CSC - Capital/Financing Update 2013

OFFERING CIRCULAR

==> picture [81 x 37] intentionally omitted <==

CHINA STEEL CORPORATION

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

52,400,000 Global Depositary Shares Representing 1,048,000,000 Common Shares

US$15.56 per GDS

The Ministry of Economic Affairs of the Republic of China, acting through the Development Fund of the Executive Yuan of the Republic of China, is offering (this ‘‘Offering’’) 52,400,000 global depositary shares (the ‘‘GDSs’’), each representing 20 common shares, par value NT$10 per share (the ‘‘Shares’’), of China Steel Corporation. We will not receive any of the proceeds from this Offering. The Ministry of Economic Affairs has granted the Managers an option exercisable within 30 days after the date of this Offering Circular to purchase up to an additional 7,759,800 GDSs representing 155,196,000 Shares.

The GDSs offered in reliance on Rule 144A (‘‘Rule 144A’’) under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), will be issued in the form of Rule 144A GDSs (the ‘‘Rule 144A GDSs’’) and the GDSs offered in reliance on Regulation S (‘‘Regulation S’’) under the Securities Act will be issued in the form of International GDSs (the ‘‘International GDSs’’). The GDSs offered in this Offering will be fully fungible with the outstanding GDSs previously issued in prior offerings. The Rule 144A GDSs previously issued have been, and the Rule 144A GDSs offered in this Offering are expected to be, designated as eligible for trading in Private Offerings, Resales and Trading through Automated Linkages Market of NASD Inc. in the United States. The International GDSs previously issued have been, and the International GDSs offered in this Offering are expected to be, listed on the Luxembourg Stock Exchange and accepted for quotation in the International Order Book of the London Stock Exchange. The Shares are listed and traded on the Taiwan Stock Exchange.

On October 16, 2003, the closing price of the Shares on the Taiwan Stock Exchange was NT$27.20 per Share and the closing price of the International GDSs previously issued on the International Order Book of the London Stock Exchange was US$15.75 per GDS.

Investing in the GDSs involves risks. See ‘‘Risk Factors’’ beginning on page 10.

The GDSs and the underlying Shares have not been registered under the Securities Act, and such securities may not be offered or sold within the United States or to U.S. persons (as defined in Regulation S), except to qualified institutional buyers (as defined in Rule 144A) in reliance on Rule 144A under the Securities Act, and to non-U.S. persons in reliance on Regulation S under the Securities Act. For a summary of certain restrictions on resale, see ‘‘Transfer Restrictions’’.

Global Coordinators

Citigroup

UBS Investment Bank

Co-Lead Manager

Nomura International

The Managers expect to deliver the GDSs in book-entry form through the facilities of The Depository Trust Company, Euroclear Bank S.A./N.V. as the operator of the Euroclear System, and Clearstream Banking S.A. on or about October 22, 2003.

October 16, 2003

We accept responsibility for the information contained in this offering circular (‘‘Offering Circular’’) with respect to our company, our subsidiaries and affiliates, the Shares and the GDSs. To the best of our knowledge and belief (we have taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and does not omit anything likely to affect the importance of such information.

No person is authorized to give any information or to make any representation not contained in this Offering Circular and, if given or made, such information or representation must not be relied upon as having been authorized by the Ministry of Economic Affairs (the ‘‘MOEA’’), the Development Fund of the Executive Yuan (the ‘‘Development Fund’’), our company or any of the Managers or any affiliate or representative thereof. The delivery of this Offering Circular at any time does not imply that the information contained herein is correct as of any time subsequent to its date. Any reproduction or distribution of this Offering Circular, in whole or in part, and any disclosure of its contents or use of any information herein for any purpose other than considering an investment in the securities offered hereby is prohibited, except to the extent such information is otherwise publicly available. Each prospective purchaser, by accepting delivery of this Offering Circular, agrees to the foregoing.

Effective from the date of commencement of discussions concerning this Offering, you and each of your employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of this Offering and all materials of any kind, including opinions and other tax analyses that we have provided to you relating to such U.S. federal income tax treatment and tax structure.

This Offering Circular does not constitute an offer of, or an invitation by or on behalf of the MOEA, the Development Fund, our company or any of the Managers or any affiliate or representative thereof to subscribe for, or purchase, any securities other than the securities to which it relates or an offer to sell or the solicitation of an offer to buy such securities by any person in circumstances in which such offer or solicitation is unlawful. No action has been or will be taken to permit a public offering in any jurisdiction where action would be required for that purpose. Accordingly, the securities offered in this Offering may not be offered or sold, directly or indirectly, and this Offering Circular may not be distributed, in any jurisdiction, except in accordance with the legal requirements applicable in such jurisdiction.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (‘‘RSA 421-B’’) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

IN CONNECTION WITH THIS OFFERING AND TO THE EXTENT PERMITTED BY APPLICABLE LAW AND REGULATIONS, UBS AG OR ITS AGENTS ON BEHALF OF THE MANAGERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES, THE GDSs AT LEVELS THAT MIGHT NOT OTHERWISE PREVAIL. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

AVAILABLE INFORMATION

The Shares are exempt from the requirements of Section 12(g) of the United States Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), in accordance with Rule l2g3-2(b) of the Exchange Act. We will furnish the Depositary (as defined below) copies of our annual reports in English containing a brief description of our operations and our annual audited consolidated financial statements prepared in accordance with ROC generally accepted accounting principles (‘‘ROC GAAP’’). We will also furnish to the Depositary copies of all reports, notices and communications that are made generally available to holders of Shares. Upon receipt thereof, the Depositary will make available English-language summaries of such reports, notices and communications to all holders of record of GDSs. See ‘‘Description of the Global Depositary Shares’’. We publish semi-annual unconsolidated financial statements and will provide English language copies to the Depositary for distribution to holders of GDSs. To permit compliance with Rule 144A under the Securities Act in connection with resales of Rule 144A GDSs, we will be required under the Rule 144A Deposit Agreement to furnish, upon request of a holder of Rule 144A GDSs to such holder and to a prospective purchaser designated by such holder the information required to be delivered under Rule 144A(d)(4) under the Securities Act if at the time of the request we are neither a reporting company under Section 13 or Section 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 in this Offering Circular. Our forward-looking statements contain information regarding, among other things, our financial condition, future expansion plans and business strategy. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that these expectations and projections are reasonable, such forwardlooking statements are inherently subject to risks, uncertainties and assumptions, including, among other things:

. the intensely competitive industries in which we operate;
. cyclicality of the worldwide steel industry;
. market demand for our steel products;
. availability of raw materials;
. industry risks;
. the regulations to which our business is subject;
. general economic, political and social conditions and developments in Taiwan and other jurisdictions in which we operate our business;
. risks associated with expansion of our facilities;
. legal proceedings; and
. other risks identified in ‘‘Risk Factors’’.

iii

We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. In light of the foregoing and the risks, uncertainties and assumptions discussed in ‘‘Risk Factors’’ and elsewhere in this Offering Circular, any forward-looking events discussed in this Offering Circular might not occur and our actual results could differ materially from those anticipated in the forward-looking statements.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

We are a company limited by shares and incorporated under the ROC Company Law. Most of our directors, executive officers and supervisors and certain of the experts named herein are residents of the ROC and substantially all of our assets and the assets of such persons are located in the ROC. As a result, it may be difficult for investors to enforce judgments obtained outside the ROC against us or such persons in the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. Any final judgment obtained against us or the MOEA 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 GDSs or the Shares will only be enforced by the courts of the ROC without further review of the merits if the court of the ROC in which enforcement is sought is satisfied that:

. the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;
. the judgment and the court procedure resulting in the judgment are not contrary to the public order or good morals of the ROC;
. if the judgment was rendered by default by the court rendering the judgment and (i) we or the MOEA was duly served during a reasonable time within the jurisdiction of such court in accordance with the laws and regulations of such jurisdiction or (ii) process was served on us with the judicial assistance of the ROC;
. judgments of the courts of the ROC would be recognized and enforceable in the jurisdiction of the court rendering the judgment on a reciprocal basis; and
. the judgment is a final judgment for which the period for appeal has expired or from which no appeal can be taken.

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 for the remittance out of the ROC of any amounts recovered in respect of such judgment denominated in a currency other than NT dollars.

TABLE OF CONTENTS

		Page		Page
Summary . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	1	Transactions with Related Parties . . . . . . .	77
Risk Factors . . . .	. . . . . . . . . . . . . . . . . . . . . .	10	Description of Capital Stock . . . . . . . . . . .	80
Selling Shareholder . . . . . . . . . . . . . . . . . . .		21	Description of the Global
Market Price Information . . . . . . . . . . . . . .		22	Depositary Shares . . . . . . . . . . . . . . . . . .	85
Dividends . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	23	Information Relating to the Depositary . .	105
Exchange Rates .	. . . . . . . . . . . . . . . . . . . . . .	24	Transfer Restrictions . . . . . . . . . . . . . . . . .	106
Capitalization . .	. . . . . . . . . . . . . . . . . . . . . .	25	Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . .	108
Use of Proceeds	. . . . . . . . . . . . . . . . . . . . . .	26	Plan of Distribution . . . . . . . . . . . . . . . . . .	112
Selected Financial	Information and		Legal Matters . . . . . . . . . . . . . . . . . . . . . . .	116
Operating Data	. . . . . . . . . . . . . . . . . . . . .	27	Independent Auditor . . . . . . . . . . . . . . . . . .	116
Management’s Discussion and Analysis			General Information . . . . . . . . . . . . . . . . . .	117
of Results of Operations and			Summary of Principal Differences Between
Financial Condition . . . . . . . . . . . . . . . . .		29	ROC GAAP and U.S. GAAP . . . . . . . .	119
Industry . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	43	Index to Financial Statements . . . . . . . . . .	F-1
Business . . . . . . .	. . . . . . . . . . . . . . . . . . . . . .	47	Appendix A — The Securities Market of
Management . . .	. . . . . . . . . . . . . . . . . . . . . .	71	the ROC . . . . . . . . . . . . . . . . . . . . . . . . . .	A-1
Principal Shareholders . . . . . . . . . . . . . . . . .		75	Appendix B — Foreign Investment and
Changes in Issued	Share Capital . . . . . . . .	76	Exchange Controls in the ROC . . . . . . .	B-1

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

The terms ‘‘China Steel Corporation’’, ‘‘we,’’ ‘‘us’’, ‘‘our’’ and ‘‘our company’’ refer to China Steel Corporation, unless the context otherwise requires. The term ‘‘CSAC’’ refers to C. S. Aluminium Corporation.

In this Offering Circular, ‘‘ROC’’ and ‘‘Taiwan’’ each refers to the Republic of China and the ‘‘ROC Company Law’’ refers to the Company Law of the ROC. The term ‘‘MOEA’’ refers to the Ministry of Economic Affairs of the ROC.

In this Offering Circular, references to (i) ‘‘tonnes’’ are to metric tons (1,000 kilograms), which is the equivalent of 2,204.6 pounds, and (ii) ‘‘production capacity’’ or ‘‘capacity utilization’’ are to the installed production capacity of our plants and equipment.

In this Offering Circular, references to ‘‘US$’’ and ‘‘U.S. dollars’’ are to United States dollars and references to ‘‘NT$’’ or ‘‘NT dollars’’ are to New Taiwan dollars. This Offering Circular contains translations of certain amounts into U.S. dollars at specified rates solely for the convenience of the reader. All translations from NT dollars to U.S. dollars of amounts stated as of December 31, 2002 and/or June 30, 2003 were made (unless otherwise indicated) on the basis of the exchange rate of NT$34.61 = US$1.00, the noon buying rate on June 30, 2003 in The City of New York for cable transfers in NT dollars per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. See ‘‘Exchange Rates’’. The noon buying rate on October 16, 2003 was NT$33.82 = US$1.00. No representation is made that the NT dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding. We maintain our financial books and records in NT dollars and present our financial statements in accordance with ROC GAAP. Unless otherwise specified, the information and financial data contained in this Offering Circular assume that the Managers’ option to purchase up to an additional 7,759,800 GDSs, exercisable within 30 days after the date of this Offering Circular, is not exercised.

Our financial statements are prepared using ROC GAAP and are not intended to present the financial condition, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions, including the United States, other than those in the ROC. The material differences between ROC GAAP and generally accepted accounting principles in the United States (‘‘U.S. GAAP’’) as applicable to us are discussed under the caption ‘‘Summary of Principal Differences Between ROC GAAP and U.S. GAAP’’. Certain financial amounts presented herein may not correspond directly to our financial statements included elsewhere herein or may not add up due to rounding.

Except for the unconsolidated financial data for the six months ended June 30, 2002 and 2003 presented in this Offering Circular, and unless otherwise indicated, the financial data contained in this Offering Circular are presented on a consolidated basis.

SUMMARY

The following summary is qualified in its entirety by, and is subject to, the consolidated and unconsolidated financial statements and notes thereto included elsewhere in this Offering Circular. For a discussion of certain factors which should be considered in connection with an investment in the GDSs offered in this Offering, see ‘‘Risk Factors’’.

The Company

We are the largest steel manufacturer and the only integrated steelmaker in the ROC, producing 10.8 million tonnes and 5.4 million tonnes of crude steel, respectively, in 2002 and the six months ended June 30, 2003. We manufacture and sell a broad range of high quality finished and semi-finished steel products, including hot and cold rolled sheets and coils, wire rods, plates, bars, slabs, blooms, billets and pig iron. Our products are used in a variety of downstream industries. For 2002, we had revenues of NT$108,389.1 million (US$3,131.7 million) and net income of NT$16,839.1 million (US$486.5 million). For the six months ended June 30, 2003, we had revenues of NT$62,541.4 million (US$1,807.0 million) and net income of NT$18,210.9 million (US$526.2 million).

We sell primarily to the ROC market. In 2002 and the six months ended June 30, 2003, approximately 72.4% and 72.7%, respectively, of our revenues from sales of steel products was accounted for by sales to customers in the ROC, while the remainder was mainly from revenues of sales within Asia, primarily in Japan, Hong Kong (including the PRC) and Southeast Asia. We believe that our leading position in the ROC steel market presents us with significant opportunities to increase sales and maintain profitability. In the ROC, domestic consumption of crude steel products has historically exceeded domestic crude steel production capacity, despite that the ROC is a net exporter of finished steel products. In 2002, ROC apparent crude steel consumption (i.e., without inventory adjustment) was 24.5 million tonnes, while ROC domestic crude steel production was 18.2 million tonnes.

Our Shares have been listed on the Taiwan Stock Exchange since 1974. On October 16, 2003, the closing price per Share on the Taiwan Stock Exchange was NT$27.20 per Share and our market capitalization was NT$257,103.2 million (US$7,428.6 million). Our International GDSs have been listed on the Luxembourg Stock Exchange and quoted in the International Order Book (the ‘‘IOB’’) of the London Stock Exchange since February 1997.

The address of our headquarters and registered office is No. 1 Chung Kang Road, Lin Hai Industrial District, Hsiao Kang, Kaohsiung, Taiwan, ROC.

Strategy

Our goal is to maintain our leadership position in the Taiwan steel industry and our position as one of the leading Asian integrated steelmakers in order to take advantage of the rising demand for steel products in the Asian region. We intend to pursue this goal through the following strategies:

Focus on higher margin, higher value-added products

We intend to continue to shift our product mix to higher margin, higher value-added products such as electrical sheets, electro-galvanized products, hot-dip galvanized products, cold rolled and surface treatment coils and sheets. These high-end products require more sophisticated production processes and technology and typically sell at higher prices and carry higher margins. We believe that our focus on higher margin, higher value-added products enhances our competitiveness and differentiates us from the increasing number of steelmakers in the region that compete in the commodity steel products market.

Continue to strengthen existing long-term customer relationships and cultivate customer loyalty

We believe that our strong customer base is an important factor in our ability to maintain our leading position in Taiwan and the Asian region. Most of our customers have been our long-term customers. In order to maintain our long-term customer relationships, we have from time to time ensured stable supply to our long-term customers during times of tight supply. We also seek to cultivate customer loyalty by maintaining the high quality of our products and by working with our customers to better understand the downstream requirements of their industry.

Continue to improve our cost competitiveness through cost reduction and operational efficiency

We seek to maintain our cost competitiveness by further reducing production costs and improving operational efficiency. We believe that our production cost is one of the lowest in Asia. Our strategy is to focus on increasing production yield through eliminating bottlenecks along the production chain and process innovations and refinements. With an annual crude steel output of 1,237 tonnes and 1,249 tonnes per employee for 2002 and the six months ended June 30, 2003, respectively, we are also among the most efficient steelmakers in the world. We believe that our high level of production efficiency is attributable to our vertically-integrated production facilities and high labor productivity. We continually seek to enhance our operational efficiency through refinements in our production processes and the revamping of our existing facilities. The completion of Phase IV in May 1997 has increased our economies of scale. We are currently undertaking, or plan to undertake, seventeen expansion and revamping projects that have been approved by our Board of Directors. We expect that in connection with these expansion and revamping projects we will incur a total of NT$22.4 billion (US$647.2 million) in capital expenditures from October 2003 to the end of 2007. Our research and development department is also undertaking numerous projects to further improve our overall operational efficiency.

Leverage our strengths to take advantage of growth opportunities in the PRC

We believe that steel consumption in the PRC will become an increasingly important driver of demand growth in the Asian export market over the next ten years, as a result of significant infrastructure build-out, car production growth and exports of consumer durables and electronics. Through our trading companies in Hong Kong and Shanghai, we provide direct sales and after-sales services to our customers in the PRC. In 2002 and the six months ended June 30, 2003, our exports to Hong Kong, substantially all of which comprised of direct and indirect sales to the PRC, accounted for 36.7% and 34.8%, respectively, of our total export volume. We believe that our long-term customer relationships with the affiliates of Taiwan companies operating in the PRC, which are currently our principal customers in the PRC, our geographic proximity, as well as our linguistic and cultural ties, to the PRC provide us with certain competitive advantages over Japanese and Korean steelmakers. We intend to broaden our customer base in the PRC by leveraging our competitive advantages, our knowledge of the PRC steel market and our ability to provide one-stop-shop services for both low-end and high-end products.

Continue to leverage the benefits of vertical integration

We intend to continue to leverage the benefits of vertical integration. We have the capability to process iron ore, coal, limestone and other raw materials through the blast furnace and basic oxygen conversion process into finished steel products. We believe that our position as the only integrated steelmaker in Taiwan enhances our operational efficiencies, competitiveness and profitability and responsiveness to the requirements of our customers. We also seek to capitalize on vertical integration in order to reduce costs and ensure stable supplies of raw materials and intermediate products.

Leverage our expertise and resources to pursue effective investment and diversification strategies

We intend to continue to leverage our expertise in the steel industry in identifying and pursuing investment opportunities in the industry. We recently entered into a joint venture with Sumitomo Metal Industries, Ltd. to establish East Asia United Steel Corp. in order to ensure a stable supply of slabs for ourselves and Yieh Loong Enterprise Co., Ltd., a Taiwan steel mill in which we hold a controlling interest. We have also made investments in companies that provide steel related services such as the processing of downstream steel products, the chemical processing of coal, slag cement production and waste disposal and the engineering design of environmental projects. We also intend to leverage the knowledge we attained and resources we marshalled as a result of operating one of the largest companies in Taiwan to diversify our business to become a provider of services (through our subsidiaries) in the areas of engineering design of environmental projects, trade, information technology, transportation, waste disposal and others.

Maintain prudent capital structure management and consistent profitability in order to maximize shareholder value

We believe that an important element of our success has been the commitment of our dedicated management team to deliver shareholder value. Our management team has on average 30 years of experience in the steel industry and most members of our management team have spent their entire career with our company. We maintain a conservative capital structure and our consolidated net debt-to-equity ratio as of December 31, 2002 and unconsolidated net debt-to-equity ratio as of June 30, 2003 were 30.1% and 20.0%, respectively, which were among the lowest in the industry globally. We have successfully attained profitability in each of the last ten years, even during industry downturns in the second half of 2000 and the entire year of 2001. We believe that our ability to generate consistent profitability allows us to deliver higher dividend payout ratios as compared to our competitors. For 2000, 2001 and 2002, we had dividend payout ratios of 84.9%, 122.0% and 83.3%, respectively.

The Offering

The following is only a summary and is qualified in its entirety by reference to the ‘‘Description of the Global Depositary Shares’’. Capitalized terms used herein and not defined have the same meaning given to them in the ‘‘Description of the Global Depositary Shares’’.

The Offering . . . . . . . . . The MOEA is offering an aggregate of 52,400,000 GDSs. The Rule 144A GDSs are being offered to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act and the International GDSs are being offered to international investors outside of the United States in offshore transactions in reliance on Regulation S under the Securities Act. See ‘‘Plan of Distribution’’.
Offering Price. . . . . . . . . US$15.56 per GDS.
The Rule 144A GDSs . . . Each Rule 144A GDS represents 20 Shares. The Rule 144A GDSs are evidenced by the Rule 144A GDRs.
The International GDSs . . Each International GDS represents 20 Shares. The International GDSs are evidenced by the International GDRs.
Over-allotment Option . . . The MOEA has granted to the Managers an option exercisable within 30 days after the date of this Offering Circular to purchase up to an aggregate of 7,759,800 additional GDSs.
Closing Date . . . . . . . . . October 22, 2003. The latest closing date is the later of the closing date pursuant to the firm GDSs offered in this Offering and the closing date of the additional GDSs if the over-allotment option is exercised.
Selling Shareholder . . . . . The MOEA, acting through the Development Fund of the Executive Yuan of the ROC. The ROC government currently holds approximately 36.2% of our outstanding capital stock through holdings by the MOEA. Immediately after this Offering, the ROC government, through Shares held by the MOEA, will hold approximately 25.2% of our outstanding capital stock. See ‘‘Selling Shareholder’’ and ‘‘Principal Shareholders’’.
Voting Rights . . . . . . . . . Holders of GDSs will have limited voting rights with respect to the Shares represented by such GDSs. See ‘‘Description of the Global Depositary Shares — Voting Rights’’.
Dividends. . . . . . . . . . . . Holders of the GDSs will be entitled to receive dividends, subject to the terms of the Deposit Agreements (as defined herein), to the same extent as holders of Shares. Holders of outstanding Shares on a dividend record date will be entitled to the full dividend declared without regard to any transfer subsequent to such record date. The payment and amount of dividends on the Shares are subject to approval by our shareholders at a shareholders’ meeting. See ‘‘Dividends’’, ‘‘Description of Capital Stock’’ and ‘‘Description of the Global Depositary Shares’’.
ROC Withholding Tax . . . ROC tax, currently at the rate of 20%, will be withheld from cash and stock dividends distributed by us out of retained earnings with respect to Shares represented by the GDSs. The 20% withholding tax will be reduced proportionally to the extent that a 10% retained earning tax was previously paid on our undistributed earnings. Stock dividends with respect to Shares represented by the GDSs declared and distributed by us out of capital reserves are not subject to ROC withholding tax. See ‘‘Taxation — ROC Taxation — Dividends’’.

Market for the International GDSs, Rule 144A GDSs and Shares . . . . . . . . .

The International GDSs previously issued have been listed, and application has been made to list the International GDSs offered in this Offering, on the Luxembourg Stock Exchange. The Rule 144A GDSs previously issued have been, and the Rule 144A GDSs offered in this Offering are expected to be, designated as eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages Market of NASD Inc. (the ‘‘PORTAL Market’’) and the International GDSs previously issued have been, and the International GDSs offered in this Offering are expected to be, accepted for quotation through the IOB of The London Stock Exchange Limited. The only trading market for the Shares is the Taiwan Stock Exchange.

Prior to this Offering, the MOEA completed offerings in 1992 and 1997. The MOEA completed a combined offering of 7,500,000 Rule 144A GDSs and 10,500,000 International GDSs in 1992 and a combined offering of 131,800 Rule 144A GDSs and 10,037,550 International GDSs in 1997 (the ‘‘Prior Offerings’’). We have been informed by the Depositary that, as a consequence of the withdrawal and sale of Shares represented by Rule 144A GDSs and International GDSs offered in connection with the Prior Offerings and the transfers of Rule 144A GDSs and International GDSs between the Rule 144A GDS facility and the International GDS facility, there were, as of October 15, 2003, a total of 265,003 Rule 144A GDSs and 5,471,699 International GDSs outstanding. In connection with this Offering, an aggregate of 52,400,000 additional GDSs will be issued. The Rule 144A GDSs and International GDSs to be issued in connection with this Offering will be issued under the Rule 144A Deposit Agreement and the International Deposit Agreement, respectively, under which Rule 144A GDSs and International GDSs currently outstanding have been issued. The respective terms of the Rule 144A GDSs offered in this Offering and the Rule 144A GDSs currently outstanding will be identical and the respective terms of the International GDSs offered in this Offering and the International GDSs currently outstanding will be identical.

Deposit and Sale or Withdrawal of Shares . .

After the initial deposit of the Shares in connection with this Offering under the Deposit Agreements and subject to current ROC law, no additional GDSs will be issued against deposits of additional Shares without specific regulatory approval from the ROC Securities and Futures Commission, except for additional GDSs to be issued in connection with (i) stock dividends on or free distributions of Shares, (ii) the exercise by holders of existing GDSs of their preemptive rights in the event of capital increases for cash, and (iii) to the extent that any of the GDSs have been cancelled, reissuances of GDSs up to an aggregate amount of outstanding GDSs equal to the total number of GDSs (subject to adjustment for the issuance described in clauses (i) and (ii)) that were originally approved by the ROC Securities and Futures Commission in 1992, 1997 and in connection with this Offering or (iv) the exchange of Rule 144A GDSs for International GDSs and vice versa. See ‘‘Description of the Global Depositary Shares’’ and ‘‘Appendix B — Foreign Investment and Exchange Controls in the ROC — Depositary Receipts’’.

