shipped by the Group to its customers do not, or are not deemed to, satisfy such warranties, it could be responsible for repairing or replacing any defective products, or, in certain circumstances, for the cost of effecting a recall of all products which might contain a similar defect, as well as for consequential damages.

However, there can be no assurance that the Group will be able to recover any losses incurred as a result of product liability in the future from any third-party, or that defects in the products sold by the Group, regardless of whether it is responsible for such defects, would not adversely affect its standing and reputation in the marketplace, result in monetary losses and have a material adverse effect on the Group’s business, financial condition and results of operations.

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The Group may experience losses on inventories

Frequent new product introductions in the computer and mobile devices industries can result in a decline in average selling prices and the stated value of inventory, which place significant demand on inventory management. The Group’s policy is to establish a full provision for any raw materials not utilized for a period of three months. With respect to other types of inventory, the Group established a provision for inventory loss based on the difference between the costs of inventory and the market price.

Since the introduction of its global logistics delivery network in June 1999, the Group has assumed part of the inventory risks of certain of its major customers such as Dell, Mitsubishi, NEC and Acer, as incomplete notebook PCs and display products are first shipped to hubs it established in Asia, Europe and the United States based on customers’ rolling forecasts, for onward delivery to, and final configuration by, customers only after a firm order has been placed. This policy may have an adverse impact on the Company’s inventory management because it results in it bearing the inventory risk with respect to such products longer than if such incomplete notebook PCs are shipped to its customers and held as part of their inventory before being configured.

The Group is susceptible to general economic and industry conditions

Any general economic, business or industry conditions that cause customers or potential customers to reduce or delay their investments in computer systems or other 3C products could have a material adverse effect on the Group’s business, prospects and financial performance. The September 11, 2001 terrorist attacks on the United States created immediate significant economic and political uncertainty. The long-term effects on the Group’s business are uncertain, but could be material. Further terrorist acts or acts of war, whether in the United States or abroad, could cause disruption or damage to the Group’s business, suppliers, distributors or customers, or could create political or economic instability, any of which may have a material adverse effect on the Group’s business, financial condition and results of operations.

The Group’s operating results are seasonal

The Group’s sales revenues are affected by seasonal variations in market conditions which contribute to the fluctuation of the average selling prices of notebook PCs, display products and mobile communications devices. The Group generally experiences seasonal lows in the demand for notebook PCs and display products during the first quarter of the year, reflecting generally decreased demand for notebook PCs in the United States and Europe. On the other hand, the Group generally experiences seasonal peaks during the latter part of the third quarter and the fourth quarter of the year, primarily as a result of increased demand for notebook PCs in the United States and Europe from back-to-school and holiday season sales. The Group expects that its ongoing operations will continue to be materially affected by seasonality in its results of operations.

The Group’s operations are subject to manufacturing risks

The manufacturing process for its products is continuously being updated in an effort to improve efficiency and to reduce product defects and unit manufacturing costs. There is a risk that, from time to time, there will be production difficulties that could cause delivery delays and reduced output. There can be no assurance that the Group will not experience manufacturing problems in achieving acceptable output, and/or product delivery delays in the future as a result of, among other things, capacity constraints, construction delays, difficulties in upgrading or expanding existing facilities, difficulties in changing its manufacturing line technologies or delays in delivery of equipment, any of which could result in a loss of future revenues.

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The rate of growth in outsourcing may not continue

The Group has benefited from the trend of notebook PC, display product and mobile communications device vendors to increasingly outsource their manufacturing. There can be no assurance that this outsourcing trend will continue and that such vendors will not, in the future, reduce orders to external manufacturers or decide to produce more of such products in-house. If such customers and other leading vendors from which the Group receives purchase orders cease giving or reduce the number of purchase orders to the Group due to a reversal or slowdown of such outsourcing trend, this would have an adverse effect on the Group’s business, financial condition, results of operations and prospects.

Risks associated with the Restructuring

On June 28, 2005, the Group announced a restructuring of its mobile communications business, pursuant to which the Company will transfer the business of its Personal Mobile Computing and Communications division and the related assets and liabilities to CCI for a consideration of NT$1,453 million. Completion of the Restructuring is subject to the obtaining of various regulatory and other approvals by each of the Company and CCI, including shareholders’ approval, and approval from the Fair Trade Commission, the FSC and the TSE. See “Business — Recent developments � Proposed restructuring of the mobile communications business”. The Group has little control over the obtaining of certain of the approvals and accordingly, there can be no assurance that all necessary approvals will ultimately be obtained or that completion of the restructuring will ultimately take place.

In addition, the Group anticipates that the restructuring will result in increased revenue opportunities, cost savings and other synergies, such as increased economies of scale and greater cross selling opportunities. These cost savings and efficiencies may or may not ultimately be achieved and there also can be no assurance as to the timing or extent of such cost savings and efficiencies.

Risks relating to the ROC

The value of an investment in the Bonds, the Shares and the GDSs may be adversely affected by the volatility of the ROC securities market

The ROC securities market is smaller and more volatile than the securities markets in the United States and in certain European and other countries. The TSE has experienced substantial fluctuations in the prices and volumes of sales of listed securities and there are currently limits on the range of daily price movements on the TSE. From time to time, the ROC regulatory agencies have intervened in the Taiwan stock market during periods of extreme volatility. In the past decade, the Taiwan Stock Exchange Index (the “TSE Index”) peaked at 10,202 in February 2000, and reached a low of 3,446 in October 2001. During 2004, the TSE Index peaked at 7,034 on March 4, 2004, and reached a low of 5,317 on August 4, 2004. On August 17, 2005, the TSE Index closed at 6,241.92, and the daily closing value of the Shares was NT$33.30 per share. In addition, the TSE has experienced problems such as market manipulation, insider trading and payment defaults. The recurrence of these or similar problems could adversely affect the market price and liquidity of the securities of ROC companies, including the Shares in both the domestic and the international markets. See “Appendix B — The securities markets of the ROC”.

ROC exchange controls may adversely affect the ability of holders of GDSs to realize the proceeds from the sale of subscription rights

Under existing ROC law and regulations relating to foreign exchange control, the Depositary must obtain foreign exchange approval from the CBC on a payment-by-payment basis for the conversion from NT dollars into any foreign currency of the proceeds from the sale of subscription rights for new Shares. Although such approvals have been routinely granted in the past, there can be no assurance that in the future any such approval will be obtained in a timely manner, or at all.

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The Company is subject to ROC GAAP, which differ from US GAAP

The Company is subject to financial reporting requirements in Taiwan that differ, in significant respects, from those applicable to companies in certain other countries, including the United States and the United Kingdom. In addition, the Company’s financial statements are prepared in accordance with ROC GAAP, which differ, in certain material respects, from US GAAP. For example, under ROC GAAP, the distribution of employee stock bonuses is treated as an allocation from retained earnings, and the Company is not required to, and does not, charge the value of the employee stock bonuses to income. Under US GAAP, however, the Company would be required to charge the market value of the employee stock bonuses to employee compensation expense in the period to which they relate; correspondingly, the Company’s net income and income per Share, if they had been calculated in accordance with US GAAP, would be significantly reduced. The Company has not quantified or identified the impact of the differences between ROC GAAP and US GAAP. See “Summary of significant differences between ROC GAAP and US GAAP”. You should consult your own professional advisors for an understanding of such differences and how they might affect the financial information contained herein.

An investment in the Bonds, the Shares or the GDSs may be adversely affected by considerations relating to the ROC

The Company is incorporated in the ROC and a significant portion of its revenues are derived from its operations in Taiwan. The ROC has a unique international political status. Although China has existed for several thousand years, since 1949, Taiwan and mainland China have been separately governed. The ROC, which was founded in 1911, governs Taiwan while the PRC, which was founded in 1949, governs mainland China. The ROC asserts that the ROC and the PRC are equal political entities which should have “state-to-state” relations, while the PRC claims that it is the sole government in China and that Taiwan is part of China. Although relations between the ROC and the PRC have improved in a number of significant respects, the PRC has consistently refused to renounce the possibility that it may at some time use force to gain control over Taiwan.

On March 14, 2005, the National People’s Congress of the PRC adopted the Anti-Secession Law which expressly authorizes the PRC government to resort to “non-peaceful” and other necessary means to protect China’s sovereignty and territorial integrity after the possibilities for a peaceful reunification have been exhausted. The adoption of the Anti-Secession Law has resulted in wide-spread protests in Taiwan.

An increase in tension in the relations between the ROC and the PRC may adversely affect the value of the TSE Index, the market price and liquidity of the Bonds, the Shares and the GDSs, the status of the Company’s property rights in its manufacturing facilities in the PRC, the Group’s production in its China factories, the availability of the PRC as an export market for its products and its ability to implement present and future plans for the development of production facilities in the PRC.

Taiwan is susceptible to earthquakes and typhoons that could disrupt the normal operation of the Group’s business and adversely affect earnings

Taiwan is susceptible to earthquakes and typhoons. In 1999 and 2000, Taiwan experienced severe earthquakes that caused significant property damage and loss of life, particularly in the central part of Taiwan. These earthquakes caused damage to production facilities and adversely affected the operations of many companies. The earthquakes also caused the breakdown of the electricity transmission system in Taiwan for a substantial period of time. Other parts of Taiwan have also experienced, from time to time, significant power outages and shortages in water supply that have disrupted the businesses of many other companies in Taiwan. Any business disruption resulting from such events could cause significant delays in shipments of the Company’s products.

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Any future outbreak of Severe Acute Respiratory Syndrome (“SARS”) or any other epidemic may have an adverse effect on the Group’s results of operations

In the first half of 2003, certain Asian countries, including the PRC and Taiwan, encountered an outbreak of SARS, a highly contagious form of atypical pneumonia. In response to the severity of the SARS outbreak, the World Heath Organization (“WHO”) issued travel advisories for certain areas, including Taiwan and certain provinces of the PRC. While the WHO’s travel advisories have been lifted, the long-term impact of the SARS outbreak is still unclear, and a recurrence of the SARS outbreak or any perception inside or outside the region that the SARS outbreak has not been contained, may have an adverse effect on the economic conditions of certain countries in Asia and may consequently adversely affect the Group’s business. If an outbreak of SARS occurs in the future and any of the Group’s employees in any of its facilities are suspected of having contracted SARS or any of its facilities are identified as a possible source of spreading SARS, the Group may be required to quarantine the employees that have been suspected of becoming infected, as well as others that have come into contact with those employees. The Group may also be required to disinfect the affected facility and therefore suffer a temporary suspension of production, which would adversely affect its results of operations.

Risks relating to the PRC

The Group is subject to the political and economic situation and legal developments in the PRC

The Company currently has a significant portion of its assets, including production facilities, in the PRC and expects to shift an increasing proportion of its manufacturing activities to the PRC and to make further investments in the PRC in the future. The Company also sells its products in the PRC. As a result, its business, financial condition, results of operations and future prospects are subject, to a significant degree, to the political and economic situation and legal developments in the PRC. There can be no assurance that the Company’s investments in the PRC and the sales of its products in the PRC will not be adversely affected if relations between the PRC and the ROC are further strained.

Prior to 1978, the PRC had a central economic planning system. Since 1978, the PRC government has permitted foreign investment and implemented economic reforms, gradually changing from a planned economy towards a market-oriented economy. However, many of the reforms and economic policies adopted or to be adopted by the PRC government are unprecedented or experimental in nature and may have unforeseen results, which may have an adverse effect on enterprises with substantial business in the PRC, including the Company.

In addition, there are currency exchange risks associated with conducting business in the PRC. Although PRC governmental policies were introduced in 1996 to allow greater convertibility of the Renminbi, the currency of the PRC, significant restrictions, including those relating to the repatriation of foreign currency denominated investments, still remain. No assurances can be made that the PRC regulatory authorities will not impose greater restrictions on the convertibility of the Renminbi.

The Group is subject to risks associated with the PRC legal system

Since 1979, many laws and regulations dealing with general economic matters or particular economic activities have been promulgated in the PRC. However, enforcement of existing laws and regulations may be uncertain and sporadic, and implementation and interpretation thereof may be inconsistent. The PRC legal system is based on statutory law. Under this system, prior court decisions may be cited as persuasive authority but do not have binding precedential effect. The outcome of any litigation in PRC courts may be uncertain. Further, it may be difficult to obtain swift and equitable enforcement, or to obtain enforcement of a judgment by a court of another jurisdiction. The introduction of new PRC laws and regulations and the interpretation of existing ones may be subject to policy changes. As the PRC legal system develops, changes in such legislation or interpretation thereof may have a material adverse effect on the Company’s business, financial condition, results of operations and future prospects, and could cause the price of the Shares and the GDSs to fall.

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The Group’s and its supplier’s production facilities in the PRC are subject to risks of power shortages

Many cities and provinces in the PRC have suffered serious power shortages since the second quarter of 2004. Many of the regional grids do not have sufficient power generating capacity to satisfy fully the increased demand for electricity driven by continual economic growth and persistent hot weather. During the second and third quarters of 2004, certain local governments required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels. To date, the Group’s operations in the PRC have not been affected by such administrative measures. However, there is no assurance that the Group’s PRC operations will not be affected by those administrative measures in the future, thereby causing material production disruption and delay in delivery schedule. In such event, the Group’s business, results of operations and financial condition could be materially adversely affected.

In addition, the Group’s facilities in the PRC had experienced temporary power outages as a result of the full load operations of the power grids in the year ended December 31, 2004. Whilst the Group’s operations have not been materially and adversely affected, the Group cannot be sure that it will not be adversely affected by any prolonged power outages in the future. In addition, frequent use of the Group’s on-site supporting power supply systems may also lead to increase in unit manufacturing costs. Furthermore, there can be no assurance that the Group’s suppliers located in the PRC will not suffer from power shortages and in turn be unable to provide the Group with the materials it needs for production.

Risks relating to ownership of the Bonds, the Shares and the GDSs

The market for the Bonds, the Shares and the GDSs may not be liquid

Prior to the Offering, there has been no market for the Bonds. Approval in-principle has been obtained from the SGX-ST to list the Bonds on the SGX-ST.

In addition, the Purchasers, or their affiliates, intend to purchase Bonds for their own account and enter into transactions relating to the Bonds, including asset swaps, repackagings and other transactions, which transactions may involve a substantial proportion of the Bonds and may adversely affect the liquidity of any trading market in the Bonds. Such transactions would be carried out as bilateral trades with selected counterparties and separately from any offering, sale or resale of the Bonds to which this Offering Circular relates (notwithstanding that such selected counterparties may also be purchasers of the Bonds). Furthermore, the Purchasers may make a market with respect to the Bonds, but are not obligated to do so, and any market-making with respect to the Bonds may be discontinued at any time without notice. Any of the foregoing transactions could adversely affect the liquidity in the Bonds.

There has been no trading market for the Shares outside the ROC, and the only trading market for the Shares is the Taiwan Stock Exchange. The GDSs are listed on the Luxembourg Stock Exchange and traded on the International Order Book System of the London Stock Exchange. Application has been made to list the GDSs which are issuable upon conversion of the Bonds on the Luxembourg Stock Exchange. The GDSs which are issuable upon conversion of the Bonds will be fungible with the existing GDSs which are listed on the Luxembourg Stock Exchange.

A holder of GDSs may withdraw and hold the Shares represented by such GDSs or request the Depositary to sell or cause to be sold on behalf of such holder the Shares represented by such GDSs; provided that the Custodian (as defined herein) has received the Shares (in physical or book-entry form) to be withdrawn or sold. There can be no assurance that the Depositary will be able to effect a sale of Shares in a timely manner or at a specified price, particularly during periods of illiquidity or volatility on the TSE. Under current ROC law or as otherwise specified in the Deposit Agreement, except for additional GDSs which may be issuable in connection with (i) dividends on or free distributions of Shares, (ii) the exercise by owners of existing GDSs of their pre-emptive rights in

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connection with rights offerings, and (iii) the deposit of Shares held or purchased directly by any person or through the Depositary of Shares on the TSE into the depositary facility to replace previously issued GDSs which have been canceled, no additional GDSs may be issued by the Depositary without specific ROC regulatory approval. ROC regulatory approval has been received for GDSs to be issued upon deposit of Shares issuable upon conversion of the Bonds.

Holders of the Bonds will bear the risk of fluctuations in the price of the Shares and the GDSs

The market price of the Bonds at any time will be affected by fluctuations in the price of the Shares and the GDSs. It is impossible to predict whether the price of the Shares or the GDSs will rise or fall. Trading prices of the Shares and the GDSs will be influenced by, among other things, the Company’s results of operations and political, economic, financial and other factors that can affect the capital markets on which the Shares are traded and the financial services market in Taiwan. Any decline in the price of the Shares or the GDSs would adversely affect the secondary market price of the Bonds.

There are limitations on your ability to exercise conversion rights

You will not be able to exercise your conversion right during Closed Periods (as defined herein). Under current ROC law, regulations and policy, PRC persons are not permitted to convert the Bonds or to register as the Company’s shareholders. See “Terms and conditions of the Bonds — Conversion”.

Holders of GDSs will have limited voting rights

Subject to the provisions described in the second succeeding paragraph below, which will apply to the election of the Company’s directors and supervisors, if a holder or holders together holding at least 51% of the GDSs outstanding at the relevant record date instruct the Depositary to vote in the same manner in respect of one or more resolutions to be proposed at the meeting of the Company’s shareholders (other than the election of directors or supervisors), the Depositary will notify the chairman of the Board of Directors, or such other person as he may designate (the “Voting Representative”), of such instructions and appoint the Voting Representative as the representative of the Depositary and the holders to attend such meeting and vote all the Shares represented by GDSs in the manner so instructed by such holder in relation to such resolution or resolutions (the “Voting Instruction”).

If, for any reason, the Depositary has not by the date specified by it received instructions from a holder or holders together holding at least 51% of all the GDSs outstanding at the relevant record date to vote in the same manner in respect of any resolution specified in the agenda for the meeting (other than the election of directors or supervisors), then such holders will be deemed to have instructed the Depositary to authorize and appoint the Voting Representative as the representative of the Depositary and the holders to attend such meeting and vote all the Shares represented by all GDSs as the Voting Representative deems appropriate with respect to such resolution or resolutions, which may not be in the interests of the holders of GDSs.

The Depositary will notify the Voting Representative of the instructions for the election of directors and supervisors received from holders and appoint the Voting Representative as the representative of the Depositary and the holders to attend such meeting, nominate, if necessary, the candidate or candidates named in such instructions, and vote the Shares represented by GDSs as to which the Depositary has received instructions from holders for the election of directors and supervisors in the manner so instructed, subject to any restrictions imposed by ROC law and the Articles of Incorporation. Such holders who by the date specified by the Depositary have not delivered instructions to the Depositary will be deemed to have instructed the Depositary to authorize and appoint the Voting Representative as the representative of the Depositary and the holders to attend such meeting and vote all the Shares represented by GDSs as to which the Depositary has not received instructions from the holders for the election of directors and supervisors as the Voting Representative

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deems appropriate with respect to such resolution or resolutions, which may not be in the best interests of the holders. Candidates standing for election as representatives of a shareholder may be replaced by such shareholder prior to the meeting of the shareholders, and the votes cast by the holders for such candidates shall be counted as votes for their replacements.

Employee stock bonuses may have a diluting effect on the holdings and associated rights of the holders with respect to the Shares and the GDSs

Taiwanese companies generally pay employee stock bonuses (in the form of cash or stock) to their employees, and the Articles of Incorporation provide that (after certain deductions and provisions) employees should receive as bonuses an aggregate of 5% of the Company’s distributable retained earnings in each current year. See “Business — Employees” and “Description of the Shares — Dividends and distributions”. In the year ended December 31, 2003, the Company issued 35,626,000 Shares, and in the year ended December 31, 2004 the Company issued 40,721,384 Shares as employee stock bonuses. The number of Shares issuable and the amount transferred from distributable earnings for employee stock bonuses are calculated by reference to the par value of NT$10 per Share, notwithstanding that the market value of the Shares as of the dates of declaration and distribution of the stock bonuses have been significantly higher than NT$10 per Share. Employee bonuses in the form of new Shares to employees will effectively dilute the holdings and associated rights of holders with respect to the GDSs.

Holders of GDSs may not be able to participate in rights offerings

The Company may, from time to time, distribute rights to its shareholders, including rights to acquire securities. Under the Deposit Agreement, the Depositary will not offer rights to holders of GDSs unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act, with respect to a distribution to all holders of GDSs, or are registered under the provisions of the Securities Act. However, under the Deposit Agreement, the Company is under no obligation to file a registration statement with respect to such rights or underlying securities or to endeavor to have such a registration statement declared effective. Accordingly, holders of GDSs may be unable to participate in the Company’s rights offerings and may experience dilution of their holdings as a result.

Holders of GDSs who withdraw Shares will be required to appoint a tax guarantor and a local agent in the ROC

Any holder of GDSs, who is a non-ROC person and elects to withdraw Shares represented by GDSs and register as the Company’s shareholder, will be required to appoint an agent (a “Tax Guarantor”) in the ROC for filing tax returns and making tax payments. Such Tax Guarantor will be required to meet the qualifications set by the Ministry of Finance of the ROC and will act as the guarantor of the withdrawing holder’s tax payment obligations. Evidence of the appointment of a Tax Guarantor and the approval of such appointment are required as conditions to such withdrawing holder’s repatriation of the profits derived from the sale of withdrawn Shares. There can be no assurance that a withdrawing holder will be able to appoint and obtain approval for a Tax Guarantor in a timely manner.

In addition, under current ROC law, such withdrawing holder is required to appoint a local agent in the ROC to, among other things, open a securities trading account with a local securities brokerage firm, remit funds and exercise a shareholder’s rights. In addition, such withdrawing holder must appoint a local bank to act as custodian for confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Under existing ROC laws and regulations, without such an account, holders of GDSs that withdraw and hold the Shares represented thereby would not be able to hold or otherwise transfer the Shares on the TSE or otherwise.

— 20 —

Sales of a substantial number of Shares following the offering could have an adverse effect on the price of the Bonds and the Shares

The Company agrees that during the period beginning from the date of the Purchase Agreement and continuing to and including the date 90 days after the Closing Date, not to, and to cause its subsidiaries not to, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of (or announce any plan or otherwise make public any intention to do any of the foregoing), any Bonds (or securities that are substantially similar to the Bonds), GDSs, Shares, or GDRs, or any options or warrants to purchase any securities, GDSs or Shares, or any securities convertible into, exchangeable for or that represent the right to receive the Bonds, GDSs, Shares or GDRs (other than stock dividends or employee stock bonuses or shares issued or transferred pursuant to employee stock option or share purchase plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Agreement), without the prior written consent of the Lead Manager. The Company will procure Kinpo to execute an undertaking prior to the Closing Date, pursuant to which Kinpo will undertake not to effect any similar transactions during the same period. However, the Lead Manager may waive or terminate these restrictions at any time. Sales of a substantial number of Shares by the Company, Kinpo or the Company’s other principal shareholders or perception that such sales may occur, could adversely affect the prevailing market price of the Shares, the GDSs and the Bonds.

The Company’s share price has historically fluctuated and may continue to fluctuate

The Company’s share price, like that of other technology companies, can be volatile. Some of the factors that can affect the Company’s Share price are:

the announcement of new products, services or technological innovations by the Group or its competitors;
quarterly increases or decreases in revenue, gross margin or earnings, and changes in the business, organizational structure, operations or prospects of the Group or any of its business units;
changes in quarterly revenue or earnings estimates by the investment community and variations between actual and anticipated financial results; and
speculation in the press or investment community about the Company’s strategic position, financial condition, financial reporting, results of operations, business acquisitions or significant transactions.

General or industry-specific market conditions or stock market performance or domestic or international macroeconomic and geopolitical factors unrelated to the Company’s performance also may affect the price of the Shares. For these reasons, recent trends may not be relied on to predict future share prices, financial condition, or results of operations or cash flows.

The Company’s public shareholders may have difficulty protecting their interests

The Company’s corporate affairs are governed by its Articles of Incorporation and by laws governing ROC corporations. The rights of its shareholders to bring shareholders’ suits against the Company or the board of directors under ROC law are much more limited than those of the shareholders of corporations formed in other jurisdictions, such as the United States. Therefore, the Company’s public shareholders may have more difficulty in protecting their interests in connection with actions taken by the management, members of the board of directors or controlling shareholders than they would as shareholders of a corporation formed in a different jurisdiction, such as the United States. Moreover, a party seeking to enforce a foreign judgment in Taiwan may encounter difficulties entering or enforcing a foreign judgment.

— 21 —

USE OF PROCEEDS

The net proceeds of this offering (after deduction of fees, commissions and estimated transaction expenses) are expected to amount to approximately US$297,275,000 and will be used by the Company for the purchase of raw materials overseas. See “Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources”.

— 22 —

MARKET PRICE OF THE SHARES

The Shares have been listed on the TSE since February 18, 1992.

The following table sets out the high and low closing prices of the Shares on the TSE, adjusted for the effects of stock dividends, the average daily volume of trading activity on the TSE Index for the Shares and the high and low closing values of the TSE Index, for the periods indicated. On August 17, 2005, the closing price of the Shares on the TSE was NT$33.30 per Share.

2001 First Quarter ........... Second Quarter ....... Third Quarter .......... Fourth Quarter ........ 2002 First Quarter ........... Second Quarter ....... Third Quarter .......... Fourth Quarter ........ 2003 First Quarter ........... Second Quarter ....... Third Quarter .......... Fourth Quarter ........ 2004 First Quarter ........... Second Quarter ....... Third Quarter .......... Fourth Quarter ........ 2005 January ................... February ................. March ..................... April ....................... May ........................ June ........................ July ........................ August (through August 17, 2005) ..	Price per Share High Low NT$33.00 NT$24.51 33.54 24.68 26.78 16.23 30.77 14.88 35.84 29.08 33.47 20.29 28.24 20.29 33.27 21.91 33.27 27.18 39.44 28.81 51.32 38.79 50.39 43.11 44.79 38.07 40.69 33.78 35.00 28.00 34.00 29.50 31.60 28.70 31.50 29.80 30.05 28.00 29.75 27.90 30.30 28.00 31.07 28.18 30.82 29.24 35.80 29.30	Average daily trading volume (in thousands of shares) 26,997.12 28,056.53 27,363.18 44,480.53 41,469.41 24,813.24 27,530.99 49,930.85 22,476.92 25,621.01 29,851.91 19,121.14 26,887.73 14,321.89 15,257.33 10,517.81 7,568.45 8,207.11 7,473.15 6,713.47 8,470.53 14,405.27 13,973.65 31,873.87	TSE Index
			High Low 6,104.24 4,894.79 5,608.50 4,768.55 4,886.86 3,493.78 5,551.24 3,446.26 6,242.64 5,488.33 6,462.30 5,071.76 5,416.50 4,185.95 4,823.67 3,850.04 5,078.80 4,260.45 5,048.91 4,139.50 5,757.91 5,017.78 6,142.32 5,581.66 7,034.10 6,041.56 6,880.18 5,482.96 5,970.18 5,316.87 6,139.69 5,650.97 6,143.12 5,771.48 6,207.83 5,981.54 6,259.69 5,957.98 6,208.75 5,693.01 6,011.56 5,803.68 6,373.86 5,971.62 6,423.81 6,201.40 6,455.57 6,241.92

Source: Bloomberg

There is no public market outside Taiwan for the Shares. The TSE has experienced fluctuations in the prices of listed securities and there are currently limits on the range of daily price movements. See “Appendix B — The securities markets of the ROC”.

— 23 —

MARKET PRICE OF THE GDSs

The GDSs have been listed on the Luxembourg Stock Exchange since 1999. Each GDS represents five Shares.

The following table set out the high and low closing prices of the GDSs on the Luxembourg Stock Exchange, adjusted for the effects of stock dividends, for the periods indicated:

Price per GDS of the Company 2001 First Quarter ........................................................................ Second Quarter .................................................................... Third Quarter....................................................................... Fourth Quarter ..................................................................... 2002 First Quarter ........................................................................ Second Quarter .................................................................... Third Quarter ...................................................................... Fourth Quarter .................................................................... 2003 First Quarter ....................................................................... Second Quarter .................................................................... Third Quarter....................................................................... Fourth Quarter .................................................................... 2004 First Quarter ....................................................................... Second Quarter ................................................................... Third Quarter ...................................................................... Fourth Quarter ..................................................................... 2005 January ............................................................................... February ............................................................................. March ................................................................................. April ................................................................................... May .................................................................................... June ..................................................................................... July ..................................................................................... August (through August 16, 2005) .......................................	High US$5.12 5.31 4.02 4.23 5.11 4.63 4.06 4.75 4.79 5.48 7.23 7.14 6.49 6.16 5.00 5.00 4.79 4.87 4.65 4.60 4.85 4.81 4.86 5.45	Low
		US$4.36 3.65 2.33 2.20 4.31 3.31 3.49 3.17 4.02 4.26 5.84 6.27 5.88 5.09 4.30 4.45 4.65 4.80 4.55 4.49 4.65 4.62 4.57 4.95

Source: Bloomberg

On August 16, 2005, the reported closing price of the GDSs was US$5.31 per GDS.

— 24 —

DIVIDENDS AND DIVIDEND POLICY

The Company has paid either stock dividends or both cash and stock dividends in each year since 1997. The following table sets forth the aggregate number of outstanding Shares entitled to dividends, as well as the cash dividends per share and stock dividends per share paid during each of the years indicated in respect of Shares outstanding on the record date applicable to the payment of such dividends.

2001 ........................................ 2002 ........................................ 2003 ........................................ 2004 ....................................... 2005 ........................................	Aggregate number of Shares(1) 1,556,834,837 2,050,638,072 2,540,100,000 3,245,536,911 3,359,236,463	Cash dividends per Share NT$0.5 0.5 1.0 2.0 1.1	Stock dividends per Share(2) NT$2.5 2.0 1.5 0.7 0.4	Total Shares issued as stock dividends(3)
				389,208,708 418,852,814 381,015,000 227,031,616 133,530,436

Notes:

(1) Aggregate number of Shares outstanding on the record date applicable to the dividend payment, excluding treasury shares.
(2) Holders of Shares receive as a stock dividend the number of Shares equal to the NT dollar value per Share of the declared dividend, multiplied by the number of Shares owned, divided by the par value of NT$10 per Share. Fractional Shares are not issued but are paid in cash.
(3) Calculation of total shares issued as stock dividends is based on the aggregate number of shares outstanding, excluding treasury shares, on the date of the shareholders’ meeting and approved by the shareholders.

On April 25, 2005, the board of directors of the Company resolved that the Company will distribute cash and stock dividends in the aggregate amounts of NT$3,672,087,004.0 and NT$1,335,304,360.0, respectively, in respect of the financial year ended December 31, 2004. The proposed dividends were approved by the Company’s shareholders at the annual general meeting of shareholders held on June 10, 2005. The record date for the dividends is August 3, 2005.

Historically, the Company has paid dividends on the Shares with respect to the preceding year after approval by the shareholders at the annual general meeting of shareholders. Before 2003, the Company has paid most of its dividends in the form of stock in order to reinvest its cash in operations. The Articles of Incorporation provide that at least 10% of dividends will be in cash. The Company expects that it will continue to pay a portion of its dividends in the form of stock. The form, frequency and amount of future dividends on the Shares will depend upon the earnings, cash flow, financial condition, reinvestment opportunities and other factors.

Except in limited circumstances, under the ROC Company Law, the Company is not permitted to distribute dividends or make other distributions to shareholders in respect of any year in which it did not record net income. The ROC Company Law also requires that 10% of annual net income (less prior years’ losses and outstanding tax) be set aside as legal reserve until the accumulated legal reserve equals the Company’s paid-in capital. The remainder, plus the accumulated undistributed profits carried over from the previous fiscal year, shall be the total allocable profit, which, after deduction of additional reserves therefrom for business operations and for the special reserve specified in the Articles of Incorporation or decided by the shareholders’ meeting, will be allocated in the proportions specified in the Articles of Incorporation. See “Description of the Shares — Dividends and distributions” and note 15 of notes to consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular.

— 25 —

Holders of GDSs will be entitled to receive dividends, subject to the terms of the Deposit Agreement, to the same extent as the holders of the Shares. Cash dividends will be paid to the Depositary in NT dollars and, after deduction of any applicable ROC taxes and except as otherwise described under “Description of the GDSs — Dividends, other distributions and rights”, will be converted by the Depositary into US dollars and paid to holders of GDSs. Stock dividends will be distributed to the Depositary and, after deduction of any applicable ROC taxes and except as otherwise described under “Description of the GDSs — Dividends, other distributions and rights”, will be distributed by the Depositary, in the form of additional GDSs, to holders of GDSs.

Holders of outstanding Shares on a dividend record date will be entitled to the full dividend declared without regard to any prior or subsequent transfer of such Shares. Holders of outstanding GDSs on the relevant dividend record date will, after deduction of any applicable ROC taxes and subject to the terms of the Deposit Agreement, be entitled to the full amount of any dividend declared at the Company’s next annual general meeting of the shareholders.

In the case of holders of the Bonds being offered hereby who have converted their Bonds into Shares which have been deposited with the Depositary against issuance of GDSs prior to the record date for dividends or any other distribution, any such dividend or distribution will be subject to the terms of the Deposit Agreement.

For information relating to ROC withholding taxes payable on cash and stock dividends, see “Taxation — ROC taxation — Dividends”. For information relating to ROC foreign exchange approvals required for the conversion by the Depositary of dividends on Shares from NT dollars into US dollars for the payment thereof to holders of GDSs, see “Appendix A — Foreign investment and exchange controls in the ROC — Depositary Receipts”.

— 26 —

EXCHANGE RATE INFORMATION

Fluctuations in the exchange rate between the NT dollar and the US dollar will affect the US dollar equivalent of the NT dollar price of the Shares on the TSE and, as a result, are expected to affect the market price of the Bonds. Fluctuations in the exchange rate between the NT dollar and the US dollar have also had, and are expected to continue to have, a significant impact on the results of operations. See “Risk Factors — Risks relating to the Group and its business — The Group’s results of operations are subject to exchange rate fluctuations” and “Management’s discussion and analysis of financial condition and results of operations”.

The following table sets forth the average, high, low and period-end noon buying rate between NT dollars and US dollars (in NT dollars per US dollar) for the periods indicated. No representation is made that the NT dollar amounts actually represent such US dollar amounts or could have been, or could be, converted into US dollars at the rate indicated, or at any other rate, or at all.

NT dollars per US dollar

NT dollars per US dollar
Noon Buying Rate 2000 ................................................................ 2001 ................................................................ 2002 ................................................................ 2003 ................................................................ 2004 ................................................................ 2005 (through August 16, 2005).......................	Average 31.26 33.82 34.54 34.40 33.37 31.51	High 33.25 35.13 35.16 34.98 34.16 32.22	Low 30.35 32.23 32.85 33.72 31.74 30.65	Period-End
				33.17 35.00 34.70 33.99 31.74 31.98

Sources: Federal Reserve Bulletin, 1996, Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release H.10 (512), 1990-2005, Board of Governors of the Federal Reserve System.

— 27 —

CAPITALIZATION

Set out below are the consolidated short-term debt balance and total capitalization of the Company under ROC GAAP as of December 31, 2004, as derived from the Company’s audited consolidated financial statements as of that date and as adjusted to reflect the issue of the Bonds. The following table should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included elsewhere in this Offering Circular. See “Management’s discussion and analysis of financial condition and results of operations”.

Actual	Actual	As adjusted for the issue of the Bonds NT$5,318.0 US$(4)167.7 8,179.3 257.9 13,497.3 425.6 5,220.0 164.6 9,513.0 300.0 14,733.0 464.6 33,382.6 1,052.7 5,768.4 181.9 19,705.0 621.4 (227.3) (7.2) (1,251.4) (39.4) 57,377.3 1,809.4 72,110.3 2,274	As adjusted for the issue of the Bonds NT$5,318.0 US$(4)167.7 8,179.3 257.9 13,497.3 425.6 5,220.0 164.6 9,513.0 300.0 14,733.0 464.6 33,382.6 1,052.7 5,768.4 181.9 19,705.0 621.4 (227.3) (7.2) (1,251.4) (39.4) 57,377.3 1,809.4 72,110.3 2,274
NT$5,318.0 8,179.3 13,497.3 5,220.0 — 5,220.0 33,382.6 5,768.4 19,705.0 (227.3) (1,251.4) 57,377.3	US$167.7 257.9 425.6 164.6 — 164.6 1,052.7 181.9 621.4 (7.2) (39.4) 1,809.4	NT$5,318.0 8,179.3 13,497.3 5,220.0 9,513.0 14,733.0 33,382.6 5,768.4 19,705.0 (227.3) (1,251.4) 57,377.3	US$(4)167.7 257.9
			425.6
			164.6 300.0
			464.6
			1,052.7 181.9 621.4 (7.2
			(39.4
			1,809.4
62,597.3	1,974.0	72,110.3

Notes:

(1) Total short-term debt includes short-term loans and convertible bonds payable.
(2) Unaudited total non-consolidated short-term debt as of June 30, 2005 amounted to NT$8,121.3 million.
(3) Unaudited total non-consolidated long-term debt as of June 30, 2005 amounted to NT$4,440.0 million.
(4) As of August 3, 2005, 4,650,000,000 Shares were authorized and 3,359,236,463 Shares were outstanding and 157,193,768 additional Shares will be issued as stock dividend and employee bonus shares.
(5) Translated into US dollars solely for the convenience of the reader using the noon buying rate provided by the Bank of Taiwan on December 31, 2004 of NT$31.71 = US$1.00.
(6) Total capitalization includes total long-term debt and total stockholders’ equity.

Except as disclosed above, there has been no material change in the Company’s consolidated capitalization since December 31, 2004.

— 28 —

SELECTED FINANCIAL INFORMATION

The following table sets out selected financial information derived from the Company’s audited non-consolidated financial statements as of and for the six-month periods ended June 30, 2004 and 2005 and audited consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular. The summary financial information is qualified in its entirety by, and should be read in conjunction with, such financial statements, including the notes thereto. The financial statements of the Company are prepared in conformity with ROC GAAP. ROC GAAP differ in certain material aspects from US GAAP. See “Summary of significant differences between ROC GAAP and US GAAP”. The audited non-consolidated financial statements as of and for the six-month periods ended June 30, 2004 and 2005, and the audited consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 have been audited by KPMG in accordance with auditing standards generally accepted in the ROC and the “ Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants ”. The amounts expressed in US dollars do not form part of any of the audited non-consolidated financial statements and audited consolidated financial statements of the Company and are provided solely for the convenience of the reader.

Non-consolidated financial information

2004	2005	2005
NT$92,154.9 85,925.1	NT$101,759.6 95,653.5 6,125.6 2,426.6 3,699.0 489.3 375.0 3,813.4 352.2 3,461.2	US$3,209.1 3,016.5
6,218.1 2,169.3		193.2 76.5
4,048.8 609.8 1,056.6		116.7 15.4 11.8
3,602.0 224.6 3,377.4		120.3 11.1 109.2
0.99 0.97	1.01 0.98	0.03 0.03

Notes:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits in the amounts of NT$(11.7) million and NT$19.5 million (US$0.62 million) for the six months ended June 30, 2004 and 2005, respectively. Profit and losses resulting from sales of products by the Company to its subsidiaries and investee companies accounted for using the equity method are deferred as “change in unrealized inter-company profits” in the balance sheet, until such products are sold by the subsidiaries or investee companies.
(2) Based on the weighted average number of Shares outstanding before any retroactive adjustments. See note 15 of the notes to non-consolidated financial statements for the six-month periods ended June 30, 2004 and 2005 included elsewhere in this Offering Circular.

— 29 —

2004	2005	2005
NT$71,090.4 28,844.4 109,335.7 40,749.0 10,795.3 51,544.4	NT$65,091.5 32,355.0 106,381.0 44,382.1 4,651.3 49,033.3	US$2,052.7 1,020.3
		3,354.8
		1,400.0 146.7
		1,546.3
57,791.3	57,347.7	1,808.5

Consolidated financial information

2002 2003 2004 NT$122,555.8 NT$176,995.7 NT$229,793.4 US$7,246.7 108,884.0 158,891.6 212,776.7 6,710.1 13,659.8 18,092.3 17,011.9 536.5 4,677.5 6,449.0 6,370.5 200.9 8,982.3 11,643.3 10,641.4 335.6 476.9 2,656.2 1,198.9 37.8 557.9 2,061.0 3,698.7 116.6 8,901.3 12,238.5 8,141.6 256.8 (490.3) (28.1) (688.2) (21.7 (492.4) (898.8) (880.3) (27.8 7,918.6 11,311.6 6,573.1 207.3	2003	2004	2004
	NT$176,995.7 158,891.6		US$7,246.7 6,710.1
	18,092.3 6,449.0		536.5 200.9
	11,643.3 2,656.2 2,061.0		335.6 37.8 116.6
			256.8 (21.7 (27.8
	11,311.6		207.3
3.21 3.10	3.80 3.51	1.95 1.84	0.06 0.06

Notes:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits in the amounts of NT$12.0 million, NT$11.8 million and NT$4.8 million (US$0.1 million) for the years ended December 31, 2002, 2003 and 2004, respectively. Profit and losses resulting from sales of products by the Company to its subsidiaries and investee companies accounted for using the equity method are deferred as “change in unrealized inter-company profits” in the balance sheet, until such products are sold by the subsidiaries or investee companies.
(2) Based on the weighted average number of Shares outstanding before any retroactive adjustments. See note 15 of the notes to consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular.

— 30 —

As of December 31, (in millions) Balance sheet data: Current assets........................................ Long-term investments under equity method ............................................. Total assets ........................................... Current liabilities .................................. Non-current liabilities ........................... Total liabilities ...................................... Total stockholders’ equity .....................		2002 NT$67,346.3 10,100.2 96,824.0 27,383.3 22,721.8 50,105.1 46,718.9		2003 NT$97,052.7 16,125.2 130,542.9 49,947.1 17,056.6 67,003.7 63,539.2		2004	2004
						NT$93,409.6 16,725.3 128,408.0 62,300.8 8,729.9 71,030.7 57,377.3	US$2,945.7 527.4
							4,049.4
							1,964.7 275.3
							2,240.0
							1,809.4

— 31 —

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the Company’s audited non-consolidated financial statements and audited consolidated financial statements and related notes thereto included elsewhere in this Offering Circular. Except as otherwise indicated, all financial information set forth herein has been presented in NT dollars in conformity with ROC GAAP. All financial information as at and for the years ended December 31, 2002, 2003 and 2004 set forth below has been audited and is given on a consolidated basis. All financial information as at and for the six-month periods ended June 30, 2004 and 2005 set forth below has been audited and is given on a non-consolidated basis.

Overview

The Group is a leading manufacturer of notebook PCs and the Group believes that it is one of the largest notebook PC manufacturers worldwide in terms of annual shipment volume and sales, including in each case complete system and bare bone system notebook PCs. In addition, the Group also produces a wide range of display products and mobile communications devices. The Group sells substantially all of its products on an ODM basis, and its major customers include leading global 3C vendors such as Dell, HP, Toshiba, Acer, NEC, Mitsubishi, Hitachi and Motorola.

Notebook PC sales constitute the major revenue source of the Group and accounted for 60.5%, 65.8% and 72.5% of the Group’s consolidated net sales in the years ended December 31, 2002, 2003 and 2004, respectively.

The Group experienced significant growth in net sales during the years ended December 31, 2004 and 2003. Consolidated net sales increased 29.8% to NT$229,793.4 million (US$7,246.7 million) in the year ended December 31, 2004 from NT$176,995.7 million in 2003, primarily due to increased sales of notebook PCs. Sales volume of notebook PCs increased to 7.7 million units in 2004 from 5.5 million units in the year ended December 31, 2003. The increase was primarily a result of additional orders from existing and new customers.

The average selling price of the Group’s notebook PCs increased slightly in both the years ended December 31, 2004 and 2003, in each case compared with its preceding year. The increase was primarily because, during these years, the Group increased, as a percentage of notebook PCs sold, sales of complete systems that commanded higher average selling prices than bare bone systems. However, due to fierce industry-wide competitive pressure on average selling prices, the Group took pricing actions during the years ended December 31, 2004 and 2003 in response to continued competition which led to a reduction of gross margins with respect to certain of its products.

Consolidated gross margin was 7.4% in the year ended December 31, 2004, compared with 10.2% in the year ended December 31, 2003, and consolidated operating profit margin was 4.6% in the year ended December 31, 2004, compared with 6.6% in the year ended December 31, 2003. Gross margins were affected by various factors, including changes in product mix, changes in average selling prices and maturing technologies. Gross margin decreased primarily due to significant price erosion caused by increased competition and a shift in product mix with increased sales of complete systems which reduced overall gross margins for notebook PCs as additional components were added at a lower gross margin.

Consolidated net income decreased 41.9% to NT$6,573.1 million (US$207.3 million) in the year ended December 31, 2004 from NT$11,311.6 million in the year ended December 31, 2003. Consolidated net income decreased primarily due to the decrease in gross profit, the recognition by the Group of significant foreign exchange losses as a result of the depreciation of the US dollar against the NT dollar and investment losses posted by Toppoly in the year ended December 31, 2004.

— 32 —

Non-consolidated net income increased 2.5% to NT$3,461.2 million (US$109.2 million) in the six months ended June 30, 2005 from NT$3,377.4 million in the six months ended June 30, 2004. The increase reflected increased sales volume as a result of orders from the Company’s major customers across each of its product lines, which were partially offset by a decrease in their average selling prices. In addition, the Company continued to face price erosion due to increased competition in the six months ended June 30, 2005.

Factors affecting financial performance

A number of general factors affected the Group’s financial performance during the years ended December 31, 2002, 2003 and 2004. The principal factors are discussed below.

Global economic conditions affecting demand. During the years ended December 31, 2002, 2003 and 2004, worldwide demand for notebook PCs increased significantly. According to International Data Corporation (“IDC”), worldwide notebook PC sales grew from US$45.6 billion in the year ended December 31, 2002 to US$56.8 billion in the year ended December 31, 2004. As a result, demand for notebook PCs from the Group’s major customers, all of whom are worldwide leaders in retail notebook PC sales, increased. Demand for display products and mobile communications devices has also increased. The Group’s consolidated net sales increased 29.8% and 44.4% for the years ended December 31, 2004 and 2003, respectively.

Shift to selling complete system notebook PCs. The Group has sold an increasing proportion of complete system notebook PCs, including on a built-to-order (“BTO”) or configured-to-order (“CTO”) basis, where it assembles notebook PCs according to the customer’s specifications, loads requested software applications and ships the product directly to a distributor or the end-user. Although the average selling prices for complete system notebook PCs are generally higher than for bare bone system notebook PCs, the gross margins with respect to additional components inserted and for assembly of a complete system notebook PC are generally low. As a result, the overall gross margins on complete system notebook PCs are generally lower than bare bone system notebook PCs. The Group has increasingly produced complete system notebook PCs and thus its gross margins have correspondingly decreased.

Downward pressure on average selling gross prices. The Group operates in a highly competitive market which is characterized by fierce industry-wide competition for market share resulting in aggressive average selling price practices. Due to industry-wide competitive pressure on average selling prices, the Group may be forced to reduce the average selling prices for its products in response to continued competition which will lead to reduction of gross margins with respect to certain of its products.

In addition, the 3C industries are also characterized by rapidly changing technologies and user preferences, evolving industry standards and the frequent introduction of new products and enhancements. As a result, the average selling prices of the Group’s 3C products tend to decline over the products’ life cycles, reflecting product obsolescence, decreased costs of input components, decreased demand and increased competition as more manufacturers are able to produce similar products in large numbers. The trend towards declining average selling prices over the life cycles of the Group’s products has resulted in constant downward pressure on its margins, which is offset by increased sales of complete system notebook PCs and the introduction of new products, which typically command higher average selling prices.

Seasonality. Companies in the notebook PC and mobile communications device industries typically experience seasonal fluctuations in their results of operations, with sales of such companies generally higher in the third and fourth quarters of the year in conjunction with the back-to-school and holiday seasons, and generally lower in the first quarter. The Group believes that its substantial annual increases in percentage terms in net sales helped to moderate the impact of such seasonality in the

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past. However, the Group believes that as the rate of growth in its net sales moderates, its results of operations will become increasingly subject to the impact of the seasonality of the notebook PC and mobile communications device industries, including the possibility that sales in the first quarter of a given year will be lower than sales in the fourth quarter of the immediately preceding year.

Fluctuations in the exchange rates of the US dollar against the NT dollar. In the year ended December 31, 2004, sales were primarily denominated in US dollars and accounted for approximately 99% of the Group’s consolidated net sales. However, approximately 94% of components (including finished products) and raw materials were paid for in US dollars, with 5% being paid for in NT dollars and the balance being paid for in other currencies. The Group has borrowings, and a significant portion of its operating expenses are paid, in NT dollars. Accordingly, fluctuations in exchange rates, in particular between the US dollar and the NT dollar, affect all of the Group’s margins. In addition, foreign exchange fluctuations could result in foreign exchange losses in respect of the Group’s assets and liabilities denominated in foreign currencies. The Group, from time to time, engages in hedging transactions to protect itself against fluctuations in the US dollar and NT dollar exchange rates. The Group recorded a net foreign exchange loss of NT$19.8 million in the year ended December 31, 2002 primarily due to the appreciation of the NT dollar against the US dollar as compared to a foreign exchange gain of NT$569.1 million in the year ended December 31, 2003 due to the depreciation of the NT dollar against the US dollar. The Group also recorded a net foreign exchange loss of NT$1,250.6 million (US$39.4 million) in the year ended December 31, 2004 primarily due to the appreciation of the NT dollar against the US dollar.

Fluctuations in investment income derived from the Group’s long-term investments. The Group has an investment portfolio that included majority and minority equity investments. In most cases, the Group does not attempt to reduce or eliminate its market exposure on these investments and may incur losses related to these investments. Some of these investments are in public and privately-held companies that are in the start-up or development stage, which have inherent risks because the technologies or products they have under development may never become successful. In some instances, the Group’s long-term investments are in companies that are in related businesses. Furthermore, the values of the Group’s investments in publicly-traded companies are subject to significant market price volatility. The Group often couples its investments in technology companies with a strategic commercial relationship. The Company had investment losses under the equity method of NT$57.7 million, NT$1,130.4 million and NT$1,626.4 million (US$51.3 million) in the years ended December 31, 2002, 2003 and 2004, respectively.

Principal income statement components

Net sales. The Group’s net sales are derived principally from sales of notebook PCs to leading PC vendors in Asia, Europe and the United States, and to a lesser extent, from the sales of display products and mobile communications devices. The Group recognizes net sales with the transfer of ownership of the product to its customer, which would typically be at the time the product is shipped to its customer, or to the end user or distribution channel at the instruction of the customer. In the year ended December 31, 2004, the Group’s largest notebook PC customers were Dell, Toshiba, HP and Acer.

Costs of sales. The Group’s principal costs of sales are raw materials, supplies and components for the manufacture of notebook PCs. The primary components for the manufacture of notebook PCs are LCD panels, CPUs, memory, HDDs, ODDs and batteries, which comprised approximately 80% of the consolidated cost of sales of notebook PCs in the year ended December 31, 2004. LCD panels are also the primary components for the manufacture of LCD monitors and LCD TVs, comprising approximately 75% of the consolidated cost of sales of LCD monitors and LCD TVs in the year ended December 31, 2004. The primary components for the manufacture of mobile handsets are chip sets, passive components, batteries and LCD panels.

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Gross margins. The Group’s gross margins are impacted significantly by technological developments in the notebook PC, display product and mobile communications device industries and the speed at which the Group and its principal customers are able to respond to such developments. The Group’s gross margins are principally affected by the following factors:

price competition among ODM/OEM manufacturers of notebook PCs, display products and mobile communications devices, particularly in the mature notebook PC market;
the trend toward manufacturing and delivering complete system notebook PCs which reduces overall margins for notebook PCs as additional components are added at lower margins;
demand for higher-margin new products (such as mobile handsets);
the Group’s ability to reduce unit manufacturing costs of its products by, among other things, increasing economies of scale through higher volume manufacturing and reducing variable and fixed costs, including shifting production to lower-cost labor markets such as the PRC;
average selling prices of products, which tend to fall during the life cycle of products and as more advanced products are introduced; and
fluctuations in supply of and demand for (and the consequent fluctuations in market prices of) principal components for the Group’s products, and the Group’s ability to pass increased component costs on to its customers (or to retain a portion of lower component costs).

Operating expenses. The Group’s operating expenses include selling expenses, administrative expenses and research and development expenses. Selling expenses generally include after-sales service expenses, export expenses, handling costs and salaries of the sales force. Administrative expenses include salaries of administrative personnel (related to finance, accounting, information technology, human resources and legal functions). Research and development expenses include salaries of research and development personnel, purchases of research and development equipment and testing and verification costs.

Non-operating income. The Group’s non-operating income includes primarily interest income, investment income, foreign exchange gain and other non-operating income comprising primarily molding charges and product development fees. Investment income comprises primarily gains realized from disposal of long-term investments and cash dividends received from investees. Interest income represents primarily interest from bank deposits.

Non-operating expenses. The Group’s non-operating expenses include primarily interest expenses, investment losses, foreign exchange losses and inventory obsolescence. Interest expenses include interest payable on the Company’s domestic bonds, short-term loans and the provision for the premium payable on the 2002 Notes (as defined herein). Investment losses include primarily the Company’s share of losses posted by its investee companies.

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Results of operations

The following table sets forth certain non-consolidated statement of income data as a percentage of total non-consolidated net sales for each of the six-month periods ended June 30, 2004 and 2005:

Six months ended June 30,

Six months ended June 30,
(in percentages) Net sales.................................................................................................. Cost of sales ........................................................................................... Gross profit(1) .......................................................................................... Operating expenses Selling ................................................................................................ Administrative ..................................................................................... Research and development ................................................................... Total operating expenses ......................................................................... Operating income..................................................................................... Non-operating income .............................................................................. Non-operating expenses and losses ......................................................... Income before income taxes .................................................................... Income tax expense ................................................................................ Net income .............................................................................................	2004 100.0 93.2 6.8 0.7 0.5 1.2 2.4 4.4 0.6 1.1 3.9 0.2 3.7	2005
		100.0 94.0 6.0 0.7 0.5 1.2 2.4 3.6 0.5 0.4 3.7 0.3 3.4

Note:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits.

The following table sets forth certain consolidated statement of income data as a percentage of total consolidated net sales for each of the three years ended December 31, 2002, 2003 and 2004:

Years ended December 31,

Years ended December 31,
(in percentages) Net sales.............................................................................. Cost of sales ....................................................................... Gross profit(1) ...................................................................... Operating expenses Selling ............................................................................ Administrative ................................................................. Research and development ............................................... Total operating expenses ..................................................... Operating income................................................................. Non-operating income .......................................................... Non-operating expenses and losses ..................................... Income before income taxes and minority interest income .. Income tax expense ............................................................ Minority interest in net income of subsidiaries and pre-acquisition income of subsidiaries ............................. Net income .........................................................................	2002		2003		2004
		100.0 88.8 11.2 1.5 0.8 1.7 4.0 7.2 0.4 0.4 7.2 (0.4)		100.0 89.8 10.2 1.2 0.9 1.5 3.6 6.6 1.5 1.2 6.9 —		100.0 92.6
						7.4 0.9 0.6 1.3
						2.8
						4.6 0.5 1.6
						3.5 (0.3
		(0.4) 6.4		(0.5) 6.4		(0.3 2.9

Note:

(1) Calculation of gross profit includes an adjustment for the change in unrealized intercompany profits.

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Six months ended June 30, 2005 compared to the corresponding period in 2004

Net sales. Non-consolidated net sales increased 10.4% to NT$101,759.6 million (US$3,209.1 million) in the six months ended June 30, 2005 from NT$92,154.9 million in the corresponding period in 2004. The increase reflected increased sales volume as a result of increased orders from the Company’s major customers across each of its product lines, which were partially offset by a decrease in their average selling prices.

Net sales attributable to notebook PCs increased 9.1% to NT$83,355 million in the six months ended June 30, 2005 from NT$76,405 million in the corresponding period in 2004. This increase was primarily due to a substantial increase in sales volume of notebook PCs sold to 4.3 million units in the six months ended June 30, 2005 from 3.2 million units in the corresponding period in 2004. This increase in sales volume was accompanied by a decrease in the average selling price of notebook PCs in the six months ended June 30, 2005 as compared to the corresponding period in 2004, primarily reflecting the decrease in costs for input components such as LCD panels, CPUs and hard drives during the six months ended June 30, 2005. The decrease in average selling prices of notebook PCs was partially offset by an increased portion of net sales accounted for by complete system notebook PCs, which typically command higher selling prices because they incorporate all input components. In addition, the Company continued to face price erosion due to increased competition during the six months ended June 30, 2005.

Net sales attributable to display products increased 20.8% to NT$13,579 million in the six months ended June 30, 2005 from NT$11,241 million in the corresponding period in 2004, primarily due to an increase in the sale volumes of LCD monitors and LCD TVs, which was partially offset by a decrease in their average selling prices as a result of the decrease in the costs of LCD panels.

Net sales attributable to mobile communications devices increased to NT$4,693 million in the six months ended June 30, 2005 from NT$4,509 million in the corresponding period in 2004, primarily due to an increase in the sale volumes of mobile handsets, which was partially offset by a decrease in their average selling price reflecting increased competition.

Cost of sales. Non-consolidated cost of sales increased 11.3% to NT$95,653.5 million (US$3,016.5 million) in the six months ended June 30, 2005 from NT$85,925.1 million in the corresponding period in 2004, resulted primarily from higher sales volumes. Gross margins decreased to 6.0% in the six months ended June 30, 2005 from 6.8% in the corresponding period in 2004. Gross margins decreased principally as a result of a decrease in the average selling prices of the Company’s products reflecting the general trend of declining prices for the Company’s products, an increased portion of sales accounted for by complete system notebook PCs and price erosion from increased competition during the six months ended June 30, 2005.

Gross profit. As a result of the foregoing, non-consolidated gross profit decreased 1.5% to NT$6,125.6 million (US$193.2 million) in the six months ended June 30, 2005 from NT$6,218.1 million in the corresponding period in 2004.

Operating expenses. Non-consolidated operating expenses increased 11.9% to NT$2,426.6 million (US$76.5 million) in the six months ended June 30, 2005 from NT$2,169.3 million in the corresponding period in 2004. This decrease was primarily due to an increase in selling expenses and research and development expenses and, to a lesser extent, an increase in general and administration expenses. However, operating expenses as a percentage of net sales remained the same at 2.4% for the six-month periods ended June 30, 2004 and 2005.

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Selling expenses increased 19.2% to NT$723.8 million (US$22.8 million) in the six months ended June 30, 2005 from NT$607.0 million in the corresponding period in 2004 primarily due to an increase in export freight and warehouse expenses as a result of increased sales volume. General and administrative expenses increased 6.7% to NT$520.3 million (US$16.4 million) in the six months ended June 30, 2005 from NT$487.9 million in the corresponding period in 2004 primarily due to an increase in salary expense as a result of the growth of the Company’s operations. Research and development expenses increased 10.1% to NT$1,182.5 million (US$37.3 million) in the six months ended June 30, 2005 from NT$1,074.4 million in the corresponding period in 2004 primarily due to an increase in the number of engineers employed as the Company increased the number of research and development projects in line with the increase in sales volume.

Operating income. As a result of the foregoing, non-consolidated operating income decreased 8.6% to NT$3,699.0 million (US$116.7 million) in the six months ended June 30, 2005 from NT$4,048.8 million in the corresponding period in 2004.

Non-operating income. Non-consolidated non-operating income decreased 19.8% to NT$489.3 million (US$15.4 million) in the six months ended June 30, 2005 from NT$609.8 million in the corresponding period in 2004. This decrease was primarily due to a decrease in other investment income and investment income accounted for under equity method, which was partially offset by the recognition of an exchange gain and an increase in interest income. Other investment income decreased 77.8% to NT$33.4 million in the six months ended June 30, 2005 from NT$150.5 million in the corresponding period in 2004 primarily due to the absence of any significant gain in the six months ended June 30, 2005 as compared to a gain on disposal of investment in the corresponding period in 2004 and an increase in investment loss in the six months ended June 30, 2005, which was partially offset by an increase in dividend income from investee companies in the six months ended June 30, 2005. Investment income accounted for under equity method decreased 29.8% to NT$189.0 million in the six months ended June 30, 2005 from NT$269.2 million in the corresponding period in 2004 primarily due to an increase in the losses recognized by the Company’s investee companies, principally Toppoly, and the recognition by the Company of an asset impairment loss in connection with certain long-term investments of the Company in the six months ended June 30, 2005, which was partially offset by an increase in the gains recognized by CCI and the Company’s PRC subsidiaries in the six months ended June 30, 2005. The recognition of an exchange gain of NT$56.2 million in the six months ended June 30, 2005 was primarily due to more effective hedging as a result of (i) better management of the Company’s foreign currency cash flows and (ii) an increase in US dollar borrowings. The increase in interest income reflected an increase in NT dollar deposits during the period.

Non-operating expenses and losses. Non-consolidated non-operating expenses and losses decreased 64.5% to NT$375.0 million (US$11.8 million) in the six months ended June 30, 2005 from NT$1,056.6 million in the corresponding period in 2004. This decrease was primarily due to the absence of foreign exchange loss, which was partially offset by an increase in interest expense, inventory loss and other losses. Interest expense increased 16.1% to NT$263.2 million in the six months ended June 30, 2005 from NT$226.7 million in the corresponding period in 2004 primarily due to an increase in long-term and short-term debts. Inventory loss increased 222.0% to NT$65.6 million in the six months ended June 30, 2005 from NT$20.4 million in the corresponding period in 2004 primarily due to inventory losses as a result of decreases in component prices and increases in inventory due to increased sales volume. Other losses primarily reflected the costs associated with the laying off of direct labor as a result of the continual migration of the Company’s production facilities from the ROC to the PRC.

Net income. As a result of the foregoing, non-consolidated net income before income tax expense increased 5.9% to NT$3,813.4 million (US$120.3 million) in the six months ended June 30, 2005 from NT$3,602.0 million in the corresponding period in 2004.

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Non-consolidated income tax expense increased 56.8% to NT$352.2 million (US$11.1 million) in the six months ended June 30, 2005 from NT$224.6 million in the corresponding period in 2004.

As a result of the factors discussed above, net income increased 2.5% to NT$3,461.2 million (US$109.2 million) in the six months ended June 30, 2005 from NT$3,377.4 million in the corresponding period in 2004.

Year ended December 31, 2004 compared to the year ended December 31, 2003

Net sales. Consolidated net sales increased 29.8% to NT$229,793.4 million (US$7,246.7 million) in the year ended December 31, 2004 from NT$176,995.7 million in the year ended December 31, 2003. The increase reflected increased sales volume as a result of increased orders from the Group’s major customers primarily as notebook PC vendors increasingly outsourced the design and manufacture of notebook PCs, increased sales from display products, and increased average selling prices of notebook PCs.

Net sales attributable to notebook PCs increased 43.0% to NT$166,518.1 million in 2004 from NT$116,442.4 million in the year ended December 31, 2003. This increase was primarily due to a substantial increase in sales volume of notebook PCs sold to 7.7 million units in the year ended December 31, 2004 from 5.5 million units in the year ended December 31, 2003, particularly sales of 15” and 15.4” complete system notebook PCs. This increase in sales volume was accompanied by a slight increase in the average selling price of notebook PCs in the year ended December 31, 2004 as compared to the year ended December 31, 2003. The increase in average selling price reflected the increased portion of sales accounted for by complete system notebook PCs, which typically command higher prices because they incorporate all input components, the effects of which were partially offset by the more favorable prices the Group offered to its major customers as a result of increased competition.

Net sales attributable to display products increased 9.5% to NT$25,277.1 million in the year ended December 31, 2004 from NT$23,091.1 million in the year ended December 31, 2003, primarily due to an increase in the sales volumes of LCD monitors and LCD TVs and an increase in the average selling price as LCD monitors and LCD TVs commanded higher prices than CRT monitors.

Net sales attributable to mobile communications devices decreased slightly to NT$24,043.5 million in the year ended December 31, 2004 from NT$24,471.2 million in the year ended December 31, 2003, primarily due to a decrease in the average selling price of the Group’s mobile handsets, despite an increase in units sold to 11.5 million units in the year ended December 31, 2004 from 6.6 million units in the year ended December 31, 2003.

Cost of sales. Consolidated cost of sales increased 33.9% to NT$212,776.7 million (US$6,710.1 million) in the year ended December 31, 2004 from NT$158,891.6 million in the year ended December 31, 2003. The increase resulted primarily from higher sales volume and increased sales of complete system notebook PCs in the year ended December 31, 2004. Gross margins decreased to 7.4% in the year ended December 31, 2004 from 10.2% in the year ended December 31, 2003. Gross margins decreased principally as a result of the increased portion of net sales accounted for by complete system notebook PCs, which typically command higher prices because they incorporate all input components but carry lower gross margins because a smaller portion of those higher prices are accounted for by the design and manufacturing value added by the Group. In addition, the industry in which the Group operates had become more competitive as the relevant technologies matured, resulting in the more favorable prices that the Group offered to its major customers.

Gross profit. As a result of the foregoing, consolidated gross profit decreased 6.0% to NT$17,011.9 million (US$536.5 million) in the year ended December 31, 2004 from NT$18,092.3 million in the year ended December 31, 2003.

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Operating expenses. Consolidated operating expenses decreased 1.2% to NT$6,370.5 million (US$200.9 million) in the year ended December 31, 2004 from NT$6,449.0 million in the year ended December 31, 2003. This decrease was primarily due to a decrease in administrative expenses and selling expenses which was partially offset by an increase in research and development expenses. Selling expenses decreased 4.1% to NT$2,074.0 million (US$65.4 million) in the year ended December 31, 2004 from NT$2,162.1 million in the year ended December 31, 2003 primarily due to the change in one customer’s product shipping method from higher cost air freight to lower cost sea freight. General and administrative expenses decreased 18.4% to NT$1,350.5 million (US$42.6 million) in the year ended December 31, 2004 from NT$1,655.3 million in the year ended December 31, 2003 primarily due to the non-recurrence of a global logistics supporting fee in the year ended December 31, 2003. Research and development expenses increased 11.9% to NT$2,946.0 million (US$92.9 million) in the year ended December 31, 2004 from NT$2,631.6 million in the year ended December 31, 2003 primarily due to an increase in the number of engineers employed as the Group increased the number of research and development projects in line with the increase in sales volume.

Operating income. As a result of the foregoing, consolidated operating income decreased 8.6% to NT$10,641.4 million (US$335.6 million) in the year ended December 31, 2004 from NT$11,643.3 million in the year ended December 31, 2003.

Non-operating income. Consolidated non-operating income decreased 54.9% to NT$1,198.9 million (US$37.8 million) in the year ended December 31, 2004 from NT$2,656.2 million in the year ended December 31, 2003. This decrease was primarily due to a decrease in investment income which was partially offset by an increase in molding charges and developing fees. Investment income decreased 77.9% to NT$338.6 million (US$10.7 million) in the year ended December 31, 2004 from NT$1,533.3 million in the year ended December 31, 2003. Investment income in the year ended December 31, 2004 primarily represented the gains from disposal of the Company’s shares in a long-term equity investment and dividends received from investee companies. Unlike the year ended December 31, 2003, there was no extraordinary gain arising from initial public offering (“IPO”) sell downs.