Subject to the terms of the Deposit Agreements, a holder of GDSs may surrender its GDSs to the Depositary and instruct the Depositary to transfer the Shares underlying the GDSs to the holder or sell the Shares underlying the GDSs on behalf of the holder on the Taiwan Stock Exchange.

Rule 144A GDS Settlement

Procedures . . . . . . . . .
The Rule 144A GDSs currently outstanding have been, and the Rule 144A GDSs offered in this Offering will be, accepted into DTC’s book-entry settlement system. The Rule 144A GDSs currently outstanding are, and the Rule 144A GDSs offered in this Offering will be, represented by a single master Rule 144A GDR (the ‘‘Master Rule 144A GDR’’) evidencing all Rule 144A GDSs. The Master Rule 144A GDR has been issued to DTC and registered in the name of Cede & Co., as nominee of DTC. As long as any Rule 144A GDSs are held in book-entry form, Cede & Co. will be the holder of record of all such Rule 144A GDSs. Accordingly, each person owning a beneficial interest in the Master Rule 144A GDR must rely upon the procedures of DTC and institutions having accounts with DTC (‘‘DTC Participants’’) to exercise or to be entitled to any rights of a Rule 144A GDS holder. So long as any Rule 144A GDSs are traded through DTC’s bookentry settlement system or unless otherwise required by law, ownership of beneficial interests in the Master Rule 144A GDR will be shown on, and the transfer of such ownership will be effected only through, records maintained by (i) DTC or its nominee (with respect to DTC Participants’ interests) or (ii) DTC Participants. See ‘‘Description of the Global Depositary Shares’’.
International GDS Settlement
Procedures . . . . . . . . . Each of Euroclear and Clearstream has accepted the International GDSs currently outstanding, and will accept the International GDSs offered in this Offering, into its book-entry settlement system. The International GDSs currently outstanding are, and the International GDSs offered in this Offering will be, represented by a single master International GDR (the ‘‘Master International GDR’’), evidencing all of the International GDSs. The Master International GDR has been delivered by the Depositary to a common depositary for Euroclear and Clearstream. Settlement of the International GDSs offered in this Offering will take place through Euroclear and Clearstream or such common depositary in accordance with the settlement procedures applicable to equity securities in the Euromarket. See ‘‘Description of the Global Depositary Shares’’.
Lock-Up Agreement . . . . We and the MOEA have agreed that, during the period commencing on the date of this Offering Circular and ending 180 days after the latest closing date of this Offering (the ‘‘Lock-up Period’’), we or the MOEA will not, nor will any person acting on our or their behalf, without the prior written consent of the Managers, (i) issue, offer, encumber, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, any (A) GDSs, (B) Shares or securities convertible into or exercisable or exchangeable for the Shares, (C) securities of the same class as the GDSs or the Shares or (D) other instruments representing interests in securities of the same class as the GDSs or the Shares (collectively, the ‘‘Lock-up Securities’’), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-up Securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of the GDSs or the Shares or such other securities, in cash or otherwise, or otherwise make public an intention to do any of the foregoing. See ‘‘Plan of Distribution’’.

Listing Agent . . . . . . . . . The Bank of New York (Luxembourg) S.A.

Timing for Deliveries of the GDSs . . . . . . . . The GDSs are expected to be delivered in book-entry form against payment on October 22, 2003.

Summary of Financial Information and Operating Data

The summary income statement data for the years ended December 31, 2000, 2001 and 2002 (other than the dividends per Share data) and the summary balance sheet data as of December 31, 2000, 2001 and 2002 set forth below are derived from our audited consolidated financial statements included elsewhere herein and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Such financial statements have been audited by Deloitte & Touche, independent auditor. T N Soong & Co and Deloitte & Touche (Taiwan) established Deloitte & Touche effective June 1, 2003. The summary income statement data for the six months ended June 30, 2002 and 2003 and the summary balance sheet data as of June 30, 2002 and 2003 set forth below are derived from our audited unconsolidated financial statements included elsewhere herein and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Such financial statements have been audited by Deloitte & Touche. Results of the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full financial year. Our financial statements have been prepared in accordance with ROC GAAP. ROC GAAP differs in certain significant respects from U.S. GAAP. See ‘‘Summary of Principal Differences Between ROC GAAP and U.S. GAAP’’.

Income Statement Data Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . Net non-operating income (loss) . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per Share (basic) . . . . . . . . . . . . . . . . . Cash dividends per Share(1) . . . . . . . . . . . . . . . . Stock dividends per Share(1) . . . . . . . . . . . . . . . . Dividend payout ratio (basic)(2). . . . . . . . . . . . . . Dividend payout ratio (diluted)(3) . . . . . . . . . . . . Balance Sheet Data Cash and cash equivalents . . . . . . . . . . . . . . . . . Working capital(4) . . . . . . . . . . . . . . . . . . . . . . . Net properties . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term bank loans and overdrafts . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . Net debt to equity ratio(5). . . . . . . . . . . . . . . . . .	Year Ended and a	Year Ended and a	s of December 31,	s of December 31,	Six Months Ended and as of June 30,	Six Months Ended and as of June 30,	Six Months Ended and as of June 30,
	2000	2001	2002	2002	2002	2003	2003

Unconsolidated Operating Data(6) Crude steel production capacity (million tonnes) . . . . . . . . . . . . . . . . . . Crude steel production (million tonnes) . . . . . . . . . . . . . . . . . . . . . . . . Crude steel production capacity utilization rate (%) . . . . . . . . . . . . . . . . Number of employees (at end of period) . . . . . . . . . . . . . . . . . . . . . . . Crude steel per employee (tonnes)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . Total employee labor costs (NT dollars in billions) . . . . . . . . . . . . . . . . Employee man hours per tonne of crude steel . . . . . . . . . . . . . . . . . . . . Product sales (thousand tonnes). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Months Ended June 30, 2002 2003 4.03 4.78 5.38 5.43 133 114(7) 8,748 8,671 1,227(9) 1,249(9) 6.62 8.19 1.69 1.67 5,472.6 5,157.0
	2000	2001	2002	2002
	8.05 10.25 127 8,876 1,151 13.56 1.91 9,715.5	8.05 10.61 132 8,796 1,199 12.76 1.74 9,689.1	8.05 10.82 134 8,711 1,237 13.51 1.70 10,536.6

(1) Represents dividends attributable to such financial year. Such dividends are typically paid in the succeeding financial year.
(2) ‘‘Dividend payout ratio (basic)’’ means the sum of cash dividend and stock dividend per Share for the specified year divided by the basic earnings per Share for such year.
(3) ‘‘Dividend payout ratio (diluted)’’ means the sum of cash dividend and stock dividend per Share for the specified year divided by the fully diluted earnings per Share for such year.
(4) ‘‘Working capital’’ means current assets less current liabilities.
(5) ‘‘Net debt to equity ratio’’ means the excess of all of our interest bearing debts (including commercial paper, bonds, debts, loans and overdrafts) over our cash and cash equivalents divided by total shareholders’ equity.
(6) Excludes operating data of C. S. Aluminium Corporation, our consolidated subsidiary.
(7) The decrease in the crude steel production capacity utilization rate in the six months ended June 30, 2003 was primarily due to improved production efficiency as a result of expansion and revamping projects undertaken by us. Such expansion and revamping projects resulted in an increase in our production capacity commencing in April 2003. As a result, our capacity utilization rate for the six months ended June 30, 2003 was lower compared to the capacity utilization rate for the six months ended June 30, 2002. Our current production capacity for crude steel production is 9.55 million tonnes per year as compared to 8.05 million tonnes per year for 2002.
(8) ‘‘Crude steel per employee’’ is determined on the basis of the average number of employees for the periods indicated. The average number of our employees was 8,904, 8,848 and 8,747 for the years ended December 31, 2000, 2001 and 2002, respectively, and 8,769 and 8,693 for the six months ended June 30, 2002 and 2003, respectively.
(9) Calculated by annualizing the crude steel production for the half year divided by the number of employees.

RISK FACTORS

You should pay particular attention to the fact that we are governed in the ROC by a legal and regulatory environment which in some respects may differ from that which prevails in other countries. Prior to making an investment decision, you should carefully consider, among other things, the risks described below.

Risks Relating to Our Industry and Our Business

The steel industry is cyclical; downward pricing pressure on steel products in response to excess capacity could harm our operating results.

The world and regional steel industry is cyclical in nature and at times has been characterized by substantial excess capacity in many markets. Excess capacity could result in lower world market prices for steel products and declines in international steel prices could result in lower prices for steel products in Taiwan. The world steel industry was subject to substantial downward pricing pressure in the second half of 2000 and the entire year of 2001 as a result of general excess capacity in the industry. Although international steel prices have generally improved since 2002, there can be no assurance that the upward pricing trend will continue. Continuation of reduced international steel prices or further declines in such prices could adversely affect domestic and international sales prices for our steel products or, if we were to seek to maintain higher prices for our products, result in reduced domestic and international sales volume.

We operate in a highly competitive environment and we may not be able to sustain our current market position if we fail to compete successfully.

The steel market in the Asian region is highly competitive with respect to price, quality and service. Our main competitors in the domestic market are smaller steelmakers and the mini-mills in Taiwan. We have recently faced competitive pressures as a result of increased production by Taiwan steelmakers and mini-mills. We may also face additional competition if other Taiwan steelmakers were to expand production capacity. Our competitive position in the domestic market may also be adversely affected if another integrated steelmaker were to be established in Taiwan. In addition, we have experienced increased price competition in the ROC market from steel exporters in the Commonwealth of Independent States, Eastern Europe and Latin America.

Our main competitors in our principal export markets are other integrated steelmakers located in countries that are exporters of steel, principally Japan and South Korea, and particularly, those steelmakers formed as a result of the consolidation of the steel industry in the Asian region. For example, Kobe Steel Ltd., Nippon Steel Corporation and Sumitomo Metal Industries, Ltd., three Japanese steelmakers, formed an alliance in 2002, and in the same year, Kawasaki Steel Corporation and NKK Corp. merged into one entity as JFE Group. Steelmakers formed as a result of consolidation may enjoy improved market share, cost structure, production efficiency, economies of scale and distribution channels.

In 2002 and the six months ended June 30, 2003, exports to Hong Kong (including the PRC) accounted for 36.7% and 34.8% of our total export volume of steel products. A substantial majority of our sales to customers in the PRC are to affiliates of Taiwan businesses operating in the PRC. Because of our geographic proximity to the ports of Guangdong province, a substantial majority of our sales to the PRC are transported through the ports of Guangdong province and to the southern provinces of the PRC. The PRC steel industry is rapidly developing as many PRC steelmakers continue to make substantial capital expenditures in new equipment and technology as well as to undertake capacity expansion projects. The improvement in production efficiency and capabilities of PRC steelmakers and expanded production capacity may result in a decrease in the price of steel products produced in the PRC and a corresponding decrease in demand for imported steel products. Our ability to remain competitive in the PRC market may be adversely affected by the supply and lower price of steel products produced by steelmakers in the PRC.

Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which could have a material adverse effect on our business, results of operations and financial condition. We cannot assure you that we will be able to compete successfully against either current or potential competitors in the future. See ‘‘Business — Competition’’.

The accession of ROC to the World Trade Organization (the ‘‘WTO’’) and other recent regulatory and policy changes by the ROC government may result in additional competition to us.

The ROC became a member of the WTO in January 2002. The entry of the ROC to the WTO may result in additional competition to us. The average of the tariff rates applicable to imports of finished steel products of the types produced by us was 7.9% for each of the three years ended December 31, 2002. The current ROC import tariff for finished steel products is 4%. As a result of the entry of the ROC to the WTO, ROC import tariffs of finished steel products will be reduced to zero with effect on January 1, 2004. Such tariff elimination may make imported finished steel products more cost competitive in our domestic market, including products from Korean and Japanese steelmakers.

In August 2003, the ROC government lifted the ban on imports of steel products from the PRC and permitted the import into Taiwan of 173 items of steel products, including hot rolled steel and cold rolled steel products. As a result, we may in the future be subject to further competition from PRC steelmakers in our domestic market. If we are not able to offer our steel products at competitive prices to compete with PRC steelmakers, our businesses and results of operations may be adversely affected.

We are dependent on imported raw materials and if we are unable to obtain raw materials in suitable quantity and quality from our suppliers at reasonable prices, our production schedules would be delayed and we may lose customers.

The principal raw materials used by us in our steel production are coal, iron ore and limestone. The prices of these raw materials have fluctuated in the past and there can be no assurance that we will be able to pass on a substantial portion of any future increases in such costs to our customers. Similar to integrated steelmakers in Japan and Korea, we import almost all of our iron ore and coal from abroad. We import our iron ore principally from Australia and Brazil, import our coal principally from Australia and Canada, and purchase our limestone principally from domestic sources and Japan. We typically purchase our raw materials from a few suppliers for each type of raw materials. Although we have not experienced protracted interruptions of our supply of raw materials from sources in these countries, any protracted interruption of our supply of raw materials, or any significant increases in the prices of such raw materials, could have a material adverse effect on our business. In addition, since we import a substantial portion of our raw materials, any significant increases in the costs of freight that we cannot pass to our customers could adversely affect our profitability.

Our products may be subject to anti-dumping and countervailing proceedings or safeguard measures.

Our products may be subject to anti-dumping and countervailing proceedings or safeguard measures all over the world, especially in the principal export markets for our products, including the PRC and other markets in the Asian region. See ‘‘Business — Legal Proceedings — Anti-dumping Cases’’. Further increases in, or new imposition of, anti-dumping duties, quotas or tariffs on our sales in the PRC or in other markets may have a material adverse effect on our exports to these regions in the future.

Our operations are concentrated at our Kaohsiung plant complex and any adverse developments affecting such complex will have a material adverse effect on our business.

Substantially all of our activities, including the production of substantially all of our steel products, are concentrated at our steelmaking facilities in Kaohsiung, Taiwan. Although we maintain insurance policies for our Kaohsiung facilities covering risk of destruction and damage to buildings, machinery and

equipment (including business interruption losses incurred after 15 calendar days of business interruption) that we consider to be adequate, adverse developments affecting the Kaohsiung facilities could have a material adverse effect on our business.

Due to the limited land adjacent to our Kaohsiung plant complex available for development, any further production capacity expansion of our steel business that requires physical expansion would need to be constructed at a new site, which may result in additional costs.

Our Kaohsiung plant complex, which currently occupies 552.6 hectares of land, is currently operating at or above its production capacity. For example, in 2002, our crude steel production capacity utilization rate was at 134%. We have in the past been able to increase our production capacity through improved production efficiency as a result of expansion and revamping projects. For example, beginning in April 2003 we increased our production capacity as a result of various expansion and revamping projects undertaken by us. This increase resulted in a lower capacity utilization rate of 114% for the six months ended June 30, 2003 compared to 133% for the six months ended June 30, 2002. However, there can be no assurance that we can continue to increase our production capacity without undertaking construction of new facilities and plants. Due to limited land adjacent to our Kaohsiung plant complex available for development, there are physical limitations on our ability to construct new facilities and plants at our Kaohsiung plant complex. As a result, any new steelmaking facilities would need to be constructed at a new site, which may result in additional costs. Other steelmakers in Taiwan are currently considering plans to expand production capacity. If we are not able to expand our production capacity, our results of operations and future competitiveness may be adversely affected.

We are subject to significant environmental laws and regulations which could adversely impact the availability of funds for capital expenditure or adversely affect our operations.

Taiwan steelmakers, including us, are subject to stringent environmental laws and regulations concerning, among other things, drinking water, noise, discharges to the air and water and the handling and disposal of solid wastes. In particular, our upstream processes produce a substantial amount of wastes. The amount of wastes discharged is under stringent regulation by ROC environmental regulatory authorities and the total amount of wastes discharged within a certain period of time may not exceed the applicable limitations. In 2000, 2001, 2002 and the six months ended June 30, 2003, we paid NT$5.0 million, NT$0.8 million, NT$1.2 million (US$34,672) and NT$0.5 million (US$14,447), respectively, in environmentalrelated fines. We have made, and will continue to make, substantial expenditures to comply with applicable environmental laws, regulations and permit requirements. We believe that we are currently in substantial compliance with all applicable environmental laws and regulations. However, in view of the possibility of unanticipated regulatory or other developments, particularly as environmental laws become more stringent, the amount and timing of future expenditures required to remain in compliance could vary substantially from their current levels and could adversely impact the availability of funds for capital expenditures and other purposes. In addition, the stringent environmental regulations may also restrict our ability to expand our production capacity, especially with respect to capacity expansion of upstream operations.

The steel industry is capital intensive and if we are not able to obtain the capital resources required to continue to modernize and upgrade our facilities, our results of operations and growth prospects may be adversely affected.

The production of steel is capital intensive. In order to be cost competitive and efficient, we need to modernize our production processes, plant and equipment, which require substantial on-going capital investments. Some of our competitors have recently announced plans to make substantial investments in new equipment and to upgrade existing production facilities. We expect to meet our capital expenditure plans through cash flow from operations, domestic debt offerings and long-term syndicated loans. Our ability to obtain additional capital will depend on:

. our future financial condition, results of operations and cash flows;

. general market conditions for financing activities by steelmakers;
. political and economic environments of the ROC and elsewhere in Asia; and
. interest rates.

If adequate funds are not available on satisfactory terms, our operations may be adversely affected.

We depend on a small number of customers for a substantial portion of our revenues.

As typical in our industry, we depend on a small group of customers for a substantial portion of our revenues. For each of 2000, 2001, 2002 and the six months ended June 30, 2003, approximately one third of our revenues was derived from sales to our top ten customers. For each of 2000, 2001, 2002 and the six months ended June 30, 2003, revenues derived from sales to our largest customer, Yieh Phui Enterprise Co., Ltd., accounted for approximately 10% of our revenues. We expect that we will continue to depend on a relatively small number of customers for a substantial portion of our revenues. This concentration of our customer base may affect our business materially and adversely due to:

. the loss or cancellation of business from any of these customers;
. significant changes in scheduled deliveries to any of these customers; or
. decreases in the prices of the products sold to any of these customers.

Our ability to maintain close and satisfactory relationships with our customers is important to the ongoing success and profitability of our business. We have not entered into any long-term supply contracts with any of our current ten largest customers. If any of our significant customers reduces, delays or cancels its orders, our business would be seriously harmed.

We depend on our key management and skilled personnel and could be affected by the loss of their services. Approximately a third of our employees will retire within the next fifteen years and our future competitiveness will depend on our ability to replace such employees through our recruitment process.

We depend on the continued service of our executive officers and skilled employees, particularly technical, engineering and research and development personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. In addition, our business is dependent on our ability to continue to recruit qualified skilled employees. Based on the current age profile of our employees, approximately a third of our employees will retire within the next fifteen years. Our mandatory retirement age ranges between 60 to 65, depending on the rank and work position of the employee. As a result of the large percentage of our employees retiring within the next fifteen years, our future competitiveness will depend on our ability to replace such employees through our recruitment process.

Fluctuations in exchange rates could adversely affect our business.

Changes in exchange rates may affect our results of operations stated in NT dollars. For each of 2000, 2001, 2002 and the six months ended June 30, 2003, approximately 40% of our cost of goods sold was denominated in foreign currencies, a substantial portion of which was denominated in U.S. dollars. This reflects the fact that prices for a substantial portion of raw materials we purchase are set by reference to the U.S. dollar. In addition, our export sales are denominated in foreign currencies and the prices we are able to obtain for our products in the domestic market are influenced by the NT dollar price of imports of competitive steel products. For 2000, 2001, 2002 and the six months ended June 30, 2003, approximately 24.3%, 23.3%, 24.7% and 26.6%, respectively, of our revenues was denominated in currencies other than the NT dollar, primarily U.S. dollars and the Japanese yen. Our NT dollar domestic sales prices are established by reference to prevailing U.S. dollar import market prices for steel products. Although the

effects of exchange rate fluctuations on our business are complex and variations in any direction have not in the past had a consistent impact on our results of operations, we believe that, as a general matter, appreciation of the NT dollar against the U.S. dollar would be more likely to have an overall adverse effect on our results of operations than would depreciation of the NT dollar against the U.S. dollar. Moreover, prolonged or substantial fluctuations in exchange rates between the U.S. dollar or other currencies and the NT dollar could adversely affect our operating margins and results of operations.

The ROC government effectively controls us and it may have interests contrary to the interests of our public shareholders.

The largest shareholder of our company is the ROC government, which owns Shares through the MOEA and the Bureau of Labor Insurance. After this Offering, the MOEA and the Bureau of Labor Insurance will hold 25.2% and 3.46%, respectively, of our outstanding capital stock. As a general matter, the ROC government’s ownership of our outstanding capital stock gives the ROC government the ability to elect certain directors on our Board of Directors and enables the ROC government to influence our management and policies and the approval of certain corporate matters that require the majority approval of shareholders, including the timing and distribution of dividends. See ‘‘Description of Capital Stock — Voting Rights’’ and ‘‘Description of the Global Depositary Shares — Voting Rights’’. Currently, the Chairman and five other members of our ten-member Board of Directors and two of our three Supervisors are representatives of the MOEA and one other Director is a representative of the Bureau of Labor Insurance. See ‘‘Management’’.

As long as the ROC government remains a significant shareholder of ours, we may at times be required to take certain actions in furtherance of the policies or objectives of the ROC government. It is possible that such actions may at times be inconsistent with the increase in the value of the Shares and the GDSs over the short term, and as a result, the price of the Shares and the GDSs may be adversely affected. For example, the ROC government may directly or indirectly recommend that we acquire the assets of, or a controlling interest in, a financially troubled government controlled company.

Further sales of our Shares by the ROC government or other major shareholders may adversely affect the price of the GDSs or Shares.

The MOEA has in the past, and may in the future, sell additional Shares. For example, the MOEA sold 18,000,000 GDSs in 1992 and 10,169,350 GDSs in 1997 in connection with the ROC government’s privatization of our company. In August 2003, the MOEA sold 336,803,000 Shares, which represented approximately 3.6% of our total issued and outstanding capital stock, through a public auction in Taiwan. In connection with this Offering, we and the MOEA have agreed with the Managers not to, subject to certain exceptions, offer, sell or otherwise dispose of any Shares or any other securities convertible or exchangeable for Shares, including GDSs, for a period commencing from the date of this Offering Circular to 180 days after the latest closing date of this Offering without the prior written consent of the Managers. See ‘‘Plan of Distribution’’.

Although the MOEA has publicly indicated its intention to further reduce its shareholding in our company in the future, we are not aware of the exact timing and amount of future sales by the MOEA. In addition, no assurance can be given that the MOEA, the Bureau of Labor Insurance or any other major shareholders will not dispose of our Shares in the future. No prediction can be made as to the effect, if any, that any future sales of GDSs or Shares, or the availability of GDSs or Shares for future sales, may have on the market prices of the GDSs or Shares prevailing from time to time. Sales of substantial amounts of GDSs or Shares, or the perception that such sales may occur, could adversely affect the prevailing market prices of the GDSs or Shares.

Risks Relating to the GDSs and the Shares

Restriction on the ability to deposit our Shares into our Rule 144A GDS or International GDS facilities and on the transfer of our Rule 144A GDSs and International GDSs may adversely affect the liquidity of the Rule 144A GDSs and the International GDSs.

Under the Deposit Agreements and subject to the terms therein, a holder of GDSs may request the Depositary to withdraw from the applicable depositary facility the Shares represented thereby and, on the holder’s behalf, to cause the Shares represented by the GDSs to be sold on the Taiwan Stock Exchange (in each case, upon surrender of the GDRs to the Depositary and upon payment of any applicable fees, expenses, taxes or governmental charges). In connection with any such withdrawal, the Rule 144A GDRs evidencing Rule 144A GDSs or the International GDRs evidencing International GDSs, as the case may be, will be cancelled. Unless additional Rule 144A GDSs or International GDSs are issued, the effect of such transactions will be to reduce the number of then outstanding Rule 144A GDSs or International GDSs and, if a significant number of such transactions are effected, to reduce the liquidity of the Rule 144A GDSs or International GDSs. In addition, there can be no assurance that the Depositary will be able to arrange for a sale of Shares in a timely manner or at a specified price, particularly during periods of illiquidity or volatility with respect to the Shares.

The ability to deposit Shares into our GDS facilities is restricted by ROC law. Under current ROC law, no person or entity, including holders of GDSs and us, may deposit the Shares into the GDS facilities without specific approval of the ROC Securities and Futures Commission unless:

. the Shares are issued as a stock dividend paid by us with respect to the Shares then deposited in the GDS facilities;
. the Shares are issued as a free distribution of Shares made by us with respect to the Shares then deposited in the GDS facilities;
. the Shares received by the holders of GDSs upon their exercising of preemptive rights in the event we increase our capital for cash;
. if permitted by the relevant Deposit Agreement, the Shares are purchased by any person, directly or through the Depositary, on the Taiwan Stock Exchange or the Shares are delivered by any person holding such Shares for deposit into our GDS facilities; or
. in connection with the exchange of Rule 144A GDSs by holders thereof for International GDSs and vice versa, subject to the terms of the Deposit Agreements.

The Depositary may issue Rule 144A GDSs or International GDSs against the deposit of those Shares referred to in the second last bullet point above only if the total number of GDSs outstanding following the deposit will not exceed the total number of GDSs previously approved by the ROC Securities and Futures Commission, plus any additional GDSs issued pursuant to the events described in the first three bullet points above. Otherwise the issuance of additional GDSs will only be permitted to the extent any previously issued GDSs have been cancelled. See ‘‘Description of the Global Depositary Shares’’.

The GDSs and the Shares underlying such GDSs are subject to restrictions on transfer.

The GDSs and the Shares underlying such GDSs are being offered pursuant to exemptions from registration under the Securities Act and, as a result, holders of such GDSs will only be able to resell their GDSs in transactions that have been registered under the Securities Act or in transactions not subject to or exempt from registration under the Securities Act. See ‘‘Transfer Restrictions’’.

You will not have the same voting rights as a holder of the Shares.

Holders of GDSs will not have the right to exercise voting rights with respect to the Shares represented by the GDSs except in accordance with the provisions of the Deposit Agreements.

With respect to all matters to be voted on by shareholders (other than the election of Directors or Supervisors), the following will apply. If the Depositary receives written instructions from holders of GDSs to vote in the same manner the Shares represented by more than 50% of the aggregate number of outstanding GDSs, the Depositary will notify and instruct our Chairman or such other person as he may designate, as the representative of the Depositary or its nominee, to vote the Shares underlying all of the GDSs in accordance with such instructions. If, for any reason, the Depositary does not receive instructions with respect to more than 50% of the aggregate number of outstanding GDSs as to any matter, the Depositary will authorize our Chairman or such other person as he may designate, as representative of the Depositary or its nominee, to vote the Shares underlying all of the GDSs in any manner he will determine in his sole discretion and in exercising such vote, he will not be required to take into account any interest of the holders of GDSs. In the event that the Depositary or its nominee is not required under ROC law to vote in the same manner the Shares underlying all of the GDSs in respect of a resolution (other than for the election of Directors and Supervisors) at a shareholders’ meeting, the voting arrangements described in the following paragraph applicable to the election of Directors and Supervisors will apply, all necessary changes having been made, to the voting of Shares underlying GDSs in respect of resolutions other than for the election of Directors and Supervisors.

With respect to the election of Directors and Supervisors, the following will apply. For the GDSs as to which the Depositary has received instructions from the holders of GDSs regarding the election of Directors and Supervisors, the Depositary will notify and instruct our Chairman or such other person as he may designate, as representative of the Depositary or its nominee, to vote the underlying Shares in the manner so instructed. For the GDSs as to which the Depositary has not received instructions from the holders of GDSs regarding the election of Directors and Supervisors, the Depositary will authorize our Chairman or such other person as he may designate, as representative of the Depositary or its nominee, to vote the underlying Shares in any manner to be determined in his sole discretion and in exercising such vote, he will not be required to take into account any interest of the holders of GDSs.

In the event that our Chairman is not a representative of the MOEA on our Board of Directors and regardless of the MOEA’s ownership interest in us, the Depositary will authorize, instead of the Chairman, a person designated by the MOEA for such purpose, to attend and to vote the underlying Shares at shareholders’ meetings. We and the Depositary have agreed that the voting arrangements will not be varied without the prior written consent of the MOEA, regardless of the MOEA’s ownership interest in our company. See ‘‘Description of the Global Depositary Shares — Voting Rights’’.

Your right to participate in rights offerings may be limited.

We may, from time to time, distribute rights to our shareholders, including rights to acquire additional securities of us. Under the Deposit Agreements, the Depositary will not offer rights to holders of the GDSs, unless both the rights and the securities to which such rights relate are either exempt from registration under the Securities Act or are registered under the Securities Act. However, we are under no obligation to file a registration statement with respect to any such rights or securities to which such rights relate or to endeavor to cause any such registration statement to be declared effective. Accordingly, holders of GDSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result. See ‘‘Description of the Global Depositary Shares — Dividends and Distributions — Distributions of Rights’’.

We are an ROC company and because the rights of shareholders under ROC law differ from those under the laws of some other jurisdictions, you may have more difficulties protecting your shareholder rights than shareholders in other jurisdictions.

Our corporate affairs are governed by our Articles of Incorporation and by the laws governing corporations incorporated in the ROC. The rights of shareholders and the responsibilities of management and the members of the board of directors under ROC law are different from those applicable to a corporation incorporated in other jurisdictions. Directors of ROC companies are required to conduct business faithfully and to act with the care of a good administrator. However, such duty of care as required of ROC companies’ directors may not be the same as the fiduciary duty of directors of non-ROC companies. Therefore, public shareholders of ROC companies may have more difficulty in protecting their interest in connection with actions taken by management or members of the board of directors than they would as public shareholders in some other jurisdictions.

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

Under current ROC law, if holders of GDSs (other than PRC persons who, under current ROC law, regulations and policy, are not permitted to register as our shareholders) wish to withdraw and hold underlying Shares from the applicable GDS facility, they will be required to appoint an eligible agent in the ROC to open a general securities trading account with a local brokerage firm and a bank account to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as such holder may designate upon such withdrawal. In addition, holders of GDSs will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without the opening of such accounts, the withdrawing holders would be unable to hold or subsequently sell the underlying Shares withdrawn from the GDS facility on the Taiwan Stock Exchange or otherwise. In addition, a holder of GDSs will be required to register with the Taiwan Stock Exchange and, if applicable, to obtain the approval from the Central Bank of China (if such holder is an offshore foreign institutional investor) prior to withdrawing Shares. These laws may change from time to time. There can be no assurance that current ROC law will remain in effect or that future changes in ROC law will not adversely affect the ability of such holders to withdraw the Shares from the GDS facilities.

Holders of GDSs withdrawing Shares represented by GDSs are also required under current ROC laws and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations. Evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the proceeds from the sale of the withdrawn Shares. There can be no assurance that such withdrawing holder will be able to appoint and obtain approval for such agent in a timely manner.

Changes in exchange controls that restrict your ability to convert proceeds from your ownership of the GDSs may have an adverse effect on the value of your investment.

The imposition of foreign exchange controls may undermine the ability of holders of GDSs to convert proceeds received from their ownership of GDSs. Under current ROC law, the Depositary, without obtaining further approval from the Central Bank of China or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including U.S. dollars, for the proceeds of the sale of Shares represented by GDSs or the proceeds of the sale of Shares received as stock dividends which have been deposited into the GDS facilities, or any cash dividends or distributions received from our Shares.

In addition, the Depositary may also convert into NT dollars incoming payments for purchases of Shares for deposit in the GDS facilities against the creation of additional GDSs. The Depositary may be required to obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription

rights for new Shares. Although it is expected that the Central Bank of China will grant this approval as a routine matter, there can be no assurance that in the future any approval will be obtained in a timely manner, or at all.

Under current ROC law, a holder of GDSs, after becoming a holder of Shares, without obtaining further approval from the Central Bank of China, may convert from NT dollars into other currencies, including U.S. dollars, for the proceeds or the sale of any underlying Shares withdrawn from the GDS facilities or the proceeds of the sale of Shares received as stock dividends which have been deposited into the depositary receipt facilities, and any cash dividends or distributions received from the Shares. However, such holder may be required to obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription right for new Shares. In addition, under the ROC Foreign Exchange Control Law, the Executive Yuan of the ROC government may, without prior notice but subject to subsequent legislative approval, impose foreign exchange controls for certain periods of time in the event of, among other things, a material change in international economic conditions. There can be no assurance that foreign exchange controls or other restrictions will not be introduced in the future.

Risks Relating to the Republic of China

Your investment may be adversely affected by political considerations relating to the ROC.

We are incorporated in the ROC, and substantially all of our assets are located in, and substantially all of our revenues are derived from, our operations in Taiwan. Taiwan has a unique international political status. The PRC asserts sovereignty over all of China (i.e., Taiwan, certain other islands and all of mainland China) and does not recognize the legitimacy of the ROC government. Although significant economic and cultural relations have been established in recent years between the ROC and the PRC, the PRC government has indicated that it may use military force to gain control over Taiwan in certain circumstances such as the declaration of independence by Taiwan. Relations between the ROC and the PRC have been strained in recent years. Certain past developments in relations between the ROC and the PRC have occasionally adversely affected the market value of Taiwanese companies and the value of the Taiwan Stock Exchange Weighted Stock Index (the ‘‘Taiwan Stock Exchange Index’’) and the GreTai Securities Market (formerly known as the ROC Over-The-Counter Securities Exchange) Index. Relations between the ROC and the PRC and other factors affecting the political or economic conditions of Taiwan could also affect our business and the market price and the liquidity of the Shares and the GDSs.

In 2002 and the six months ended June 30, 2003, exports to Hong Kong (including the PRC) accounted for 36.7% and 34.8% of our total export volume of steel products. A substantial majority of our sales to customers in the PRC are to affiliates of Taiwan businesses operating in the PRC. In addition, a significant portion of our products sold in the ROC market is used by our customers in the manufacture of downstream steel products that are in turn exported to the PRC. Our results of operations and future profitability would be adversely affected if the political situation between the ROC and the PRC were to deteriorate or adversely affect the growth of the operations of our customers in the PRC or otherwise adversely affect our ability or our customers’ ability to export our respective products to the PRC. In addition, as we are a former state-owned enterprise, and the ROC government, through the ownership of our Shares held by the MOEA, will hold 25.2% of our Shares after this Offering. As a result, we may be limited in our ability to make investments in, or to establish a joint venture with, PRC steelmakers.

Due to our location in Taiwan, we and some of our customers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.

Taiwan is particularly vulnerable to earthquakes because most of Taiwan is located in a collision zone between the Philippine Sea plate and the Eurasian plate. Our production facilities as well as many of our customers are located in Taiwan. As a result, a major earthquake in Taiwan could result in damage to our production facilities or those of our customers and our customers may cancel or delay their orders due to damages to their facilities or other interruptions to their operations. In addition, an earthquake could cause

power outages, which may indirectly disrupt our operations or those of our customers. A major earthquake in Taiwan could therefore adversely affect our results of operations and financial condition and the market prices of the Shares and the GDSs. For instance, on March 31, 2002, a major earthquake registering 6.8 on the Richter Scale struck northeast Taiwan, with an epicenter approximately 44.3 kilometers east of Hualien County, followed by another earthquake registering 6.2 on the Richter Scale on May 15, 2002 in northeast Taiwan, with an epicenter approximately 9.3 kilometers northeast of Suao in Ilan County. On September 21, 1999, a major earthquake registering 7.3 on the Richter Scale struck central Taiwan, with an epicenter approximately 160 kilometers south of Taipei. This was followed by another strong earthquake on October 22, 1999 near the city of Chiayi, about 300 kilometers south of Taipei, registering 6.4 on the Richter Scale and a third earthquake on November 2, 1999 in Taitung County, which registered 6.9 on the Richter Scale. Although we did not experience any structural damage to our facilities as a result of these earthquakes, we cannot guarantee that future earthquakes will not cause damage to our facilities or property or cause significant business interruptions. Therefore, any future earthquakes may have an adverse effect on our business and results of operation.

Taiwan is also susceptible to typhoons, which may cause damage and business interruption to companies with facilities located in Taiwan. In 2001, Taiwan experienced severe damage from typhoons, including a typhoon on September 16 that caused over 100 deaths, severe flooding and extensive damage to property and businesses. Although we have not experienced any damage or business interruption due to typhoons in the past, there can be no assurance that we will not suffer damage or business interruption due to typhoons in the future, or that our results of operations or financial condition will not be adversely affected as a result. For more information on our insurance coverage against losses and damages (including losses from business interruption) resulting from natural perils, including typhoons, floods and earthquakes, see ‘‘Business — Insurance’’.

In May 2002, Taiwan experienced a severe drought. Our manufacturing processes require a substantial amount of water. Although a substantial portion of our water supply is from recycled water, if Taiwan were to encounter another severe drought and we or the authorities were unable to obtain water from alternative sources in sufficient quantity, we may be required to temporarily shut down or substantially reduce our operations which would seriously affect our operations. In addition, shortages or suspensions of power supplies have occasionally occurred and have disrupted our operations. The occurrence of any of these events in the future could have a material adverse effect on our business.

The outbreak of severe acute respiratory syndrome (‘‘SARS’’) in the first half of 2003 may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations.

Beginning March 2003, China, Hong Kong, Taiwan, Singapore, Vietnam and certain other countries encountered an outbreak of SARS, a highly contagious form of atypical pneumonia. To date, the SARS outbreak that occurred in the first half of this year has had no significant impact on our production operations and those of our suppliers or customers. There is no guarantee that the SARS or SARS-like outbreaks will not occur again in the future and no guarantee that any future SARS or SARS-like outbreaks, or the measures taken by the governments of the ROC, Hong Kong, PRC or other countries against SARS or SARS-like outbreaks, will not seriously interrupt our production operations or those of our suppliers and customers, which may have a material adverse effect on our results of operations.

Each of the governments of the ROC, Hong Kong and Singapore revised downward its gross domestic product growth forecasts for 2003 due to SARS. As a result, the economic fallout of the SARS outbreak resulted in a temporary decrease in the demand for our products immediately following the outbreak and may in the future result in further decreases in such demand, which would have a material adverse effect on our results of operations.

The value of your investment 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, Europe and certain other countries. The Shares are traded on the Taiwan Stock Exchange. As of September 30, 2003, the aggregate market capitalization of the Taiwan Stock Exchange was NT$11.5 trillion. The Taiwan Stock Exchange has had 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 Taiwan Stock Exchange. The Taiwan Stock Exchange Index peaked at 10,202.2 in February 2000 and subsequently fell to a low of 3,446.3 in October 2001. As of October 16, 2003, the Taiwan Stock Exchange Index closed at 6,035.7. Such market size and volatility could adversely affect the market price and liquidity of the securities of ROC companies, including the Shares underlying the GDSs, in both domestic and international markets. See ‘‘Market Price Information’’ and ‘‘Appendix A — The Securities Market of the ROC’’.

In response to price decreases and volatility in the securities markets in Taiwan, the ROC government formed The National Financial Stabilization Fund to support these markets through open market purchases of shares of ROC companies from time to time. The National Financial Stabilization Fund may only intervene in the securities market in the event of price volatility resulting from material domestic and foreign events and substantial movements of international capital, which may disrupt the ROC capital markets or threaten the stability of Taiwan. The details of the transactions of The National Financial Stabilization Fund have not been made public. Moreover, the ROC government’s Labor Insurance Fund as well as other funds associated with the government have in the past purchased, and may from time to time purchase, shares of Taiwan companies listed on the Taiwan Stock Exchange or other markets. As a result of these activities, the price of common shares of Taiwan companies may have been and may currently be higher than the prices that might otherwise prevail in the open market. Market intervention by government entities, or the perception that the government could intervene, may result in sudden movements in the market prices of the securities of Taiwan companies, which may affect the market price and liquidity of our Shares and the GDSs.

SELLING SHAREHOLDER

The MOEA is selling up to an aggregate of 52,400,000 GDSs in this Offering. Immediately prior to this Offering, the MOEA owned approximately 36.2% of our outstanding capital stock. Immediately after this Offering, the MOEA will own approximately 25.2% of our outstanding capital stock.

The ROC government’s rights as a shareholder of our company are exercised principally by the MOEA. As a general matter, the ROC government’s ownership of our outstanding capital stock gives the ROC government the ability to elect certain directors on our Board of Directors and enables the ROC government to influence our management and policies and the approval of certain corporate matters which require the majority approval of shareholders, including the timing and distribution of dividends. See ‘‘Description of Capital Stock — Voting Rights’’. Our Chairman and five other members of our ten-member Board of Directors and two of the three Supervisors are currently representatives of the MOEA. See ‘‘Management’’.

We became a non-state-owned entity in April 1995 through a domestic offering by the ROC government which reduced the ROC government’s ownership to less than 50% of our outstanding capital stock.

MARKET PRICE INFORMATION

Our Shares have been listed on the Taiwan Stock Exchange since December 1974. The MOEA, as part of an overall privatization program undertaken by the ROC government, offered to international investors 10,500,000 International GDSs and 7,500,000 Rule 144A GDSs, each representing 20 Shares, in May 1992 and 10,037,550 International GDSs and 131,800 Rule 144A GDSs, each representing 20 Shares, in February 1997. We have been informed by Citibank, N.A. that as of October 15, 2003 there were 265,003 Rule 144A GDSs and 5,471,699 International GDSs outstanding. The table below sets forth, for the periods indicated, the high and low trading prices of the Shares on the Taiwan Stock Exchange, the high and low trading prices of the International GDSs as quoted on the IOB of the London Stock Exchange and the high and low closing values of the Taiwan Stock Exchange Index.

2000 . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . 2003 (through October 16) . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . July. . . . . . . . . . . . . . . . . . . . . . August. . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . Fourth Quarter (through October 16) .	Share	Price Low NT$ 16.4 11.1 17.4 15.5 11.1 11.4 13.2 13.2 14.3 14.8 14.8 18.9 18.9 19.2 19.2 19.2 20.7 23.3 23.3 24.0 25.9 25.7	International GDS Price(1) High Low US$ US$ 18.8 10.0 12.6 6.3 12.6 10.7 11.6 9.0 9.4 6.3 8.6 6.3 11.3 7.5 10.3 7.5 10.5 8.4 10.5 8.3 11.3 8.3 16.4 10.8 13.5 10.8 13.7 10.9 12.3 10.9 11.7 10.9 13.7 11.7 16.4 13.4 15.3 13.4 16.0 13.9 16.4 15.1 16.2 15.0	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High NT$ 24.6 20.4 20.4 19.1 16.1 15.1 19.9 18.2 17.8 17.5 19.9 28.3 23.8 23.8 21.4 20.2 23.8 28.3 26.8 28.3 27.7 27.9		High US$ 18.8 12.6 12.6 11.6 9.4 8.6 11.3 10.3 10.5 10.5 11.3 16.4 13.5 13.7 12.3 11.7 13.7 16.4 15.3 16.0 16.4 16.2	High 10,202.2 6,104.2 6,104.2 5,608.2 4,886.2 5,551.2 6,462.3 6,242.3 6,462.3 5,416.3 4,823.7 6,035.7 5,078.8 5,048.9 4,658.3 4,555.9 5,048.9 5,757.9 5,451.8 5,686.9 5,757.9 6,035.7	Low
					4,614.6 3,446.3 4,854.8 4,768.6 3,493.8 3,446.3 3,850.0 5,488.3 5,071.8 4,186.0 3,850.0 4,139.5 4,260.5 4,139.5 4,139.5 4,187.8 4,678.1 5,017.8 5,017.8 5,214.6 5,611.4 5,581.7

Sources: Taiwan Stock Exchange Statistical Data; Bloomberg Financial Markets.

(1) Each International GDS represents 20 Shares.

There are currently daily price limits in trading on the Taiwan Stock Exchange. See ‘‘Appendix A — The Securities Market of the ROC’’.

DIVIDENDS

The table below sets forth the cash and stock dividends per Share paid by us with respect to the last four financial years to holders of Shares and the aggregate number of Shares outstanding after stock dividends were paid.

Year Ended December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cash Dividend NT$1.30 1.50 0.80 1.40	Stock Dividend(1) NT$0.20 0.30 0.20 0.15	Aggregate Number of Shares Outstanding(2)
			8,796,139,583 9,108,936,839 9,315,760,933 9,500,085,763

(1) The number of Shares the holders of Shares receive in a stock dividend equals the NT dollar value per Share of the declared dividend (shown in the table above) multiplied by the number of Shares owned divided by the par value of NT$10 per Share. Fractions of Shares are not issued to holders of Shares and are paid in cash. The NT dollar amounts set forth in this column in respect of stock dividends reflect the per Share par value, based on a par value of NT$10 per Share, of the dividend Shares on the dates distributed.
(2) The numbers set forth in this column denote the aggregate number of Shares outstanding after stock dividends were paid.

Dividends paid on capital stock, including the Shares, are subject to approval by our shareholders at a general meeting of shareholders. See ‘‘Description of Capital Stock’’. We historically have paid, after the end of the applicable financial year, annual cash dividends approved at a general meeting of shareholders held in the first half of the succeeding financial year. For each of the financial years ended December 31, 2000, 2001 and 2002, cash dividend paid by us as a percentage of its net income was 70.8%, 97.5% and 75.3%, respectively. Future dividends, if any, declared by us, will depend upon our future earnings, cash flow, financial condition and other factors.

Subject to the terms and conditions set forth in the Rule 144A Deposit Agreement and the International Deposit Agreement, holders of Rule 144A GDSs and International GDSs will be entitled to receive dividends payable in respect of Shares represented by such Rule 144A GDSs and International GDSs. Cash dividends will be paid to the Depositary in NT dollars and, except as otherwise described under ‘‘Description of the Global Depositary Shares’’, converted by the Depositary into U.S. dollars, for payment to holders of Rule 144A GDSs and International GDSs, respectively. Stock dividends will be distributed to the Depositary and, except as otherwise described under ‘‘Description of the Global Depositary Shares’’, will be distributed by the Depositary in the form of additional GDSs to holders of Rule 144A GDSs and International GDSs, respectively.

For information relating to ROC withholding taxes payable on dividends, see ‘‘Taxation — ROC Taxation — Dividends’’. For information relating to ROC foreign exchange approvals required for the conversion of the dividends on Shares from NT dollars into U.S. dollars and the payment thereof to holders of GDSs, see ‘‘Appendix B — Foreign Investment and Exchange Controls in the ROC’’.

EXCHANGE RATES

Fluctuations in the exchange rate between NT dollars and U.S. dollars will affect the U.S. dollar equivalent of the NT dollar price of the Shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of the GDSs. Such fluctuations will also affect the U.S. dollar conversion of cash dividends, which will be paid in NT dollars, on, and the NT dollars proceeds received from any sale of, Shares represented by GDSs. In addition, fluctuations in the exchange rate between NT dollars and U.S. dollars may also affect our results of operations since a substantial portion of our costs of goods sold is denominated in U.S. dollars and our NT dollar domestic sales prices are also established by reference to prevailing U.S. dollar import market prices for steel products.

The following table sets forth the average and period-end noon buying rate between NT dollars and U.S. dollars (in NT dollars per U.S. dollar) for the periods indicated:

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 (through October 16) . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . July. . . . . . . . . . . . . . . . . . . . . . . . . . . . . August. . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . October (through October 16) . . . . . . . . . . .	NT Dollars per U.S. Dollar Noon Buying Rate	NT Dollars per U.S. Dollar Noon Buying Rate	NT Dollars per U.S. Dollar Noon Buying Rate	NT Dollars per U.S. Dollar Noon Buying Rate
	Average(1) 31.37 33.91 33.53 34.44 34.82 34.70 34.64 34.40 34.32 34.00 33.79	High 33.25 35.13 35.16 34.98 34.98 34.85 34.70 34.58 34.47 34.15 33.90	Low 30.35 32.23 32.85 33.72 34.79 34.60 34.52 34.25 34.12 33.72 33.72	Period-End
				33.17 35.00 34.70 33.82 34.85 34.71 34.61 34.41 34.12 33.78 33.82

Sources: Federal Reserve Statistical Release H. 10 (512), 2000–2003, Board of Governors of the Federal Reserve System.

(1) Annual averages are calculated from month-end rates.

On October 16, 2003, the noon buying rate was NT$33.82 to US$1.00.

For information relating to ROC foreign exchange approvals required by the Depositary under certain limited circumstances, see ‘‘Appendix B — Foreign Investment and Exchange Controls in the ROC’’.

CAPITALIZATION

The following table sets forth our unconsolidated short-term and long-term debt and total capitalization as of June 30, 2003. The MOEA will receive all of the proceeds from the sale of the GDSs in this Offering. We will not receive any proceeds from this Offering. This table should be read in conjunction with our audited unconsolidated financial statements as of and for the six months ended June 30, 2002 and 2003, including the notes thereto, included elsewhere in this Offering Circular.

Except as otherwise described in the Offering Circular, there has been no material change in our unconsolidated short-term and long-term debt or capitalization since June 30, 2003.

Short-term Debt(1) Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ Equity Capital stock, 10,600,000,000 shares authorized: Preferred stock, par value NT$10 per share, 47,762,000 shares outstanding(1) . . . . . . . Common stock, par value NT$10 per share, 9,267,998,933 shares outstanding . . . . . . . Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capitalization(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	As of June 30, 2003	As of June 30, 2003
	(in millions) NT$ 1,213.0 US$ 35.0 11,051.7 319.3 NT$ 12,264.7 US$ 354.3 NT$ 17,250.0 US$ 498.4 477.6 13.8 92,680.0 2,677.8 413.9 11.9 50,003.3 1,444.8 NT$141,807.0 US$4,097.3 NT$159,057.0 US$4,595.7
		US$ 354.3
		US$ 498.4
		13.8 2,677.8 11.9 1,444.8
		US$4,097.3
		US$4,595.7

(1) Our Preferred Shares are convertible, on a one-for-one basis, into Shares. See ‘‘Description of Capital Stock — Redemption and Conversion of Preferred Shares’’.

(2) Includes long-term debt (less current portion) and total shareholders’ equity as of June 30, 2003.

USE OF PROCEEDS

The MOEA will receive all of the proceeds from the sale of the GDSs in this Offering. We will not receive any proceeds from this Offering.