Non-operating expenses. Consolidated non-operating expenses and losses increased 79.5% to NT$3,698.7 million (US$116.6 million) in the year ended December 31, 2004 from NT$2,061.0 million in the year ended December 31, 2003. This increase was primarily due to a foreign exchange loss and an increase in investment losses. The Company had a foreign exchange loss of NT$1,250.6 million (US$39.4 million) in the year ended December 31, 2004 as compared to a foreign exchange gain in the year ended December 31, 2003. The foreign exchange loss in the year ended December 31, 2004 was primarily due to the depreciation of the US dollar against the NT dollar in the year ended December 31, 2004. Investment losses increased 43.9% to NT$1,626.4 million (US$51.3 million) in the year ended December 31, 2004 from NT$1,130.4 million in the year ended December 31, 2003 primarily due to net losses posted by Toppoly and, to a lesser extent, Accesstek Inc. In particular, the Group’s share of the net loss posted Toppoly in the year ended December 31, 2004 amounted to NT$1.1 billion.

Income before income tax expense. As a result of the foregoing, consolidated net income before income tax expense decreased 33.5% to NT$8,141.6 million (US$256.8 million) in the year ended December 31, 2004 from NT$12,238.5 million in the year ended December 31, 2003.

Income tax expense. Consolidated income tax expense increased 2,349.1% to NT$688.2 million (US$21.7 million) in the year ended December 31, 2004 from NT$28.1 million in the year ended December 31, 2003. This increase was primarily due to reduced investment tax credits and tax exemption. As the Group relocated part of its production capacity from Taiwan to China, income attributable to a portion of such capacity enjoyed less tax exemption in Taiwan.

Net income. As a result of the factors discussed above, net income decreased 41.9% to NT$6,573.1 million (US$207.3 million) in the year ended December 31, 2004 from NT$11,331.6 million in the year ended December 31, 2003.

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Year ended December 31, 2003 compared to the year ended December 31, 2002

Net sales. Consolidated net sales increased 44.4% to NT$176,995.7 million in the year ended December 31, 2003 from NT$122,555.8 million in the year ended December 31, 2002. The increase reflected increased orders from the Group’s major customers primarily as notebook PC vendors increasingly outsourced the design and manufacture of notebook PCs and increased sales from mobile communications devices. Sales volume of notebook PCs increased to 5.5 million in the year ended December 31, 2003 compared to 4.0 million in the year ended December 31, 2002. This increase in sales volume was accompanied by an increase in average selling prices of notebook PCs in the year ended December 31, 2003 as compared to the year ended December 31, 2002 due to increased sales of complete system notebook PCs, which was partially offset by declining average selling prices for certain notebook PC models.

Cost of sales. Consolidated cost of sales increased 45.9% to NT$158,891.6 million in the year ended December 31, 2003 from NT$108,884.0 million in the year ended December 31, 2002. The increase resulted primarily from an increase in sales volume of notebook PCs, particularly complete system notebook PCs, and increased costs associated with the production of other lines of products.

Gross profit. As a result of the foregoing, consolidated gross profit increased 32.4% to NT$18,092.3 million in the year ended December 31, 2003 from NT$13,659.8 million in the year ended December 31, 2002 but gross margins decreased to 10.2% in the year ended December 31, 2003 from 11.1% in the year ended December 31, 2002. Gross margins decreased primarily because of the shift in product mix towards increased sales of complete system notebook PCs which carried lower margins than bare bone system notebook PCs and price erosion as the notebook PC industry had become more competitive as the relevant technology matured.

Operating expenses. Operating expenses increased 37.9% to NT$6,449.0 million in the year ended December 31, 2003 from NT$4,677.5 million in the year ended December 31, 2002. This increase was due to increased administrative expenses, research and development expenses and selling expenses. Administrative expenses increased 76.6% to NT$1,655.3 million in the year ended December 31, 2003 from NT$937.1 million in the year ended December 31, 2002 primarily due to a global logistics supporting fee and an increase in headcount which correspondingly increased salaries and travel expenses in the year ended December 31, 2003. Research and development expenses increased 34.5% to NT$2,631.6 million in the year ended December 31, 2003 from NT$1,956.7 million in the year ended December 31, 2002 primarily due to an increase in the number of engineers employed by the Group as the number of research and development projects grew. Selling expenses increased 21.2% to NT$2,162.1 million in the year ended December 31, 2003 from NT$1,783.7 million in 2002 primarily due to increased after-sales service expenses in line with the notebook PC sales growth.

Operating income. As a result of the foregoing, consolidated operating income increased 29.6% to NT$11,643.3 million in the year ended December 31, 2003 from NT$8,982.3 million in the year ended December 31, 2002.

Non-operating income. Consolidated non-operating income increased 457.0% to NT$2,656.2 million in the year ended December 31, 2003 from NT$476.9 million in the year ended December 31, 2002 primarily due to an increase in investment income and a foreign exchange gain in the year ended December 31, 2003. Investment income was NT$1,533.3 million in the year ended December 31, 2003 which primarily represented investment gains arising from a sell down of the Company’s holdings in CCI and International Semiconductor Technology Inc. (“IST”) as part of their respective IPOs on the TSE in the year ended December 31, 2003. The Group also recognized a foreign exchange gain of NT$569.1 million in 2003 as a result of the appreciation of the US dollar against the NT dollar in the year ended December 31, 2003.

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Non-operating expenses. Consolidated non-operating expenses increased 269.4% to NT$2,061.0 million in the year ended December 31, 2003 from NT$557.9 million in the year ended December 31, 2002 primarily due to investment losses in the year ended December 31, 2003 and an increase in interest expenses. Investment losses in the year ended December 31, 2003 were primarily due to net losses from Toppoly of NT$876.9 million. Interest expenses increased 134.6% to NT$681.5 million in the year ended December 31, 2003 from NT$290.5 million in the year ended December 31, 2002 primarily because the year ended December 31, 2003 was the first full year in which the Company recognized the interest payments on its domestic bonds and the provision for the premium payable on the 2002 Notes.

Income before income tax expense. As a result of the foregoing, consolidated net income before income tax expense increased 37.5% to NT$12,238.5 million in the year ended December 31, 2003 from NT$8,901.3 million in the year ended December 31, 2002.

Income tax expense. Consolidated income tax expense decreased 94.3% to NT$28.1 million in the year ended December 31, 2003 from NT$490.3 million in the year ended December 31, 2002 primarily as a result of increased investment tax credits arising from the Group’s long-term investments.

Net income. As a result of the factors discussed above, net income increased 42.8% to NT$11,311.6 million in the year ended December 31, 2003 from NT$7,918.6 million in the year ended December 31, 2002.

Working capital management

Careful management of working capital is an important part of the Group’s operations. Accounts receivable and inventories, principal components of the Group’s current assets, will continue to require significant amounts of working capital, particularly if net sales continue to increase. Accounts payable, the largest component of the Group’s current liabilities, serve as sources of working capital as it attempts to take advantage of extended payment terms from suppliers when making purchases.

The following table summarizes the Group’s accounts receivable, inventory, accounts payable and cash conversion cycle positions as at and for the dates and periods indicated:

(in NT$ millions, except for average days) Notes and accounts receivable(1) ................... Inventory(2) ................................................... Notes and accounts payable(3) ....................... Cash conversion cycle(4) ...............................		As at and for the year ended December 31,
	2002	2003	2004
	NT$ Average days 22,486.1 60 9,572.9 28 22,607.4 71 — 17	NT$ Average days 42,842.5 67 14,198.7 27 43,534.6 76 — 18	NT$ Average days 40,657.2 66 16,535.7 26 44,428.2 75 — 17

Notes:

(1) The average number of days for accounts receivable for the years ended December 31, 2002, 2003 and 2004 is equal to 365 divided by (i) the net sales in such year divided by (ii) the average of the accounts receivable balance as of December 31 of that year and the accounts receivable balance as of December 31 of the immediately preceding year.

(2) The average number of days for inventory for the years ended December 31, 2002, 2003 and 2004 is equal to 365 divided by (i) the cost of sales in such year divided by (ii) the average of the inventory balance as of December 31 of that year and the inventory balance as of December 31 of the immediately preceding year.

(3) The average number of days for accounts payable for the years ended December 31, 2002, 2003 and 2004 is equal to 365 divided by (i) the cost of sales in such year divided by (ii) the average of the accounts payable balance as of December 31 of that year and the accounts payable balance as of December 31 of the immediately preceding year.

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(4) The cash conversion cycle (the length of time between the purchase of inventory and the receipt of cash from accounts receivable) is equal to the sum of days saleable inventory and outstanding days receivable, minus outstanding days payable.

Notes and accounts receivable. The Group generally trades with its principal customers on an open account basis. The average number of days required for collection of its accounts receivable and notes receivable was approximately 66 days, 67 days and 60 days in the year ended December 31, 2004, 2003 and 2002, respectively. The increase in the number of days required for collection of these receivables was primarily a result of increased competitiveness in the industry in which the Group operates. The Group generally has not experienced material problems in collecting from its customers and historically has enjoyed a relatively low level of bad debt provisioning expense.

Inventory. The Group believes that sound inventory management is a key factor in the successful operation and financial performance of its business. The Group’s consolidated days saleable inventory was 26 days, 27 days and 28 days in the years ended December 31, 2004, 2003 and 2002, respectively. The decrease in inventory turnover days was primarily due to improved inventory management.

The Group’s policy is to establish a full provision for any raw materials not utilized within a period of three months. With respect to other types of inventory, such as work in progress and finished goods, the Group establishes a provision for inventory loss based on the difference between the costs of inventory and the market price, if lower.

The Group has purchased transportation insurance coverage from independent third-party insurers for finished goods delivered as part of its global logistics delivery network, which generally insures against risk of damage up to 60 days from the date of shipment. In accordance with market practice, the Group is required to notify the insurers of the inventory amounts on a monthly basis, and the insurance coverage for the subsequent month is based on such inventory amount submitted by it in the previous month.

Notes and accounts payable. The Group’s consolidated outstanding days payable were 75 days, 76 days and 71 days in the years ended December 31, 2004, 2003 and 2002, respectively. This increase in consolidated outstanding days payable was primarily because the Group has managed to obtain better credit terms as its bargaining power has strengthened and competition among its suppliers has intensified.

Cash conversion cycle. The Group’s consolidated cash conversion cycle (being the sum of days saleable inventory and outstanding days receivable, minus outstanding days payable) was 17 days, 18 days and 17 days in the years ended December 31, 2004, 2003 and 2002, respectively.

Liquidity and capital resources

The Group’s primary cash requirements are to fund capital expenditures including investments in acquired businesses and to finance working capital requirements. Historically, the Group has funded its operations through operating cash flows, bank borrowings and other loans. Current sources of liquidity to meet funding needs include operating cash flows, cash on hand and bank borrowings.

Working capital, cash and indebtedness

The Group funds its short-term working capital requirements through cash flow from operations, working capital facilities and short-term borrowings. As of December 31, 2002, 2003 and 2004, the Group had cash and cash equivalents of NT$33,191.4 million, NT$31,622.7 million and NT$34,242.7 million, respectively. There was a decrease in cash and cash equivalents of NT$1,568.7 million, or 4.7%, in the year ended December 31, 2002 compared to the year ended December 31, 2003, primarily due to net cash provided by operating activities of NT$10,580.5 million and net cash provided by financing activities of NT$1,678.2 million which was partially offset by net cash used in investing activities of NT$13,508.8 million. There was an increase in cash and cash equivalents of NT$2,620.0

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million, or 8.3% in the year ended December 31, 2004 compared to the year ended December 31, 2003, primarily due to net cash provided by operating activities of NT$11,740.4 million and net cash provided by investing activities of NT$1,396.8 million which was partially offset by net cash used in financing activities of NT$10,378.5 million.

As of December 31, 2004, the Group had short-term loans of NT$5,318.0 million and cash and cash equivalents of NT$34,242.7 million. The Group believes that its existing credit lines under its short-term loans and commercial paper facilities, together with cash generated from its operations and the proceeds of this offering, will be sufficient to finance its working capital needs for the next 12 months.

The following table sets forth the Group’s short-term and long-term debt as of the periods indicated:

	As of December 31,	As of December 31,
2002 (NT$) — 1,363.8 21,086.4	2003 (NT$) 2,642.9 — 14,113.5	2004 (NT$) 5,318.0 8,179.3 5,220.0	2004
			(US$) 167.7 257.9 164.6
22,450.2	16,756.4	18,717.3		590.2

The following table sets out the domestic corporate bonds issued by the Group:

		As of December 31,	As of December 31,	As of December 31,	As of December 31,
2002 (NT$) 5,000.0 4,000.0 9,000.0 —		2003 (NT$) 5,000.0 4,000.0 9,000.0 —		2004 (NT$) 5,000.0 4,000.0 9,000.0 3,780.0		2004
						(US$) 157.7 126.1 283.8 119.2
							283.8 119.2
	9,000.0		9,000.0		5,220.0		164.6

Unsecured bonds (First Issue) were issued in two tranches from April 24, 2002 to May 10, 2002. Tranche A bonds mature at three years from issuance and Tranche B bonds mature at five years from issuance. Interest on these bonds was payable annually at 3.05% and 3.45% for Tranche A bonds and Tranche B bonds, respectively. Principal on Tranche A bonds is repayable in full at maturity and principal on Tranche B bonds at years three, four and five at 30%, 30% and 40% of their principal amount.

Unsecured bonds (Second Issue) were issued in three tranches from September 16, 2002 to September 26, 2002. These bonds mature at three years and five years from issuance. Interest on these bonds was payable semi-annually at floating rates against six-month LIBOR. Principal on unsecured bonds (Second Issue) is repayable in full at maturity.

In October 2002, the Company issued US$345.0 million aggregate principal amount of Zero Coupon Convertible Notes due 2007 (the “2002 Notes”). The 2002 Notes are convertible into the Shares which may be delivered in the form of Shares or GDSs. The terms of the 2002 Notes provide

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that the holders of the 2002 Notes have the right to require the Group to repurchase such 2002 Notes on October 11, 2005 at a price equal to 100% of the unpaid principal amount plus the redemption premium. As of December 31, 2004, approximately US$128.1 million aggregate principal amount of 2002 Notes was outstanding.

The following table sets forth a summary of the maturity profile for the Group’s outstanding long-term debt obligations as of December 31, 2004:

Payments due by period Repayment within one year ..................................................................... Repayment after one year ........................................................................ Repayment after two and up to five years ................................................ Total ........................................................................................................	(in NT$ millions)	(in NT$ millions)	(in US$ millions)	(in US$ millions)
		8,179.3 780.0 4,440.0		257.9 24.6 140.0
		13,399.3		422.5

Income taxes

In the year ended December 31, 2004, the Group paid income tax at an effective rate of approximately 8.5%, compared to the statutory rate of 25%, primarily due to tax exemptions under the ROC Statute for Upgrading Industries. Under such statute, the Group is exempted from taxation on income from sales of notebook PCs, certain monitors and certain mobile handsets manufactured using machinery and equipment purchased with proceeds from the issue of Shares for cash or out of retained earnings. This exemption lasts for five years commencing upon the completion of the investment plan for which the equipment was purchased. This tax exemption has reduced the Group’s income tax liability on a consolidated basis by NT$670.8 million in the year ended December 31, 2002, NT$875.3 million in the year ended December 31, 2003 and NT$546.8 million in the year ended December 31, 2004. In lieu of this exemption, the statute provides the option for the Group’s stockholders who are corporate entities and have held their Shares for over three years to reduce their taxable income by up to 20% of the acquisition cost of such Shares and the tax credit applicable to the Group’s shareholders who are individuals is 10%. The stockholders may opt for this stockholder income tax deduction, instead of the five-year tax exemption for the Group, by a resolution of the meeting of stockholders. In addition, under the ROC Statute for Upgrading Industries, a company may earn investment tax credits ranging from 5% to 13% of equipment cost when it installs machinery to increase automation or for environmental protection purposes. These tax credits must be utilized within four succeeding years.

The Group’s valuation allowance provided on deferred tax assets is calculated differently under ROC GAAP, compared to US GAAP. This difference has a significant impact on the Group because it has a significant amount of potential deferred tax assets as a result of the various tax exemptions available to the Group under ROC governmental tax incentive programs. US GAAP requires more stringent criteria by which such valuation allowance is determined. This recognition of net deferred tax assets under ROC GAAP resulted primarily from the projection of income before tax for the year ended December 31, 2002.

Exchange rates

For each of the years ended December 31, 2002, 2003 and 2004, over 99% of the Group’s net sales were denominated in currencies other than the NT dollar, principally the US dollar. However, for the years ended December 31, 2002, 2003 and 2004, approximately 95% of the Group’s purchases of raw materials were denominated in currencies other than the NT dollar, principally the US dollar and, to a lesser extent, the PRC Renminbi and the Japanese Yen. In addition, the Group has significant foreign currency-denominated assets, principally US dollar-denominated notes and accounts receivable and cash balances, and foreign currency-denominated liabilities, principally US dollar and

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Japanese Yen-denominated accounts payable. Accordingly, fluctuations in exchange rates, in particular between the US dollar and the NT dollar, affect the Group’s gross and operating margins and result in foreign exchange losses or gains in respect of its assets and liabilities denominated in foreign currencies.

The Group recorded a net foreign exchange loss of NT$19.8 million in the year ended December 31, 2002 due to the appreciation of the NT dollar against the US dollar as compared to a foreign exchange gain of NT$569.1 million in the year ended December 31, 2003 due to the depreciation of the NT dollar against the US dollar. The Group also recorded a net foreign exchange loss of NT$1,250.6 million (US$39.4 million) in the year ended December 31, 2004 due to the appreciation of the NT dollar against the US dollar.

To the extent the Group is exposed to exchange rate fluctuations beyond its natural hedge of US dollar sales and costs of sales, it attempts to mitigate the adverse effects of exchange rate fluctuations on its business primarily through the use of forward exchange contracts. For information relating to such contracts, see note 16 to the consolidated financial statements as of and for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular. However, the impact of future exchange rate fluctuations between the US dollar and the NT dollar on the Group’s results of operations cannot be predicted accurately.

Recent Accounting Pronouncements

Impairment loss

In accordance with the ROC Statement of Financial Accounting Standards (“ROC SFAS”) No. 35, Accounting for Impairment Loss , which applies to the Company’s financial statements for financial periods beginning January 1, 2005, the Company must recognize impairment loss in respect of its fixed assets, intangible assets, long-term investments under the equity method, idle assets and goodwill if their realized value is below their book value. Reversals of impairment losses (except for impairments of goodwill) is permissible under limited circumstances only. Before the coming into effect of SFAS No. 35, the ROC GAAP did not contain any definitive guidance on the method of recognizing impairment loss.

Consolidation policy

In accordance with ROC SFAS No. 7, Consolidated Financial Statements , which applies to the Company with effect from January 1, 2005, the Company is required to consolidate in its consolidated financial statements the results of operations of all entities in which the Company has control over the financial and operating policies, irrespective of whether or not it has a majority shareholding in such entities.

For the years ended December 31, 2002, 2003 and 2004, although the Company’s consolidated financial statements included the accounts of its subsidiaries in which it had more than 50% shareholding, if the total assets and operating revenues of any subsidiary were less than 10% of the Company’s total assets and operating revenues, then that particular subsidiary was not consolidated but was instead accounted for under the equity method. It is expected that the Company will have to consolidate certain investee companies accounted for under the equity method as consolidated subsidiaries in its consolidated financial statements from January 1, 2005.

Investments in debt and equity investments

Under ROC GAAP currently in effect, the Company categorizes securities it owns as either short-term investments or long-term investments. Short-term investments are recorded at cost when acquired and stated at the lower of aggregate cost or market value (“LCM”). Long-term investments are stated at cost when acquired. Long-term investments in listed equity securities are evaluated under the LCM method or equity method, depending on the percentage of the Company’s shareholding.

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Long-term investments in non-listed equity securities are evaluated under the cost method or equity method, depending on the percentage of the Company’s shareholding. In accordance with ROC SFAS No. 34, Accounting for Financial Instruments , which will take effect with effect from 2006, investments in debt and equity securities will be classified into three categories: trading securities, available-for-sale securities and held-to-maturity securities. Changes in the values of securities in the trading portfolio will be recognized in the income statement immediately; changes in the values of available-for-sale category will be reported in a separate component of shareholders’ equity; held-to-maturity securities will be recorded under the amortized cost method.

Derivatives

Under ROC GAAP currently in effect, derivatives are treated as off-balance sheet items. In addition, SFAS 34 requires all derivatives to be recorded on the balance sheet at fair value and establishes “hedge accounting” for three different types of hedges: fair-value hedge, cash-flow hedge and foreign-currency hedge. Under hedge accounting, the effective portion of gains or losses from the hedging instrument and the hedged item will be recognized in earnings immediately. Changes in the fair value of derivatives that do not meet the criteria of one of these three categories of hedges are recorded directly in earnings.

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BUSINESS

Introduction

The Group is actively developing and diversifying its products, through its own research and development and cooperation with its strategic customers, to take advantage of new business opportunities arising from the further convergence of 3C technologies and the emerging digital home market and to leverage on its manufacturing and R&D capabilities. The Group’s display products include LCD monitors, CRT monitors, LCD TVs, PDP TVs and projectors. The Group’s mobile communications devices include mobile handsets, PDAs and smart phones.

As of the date of this Offering Circular, the Group had a 48.2% interest in CCI, a company that develops and manufactures mobile handsets. See “— Description of Consolidated Subsidiaries”. The Company, in association with Kinpo, Uni-President Group and Teco, established a joint venture company, Toppoly, to engage in the development and production of LTPS TFT-LCD panels. These panels are used primarily in mobile communications devices. See “— Toppoly Optoelectronics Corp”.

For the six months ended June 30, 2005, the Company had non-consolidated net sales of NT$101,759.6 million (US$3,209.1 million) and non-consolidated net income of NT$3,461.2 million (US$120.3 million) compared to NT$92,154.9 million and NT$3,377.4 million for the six months ended June 30, 2004. For the year ended December 31, 2004, the Company had consolidated net sales of NT$229,793.4 million (US$7,246.7 million) and consolidated net income of NT$6,573.1 million (US$207.3 million) compared to NT$176,995.7 million and NT$11,311.6 million for the year ended December 31, 2003.

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Corporate information

Industry overview

Notebook PC market

The worldwide market for notebook PCs has expanded rapidly in the past few years and is expected to grow over the next few years at a faster rate than the global desktop PC industry. According to IDC, notebook PC shipments were estimated to be 43.7 million in the year ended December 31, 2004, an increase of 23.3% from 35.4 million in the year ended December 31, 2003. IDC also estimates that notebook PC shipments could increase by another 19.1% to 52.0 million in the year ended December 31, 2005 with further increases of 17.8% and 15.7% in the year ended December 31, 2006 and the year ended December 31, 2007, respectively. The compound annual growth rate for notebook PC shipments is estimated to be 18.4% between the year ended December 31, 2003 and the year ended December 31, 2008, as compared to 6.2% for desktop PC shipments over the same period, according to IDC.

The global notebook PC market is dominated by several large global vendors due to the lower degree of standardization of notebook PCs as compared to desktop PCs and the higher degree of consumer brand consciousness in the notebook PC market. According to IDC, the top ten global vendors of notebook PCs shipped nearly 80% of total shipments of notebook PCs. The Group believes that the global notebook PC market is characterized by intense competition for market share, short product life cycles and intense pressure on costs. These characteristics are expected to intensify global market concentration around the top ten global vendors and increase outsourcing of the design and manufacture of notebook PCs.

Companies based in Taiwan are currently the world’s largest producers of notebook PCs. According to Taiwan Market Intelligence Centre (“MIC”), Taiwan’s share of the global notebook PC market increased to 72.3% in the year ended December 31, 2004 from 49.0% in the year ended December 31, 1999. As a result of these global trends, the Group believes that top-tier Taiwanese notebook PC manufacturers with strong relationships with the top global vendors, strong design and cost control capabilities, critical scale and flexible production models will be able to benefit from the increased outsourcing in the global notebook PC market.

Display market

According to IDC, unit sales of desktop PCs are estimated to reach 122.7 million, and revenues were over US$104.9 billion in the year ended December 31, 2004, representing an 11.0% unit growth and a 4.3% revenue growth over the year ended December 31, 2003.

Companies based in Taiwan are the largest manufacturers of displays in the world. According to MIC, companies based in Taiwan shipped approximately 81.1 million PC monitors in the year ended December 31, 2004, representing an increase of 12.6% from 72.0 million units shipped in the year ended December 31, 2003.

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LCD monitors represented about 50.2% of global PC monitor shipments and 75.1% of global PC monitor revenues in the year ended December 31, 2004, as compared to 49.8% and 24.9%, respectively, for CRT monitors according to IDC. The market for LCD monitors continues to increase and replaces the market for CRT monitors. According to IDC, LCD monitor shipments are estimated to be 60.1 million, an increase of 31.5% from 45.7 million units in the year ended December 31, 2003. IDC also forecasts that the LCD monitor shipments will increase by another 31.6% to 79.0 million units in the year ended December 31, 2005 with further growth of 22.4% and 15.6% in the year ended December 31, 2006 and the year ended December 31, 2007, respectively. The total LCD monitor shipment will reach 126.7 million in 2008, representing 80.9% of global PC monitor shipments. LCD monitors with 17” and 19” screens were the most popular LCD monitors in the year ended December 31, 2004 in terms of units shipped.

The global LCD TV market is expected to grow due to the decline of average selling price resulting from increased and more stable component supplies. IDC estimates that LCD TV shipments will grow from 7.7 million units in the year ended December 31, 2004 to 58 million in the year ended December 31, 2008, representing a compound annual growth rate of 65.7%. The LCD TV market has traditionally been dominated by Japanese consumer electronics brands, such as Sony, Panasonic and Sharp. Samsung and LG have caught up in the past few years and have taken significant market share from their Japanese competitors. However, the efficient manufacturing process and the significant scale of TV component vendors have made the entry to the market relatively easy for new players who may develop their own brands by outsourcing the LCD TV manufacturing to ODM manufacturers. PC vendors such as Dell and Gateway and monitor vendors such as ViewSonic have recently started to source LCD TVs from Taiwanese and PRC ODM manufacturers.

Mobile communications device market

The world mobile communications device market is experiencing a period of rapid growth. According to Business Intelligence System (“BIS”), worldwide mobile handset subscribers reached 1.5 billion in the year ended December 31, 2004, and this base is expected to increase to approximately 1.8 billion subscribers in the year ended December 31, 2006.

Global mobile handset shipments have increased due to various factors, including advanced technologies, new applications, new emerging markets and changing consumer preferences. The evolution of technologies, such as global system for mobile communications (“GSM”), CDMA, time division multiple access (“TDMA”), personal handyphone system (“PHS”), general packet radio service (“GPRS”), time division - synchronous code division multiple access (“TD-SCDMA”), dual mode systems and the new 3G technologies, such as WCDMA and CDMA 2000, has driven demand in mature markets such as Western Europe, North America and parts of Asia and also injected new growth to the market. New applications such as multimedia messaging service, cameras, color screens, smart phones, enhanced phones, wireless local area networks and increased variety in games have also contributed to increased demand for handsets and have required handset vendors to acquire more design and manufacturing sophistication.

New emerging markets, such as areas in Asia, Central Europe and Latin America, have also propelled demand for mobile handsets, especially more affordable handsets, which has led to increased pricing pressures in the global handset industry. IDC forecasts that the global handset market is expected to grow at a compound annual growth rate of 8.2% from the year ended December 31, 2004 to the year ended December 31, 2008. The Asia Pacific region (excluding Japan) is expected to grow at a compound annual growth rate of 13.6% over the same period, driven primarily by the strength of China and India along with the technological leadership of South Korea.

The handset industry is also characterized by market concentration around several top global handset vendors. According to IDC, in the first six months of 2004, the top five global vendors accounted for 73.6% of the global handset market. Major mobile handset vendors have also reduced their own handset manufacturing and have outsourced an increasing amount of manufacturing to ODM/OEM manufacturers. Outsourcing is expected to continue to increase following the development

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of 3G technologies as handset vendors are under constant pressure to foster innovation in developing segment-specific mobile phones and introduce new models while at the same time controlling their costs. The Group believes that Taiwanese manufacturers are well positioned to benefit from the increasing outsourcing by the top global handset vendors as these vendors seek to lower their costs and shorten product lead times.

According to IDC, the shipment of smart handheld devices, comprising products such as PDAs, smart phones and communicators, are expected to grow from 20.0 million units in the year ended December 31, 2003 to 138.5 million in the year ended December 31, 2008, representing a compound annual growth rate of 47.8%. The Group believes that Taiwanese manufacturers will benefit from increasing outsourcing in this market as operators and vendors seek cost-efficient and customized hardware design and manufacturing solutions.

Strategy

Be the ODM manufacturing partner of choice in the notebook PC, display product and mobile communications device industries

The Group’s strategy is to be the manufacturing partner of choice for leading notebook PC, display product and mobile communications device companies. Changing dynamics in such markets, including shortened product cycles and faster time-to-market requirements, are driving notebook PC, display product and mobile communications device vendors and operators to embrace a business model dependent upon ODM manufacturing companies’ services and products. As a leading ODM manufacturer, the Group offers its customers an ability to design and produce high-quality, high-volume and low-cost customized notebook PCs, display products and mobile communications devices with quick turn-around times. The Group is focused on continually improving its products and services in order to deliver even better design, manufacturing, fulfillment and after-sales services. The Group continues to develop its production capacity which, when coupled with its management experience, gives it the ability to scale production more quickly to meet large demand. As a result, global branded notebook PC, display product and mobile communications device customers would not have to allocate internal resources to establish and operate such capabilities; instead, those customers could focus more on their sales and marketing efforts.

Foster product innovation and improve product quality through R&D

The Group works closely with its customers to design and develop high quality products that can be manufactured quickly and cost-effectively. To capitalize on the convergence among the technologies used in the 3C industries, the Group seeks to formulate innovative product design concepts and creates manufacturing solutions for such concepts for its customers. The Group intends to continue to increase its R&D spending and enhance its investments in R&D resources to support its business growth, including in-house research and development activities and joint development with certain major customers. Such resources focus on developing new products, providing manufacturing solutions to customers, improving production efficiency and lowering unit manufacturing costs. The Group’s strategy is to stay ahead of the market and develop the next generation of 3C products in anticipation of future customer demands. The Group’s R&D team plays a key role in enabling it to design products suitable for immediate sale by customers and allows the Group to move quickly in creating new products based on customer specifications. Furthermore, the R&D team is primarily responsible for integrating design and manufacturing processes in order to produce reliable and high quality products. The Group will continue to place strong emphasis on building a top-quality R&D team. Currently, the R&D team consists of 2,600 engineers. The Group has also recently implemented the Integrated System of Product Development (“ISPD”) and the Six

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Sigma program to enhance its innovative design capability, improve its design efficiency and quality and reduce manufacturing costs. The Group believes that enhanced R&D and product design capability will enable it to foster product differentiation, reduce price erosion and improve its competitiveness.

Expand relationships with existing customers, improve cross-selling and diversify its customer base

The Group has established and will continue to develop its long-standing relationships with top-tier global information technology industry leaders. The Group is working with these global clients as well as new clients to broaden and deepen its supply relationships with them and to expand its product offering into new products, applications and markets. One of the Group’s key strategies is to build integrated relationships with its customers, from the design stage to after-sales service. Several of its new growth product initiatives build upon existing relationships with key customers.

The Group intends to further increase its global market share by concentrating its sales efforts on increasing penetration of existing customers, currently concentrated on the notebook PC and information technology vendors, as well as expanding and diversifying its customer portfolio to include industry leaders in the communications and consumer electronics industries as well as other top-tier notebook PC vendors. The Group intends to pursue aggressively a strategy of cross-selling a wide range of products to the combined customer bases of the individual business groups. The Group believes that focused cross-selling by the individual business groups will, in addition, enable them to increase penetration of their own existing customer base. For instance, the Group has started to supply LCD TVs to some of its notebook PC customers who have recently expanded into the digital home entertainment market. The Group will also continue to increase its customer diversification in terms of geographic distribution. For instance, the Group has been actively pursuing business opportunities in emerging markets in China, India and Central and South America to take advantage of the rapid economic growth and increasing demand for 3C products in these areas.

Build a diversified product portfolio to capitalize on opportunities arising from the convergence of the 3C industries and diversify its income sources

As personal communications, computing and digital entertainment technologies converge, the growing trend is to combine various computing, wireless communications and digital entertainment features and functions into a single product. The Group intends to leverage its technological and manufacturing expertise as well as its existing relationships with suppliers and customers in order to capitalize on opportunities arising from the convergence among the technologies used in the 3C industries and the significant growth potential presented by the digital home entertainment and wireless communications markets. As part of its 3C convergence strategy and leveraging its significant computing, wireless communications and digital technologies and expertise, the Group has developed, and will continue to enhance and diversify, its integrated product portfolio for each core product line. For instance, the Group is developing a wide range of entertainment notebook PCs and home media center PCs with built-in WiFi and Bluetooth connectivity and multi-media functions. It has developed LCD TVs and PDP TVs for digital home entertainment, and smart phones which combine mobile communication and PDA functions which enable users to download applications, music, videos, games and other multi-media content from the Internet. In addition, the Group is also actively positioning itself for migration to 3G technologies. The Group believes that its focus on the development and marketing of new products will allow it to diversify its revenue sources and strengthen its leadership in the information technology ODM industry and develop a leading position in consumer electronic products.

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Pursue selective long-term strategic investments to secure stable and preferred access to key input components

Because the availability of certain input components can be uncertain, the Group believes that selective vertical integration will enhance its overall competitiveness, particularly in respect of its display and mobile communication product lines. It believes that selective vertical integration will allow it to secure a low cost and stable supply of input components, maintain a time-to-market advantage as customers increasingly require component customization and maintain a time-to-volume advantage as orders increase.

As of December 31, 2004, the Company had a 32.82% interest in Toppoly, a joint venture company established to develop and manufacture LTPS TFT-LCD panels. The Group’s goal is for Toppoly to become a major manufacturer of LTPS TFT-LCD panels, to be one of its suppliers for what the Group believes will be a growing market for such panels and to supply such panels for use in its mobile handsets and other mobile communications devices. In addition to capitalizing on the potential market for LTPS TFT-LCD panels, Toppoly will enable the Group to source a portion of its requirements for such panels, even during supply shortages, for use in its mobile communications devices. Other examples of such long-term investments include the Company’s 37.66% interest in Accesstek Inc., a manufacturer of CD-RW, Combo and DVD dual drivers, its 47.29% interest in Swenc Technology, a manufacturer of touch panels, and its 59.69% interest in Wisepal Technology, an integrated circuit (“IC”) design house. See “— Subsidiaries and associated companies”.

The Group intends to continue to pursue opportunities to make long-term strategic investments, in a prudent and selective manner, in other ODM/OEM players, particularly upstream suppliers, who will be able to complement its core product portfolio and capabilities, enhance its technologies and knowhow and assist it in securing low-cost and reliable component supply.

Competitive strengths

With its manufacturing and service infrastructure and ability to provide total solutions to leading global notebook PC, display product and mobile communications device customers, the Group believes that it is well positioned to capitalize on the growth in such sectors, outsourcing by leading global branded notebook PC, display product and mobile communications device companies and the growth of the customers that it targets. The following are the Company’s key competitive strengths:

Proven design and manufacturing track record

Many of the products manufactured for the Group’s major customers have won numerous awards, including the CNET Magazine “Editor’s Choice Award”, PC Magazine “The Best Product of 2003” and “The Best Product” award by the US Consumer Electronic Show in 2003. The Group has also received awards from its customers and suppliers including HP and Intel. The fact that the Group supplies its products to its premium customer base, which includes many of the leading global 3C vendors that implement the most stringent and sophisticated supplier qualification criteria and product testing standards in the industry, is itself a proof of the high quality and reliability of the products designed and manufactured by the Group. The Group has assembled a high quality R&D team to work together with these global industry leaders. The Group has also developed cost-effective and quality-controlled manufacturing processes and facilities and new initiatives such as the Six Sigma program and the ISPD system, to further streamline the Group’s design and manufacturing processes and reduce its unit manufacturing costs.

Premium customer base driving future growth

The Group has established long-standing relationships with some of the world’s leading manufacturers in the 3C industries. Its strong client base has been instrumental in its success to date as such industry leaders have increasingly concentrated their market share of the information technology industry worldwide.

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The Group’s customers include many of the leading global 3C brand name vendors: Dell, HP, Toshiba and Acer for notebook PCs; NEC, Mitsubishi, Acer, Hitachi and Dell for display products; and Motorola and HP for mobile communications devices. The Group has established close, strategic relationships with these customers. As the computing industry undergoes further consolidation of vendors, the 3C industries undergo further convergence and the Group’s customers increase their share of the growing 3C markets, the Group believes that it will be well positioned to strengthen its relationships with such customers and to take advantage of the increasing outsourcing of the design and manufacturing of notebook PCs and other products by these top-tier 3C product vendors.

Depth of customer relationships which increases switching costs and barriers to entry

The Group offers its customers a full range of products and services including leading design capabilities, a supply of key components, high quality and innovative products, scalable manufacturing facilities, a strategically placed logistics and fulfillment network and convenient after-sales services. In addition, the Group assigns to each key customer a cross-function team to ensure that goods and services are designed, manufactured and delivered efficiently and consistently. With the support of its high quality products and services, customers can concentrate on sales and marketing without having to divert attention and resources to managing the design, production and fulfillment processes.

The Group believes that the integration of its design and manufacturing capabilities with those of its customers’ has created competitive advantages. As the Group’s customer team, consisting of personnel from sales and marketing, logistics, R&D, manufacturing and quality assurances, becomes integrated with its customers’ corporate management and develops an in-depth understanding of the customer’s specifications, testing, quality, logistics, inventory and service needs, switching to a new manufacturing partner becomes increasingly costly for its customers.

Differentiated product design and value added R&D expertise

Strong product design and research and development capability and adaptiveness to new technologies are critical to the Group’s success given the rapidly changing technological environment in the 3C industries.

The Group believes that one of its significant competitive strengths is the quality of its R&D department, currently comprising approximately 2,600 engineers with in-depth experience in the notebook PC and other 3C product design and manufacturing sectors and has established a corporate culture that fosters continuous product innovation. The department is divided into teams assigned to work either on different products or, in the case of notebook PCs, for specific key customers. Customer-specific R&D teams work closely with the Group’s personnel in sales, logistics, manufacturing and quality assurance in order to develop products to best serve the needs of the specific customer and to maintain its manufacturing readiness. The Group believes the effectiveness of the R&D department, due in large part to its organization and the close interaction between it and the Group’s other departments, has enabled the Group to reduce the time it takes to design and bring to market high quality and high performance products using advanced technology at a lower unit manufacturing cost. Such innovative product design capabilities, combined with the Group’s advanced processing technology and extensive production experience, have enabled the Group to react quickly to technological changes and the changing demands for new products and appliances as the end-user environment experiences fundamental changes.

The Group continues to focus on building R&D capabilities for its new businesses and has research teams comprising approximately 160 engineers for display products, approximately 1,200 engineers for mobile communications devices and approximately 100 engineers at the corporate level focusing on the research and development of new technologies, materials and manufacturing processes (which numbers of engineers in each case are included in the approximately 2,600 engineers discussed above).

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Competitive cost structure due to global market leadership, economies of scale and effective cost management

With annual sales of 7.7 million notebook PCs, 3.1 million displays and 11.5 million mobile communications devices in the year ended December 31, 2004, the Group enjoys significant benefits of economies of scale in its design and manufacturing process, customer service and sourcing of raw materials and components. Since many of its products use a substantial number of the same materials and components, the Group has greater leverage in negotiations with key suppliers. The Group is focused on leveraging its scale to maximize purchasing efficiency and has established stringent requirements for its suppliers including competitive prices, outstanding quality and on-time delivery with an aim to further improve its efficiency and reduce its inventory costs. Economies of scale tend to facilitate higher utilization of the Group’s resources, lower its unit cost production and lead to greater purchasing power. The Group believes that these economies of scale enable it to enhance its ability to receive large orders from global customers, remain competitive in the market and further expand its global market share in industry segments with high growth potential.

The Group utilizes its notebook PC, display product and mobile communications device production capabilities in Kunshan and Nanjing, China, to manufacture products at lower unit cost and service the global and Chinese markets more efficiently and to further enhance its ability to ramp up its total production capacity at relatively low unit cost. With more key customers setting up production and marketing facilities in China, the Group shortens its supply chain by shipping its products directly from the Kunshan and Nanjing plants to its key customers’ factories or outlets in China. The Group currently produces all of its notebook PCs and display products and most of its mobile communications devices in China. The Group believes that since China has now joined the World Trade Organization, more leading notebook PC, display product and mobile communications device companies will establish and expand their operations in China and seek partnerships with companies that can effectively supply and provide service in China. In addition, suppliers of key components have also been expanding their production infrastructure in China, thereby allowing the Group to manage its supplies and costs more effectively. The Group will continue to benefit from its low cost manufacturing base in China.

Scalability supports further expansion

The Group believes that consolidation in the notebook PC, display product and mobile communications device industries, coupled with the current increased outsourcing, has driven the leading global vendors to identify partners, such as the Group, who have the ability to scale production rapidly to meet their growing needs. The Group currently has a total monthly capacity to produce approximately 1 million notebook PCs, 0.8 million display products and 2.6 million mobile communications devices. In addition, most of the Group’s manufacturing equipment can be quickly converted to produce different specifications of products as requested by its customers. This enables it to ramp up mass production of new products quickly. In addition, the Group has established strict quality control systems, which are designed to ensure high production efficiency at its production facilities. The Group believes that its significant, flexible and reliable production capacity allows it to assist its customers to respond quickly to end-user demands in an industry in which production introduction times are relatively short and to capture future growth opportunities in the notebook PC, display product and mobile communications device markets.

Customer-focused global logistics and fulfillment network

The Group believes that an efficient, flexible, reliable and customer-focused global logistics and fulfillment network has been and will be an important reason for its success.

The leading notebook PC, display product and mobile communications device vendors have increasingly required ODM suppliers to provide global fulfillment and support networks so that such vendors can respond to market demand quickly and reduce their inventory risk. The Group’s strategy is to offer such clients the ability to ship and service products in Asia, Europe and the United States

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on a timely and cost-effective basis. For notebook PC customers, the Group offers customers the ability to produce notebook PCs on a BTO/CTO basis and to deliver such products to customerdesignated locations within five to seven days of receiving an order. The Group first ships its notebook PCs to these hubs, for rapid shipment within 24 to 48 hours to end-users upon final orders being placed. In addition, the Group has developed a Customer Relationship Management (“CRM”) system through which the Group communicates directly with its customers and customers can access electronically information on its R&D, testing and production progress.

Products

The Company’s operations are organized into three major product lines — notebook PCs, display products and mobile communications devices.

The following table sets out the breakdown of net sales by product line as a percentage of net sales for each of the periods indicated:

	Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,
2002		2003 (in millions) NT$116,442.4 23,091.1 24,471.2 12,991.0	2003		2004 (in millions) NT$166,518.1 25,277.1 24,043.5 13,954.7	2004
(in millions) NT$74,166.0 28,102.9 12,450.9 7,836.0	% 60.5 22.9 10.2 6.4			% 65.8 13.0 13.8 7.4			% 72.5 11.0 10.4 6.1
	100.0	NT$176,995.7		100.0	NT$229,793.4		100.0

The following table sets out the unit sales of notebook PCs, display products and mobile communications devices for each of the periods indicated:

(in thousands) Unit sales: Notebook PCs ...................................................................... Display products ................................................................. Mobile communications devices ..........................................	Year	ended December 31,	ended December 31,
	2002 4,015 4,223 3,151	2003 5,492 3,532 6,590	2004
			7,666 3,080 11,485

The geographic breakdown of the Company’s net sales (according to shipment destinations) for the periods indicated below is as follows:

Year	Year	ended December 31,	ended December 31,	ended December 31,	ended December 31,
2002 26.0 32.2 39.4 2.4		2003 27.1 33.4 37.5 2.0		2004
					36.3 35.6 25.3 2.8
	100.0		100.0		100.0

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Notebook PCs

The Group sells a wide range of notebook PC models that vary as to processor brand and speed, hard drive, memory, type and size of display, number and type of modules and other major configurations. Net sales from notebook PCs constitute the most significant source of the Group’s revenue. Net sales of notebook PCs constituted 60.5%, 65.8% and 72.5% of the Group’s total consolidated net sales for the year ended December 31, 2002, 2003 and 2004, respectively.

Typically, the Group works closely with its ODM/OEM customers to develop models meeting these customers’ specific needs and requests. Notebook PCs sold under individual customers’ brands will often be different in terms of configuration and style, even for substantially similar models. The computer industry recognizes five categories of notebook PCs: mainstream, performance (high-end), portable (light-weight), value (low- to mid-end) and ultra-portable (thin and light). The Group produces each of these types of notebook PCs.

The Group developed the following for incorporation into its notebook PCs: higher-efficiency processors for desktop replacement notebook PCs; the use of aluminium or magnesium/aluminium alloy for a lighter, firmer and more durable notebook shell; wider screens and built-in portable DVD; built-in TV modules and multimedia hardware; built-in wireless local area network (“WLAN”) and dual-band BT wireless functionalities; SD and MS sockets; application of nano-technologies; and the ability to read handwriting.

The Group manufactures bare bone and complete system notebook PCs. For bare bone systems, the Group assembles various parts of the notebook PCs and then ships the assembled products to the customers for such customers to insert other components and accessories. Since 1999, the Group has been manufacturing and delivering increasing numbers of complete system notebook PC, including notebook PCs on a BTO/CTO basis. Under a BTO/CTO arrangement, the Group assembles notebook PCs in its plants according to customers’ specifications and loads requested software applications on the notebook PCs. It then arranges for delivery of the finished product to a distributor or the end user according to the customers’ instructions, generally within five to seven days after receipt of a firm order. Complete notebook PC system orders currently account for more than half of the Group’s shipment volume as this method allows vendors to reduce in-house assembly and packaging costs and inventory levels.

The Group’s OEM customers for notebook PCs consist mainly of major vendors in the global and regional notebook PC markets, including Dell, HP, Toshiba and Acer. Because a small number of vendors dominate the global notebook PC industry, there are a limited number of large customers. As a result, the Group’s sales of notebook PCs are concentrated in sales to a small number of key customers. The Group focuses on a small number of major vendors which enables it to work closely with such vendors in all aspects of design, production and distribution. In addition to working closely with current clients, the Group will continue to target aggressively the remaining top notebook PC vendors.

Display products

The Group manufactures display products such as LCD monitors, CRT monitors, LCD TVs and PDP TVs of different sizes:

LCD monitors

The Group manufactures 15”, 17”, 19” and 20” LCD monitors. The 17” LCD monitors are at present the most popular size.

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The growth of the Group’s LCD monitor business is expected to follow rising global demand for flat panel displays. LCD monitors are increasingly being adopted for desktop PC applications due to the advantages of LCD monitors over CRT monitors such as their compact size, slim profile, low radiation and low power consumption.

● LCD TVs and PDP TVs

The Group manufactures 15”, 17”, 19”, 22”, 23”, 27”, 28” and 32” LCD TVs. The introduction of LCD TVs represents a significant step in the Group’s expansion into the consumer electronics business and the home digital entertainment market. LCD TVs generally produce images which have a sharper resolution than conventional CRT display devices.

In addition, the Group also manufactures a small quantities of 42” high resolution PDP TVs and projectors.

● CRT monitors

The Group primarily manufactures 17” and 19” CRT monitors. The Group expects that the percentage contribution of CRT monitor sales to total sales will continue to decline over the next few years due to the expected continuing increase in sales of other products, particularly LCD monitors and LCD TVs. The Group intends to gradually discontinue production of CRT monitors and utilize its CRT monitor production capacity to produce LCD monitors, LCD TVs and PDP TVs.

The Group sells its display products to customers primarily on an ODM or OEM basis. The Group’s principal display product customers include NEC, Mitsubishi and Acer for LCD monitors, Hitachi and Dell for LCD TVs and Hitachi for PDP TVs.

The Group’s strategy with regard to display products is to continue to add major ODM/OEM customers by leveraging its customer base for notebook PCs and other products. The Group markets to ODM/OEM customers by emphasizing its high quality, high volume manufacturing capabilities as demonstrated in the context of its notebook PCs. By adding new major ODM/OEM customers, the Group plans to increase production volumes, which will lead to reduced unit manufacturing costs. In terms of product mix, the Group’s strategy with respect to LCD monitors and LCD TVs is to increase production volume of large size LCD monitors and TVs so as to capitalize on growing demand and maintain profit margins and focus on the development of high-end LCD monitors and TVs, which are more design intensive and technologically sophisticated and typically carry higher margins.

Mobile communications devices

The Company was one of the first companies in Taiwan to develop and manufacture both GSM/GPRS and CDMA mobile handsets. The Group manufactures and sells GSM/GPRS and CDMA mobile handsets, PDAs and smart phones and, as of the date of this Offering Circular, has a 48.2% interest in CCI, which manufactures and sells GSM and GPRS mobile handsets.

The Group’s mobile communications products include:

● GSM/GPRS handsets

The Group develops and manufactures GSM/GPRS mobile handsets both as part of its Personal Mobile Computing and Communications, or “PMCC”, division and through CCI, a consolidated subsidiary. The Company focuses on the development and manufacture of GSM and GPRS handsets for customers that use Agere Systems (formerly a business unit of Lucent) solutions, while CCI focuses on the development and manufacture of GSM and GPRS handsets for customers that use Texas Instruments solutions.

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● CDMA handsets

The Company’s CDMA handset business is also part of its PMCC division. In the fourth quarter of 2001, the Company commenced commercial manufacture and shipment of CDMA handsets utilizing CDMA technology from Qualcomm.

● PDAs

The Group designs and manufactures a wide range of PDAs which use Microsoft’s Pocket PC operating system and Intel’s processors. These products range from entry-level devices primarily used as organizers to advanced handheld computing devices with WiFi, Bluetooth and GPS functions. Also, the Group has developed 3G solutions for its wireless PDAs.

● Smart Phones

The Group produces various models of “smart phones” combining GSM/GPRS with WiFi, Bluetooth and GPS functions, which provide significant data capabilities in addition to the normal functions of a mobile phone. In addition, smart phones enable users to download applications, music, video and games.

The Groups manufactures and sells its mobile communication products on an ODM basis. Its mobile handset and smart phone and PDA customers include Motorola and HP.

The Group aims to leverage its technological and manufacturing expertise as well as its existing relationships with suppliers and customers in order to become a significant manufacturer of mobile handsets and PDAs. As personal communications and computing technologies converge, the growing trend is to combine various computing, communications and multi-media features and functions into a single product. To take advantage of future demand for such products, the Group intends to enhance product development by investing in R&D. In anticipation of the further convergence of the instant sound and image data, multi-media and communication functions of such products, the Group intends to focus on the development of 3G handsets and 3G PDA phones and other applications (including digital entertainment products which allow users to enjoy a broad range of digital entertainment experiences and to enjoy their digital content through hand-held computing devices).

In order to continue to increase its global market share, the Group will continue to develop low-to-high end GSM/GPRS and CDMA handset models for distribution in emerging markets such as China, India and Central and South America. The Group is also preparing itself for the migration to 3G technology with the aim of capturing new business opportunities and has developed 3G mobile handset models which are undergoing field tests and interfaces with customers.

Sales and marketing

The Group is organized into business units along product lines, with the Computer Business Unit for notebook PCs, the Display Business Unit for display products and the PMCC division for mobile communications devices. Each of these business units has sales and marketing teams focusing on the unit’s products. Sales and marketing personnel are further divided into smaller groups dedicated to each of the Group’s major customers. Each dedicated customer group is headed by an account manager who is primarily responsible for the Group’s relationship with that specific customer.

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The Group focuses its sales and marketing activities on a small number of large, global customers, with whom it seeks to build close relationships. The sales and marketing division endeavors both to maintain and to strengthen relationships with the Group’s current customers and to expand its business by attracting new clients and procuring larger, more diverse orders from existing clients. With respect to existing clients, the account manager responsible for a specific client will work closely both with the customer and with employees in the Group’s other divisions, such as R&D and manufacturing, in order to develop products tailored to meet that customer’s specific needs. The Group believes that such contact between its staff and that of its clients further strengthens its customer relationships.

With respect to attracting new customers, the Group targets first-tier companies with whom it is not currently doing business. To aid in the process of securing purchase orders from new customers, the Group will, often in response to a request for a quotation, set up a team dedicated to a specific potential client.

Due to the competitiveness of the markets for the Group’s products, long-term contracts are not typical. The Company does, however, enter into arrangements with customers whereby, for planning purposes, such customers supply it with non-binding rolling forecasts, which form the basis of purchase orders at a later point in time. The establishment of distribution hubs in Asia, Europe and the United States for notebook PCs and display products enables customers to shorten the time between firm orders and delivery. Substantially all customer payments are made in US dollars.

The Group makes available to each of its major customers the CRM system to maintain an on-going interactive channel of communication between the customer and the Group. The CRM system is an internal information system interfaced with the database of the customer, through which the customer can monitor each stage of the progress of products from design to shipping. This customer-engagement tool includes many protocols such as forecast, order, order confirmation, change of order, order change confirmation and shipment forecast. The Group believes its CRM system provides a convenient way for customers to interact with it and is an important element in achieving customer satisfaction.

Distribution and after-sales support

The Group ships most of its products either directly from its factories to customers or, in the case some of its notebook PCs and displays, through hubs. In addition, notebook PC orders on a BTO/CTO basis are shipped to distributors or end-users, typically within five to seven days after a firm order is received. Other orders are delivered according to vendor specification.

Although the Group does not intend to establish manufacturing sites in regions where its major customers are located, its policy is to maintain after-sales service centers in strategic locations. The Group currently has after-sales service centers in Asia, Europe and the United States. These after-sales service centers serve as its main point of contact with the Group’s customers who purchase warranty from the Group and are primarily maintained by the Group. In most cases where the Group outsources such after-sales services to third-party service providers, the Group supplies spare parts to such service providers. The centers provide direct repair services to customers, thereby avoiding the expense and delay of shipping to Taiwan and eliminating the need for customers to establish their own service centers.

Raw materials and components

Input components generally comprise the largest single cost for all of the Group’s products and accounted for over 95% of the total consolidated cost of goods sold for the years ended December 31, 2002, 2003 and 2004. The Group’s ability to control supplier relationships is a key competitive advantage and is critical to maintaining a competitive margin structure. This advantage is largely dependent on the Group’s production volume and purchasing power.

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The Group focuses on managing its raw materials and components to minimize costs and potential disruption to its business.

The Group has implemented a supply chain management (“SCM”) system to allow closer communication with its suppliers. Similar to the CRM system, the SCM system is an information system used by the Group to monitor the supply of components and raw materials and manage its inventory and control costs.

To ensure a stable supply of input components at competitive prices, the Group generally sources each major input component from at least two to three different suppliers. The Group generally maintains relationships with a number of suppliers, so as to retain maximum flexibility and pricing advantages. However, the Group is dependent upon Intel as supplier of processors and static random assess memory (“SRAM”) and Microsoft for various software products. In selecting suppliers, the Group considers the supplier’s production capacity and ability to commit such capacity, technological capabilities and capacity to meet cost and quality requirements.

The Group acquires the majority of its raw materials and components from suppliers on the approved vendor lists, or AVLs, of its key customers. Typically, the prices for such raw materials and components will be pre-agreed between its key customers and their AVLs and will be comparable to, or better than, prices that it would be able to obtain from other third-party suppliers.

The Group does not enter into long-term supply contracts with its suppliers (whether AVLs or third-party suppliers), but provides many of them with 12-week rolling forecasts. The Group endeavors to maintain a flexible policy on raw materials and components inventory in order to balance the benefits of having a ready supply of key components through bulk purchasing against the risks of possible inventory obsolescence.

For the year ended December 31, 2004, approximately 94% of the Group’s total raw materials purchase cost was denominated in US dollars and the remaining portion was primarily denominated in Yen, RMB and NT dollars.

The table below sets forth the major raw materials and components used in the Group’s production processes:

Product	Raw materials and components
Notebook PCs ..................................................... Display products ................................................. Mobile communications devices .........................	CPUs, LCD panels, HDDs, optical disk drives (“ODDs”), memory and batteries CRTs, LCD panels, PDPs and passive components such as chip capacitors and resistors chip sets, passive components, batteries, LCD panels, printed circuit boards and memory

Research and development

The industry sectors in which the Group operates are characterized by rapid technological advances, changes in customer requirements and the frequent introduction of new products and enhancements. The Group’s research and development policy for the past three years has been to stay ahead of the market by developing products in anticipation of future customer demand.

The Group’s research and development efforts are focused on the following areas:

the design and development of new products, including collaboration with its key customers, who are industry leaders;
devising practical manufacturing solutions for its customers; and

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the design and development of new production processes to improve production efficiency and reduce overall manufacturing costs.

The Group currently has an R&D staff consisting of 2,600 engineers organized into teams based on product types. The main activities of the R&D engineers are product initialization and manufacturing readiness.

The Group’s relationships with its customers begin at the R&D and design stage. At each stage of product design and development, the engineers work closely with the sales and marketing personnel and customers and interact with them via the CRM system with respect to specifications, schedule, prices and manufacturing readiness. R&D personnel conduct phase reviews and a series of tests for each new product. The engineers participate in weekly telephone calls with customers and conduct regular customer visits. The objective is to design high quality products, measured by costeffectiveness and ease of manufacturing.

Functional directors and knowledge managers supervise and coordinate the work of different R&D teams across the five function areas: sales and marketing, logistics, R&D, manufacturing and quality assurance. Two project managers are assigned to each project and are each responsible for the development and manufacturing aspects of the project.

The Group also has developed cost-effective and quality-controlled design and manufacturing processes. The Six Sigma program the Group has developed is a comprehensive management program which encompasses a broad range of its operating functions, including R&D, design, manufacturing and sales. Among other things, the Six Sigma program is used to enhance its design capability by matching the Group’s R&D development work with a high quality manufacturing process. The Group also implemented the ISPD, an integrated product development system, to enhance the on-going review and evaluation of product design and construct a comprehensive product design database, with the aim of improving its product design capability and efficiency. These initiatives have further streamlined the Group’s design and manufacturing processes and reduced unit manufacturing costs.

The Group’s spending on research and development, on a consolidated basis, increased 11.9% to NT$2,946.0 million in the year ended December 31, 2004, from NT$2,631.6 million in the year ended December 31, 2003.

Notebook PCs

The Group’s current R&D activities relating to notebook PCs are focused mainly on enhancing and improving its range of products. There are currently six core R&D teams, each dedicated to one of its key ODM/OEM notebook PC customers. The R&D team also maintains direct communications with other industry leaders such as Intel and Microsoft, and participates in various standard bodies such as universal serial bus (“USB”), IEEE1394, 802.11a.b.n. and Bluetooth. Recent notebook PC R&D initiatives have included the development of a complete line of entertainment notebook PCs and home media center PCs with improved wireless functionalities, internet accessibility, data exchange services, security and multimedia hardware. Other technologies such as flat-screen touch panel computers and wireless home servers are also part of the R&D program. The Group has an R&D staff of approximately 1,200 employees working on notebook PCs.

Knowledge management is another key area for the Group’s R&D group. The Group focuses on knowledge collection, sorting and sharing with the aim of improving efficiency among different core R&D teams and achieving improved results.

Display products

The Group maintains an R&D engineering team of approximately 160 employees that focuses on display products. The R&D team collects market information from the Company’s customers and suppliers and develops new products based on customers’ requirements, desired specifications and features.

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The Group currently focuses on the development of competitively priced and environmentally friendly 23” and 24” LCD monitors, 37” to 42” LCD TVs, 50” and 55” PDP TVs and high-brightness and high resolution front projectors.

Mobile communications devices

The Group has an R&D engineering team of 1,200 R&D personnel that focuses on mobile communications devices (including the R&D engineers of CCI and Vacom Wireless, Inc. (“VACOM”), the Company’s subsidiary in Korea which focuses on CDMA technology). The Group currently has its own GSM/GPRS R&D team consisting of 900 engineers, and VACOM, the R&D center for its CDMA handsets, currently employs 80 engineers. The Group’s mobile handset research efforts are focused on preparation for migration to 3G technology products such as the universal mobile telecommunications system (“UMTS”) handsets and voice over internet protocol (“VoIP”) handsets. The Company’s R&D program also includes a wide range of high-color GSM, GPRS and CDMA handset models with GPS, TV, multi-media and camera functions.

The Group’s R&D activities are also focused on PDAs and embedded wireless communications and digital media system devices.

The Group currently has an R&D staff of 100 employees at the corporate level working on non-business unit specific new technologies, raw materials and manufacturing solutions.

Competition

The notebook PC, display product and wireless communications device ODM industry is highly competitive. The Group believes that the principal competitive factors in the industry are:

technological capabilities;
service offerings and product quality;
geographic location and coverage;
reliability in meeting product delivery schedules;
flexibility and timeliness in responding to design and schedule changes; and
pricing.

The Group’s principal competitors include contract manufacturers from Taiwan, as well as manufacturers from Japan and Korea. It also faces increasing challenges from PRC competitors and overseas competitors who relocate to the PRC to take advantage of low manufacturing costs. The Group has, both in the past and recently, experienced price and margin pressures due to intense competition.

Notebook PCs and display products

The markets for notebook PCs and display products are highly competitive. Competition mainly comes from other Taiwanese manufacturers, and the Group has experienced pressure on prices and margins.

As the Group focuses primarily on ODM/OEM customers, it seeks to offer superior design, products and service to its existing customers while also exploring opportunities to develop new relationships with other ODM/OEM customers. The Group believes it will be able to maintain and improve its competitive position for a number of reasons. The Group’s management team has been in the ODM and OEM business for a considerable period, and has acquired extensive experience and understanding of the development of each of its major products. Unlike some competitors, the Group

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considers centralized manufacturing (having its manufacturing plants in a restricted number of locations) a more effective way of managing production than establishing worldwide manufacturing capabilities. Resources (including capital and manpower) saved by centralized manufacturing are devoted to improving the quality of its products. However, to better serve customers, the Group has established a number of after-sales hubs and service centers in the regions where its customers are located. The Group believes that centralized manufacturing, combined with regional hubs and service centers, enables it to maintain quality while providing enhanced service close to its customers.

Mobile communications devices

The Group is one of the first companies in Taiwan to manufacture both GSM/GPRS and CDMA handsets. Its goal is to become an ODM/OEM manufacturing partner of major mobile handset vendors. In Taiwan, there are several manufacturers of handsets, including those which manufacture handsets on an ODM/OEM basis. These companies are the Group’s primary competitors in the market for ODM/OEM manufacturing of mobile handsets.

Competition in the mobile handset market is intense. The Group’s mobile handset businesses are dependent on the success and growth of the relevant technology standard, and the growth in outsourcing of manufacturing by major handset vendors. While the Group believes that its R&D efforts, such as the establishment of VACOM as an R&D center in Korea, and the access to advanced technology through its investment in Toppoly, will provide a competitive advantage over certain other entrants, there can be no assurance that other manufacturers in Taiwan or abroad may not be able to establish joint ventures or alliances which will give them access to advanced technology and customer orders. The Group plans to continue to focus R&D on mobile handset technology as well as to leverage its customer base in other product lines to cultivate new clients for its mobile handsets.

Production facilities

The Group currently has production facilities operating in Taiwan and China. For the year ended December 31, 2004, the Group’s production facilities in the PRC (comprising a total of seven factories) accounted for over 95% of its total output by value, with the remaining production facilities in Taiwan.

The Group currently has five manufacturing plants in Kunshan, Jiangsu Province, with an aggregate gross floor area of approximately 260,000 sq.m., for manufacturing notebook PCs and display products. The remaining two plants in Nanjing, Jiangsu Province, with an aggregate gross floor area of approximately 55,000 sq.m., are for manufacturing mobile handsets. The Group currently has a small production facility in Pincheng, Taoyuan County, Taiwan, for production of mobile handsets and PDAs. The plants have a combined monthly production capacity of approximately 1 million notebook PCs, 0.8 million display products and 2.6 million mobile communications devices.

The Group believes that its existing production facilities, together with its currently planned expansions, should provide it with sufficient capacity to meet the expected demand for its products during the remainder of the year ending December 31, 2005 and the year ending December 31, 2006.

Quality control

The Group places special emphasis on quality control, which it considers to be one of the keys to succeed in the computer industry. The Group employs quality control procedures at every critical manufacturing stage and carries out various tests on its sites. These tests include an engineering verification test, a development verification test and a production verification test. These tests enforce internal standards set by the Group for its products and are conducted by a team of staff dedicated to quality management. For customers having their own specifications, the Group will also carry out tests as prescribed by such customers. The Group also receives feedback reports from customers on a weekly basis. On-site checks are also carried out by the Group on its major suppliers’ facilities.

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The notebook PCs that the Group has developed and manufactured for its customers have received numerous awards. Existing manufacturing facilities in both Taiwan and China have received ISO9001 and ISO14001 certification.

Trademarks, patents and licenses

As of December 31, 2004, the Group held approximately 700 patents in respect of its products, in and outside of Taiwan. The Group believes that it is important to develop and patent its designs and special features in its products and may be able to license out some of the more important patents in the future.

In May 2002, registration of the “Compal” trademark with the US Patent and Trademark Office became effective.

As of December 31, 2004, the Group has in effect the following significant license agreements.

Licensor	Licensed technology Quantitative memory Basic Input/ Output Systems (“BIOS”) Specified CDMA mobile phone technologies Specified GSM/GPRS technologies Specified Pocket PC technologies Windows CE in Pocket PCs Specified CDMA technologies Specified CRT and LCD monitor technologies i-250 platform and keyboard input software and hardware for use in mobile phones Mobile phone software and hardware for network and communication Mobile software	Term
Compal Electronics, Inc.: Phoenix Technologies, Ltd. Qualcomm Incorporated Agere Systems Inc. (formerly Lucent Technologies Inc.) Accelent Systems Inc. Microsoft Corporation Vacom Hitachi, Ltd. Compal Communications, Inc.: Motorola Openwave Magic 4		For specified quantity For specified quantity October 2003 — October 2006 For specified quantity For specified quantity June 2003 — May 2006 September 2003 — September 2008 July 2002 — July 2007 Annual (the latest amendment was due June 2005) July 2002 — June 2007

Environmental protection

The Group is mainly engaged in the assembly of products which are generally not associated with environmental problems. The Group has not been subject to any material fines or actions involving non-compliance with environmental regulations of Taiwan or China and believes that it is in compliance in all material respects with relevant environmental protection regulations.

Litigation and legal issues

The Group is party to certain lawsuits in the ordinary course of business. The Group does not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on its financial position, results of operations or cash flow.

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As is the case with many companies in the IT industry, the Company, including some of its subsidiaries, investee companies and affiliates, has from time to time received letters from third parties alleging infringement of intellectual property rights. Some of these letters have requested royalty payments based on the sales of products produced by the Group. The Group evaluates each claim related to its products and, if appropriate, seek a license to use the protected technology.

On October 13, 2000, Samsung Electronics Co., Ltd., initiated a patent infringement action in the United States District Court for the Northern District of California against the Company and certain other notebook PC manufacturers in Taiwan. The asserted patents purport to cover various aspects of notebook PC systems, including an easily-upgradable CPU board, a particular cache memory system, a counter for refreshing DRAMs using the system clock, a potential power-saving feature related to modems, certain PC facsimile devices, and use of special keys for certain applications. Samsung has indicated that it will likely seek the payment of damages or reasonable royalties if the action is successful. The Company submitted a preliminary response to the court in December 2000. Samsung has subsequently dropped the claims relating to five out of the six patents which the Company was originally alleged to have infringed. The defendants, including the Company, dispute the claims and are pursuing a defense of the action. The Company believes that even if it is required to pay royalties or damages, such payments would not have a material adverse effect on its business, financial condition and results of operations.