SELECTED FINANCIAL INFORMATION AND OPERATING DATA

The selected income statement data for the years ended December 31, 2000, 2001 and 2002 (other than the dividends per Share data) and the selected balance sheet data as of December 31, 2000, 2001 and 2002 set forth below are derived from our audited consolidated financial statements included herein and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Such financial statements have been audited by Deloitte & Touche, independent auditor. T N Soong & Co and Deloitte & Touche (Taiwan) established Deloitte & Touche effective June 1, 2003. The selected income statement data for the six months ended June 30, 2002 and 2003, and the selected balance sheet data as of June 30, 2002 and 2003 set forth below are derived from our audited unconsolidated financial statements included elsewhere herein and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Such financial statements have been audited by Deloitte & Touche. Results of the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full financial year. Our financial statements have been prepared in accordance with ROC GAAP. ROC GAAP differs in certain significant respects from U.S. GAAP. See ‘‘Summary of Principal Differences Between ROC GAAP and U.S. GAAP’’.

Income Statement Data Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . Net non-operating income (loss) . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per Share (basic) . . . . . . . . . . . . . . . . . Cash dividends per Share(1) . . . . . . . . . . . . . . . . Stock dividends per Share(1) . . . . . . . . . . . . . . . . Dividend payout ratio (basic)(2). . . . . . . . . . . . . . Dividend payout ratio (diluted)(3) . . . . . . . . . . . . Balance Sheet Data Cash and cash equivalents . . . . . . . . . . . . . . . . . Working capital(4) . . . . . . . . . . . . . . . . . . . . . . . Net properties . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term bank loans and overdrafts . . . . . . . . . . Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . Net debt to equity ratio(5). . . . . . . . . . . . . . . . . .	Year Ended and a	Year Ended and a	s of December 31,	s of December 31,	Six Months Ended and as of June 30,	Six Months Ended and as of June 30,	Six Months Ended and as of June 30,
	2000	2001	2002	2002	2002	2003	2003

Unconsolidated Operating Data(6) Crude steel production capacity (million tonnes) . . . . . . . . . . . . . . . . . . Crude steel production (million tonnes) . . . . . . . . . . . . . . . . . . . . . . . . Crude steel production capacity utilization rate (%) . . . . . . . . . . . . . . . . Number of employees (at end of period) . . . . . . . . . . . . . . . . . . . . . . . Crude steel per employee (tonnes)(8) . . . . . . . . . . . . . . . . . . . . . . . . . . Total employee labor costs (NT dollars in billions) . . . . . . . . . . . . . . . . Employee man hours per tonne of crude steel . . . . . . . . . . . . . . . . . . . . Product sales (thousand tonnes). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Months Ended June 30, 2002 2003 4.03 4.78 5.38 5.43 133 114(7) 8,748 8,671 1,227(9) 1,249(9) 6.62 8.19 1.69 1.67 5,472.6 5,157.0
	2000	2001	2002	2002
	8.05 10.25 127 8,876 1,151 13.56 1.91 9,715.5	8.05 10.61 132 8,796 1,199 12.76 1.74 9,689.1	8.05 10.82 134 8,711 1,237 13.51 1.70 10,536.6

(1) Represents dividends attributable to such financial year. Such dividends are typically paid in the succeeding financial year.
(2) ‘‘Dividend payout ratio (basic)’’ means the sum of cash dividend and stock dividend per Share for the specified year divided by the basic earnings per Share for such year.
(3) ‘‘Dividend payout ratio (diluted)’’ means the sum of cash dividend and stock dividend per Share for the specified year divided by the fully diluted earnings per Share for such year.
(4) ‘‘Working capital’’ means current assets less current liabilities.
(5) ‘‘Net debt to equity ratio’’ means the excess of all of our interest bearing debts (including commercial paper, bonds, debts, loans and overdrafts) over our cash and cash equivalents divided by total shareholders’ equity.
(6) Excludes operating data of C. S. Aluminium Corporation, our consolidated subsidiary.
(7) The decrease in the crude steel production capacity utilization rate in the six months ended June 30, 2003 was primarily due to improved production efficiency as a result of expansion and revamping projects undertaken by us. Such expansion and revamping projects resulted in an increase in our production capacity commencing in April 2003. As a result, our capacity utilization rate for the six months ended June 30, 2003 was lower compared to the capacity utilization rate for the six months ended June 30, 2002. Our current production capacity for crude steel production is 9.55 million tonnes per year as compared to 8.05 million tonnes per year for 2002.
(8) ‘‘Crude steel per employee’’ is determined on the basis of the average number of employees for the periods indicated. The average number of our employees was 8,904, 8,848 and 8,747 for the years ended December 31, 2000, 2001 and 2002, respectively, and 8,769 and 8,693 for the six months ended June 30, 2002 and 2003, respectively.
(9) Calculated by annualizing the crude steel production for the half year divided by the number of employees.

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

The following discussion should be read in conjunction with ‘‘Selected Financial Information and Operating Data’’ and our audited consolidated financial statements as of and for the years ended December 31, 2000, 2001 and 2002, and our audited unconsolidated financial statements as of and for the six months ended June 30, 2002 and 2003, including the notes thereto, included elsewhere in this Offering Circular.

Overview

We derive substantially all of our revenues and income from sales of steel products. We manufacture and sell a broad range of high quality semi-finished and finished steel products, including hot and cold rolled sheets and coils, wire rods, plates, bars, slabs, blooms, billets and pig iron. We expect that our profitability will continue to be affected by the following principal factors:

. world and regional prices for finished steel products, which will in turn depend upon overall worldwide and regional supply and demand for such products;
. prices of raw materials;
. labor costs;
. changes in depreciation expense;
. competition in the ROC and elsewhere; and
. the prevailing exchange rate of the NT dollar.

Cyclicality of the Steel Industry and Steel Prices

Our results of operations are directly affected by market prices for our steel products in the Asian region. Prices for such products are influenced by a number of factors, the most significant of which is supply and demand for steel. In 2000 and 2001, average realized sales prices for our steel products were greatly depressed, reflecting the economic slow down in the United States and the Asian region and the decreased demand relative to steel production. Commencing February 2002, there has been a rebound in the prices of steel products in the Asian region, primarily due to the effect of decreased production volumes by the major steel producing countries, the increase in demand of steel products by customers in the PRC and Taiwan due to the accelerated construction of infrastructure projects in these locations, and the increased demand for our products due to the construction of certain major projects and increased demand for export of various end use products that require steel in production.

We typically announce the price changes for our finished steel products for each quarter five to six weeks before such quarter commences. As of September 30, 2003, the prices for our finished steel products had increased for each quarter since April 1, 2002.

The average realized unit sales prices for our steel products over the periods since 2000 have reflected the trends in the prevailing prices for steel products in the Asian region generally, as well as the increasing portion of our revenues represented by higher-priced products, including cold rolled related products such as electrical sheet and electro-galvanized products. The table below sets forth the average realized unit sales

prices for our finished steel products, by principal product category and for all products, for the periods indicated. Such prices are based on the weighted averages, by sales volumes, of our domestic and export unit sales prices for finished steel products.

Hot rolled products Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . . Cold rolled products Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . . Plate Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . . Bar Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . . Wire rod Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . . Average finished steel products Domestic . . . . . . . . . . . . . . . . . . . . . . . . Export . . . . . . . . . . . . . . . . . . . . . . . . . .	Year Ended December 31, Six Months Ended June 30, 2000 2001 2002 2002 2003 (NT dollars per tonne) 8,685 7,210 8,364 7,256 10,813 8,087 6,265 7,378 6,384 10,031 12,446 11,082 11,782 10,699 14,498 11,972 10,489 11,071 9,833 15,130 9,556 9,259 9,743 9,284 11,061 8,574 7,721 8,126 7,624 9,779 10,950 9,891 10,275 9,668 11,761 9,495 9,194 9,144 8,674 11,132 10,866 9,718 10,078 9,546 11,570 9,705 9,280 9,186 8,594 11,289 10,123 8,796 9,670 8,754 11,857 9,546 8,019 8,901 7,884 11,976	Six Months Ended June 30,	Six Months Ended June 30,
	2000 8,685 8,087 12,446 11,972 9,556 8,574 10,950 9,495 10,866 9,705 10,123 9,546		2003
			10,813 10,031 14,498 15,130 11,061 9,779 11,761 11,132 11,570 11,289 11,857 11,976

The substantial majority of our revenues are derived from the sale of hot rolled steel coil and sheet products, cold rolled steel coil and sheet products, steel plate products, steel wire rod products and steel bar products. For 2000, 2001, 2002 and the six months ended June 30, 2003, revenues from the sale of such products to customers in the ROC were NT$69,205.8 million, NT$57,263.0 million, NT$65,375.6 million and NT$43,231.8 million (US$1,249.1 million), respectively, which constituted 71.9%, 70.2%, 67.5% and 71.0%, respectively, of our revenues from sales of steel products for such period. See ‘‘Business — Products’’. For 2002, hot rolled steel coil and sheet products, cold rolled steel coil and sheet products, steel plate products, steel wire rod products and steel bar products accounted for 36.6%, 29.9%, 10.8%, 12.3% and 5.5%, respectively, of our revenues from sales of steel products.

We also produce and sell semi-finished steel products. See ‘‘Business — Products’’.

Production Efficiency and Capacity Utilization

We have operated in recent years at levels in excess of full capacity for our production of crude steel. Because of the high percentage of fixed costs characteristic of steelmakers, sustained high levels of plant utilization have had a favorable effect on our cost efficiency.

The table below sets forth, for the periods indicated, certain information relating to our steel production efficiency.

Crude steel production capacity (million tonnes). . . . . . . . . . . . . . . . . . . . . . . . . . Crude steel production (million tonnes) . . . . . Crude steel production capacity utilization rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of employees (at end of period) . . . . Crude steel per employee (tonnes)(2) . . . . . . . Total employee labor costs (NT dollars in billions) . . . . . . . . . . . . . . . . . . . . . . . . . Employee man hours per tonne of crude steel .	Year Ended December 31, 2000 2001 2002 8.05 8.05 8.05 10.25 10.61 10.82 127 132 134 8,876 8,796 8,711 1,151 1,199 1,237 13.56 12.76 13.51 1.91 1.74 1.70	Year Ended December 31, 2000 2001 2002 8.05 8.05 8.05 10.25 10.61 10.82 127 132 134 8,876 8,796 8,711 1,151 1,199 1,237 13.56 12.76 13.51 1.91 1.74 1.70	Six Months Ended June 30, 2002 2003 4.03 4.78 5.38 5.43 133 114(1) 8,748 8,671 1,227(3) 1,249(3) 6.62 8.19 1.69 1.67
	2000 8.05 10.25 127 8,876 1,151 13.56 1.91	2001 8.05 10.61 132 8,796 1,199 12.76 1.74	2002 4.03 5.38 133 8,748 1,227(3) 6.62 1.69

(1) The decrease in the crude steel production capacity utilization rate in the six months ended June 30, 2003 was primarily due to improved production efficiency as a result of expansion and revamping projects undertaken by us. Such expansion and revamping projects resulted in an increase in our production capacity commencing in April 2003. As a result, our capacity utilization rate for the six months ended June 30, 2003 was lower compared to the capacity utilization rate for the six months ended June 30, 2002. Our current production capacity for crude steel production is 9.55 million tonnes per year as compared to 8.05 million tonnes per year for 2002.
(2) ‘‘Crude steel per employee’’ is determined on the basis of the average number of employees for the periods indicated.
(3) Calculated by annualizing the crude steel production for the half year divided by the number of employees.

Import Restrictions

Tariffs in the ROC are applicable to imports of steel products. The average of the tariff rates applicable to imports of finished steel products of the types produced by us was 7.9% for each of the three years ended December 31, 2002. The current ROC import tariff for finished steel products is 4%. As a result of the entry of the ROC to the WTO, ROC import tariffs of finished steel products will be reduced to zero with effect on January 1, 2004. Such tariff elimination may make imported finished steel products more cost competitive in our domestic market, including products from Korean and Japanese steelmakers.

In August 2003, the ROC government lifted the ban on importing steel products from the PRC and permitted the import into Taiwan of 173 items of steel products, including hot rolled steel and cold rolled steel products. As a result, we may in the future be subject to further competition from PRC steelmakers in our domestic market.

Costs and Operating Expenses

The major components of our costs and operating expenses are raw materials and consumables, including freight costs for our raw materials, most of which are imported, labor and depreciation. The principal raw materials used by us in ironmaking and steelmaking are iron ore, coal and limestone. Iron ore is imported principally from Australia and Brazil and coal is imported principally from Australia and Canada, typically pursuant to long-term contracts that provide for annual price adjustments. We purchase limestone principally from domestic sources and Japan based on long-term contracts. Changes in our costs of raw materials and consumables principally reflect changes in the commodity prices of raw materials and consumables used in steel production. Changes in our labor costs as a percentage of total revenues in recent periods principally reflected changes in the average number of production and administration employees employed in the steel business and changes in amounts of bonuses paid to our employees reflecting changes in profitability.

The table below sets forth, for the periods indicated, our total costs of goods sold and total costs and operating expenses, as a percentage of total revenues, and our gross margin and operating margin.

Total costs of goods sold . . . . . . . . . . . . . . . Total costs and operating expenses . . . . . . . . Gross margin . . . . . . . . . . . . . . . . . . . . . . . Operating margin . . . . . . . . . . . . . . . . . . . .	Year Ended December 31, Six Months Ended June 30, 2000 2001 2002 2002 2003 (consolidated) (unconsolidated) (% of total revenues) 75.2% 86.4% 76.0% 83.7% 64.5% 79.7 91.4 80.3 88.4 68.6 24.8 13.6 24.0 16.3 35.5 20.3 8.6 19.7 11.6 31.4

Consolidation

We are required to prepare consolidated financial statements on an annual basis. Under ROC GAAP, in preparing consolidated financial statements, all subsidiaries that are 50% or more owned (directly or indirectly through its 50% or more owned subsidiaries) by the parent are consolidated unless a subsidiary’s total assets or operating revenues do not exceed 10% of the respective amounts of the parent on an unconsolidated basis and the aggregate of all such subsidiaries do not exceed 30% of those of the parent. For more information relating to consolidation principles under ROC GAAP, see Note 2 to the Consolidated Financial Statements.

In accordance with ROC GAAP, in each of 2001 and 2002, we were required to consolidate C.S. Aluminium Corporation (‘‘CSAC’’) in preparing our consolidated financial statements. Although we were not required to prepare consolidated financial statements in 2000, we have, for comparative purposes, prepared consolidated financial statements in connection with this Offering. Our consolidated revenues for 2000, 2001 and 2002 were NT$107,679.6 million, NT$92,687.8 million and NT$108,389.1 million (US$3,131.7 million), respectively, as compared to unconsolidated revenues of NT$100,634.8 million, NT$85,101.3 million and NT$99,939.8 million (US$2,887.6 million), respectively. Our consolidated operating income for 2000, 2001 and 2002 were NT$21,830.9 million, NT$7,927.4 million and NT$21,341.7 million (US$616.6 million), respectively, as compared to unconsolidated operating income of NT$21,221.3 million, NT$7,393.5 million and NT$20,373.6 million (US$588.7 million), respectively. Our net income for 2000, 2001 and 2002 was not affected by the consolidation of CSAC since the net income of CSAC was recorded as investment income using equity method accounting in our unconsolidated financial statements.

Other than CSAC, we currently are not required under ROC GAAP to consolidate our subsidiaries because none of our subsidiaries (other than CSAC) singly or in the aggregate meet the consolidation requirements under ROC GAAP.

As we are only required to prepare consolidated financial statements on an annual basis, the audited financial statements for the six months ended June 30, 2002 and 2003 included in this Offering Circular have been prepared and presented on an unconsolidated basis under ROC GAAP and do not consolidate our subsidiaries, including CSAC. Instead, the unconsolidated financial statements account for our investments in our subsidiaries, including CSAC, by using equity method accounting, which differs materially from consolidation. Other differences resulting from nonconsolidation include: (1) intercompany sales between our company and our subsidiaries are not eliminated; and (2) individual assets, liabilities, revenues and expenses of our subsidiaries are not included in the unconsolidated financial statements.

Because we account for subsidiaries in our unconsolidated financial statements based on the equity method, our audited unconsolidated net assets and net income would generally be the same as in our consolidated financial statements. Other amounts in other line items may be materially different in our unconsolidated financial statements from our consolidated financial statements. In addition, unconsolidated results of operations for the six months ended June 30, 2003 may not be indicative of our unconsolidated or consolidated results of operations for the full year ended December 31, 2003.

Critical Accounting Policies and Estimates

Preparation of our consolidated and unconsolidated financial statements requires us to make estimates and judgments in applying our critical accounting policies which have a significant impact on the results we report in our consolidated and unconsolidated financial statements. We continually evaluate these estimates, including those related to revenue recognition, properties and leased assets, inventories, long-term investments and short-term investments. We base our estimates on historical experience and other assumptions which we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. We have identified below the accounting policies that are the most critical to our consolidated and unconsolidated financial statements.

Revenue Recognition

We recognize revenues when titles to our products and risks of ownership are transferred to the customers. With respect to domestic sales, title transfer occurs when the products leave the premises of our Kaohsiung plant complex for delivery to customers. With respect to exports, title transfer occurs when the products are loaded onto the shipping vessels.

We record sales by the agreed upon price, net of trade discounts and sales discounts, between us and the customers.

We do not discount the receivables amount to calculate the present value of the receivables for the imputed interest rate for the reasons below:

. the receivables for the goods sold are due within one year, resulting in immaterial differences between receivable amounts and their discounted present values; and
. the transactions for the sale of goods occur frequently.

We estimate allowances for rebates and discounts based on probability for such rebates and discounts.

Long-term Investments

Long-term investments in which we own 20% or more of the voting shares or have significant influence over are accounted for using the equity method. When the equity method is first applied or when a stock is acquired, the difference between the carrying value of an investment and the proportionate equity value in such investee is amortized over five years. If the financial statements of investees cannot be obtained in time, we will recognize investment gains or losses on related investments in June of the following year. Otherwise, investment gains or losses are recognized in the same year. Unrealized gains or losses from transactions with investees and from transactions between investees are eliminated. Cash dividends received from investees are recorded as a deduction in the investment carrying value. Translation adjustments, unrealized loss on investees’ long-term investments and unrecognized net loss on pension cost are recognized proportionately in accordance with our ownership in such investee.

If an investee issues additional shares but we do not acquire shares at a ratio equal to our initial equity, our ownership percentage will be changed. As a result, capital surplus is adjusted for the difference between the carrying value of the investment and our equity in such investee’s net assets. If the carrying value is less than equity in net assets, the difference is credited to capital surplus. If the carrying value is more than equity in net assets, the difference is debited to capital surplus or unappropriated earnings while capital surplus is unavailable. If the market price of the shares of an investee declines significantly, and such decline is not temporary, we would recognize the loss in investment as a realized loss in the same year. Such

investment will be re-valued by the equity method if an investee’s market value recovers and becomes higher than its book value per share. The difference between the new cost of the investment and proportionate equity in the investee is amortized over five years.

Other investments are accounted for by the cost method. If there are indications that the market value of investments has significantly declined, and such decline is not temporary, we would recognize such loss in the investment as a realized investment loss. The previous carrying value less the amount of investment loss write-down becomes the new cost basis for such investments. Cash dividends received from investee are recorded as a deduction in the investment carrying value for the initial year, otherwise they are recorded as investment income. Upon sale of investment, the cost of investment sold is calculated using weighted average method.

Properties and Leased Assets

We state properties and leased assets (recorded under other assets) at cost (or cost plus appreciation) less accumulated depreciation. We capitalize the interest expenses incurred in connection with the purchase or construction of properties. We also capitalize major additions, renewals and improvements but expense maintenance and repairs currently.

Depreciation on properties is calculated using the straight-line method for the properties’ estimated serviceable lives:

land improvements	10 to 40 years
buildings and improvements	4 to 60 years
machinery and equipment	2 to 25 years
transportation equipment	2 to 25 years
miscellaneous equipment	2 to 14 years

Depreciation on appreciations is calculated using the straight-line method for the remaining serviceable lives of the appreciated properties. If a property remains in use upon the expiration of its original estimated serviceable life, we re-estimate its remaining serviceable life and depreciate the residual value of such property using a straight-line method over such re-estimated remaining serviceable life.

Depreciation of machinery and equipment leased to our investee is calculated by the working hour method.

Upon the sale or disposal of property, we write off the cost, appreciation and accumulated depreciation associated with such property. Gains or losses resulting from such sale or disposal are credited or charged to current income.

Inventories

Inventories consist of raw materials, supplies, fuel, finished products, work in progress, by-products and construction in progress. With the exception of construction in progress, we state inventories at the lower of moving weighted average costs or their market values. Market values are calculated according to net realizable value for finished products, work in process, by-products and construction in progress, and replacement costs for raw materials, supplies and fuel. We state construction projects over one year using the percentage-of-completion method, and construction in progress is valued by the costs incurred plus (less) the estimated gain (loss). Construction projects less than one year are valued at cost method.

Short-term Investments

Short-term investments consist of our investment in bond funds, security investment trust funds, commercial papers with maturities over three months and stocks listed on the Taiwan Stock Exchange to which we have no intent for long-term holding. We state short-term investments at the lower of weighted

average cost or their market value. Loss due to a decline in market value is charged to income when such decline occurs. The allowance for investment loss is created to account for the loss resulting from the total costs exceeding the market value. If the market value is recovered above the total costs, the allowance account will be reversed to the extent with respect to its remaining balance. We calculate the cost for the sale of investment using weighted average method. Market value of a short-term investment is determined based on the net assets value of bond funds and security investment trust funds at balance sheet date or monthly average price of listed stocks in the latest month of the relevant period.

Stock dividends received from investees are not recorded as investment income but as an increase in shares. Accordingly, the carrying value per share is recalculated on the basis of total shares owned. Cash dividends are recorded as investment income for the current year, except for as a deduction to its original investment for the initial investing year.

Results of Operations

Recent Events

Our unaudited unconsolidated revenues, prepared in accordance with the ROC GAAP, was NT$11,427.3 million in July 2003, NT$11,192.4 million in August 2003 and NT$11,066.9 million in September 2003. Our unaudited unconsolidated income before income tax and minority interest was NT$3,833.7 million, NT$3,669.1 million and NT$4,150.1 million in July, August and September 2003, respectively. These unaudited unconsolidated financial data are not necessarily indicative of our results of operations for any future periods.

On August 25, 2003, we announced a limited price increase of between NT$284 to NT$500 for our finished steel products in the fourth quarter of 2003. We announced that we would increase the prices for plates, bars, wire rods, hot-rolled products, cold rolled products, electro-galvanized sheets and electrical sheets by NT$322, NT$284, NT$373, NT$369, NT$300 and NT$500, respectively.

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Unconsolidated Revenues. Unconsolidated revenues increased 35.2% to NT$62,541.4 million (US$1,807.0 million) for the six months ended June 30, 2003 from NT$46,258.2 million for the six months ended June 30, 2002. This increase was primarily as a result of an increase in the unconsolidated revenues for our finished steel products. The increase in the revenues for our finished steel products was primarily a result of an increase in the average realized sales price and an increase in sales volume. The average realized sales price for our finished steel products increased 40.3% to NT$11,889.9 per tonne (US$343.5 per tonne) for the six months ended June 30, 2003 from NT$8,477.1 per tonne for the six months ended June 30, 2002. The sales volume for our finished steel products increased 4.5% to 5,034.2 thousand tonnes for the six months ended June 30, 2003 from 4,816.5 thousand tonnes for the six months ended June 30, 2002.

Unconsolidated Cost of Revenues. Unconsolidated cost of revenues increased 4.2% to NT$40,311.4 million (US$1,164.7 million) for the six months ended June 30, 2003 from NT$38,702.6 million for the six months ended June 30, 2002. This increase was primarily as a result of a 4.4% increase in the cost of goods sold for our steel products to NT$39,872.9 million (US$1,152.1 million) for the six months ended June 30, 2003 from NT$38,205.0 million for the six months ended June 30, 2002. Unit cost of goods sold increased 10.1% to NT$7,567.8 (US$218.7) per tonne of steel products sold for the six months ended June 30, 2003 from NT$6,873.9 per tonne of steel products sold for the six months ended June 30, 2002. The unit costs of raw materials increased primarily as a result of increases in the unit freight costs for raw materials and costs of scrap.

Unconsolidated Gross Profit and Unconsolidated Gross Margin. Unconsolidated gross profit increased 194.2% to NT$22,230.0 million (US$642.3 million) for the six months ended June 30, 2003 from NT$7,555.6 million for the six months ended June 30, 2002. This increase was primarily as a result of a

35.2% increase in unconsolidated revenues compared to a 4.2% increase in unconsolidated cost of revenues. Unconsolidated gross margin was 35.5% for the six months ended June 30, 2003 compared to 16.3% for the six months ended June 30, 2002.

Unconsolidated Operating Expenses. Unconsolidated operating expenses increased 19.4% to NT$2,592.2 million (US$74.9 million) for the six months ended June 30, 2003 from NT$2,170.5 million for the six months ended June 30, 2002. This increase was primarily as a result of an increase in unconsolidated general and administrative expenses and unconsolidated selling expenses. Unconsolidated general and administrative expenses increased 25.5% to NT$1,131.3 million (US$32.7 million) for the six months ended June 30, 2003 from NT$901.4 million for the six months ended June 30, 2002. Unconsolidated selling expenses increased 14.9% to NT$1,003.0 million (US$29.0 million) for the six months ended June 30, 2003 from NT$873.0 million for the six months ended June 30, 2002. The increase in unconsolidated general and administrative expenses and selling expenses was primarily as a result of an increase in employee costs due to an increase in bonuses paid to employees and as a result of increased sales activity due to the improvement in market conditions of the steel industry in the Asian region, including Taiwan.

Unconsolidated Operating Income and Unconsolidated Operating Margin. Unconsolidated operating income increased 264.7% to NT$19,637.8 million (US$567.4 million) for the six months ended June 30, 2003 from NT$5,385.2 million for the six months ended June 30, 2002. This increase was primarily as a result of an increase in unconsolidated gross profit. Unconsolidated operating margin was 31.4% for the six months ended June 30, 2003 compared to 11.6% for the six months ended June 30, 2002.

Unconsolidated Net Non-Operating Income (Expenses). Unconsolidated net non-operating income increased to NT$2,634.9 million (US$76.1 million) for the six months ended June 30, 2003 from a net non-operating loss of NT$226.0 million in the six months ended June 30, 2002. This increase was primarily as a result of an increase in investment income under equity method and a decrease in interest expense. Investment income under equity method increased 110.9% to NT$3,160.2 million (US$91.3 million) for the six months ended June 30, 2003 from NT$1,498.7 million for the six months ended June 30, 2002 primarily as a result of an increase in the value of our investments in some of our subsidiaries and affiliates. Net interest expense decreased 40.9% to NT$733.3 million (US$21.2 million) for the six months ended June 30, 2003 from NT$1,241.4 million for the six months ended June 30, 2002 primarily as a result of a reduction in the amount of our long-term and short-term debts and a decrease in the prevailing interest rates.

Unconsolidated Net Income (Loss). Unconsolidated net income increased 346.0% to NT$18,210.9 million (US$526.2 million) for the six months ended June 30, 2003 from NT$4,082.9 million for the six months ended June 30, 2002, partially offset by an increase in unconsolidated tax expenses. Unconsolidated tax expenses increased to NT$4,061.9 million (US$117.4 million) for the six months ended June 30, 2003 from NT$1,076.3 million for the six months ended June 30, 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues. Revenues in 2002 increased 16.9% to NT$108,389.1 million (US$3,131.7 million) from NT$92,687.8 million in 2001. This increase was primarily as a result of an increase in the average realized sales price for and an increase in the sales volume of our finished steel products. The average realized sales price for our finished steel products increased 10.1% to NT$9,432.9 per tonne (US$272.5 per tonne) in 2002 from NT$8,568.3 per tonne in 2001. The sales volume for our finished steel products increased 6.1% to 9,766.8 thousand tonnes in 2002 from 9,204.0 thousand tonnes in 2001. The increase in average realized sales price and volume of our finished steel products was primarily as a result of an improvement in market conditions of the steel industry in the Asian region, including Taiwan.

Cost of Revenues. Cost of revenues increased 2.9% to NT$82,337.4 million (US$2,379.0 million) in 2002 from NT$80,037.9 million in 2001. The increase was primarily as a result of an increase in steel production volume. The cost of goods sold for our steel products increased 3.7% to NT$74,280.4 million (US$2,146.2 million) in 2002 from NT$71,655.3 million in 2001. The unit cost of goods sold for our steel

products decreased 4.3% to NT$6,934.9 (US$200.4) per tonne of our steel products sold in 2002 from NT$7,246.4 per tonne of our steel products sold in 2001. The decrease was primarily as a result of a decrease in unit depreciation expenses, an increase in steel production volume and an increase in sales of semi-finished steel products that were held as inventory.

Gross Profit and Gross Margin. Gross profit increased 105.9% to NT$26,051.7 million (US$752.7 million) in 2002 from NT$12,649.9 million in 2001. The increase was primarily as a result of a 16.9% increase in revenues compared to a 2.9% increase in cost of revenues. Gross margin was 24.0% in 2002 compared to 13.6% in 2001.

Operating Expenses. Operating expenses remained relatively unchanged at NT$4,710.1 million (US$136.1 million) (comprising of NT$1,894.5 million in selling expenses, NT$1,949.3 million in general and administrative expenses and NT$866.3 million in research and development expenses) in 2002 as compared to NT$4,722.6 million (comprising of NT$1,671.8 million in selling expenses, NT$2,154.0 in general and administrative expenses and NT$896.8 million in research and development expenses) in 2001.

Operating Income (Loss) and Operating Margin. Operating income increased 169.2% to NT$21,341.7 million (US$616.6 million) in 2002 from NT$7,927.4 million in 2001. The increase was primarily as a result of an increase in gross profits and the relatively unchanged operating expenses. Operating margin was 19.7% in 2002 compared to 8.6% in 2001.

Net Non-Operating Income (Loss). We recorded a net non-operating loss of NT$543.9 million (US$15.7 million) in 2002 compared to a net non-operating income of NT$557.3 million in 2001. The decrease was primarily as a result of a decrease in gain on disposal of investments, partially offset by an increase in net investment income. Gain on disposal of investments decreased to NT$282.8 million (US$8.2 million) in 2002 from NT$4,081.6 million in 2001. The decrease was primarily as a result of a large onetime gain of NT$3,741.1 million resulting from sale of 73.3 million shares of common stock of Taiwan Semiconductor Manufacturing Company Limited in 2001. Net investment income increased to NT$1,514.2 million in 2002 from a net investment loss of NT$1,770.3 in 2001, primarily as a result of our recognition of an investment loss of NT$1,584.4 million in 2001 due to a significant decrease in the stock price of Yieh Loong Enterprise Co., Ltd. (‘‘Yieh Loong’’), in which we owned an interest as of December 31, 2001. The stock price of Yieh Loong recovered and was valued at higher than its book value per share in 2002. Pursuant to an interpretation with respect to this matter issued by the ROC Accounting Research and Development Foundation, we re-valued our investment in Yieh Loong using the equity method in 2002.

Net Income (Loss). Net income increased 125.7% to NT$16,839.1 million (US$486.5 million) in 2002 from NT$7,459.8 million in 2001, after accounting for an increase in tax expenses to NT$3,933.1 million (US$113.6 million) in 2002 from NT$1,017.0 million in 2001.

Year Ended December 2001 Compared to Year Ended December 2000

Revenues. Revenues in 2001 decreased 13.9% to NT$92,687.8 million from NT$107,679.6 million in 2000. The decrease was primarily as a result of a decrease in the average realized sales price for, and a decrease in the sales volume of, our finished steel products. The average realized sales price of our finished steel products decreased 14.0% to NT$8,568.3 per tonne in 2001 from NT$9,958.8 per tonne in 2000. The sales volume for our finished steel products decreased 3.7% to 9,204.0 thousand tonnes in 2001 from 9,555.8 thousand tonnes in 2000. Such decrease was primarily as a result of the downturn in the market conditions of the steel industry in the Asian region, including Taiwan.

Cost of Revenues. Cost of revenues remained relatively unchanged at NT$80,037.9 million in 2001 compared to NT$80,939.2 million in 2000. Cost of goods sold for our steel products remained relatively unchanged at NT$71,655.3 million in 2001 compared to NT$72,407.2 million in 2000. Unit cost of goods sold for our steel products also remained relatively unchanged at NT$7,246.4 per tonne of our steel products sold in 2001 compared to NT$7,248.0 per tonne of our steel products sold in 2000.

Gross Profit and Gross Margin. Gross profit decreased 52.7% to NT$12,649.9 million in 2001 from NT$26,740.4 million in 2000. This decrease was primarily as a result of a 13.9% decrease in revenues, partially offset by 1.1% decrease in cost of revenues. The gross margin was 13.6% in 2001 compared to 24.8% in 2000.

Operating Expenses. Operating expenses remained relatively unchanged at NT$4,722.6 million (comprising of NT$1,671.8 million in selling expenses, NT$2,154.0 million in general and administrative expenses and NT$896.8 million in research and development expenses) in 2001 compared to NT$4,909.5 million (comprising of NT$1,828.5 million in selling expenses, NT$2,161.2 million in general and administrative expenses and NT$919.8 million in research and development expenses) in 2000.

Operating Income (Loss) and Operating Margin. Operating income decreased 63.7% to NT$7,927.4 million in 2001 from NT$21,830.9 million in 2000. The decrease was primarily as a result of the decrease in revenues and gross profit. Operating margin was 8.6% in 2001 compared to 20.3% in 2000.

Net Non-Operating Income (Loss). Net non-operating income increased to NT$557.3 million in 2001 from a net non-operating loss of NT$342.6 million in 2000. The increase was primarily as a result of an increase in gain on disposal of investments, partially offset by an increase in net investment loss. Gain on disposal of investments increased to NT$4,081.6 million for 2001 from NT$1,819.5 million for 2000 primarily as a result of a large one-time gain of NT$3,741.1 million resulting from the sale of 73.3 million shares of Taiwan Semiconductor Manufacturing Company Limited in 2001. Investment loss increased to NT$1,770.3 million in 2001 from NT$115.6 million in 2000 primarily as a result of our recognition of an investment loss of NT$1,584.4 million in 2001 in connection with a significant decrease in the stock price of Yieh Loong.

Net Income (Loss). Net income decreased 59.8% to NT$7,459.8 million in 2001 from NT$18,581.5 million in 2000, despite a decrease in tax expenses to NT$1,017.0 million in 2001 from NT$2,886.1 million in 2000.

Liquidity and Capital Resources

We have historically been able to satisfy our working capital needs from cash flow from our operations. We have historically funded our capacity expansion from internally generated cash and, to the extent necessary, the issuance of equity securities and long-term borrowings. If adequate funds are not available on satisfactory terms, we may be forced to curtail our expansion plans. Moreover, our ability to meet our working capital needs from cash flow from operations will be affected by the demand for our steel products, which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the international steel prices caused by a downturn in the steel industry. See ‘‘Risk Factors — Risks Relating to Our Industry and Our Business — The steel industry is cyclical; downward pricing pressure on steel products in response to excess capacity could harm our operating results’’. The average realized sales price of our steel products may be subject to downward pressure in the future. To the extent we do not generate sufficient cash flow from our operations to meet our cash requirements, we will have to rely on external financing. Other than as described in ‘‘— Off-Balance Sheet Arrangements’’, we have not historically relied, and we do not plan to rely in the foreseeable future, on off-balance financing arrangements to finance our working capital or capacity expansion.

Our principal uses of cash in the six months ended June 30, 2003 were primarily for debt reductions and making short term investments. Our principal uses of cash in 2000, 2001 and 2002 were primarily for debt reductions, payment of cash dividends and capital expenditures.

In connection with our expansion and revamping projects, we have incurred capital expenditures in the amount of NT$2,494.4 million, NT$5,738.5 million and NT$6,534.7 million and NT$3,067.8 million (US$88.6 million), respectively, in 2000, 2001, 2002 and the six months ended June 30, 2003. We are currently undertaking, or plan to undertake, seventeen expansion and revamping projects that have been

approved by our Board of Directors. We expect that in connection with these expansion and revamping projects we will incur a total NT$22.4 billion (US$647.2 million) in capital expenditures from October 2003 to the end of 2007. We expect that two-thirds of our capital expenditure requirements will be funded by internally generated cash and the remaining one third will be financed by long-term borrowings.

From time to time, we evaluate possible investments and may, if a suitable opportunity arises, make an investment or acquisition. We currently have no commitments to make any material investment or acquisition.

Liquidity

As of June 30, 2003, we had, on an unconsolidated basis, working capital (defined as current assets less current liabilities) of NT$18,661 million (US$539.2 million), of which we had cash and cash equivalents of NT$1,207.5 million (US$34.9 million), pledged time deposits with a fair market value of NT$6,600.0 million (US$190.7 million), short-term investments with a fair market value of NT$32,900.8 million (US$950.6 million) and our short-term borrowings outstanding of NT$213.2 million (US$6.2 million). Additionally, we had several credit lines with a total available credit of NT$43,624.4 million (US$1,260.5 million).

As of December 31, 2002, we had, on an consolidated basis, working capital (defined as current assets less current liabilities) of NT$22,875.4 million (US$660.9 million), of which we had cash and cash equivalents of NT$3,203.2 million (US$92.6 million), pledged time deposits with a fair market value of NT$6,900 million (US$199.4 million), short-term investments with a fair market value of NT$23,146.2 million (US$668.8 million) and our short-term borrowings outstanding of NT$2,069.2 million (US$59.8 million). Additionally, we had several credit lines with a total available credit of NT$53,822.0 million (US$1,555.1 million).

Net cash provided by operating activities amounted to NT$20,753.1 million (US$599.6 million) for the six months ended June 30, 2003. Net cash provided by operating activities amounted to NT$36,702.9 million (US$1,060.5 million) in 2002, NT$14,016.6 million in 2001 and NT$28,227.6 million in 2000. Changes in net cash from operating activities are primarily results of year-to-year changes in net income.

Net cash used in investment activities increased 249.4% to NT$14,886.7 million (US$430.1 million) for the six months ended June 30, 2003 from NT$4,260.7 million for the six month ended June 30, 2002. This increase was primarily due to the application of NT$10,696.1 million (US$309.1 million) in cash used for short-term investment and NT$1,904.2 million (US$55.0 million) in cash used for long-term investment for the six months ended June 30, 2003, compared to NT$1,610.4 million in cash for short-term investment and NT$130.2 million in cash for long-term investment for the six months ended June 30, 2002. Net cash used in investment activities for each of 2002, 2001 and 2000 amounted to NT$13,618.7 million (US$393.5 million), NT$12,576.9 million and NT$16,188.6 million, respectively.

Net cash used in financing activities decreased 32.2% to NT$7,727.9 million (US$223.3 million) for the six months ended June 30, 2003 from NT$11,390.5 million for the six month ended June 30, 2002. This decrease was primarily due to the proceeds received in the amount of NT$1,807 million (US$52.2 million) for the six months ended June 30, 2003 provided by the sale of treasury stocks to our employees. Net cash used in financing activities for each of 2002, 2001 and 2000 amounted to NT$24,688.1 million (US$713.3 million), NT$12,798.0 million and NT$16,640.4 million, respectively.

Capital Resources

As of June 30, 2003, we had, on an unconsolidated basis, outstanding short-term loans and overdrafts of NT$213.2 million (US$6.2 million), outstanding commercial paper of NT$999.8 million (US$28.9 million), outstanding current portion of long-term bonds of NT$10,250.0 million (US$296.2 million) and outstanding long-term bonds of NT$17,250.0 million (US$498.4 million).

As of December 31, 2002, we had, on a consolidated basis, outstanding short-term loans and overdrafts of NT$2,069.2 million (US$59.8 million), outstanding commercial paper of NT$998.3 million (US$28.9 million), outstanding current portion of long-term bonds of NT$9,710.0 million (US$280.6 million), outstanding long-term bonds of NT$26,250.0 million (US$758.5 million), outstanding current portion of long-term debts of NT$2,985.0 million (US$86.2 million) and outstanding long-term debts of NT$1,774.1 million (US$51.3 million)

In November and December 1998, we issued NT$5 billion in aggregate principal amount of corporate bonds. These bonds have a stated interest rate of 6.785% and are scheduled to mature from time to time in November and December 2003, respectively. We are obligated to repay the principal amount of these bonds in two annual installments, each in the amount of NT$2.5 billion, commencing in November and December 2003.

In May and June 1999, we issued NT$7.75 billion in aggregate principal amount of corporate bonds. These bonds have a stated interest rate of 5.69% and are scheduled to mature in May and June 2004, respectively. We are obligated to repay the principal amount of these bonds at maturity. These bonds received a twAA+ credit rating from Taiwan Ratings Corporation in April 1999.

In July 1999, we issued NT$2.25 billion in aggregate principal amount of corporate bonds. These bonds have a stated interest rate of 5.99% and are scheduled to mature in July 2004. We are obligated to repay the principal amount of these bonds at maturity. These bonds received a twAA+ credit rating from Taiwan Ratings Corporation in May 1999.

In November and December 2000, we issued NT$5 billion in aggregate principal amount of corporate bonds. These bonds have a stated interest rate of 5.18% and are scheduled to mature in November and December 2005, respectively. We are obligated to repay the principal amount of these bonds at maturity. These bonds received a twAA+ credit rating from Taiwan Ratings Corporation in September 2000.

In June 2001, we issued NT$5 billion in aggregate principal amount of corporate bonds. These bonds have a stated interest rate of 4.27% and are scheduled to mature in June 2006. We are obligated to repay the principal amount of these bonds at maturity. These bonds received a twAA+ credit rating from Taiwan Ratings Corporation in September 2000.

In November 2001, we issued NT$5 billion in aggregate principal amount of corporate bonds. These bonds were issued in two tranches with a stated interest rate of 3.1% and 3.0763%, respectively, and are scheduled to mature in November 2006. We are obligated to repay the principal amount of these bonds at maturity. These bonds received a twAA credit rating from Taiwan Ratings Corporation in September 2001.

We have long-term debt obligations (primarily comprised of bank loans and corporate bonds) in the total amount of NT$40,719 million (US$1,176.5 million), of which NT$12,695 million (US$366.8 million) is due in less than one year, NT$17,599 million (US$508.5 million) is due between one year and three years and NT$10,425 million (US$301.2 million) is due between three to five years.

Additionally, we have the following significant contingent obligations:

. As of June 30, 2003, we had a stand-by letter of credit issued by the International Commercial Bank of China and Taipei Bank on our behalf in the aggregate amount of NT$1,424.7 million (US$41.2 million).
. In connection with the sale of certain of our outstanding notes receivables to Chung Hsing Bills Finance Corporation, we endorsed such notes receivables. Chung Hsing Bills Finance Corporation has waived any recourse it may have against us. In order to reduce the risk associated with non-payment of the notes receivables, we purchased credit risk insurance with Chung Hsing Bills Finance Corporation as the only payee. Furthermore, upon the occurrence of certain events, we will be required to buy back the notes receivables from Chung Hsing Bills

Finance Corporation. The outstanding amount of such endorsement was NT$421.6 million (US$12.2 million) and NT$792.1 million (US$22.9 million) as of December 31, 2002 and June 30, 2003, respectively.

Taxation

Our applicable tax rate is the statutory corporate income tax rate of 25%. Under 2002 amendments to the ROC Statute for Upgrading Industries, we, as an investor holding shares in qualifying ‘‘the newly emerging, important and strategic’’ industries for three years or longer, will be entitled to tax credits over five years of up to 20% of the price paid for the acquisition of the shares of such enterprises.

We also have tax credits arising from expenditures for machinery and equipment, research and development and personnel training. These tax credits are eligible to be deducted from the tax payable within five years after such credits are granted. Furthermore, the deductions for these tax credits are limited to up to 50% of the income tax payable each year, except that during the last year such credits are eligible for deduction, any remainder tax credits can be deducted entirely.

Our effective income tax rate was 13.4%, 12.0% and 18.9%, respectively, in 2000, 2001 and 2002.

Interest Rate and Currency Risks

Our exposure to financial market risks relates primarily to changes in interest rates and foreign currency exchange rates.

Interest Risk

Since most of our long-term debt obligations have fixed interest rates, we have limited exposure to interest rate risks. As of June 30, 2003, we had NT$50 million (US$1.4 million) in aggregate principal amount of floating rate debts outstanding. As of June 30, 2003, we had no interest rate derivative transactions.

The table below sets forth the principal amount and interest rate of our long-term debt.

		As of December 31, 2002
		Expected Maturity Date
2003 2,050 3.125% 9,710 6.754% 2,600 1.0466% 5 6.715%	2004 2005 2006 2007 (in millions, except percentages) 1,774 — — — 1.580% — — — 10,412.5 5,412.5 10,425 — 5.628% 4.976% 3.633% — — — — — — — — — — — — — — — — —		Total
			3,824 2.408% 35,960 5.256% 2,600 1.0466% 5 6.715%

Foreign Currency Exchange Rate Risk

Changes in exchange rates may affect our results of operations stated in NT dollars. In each of 2000, 2001, 2002 and the six months ended June 30, 2003, approximately 40% of our cost of goods sold was denominated in foreign currencies, the substantial portion of which was denominated in U.S. dollars. This reflects the fact that prices for a substantial portion of raw materials we purchase are set by reference to the U.S. dollar. In addition, our export sales are denominated in foreign currencies and the prices we are able to obtain for our products in the domestic market are influenced by the NT dollar price of imports of competitive steel products. Our NT dollar domestic sales prices are also established by reference to prevailing U.S. dollar import market prices for steel products. In general, a strengthening of the NT dollar against foreign currencies may have an adverse effect on both export sales and, as a consequence of import

competition, on domestic sales prices for our products. In general, however, a strengthening of the NT dollar against the U.S. dollar may also have a favorable effect on certain of our costs, such as the cost of raw materials we import. Although the effects of fluctuations in the relationship between the NT dollar and foreign currencies are complex and variations in any direction which cannot be expected to have a consistent impact on results of operations, we believe that as a general matter, appreciation of the NT dollar against the U.S. dollar would be more likely to have an overall adverse effect on our results of operations than would depreciation of the NT dollar against the U.S. dollar. Moreover, prolonged or substantial fluctuations in exchange rates between the U.S. dollar or other currencies and the NT dollar could adversely affect our operating margins and results of operations.

As of June 30, 2003, approximately 31.9% of our cash and accounts receivable were denominated in currencies other than the NT dollar. As of June 30, 2003, approximately 20.8% of our accounts payable and payable for fixed assets were denominated in currencies other than the NT dollar. To protect against reductions in value and the volatility of future cash flows caused by changes in foreign currency exchange rates, we may utilize natural hedge and foreign exchange contracts from time to time to reduce the impact of foreign currency fluctuations on our results of operations. As of June 30, 2003, we had no foreign exchange contracts outstanding.

Off-Balance Sheet Arrangements

We have, from time to time, entered into foreign exchange contracts to hedge the foreign currency exposure associated with our existing assets or liabilities denominated in foreign currencies. As of June 30, 2003, we had no outstanding foreign exchange contracts. We currently do not have any commitments to provide guarantees to our subsidiaries or affiliates.

INDUSTRY

General

The ROC was the fifth largest steel producing country in Asia and the twelfth largest in the world for 2002 in terms of crude steel production according to the International Iron and Steel Institute. During such year, ROC steelmakers manufactured an estimated 18.2 million tonnes of crude steel, while apparent ROC crude steel consumption (without inventory adjustment) was estimated at 24.5 million tonnes. Among Asian countries, the ROC had the fifth highest consumption of steel in 2002.

While global production and consumption of crude steel has each grown at a compound annual rate of 3.8% and 4.8%, respectively, from 1998 to 2002, the production and consumption of crude steel in the Asian region have generally been higher, partly as a result of higher rates of economic growth. In the ROC, crude steel production grew at a compound annual rate of 1.9% from 1998 to 2002. However, during the same period, apparent crude steel consumption (without inventory adjustment) grew at a compound annual rate of 0.3%. In addition, per capita consumption of crude steel in countries in the Asia-Pacific region is generally higher than in western industrialized countries. In 2001, per capita consumption of crude steel in the ROC was 950 kilograms, which was the second highest per capita consumption in the world after Hong Kong (excluding PRC). The table below sets forth certain information relating to the production and consumption of crude steel in certain countries in Asia and Europe, as well as the United States, for the periods indicated.

ROC . . . . . . . . . . . . . . . . . . Singapore. . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . Japan. . . . . . . . . . . . . . . . . . PRC . . . . . . . . . . . . . . . . . . Malaysia . . . . . . . . . . . . . . . Indonesia . . . . . . . . . . . . . . . Thailand . . . . . . . . . . . . . . . India . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . France . . . . . . . . . . . . . . . . . Germany . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . World total. . . . . . . . . . . . . .	Year Ended December 31, 1998 2002 Production Consumption Production Consumption (millions of tonnes) 16.9 24.2 18.2 24.5 — 4.8 — 3.7 39.9 25.8 45.4 45.4 93.5 72.5 107.7 73.4 114.6 131.7 181.6 244.2 1.9 4.3 4.1 8.8 2.7 3.5 2.8 5.3 1.8 5.0 2.3 12.1 23.5 27.1 28.8 33.9 98.7 135.1 92.2 118.8 20.1 18.0 20.3 17.7 44.0 41.2 45.0 41.4 17.3 16.4 11.7 14.3 777.2 781.5 902.8 941.4	1998–2002 Compound Annual Growth Rate Production Consumption (percentage) 1.9% 0.3% — (6.3) 3.3 15.2 3.6 0.3 12.3 16.7 21.2 19.6 0.9 10.9 6.3 24.7 5.2 5.8 (1.7) (3.2) 0.2 (0.4) 0.6 0.1 (9.3) (3.4) 3.8 4.8
	Production 16.9 — 39.9 93.5 114.6 1.9 2.7 1.8 23.5 98.7 20.1 44.0 17.3 777.2

Source: International Iron and Steel Institute.

As in most countries, the steel industry in the ROC is presently divided into two principal categories: integrated steel plants and mini-mills. Currently we are the only integrated steelmaker in the ROC. Currently, mini-mills in the ROC include approximately 32 electric arc furnace units producing a variety of steel products using imported scraps and semi-finished steel. In 2002, approximately 57.7% of total domestic crude steel production came from our integrated steel plant, and the mini-mills, collectively, accounted for approximately 42.3% of total domestic crude steel production.

The ROC Steel Market

As compared to other domestic steel markets in steel producing countries, the ROC steel market is characterized by a broad range of small and medium size customers for steel products. In 2002, the ROC imported 10.8 million tonnes of semi-finished and finished steel products. In the same year, the ROC exported 8.9 million tonnes of semi-finished and finished steel products. The main steel products consumed in Taiwan are hot rolled coil and sheet, cold rolled coil and sheet, plate, wire rod and bars.