On April 6, 2001, LG Electronics Inc., filed a complaint for patent infringement against the Company, two of the Company’s subsidiaries, Bizcom Electronics, Inc. and Sceptre Technologies, Inc., and a number of other companies in the United States District Court for the Northern District of California. The complaint alleges infringement of five patents relating to various aspects of notebook PC systems and requests relief in the form of damages and injunctions enjoining future infringement. On January 19, 2005, the District Court entered a judgment in favor of the Company. LG Electronics subsequently filed an appeal with the Federal Circuit Court of Appeal. The Company is pursuing a defense of this appeal. The Company believes that even if it is required to pay royalties or damages, such payments or injunctions would not have a material adverse effect on the Company’s business, financial condition and results of operations.

On July 24, 2003, Audiovox Communication Corp. (“Audiovox”), filed an arbitration claim against the Company with the International Center for Dispute Resolution of the American Arbitration Association. Audiovox alleges that the Company has breached the exclusivity provision of a supply agreement with Audiovox by selling CDMA mobile phones to Bell South International, Inc., during the term of the supply agreement. Audiovox seeks lost profits or “reasonable royalty” against the Company. The Company has engaged counsel to investigate the merits of this claim. The eventual outcome of this case is uncertain. However, the Company believes that even if the Company were required to pay royalties or damages, such payment would not have any material adverse effect on the Company’s business, financial condition or results of operations.

On January 19, 2005, Guardian Industries Corp. initiated a patent infringement case in the United States Delaware courts against the Company and 22 other Taiwanese and US manufacturers. The claims relate to infringement of patents related to LCD display designs and seek damages. The Company is investigating the merits of this case but does not believe an adverse resolution would have a material adverse effect on its financial condition, results of operations or its prospects.

The Company is not and has not been involved in, and the Company is not aware of, any other material litigation or proceedings or legal issues the outcome of which might, individually or taken as a whole, adversely affect its financial condition or results of operations.

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Insurance

The Group has insurance policies primarily covering risks of fire and damage to machinery, land and sea delivery, construction damage and business disruption, which it considers adequate. Fire insurance includes coverage of risks from explosions, earthquakes and flooding. The Group has also purchased transportation insurance coverage for finished goods delivered as part of its global logistics delivery network. The Group considers such insurance coverage to be adequate and in accordance with customary industry practice in the relevant locations.

Employees

As of December 31, 2004, the Group had approximately 20,000 employees. The workforce is not unionized and to date the Group has not experienced any labor disputes. The Group believes that it maintains good relationships with its employees. In addition, the Company has a mentoring system to assist its employees, which it believes contributes towards establishing good employer-employee relationships.

Employee salaries are reviewed on an annual basis. Salaries are adjusted based on industry standards, inflation and individual performance. The Group normally pays annual bonuses to its employees equivalent to an average of two months’ salary. In addition, the Articles of Incorporation provide that the Group’s employees are entitled to employee bonuses out of the distributable earnings which may be paid in cash or stock. See “Description of Shares”. In the year ended December 31, 2004, the Company issued approximately 40.7 million Shares as employee stock bonuses. Under ROC GAAP, employee stock bonuses are accounted for as a transfer from distributable earnings to common shares in stockholders’ equity. The amount allocated from distributable earnings is calculated at a par value of NT$10 per Share, notwithstanding that the market value of the Shares on the date of declaration and distribution of employee stock bonuses has been significantly higher than NT$10 per Share. The Group is not required to and does not charge the market value of the employee stock bonuses to employee compensation expense. ROC law requires that employees be given pre-emptive rights to subscribe to between 10% and 15% of any of the Company’s rights issues or share offerings. The Group does not have any share option schemes. See “Risk Factors — Risks Relating to Ownership of the Bonds, the GDSs and the Shares — Employee stock bonuses may have a diluting effect on the holdings and associated rights of the holders with respect to the Shares and the GDSs”.

The Company maintains a pension plan for its employees in accordance with the ROC Labor Standards Law. Pursuant to the ROC’s Rules for the Allocation and Management of Employees’ Retirement Fund, or the ROC Labor Rules, an employer has an obligation to contribute, on a monthly basis, an amount between 2% and 15% of an employee’s total monthly wage payment to the retirement fund of its pension plan. The applicable rate of contribution under the ROC Labor Rules is determined by taking into account the seniority of employees, the wage structure, the employee turnover rate during the preceding five years, the number of employees who will retire over the succeeding five years and the amount of funds that were in its retirement account prior to the adoption of the ROC Labor Rules. The contribution rate used by the Company, determined in accordance with the ROC Labor Rules and approved by the relevant government authorities, was 5% in each of the last three years. As of December 31, 2004, the retirement fund under the Company’s pension plan had approximately NT$632.8 million (US$20.0 million), including earned interest, deposited in the name of the Compal Employees’ Retirement Fund Committee with the Central Trust of China. See “Summary of significant differences between ROC GAAP and US GAAP” for a description of material differences between accounting for pensions under ROC GAAP and US GAAP. On June 30, 2004, a new law governing pension funds was promulgated, effective July 1, 2005. Under the new law, the Company has an obligation to contribute on a monthly basis an amount equal to at least 6% of each employee’s monthly wage into an account in each employee’s individual name maintained with the Bureau of Labor Insurance. As the pension fund will be deposited in each employee’s individual account, such pension fund is portable by each employee. Employees that joined us on or after July 1, 2005, have to enroll in the new plan, while those who joined the Company before that date may choose within the next five years to enroll in either the new one or the old one. For those employees

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who choose to enroll in the new plan and to keep certain benefits under the old plan, in addition to the contribution of at least 6% of each employee’s monthly wage payment as required by the new law, the Company must also deposit a certain percentage of these employees’ total monthly wages based on actuarial calculations into its pension fund account maintained with Central Trust of China as required by the current law for the next five years after July 1, 2005. Alternatively, the Company may also provide private pension insurance programs to employees upon satisfying certain requirements under the New law. In that case, the Company will need to pay premiums at an amount not lower than 6% of the employees’ monthly wages. It also provides its employees with benefits other than wages and bonuses such as food and transportation to work.

In order to sustain its competitive advantage, the Company’s human resources team has developed the core competencies model based on its corporate strategy, and implemented an annual training program to develop various skills of its employees, including problem analysis, quality control, creative thinking, teamwork, customer relationship management and strategic thinking. The goal of such training is to align the Company’s employees’ development with its corporate strategies.

In addition to complying with the ROC government’s compulsory insurance policy of providing labor and national health insurance, the Company provides additional benefits to its employees, such as accident and medical insurance and, in some cases, accommodation.

Subsidiaries and associated companies

As of December 31, 2004, the Company held direct or indirect investments of 10% or more of the paid-in capital of the following principal subsidiaries and associated companies:

Name and registered office of subsidiary/associated company	Main business Manufacture of CD-RW, Combo and DVD dual drivers Printed circuit board manufacturing Mask Maintenance and wholesale of notebook PCs and other electronic products	The Company’s effective equity interest 37.66% 32.44% 11.36% 50.00%	Jurisdiction of incorporation
Accesstek Inc. 10F-1, No. 285, Sec 2, Guang Fu Road, Hsinchu (300), Taiwan, ROC Allied Circuit Co., Ltd. 128 Kung Erh Rd., Wu Lin Village, Lung Tan, Taoyuan County, Taiwan, ROC Allied Integrated Patterning Corporation No. 6, Technology Road 5, Science Based Industrial Park, Hsinchu, Taiwan, ROC Beijing Compower Xuntong Electronic Technology Co., Ltd. Beijing 3F, DSP Building, 17 Zhongguancun Rd., Haidian Region, Beijing 100080, China			Taiwan Taiwan Taiwan PRC

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The Company’s effective Name and registered office of equity Jurisdiction of subsidiary/associated company Main business interest incorporation Bizcom Electronics, Inc. Maintenance and 100.00% U.S.A. 881 Wrigley Way, wholesale of notebook Miliptas, CA 95035, U.S.A. PCs C&C Laboratory Co., Ltd. EMI testing 26.22% Taiwan No. 24, Alley 27, Lane 358, Hsinchu Road 1, Neihu Zone, Taipei, Taiwan, ROC Cal-Comp Electronics (Thailand) Manufacture of 11.18% Thailand Public Company Limited calculators, facsimile 191/54, 191/57 18th Fl., CTI Tower, machines, cordless Rachadapisek Rd., phones, printers, CDKlongtoey, Bangkok 10110, Roms and other types of Thailand electronic products Compal Communications Inc. Design, manufacture and 50.28%[(1)] Taiwan 7th Fl, 319 Pa-Teh Rd., sale of GSM and GPRS Sec. 4, Taipei 105, handsets Taiwan, ROC Compal Electronics (China) Co., Ltd. Manufacture and sale of 100.00% PRC 988 Tung Feng East Rd., CRT monitors Economic & Technical Development Zone, Kunshan, Jiangsu, China Compal Electronics Holding Ltd. Holding company 100.00% British Virgin Tropic Isle Building, P.O. Box 438, Islands Road Town, Tortola, British Virgin Islands Compal Electronics International Ltd. Holding company 100.00% British Virgin Tropic Isle Building, P.O. Box 438, Islands Road Town, Tortola, British Virgin Islands Compal Electronics Technology Manufacture and sale of 100.00% PRC (Kunshan) notebook PCs and PDAs Co. Ltd. The Third Street Kunshan Export Processing Zone, Kunshan, Jiangsu, China

(1) As of the date of this Offering Circular, the Group’s interest in CCI was 48.2%.

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Name and registered office of subsidiary/associated company	Main business Maintenance and wholesale of notebook PCs and monitors Maintenance of notebook PCs Holding company Manufacture of notebook PCs Manufacture of notebook PCs Holding company Wholesale of monitors Manufacture and sale of LCD TVs Holding company	The Company’s effective equity interest 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 50.00%	Jurisdiction of incorporation
Compal Europe B.V. Hoeksteen 149, 2132 MX, Hoofddorp, Netherlands Compal Europe (U.K.) Ltd. Unit A, Centrepoint, Marshall Stevens Way, Westinghouse Road, Manchester, Trafford Park, M17 1PP, UK Compal Holding Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands Compal Information (Kunshan) Co., Ltd. The Third Street Kunshan Export Processing Zone, Kunshan, Jiangsu, China Compal Information Technology (Kunshan) Co., Ltd. The Third Street Kunshan Export Processing Zone, Kunshan, Jiangsu, China Compal International Holding Co. Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands Compal International Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands Compal Optoelectronics (Kunshan) Co., Ltd. 988 Tung Feng East Rd., Economic & Technical Development Zone, Kunshan, Jiangsu, China Compower International Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands			The Netherlands U.K. British Virgin Islands PRC PRC British Virgin Islands British Virgin Islands PRC British Virgin Islands

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Name and registered office of subsidiary/associated company	Main business Retail of office equipment, information software, import and export Manufacture of ceramic substrate chip diodes Application service provider Design and manufacture of LCD display and display modules Venture capital Venture capital IC foundry Investment Wholesale of notebook PCs and monitors	The Company’s effective equity interest 10.00% 31.67% 11.76% 10.88% 10.00% 15.63% 15.38% 41.12% 100.00%	Jurisdiction of incorporation
Compower International Technology Co., Ltd. 11th Fl., 99 Nan-King E. Rd., Sec. 5, Taipei 105, Taiwan, ROC Crownpo Technology Inc. 8F, No. 99, Sec. 5, Nanjing E Rd., Taipei, Taiwan, ROC eASPNet Inc. One Capital Place, P.O. Box 1787, Grand Cayman, Cayman Islands, British West Indies Emerging Display Technologies No. 5, Central 1st Road, K.E.P.Z., Kaohsiung, Taiwan, ROC Emerging Technology Venture Capital Corp. 13F-1, No. 128, Sec. 3, Ming Sheng E. Rd., Taipei, Taiwan, ROC FR Venture Capital Inc. 1317, 563, Chung Hsiao E. Rd., Sec. 4, Taipei, Taiwan, ROC G-Advanced Semiconductor Tech. Corp. B2, No 8 Tung Hsing Rd., Taipei 105, Taiwan, ROC Gallery Management Limited The Lake Building 1st Floor, Wickhams Cay 1, Road Town, Tortola, British Virgin Islands Gempal Technology Corp. No. 581 Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC			Taiwan Taiwan Cayman Islands Taiwan Taiwan Taiwan Taiwan British Virgin Islands Taiwan

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Name and registered office of subsidiary/associated company	Main business Wholesale of notebook PCs and monitors Wholesale of notebook PCs and monitors Venture capital Smart card selling and testing Holding company Holding company Holding company Design and manufacture of consumer electronics, communications and PC peripherals products Manufacture and sale of notebook PCs Venture capital	The Company’s effective equity interest 100.00% 100.00% 10.00% 42.21% 100.00% 100.00% 100.00% 10.20% 100.00% 14.93%	Jurisdiction of incorporation
Hong Ji Capital Co., Ltd. No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC Hong Chin Investment Co., Ltd. No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC Hua Cheng Venture Capital Corp. 17th-1 Floor, 105 Tun Hwa S. Rd., Sec. 2, Taipei, Taiwan, ROC International Semiconductor Technology Ltd. No. 5, South 6th Rd., K.E.P.Z. Kaohsiung, Taiwan, ROC Just International (Singapore) Pte. Ltd. 138 Robinson Road #17-00, Hong Leong Centre, Singapore 068906 Just International Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands Kadia Management Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands Kinpo Electronics, Inc. 10F, No 99, Nan-King E. Rd., Sec. 5, Taipei, Taiwan, ROC Kunshan Botai Electronics Co. Ltd. 998 Tung Feng East Road, Economic & Technical Development Zone, Kunshan, Jiangsu, China Landport Capital Investment Company 8F, No. 248 Nan-King E. Rd., Sec. 3, Taipei 105, Taiwan, ROC			Taiwan Taiwan Taiwan Taiwan Singapore British Virgin Islands British Virgin Islands Taiwan PRC Taiwan

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Name and registered office of subsidiary/associated company	Main business Holding company Manufacture and sale of chip resistors, ceramic capacitors and chip diodes Venture capital Manufacture of tablet PCs Wholesale of notebook PCs and monitors Wholesale of notebook PCs, mobile handsets and PDAs IC design Fixed line business Maintenance and wholesale of notebook PCs and monitors	The Company’s effective equity interest 50.00% 20.00% 22.55% 13.57% 100.00% 100.00% 16.25% 99.97% 60.00%	Jurisdiction of incorporation
Lipo Holding Co., Ltd. 4th Fl., Harbour Centre, P.O. Box 613, George Town, Grand Cayman, Cayman Islands, British West Indies Liz Electronics (Kunshan) Co., Ltd. No. 989, Hanpu Road, Chengbei, Kunshan, Jiangsu, China Maxima Venture Co., Ltd. 10 Floor, No. 89, Song Ren Road, Taipei 110, Taiwan, ROC Motion Computing Inc. 9433 Bee Caves Road, Building 1, Suite 250, Austin, TX 78733 U.S.A. Panpal Technology Corp. No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC Prospect Fortune Group Ltd. Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands RF Integrated Corp. 15375 Barranca Parkway, Suite B-109, Irvine, CA 92618, U.S.A. SaveCom InfoCom Inc. 7th Floor, 319 Pa-Teh Rd., Sec. 4, Taipei 105, Taiwan, ROC Sceptre Industries Inc. 16800 East Gale Ave., City of Industry, CA 91745 U.S.A.			Cayman Islands PRC Taiwan U.S.A. Taiwan British Virgin Islands U.S.A. Taiwan U.S.A.

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Name and registered office of subsidiary/associated company	Main business Manufactured driver ICs, reel-to-reel flex and IC substrates Venture capital Venture capital Design, manufacture and sale of touch panels Third generation mobile phone and value added services Manufacture and sale of LTPS TFT-LCD panels Develop, manufacture and market OLEDs Research and development on electric and communications apparatus IC design house	The Company’s effective equity interest 49.83% 15.00% 15.00% 47.29% 19.00% 32.82% 17.28% 83.23% 59.69%	Jurisdiction of incorporation
Simpal Electronics Co., Ltd. No. 5, South 6th Rd., K.E.P.Z., Kaohsiung, Taiwan, ROC Softchina Venture Capital Corp. 1317-2, No. 50, Sec. 1, Chung Hsiao W. Rd., Taipei 100, Taiwan, ROC Softchina (II) VC Corp. 1317-2, No. 50, Sec. 1, Chung Hsiao W. Rd., Taipei 100, Taiwan, ROC Swenc Technology Co. Ltd. 617, No. 26 Wen Hua Road, Hsin Chu Industrial Park, Hsinchu Hsien 303, Taiwan, ROC VIBO Telecom Inc. 5th Fl., 36, Lan 358, Juikung Rd., Neihu, Taipei 114, Taiwan, ROC Toppoly Optoelectronics Corp. 517, No. 18, Creation Road I, Science-Based Industrial Park, Hsinchu, Taiwan, ROC Univision Technology Inc. 8, Kebei Rd., 2, Science-Based Industrial Park, Chu-Nan, Taiwan, ROC Vacom Wireless Inc. 5-68, Yung Chang B/D, 250, Choul San-3 Dong, Kwang Meong City, Kyunggi-Do, Korea Wisepal Technology, Inc. 2F, No. 2, Kedong 3rd Road, Jhunan Science Park, Miao-Li County Taiwan (350), ROC			Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Taiwan Korea Taiwan

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Description of Consolidated Subsidiaries

Panpal Technology Corp. was incorporated on August 20, 1997, with a paid-in capital of NT$5,000.0 million as of December 31, 2004. The registered office for Panpal is at No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC. Its principal activities consist of investing in businesses relating to the PC industry. As of December 31, 2004, the Company owned a 100.00% stake in Panpal. As of and for the year ended December 31, 2004, Panpal had total assets, revenues and net profit of approximately NT$5,535 million, NT$0 and NT$126 million, respectively. The revenue for the year ended December 31, 2004 was NT$0.0 because from the year ended December 31, 2001 Panpal is purely a holding company with no operating revenue, whereas prior to 2001, Panpal was also a trading company. All the shares in Panpal have been fully paid up. Panpal paid cash dividends of NT$73 million for the year ended December 31, 2004. There are no intracompany loans between Panpal and the Company other than the loans outstanding owed by Gempal to Panpal described below under “— Related Party Transactions — Transactions with other related parties”.

Just International Ltd. was incorporated on August 25, 1992, with a paid-in capital of US$48.0 million as of December 31, 2004. The registered office for Just is at Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands. Its principal activities consist of acting as a holding company. As of December 31, 2004, the Company owned a 100.0% stake in Just. As of and for the year ended December 31, 2004, Just had total assets, revenues and net profits of approximately US$334 million, US$750 million and US$36,000, respectively. All the shares in Just have been fully paid up. Just did not pay any dividend for the year ended December 31, 2004. There are no intracompany loans between Just and the Company.

CCI was incorporated on February 12, 1999, with a paid-in capital of NT$3,380.7 million as of December 31, 2004. The registered office for CCI is 7F, No.319, Section 4, Pa The Road, Taipei 105, Taiwan, ROC. Its core business is the manufacturing and selling of GPRS/GSM handsets. In addition, it also manufactures and sells mechanical communications equipment and radio frequency communications equipment. CCI’s customers are primarily global branded handset OEMs. As of the date of this Offering Circular, the Group owned a 48.2% stake in CCI. As of and for the year ended December 31, 2004, CCI had total assets, revenues and net profit of approximately NT$12,174 million, NT$14,293 million and NT$1,608 million, respectively. CCI had 400 million authorized shares and 338 million issued shares. CCI paid cash dividends of NT$652.5 million and stock dividends of NT$443.7 million for the year ended December 31, 2004. There are no intracompany loans between CCI and the Company.

CCI sold 8.6 million mobile handsets for the year ended December 31, 2004. Total revenues were NT$14,292.7 million (US$450.7 million) for the year ended December 31, 2004.

CCI was not consolidated in the Company’s consolidated financial statements for 2002 since, under ROC GAAP, the Company is not required to include in its consolidated financial statements a subsidiary whose total assets or total revenues are less than 10% of its total assets or total revenues, respectively. However, CCI has been consolidated in the Company’s consolidated financial statements for the years 2003 and 2004.

Compal International Holding Co., Ltd. (“CIH”) was incorporated in 2000. The registered office for CIH is Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands. As of December 31, 2004, its paid in capital was US$38.1 million. CIH is a holding company. The Group holds its interests in the manufacturing facilities in Kunshan, the PRC, through CIH. As of December 31, 2004, the Company owned a 100.0% stake in CIH.

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Compal Electronics Holding Co., Ltd. (“CEH”) was incorporated in 2003. The registered office for CEH is Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands. CEH is a holding company. The primary business activity of CEH is investment in equity securities. As of December 31, 2004, the Company owned a 100.0% stake in CEH.

Toppoly Optoelectronics Corp.

The Company holds a 32.82% interest in Toppoly, a joint venture company established to develop and manufacture LTPS TFT-LCD panels. An LTPS TFT-LCD panel is different from a traditional a-Si TFT-LCD panel in that it integrates a driver circuit on the panel. As a result, it is lighter, has better resolution, consumes less power and produces a clearer and brighter image. Toppoly currently manufactures from 1.5” to 14.1” LTPS TFT-LCD panels for use in DSC, mobile handsets, PDAs, smart phones, car navigation, PMP and notebooks PCs.

The Company, along with Kinpo and the Uni-President Group, established Toppoly as a joint venture company in December 1999. As of December 31, 2004, Toppoly had stockholders’ equity of NT$27,496 million. All issued shares in Toppoly have been fully paid. As of December 31, 2004, the Company has invested NT$11,074.5 million (US$349.2 million) for a 32.82% interest in Toppoly. Toppoly is currently undertaking a new round of equity capital raising and the Company will make further capital contributions of a minimum of NT$2,387.4 million to Toppoly. Toppoly may also raise additional capital from new investors or enter into borrowing arrangements with lenders.

Manufacture of LTPS TFT-LCD panels involves the production of LTPS TFT glass substrates which are subsequently cut into individual panels. Toppoly’s first fab began mass production in June 2003 and currently had a monthly production capacity of 60,000 substrates per month. In December 2004, Toppoly broke ground on its second fab and anticipates full commercial production to begin in the first half of 2006. Toppoly intends to focus on the production of color filters and AMOLED products at its second fab.

The Company sources a portion of its requirements for LTPS TFT-LCD panels for use in its production of mobile handsets, PDAs and smart phones from Toppoly. The Company believes that its ability to offer mobile handsets, PDAs and smart phones with LTPS TFT-LCD technology sourced from Toppoly gives it a competitive advantage in the future for obtaining manufacturing orders from top-tier mobile communications device vendors.

Related party transactions

Relationship with Kinpo Electronics, Inc.

Kinpo is the Company’s largest shareholder and the Company is the largest shareholder of Kinpo. As of August 3, 2005, the most recent record date for which shareholder information in respect of the Company is available, Kinpo held 4.27% of the Company’s share capital and as of June 30, 2005, the most recent record date for which shareholder information in respect of Kinpo is available the Company held 10.20% of Kinpo’s share capital. Kinpo designs and manufactures consumer electronic products, communications products and PC peripheral products. Mr. Sheng-Hsiung Hsu, Chairman of the Board of Kinpo, is also Chairman of the Company’s Board. In addition, there are three common directors and two common supervisors serving on both Boards. The original shareholders of Kinpo were Mr. Chao-Yin Hsu and certain members of his extended family. Transactions between Compal and Kinpo in recent years have not been material. Decisions made by the respective Boards of Directors of Kinpo and Compal are made independently of each other. However, there can be no assurance that Kinpo and Compal will not continue to pursue product expansion and diversification strategies which result in direct competition between the two companies.

The Company has invested NT$1,900 million for a 19.00% equity interest in VIBO. VIBO is one of the five 3G cellular license holders in Taiwan. Kinpo holds a 34.5% interest in VIBO, and Mr. Sheng-Hsiung Hsu is the Chairman of the Company, Kinpo and VIBO.

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Transactions with other related parties

The Company sells its products to certain of its related parties, including Bizcom, a wholly-owned subsidiary in the United States that is engaged in configuring its products and after-sales service, with respect to which the Company had net sales of NT$1,590.4 million or 0.7% of consolidated net sales for the year ended December 31, 2004, and Compower International Ltd., an equity method accounted affiliate, with respect to which the Company had net sales of NT$272.0 million or 0.1% of consolidated net sales for the year ended December 31, 2004. The sales price and terms to such related parties were similar to those for third-party customers. Total notes and accounts receivable from related parties as of December 31, 2004, were NT$1,023.9 million, of which NT$601.7 million was due from Bizcom.

The Company also purchases goods from related parties, including Toppoly, an equity method accounted affiliate, from which the Company purchased NT$4,192.0 million in goods or 1.9% of total net purchases for the year ended December 31, 2004, and VACOM, from which it purchased NT$972.3 million in goods, or 0.5% of its total net purchases for the year ended December 31, 2004. The sales price and terms to such related parties were similar to those for third-party suppliers. Total notes and accounts payable to related parties as of December 31, 2001, were NT$680.0 million, of which NT$517.2 million was payable to Toppoly.

The Company also had an aggregate of US$6,200 million in guarantees issued in favor of four related parties. See “Management’s discussion and analysis of financial condition and results of operations — Liquidity and capital resources” and note 17 of the notes to the consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 included elsewhere in this Offering Circular.

Recent developments � Proposed restructuring of the mobile communications business

On June 28, 2005, the Group announced a proposed restructuring of its mobile communications business (the “Restructuring”), pursuant to which the Company will transfer the business of its PMCC division and the related assets and liabilities to CCI.

Consideration

The agreed consideration for the transfer is NT$1,453 million, which will be satisfied by CCI issuing 85,078,000 new shares to the Company (which has already taken into the stock dividends declared by CCI for the year ended December 31, 2004). The consideration was agreed between the Company and CCI on an arm’s length basis based on the projected net asset value of the PMCC division as of December 31, 2005. Upon the completion of the Restructuring, the Company’s shareholding in CCI’s enlarged share capital will be increased to 57.7% and the issued and outstanding share capital of CCI will be increased to NT$4,651 million.

Reasons for the Restructuring

The Group believes that the integration of the PMCC division and CCI will create significant synergies in view of the complementary nature of their respective customer portfolios, product portfolios, technology platforms and geographical markets:

Customers : The customer base of each of the PMCC division and CCI is distinct, with the PMCC division focusing primarily on IT customers, while CCI focuses primarily on global branded handset OEMs. The Restructuring will result in a significantly enlarged customer portfolio for CCI.

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Products : The PMCC division produces CDMA, GPRS/GSM and 3G handsets, as well as PDAs, while CCI’s core focus has been the manufacturing of GSM/GPRS handsets. The Restructuring will expand CCI’s product offering to include a full range of GSM/GPRS, CDMA and 3G handsets and PDAs.
Technology : The PMCC division and CCI possess different technologies and knowhow as a result of the differences in their product offerings. The Restructuring will facilitate the integration of their significant R&D resources and the creation of a comprehensive spectrum of handset and PDA technologies and knowhow. CCI will also be able to leverage the strategic alliances and strategic investments of the PMCC division to develop innovative and technologically advanced products.
Markets : The majority of the PMCC division’s revenue is derived from sales to the Americas while the majority of CCI’s revenue is derived from sales in Asia. The Restructuring is expected to result in a more geographically balanced distribution of revenues from different markets.

The Group therefore believes that the Restructuring will generate synergies and opportunities for it to further enhance competitiveness and efficiency of its mobile communications business and increase its market share in the global mobile communications ODM market. The significantly enlarged customer base, product portfolio and technology platform of CCI following the Restructuring will present CCI with significant new business opportunities, facilitate the cross-selling of new products and enable CCI to increase its cooperation with tier-one technology vendors and suppliers. In addition, the Restructuring is expected to create opportunities for cost savings arising from increased economies of scale, enhanced procurement power and elimination of redundant R&D, sales and marketing and other functions. Finally, the Restructuring will also strengthen CCI’s capital base and its balance sheet..

Status of the Restructuring

The Restructuring was approved by the respective board of directors of the Company and CCI on June 28, 2005, and is subject to the approval of the respective shareholders of the Company and CCI. Each of the Company and CCI will convene an extraordinary general meeting on September 30, 2005, for its shareholders to consider and, if appropriate, to approve the Restructuring.

Completion

The Restructuring is expected to be completed on or about January 1, 2006. However, completion of the Restructuring is still subject to the obtaining of various regulatory and other approvals by each of the Company and CCI, including shareholders’ approval, and approvals from the Fair Trade Commission, the FSC and the TSE.

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MANAGEMENT

The Board of Directors has ultimate responsibility for the management of the Company’s business and affairs. At present, there are eleven Directors and three Supervisors who are elected by the shareholders at the general shareholders’ meeting. The term of office for Directors and the Supervisors is three years. Under the Articles of Incorporation, the Board of Directors is required to elect a Director to act as a Chairman. The Chairman is the legal representative under the Company Law.

The Articles of Incorporation require the election of three Supervisors. Under the Company Law, each Supervisor is responsible for overseeing the activities of the Board of Directors and has power to investigate business and financial condition of the Company, examine its books, records and documents and request the Board of Directors to submit reports. A Supervisor may engage independent experts to carry out any such investigations or examinations at the Company’s expense. A Supervisor may also convene a meeting of shareholders when he deems it necessary.

The Company may, under the Company Law, by resolution adopted at a shareholders’ meeting, allow any of the Directors to be a director of another company with the same or a similar scope as the Company’s business or to engage in any businesses within the scope of the Company’s business. However, a Director is precluded from voting in respect of any discussions regarding contracts or arrangements where he has, or will have, a direct or indirect personal interest or benefit.

The present Board of Directors was elected by the shareholders on June 10, 2003 for a term of three years expiring on June 9, 2006.

The particulars of each of the Directors, Supervisors and Senior Executives are set forth as follows:

Name	Position with Compal Chairman Director and President Director Director (Representative of Kinpo Electronics, Inc.) (2) Director Director Director Director and President of the Operation Business Unit Director, Executive Vice President and President of the Computer Business Unit Director, Executive Vice President and President of the Monitor Business Unit Director, Senior Vice President Supervisor Supervisor Supervisor Chief Financial Officer	Age 61 55 55 57 60 40 56 47 51 55 44 57 69 55 49	Years with Compal(1)
Hsu, Sheng-Hsiung .... Chen, Jui-Tsung ......... Hsu, Wen Being ......... Lin, Lina ................... Lin, Kuang-Nan ......... Hsu, Chiung-Chi ........ Chen, Shin ................. Chang, Yung-Ching .... Shen, Wen-Chung....... Wang, Ping-Hsien ...... Kung, Shao-Tsu ........ Hsu, Sheng-Chieh ...... Ko, Charng-Chyi........ Chou, Yen-Chia.......... Lu, Ching-Hsiung ......			20 30 20 5 16 10 0.5 13 13 27 13 13 20 7 16

Notes:

(1) Includes years worked with Kinpo.

(2) The number of years with Compal indicated is the number of years the relevant company has had a Representative on the Board.

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Sheng-Hsiung Hsu , aged 61, is the Chairman. He received a bachelor’s degree from National Taiwan Normal University. He has been with the Company for 20 years. He is also the Chairman of Kinpo, VIBO, Acbel Polytech Inc., Cal-Comp Electronic (Thailand) Public Company Ltd., the China Productivity Center and the Taiwan Electrical and Electronic Manufacturers’ Association. He is also a Director of Toppoly and a Supervisor of the Chinese National Federation of Industries.

Jui-Tsung Chen , aged 55, is the President and a Director. He received a bachelor’s degree from National Cheng Kung University (Electrical Engineering Department). He has been with the Company for 30 years and he is in charge of the operations. He is also the Chairman of the Board of Directors of International Semiconductor Technology Ltd., Toppoly and CCI. Mr. Chen is also a Director of Kinpo, VIBO and Accesstek Inc.

Wen Being Hsu , aged 55, is a Director. He graduated from National Tao-Yuan Senior Vocational Agricultural & Industrial School. He has been with the Company for 20 years.

Lina Lin , aged 57, is a Director as representative of Kinpo. She received a bachelor’s degree from Chinese Culture University (Business Administration Department). She has been with the Company for 5 years.

Kuang Nan Lin , aged 60, is a Director. He received a bachelor’s degree from Tam Kang University (Mathematics Department). He has been with the Company for 16 years.

Chiung-Chi Hsu , aged 40, is a Director. He received a Master’s degree from San Francisco Golden Gate University. He has been with the Company for 10 years.

Shin Chen , aged 56, is a Director. He received his doctorate degree from the University of Florida. He joined the Company on June 23, 2004.

Yung-Ching Chang , aged 47 is a Director and the President of the Operation Business Unit. He received a bachelor’s degree from National Tsing Hua University (Industrial Engineering Department). He has been with the Company for 13 years. He is the Chairman of Allied Circuit Co., Ltd. and a Director of Accesstek Inc.

Wen-Chung Shen , aged 51, is an Executive Vice President and a Director. He is the President of the Computer Business Unit and in charge of R&D, Sales and Marketing and Global Logistics. He received a bachelor’s degree from National Taiwan University (Electrical Engineering Department). He has been with the Company for 13 years. He is also a director of International Semiconductor Technology Ltd. and Toppoly.

Ping-Hsien Wang , aged 55, is an Executive Vice President and a Director. He is the President of the Monitor Business Unit and in charge of research and development, sales and marketing and global logistics. He received a bachelor’s degree from National Chiao Tung University (Electrical Engineering Department). He has been with the Company for 27 years. He is the Chairman and President of Accesstek Inc. and a Director of Kinpo and CCI.

Shao-Tsu Kung , aged 44, is a Senior Vice President and a Director. He received a master’s degree from National Taiwan University (Electrical Engineering Department). He has been with the Company for 13 years. He is a Director of Accesstek Inc.

Sheng-Chieh Hsu , aged 57, is a Supervisor. He received a bachelor’s degree from Tam Kang University (Architectural Department). He has been with the Company for 13 years. He is a Director of Kinpo, VIBO and Cal-Comp Electronics (Thailand) Public Company Ltd.

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Charng-Chyi Ko , aged 69, is a Supervisor. He received a bachelor’s degree from National Taiwan University (Division of Business). He has been with the Company for 20 years. He is a Director of International Semiconductor Technology Ltd., CCI and VIBO. He is also the Supervisor of Toppoly, Kinpo and Cal-Comp Electronics (Thailand) Public Company Ltd.

Yen-Chia Chou , aged 55, is a Supervisor. He received a bachelor’s degree from National Taiwan University (Geology Department). He has been with the Company for 7 years. He also is a supervisor of Kinpo.

Ching-Hsiung Lu , aged 49, is the CFO. He received his bachelor’s degree from Feng Chia University (Accounting Department). He has been with the Company for 16 years. He is also the Supervisor of International Semiconductor Technology Ltd. and Accesstek Inc.

As of August 3, 2005, the Directors, Supervisors, Senior Executives and their families (spouses and children) held, directly or indirectly, approximately 8.45% of the Company’s issued Shares (including beneficial interests in Shares held through discretionary trusts).

Subject to proposal by the Board of Directors and approval by shareholders, the Directors and Supervisors are entitled to annual remuneration amounting to up to 2% of the net income allocated for distribution after offsetting accumulated net losses of prior years, any applicable income tax payments and a 10% appropriation to the legal reserve (until the accumulated legal reserve is equal to the amount of the Company’s paid-in share capital). The aggregate remuneration and benefits-in-kind granted to the Company’s Directors and Supervisors in their capacities as Directors and Supervisors for the year ended December 31, 2004, was approximately NT$212.1 million (US$6.7 million).

There have been no loans or advances made by the Company or any of its subsidiaries to, or guarantees given by us or any of the Company’s subsidiaries in relation to loans or advances received by the Directors, and none of the Directors, Supervisors or Senior Executives have or have had interests in transactions which are or were unusual in their nature or conditions or significant in relation to the Company’s business or any of its subsidiaries and which were effected by us during the current financial year or the financial year immediately preceding the date of this document, or were effected by us during earlier financial years and remain, in any respect, outstanding or unperformed.

The business address of all the Company’s Directors, Supervisors and Senior Executives is No. 581, Ruiguang Rd., Neihu, Taipei (114), Taiwan, ROC.

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PRINCIPAL SHAREHOLDERS

Kinpo is the largest shareholder of the Company. As of August 3, 2005, the date for which the latest information was available, Kinpo held 143,372,440 Shares, or 4.27% of the issued Shares.

The following table sets forth certain information, as of August 3, 2005, the date for which the latest information is available, with respect to the Shares owned by the top 10 shareholders.

Name of Shareholder	Number of Shares	Percentage of total issued Shares
1 Bank of New York(1) ..................................................................... 2 Kinpo Electronics, Inc. ................................................................. 3 Templeton Foreign Fund (a series of Templeton Funds, Inc.)......... 4 Bureau of Labor Insurance ............................................................ 5 Director General of Postal Remittances and Savings Bank ............ 6 California Public Employees’ Retirement System .......................... 7 Jui-Tsung Chen(2).......................................................................... 8 Panpal Technology Group(3) .......................................................... 9 Shin Kong Silicon Valley Fund ..................................................... 10 Supervisory Committee of the Labor Retirement Fund ..................	423,220,488 143,372,440 101,117,346 68,300,790 59,671,962 44,132,371 43,227,772 38,248,678 37,300,000 34,247,467	12.60% 4.27% 3.01% 2.03% 1.78% 1.31% 1.29% 1.14% 1.11% 1.02%
Total .......................................................................................... Total Shares issued ....................................................................		29.56%

Notes:

(1) The Bank of New York is the depositary for the GDSs. See “Description of the GDSs”.

(2) Jui-Tsung Chen is the President.

(3) The Company’s 100%-owned subsidiary.

As of August 3, 2005, the date for which the latest information is available, the total number of Shares directly and indirectly held by the Directors and Supervisors, Senior Executives, their spouses and minor children (including the Shares held by Kinpo and China Development Industrial Bank, each of which is represented by a director on the Board of Directors and beneficial interests in Shares held through discretionary trust was 283,868,103, or 8.45% of the issued Shares.

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CHANGES IN ISSUED SHARE CAPITAL

According to the Company’s Articles of Incorporation, the Company has only one class of capital stock, Shares with a par value of NT$10 per share. Currently, the Articles of Incorporation provide that the authorized share capital is NT$46,500,000,000 divided into 4,650,000,000 Shares, which includes 100,000,000 Shares reserved for issuance upon exercise of employee stock options or warrants. All issued Shares are in registered form.

The following table shows, inter alia , the increases in the Company’s issued share capital since June 1984:

Date of Issue	Type of Issue Incorporation Rights issue Rights issue Rights issue Rights issue From retained earnings From capital reserves From retained earnings From capital reserves From capital reserves Rights issue From retained earnings From capital reserves Employees’ bonuses Rights issue From retained earnings From capital reserves Employees’ bonuses Rights issue From retained earnings From capital reserves Employees’ bonuses Rights issue Conversion of convertible bonds From retained earnings From capital reserves Employees’ bonuses Conversion of convertible bonds Rights issue Conversion of convertible bonds From retained earnings From capital reserves Employees’ bonuses Conversion of convertible bonds Rights issue Conversion of convertible bonds From retained earnings Employees’ bonuses Conversion of convertible bonds Conversion of convertible bonds	Number of Shares Issued 5,000,000 3,000,000 5,000,000 6,890,000 30,000,000 7,483,500 7,982,400 1,960,677 9,149,826 7,646,640 15,886,957 10,000,000 10,000,000 200,000 30,000,000 22,530,000 15,020,000 550,000 70,000,000 7,749,000 30,996,000 555,000 70,000,000 13,023,560 22,837,413.6 91,349,654.4 2,207,372 24,174,233 60,000,000 2,651,768 58,384,400 175,153,200 16,987,399 10,272,722 2,200,000 2,668,338 297,328,521 24,351,419 1,085,200 2,798,115	Number of Issued Shares after Issue(1)
June 1984 .................. July 1986 ................... June 1987 .................. June 1988 .................. April 1990 ................. September 1991 ......... September 1992 ......... November 1993.......... October 1994 ............. October 1995 ............. May 1996 .................. December 1996 .......... April 1997 ................. August 1997 .............. September 1997 ......... December 1997 .......... March 1998................ May 1998 .................. September 1998 ......... February 1999............ March 1999................ May 1999 .................. June 1999 .................. September 1999 .........			5,000,000 8,000,000 13,000,000 19,890,000 49,890,000 65,355,900 76,466,403 100,000,000 150,200,000 258,300,000 297,600,000 367,600,000 380,623,560 497,018,000 521,192,233 581,192,233 583,844,001 834,369,000 844,641,722 846,841,722 849,510,060 1,171,190,000 1,172,275,200 1,175,073,315

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Date of Issue	Type of Issue Rights issue Conversion of convertible bonds From retained earnings From capital reserves Employees’ bonuses Conversion of convertible bonds Conversion of convertible bonds From retained earnings From capital reserves Employees’ bonuses Issuance of GDSs Rights issue Conversion of convertible bonds From retained earnings From capital reserves Employees’ bonuses From retained earnings From capital reserves Employees’ bonuses Conversion of convertible bonds Conversion of convertible bonds Conversion of convertible bonds Conversion of convertible bonds Cancellation of treasury stock From retained earnings From capital reserves Employees’ bonuses Cancellation of treasury stock Conversion of convertible bonds From retained earnings From capital resources Employees’ bonuses	Number of Shares Issued 1,560,000 126,705 82,373,201 270,654,805 26,981,974 64,837 2,468,352 233,525,225 155,683,483 29,906,455 100,000,000 23,396,492 8,228 209,426,407 209,426,407 26,983,114 127,005,000 254,010,000 35,626,000 178,357,873 47,143,386 45,453,161 17,841,491 75,038,000 64,866,176 162,165,440 40,721,384 107,550,000 17,800,561 66,765,218 66,765,218 23,663,332	Number of issued Shares after Issue(1)
January 2000.............. March 2000................ May 2000 .................. December 2000 .......... May 2001 .................. May 2001 .................. June 2001 .................. February 2002............ July 2002 ................... August 2003 ............. September 2003 ......... November 2003.......... December 2003 .......... March 2004................ June 2004 .................. August 2004 ............. October 2004 ............. June 2005(2) ............... August 2005 ..............			1,176,633,315 1,176,760,020 1,556,770,000 1,556,834,837 1,559,303,189 1,978,418,352 2,078,418,352 2,101,814,844 2,101,823,072 2,547,659,000 2,964,300,000 3,142,657,873 3,189,801,259 3,235,254,420 3,253,095,911 3,178,057,911 3,445,810,911 3,338,260,911 3,356,061,472 3,513,255,240

Notes:

(1) Includes treasury shares.

(2) In July 2005, there was also an increase in share capital due to conversion of convertible bonds.

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TERMS AND CONDITIONS OF THE BONDS

The following terms and conditions (subject to amendment and except for the sentences in italics) will be endorsed on the Certificates (as defined herein) issued in respect of the Bonds:

The issue of US$300,000,000 Zero Coupon Convertible Bonds due 2010 (the “Bonds”, which term shall include, unless the context requires otherwise, any further Bonds issued in accordance with Condition 18 and consolidated and forming a single series therewith) of Compal Electronics, Inc. (the “Company”) was authorized by a resolution of the Board of Directors of the Company adopted on March 3, 2005. The Bonds are constituted by an Indenture dated August 19, 2005 (the “Indenture”) between the Company and Citibank, N.A. as the trustee (the “Trustee”, which term shall include all persons for the time being acting as the trustee or trustees under the Indenture) for the holders of the Bonds (the “Bondholders”). The Company has entered into a paying and conversion agency agreement dated August 19, 2005 (the “Agency Agreement”) with the Trustee, Citigroup Global Markets Deutschland AG & Co. KGaA as registrar, Citibank, N.A. as principal paying, conversion and transfer agent and the other paying, conversion and transfer agents appointed thereunder (each an “Agent” and together the “Agents”) in relation to the Bonds. The registrar, principal paying and conversion agent, paying agents, conversion agents and transfer agents and replacement agent for the time being are referred to below as the “Registrar”, the “Principal Agent”, the “Paying Agents” (which expression shall include the Principal Agent), the “Conversion Agents” (which expression shall include the Principal Agent), the “Transfer Agents” (which expression shall include the Registrar) and the “Replacement Agent”, respectively. The statements in these terms and conditions include summaries of, and are subject to, the detailed provisions of the Indenture. Copies of the Indenture and the Agency Agreement are available for inspection at the registered office of the Trustee being at the date hereof at Citigroup Centre, 14th Floor, Canada Square, Canary Wharf, London E14 5LB, United Kingdom and at the specified offices of each of the Agents. The Bondholders are entitled to the benefit of the Indenture and are bound by, and are deemed to have notice of, all the provisions of the Indenture and the Agency Agreement.

1 Status

The Bonds constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 4) unsecured obligations of the Company and rank pari passu among themselves and (subject as aforesaid) shall at all times rank at least equally with all other present and future direct, unconditional, unsubordinated and unsecured obligations of the Company (other than any obligation preferred by mandatory provisions of law).

2 Form and Denomination

The Bonds are issued in registered form in the denomination of US$1,000 each. The Bonds will be offered and sold in principal amounts of US$1,000 or an integral multiple thereof and will be transferable in principal amounts of US$1,000 or an integral multiple thereof. A certificate (each a “Certificate”) will be issued to each Bondholder in respect of its registered holding of Bonds. Each Bond and each Certificate will be serially numbered with an identifying number which will be recorded on the relevant Certificate and in the register of Bondholders which the Company will procure to be kept by the Registrar.

Upon issue, the Bonds will be represented by a Global Certificate which will be deposited with a common depositary for, and registered in the name of a nominee of, Euroclear and Clearstream, International. The Conditions are modified by certain provisions contained in the Global Certificate. See “The Global Certificate”.

Except in the limited circumstances described in the Global Certificate, owners of interests in the Bonds represented by the Global Certificate will not be entitled to receive definitive Certificates in respect of their individual registered holdings of Bonds. The Bonds are not issuable in bearer form.

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3 Title

Title to the Bonds passes only by registration in the register of Bondholders. The holder of any Bond will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the Certificate issued in respect of it) and no person will be liable for so treating the holder. In these terms and conditions, “Bondholder” and (in relation to a Bond) “holder” means the person in whose name a Bond is registered.

4 Negative Pledge

So long as any Bond remains outstanding (as defined in the Indenture), the Company will not, and will procure that none of its Principal Subsidiaries (as hereinafter defined) other than a Listed Subsidiary (as defined below) will, create or permit to subsist any Encumbrance upon the whole or any part of its property, assets or revenues, present or future, to secure for the benefit of the holders of any International Investment Securities (as hereinafter defined) (i) payment of any sum due in respect of any such International Investment Securities; (ii) any payment under any guarantee of any such International Investment Securities; or (iii) any payment under any indemnity or other like obligation relating to any such International Investment Securities without, in any such case, at the same time or prior thereto provided to the Bondholders, to the satisfaction of the Trustee, either the same security as is granted to or is outstanding in respect of such International Investment Securities, guarantee, indemnity or other like obligation or such other security as the Trustee in its absolute discretion shall deem to be not materially less beneficial to the Bondholders or as shall be approved by an Extraordinary Resolution (as defined in the Indenture) of the Bondholders.

For the purposes of these Conditions:

“Encumbrance” means any mortgage, charge, pledge, lien or other form of encumbrance or security interest.

“International Investment Securities” means bonds, debentures, notes, loan stock or other similar investment securities of the Company or any other person evidencing indebtedness with a maturity of not less than one year from the issue date thereof, or any guarantee thereof, which (a) either (i) are by their terms payable, or confer a right to receive payment, in any currency other than the currency of the country of incorporation of the issuer or (ii) are denominated or payable in the currency of the country of incorporation of the issuer and more than 50% of the aggregate principal amount thereof is initially distributed outside the country of incorporation of the issuer by or with the authorization of the issuer thereof, and (b) are for the time being, or are intended to be, quoted, listed, ordinarily dealt in or traded, in each case primarily, on any stock exchange, quotation system or over-the-counter or other similar securities market outside the country of incorporation of the issuer.

“Listed Subsidiary” means, at any time, any Subsidiary of the Company the ordinary voting shares of which are at such time listed on the TSE or any other recognised stock exchange.

“Principal Subsidiary” means any Subsidiary of the Company:

(a) whose net sales or (in the case of a Subsidiary which itself has subsidiaries) consolidated net sales, as shown by its latest audited income statement are at least 10% of the consolidated net sales of the Company and its consolidated Subsidiaries as shown by the latest published audited consolidated income statement of the Company and its consolidated Subsidiaries; or
(b) whose total assets or (in the case of a Subsidiary which itself has subsidiaries) consolidated total assets, as shown by its latest audited balance sheet are at least 10% of the consolidated total assets of the Company and its consolidated Subsidiaries as shown by the latest published audited consolidated balance sheet of the Company and its consolidated Subsidiaries;

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provided that, in relation to paragraphs (a) and (b) above:

(i) in the case of a corporation or other business entity becoming a Subsidiary after the end of the financial period to which the latest consolidated audited financial statements of the Company relate, the reference to the then latest consolidated audited financial statements of the Company for the purposes of the calculation above shall, until consolidated audited financial statements of the Company for the financial period in which the relevant corporation or other business entity becomes a Subsidiary are published, be deemed to be a reference to the then latest consolidated audited financial statements of the Company adjusted to consolidate the latest audited financial statements (consolidated in the case of a Subsidiary which itself has Subsidiaries) of such Subsidiary in such financial statements;
(ii) if at any relevant time in relation to the Company or any Subsidiary which itself has Subsidiaries no consolidated financial statements are prepared and audited, total revenue or assets of the Company and/or any such Subsidiary shall be determined on the basis of pro forma consolidated financial statements prepared for this purpose by the Company and reviewed by the Auditors (as defined in the Indenture) for the purposes of preparing a certificate thereon to the Trustee;
(iii) if at any relevant time in relation to any Subsidiary, no financial statements are audited, its total assets (consolidated, if appropriate) shall be determined on the basis of pro forma financial statements (consolidated, if appropriate) of the relevant Subsidiary prepared for this purpose by the Company and reviewed by the Auditors for the purposes of preparing a certificate thereon to the Trustee; and
(iv) if the financial statements of any subsidiary (not being a Subsidiary referred to in proviso (i) above) are not consolidated with those of the Company, then the determination of whether or not such subsidiary is a Principal Subsidiary shall be based on a pro forma consolidation of its financial statements (consolidated, if appropriate) with the consolidated financial statements (determined on the basis of the foregoing) of the Company; or
(c) any Subsidiary of the Company to which is transferred the whole or substantially the whole of the assets of a Subsidiary which immediately prior to such transfer was a Principal Subsidiary, provided that the Principal Subsidiary which so transfers its assets shall forthwith upon such transfer cease to be a Principal Subsidiary and the Subsidiary to which the assets are so transferred shall cease to be a Principal Subsidiary at the date on which the first published audited financial statements (consolidated, if appropriate) of the Company prepared as of a date later than such transfer are issued unless such Subsidiary would continue to be a Principal Subsidiary on the basis of such financial statements by virtue of the provisions of paragraph (a) or (b) above.

“Subsidiary” means any company or other business entity of which the Company owns or controls (either directly or indirectly) 50% or more of the issued share capital or other ownership interest having ordinary voting power to elect directors, managers or trustees of such company or other business entity (whether or not capital stock or other ownership interest of any other class or classes shall or might have a voting power upon the occurrence of any contingency).

“TSE” means the Taiwan Stock Exchange.

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5 Transfers of Bonds; Issue of Certificates

(A) Transfers

A Bond may be transferred, subject to Condition 5(D), by depositing the Certificate issued in respect of that Bond, with the form of transfer on the back duly completed and signed, at the specified office of the Registrar or any of the other Transfer Agents.

Transfers of interests in the Bonds evidenced by the Global Certificate will be effected in accordance with the rules of the relevant clearing systems.

(B) Delivery of new Certificates

Each new Certificate to be issued upon transfer of Bonds will, within three business days of receipt by the relevant Transfer Agent of the form of transfer, be mailed by uninsured mail at the risk of the holder entitled to the Bonds to the address specified in the form of transfer. For the purposes of this Condition 5, “business day” shall mean a day on which banks are open for business in the city in which the specified office of the relevant Transfer Agent with whom a Certificate is deposited in connection with a transfer is located.

Except in the limited circumstances described in the Global Certificate, owners of interests in Bonds represented by the Global Certificate will not be entitled to receive definitive Certificates in respect of their individual holdings of Bonds. Issues of Certificates upon transfer of Bonds are subject to compliance by the transferor and transferee with the certification procedures described in the Agency Agreement.

Where some but not all the Bonds in respect of which a Certificate is issued are to be transferred, converted or redeemed, a new Certificate in respect of the Bonds not so transferred, converted or redeemed will, within three business days of deposit or surrender of the original Certificate with or to the relevant Agent, be mailed by uninsured mail at the risk of the holder of the Bonds not so transferred, converted or redeemed to the address of such holder appearing on the register of Bondholders.

(C) Formalities free of charge

Registration of transfer of Bonds will be effected without charge by or on behalf of the Company or any of the Agents, subject to payment (or the giving of such indemnity as the Company or any of the Agents may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

(D) No transfer periods

No Bondholder may require the transfer of a Bond to be registered (i) during the period of 15 days ending on the due date for any payment of principal on the Bond, (ii) after such Bond has been called for redemption pursuant to Condition 8(B) or 8(C), (iii) after the Certificate in respect of such Bond has been deposited for conversion pursuant to Condition 6, or (iv) on exercise of the Bondholder’s put option pursuant to Condition 8(D), Condition 8(E) or Condition 8(F).

(E) Regulations

All transfers of Bonds and entries on the register of Bondholders will be made subject to the detailed regulations concerning transfer of Bonds set forth in the Agency Agreement. The regulations may be changed by the Company, with the prior written approval of the Trustee and the Registrar. A copy of the current regulations will be mailed (at the Company’s expense) by the Registrar to any Bondholder upon written request.

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6 Conversion

The Indenture provides, in summary, that the term “Share” or “Shares” means, when used to refer to the class or classes of the Company’s capital stock into which the Bonds are convertible and when used in certain other instances, only the Company’s Shares, NT$10 par value per share, but that when used elsewhere, including in Condition 6(C), such term also includes shares of any other class or classes of the share capital of the Company authorized after the date of the Indenture which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or winding-up of the Company.

(A) Conversion Right

(i) Conversion Period

Each Bondholder has the right hereunder to convert any Bond into Shares on and subject to the terms set forth herein (the “Conversion Right”). Subject to and upon compliance with the provisions of this Condition, the Conversion Right attaching to any Bond may be exercised, at the option of the holder thereof and as to the extent provided herein, at any time on or after September 18, 2005 and prior to the close of business (at the place where such Bond is deposited for conversion) on July 20, 2010 (but in no event thereafter), or, if such Bond shall have been called for redemption prior to August 19, 2010 then up to, and including, the close of business (at the place aforesaid) on the date seven days prior to the date fixed for redemption thereof or if such date shall not be a business day at such place, on the immediately preceding business day at such place (the “Conversion Period”); provided however that the Conversion Right during any Closed Period shall be suspended and the Conversion Period shall not include any such Closed Period. The Company shall procure that Bondholders are given not less than seven days’ notice in accordance with Condition 15 of any Closed Period.

For the purposes of these Conditions:

“Closed Period” means: (i) the 60-day period prior to the date of any general shareholders’ meeting of the Company; (ii) the 30-day period prior to the date of any special shareholders’ meeting of the Company; (iii) the period beginning on the third Stock Exchange Business Day prior to the Company’s notification to the Taiwan Stock Exchange of a record date (and the relevant closure of the Company’s Shareholders’ register) for the determination of the identity of shareholders entitled to receive dividend distributions or other rights or benefits to the date of such record date; and (iv) such other periods during which the Company may be required to close its shareholders’ register or to suspend conversion under ROC laws and regulations applicable from time to time.

For the purposes of this Condition 6:

“business day” shall mean a day on which commercial banks are open for business in the city in which the specified office of the Conversion Agent with whom a Conversion Notice is deposited in connection with the conversion is located.

“Stock Exchange Business Day” means a day when the TSE is open for trading of securities.

Under current ROC law, regulation and policy, People’s Republic of China (“PRC”) persons are not permitted to hold or convert the Bonds or to register as the Company’s shareholders. Under current ROC law, “PRC person” includes any of the following: (a) an individual holding a passport issued by the PRC; (b) a resident of any area of China under the effective control or jurisdiction of the PRC (but not including a special administrative region of the PRC such as

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Hong Kong or Macau, if so excluded by applicable laws of the ROC); (c) an agency or instrumentality of the PRC; and (d) a corporation, partnership or other entity organized under the laws of any such area or controlled or beneficially owned by any such person, resident, agency or instrumentality.

Under current ROC law, a non-ROC converting holder of the Bonds, before exercising his conversion right to convert the Bonds into Shares, is required to register with the TSE. Under current ROC law, a non-ROC converting holder of any Bond, when exercising its conversion right to convert its Bond into Shares, is also required to appoint a local agent in the ROC with such qualifications as are set by the ROC Securities and Futures Bureau, Financial Supervisory Commission. The local agent has the power to take the following actions on behalf of and as agent for the converting holder: open a securities trading account with a local brokerage firm and a NT dollar bank account, act as custodian for the securities, pay ROC withholding taxes, make confirmation or settlement remit funds, exercise shareholders’ rights, and perform such other matters as may be designated by the converting holder. In addition, such non-ROC converting Bondholder must also appoint a custodian bank to hold the securities for safekeeping, confirm and settle trades and report all relevant information. Without meeting these requirements, the converting holder would not be able to receive, hold or to sell or otherwise transfer the Shares into which the Bonds may have been converted on the TSE or otherwise. See “Appendix A — Foreign investment and exchange controls in the ROC” and “Description of the Shares”.

(ii) Number of Shares issuable on Conversion

The number of Shares to be issued upon conversion of any Bond will be determined by dividing the principal amount of the Bond (translated into New Taiwan dollars at the fixed rate of NT$31.884 = US$1.00 (the “Fixed Exchange Rate”)) by the Conversion Price (as hereinafter defined) in effect on the Conversion Date. If more than one Bond shall be deposited for conversion at any one time by the same Bondholder, the number of Shares to be issued upon conversion thereof will be calculated on the basis of the aggregate principal amount of the Bonds so deposited. Fractions of Shares will not be issued on conversion, and cash adjustments will not be made in respect thereof by the Company. Notwithstanding the foregoing, in the event of a consolidation or reclassification of Shares by operation of law or otherwise occurring after August 12, 2005, the Company will upon conversion of the Bonds pay in US dollars a sum equal to such portion of the principal amount of the Bond or Bonds deposited for conversion as corresponds to any fraction of a Share not issued as aforesaid if such sum exceeds US$10.00. For the purpose of calculating the amount of such payment, the Company shall use the Fixed Exchange Rate.

(iii) Initial Conversion Price

The price at which Shares will be issued upon conversion (the “Conversion Price”) will initially be NT$38.40 per Share, but will be subject to adjustment in the manner provided in Condition 6(C).

(iv) Revival on default

Notwithstanding the provisions of Condition 6(A)(i), if the Company shall default in making payment in full in respect of any Bond which shall have been called for redemption on or prior to August 19, 2010 on the date fixed for redemption thereof, the Conversion Right attaching to such Bond will continue to be exercisable up to and including the close of business (at the place where the Bond is deposited for conversion) on the date upon which the full amount of the monies payable in respect of such Bond has been duly received by the Trustee or the Principal Agent and notice of such receipt has been duly given to the Bondholders.

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(B) Conversion procedure

(i) Exercise procedure

To exercise the Conversion Right attaching to any Bond, the holder thereof must complete, execute and deposit at his own expense between 9:00 am and 3:00 pm (local time at the specified office referred to below) on any business day during the Conversion Period at the specified office of a Conversion Agent outside the ROC at which the Bond is presented for conversion a notice of conversion (a “Conversion Notice”) in duplicate, duly completed and signed, in the then current form obtainable from the specified office of any Conversion Agent, together with the Certificate relating to the relevant Bond and any certificates and other documents as may be required under the law of the ROC or the jurisdiction in which such Conversion Agent shall be located. Any Conversion Notice received by the Conversion Agent after 3:00 pm shall be deemed to have been delivered on the following business day.

A Conversion Notice once deposited may not be withdrawn without the consent in writing of the Company. Bondholders who deposit a Conversion Notice during a Closed Period will not be permitted to convert their Bond until the day following the last day of that Closed Period, which (if all other conditions to conversion have been fulfilled) will be the Conversion Date for such Bonds. Such Bondholders will not be registered as shareholders of the Company and will retain the rights of a Bondholder with respect to the Bonds until the Conversion Date. The price at which such Bonds will be converted will be the Conversion Price in effect on the Conversion Date.

(ii) Taxes and expenses; deposit date and conversion date

Together with the Conversion Notice, the Bondholder must pay to the relevant Conversion Agent all stamp, issue, registration and similar taxes and duties (if any) arising on conversion in the country in which the Bond is deposited for conversion, or payable in any jurisdiction consequent upon the issue or delivery of Shares or any other property or cash upon conversion to or to the order of a person other than the converting Bondholder. Except as aforesaid, the Company will pay the expenses arising in the ROC on the issue of Shares on conversion of Bonds and all charges of the Conversion Agents in connection therewith as provided in the Agency Agreement. The date on which any Bond and the Conversion Notice (in duplicate) relating thereto are deposited with a Conversion Agent and the payments, if any, required to be paid by the Bondholder are made is hereinafter referred to as the “Deposit Date”. The “Conversion Date” applicable to a Bond shall mean the next day following the Deposit Date, which day both is a Stock Exchange Business Day and occurs during the Conversion Period.

(iii) Bondholder of record

In the event the converting Bondholder elects to receive Shares, with effect from the Conversion Date, the Company will deem the converting Bondholder as indicated in the Conversion Notice to have become the holder of record of the number of Shares to be issued upon such conversion (disregarding any retroactive adjustment of the Conversion Price referred to below prior to the time such retroactive adjustment shall have become effective) and at such time, subject to Condition 6(B)(v), the rights of such converting Bondholder as a Bondholder with respect to the Bonds deposited for conversion shall cease (except rights arising under Conditions 6(B)(iv), 6(B)(vi) and 6(E)(ii)).

(iv) Availability of Shares

The Company shall, for the benefit of Bondholders, ensure that sufficient Shares, which are listed on the TSE, are available as soon as possible and in any event within five Stock Exchange Business Days after the applicable Conversion Date.

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(v) Delivery of Shares

On the Conversion Date the Company will register the converting Bondholder (or its designee) in the Company’s register of shareholders as the owner of the number of Shares to be issued pursuant to Condition 6(B)(iii) upon conversion of such Bonds and, subject to any applicable limitations then imposed by ROC laws and regulations (including any limitations on foreign ownership of Shares), according to the request made in the relevant Conversion Notice, that the Company will otherwise deliver, as soon as practicable, and in any event within five Stock Exchange Business Days after (and including) the Conversion Date, for the benefit of the converting Bondholder:

(a) the relevant Shares, either through book-entry transfer or physical delivery to an account registered in the name of the converting holder or its designee specified for that purpose in the Conversion Notice at Taiwan Securities Central Depository Co., Ltd. or its successor;
(b) any other securities, property or cash (including, without limitation, cash payable pursuant to Condition 6(A)(ii)) required to be delivered upon conversion and such assignments; and
(c) other documents (if any) as may be required by law to effect the delivery thereof.

(vi) Retroactive adjustment of Conversion Price

If the Conversion Date in relation to any Bond shall be on or after a date with effect from which an adjustment to the Conversion Price takes retroactive effect pursuant to any of the provisions referred to in Condition 6(C) and the Indenture and the relevant Conversion Date falls on a date when the relevant adjustment has not been reflected in the Conversion Price, the Company will, within 20 days after the date of such adjustment of the Conversion Price, issue and deliver such number of Shares as is equal to the excess of the number of Shares that would have been required to be issued on conversion of such Bond if the relevant retroactive adjustment had been made as at the said Conversion Date over the number of Shares previously issued pursuant to such conversion, and in such event and in respect of such number of Shares references in Condition 6(B)(iii) and (v) to the Conversion Date shall be deemed to refer to the date upon which such retroactive adjustment becomes effective (disregarding the fact that it becomes effective retroactively). Fractions of Shares will not be issued and no cash adjustment will be made in respect thereof.

(vii) Dividends and other entitlements

Shares issued on conversion of Bonds (if applicable) will in all respects rank pari passu with the Shares in issue on the relevant Conversion Date (except for any right the record date for which precedes such Conversion Date and except for any other right excluded by mandatory provisions of applicable law). Any dividend on the Shares issued upon conversion of a Bond or Bonds, with respect to the Dividend Accrual Period during which the relevant Conversion Date falls will be paid (except as described above) with respect to the full Dividend Accrual Period as if the conversion took effect at the beginning of such Dividend Accrual Period. A “Dividend Accrual Period” means an annual period ending on 31 December in any year or such other period by reference to which the Company declares a dividend.

(viii) Conversion Agents

The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of any Conversion Agent and to appoint further or other Conversion Agents, provided that the Company will at all times maintain Conversion

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Agents having specified offices in London. Notice of any such termination or appointment and of any changes in the specified offices of the Conversion Agents will be given promptly by the Company to the Bondholders in accordance with Condition 15 and to the Trustee in accordance with the Indenture.

(C) Adjustments to Conversion Price

The Conversion Price will be subject to adjustment as follows:

(i) Free distribution, bonus issue, division, consolidation, reclassification of Shares and capital reduction

Adjustment: If the Company shall (a) make a free distribution of Shares, (b) make a bonus issue of its Shares (including employee stock bonuses), (c) divide its outstanding Shares, (d) consolidate its outstanding Shares into a smaller number of Shares, (e) reduce its outstanding Shares by way of cancellation of Shares held by shareholders of the Company on a pro-rata basis (and which does not involve any distribution of assets) to reflect the write-off of accumulated losses of the Company in accordance with ROC law, or (f) re-classify any of its Shares into other securities of the Company, then the Conversion Price shall be appropriately adjusted so that the holder of any Bond, the Conversion Date in respect of which occurs after the coming into effect of the adjustment described in this Condition 6(C)(i), shall be entitled to receive on exercise of the Conversion Right the number of Shares and/or other securities of the Company which he would have held or have been entitled to receive after the happening of any of the events described above had such Bond been converted immediately prior to the happening of such event (or, if the Company has fixed a prior record date for the determination of shareholders entitled to receive any such free distribution or bonus issue of Shares or other securities issued upon any such division, consolidation or re-classification, immediately prior to such record date), but without prejudice to the effect of any other adjustment to the Conversion Price made with effect from the date of the happening of such event (or such record date) or any time thereafter.

Effective date of adjustment: An adjustment made pursuant to Condition 6(C)(i) shall become effective immediately on the relevant event referred to in Condition 6(C)(i) becoming effective or, if a record date is fixed therefor, immediately after such record date; provided that in the case of a free distribution or bonus issue of Shares which must, under applicable laws of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the Board of Directors of the Company before being legally paid or made, and which is so approved after the record date fixed for the determination of shareholders entitled to receive such distribution or issue, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.

(ii) Declaration of dividend in Shares

Adjustment: If the Company shall declare a dividend in Shares then the Conversion Price shall be appropriately adjusted so that the holder of any Bond, the Conversion Date in respect of which occurs after the coming into effect of the adjustment described in this Condition 6(C)(ii), shall be entitled to receive on exercise of the Conversion Right the number of Shares and/or other securities of the Company which he would have held or have been entitled to receive after the date when such dividend is declared had such Bond been converted immediately prior to the happening of such event (or, if the Company has fixed a prior record date for the determination of shareholders entitled to receive such dividend, immediately prior to such record date), but without prejudice to the effect of any other adjustment to the Conversion Price made with effect from the date of the happening of such event (or such record date) or any time thereafter. No account is to be taken of, or credit given for, the par value of the Shares issued in a dividend in Shares in calculating the appropriate conversion price adjustment, so that the full dilutive effect is provided for.

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Effective date of adjustment: An adjustment made pursuant to Condition 6(C)(ii) shall become effective immediately on the relevant event referred to in Condition 6(C)(ii) becoming effective or, if a record date is fixed therefor, immediately after such record date; provided that in the case of a dividend in Shares which must, under applicable laws of the ROC, be submitted for approval to a general meeting of shareholders of the Company before being legally paid or made, and which is so approved after the record date fixed for the determination of shareholders entitled to receive such dividend, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.

(iii) Concurrent adjustment events

If the Company shall declare a dividend in, or make a free distribution or bonus issue of, Shares which dividend, issue or distribution is to be paid or made to shareholders as of a record date which is also:

(a) the record date for the issue of any rights or warrants which requires an adjustment of the Conversion Price pursuant to Conditions 6(C)(iv), 6(C)(v) or 6(C)(vi);
(b) the day immediately before the date of issue of any securities convertible into or exchangeable for Shares which requires an adjustment of the Conversion Price pursuant to Condition 6(C)(viii);
(c) the day immediately before the date of issue of any Shares which requires an adjustment of the Conversion Price pursuant to Condition 6(C)(ix) or, if applicable, the record date for determination of stock dividend entitlement as referred to in Condition 6(C)(ix);
(d) the day immediately before the date of issue of any rights, options or warrants which requires an adjustment of the Conversion Price pursuant to Condition 6(C)(x); or
(e) determined by the Company and notified by the Company to the Trustee in writing to be the relevant date for an event or circumstance which requires an adjustment to the Conversion Price pursuant to Condition 6(C)(xii),

then (except where such dividend, bonus issue or free distribution gives rise to a retroactive adjustment of the Conversion Price under Condition 6(C)(i) or 6(C)(ii)) no adjustment of the Conversion Price in respect of such dividend, bonus issue or free distribution shall be made under Condition 6(C)(i) or Condition 6(C)(ii), but in lieu thereof an adjustment shall be made under Conditions 6(C)(iv), 6(C)(v), 6(C)(vi), 6(C)(viii), 6(C)(ix), 6(C)(x) or 6(C)(xii) (as the case may require) by including in the denominator of the fraction described therein the aggregate number of Shares to be issued pursuant to such dividend, bonus issue or free distribution.

(iv) Rights Issues to Shareholders

Adjustment: If the Company shall grant, issue or offer to the holders of Shares rights entitling them to subscribe for or purchase Shares (which shall include those Shares which are required to be offered to employees and persons other than holders of Shares) (each a “Rights Issue”):

(a) at a consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price (as defined in Condition 6(C)(xiv)) per Share at such record date; or

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(b) at a consideration per Share receivable by the Company which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration, then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such rights or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP = the Conversion Price after such adjustment;

OCP = the Conversion Price before such adjustment;

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.
n = the number of Shares issued in connection with the Rights Issue at the said consideration.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

Effective date of adjustment: Subject as provided below, such adjustment shall become effective immediately after the issue of the Shares pursuant to the Rights Issue but retroactively to immediately after the record date mentioned above.

If, in connection with a Rights Issue, no Shares are ultimately issued, no adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(v) Warrants issued to Shareholders

Adjustment: If the Company shall grant, issue or offer to the holders of Shares warrants entitling them to subscribe for or purchase Shares:

(a) at a consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) which is fixed on or prior to the record date for the determination of shareholders entitled to receive such warrants and is less than the Current Market Price per Share at such record date; or
(b) at a consideration per Share receivable by the Company which is fixed after the record date mentioned above and is less than the Current Market Price per Share on the date the Company fixes the said consideration, then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such warrants or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

N + v NCP = OCP x

N + n

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where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.
n = the number of Shares to be issued upon exercise of such warrants at the said consideration which, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (aa) the number of warrants which underwriters have agreed to underwrite as referred to below or, as the case may be, (bb) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(C)(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

Effective date of adjustment: Subject as provided below, such adjustment shall become effective (i) where no applications for such warrants are required from shareholders entitled to the same, upon their issue and (ii) where applications by shareholders entitled to the same are required as aforesaid, immediately after the latest date for the submission of such applications or (if later) immediately after the Company fixes the said consideration but in all cases retroactively to immediately after the record date mentioned above.

Warrants not subscribed for by Shareholders: If, in connection with a grant, issue or offer to the holders of Shares of warrants entitling them to subscribe for or purchase Shares in the circumstances described in (a) and (b) of this Condition 6(C)(v), any warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of warrants entitling them to subscribe for or purchase Shares, any warrants which are not subscribed for or purchased by the underwriters who have agreed to underwrite as referred to above or by the shareholders entitled thereto (or persons to whom shareholders have transferred the right to purchase such warrants) who have submitted applications for such warrants as referred to above are offered to and/or subscribed by others, no further adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(vi) Issues of rights or warrants for equity related securities to Shareholders

Adjustment: If the Company shall grant, issue or offer to the holders of Shares rights or warrants entitling them to subscribe for or purchase any securities convertible into or exchangeable for Shares: at a consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price per Share at such record date; or

(a) at a consideration per Share receivable by the Company (determined as aforesaid) which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration,

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(b) then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such rights or warrants or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.
n = the number of Shares initially to be issued upon exercise of such rights or warrants and conversion or exchange of such convertible or exchangeable securities at the said consideration being, in the case of rights, (aa) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities which the underwriters have agreed to underwrite as referred to below or, as the case may be, (bb) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa) and which, in the case of warrants, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (x) the number of warrants which underwriters have agreed to underwrite as referred to below or, as the case may be, (y) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(C)(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

Effective date of adjustment: Subject as provided below, such adjustment shall become effective (a) where no applications for such warrants are required from shareholders entitled to the same, upon their issue and (b) where applications by shareholders entitled to the warrants are required as aforesaid and in the case of convertible or exchangeable securities by shareholders entitled to the same pursuant to such rights, immediately after the latest date for the submission of such applications or (if later) immediately after the Company fixes the said consideration; but in all cases retroactively to immediately after the record date mentioned above.

Rights or warrants not taken up by Shareholders: If, in connection with a grant, issue or offer to the holders of Shares of rights or warrants entitling them to subscribe for or purchase securities convertible into or exchangeable for Shares in the circumstances described in this Condition 6(C)(vi), any convertible or exchangeable securities or warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such convertible or exchangeable securities or warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

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If, in connection with a grant, issue or offer to the holders of Shares or rights or warrants entitling them to subscribe for or purchase securities convertible into or exchangeable for Shares, any convertible or exchangeable securities or warrants which are not subscribed for or purchased by the underwriters who have agreed to underwrite as referred to above or by the shareholders entitled thereto (or persons to whom shareholders have transferred such rights or the right to purchase such warrants) who have submitted applications for such convertible or exchangeable securities or warrants as referred to above are offered to and/or subscribed by others, no further adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(vii) Capital Distribution

Adjustment: If the Company shall pay or make any Capital Distribution (as defined below) to its shareholders, then the Conversion Price shall be adjusted in accordance with the following formula:

==> picture [145 x 27] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

CMP = the Current Market Price per Share on the last Trading Day preceding the date on which the Capital Distribution is publicly announced.
fmv = the aggregate fair market value on the date of such announcement, as determined in good faith by a leading independent investment bank of international repute selected by the Company and approved by the Trustee and acting as expert, of the portion of the Capital Distribution attributable to one Share.

Effective date of adjustment: Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such Capital Distribution, provided that (a) in the case of such a Capital Distribution which must, under applicable law of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the Board of Directors of the Company before such Capital Distribution may legally be made and is so approved after the record date fixed for the determination of shareholders entitled to receive such Capital Distribution, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date and (b) if the fair market value of such Capital Distribution cannot be determined until the record date fixed for the determination of shareholders entitled to receive such Capital Distribution, such adjustment shall, immediately upon such fair market value being determined, become effective retroactively to immediately after such record date.

If the Company shall pay or make any Capital Distribution in cash only then, in such case, the Conversion Price shall be adjusted (with such adjustment to be effective on the record date for the determination of shareholders entitled to receive such Capital Distribution in cash) in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP and OCP shall have the meanings ascribed thereto in Condition 6(C)(iv) above.

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M = the Current Market Price per Share on such record date.
C = the amount of cash so distributed applicable to one Share.
For the purposes of this Condition 6(C)(vii):

“Capital Distribution” means any dividend or distribution, whether of cash, assets or other property, and whenever paid or made and however described (and for these purposes a distribution of assets includes, without limitation, an issue of shares or other Securities (as defined below) credited as fully or partly paid up) provided that:

(a) where a cash Capital Distribution is announced which is to be, or may at the election of a holder or holders of Shares be, satisfied by the issue or delivery of Shares or other property or assets, then for the purposes of the above formula the Capital Distribution in question shall be treated as a Capital Distribution of (1) the cash Capital Distribution so announced or (2) the fair market value on the date of announcement of such Capital Distribution, of such Shares or other property or assets to be issued or delivered in satisfaction of such Capital Distribution (or which would be issued if all holders of Shares elected therefor, regardless of whether any such election is made) if the fair market value of such Shares or other property or assets is greater than the cash Capital Distribution so announced; and
(b) any issue of Shares falling within Condition 6(C)(ii) shall be disregarded.

“Securities” includes, without limitation, shares in the capital of the Company or options, warrants or other rights to subscribe for or purchase shares in the capital of the Company or evidence of its indebtedness.

(viii) Issue of convertible or exchangeable securities other than to Shareholders or on exercise of warrants

Adjustment: If the Company shall issue any securities convertible into or exchangeable for Shares (other than the Bonds, or in any of the circumstances described in Condition 6(C)(vi) and Condition 6(C)(x)) or grant such rights in respect of any existing securities and the consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such securities is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of issue of such convertible or exchangeable securities shall be adjusted in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC on the day immediately prior to the date of such issue.

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n = the number of Shares to be issued upon conversion or exchange of such convertible or exchangeable securities at the initial conversion or exchange price or rate.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(C)(xv)) would purchase at such Current Market Price per Share.

Effective date of adjustment: Such adjustment shall become effective as of the calendar day in the ROC corresponding to the calendar day at the place of issue on which such convertible or exchangeable securities are issued.

(ix) Other issues of Shares

Adjustment: If the Company shall issue any Shares (other than Shares issued upon conversion or exchange of any convertible or exchangeable securities (including the Bonds) issued by the Company or upon exercise of any rights or warrants granted, offered or issued by the Company or in any of the circumstances described in Conditions 6(C)(i) and 6(C)(ii) but including Shares issued under any employee dividend or profit-sharing arrangements) for a consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such Shares is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the issue of such additional Shares shall be adjusted in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC on the day immediately prior to the date of issue of such additional Shares.
n = the number of additional Shares issued as aforesaid.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(C)(xv)) would purchase at such Current Market Price per Share.

Effective Date of Adjustment: Such adjustment shall become effective as of the calendar day in the ROC of the issue of such additional Shares or, in the case of an issue to employees under any employee stock bonus or profit sharing arrangements, where such an issue is announced at the same time as a stock dividend, such adjustment shall become effective as of the record date for determination of the identity of the shareholders entitled to receive any such dividend.

(x) Issue of equity related Securities

Adjustment: If the Company shall grant, issue or offer options, warrants or rights (excluding those rights and warrants referred to in Conditions 6(C)(iv), 6(C)(v), 6(C)(vi) and 6(C)(vii)) to subscribe for or purchase Shares or securities convertible into or exchangeable for Shares and the consideration per Share receivable by the Company (determined as provided in Condition 6(C)(xv)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the offer, grant or issue of such rights,

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options or warrants is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of the offer, grant or issue of such rights, options or warrants shall be adjusted in accordance with the following formula:

==> picture [121 x 26] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 6(C)(xvi)) at the close of business in the ROC on the day immediately prior to the date of such issue.
n = the number of Shares to be issued on exercise of such rights or warrants and (if applicable) conversion or exchange of such convertible or exchangeable securities at the said consideration.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 6(C)(xv)) would purchase at such Current Market Price per Share.

Effective Date of Adjustment: Such adjustment shall become effective as of the calendar day in the ROC corresponding to the calendar day at the place of issue on which such rights or warrants are issued.

(xi) Tender or exchange offer

Adjustment: If a tender or exchange offer made by the Company or any subsidiary of the Company for all or any portion of the Shares shall expire and such tender or exchange offer shall involve the payment by the Company or such subsidiary of consideration per Share having a fair market value (as determined in good faith by a leading independent investment bank of international repute selected by the Company and approved by the Trustee and acting as expert) at the last time (the “Expiration Date”) tenders or exchanges could have been made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Current Market per Share, as of the Expiration Date, the Conversion Price shall be adjusted in accordance with the following formula:

==> picture [196 x 28] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in Condition 6(C)(iv) above.

N = the number of Shares outstanding (including any tendered or exchanged Shares) on the Expiration Date.

CMP = Current Market Price per Share as of the Expiration Date.

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fmv = the fair market value (as determined in good faith by a leading independent investment bank of international repute selected by the Company and approved by the Trustee and acting as expert) of the aggregate consideration payable to the holders of Shares based on the acceptance (up to a maximum specified in the terms of the tender or exchange offer) of all Shares validly tendered or exchanged and not withdrawn as of the Expiration Date (the Shares deemed so accepted up to any such maximum, being referred to as the “Purchased Shares”).
n = the number of Purchased Shares.

Effective date of adjustment: Such adjustment shall become retroactively effective immediately prior to the opening of business on the day following the Expiration Date.

Tender or exchange offer not completed: If the Company is obligated to purchase Shares pursuant to any tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchase or if such purchases are rescinded, the Conversion Price shall again be the Conversion Price which would then be in effect if such tender or exchange offer had not been made.

(xii) Analogous events and modifications

If (a) the rights of conversion or exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for, or which carry rights to subscribe for or purchase Shares are modified (other than pursuant to and as provided in the terms and conditions of such options, rights, warrants or securities) or (b) the Company determines or written notice has been given to the Trustee that any other event or circumstance has occurred which has or would have an effect on the position of the Bondholders as a class compared with the position of the holders of all the securities (and options and rights relating thereto) of the Company,

taken as a class which is analogous to any of the events referred to in Conditions 6(C)(i) to 6(C)(xi), then, in any such case, the Company shall notify the Trustee thereof or if the Trustee has been notified under (b), the Trustee shall notify the Company thereof and the Company shall consult with a leading independent investment bank of international repute in Taipei selected by the Company and approved by the Trustee and shall take fully into account the advice received from such bank as to what adjustment, if any, should be made to the Conversion Price (and the timing of any such adjustment) to preserve the value of the Conversion Right of Bondholders and will make any such adjustment.

(xiii) Simultaneous issues of different classes of Shares

In the event of simultaneous issues of two or more classes of share capital comprising Shares or rights or warrants in respect of, or securities convertible into or exchangeable for, two or more classes of share capital comprising Shares, then, for the purposes of this Condition, the formula

==> picture [121 x 26] intentionally omitted <==

shall be restated as

==> picture [181 x 26] intentionally omitted <==

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where v1 and n1 shall have the same meanings as “v” and “n” but by reference to one class of Shares, v2 and n2 shall have the same meanings as “v” and “n” but by reference to a second class of Shares, v3 and n3 shall have the same meanings as “v” and “n” but by reference to a third class of Shares and so on.

(xiv) Current Market Price per Share

For the purposes of these Conditions, the “Current Market Price” per Share on any date means the average of the daily closing prices (as defined below) of the relevant Shares for the 30 consecutive Trading Days commencing 45 Trading Days before such date. If the Company has more than one class of share capital comprising Shares, then the relevant Current Market Price for Shares shall be the price for that class of Shares the issue of which (or of rights or warrants in respect of, or securities convertible into or exchangeable for, that class of Shares) gives rise to the adjustment in question.

If during the said 45 Trading Days or any period thereafter up to but excluding the date as of which the adjustment of the Conversion Price in question shall be effected, any event (other than the event which requires the adjustment in question) shall occur which gives rise to a separate adjustment to the Conversion Price under the provisions of these Conditions, then the Current Market Price as determined above shall be adjusted in such manner and to such extent as a leading independent investment bank of international repute in Taipei selected by the Company and approved by the Trustee shall in its absolute discretion deem appropriate and fair to compensate for the effect thereof.

For the purposes of these Conditions:

“Closing Price” of the Shares for each Trading Day shall be the last reported transaction price of the Shares on the TSE for such day or, if no transaction takes place on such day, the average of the closing bid and offered prices of Shares on the TSE in effect on the Trading Day immediately preceding such day as furnished by a leading independent securities firm licensed to trade on the TSE selected from time to time by the Company for the purpose; and

“Trading Day” means a day when the TSE is open for business, but does not include a day when (a) no such last transaction price or closing bid and offered prices is/are reported and (b) (if the Shares are not listed or admitted to trading on such exchange) no such closing bid and offered prices are furnished as aforesaid.

(xv) Consideration receivable by the Company

For the purposes of any calculation of the consideration receivable by the Company pursuant to Conditions 6(C)(iv), 6(C)(v), 6(C)(vi), 6(C)(viii), 6(C)(ix) and 6(C)(x) above, the following provisions shall be applicable:

(a) in the case of the issue of Shares for cash, the consideration shall be the amount of such cash, provided that in no such case shall any deduction be made for any commissions or any expenses paid or incurred by the Company for any underwriting of the issue or otherwise in connection therewith;
(b) in the case of the issue of Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Company (and in making such determination the Company shall consult a leading independent investment bank of international repute in Taipei selected by the Company and approved by the Trustee and shall take fully into account

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the advice received from such bank) or, if pursuant to applicable law of the ROC such determination is to be made by application to a court of competent jurisdiction, as determined by such court or an appraiser appointed by such court, irrespective of the accounting treatment thereof;

(c) in the case of the issue (whether initially or upon the exercise of rights or warrants) of securities convertible into or exchangeable for Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for such securities and (if applicable) rights or warrants plus the additional consideration (if any) to be received by the Company upon (and assuming) the conversion or exchange of such securities at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in this Condition 6(C)(xv)) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) such conversion or exchange at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price;
(d) in the case of the issue of rights or warrants to subscribe for or purchase Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for any such rights or warrants plus the additional consideration to be received by the Company upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in (a) and (b) above) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price;
(e) if any of the considerations referred to in any of the preceding paragraphs of this Condition 6(C)(xv) is receivable in a currency other than NT dollars, such consideration shall (in any case where there is a fixed rate of exchange between the NT dollar and the relevant currency for the purposes of the issue of the Shares, the conversion or exchange of such securities or the exercise of such rights or warrants) be translated into NT dollars for the purposes of this Condition 6(C)(xv) at such fixed rate of exchange and shall (in all other cases) be translated into NT dollars at the mean of the exchange rate quotations (being quotations for the cross rate through US dollars if no direct rate is quoted) by a leading bank in the ROC for buying and selling spot units of the relevant currency by telegraphic transfer against NT dollars on the date as of which the said consideration is required to be calculated as aforesaid; and
(f) in the case of the issue of Shares (including, without limitation, to employees under any employee bonus or profit sharing arrangements) credited as fully paid out of retained earnings or capitalization of reserves at their par value, the aggregate consideration receivable by the Company shall be deemed to be zero (and accordingly the number of Shares which such aggregate consideration receivable by the Company could purchase at the relevant Current Market Price per Share shall also be deemed to be zero).

(xvi) Cumulative adjustments

If, at the time of computing an adjustment (the “later adjustment”) of the Conversion Price pursuant to any of Conditions 6(C)(ii), 6(C)(iv), 6(C)(v), 6(C)(vi), 6(C)(viii), 6(C)(ix), 6(C)(x) and 6(C)(xii) above, the Conversion Price already incorporates an adjustment made (or taken or to be taken into account pursuant to the proviso to Condition 6(C)(xvii)) to reflect an issue of

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Shares or of securities convertible into or exchangeable for Shares or of rights or warrants to subscribe for or purchase Shares or securities, to the extent that the number of such Shares or securities taken into account for the purposes of calculating such adjustment exceeds the number of such Shares in issue at the time relevant for ascertaining the number of outstanding Shares for the purposes of computing the later adjustment, such excess Shares shall be deemed to be outstanding for the purposes of making such computation.

(xvii) Minor adjustments

No adjustment of the Conversion Price shall be required if the adjustment would be less than 1% of the Conversion Price then in effect; provided that any adjustment which by reason of this Condition 6(C)(xvii) is not required to be made shall be carried forward and taken into account (as if such adjustment had been made at the time when it would have been made but for the provisions of this Condition 6(C)(xvii)) in any subsequent adjustment. All calculations under this Condition 6(C) shall be made to the nearest NT$0.01 with NT$0.005 being rounded up to the next NT$0.01.

(xviii) Minimum Conversion Price

Notwithstanding the provisions of this Condition 6(C), the Company covenants that Conversion Price shall not be reduced below the par value of the Shares (NT$10 at the date hereof) as a result of any adjustment made hereunder unless under applicable law then in effect Bonds may be converted at such reduced Conversion Price into legally issued, fully-paid and non-assessable Shares.

(xix) Reference to “fixed”

Any references herein to the date on which a consideration is “fixed” shall, where the consideration is originally expressed by reference to a formula which cannot be expressed as an actual cash amount until a later date, be construed as a reference to the first day on which such actual cash amount can be ascertained.

(xx) Trustee not obliged to monitor

The Trustee shall not be under any duty to monitor whether any event or circumstance has happened or exists within Condition 6(C)(i) to 6(C)(xiii) and will not be responsible to Bondholders for any loss arising from any failure by it to do so.

(xxi) Approval of Trustee

All calculations relating to adjustment of the Conversion Price shall be performed by the Company and approved by the Trustee before notice of any such adjustment is given to Bondholders.

(D) Mergers; disposals

The Company will not merge, amalgamate or consolidate with or into any other corporation or entity (the Company not being the continuing entity) or sell or transfer all, or substantially all, of the assets of the Company, whether as a single transaction or number of transactions, related or not, to any corporation, entity or person or to one or more members of any group under the common control of any corporation, entity or person unless:

(i) the Company shall have notified the Bondholders of such event in accordance with Condition 15;

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the Company and such corporation, entity or person resulting from such consolidation, amalgamation or merger or the corporation or the entity which has acquired such assets, as the case may be, shall have executed an indenture supplemental to the Indenture in form and substance satisfactory to the Trustee (a) providing that such corporation, entity or person shall assume the obligations of the Company under the Bonds, the Indenture and the Agency Agreement; (b) providing that each Bond then outstanding shall be convertible into the class and amount of shares and other securities, cash and other property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of Shares into which such Bond would have been convertible immediately prior to such consolidation, amalgamation, merger, sale or transfer (assuming for such purpose that the Bonds were convertible at the time of such consolidation, amalgamation, merger, sale or transfer) at the Conversion Price as adjusted from time to time pursuant to the Indenture; and (c) providing for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in Conditions 6(C);

(ii) immediately after giving effect to such merger, amalgamation, consolidation, sale or transfer, no Event of Default shall have occurred or be continuing or would result therefrom; and
(iii) the corporation or entity formed by such merger, amalgamation or consolidation or that acquired such assets shall expressly agree, among other things, to indemnify each Bondholder against any tax, assessment or government charge payable by withholding or deduction thereafter imposed on such holder solely as a consequence of such merger, amalgamation, consolidation, sale or transfer with respect to the payment of any amount in connection with the Bonds.

The above provisions of this Condition 6(D) will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers.

(E) Conversion undertakings

(i) Depositary Receipt facility

Subject to the ROC FSC’s separate approval, if required, the Company will make arrangements satisfactory to the Trustee for Shares delivered on conversion of the Bonds to be deposited into a depositary receipt facility or similar scheme, and for depositary receipts or other scrip evidencing Shares to be delivered to the converting Bondholder, if a converting Bondholder so requests in respect of such Shares. Any such arrangements shall not require approval of the Bondholders and shall be subject to the terms and conditions of such facility or scheme.

The initial arrangements made by the Company for Bondholders to elect to direct the Company to deposit Shares issued on conversion of the Bonds with the Depositary for issuance of GDRs are set out in the Indenture and summarized in the Offering Circular.

(ii) Closed Periods

The Company undertakes to ensure that any Closed Period is as short a period as is reasonably practicable having regard to applicable ROC laws and regulations and practices.

The Company has also given certain other undertakings in the Indenture for the protection of the Conversion Rights.

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(F) Notice of Change in Conversion Price

The Company shall give notice to the Bondholders in accordance with Condition 15 of any change in the Conversion Price. Any such notice relating to a change in the Conversion Price shall set forth the event giving rise to the adjustment, the Conversion Price prior to such adjustment, the adjusted Conversion Price and the effective date of such adjustment.

7 Payments

(A) Method of payment

Payment of principal, premium (if any) and interest (if any) will be made by transfer to the registered account of the Bondholder or by US dollar cheque drawn on a bank in New York City mailed to the registered address of the Bondholder if it does not have a registered account. Payments of principal, premium (if any) and interest (if any) will only be made after surrender of the relevant Certificate at the specified office of any Agent.

References in these Conditions, the Indenture and Agency Agreement to principal in respect of any Bond shall, where the context so permits, be deemed to include a reference to any premium, interest and other amounts payable thereon.

(B) Registered accounts

A Bondholder’s registered account means the US dollar account maintained by or on behalf of it with a bank in New York City details of which appear on the register of Bondholders at the close of business on the fifth business day (as defined below) before the due date for payment and a Bondholder’s registered address means its address appearing on the register of Bondholders at that time.

(C) Fiscal laws

All payments are subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 9. No commissions or expenses shall be charged to the Bondholders in respect of such payments.

(D) Payment initiation

Where payment is to be made by transfer to a registered account, payment instructions (for value the due date or, if that is not a business day, for value the first following day which is a business day) will be initiated and, where payment is to be made by cheque, the cheque will be mailed on the business day preceding the due date for payment or, in the case of a payment of principal, if later, on the business day on which the relevant Certificate is surrendered at the specified office of an Agent.

(E) Default interest

If the Company fails to pay any sum in respect of the Bonds when the same becomes due and payable under these Conditions, interest shall accrue on the overdue sum at the rate of 6% per annum from the due date and ending on the date which the Trustee determines to be the date on and after which payment is to be made to the Bondholders in respect thereof as stated in a notice given to the Bondholders in accordance with Condition 15 (both dates inclusive) as provided in the Indenture. Such default interest shall accrue on the basis of the actual number of days elapsed and a 360-day year.

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(F) Payment delay

Bondholders will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due if the due date is not a business day, if the Bondholder is late in surrendering its Certificate (if required to do so) or if a check mailed in accordance with this Condition arrives after the due date for payment.

(G) Business days

In this Condition 7, “business day” means a day on which commercial banks are open for business in New York City and, in the case of the surrender of a Certificate, in New York City and in the place where the Certificate is surrendered.

(H) Partial payments

If the amount of principal and premium (if any) which is due on the Bonds is not paid in full, the Registrar will annotate the register of Bondholders with a record of the amount of principal and/or premium (if any), in fact paid.

8 Redemption, Purchase and Cancellation

(A) Redemption at maturity

Unless previously redeemed or converted or purchased and cancelled as herein provided, the Company will redeem each Bond at their principal amount, in US dollars, on August 19, 2010 (the “Maturity Date”). The Bonds may be redeemed by the Company in whole or in part prior to that date only as provided in Conditions 8(B) and (C) (but without prejudice to Condition 10).

(B) Redemption at the option of the Company

At any time on or after August 19, 2007 and prior to the Maturity Date, the Company may (subject to this Condition 8(B)), having given not less than 30 nor more than 60 days’ notice to the holders of the Bonds (which notice shall be irrevocable), redeem the Bonds, in whole or in part (being US$10,000,000 in principal amount or an integral multiple thereof), at their principal amount, in US dollars, on the relevant date of redemption; provided, however, that no such redemption may be made unless the Closing Price of the Shares, translated into US dollars at the Prevailing Rate, for a period of 20 consecutive Trading Days, the last of which occurs not more than five Trading Days prior to the date upon which notice of such redemption is given, is 130% or above the Conversion Price then in effect, translated into US dollars at the Fixed Exchange Rate. If an event giving rise to a change in the Conversion Price occurs during any such 20 consecutive Trading Day period, appropriate adjustments for the relevant days shall be made for the purpose of calculating the Closing Price for such days.

Notwithstanding the conditions to the Company’s right to redeem the Bonds set forth in the immediately preceding paragraph, at any time, the Company may, having given not less than 30 nor more than 60 days’ notice to the holders (which notice shall be irrevocable), redeem the Bonds, in whole but not in part at their principal amount, in US dollars, if at least 90% in principal amount of the Bonds has already been redeemed, converted or purchased and cancelled. No notice of redemption given under this Condition 8(B) shall be effective if it specifies a date for redemption which falls during a Closed Period (as defined in Condition 6(A)) or within 15 business days immediately after the expiry of any Closed Period. Upon the expiry of any effective notice of redemption, the Company will be bound to redeem the Bonds to which such notice relates at the date fixed for redemption.

“Prevailing Rate” for any Trading Day means the closing rate for the purchase of US dollars with NT dollars quoted by Taipei Forex Inc. at the close of business on each Trading Day during the 20 consecutive Trading Day period and shall be expressed as the number of NT dollars per US$1.00.

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(C) Redemption for taxation reasons

At any time, the Company may (subject to this Condition 8(C)), having given not less than 30 nor more than 60 days notice to the Bondholders (in accordance with Condition 15) (which notice shall be irrevocable) redeem all but not some only of the Bonds at their principal amount, in US dollars, (such date of redemptions, the “Tax Redemption Date”) if (i) the Company satisfies the Trustee immediately prior to the giving of such notice that it has or will become obliged to pay additional amounts as provided or referred to in Condition 9(C) as a result of any change in, or amendment to, the laws or regulations of the ROC or any political subdivision or any authority thereof or therein having power to tax, or any change in the general application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after August 12, 2005 and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company would be obliged to pay such additional amounts were a payment in respect of the Bonds then due. Prior to the publication of any notice of redemption pursuant to this paragraph, the Company shall deliver to the Trustee a certificate signed by two authorized officers of the Company stating that the obligation referred to in (i) above cannot be avoided by the Company taking reasonable measures available to it and the Trustee shall be entitled to accept such certificate as sufficient evidence of the satisfaction of the condition precedent set out in (ii) above in which event it shall be conclusive and binding on the Bondholders.

If the Company gives a notice pursuant to this Condition 8(C), each Bondholder will have the right to elect that all or a portion of its Bonds (being US$1,000 in principal amount or an integral multiple thereof) shall not be redeemed and that the provisions of Condition 9 shall not apply in respect of any payment of principal to be made in respect of such Bond(s) which falls due after the relevant Tax Redemption Date whereupon no Additional Amounts shall be payable in respect thereof pursuant to Condition 9 and payment of all amounts shall be made subject to the deduction or withholding of the ROC taxation required to be withheld or deducted. For the avoidance of doubt, any withholding or deduction which had been payable in respect of the Bonds as a result of the laws or regulations of the ROC in effect on the original date of their issuance will continue to be payable to such Bondholders. To exercise such right, the holder of the relevant Bond must complete, sign and deposit at the specified office of any Paying Agent a duly completed and signed notice of non-redemption, in the form for the time being current, obtainable from the specified office of any Paying Agent together with the Certificate evidencing the Bonds on or before the day falling 10 days prior to the Tax Redemption Date.

(D) Redemption at the option of Bondholders

The Company will, at the option of the holder of any Bond, redeem such Bond on August 19, 2007 (the “Put Date”) at its principal amount in US dollars. To exercise such option, the holder must deposit the Certificate issued in respect of such Bond with any Agent together with a duly completed redemption notice in the form obtainable from any of the Agents, not more than 60 nor less than 30 days prior to such date. No Bond so deposited may be withdrawn (except as provided in the Agency Agreement) without prior consent of the Company. Not less than 30 nor more than 45 days’ notice of the commencement of the period for the deposit of Certificates for redemption pursuant to this Condition 8(D) shall be given to the Bondholders by the Company.

(E) Delisting Put Right

(i) In the event the Shares cease to be listed or admitted to trading on the TSE (a “Delisting”) each Bondholder shall have the right (the “Delisting Put Right”), at such Bondholder’s option, to require the Company to repurchase all (but not less than all) of such Bondholder’s Bonds on the 20th business day after notice has been given to the Bondholder regarding the Delisting referred to under paragraph (ii) below (the “Delisting Put Date”) at a price equal to their principal amount, in US dollars, on the relevant date for redemption (the “Delisting Put Price”).

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(ii) Promptly after becoming aware of a Delisting, the Company shall procure that notice regarding the Delisting Put Right shall be given to Bondholders (in accordance with Condition 15) stating:
(a) the Delisting Put Date;
(b) the date of such Delisting and, briefly, the events causing such Delisting;
(c) the date by which the Purchase Notice (as defined below) must be given;
(d) the Delisting Put Price and the method by which such amount will be paid;
(e) the name and addresses of all Paying Agents;
(f) briefly, the Conversion Right of the Bondholders and the then current Conversion Price;
(g) the procedures that Bondholders must follow and the requirements that Bondholders must satisfy in order to exercise their repurchase rights and Conversion Right; and
(h) that a Purchase Notice, once validly given, may not be withdrawn.

To exercise its rights to require the Company to purchase its Bonds, the Bondholder must deliver a written irrevocable notice of the exercise of such right (a “Purchase Notice”), in the then current form obtainable from the specified office of any Agent, to any Paying Agent on any business day prior to the close of business at the location of such Paying Agent on such day and which day is not less than 10 business days prior to the Delisting Put Date.

Payment of the Delisting Put Price upon exercise of the Delisting Put Right for any Certificate for which a Purchase Notice has been delivered is conditional upon delivery of such Certificate (together with any necessary endorsements) to any Paying Agent on any business day together with the delivery of such Purchase Notice and will be made promptly following the later of the Delisting Put Date and the time of delivery of such Certificate. If the Paying Agent holds on the Delisting Put Date money sufficient to pay the Delisting Put Price of Bonds for which Purchase Notices have been delivered in accordance with the provisions hereof upon exercise of such right, then, whether or not such Bond is delivered to the Paying Agent, on and after such Delisting Put Date, (i) such Bond will cease to be outstanding; (ii) such Bond will be deemed paid; and (iii) all other rights of the Bondholder shall terminate (other than the right to receive the Delisting Put Price).

For the purposes of this Condition, “business day” shall mean a day on which commercial banks are open for business in London and New York.

(F) Redemption for Change of Control

Following the occurrence of a Change of Control, the holder of each Bond will have the right at such holder’s option, to require the Company to redeem all (but not less than all) of such holders’ Bonds on the Change of Control Put Date at a price equal to their principal amount, in US dollars, on the Change of Control Put Date. To exercise such right, the holder of the relevant Bond must complete, sign and deposit at the specified office of any Paying Agent a duly completed and signed notice of redemption, in the form for the time being current, obtainable from the specified office of any Paying Agent (“Put Exercise Notice”) together with the Certificate evidencing the Bonds to be redeemed by not later than 60 days following a Change of Control, or, if later, 60 days following the date upon which notice thereof is given to Bondholders by the Company in accordance with Condition 15. The “Change of Control Put Date” shall be the fourteenth day after the expiry of such period of 60 days as referred to above.

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A Put Exercise Notice, once delivered, shall be irrevocable (and may not be withdrawn unless the Company consents to such withdrawal) and the Company shall redeem the Bonds the subject of Put Exercise Notices delivered as aforesaid on the Change of Control Put Date.

The Trustee shall not be required to take any steps to ascertain whether a Change of Control or any event which could lead to the occurrence of a Change of Control has occurred.

The Company shall give notice to Bondholders in accordance with Condition 15 by not later than 14 days following the first day on which it becomes aware of the occurrence of a Change of Control, which notice shall specify the procedure for exercise by holders of their rights to require redemption of the Bonds pursuant to this Condition 8(F).

A “Change of Control” occurs when:

(i) any Person or Persons acting together acquires Control of the Company if such Person or Persons does not or do not have, and would not be deemed to have, Control of the Company on the Closing Date;
(ii) the Company consolidates with or merges into or sells or transfers all or substantially all of the Company’s assets to any other Person, unless the consolidation, merger, sale or transfer will not result in the other Person or Persons acquiring Control over the Company or the successor entity; or
(iii) one or more other Persons acquires the legal or beneficial ownership of all or substantially all of the Company’s capital stock.

“Control” means the right to appoint and/or remove all or the majority of the members of the Company’s board of directors or other governing body, whether obtained directly or indirectly, and whether obtained by ownership of share capital, the possession of voting rights, contract or otherwise;

a “Person” includes any individual, company, corporation, firm, partnership, joint venture, undertaking, association, organization, trust, state or agency of a state (in each case whether or not being a separate legal entity) but does not include the Company’s directors or any other governing board and does not include the Company’s majority-owned direct or indirect Subsidiaries.

(G) Purchase

The Company or any of its Subsidiaries may at any time and from time to time purchase Bonds in the open market or otherwise. Bonds so purchased will be deemed cancelled and may not be reissued or resold.

(H) Selection of Bonds

In the case of a redemption of some only of the Bonds pursuant to Condition 8(B), the Bonds to be redeemed will be selected individually by lot by the Principal Agent, in such place as the Trustee shall approve and in such manner as the Trustee shall deem to be appropriate and fair not more than 70 days and not less than 40 days prior to the date fixed for redemption.

(I) Cancellation

All Bonds which are redeemed or converted or purchased and surrendered to any Agent will forthwith be cancelled. Certificates in respect of all Bonds cancelled will be forwarded to or to the order of the Principal Agent and such Bonds may not be reissued or resold.

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(J) Redemption procedures

All notices to Bondholders given by or on behalf of the Company pursuant to this Condition will specify the date fixed for redemption, the redemption price, the Conversion Price as at the date of the relevant notice, the Closing Price of the Shares and the aggregate principal amount of the Bonds outstanding as at the latest practicable date prior to the publication of the notice and, in the case of a partial redemption, a list of the Bonds called for redemption (when applicable).

To exercise its right to redeem the bonds in accordance with Condition 8(B) or 8(C), the Company shall provide the relevant information to the Trustee with sufficient time in advance to enable the Trustee to notify each Bondholder not less than 30 nor more than 60 days prior to the redemption date. Such notice shall be irrevocable upon its dispatch by the Trustee to the holders. Such notice shall be provided in accordance with Condition 15.

The Company shall provide the relevant information to the Trustee with sufficient time in advance (or, in the case of a Delisting or Change of Control, promptly after the Company’s becoming aware, but in any event within seven days, of such an event) to enable the Trustee to notify each holder of the Bonds (a) in the case of a redemption in accordance with Condition 8(D) or 8(F), not less than 30 nor more than 60 days prior to the Put Date or the date set by the Company for redemption in accordance with Condition 8(F), as the case may be, and (b) in the case of a redemption in accordance with Condition 8(E), 20 business days prior to the Bondholder’s redemption date thereunder. Any such notice shall be provided in accordance with Condition 15.

9 Taxation

(A) All payments of principal, premium (if any) and interest (if any) by the Company will be made free and clear of and without any deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the government of the ROC or any authority thereof or therein having power to tax, unless deduction or withholding of such taxes, duties, assessments or governmental charges is compelled by law.
(B) Where such withholding or deduction is in respect of ROC withholding tax on payments of premium (if any) or interest (if any) at the rate of up to and including 20%, the Company will increase the amount of premium (if any) or interest (if any) paid by it to the extent required so that the net amount of premium (if any) and interest (if any) received by Bondholders (without prejudice to Condition 7) amounts to the relevant amount of the premium (if any) and interest (if any) payable pursuant to Condition 7(E).
(C) In the event that any such withholding or deduction in respect of principal or any additional withholding or deduction in excess of 20% in respect of premium (if any) or interest (if any) is required, the Company will pay such additional amounts (the “Additional Amounts”) by way of principal and premium (if any) and interest (if any) as will result in the receipt by the Bondholders of the amounts which would have been receivable in the absence of any such withholding or deduction, except that no such Additional Amounts shall be payable in respect of any Bond:
(i) to, or on behalf of, a holder who is subject to such taxes, duties, assessments or governmental charges in respect of such Bond by reason of his being connected with the ROC otherwise than merely by holding such Bond or by the receipt of principal or premium (if any) in respect of the Bond; or
(ii) if the Certificate in respect of such Bond is surrendered more than 30 days after the relevant date except to the extent that the holder would have been entitled to such additional amount on surrendering the relevant Certificate for payment on the last day of such 30-day period; where such withholding or deduction is imposed on a payment to an individual and is

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required to be made pursuant to European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; or

(iii) to or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Bond to another Paying Agent in a Member State of the European Union.

For this purpose the “relevant date” in relation to any Bond means (a) the due date for payment in respect thereof, or (b) (if the full amount of the monies payable on such due date has not been received in New York City by the Trustee or the Principal Agent on or prior to such due date) the date on which notice is duly given to the Bondholders that such monies have been so received.

(D) References in these Conditions to principal, premium and/or interest (if any) shall be deemed also to refer to any increased or additional amounts which may be payable in respect thereof under this Condition.

10 Events of Default

(A) The Trustee at its discretion may, and if so requested in writing by the holders of not less than 25% in principal amount of the Bonds then outstanding or if so directed by an Extraordinary Resolution shall (but subject to its rights under the Indenture to be indemnified), give notice to the Company that the Bonds are immediately due and payable, if any of the following events (an “Event of Default”) shall have occurred and be continuing:
(i) default in payment of the principal amount of any Bond, as and when the same becomes due and payable and continuance of such default for three Business Days; default in the payment of interest (if any) or Additional Amounts upon any Bond as and when the same becomes due and payable, and continuance of such default for five Business Days;
(ii) failure by the Company to deliver the Shares as and when such Shares are required to be delivered following conversion of a Bond;
(iii) failure on the part of the Company duly to observe or perform any of the covenants or agreements provided in the Bonds or the Indenture (other than those referred to in paragraphs (i), (ii) or (iii) above) which failure cannot be remedied or, if such failure can be remedied, is not remedied within 30 days after the date on which written notice thereof requiring the Company to remedy the same shall have been given to the Company by the Trustee or the Bondholders of at least 25% in aggregate principal amount of the Bonds then Outstanding;
(iv) there shall have been entered against the Company or any of its Subsidiaries a final judgment, decree or order by a court of competent jurisdiction for the payment of money in excess of US$10 million with respect to the Company or any of its Subsidiaries (or its equivalent in any other currency or currencies) and 60 days shall have passed since the entry of the order without it being bonded, satisfied, discharged or stayed; provided, that where two or more of the Company and/or its Subsidiaries are liable for the payment of the same relevant debt, whether liable jointly and severally, by way of guarantee, surety or otherwise, any such amount shall be counted once only;
(v) (A) the Company or any of its Subsidiaries shall fail to make any payment with respect to present or future indebtedness of the Company or any of its Subsidiaries for or in respect of any monies raised or borrowed (other than the Bonds) in an aggregate principal amount in excess of US$10 million (or its equivalent in any other currency or currencies) when and as the same shall become due and payable, if such failure shall continue for more than the

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period of grace, if any, originally applicable thereto or (B) the Company or any of its Principal Subsidiaries shall fail to perform or observe any covenant or agreement to be performed or observed by the Company or any of its Principal Subsidiaries contained in any agreement or instrument evidencing any indebtedness (other than the Bonds) in an aggregate principal amount in excess of US$10 million with respect to the Company or any of its Principal Subsidiaries (or its equivalent in any other currency or currencies);

(vi) a decree or order by a court having jurisdiction shall have been entered under any applicable bankruptcy, insolvency, reorganization or other similar law (A) adjudging the Company or any of its Principal Subsidiaries as bankrupt or insolvent, or approving as properly filed a petition seeking reorganization of the Company or any of its Principal Subsidiaries or (B) appointing a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of the Company or any of its Principal Subsidiaries or of its property or (C) ordering the winding up or liquidation of the affairs of the Company or any of its Principal Subsidiaries and in any such case such decree or order shall have continued undischarged and unstayed for a period of 60 days;
(vii) the Company or any of its Principal Subsidiaries shall voluntarily commence proceedings to be adjudicated a bankrupt or insolvent, or shall consent to the filing of a bankruptcy or insolvency proceeding against it, or shall file a petition or answer or consent seeking reorganization under any applicable bankruptcy, insolvency, reorganization or other similar law or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or its property, or shall make an assignment for the benefit of creditors; or
(viii) any event occurs which under the laws of the ROC, has an analogous effect to any of the events referred to in the foregoing paragraphs.

Upon any such notice being given to the Company, the Bonds will immediately become due and payable at their principal amount as provided in the Indenture.

For the purposes of Conditions 10 (A)(v) and (vi) above, any indebtedness or monetary amount which is in a currency other than US dollars shall be translated into US dollars at the spot rate for the sale of US dollars against the purchase of the relevant currency quoted by any leading bank in the relevant market selected by the Trustee on any day when the Trustee requests such a quotation for such purposes. If no direct spot rate is available, a rate shall be calculated by reference to the cross rates through US dollars of the relevant currencies. Notwithstanding receipt of any payment after the acceleration of the Bonds, a Bondholder may exercise its Conversion Right by depositing a Conversion Notice with a Conversion Agent or Paying Agent during the period from and including the date of a default notice with respect to an event specified in Condition 10(A)(iii) (at which time the Company will notify the Bondholders of the number of Shares per Bond to be delivered upon conversion, assuming all the then outstanding Bonds are converted) to and including the 30th business day after such payment.

(B) If any converting Bondholder deposits a Conversion Notice pursuant to this Condition 10 on the business day prior to, or during, a Closed Period, the Bondholder’s Conversion Right shall continue until the business day following the last day of the Closed Period, which shall be deemed the Conversion Date, for the purposes of such Bondholder’s exercise of its Conversion Right pursuant to this Condition 10.

If the Conversion Right attached to any Bond is exercised pursuant to this Condition 10, the Company will deliver Shares (which number will be disclosed to such Bondholder as soon as practicable after the Conversion Notice is given) in accordance with the Conditions, except that the

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Company shall have twelve business days before it is required to register the converting Bondholder (or its designee) in its register of members as the owner of the number of Shares to be delivered pursuant to this Condition and an additional five business days from such registration date to make payment in accordance with the following paragraph.

If the Conversion Right attached to any Bond is exercised pursuant to this Condition 10, or if the Bonds have become due and payable pursuant to Condition 10(A)(iii), the Company shall, at the request of the converting Bondholder, pay to such Bondholder an amount in US dollars (the “Default Cure Amount”), equal to the product of (x) (i) the number of Shares that are required to be delivered by the Company to satisfy the Conversion Right in relation to such converting Bondholder minus (ii) the number of Shares that are actually delivered by the Company pursuant to such Bondholders’ Conversion Notice and (y) the Share Price (as defined below) on the Conversion Date; provided that if such Bondholder has received any payment under the Bonds pursuant to this Condition 10, the amount of such payment shall be deducted from the Default Cure Amount.

The “Share Price” means the closing price of the Shares as quoted by the Taiwan Stock Exchange on the original Conversion Date or, if no reported sales take place on such date, the average of the reported closing bid and offered prices, in either case as reported by the Taiwan Stock Exchange on which the Shares are listed for such day as furnished by a reputable and independent investment bank selected from time to time by the Trustee at the expense of the Company for such purpose.

11 Prescription

Claims in respect of principal and interest (if any) will become unenforceable after 15 years and five years, respectively, from the relevant date for payment in respect thereof.

12 Enforcement

At any time after the Bonds shall have become due and payable, the Trustee may, at its discretion and without further notice, take such proceedings against the Company as it may think fit to enforce payment of the Bonds together with interest (if any) and to enforce the provisions of the Indenture, but it will not be bound to take any such proceedings unless (a) it shall have been so requested in writing by the holders of at least 25% in principal amount of the Bonds then outstanding or so directed by an Extraordinary Resolution and (b) it shall have been indemnified and/or secured to its satisfaction. No Bondholder will be entitled to proceed directly against the Company, unless the Trustee, having become bound to do so, fails to do so and such failure shall have continued for a period of 60 days and no direction inconsistent with such written request or Extraordinary Resolution has been given to the Trustee during such 60-day period by the holders of a majority in principal amount of the outstanding Bonds.

13 Meetings of Bondholders, Modification and Waiver

(A) Meetings

The Indenture contains provisions for convening meetings of Bondholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of the Bonds or the provisions of the Indenture. The quorum at any such meeting for passing an Extraordinary Resolution will be two or more persons holding or representing over 50% in principal amount of the Bonds for the time being outstanding or, at any adjourned such meeting, two or more persons being or representing Bondholders whatever the principal amount of the Bonds so held or represented unless the business of such meeting includes consideration of proposals, inter alia , (i) to modify the Maturity Date of the Bonds or the date for redemption at the option of Bondholders, (ii) to reduce or cancel the amount of principal, (iii) to change the currency of payment of the Bonds, (iv) (subject to Condition 13(B)) to modify or cancel the Conversion Right (except in accordance with Conditions 6(B) and 13(B) or by a unilateral and unconditional reduction of the Conversion Price) or (v) to modify the provisions concerning the quorum required at a meeting of Bondholders or the

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majority required to pass an Extraordinary Resolution, in which case the necessary quorum for passing an Extraordinary Resolution will be two or more persons holding or representing over two thirds, or at any adjourned such meeting over one third, in principal amount of the Bonds for the time being outstanding. An Extraordinary Resolution passed at any meeting of Bondholders will be binding on all Bondholders, whether or not they are present at the meeting.

The Indenture provides that a written resolution signed by or on behalf of the holders of not less than 90% of the aggregate principal amount of Bonds outstanding shall be as valid and effective as a duly passed Extraordinary Resolution.

(B) Modification of Conversion Right

Notwithstanding Condition 13(A)(iv) and (v) above, the Trustee may agree, without the consent of the Bondholders, any modification to or variation of the Conversion Rights (including modification of and additions to the declarations and statements to be made by Bondholders in a Conversion Notice) which is in its opinion necessary or desirable to effect or facilitate conversion as contemplated in these Conditions and which is not, in the Trustee’s opinion, materially prejudicial to the interests of the Bondholders. The Trustee’s agreement may be subject to it being indemnified to and/or secured to its satisfaction and to any condition which the Trustee requires. The Trustee shall not be liable to any loss or liability occasioned by any such modification or variation. Any such modification or variation will be binding on the Bondholders and, unless the Trustee agrees otherwise, any such modification will be notified by the Company to the Bondholders as soon as practicable thereafter.

(C) Other modifications and waivers

The Trustee may agree, without the consent of the Bondholders, to (i) any modification (except as mentioned above) of, or the waiver or authorization of any breach or proposed breach of, the Bonds or the Indenture which is not, in the opinion of the Trustee, materially prejudicial to the interests of the Bondholders or (ii) any modification of the Bonds or the Indenture which, in the Trustee’s opinion, is of a formal, minor or technical nature or to correct a manifest error or to comply with mandatory provisions of law. The Trustee shall not be liable for any loss or liability occasioned by any such modification or waiver, or authorization. Any such modification, waiver or authorization will be binding on the Bondholders and, unless the Trustee agrees otherwise, any such modification will be notified by the Company to the Bondholders as soon as practicable thereafter.

(D) Exercise of Trustee’s functions

In connection with the exercise of its functions (including but not limited to those in relation to any proposed modification, authorization or waiver), the Trustee shall have regard to the interests of the Bondholders as a class and shall not have regard to the consequences of such exercise for individual Bondholders and the Trustee shall not be entitled to require, nor shall any Bondholder be entitled to claim, from the Company or the Trustee any indemnification or payment in respect of any tax consequences of any such exercise upon individual Bondholders.

14 Replacement of Certificates

If any Certificate is mutilated, defaced, destroyed, stolen or lost, it may be replaced at the specified office of the Registrar upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company and the Registrar may reasonably require. Mutilated or defaced Certificates must be surrendered before replacements will be issued.

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15 Notices

All notices to Bondholders shall be validly given if published in a leading newspaper having general circulation in London (which is expected to be the Financial Times (London Edition)) and mailed to them at their respective addresses in the register of Bondholders maintained by the Registrar. Any such notice shall be deemed to have been given on the later of the date of such publication and the seventh day after being so mailed.

So long as the Bonds are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear or Clearstream, International or the alternative clearing system (as defined in the Global Certificate), notices to holders of the Bonds may be given by delivery of the relevant notice to Euroclear or Clearstream, International or the alternative clearing system, for communication by it to entitled account holders in substitution for notification as required by the Conditions.

16 Indemnification

The Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking proceedings to enforce payment unless indemnified and/or secured to its satisfaction. The Trustee is entitled to enter into business transactions with the Company and any entity related to the Company without accounting for any profit.

The Trustee may rely without liability to Bondholders on any certificate prepared by the directors of the Company and accompanied by a certificate or report prepared by an internationally recognized firm of accountants pursuant to the Conditions and/or the Indenture, whether or not addressed to the Trustee and whether or not the internationally recognized firm of accountants liability in respect thereof is limited by a monetary cap or otherwise limited or excluded and shall be obliged to do so where the certificate or report is delivered pursuant to the obligation of the Company to procure such delivery under these Conditions; any such certificate or report shall be conclusive and binding on the Company, the Trustee and the Bondholders.

17 Agents

The names of the initial Agents and Registrar and their specified offices are set out at the end of these Conditions. The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of replacement or additional Agents, provided that the Company will at all times maintain (a) a Principal Agent, (b) a Paying Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to any European Directive on the taxation of savings implementing the provisions of the ECOFIN Council Meeting of 26-27 November 2000 or any law implementing or complying with, or introduced in order to conform, to such Directive, and (c) a Registrar which will maintain the Register outside the United Kingdom. Notice of any such termination or appointment, of any changes in the specified offices of the Agents or of any change in the identity of any Conversion Agent, Paying Agent or Transfer Agent will be given promptly by the Company to the Bondholders and the Trustee in accordance with Condition 15.

18 Further Issues

The Company may from time to time, without the consent of the Bondholders, create and issue further bonds having the same terms and conditions as the Bonds in all respects (except for the issue date, issue price and to the extent necessary, certain temporary securities law transfer restrictions) and so that such further issue shall be consolidated and form a single series with the Bonds. Such further bonds may, with the consent of the Trustee, be constituted by a deed supplemental to the Indenture.

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19 Governing Law and Jurisdiction

(A) Governing law

The Indenture, the Agency Agreement and the Bonds are governed by and shall be construed in accordance with the laws of the State of New York.

(B) Jurisdiction

The courts of the State of New York sitting in the Borough of Manhattan, the City of New York, and the federal courts of the United States sitting in the Borough of Manhattan and the City of New York, are to have jurisdiction to settle any disputes which may arise out of or in connection with the Bonds and accordingly any legal action or proceedings arising out of or in connection with the Bonds (“Proceedings”) may be brought in such courts. The Company has in the Indenture irrevocably submitted to the jurisdiction of such courts.

(C) Agent for service of process

The Company has irrevocably appointed CT Corporation System, 111 Eighth Avenue, New York, NY 10011, United States of America as its agent in New York to receive service of process in any Proceedings in New York based on any of the Bonds.

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GLOBAL CERTIFICATE

The Global Certificate

The Global Certificate will be deposited with, and registered in the name of, a nominee for a common depositary for Euroclear and Clearstream, Luxembourg (the “Common Depositary”) and Euroclear and Clearstream, Luxembourg will credit their respective accountholders with the respective principal amounts of the individual interests represented by such Global Certificate. Such accounts will be designated initially by or on behalf of the Purchasers. Ownership of beneficial interests in the Global Certificate will be limited to persons who have accounts with Euroclear or Clearstream, Luxembourg or persons who hold interests through such accountholders. Ownership of beneficial interests in the Global Certificate will be shown on, and the transfer of that ownership will be effected only through, the records maintained by Euroclear and Clearstream, Luxembourg (with respect to interests of their respective accountholders) and the records of such accountholders (with respect to interests of persons other than such accountholders).

Payments of the principal of the Global Certificate will be made to the Common Depositary or its respective nominees as the registered owners thereof. None of the Company, the Trustee, the Agents and any custodian, transfer agent or registrar will have any responsibility or liability for the accuracy of any of the records relating to, or payments made on account of, ownership interests in the Global Certificate or for any notice permitted or required to be given to holders of the Bonds or any consent given or actions taken by such registered holders of the Bonds. The Company expects that upon receipt of any payment of principal in respect of a Global Certificate representing any Bonds held by it or its nominee or the Common Depositary, as the case may be, will immediately credit Euroclear and Clearstream, Luxembourg, in the case of the Common Depositary, with payments in amounts proportionate to their respective interests in the principal amount of the Global Certificate as shown on their respective records.

Transfers between accountholders in Euroclear and Clearstream, Luxembourg will be effected in accordance with their respective rules and operating procedures.

The laws of certain jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Accordingly, the ability of beneficial owners to own, transfer or pledge beneficial interests in the Global Certificate may be limited by such laws.

Conversion of the Bonds will be effected through participants in Euroclear and Clearstream, Luxembourg in the ordinary way in accordance with their respective rules and operating procedures.

None of the Company, the Trustee, the Agents, any custodian, any transfer agent, any registrar or any other agent of the Company will have any responsibility for the performance of Euroclear or Clearstream, Luxembourg or their respective participants, indirect participants or accountholders of their respective obligations under the rules and procedures governing their operations.

Euroclear and Clearstream, Luxembourg, each hold securities for participating organizations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream, Luxembourg provide to their respective participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg participants are financial institutions throughout the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Euroclear and Clearstream, Luxembourg is also available to others, such as banks, brokers, dealers and trust companies which clear through or maintain a custodial relationship with a Euroclear or Clearstream, Luxembourg participant, either directly or indirectly.

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So long as the Bonds are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear and Clearstream, Luxembourg, notices required to be given to the holders of the Bonds may be given by delivery of the relevant notice to Euroclear and Clearstream, Luxembourg for communication by it to the entitled account holders in substitution for notification as required by the Indenture or as described in the section entitled “Terms and conditions of the Bonds”.

No selection of the Bonds will be required in the event of a redemption in the manner described in Condition 8(B) in respect of less than the aggregate principal amount of the Bonds in respect of which the Global Certificate is issued. Instead, there will be a pro rata allocation of the Bonds to be redeemed among the accounts in Euroclear and Clearstream, Luxembourg in accordance with the rules and procedures of the clearing systems.

Cancellation of any Bond following its redemption, conversion or purchase by the Company will be effected by a reduction in the principal amount of the Bonds in the register of holders of Bonds.

In considering the interests of the holders of Bonds while the Global Certificate is registered in the name of a nominee for a clearing system, the Trustee may, without being obliged to do so, have regard to any information provided to it by such clearing system or its operator as to the identity (either individually or by category) of its accountholders with entitlements to Bonds and may consider such interests as if such accountholders were the holders of the Bonds.

The put option of the holders of Bonds in Condition 8(D) may be exercised by the holders of the Global Certificate giving notice to the Principal Paying Agent of the principal amount of Bonds in respect of which the option is exercised and presenting the Global Certificate for endorsement or exercise within the time limits specified in Condition 8(D).

For so long as the Bonds are evidenced by the Global Certificate, beneficial owners of the Bonds shall be recognized as the beneficiaries of the trusts set out in the Indenture, to the extent of the principal amount of their interest in the Bonds set out in a certificate executed and delivered by the registered holder, as if they were themselves the holders of Bonds in such principal amounts.

For so long as the Bonds are evidenced by the Global Certificate, notices required to be delivered by holders of the Bonds may be given by facsimile rather than by depositing such notices at the specified office of the Principal Paying Agent as required by these Conditions.

Individual definitive certificates

If (a) at any time the Common Depositary notifies the Company in writing that it is unwilling or unable to discharge properly its responsibilities, or at anytime it is no longer eligible to act as the depositary for the Global Certificate, and a successor common depositary for the Global Certificate is not appointed within 90 days after the Company receives such notice or becomes aware of such ineligibility, (b) either Euroclear or Clearstream, Luxembourg or a successor clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, or (c) the Trustee advises the Company in writing that any of the Bonds have become immediately due and payable in accordance with the terms of the Indenture, or the Trustee institutes or is directed to institute any judicial proceeding to enforce the holders’ rights and it determines in accordance with the terms of the Indenture that the Bonds shall no longer be represented by the Global Certificate, the Company will issue individual certificates in registered form in exchange for the Global Certificate. The Company will use its best efforts to make arrangements for the exchange of interests in the Global Certificate for individual definitive certificates and cause the requested individual definitive certificates to be executed and delivered to the Registrar in sufficient quantities and authenticated by the Registrar for delivery to holders. Persons exchanging interests in the Global Certificate for individual definitive certificates will be required to provide to the Registrar, through the relevant clearing system, written instructions and other information required by the Company and the Registrar

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to complete, execute, authenticate and deliver such individual definitive certificates. Individual definitive certificates delivered in exchange for the Global Certificate or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by the relevant clearing system.

In the case of individual definitive certificates issued in exchange for the Global Certificate, such individual definitive certificates will bear, and be subject to, such legends as the Company requires in order to assure compliance with any applicable law. The holder of a restricted individual definitive certificate may transfer the Bonds represented by such certificate, subject to compliance with the provisions of such legend. Upon the transfer, exchange or replacement of certificates bearing the legend, or upon specific request for removal of the legend on a certificate, the Company will deliver only certificates that bear such legend, or will refuse to remove such legend, as the case may be, unless there is delivered to the Company such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Company that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.

So long as the Bonds are listed on the SGX-ST and the rules of the SGX-ST so require, the Company shall appoint and maintain a Paying Agent in Singapore, where the Bonds may be presented or surrendered for payment or redemption, in the event that the Global Certificate is exchanged for individual definitive certificates. In addition, in the event that a Global Certificate is exchanged for individual definitive certificates, announcement of such exchange shall be made through the SGX-ST and such announcement will include all material information with respect to the delivery of the individual definitive certificates, including details of the Paying Agent in Singapore.

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CONVERSION INTO GDSs

Conversion into GDSs

The Depository Facility

The Company has made the following arrangements (as permitted under Condition 6(E)(i) of the Bonds) under which Bondholders may elect to direct the Company to deposit Shares issued on conversion of the Bonds with the Depositary for issuance of GDSs.

The Company entered into an international deposit agreement with the Depositary dated October 19, 2000, as amended (the “International Deposit Agreement”) pursuant to which the International GDS Facility (the “International GDS Facility”) was established and certain international global depositary receipts were issued. The Company will, if so directed by a converting Bondholder, deposit the Shares issuable on conversion into the International GDS Facility upon the making by such converting Bondholder of the required certifications described in the International Deposit Agreement and the payment of the fees and expenses of the Depositary by such converting Bondholder.

Delivery of GDSs on conversion of Bonds

A Bondholder may elect, in the Conversion Notice, to direct the Company to deposit the Shares issued on conversion of Bonds into the International Depository Facility, subject to the conditions, and on the terms, set out in the Paying and Conversion Agency Agreement and the Deposit Agreements.

Where a Bondholder has elected to receive GDSs upon conversion, subject to (i) compliance with the terms and conditions of the International Deposit Agreement or such other depository facility which may be established from time to time and (ii) in accordance with applicable law (including, without limitation, payment of the fees and expenses of the Depositary), the Shares issuable upon conversion shall be deposited by the Company on behalf of the converting Bondholder with the Depositary for issuance of GDSs.

The number of GDSs to be issued upon conversion to converting Bondholders who elect to receive GDSs will be determined by dividing the aggregate principal amount of all the Bonds to be converted by such Bondholder (translated into NT dollars at the Fixed Exchange Rate) by the Conversion Price in effect on the Conversion Date, and dividing such quotient by the number of Shares represented by each GDS at the time of deposit of such Shares with the Depositary. As of the date of this Offering Circular, each GDS represents five Shares. Converting Bondholders electing to receive GDSs will be entitled, upon conversion, only to a number of Shares to be represented by an integral number of GDSs. Shares which would be represented by a fraction of one GDS will not be issuable, and such holders will not receive any cash adjustments in respect of any such fraction.

Delivery of GDSs

The Company will deliver to and deposit with the Custodian under the International Deposit Agreement the number of Shares which such Bondholder is entitled to receive upon a Bondholder exercising its Conversion Right. Such Shares will be registered in the name of the Depositary, the Custodian or a nominee of either and deposited in accordance with the terms of the International Deposit Agreement.

ROC regulatory approval has been received for GDSs to be issued upon deposit of Shares issuable upon conversion of the Bonds.

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Converting Bondholders who receive GDSs following exercise of their Conversion Right are also hereby notified that under the terms and conditions of the International Deposit Agreement, the converting Bondholder will be required, prior to the issue of the International GDSs, to provide certain written acknowledgments, certifications and agreements to the Company and the Depositary to the effect that:

(a) The International GDSs and the Shares represented thereby have not been and will not be registered under the Securities Act;
(b) It is not a US person (within the meaning of Regulation S) and is located outside the United States (within the meaning of Regulation S) and has agreed to acquire and will acquire, the Shares to be deposited outside the United States;
(c) it is not an affiliate of the Company or a person acting on behalf of such an affiliate; and
(d) it is not in the business of buying or selling securities or, if in such business, did not acquire the securities to be deposited from the Company or any affiliate thereof in the initial offering and placement of the International GDSs and Shares.

Converting Bondholders that are unable to make either the representations with respect to the International GDS Facility will not be able to deposit their Shares and receive GDSs

Upon delivery to and deposit with the Custodian of a sufficient number of Shares to which such Bondholder is entitled upon conversion, and receipt by the Depositary of the applicable fees and written acknowledgments, certifications and agreements, the Depositary shall, pursuant to the terms of the International Deposit Agreement, deliver the GDSs to or to the order of the converting Bondholder.

Procedures; conversion notice; taxes and duties

The provisions of the Conditions relating to conversion of Bonds apply. The following summary sets out certain further modifications applicable to delivery of GDSs on conversion of Bonds.

In order to effect a conversion into GDSs, each Bondholder must complete, execute and deliver at such Bondholder’s expense during the Conversion Period at the office of any Conversion Agent a Conversion Notice, in the form then obtainable from the office of any Conversion Agent and specify in the Conversion Notice its election to convert into GDSs, together, if Bond certificates have been issued with the certificate representing the Bonds to be converted, and any certificates and other documents as may be required under applicable law or the International Deposit Agreement (if applicable) and any expenses or other payments required to be paid by the Bondholder pursuant to the terms of the Paying and Conversion Agency Agreement or by the person depositing securities pursuant to the terms of the International Deposit Agreement.