Production and Consumption

In the ROC, the major industries that use steel include the automotive, electrical appliance, pipe manufacturing, furniture, construction, shipbuilding, bridgebuilding, toolmaking and computer peripherals industries. The major industries that use steel for exports are steel pipes, fasteners and hand tools. Hot and cold rolled products, wire rods/bars and plates make up the bulk of steel products in demand in the ROC. Industrial applications for hot rolled products include the manufacture of steel pipes, shipping containers and pressure vessels. Industrial applications for cold rolled products include the manufacture of steel pipes, automobile parts, electrical appliances and furniture. Wire rods/bars are used for producing, among other things, fasteners, hand tools, steel wires, automobile, motorcycle and bicycle parts. Plate products are mainly used in the construction and shipbuilding industries for the manufacture of bridges, steel structures, ships, pipes, storage tanks, boilers and pressure vessels.

In the ROC, unlike many of the principal world steel producing countries and areas, domestic demand for steel products exceeds domestic production capacity. For 2002, apparent ROC crude steel consumption (without inventory adjustment) was estimated at 24.5 million tonnes, and ROC domestic crude steel production was estimated at 18.2 million tonnes. Of the difference between apparent ROC crude steel consumption and ROC domestic crude steel production in 2002, approximately 6.3 million tonnes of crude steel was supplied by imports from foreign steelmakers. However, in 2001 the ROC was the third leading exporter in Asia of semi-finished and finished steel products. The table below sets forth information relating to the production and consumption of crude steel in the ROC for the periods indicated.

Production of crude steel . . . . . . . . . . . . . . . Consumption of crude steel . . . . . . . . . . . . . Difference between production and consumption of crude steel . . . . . . . . . . . .		Year Ended December 31,
	1998 16.9 24.2 7.3	1999 2000 2001 (millions of tonnes) 15.4 16.9 17.2 24.5 25.3 21.2 9.1 8.4 4.0	2002
			18.2 24.5 6.3

Source: International Iron and Steel Institute.

For each of the calendar years from 1998 to 2002, we were the largest supplier of hot rolled products, cold rolled products, steel plate and wire rod in the ROC. Increased ROC demand for such products since 1998 has been met by other domestic producers as well as by foreign steelmakers exporting to the ROC.

The table below sets forth, for the periods indicated, information relating to ROC demand for our finished steel products, by principal product category.

Hot rolled coil and sheet . . . . . . . . . Cold rolled coil and sheet. . . . . . . . . Plate . . . . . . . . . . . . . . . . . . . . . . . Wire rod . . . . . . . . . . . . . . . . . . . . Bar . . . . . . . . . . . . . . . . . . . . . . . .		Year Ended December 31,
	1998 5,131 1,948 1,638 1,771 1,139	1999 2000 2001 (thousands of tonnes) 5,530 5,517 4,764 2,266 2,292 1,720 1,366 1,619 1,326 2,013 1,961 1,634 1,086 1,305 971	2002
			5,106 2,151 1,503 2,035 1,113

Prices

The prices of ROC steel products are not regulated by the ROC government. Prices of steel products in the ROC market are substantially affected by prevailing prices for steel products in the Asian region generally. ROC steelmakers maintain separate domestic and export base prices for their steel products which are adjusted periodically in response to changes in market conditions, exchange rates and other factors. The actual sales prices realized for steel products are also subject to the specifications, sizes and quantity of the products ordered. See ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition — Overview — Cyclicality of the Steel Industry and Steel Prices’’ for a discussion of recent trends in world prices for our steel products.

Tariffs

Tariffs in the ROC are applicable to imports of steel products. The table below sets forth, as of the end of the periods indicated, tariff rates in the ROC applicable to the import of the steel products indicated. See ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition — Import Restrictions’’.

Hot rolled products . . . . . Cold rolled products . . . . Plate . . . . . . . . . . . . . . . Bar . . . . . . . . . . . . . . . . Wire rod (high carbon and alloy). . . . . . . . . . . . . Wire rod (low carbon) . . .		Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	2002 6.3~7% 6.3~7 6.3~7 6.5~10 6.5 9.5~10	Six Months Ended June 30 2002 2003 6.3~7% 3.1~3.5% 6.3~7 3.1~3.6 6.3~7 3.1~3.5 6.5~10 3.3~5.0 6.5 3.3 9.5~10 5.1
	1998 7% 7 7 7.5~10 7.5 9.5~10	1999 7% 7 7 7.5~10 7.5 9.5~10	2000 7% 7 7 7.5~10 7.5 9.5~10	2001 7% 7 7 7.5~10 7.5 9.5~10		2002 6.3~7% 6.3~7 6.3~7 6.5~10 6.5 9.5~10

Source: Customs Import Tariff and Classification of Import and Export Commodities of the Republic of China, March 2002 Revised Edition; Directorate-General of Customs, Ministry of Finance and Board of Foreign Trade, Ministry of Economic Affairs, Executive Yuan, ROC.

The World Steel Market

The world steel industry is cyclical in nature. World steel prices decreased during the downturn in the steel industry in the second half of 2000 and the entire year of 2001 and have, since the second quarter of 2002, improved steadily. World crude steel production was estimated at 902.8 million tonnes in 2002, of which 401.8 million tonnes were estimated to be attributable to countries in Asia-Pacific region. In 2002, the PRC, Japan, the United States and Russia were estimated to be the world’s largest steel producing countries. World crude steel production increased by 16.2% between 1998 and 2002. The increase was primarily attributable to production increases in developing countries.

Over the last decade, the world steel industry has been characterized by substantial overcapacity. Except in the last few years, the world steel industry was adversely affected by a generally sluggish demand for steel in the Western industrialized countries accompanied by no significant reductions in capacity in those countries. The world steel industry has also been affected by the significant increase in steel production capacity in developing countries, occurring partly as a result of increased demand for steel in such developing countries, which has more than offset reductions in capacity in the Western industrialized countries.

Over the last decade demand for steel has been weak in the Western industrialized countries as a result of a number of factors, including the effects of sluggish economic growth, the related effects of inflation on capital investment and the long-term decline in steel intensity (defined as the ratio of steel consumption to gross domestic product). One factor underlying the decline in steel intensity has been the movement of Western industrialized economies away from the manufacturing sector, which is steel-intensive, towards the service sector, which is not. Another factor has been the reduced specific consumption of steel (the decline in the amount of steel required to make a particular product) arising from improved manufacturing methods which involve less metal wastage and the introduction of better quality steels with higher strength-to-weight ratios. Additionally, the use of substitute materials, such as aluminum and plastics, has increased.

Trade in steel products among steelmakers and consumers in Asian countries is substantial. For 2001, the aggregate volume of exports and imports of steel products among Asian countries was approximately 151.3 million tonnes, of which exports from Japan represented approximately 29.5 million tonnes and imports to Japan represented approximately 4.1 million tonnes.

BUSINESS

Overview

We are the largest steel manufacturer and the only integrated steelmaker in the ROC, producing 10.8 million tonnes and 5.4 million tonnes of crude steel, respectively, in 2002 and the six months ended June 30, 2003. We manufacture and sell a broad range of high quality finished and semi-finished steel products, including hot and cold rolled sheets and coils, wire rods, plates, bars, slabs, blooms, billets, and pig iron. Our products are used in a variety of downstream industries. For 2002, we had revenues of NT$108,389.1 million (US$3,131.7 million) and net income of NT$16,839.1 million (US$486.5 million). For the six months ended June 30, 2003, we had revenues of NT$62,541.4 million (US$1,807.0 million) and net income of NT$18,210.9 million (US$526.2 million).

Our Shares have been listed on the Taiwan Stock Exchange since 1974. On October 16, 2003, the closing price per Share on the Taiwan Stock Exchange was NT$27.20 per Share and our market capitalization was NT$257,103.2 million (US$7,428.6 million). Our International GDSs have been listed on the Luxembourg Stock Exchange and quoted in the IOB of the London Stock Exchange since February 1997.

The address of our headquarters and registered office is No. 1 Chung Kang Road, Lin Hai Industrial District, Hsiao Kang, Kaohsiung, Taiwan, ROC.

History

We were formed on December 3, 1971 to provide the ROC with its first domestic integrated steelmaking facility. Our Kaohsiung plant complex adjacent to a deep water port was constructed in four separate construction and planning phases (each requiring approximately four years to complete). The four phases are as follows:

. Phase I, which commenced in September 1974 and was completed in December 1977, included the initial construction of our existing Kaohsiung facilities. In January 1978, when we commenced steelmaking operations, we had an annual crude steel production capacity of 1.50 million tonnes per year.
. Phase II, which commenced in July 1978 and was completed in June 1982, increased our annual crude steel production capacity to 3.25 million tonnes per year.
. Phase III, which commenced in July 1984 and was completed in April 1988, increased our annual crude steel production capacity to 5.65 million tonnes per year.
. Phase IV, which commenced in July 1993 and was completed in May 1997, further increased our annual crude steel production capacity to 8.05 million tonnes per year.

We became a non-state-owned enterprise in April 1995 when the ROC government decreased its holding, through the MOEA, of our outstanding capital stock to below 50% following successive domestic and international offerings. As a non-state-owned enterprise, we are not subject to various restrictive ROC government regulations. As a result, we have additional management flexibility to streamline and expand our operations. The ROC government, through the MOEA, currently holds approximately 36.2% of our outstanding capital stock. Immediately after this Offering, the ROC government, through the MOEA, will hold approximately 25.2% of our outstanding capital stock.

Strategy

Focus on higher margin, higher value-added products

Continue to strengthen existing long-term customer relationships and cultivate customer loyalty

Continue to improve our cost competitiveness through cost reduction and operational efficiency

We seek to maintain our cost competitiveness by further reducing production costs and improving operational efficiency. We believe that our production cost is one of the lowest in Asia. Our strategy is to focus on increasing production yield through eliminating bottlenecks along the production chain and process innovations and refinements. With an annual crude steel output of 1,237 tonnes and 1,249 tonnes per employee for 2002 and the six months ended June 30, 2003, respectively, we are also among the most efficient steelmakers in the world. We believe that our high level of production efficiency is attributable to our vertically-integrated production facilities and high labor productivity. We continually seek to enhance our operational efficiency through refinements in our production processes and the revamping of our existing facilities. The completion of Phase IV in May 1997 has increased our economies of scale. We are currently undertaking, or plan to undertake, seventeen expansion and revamping projects that have been approved by our Board of Directors. We expect that in connection with these expansion and revamping projects we will incur a total NT$22.4 billion (US$647.2 million) in capital expenditures from October 2003 to the end of 2007. Our research and development department is also undertaking numerous projects to further improve our overall operational efficiency.

Leverage our strengths to take advantage of growth opportunities in the PRC

We believe that steel consumption in the PRC will become an increasingly important driver of demand growth in the Asian export market over the next ten years, as a result of significant infrastructure build-out, car production growth and exports of consumer durables and electronics. Through our trading companies in Hong Kong and Shanghai, we provide direct sales and after-sales services to our customers in the PRC. In 2002 and the six months ended June 30, 2003, our exports to Hong Kong, substantially all of which comprised of direct and indirect sales to the PRC, accounted for 36.7% and 34.8%, respectively, of our total export volume. We believe that our long-term customer relationships with the affiliates of Taiwan companies operating in the PRC, which are currently our principal customers in the PRC, our geographic proximity as well as our linguistic and cultural ties, to the PRC provide us with certain competitive advantages over Japanese and Korean steelmakers. We intend to broaden our customer base in the PRC by leveraging our competitive advantages, our knowledge of the PRC steel market and our ability to provide one-stop-shop services for both low-end and high-end products.

Continue to leverage the benefits of vertical integration

We intend to continue to leverage the benefits of vertical integration. We have the capability to process iron ore, coal, limestone and other raw materials through the blast furnace and basic oxygen conversion process into finished steel products. We believe that our position as the only integrated steelmaker in Taiwan enhances our operational efficiencies, competitiveness and profitability and responsiveness to the requirements of our customers. We also seek to capitalize on vertical integration in order to reduce costs and assure stable supplies of raw materials and intermediate products.

Leverage our expertise and resources to pursue effective investment and diversification strategies

Maintain prudent capital structure management and consistent profitability in order to maximize shareholder value

Products

We produce and sell a broad range of semi-finished and finished steel products. The table below sets forth, for the periods indicated, our steel production volume and production cost, by principal product category. For information on our sales volume and sales revenues, by principal product category, for the same periods, see ‘‘— Sales and Marketing — Sales’’.

			Year Ended	December 31,	December 31,				Six	Months Ended June 30,	Months Ended June 30,
	2000		2001			2002		2002			2003
	Production	Production	Production	Production		Production	Production	Production	Production		Production	Production
	Volume	Cost	Volume		Cost	Volume	Cost	Volume		Cost	Volume	Cost
		(production volume			in thousands of tonnes,		production	cost in millions of		NT dollars)
Hot rolled coil and
sheet. . . . . . . .	4,291.1	26,326.5	4,131.5		25,299.1	4,340.9	25,885.6	2,118.5		12,640.7	2,199.6	14,327.6
Cold rolled
products . . . . .	2,312.0	21,389.5	2,061.4		19,187.2	2,418.8	20,723.2	1,131.9		9,928.8	1,260.6	11,621.4
Wire rod . . . . . . .	1,152.2	9,151.7	1,125.5		9,277.0	1,173.5	9,200.2	588.8		4,613.3	620.8	5,276.6
Plate . . . . . . . . . .	1,086.8	7,913.3	1,100.6		8,182.2	1,093.8	7,941.4	549.3		3,960.6	575.9	4,533.2
Bar . . . . . . . . . . .	549.8	4,276.2	452.0		3,719.1	500.7	3,865.8	237.0		1,842.6	262.3	2,191.1
Slab, bloom, billet
and pig iron. . .	99.6	498.0	466.7		2,299.1	760.1	3,711.3	663.9		3,212.9	152.2	861.9
Total . . . . . . . . . .	9,491.5	69,555.2	9,337.7		67,963.7	10,287.8	71,327.5	5,289.4		36,198.9	5,071.4	38,811.8

Hot Rolled Products

We manufacture hot rolled coils and sheets in various specifications and sizes for use in industrial applications and as feedstock for our cold roll mill. Industrial applications for our hot rolled products include the manufacture of steel pipes, shipping containers and pressure vessels. Hot rolled products are our largest product category in terms of production and sales volumes. We are the leading domestic producer of hot rolled products in the ROC. Our largest customers for our hot rolled products are re-rollers, pipe makers and service centers that provide cutting and slitting services for downstream users.

For 2002 and the six month ended June 30, 2003, we sold hot rolled products representing approximately 64.2% and 69.1%, respectively, of the output from our hot roll mill, while the remainder was consumed as feedstock for our cold roll mill.

For 2002, we delivered 4,411.8 thousand tonnes of hot rolled products, of which 2,953.8 thousand tonnes were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 2,243.5 thousand tonnes of hot rolled products, of which 1,581.8 thousand tonnes were delivered to customers in the ROC.

Cold Rolled Products

We manufacture cold rolled coils and sheets in various specifications and sizes for use in industrial applications or for further processing. Industrial applications for our cold rolled products include the manufacture of steel pipes, automobile parts, electrical appliances, computer casings, furniture as well as the use as feedstock to galvanized products. Cold rolling of hot rolled products produces a superior surface finish, improves the physical properties of the steel, such as tensile strength and formability, and electrical and magnetic properties of the steel and reduces its thickness to precise gauges. As a result, cold rolled products generally command higher prices than hot rolled products. See ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition — Overview — Cyclicality of the Steel Industry and Steel Prices’’. Cold rolled products are our second largest product category in terms of production and sales volumes. The largest customers for our cold rolled products are service centers that provide cutting

and slitting services for downstream users, including manufacturers of automobile, motorcycle and bicycle parts, computer casings, steel pipes and customers that use the cold rolled products as feedstock to galvanized products.

For 2002, we delivered 2,523.2 thousand tonnes of cold rolled products, of which 1,485.5 thousand tonnes were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 1,334.2 thousand tonnes of cold rolled products, of which 836.1 thousand tonnes were delivered to customers in the ROC. We generally meet all of our cold rolled feedstock requirements internally.

Wire Rods

We manufacture steel wire rods in various sizes and specifications for use mainly in the manufacture of fasteners, wires and ropes, umbrella ribs and welding electrode wires. For 2002, we delivered 1,207.0 thousand tonnes of wire rod products, of which 966.2 thousand tonnes were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 610.4 thousand tonnes of wire rod, of which 506.2 thousand tonnes were delivered to customers in the ROC.

Plates

We manufacture steel plates in various specifications and sizes for use in industrial applications. Our plate products are mainly used in the construction and shipbuilding industries for the manufacture of bridges, steel structures, ships, pipes, storage tanks, boilers and pressure vessels.

For 2002, we delivered 1,097.0 thousand tonnes of plate products, of which 933.8 thousand tonnes were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 567.7 thousand tonnes of plate products, of which 488.3 thousand tonnes were delivered to customers in the ROC. We also sell plates to an affiliate, China Steel Structure Corporation, for use in the manufacturing of steel structures. Such sales are made at market prices. See ‘‘— Subsidiaries and Other Principal Equity Investments’’.

Bars

We manufacture straight and coiled steel bars in various sizes and specifications for use mainly in the manufacture of fasteners, hand tools, machine parts, audio speaker tips, and automobile and motor parts. For 2002, we delivered 527.7 thousand tonnes of bar products, of which 421.6 thousand tonnes were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 278.5 thousand tonnes of bars, of which 233.7 thousand tonnes were delivered to customers in the ROC.

Slabs, Blooms, Billets and Pig Iron

We manufacture and sell semi-finished slabs, blooms, billets and pig iron to other steel mills for further processing. Our sales of semi-finished products and pig iron tend to vary, depending on production and sales requirements for our finished steel products. For 2002, we delivered 743.7 thousand tonnes of slabs, blooms and billets, substantially all of which were delivered to customers in the ROC. For the same year, we delivered 26.1 thousand tonnes of pig iron, all of which were delivered to customers in the ROC. For the six months ended June 30, 2003, we delivered 113.2 thousand tonnes of slabs, blooms and billets, substantially all of which were delivered to customers in the ROC. For the same period, we delivered 9.4 thousand tonnes of pig iron, all of which were delivered to customers in the ROC.

Production

We produce all of our crude steel and steel products at an integrated steelmaking plant complex located in Kaohsiung in southern Taiwan. We produce crude steel exclusively by means of the basic oxygen steelmaking method and cast all of our liquid steel by the continuous casting method. For 2002, we had total crude steel production capacity of 8.05 million tonnes per annum and produced 10.82 million tonnes, from which we produced 10.29 million tonnes of semi-finished and finished steel products. As a result of expansion and revamping projects undertaken by us, our current crude steel production capacity is 9.55 million tonnes per year.

Raw Materials

The principal raw materials used by us in our integrated steelmaking process are iron ore, coal and limestone. Raw materials imported by us are delivered by ship to the deep water port adjacent to our Kaohsiung plant complex and are stored at facilities located within the complex. We import iron ore principally from Australia and Brazil, and coal principally from Australia and Canada, in each case pursuant to long-term contracts that provide for annual price adjustments. We purchase limestone from domestic sources and Japan based on long-term contracts. We seek to maintain one month inventory of iron ore, coal and limestone at our storage yard at our Kaohsiung plant complex.

Materials Preparation

Coal is converted, after blending, into coke in coke ovens in facilities located within our Kaohsiung plant complex. A portion of the iron ore is blended with screened coke, limestone and other additives and transported by conveyors to a sinter plant, where it is ignited in a continuous process to produce sinter, a hard material of uniform size for use in the blast furnace. The remaining iron ore is fed without blending or further processing into the blast furnace.

Ironmaking

Coke, iron ore and sinter, together with limestone, are fed into blast furnaces, which are large chambers lined with refractory bricks, and are ignited to produce molten iron, the principal feedstock for the steelmaking process.

Steelmaking

In the basic oxygen steelmaking method, molten iron is transported from the blast furnace and poured into a vessel that contains steel scrap. Oxygen is blown into the vessel and reacts with the hot metal, burning off unwanted carbon and other elements to produce steel. Molten iron is transported by insulated railcar to the basic oxygen furnace facilities located within our Kaohsiung plant complex.

Casting

Liquid steel produced in our basic oxygen furnaces is poured into vessels from which it is released at a steady rate to form a continuous solid strand. The strand can then be cut into specified lengths as semifinished slabs or blooms. We cast all of our liquid steel by the continuous casting method, which dispenses with ingot casting and primary rolling and generally is more efficient and provides higher yields than other methods of casting.

Rolling Mills and Downstream Products

We roll substantially all of our semi-finished steel in our own rolling mills and, in some cases, also provide rolling services to other domestic steelmakers. For 2002, approximately 64% of our liquid steel production was rolled into hot rolled and cold rolled coils and sheets. The remaining liquid steel production was processed into plates, bar or wire rod products or sold in semi-finished form.

Within our Kaohsiung plant complex, we maintain rolling equipment capable of producing a wide range of marketable finished steel products from semi-finished slabs and blooms. Slabs are fed into our plate mill to be shaped into plate for sale to customers, or for further processing in our hot roll mill, into hot rolled coil and sheet products. Hot rolled products may be sold to customers or further processed in our cold roll mill. Blooms are fed into our billet mill to be shaped into billets for sale to steel re-rollers and forgers or for further processing in our bar and rod mills into bar and wire rod products.

The flow chart below outlines the production processes of our semi-finished and finished steel products.

==> picture [508 x 495] intentionally omitted <==

==> picture [509 x 571] intentionally omitted <==

Production Facilities

Current Facilities

The table below sets forth our major production facilities. All of the facilities are located at our Kaoshiung plant complex.

Plants Coke ovens . . . . . . . . . . . . . . . . . . . . Sinter plants (Dwight Lloyd Type). . . . . Blast furnaces . . . . . . . . . . . . . . . . . . . Basic oxygen furnaces . . . . . . . . . . . . . Continuous casters. . . . . . . . . . . . . . . . Plate mill . . . . . . . . . . . . . . . . . . . . . . Billet mill . . . . . . . . . . . . . . . . . . . . . Bar mill . . . . . . . . . . . . . . . . . . . . . . . Bar and rod combination mill . . . . . . . . Rod mill . . . . . . . . . . . . . . . . . . . . . . Hot strip mill . . . . . . . . . . . . . . . . . . . Hot rolled finishing lines . . . . . . . . . . . No. 1 pickling and cold reduction . . . . . No. 2 pickling and cold reduction . . . . . Batch annealing . . . . . . . . . . . . . . . . . Continuous annealing lines . . . . . . . . . . Electrolytic galvanizing line . . . . . . . . . Hot dip galvanizing line. . . . . . . . . . . . Reversing cold rolling mill . . . . . . . . . . Horizontal annealing and coating line . .	Facilities 60 coke oven cells (height 6 meters) 39 coke oven cells (height 6 meters) 49 coke oven cells (height 6 meters) 50 coke oven cells (height 7 meters) 50 coke oven cells (height 7 meters) Sinter area — 150 square meters Sinter area — 280 square meters Sinter area — 367 square meters Sinter area — 400 square meters Inner volume — 2,434 cubic meters Inner volume — 2,850 cubic meters Inner volume — 3,400 cubic meters Inner volume — 3,400 cubic meters Capacity — 150 metric tonnes Capacity — 250 metric tonnes 4-strand bloom continuous casters 2-strand slab continuous casters 1-stand 4-hi roughing and finishing mill 3-stand semi-continuous 18-stand 18-stand with 10-stand for rod 25-stand Continuous mill Hot rolled heavy gauge shear line Hot rolled light gauge shear line Hot rolled temper mill and recoil lines Pickled and oiled coil line Pickling line coupled with 5-stand 4-hi tandem mill Pickling line coupled with 4-stand 6-hi tandem mill Batch annealing bases Continuous annealing and temper mill 8 plating cells Continuous annealing, galvanneal furnace, induction heating 1-stand 6-hi reversing mill Horizontal annealing and coating	Number of Facilities
		1 1 2 2 2 1 1 1 1 1 1 1 1 3 3 3 6 1 1 1 1 1 2 1 1 4 1 1 1 130 2 1 1 1 1

Expansion and Revamping Projects

Expansion Projects

We are currently undertaking, or plan to undertake, seventeen expansion and revamping projects that have been approved by our Board of Directors. We expect that in connection with these expansion and revamping projects we will incur a total NT$22.4 billion (US$647.2 million) in capital expenditures from October 2003 to the end of 2007. Set forth below is a brief summary of the major expansion projects that currently are under progress or are scheduled to commence.

New Coke Dry Quenching System for Phase IV Coke Oven Plant. This project comprises (1) the installation of a new set of coke dry quenching equipment with a capacity of cooling 160 metric tonnes of coke from 10308C to 1808C per hour, and (2) modification of the existing Phase IV coke conveyor system and dust collectors. The installation of this new system will enable us to improve the quality of coke and conserve energy through heat recovery during the coke cooling process. The project commenced in January 2003 and is scheduled to be completed in July 2006. The estimated total cost for this project is NT$1,837 million (US$53.1 million).

Addition of Sizing Press for No. 1 Hot Strip Mill. This project comprises (1) the removal of No. 1 hot strip mill’s existing No.1 vertical edger, (2) the installation of a new sizing press in the No. 1 hot strip mill, and (3) addition of a set of width gauge in the No. 1 hot strip mill. The project will improve our ability to perform width reduction, reduce our slab inventory, shorten lead time for our shipment and increase our production. The project commenced in January 2003 and is scheduled to be completed in September 2005. The estimated total cost for this project is NT$1,081 million (US$31.2 million).