As conditions precedent to conversion, the Bondholder must pay to the applicable Conversion Agent all stamp, issue, registration and similar taxes and duties (if any) arising on conversion in the country in which the Bonds are deposited for conversion, or payable in any jurisdiction consequent upon the issue and delivery of Shares, GDSs or any other property or cash upon conversion to or to the order of a person other than the converting Bondholder. Except as aforesaid, the Company will pay the expenses arising in the ROC on the issue of Shares on conversion of Bonds and all charges of the Conversion Agents in connection therewith as provided in the Agency Agreement. The Depositary may require the converting Bondholder to pay its fees and expenses upon deposit of Shares for issuances of GDSs including GDS issuance fee of up to US$5.00 per 100 GDSs or portion thereof issued. The date on which any Bond and the Conversion Notice (in duplicate) relating thereto, together with any certificates and other documents as may be required under applicable law or the International Deposit Agreement (if applicable), are deposited with a Conversion Agent and the payments, if any, required to be paid by the Bondholder are made is hereinafter referred to as the “Deposit Date”. The

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“Conversion Date” applicable to a Bond shall mean the day next following the Deposit Date, which day must be a Trading Day with respect to the Shares and must fall within the Conversion Period. The Bondholder must therefore satisfy all such conditions on or before the Business Day prior to the end of the Conversion Period.

In the event the converting Bondholder elects to receive GDSs, with effect from the opening of business in the ROC on the Conversion Date, the Company will deem the Depositary, the Custodian, or a nominee of either as the person in whose name the Shares represented by such GDSs to be issued upon such conversion are to be registered, as the holder of record of the number of Shares (disregarding any retroactive adjustment of the Conversion Price referred to below prior to the time such retroactive adjustment shall have become effective), and at such time the rights of such converting Bondholder as a Bondholder with respect to the Bonds deposited for conversion shall cease.

On the Conversion Date, the Company will register the Depositary, the Custodian, or a nominee of either, in the Company’s register of shareholders as the record owner of the number of Shares to be issued upon conversion of such Bonds and, subject to any applicable limitations then imposed by ROC laws and regulations, according to the request made in the relevant Conversion Notice, procure that, as soon as practicable, and in any event within five Trading Days with respect to the Shares after the Conversion Date, there be delivered to the Custodian under the International Deposit Agreement a certificate or certificates for the relevant Shares, registered in the name of the Depositary’s nominee, together with any other property or cash required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the delivery thereof.

Termination or substitution of arrangements for delivery of GDSs

Each of the Company and the Depositary has the right under the International Deposit Agreement to terminate the Depositary Facility at any time by giving notice in accordance with their terms. The Company has covenanted in the Indenture that it will give notice to Bondholders of any such termination at the same time as notice is given to holders of GDSs under the International Deposit Agreement. The notice to Bondholders may also state that the arrangements for delivery of GDSs on conversion of Bonds will be withdrawn from a date specified in the notice.

The Company may make further or other arrangements available to Bondholders pursuant to Condition 6(E)(i) in addition to, or in substitution for, the arrangements described herein relating to delivery of GDSs.

The Company has further undertaken in the Indenture that it will maintain the arrangements for delivery of GDSs on conversion of Bonds for so long as the Depositary Facility remains in effect (unless prevented by applicable laws or regulations).

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FORM OF THE BONDS AND TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers are advised to consult with legal counsel prior to making any offer, resale, pledge or other transfer of the Bonds, the Shares issuable upon conversion of the Bonds or the GDSs representing such Shares.

This offering is being made pursuant to Regulation S under the Securities Act. The Bonds, the Shares deliverable upon conversion thereof and the GDSs representing such Shares have not been registered under the Securities Act or with any securities regulatory authority of any state in the United States or other jurisdiction and may not be offered or sold to any person in the United States or to, or for the account or benefit of, US persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In addition, no transfer of any interest in the Bond may be made to any US person outside the United States or any person in the United States for a period of 40 days after the later of the commencement of this offering and the latest closing date of this offering. Terms used in this section are defined in Regulation S under the Securities Act.

Transfer restrictions on the Bonds

Each owner of the Bonds will, by its acceptance thereof, be deemed to have acknowledged and represented to and agreed with the Company, the Trustee and the Purchasers that:

The Bonds, the Shares deliverable upon conversion thereof and the GDSs representing such Shares have not been, and are not expected to be, registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer.
Each owner purchasing prior to the expiration of 40 days after the later of the commencement of the offering and the latest closing date (“Distribution Compliance Period”) is purchasing the Bonds in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S.
The Bonds, the Shares deliverable upon conversion thereof and the GDSs representing such Shares will not be sold, pledged or transferred to, or for the account or benefit of, any US person outside the Untied States or any person in the United States during the Distribution Compliance Period.
Such owner will not offer, sell, pledge or otherwise transfer any interest in the Bonds, the Shares deliverable upon conversion thereof and the GDSs representing such Shares except as described by the applicable legend set forth in paragraph 5 below.
The Bonds will bear a legend to the following effect, unless the Company determines otherwise in compliance with applicable law, and that it will observe the restrictions contained therein:

THE BONDS EVIDENCED HEREBY, THE SHARES OF COMPAL ELECTRONICS, INC. DELIVERABLE UPON CONVERSION HEREOF AND THE GLOBAL DEPOSITARY SHARES (“GDSs”) REPRESENTING SUCH SHARES, HAVE NOT BEEN AND ARE NOT EXPECTED TO BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND PRIOR TO THE EXPIRATION OF 40 DAYS AFTER THE LATER OF THE COMMENCEMENT OF THE OFFERING OF BONDS AND THE LAST RELATED CLOSING (THE “DISTRIBUTION COMPLIANCE PERIOD”) SUCH BONDS MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED TO ANY US PERSON OUTSIDE THE UNITED STATES OR ANY PERSON IN THE UNITED STATES. EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THE BONDS EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING AND FOLLOWING RESTRICTIONS.

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UPON THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD, THE BONDS EVIDENCED HEREBY, THE SHARES OF COMPAL ELECTRONICS, INC. DELIVERABLE UPON CONVERSION OF THE BONDS AND THE GDSs REPRESENTING SUCH SHARES SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS PROVIDED IN THIS LEGEND, PROVIDED THAT AT SUCH TIME AND THEREAFTER THE OFFER OR SALE OF THE BONDS EVIDENCED HEREBY BY THE HOLDER HEREOF IN THE UNITED STATES WOULD NOT BE RESTRICTED UNDER ANY APPLICABLE SECURITIES LAWS OF THE UNITED STATES OR THE STATES OR TERRITORIES OF THE UNITED STATES.

Except in certain limited circumstances, interests in the Bonds may only be held through interests in the Global Certificate. Such interests in the Bonds will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants. See “Terms and conditions of the Bonds”.
Any resale or other transfer, or attempted resale or other transfer, of the Bonds represented thereby made other than in compliance with the above-stated restrictions shall not be recognized by the Company.

Other provisions regarding transfer of the Bonds

The above legend and the certifications as further described in the Indenture prohibit or restrict certain transfers as summarized below. Interests in the Bonds evidenced by the Global Certificate will be freely transferable within Euroclear and Clearstream, Luxembourg, subject to the regulations thereof.

Except in the limited circumstances described in the Indenture, no person will be entitled to receive physical delivery of definitive Bonds. The Bonds are not issuable in bearer form.

Any resale or other transfer, or attempted resale or other transfer, made other than in compliance with the above-stated restrictions shall not be recognized by the Company.

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DESCRIPTION OF THE SHARES

The following is a summary of certain provisions of the Company’s Articles of Incorporation, the ROC Company Law, the ROC Securities and Exchange Law and the regulations promulgated thereunder.

The ROC Company Law and the ROC Securities and Exchange Law provide that any change in the authorized share capital of a public company, such as the Company, requires the approval of its Board of Directors, an amendment to its Articles of Incorporation (which requires shareholder approval) and the approval of the FSC and the Ministry of Economic Affairs (“MOEA”). The rights attaching to the Shares are described below.

Dividends and distributions

Except under limited circumstances as permitted under the Company Law, a company is not permitted to distribute dividends or to make any other distributions to shareholders at any time when that company has no Earnings (as defined below). In addition, before distributing a dividend or making any other distribution to shareholders, a company must recover any past losses, pay all outstanding taxes and set aside in a reserve, known as the “Legal Reserve”, 10% of its net profits after tax (“Earnings”) until such time as its Legal Reserve equals its paid-in-capital. Subject to compliance with these requirements, a company may pay dividends or make other distributions from its Earnings, reserves or other as permitted by the Company Law as set forth below.

Following approval by the shareholders in a general meeting, dividends are paid annually to shareholders from a company’s Earnings, in proportion to the number of shares held by them as listed on the register of shareholders as of the relevant record date (“Annual Dividends”). Annual Dividends may be distributed either in cash or in the form of common stock or a combination thereof, as determined by the shareholders at such meeting. All Shares, outstanding and fully paid as of the relevant record date for the distribution of dividends, are entitled to share equally in any dividend or other distribution so approved. The amount of any dividends is determined by the shareholders in a general meeting.

The Articles of Incorporation provide that after recovering any past losses, paying all income taxes in accordance with the law and deducting 10% of the Earnings as Legal Reserve, the remaining portion (plus the accumulated undistributed profits carried over from the last fiscal year as permitted by the Company Law) shall be the total profit available for distribution, which is allocated as follows:

2% of such total profit shall be distributed to directors and supervisors as remuneration.
5% of such total profit shall be distributed to employees as bonus. The employees of the Company’s subsidiaries would be entitled, if so approved, to enjoy the bonus in the form of share stocks.
Special reserve at the percentage deemed necessary and approved by the shareholders’ meeting.
Not less than 10% of the balance may be distributed as a shareholders’ dividend to all shareholders in proportion to their individual holdings proposed by the Board of Directors and approved by the shareholders’ meeting.

In addition to permitting dividends to be paid out of Earnings, the Company Law permits a company to make distributions to its shareholders in the form of additional shares of common stock from reserves (including the Legal Reserve and any special reserve or capital surplus reserve). In the

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case of a company’s Legal Reserve, however, the recapitalized portion payable out of such Legal Reserve is limited to 50% of the total accumulated Legal Reserve and such recapitalization can only be effected when the accumulated Legal Reserve amounts to 50% of the paid-in-capital of the company.

For information as to ROC taxes on dividends and distributions, see “Taxation — ROC taxation”.

Pre-emptive rights and issues of additional shares

According to the Company Law, when a company issues new shares of capital stock for cash, 10% to 15% of the issue must be offered to its employees. According to the Securities and Exchange Law (in the case of a listed company), at least 10% of the issue must also be offered to the public in order to fulfill the company’s obligations as a public and listed company except when exempted by the FSC. This percentage can be increased by a resolution passed at a shareholders’ meeting, thereby reducing the number of new shares subject to the pre-emptive rights of existing shareholders. Unless the percentage of the shares to be offered to the public is increased by such a resolution, existing shareholders of the company have a pre- emptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings. Such shares with respect to which no pre-emptive right has been exercised may be offered to other persons, subject to ROC law. Under the Company Law, the pre-emptive rights of shareholders are transferable, but the pre-emptive rights of employees may not be transferred. In practice, the Company will notify the shareholders or employees of the availability of such pre-emptive rights, and prescribe in the notice a period for paying the subscription price, and if the price is not paid or the pre-emptive right is waived, the shareholders or employees in question will not be able to obtain the new shares.

Authorized but unissued shares of any class may be issued at such times and, subject to the above mentioned provisions of the Company Law and the Securities and Exchange Law, upon such terms as the Board of Directors may determine.

Meeting of shareholders

The general meeting of shareholders is generally held in Taipei, Taiwan, within six months after the end of each fiscal year. Notice in writing of general meetings, stating the place, time and purpose thereof, must be dispatched to each shareholder at least 30 days prior to the date set for the meeting. Extraordinary meetings of shareholders may be convened by resolution of the Board of Directors whenever they consider it necessary, or under certain circumstances by shareholders or by a Supervisor. A notice in writing of such extraordinary meeting, stating the place, time and purpose thereof, must be dispatched to each shareholder at least 15 days prior to the date set for such meeting.

Voting rights

A holder of Shares has one vote for each Share. Except as otherwise provided by law or by the Articles of Incorporation, a resolution can be adopted by the holders of a simple majority of the Shares represented at a shareholders’ meeting at which a majority of the holders of the Shares is present.

The Company Law also provides that in order to approve certain major corporate actions, including any amendment of the Articles of Incorporation (which is required for, inter alia , any increase in authorized share capital), the dissolution, merger or spin-off of a company, the transfer of the whole or a substantial part of its business or its assets or the taking over of the whole of the business or assets of any other company which would have a significant impact on the acquiring company’s operations, or the distribution of any stock dividend, a meeting of the shareholders must be convened with a quorum of holders of at least two-thirds of all issued and outstanding shares of common stock at which the holders of at least a majority of the common stock represented at the

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meeting vote in favor thereof. Alternatively, in the case of a public company, such a resolution may be adopted by the holders of at least two-thirds of the shares of common stock represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding shares of common stock are present.

A shareholder may be represented at a general or extraordinary meeting by proxy. A proxy must be delivered to the Company five days prior to the commencement of the meeting.

Register of shareholders and record dates

The Company currently appoints Chinatrust Commercial Bank in Taipei, Taiwan as its share registrar to maintain the register of its shareholders and to enter transfers of the Shares in the register upon presentation of the certificates in respect of the Shares transferred. Under the Company Law, a transfer of Shares is effected by endorsement and delivery of the related share certificates. In order, however, to assert shareholders’ rights against the Company, the transferee must have his name and address registered on the register of shareholders. The Company’s shareholders are required to file their respective specimen signatures or seals with the Company.

The Company Law permits the Company to set a record date and/or close the register of shareholders for a specified period in order for the Company to determine the shareholders or pledgees that are entitled to certain other rights pertaining to Shares by giving advance public notice. As provided in the Articles of Incorporation, the register of shareholders is closed for periods of 60 days, 30 days and five calendar days immediately before each annual general meeting of shareholders, each extraordinary meeting of shareholders and each record date, respectively. The settlement of trading of the common stock is normally carried out on the book-entry system maintained by Taiwan Securities Central Depositary Co., Ltd.

Acquisition of Shares by the Company

The Company may not acquire its own Shares except in certain limited circumstances provided in ROC Company Law or ROC Securities and Exchange Law. Under Article 28-2 of the ROC Securities and Exchange Law, which took effect on July 19, 2000, the Company may, by a board resolution adopted by majority consent at a meeting with two-thirds of its directors present, purchase its Shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the FSC, for the following purposes: (1) to transfer Shares to the Company’s employees; (2) to convert bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by the Company into its Shares; and (3) if necessary, to maintain its credit and its shareholders’ equity; provided that the Shares purchased shall be cancelled thereafter.

The Company is not allowed to purchase more than 10% of its total issued and outstanding Shares. In addition, the Company may not spend more than the aggregate amount of the retained earnings, the premium from issuing shares and the realized portion of the capital reserve to purchase its Shares.

The Company may not pledge or hypothecate any purchased Shares. In addition, the Company may not exercise any shareholders’ rights attaching to such Shares. In the event that the Company purchases its Shares on the Taiwan Stock Exchange, the Company’s affiliates, directors, supervisors, managers and their respective spouses and minor children and/or nominees are prohibited from selling any of the Shares during the period in which the Company purchases its Shares.

The Company bought back 175,029 thousand Shares between April 26, 2004 to May 28, 2004 and August 8, 2004 to December 7, 2004 in order to enhance the value of the Company. Those treasury Shares have since been cancelled.

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The recent amendment to ROC Company Law prohibits the Company’s subsidiaries from acquiring the Shares if such subsidiaries are majority-owned, directly or indirectly, by the Company.

Annual financial statements

Ten days before the general meeting of shareholders, the Company’s annual financial statements must be made available at its principal office in Taipei for inspection by the shareholders. The Board of Directors is required to furnish the resolution for allocation of surplus profit or making up loss, including audited financial statements, to its shareholders.

Other rights of shareholders

Under ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of amalgamation and certain other major corporate actions. A dissenting shareholder may request the company to redeem all of the shares owned by such shareholder at a fair price to be determined by mutual agreement or a court order if such agreement cannot be reached. Such shareholder may exercise such appraisal right by serving written notice on the company prior to the related shareholders’ meeting or by raising and registering such objection at such shareholders’ meeting. In addition to appraisal rights, any shareholder has the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedures were defective. One or more shareholders who have held more than 3% of the issued and outstanding shares for over a year may require a supervisor to bring a derivative action against a director for such director’s liability to the company as a result of such director’s unlawful actions or failure to act. In addition, one or more shareholders who have held more than 3% issued and outstanding shares for over a year may require the Board of Directors to convene an extraordinary shareholders’ meeting by sending a written request to the Board of Directors.

Liquidation rights

In the event of liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed pro rata to the shareholders in accordance with the ROC Company Law and the Articles of Incorporation.

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INFORMATION RELATING TO THE DEPOSITARY

The Depositary is a state-chartered New York banking corporation and a member of the United States Federal Reserve System, subject to regulation and supervision principally by the United States Federal Reserve Board. The Depositary was created by a Special Act of the New York Legislature passed on April 19, 1871. It is a wholly-owned subsidiary of The Bank of New York Company, Inc., a New York corporation. The principal office of the Depositary is located at One Wall Street, New York, New York 10286. Its principal administrative offices are located at One Wall Street, New York, New York 10286. A copy of the Depositary’s By-laws, as amended, together with copies of The Bank of New York Company, Inc.’s most recent financial statements and annual report are available for inspection at the Corporate Trust Office of the Depositary located at 101 Barclay Street, New York, New York 10286 and at The Bank of New York, 48th Floor, One Canada Square, London E14 5AL and will also be available at the offices of the Luxembourg Intermediary, The Bank of New York (Luxembourg) S.A., located at Aerogolf Center, 1A, Hoehenhof, L-1736 Senningerberg, Luxembourg.

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DESCRIPTION OF THE GDSs

Two classes of GDSs are currently outstanding, “International GDSs” issued pursuant to the International Deposit Agreement (as defined below) and “Rule 144A GDSs” issued pursuant to the Rule 144A Deposit Agreement (as defined below).

The Company has not made any arrangement for the Shares issuable upon conversion of the Bonds to be delivered into the Rule 144A GDS Facility in accordance with the provisions of the Rule 144A Deposit Agreement.

The following, other than the paragraphs in italics, is a summary of certain material provisions of the Rule 144A Deposit Agreement dated October 19, 2000 among the Company, the Depositary and the Owners and Beneficial Owners (as defined in the Rule 144A Deposit Agreement) from time to time of Rule 144A GDRs and the International Deposit Agreement dated October 19, 2000 among the Company, the Depositary and the Owners and Beneficial Owners (as defined in the International Deposit Agreement) from time to time of International GDRs, pursuant to which the Rule 144A GDRs and International GDRs, respectively, are to be issued. This summary does not purport to be complete and is subject to and qualified in its entirety by reference to the Deposit Agreements, including the forms of Rule 144A GDRs and International GDRs. Terms used in this description and not otherwise defined shall have the meanings set forth in the Deposit Agreements. Copies of the Deposit Agreements are available for inspection at the Corporate Trust Office of the Depositary, currently located at 101 Barclay Street, New York, New York 10286, and at the principal Taipei office of the International Commercial Bank of China, the custodian and agent of the Depositary under each of the Deposit Agreements (the “Custodian”). The Depositary’s principal executive office is located at One Wall Street, New York, New York 10286. Unless the context otherwise requires, references herein to GDRs shall apply equally to the Rule 144A GDRs and the International GDRs.

Global depositary receipts

Rule 144A GDSs evidenced by Rule 144A GDRs are issuable by the Depositary pursuant to the Rule 144A Deposit Agreement. International GDSs evidenced by International GDRs are issuable by the Depositary pursuant to the International Deposit Agreement. Each GDS will represent five Shares, or evidence of the right to receive five Shares, deposited with the Custodian and registered in the name of the Depositary or its nominee (together with any additional Shares at any time deposited or deemed deposited under the Deposit Agreements and any other securities, cash or other property received by the Depositary or the Custodian in respect of such Shares, the “Deposited Securities”). Only persons in whose name GDSs are registered on the books of the Depositary as owners of the GDSs will be treated by the Depositary and the Company as Owners.

The following description applies equally to the Rule 144A Deposit Agreement and the International Deposit Agreement, except as specifically indicated.

Deposit and withdrawal

The Depositary has agreed, subject to the terms and conditions of the relevant Deposit Agreement, that upon delivery to the Custodian of Shares (or evidence of rights to receive Shares) to be represented by the GDSs and pursuant to appropriate instruments of transfer in a form satisfactory to the Custodian, the Depositary will upon payment of the fees, charges and taxes provided in the relevant Deposit Agreement, execute and deliver at its Corporate Trust Office to, or upon the written order of, the person or persons named in the notice of the Custodian delivered to the Depositary or requested by the person depositing such Shares with the Depositary, a GDR or GDRs, registered in the name or names of such person or persons, and evidencing any authorized number of GDSs requested by such person or persons.

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No deposit of Shares may be made into the Rule 144A GDS facility or the International GDS facility, and no GDSs may be issued against such deposits, without specific ROC regulatory approval, except in connection with (i) dividends on or free distributions of Shares, (ii) the exercise by Owners of existing GDSs of their pre-emptive rights in connection with rights offerings, (iii) transfers between the depositary facility for the Rule 144A GDSs and the depositary facility for the International GDSs and (iv) to the extent that previously issued GDSs have been canceled, reissuances of GDSs of up to an aggregate amount of outstanding GDSs not exceeding the total number of GDSs (subject to adjustment for the issuances described in clauses (i) and (ii) above) that were originally approved by the ROC FSC. ROC regulatory approval has been received for GDSs to be issued upon deposit of Shares issuable upon conversion of the Bonds.

Any deposit of Shares for Rule 144A GDSs must be accompanied by a written certification (“Depositor Certificate”) by or on behalf of the person who will be the beneficial owner of the Rule 144A GDSs to be issued upon deposit of such Deposited Securities, to the effect that (a) the Rule 144A GDSs and the Shares represented thereby have not been registered under the Securities Act, (b) it is a QIB acquiring such beneficial ownership for its own account or for the account of one or more QIBs and (c) it will comply with the restrictions set forth under “Form of the GDRs and transfer restrictions” on transfers of the Rule 144A GDSs and the underlying Shares. No Shares will be accepted for deposit unless accompanied by evidence satisfactory to the Depositary that all conditions to such deposit have been satisfied by the depositor under ROC laws and regulations. The Depositary may also refuse to accept certain Shares for deposit under the Rule 144A Deposit Agreement if it believes that GDSs representing such Shares would not be eligible for resale pursuant to Rule 144A.

A registration statement on Form F-6 under the Securities Act relating to the International GDSs issued pursuant to the International Deposit Agreement may be filed with and declared effective (the “Effective Time”) by the US Securities and Exchange Commission (“SEC” or the “Commission”). However, the Company has no present intention to cause any such registration statement to be filed with the SEC. There can be no assurance that a registration statement under the Securities Act relating to the International GDSs will be filed or, if filed, will be declared effective under the Securities Act by the SEC, nor can there be any assurance as to the timing of the filing of any such registration statement or the timing of the effectiveness thereof under the Securities Act.

Prior to the Effective Time, any depositor of Shares for International GDRs is required to (a) have made the representations and warranties required pursuant to the International Deposit Agreement and (b) acknowledge and agree that the International GDRs, the GDSs evidenced thereby and the Shares represented thereby have not been registered under the Securities Act and until the expiration of the 40-day period following the later of an offering of Shares by the Company or its affiliates or securities convertible, exercisable, or exchangeable into Shares, pursuant to which offering of securities the Company acquired the Shares being deposited, and the related closing (the “Distribution Compliance Period”) may not be offered, sold, pledged or otherwise transferred except (i) in accordance with Rule 144A under the Securities Act to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or the account of a QIB or (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S, in each case in accordance with any applicable securities laws of any State of the United States and provided that in connection with any transfer during the Distribution Compliance Period under (i) above, the transferor shall withdraw the Shares or the Deposited Securities in accordance with the terms and conditions of the International Deposit Agreement and instruct that such Shares be delivered to the Custodian under the Rule 144A Deposit Agreement for issuance, in accordance with the terms and conditions thereof, of Rule 144A GDSs to or for the account of such QIB.

After the closing date of an offering of new shares, an Owner may, to the extent that settlement for trading of Shares through the book-entry system maintained by the Taiwan Securities Central Depositary Co. Ltd. is permitted, withdraw and hold the Shares represented by the GDSs or request

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the Depositary to sell or cause to be sold on behalf of such owner the Shares represented by such GDSs on the Taiwan Stock Exchange. However, Owners will not be able to withdraw Shares either for delivery or sale unless and until the Company has delivered to the Custodian physical share certificates for the Shares.

Upon surrender at the Corporate Trust Office of the Depositary of a GDR for the purpose of withdrawal of the Deposited Securities underlying GDSs evidenced by such GDR, and upon payment of the fees, governmental charges and taxes provided in the relevant Deposit Agreement, and subject to the terms and conditions of such Deposit Agreement, the Articles of Incorporation and the Deposited Securities, the Owner of such GDSs will be entitled (i) to request that such Deposited Securities be sold on such Owner’s behalf, (ii) to delivery, to an account registered with the Company maintained by such Owner in the ROC, of the amount of Deposited Securities at the time represented by the GDSs, (iii) if applicable ROC law should change to prohibit one of the foregoing options, to whichever option shall remain or (iv) to such other dispositions of the Deposited Securities at the time represented by GDSs for such Owner’s benefit as the Depositary and the Company may agree upon in compliance with ROC law.

In the case of any sale of Deposited Securities under (i) above, the following provisions shall apply:

The person requesting withdrawal of Deposited Securities shall deliver, or cause to be delivered, to the Depositary a written order requesting the Depositary to sell, or cause to be sold, such Deposited Securities. Upon the receipt of such an order and any other required instruments, the Depositary shall make a reasonable effort, in its sole discretion, to sell or cause to be sold such Deposited Securities in accordance with applicable law through a securities company in the ROC on the Taiwan Stock Exchange or in such manner as is or may be permitted under applicable ROC law. Any such sale of Deposited Securities shall be at the risk and expense of the Owner requesting such sale. There is no assurance that the Depositary will be able to effect any sale of the Deposited Securities in a timely manner or at a specified price, particularly during periods of illiquidity or volatility with respect to the Deposited Securities.

Upon receipt of any proceeds from such sale, the Depositary shall, subject to the provisions of the relevant Deposit Agreement and any restrictions imposed by ROC laws and regulations, convert or cause to be converted any such proceeds into US dollars and distribute any such proceeds to the Owners entitled thereto, after deduction or payment of any fees, expenses, taxes and governmental charges incurred in connection with such sale.

Under current ROC laws and regulations, a non-ROC withdrawing Owner is required to appoint a local agent in the ROC to, among other things, pay ROC taxes, open a securities trading account (with prior approval granted by the Taiwan Stock Exchange) with a local securities brokerage firm, remit funds and exercise a stockholder’s right. In addition, such non-ROC withdrawing Owner must also appoint a bank in the ROC to act as custodian for confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting of information. Under existing ROC laws and regulations, without obtaining an approval from the Taiwan Stock Exchange and opening such securities trading account, a non-ROC withdrawing Owner would not be able to sell or otherwise transfer the Shares on the Taiwan Stock Exchange or otherwise.

In the case of any delivery of Deposited Securities under (ii) above, the following provisions shall apply:

Delivery of such Deposited Securities may be made by the delivery of (a) Certificates in the name of such Owner or as ordered by him or Certificates properly endorsed or accompanied by proper instruments of transfer to such Owner or as ordered by him and (b) any other securities, property and cash to which such Owner is then entitled in respect of such GDSs transferred to such Owner or as ordered by him.

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No Deposited Securities may be withdrawn upon surrender of a Rule 144A GDR in the manner described above unless, at or prior to the time of surrender, the Depositary shall have received a written Certificate and agreement by or on behalf of the person surrendering such Rule 144A GDR or who after withdrawal will be the Beneficial Owner of the Deposited Securities withdrawn, acknowledging that such Shares have not been registered under the Securities Act, certifying that, (a) if it is the person surrendering the Rule 144A GDR, it is a QIB and is selling or transferring such Rule 144A GDR or the underlying Shares to another QIB or to a non-US person (within the meaning of Regulation S) or (b) if it will be the Beneficial Owner upon withdrawal of the Shares underlying such Rule 144A GDR, it is either (i) a non-US person (within the meaning of Regulation S) or (ii) a QIB (as defined in Rule 144A) and in the case of (ii), agrees (x) not to offer, sell, pledge or otherwise transfer such Shares except in a transaction that complies with the restrictions on transfer set forth under “Form of the GDRs and transfer restrictions” and (y) not to deposit or cause to be deposited such Shares into any unrestricted depositary receipt facility established or maintained by a depositary bank (including another facility maintained by the Depositary) relating to such Shares unless such Shares are no longer deemed to be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

During the Distribution Compliance Period no Deposited Securities may be withdrawn upon surrender of an International GDR in the manner described above unless, at or prior to the time of surrender, the Depositary shall have received a written Certificate and agreement by or on behalf of the person surrendering such International GDR or who after withdrawal will be the Beneficial Owner of the Shares withdrawn, (a) acknowledging that such Shares have not been registered and will not be registered under the Securities Act and (b) certifying that, (i) if it is the person surrendering the International GDR, it is a non-US person (within the meaning of Regulation S) and is selling or transferring such International GDR or the underlying Shares to another non-US person or to a QIB in reliance on Rule 144A, in which latter case it shall cause, during the Distribution Compliance Period, the underlying Shares to be deposited under the Rule 144A Deposit Agreement for issuance of Rule 144A GDRs in accordance with the terms and conditions of the Rule 144A Deposit Agreement or (ii) if it will be the Beneficial Owner upon withdrawal of the Shares underlying such International GDR, it is either (x) a QIB and will cause, during the Distribution Compliance Period, the underlying Shares to be deposited under the Rule 144A Deposit Agreement for issuance of Rule 144A GDRs in accordance with the terms and conditions of the Rule 144A Deposit Agreement or (y) a non-US person and, in the case of (y), agrees, during the Distribution Compliance Period, not to offer, sell, pledge or otherwise transfer such Shares except in a transaction that complies with the restrictions on transfer set forth below under “Form of the GDRs and transfer restrictions”.

Notwithstanding any of the foregoing, the Depositary may not accept requests for withdrawal or sale of Deposited Securities and no such withdrawal or sale shall be completed prior to three months after the closing date of an offering of new shares; provided, however , that the Depositary may accept requests for withdrawal of Deposited Securities from the Rule 144A facility or the international facility, as the case may be, during such period of time if such request for withdrawal is accompanied by instructions to be given to the Custodian for the immediate deposit under the International Deposit Agreement or the Rule 144A Deposit Agreement, as the case may be, of such withdrawn Deposited Securities and to the Depositary for the issuance of International GDRs or Rule 144A GDRs, as the case may be, all in accordance with the provisions of the International Deposit Agreement or the Rule 144A Deposit Agreement, as the case may be.

Neither the Depositary nor the Custodian under the International Deposit Agreement, nor any nominee or person on their behalf, shall accept Rule 144A GDRs issued pursuant to the Rule 144A Deposit Agreement or Shares withdrawn from the Rule 144A Deposit Agreement for the purpose of deposit under the International Deposit Agreement, or issue International GDRs against delivery thereof, as long as such Rule 144A GDRs or Shares are or may be deemed to be “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act.

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Dividends, other distributions and rights

Subject to any restrictions imposed by ROC law, regulations or applicable permits, the Depositary is required to convert or cause to be converted into US dollars, to the extent that in its judgment it can do so on a reasonable basis and can transfer the resulting US dollars to the United States, all cash dividends and other cash distributions denominated in a currency other than US dollars, including NT dollars (“Foreign Currency”) that it receives in respect of the Deposited Securities, and to distribute the resulting US dollar amount (net of any expenses of conversion incurred by the Depositary and of the fees of the Depositary) to the Owners entitled thereto, in proportion to the number of GDSs representing such Deposited Securities held by them, respectively. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Owners on account of exchange restrictions or the date of delivery of any GDR or GDRs or otherwise. The amount distributed will be reduced by any amount on account of taxes to be withheld by the Company or the Depositary. See “— Liability of owner for taxes”. If the Depositary determines that in its judgment any Foreign Currency received by it cannot be so converted and transferred, or if any approval or license of any government or agency thereof which is required for such conversion is denied or in the opinion of the Depositary is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may, subject to applicable laws and regulations, distribute the Foreign Currency (or an appropriate document evidencing the right to receive such foreign currency) received by it to, or in its discretion hold such Foreign Currency uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled to receive the same. If any such conversion of Foreign Currency, in whole or in part, cannot be effected for distribution to some of the Owners entitled thereto, the Depositary may in its discretion make such conversion and distribution in US dollars to the extent permissible to the Owners entitled thereto, and may distribute the balance of the Foreign Currency received by it to, or hold such balance uninvested and without liability for interest thereon for the respective accounts of, the Owners entitled thereto. Notwithstanding the foregoing, Owners of International GDSs may elect to receive any such cash dividends or other cash distributions in a Foreign Currency under certain circumstances (a “Currency Election”) as set forth in the International Deposit Agreement.

If the Company declares a dividend in, or free distribution of, Shares, the Depositary may distribute to the Owners of outstanding GDRs entitled thereto, in proportion to the number of GDSs held by them, respectively, additional GDRs evidencing an aggregate number of GDSs representing the amount of Shares received as such dividend or free distribution, subject to the terms and conditions of the relevant Deposit Agreement with respect to the deposit of Shares and the issuance of GDSs, including the withholding of any tax or other governmental charge and the payment of fees of the Depositary. The Depositary may withhold any such distribution of GDRs if it has not received satisfactory assurances from the Company that such distribution does not require registration under the Securities Act or is exempt from registration under the provisions of such Act. In lieu of delivering GDRs evidencing fractional GDSs in the event of any such dividend or free distribution, the Depositary will sell the amount of Shares represented by the aggregate of such fractions and distribute the net proceeds in accordance with the relevant Deposit Agreement. If additional GDRs are not so distributed, each GDS shall thenceforth also represent the additional Shares distributed upon the Deposited Securities represented thereby. Each Beneficial Owner of Rule 144A GDSs (and prior to the Effective Time, each Beneficial Owner of International GDSs) or Shares so distributed shall be deemed to have acknowledged that the Shares have not been registered under the Securities Act and to have agreed to comply with the restrictions on transfer set forth under “Form of the GDRs and transfer restrictions”.

If the Company offers or causes to be offered to the holders of any Deposited Securities any rights to subscribe for additional Shares or any rights of any other nature, the Depositary will have discretion as to the procedure to be followed in making such rights available to any Owners of GDSs or in disposing of such rights for the benefit of any Owners and making the net proceeds available in US dollars to such Owners or, if by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any Owners or dispose of such rights and

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make the net proceeds available to such Owners, then the Depositary shall allow the rights to lapse; provided, however , if at the time of the offering of any rights the Depositary determines in its discretion that it is lawful and feasible to make such rights available to all Owners or to certain Owners but not to other Owners, the Depositary may distribute to any Owner to whom it determines the distribution to be lawful and feasible in proportion to the number of GDSs held by such Owner, warrants or other instruments therefor in such form as it deems appropriate. If the Depositary determines in its discretion that it is not lawful and feasible to make such rights available to certain Owners, it may sell the rights, warrants or other instruments in proportion to the number of GDSs held by the Owners to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds (net of the fees and expenses of the Depositary and all taxes and governmental charges payable in connection with such rights and subject to the terms and conditions of the relevant Deposit Agreement) of such sales for the account of such Owners otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such Owners because of exchange restrictions or the date of delivery of any GDR or GDRs, or otherwise.

In circumstances in which rights would not otherwise be distributed, if an Owner of GDSs requests the distribution of warrants or other instruments in order to exercise the rights allocable to the GDSs of such Owner, the Depositary will make such rights available to such Owner upon written notice from the Company to the Depositary that (a) the Company has elected in its sole discretion to permit such rights to be exercised and (b) such Owner has executed such documents as the Company has determined in its sole discretion are reasonably required under applicable law. Upon instruction pursuant to such warrants or other instruments to the Depositary from such Owner to exercise such rights, upon payment by such Owner to the Depositary for the account of such Owner of an amount equal to the purchase price of the Shares to be received in exercise of the rights, and upon payment of the fees of the Depositary as set forth in the relevant Deposit Agreement and in such warrants or other instruments, the Depositary will, on behalf of such Owner, exercise the rights and purchase the Shares, and the Company shall cause the Shares so purchased to be delivered to the Depositary on behalf of such Owner. As agent for such Owner, the Depositary will cause the Shares so purchased to be deposited, and will execute and deliver GDRs to such Owner, pursuant to the relevant Deposit Agreement.

The Depositary will not offer rights to Owners unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act with respect to a distribution to all Owners or are registered thereunder. If an Owner of GDSs requests the distribution of warrants or other instruments, notwithstanding that there has been no such registration under the Securities Act, the Depositary shall not effect such distribution unless it has received an opinion from the Company’s recognized counsel in the United States, to be provided at the Company’s sole expense, upon which the Depositary may rely that such distribution to such Owner is exempt from such registration. Notwithstanding any terms of the relevant Deposit Agreement to the contrary, the Company shall have no obligation to prepare and file a registration statement for any purpose.

The Depositary shall not be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Owners in general or any Owner in particular.

Whenever the Depositary shall receive any distribution other than cash, Shares or rights in respect of the Deposited Securities, the Depositary will cause the securities or property received by it to be distributed to the Owners entitled thereto, after deduction or upon payment of any fees and expenses of the Depositary or any taxes or other governmental charges, in proportion to their holdings, respectively, in any manner that the Depositary may reasonably deem equitable and practicable for accomplishing such distributions; provided, however , that if in the opinion of the Depositary such distribution cannot be made proportionately among the Owners entitled thereto, or if for any other reason (including any requirement that the Company or the Depositary withhold an amount on account of taxes or other governmental charges or that such securities must be registered under the Securities Act in order to be distributed) the Depositary deems such distribution not to be feasible, the Depositary may adopt such method as it may deem equitable and practicable for the purpose of

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effecting such distribution, including but not limited to the sale (at public or private sale) of the securities or property thus received, or any part thereof, and the net proceeds (net fees and expenses as provided in the relevant Deposit Agreement) of any such sale will be distributed by the Depositary to the Owners entitled thereto as in the case of a distribution received in cash.

If the Depositary determines that any distribution of property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charge which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such property in such amounts and in such manner as the Depositary deems necessary and practicable to pay such taxes or charges, by public or private sale, and the Depositary will distribute the net proceeds of any such sale after deduction of such taxes or charges to the Owners entitled thereto in proportion to the number of GDSs held by them, respectively.

Upon any change in nominal or par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which the Company is a party, any securities that shall be received by the Depositary or Custodian in exchange for, in conversion of, or in respect of Deposited Securities will be treated as new Deposited Securities under the relevant Deposit Agreement, and the GDSs shall thenceforth represent, in addition to the existing Deposited Securities, the right to receive the new Deposited Securities so received in exchange or conversion, unless additional GDRs are delivered pursuant to the following sentence. In any such case, the Depositary may execute and deliver additional GDRs as in the case of distribution in Shares, or call for the surrender of outstanding GDRs to be exchanged for new GDRs specifically describing such new Deposited Securities.

Record dates

Whenever any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made, or whenever rights shall be issued with respect to the Deposited Securities, or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each GDS, or whenever the Depositary shall receive notice of any meeting of holders of Shares, or other Deposited Securities, or whenever the Depositary shall find it necessary or convenient, the Depositary will fix a record date which shall be the same date or as near as possible to the corresponding date the Company fixed, (a) for the determination of the Owners who shall be (i) entitled to receive such dividend, distribution or rights, or the net proceeds of the sale thereof, (ii) entitled to give instructions for the exercise of voting rights at any such meeting or (iii) obligated to pay any charges in connection with the servicing of the Shares or other Deposited Securities or (b) on or after which each GDS will represent the changed number of Shares, all subject to the provisions of the relevant Deposit Agreement.

Voting of deposited securities

Upon receipt of notice of any meeting of holders of Shares or other Deposited Securities, the Depositary shall, at the Company’s written request, as soon as practicable thereafter, fix a record date for determining the Owners entitled to receive information as to such meeting and shall deliver to the Owners of record: (a) the notice of such meeting sent by the Company, including, if an election of directors or supervisors is to be held at the meeting, a list of the candidates who have expressed their intention to run for an election of directors or supervisors, if such list is provided to the Depositary by the Company, (b) a statement that (i) if the Depositary receives instructions from Owners as of the close of business on a record date established by the Depositary of an aggregate of at least 51% of Rule 144A GDSs and International GDSs (a “Majority of Owners”) instructing the Depositary to vote Shares in respect of any matter in the same manner (other than the election of directors or supervisors) to be voted upon at such meeting, then the Depositary will in respect of such matter appoint the Company’s Chairman or a person designated by the Chairman (the “Voting Representative”) as the representative of the Depositary and the Owners to attend such meeting and to vote all the Shares represented by GDSs in accordance with such identical instructions, insofar as practical and permitted under applicable law and the Articles of Incorporation and (ii) if the Depositary does not receive such

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identical instructions from a Majority of Owners with respect to such matters, the Depositary will appoint the Voting Representative to attend the relevant meeting and to vote all the Shares represented by GDSs as the Voting Representative deems appropriate and (c) a statement as to the manner in which instruction in respect of such matter may be given by Owners.

If the Depositary receives instructions from a Majority of Owners instructing the Depositary to vote Shares in respect of any matter in the same manner (other than the election of directors or supervisors) to be voted upon at such meeting, then the Depositary will in respect of such matter appoint the Voting Representative as representative of the Depositary and the Owners to attend such meeting and to vote all the Shares represented by GDSs in accordance with such identical instructions, insofar as practicable and permitted under applicable law and the Articles of Incorporation. If the Depositary does not receive such identical instructions from a Majority of Owners with respect to such matter, the Depositary will appoint the Voting Representative to attend such meeting and to vote all the Shares represented by GDSs as the Voting Representative deems appropriate; provided, however, that the Depositary will not make any such appointment unless it has received an opinion of the Company’s ROC counsel addressed to the Depositary and in form and substance satisfactory to the Depositary, at the Company’s sole expense, to the effect that, under ROC law (i) the relevant Deposit Agreement is valid, binding and enforceable against the Company and the Owners and the Beneficial Owners and (ii) the Depositary will not be deemed to be authorized to exercise any discretion when voting in accordance with the relevant Deposit Agreement and will not be subject to any potential liability for losses arising from such voting.

In connection with the election of directors and supervisors, the Company will provide in the notice to stockholders an indication of the number of directors or supervisors to be elected and a list of the candidates proposed by the Company. Additional or different candidates may be nominated at the meeting of the stockholders other than those proposed in the list the Company provided. The Depositary will forward the instructions for election of directors and supervisors that it has received from the Owners to the Voting Representative and appoint the Voting Representative as the representative of the Depositary and the Owners to attend such meeting, nominate, if necessary, the candidate or candidates named in such instructions, and vote the Shares represented by GDSs for which it has received instructions for the election of directors and supervisors from Owners in the manner so instructed. If the Depositary does not receive any such instructions from any Owner as provided above by the date fixed by the Depositary as the last date to accept such instructions, then, subject to the preceding sentence, the Depositary will appoint the Voting Representative to attend the relevant meeting and vote all the Shares represented by GDSs as to which the Depositary has not received instructions (with respect to the election of directors and supervisors) as the Voting Representative deems appropriate; provided, however, that the Depositary will not make any such appointment unless it has received an opinion of the Company’s ROC counsel addressed to the Depositary and in form and substance satisfactory to the Depositary, at the Company’s sole expense, to the effect that, under ROC law (i) the relevant Deposit Agreement is valid, binding and enforceable against the Company and the Owners and Beneficial Owners and (ii) the Depositary will not be deemed to be authorized to exercise any discretion when voting in accordance with the relevant Deposit Agreement and will not be subject to any potential liability for losses arising from such voting. In connection with the election of directors and supervisors, candidates standing for election as representatives of a stockholder may be replaced by such stockholder prior to the meeting of the stockholders, and the votes cast by the Owners for such candidates shall be counted as votes for their replacements.

The Depositary, in order to be qualified to act as representative of the Owners, shall take all appropriate actions required from time to time by applicable laws and regulations of the ROC, including acting as an Owner in its own capacity.

There can be no assurance that the Owners generally or any Owner in particular will receive the notice described in this paragraph sufficiently prior to the date established by the Depositary for the receipt of instructions to ensure that the Depositary will in fact receive such instructions on or before such date.

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Reports and other communications

The Depositary will make available for inspection by Owners at its Corporate Trust Office any reports and communications, including any proxy soliciting material, received from the Company, which are both (a) received by the Depositary as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company. The Depositary will also send to the Owners copies of such reports, when furnished by the Company pursuant to the relevant Deposit Agreement. Any such reports and communications, including any proxy soliciting material, furnished to the Depositary by the Company will be furnished in English when so required pursuant to any regulations of the Commission.

For so long as any of the GDSs are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, at any time. The Company is neither subject to Section 13 or 15(d) of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, the Company has agreed in the Deposit Agreements to supply to the Depositary such information in the English language, in sufficient quantities, as is required to be delivered to any holder or Beneficial Owner of GDSs and a prospective purchaser designated by such holder (in each case, within the meaning of Rule 144A under the Securities Act) and the information delivery requirements of Rule 144A(d)(4) under the Securities Act, in order to permit compliance with Rule 144A thereunder in connection with resales of GDSs. Subject to receipt, the Depositary will deliver such information on the Company’s behalf in its capacity as an agent only, at the Company’s expense during any period in which the Company informs the Depositary that the Company is subject to the information delivery requirements of Rule 144A(d)(4), to any such holder, or Beneficial Owner or prospective purchaser at the request of such holder, Beneficial Owner or prospective purchaser.

Amendment and termination of the Deposit Agreements

The GDRs and the Deposit Agreements may at any time be amended by agreement between the Depositary and the Company without the consent of the Owners or Beneficial Owners of GDRs; provided, however , that any amendment that imposes or increases any fees or charges (other than taxes, other governmental charges, delivery and other such expenses), or which otherwise prejudices any substantial existing right of Owners, will not take effect as to outstanding GDRs until the expiration of 30 days after notice of any amendment has been given to the Owners of outstanding GDRs. Every Owner of a GDS, at the time any amendment so becomes effective, will be deemed by continuing to hold such GDS to consent and agree to such amendment and to be bound by the relevant Deposit Agreement as amended thereby.

The Depositary shall at any time at the Company’s direction terminate the Deposit Agreements by mailing notice of such termination to the Owners or Beneficial Owners of the GDRs then outstanding at least 30 days prior to the date fixed in such notice for such termination. The Depositary may likewise terminate the Deposit Agreements by mailing notice of such termination to the Company and the Owners of all GDRs then outstanding if, at any time after 30 days have expired after the Depositary shall have delivered to the Company a written notice of its election to resign, a successor depositary shall not have been appointed and accepted its appointment, in accordance with the terms of the Deposit Agreements. If any GDRs remain outstanding after the date of termination of the Deposit Agreements, the Depositary thereafter will discontinue the registration of transfers of GDRs, will suspend the distribution of dividends to the Owners thereof and will not give any further notices or perform any further acts under the Deposit Agreements, except the collection of dividends and other distributions pertaining to the Deposited Securities, the sale of rights and other property and the delivery of underlying Deposited Securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for surrendered GDRs (after deducting the fees of the Depositary and other expenses set forth in the Deposit Agreements). At any time after the expiration of one year from the date of termination, the Depositary may sell the Deposited Securities then held thereunder and hold uninvested the net proceeds of such sale together with any other cash, unsegregated and without liability for interest, for the pro rata benefit of the Owners that have not theretofore surrendered their

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GDRs, such Owners thereupon becoming general creditors of the Depositary with respect to such net proceeds. After making such sale, the Depositary will be discharged from all obligations under the Deposit Agreements, except to account for net proceeds and other cash (after deducting the fees of the Depositary and other expenses set forth in the Deposit Agreements and any applicable taxes or other governmental charges). Upon termination of the relevant Deposit Agreement, the Company shall be discharged from all obligations under the relevant Deposit Agreement except for its obligations to the Depositary with respect to indemnities and payment of charges.

Charges of Depositary

The Depositary will charge any party depositing or withdrawing Shares or any party surrendering GDRs or to whom GDRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared by the Company or an exchange of stock regarding the GDRs or Deposited Securities or a distribution of GDRs pursuant to the relevant Deposit Agreement) where applicable: (1) taxes and other governmental charges; (2) such registration fees as may from time to time be in effect for the registration of transfers of Shares generally on the Company’s share register (or its appointed agent for transfer and registration of Shares) and applicable to transfers of Shares to the name of the Depositary or its nominee or the Custodian or its nominee on the making of deposits or withdrawals; (3) such cable, telex and facsimile transmission expenses as are expressly provided in the relevant Deposit Agreement to be at the expense of persons depositing Shares or Owners; (4) such expenses as are incurred by the Depositary in the conversion of Foreign Currency pursuant to the relevant Deposit Agreement; (5) a fee not in excess of US$5.00 per 100 GDSs (or portion thereof) for the issuance or surrender, respectively, of GDRs pursuant to the Deposit Agreement; (6) a fee not in excess of US$.02 per GDS (or portion thereof) for any cash distribution made pursuant to the relevant Deposit Agreement; (7) a fee for the distribution of securities or rights pursuant to the relevant Deposit Agreement, such fee being in an amount equal to the fee for the issuance of GDSs referred to above which would have been charged as a result of the deposit by the Owners of such securities (for purposes of this clause (7) treating all such securities as if they were Shares) but which securities are instead distributed by the Depositary to the Owners; (8) a fee not in excess of US$1.50 per Certificate for issuances or registrations of transfers of GDRs in definitive form made pursuant to the relevant Deposit Agreement; (9) any other charge payable by the Depositary, any of the Depositary’s agents, including the Custodian, or the agents of the Depositary’s agents in connection with the servicing of Shares or other Deposited Securities (which charge shall be assessed against Owners of record as of the date or dates set by the Depositary in accordance with the relevant Deposit Agreement and shall be collected at the sole discretion of the Depositary by billing such Owners for such charge or by deducting such charge from one or more cash dividends or other cash distributions) and (10) a Currency Election fee of US$.05 or less per International GDS for the acceptance by the Depositary of a Currency Election.

Liability of owner for taxes

If any tax or other governmental charge shall become payable by the Custodian or the Depositary with respect to any GDR, the GDSs evidenced thereby or any underlying Deposited Securities, such tax or other governmental charge will be payable by the Owner of such GDS to the Depositary. The Depositary may refuse to effect any transfer of such GDS of any withdrawal of Deposited Securities underlying such GDS until such payment is made and may withhold any dividends or other distributions or may sell for the account of the owner or beneficial owners thereof any part or all of the Deposited Securities underlying such GDS and may apply such dividends, distributions or the proceeds of any such sale to pay any such tax or other governmental charge and the owner of such GDS shall remain liable for any deficiency.

General

Neither the Depositary nor the Company nor any of their respective directors, employees, agents or affiliates will be liable to any Owner or beneficial owner if by reason of any provision of any present or future law or regulation of the United States, ROC or any other country, or of any other

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governmental or regulatory authority or stock exchange or by reason of any provision, present or future, of the Articles of Incorporation, or by reason of any provision of any securities issued or distributed by the Company, or any offering or distribution thereof, or by reason of any act of God or war or other circumstances beyond the Company’s control, the Depositary or the Company or any of their directors, employees, agents or affiliates shall be prevented, delayed or forbidden from, or be subject to any civil or criminal penalty on account of, doing or performing any act or thing which by the terms of the relevant Deposit Agreement or the Deposited Securities it is provided shall be done or performed; nor will the Depositary or the Company incur any liability to any Owner or beneficial owner by reason of any non-performance or delay, caused as stated in the preceding clause, in the performance of any act or thing which by the terms of the Deposit Agreement it is provided shall or may be done or performed, or by reason of any exercise of, or failure to exercise, any discretion provided for under the relevant Deposit Agreement or the Articles of Incorporation.

The Depositary and the Company assume no obligation nor will they be subject to any liability under the Deposit Agreements to the Owners or Beneficial Owners of GDSs, except that each of the Depositary and the Company agrees to perform its respective obligations specifically set forth under the relevant Deposit Agreement without negligence or bad faith.

The GDSs are transferable on the books of the Depositary, provided that the Depositary may close the transfer books at any time or from time to time when deemed expedient by it in connection with the performance of its duties or at the Company’s written request. As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any GDR or withdrawal of any Deposited Securities, the Depositary or the Custodian may require payment from the person presenting the GDR or the depositor of the Shares of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees payable by the Beneficial Owners. The Depositary may refuse to deliver GDRs, to register the transfer of any GDS or to make any distribution on, or related to, Shares until it has received such proof of citizenship or residence, exchange control approval or other information as it may deem necessary or proper as to the identity and genuineness of any signature and may also require compliance with any regulations the Depositary may establish consistent with the relevant Deposit Agreement. The delivery, transfer and surrender of GDRs generally may be suspended during any period when the transfer books of the Depositary, the Foreign Registrar or the Company are closed or if any such action is deemed necessary or advisable by the Depositary or the Company. At any time or from time to time at and subsequent to the Effective Time, the surrender of outstanding International GDRs, and the withdrawal of Deposited Securities may not be suspended subject only to (i) the temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders’ meeting or the payment of dividends, (ii) the payment of any fees, taxes, and similar charges and (iii) compliance with any US or foreign laws or governmental regulations relating to the GDSs or to the withdrawal of the Deposited Securities.

Subject to the terms and conditions of the Deposit Agreements unless requested in writing by the Company to cease doing so, the Depositary may execute and deliver GDRs prior to the receipt of Shares (a “Pre-Release”) and deliver Shares upon the receipt and cancellation of GDRs which have been Pre-Released, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such GDR has been Pre-Released. The Depositary may receive GDRs in lieu of Shares in satisfaction of a Pre-Release. Each Pre-Release must be (i) preceded or accompanied by a written representation and agreement from the person to whom the GDRs or Shares are to be delivered (the “Pre-Releasee”) that such person, or its customer, owns the Shares or GDRs to be remitted, as the case may be, assigns all beneficial right, title and interest in such Shares or GDRs, as the case may be, to the Depositary for the benefit of the Owners, and will not take any action with respect to such Shares or GDRs, as the case may be, that is inconsistent with the transfer of beneficial ownership (including, without the consent of the Depositary, disposing of such Shares or GDRs, as the case may be) other than in satisfaction of such pre-Release, (ii) at all times fully collateralized with cash, US government securities or such other collateral, as the Depositary determines, in good faith,

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will provide substantially similar liquidity and security, (iii) terminable by the Depositary on not more than five business days’ notice and (iv) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of Shares not deposited but represented by GDSs outstanding at any time as a result of Pre-Releases will not normally exceed 30% of the Shares deposited under the Deposit Agreements; provided, however , that the Depositary reserves the right to disregard such limit from time to time as it deems reasonably appropriate, and may, with the Company’s prior written consent, change such limit for purposes of general application. The Depositary will also set US dollar limits with respect to Pre-Release transactions to be entered into under the Deposit Agreements with any particular Pre-Releasee on a case-by-case basis as the Depositary deems appropriate. For purposes of enabling the Depositary to fulfill its obligations to the Owners under the Deposit Agreements, the collateral referred to in clause (ii) above shall be held by the Depositary as security for the performance of the Pre-Releasee’s obligations to the Depositary in connection with a Pre-Release transaction, including the Pre-Releasee’s obligation to deliver Shares or GDRs upon termination of a Pre-Release transaction (and shall not, for the avoidance of doubt, constitute Deposited Securities).

Each deposit of Shares under the Rule 144A Deposit Agreement or, prior to the Effective Time, the International Deposit Agreement, in connection with a Pre-Release described above shall be subject to receipt by the Depositary of a duly executed and completed Depositor Certificate. The Depositary may retain for its own account any compensation received by it in connection with the foregoing.

The Depositary will keep books, at its transfer office in The City of New York, for the registration and transfer of GDSs, which at all reasonable times will be open for inspection by the Owners, provided that such inspection shall not be for the purpose of communicating with Owners in the interest of a business or object other than the Company’s business or a matter related to the Deposit Agreements or the GDSs.

The Depositary may, upon the Company’s written approval, appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of GDSs at designated transfer offices on behalf of the Depositary. In carrying out its functions, a co-transfer agent may require evidence of authority and compliance with applicable laws and other requirements by the Beneficial Owners or Owners or persons entitled thereto and will be entitled to protection and indemnity to the same extent as the Depositary.

Governing law

The Deposit Agreements are governed by the laws of the State of New York.

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FORM OF THE GDRs AND TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers are advised to consult with legal counsel prior to making any resale, pledge or other transfer of International GDSs or Shares represented thereby.

The International GDSs and the Shares represented thereby have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, US persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.

Except in certain limited circumstances, interests in the GDSs may only be held through interests in the Master International GDR. Such interest in the Master International GDR will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants.

International GDSs

Each owner of an interest in the International GDSs prior to the expiration of the 40-day period following the later of an offering of Shares by the Company or its affiliates or securities convertible, exercisable or exchangeable into Shares, pursuant to which offering of securities it acquired the Shares being deposited, and the related closing (the “Distribution Compliance Period”), will be deemed to have represented, agreed and acknowledged that:

It understands that such International GDSs and the Shares represented thereby have not been and will not be registered under the Securities Act; it is acquiring such GDSs for its own account and that it is not a US person (as defined in Regulation S) and is located outside the United States (within the meaning of Regulation S) and acquired, or have agreed to acquire and will have acquired, the Shares to be deposited outside the United States (within the meaning of Regulation S); it is not an affiliate of the Company or a person acting on behalf of such affiliate; and it is not in the business of buying or selling securities, or, if it is in such business, it did not acquire the securities to be deposited from the Company or any affiliate thereof. It understands that, prior to the expiration of the Distribution Compliance Period (if applicable), it will not offer, sell, pledge or otherwise transfer such International GDSs and the Shares represented thereby except (a) to a person that it and any person acting on its behalf reasonably believe is a QIB within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A or (b) in accordance with Regulation S, in each case in accordance with any applicable securities laws of any State of the United States. If it sells or otherwise transfers the International GDSs or the Shares represented thereby in accordance with Rule 144A prior to the expiration of the Distribution Compliance Period (if applicable), it will, prior to the settlement of such sale, cause such Shares to be withdrawn in accordance with the terms and conditions of the International Deposit Agreement and it will cause instructions to be given to the Depositary to deliver such Shares to the custodian under the Rule 144A Deposit Agreement for deposit thereunder and issuance of a Rule 144A GDR evidencing a Rule 144A GDS upon receipt of the proper certification on behalf of the purchaser and otherwise in accordance with the terms and conditions of such Rule 144A Deposit Agreement.
It understands that the International GDRs and the Master International GDR, unless otherwise determined by the Company in accordance with applicable law, will bear a legend substantially to the following effect prior to the termination of the Distribution Compliance Period (if applicable):

THIS INTERNATIONAL GLOBAL DEPOSITARY RECEIPT (“GDR”), THE INTERNATIONAL GLOBAL DEPOSITARY SHARES (“INTERNATIONAL GDSs”) EVIDENCED HEREBY AND THE UNDERLYING SHARES OF COMPAL ELECTRONICS, INC. (THE “COMPANY”) (THE “SHARES”) REPRESENTED

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THEREBY, HAVE NOT BEEN AND ARE NOT EXPECTED TO BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND PRIOR TO THE EXPIRATION OF THE 40-DAY PERIOD FOLLOWING THE LATER OF THE OFFERING OF SHARES BY THE COMPANY OR ITS AFFILIATES, OR SECURITIES CONVERTIBLE, EXERCISABLE, OR EXCHANGEABLE INTO SHARES, PURSUANT TO WHICH OFFERING OR SECURITIES THIS GDR IS DELIVERED, AND THE RELATED CLOSING (THE “DISTRIBUTION COMPLIANCE PERIOD”), SUCH SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT IS (A) A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR A PURCHASER THAT THE SELLER AND ANY PERSON ACTING ON THE SELLER’S BEHALF REASONABLY BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER AND (B) AWARE THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A OR (2) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS AND FURTHER PROVIDED THAT, IN CONNECTION WITH ANY TRANSFER UNDER (1) ABOVE, THE TRANSFEROR SHALL, PRIOR TO THE SETTLEMENT OF SUCH SALE, WITHDRAW THE SHARES FROM DEPOSIT UNDER THE INTERNATIONAL DEPOSIT AGREEMENT AND CAUSE INSTRUCTIONS TO BE GIVEN TO THE CUSTODIAN FOR THE DEPOSITING OF SUCH SHARES UNDER THE RULE 144A DEPOSIT AGREEMENT AND TO THE DEPOSITARY FOR THE ISSUANCE OF RULE 144A GDRs TO OR FOR THE ACCOUNT OF SUCH QUALIFIED INSTITUTIONAL BUYER, ALL IN ACCORDANCE WITH THE PROVISIONS OF THE RULE 144A DEPOSIT AGREEMENT. EACH OWNER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS GDR OR AN INTEREST IN THE INTERNATIONAL GDSs EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING AND FOLLOWING RESTRICTIONS.

UPON THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD, THE INTERNATIONAL GDSs EVIDENCED HEREBY AND THE SHARES REPRESENTED THEREBY SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS PROVIDED IN THIS LEGEND, PROVIDED THAT AT SUCH TIME AND THEREAFTER THE OFFER OR SALE OF THE INTERNATIONAL GDSs EVIDENCED HEREBY AND THE SHARES REPRESENTED THEREBY BY THE OWNER HEREOF IN THE UNITED STATES WOULD NOT BE RESTRICTED UNDER ANY APPLICABLE SECURITIES LAWS OF THE UNITED STATES OR OF THE STATES OR TERRITORIES OF THE UNITED STATES.

The Company, the Depositary, the Purchasers and their respective affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements.
It understands that the GDSs offered in reliance on Regulation S will be represented by the Master International GDR. Prior to the expiration of the Distribution Compliance Period (if applicable), before any interest in the Master International GDR may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Master Rule 144A GDR, it will be required to provide a transfer agent with written certifications (in the form provided in the International Deposit Agreement and the Rule 144A Deposit Agreement) as to compliance with applicable securities laws.

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Beneficial interests in the International GDSs will be represented by the Master International GDR registered in the name of a common depositary for Euroclear and Clearstream, Luxembourg. The aggregate holdings of beneficial interests in the International GDSs in Euroclear and Clearstream, Luxembourg will be reflected in the book-entry accounts of each such institution. Ownership of International GDSs evidenced by the Master International GDR will be limited to Euroclear or Clearstream, Luxembourg accountholders or persons who hold interests through such accountholders. Ownership of such interests will be shown on, and the transfer of that ownership will be effected only through, records maintained by the common depositary (with respect to the aggregate holdings of Euroclear and Clearstream, Luxembourg), the records of Euroclear and Clearstream, Luxembourg (with respect to the holdings of their respective accountholders) and the records of such Euroclear and Clearstream, Luxembourg accountholders (with respect to the interests of persons trading International GDSs through such accountholders).

Transfers of International GDSs held through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg.

Euroclear and Clearstream, Luxembourg each hold securities for participating organizations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of such participants. Euroclear and Clearstream, Luxembourg provide to their respective participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg participants are financial institutions throughout the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Euroclear and Clearstream, Luxembourg is also available to others, such as banks, brokers, dealers and trust companies which clear through or maintain a custodial relationship with Euroclear or Clearstream, Luxembourg, either directly or indirectly.

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TAXATION

The following discussion is a summary of the material ROC income tax considerations relevant to an investment decision by certain non-ROC holders.

ROC taxation

The following summary addresses the principal ROC tax consequences of the ownership and disposition of the Bonds or the Shares to a non-resident individual or non-resident entity that holds such Bonds or Shares (a “Non-ROC Holder”). “Non-resident individual” (a “Non-ROC Individual Holder”) is a foreign national individual who is not physically present in the ROC for 183 days or more during any calendar year in which he or she owns the Bonds or the Shares and a “non-resident entity” (a “Non-ROC Entity Holder”) is a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the ROC for profit-making purposes and does not have a fixed place of business or other permanent establishment in the ROC.

Bonds

Interest

Payments of interest (if any) or premium (if any) on a Bond to a Non-ROC Holder are subject to ROC withholding tax at the rate of 20% at the time of payment.

Sale

Securities transaction tax will be imposed on the transfer of equity securities issued by ROC companies at the rate of 0.3%, which is payable by the seller. Under the current tax law, no securities transaction tax will be imposed on the transfer of the Bonds.

However, securities transaction tax, gift tax and/or income tax may be imposed in relation to the converting holder’s designation of other persons to be the holders of Shares upon conversion of the Bonds.

Under current ROC laws, capital gains on transactions of securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of Bonds.

Conversion into Shares

ROC law currently provides no specific provisions regarding the ROC income tax consequences of a conversion of Bonds into Shares or cash. Without further clarification from the ROC tax authorities, it is impossible to conclude with certainty that gain on the conversion of Bonds into Shares or cash will not be deemed a taxable gain, additional interest income (subject to the 20% withholding tax) or otherwise be subject to other ROC tax.

Transfer of Bonds by Non-ROC Holders are regarded as transactions outside the ROC and thus any gains derived therefrom are not subject to ROC income.

Stamp Duty

There is no ROC stamp, issue or registration tax imposed on the delivery of Shares upon conversion of the Bonds.

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Shares

Dividends

Dividends (whether in cash or shares) declared by us out of retained earnings and distributed to a Non-ROC Holder in respect of Shares are subject to ROC withholdings tax, currently at the rate of 20%, on the amount of the distribution (in the case of cash dividends) or on the par value of the Shares (in the case of stock dividends).

Distributions of Shares declared by us out of capital reserves are not subject to ROC withholding tax.

Sale

Securities transaction tax will be withheld at the rate of 0.3% of the transaction price upon a sale of Shares.

Under current ROC laws, capital gains on transactions in securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of Shares.

Pre-emptive rights

Distributions of statutory subscription rights for the Shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3% of the gross sales amount. Proceeds derived from sales of statutory subscription rights which are not evidenced by securities are subject to capital gains tax at the rate of (1) 25% of the gains realized by Non-ROC Entity Holders and (2) 35% of gains realized by Non-ROC Individual Holders. Subject to compliance with ROC laws, the Company has the sole discretion to determine whether statutory subscription rights shall be evidenced by the issuance of securities.

Inheritance tax and gift tax

ROC inheritance tax is payable on any property located within the ROC of a deceased Non-ROC individual, and ROC gift tax is payable on any property located within the ROC donated by such person. Inheritance tax is payable at rates ranging from 2% of the first NT$0.6 million to 50% of amounts over NT$100 million. Gift tax is payable at rates ranging from 4% of the first NT$0.6 million to 50% of amounts over NT$45 million. Under ROC inheritance and gift tax law, bonds and shares issued by ROC companies are deemed located within the ROC regardless of the location of the owner.

Tax treaties

The United States does not have an income tax treaty with the ROC. At present, the ROC has income tax treaties with Australia, Gambia, Indonesia, Malaysia, Macedonia, the United Kingdom, the Netherlands, New Zealand, Singapore, South Africa, Swaziland, Senegal, Sweden and Vietnam which limit the rate of withholding tax on dividends or interest paid with respect to shares or bonds in ROC companies. It is unclear whether a Non-ROC Holder will be considered to own Bonds or Shares for the purposes of such income tax treaties. Accordingly, holders of Bonds or Shares who are otherwise entitled to the benefits of a relevant income tax treaty should consult their own tax advisors concerning their eligibility for benefits under the treaty with respect to the Bonds or Shares.

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Tax reform

In order to increase ROC’s competitiveness, an amendment to the ROC Income Tax Law (the “Amendment”) was enacted on January 1, 1998 to integrate corporate income tax with shareholder dividend tax with the aim of eliminating the double taxation effect for resident shareholders of ROC companies. According to the Amendment, a 10% retained earnings tax is imposed on a company for its after-tax earnings generated after January 1, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for further distribution. When the Company declares dividends out of its retained earnings, a maximum amount of 10% of the declared dividends will be credited against the ROC 20% withholding tax, so that the actual withholding tax imposed on the Non-ROC Holders may be less than 20%.

Proposed EU Directive on the Taxation of Savings Income

Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are required, from July 1, 2005, to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual resident in that other Member State. However, for a transitional period, Belgium, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). A number of non-EU countries and territories including Switzerland have agreed to adopt similar measures (a withholding system in the case of Switzerland) with effect from the same date.

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PLAN OF DISTRIBUTION

ABN AMRO Bank N.V. and NM Rothschild & Sons Limited, each trading as ABN AMRO Rothschild (the “Lead Manager”), Yuanta Core Pacific Securities (Hong Kong) Co. Ltd., JS Cresvale Securities International Company Limited and TIS Securities (HK) Limited (together, the “Purchasers”) have pursuant to a purchase agreement dated August 12, 2005 (the “Purchase Agreement”) between the Company and the Purchasers agreed with the Company to subscribe and pay for the Bonds at their issue price less a combined management and underwriting commission and a selling concession. The Purchase Agreement provides that the Company will indemnify the Purchasers against certain liabilities. The Purchase Agreement provides that the obligations of the Purchasers are subject to certain conditions precedent, and entitles the Purchasers to terminate it in certain circumstances prior to payment being made to the Company.

Purchasers		Principal Amount of Bonds
ABN AMRO Rothschild ......................................................................................... Yuanta Core Pacific Securities (Hong Kong) Co. Ltd. ............................................ JS Cresvale Securities International Company Limited .......................................... TIS Securities (HK) Limited .................................................................................	US$291,000,000 US$3,000,000 US$3,000,000 US$3,000,000
Total...................................................................................................................	US$300,000,000

The Purchasers are committed, subject to certain conditions, to take and pay for all of the Bonds being offered, in an aggregate principal amount of US$300,000,000.

The Purchasers or its affiliates may purchase the Bonds for their own accounts and enter into transactions, including (i) credit derivatives including asset swaps, repackaging and credit default swaps relating to the Bonds and/or the Company’s securities or (ii) equity derivatives and stock loan transactions relating to the Shares at the same time as the offer and sale of the Bonds or in secondary market transactions. Such transactions would be carried out as bilateral trades with selected counter-parties and separately from any existing sale or resale of the Bonds to which this Offering Circular relates (notwithstanding that such selected counter-parties may also be purchasers of the Bonds).

The Purchasers and certain of their subsidiaries or affiliates have performed certain investment banking and advisory services for the Company and/or its subsidiaries from time to time for which they have received customary fees and expenses. The Purchasers may, from time to time, engage in transactions with and perform services for the Company and/or its subsidiaries in the ordinary course of their business.

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No action has been taken or will be taken in any jurisdiction that would permit a public offering of the Bonds, or possession or distribution of this Offering Circular or any amendment or supplement thereto or any other offering or publicity material relating to the Bonds, in any country or jurisdiction where action for that purpose is required. The Purchasers not authorized to make any representation or use any information in connection with the issue, subscription and sale of the Bonds other than as contained in this Offering Circular or any amendment or supplement thereto.

The Bonds (and the Shares or GDSs issuable upon conversion of the Bonds) have not been registered under the Securities Act or the securities laws of any other place. Accordingly, the Bonds, Shares or GDSs to be issued upon conversion of the Bonds are subject to restrictions on resale and transfer as described under “Form of the Bonds and transfer restrictions”. In the Purchase Agreement, the Purchasers have acknowledged and agreed that:

The Bonds, Shares or GDSs to be issued upon conversion of the Bonds may not be offered or sold within the United States or to US persons except pursuant to an exemption from the registration requirements of the Securities Act or in transactions not subject to those registration requirements.
During the initial distribution of the Bonds, it will offer or sell the Bonds only to non-US persons (as defined in Regulation S of the Securities Act) outside the United States in compliance with Regulations S.

In addition, until 40 days following the Closing Date, an offer or sale of the Bonds, Shares or GDSs to be issued upon conversion of the Bonds within the United States or to, or for the account or benefit of, US persons by a dealer (whether or not participating in this offering) may violate the registration requirements of the Securities Act unless the dealer makes the offer or sale in compliance with another exemption from registration under the Securities Act.

Each purchaser of the Bonds, Shares or GDSs to be issued upon conversion of the Bonds offered by this Offering Circular, in making its purchase, will be deemed to have made certain acknowledgements, representations and agreements as described under “Form of the Bonds and transfer restrictions” and “Form of the GDRs and transfer restrictions”.

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), each Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Bonds to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Bonds which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of Bonds to the public in that Relevant Member State at any time:

(a) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than C= 43,000,000 and (3) an annual net turnover of more than C= 50,000,000, as shown in its last annual or consolidated accounts; or

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(c) in any other circumstances which do not require the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of Bonds to the public” in relation to any Bonds in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Bonds to be offered so as to enable an investor to decide to purchase or subscribe the Bonds, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

In addition, each Purchaser has represented, warranted and agreed that:

(i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of any Bonds in circumstances in which section 21(1) of the FSMA does not apply to the Company, and (ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom;
(i) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Bonds other than (a) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance; and (ii) it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Bonds, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Bonds which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance;
this Offering Circular has not been, and will not be, registered as a prospectus with the Monetary Authority of Singapore and accordingly, it has not offered or sold the Bonds or caused the Bonds to be made the subject of an invitation for subscription or purchase, and will not offer or sell the Bonds or cause the Bonds to be made the subject of an invitation for subscription or purchase, nor has it circulated or distributed nor will it circulate or distribute this Offering Circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Bonds, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor specified in Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA;
it has not offered or sold and will not offer or sell any Bonds, directly or indirectly, in the ROC; and

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the Bonds have not been registered and will not be registered under the Securities and Exchange Law of Japan (the “Securities and Exchange Law”), and it has not offered or sold and will not offer or sell, directly or indirectly, the Bonds in Japan or to or for the account of or benefit of any resident of Japan, except (i) pursuant to an exemption from the registration requirements of the Securities and Exchange Law and (ii) in compliance with any other applicable requirements of Japanese law. As used in this paragraph “resident of Japan” means any person residing in Japan, including any corporation or other entity organized under the laws of Japan.

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LEGAL MATTERS

Certain legal matters with respect to the Bonds and the Shares issuable upon conversion thereof will be passed upon for the Company by Tsar & Tsai, Taipei, Taiwan, ROC, and for the Purchasers with respect to the Bonds by Linklaters, Hong Kong. Linklaters will rely upon Tsar & Tsai with respect to certain matters of ROC law. Tsar & Tsai will rely upon Linklaters with respect to certain matters of New York and US federal law.

INDEPENDENT PUBLIC ACCOUNTANTS

The consolidated financial statements of the Company as of and for the years ended December 31, 2002, 2003 and 2004, included in this Offering Circular have been audited by KPMG, Certified Public Accountants, as stated in their report included herein, in accordance with generally accepted auditing standards in the ROC.

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GENERAL INFORMATION

Listing

Approval in-principle has been obtained from the SGX-ST to list the Bonds on the SGX-ST. The Bonds will be traded on the SGX-ST in a minimum board lot size of US$200,000 for so long as the Bonds are listed on the SGX-ST. The Shares are listed and traded on the Taiwan Stock Exchange and application will be made for the Shares to be issued upon conversion of the Bonds to be listed on the Taiwan Stock Exchange. The GDSs are listed and traded on the Luxembourg Stock Exchange.

Authorizations

The Company has obtained all necessary consents, approvals and authorizations in connection with the issue of the Bonds. The issue of the Bonds and the GDSs was authorized by resolutions of the Board of Directors of the Company passed on March 3, 2005.

Material change

Except as disclosed in this Offering Circular, there has been no material adverse change in the financial position or prospects of the Group since December 31, 2004, the date of the latest audited consolidated financial statements.

Litigation

Save as disclosed in the section “Business — Litigation and legal issues”, neither the Company nor any of its subsidiaries and affiliates is involved in any litigation, arbitration or administrative proceedings relating to claims which are material in the context of the issue of the Bonds and, so far as any of them is aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

Clearing system

The Bonds and the GDSs have been accepted for clearance through the facilities of Euroclear and Clearstream, Luxembourg. Certain relevant trading information is set forth below.

ISIN Bonds ......................................................................... XS0217950541	Common Code 021795054

Action by the Trustee

The Bonds provide that the Trustee will take action on behalf of the holders thereof in certain circumstances, but only if the Trustee is indemnified to its satisfaction. It may not be possible for the Trustee to take certain actions and, accordingly, in such circumstances the Trustee will be unable to take such actions, notwithstanding the provision of an indemnity to it, and it will be for holders of the Bonds to take such actions directly.

Participating rights in event of take-over

The Bonds do not provide for participating rights in the event of a take-over of the Company.

— 155 —

SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ROC GAAP AND US GAAP

The accompanying financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the Republic of China (collectively referred herein as “ROC GAAP”) differ in certain respects from US GAAP. A brief description of certain significant differences between ROC GAAP and US GAAP are set out below. The regulatory organizations that promulgate ROC GAAP and US GAAP have projects ongoing that could have a significant impact on future comparisons such as between ROC GAAP and US GAAP, including those specifically related to US or to the industry in which the Group operates. Had the Company undertaken to identify the differences specifically affecting the financial statements which are not provided in the following summary. Accordingly, there can be no assurance that this summary of certain significant differences between ROC GAAP and US GAAP provides a complete description of all differences which may have a significant impact on the accompanying financial statements. US GAAP is generally more restrictive and comprehensive than ROC GAAP regarding the recognition and measurement of transactions, account classification and disclosure requirements. No attempt has been made in this summary to identify disclosure, presentation or classification differences that would affect the manner in which transactions and events are reflected in the accompanying financial statements or the notes thereto.

Certain significant differences between ROC GAAP and US GAAP which would affect the determination of net income and equity of the Company are as follows:

ROC GAAP US GAAP

Presentation of non-consolidated financial statements

Under ROC FSC requirements, nonconsolidated financial statements of a company are presented as the primary financial statements and consolidated financial statements as supplemental financial statements. A company’s investment in its subsidiaries is accounted for under the equity method of accounting in the nonconsolidated financial statements. The net income from a company’s subsidiaries is included in investment income as a one-line item in the non-operating section of the non-consolidated statement of operations. A company’s investment in its subsidiaries is included in long-term equity investments as a one-line item in the non-consolidated balance sheet.

Under US GAAP, parent-company-only nonconsolidated financial statements are not allowed to be presented as the primary financial statements.

— 156 —

US GAAP

ROC GAAP

Consolidation policy

The-consolidated financial statements include the accounts of a company and all of its subsidiaries in which more than 50% of the shares are owned by the company. If the total assets and operating revenues of a subsidiary is less than 10% of the company’s total assets and operating revenues, then the subsidiary could be excluded from the consolidation entities and is accounted for under the equity method of accounting. Under ROC FSC requirements, for those subsidiaries in which more than 50% of the shares are owned by the company and in which total assets and operating revenues do not exceed 10% of the corresponding accounts of the company, and the aggregate total assets and total operating revenues of all these subsidiaries is less than 30% of the company’s total assets and operating revenues, respectively, the financial statements of these subsidiaries are not consolidated into the company’s consolidated financial statements.

ROC SFAS No. 7, “The Consolidated Financial Statements”, issued on December 9, 2004, will be effective for financial statements for the year 2005. The revised ROC GAAP requires that consolidation is based on the ability to control, which is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

Under US GAAP, all subsidiaries in which more than 50% of the shares are owned by a company are to be consolidated into such company’s consolidated financial statements. In December 2003, the US FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R or the Interpretation), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. The Interpretation replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), which was issued on January 2003.

When voting interests are not effective in identifying whether an entity is controlled by another party, the economic risks and rewards inherent in the entity’s assets and liabilities and the way in which the various. parties that have involvement with the entity share in those economic risks and rewards should be used to determine whether the entity should be consolidated.

Many structures that traditionally have not been considered SPEs, such as joint ventures, limited partnerships, franchise arrangements, and trusts, may be subject to the consolidation requirements of FIN 46R. Even consolidated subsidiaries are subject to the provisions of FIN 46R.

— 157 —

US GAAP

ROC GAAP

Acquisition of businesses

Pooling of interests accounting is allowed in limited circumstances.

Under ROC GAAP, if a company acquires an enterprise by issuing shares of its stock in exchange for 100% of the outstanding shares of the enterprise’s stock, the fair value of the net assets acquired may be used to determine the fair value of the acquired enterprise. Under this method of accounting, the shares of stock issued by the acquirer are recorded at the fair value of the net assets acquired. No goodwill is recognized by the acquirer under this method. If a company acquires an enterprise using cash as the purchase consideration, the difference between the purchase consideration and the fair value of the net assets acquired is accounted for as a consolidation debit asset and amortized to income within twenty years.

Also, ROC GAAP has no specific accounting practice related to the recognition of liabilities in connection with an acquisition of a business.

Under US GAAP, business combinations subsequent to July 1, 2001 are accounted for based on the “purchase” method.

The difference between purchase consideration and historical net assets acquired is allocated based on the fair values of the net assets and other identifiable intangible assets acquired, with any residual accounted for as goodwill. In such allocation of purchase consideration, purchased research and development costs would be expensed upon consummation of the acquisition. In an acquisition resulting in the exchange of shares of stock, the purchase consideration is measured based on the fair value of exchanged stock of either the acquirer or acquire, whichever stock has a more readily determinable market value. The income of the acquirer includes the operations of the acquiree subsequent to the acquisition.

US GAAP has detailed guidance regarding the accounting treatment related to the recognition of liabilities in connection with a purchase business combination. EITF Issue No. 95-3 specifies the accounting requirements related to the cost to exit an activity of an acquired company, including employee termination benefits and relocation costs.

Presentation of interim financial statements

Under ROC GAAP, the entity is permitted to presents its interim financial statements on a parent company only basis and account for all subsidiaries using the equity method of accounting.

Under US GAAP, the entity would be required to present consolidated interim financial statements that would include the accounts of the entity and all of its subsidiaries.

— 158 —

US GAAP

ROC GAAP

Investments in debt and equity securities

Investments in debt securities and short-term investments are stated at the lower of amortized cost or market value. Long-term investments in publicly listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at the lower of cost or market value, and unrealized losses are deducted from stockholders’ equity. Long-term investments in non-listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at cost, subject to a permanent impairment test.

Investments in debt and marketable equity securities are classified into one of three categories: trading, held-to-maturity, or available-for-sale. Debt and marketable equity securities classified as trading securities are reported at fair value with unrealized gains and losses included in earnings; debt securities classified as held-to-maturity securities are reported at amortized cost; and, debt and marketable equity securities classified as available-for-sale are reported at fair value with unrealized gains and losses reported in accumulated other comprehensive income.

ROC SFAS No. 34, “Accounting for financial instruments”, issued on December 25, 2003, will be effective for financial statements for the year ending on and after December 31, 2006. Under ROC SFAS No. 34, accounting treatments for investments in debt and equity securities are substantially similar to US GAAP.

Accounting for derivative financial instruments

Before the issuance of ROC SFAS No. 34, which will be effective for the years end on and after December 31, 2006, there are no definitive accounting standards under ROC GAAP which address accounting for derivative financial instruments such as foreign currency options, futures, interest rate of foreign currency swaps except for forward exchange contracts. The accounting treatment of forward exchange contracts is similar to US SFAS No. 52. According to a new accounting explanation issued on January 19, 2005, foreign currency options which do not meet the criteria for accounting for such items as hedges are accounted for at fair value with all gains and losses recognized currently in earnings for the financial statements for the year end on and after December 31, 2004.

Under US GAAP, accounting for derivative financial instruments is in large part determined by the purpose for which the instrument was entered into. In general, derivative financial instruments which are entered into for speculative or trading purposes (or which do not meet the criteria for accounting for such items as hedges), rather than to hedge exposures to risk, are accounted for at fair value with all gains and losses recognized currently in earnings. Derivative financial instruments which (i) are entered into in order to hedge certain exposures and (ii) meet defined criteria in order to be classified as hedges, are accounted for in a manner so as to offset the gains and losses applicable to the derivative financial instrument against the gains and losses on the transaction or commitment which is being hedged (i.e. either by recording the gains and losses on derivative financial instruments currently when they are used as hedges of existing (on-balance sheet) transactions or by deferring the gains and losses on derivative financial when they are used as hedges of committed or anticipated transactions).

— 159 —

US GAAP

ROC GAAP

Equity method investments

If investees are unable to forward their audited financial statements in timely fashion, the income (loss) of the investees is recognized in the following year.

Under US GAAP, if investees are unable to forward their audited financial statements in timely fashion, the income (loss) of the investees is recognized in the same year with a quarter time lag.

Valuation of inventory

Inventory is valued at the lower of cost or market. Market is determined on the basis or replacement cost or net realizable value. Any write-down of inventory that is no longer required must be reversed. The amount transfers to cost of goods sold is the original cost of the inventory. Actual production volume can be used in lieu of normal capacity of production facilities in the allocation of fixed production overhead when it represents more realistic results.

Inventory is valued at the lower of cost or market, with market limited to an amount that is not more than net realizable value nor less than net realizable value less a normal profit margin. Any write-down of inventory that is no longer required must not be reversed. The amount transfers to cost of goods sold is the valued at the lower of cost or market. Under SFAS 151, allocation of fixed production overheads to the costs of conversion should be based on the normal capacity of the production facilities. The provisions shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 2004.

Depreciation of fixed assets

In practice, depreciation is generally provided using the guideline service lives as prescribed by the ROC Tax Authorities plus one additional year as salvage value.

Depreciation is provided over the asset’s estimated useful life. There is no additional depreciation for fully depreciated assets, which continue to be used in the business.

ROC FSC regulations applicable to public companies require that when a fixed asset has been fully depreciated over the prescribed service life and the underlying asset continues to be used, the remaining unamortized value (i.e., the salvage value portion) is depreciated over the asset’s remaining economic life.

— 160 —

US GAAP

ROC GAAP

Impairment of long-lived assets and longlived assets to be disposed of

ROC GAAP has required an entity to recognize impairment loss when fixed assets held and used by the entity occur impairment. However, there are no definitive accounting standards regarding calculation of impairment loss under ROC GAAP until July 1, 2004. ROC SFAS No. 35 “Impairment of Assets” is effective for financial statements for the year ending on and after December 31, 2005. Before the effective date of SFAS 35, Idle assets which are not currently used in operation are stated at the lower of carrying value or net realizable value.

Under SFAS 35, if impairment indicated, write down assets to higher of net selling price or value in used based on discounted cash flows.

Reversals of impairment losses are permitted in certain circumstances, but reversal of impairments losses of goodwill are prohibited.

Under US SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, as amended by SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” requires entity to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required, and if so, to measure the impairment.

If the sum of the expected future cash flows, undiscounted and without interest charge is less than an asset’s carrying amount, an impairment loss is recognized; if the sum of the expected future cash flows is greater than an asset’s carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset.

US SFAS 121, as amended by SFAS 144, also generally requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of the carrying amount or fair value less cost to sell.

Reversals of impairment losses are prohibited.

Computer software developed or obtained for internal use

ROC GAAP has no specific accounting practice related to costs of computer software developed or obtained for internal use.

US GAAP provides detailed guidance regarding the accounting treatment for internal-use software costs. AICPA Statement of Position 98-1 specifies the requirements for the capitalization of internal-use computer software costs.

— 161 —

US GAAP

ROC GAAP

Goodwill

Under ROC GAAP, the Company amortizes goodwill arising from acquisitions over five to twenty years.

Based on ROC SFAS No. 35, goodwill is subject to impairment testing at least annually.

US GAAP requires goodwill to be recorded on the balance sheet as an intangible asset and not to be amortized but, rather, to be tested for impairment when events or circumstances indicate that goodwill of a reporting entity within a company might be impaired. A goodwill impairment loss would be charged to operations if the implied fair value of a reporting unit’s goodwill is less than its carrying amount. US SFAS No. 142 requires a company to review for possible impairment of goodwill existing at the date of adoption and perform subsequent impairment tests on at least an annual basis. In addition, existing goodwill and intangible assets must be reassessed and classified consistently in accordance with the criteria set forth in US SFAS No. 141 and US SFAS No. 142. Definite lived intangible assets will continue to be amortized over their estimated useful lives.

Convertible bonds

When convertible bonds are issued, ROC GAAP does not recognize or account for any beneficial conversion feature embedded in the bonds.

Under US GAAP, beneficial conversion features should be recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to capital surplus.

The amount of the beneficial conversion feature was calculated at the issuance date as the difference between the conversion price and the fair value of the common stock, multiplied by the number of shares into which the security is convertible. As a result of allocating a portion of the proceeds equal to the intrinsic value of the beneficial conversion feature to capital surplus, a discount on the bonds was recognized. The discount resulting form such allocation is recognized as interest expense over the life of the convertible debt.

Capital surplus

The following items are treated by the Company as capital under ROC GAAP:

(a) any premium on issuance of capital stock;

Under US GAAP, items (a) and (c) of the preceding column are reported as additional paid-in capital; item (b) remain a component of retained earnings; item (d) of the preceding column is not permitted.

(b) any after-tax gain on disposal of fixed assets before December 27, 2001; (c) any donated surplus; and (d) any revaluation increment of fixed assets.

— 162 —

US GAAP

ROC GAAP

Bonuses to Employees, Directors and Supervisors

Under ROC GAAP, employee bonuses and remuneration of directors and supervisors paid in accordance with a company’s Articles of Incorporation as a part of the distribution of earnings are recorded as an appropriation from retained earnings in the period the distribution of earnings is approved at the Company’s shareholders’ meeting. If employee bonuses are paid through the issuance of common shares of the Company, the amount transferred from retained earnings is based on the par value of the common shares issued. The remuneration of directors and supervisors must be paid in cash and may not be paid through the issuance of common shares.

US GAAP requires that all such bonuses and remuneration be recorded as compensation expense at a defined measurement date. In addition, if the employee bonuses are paid in the form of common shares, the fair value of the common shares issued is used to determine the amount of the expense. Since the amount and form of bonuses are not finally determinable until a shareholders’ meeting in the subsequent year, the total amount of the aforementioned bonuses is initially accrued based on management’s estimate regarding the amount to be paid based on the company’s Articles of Incorporation. Any difference between the initially accrued amount and the fair market value of the bonuses settled by the issuance of the shares is recognized in the year of approval by shareholders.

Shareholder bonuses

Shareholder bonuses (stock dividends) of the Company are recorded as a reduction to its retained earnings using the par value of the stock issued, and a like amount is recorded to the common stock account.

Under US GAAP, when the ratio of distribution is less than 25% of shares of the same class outstanding, stock dividends are generally recorded based on the fair value method, with the par value recorded in the capital stock account and the excess of fair value recorded as additional paid-in-capital. Distribution in excess of 25% is generally considered as stock split.

Treasury stock

When a company acquires its outstanding shares as treasury stock, the acquisition cost should be debited to the treasury stock account if the shares are purchased. The carrying value of treasury stocks should be calculated by using the weighted-average approach according to the same class of treasury stock (common stock or preferred stock) respectively.

When treasury stocks are sold, if the selling price is above the book value, the difference should be credited to the capital surplus. — from treasury stock transactions account. If the selling price is below the book value, the difference should first be offset against capital surplus from the same class of treasury stock transactions, and the remainder, if any, debited to retained earnings.

Two general methods of handling treasury stock in the accounts are the cost method and the par value method. Both methods are generally acceptable. The cost method is debiting the Treasury Stock account for the reacquisition cost and in reporting this account as a deduction from the total paid-in capital and retained earnings on the balance sheet. The par value method records all transaction in treasury shares at their par value and reports the treasury stock as a deduction from capital stock only. An excess of purchase price over par value may be allocated between capital surplus and retained earnings. Alternatively, the excess may be charged entirely to retained earnings. An excess of par value over purchase price should be credited to capital surplus.

— 163 —

US GAAP

ROC GAAP

Comprehensive income

Under ROC GAAP, there is no requirement to present comprehensive income.

Comprehensive income and its components (revenues, expenses, gains and losses) must be presented in a full set of financial statements under US GAAP. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from investments by or distributions to owners, including certain items not included in the current results of operations.

Compensated absences

ROC GAAP has no specific accounting practice regarding compensated absences.

Compensated absences must be accrued based on the liability for employees’ rights to receive compensation for future absences when certain conditions are met.

Accounting for pensions

Under SFAS No. 18, the annual pension provision is recognized as a charge to the statement of operations over the employees’ service period. SFAS No. 18 focuses on the plan’s benefit formula as the basis for determining the benefit earned, and therefore the cost incurred for each year. The determination of the benefit earned is actuarially determined, and includes components for service cost, time value of money, return on plan assets and gains or losses from changes in previous assumptions. In certain cases, a minimum liability is recognized through a direct charge to shareholders’ equity. Also, upon adoption of SFAS No. 18, the initial difference between the projected benefit obligation and the fair value of the plan assets is recognized in the statement of operations over the average expected employees’ service period.

Under US GAAP, the annual pension provision is recognized in accordance with SFAS No. 87. US SFAS No. 87 is substantially similar to ROC SFAS No. 18. However, the unrecognized transitional asset/liability balance, representing the initial difference between the projected benefit obligation and the fair value of plan assets upon adoption of ROC SFAS No. 18, might be different under US SFAS No. 87, due to different adoption dates.

— 164 —

US GAAP

ROC GAAP

Deferred income taxes

Under ROC Statement of Financial Accounting Standards (SFAS) No. 22, “Accounting for Income Tax”, current tax liabilities are recognized for estimated taxes payable for the current period. ROC GAAP requires that all temporary differences between the carrying values of assets and liabilities and their respective tax bases be recognized as deferred income tax liabilities or assets. A valuation allowance is provided on deferred income tax assets to the extent that it is “more likely than not” such deferred income tax assets will be realized. A change in tax rate or law requires an adjustment to such deferred income tax assets and liabilities in the period of enactment, and is reported as part of results of operations.

Under ROC GAAP, in accordance with ROC SFAS 22, there are no differences between annual financial statements and interim quarterly financial statements on the income tax. Companies in the ROC are subject to a 10 percent tax on profits retained and earned after December 31, 1997. If the retained profits are distributed to the shareholders in the following fiscal year, the tax can be avoided. Under ROC GAAP, income tax expense is recorded in the statement of operations in the following fiscal year if the earnings are not distributed to the shareholders.

The requirements under US SFAS No. 109, “Accounting for Income Taxes”, are similar to ROC SFAS No. 22. Application of the “more likely than not” criteria related to the recognition of a deferred income tax asset valuation allowance may result in a difference between US GAAP and ROC GAAP.

Under US GAAP, tax provisions in interim quarterly financial statements are provided based on an estimated effective tax rate expected to be applicable to the full fiscal year. Such estimated effective tax rate takes into account all anticipated tax attributes for the full fiscal year.

Under US GAAP, income tax expense related to the 10 percent retained profit tax is recorded in the statement of income in the year that the profits were earned based on management’s estimate of the amount of profits to be retained. The income tax expense, include the tax effects of temporary differences, is measured by using the rate that includes the tax on undistributed earnings.

Investment tax credits

Companies in the ROC generally record the benefits of investment tax credits in the year in which the related acquired asset is placed in service.

Under US GAAP, the benefit of the investment tax credit should reduce the basis in the long-lived asset acquired and should be reflected in net income over the productive life of the acquired long-lived asset.

Functional currency

The local currency of New Taiwan dollar is the functional currency of the Company.

Management must make an assessment of the functional currency of a company and its subsidiaries. Such assessment is based on the primary economic environment in which the company and /or its subsidiaries operate.

— 165 —

US GAAP

ROC GAAP

Segment information

ROC GAAP requires disclosure of segment information in the footnotes information to the financial statements according to industry and geographic information which need not necessarily be the same as the management’s internal report to company decision-makers.

Under US GAAP public business enterprises is required to present segments information based on operating segments. Several operating segments may, provided aggregation criteria are met, be aggregated to reportable segments for which the required information is disclosed. Disclosure is based on the management’s approach for reporting segments information to Company chief operating decision makers that are used internally for evaluating segment performance and deciding resources allocation to segments.

Shipping revenue received

Shipping revenue received from customers is accounted as a reduction of selling expenses.

In accordance with EITF 00-10, shipping revenue received from customers is recorded as revenue.

The information set forth above does not in any way attempt to quantify the effects of the aforementioned differences between ROC GAAP and US GAAP and the impact such differences would have on net income or shareholders’ equity under US GAAP.

— 166 —

INDEX TO FINANCIAL STATEMENTS

Audited non-consolidated financial statements		Page
Report of independent accountants . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-2
Non-consolidated balance sheets as of June 30, 2004 and 2005 . . . . . . . . . . . . . . . . . . . . . . .		F-3
Non-consolidated statements of income
for the six months ended June 30, 2004 and 2005 . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-5
Non-consolidated statements of changes in stockholders’ equity
for the six months ended June 30, 2004 and 2005 . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-6
Non-consolidated statements of cash flows
for the six months ended June 30, 2004 and 2005 . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-7
Notes to non-consolidated financial statements . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-8
Audited consolidated financial statements
Report of independent accountants . . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-31
Consolidated balance sheets as of December 31, 2002, 2003 and 2004 . . . . . . . . . . . . . . . . . .		F-32
Consolidated statements of income
for the years ended December 31, 2002, 2003 and 2004	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-34
Consolidated statements of changes in stockholders’ equity
for the years ended December 31, 2002, 2003 and 2004	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-35
Consolidated statements of cash flows
for the years ended December 31, 2002, 2003 and 2004	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-37
Notes to consolidated financial statements . . . . . . . . . . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . .	F-38

F-1

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Independent Auditors’ Report

The Board of Directors Compal Electronics, Inc.:

We have audited the accompanying non-consolidated balance sheets of Compal Electronics, Inc. as of June 30, 2004 and 2005, and the related non-consolidated statements of income, changes in stockholders’ equity, and cash flows for the six-month periods then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

Except for the facts stated in the third paragraph, we conducted our audits in accordance with auditing standards generally accepted in the Republic of China and the “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants”. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As stated in note 8 to the financial statements, the long-term equity investments accounted for under the equity method amounting to NT$14,792,808,000 and NT$17,510,579,000 as of June 30, 2004 and 2005, respectively, and the related investment income of NT$389,104,000 and NT$361,634,000 recognized for the six-month periods ended June 30, 2004 and 2005, respectively, were based on the investee companies’ unaudited financial statements.

In our opinion, except for the effects of such adjustments, if any, as might have been determined to be necessary had the investee companies’ financial statements discussed in the third paragraph been audited, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of Compal Electronics, Inc. as of June 30, 2004 and 2005, and the results of its operations and its cash flows for the six-month periods then ended, in conformity with accounting principles generally accepted in the Republic of China.

The accompanying non-consolidated financial statements as of and for the six-month period ended June 30, 2005, have been translated into United States dollars solely for the convenience of the readers. We have reviewed the translation, and in our opinion, the financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in note 2(q) of the notes to the financial statements.

August 3, 2005

The accompanying non-consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

==> picture [177 x 15] intentionally omitted <==

F-2

COMPAL ELECTRONICS, INC.

Non-consolidated Balance Sheets

June 30, 2004 and 2005

(expressed in thousands of New Taiwan or US dollars)

2004	2005
NT$ $23,474,008 7,538,807 30,568,200 1,297,791 215,023 7,622,675 373,944 71,090,448 28,844,350 5,053,016 — 33,897,366 142,000 1,100,901 1,837,264 1,998,014 943,314 560,044 6,439,537 (3,109,077) 31,654 3,362,114 554,061 289,737 843,798	NT$ $20,498,410 7,978 33,091,011 1,075,862 1,089,984 9,130,802 197,451 65,091,498 32,354,962 4,822,874 (85,995) 37,091,841 142,000 1,050,190 2,075,367 1,286,541 606,252 620,885 5,639,235 (2,558,125) 32,982 3,114,092 398,653 542,950 941,603	US$ $646,434 252 1,043,551 33,928 34,373 287,947 6,227
		2,052,712
		1,020,339 152,093 (2,711)
		1,169,721
		4,478
		33,119 65,448 40,572 19,119 19,580
		177,838 (80,673) 1,040
		98,205
		12,572 17,122
		29,694
$109,335,726	$106,381,034	$3,354,810

See accompanying notes to financial statements.

F-3

COMPAL ELECTRONICS, INC.

Non-consolidated Balance Sheets (Cont’d)

June 30, 2004 and 2005

(expressed in thousands of New Taiwan or US dollars)

2004	2005
NT$ $— 19,181,445 8,869,558 978,923 1,471,963 6,486,664 3,180,000 580,492 40,749,045 10,403,035 392,303 10,795,338 51,544,383 31,780,579 2,677,530 34,458,109 5,751,651 193,431 5,945,082 4,624,036 588,479 13,509,138 18,721,653 111,743 (1,445,244) 57,791,343	NT$ $2,773,025 18,799,879 11,023,429 972,543 1,226,973 3,672,324 5,348,306 565,575 44,382,054 4,440,000 211,258 4,651,258 49,033,312 33,560,615 1,571,937 35,132,552 5,200,860 287,722 5,488,582 5,281,351 1,539,762 11,476,885 18,297,998 (319,997) (1,251,413) 57,347,722	US$ $87,449 592,869 347,632 30,670 38,694 115,810 168,663 17,836
		1,399,623
		140,019 6,662
		146,681
		1,546,304
		1,058,361 49,572
		1,107,933
		164,013 9,074
		173,087
		166,551 48,558 361,933
		577,042
		(10,092)
		(39,464)
		1,808,506
$109,335,726	$106,381,034	$3,354,810

See accompanying notes to financial statements.

F-4

COMPAL ELECTRONICS, INC.

Non-consolidated Statements of Income

Six-month periods ended June 30, 2004 and 2005

(expressed in thousands of New Taiwan or US dollars, except net income per share amounts)

2004	2004	2004	2005	2005	2005	2005
NT$ $92,154,863 85,925,113 6,229,750 (11,685) 6,218,065 607,030 487,879 1,074,390 2,169,299 4,048,766 137,739 269,226 150,494 — 52,385 609,844 226,745 808,441 20,365 1,048 1,056,599 3,602,011 224,579			NT$ $101,759,621 95,653,491 6,106,130 19,492 6,125,622 723,807 520,328 1,182,467 2,426,602 3,699,020 152,044 188,972 33,400 56,177 58,733 489,326 263,155 — 65,573 46,255 374,983 3,813,363 352,155				US$ $3,209,070 3,016,509
							192,561 615
							193,176 22,826 16,409 37,290
							76,525
							116,651
							4,795 5,959 1,053 1,772 1,852
							15,431
							8,299 — 2,068 1,458
							11,825
							120,257 11,105
$3,377,432 After income tax Before income tax $0.99 $1.11 $0.94 $0.97 $1.08 $0.93				$3,461,208 $109,152 After income tax Before income tax After income tax $1.01 $0.04 $0.03 $0.98 $0.03 $0.03			$109,152
After income tax				After income tax				After income tax
	$0.99	$1.11			$1.01	$0.04			$0.03
	$0.94	$1.08			$0.98	$0.03			$0.03
	$0.97
	$0.93

F-5

			Foreign	currency	translation Treasury Total stockholders’	adjustments stock equity	NT$ NT$ NT$ US$	$163,509 $(1,445,244) $63,539,243		— — —	— — —	— — (101,810)	— — (203,609)	— — (6,486,617)	— — —	— — 556,161		— — (21,242)		— — 119,701		— — 3,377,432	(51,766) — (51,766)	— — (2,936,150)	$111,743 $(1,445,244) $57,791,343	$(227,273) $(1,251,413) $57,377,258 $1,809,437		— — — —	— — — —	— — (59,158) (1,866)	— — (118,317) (3,731)	— — (3,672,087) (115,802)	— — — —	— — 474,318 14,958		— — (93,326) (2,943)		— — 70,550 2,225		— — 3,461,208 109,152	(92,724) — (92,724) (2,924)	$(319,997) $(1,251,413) $57,347,722 $1,808,506
			Retained earnings		Special	reserve Unappropriated	NT$ NT$	$219,643 $21,513,082		368,836 (368,836)	— (1,131,164)	— (509,024)	— (203,609)	— (7,135,279)	— —	— —		— (21,242)		— —		— 3,377,432	— —	— (2,012,222)	$588,479 $13,509,138	$588,479 $14,492,443		951,283 (951,283)	— (657,315)	— (295,791)	— (118,317)	— (4,339,739)	— —	— —		— (114,321)		— —		— 3,461,208	— —	$1,539,762 $11,476,885
					Legal	reserve	NT$	$3,492,872		—	1,131,164	—	—	—	—	—		—		—		—	—	—	$4,624,036	$4,624,036		—	657,315	—	—	—	—	—		—		—		—	—	$5,281,351
Non-consolidated Statements of Changes in Stockholders’ Equity	Six-month periods ended June 30, 2004 and 2005	(expressed in thousands of New Taiwan dollars or US dollars )	Stock	dividends	Common to be Capital	stock distributed surplus	NT$ NT$ NT$	Balance on January 1, 2004 ................................... $32,352,544 $— $7,242,837	Appropriation of 2003 net income:	Special reserve...................................................... — — —	Legal reserve ........................................................ — — —	Employee bonuses (cash and stock)....................... — 407,214 —	Directors’ and supervisors’ remuneration ............... — — —	Dividends (cash and stock) ................................... — 648,662 —	Capital surplus transferred to common stock ............ — 1,621,654 (1,621,654)	Convertible bonds converted into common stock ...... 178,415 — 377,746	Adjustment for changes in investment in investee	company’ stockholders’ equity ............................. — — —	Cash dividends of the Company received by its	subsidiaries ........................................................... — — 119,701	Net income for the six-month period ended	June 30, 2004 ....................................................... — — —	Foreign currency translation adjustment .................... — — —	Purchase of treasury stock......................................... (750,380) — (173,548)	Balance on June 30, 2004 ....................................... $31,780,579 $2,677,530 $5,945,082	Balance on January 1, 2005 ................................... $33,382,609 $— $5,768,377	Appropriation of 2004 net income:	Special reserve...................................................... — — —	Legal reserve ........................................................ — — —	Employee bonuses (cash and stock)....................... — 236,633 —	Directors’ and supervisors’ remuneration ............... — — —	Dividends (cash and stock) ................................... — 667,652 —	Capital surplus transferred to common stock ............ — 667,652 (667,652)	Convertible bonds converted into common stock ...... 178,006 — 296,312	Adjustment for changes in investment in investee	company’ stockholders’ equity ............................. — — 20,995	Cash dividends of the Company received by its	subsidiaries ........................................................... — — 70,550	Net income for the six-month period ended	June 30, 2005 ....................................................... — — —	Foreign currency translation adjustment .................... — — —	Balance on June 30, 2005 ....................................... $33,560,615 $1,571,937 $5,488,582

F-6

COMPAL ELECTRONICS, INC.

Non-consolidated Statements of Cash Flows Six-month periods ended June 30, 2004 and 2005 (expressed in thousands of New Taiwan or US dollars)

2004	2005
NT$ $3,377,432 356,485 191,473 280,621 (269,226) 8,244,596 795,152 (21,841) (6,757,773) (197,005) 309,980 (69,767) 6,240,127 (103,187) (61,978) (483,463) (1,962,388) 82,803 34,624 (2,493,589) — — (2,936,150) (203,609) (310) (3,140,069) 606,469 22,867,539	NT$ 3,461,208 304,900 411,312 — (188,972) 1,199,609 (1,203,821) (173,808) (694,206) (491,680) 220,671 267,607 3,112,820 (52,483) (165,661) 461,890 (2,612,610) — (46,731) (2,415,595) 1,438,510 (3,180,000) — (118,317) 300 (1,859,507) (1,162,282) 21,660,692	US$ 109,152 9,615 12,971 — (5,959) 37,831 (37,963) (5,481) (21,892) (15,506) 6,959 8,438
		98,165
		(1,655) (5,224) 14,566 (82,391) — (1,473)
		(76,177)
		45,365 (100,284) — (3,731) 9
		(58,641)
		(36,653) 683,087
$23,474,008 $216,176 $31,269 $— $6,588,427	$20,498,410 $267,008 $9,199 $474,318 $3,731,245	$646,434
		$8,420
		$290
		$14,958
		$117,668

See accompanying notes to financial statements.

F-7

COMPAL ELECTRONICS, INC.

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2004 AND 2005

(expressed in thousands of New Taiwan dollars or US dollars unless otherwise specified)

(1) Organization

Compal Electronics, Inc. (the “Company”) was incorporated in the Republic of China (“ROC”) as a company limited by shares in June 1984. The major business activities of the Company are the manufacture and sale of notebook personal computers (“notebook PCs”), monitors, wireless handsets, and personal digital assistants (“PDAs”).

As of June 30, 2005, the number of employees hired by the Company was approximately 2,890.

(2) Summary of Significant Accounting Policies

The financial statements are prepared in accordance with accounting principles and practices generally accepted in the Republic of China (ROC). The significant accounting policies and measurement basis adopted in preparing the accompanying financial statements are summarized as follows:

(a) Foreign currency transactions

The Company’s reporting currency is the New Taiwan dollar. Foreign currency transactions are translated at the rates prevailing on the transaction dates. Foreign currency receivables and payables are translated into New Taiwan dollars at the approximate market rates of exchange prevailing on the balance sheet date. The resulting unrealized gains or losses are included in current operations.

(b) Impairment of assets

Effective January 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 35 (SFAS 35) “Accounting for Asset Impairment”. According to SFAS 35, the Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) other than goodwill may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. The Company recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount.

The Company reverses an impairment loss recognized in prior periods for assets other than goodwill if there is indication that the impairment loss recognized no longer exists or has decreased. The carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods.

The Company assesses the cash-generating unit to which goodwill is allocated on an annual basis and recognizes an impairment loss on the excess of carrying value over the recoverable amount.

(c) Cash equivalents

Cash equivalents represent investments in bonds purchased under resale agreements or commercial paper with a maturity of three months or less from the date of investment.

(d) Short-term investments

Short-term investments represent investments in publicly listed equity securities not intended to be held for the long term, open-end mutual funds, and bonds purchased under resale agreements with a maturity more than three months from the date of investment, which are stated at the lower of cost or market value. Market value of marketable equity securities is based on the average closing price of the last month of the accounting period. Market value of open-end mutual funds is based on their net asset value on the balance sheet date. Cost is determined by using the weighted-average method. Bonds purchased under resale agreements are stated at cost, which approximates the market price. The interest income on bonds purchased under resale agreements is calculated based on the contractual term.

(e) Allowance for doubtful accounts

The allowance for doubtful accounts is based on the likelihood of collection of the Company’s accounts receivable balances. The amount of the allowance for doubtful accounts is determined based on experience in the collection of the Company’s accounts receivable balances, the credit rating of the customers, an aging analysis outstanding accounts receivable, and the credit policy of the Company.

F-8

(f) Inventories

Inventories are stated at the lower of cost or market value. Market value for raw materials and work in process is based on replacement cost. The market value of finished goods is based on net realizable value.

(g) Long-term equity investments

Investments in equity securities intended to be held for the long term are classified as long-term equity investments in the accompanying balance sheets. Long-term investments in publicly listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at the lower of cost or market value. Unrealized investment losses, net of the income tax effect, are treated as a deduction item of stockholders’ equity. Long-term investments in non-listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at cost. However, if there is evidence indicating a decline in the value of an investment is not temporary, the investment is written down to reflect such decline. The resulting loss is recognized in the period incurred. Stock dividends are not recognized as income but as an increase in the number of shares held.

Long-term investments are accounted for under the equity method when the percentage of ownership exceeds 20% or if the Company owns less than 20% of the investee’s common stock ownership but has significant influence on the investee’s operation. The difference between the cost of the investment and the amount of underlying equity in net assets of an investee is amortized using the straight-line method over ten years. If an investee company accounted for under the equity method issues new shares and the Company does not purchase new shares proportionately, then the investment percentage, and therefore the equity in net assets for the investment, will be changed. Such difference shall be used to adjust capital surplus or retained earnings and long-term equity investments.

Investees that the Company controls are the Company’s subsidiaries. The Company recognizes fully investment losses when the equity in net assets of such subsidiaries is negative except to the extent to that the minority has a binding obligation to, and is able to, make good the losses. Such credit balance of the carrying amount of a long-term equity investment is first offset with accounts receivables from the subsidiaries, and the remaining amount, if any, is recorded as a liability on the balance sheet.

Unrealized inter-company profits or losses resulting from transactions between the Company and its subsidiaries and investees accounted for under the equity method are deferred until realized, or are amortized based on the useful lives of the assets that give rise to such unrealized profits or losses.

The financial statements of foreign investees accounted for under the equity method and reported in foreign currencies are translated into New Taiwan dollars at the exchange rates prevailing on the balance sheet date, with the exception of stockholders’ equity, which is translated at historical rates, and revenues, costs, and expenses, which are translated at the weighted-average exchange rates during the reporting period. Translation differences resulting from translation of the financial statements into New Taiwan dollars, net of income taxes, are recorded as foreign currency translation adjustments, a separate component of stockholders’ equity.

The financial statements of subsidiaries are consolidated into the Company’s financial statements as of the end of each half-fiscal and fiscal year.

(h) Property, plant and equipment, leased assets, and idle assets

Property, plant and equipment are stated at cost. Interest expense incurred in connection with the acquisition or construction of property, plant and equipment is capitalized. Excluding land, depreciation of property, plant and equipment is provided for by using the straight-line method over the estimated useful lives of the assets. If the property, plant and equipment have reached the end of their estimated useful lives but are still in use, the Company will estimate the remaining useful lives and residual value, and depreciate the remaining costs using the same method. The useful lives of assets are summarized as follows:

Buildings: 50 years.
Building improvement: 8~10 years.
Machinery and equipment: 5~7 years.
Molding equipment: 0.5~1 year.
Other equipment: 3~5 years.

F-9

Property, plant and equipment leased to other parties under operating leases are classified as leased assets. Rental income received by the Company is recorded as non-operating income. The related depreciation is accounted for as a reduction of rental income. Property, plant and equipment not for current operating use are transferred to idle assets, and are stated at the lower of carrying value or net realizable value.

(i) Deferred expenses

Charges for royalties are deferred and amortized over the contract period. The cost of computer software for internal use is amortized by using the straight-line method over three years.

(j) Convertible bonds payable

For interest-premium of convertible bonds with a put option, the difference between the specified put price and the par value, is recognized as a liability by using the interest method over the period from the issuance date of the bonds to the expiry date of the put option. Costs incurred for the issuance of redeemable convertible bonds are amortized during the period between the issuance date and the last redeemable date. When bondholders exercise their redemption rights, unamortized costs will be recognized as interest expense based on the percentage of redemption.

The number of common shares that are to be given is calculated based on the number of convertible bonds and the conversion price at the time of the conversion. The convertible bond payable over the par value of the common stock, recognized interest premium, and deferred issuance costs is transferred to capital surplus upon conversion.

(k) Retirement plan

The Company has established an employee noncontributory retirement plan covering all regular employees. According to this plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. The retirement benefits are lump-sum payments and are determined principally by the length of service of the employees. Payments of employee retirement benefits are based on the years of service and the average salary six months before the employee’s retirement. Each employee will earn two months’ salary for the first 15 years of service and one month’s salary for each service year after the sixteenth year. The maximum is 45 months of salary.

The Company has made a monthly cash contribution of 5% of salaries and wages to its pension fund maintained with the Central Trust of China. Payment of employee retirement benefits will be paid by the pension fund first and then by the Company if the fund is insufficient.

The Company has its pension plan actuarially valued on the year-end date and recognizes net periodic pension costs, including service cost, interest cost, expected return on plan assets, and amortization of net unrecognized transaction assets over the average remaining service period of the employees of 20 years.

(l) Income taxes

Income taxes are calculated based on accounting income. The amounts for deferred income tax liabilities and assets are calculated by applying the provisions of enacted tax law to determine the amount of tax payable or refundable, currently or in future years. The tax effects of taxable temporary differences are recorded as deferred income tax liabilities. The tax effects of deductible temporary differences and income tax credits are recognized as deferred income tax assets. The realization of deferred income tax assets is evaluated, and if it is considered more likely than not that the asset will not be realized, a valuation allowance is recognized accordingly.

Deferred income tax assets or liabilities are classified as current or non-current based on the classification of the asset or liability that resulted in the deferred item or, for certain transactions not directly related to an asset or liability, based on the timing of the expected reversal date.

Investment tax credits are accounted for using the flow-through method. Therefore, deferred income tax credits generated from purchases of machinery for automation of production and production technology are recognized in the year in which the credit arises.

The 10% surtax on unappropriated earnings is recorded as current income tax expense after the resolution to appropriate retained earnings is approved in a stockholders’ meeting.

F-10

(m) Treasury stock

The Company accounts for the cost of purchasing its outstanding stock as “treasury stock”. A gain on the sale of treasury stock is credited to capital surplus — treasury stock. Losses are charged to capital surplus, but only to the extent of available net gains from previous sales or retirements of the same class of stock; otherwise, losses are charged to retained earnings. The cost of treasury stock is computed using the weighted-average method.

When treasury stock is retired, the weighted-average cost of the retired treasury stock is written off to offset the par value and the paid-in capital in excess of par value. If the weighted-average cost written off exceeds the sum of the par value and the paid-in capital in excess of par value, the difference is charged to capital surplus — treasury stock arising from the same class of stock or to retained earnings, and if vice versa, the difference is credited to capital surplus — treasury stock.

The Company’s outstanding shares held by its subsidiaries are regarded as treasury stock when calculating investment income recognized and presenting its financial statements.

(n) Net income per share

Net income per share of common stock is computed based on the weighted-average number of common shares outstanding during the period. Net income per share for the prior period is retroactively adjusted to reflect the effects of new shares issued by transferring capital surplus, retained earnings, and employee bonuses.

The convertible bonds issued by the Company are potential common shares. Basic net income per share will be disclosed if there is no dilution effect. Otherwise, both basic and diluted net income per share shall be disclosed. For the purpose of calculating diluted net income per share, the potential common shares should be deemed to have been converted into common stock at the beginning of the period, and the effect on the net income attributable to additional common shares outstanding should be considered accordingly.

(o) Raw materials processing

The Company purchases raw materials on behalf of other companies for assembly of its products, purchases finished goods back after assembly from those companies, and sells them directly to its customers. Although the title to the raw materials has been transferred, the risk of carrying raw materials, by its nature, still exists. Pursuant to Securities and Futures Bureau (“SFB”, formerly known as the Securities and Futures Commission) regulation #6 (00747), the above-mentioned transactions shall not be recognized as sales in the financial statements. In addition, raw materials provided by the Company for the other companies that were not resold to the Company on the balance sheet date are recorded as inventories. The amount of payables resulting from the transactions can be used to offset receivables from the purchase of raw materials for the other companies.

(p) Derivative financial instruments

If a forward exchange contract is intended to hedge the risk of changes in foreign currency exchange rates, the related forward exchange contract receivables and payables are recorded in New Taiwan dollars at the spot rate on the date of contract inception, and the balance on the balance sheet date is translated into New Taiwan dollars at the prevailing spot rate. Gains or losses resulting from actual settlement or translation on the balance sheet date are recognized as non-operating income or losses. The discount or premium on a forward exchange contract is amortized over the life of the contract.

Foreign exchange swap contracts are recorded as assets or liabilities in New Taiwan dollars at the spot rate on the date of contract inception, and the balance on the balance sheet date is translated into New Taiwan dollars at the prevailing spot rate. Realized and unrealized gains or losses on these contracts resulting from actual settlement or balance sheet date translation are recognized as non-operating income or losses.

The related assets or liabilities of foreign currency options are not recorded on the date of contract inception, and exchange gains or losses resulting from settlement are recognized as non-operating income or losses. The related premiums received or paid are accounted for as advance receipts or prepaid expenses, which are stated at the fair value at the balance sheet date. The changes in fair value as well as gains or losses resulting from exercise are recognized as non-operating income or losses.

The Company entered into interest rate swap contracts with banks to hedge the risks of changes in interest rates. There is no transfer of notional principal, and therefore notional principal is recorded in a memo account. At the balance sheet date or the settlement date, the interest arising from the difference between the floating interest rate and agreed interest rate is recorded as adjustment of interest expenses.

F-11

(q) Convenience translation into US dollars

The financial statements are stated in New Taiwan dollars. Translation of the 2005 New Taiwan dollar amounts into US dollar amounts is included solely for the convenience of the readers, using the noon buying rate provided by the Bank of Taiwan on December 31, 2004, of NT$31.71 to US$1. The convenience translation should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into US dollars at this rate or any other rate of exchange.

(3) Change in Accounting Policy and Its Influence

The Company has adopted ROC SFAS No. 35 starting from January 1, 2005. The Company recognized impairment losses amounting to NT$220,377 on long-term equity investment under the equity method, recorded as net investment income under the equity method in the accompanying statements of income, for the six-month period ended June 30, 2005. Net income and net income per share decreased NT$220,377 and 0.06 New Taiwan dollars, respectively, for the six-month period ended June 30, 2005. Please see note 8.

(4) Cash and Cash Equivalents

		June 30,
	2004	2005
	NT$	NT$	US$
Cash on hand ....................................................................................	$2,622	$2,431	$77
Checking accounts and demand deposits ...........................................	2,123,426	20,769	655
Time deposits....................................................................................	14,120,943	14,544,157	458,662
Bonds purchased under resale agreements .........................................	7,227,017	5,931,053	187,040
	$23,474,008	$20,498,410	$646,434

(5) Short-term Investments

		June 30,
	2004	2005
	NT$	NT$	US$
Open-end mutual funds .....................................................................	$7,310,000	$—		$—
Listed stocks.....................................................................................	68,564	68,564	2,162
Bonds purchased under resale agreements — due over three months .	200,000	—		—
	7,578,564	68,564	2,162
Less: allowance for losses on valuation of short-term investments ....	(39,757)	(60,586)	(1,910)
Market value.....................................................................................	$7,538,807	$7,978		$252
	$7,538,807	$7,978		$252

(6) Notes and Accounts Receivable — Non-related Parties

		June 30,
	2004	2005
	NT$	NT$	US$
Notes receivable ...............................................................................	$59,339	$17,607	$555
Accounts receivable ..........................................................................	31,182,136	34,299,299	1,081,656
	31,241,475	34,316,906	1,082,211
Less: allowance for doubtful accounts...............................................	(128,393)	(147,615)	(4,655)
allowance for sales returns and discounts.................................	(544,882)	(1,078,280)	(34,005)
	$30,568,200	$33,091,011	$1,043,551

F-12

(7) Inventories

	June 30,
2004 NT$ $2,112,120 451,573 5,353,208 16,683 7,933,584 (310,909)	2005
	NT$ $2,167,927 166,988 6,604,597 618,742 9,558,254 (427,452)	US$ $68,367 5,266 208,281 19,513
		301,427 (13,480)
$7,622,675 $8,060,000	$9,130,802 $8,790,000	$287,947
		$277,200

The above inventories included raw materials provided to other companies that were not resold to the Company. The net value of these raw materials was NT$407,047 and NT$730,966 as of June 30, 2004 and 2005, respectively.

(8) Long-term Equity Investments and Credit Balance of Long-term Equity Investments

		June 30,
	2004	2005
	NT$	NT$	US$
Long-term equity investments:
Under the equity method...............................................................	$28,501,350	$32,354,962	$1,020,339
Add: Prepayment for long-term equity investments .......................	343,000	—	—
	28,844,350	32,354,962	1,020,339
Less: accumulated impairment losses ............................................	—	(85,995)	(2,711)
	28,844,350	32,268,967	1,017,628
Under the lower-of-cost-or-market-value method...........................	2,859,789	2,836,765	89,460
Under the cost method .................................................................	2,191,727	1,866,109	58,849
Prepayment for long-term equity investments................................	1,500	120,000	3,784
Total.........................................................................................	$33,897,366	$37,091,841	$1,169,721
Credit balance of long-term equity investments and
reductions of other receivables .................................................	$142,415	$70,616	$2,227

(a) The investment income of the long-term equity investments of NT$269,226 and NT$188,972 (including impairment losses amounting to NT$220,377) was recognized under the equity method for the six-month periods ended June 30, 2004 and 2005, respectively. Except for certain long-term equity investments amounting to NT$14,792,808 and NT$17,510,579 as of June 30, 2004 and 2005, respectively, and the related investment income of NT$389,104 and NT$361,634 recognized for the six-month periods ended June 30, 2004 and 2005, respectively, based on the investee companies’ unaudited financial statements, such information was based on the investee companies’ unaudited financial statements.
(b) As of June 30, 2004 and 2005, the market value based on the average closing price in June of long-term equity investments accounted for under the lower-of-cost-or-market-value method amounted to NT$4,402,716 and NT$3,635,999, respectively. In addition, International Semiconductor Technology Inc. (“IST”) and Compal Communication, Inc. (“CCI”), accounted for under the equity method, were listed companies. As of June 30, 2004, the market value at the average closing price of IST and CCI in June amounted to NT$2,703,543 and NT$10,072,883, respectively. As of June 30, 2005, the market value at the average closing price of IST and CCI in June amounted to NT$2,422,606 and NT$13,183,564, respectively.
(c) The Company disposed of part of is long-term equity investments in Everskill Technology Co., Ltd. in the first half of 2004. The related gain resulting from the disposal amounted to NT$52,611.
(d) The value of some investee companies’ long-term equity investments under the cost method declined materially and permanently, and the Company therefore recognized realized loss in the first half of 2004 and 2005 amounting to NT$59,853 and NT$136,850, respectively.

F-13

(e) The Company increased its investments in Compal International Holding Co., Ltd. (“CIH”), Just International Ltd. (Just) and Maxima Ventures I, Inc., (Maxima) by NT$355,210, NT$118,037 and NT$126,000, respectively, and the Company invested NT$1,000,000 to set up Hong Ji Capital Co., Ltd. (Hong Ji) and had 100% ownership in the first half of 2004. The Company purchased the newly issued shares of Toppoly Optoelectronics Corp. (“Toppoly”), Maxima and Allied Circuit Co., Ltd (“Allied Circuit”) in the first half of 2005 for NT$2,180,845, NT$126,000 and NT$116,153, respectively.
(f) Pursuant to ROC SFAS No. 35, the Company recognized impairment losses on long-term equity investment under the equity method of NT$220,377, recorded as net investment income under the equity method in the accompanying statement of income, for the six-month period ended June 30, 2005. Among those losses, an impairment loss amounting to NT$134,382 was due to impairment of goodwill of investee companies.
(g) As of June 30, 2004 and 2005, the original investment costs of long-term equity investments accounted for under the equity method were as follows:

	June 30,
2004 NT$ $9,623,899 1,362,418 3,199,940 1,078,481 1,900,000 1,314,800 1,000,000 814,967 899,940 3,050,727	2005
	NT$ $11,804,744 1,480,509 4,728,018 1,078,481 1,900,000 1,314,800 1,000,000 967,637 900,036 3,828,672	US$ $372,272 46,689 149,102 34,011 59,918 41,463 31,536 30,515 28,383 120,740
$24,245,172	$29,002,897	$914,629

(9) Property, Plant and Equipment, Leased Assets, and Idle Assets

(a) The Company entered into agreements to lease a portion of its office space and plants. According to the agreements, the rental should be paid monthly. As of June 30, 2004 and 2005, the leased assets consisted of the following:

		June 30,
	2004	2005
	NT$	NT$	US$
Land .......................................................................................	$233,787	$285,813	$9,013
Buildings and others ...............................................................	375,120	139,038	4,385
	608,907	424,851	13,398
Less: accumulated depreciation ...............................................	(54,846)	(26,198)	(826)
	$554,061	$398,653	$12,572

F-14

(b) The land, buildings and equipment in Jhonghe and NanKan not for operating use were transferred to idle assets, and were stated at the lower of carrying value or net realizable value. The Company disposed of a portion of the land, buildings and equipment in Jhonghe amounting to NT$107,042 at a selling price of NT$83,805 in the second quarter of year 2004. The related loss resulting from disposal amounting to NT$23,237 was recorded as a reduction of provision for losses. As of June 30, 2004 and 2005, the idle assets were as follows:

		June 30,
	2004	2005
	NT$	NT$	US$
Land .......................................................................................	$78,912	$66,907	$2,110
Buildings ................................................................................	69,083	59,465	1,875
Machinery and equipment .......................................................	14,710	14,710	464
Other equipment .....................................................................	6,442	6,442	203
	169,147	147,524	4,652
Less: accumulated depreciation ...............................................	(32,938)	(35,723)	(1,127)
provision for losses........................................................	(71,763)	(66,512)	(2,097)
	$64,446	$45,289	$1,428

(c) The Company does not provide property, plant and equipment, leased assets, or idle assets as collateral for its loans. As of June 30, 2004 and 2005, insurance coverage for property, plant and equipment, leased assets, and idle assets amounted to NT$5,042,000 and NT$4,379,000, respectively.

(10) Short-term Loans

	June 30,
2004	2005
NT$ — $10,585,487 —	NT$ $2,773,025 $13,348,754 2.90%~3.69%	US$ $87,449
		$420,964

As of June 30, 2005, the Company did not provide any collateral for its loans.

(11) Bonds Payable

		June 30,
	2004	2005
	NT$	NT$	US$
Domestic unsecured bonds ................................................................	$9,000,000	$5,820,000	$183,538
The third overseas unsecured convertible bonds ................................	4,583,035	3,968,306	125,144
Total bonds payable ..........................................................................	13,583,035	9,788,306	308,682
Less: due within one year .................................................................	(3,180,000)	(5,348,306)	(168,663)
	$10,403,035	$4,440,000	$140,019

(a) As of June 30, 2004 and 2005, the domestic unsecured bonds payable consisted of the following:

	June 30,
2004 NT$ $2,400,000 2,600,000 1,000,000 2,400,000 600,000	2005
	NT$ $— 1,820,000 1,000,000 2,400,000 600,000	US$ $— 57,395 31,536 75,686 18,921
$9,000,000	$5,820,000	$183,538

All of the domestic unsecured bonds were listed on the GreTai (Over-the-Counter) Securities Market in the ROC.

F-15

The significant terms of the first domestic unsecured bonds are as follows:

Interest rate: series A: 3.05% per annum, due annually from the date of issuance; series B: 3.45% per annum, due annually from the date of issuance.
Duration: series A: three years from the date of issuance (from April 24 to May 10, 2002); series B: five years from the date of issuance (from April 24 to May 10, 2002).
Repayment: series A: the principal amount is to be redeemed at the end of the third year after the date of issuance; series B: the principal amount is to be redeemed 30%, 30% and 40% at the end of the third, fourth, and fifth year, respectively, after the date of issuance.

The significant terms of the second domestic unsecured bonds are as follows:

Interest rate: A~G, L, M: 6.10% - floating rate; H, I: 7.40% - 1.5 floating rate; J: 6.30% - 1.1 floating rate; K: 6.85% - 1.3* floating rate; N: 5.15% - floating rate; O, P: the first six-month period from the date of issuance: 4.00%; six months after the date of issuance: 5.00% - floating rate.

The floating rate means 6-month USD LIBOR at 11:00 am London time of the second London Business Day prior to each payment of interest. The interest is calculated semi-annually from the date of issuance.

Duration: A~M: five years from the date of issuance (from September 16 to 26, 2002); N, O, P: three years from the date of issuance (from September 16 to 17, 2002).
Repayment: A~M: the principal amount is to be redeemed at the end of the five years after the date of issuance; N, O, P: the principal amount is to be redeemed at the end of the three years after the date of issuance.

In order to hedge the risks of changes in floating interest rates, the Company entered into interest rate swap contracts with Deutsche Bank. See note 16.

(b) The Company issued the third overseas unsecured zero coupon convertible bonds, which were listed on the Luxembourg Stock Exchange with a face value of US$345,000 on October 9, 2002. Because the bondholders have the right to require the Company to repurchase the bonds after October 11, 2005, the convertible bonds were classified as an item under current liabilities from the fourth quarter of year 2004. However, it does not mean the Company has the duty to repay all the bonds within one year. As of June 30, 2004 and 2005, the convertible bonds payable consisted of the following:

	June 30,
2004 NT$ $12,108,810 (7,399,358) 260,773 (387,190)	2005
	NT$ $12,108,810 (7,833,033) 349,501 (656,972)	US$ $381,861 (247,021) 11,022 (20,718)
$4,583,035	$3,968,306	$125,144

The significant terms of the convertible bonds are as follows:

Interest rate: 0%;
Duration: five years (October 9, 2002, to October 9, 2007);

F-16

Redemption at the option of the Company: The Company may redeem the bonds at a redemption price equal to 100% of the unpaid principal amount plus the redemption premium under the following circumstances:
(1) On or after October 11, 2005: if (i) the closing price (translated into US dollars at the prevailing rate) of the Company’s common shares on the TSE or (ii) the closing price of the Company’s GDRs on the Luxembourg Stock Exchange for a period of 20 consecutive trading days before redemption has been at least 130% of the conversion price (translated into US dollars at the fixed rate of 34.97 NT dollars) in effect on each such trading day;
(2) In the event that at least 95% of the principal amount of the bonds originally outstanding has been redeemed, repurchased, or converted;
(3) In the event of certain changes relating to tax laws in the ROC, the Company becomes obligated to pay additional amounts; or
(4) Unless the bonds have been previously redeemed, repurchased and cancelled, or converted, the Company will redeem the bonds at a price equal to 114.63% of the outstanding principal amount on October 9, 2007.

Redemption premium means an amount that is determined so that such redemption premium represents for the bondholders a gross yield-to-maturity of 2.75% per annum, calculated on an annual basis.

Repurchase at the option of bondholders: The bondholders have the right to require the Company to repurchase the bonds at a price equal to 100% of the unpaid principal amount plus the redemption premium under the following circumstances:
(1) On October 11, 2005, and the bondholders must deliver a written irrevocable notice to the Company on any business day which is no less than 20 business days prior to the repurchase day;
(2) In the event that the Company’s shares cease to be listed or admitted to trading on the Taiwan Stock Exchange;
(3) In the event of change of control of the Company.
Terms of conversion:
(1) Bondholders may opt to have the bonds converted into common stock or GDRs of the Company from November 9, 2002, to September 9, 2007;
(2) Conversion price: 27.15 NT dollars per share of common stock (the conversion price was 36.54 NT dollars at issued day); and
(3) The conversion price is translated into New Taiwan dollars at the fixed rate of 34.97 NT dollars = 1 US dollar.

(12) Pension

Six-month periods ended June 30,

	2004	2005
	NT$	NT$	US$
Net pension cost ...............................................................................	$47,783	$39,381	$1,242
Pension fund deposits in Central Trust of China ...............................	$610,970	$651,847	$20,557
Prepaid (accrued pension liability) ....................................................	$(44,410)	$90,155	$2,843
Vested benefits..................................................................................	$192,018	$234,055	$7,381

F-17

(13) Stockholders’ Equity

(a) Capital increase

Based on a resolution of the annual stockholders’ meeting held on June 15, 2004, the Company declared a 2 New Taiwan dollar cash dividend per share, which amounted to NT$6,486,617, and increased its common stock through the issuance of stock dividends by transferring capital surplus, retained earnings, and employee stock bonuses amounting to NT$2,677,530.