Addition of the Second Hot-dip Galvanizing Plant. This project comprises the construction of the second continuous galvanizing line with an annual capacity of 300 thousand tonnes, including annual capacity of 120 thousand tonnes of galvannealed steel products and 180 thousand tonnes of galvanized steel products. This project commenced in September 2003 and is scheduled to be completed in December 2006. The estimated total cost for this project is NT$4,678 million (US$135.2 million).

Addition of No. 9 Oxygen Plant. We expect that demand for oxygen will substantially increase upon the completion of upgrading and expansion of our No. 2 blast furnace. The construction of a new No. 9 oxygen plant is expected to ensure the supply of oxygen. In addition, in connection with the replacement of our current systems, we will construct the No. 9 system in our oxygen plant. This project commenced in September 2003 and is scheduled to be completed in August 2007. The estimated total cost for this project is NT$2,610 million (US$75.4 million).

Revamping Projects

We are currently undertaking five revamping projects. We expect to incur capital expenditures in the aggregate of NT$8,153 million (US$235.6 million) for these five revamping projects. Set forth below is a brief summary of the major revamping projects that are currently under progress or are scheduled to commence.

No. 2 Blast Furnace Second Stage Revamping. We have completed the modification and revamping of the hearth shell and lining refractory of No. 2 blast furnace. We have also completed the modernization and renovation of mechanical and electrical systems of No. 2 blast furnace. We are currently undertaking the second stage revamping of the No. 2 blast furnace to enlarge its furnace shell and inner volume and as a result increase its annual production capacity of molten iron from 1.75 to 2.10 million tonnes. This project commenced in April 2003 and is scheduled to be completed in June 2006. The estimated total cost for this project is NT$3,030 million (US$87.5 million).

Revamping and Modification of No. 4 And 5 Slab Continuous Casting Machines. This project comprises the conversion of No. 5 slab continuous casting machine from the curved type into the verticalbended type, and the revamping of certain other equipments of No. 4 and No. 5 slab continuous casting machines. We expect this project will enable us to meet the quality and quantity requirements in our highgrade steel products, as well as to reach the annual capacity goal of 11 million tonnes of steel liquid. We are undertaking this project currently to take advantage of the shut-down of the No. 2 blast furnace in connection with its own revamping. The project commenced in July 2003 and is scheduled to be completed in December 2005. The estimated total cost for this project is NT$2,102 million (US$60.7 million).

Revamping of Down-Coiler for No. 1 Hot Strip Mill. This project comprises the revamping of the rolling equipment for No. 1 hot strip mill. We expect this project will enable us to improve our rolling capability to 25.4 mm (or 20 mm for the API steel). Furthermore, upon the completion of this project, we expect that we will be able to produce high strength super thick sheets, including API steel, and may develop the new class of automobile steel, including the variable phase steel. The project commenced in July 2002 and is scheduled to be completed in February 2005. The estimated total cost for this project is NT$1,793 million (US$51.8 million).

Sales and Marketing

Sales

The ROC is the primary market for our steel products. For 2002 and the six months ended June 30, 2003, approximately 72.4% and 72.7% respectively of our revenues from sales of steel products was attributable to sales made to customers in the ROC, principally in the re-rolling, pipemaking and hardware manufacturing industries, and to domestic steel service centers. Our domestic sales are generally made directly to customers upon the customers’ orders. The table below sets forth, for the periods indicated, our steel domestic sales volume and sales revenues, by principal product category.

Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Months Ended June 30,	Six Months Ended June 30,	Six Months Ended June 30,	Six Months Ended June 30,
2000		2001		2002		2002		2003
Volume	Revenues	Volume	Revenues	Volume	Revenues	Volume	Revenues	Volume	Revenues
2,892.4 1,537.3 946.6 997.6 462.7 130.5					evenues in 24,705.2 17,502.6 9,098.4 9,737.2 4,332.3 4,780.1				17,103.4 12,122.5 5,400.9 5,856.2 2,748.8 1,033.2
6,967.1	70,023.2	6,995.2	59,916.2	7,530.7	70,155.8	3,940.8	32,615.4	3,768.7	44,265.0

The major industries that use our finished steel products include the automotive, electrical appliance, pipe manufacturing, furniture, construction, shipbuilding, bridgebuilding, toolmaking and computer peripherals industries.

Our steel export sales are made primarily to customers in Japan, Hong Kong (including the PRC) and Southeast Asia. For 2002 and the six months ended June 30, 2003, steel exports represented approximately 27.6% and 27.3%, respectively, of our revenues from sales of steel products. Export sales are made through China Steel Global Trading Corporation, our wholly owned subsidiary. The table below sets forth, for the periods indicated, our steel export sales volume and sales revenues, by principal product category.

Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Months Ended June 30,	Six Months Ended June 30,	Six Months Ended June 30,	Six Months Ended June 30,
2000		2001		2002		2002		2003
Volume	Revenues	Volume	Revenues		Revenues	Volume	Revenues	Volume	Revenues
1,392.4 894.1 164.1 171.1 97.4 29.3					evenues in 10,757.3 11,488.5 1,326.3 2,211.7 970.1 0.9				6,637.5 7,536.5 776.0 1,176.1 498.3 0.6
2,748.4	26,165.3	2,693.9	21,602.9		26,754.8	1,531.8	12,076.2	1,388.3	16,625.0

(1) We do not export pig iron.

Our principal export products are hot rolled and cold rolled steel products and our principal export markets are Hong Kong (including the PRC), Japan and Southeast Asia. In 2002, exports to Hong Kong (including the PRC), Japan and Southeast Asia accounted for 36.7%, 32.4% and 26.1%, respectively, of our total volume of steel exports. The table below sets forth the geographical distribution, in percentages, of our steel export volume for the periods indicated.

Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong (including the PRC) . . . . . . . . . . . . . . . . Southeast Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year Ended December 31, 2000 2001 2002 39.8% 35.3% 32.4% 31.5% 30.1% 36.7% 22.7% 25.2% 26.1% 1.7% 2.2% 2.7% 4.3% 7.2% 2.1%	Year Ended December 31, 2000 2001 2002 39.8% 35.3% 32.4% 31.5% 30.1% 36.7% 22.7% 25.2% 26.1% 1.7% 2.2% 2.7% 4.3% 7.2% 2.1%	Six Months Ended June 30,	Six Months Ended June 30,
	2000 39.8% 31.5% 22.7% 1.7% 4.3%	2001 35.3% 30.1% 25.2% 2.2% 7.2%	2002 30.8% 38.3% 26.2% 3.1% 1.6%	2003
				31.8% 34.8% 29.2% 2.4% 1.8%

China Steel Global Trading Corporation, our wholly owned subsidiary, established trading firms in Shanghai and Hong Kong to coordinate our sales to the PRC and to serve as customer service centers. A substantial majority of our sales to customers in the PRC are to affiliates of Taiwan businesses operating in the PRC.

Our customer base is fairly stable from year to year. For each of 2000, 2001, 2002 and the six months ended June 30, 2003, revenues derived from sales to our largest customer, Yieh Phui Enterprise Co., Ltd., accounted for approximately 10% of our revenues and no other customer accounted for more than 5% of our revenues.

Marketing and Pricing

We seek to maintain close relationships with our domestic steel customers. As of September 30, 2003, we had 92 employees in our sales and marketing departments whose principal activities include marketing research, sales planning, marketing strategy, order consultation with customers and sales coordination and control. We generally determine our production schedule on a quarterly basis in response to orders. To assist our customers, we have also established a computerized order-tracking system designed to permit customers to monitor the progress of orders at each production stage. We also promote the consumption of higher quality steel products in the ROC through seminars, conferences and other marketing activities conducted with steel customers in the ROC. Yieh Phui Enterprise Co., Ltd. was our top customer in terms of our revenues for each of 2000, 2001, 2002 and the six months ended June 30, 2003. Yieh Loong, in which we own 39.3% of the outstanding share capital, was our second largest customer in terms of our revenues for each of 2001 and 2002.

The prices of our steel products generally reflect world market prices for similar products. The prices of our products are not regulated by the ROC government. We maintain separate domestic and export base prices for our steel products which are adjusted periodically, typically quarterly, in response to changes in the import prices of foreign steel, export prices, and supply and demand. For information relating to average realized sales prices for our products and tariff rates applicable to imports of finished steel products of the type produced by us, see ‘‘Management’s Discussion and Analysis of Results of Operations and Financial Condition — Overview — Cyclicality of the Steel Industry and Steel Prices’’, ‘‘— Import Restrictions’’, and ‘‘Industry — The ROC Steel Market — Prices’’ and ‘‘— Tariffs’’. The actual sales prices that we obtain for our products are also subject to the specifications, sizes and quantity of the products ordered.

Raw Materials and Energy

Iron ore, coal and limestone are the principal raw materials used in our integrated steelmaking operations. We purchase substantially all of our raw materials from foreign suppliers due to the unavailability of such materials (with the exception of limestone) from domestic sources. We have not experienced any material interruptions in the availability of raw materials for our operations and do not believe we are dependent on any one supplier for our raw materials.

We purchase iron ore and coal required in our operations pursuant to long-term contracts entered into with overseas suppliers. The initial term of these contracts typically range in duration from three to ten years and provide for annual price adjustments, which reflect changes in world market prices. For 2000, 2001, 2002 and the six months ended June 30, 2003, 48.8%, 54.8%, 48.7% and 50.2%, respectively, of our purchases of raw materials for each year were from our top ten suppliers for such year. Our major suppliers include Hamersley Iron Pty. Ltd. (Australia), BHP Iron Ore Limited (Australia), Companhia Vale Do Rio Doce (Brazil), Anglo Coal Australia Pty. Limited (Australia) and Fording Coal Limited (Canada).

For 2002, we met our iron ore requirements principally from sources in Australia and Brazil, and our coal requirements principally from sources in Australia and Canada. China Steel Express Corporation (‘‘CSE’’), our wholly owned subsidiary, owns and maintains a fleet of seventeen bulk carriers. Eight of these bulk carriers provide transportation of iron ore and coal from Australian suppliers to our Kaohsiung plant complex. Iron ore and coal from countries other than Australia are delivered by the other four bulk carriers owned by CSE or vessels chartered by CSE. See ‘‘— Subsidiaries and Other Principal Equity Investments’’.

We purchase limestone from domestic and foreign suppliers at market prices. For 2002, we met our limestone requirements principally from domestic sources and sources in Japan. Limestone from domestic sources is delivered to our Kaohsiung plant complex by a vessel owned by CSE. Limestone from other sources is delivered by vessels chartered by CSE or the suppliers.

We consumed approximately 4,525 Mkwh of electricity in 2002. Currently, approximately 77.3% of our power consumption is generated internally from two power plants and several co-generation facilities located within our Kaohsiung plant complex. We source our remaining electricity requirements from

government-controlled public utilities pursuant to supply contracts which are subject to periodic price adjustments as well as power reductions during periods of peak demand. The average cost of internally generated power was NT$1.03 per kwh in 2002, compared to an average cost of NT$1.45 per kwh for power purchased from public utility grids. We have not experienced any significant disruptions in electricity or water supply at our facilities in recent years.

We obtain water for our operations from government-controlled utilities pursuant to supply contracts which are subject to periodic price adjustments as well as water supply reductions during periods of drought.

Competition

The international steel industry is highly competitive. We compete in the domestic and export markets on the basis of:

. range and quality of our products;
. price;
. delivery performance; and
. customer service.

Our main competitors in the domestic market are smaller steelmakers and the mini-mills in Taiwan. We have recently faced competitive pressures as a result of increased production by Taiwan steelmakers and mini-mills. We may also face additional competition if other Taiwan steelmakers were to expand production capacity. Our competitive position in the domestic market may also be adversely affected if another integrated steelmaker were to be established in Taiwan. In addition, we have experienced increased price competition in the ROC market from steel exporters in the Commonwealth of Independent States, Eastern Europe and Latin America.

Our main competitors in our principal export markets are other integrated steelmakers located in countries that are exporters of steel, principally Japan and South Korea, and particularly, those steelmakers formed as a result of the consolidation of the steel industry in the Asian region. For example, Kobe Steel, Ltd., Nippon Steel Corporation and Sumitomo Metal Industries, Ltd., three Japanese steelmakers, formed an alliance in 2002, and in the same year, Kawasaki Steel Corporation and NKK merged into one entity as JFE Group. Steelmakers formed as a result of consolidation may enjoy improved market share, cost structure, production efficiency, economies of scale and distribution channels.

In 2002 and the six months ended June 30, 2003, exports to Hong Kong (including the PRC) accounted for 36.7% and 34.8% of our total export volume of steel products. A substantial majority of our sales to customers in the PRC are to affiliates of Taiwan businesses operating in the PRC. Because of our geographic proximity to the ports of Guangdong province, a substantial portion of our sales to the PRC is transported through the ports of Guangdong province and to the southern provinces of the PRC. The PRC steel industry is rapidly developing as many PRC steelmakers continue to make substantial capital expenditures in new equipment and technology as well as to undertake capacity expansion projects. The improvement in production efficiency and capabilities of PRC steelmakers and expanded production capacity may result in a decrease in the price of steel products produced in the PRC and a corresponding decrease in demand for imported steel products. Our ability to remain competitive in the PRC market may be adversely affected by the supply and lower price of steel products produced by steelmakers in the PRC.

In recent years, we have sought to maintain our relative share of the expanding ROC market for steel products of the type produced by us without reducing the volume of our exports. For 2000, 2001 and 2002, the volume of our steel exports, measured as a percentage of our total steel sales volume, was 28.3%, 27.8% and 28.5%, respectively. See ‘‘— Sales and Marketing — Sales’’.

Research and Development

Our steel and aluminum research and development activities are generally directed towards the improvement of the range and quality of our steel products and the aluminum products of our subsidiary, establishing new uses for steel, aluminum and related by-products, enhancing production efficiency, reducing production cost and enhancing environmental pollution control technology. Our new materials research and development activities are generally directed towards the development of specialty chemicals, coated steel and aluminum products, ceramic powder materials, refractories and related production, energy saving, pollution control and resources recovery processes for use by us and our subsidiaries and affiliates.

Our research and development team works with our production team to develop new commercial applications for our steel products and also regularly provides to customers and our affiliates technical, production and environmental engineering advisory services relating to the use of new products, improvements in operational efficiency and measures to reduce pollution.

As of September 30, 2003, we had 255 employees in two separate research and development departments focused on steel, aluminum and new materials, located in facilities within our Kaohsiung plant complex. Our research and development expenses typically amount to approximately 1% of revenues.

We have obtained ISO 9001 certificate issued by the Bureau of Standards, Metrology and Inspection of the MOEA in October 2002 and JIS Marking approvals for our major steel products. In addition, eight principal international classification societies have also accepted us as an approved producer of highstrength hull structural steel.

Intellectual Properties

We have 221 patents registered in Taiwan and certain other jurisdictions (including United Kingdom, Germany, United States, the PRC, Japan and Korea) and an additional 24 patents in the process of patent registration. The major registered patents related primarily to technologies and know-how, equipment and new products. In addition, we have the right to use a number of trademarks and service marks in Taiwan and the PRC and other countries, including ‘‘CSC’’ and ‘‘China Steel’’, which are used to identify our businesses and products.

Environmental Protection

We have installed various types of anti-pollution equipment for the treatment of waste water, air pollution, solid waste and noise pollution emitted from our production facilities. We and our production facilities in Kaohsiung are subject to regulation by the Environmental Protection Administration of the ROC and the Environmental Protection Bureau of the Kaohsiung municipal government.

ROC steelmakers, including us, are subject to stringent environmental laws and regulations concerning, among other things, drinking water, noise, discharges to the air and water and disposal of solid wastes. In particular, our upstream processes produce a substantial amount of wastes. The amount of wastes discharged is under stringent regulation by the ROC environmental regulatory authorities and the total amount of wastes discharged within a certain period of time may not exceed the applicable limitations. In 2000, 2001, 2002 and the six months ended June 30, 2003, we paid NT$5.0 million, NT$0.8 million, NT$1.2 million (US$34,672) and NT$0.5 million (US$14,447), respectively, in environmental-related fines. We have made, and will continue to make, substantial expenditures to comply with applicable environmental laws, regulations and permit requirements. We believe we are currently in substantial

compliance with applicable environmental laws and regulations and that any current failure to comply with such laws and regulations or the foreseeable costs of compliance with current laws and regulations will not have a material adverse effect on our business.

Enterprise Resource Planning System

We have an enterprise resource planning (‘‘ERP’’) system that is designed to integrate the major aspects of our business functions, including the management of sales, production, purchasing, transportation, human resource and administration. Our ERP system interacts with our accounting system to provide our management with critical operational data to assist them in their decision-making process. Our ERP system provides us with timely monitoring of the major aspects of our business process through production automation, flow control, on-line real-time data collection and plant-wide optical network. We believe our ERP system has enabled us to achieve faster time-to-market of new products, shorter delivery time, optimized inventory for finished goods, shorter production and development cycles, improved product quality, reliability and serviceability.

Legal Proceedings

Except as set forth below, we are not involved in any other legal proceedings, the outcome of which, in our opinion, would have a material adverse effect on our business.

Employee Action

In April 2000, 1,441 of our employees filed a civil suit with the Taiwan Kaohsiung District Court alleging that we failed to account for the extra compensations for the second and third shift workers when calculating the seniority payments paid to such employees upon our privatization in 1995. The suit is seeking NT$125.4 million in compensation, plus accrued interest. Both the Taiwan Kaohsiung District Court and the Taiwan High Court Kaohsiung Branch had rendered a judgment against us. We appealed this case to the Supreme Court and on September 26, 2003, the Supreme Court rendered a final judgment against us.

Anti-dumping Cases

There are two current international anti-dumping investigations against us.

United States

In September 2001, the U.S. Department of Commerce determined that imported hot rolled steel products from certain countries, including the ROC, were being imported into the U.S. at prices below fair value. In November 2001, the U.S. International Trade Commission determined that such imports at prices below fair value injured the steel industry in the United States. As a result, the U.S. Department of Commerce imposed a 29.14% anti-dumping duty on imports of hot rolled products into the U.S. We are currently involved in administrative proceedings with the U.S. Department of Commerce in connection with our export of hot rolled steel products to the United States. In 2002 and the six months ended June 30, 2003, our export of hot rolled steel products to the United States. accounted for less than 1%, respectively, of our total exports of hot rolled products. As such, we do not believe that the pending administrative proceedings by the U.S. Department of Commerce will have a material adverse effect on our results of operations or financial condition.

The PRC

In May 2003, the PRC Ministry of Commerce (‘‘MOC’’) found that dumping activities existed with respect to the imported cold rolled steel products originated in certain countries, including the ROC. The MOC concluded that such dumping activities materially injured the PRC steel industry. On September 23,

2003, the MOC made the final determination that we were engaging in dumping activities with respect to our imports of cold rolled steel products into PRC and imposed a 24% anti-dumping duty on such imports of ours, although the MOC postponed the implementation of this duty until further notice.

Most of our cold rolled steel products imported into the PRC market are primarily supplied to customers in the export processing industry, who receive refunds of any duties paid on their imported materials, including duties paid on our imported cold rolled products, upon exporting of their products. For this reason, we believe that the PRC anti-dumping duty imposed on our imports, if implemented, will not adversely affect the sales of our cold rolled products to our customers in the PRC.

Properties

Our steelmaking facility is located at a site in Kaohsiung adjacent to a deep water port and comprises coke ovens, sinter plants, blast furnaces, basic oxygen furnaces, continuous casters, rolling mills and finishing lines. See ‘‘— Production Facilities’’. As of June 30, 2003, we owned 526.7 hectares and leased 25.9 hectares of land at our Kaohsiung plant complex. Our principal executive offices are located in two headquarter buildings at a site adjacent to our steel production facilities at our Kaohsiung plant complex. We maintain administration and market research offices in Taipei, Singapore and Osaka, Japan.

Insurance

We have insurance policies that we believe to be adequate to cover all of our production facilities at our Kaohsiung plant complex (including buildings, machinery and equipment) against losses and damages (including business interruption losses incurred after 15 calendar days of business interruption) caused by natural perils, including typhoons, floods and earthquakes. Our insurance policies also cover losses and damages resulting from fire and explosion caused by earthquakes. Our coverage for losses and damages caused by earthquakes and resulting fire is subject to limits on the amount for which coverage can be claimed.

Employees

The table below sets forth, for the periods indicated, a breakdown of our employees by function.

Production . . . . . . . . . . . . . . . . . . . Technical . . . . . . . . . . . . . . . . . . . . Sales and marketing. . . . . . . . . . . . . Management and administration . . . . Total . . . . . . . . . . . . . . . . . . . . .	Year Ended December 31, 2000 2001 2002 7,066 7,013 7,073 799 794 793 170 171 170 841 818 675 8,876 8,796 8,711	Year Ended December 31, 2000 2001 2002 7,066 7,013 7,073 799 794 793 170 171 170 841 818 675 8,876 8,796 8,711	Six Months Ended,	Six Months Ended,
	2000 7,066 799 170 841 8,876	2001 7,013 794 171 818 8,796	2002 7,105 795 170 678 8,748	2003
				7,037 791 163 680 8,671

As of July 31, 2003, we had a total of 8,665 employees, almost all of whom were members of the China Steel Corporation Labor Union. We entered into a collective agreement with the China Steel Corporation Labor Union that provides basic guidelines with respect to working hours, employee compensation and benefits, labor dispute resolution procedures and other labor-related matters. The collective agreement remains in effect until February 2004.

Approximately 90.4% of our employees have high-school and post-secondary diplomas, 16.8% have bachelors degrees and 5.7% have masters or doctorate degrees. Our average labor cost per employee per month for 2002 was NT$129,700 (US$3,747.5), which included such costs as salaries, benefits and pension contributions. Employee compensation is typically determined annually through discussions among us, the management and representatives of the China Steel Corporation Labor Union. Increases in our labor costs in recent years reflect annual increases in salary and other compensation determined as a result of such discussions.

Our management has consistently sought to maintain good relations with our workforce, and organizes meetings and seminars to provide a forum for management and workers to exchange ideas and to consider suggestions to improve the working environment and enhance the productivity of the workforce. We also maintain an employee training and continuing education program and a compensation program for employee accidents, disability and death.

We maintain a pension plan for our employees in accordance with the ROC Labor Standards Law, as amended (‘‘ROC Labor Standards Law’’). Pursuant to the ROC Labor Standards Law, we are required to provide retirement benefits to any employee who has worked for us for at least 25 years or has reached the age of 55 after having worked for us for a period of at least 15 years. An employee who reaches the prescribed age or service period becomes eligible for a lump sum payment upon retirement or resignation. To meet our obligations under the ROC Labor Standards Law, we make monthly contributions to a pension fund administered by the Employee Pension Fund Administration Committee, which maintains the fund with the Central Trust of China. Actual payments of pension or retirement benefits under the ROC Labor Standards Law and our retirement benefit plan are financed by the pension funds, and any shortfall is paid by us. As a result of seniority payments made by us to our employees in April 1995 upon our privatization in accordance with ROC government regulations, we believe we no longer have obligations to pay our employees pension or retirement benefits with respect to periods of service with us prior to April 1995 except for the amount payable for certain seniority payments in accordance with a final judgment rendered by the Supreme Court against us on September 26, 2003. See ‘‘— Legal Proceedings — Employee Action’’.

As of July 31, 2003, our employees, as a group, owned approximately 2.9% of our outstanding capital stock. We currently do not have a stock option plan.

Subsidiaries and Other Principal Equity Investments

The table below sets forth certain information regarding our principal subsidiaries and other principal equity investments as of June 30, 2003.