Based on a resolution of the annual stockholders’ meeting held on June 10, 2005, the Company increased its authorized common stock to 4.65 billion shares, declared a 1.1 New Taiwan dollar cash dividend per share, which amounted to NT$3,672,087, and increased its common stock through the issuance of stock dividends by transferring capital surplus, retained earnings and employee stock bonuses amounting to NT$1,571,937. The share issuance was authorized by the SFB on June 23, 2005, and the Company expects the effective date of share issuance to be August 3, 2005.

A portion of the overseas convertible bonds were converted into 17,842 thousand and 17,801 thousand shares of common stock in the first half of 2004 and 2005, respectively.

As of June 30, 2004 and 2005, the authorized common stock, at a par value of 10 New Taiwan dollars per share, was NT$39,800,000 and NT$46,500,000, respectively.

(b) Treasury stock

In 2001, the Company purchased 51,185 thousand shares of treasury stock at a total cost of NT$1,312,509 for the purpose of transferring to employees. The Company transferred 43,626 thousand shares of treasury stock to employees. The remaining 7,559 thousand shares of treasury stock were cancelled on October 28, 2004.

In the second quarter of year 2004, the Company purchased 75,038 thousand shares of treasury stock at a total cost of NT$2,936,150 for the purpose of maintaining the Company’s credibility and stockholders’ rights. All the treasury stock mentioned above was cancelled on June 29, 2004.

Pursuant to SFB regulations, the number of shares of treasury stock can not exceed 10% of the number of shares issued. The total purchase cost of treasury stock can not exceed the sum of retained earnings, paid-in capital in excess of par value, and realized capital surplus. Shares bought back with the intent of transferring to employees must be transferred within three years from the date of buyback. Otherwise, the shares shall be deemed as not issued by the Company, and cancelled. And for shares bought back with the intent of maintaining the Company’s credibility and stockholders’ rights, the registration procedure must be completed within six months from the date of buyback. In addition, treasury stock can not be pledged for debts, and treasury stock does not carry any shareholder rights until it is disposed of or transferred to employees.

The subsidiaries of the Company did not sell the common stock of the Company in the first half of 2004 and 2005. As of June 30, 2004 and 2005, Panpal and Gempal, subsidiaries of the Company, held 59,851 and 64,136 thousand shares of common stock of the Company with a book value of 20.9 and 19.5 New Taiwan dollars per share, respectively. The total cost was NT$1,251,413 as of June 30, 2004 and 2005. The fair value of the common stock of the Company was 36.50 and 31.45 New Taiwan dollars per share as of June 30, 2004 and 2005, respectively.

(c) Capital surplus

Pursuant to the ROC Company Law, capital surplus can only be used to offset a deficit or to increase common stock. Cash dividends can not be declared out of capital surplus. According to SFC regulations, capital increases by transferring paid-in capital in excess of par value should not exceed 10% of total common stock outstanding. In addition, capital increases by transferring paid-in capital in excess of par value can only commence in the following year.

Due to the conversion of overseas unsecured convertible bonds for the six-month periods ended June 30, 2004 and 2005, the excess of convertible bonds payable over the par value of the common stock, recognized interest premium, and deferred issuance costs amounting to NT$377,746 and NT$296,312, respectively, was transferred to capital surplus.

(d) Special reserve

According to the Company’s articles of incorporation, unrealized foreign currency exchange gains accounted for under SFAS No. 14 must be set aside as a special reserve before profit appropriation. The special reserve is transferred to retained earnings when the exchange gains are realized.

F-18

(e) Legal reserve and limitation on distribution of retained earnings

Based on the Company’s articles of incorporation, 10% of annual net income after offsetting prior years’ deficits, if any, is to be set aside as legal reserve; 2% of the unappropriated earnings, after deducting the legal reserve, can be distributed as remuneration to the directors and supervisors, and 5% as bonus to employees. The remaining balance can be distributed as dividends to stockholders after special reserves are appropriated, if any. The dividends to stockholders can not be lower than 10% of annual net income after deducting the above items. If the annual net income per share is less than 1 New Taiwan dollar, the Company may opt to retain net income.

Pursuant to the ROC Company Law, the legal reserve must be used exclusively to offset losses and can not be used for any other purpose, except that one-half of the legal reserve may be capitalized based on a resolution of the stockholders’ meeting when it equals at least 50% of paid-in capital.

According to SFB regulations, when there is a deduction item in stockholders’ equity (excluding treasury stock) during the year, an amount equal to the deduction item before appropriation must be set aside as a special reserve. The special reserve will be available for dividend distribution only after the related stockholders’ equity deduction item has been reversed.

(14) Income Taxes

(a) The purchase of machinery through proceeds from common stock issuances met the prescribed criteria under the “Statute for Upgrading Industries” in the following years:

Year 1998 1999 1999 2002 2003	Tax exemption products notebook PCs notebook PCs, liquid crystal display (“LCD”) monitors, cellphones notebook PCs, cellphones, PDAs (tax exemption transferred from merger with Palmax) cellphones, PDAs design and research for notebook PCs, display products, cellphones and PDAs	Tax exemption chosen Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years	Tax exemption period
			October 31, 1999~ October 30, 2004 December 1, 2000~ November 30, 2005 January 30, 2003~ January 29, 2008 The Company had completed the investment plan, and the application for a tax exemption is still in process The investment plan was completed but is still subject to approval by the tax authorities. Expected to have tax exemption during January 1, 2004~December 31, 2008

F-19

(b) The operations of the Company are subject to income tax at a rate of 25%. The components of income tax expense of the Company for the six-month periods ended June 30, 2004 and 2005, were as follows:

Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,
2004 NT$ $891,005 193,507 (738,957) 345,555 (173,303) (32,068) (32,685) 138,361 (21,281) (120,976) $224,579	2005
	NT$ US$ $608,228 $19,181 242,032 7,633 (620,391) (19,565) 229,869 7,249 221,982 7,000 123,177 3,884 (58,483) (1,844) (151,111) (4,765) (13,279) (419) 122,286 3,856 $352,155 $11,105
		7,249
		7,000 3,884 (1,844) (4,765) (419)
		3,856
		$11,105

(c) The reconciliation of the expected income tax expense computed at the statutory rate of 25% to the actual income tax expense for the six-month periods ended June 30, 2004 and 2005, is summarized as follows:

Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,
2004 NT$ $900,493 193,507 (173,303) (33,049) (812,680) (18,147) (72,185) 239,943		2005
		NT$ US$ $953,331 $30,064 242,032 7,633 221,982 7,000 40,049 1,263 (697,302) (21,990) (177,216) (5,589) (151,428) (4,775) (79,293) (2,501)
	$224,579	$352,155	$11,105

F-20

(d) Deferred income tax assets (liabilities) as of June 30, 2004 and 2005, were as follows:

	June 30,	June 30,
2004 NT$ $136,220 79,421 146,978 80,327 — 31,549 46,423 520,918 (210,977) 309,941 (179,737) (37,247) —	2005
	NT$ US$ $269,570 $8,501 163,100 5,143 141,394 4,459 119,567 3,771 96,743 3,051 48,853 1,541 71,477 2,254 910,704 28,720 (524,051) (16,526 386,653 12,194 (285,029) (8,989 — — (31,996) (1,009
		28,720 (16,526
		12,194 (8,989 — (1,009
$92,957	$69,628	$2,196
$130,204 (37,247)	$4,881 64,747	$154 2,042
$92,957	$69,628	$2,196

(e) The ROC tax authorities have assessed the Company’s income tax returns through 2001. The tax authorities assessed the Company additional income tax expenses for 1997, 1998, 1999, 2000 and 2001 in the amount of NT$72,947, NT$50,684, NT$166,584, NT$272,303 and NT$275,141, respectively, mainly due to different interpretations related to tax-exempt income and income tax credits. The Company disagreed with the assessment and filed appeals related to these issues. The total amounts of the assessed additional income tax expenses were recognized in the accompanying statements of income. Any other assessed differences will be reflected as an adjustment after the tax appeal is resolved.

(f) Imputation credit account and creditable ratio

Beginning in 1998, the corporate income tax paid at the corporate level can be used to offset the resident shareholders’ individual income tax. The amount of imputation credit which shareholders can claim depends on total corporate income tax paid at the corporate level. Beginning in 1998, corporations have been required to set up an imputation credit account (ICA) to keep track of the corporate income taxes paid and the imputation credit they have allocated for shareholders. In addition, the creditable ratio, which represents the imputation credit per dollar of accumulated retained earnings, shall be calculated for resident shareholders when corporations declare dividends.

Calculation of the ICA balance as of June 30, 2004 and 2005, and the creditable ratio for 2003 and 2004 was as follows:

	June 30,	June 30,
2004 NT$ $3,161,576 10,936,094	2005
	NT$ $3,161,523 9,627,851		US$ $99,701 303,622
			$403,323
			$22,010
			2004
		6.03% (actual

F-21

(g) As of June 30, 2005, the Company’s unused investment tax credits, mainly resulting from purchases of machinery for automation of production, research and development expenses, personnel training expenditures, and investment in qualified industries specified by the government, were as follows:

Regulations The “Statute for Upgrading Industries”, Article Eight .............	Aggregate tax credits NT$ $380,980	Unused tax credits NT$ $163,100	Year of expiry
			2009

ROC income tax regulations stipulate that total tax credits resulting from purchases of machinery for automation of production, research and development expenses, and personnel training expenditures, as well as total tax credits resulting from investments in qualified industries specified by the government, can be applied for only up to 50% of the income tax liability respectively. Unused tax credits can be carried forward for the following four years, subject to the same percentage limitation for each year except for the last year, in which they will expire.

(15) Net Income per Share

Net income per share for the six-month periods ended June 30, 2004 and 2005, was computed as follows. All net income per share amounts are expressed in dollars:

Six-month	Six-month	periods ended June 30,	periods ended June 30,	periods ended June 30,	periods ended June 30,
2004				2005
Before income tax	After income tax	Before income tax		After income tax		After income tax
NT$ $3,602,011 3,420,025 $1.05 3,574,665 $1.01	NT$ $3,377,432		NT$ $3,813,363		NT$ $3,461,208		US$ $109,152
	3,420,025		3,434,996		3,434,996		3,434,996
	$0.99		$1.11		$1.01		$0.03
	3,574,665
	$0.94
$3,602,011 78,327	$3,377,432 73,119		$3,813,363 57,215		$3,461,208 51,931		$109,152 1,638
$3,680,338	$3,450,551		$3,870,578		$3,513,139		$110,790
3,420,025 146,810	3,420,025 146,810		3,434,966 163,882		3,434,966 163,882		3,434,966 163,882
3,566,835 $1.03 3,721,475 $0.99	3,566,835		3,598,848		3,598,848		3,598,848
	$0.97		$1.08		$0.98		$0.03
	3,721,475
	$0.93

F-22

(16) Related Information about Financial Instruments

(a) Derivative financial instruments

As of June 30, 2004 and 2005, the details of the derivative financial instruments were as follows:
(1) Foreign currency options and forward exchange contracts (in thousands of dollars)

Financial Instruments			June 30, 2004	June 30, 2004
	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
USD forward foreign currency exchange contracts sold EUR forward foreign currency exchange contracts sold EUR forward foreign currency exchange contracts bought USD put options bought USD call options sold USD put options sold USD call options sold	USD400,000 EUR15,000 EUR35,000 USD110,000 USD145,000 USD60,852 USD54,428	November 28, 2003 to May 14, 2004 June 15 to June 21, 2004 May 25 to June 10, 2004 January 20 to June 1, 2004 January 20 to June 1, 2004 May 19 to June 14, 2004 June 1, 2004	July 14 to November 4, 2004 USD/NTD 32.71~33.964 July 15 to July 21, 2004 EUR/USD 1.19765~1.20925 July 27 to September 10, 2004 EUR/USD 1.2056~1.2261 July 2 to September 1, 2004 USD/NT 33.70~33.90 July 2 to October 05, 2004 USD/NT 33.20~33.98 July 19 to August 30, 2004 EUR/USD 1.2050~1.2376 July 2 to September 1, 2004 EUR/USD 1.2095		NTD(151,341) — NTD(3,370) — NTD(5,357) — NTD21,397 NTD21,397 NTD(45,949) — NTD(14,989) — NTD(14,067) —

June 30, 2005

	June 30, 2005	June 30, 2005	June 30, 2005	June 30, 2005	June 30, 2005	June 30, 2005

Financial Instruments	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
USD forward foreign currency exchange contracts sold EUR forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts bought	USD60,000 EUR5,000 USD5,000 USD41,000	June 1 to June 30, 2005 June 24, 2005 June 24, 2005 June 13 to June 20, 2005	July 1 to August 3, 2005 July 28 2005 July 28 2005 July 13 to August 11, 2005	USD/NTD 31.192~31.520 EUR/USD 1.204 USD/JPY 108.99 USD/NTD 31.189~31.327	NTD(14,728) — NTD(614) — NTD(1,721) — NTD14,181 NTD14,181

(2) Interest rate swaps

Interest rate swap contracts...........................................		June 30,
	2004	2005
	NT$ $4,000,000	NT$ US$ $4,000,000 $126,143

The Company entered into interest rate swap contracts with Deutsche Bank for the purpose of hedging the risks of changes in the floating interest rate of the second domestic unsecured bonds. The nominal principal amount was the same as the bonds payable. The differential between the floating interest rate of the second domestic unsecured bonds and the contractual interest rate is settled at the date of each interest payment to bondholders.

(3) Foreign exchange swap contracts

Financial Instruments			June 30, 2005	June 30, 2005
	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
Foreign exchange swap contracts	USD110,000	May 12 to June 14, 2005	July 8 to July 18, 2005	USD/NTD 31.161~31.4115	NTD(33,344) —

F-23

Credit risk

The amount of the credit risk is a potential loss of the Company if the counterpart involved in that transaction defaults. Since the Company’s derivative financial instrument agreements are entered into with financial institutions with good credit ratings, management does not believe that there is significant credit risk from these transactions.

3. Market risk

The main purpose of the derivative financial instruments is to hedge the exchange rate and interest rate risk. Therefore, the gains or losses resulting from changes in exchange rates and interest rates will be offset by those from the hedged item. Management believes that the related market risk is not significant.

4. Liquidity risk (in thousands of dollars)

The Company will have cash inflows and outflows within the periods shown below. There are no financing risks due to expected sufficient foreign currency received in the future. Management believes that the cash flow risk is not significant because contracted foreign currency exchange rates are fixed.

Financial instruments	June 30, 2004	June 30, 2004
	Date	Cash outflow	Cash inflow
USD forward foreign currency exchange contracts sold .......................................... EUR forward foreign currency exchange contracts sold .......................................... EUR forward foreign currency exchange contracts bought ...................................... Financial instruments	July to November 2004 USD400,000 NTD13,321,950 July 2004 EUR15,000 USD18,050 July to September 2004 USD42,492 EUR35,000 June 30, 2005
	Date	Cash outflow	Cash inflow
USD forward foreign currency exchange contracts sold .......................................... EUR forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts bought ...................................... Foreign exchange swap contracts ................	July to August 2005 July 2005 July 2005 July to August 2005 July 2005	USD60,000 EUR5,000 USD5,000 NTD1,282,407 USD110,000	NTD1,882,423 USD6,021 JPY544,950 USD41,000 NTD3,442,845

Management believes that the cash flow risk of interest rate swap contracts is not significant because these contracts are settled in net amount.

The categories and objectives of the derivatives, and strategies to accomplish the underlying objectives

The derivative financial instrument contracts held by the Company are for the purpose of hedging the risks that may result from changes in exchange rates of foreign currency assets and liabilities and interest rates rather than for the purpose of trading. The hedging strategies of the Company are to hedge the market risk to the highest extent possible. The Company uses derivatives that are highly correlated to the changes in fair values of the hedged items as hedging instruments.

6. Presentation of financial statements

The receivables and payables derived from foreign currency forward contracts were offset against each other, and the net amount was accounted for as other current financial assets or other current liabilities. The net forward foreign currency exchange contracts payable were NT$153,637 and NT$4,401 as of June 30, 2004 and 2005, respectively. The exchange gains or losses resulting from the forward transactions for the six-month periods ended June 30, 2004 and 2005, amounting to losses of NT$228,851 and gains of NT$92,425, respectively, were included in non-operating income (expenses) in the accompanying statements of income.

F-24

The premium received and paid resulting from foreign currency option contracts were offset against each other, and the net amount was recorded as other current assets or other current liabilities. As of June 30, 2005, the unamortized balance was current liabilities of NT$11,055. The exchange gains and losses resulting from the option transactions for the six-month periods ended June 30, 2004 and 2005, amounting to losses of NT$13,930 and gains of NT$8,638, respectively, were included in non-operating income (expenses) in the accompanying statements of income.

The receivables and payables derived from foreign exchange swap contracts were offset against each other, and the net amount was accounted for as other current financial assets or other current liability. The net foreign exchange swap contracts payable was NT$39,741 as of June 30, 2005. The exchange losses resulting from foreign exchange swap contract transactions for the six-month period ended June 30, 2005, amounting to NT$61,039, were included in non-operating income in the accompanying statements of income.

7. Fair value of derivative financial instruments

The fair value of a derivative is the expected receivable or payable amount assuming that the contract is terminated on the balance sheet date. Generally, the unrealized gain or loss on open contracts is included in the fair value. The above fair value estimates were based on quotes from financial institutions.

(b) Non-derivative financial instruments

As of June 30, 2004 and 2005, the book values of non-derivative financial instruments not the same as their fair market value were as follows:

	June 30,	June 30,
2004 Book Value Fair Value	2005
Book Value	Book Value	Fair Value
NT$ NT$ $6,057,847 $17,179,142 27,697,104 —	NT$ US$ NT$ US$ $6,686,515 $210,865 $19,242,169 $606,817 30,334,710 956,629 — —

For long-term equity investments, the Company valued its publicly listed equity securities based on market price. The remaining balance was invested in companies that were not publicly listed, and no market prices are available for these investments.

(17) Related-party Transactions

(a) Name of the related parties and relationship

Related Party
Bizcom Electronics, Inc. (Bizcom) ..................................
Compal Europe (UK) Limited (CEUK) ............................
CIH and its subsidiaries ..................................................
Just and its subsidiaries...................................................
Compal Electronics International Ltd. (CII)
and its subsidiaries......................................................
Compal Information Technology (CIT) ............................
CCI .................................................................................
Toppoly ...........................................................................
Vacom Wireless, Inc. (Vacom) .........................................
Allied Circuit .................................................................
Compower International Ltd. (Compower) .......................
Sceptre Industries, Inc. (Sceptre) .....................................
Liz Electronics (Kunshan) Co., Ltd. (Liz Kunshan) .........
Cal-Camp Electronics (Thailand) Public Co., Pte Ltd.
(Cal-Camp) .................................................................
Acbel Polytech, Inc. (Acbel) ...........................................

Relationship with the Company

100%-owned subsidiary company
100%-owned subsidiary company
100%-owned subsidiary company
100%-owned subsidiary company
100%-owned subsidiary company
100%-owned subsidiary company
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Cal-Camp’s chairman of the board of directors is the same
as the Company’s
Acbel’s chairman of the board of directors is the same as
the Company’s

F-25

(b) Summary of significant transactions with related parties

1. Sales and purchases

(i) Sales to related parties for the six-month periods ended June 30, 2004 and 2005, were as follows:

Six-month	periods ended June 30,	periods ended June 30,
2004 Amount % of net sales NT$ $691,440 0.8 857,301 1.0 213,565 0.2 256,727 0.3 179,636 0.1 $2,198,669 2.4		2005
Amount NT$ $691,440 857,301 213,565 256,727 179,636 $2,198,669	Amount NT$ $534,517 442,509 123,191 1,287 264 $1,101,768	% of net sales 0.5 0.4 0.1 — — 1.0	Amount
				US$ $16,856 13,955 3,885 41 8
				$34,745

Sales prices for related parties were similar to those for third-party customers. The collection periods were approximately 75 to 120 days for Bizcom, 120 days for CIH and its subsidiaries, 120 days for CEUK, and 90 days for Compower, which could be extended when necessary.

(ii) Purchases from related parties for the six-month periods ended June 30, 2004 and 2005, were as follows:

Six-month	Six-month	periods ended June 30,	periods ended June 30,
2004 Amount % of net sales NT$ $22,027,594 26.2 10,737,774 12.7 379,751 0.5 359,348 0.4 176,195 0.2			2005
Amount NT$ $22,027,594 10,737,774 379,751 359,348 176,195		Amount NT$ $27,373,584 10,454,590 688,516 303,954 156,482	% of net sales 28.4 10.8 0.7 0.3 0.2	Amount
				US$ $863,248 329,694 21,713 9,585 4,935
$33,680,662	40.0	$38,977,126	40.4	$1,229,175

Purchase prices for finished goods and raw materials from related parties were similar to those from third-party suppliers. The payment periods were approximately 120 days for CIH and its subsidiaries as well as for Just and its subsidiaries, and 45 days for Vacom and Toppoly.

F-26

(iii) The balances resulting from the above sales and purchases as of June 30, 2004 and 2005, were as follows:

		June 30,
2004		Amount NT$ $737,651 347,141 67,058 16,496 1,168,346 (92,484)	2005
Amount NT$ $565,286 496,051 220,415 27,212 1,308,964 (11,173)	%		% 2.2 1.0 0.2 — 3.4 (0.3)	Amount
	1.8 1.6 0.7 — 4.1 —				US$ $23,262 10,947 2,115 521
					36,845 (2,917
$1,297,791	4.1	$1,075,862	3.1		$33,928
$4,553,529 4,169,960 146,069	16.2 14.9 0.5	$8,910,520 1,797,007 315,902	29.9 6.0 1.1		$281,000 56,670 9,962
$8,869,558	31.6	$11,023,429	37.0		$347,632

2. Royalty agreement with related party

The Company entered into an agreement with its subsidiary Vacom for the use of CDMA technologies. The related royalty expenses for the six-month periods ended June 30, 2004 and 2005, amounted to NT$87,261 and NT$97,400, respectively. As of June 30, 2004 and 2005, the payable had already been paid.

3. Product warranty service expenses

As of June 30, 2004 and 2005, the product warranty service expenses paid to related parties were as follows:

Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,
2004 NT$ $6,672 51,491 27,514		2005
		NT$ US$ $92,011 $2,902 45,169 1,424 28,925 912
	$85,677	$166,105	$5,238

As of June 30, 2004 and 2005, the related payable had been paid.

4. Financing — other receivables — related parties

The Company’s loans to related parties were as follows:

			Six-month period ended June 30, 2004	Six-month period ended June 30, 2004	Six-month period ended June 30, 2004	Six-month period ended June 30, 2004	Six-month period ended June 30, 2004
Ending balance			Maximum balance		Interest rate	Period	Interest income r	Interest eceivable
	NT$ $54,504 (54,504)			NT$ $54,504	2.00%~2.50%	2003.10.30~ 2004.12.29	NT$ $563	NT$ $—
		)
	$—

F-27

			Six-month period ended June 30, 2005	Six-month period ended June 30, 2005	Six-month period ended June 30, 2005	Six-month period ended June 30, 2005	Six-month period ended June 30, 2005
Ending balance			Maximum balance		Interest rate	Period	Interest income	Interest receivable
	NT$ $50,736 — (50,736)			NT$ $50,736 $111,475	3.5% —	2005.06.29~ 2005.12.29 2004.11.22~ 2005.05.21	NT$ $945 $—	NT$ $— $—
		)
	$—

For the demand for working capital of CIT, which was in the beginning of operation, the Company provided loans to CIT without interest. The loans were collected on March 22, 2005.

The Company did not retain any collateral from CEUK. As of June 30, 2004 and 2005, the Company’s long-term equity investment in CEUK was a credit balance, which was recorded as a deduction item of other receivables — related parties. Please refer to note 8.

5. Rental income

The Company entered into an agreement with its subsidiary CCI to lease a portion of its office space and plants. The related rental income for the six-month periods ended June 30, 2004 and 2005, amounted to NT$20,374 and NT$18,625, respectively.

6 Guarantees

Just and its subsidiaries ................................................................................... CIH and its subsidiaries ................................................................................... Bizcom ............................................................................................................ CEUK .............................................................................................................. Liz Kunshan .................................................................................................... Sceptre ............................................................................................................	June 30,	June 30,
	2004	2005
	US$9,500 US$9,500 US$2,000 US$1,000 US$— US$2,200	US$4,500 US$4,500 US$2,000 US$1,000 US$1,000 US$—

(18) Pledged Assets

There were no pledged assets as of June 30, 2004 and 2005.

(19) Commitments and Contingencies

(a) As of June 30, 2005, the unused balance of the Company’s letters of credit for the purchase of materials and machinery equipment was NT$14,427.
(b) On October 13, 2000, Samsung Electronics Co., Ltd. (“Samsung”) brought a civil lawsuit in the State Court of California against the Company and various other companies related to patent rights infringement and sought damages. The plaintiff claimed that the defendants violated its U.S. patents. As of June 30, 2005, Samsung had agreed to dismiss five of the six patent complaints against the Company. Management engaged lawyers to deal with this case. The eventual outcome of this case is uncertain. However, even if the Company is required to pay royalties or damages, there would not be material adverse effects on the Company’s business, financial condition, or results of operations.
(c) On April 6, 2001, LG Electronics Co., Ltd. (“LG”) brought a civil lawsuit in the State Court of California against the Company, Bizcom and Sceptre related to patent rights infringement and sought damages. Management engaged lawyers to deal with this case. On November 30, 2004, the court granted summary judgment to the Company, Bizcom and Sceptre, effectively terminating the case. LG filed an appeal with the Federal Circuit Court of Appeals in the first quarter of year 2005. The Company believes there would not be any material adverse effects on the Company’s business, financial condition, or results of operations.

F-28

(d) On July 24, 2003, Audiovox Communication Corp. (“Audiovox”) filed an arbitration claim against the Company in the International Centre for Dispute Resolution of the American Arbitration Association. Audiovox alleges that the Company breached the exclusivity provision of a supplier agreement with Audiovox when the Company sold CDMA wireless phones to Bell South International, Inc. during the contract period. Audiovox seeks lost profits or what Audiovox has termed a “reasonable royalty”. Management engaged lawyers to deal with the case. In May 2005, the arbitration was held in New York State, USA. In arbitration, both the claim of Audiovox and the defense of the Company were rejected. The Company believes there would not be material adverse effects on the Company’s business, financial condition, or results of operations.
(e) On January 19, 2005, Guardian Industries Corp. (“Guardian”) brought a lawsuit in the State of Delaware against the Company and various other companies related to patent rights infringement and sought damages. Management engaged lawyers to deal with this case. The Company believes there would not be any material adverse effects on the Company’s business, financial condition, or results of operations.
(f) In the syndicated loan agreement of VIBO, the Company, together with its subsidiaries and Kinpo Electronics, Inc., committed to hold a specific portion of VIBO’s outstanding shares until VIBO is listed on the TSE or Over-the-Counter Securities Exchange.
(g) In the syndicated loan agreement of Toppoly, the Company, together with its subsidiaries and Kinpo Electronics, Inc., committed to hold a specific portion of Toppoly’s outstanding shares and influence on Toppoly’s management of operations.
(h) See note 17 for guarantees made to related parties.

(20) Others

(a) As of June 30, 2005, the effective significant royalty agreements were as follows:

Royalty Owner Phoenix Technologies, Ltd. Qualcomm Incorporated Agere Systems Inc. (formerly Lucent Technologies Inc.) Accelent Systems Inc. Microsoft Corporation Vacom Hitachi, Ltd.	Content Produce, use, and sell quantitative memory Basic Input / Output Systems (“BIOS”) Royalty for producing, using, and selling CDMA mobile phones Use of specified GSM, GPRS technologies Royalty for producing, using, and selling Pocket PCs Use of Windows CE in Pocket PCs Use of specified CDMA technologies Use of specified CRT and LCD monitor technologies	Period
		Authorized a certain quantity; contract shall be renewed after quantity is fulfilled Based upon quantities sold October 2003~October 2006 Based upon quantities sold Authorized a certain quantity June 2003~May 2006 September 2003~September 2008

F-29

(b) Employee expenses, depreciation expenses, and amortization expenses for the six-month periods ended June 30, 2004 and 2005, were as follows:

		Six-month periods ended June 30,	Six-month periods ended June 30,	Six-month periods ended June 30,
	2004			2005
Cost of sales	Operating expenses	Total	Cost of sales	Operating expenses	Total
NT$ $485,895 36,132 14,941 76,720 186,312 578	NT$ $703,026 48,355 32,842 48,825 85,247 65,848	NT$ $1,188,921 84,487 47,783 125,545 271,559 66,426	NT$ US$ $159,020 $5,015 12,176 384 6,447 203 27,484 867 103,739 3,271 453 14	NT$ US$ $861,368 $27,164 58,807 1,855 32,934 1,039 73,771 2,326 89,893 2,835 96,126 3,032	NT$ US$ $1,020,388 $32,179 70,983 2,239 39,381 1,242 101,255 3,193 193,632 6,106 96,579 3,046

(c) Reclassification

Certain accounts in the financial statements as of and for the six-month period ended June 30, 2004, have been reclassified to conform with the 2005 presentation. Such reclassification does not have a significant impact on the accompanying financial statements.

F-30

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Independent Auditors’ Report

The Board of Directors Compal Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Compal Electronics, Inc. and subsidiaries as of December 31, 2002, 2003 and 2004, and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of China and “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants”. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Compal Electronics, Inc. and subsidiaries as of December 31, 2002, 2003 and 2004, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the Republic of China.

The accompanying consolidated financial statements are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China. The standard, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

The accompanying consolidated financial statements as of and for the year ended December 31, 2004, have been translated into United States dollars solely for the convenience of the readers. We have audited the translation, and in our opinion, the consolidated financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in note 2(r) of the notes to the consolidated financial statements.

Taipei, Taiwan February 3, 2005

==> picture [177 x 15] intentionally omitted <==

F-31

COMPAL ELECTRONICS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 31, 2002, 2003 and 2004

(expressed in thousands of New Taiwan or US dollars)

2002	2003	2004
NT$ $33,191,415 532,839 20,956,092 1,530,027 1,081,144 9,572,876 420,738 61,201 67,346,332 10,100,232 7,876,976 2,639,134 20,616,342 84,922 1,720,503 3,120,925 4,100,382 1,107,554 1,145,455 11,194,819 (3,606,788) 338,366 7,926,397 — 443,581 406,468 850,049	NT$ $31,622,652 7,055,344 42,099,858 742,616 566,210 14,198,676 565,902 201,403 97,052,661 16,125,180 7,273,394 207,300 23,605,874 76,307 1,606,516 3,776,374 4,784,201 1,298,422 1,913,066 13,378,579 (4,678,640) 559,338 9,259,277 150,711 170,060 228,011 548,782	NT$ $34,242,732 469,868 39,633,304 1,023,921 464,707 16,535,663 678,700 360,712 93,409,607 16,725,313 6,586,116 348,174 23,659,603 142,000 1,587,492 4,034,489 5,674,922 1,042,040 2,305,713 14,644,656 (5,066,714) 812,767 10,390,709 47,241 213,716 545,082 806,039	US$ $1,079,872 14,818 1,249,868 32,290 14,655 521,465 21,403 11,375
			2,945,746
			527,446 207,698 10,980
			746,124
			4,478
			50,063 127,231 178,963 32,862 72,712
			461,831 (159,783) 25,631
			327,679
			1,490 6,740 17,190
			25,420
$96,824,042	$130,542,901	$128,407,958	$4,049,447

See accompanying notes to consolidated financial statements.

F-32

COMPAL ELECTRONICS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Cont’d)

December 31, 2002, 2003 and 2004

(expressed in thousands of New Taiwan or US dollars)

2002	2003	2004
NT$ $— — 22,481,530 125,876 757,435 1,363,843 571,460 2,083,119 27,383,263 21,086,393 181,912 1,453,530 22,721,835 50,105,098 25,476,590 4,065,706 55,628 4,121,334 2,701,014 425,888 15,201,698 18,328,600 237,664 (1,445,244) 46,718,944	NT$ $1,904,756 738,100 42,396,587 1,138,054 668,943 — 566,459 2,534,151 49,947,050 14,113,519 326,361 2,616,728 17,056,608 67,003,658 32,352,544 7,135,164 107,673 7,242,837 3,492,872 219,643 21,513,082 25,225,597 163,509 (1,445,244) 63,539,243	NT$ $5,318,005 — 43,748,298 679,880 864,955 8,179,289 770,684 2,739,669 62,300,780 5,220,000 328,897 3,181,023 8,729,920 71,030,700 33,382,609 5,572,199 196,178 5,768,377 4,624,036 588,479 14,492,443 19,704,958 (227,273) (1,251,413) 57,377,258	US$ $167,708 — 1,379,637 21,441 27,277 257,940 24,304 86,398
			1,964,705
			164,617 10,372 100,316
			275,305
			2,240,010
			1,052,747
			175,724 6,186
			181,910
			145,823 18,558 457,030
			621,411
			(7,167)
			(39,464)
			1,809,437
$96,824,042	$130,542,901	$128,407,958	$4,049,447

See accompanying notes to consolidated financial statements.

F-33

COMPAL ELECTRONICS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Years ended December 31, 2002, 2003 and 2004

(expressed in thousands of New Taiwan or US dollars, except net income per share amounts)

2002	2003	2004
NT$ $122,555,822 108,884,055 13,671,767 (12,063) 13,659,704 1,783,701 937,101 1,956,652 4,677,454 8,982,250 334,740 — — 142,177 476,917 290,489 19,810 57,653 44,343 137,077 8,497 557,869 8,901,298 (490,271) (327,512) (164,935)	NT$ $176,995,668 158,891,682 18,103,986 (11,753) 18,092,233 2,162,149 1,655,281 2,631,553 6,448,983 11,643,250 435,513 1,533,293 569,055 118,375 2,656,236 681,491 — 1,130,387 — 86,000 163,135 2,061,013 12,238,473 (28,068) (898,767) —	NT$ $229,793,413 212,776,669 17,016,744 (4,800) 17,011,944 2,073,959 1,350,497 2,946,000 6,370,456 10,641,488 415,650 338,587 — 444,622 1,198,859 518,721 1,250,585 1,626,433 — 139,538 163,403 3,698,680 8,141,667 (688,182) (880,337) —	US$ $7,246,717 6,710,081
			536,636 (151)
			536,485
			65,404 42,589 92,904
			200,897
			335,588
			13,108 10,678 14,021
			37,807
			16,358 39,438 51,291 — 4,401 5,153
			116,641
			256,754 (21,703) (27,762) —
$7,918,580 $3.21 $2.51 $3.10 $2.45	$11,311,638 $3.80 $3.49 $3.51 $3.24	$6,573,148 $1.95 $1.84	$207,289
			$0.06
			$0.06

See accompanying notes to consolidated financial statements.

F-34

				Total	stockholders’	equity	NT$	$39,332,310		—		—	—	(307)	(108,055)	(1,047,132)	—	346	(50,146)	21,685	7,918,580	904	1,152,621	(501,862)	46,718,944		—	—	(76)	(142,535)	(2,540,100)	—	8,319,103	(105,620)	52,044	11,311,638	(74,155)	$63,539,243
			Foreign	currency	translation Treasury	adjustment stock	NT$ NT$	$236,760 $(2,062,060)		— —		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	904 —	— 1,118,678	— (501,862)	237,664 (1,445,244)		— —	— —	— —	— —	— —	— —	— —	— —	— —	— —	(74,155) —	$163,509 $(1,445,244)
			Retained earnings		Special	reserve Unappropriated	NT$ NT$	$200,898 $11,585,555		— 21,161		224,990 (224,990)	— (542,392)	— (270,138)	— (108,055)	— (3,141,396)	— —	— —	— (36,627)	— —	— 7,918,580	— —	— —	— —	425,888 15,201,698		(206,245) 206,245	— (791,858)	— (356,336)	— (142,535)	— (3,810,150)	— —	— —	— (105,620)	— —	— 11,311,638	— —	$219,643 $21,513,082
					Legal	reserve	NT$	$2,158,622		—		—	542,392	—	—	—	—	—	—	—	—	—	—	—	2,701,014		—	791,858	—	—	—	—	—	—	—	—	—	$3,492,872
					Capital	surplus	NT$	$6,194,387		(21,161)		—	—	—	—	—	(2,094,264)	263	(13,519)	21,685	—	—	33,943	—	4,121,334		—	—	—	—	—	(2,540,100)	5,609,559	—	52,044	—	—	$7,242,837
Consolidated Statements of Changes in Stockholders’ Equity	Years ended December 31, 2002, 2003 and 2004	(expressed in thousands of New Taiwan dollars)			Common	stock	NT$	Balance on January 1, 2002................................................................................ $21,018,148	Capital surplus - gain on disposal of property, plant and equipment prior to	2000 transferred to retained earnings ................................................................ —	Appropriation of 2001 net income:	Increase in special reserve ................................................................................ —	Legal reserve .................................................................................................... —	Employee bonuses (stock and cash) .................................................................. 269,831	Directors’ remuneration .................................................................................... —	Dividends (stock and cash) ............................................................................... 2,094,264	Capital surplus transferred to common stock ......................................................... 2,094,264	Convertible bonds converted into common stock ................................................... 83	Adjustment for changes in investee company’s stockholders’ equity ...................... —	Cash dividends of the Company received by its subsidiaries ................................. —	Net income for the year ended December 31, 2002 ............................................... —	Foreign currency translation adjustment ................................................................ —	Treasury stock transferred to employees................................................................ —	Company’s capital stock held by subsidiaries ........................................................ —	Balance on December 31, 2002............................................................................ 25,476,590	Appropriation of 2002 net income:	Special reserve ................................................................................................. —	Legal reserve .................................................................................................... —	Employee bonuses (cash and stock) .................................................................. 356,260	Directors’ remuneration .................................................................................... —	Dividends (cash and stock) ............................................................................... 1,270,050	Capital surplus transferred to common stock ........................................................ 2,540,100	Convertible bonds converted into common stock .................................................. 2,709,544	Adjustment for changes in investee company’s stockholders’ equity ...................... —	Cash dividends of the Company received by its subsidiaries ................................. —	Net income for the year ended December 31, 2003 ............................................... —	Foreign currency translation adjustment ................................................................ —	Balance on December 31, 2003............................................................................ $32,352,544	See accompanying notes to consolidated financial statements.

F-35

						Total stockholders’ equity	NT$ US$	$63,539,243 $2,003,760		— —	— —	(101,810) (3,211)	(203,609) (6,421)	(6,486,617) (204,561)	— —	556,161 17,539		(68,969) (2,175)	122,448 3,862	6,573,148 207,290	(390,782) (12,324)	(6,161,955) (194,322)	$57,377,258 $1,809,437
					Treasury	stock	NT$	$(1,445,244)		—	—	—	—	—	—	—		—	—	—	—	193,831	$(1,251,413)
			Foreign	currency	translation	adjustment	NT$	$163,509		—	—	—	—	—	—	—		—	—	—	(390,782)	—	$(227,273)
			Retained earnings		Special	reserve Unappropriated	NT$ NT$	$219,643 $21,513,082		368,836 (368,836)	— (1,131,164)	— (509,024)	— (203,609)	— (7,135,279)	— —	— —		— (68,969)	— —	— 6,573,148	— —	— (4,176,906)	$588,479 $14,492,443
					Legal	reserve	NT$	$3,492,872		—	1,131,164	—	—	—	—	—		—	—	—	—	—	$4,624,036
Consolidated Statements of Changes in Stockholders’ Equity (Cont’d)	Years ended December 31, 2002, 2003 and 2004	(expressed in thousands of New Taiwan dollars or US dollars)			Common Capital	stock surplus	NT$ NT$	Balance on December 31, 2003........................................... $32,352,544 $7,242,837	Appropriation of 2003 net income:	Special reserve ................................................................. — —	Legal reserve ................................................................... — —	Employee bonuses (cash and stock).................................. 407,214 —	Directors’ remuneration .................................................... — —	Dividends (cash and stock)............................................... 648,662 —	Capital surplus transferred to common stock ....................... 1,621,654 (1,621,654)	Convertible bonds converted into common stock ................. 178,415 377,746	Adjustment for changes in investee company’s	stockholders’ equity ......................................................... — —	Cash dividends of the Company received by its subsidiaries. — 122,448	Net income for the year ended December 31, 2004............... — —	Foreign currency translation adjustment................................ — —	Purchase of treasury stock .................................................... (1,825,880) (353,000)	Balance on December 31, 2004........................................... $33,382,609 $5,768,377

F-36

COMPAL ELECTRONICS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows Years ended December 31, 2002, 2003 and 2004 (expressed in thousands of New Taiwan or US dollars)

2002	2003	2004
NT$ $7,918,580 327,512 164,935 1,557,905 (2,872) 137,077 57,653 179,848 (4,637,567) (2,265,045) (1,076,848) 2,416,459 542,409 1,087,898 97,355 6,505,299 (1,867,781) 42,198 (485,524) (4,933,542) 1,535,939 90,433 (396,748) (192,400) (6,207,425) (1,341,253) 21,105,364 (108,362) 1,152,621 (1,047,132) 17,831 2,155 19,781,224 40,397 20,119,495 13,071,920	NT$ $11,311,638 898,767 — 1,776,095 261,380 86,000 1,130,387 (1,307,450) (20,730,582) (4,710,500) 308,983 20,927,235 (88,492) 459,633 257,445 10,580,539 (2,970,186) 100,631 (6,522,505) (4,812,316) 650,589 40,828 (87,622) 91,830 (13,508,751) 2,642,856 — (142,611) — (2,540,100) 1,743,525 (25,493) 1,678,177 (318,728) (1,568,763) 33,191,415	NT$ $6,573,148 880,337 — 1,993,379 365,338 131,889 1,626,433 (69,147) 1,819,996 (2,468,876) (125,923) 893,537 196,012 279,087 (354,785) 11,740,425 (3,257,197) 84,813 6,585,476 (2,599,798) 559,328 344,134 (307,188) (12,755) 1,396,813 2,675,149 — (203,609) (6,161,955) (6,486,617) (316,043) 114,542 (10,378,533) (138,625) 2,620,080 31,622,652	US$ $207,289 27,762 — 62,863 11,521 4,159 51,291 (2,181) 57,395 (77,858) (3,971) 28,178 6,182 8,802 (11,188)
			370,244
			(102,718) 2,675 207,678 (81,987) 17,639 10,853 (9,688) (402)
			44,050
			84,363 — (6,421) (194,322) (204,560) (9,967) 3,612
			(327,295)
			(4,372)
			82,627 997,245
$33,191,415 $244,520 $57,881 — $346	$31,622,652 $277,855 $145,915 — $8,319,103	$34,242,732 $328,640 $667,637 $101,810 $556,161	$1,079,872
			$10,364
			$21,054
			$3,211
			$17,539

See accompanying notes to consolidated financial statements.

F-37

COMPAL ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2003 AND 2004

(expressed in thousands of New Taiwan or US dollars unless otherwise specified)

(1) Organization

Compal Electronics, Inc. (“the Company”) was incorporated in the Republic of China (“ROC”) as a company limited by shares in June 1984. The major business activities of the Company are the manufacture and sale of notebook personal computers (“notebook PCs”), monitors, mobile handsets, and personal digital assistants (“PDAs”).

The consolidated subsidiaries comprised the following as of December 31, 2004:

Just International Ltd. (“Just”) was incorporated in the British Virgin Islands in August 1992. The main activity of Just is investing in Mainland China companies as a production center of the Company. As of December 31, 2004, the Company owned 100% of Just’s issued common stock, amounting to US$48,010.

Panpal Technology Corp. (“Panpal”) was incorporated in August 1997 in the ROC. The main activity of Panpal is investing in businesses relating to the PC industry. As of December 31, 2004, the Company owned 100% of Panpal’s outstanding common stock, amounting to NT$5,000,000.

Compal Communications, Inc. (“CCI”) was incorporated as a company limited by shares in February 1999. The major business activities of CCI are the manufacture and sales of mobile handsets. As of December 31, 2004, the Company and its subsidiaries owned 50.28% of CCI’s outstanding common stock, amounting to NT$3,380,730. CCI has 100% ownership of Etrade Management Co., Ltd. (Etrade) and Webtek Technology Co., Ltd. (Webtek). Both Etrade and Webtek were incorporated in the British Virgin Islands. The main activity of Etrade is investing in Mainland China companies as a production center of CCI, and of Webtek is the sale of mobile handsets.

Compal International Holding Co., Ltd. (“CIH”) was incorporated in the British Virgin Islands in January 2000. The main activity of CIH is investing in Mainland China companies as a production center of the Company. In March 2002, the Company acquired 100% of CIH. As of December 31, 2004, CIH’s issued common stock amounted to US$38,100.

Compal Electronics Holding Co., Ltd. (“CEH”) was incorporated in the British Virgin Islands in 2003. The main activity of CEH is investing in equity securities. As of December 31, 2004, the Company had 100% ownership of CEH.

As of December 31, 2004, the number of employees hired by the Company and consolidated subsidiaries was approximately 20,060.

(2) Summary of Significant Accounting Policies

(a) Accounting principles and consolidation policy

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the ROC. These financial statements are not intended to present the consolidated financial position of the Company and the related consolidated results of operations and cash flows based on accounting principles and practices generally accepted in countries and jurisdictions other than the ROC.

The consolidated financial statements include the accounts of the Company and all subsidiaries in which more than 50% of the shares are owned by the Company and in which total assets or sales exceed 10% of the Company’s total assets or sales. If the total assets and sales of a subsidiary are less than 10% of the Company’s total assets and sales, then the subsidiary is accounted for under the equity method of accounting.

The Company and the subsidiaries consolidated in the accompanying financial statements are jointly called “the Group”. All significant inter-company accounts and transactions have been eliminated. If the sources of the differences between the cost of investments and the amount of underlying equity in net assets of the consolidated subsidiaries cannot be identified, such differences shall be amortized by using the straight-line method over ten years and treated as a consolidated debit of long-term equity investments, which is included in other assets in the accompanying consolidated financial statements.

Since the total assets and sales of Compal Electronic International Ltd. (“CII”), Gempal Technology Corp., (“Gempal”), Compal Europe B.V. (“CEBV”), Bizcom Electronics, Inc. (“Bizcom”), SaveCom InfoCom Inc. (“SaveCom”) (in the process of liquidation), Wisepal Technologies, Inc. (“Wisepal”), Hong Ji Capital Co., Ltd (Hong Ji), Hong Chin Capital Co., Ltd. (Hong Chin), Compal Europe (UK) Ltd. (“CEUK”), Vacom Wireless, Inc. (“Vacom”), Compal Holding Ltd.

F-38

(“CPH”), Kadia Management Ltd. (“Kadia”) and Just International (Singapore) Pte. Ltd. (“Just-Singapore”) do not exceed 10% of the corresponding accounts of the Company, and the aggregate total assets and total sales of all of these subsidiaries are less than 30% of the Company’s total assets and sales, respectively, the financial statements of these subsidiaries have not been consolidated in the accompanying consolidated financial statements.

(b) Foreign currency transactions and translation

The functional currency of each consolidated entity is its respective local currency. The Group’s reporting currency is the New Taiwan dollar. Foreign currency transactions are translated at the rates prevailing on the transaction dates. Foreign currency receivables and payables are translated into New Taiwan dollars or local currency at the approximate market rate of exchange prevailing on the balance sheet date. The resulting unrealized gains or losses are included in current operations.

(c) Cash equivalents

Cash equivalents represent investments in bonds purchased under resale agreements or commercial paper with a maturity of three months or less from the date of investment.

(d) Short-term investments

(e) Allowance for doubtful accounts

(f) Inventories

(g) Long-term investments

Investments in convertible bonds are stated at cost adjusted for unamortized premium or discount. The unamortized premium or discount should be amortized by using the straight-line method over the period from the purchase date to its maturity. Cost is determined by using the weighted-average method.

Investments in equity securities intended to be held for the long term are classified as long-term equity investments in the accompanying consolidated balance sheets. Long-term equity investments in publicly listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at the lower of cost or market value. Unrealized investment losses, net of the income tax effect, are treated as a deduction item of stockholders’ equity. Long-term equity investments in non-listed equity securities that represent less than 20% of the investee’s common stock ownership are stated at cost. However, if there is evidence indicating a decline in the value of an investment is not temporary, the investment is written down to reflect such decline. The resulting loss is recognized in the period incurred. Stock dividends are not recognized as income but as an increase in the number of the shares held.

Long-term equity investments are accounted for under the equity method if the Group owns more than 20% of the investee’s common stock ownership or if the Group owns less than 20% of the investee’s common stock ownership but has significant influence on the investee’s operation. The difference between cost of investment and the amount of underlying equity in net assets of an investee is amortized using the straight-line method over ten years. If an investee company accounted for under the equity method issues new shares and the Group does not purchase new shares proportionately, then the investment percentage, and therefore the equity in net assets for the investment, will be changed. Such difference shall be used to adjust capital surplus or retained earnings and long-term equity investments.

F-39

Unrealized inter-company profits or losses resulting from transactions between the Group and its subsidiaries and investees accounted for under the equity method are deferred until realized, or are amortized based on the useful lives of the assets that give rise to such unrealized profits or losses.

The financial statements of foreign subsidiaries and investees accounted for under the equity method and reported in foreign currencies are translated into New Taiwan dollars at the exchange rates prevailing on the balance sheet date, with the exception of stockholders’ equity, which is translated at historical rates, and revenues, costs and expenses, which are translated at the weighted-average exchange rates during the reporting period. Translation differences resulting from translation of the financial statements into New Taiwan dollars, net of income taxes, are recorded as foreign currency translation adjustment, a separate component of stockholders’ equity.

(h) Property, plant and equipment, idle assets and leased assets

Property, plant and equipment are stated at cost. Interest expense incurred in connection with the acquisition or construction of property, plant and equipment is capitalized. Excluding land and land leasehold rights, depreciation of property, plant and equipment is provided for by using the straight-line method over the estimated useful lives of the assets. If the property, plant and equipment have reached the end of their estimated useful lives but are still in use, the Group will estimate the remaining useful lives and residual values, and depreciate the remaining costs using the same method. The useful lives of assets are summarized as follows:

Buildings: 50 years.
Building improvement: 10 years.
Machinery and equipment: 3~10 years.
Molding equipment: 0.5~1 year
Research equipment: 3~5 years
Other equipment: 1~10 years.

The expenditures for obtaining land leasehold rights, including charges for land leasehold rights and related expenses, are capitalized and amortized as rental expenses by using the interest method over the contract periods.

Leasehold improvements are amortized by using the straight-line method over the shorter of the estimated useful lives or the contract periods.

(i) Deferred expenses

Charges for royalties are deferred and amortized over the contract period. The cost of computer software for internal use and of installing power supply is amortized by using the straight-line method over three and five years, respectively.

(j) Convertible bonds payable

For interest-premium of convertible bonds with a put option, the difference between the specified put price and the par value is recognized as a liability by using the interest method over the period from the issuance date of the bonds to the expiry date of the put option. Costs incurred for the issuance of redeemable convertible bonds are amortized during the period between the issuance date and the last redeemable date. When bondholders exercise their redemption rights, unamortized costs will be recognized as interest expense based on the percentage of redemption.

The number of common shares that are to be given is calculated based on the number of convertible bonds and the conversion price at the time of the conversion. The convertible bonds payable over the par value of the common stock, recognized interest premium, and deferred issuance costs are transferred to capital surplus upon conversion.

F-40

(k) Retirement plan

The Company and CCI have established an employee noncontributory retirement plan covering all regular employees in the ROC. According to this plan, employees are eligible for retirement or are required to retire after meeting certain age or service requirements. The retirement benefits are lump-sum payments and are determined principally by the length of service of the employees. Payments of employee retirement benefits are based on the years of service and the average salary six months before the employee’s retirement. Each employee will earn two months’ salary for the first 15 years of service and one month’s salary for each service year after the sixteenth year. The maximum is 45 months of salary.

The Company and CCI have made a monthly cash contribution of 5% and 2%, respectively, of salaries and wages to its pension fund maintained with the Central Trust of China. Payment of employee retirement benefits will be paid by the pension fund first and then by the Company and CCI if the fund is insufficient.

The Company and CCI have their pension plan actuarially valued on the year-end date and recognize net periodic pension costs, including service costs, interest cost, expected return on plan assets, and amortization of net unrecognized transition assets over the average remaining service period of the employees of 20 and 15 years, respectively.

Payments of employee retirement benefits for the rest of the consolidated subsidiaries are based on local labor law of each subsidiary’s registered jurisdiction. The consolidated subsidiaries in Mainland China have made a monthly cash contribution of salaries and wages to a pension fund based on the statutory percentage and recognized it as current expenses. No official employees were hired by Panpal for its business operation, and no pension costs and liabilities are recognized accordingly.

(l) Subsidy income

Subsidy income from the Government is recognized as non-operating income after the Group meets subsidy criteria.

(m) Income taxes

The 10% surtax on unappropriated earnings is recorded as current income tax expense after the resolution to appropriate retained earnings is approved in a stockholders’ meeting.

The Group’s income tax returns are calculated and filed based on the Company’s and each subsidiary’s registered local tax law. The Group’s income tax expenses are the aggregation of all consolidated entities’ income tax expenses.

(n) Treasury stock

The Company accounts for the cost of purchasing its outstanding stock as “treasury stock”. A gain on the sale of treasury stock is credited to capital surplus - treasury stock. Losses are charged to capital surplus, but only to the extent of available net gains from previous sales or retirements of the same class of stock; otherwise, losses are charged to retained earnings. The cost of treasury stock is computed using the weighted-average method.

When treasury stock is retired, the weighted-average cost of the retired treasury stock is written off to offset the par value and the paid-in capital in excess of par value. If the weighted-average cost written off exceeds the sum of the par value and the paid-in capital in excess of par value, the difference is charged to capital surplus - treasury stock arising from the same class of stock or to retained earnings, and if vice versa, the difference is credited to capital surplus - treasury stock.

F-41

The Company’s outstanding shares held by its subsidiaries are regarded as treasury stock when calculating investment income recognized and presenting its financial statements.

(o) Net income per share

(p) Raw materials processing

The Company purchases raw materials on behalf of other companies for assembly of its products, purchases finished goods back after assembly from those companies, and sells them directly to its customers. Although the title to the raw materials has been transferred, the risk of carrying raw materials, by its nature, still exists. Pursuant to Securities and Futures Bureau (SFB, formerly known as Securities and Futures Commission) regulation #6 (00747), the abovementioned transactions shall not be recognized as sales in the consolidated financial statements. In addition, raw materials provided by the Company for the other companies that were not resold to the Company on the balance sheet date were recorded as inventories. The amount of payables resulting from the transactions can be used to offset receivables from the purchase of raw materials for the other companies.

(q) Derivative financial instruments

If a forward exchange contract is intended to hedge the risk of changes in foreign currency exchange rates, the related forward exchange contract receivables and payables are recorded in New Taiwan dollars at the spot rate on the date of contract inception, and the balance on the balance sheet date is translated into New Taiwan dollars at the prevailing spot rate. Gains or losses resulting from translation on the balance sheet date are recognized as non-operating income or losses. The discount or premium on a forward exchange contract is amortized over the life of the contract.

The related assets or liabilities of foreign currency options are not recorded on the date of contract inception, and exchange gains or losses resulting from settlement are recognized as non-operating income or losses. The related premiums received or paid are accounted for as other current liabilities or other current financial assets, which are stated at the fair value at the balance sheet date. The changes in fair value as well as gains or losses resulting from exercise are recognized as non-operating income or losses.

The Group entered into interest rate swap contracts with banks to hedge the risks of changes in interest rates. There is no transfer of notional principal, and therefore notional principal is recorded in the memo account. At the balance sheet date or the settlement date, the interest arising from the difference between the floating interest rate and agreed interest rate is recorded as adjustment of interest expenses.

(r) Convenience translation into US dollars

The consolidated financial statements are stated in New Taiwan dollars. Translation of the 2004 New Taiwan dollar amounts into US dollar amounts is included solely for the convenience of the readers, using the noon buying rate provided by the Bank of Taiwan on December 31, 2004, of NT$31.71 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into US dollars at this rate or any other rate of exchange.

(3) Changes in Consolidated Entities

In 2004, the entities of consolidation included the Company, Just, CIH, CEH, Panpal and CCI (including Etrade and Webtek). Accordingly, the 2002 and 2003 consolidated financial statements have been restated for comparison purposes.

F-42

(4) Cash and Cash Equivalents

	December 31,	December 31,
2002 NT$ $3,518 1,366,440 23,424,657 8,396,800	2003 NT$ $4,088 1,185,781 22,687,689 7,745,094	2004
		NT$ $4,589 643,765 24,550,078 9,044,300	US$ $145 20,302 774,206 285,219
$33,191,415	$31,622,652	$34,242,732	$1,079,872

The Company’s interest income is primarily generated from cash and cash equivalents.

(5) Short-term Investments

		December	December	31,
	2002	2003			2004
	NT$	NT$		NT$		US$
Bonds purchased under resale agreement..................	$507,000		$—		$—	$—
Marketable equity securities (market value as of
December 31, 2002, 2003 and 2004 was
NT$15,839, NT$41,633 and NT$19,140,
respectively) ........................................................	68,564	68,564			68,564	2,162
Open-end mutual funds (net asset value as of
December 31, 2002, 2003 and 2004, was
NT$10,260, NT$7,013,711 and NT$450,742,
respectively) ........................................................	10,000	7,010,000			450,728	14,214
Less: allowance for losses on valuation of
short-term investments ....................................	(52,725)	(23,220)			(49,424)	(1,558)
	$532,839	$7,055,344		$469,868		$14,818

(6) Notes and Accounts Receivable - Nonrelated Parties

	December 31,	December 31,
2002 NT$ $78,790 21,196,013 (66,394) (252,317)	2003 NT$ $13,064 42,683,022 (94,574) (501,654)	2004
		NT$ $58,541 40,523,074 (103,402) (844,909)	US$ $1,846 1,277,927 (3,261 (26,644
$20,956,092	$42,099,858	$39,633,304	$1,249,868

(7) Inventories

	December 31,	December 31,
2002 NT$ $3,995,892 856,745 4,384,660 676,631 9,913,928 (341,052)	2003 NT$ $3,087,481 1,542,359 8,526,881 1,467,706 14,624,427 (425,751)	2004
		NT$ $4,993,717 1,203,171 10,838,659 57,756 17,093,303 (557,640)	US$ $157,481 37,943 341,806 1,821
			539,051 (17,586
$9,572,876 $11,135,000	$14,198,676 $14,072,000	$16,535,663 $18,875,000	$521,465
			$595,238

F-43

(8) Long-term Investments and Credit Balance of Long-term Equity Investment

	December 31,	December 31,
2002 NT$ $10,100,232 3,156,221 4,529,575 2,639,134 191,180	2003 NT$ $16,125,180 3,541,597 3,731,797 207,300 —	2004
		NT$ $16,725,313 3,777,222 2,808,894 348,174 —	US$ $527,446 119,118 88,580 10,980 —
$20,616,342 $14,365	$23,605,874 $25,137	$23,659,603 $62,987	$746,124
			$1,986

(a) As of December 31, 2002, the market value and unamortized premium/discount of investments in convertible bonds amounted to NT$195,181 and NT$0, respectively. As of December 31, 2002, 2003 and 2004, the market price of long-term equity investments accounted for under the lower-of-cost-or-market value method amounted to NT$3,924,689, NT$5,223,924 and NT$4,212,864, respectively. International Semiconductor Technology Inc. (“IST”), accounted for under the equity method, was listed on the Taiwan Stock Exchange (“TSE”) in September 2003. As of December 31, 2003 and 2004, the book value of IST amounted to NT$1,175,782 and NT$1,489,711, respectively, and the market value at the average closing price of IST in December 2003 and 2004 amounted to NT$3,477,382 and NT$1,872,564, respectively.
(b) Net investment loss on long-term equity investments under the equity method for the years ended December 31, 2002, 2003 and 2004 amounted to NT$57,653, NT$1,130,387 and NT$1,626,433, respectively. The calculation of these losses was based on the investees’ audited financial statements.
(c) The value of some investee companies’ long-term equity investments under the cost method declined materially and permanently, and the Group recognized realized loss for the years ended December 31, 2002, 2003 and 2004, amounting to NT$528,534, NT$83,994 and NT$228,735, respectively.
(d) The Group disposed of part of its long-term equity investment in Hannstar Display Corp. (Hannstar) in 2002. The related gains amounted to NT$216,715. The Group provided part of its shares of IST and CCI for public underwriting in 2003. The related gains resulting from disposal of shares of IST and CCI amounted to NT$215,000 and NT$1,237,778, respectively. The Group disposed of long-term equity investment in Hannstar and Everskill Technology Co., Ltd. in the year 2004. The related gain resulting from disposal amounted to NT$219,576 and NT$55,218, respectively.
(e) The Group made a prepayment for cash injection of Toppoly Optoelectronics Corp. (Toppoly) and invested in VIBO Telecom Inc. (“VIBO”, formerly Taiwan 3G Mobile Network Inc.) amounting to NT$2,569,115 and NT$1,000,000, respectively, in 2002. The Group purchased the newly issued shares of Toppoly and VIBO in 2003 for NT$1,904,900 and NT$900,000, respectively. The Group increased its investments in Toppoly and Maxima Ventures I, Inc., by NT$450,000 and NT$126,000, respectively, in 2004, in order to increase their working capital. The Company invested NT$1,000,000 and NT$295,000 in Hong Ji and Hong Chin, respectively, in 2004, and had 100% ownership.
(f) The Company purchased 13% of the newly issued shares of VIBO for NT$1,000,000 in 2002, and accounted for it under the cost method. The Company purchased additional newly issued shares of VIBO for NT$900,000 in 2003. As of December 31, 2003, the Company held 19% of VIBO’s outstanding shares. In addition, the directors and supervisors of VIBO were reelected in the fourth quarter of 2003. Since the Company came to have significant influence on VIBO’s operations, the Company changed the accounting for this investment from the cost method to the equity method in 2003.
(g) IST merged with Phipal Technology Co, Ltd. (“Phipal”) (the Company held 47.71% of Phipal before the consolidation) on September 1, 2004, and is the surviving company. The registration procedure related to this consolidation is complete. The Company recognized the investment loss of NT$49,708 in Phipal under the equity method before the consolidation.

F-44

(h) As of December 31, 2002, 2003 and 2004, the original costs of long-term equity investments under the equity method consisted of the following:

		December	31,
	2002	2003	2004
	NT$	NT$	NT$	US$
Toppoly .........................................................	$6,255,820	$10,624,524	$11,074,524	$349,244
VIBO .............................................................	1,000,000	1,900,000	1,900,000	59,918
IST ................................................................	1,097,420	986,668	1,166,219	36,778
Hong Ji..........................................................	—	—	1,000,000	31,536
Gempal ..........................................................	899,940	899,940	900,036	28,383
Hong Chin .....................................................	—	—	295,000	9,303
Other .............................................................	2,318,165	3,342,108	3,582,336	112,972
	$11,571,345	$17,753,240	$19,918,115	$628,134

(9) Property, Plant and Equipment, Idle Assets, and Leased Assets

(a) Just’s and CIH’s subsidiaries in Mainland China entered into an agreement with the government authority of Kunshan City, Jiangsu Province, People’s Republic of China, to acquire land leasehold rights for the buildings and dormitories. The contract period extends from 1996 to 2046 and 2000 to 2054 for Just’s and CIH’s subsidiaries, respectively. According to the contract, total expenditures for obtaining land leasehold rights amounted to RMB38,496 thousand and RMB 38,079 thousand for Just’s and CIH’s subsidiaries, respectively. The related annual administrative expense amounted to RMB179 thousand.
(b) CCI’s subsidiaries in Mainland China entered into an agreement with the government authority of Nanjing City, Jiangsu Province, People’s Republic of China, to acquire land leasehold rights for buildings. The contract period extends from 2003 to 2053. According to the contract, total expenditures for obtaining land leasehold rights amounted to RMB668 thousand.
(c) The Company entered into agreements to lease a portion of its office space and plants. According to the agreements, the rental should be paid monthly. As of December 31, 2004, the leased assets consisted of the following:

NT$ US$ Land ................................................................................................................ $26,909 $849 Buildings and others ........................................................................................ 44,431 1,401 71,340 2,250 Less: accumulated depreciation ........................................................................ (7,071) (223 $64,269 $2,027	NT$ US$ Land ................................................................................................................ $26,909 $849 Buildings and others ........................................................................................ 44,431 1,401 71,340 2,250 Less: accumulated depreciation ........................................................................ (7,071) (223 $64,269 $2,027	NT$ US$ Land ................................................................................................................ $26,909 $849 Buildings and others ........................................................................................ 44,431 1,401 71,340 2,250 Less: accumulated depreciation ........................................................................ (7,071) (223 $64,269 $2,027
	71,340 (7,071)	2,250 (223
	$64,269	$2,027

(d) The land, buildings and equipment in Jhonghe and NanKan not for operating use were transferred to idle assets, and were stated at the lower of carrying value or net realizable value. The Company disposed of all the land, buildings and equipment in Jhonghe amounting to NT$127,490. The related loss resulting from disposal amounting to NT$28,488 was recorded as a reduction of provision for losses. As of December 31, 2003 and 2004, the idle assets were as follows:

		December 31,
	2003	2004
	NT$	NT$	US$
Land .......................................................................................	$141,673	$66,907	$2,110
Buildings ................................................................................	118,818	59,465	1,875
Machinery and equipment .......................................................	14,710	14,710	464
Other equipment .....................................................................	8,450	6,442	203
	283,651	147,524	4,652
Less: Accumulated depreciation ..............................................	(37,940)	(33,771)	(1,065)
Provision for losses .......................................................	(95,000)	(66,512)	(2,097)
	$150,711	$47,241	$1,490

F-45

(e) The Group does not provide property, plant and equipment as collateral for its loans. As of December 31, 2002, 2003 and 2004, insurance coverage for property, plant and equipment, and leased assets amounted to NT$7,708,000, NT$9,690,000 and NT$12,406,000, respectively.

(10) Short-term Loans and Short-term Notes and Bills Payable

	December 31,	December 31,
2002	2003	2004
NT$ $— $— $18,981,000 1.55%~2.98%	NT$ $1,904,756 $738,100 $20,968,000 0.75%~4.54%	NT$ $5,318,005 $— $17,985,000 1.40%~3.06%	US$ $167,708
			$—
			$567,171

As of December 31, 2002, 2003 and 2004, all short-term loans and short-term notes and bills payable were unsecured, except that the short-term notes and bills payable of Panpal were guaranteed by certain directors.

(11) Bonds Payable

		December	31,
	2002	2003	2004
	NT$	NT$	NT$	US$
The second overseas unsecured convertible bonds ...	$1,363,843	$—	$—	$—
Domestic unsecured bonds ......................................	9,000,000	9,000,000	9,000,000	283,822
The third overseas unsecured convertible bonds ......	12,086,393	5,113,519	4,399,289	138,735
	22,450,236	14,113,519	13,399,289	422,557
Less: due within one year ........................................	(1,363,843)	—	(8,179,289)	(257,940)
	$21,086,393	$14,113,519	$5,220,000	$164,617

(a) The Company issued the second overseas unsecured zero coupon convertible bonds on October 19, 2000. As of December 31, 2003, the bonds had all been converted or redeemed. As of December 31, 2002, the convertible bonds payable consisted of the following:

Aggregate principal amount (US$148,000) ................................................................................
Accumulated converted amount (US$3,110) ..............................................................................
Accumulated redemption amount (US$105,654) ........................................................................
Foreign currency exchange loss.................................................................................................

$4,636,840
(102,401
(3,310,140
139,544

$1,363,843

(b) As of December 31, 2002, 2003 and 2004, the domestic unsecured bonds payable consisted of the following:

	December	31,
2002 NT$ $2,400,000 2,600,000 1,000,000 2,400,000 600,000	2003 NT$ $2,400,000 2,600,000 1,000,000 2,400,000 600,000	2004
		NT$ $2,400,000 2,600,000 1,000,000 2,400,000 600,000	US$ $75,686 81,993 31,536 75,686 18,921
$9,000,000	$9,000,000	$9,000,000	$283,822

All of the domestic unsecured bonds were listed on the GreTai (Over-the-Counter) Securities Market.

F-46

The significant terms of the first domestic unsecured bonds are as follows:

Interest rate: series A: 3.05% per annum, due annually from the date of issuance; series B: 3.45% per annum, due annually from the date of issuance.
Duration: series A: three years from the date of issuance (from April 24 to May 10, 2002); series B: five years from the date of issuance (from April 24 to May 10, 2002).
Repayment: series A: the principal amount is to be redeemed at the end of the third year after the date of issuance; series B: the principal amount is to be redeemed 30%, 30% and 40% at the end of the third, fourth, and fifth year, respectively, after the date of issuance.

The significant terms of the second domestic unsecured bonds are as follows:

Interest rate: A~G, L, M: 6.10% - floating rate; H, I: 7.40% - 1.5 floating rate; J: 6.30% - 1.1 floating rate; K: 6.85% - 1.3* floating rate; N: 5.15% - floating rate; O, P: the first six-month period from the date of issuance: 4.00%; six months after the date of issuance: 5.00% - floating rate.

Duration: A~M: five years from the date of issuance (from September 16 to 26, 2002); N, O, P: three years from the date of issuance (from September 16 to 17, 2002).
Repayment: A~M: the principal amount is to be redeemed at the end of five years after the date of issuance; N, O, P: the principal amount is to be redeemed at the end of three years after the date of issuance.

In order to hedge the risks of changes in floating interest rates, the Company entered into interest rate swap contracts with Deutsche Bank. See note 16.

(c) The Company issued the third overseas unsecured zero coupon convertible bonds, which were listed on the Luxembourg Stock Exchange with a face value of US$345,000 on October 9, 2002. Because the bondholders have the right to require the Company to repurchase the bonds after October 11, 2005, the convertible bonds were classified as an item under current liabilities since the fourth quarter of 2004. However, it does not mean the Company has the duty to repay all the bonds within one year. As of December 31, 2002, 2003 and 2004, the convertible bonds payable consisted of the following:

	December 31,	December 31,
2002 NT$ $12,108,810 — 94,193 (116,610)	2003 NT$ $12,108,810 (6,863,135) 209,041 (341,197)	2004
		NT$ $12,108,810 (7,399,358) 319,750 (629,913)	US$ $381,861 (233,345) 10,084 (19,865)
$12,086,393	$5,113,519	$4,399,289	$138,735

The significant terms of the convertible bonds are as follows:

Interest rate: 0%;
Duration: five years (October 9, 2002, to October 9, 2007);

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Redemption at the option of the Company: The Company may redeem the bonds at a redemption price equal to 100% of the unpaid principal amount plus the redemption premium under the following circumstances:
(1) On or after October 11, 2005: if (i) the closing price (translated into US dollars at the prevailing rate) of the Company’s common shares on the TSE or (ii) the closing price of the Company’s GDRs on the Luxembourg Stock Exchange for a period of 20 consecutive trading days before redemption has been at least 130% of the conversion price (translated into US dollars at the fixed rate of NT$34.97) in effect on each such trading day;
(2) In the event that at least 95% of the principal amount of the bonds originally outstanding has been redeemed, repurchased, or converted;
(3) In the event of certain changes relating to tax laws in the ROC, the Company becomes obligated to pay additional amounts; or
(4) Unless the bonds have been previously redeemed, repurchased and cancelled, or converted, the Company will redeem the bonds at a price equal to 114.63% of the outstanding principal amount on October 9, 2007.

Redemption premium means an amount that is determined so that such redemption premium represents for the bondholders a gross yield-to-maturity of 2.75% per annum, calculated on an annual basis.

Repurchase at the option of bondholders: The bondholders have the right to require the Company to repurchase the bonds at a price equal to 100% of the unpaid principal amount plus the redemption premium under the following circumstances:
(1) On October 11, 2005, and the bondholders must deliver a written irrevocable notice to the Company on any business day which is no less than 20 business days prior to the repurchase day;
(2) In the event that the Company’s shares cease to be listed or admitted to trading on the Taiwan Stock Exchange;
(3) In the event of change of control of the Company.
Terms of conversion:
(1) Bondholders may opt to have the bonds converted into common stock or GDRs of the Company from November 9, 2002, to September 9, 2007;
(2) Conversion price: NT$27.15 per share of common stock (the conversion price was NT$36.54 at issued day); and
(3) The conversion price is translated into New Taiwan dollars at the fixed rate of NT$34.97 = US$1.

F-48

(12) Pension

The Company and CCI made an actuarial valuation of their pension plans on December 31, 2002, 2003 and 2004. According to the actuarial reports, the reconciliation of funded status and prepaid pension cost (accrued pension liabilities) was as follows:

		December 31,	December 31,	December 31,	December 31,
2002 NT$ $(82,968) (330,771) (413,739) (216,061) (629,800) 536,668 (93,132) (13,438) (542) 64,027		2003 NT$ $(94,119) (393,519) (487,638) (231,186) (718,824) 597,278 (121,546) (12,409) 10,661 59,896		2004
				NT$ US$ $(114,645) $(3,615 (328,542) (10,361 (443,187) (13,976 (218,372) (6,887 (661,559) (20,863 666,863 21,030 5,304 167 (8,512) (268 48,521 1,530 42,564 1,342
					(13,976 (6,887
					(20,863 21,030
					167 (268 1,530 1,342
	$(43,085)		$(63,398)	$87,877	$2,771

The net pension costs in 2002, 2003 and 2004 consisted of the following:

		December 31,	December 31,	December 31,	December 31,
2002 NT$ $79,124 26,511 (24,109) 3,198 —		2003 NT$ $101,011 31,050 (28,330) 3,269 —		2004
				NT$ US$ $103,218 $3,255 23,984 756 (21,833) (688 3,120 98 (161,944) (5,107
	$84,724		$107,000	$(53,455)	$(1,686

Actuarial assumptions were as follows:

Discount rate .................................................................................... Future salary increase rate - year 2003 ~ 2005................................. year 2006 and after .............................. Expected long-term rate of return on plan assets...............................	2002 3.75%~5.00% 1.50%~3.00% 3.00%~4.00% 3.75%~5.00%	2003 3.50% 2.50%~3.00% 2.50%~3.00% 3.50%	2004
			3.50% 2.50%~3.00% 2.50%~3.00% 3.50%

As of December 31, 2002, 2003 and 2004, the vested benefits were approximately NT$125,324, NT$180,806 and NT$240,803, respectively.

Since the Company moved most of its manufacturing base to Mainland China, 1,301 employees were laid off in 2004. The related severance costs amounting to NT$307,361 were paid and recorded as nonoperating expenses. Pursuant to ROC SFAS No. 18, the curtailment gain of NT$161,944, recorded as a deduction from severance costs, was recognized in 2004 for the adjusted vested benefit affected by the layoff mentioned above.

The contributions of consolidated subsidiaries in Mainland China for employee retirement benefits for the years ended December 31, 2002, 2003 and 2004 were approximately NT$17,666, NT$6,436 and NT$11,221, respectively.

F-49

(13) Stockholders’ Equity

(a) Capital increase

Based on a resolution of the annual stockholders’ meeting held on May 24, 2002, the Company increased its authorized common stock to 3.48 billion shares, declared a 0.5 New Taiwan dollar cash dividend per share, which amounted to NT$1,047,132, and increased its common stock through the issuance of stock dividends by transferring capital surplus, retained earnings, and employee stock bonuses amounting to NT$4,458,359.

Based on a resolution of the annual stockholders’ meeting held on June 10, 2003, the Company increased its authorized common stock to 3.98 billion shares, declared a 1 New Taiwan dollar cash dividend per share, which amounted to NT$2,540,100, and increased its common stock through the issuance of stock dividends by transferring capital surplus, retained earnings, and employee stock bonuses amounting to NT$4,166,410. The registration procedure related to this issuance has been completed.

A portion of the overseas convertible bonds were converted into 8 thousand, 270,954 thousand and 17,842 thousand shares of common stock in 2002, 2003 and 2004, respectively.

As of December 31, 2002, 2003 and 2004, the authorized common stock, at a par value of 10 New Taiwan dollars per share, was NT$34,800,000, NT$39,800,000 and NT$39,800,000, respectively.

(b) Treasury stock

In 2001, the Company purchased 51,185 thousand shares of treasury stock at a total cost of NT$1,312,509 for the purpose of transferring to employees. As of December 31, 2004, 43,626 thousand shares of treasury stock had been transferred to employees. The remaining 7,559 thousand shares of treasury stock were cancelled on October 28, 2004.

In 2004, the Company purchased 175,029 thousand shares of treasury stock at a total cost of NT$6,161,955 for the purpose of maintaining the Company’s credibility and stockholders’ rights. As of December 31, 2004, all the treasury stock mentioned above had been cancelled.

Pursuant to SFB regulations, the number of shares of treasury stock can not exceed 10% of the number of shares issued. The total purchase cost of treasury stock can not exceed the sum of retained earnings, paid-in capital in excess of par value, and realized capital surplus. The shares bought back with the intent of transferring to employees must be transferred within three years from the date of buyback. Otherwise, the shares shall be deemed as not issued by the Company, and cancelled. And for shares bought back with the intent of maintaining the Company’s credibility and stockholders’ rights, the registration procedure must be completed within six months from the date of buyback. In addition, treasury stock can not be pledged for debts, and treasury stock does not carry any shareholder rights until it is disposed of or transferred to employees.

The Company records treasury stock held by its subsidiaries as a deduction from stockholders’ equity in the accompanying consolidated balance sheets. The subsidiaries of the Company did not sell the common stock of the Company for the years ended December 31, 2002, 2003 and 2004. As of December 31, 2002, 2003 and 2004, treasury stock of the Company held by its consolidated subsidiary, Panpal was 31,037, 35,693 and 38,248 thousand shares, respectively. The treasury stock held by the consolidated subsidiaries as of December 31, 2002, 2003 and 2004, amounted to NT$749,551. As of December 31, 2002, 2003 and 2004, Gempal, a subsidiary of the Company, held 21,007, 24,158 and 25,888 thousand shares of common stock of the Company, respectively. The total cost was NT$501,862 for 2002, 2003 and 2004. The fair value of the common stock of the Company was 39, 47 and 31 New Taiwan dollars per share as of December 31, 2002, 2003 and 2004, respectively.

(c) Capital surplus

Pursuant to the ROC Company Law, capital surplus can only be used to offset a deficit or to increase common stock. Cash dividends can not be declared out of capital surplus. According to the SFB regulations, capital increases by transferring paid-in capital in excess of par value should not exceed 10% of total common stock outstanding. In addition, capital increases by transferring paid-in capital in excess of par value can only commence in the following year.

F-50

Due to the conversion of overseas unsecured convertible bonds for the years ended December 31, 2002, 2003 and 2004, convertible bonds payable over the par value of the common stock, recognized interest premium, and deferred issuance costs amounting to NT$263, NT$5,609,559 and NT$377,746, respectively, were transferred to capital surplus.

(d) Special reserve

According to the Company’s articles of incorporation, unrealized foreign currency exchange gains accounted for under SFAS No. 14, must be set aside as a special reserve before profit appropriation. The special reserve is transferred to retained earnings when the exchange gains or losses are realized.

(e) Legal reserve and limitation on distribution of retained earnings

Based on Panpal’s articles of incorporation, 10% of its annual net income is to be set aside as legal reserve after offsetting prior years’ deficits, if any. No more than 2% of unappropriated earnings, after deducting the legal reserve, can be distributed as remuneration to the directors and supervisors and no more than 2% (but not equal to zero) as bonuses to employees. The remaining balance can be distributed as dividends to stockholders based on the proposal provided at the board of directors’ meeting and approved by the stockholders’ meeting.

Based on CCI’s articles of incorporation, 10% of the annual net income after tax and offsetting prior years’ deficits, if any, is to be set aside as legal reserve, 2% of the unappropriated earnings, after deducting the legal reserve, can be distributed as remuneration to the directors and supervisors, and no less than 7% as bonus to employees. The remaining balance can be distributed as dividends to stockholders after special reserves are appropriated, if any. Cash dividends will not be lower than 10% of total cash and stock dividends in the current year based on the capital demands for the Company’s future operation and long-term financial plan. The stockholders’ meeting can determine to increase or decrease the percentage of cash dividends based on the future capital plan.

Based on Just’s, CIH’s, Etrade’s and Webtek’s articles of incorporation, before recommending a dividend, the directors may set aside reserves based on a resolution by the directors’ meeting. The remaining balance can be distributed as dividends to stockholders based on the resolution of the directors’ meeting under the following two circumstances.

(i) the Company will be able to satisfy its liabilities as they become due in the ordinary course of its business; and
(ii) the realizable value of the assets of the Company will not be less than the sum of its total liabilities, other than deferred taxes, as shown in the books of account, and its capital.

Pursuant to ROC Company Law, the legal reserve must be used exclusively to offset losses, and can not be used for any other purpose, except that one-half of the legal reserve may be capitalized based on the resolution of the stockholders’ meeting when it equals at least 50% of paid-in capital.

According to SFB regulations, when there is a deduction item of stockholders’ equity (excluding treasury stock) incurred in the year, an amount equal to the deduction item before appropriation must be set aside as special reserve. The special reserve will be available for dividend distribution only after the related stockholders’ equity deduction item has been reversed.

F-51

(f) Based on the resolution of the annual stockholders’ meetings held in 2002, 2003, and 2004, the information on dividends, employees’ bonuses, and directors’ and supervisors’ remuneration appropriated from the distributable retained earnings of 2001, 2002 and 2003 was as follows:

Dividends (expressed in New Taiwan dollars) Cash ............................................................................................. Stock (at par value) ...................................................................... Employees’ bonuses - stock (at par value)......................................... Employees’ bonuses - cash................................................................ Directors’ and supervisors’ remuneration...........................................		2001 NT$ $1.0 0.5 $1.5 $269,831 307 108,055 $378,193		2002 NT$ $1.0 0.5 $1.5 $356,260 76 142,535 $498,871		2003
						NT$ $2.0 0.2
						$2.2
						$407,214 101,810 203,609
						$712,633

If employees’ bonuses and directors’ and supervisors’ remuneration were recorded as expenses, net income per share would be decreased from 2.66 New Taiwan dollars, 3.21 New Taiwan dollars and 3.80 New Taiwan dollars to 2.47 New Taiwan dollars, 2.61 New Taiwan dollars and 3.31 New Taiwan dollars in 2001, 2002 and 2003, respectively. The shares issued as employees’ bonuses were approximately 1.3%, 1.4% and 1.3% of outstanding shares on December 31, 2001, 2002 and 2003, respectively.

The earnings distribution of fiscal year 2004 is still subject to being determined by a meeting of the board of directors and approved in a stockholders’ meeting. The related information about earnings distribution can be queried in the Market Observation Post System after the above meetings are held by the Company.

F-52

(14) Income Taxes

(a) The purchase of machinery through proceeds from common stock issuances met the prescribed criteria under the “Statute for Upgrading Industries” in the following years:

Year Tax exemption products The Company: 1996 notebook PCs 1998 notebook PCs 1999 notebook PCs, liquid crystal display (“LCD”) monitors, cellphones 1999 notebook PCs, cellphones, PDAs (tax exemption transferred from Palmax) 2002 cellphones, PDAs 2003 design and research for notebook PCs, monitors, cellphones and PDAs CCI: 1999 communication products 2000 personal digital assistants (PDAs) 2002 personal communication products 2003 design and research for cellphones	Tax exemption chosen Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years Stockholders’ income tax deduction Tax exemption on the Company’s corporate income taxes for five years Tax exemption on the Company’s corporate income taxes for five years	Tax exemption period
		January 31, 1998~ January 30, 2003 October 31, 1999~ October 30, 2004 December 1, 2000~ November 30, 2005 January 30, 2003~ January 29, 2008 The Company had completed the investment plan, and the application for a tax exemption is still in process December 31, 2003~ December 30, 2008 November 4, 2002~ November 3, 2007 — Tax exemption is not applied until CCI completes its investment plan Tax exemption is not applied until the CCI completes its investment plan

(b) The operations of the Company, Panpal and CCI are subject to income tax at a rate of 25%. Consolidated subsidiaries of the Group in Mainland China are subject to income tax at a rate of 15%. According to the PRC Tax Law, consolidated subsidiaries of the Group in Mainland China can, from the year in which they begin to make profits, be exempted from income tax in the first and second years and allowed a 50% reduction in the third to fifth years. In addition, consolidated subsidiaries of the Group in Mainland China are also exporting enterprises; thus, their operation will be subject to income tax at a rate of 10% if the annual exporting amount is in excess of 70% of the annual sales revenue. Just’s subsidiary, Compal Electronics (China) Ltd. (CPC), was exempted from income tax from 1999 to 2000 and allowed a 50% reduction in 2001, 2002 and 2003. Starting from 2004, CPC is subject to income tax at a rate of 10%. No income tax expenses were incurred by the other consolidated subsidiaries in Mainland China due to tax exemption under local tax laws in 2002, 2003 and 2004. The Company’s

F-53

operations outside Taiwan are subject to income tax rates applicable to the related foreign jurisdiction. The components of income tax expense of the Group for the years ended December 31, 2002, 2003 and 2004, consisted of the following:

2002	2003	2004	2004
NT$ $1,084,785 110,219 (592,527) 602,477 (319,392) (143,879) 353,213 12,038 (20,886) 6,700 (112,206)	NT$ $1,895,081 199,443 (2,035,206) 59,318 — (82,653) 55,349 (62,334) 131,584 (73,196) (31,250)	NT$ US$ $1,977,047 $62,348 276,361 8,715 (1,392,011) (43,898) 861,397 27,165 — — 241,503 7,616 (169,877) (5,357) (85,814) (2,706) (85,303) (2,690) (73,724) (2,325) (173,215) (5,462)
			27,165
			— 7,616 (5,357) (2,706) (2,690) (2,325)
			(5,462)
$490,271	$28,068	$688,182	$21,703

The foreign investees accounted for under the equity method do not intended to distribute their earnings. Therefore, the Company reserved deferred income tax liabilities of investment income recognized in prior years under the equity method amounting to NT$319,392 in 2002.

(c) The reconciliation of the expected income tax expense computed at the statutory rate to the actual income tax expense for the years ended December 31, 2002, 2003 and 2004, is summarized as follows:

Expected income tax on income before tax .... 10% surtax on unappropriated earnings .......... Expired investment tax credits ....................... Reversal of deferred income tax liabilities of investment income recognized in prior years under the equity method ................... Recognized interest premium of convertible bonds payable ............................................ Investment loss (income), net (domestic) ....... Investment tax credits .................................... Increase (decrease) in valuation allowance for deferred income tax assets ................... Investment income, net (overseas).................. Estimated tax effect of tax exemption ............ Other ............................................................. Total income tax expense ...............................		2002		2003		2004	2004
		NT$ $2,295,492 110,219 — (319,392) — (113,149) (632,314) 386,345 (457,857) (670,793) (108,280)		NT$ $3,384,992 199,443 66,142 — 84,787 (475,193) (2,183,801) 55,349 (322,632) (875,327) 94,308		NT$ US$ $2,284,918 $72,057 276,361 8,715 47,918 1,511 — — 38,826 1,224 36,462 1,150 (1,416,960) (44,685) (169,877) (5,357) (210,149) (6,627) (546,764) (17,243) 347,447 10,958
		$490,271		$28,068		$688,182	$21,703

F-54

(d) Deferred income tax assets (liabilities) as of December 31, 2002, 2003 and 2004, were as follows:

		December 31	December 31	December 31
2002 NT$ $— 690,250 98,048 63,079 52,496 22,952 70,630 997,455 (734,665) 262,790 — (55,318) (79,221) (10,395)		2003 NT$ $— 772,903 141,615 125,413 15,643 46,406 66,505 1,168,485 (790,014) 378,471 — (150,049) (54,474) —	2004
			NT$ US$ $85,945 $2,710 531,400 16,758 192,671 6,076 211,227 6,661 285,905 9,016 50,777 1,601 108,464 3,421 1,466,389 46,243 (620,137) (19,556 846,252 26,687 (23,662) (746 (335,008) (10,565 — — — —
				46,243 (19,556
				26,687 (746 (10,565 — —
	$117,856	$173,948	$487,582	$15,376
	$61,201 56,655	$201,403 (27,455)	$360,712 126,870	$11,375 4,001
	$117,856	$173,948	$487,582	$15,376

(e) The ROC tax authorities have assessed the Company’s income tax returns through 2001. The tax authorities assessed the Company additional income tax expenses for 1997, 1998, 1999, 2000 and 2001 in the amount of NT$72,947, NT$50,684, NT$166,584, NT$272,303 and NT$275,141, respectively, mainly due to different interpretations related to tax-exempt income and income tax credits. The Company disagreed with the assessment and filed appeals related to these issues. The total amounts of the assessed additional income tax expenses were recognized in the accompanying consolidated statements of income. Any other assessed differences will be reflected as an adjustment after the tax appeal is resolved.

The ROC tax authorities have assessed CCI’s and Panpal’s income tax returns through 2001 and 2002, respectively.

F-55

(f) Imputation credit account and creditable ratio

	December 31,	December 31,
2002 NT$ $3,163,576 12,464,010	2003 NT$ $3,163,576 18,569,149	2004
		NT$ $3,161,523 11,919,399	US$ $99,701 375,887
$15,627,586 $99,365	$21,732,725 $124,484 2002	$15,080,922 $475,588 $696,906 $21,977 2003 2004	$475,588
			$21,977

Creditable ratio for earnings distribution............................. 1.19% (actual) 0.85% (actual) 5.86% (expected)

(g) As of December 31, 2004, the unused investment tax credits of the Company, Panpal and CCI, mainly resulting from purchases of machinery for automation of production, research and development expenses, personnel training expenditures, and investments in qualified industries specified by the government, were as follows:

Regulations	Aggregated tax credit	Aggregated tax credit	Unused tax credits	Unused tax credits	Year of expiry
The Company The “Statute for Upgrading Industries”, Article Six ................ The “Statute for Upgrading Industries”, Articles Six and Eight .................................................................................. Panpal The “Statute for Upgrading Industries”, Article Eight ............. The “Statute for Upgrading Industries”, Article Eight ............. The “Statute for Upgrading Industries”, Article Eight ............. CCI The “Statute for Upgrading Industries”, Article Six ................ The “Statute for Upgrading Industries”, Article Six ................ The “Statute for Upgrading Industries”, Article Six ................ The “Statute for Upgrading Industries”, Article Six ................		NT$ $5,698 1,212,835 1,218,533 6,840 74,979 5,600 87,419 83,454 130,683 189,180 198,525 601,842		NT$ $5,698 6,291 11,989 185 65,854 5,600 71,639 61,190 22,789 165,268 198,525 447,772	2005 2008 2005 2006 2008 2005 2006 2007 2008
		$1,907,794		$531,400

ROC income tax regulations stipulate that total tax credits resulting from purchases of machinery for automation of production, research and development expenses, and personnel training expenditures, as well as total tax credits resulting from investments in qualified industries specified by the government, can be applied for only up to 50% of the income tax liability, respectively. Unused tax credits can be carried forward for the following four years, subject to the same percentage limitation for each year except for the last year, in which they will expire.

F-56

(15) Net Income per Share

Net income per share for the years ended December 31, 2002, 2003 and 2004, was computed as follows (all net income per share amounts are expressed in dollars):

2002	2002	2002	2003	2003			2004	2004
Before income tax	After income tax		Before income tax	After income tax	Before income tax		After income tax
NT$ $8,408,851		NT$ $7,918,580	NT$ $11,339,706	NT$ $11,311,638		NT$ $7,261,330	NT$ $6,573,148 3,368,556 $1.95	US$ $207,289
2,469,877		2,469,877	2,980,665	2,980,665		3,368,556		3,368,556
$3.41		$3.21	$3.80	$3.80		$2.16		$0.06
3,154,271		3,154,271	3,244,131	3,244,131
$2.67		$2.51	$3.50	$3.49
$8,408,851 94,193		$7,918,580 89,320	$11,339,706 339,149	$11,311,638 338,356		$7,261,330 (126,037)	$6,573,148 (115,024)	$207,289 (3,627
$8,503,044		$8,007,900	$11,678,855	$11,649,994		$7,135,293	$6,458,124	$203,662
2,469,877 39,689 73,464		2,469,877 39,689 73,464	2,980,665 36,551 311,164	2,980,665 36,551 311,164		3,368,556 — 144,752	3,368,556 — 144,752	3,368,556 — 144,752
2,583,030		2,583,030	3,328,380	3,328,380		3,513,308 $2.03	3,513,308 $1.84	3,513,308
$3.29		$3.10	$3.51	$3.51				$0.06
3,267,424		3,267,424	3,591,846	3,591,846
$2.60		$2.45	$3.25	$3.24

F-57

(16) Related Information about Financial Instruments

(a) Derivative financial instruments

As of December 31, 2002, 2003 and 2004, the details of the derivative financial instruments were as follows:
(1) Foreign currency options and forward exchange contracts (in thousands of dollars)

Financial Instruments			December 31, 2002	December 31, 2002
	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts sold EUR put options sold USD put options sold USD put options sold USD put options bought Financial Instruments	USD50,000 USD10,000 USD 6,000 USD31,277 USD20,000 USD10,300 USD10,000	November 12 to December 10, 2002 November 14, 2002 October 18, 2002 October 28 to November 13, 2002 October 29, 2002 November 12, 2002 September 26, 2002	January 13 to June 12, 2003 USD/NTD 34.498~34.829 NTD(724) January 31, 2003 USD/JPY 119.93~120.13 NTD4,094 January 22, 2003 USD/NTD 34.807~34.910 NTD454 March 3 to April 28, 2003 EUR/USD 0.940~0.995 NTD12,088 January 29, 2003 USD/JPY120.8 NTD(16,800) April 10, 2003 EUR/USD1.03 NTD(10,636) March 27, 2003 USD/NTD35.100 NTD4,739 December 31, 2003			— NTD4,094 NTD454 NTD12,088 — — NTD4,739
	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
USD forward foreign currency exchange contracts sold USD230,000 USD forward foreign currency exchange contracts sold USD30,000 EUR forward foreign currency exchange contracts bought EUR5,000 YEN call options sold YEN2,000,000 Financial Instruments Nominal amount		November 27 to December 30, 2003 December 30 to 31, 2003 December 10, 2003 December 12, 2003	February 26 to August 31, 2004 USD/NTD 33.96~34.145 January 30 to February 6, 2004 USD/JPY 106.9830~ 107.04 January 12, 2004 EUR/USD1.2175 January 5, 2004 USD/JPY108 December 31, 2004		NTD77,203 NTD1,952 NTD6,630 NTD1,114	NTD77,203 NTD1,952 NTD6,630 NTD1,114
	Nominal amount	Transaction period	Maturities	Strike rate	Fair value	Credit risk
USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts sold USD forward foreign currency exchange contracts bought USD forward foreign currency exchange contracts sold USD call options sold USD call options sold USD put options bought ............	USD180,000 USD30,000 USD61,000 USD11,000 USD11,000 USD30,000 USD10,000 USD15,000	December 3 to 31, 2004 December 2 to 3, 2004 November 1 to December 28, 2004 November 11, 2004 November 11, 2004 November 23, 2004 November 23, 2004 November 23, 2004	January 4 to March 8, 2005 January 6, 2005 January 3 to March 25, 2005 January 12 to November 14, 2005 January 12 to November 14, 2005 February 23, 2005 January 24, 2005 February 23, 2005	USD/NTD 31.86~32.277 USD/JPY 102.0~102.783 USD/NTD 32.001~33.824 USD/RMB 7.9445~8.2305 USD/RMB 8.1294~8.2440 USD/NTD32.80 USD/JPY104.70 USD/NTD32.20	NTD50,021 NTD(2,097) NTD59,731 NTD96 NTD447 NTD(728) NTD(1,089) NTD11,132	NTD50,021 — NTD59,731 NTD96 NTD447 — — NTD11,132

(2) Interest rate swaps

December 31,


Interest rate swap contracts..................	2002	2003	2004
	NT$ $4,000,000	NT$ $4,000,000	NT$ US$ $4,000,000 $126,143

F-58

2. Credit risk

The amount of credit risk is a potential loss of the Group if the counterpart involved in that transaction defaults. Since the Group’s derivative financial instrument agreements are entered into with financial institutions with good credit ratings, management does not believe that there is significant credit risk from these transactions.

3. Market risk

4. Liquidity risk (in thousands of dollars)

The Group will have cash inflows and outflows within the periods shown below. There are no financing risks due to expected sufficient foreign currency received from accounts receivable. Management believes that the cash flow risk is not significant because contracted foreign currency exchange rates are fixed.

Financial instruments	December	31, 2002
	Date	Cash outflow	Cash inflow
USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... Financial instruments	November 2002 to June 2003 November 2002 to January 2003 January 22, 2003 December	USD50,000 USD10,000 USD6,000 31, 2003	NTD1,734,590 JPY1,200,300 NTD209,234
	Date	Cash outflow	Cash inflow
USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... EUR forward foreign currency exchange contracts bought ...................................... Financial instruments USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts sold .......................................... USD forward foreign currency exchange contracts bought ...................................... USD forward foreign currency exchange contracts sold ..........................................	February to August 2004 January to February 2004 January 2004 December	USD230,000 USD30,000 USD6,088 31, 2004	NTD7,815,950 JPY3,210,630 EUR5,000
	Date January to March 2005 January 2005 January to March 2005 January to November 2005 January to November 2005	Cash outflow USD180,000 USD30,000 USD61,000 RMB88,750 USD11,000	Cash inflow
			NTD5,770,570 JPY3,069,190 NTD1,998,050 USD11,000 RMB90,130

Management believes that the cash flow risk of interest rate swap contracts is not significant because these contracts are settled in net amount.

F-59

The categories and objectives of the derivatives, and strategies to accomplish the underlying objectives

The derivative financial instrument contracts held by the Group are for the purpose of hedging the risks that may result from changes in exchange rates of foreign currency assets and liabilities and in interest rates rather than for the purpose of trading. The hedging strategies of the Group are to hedge the market risk to the highest extent possible. The Group uses derivatives that are highly correlated to the changes in fair values of the hedged items as hedging instruments.

6. Presentation of financial statements

The receivables and payables derived from foreign currency forward contracts were offset against each other, and the net amount was accounted for as other current financial assets or other current liabilities. The net forward foreign currency exchange contracts receivable were NT$2,626, NT$37,159 and NT$85,126 as of December 31, 2002, 2003 and 2004, respectively. The exchange gains (losses) resulting from the forward transactions for the years ended December 31, 2002, 2003 and 2004, amounting to NT$(62,118), NT$93,102 and NT$26,089, respectively, were included in non-operating income (expenses) in the accompanying consolidated statements of income.

The premium received and paid resulting from foreign currency option contracts were offset against each other, and the net amount was recorded as other current financial assets or other current liabilities. As of December 31, 2002, 2003 and 2004, the balances were liabilities of NT$19,346, liabilities of NT$2,373 and assets of NT$8,974, respectively. The exchange losses resulting from the option transactions for the years ended December 31, 2002, 2003 and 2004, amounting to NT$30,159, NT$23,088 and NT$95,326, respectively, were included in nonoperating expenses in the accompanying consolidated statements of income.

7. Fair value of derivative financial instruments

(b) Non-derivative financial instruments

Except for long-term equity investments, the book value of non-derivative financial instruments was similar to fair market value as of December 31, 2002, 2003 and 2004.
As of December 31, 2002, 2003 and 2004, the book values of long-term investments were NT$20,616,342, NT$23,526,281 and NT$23,596,616, respectively, of which NT$3,156,221, NT$4,717,379 and NT$5,266,933, respectively, were invested in publicly listed equity securities. As of December 31, 2003 and 2004, the book value of long-term equity investment in publicly listed equity securities included IST, which was accounted for under the equity method. The remaining balance was invested in companies that are not publicly listed. The fair values of these publicly listed investments were NT$3,924,689, NT$8,701,306 and NT$6,085,428 as of December 31, 2002, 2003 and 2004, respectively. The book values of investments in convertible bonds were NT$191,180 as of December 31, 2002. The fair value of these convertible bonds was NT$195,181 as of December 31, 2002.

F-60

(17) Related-party Transactions

(a) Name of the related parties and relationship

Related Party

Relationship with the Company
100%-owned unconsolidated subsidiary company
100%-owned unconsolidated subsidiary company
100%-owned unconsolidated subsidiary company
100%-owned unconsolidated subsidiary company
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
Investee company accounted for under the equity method
before 2002
The same chairman
The same chairman

Bizcom............................................................................
CEUK .............................................................................
CII ..................................................................................
Gempal............................................................................
Toppoly ...........................................................................
Vacom .............................................................................
Allied Circuit Co., Ltd. (Allied Circuit) ..........................
Sceptre Industries, Inc. (“Sceptre”)..................................
Liz Electronics (Kunshan) Co., Ltd. (“Liz Kunshan”) ......
Compower International Ltd. (“Compower”) ....................
Motion Computing, Inc. (“Motion”).................................
Acbel Polytech Inc. (“Acbel”) .........................................
Cal-Camp Electronics (Thailand) Public Co., Pte Ltd.
(Cal-Camp) .................................................................

(b) Summary of significant transactions with related parties

Sales

2002	2002	2003	2003		2004
Amount NT$ $929,970 244,056 214,904 3,038,590 117,736	% of net operating revenue 0.8 0.2 0.2 2.5 —	Amount NT$ $1,174,460 177,790 133,312 2,126,456 873,677	% of net operating revenue 0.7 0.1 — 1.2 0.5	Amount NT$ $1,590,382 271,970 176,752 — 56,312	% of net operating revenue 0.7 0.1 0.1 — —	Amount
							US$ $50,154 8,577 5,574 — 1,776
$4,545,256	3.7	$4,485,695	2.5	$2,095,416	0.9		$66,081

Sale prices for related parties were similar to those for third-party customers. The collection periods were approximately 75 to 120 days for Bizcom, 90 to 120 days (90 days for 2004) for Compower, 120 days for CEUK, and 30 days for CII, which could be extended when necessary.

2. Purchases

	2002	2002	2003	2003		2004
	Amount NT$ $— 271,607 199,917	% of net purchases — 0.2 0.2	Amount NT$ $2,089,000 1,091,976 163,711	% of net purchases 1.3 0.7 0.1	Amount NT$ $4,191,956 972,318 117,384	% of net purchases 1.9 0.5 0.1		Amount
								US$ $132,196 30,663 3,702

Purchase prices for finished goods from related parties were similar to those from third-party suppliers. The payment periods were approximately 45 to 60 days for Toppoly and 45 days for Vacom.

F-61

The balances resulting from the above sales and purchase as of December 31, 2002, 2003 and 2004, were as follows:

	December	31,
2002 NT$ % $205,278 0.9 221,683 1.0 36,183 0.1 901,079 4.0 193,534 0.9 1,557,757 6.9 (27,730) (0.1)	2003	2004 NT$ % $601,675 1.5 333,078 0.8 117,595 0.3 — — 3,285 — 1,055,633 2.6 (31,712) (0.1)
	NT$ % $286,512 0.7 304,614 0.7 65,148 0.1 — — 97,715 0.2 753,989 1.7 (11,373) —		US$ $18,974 10,504 3,708 — 104
			33,290 (1,000
$1,530,027 6.8	$742,616 1.7	$1,023,921 2.5	$32,290
$— — — — 58,630 0.3 67,246 0.3	$995,114 2.3 — — 96,687 0.2 46,253 0.1	$517,240 1.2 127,042 0.3 14,131 — 21,467 —	$16,312 4,006 446 677
$125,876 0.6	$1,138,054 2.6	$679,880 1.5	$21,441

4. Royalty agreement with related party

The Company entered into an agreement with its subsidiary Vacom due to use of CDMA technologies. The related royalty expenses for the years 2002, 2003 and 2004 amounted to NT$83,001, NT$132,420 and NT$176,617, respectively. As of December 31, 2002, 2003 and 2004, the payable had already been paid.

5. Product warranty service expenses

As of December 31, 2002, 2003 and 2004, the product warranty service expenses paid to related parties were as follows:

Bizcom .......................................................... CEUK ............................................................	2002 NT$ $55,186 5,732 $60,918	2003	2003		2004	2004
			NT$ $129,019 37,615		NT$ US$ $205,911 $6,494 87,474 2,758 $293,385 $9,252
			$166,634			$9,252

As of December 31, 2002, 2003 and 2004, the related payable had been paid.

Financing - other receivables - related parties

The Company’s loans to related parties were as follows:

Gempal ...................................... CEUK ........................................				2002	2002	2002
	Ending balance		Maximum balance	Interest rate			Period	Interest income		Interest receivable
		NT$ $— $60,787	NT$ $137,500 $60,787		2.75% 2.08%~2.34%		2001.12.28~ 2002.09.04 2002.03.27~ 2003.06.25		NT$ $2,346 $264	NT$ $— $—

F-62

				2003	2003
Ending balance NT$ $54,456 (54,456) $—			Maximum balance NT$ $60,787	Interest rate 2.00%~2.34%	Period 2003.10.30~ 2004.06.29	Interest income NT$ $1,106	Interest receivable
							NT$ $—
		)
	$—			2004
Ending balance NT$ $—			Maximum balance NT$ $54,400	Interest rate 2.00%~2.50%	Period 2004.6.30~ 2004.12.29	Interest income NT$ $1,224	Interest receivable
							NT$ $—

The Company did not retain any collateral from CEUK and Gempal. As of December 31, 2003, the Company’s long-term equity investment in CEUK was a credit balance, which was recorded as a deduction item of other receivables - related parties.

7. Stock transactions

The Company sold part of the shares of IST at book value to its related parties in 2002. A summary of the stock transaction is as follows:

Name of stock IST ..................................................................................................................	2002	2002
	Name of related party Gempal	Amount
		NT$ $17,064

As of December 31, 2002, all of the receivables had been collected.

8. Guarantees

Sceptre ...................................................................................
Bizcom ...................................................................................
CEUK .....................................................................................
Liz Kunshan ...........................................................................
CII..........................................................................................

December 31,

2002
2003
2004
US$2,200
US$2,200
US$2,200
US$2,000
US$2,000
US$2,000
US$1,000
US$1,000
US$1,000
—
—
US$1,000
US$5,000
—
—

(18) Pledged Assets

There were no pledged assets as of December 31, 2002, 2003 and 2004.

(19) Commitments and Contingencies

(a) As of December 31, 2004, the unused balance of the Group’s letters of credit for the purchase of materials and machinery was NT$1,164,864.
(b) On October 13, 2000, Samsung Electronics Co., Ltd. (“Samsung”) brought a civil lawsuit in the State Court of California against the Company and various other companies related to patent rights infringement and sought damages. The plaintiff claimed that the defendants violated its U.S. patents. As of December 31, 2004, Samsung had agreed to dismiss five of the six patent complaints against the Company. Management engaged lawyers to deal with this case. The eventual outcome of this case is uncertain. However, even if the Company is required to pay royalties or damages, there would not be material adverse effects on the Company’s business, financial condition, or results of operations.

F-63

(c) On April 6, 2001, LG Electronics Co., Ltd. (“LG”) brought a civil lawsuit in the State Court of California against the Company, Bizcom and Sceptre related to patent rights infringement and sought damages. Management engaged lawyers to deal with this case. On November 30, 2004, the court granted summary judgment to the Company, effectively terminating the case. LG has indicated that it intends to file a appeal with the Federal Circuit Court of Appeals. The Company believes there would not be any material adverse effects on the Company’s business, financial condition, or results of operations.
(d) On July 24, 2003, Audiovox Communication Corp. (“Audiovox”) filed an arbitration claim against the Company in the International Centre for Dispute Resolution of the American Arbitration Association. Audiovox alleges that the Company breached the exclusivity provision of a supplier agreement with Audiovox when the Company sold CDMA wireless phones to Bell South International, Inc. during the contract period. Audiovox seeks lost profits or what Audiovox has termed a “reasonable royalty”. Management engaged lawyers to deal with the case. The eventual outcome of this case is uncertain. However, even if the Company is required to pay royalties or damages, there would not be material adverse effects on the Company’s business, financial condition, or results of operations.
(e) In the syndicated loan agreement of VIBO, the Company, with its subsidiaries and Kinpo Electronics, Inc., committed to hold a specific portion of VIBO’s outstanding shares until VIBO is listed on the TSE or Over-the Counter Securities Exchange.
(f) In the syndicated loan agreement of Toppoly, the Company, with its subsidiaries and Kinpo Electronics, Inc., committed to hold a specific portion of Toppoly’s outstanding shares and influence on Toppoly’s management of operations.
(g) See note 17 for guarantees made to related parties.

(20) Other

(a) As of December 31, 2004, the effective significant royalty agreements were as follows:

Royalty Owner The Company: Phoenix Technologies, Ltd. ............. Qualcomm Incorporated .................. Agere Systems Inc. (formerly Lucent Technologies Inc.) ........... Accelent Systems Inc. ..................... Microsoft Corporation..................... Vacom............................................. Hitachi, Ltd. ................................... CCI: Motorola ......................................... Openwave ....................................... Magic 4 ..........................................	Content Produce, use, and sell quantitative memory Basic Input / Output Systems (“BIOS”) Royalty for producing, using, and selling CDMA mobile phones Use of specified GSM, GPRS technologies Royalty for producing, using, and selling Pocket PCs Use of Windows CE in Pocket PCs Use of specified CDMA technologies Use of specified CRT and LCD monitor technologies Use of i-250 platform and keyboard input software and hardware in mobile phones Use of mobile phone software and hardware for network and communication Use of mobile software	Period
		Authorized a certain quantity; contract shall be renewed after quantity is fulfilled Based upon quantities sold October 2003~October 2006 Based upon quantities sold Authorized a certain quantity June 2003~May 2006 September 2003~September 2008 July 2002~July 2007 Contract renewed annually July 2002~June 2007

F-64

(b) Employee expenses, depreciation expenses, and amortization expenses for the years ended December 31, 2002, 2003 and 2004, were as follows:

Employee expenses Salaries and wages .... Labor and health insurance .............. Pension expense ......... Other.......................... Depreciation expenses...... Amortization expenses .....		2002			2003			2004
	Cost of Sales	Operating Expenses	Total	Cost of Sales O E	perating xpenses	Total	Cost of Sales	Operating Expenses	Total
	NT$ 1,494,681 89,142 62,012 247,081 1,113,364 9,392	NT$ 1,214,285 72,319 40,378 74,282 172,167 216,806	NT$ 2,708,966 161,461 102,390 321,363 1,285,531 226,198	NT$ 1,867,949 1 112,485 50,990 272,049 1,268,446 40,662	NT$ ,642,540 104,710 62,446 136,000 195,189 173,130	NT$ 3,510,489 217,195 113,436 408,049 1,463,635 213,792	NT$ US$ 1,599,090 50,429 69,295 2,185 38,277 1,207 299,813 9,455 1,450,343 45,738 45,366 1,431	NT$ US$ 2,003,047 63,167 133,234 4,202 81,433 2,568 173,759 5,479 272,654 8,598 170,582 5,379	NT$ US$ 3,602,137 113,596 202,529 6,387 119,710 3,775 473,572 14,934 1,722,997 54,336 215,948 6,810

Certain accounts in the financial statements for years ended December 31, 2002 and 2003, have been reclassified to conform with the 2004 presentation. Such reclassification does not have a significant impact on the accompanying financial statements.

(21) Segment Information

(a) Industrial information

The Group is engaged in a single industry: the manufacture and sale of electronic products and related components. No industrial information is required to be disclosed.

(b) Geographic information

	2002	2002	2002
Taiwan	Asia	Eliminations NT$ $— (49,075,394)		Consolidated NT$ $122,555,822 —
NT$ $121,809,834 315,895	NT$ $745,988 48,759,499		NT$ $— (49,075,394)		NT$ $122,555,822 —
$122,125,729 $7,407,304 $67,284,892	$49,505,487		$(49,075,394)		$122,555,822
	$1,907,348		$(20,869)		$9,293,783
	$19,551,342				(290,489 (101,996
			$(10,628,534)		$8,901,298
					$76,207,700
					20,616,342
					$96,824,042

F-65

	2003	2003	2003
Taiwan NT$ $175,350,281 — $175,350,281 $11,314,360 $92,814,930	Asia NT$ $1,645,387 73,211,076 $74,856,463 $1,223,546 $33,040,057	Eliminations NT$ $— (73,211,076) $(73,211,076) $(20,848) $(18,917,960)		Consolidated
					NT$ $176,995,668 —
					$176,995,668
					$12,517,058
					(681,491 402,906
			$(18,917,960)		$12,238,473
					$106,937,027 23,605,874
					$130,542,901

		2004	2004
Taiwan NT$ $225,680,013 —	Asia NT$ $4,113,400 79,760,017	Eliminations NT$ $— (79,760,017)		Consolidated
				NT$ $229,793,413 —	US$ $7,246,717 —
$225,680,013 $8,938,719 $84,096,908	$83,873,417 $1,026,133 $34,675,586		$(79,760,017) $(16,618)	$229,793,413 $9,948,234	$7,246,717
					$313,725
				(518,721) (1,287,846)	(16,358 (40,613
			$(14,024,139)	$8,141,667 $104,748,355	$256,754
					$3,303,323
				23,659,603	746,124
				$128,407,958	$4,049,447

(c) Export sales

Export sales to geographic areas generating over 10% of the total revenue in the consolidated statements of income of 2002, 2003 and 2004 are summarized as follows:

Destination area North and South America......................................... Europe ..................................................................... Asia ......................................................................... Other (individually less than 10% of total revenue) .	2002		2003		2004
	NT$ $31,893,585 39,485,159 45,667,679 2,939,781		NT$ $47,919,902 59,076,302 61,843,450 3,538,538		NT$ $83,328,354 81,849,837 54,459,662 6,424,472	US$ $2,627,826 2,581,199 1,717,429 202,601
	$119,986,204		$172,378,192		$226,062,325	$7,129,055

F-66

(d) Significant customers

Sales to individual customers generating over 10% of consolidated net sales for the years ended December 31, 2002, 2003 and 2004, are summarized as follows:

2002	2003	2004
% of total revenue	% of total revenue	% of total revenue 32.1 16.3 13.8 13.6 1.3 77.1	Amount
8.9 27.9 11.5 21.2 — 69.5	9.1 24.0 10.2 19.4 9.5 72.2		US$ $2,324,981 1,177,761 1,002,465 982,165 94,814
			$5,582,186

F-67

APPENDIX A — FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

The information presented in this section has been extracted from publicly available documents, such as statistical data and information published by the ROC FSC and the TSE, which have not been prepared or independently verified by the Company, the Lead Manager or any of their respective affiliates or advisors in connection with this offering. The Company only accepts responsibility for correctly reproducing such information.

General

Historically, foreign investments in the securities market of Taiwan were restricted. However, commencing in 1983, the Taiwan government has from time to time enacted legislation and adopted regulations to make foreign investment in the Taiwan securities market possible. Initially, only overseas investment trust funds of authorised securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualified foreign institutional investors are allowed to make investments in the Taiwan public securities market. Since March 1, 1996, overseas Chinese, non-resident foreign institutional and individual investors (other than qualified foreign institutional investors), called “general foreign investors”, are permitted to make direct investments in the Taiwan public securities market.

On September 30, 2003, the Executive Yuan approved an amendment to the Regulations for Government Investment in Securities by Overseas Chinese and Foreign Nationals (the “Regulations”) which took effect on October 2, 2003. According to the Regulations, the ROC FSC abolished the mechanism of the so-called “qualified foreign institutional investors” and “general foreign investors” as stipulated in the Regulations before the amendment.

Under the Regulations, foreign investors are classified as either “onshore foreign investors” or “offshore foreign investors” according to their respective geographical locations. Both onshore and offshore foreign investors are allowed to invest in ROC securities after they register with the Taiwan Stock Exchange. The Regulations further classify foreign investors into foreign institutional investors and foreign individual investors. “Foreign institutional investors” refer to those incorporated and registered in accordance with foreign laws outside of the ROC (i.e. offshore foreign institutional investors) or those that set up branches that are recognised in the ROC (i.e. onshore foreign institutional investors).

Foreign Ownership Limitations

Other than specific limits imposed by certain laws and regulations, there are generally no limits on the extent of foreign ownership of the issued share capital in a Taiwan Stock Exchange-listed company or a GreTai Securities Market-traded company.

Capital remitted into Taiwan under the foreign investment guidelines may be repatriated at any time without the approval of the ROC FSC. Capital gains and income on investments may also be repatriated at any time.

Foreign Investment Approvals

Other than:

onshore foreign investors;
offshore foreign investors; and
investors in overseas convertible bonds and depositary receipts,

A-1

foreign investors who wish to make direct investments in the shares of Taiwan companies are required to submit a “foreign investment approval” application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other government authority for enjoyment of benefits granted under the Regulations Governing Investments by Foreigners. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval may repatriate annual net profits and interests and cash dividends attributable to an approved investment. Investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.

Non-Taiwan persons are currently prohibited from investing in prohibited industries in Taiwan under the Negative List promulgated by the Executive Yuan from time to time. The prohibition of the Negative List is absolute in the absence of a specific exemption from the application of the Negative List. Under the Negative List, some other industries are restricted so that non-Taiwan persons may directly invest only up to a specified level and with the specific approval of the relevant authority which is responsible for enforcing the legislation which the negative list is intended to implement.

Depositary Receipts

In April 1992, the ROC FSC began allowing Taiwan companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing shares of its capital stock. In December 1994, the Ministry of Finance began allowing companies whose shares are traded on the GreTai Securities Market also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of its capital stock. Approvals for these issuances are still required.

Immediately after the issuance of a depositary receipt, a holder of the depositary receipt may, subject to the terms and conditions of the Deposit Agreement and the applicable laws in respect of the depositary shares representing new shares, and subject further to the approval of the Taiwan Stock Exchange, request the depositary to cause the underlying shares to be sold in Taiwan and to distribute the proceeds of the sale to or withdraw the shares and deliver the shares to the depositary receipt holder. A citizen of the PRC is not permitted to withdraw and hold shares.

A depositary receipt holder wishing to withdraw shares represented by depositary receipts is required to register with the Taiwan Stock Exchange, if it has not previously done so. The depositary receipt holder is also required to appoint a qualified local agent to, among other things, open a securities trading account with a local securities brokerage firm, open a bank account, remit funds and exercise shareholders’ rights. In addition, the withdrawing holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and the opening of accounts, the withdrawing holder would be unable to subsequently hold or transfer the shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange or otherwise. The withdrawing holder is also generally required to appoint a tax guarantor as guarantor for the withdrawing depositary receipt holder’s ROC tax payment obligations. The tax guarantor must meet certain qualifications set by the MOF. Under current ROC law, repatriation of profits by a non-Taiwan withdrawing holder is subject to the submission of evidence of the appointment of a tax guarantor to, and the approval by, the tax authority or submission of tax clearance certificates as long as the capital gains from securities transactions are exempt from ROC income tax. As required by the CBC, if repatriation by a holder is based on a tax clearance certificate, the aggregate amount of the cash dividends or interest on bank deposits converted into foreign currencies to be repatriated by the holder will not exceed the amount, as applicable, of:

(1) the net payment indicated on the withholding tax voucher issued by the tax authority;
(2) the net investment gains as indicated on the holder’s certificate of tax payment; or

A-2

(3) the aggregate transfer price as indicated on the income tax return for the transfer of tax-deferred dividend shares.

No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific ROC FSC approval, unless they are:

(1) stock dividends or free distributions of shares;
(2) due to the exercise by the depositary receipt holder of his pre-emptive rights in the event of capital increases for cash; or
(3) if permitted under the deposit agreement and custodian agreement, the deposit of shares purchased by any person directly or through a depositary bank on the Taiwan Stock Exchange or Gre Tai Securities Market or held by such person for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the aggregate number of:
the number of issued depositary receipts previously approved by the FSC; and
the number of depositary shares created from stock dividends, free distributions of shares and rights offerings.

Under current ROC laws and regulations, the term “any person” mentioned above may be interpreted to mean either (a) any foreign or overseas Chinese investor (excluding any ROC investor) or (b) any foreign national or ROC investor. It is expected that the FSC will clarify this issue in its forthcoming review and amendment of the Guidelines for Offering and Issuance of Overseas Securities by Issuers.

These issuances of depositary receipts may only be made to the extent that previously issued depositary receipts have been canceled.

In the past, for depositary shares that represent new shares, three months after the issuance of a depositary receipt, a holder may request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder. For depositary shares that represent previously existing shares, a holder may immediately after the issuance of depositary receipts request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder. The relevant regulations have been amended such that the three-month restriction has been removed.

A depositary receipt holder or the depositary, without obtaining further approvals from the CBC or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including US dollars, in respect of:

the proceeds of the sale of shares represented by depositary receipts or received as share dividends with respect to the shares and deposited into the depositary receipt facility; and
any cash dividends or distributions received from the shares.

In addition, the depositary may also convert into NT dollars incoming payments for purchases of shares for deposit in the depositary receipt facility against the creation of additional depositary receipts. If you withdraw the shares underlying your GDSs and become a holder of shares, you may convert into NT dollars subscription payment for rights offerings. The depositary may be required to obtain foreign exchange payment approval from the CBC on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new shares. Although it is expected that the CBC will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

A-3

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the MOF and by the CBC. Current regulations favour trade-related foreign exchange transactions.

Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million (or its equivalent) and US$5 million (or its equivalent) respectively in each calendar year. These limits apply to remittances involving a conversion between NT dollars and US dollars or other foreign currencies. A requirement is also imposed on all private enterprises to register all medium and long-term foreign debt with the CBC.

In addition, a foreign person without an alien resident card or an unrecognised foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if the required documentation is provided to Taiwan authorities. This limit applies only to remittances involving a conversion between NT dollars and US dollars or other foreign currencies.

A-4

APPENDIX B — THE SECURITIES MARKETS OF THE ROC

The Securities Market of the ROC

The Taiwan Stock Exchange

In 1961, the ROC FSC established the TSE to provide a marketplace for securities trading. Starting from July 1, 2004, the FSC was renamed to Securities and Futures Bureau under Financial Supervisory Commission. The TSE is a corporation owned by government controlled and private banks and enterprises. The TSE is independent of entities transacting business through it, each of which pays a user’s fee. Generally, all transactions in listed securities by brokers, traders and integrated securities firms must be made through the Taiwan Stock Exchange.

The TSE commenced operations in 1962. During the early 1980s, the ROC FSC actively encouraged new listings on the TSE and the number of listed companies grew from 119 in 1983 to 698 as of June 30, 2005. As of August 17, 2005, the market capitalization of companies listed on the TSE was approximately NT$14.5 trillion.

Historically, ROC companies have listed only shares and bonds on the TSE. However, the ROC FSC has encouraged companies to list other types of securities. In 1988, the ROC FSC permitted the issuance of Taiwan’s first convertible bonds. Since 1989, there have been offerings of domestic convertible bonds and convertible preferred shares. In addition, beneficiary units evidencing beneficiary interests in closed end investment funds and Dragon Bonds issued by Asian Development Bank are also listed on the TSE or traded on the Gre Tai Securities Market. The ROC FSC also has regulations which permit foreign issuers to list their equity securities directly on the TSE or through the use of depositary receipts. To date, five foreign issuers have listed their equity securities on the TSE through the use of depositary receipts in accordance with these regulations.

The TSE requirements for listing are based on the following company attributes:

the number and distribution of shareholders, including the diversification of such shareholders;
length of time in business;
amount of paid-in capital;
profitability; and
capital structure.

However, special listing criteria apply to technology companies and key businesses engaging in national economic development.

The ROC Gre Tai Securities Market

To complement the Taiwan Stock Exchange, the Gre Tai Securities Market was established in September 1982 on the initiative of the ROC FSC to encourage the trading of securities of companies who do not qualify for listing on the Taiwan Stock Exchange. As of August 17, 2005, 473 companies had listed equity securities on the Gre Tai Securities Market and the total market capitalization of those companies was approximately NT$1.3 trillion as of August 17, 2005.

B-1

TSE Index

The TSE Index is calculated on the basis of a wide selection of listed shares weighted according to the number of shares outstanding. This weighted average method is also used for the Standard and Poor’s Index in the United States and the Nikkei Stock Average in Japan. The TSE Index is compiled by dividing the market value by the base day’s total market value for the index shares. The TSE Index is the oldest and most widely quoted market index in Taiwan.

The weighting of shares in the index is fixed as long as the number of shares outstanding remains constant. When the total number of shares outstanding changes, the weight of each stock is adjusted. Stock splits and stock dividends are adjusted automatically. Cash dividends are not included in the calculation.

The following table sets forth, for the periods indicated, information relating to the TSE Index.

Period Ended December 31,	Number of Listed Companies at the Period End 199 221 256 285 313 347 382 404 437 462 531 584 638 669 697 695	Total Trading Value of TSE (in billions) NT$19,031.3 9,682.7 5,917.1 9,056.7 18,812.1 10,151.5 12,907.6 37,241.1 29,619.0 29,291.5 30,526.6 18,354.9 21,874.0 20,333.2 23,875.4 10,287.2	Index High 12,495.34 6,305.22 5,391.63 6,070.56 7,183.75 7,051.49 6,982.81 10,116.84 9,277.09 8,608.91 10,202.20 6,104.24 6,462.30 6,142.32 7,034.10 6,423.81	Index Low 2,560.47 3,316.26 3,327.67 3,135.56 5,194.63 4,503.37 4,690.22 6,820.35 6,251.38 5,474.79 4,614.63 3,446.26 3,850.04 4,139.50 5,316.87 5,693.01	Trading Index at Period End
1990 ...................................... 1991 ...................................... 1992 ...................................... 1993 ...................................... 1994 ...................................... 1995 ...................................... 1996 ...................................... 1997 ...................................... 1998 ...................................... 1999 ...................................... 2000 ...................................... 2001 ...................................... 2002 ...................................... 2003 ...................................... 2004 ...................................... 2005 (through July 31, 2005)..					4,530.16 4,600.67 3,377.06 6,070.56 7,124.66 5,173.73 6,933.94 8,187.27 6,418.43 8,448.84 4,739.09 5,551.24 4,452.45 5,890.69 6,139.69 6,311.98

Source: Taiwan Stock Exchange.

As indicated above, the performance of the TSE has in recent years been characterized by extreme price volatility.

Price Limits, Commissions, Transaction Tax and Other Matters

The TSE has placed limits on block trading and on the range of daily price movements. Fluctuations in the price of securities traded on the TSE is restricted to 7% above and below the previous day’s closing price in the case of equity securities, and 5% in the case of debt securities. The price limit for movements below the previous day’s closing price has been modified from time to time by MOF based on market conditions.

Effective July 1, 2000, brokerage commission can be set at any rate not exceeding 0.1425% of the transaction price subject to reporting to the TSE.

B-2

A securities transaction tax of 0.3% of the transaction price is payable by the seller of equity securities. These securities transaction taxes are withheld at the time of the transaction. Under the current tax law, no securities transaction tax will be imposed on the transfer of the Bonds.

Sales of shares of listed companies on the TSE are generally sold in “round lots” of 1,000 shares. Investors who desire to sell less than 1,000 shares of a listed company occasionally experience delays in making these sales. Transactions that involve 500 trading lots (500,000 shares) or more must be registered and executed in accordance with TSE guidelines.

Regulation and Supervision

The ROC FSC has extensive regulatory authority over public companies. Public companies are generally required to obtain approval from, or registration with, the ROC FSC for all securities offerings. The ROC FSC requires periodic reporting of financial and operating information by all public companies. In addition, the ROC FSC establishes standards for financial reporting and carries out licensing and supervision of participants in the Taiwan securities market.

The Securities and Futures Bureau has responsibility for implementing the ROC Securities and Exchange Law and for overall administration of governmental policies in the Taiwan securities market. It has extensive regulatory authority over the offering, issuance and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the Securities and Futures Bureau to promulgate necessary rules. The ROC Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-term trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors, as well as the spouses, minor children and nominees of these parties, and shareholders who (together with their spouses, minor children and nominees) hold 10% or more of the shares of the issuer. The ROC Securities and Exchange Law prohibits trading by “insiders” based on non-public information that materially affects share price movement. “Insiders” include:

directors, supervisors, managers, as well as the spouses, minor children and nominees of these parties, and shareholders (together with their spouses, minor children and nominees) who hold 10% or more of the issuing company’s shares;
any person who has learned material, non-public information due to an occupational or controlling relationship with the issuing company; and
any person who has learned material, non-public information from any of the above.

Sanctions include imprisonment. In addition, damages may be awarded to persons injured by the transaction.

The ROC Securities and Exchange Law also imposes criminal liability on certified public accountants and lawyers who make false certifications in their examination and audit of an issuer’s contracts, reports and other documents related to securities transactions. The ROC FSC regulations require that financial reports of listed companies be audited by accounting firms consisting of at least three certified public accountants and be signed by at least two certified public accountants.

In addition, the ROC Securities and Exchange Law provides for civil liability for material misstatements or omissions made by issuers and regulation of tender offers.

B-3

The ROC FSC does not have criminal or civil enforcement powers under the ROC Securities and Exchange Law. Criminal actions may be pursued only by the government prosecutors. Civil actions may only be brought by plaintiffs who assert that they have suffered damages. The ROC FSC is empowered to curb abuses and violations of laws and regulations only through administrative measures including:

issuance of warnings;
temporary suspension of operation;
imposition of administrative fines; and
revocation of licenses or permits.

In addition to providing a market for securities trading, the TSE reviews applications by Taiwan issuers to list securities on the TSE. If issuers of listed securities violate laws and regulations or encounter extended or severe negative results of operations, the TSE may, with the approval of the ROC FSC, delist securities of these issuers.

B-4

REGISTERED OFFICE OF THE COMPANY

Compal Electronics, Inc.

No. 581 Ruiguang Rd., Neihu Taipei (114), Taiwan ROC

PRINCIPAL PAYING, TRANSFER AND TRUSTEE CONVERSION AGENT REGISTRAR

Citibank, N.A. Citigroup Centre 14th Floor, Canada Square Canary Wharf London E14 5LB United Kingdom

Citibank, N.A. Citigroup Global Markets Deutschland 5 Carmelite Street AG & Co. KGaA London EC4Y 0PA Reuterweg 16 United Kingdom 60323 Frankfurt Germany

DEPOSITARY

CUSTODIAN IN ROC

The Bank of New York

101 Barclay Street, 22W New York New York 10286 United States

The International Commercial

Bank of China

11/F, 100 Chilin Road Taipei, Taiwan ROC

INDEPENDENT PUBLIC ACCOUNTANTS

KPMG Certified Public Accountants

6th Floor 156 Min Sheng East Road Section 3 Taipei, Taiwan ROC

LEGAL ADVISORS

ROC Legal Advisors to the Company US Legal Advisors to the Lead Manager Tsar & Tsai Linklaters 8th Floor 10th Floor 245 Tun Hwa South Road, Section 1 Alexandra House Taipei 106, Taiwan Chater Road ROC Hong Kong

US Legal Advisors to the Trustee

Linklaters

10th Floor Alexandra House Chater Road Hong Kong

Printed by IFN Financial Press Limited

25123

AI assistant

Compal — Capital/Financing Update 2013

52007_rns_2013-10-07_f3f7352f-fa01-4101-8ff3-4a43aff4cf48.pdf

IMPORTANT NOTICE

NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES

INVESTING IN THE BONDS INVOLVES RISKS AND YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED UNDER THE CAPTION “RISK FACTORS”, AS WELL AS INFORMATION CONTAINED ELSEWHERE IN THE ATTACHED OFFERING CIRCULAR, BEFORE MAKING AN INVESTMENT DECISION.

Compal Electronics, Inc.

US$300,000,000 Zero Coupon Convertible Bonds due 2010 Issue Price: 100%

Investing in the Bonds involves risks. See “Risk factors” beginning on page 9.

ABN AMRO Rothschild

FORWARD-LOOKING STATEMENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

TABLE OF CONTENTS

SUMMARY

Overview

Strategy

Competitive strengths

Recent developments — Proposed restructuring of the mobile communications business

Summary financial information

Non-consolidated financial information

Notes:

THE OFFERING

RISK FACTORS

Risks relating to the Group and its business

The Group depends on key ODM and OEM customers

The Group’s gross margins are subject to downward pressure

The Group operates in a highly competitive environment

If the Group does not effectively manage its product transitions, its revenue may suffer

The Group’s results of operations are subject to exchange rate fluctuations

The Group relies on key personnel

The Group relies on technology provided by third parties

The Group’s business depends on intellectual property and it may become involved in intellectual property litigation

The Group depends on access to key components, the supply of which can be volatile

The Group may face potential liability with respect to product defects

The Group may experience losses on inventories

The Group is susceptible to general economic and industry conditions

The Group’s operating results are seasonal

The Group’s operations are subject to manufacturing risks

The rate of growth in outsourcing may not continue

Risks associated with the Restructuring

Risks relating to the ROC

The value of an investment in the Bonds, the Shares and the GDSs may be adversely affected by the volatility of the ROC securities market

ROC exchange controls may adversely affect the ability of holders of GDSs to realize the proceeds from the sale of subscription rights

The Company is subject to ROC GAAP, which differ from US GAAP

An investment in the Bonds, the Shares or the GDSs may be adversely affected by considerations relating to the ROC

Taiwan is susceptible to earthquakes and typhoons that could disrupt the normal operation of the Group’s business and adversely affect earnings

Risks relating to the PRC

The Group is subject to the political and economic situation and legal developments in the PRC

The Group is subject to risks associated with the PRC legal system

The Group’s and its supplier’s production facilities in the PRC are subject to risks of power shortages

Risks relating to ownership of the Bonds, the Shares and the GDSs

The market for the Bonds, the Shares and the GDSs may not be liquid

Holders of the Bonds will bear the risk of fluctuations in the price of the Shares and the GDSs

There are limitations on your ability to exercise conversion rights

Holders of GDSs will have limited voting rights

Employee stock bonuses may have a diluting effect on the holdings and associated rights of the holders with respect to the Shares and the GDSs

Holders of GDSs may not be able to participate in rights offerings

Holders of GDSs who withdraw Shares will be required to appoint a tax guarantor and a local agent in the ROC

Sales of a substantial number of Shares following the offering could have an adverse effect on the price of the Bonds and the Shares

The Company’s share price has historically fluctuated and may continue to fluctuate

The Company’s public shareholders may have difficulty protecting their interests

USE OF PROCEEDS

MARKET PRICE OF THE SHARES

MARKET PRICE OF THE GDSs

DIVIDENDS AND DIVIDEND POLICY

EXCHANGE RATE INFORMATION

NT dollars per US dollar

CAPITALIZATION

SELECTED FINANCIAL INFORMATION

Non-consolidated financial information

Consolidated financial information

Overview

Factors affecting financial performance

Principal income statement components

Results of operations

Six months ended June 30,

Years ended December 31,

Year ended December 31, 2004 compared to the year ended December 31, 2003

Year ended December 31, 2003 compared to the year ended December 31, 2002

Working capital management

Compal Capital/Financing Update 2013