Name and Registered Office PRINCIPAL SUBSIDIARIES China Steel Express Corporation 32F, 8 Ming Chuan 2nd Road Chien Chen District Kaohsiung 806, Taiwan, ROC GAINS Investment Corporation 30F, 6 Ming Chuan 2nd Road Chien Chen District Kaohsiung 806, Taiwan, ROC China Prosperity Development Corporation Room 6, 24F, 31 Hai Bien Road Ling Ya District Kaohsiung 802, Taiwan, ROC China Steel Asia Pacific Holdings Pte. Ltd. 88 Amoy Street Level Three Singapore 069907 Info-Champ Systems Corporation 11F, 6 Ming Chuan 2nd Road Kaohsiung 806, Taiwan, ROC	Year Established 1996 1996 1998 2000 2000	Total Assets (in billions of NT dollars) 9.4 6.8 4.9 2.4 1.9	Our Ownership (percentage) 100.0(1) 100.0(1) 100.0(1) 100.0(1) 100.0(1)	Principal Business
				Shipping and chartering services for bulk and general cargo Investment in industrial materials, electronics, telecommunications and other high technology industries Real estate development and investment Investment in the Asia-Pacific region Information system planning

Name and Registered Office China Steel Machinery Corporation 3 Taichi Road Kaohsiung 812, Taiwan, ROC China Steel Security Corporation Room 1, 17F, 247 Ming Sheng 1st Road Kaohsiung 800, Taiwan, ROC China Steel Global Trading Corporation 31F, 8 Ming Chuan 2nd Road Chien Chen District Kaohsiung 806, Taiwan, ROC C. S. Aluminium Corporation 17 Tong Lin Road Hsiao Kang District Kaohsiung 812, Taiwan, ROC China Steel Management Consulting Corp. Room 2, 11F, 243 Yi-Hsin 1st Road Chien Chen District Kaohsiung 81233, Taiwan, ROC HIMAG Magnetic Corporation 24-1 Chien Kuo Road Nei Pu Industrial Park Ping Tung Hsien 912, Taiwan, ROC OTHER PRINCIPAL EQUITY INVESTMENTS Kuei Yi Industrial Co., Ltd. 100 Lung Chang Road Li Shui Village, Lung Ching Hsiang Taichung Hsien 434, Taiwan, ROC Yieh Loong Enterprise Co., Ltd. 317 Yu-Liao Road, Chiao Tou Kaohsiung 825, Taiwan, ROC China Ecotek Corporation 8F, 8 Ming Chuan 2nd Road Chien Chen District Kaohsiung 806, Taiwan, ROC Taisil Electronic Materials Corporation 2 Creation Road 1 Science-based Industrial Park Hsinchu, Taiwan, ROC Kaohsiung Rapid Transit Corporation 1 Jhong An Road Chien Chen District Kaohsiung 806, Taiwan, ROC China Steel Chemical Corporation Room 1, 5F, 47 Chunghua 4th Road Ling Ya District Kaohsiung 802, Taiwan, ROC	Year Established 2001 1997 1996 1996 1998 1991 1993 1983 1993 1994 2000 1989	Total Assets (in billions of NT dollars) 1.9 0.4 2.1 12.7 0.01 0.4 13.3 28.7 3.6 4.8 25.0 4.6	Our Ownership (percentage) 100.0(1) 100.0(1) 99.5(1) 97.7(1) 80.0(2) 56.3(3) 45.2 39.3(4) 36.1 35.0 31.3 30.7	Principal Business
				Machinery manufacturing and contracting for heavy machine engineering and construction Security services and systems Trading of steel products and industrial materials Manufacturing of aluminum products Management consultancy Manufacturing magnetic materials Manufacturing of section steel Manufacturing of steel products Engineering and consulting services for waste treatment and co-generation plants Manufacturing of silicon wafers Mass rapid transit engineering and services Manufacturing of coal-based and other chemicals

Name and Registered Office Taiwan Rolling Stock Co., Ltd. 458 Hsin Hsing Road Hu Kou Hsiang Hsin-Chu Hsien 303, Taiwan, ROC China Hi-ment Corporation Room 1 and 2 10F, 243 Yi-Hsin 1st Road Chien Chen District Kaohsiung 806, Taiwan, ROC China Steel Structure Co., Ltd. 1 Chung Kang Road Kaohsiung 81233, Taiwan, ROC	Year Established 2002 1991 1978	Total Assets (in billions of NT dollars) 0.9 4.6 5.7	Our Ownership (percentage) 26.8 20.3 17.9	Principal Business
				Manufacturing of rolling stock vehicles Manufacturing of cement from blast furnace slag Construction of steel structures

(1) Includes shares held by certain of our officers and Directors in order to satisfy ROC legal requirements relating to the minimum number of shareholders.
(2) Includes 37.5% held directly by us and the remainder held indirectly through Info-Champ Systems Corporation and GAINS Investment Corporation.
(3) Includes 50.2% held directly by us and the remainder held indirectly through China Steel Structure Corporation, China Steel Chemical Corporation and China Hi-ment Corporation.
(4) Includes 23.7% held directly by us and 15.6% held indirectly through our wholly owned subsidiaries.

Subsidiaries

Set forth below is a brief overview of each of our principal subsidiaries.

China Steel Express Corporation (‘‘CSE’’). In May 1996, we transferred our shipping operations to CSE, including our fleet of vessels designed for the transport of coal and iron ore and rights to three vessels that were then under construction. As of June 30, 2003, CSE and its subsidiaries owned 17 vessels with total shipping tonnage of 2,104,000 deadweight tonnes that are used for the transport of coal, iron ore, limestone and other goods. CSE expects to continue to provide shipping services to us and plans to expand its shipping activities. CSE’s operating revenues were NT$5.8 billion (US$0.2 billion) and its profit after tax was NT$896.0 million (US$25.9 million) in 2002.

GAINS Investment Corporation (‘‘GAINS’’). In April 1996, we established GAINS to develop and pursue direct investment opportunities in industrial materials, electronics, telecommunications and other high technology industries. GAINS intends to focus on investments in the ROC in companies presenting opportunities for rapid growth in revenues. GAINS’ operating revenues were NT$380.4 million (US$11.0 million) and its profit after tax was NT$237.3 million (US$6.9 million) in 2002.

China Prosperity Development Corporation (‘‘CPDC’’). We established CPDC in 1998. CPDC is engaged primarily in land and real estate development. CPDC’s operating revenues were NT$16.6 million (US$0.5 million) and its profit after tax was NT$1.1 million (US$0.03 million) in 2002.

China Steel Asia Pacific Holdings Pte Ltd. (‘‘CSAP’’). CSAP was incorporated in Singapore in November 2000 to hold indirectly the shares of Ornasteel Enterprise Corp. (M) Sdn. Bhd. (‘‘Ornasteel’’) and Group Steel Corporation (M) Sdn. Bhd. (‘‘Group Steel’’) in Melake, Malaysia. As of June 30, 2003, CSAP held indirectly 72% shares of Ornasteel with the remaining 23% held by CSE, CSGT and CSE Transport International Corp. For the same period, CSAP also held indirectly 60% shares of Group Steel with the

remaining 8% held by CSGT. Ornasteel and Group Steel were local millers producing cold rolled steel products in Malaysia. We sold hot rolled steel products to Ornasteel and Group Steel in the amount of NT$1,972.9 million (US$57.0 million) in 2002. As of November 30, 2002, Ornasteel’s total assets was NT$3.9 billion (US$0.1 billion), and its operating revenues were NT$4.3 billion (US$0.1 billion) and profit after tax was NT$171.3 million (US$5.0 million) in 2002. As of November 30, 2002, Group Steel’s total assets was NT$3.2 billion (US$0.1 billion), and its operating revenues were NT$3.5 billion (US$0.1 billion) and profit after tax was NT$351.4 million (US$10.2 million) in 2002.

Info-Champ System Corporation (‘‘ICSC’’). ICSC primarily provides information software and design of systems integration and related information technology services. ICSC’s operating revenues were NT$392.1 million (US$11.3 million) and its profit after tax was NT$84.4 million (US$2.4 million) in 2002.

China Steel Machinery Corporation (‘‘CSMC’’). CSMC is one of our wholly owned subsidiaries. In 2001 we acquired most of the assets, facilities and business of Taiwan Machinery Manufacturing Corporation to set up CSMC to engage principally in machinery manufacturing and contracting for heavy machine engineering and construction. CSMC’s operating revenues were NT$613.6 million (US$17.7 million) and its loss after tax was NT$48.2 million (US$1.4 million) in 2002.

China Steel Security Corporation (‘‘CSS’’). CSS primarily sells, installs, maintains and repairs security equipment and fire safety equipment. CSS’s operating revenues were NT$465.0 million (US$13.4 million) and its profit after tax was NT$16.6 million (US$0.5 million) in 2002.

China Steel Global Trading Corporation (‘‘CSGT’’). In April 1996, we transferred our steel trading business to CSGT. CSGT is currently engaged in the business of trading steel products and industrial materials and acting as the export sales agent for our steel products and the aluminum products of CSAC. CSGT imports slabs, hot rolled products, cold rolled products, plates and other steel products both for consumption as feedstock at our plants and for other domestic steel companies. CSGT imports materials and exports products for us on the basis of commissions at rates negotiated between the two parties. CSGT’s operating revenues were NT$4.1 billion (US$0.1 billion) and its profit after tax was NT$219.6 million (US$6.3 million) in 2002.

C. S. Aluminium Corporation (‘‘CSAC’’). In March 1996, we transferred our aluminum business to CSAC, including our aluminum remelting and rolling mills located in Kaohsiung. The aluminum mills were originally acquired by us in February 1985 from Taiwan Aluminium Corporation. The ROC is the primary market for CSAC’s aluminum products. CSAC’s aluminum export sales are made primarily to customers in Japan and Southeast Asia. CSAC’s operating revenues were NT$10.1 billion (US$0.3 billion) and its profit after tax was NT$507.0 million (US$14.6 million) in 2002.

China Steel Management Consulting Corporation (‘‘CMCC’’). We acquired 37.5% shares of CMCC in March 2003 to engage principally in the business of management consultancy. CMCC’s operating revenues were NT$6.5 million (US$0.2 million) and its profit after tax was NT$0.3 million (US$0.01 million) in 2002.

HIMAG Magnetic Corporation (‘‘HIMAG’’). HIMAG is a manufacturer of ferrite powder for power and telecommunication applications. It also sells iron oxide powder for ferrite products. HIMAG’s operating revenues were NT$332.8 million (US$9.6 million) and its loss after tax was NT$195.0 million (US$5.6 million) in 2002.

Other Principal Equity Investments

Kuei Yi Industrial Co., Ltd. (‘‘Kuei Yi’’). Kuei Yi produces section steel and has an annual crude steel production capacity of 600 thousand tonnes. Its principal facilities are located in the industrial district of Taichung Harbor in Taichung, Taiwan.

As of December 31, 1997, we had invested approximately NT$2.7 billion and acquired a 30% interest in Kuei Yi. In 2000, Kuei Yi filed for restructuring under the ROC Company Law after encountering severe financial problems due to certain malfeasance alleged to have been committed by its former chairman. In the first half of 2003, we invested an additional NT$1 billion in Kuei Yi and some of the lenders of Kuei Yi have agreed to convert approximately NT$800 million in debt owed by Kuei Yi into equity interest in Kuei Yi. As a result, Kuei Yi successfully completed the restructuring and resumed normal operations in August 2003. We currently hold 45.2% of the outstanding shares in Kuei Yi.

As of December 31, 2002, Kuei Yi had total assets of NT$12.8 billion (US$369.8 million), total debt NT$11.0 billion (US$317.8 million) and for the year ended December 31, 2002, Kuei Yi’s operating revenues were NT$5.3 billion (US$153.23 million) and it incurred a net loss of NT$98.7 million (US$2.9 million).

Yieh Loong Enterprise Co., Ltd. (‘‘Yieh Loong’’). Yieh Loong’s common shares are traded on the Taiwan Stock Exchange. Yieh Loong manufactures hot rolled and cold rolled steel products. We sell semifinished steel products such as slabs, hot rolled and cold rolled products to Yieh Loong as raw materials for its hot rolled and cold rolled products.

In February 2000, we acquired 22.5% of the outstanding shares of Yieh Loong at a purchase price of approximately NT$1.4 billion. In June 2000, we made an additional investment of approximately NT$2.7 billion in cash. We are now a controlling shareholder of Yieh Loong and have appointed two out of its three directors, both of its supervisors as well as its senior executive officers.

During the steel industry downturn in the second half of 2000 and the entire year of 2001, Yieh Loong suffered substantial operating losses. In October 2001, Yieh Loong petitioned for the traditional industries operational funds from the ROC Ministry of Finance. In 2001, the share price of Yieh Loong was substantially depressed. As a result, we wrote off NT$1,584.4 million to recognize our investment loss in Yieh Loong. In 2002, the operations of Yieh Loong significantly improved, resulting in an increase in the market price of Yieh Loong’s shares. In March 2003, Yieh Loong completed the restructuring of its debt.

Yieh Loong’s operating revenues were NT$23.2 billion (US$0.7 billion) and its profit after tax was NT$2.0 billion (US$0.1 billion) in 2002.

China Ecotek Corporation (‘‘Ecotek’’). Ecotek provides engineering and consulting services to waste treatment and co-generation plants. Ecotek’s operating revenues were NT$1.8 billion (US$0.1 billion) and its profit after tax was NT$22.0 million (US$0.6 million) in 2002. Ecotek’s shares are traded on the Taiwan Stock Exchange.

Taisil Electronic Materials Corporation (‘‘Taisil’’). Taisil was established in 1994 as a joint venture between us and MEMC Electronic Materials Inc. to produce raw silicon wafers. Taisil’s operating revenues were NT$2.7 billion (US$0.1 billion) and its profit after tax was NT$62.2 million (US$1.8 million) in 2002.

Kaohsiung Rapid Transit Corporation (‘‘KRTCO’’). KRTCO is involved in the construction and operation of public transportation systems in Kaohsiung. The Kaohsiung rapid transit system is currently under construction and is expected to be completed for operation in 2006. KRTCO’s operating revenues were NT$213.4 million (US$6.2 million) and its loss after tax was NT$5.1 million (US$0.1 million) in 2002.

China Steel Chemical Corporation (‘‘CSCC’’). CSCC was established in 1989 to engage principally in the manufacture of marketable coal-based chemicals from by-products generated from our coking and other integrated steelmaking operations, including benzene, coal tar, pitch, naphthalene, coke and coke breeze. CSCC was listed on the Taiwan Stock Exchange in 1998. CSCC’s operating revenues were NT$2.7 billion (US$0.1 billion) and its profit after tax was NT$557.5 million (US$16.1 million) in 2002.

Taiwan Rolling Stock Co., Ltd. (‘‘TRSC’’). TRSC is a joint venture of China Steel Corp., Nippon Sharyo Corp., Sumitomo Corp. and Tang Eng Iron Works Co., Ltd. It was established in October 2002 to engage principally in the manufacture of rolling stock vehicles. TRSC’s operating revenues were NT$129.3 million (US$3.7 million) and its profit after tax was NT$2.3 million (US$0.1 million) in 2002.

China Hi-Ment Corporation (‘‘Hi-Ment’’). Hi-Ment develops marketable cement products using blast furnace slag materials generated from our blast furnaces. Hi-Ment’s operating revenues were NT$2.6 billion (US$0.1 billion) and its profit after tax was NT$215.4 million (US$6.2 million) in 2002. Hi-Ment’s shares are listed on the Taiwan Stock Exchange.

China Steel Structure Co., Ltd. (‘‘CSSC’’). CSSC was established in 1978 to engage principally in the manufacture of steel sections and structural shapes for use in the domestic construction industry. CSSC’s manufacturing facilities are located adjacent to our Kaohsiung plant complex. CSSC purchases steel plate from us and manufactures and sells structural products principally to domestic customers. CSSC’s shares are listed on the Taiwan Stock Exchange. CSSC’s operating revenues were NT$5.8 billion (US$0.2 billion) and its profit after tax was NT$105.9 million (US$3.1 million) in 2002.

Others

East Asia United Steel Corp. Joint Venture. We entered into a joint venture agreement with Sumitomo Metal Industries, Ltd. (‘‘Sumitomo Metals’’) and Sumitomo Corporation in May 2003 to form a joint venture company, East Asia United Steel Corp. (‘‘EAU Steel’’). EAU Steel was incorporated in Japan in July 2003 with capital of Y=30.3 billion to be fully contributed in four installments by May 2005. We intend to make a total investment of Y=10 billion in EAU Steel, representing 33% of the share capital of EAU Steel, of which NT$9.5 million (US$0.3 million) was paid in July 2003. It is expected that EAU Steel will, through its wholly owned subsidiary, hold the foundry operations for production of steel slabs and billets, which will be spun off in November 2003 from Sumitomo Metals’ plant in Wakayama City in western Japan. It is expected that the wholly owned operating subsidiary of EAU Steel will sell up to 1.8 million tonnes of slabs per year to us and other ROC customers designated by us, including our subsidiary, Yieh Loong.

Tang Eng Iron Works Co., Ltd. We own approximately 8.5% of the outstanding common stock of Tang Eng Iron Works Co., Ltd. (‘‘Tang Eng’’), a manufacturer of steel structures and stainless steel products whose production facilities are located in the Kaohsiung area. The majority of the common shares of Tang Eng are owned by The Bank of Taiwan and the MOEA. We process Tang Eng’s semi-finished steel in our hot roll mills for which we receive compensation at market rates.

Maruichi Steel Tube Ltd. We also own approximately 2.0% of the outstanding common shares of Maruichi Steel Tube Ltd.

For a list of our long-term investments held as of June 30, 2003, please see Note 5 of our Audited Unconsolidated Semi-annual Financial Statements included elsewhere in this Offering Circular.

MANAGEMENT

Directors and Supervisors

Members of our Board of Directors are elected by our shareholders. As of October 16, 2003, our Board of Directors is composed of ten Directors. The Chairman of the Board of Directors is elected from among the Directors. The Chairman of the Board of Directors presides at all the meetings of the Board of Directors, and also has the authority to act as our representative. The Board of Directors is responsible for the management of our business and appoints the executive officers of our company. The term of office for Directors is three years and the current term of our Board of Directors ends on May 2004.

In accordance with the ROC Company Law, our Supervisors are elected by our shareholders, typically at the same time that Directors are elected. Supervisors cannot concurrently serve as our Directors, executive officers or be employed as staff members. The term of office for our Supervisors is three years. The duties and powers of the Supervisors include, but are not limited to, oversight of the activities of the Board of Directors, investigation of our business and financial condition, verification and review of financial statements presented by the Board of Directors, inspection of corporate records, verification of statements made by the Board of Directors and request to the Board of Directors to submit reports. To perform their supervisory duties, the Supervisors may, on behalf of our company, engage such independent experts as they may deem necessary to carry out any investigation or examination. A Supervisor may also convene an extraordinary meeting of shareholders when such Supervisor deems necessary.

In accordance with ROC law, each of our Director or Supervisor is elected either in his capacity as an individual shareholder or in his capacity as an individual representative of a corporate or government shareholder.

The table below sets forth, as of October 16, 2003, the names of our Directors and Supervisors, their principal occupation and their age.

Name Wen-Yuan Lin(1) . . . Feng-Sheng Wu(1) . . Jung-Yung Chen(1) . Iuan-Yuan Lu(1) . . . Yuan-Cheng Chen(1) Cheng-I Weng(1) . . . Chu Chen(2) . . . . . . Pai-Chien Huang(3) . Yuan-Chi Chao(4) . . Ho-Chong Chen(5) . . Shui-Yuan Wu(1) . . . Chen-Cheng Huang(1). . . . . . . Li-Tang Chang(6). . .	Position Chairman Director Director Director Director Director Director Director Director Director Supervisor Supervisor Supervisor	Principal Occupation Chairman of the Board, China Steel Corporation Executive Director, State-owned Enterprise Commission, Ministry of Economic Affairs President, China Steel Corporation Full Professor of Business Administration of National Sun Yat-Sen University Executive Vice President, China Steel Corporation Chairman of Industrial Technology Research Institute Chairperson of Council of Labor Affairs, Executive Yuan Manager, Cost Accounting System Section, Cost Department, China Steel Corporation President, China Development Financial Holdings Corporation Chairman of Ching Hwa Investment & Development Co., Ltd.; Chairman of CGS International, Inc. Chief Secretary of Directorate-General of Budget, Accounting and Statistics, Executive Yuan Director, Fourth Department, State-owned Enterprise Commission, Ministry of Economic Affairs Chairman of the Wu Chun-Hsien Foundation	Age
			51 50 57 55 58 59 53 45 54 52 47 56 68

(1) Representative of the MOEA.

(2) Representative of the Bureau of Labor Insurance.

(3) Representative of the China Steel Corporation Labor Union.

(4) Representative of China Development Industrial Bank.

(5) Representative of Ching Hwa Investment & Development Co., Ltd.

(6) Representative of Ever Wealthy Investment Corporation.

All of our Directors and Supervisors are citizens of the ROC. The business address of each of our Directors and Supervisors is the address of the registered office of our company.

As of December 31, 2002, our Directors and Supervisors, as representatives of our major shareholders and not in their personal capacities, control in the aggregate 4,138,029,781 shares of our outstanding capital stock. As of December 31, 2002, our Directors and Supervisors, their spouses and minor children, beneficially own, in their personal capacities, in the aggregate 806,813 shares of our outstanding capital stock. For the year ended December 31, 2002, our 11 Directors and three Supervisors, in their capacities as such, received aggregate remuneration of approximately NT$22.7 million (US$0.7 million) and NT$6.4 million (US$0.2 million), respectively. We have not provided any guarantee with respect to any personal liabilities of any of our Directors or Supervisors. In addition, none of our Directors and Supervisors has entered into any transactions with us which are unusual in their nature or conditions and there are no outstanding loans by us to any such person.

Executive Officers

The table below sets forth, as of October 16, 2003, the names, positions, age and years of service with our company of our principal executive officers.

Name Jung-Yung Chen . . . Yuan-Cheng Chen . . Chin-Sheng Huang . Tzer-Haw Chen. . . . Lo-Min Chung . . . . Chao-Ching Chen . . Guo-Hwa Cheng . . . Chaur-Hwa Ou . . . .	Position President Executive Vice President Vice President, Administration Division Vice President, Commercial Division Vice President, Finance Division Vice President, Corporate Planning Division Vice President, Technology Division Vice President, Production Division	Age 57 58 61 54 52 58 55 56	Years With Our Company
			31 31 29 29 28 29 27 31

As of December 31, 2002, our principal executive officers, their spouses and minor children, held 3,023,587 shares of our outstanding capital stock. For the year ended December 31, 2002, our principal executive officers, in their capacity as such, received aggregate remuneration of approximately NT$32.4 million (US$0.9 million). We currently do not have a stock option plan. We have not provided any guarantee with respect to any personal liabilities of any of our principal executive officers. In addition, none of our principal executive officers has entered into any transactions with us that are unusual in their nature or conditions and there are no outstanding loans by us to any such person.

Biographies of Directors, Supervisors and Executive Officers

Wen-Yuen Lin joined our company in December 2002 and has served as Chairman of our company since December 2002. He has also served as the chairman of Taiwan Cogeneration Corporation since July 2002. He is also currently the chairman of China Steel Global Trading Corporation and Taisil Electronic Materials Corporation. Mr. Lin graduated with an M.S. in civil engineering from the University of Hawaii in the United States.

Feng-Sheng Wu has served as a Director of our company since August 2003. Mr. Wu graduated with an M.A. in social science from National Taiwan University.

Jung-Yung Chen joined our company in 1972 and has served as a Director of our company since May 2001 and the President of our company since September 1993, before which he served as Vice President, Administration Division of our company. He is also the chairman of China Steel Structure Co., Ltd. and Kaohsiung Rapid Transit Corporation. Mr. Chen graduated with a B.S. in mineral and metallurgical engineering from the National Cheng-Kung University in Taiwan.

Iuan-Yuan Lu has served as a Director of our company since May 2001. Mr. Lu graduated with a Ph.D. in administrative engineering from Keio University in Japan.

Yuan-Cheng Chen joined our company in 1972 and has served as a Director of our company since May 2001 and an Executive Vice President of our company since February 1991, before which he served as Vice President, Steel Production Division of our company. He is also the chairman of China Steel Express Corporation and Ascentek Venture Capital. Mr. Chen graduated with a B.S. in mineral and metallurgical engineering from the National Cheng-Kung University in Taiwan.

Cheng-I Weng has served as a Director of our company since May 2001. Mr. Weng graduated with a Ph.D. in mechanical engineering from the University of Rochester in the United States.

Chu Chen has served as a Director of our company since January 2003. Ms. Chen graduated with an M.A. in public affairs management from National Sun Yat-sun University in Taiwan.

Pai-Chien Huang joined our company in 1984 and has served as a Director of our company since July 2003. He is also a manager of the Cost Accounting System Section in our Cost Department. Mr. Huang graduated with a B.A. in business administration from National Chen Kung University in Taiwan.

Yuan-Chi Chao has served as a Director of our company since July 2003. Mr. Chao graduated with an M.B.A. from New York University in the United States.

Ho-Chong Chen has served as a Director of our company since May 2001. He is also the chairman of CGS International, Inc.

Shui-Yuan Wu has served as a Supervisor of our company since January 2003. Mr. Wu graduated with an M.S. in traffic and transportation from National Chiao Tung University in Taiwan.

Chen-Cheng Huang has served as a Supervisor of our company since May 2001. Mr. Huang graduated with an L.L.M. from National Chengchi University in Taiwan.

Li-Tang Chang has served as a Supervisor of our company since May 2001. Mr. Chang graduated with an L.L.B. from National Chung Hsing University in Taiwan.

Chin-Sheng Huang joined our company in 1974 and has served as Vice President, Administration Division of our company since July 1999, before which he served as Assistant Vice President, Steel Production Division of our company. He is also a director of China Steel Security Corporation. Mr. Huang graduated with a B.S. degree in mechanical engineering from National Taiwan University.

Tzer-Haw Chen joined our company in 1974 and has served as Vice President, Commercial Division since July 2002, before which he served as Assistant Vice President, Commercial Division of our company. He is also a director of China Steel Global Trading Corporation. Mr. Chen graduated with a B.S. in navigation from National Taiwan Ocean University.

Lo-Min Chung joined our company in 1975 and has served as Vice President, Finance Division of our company since January 1990, before which he served as Assistant Vice President, Finance Division of our company. He is also the chairman of GAINS Investment Corporation. Mr. Chung graduated with an M.B.A. from Arizona State University in the United States.

Chao-Ching Chen joined our company in 1974 and has served as Vice President, Corporate Planning Division of our company since August 2001, before which he served as Special Assistant to the President of our company. He is also the chairman of China Steel Machinery Corporation. Mr. Chen graduated with a B.S. in mechanical and marine engineering from National Taiwan Ocean University.

Gwo-Hwa Cheng joined our company in 1976 and has served as Vice President, Technology Division of our company since June 1995, before which he served as Assistant Vice President, Technology Division of our company. He is also the chairman of HIMAG Magnetic Corporation. Mr. Cheng graduated with a Ph.D. in material engineering from Purdue University in the United States.

Chaur-Hwa Ou joined our company in 1972 and has served as Vice President, Production Division of our company since June 1998, before which he served as Assistant Vice President, Steel Production Division of our company. He is also a director of China Steel Structure Co., Ltd. Mr. Ou graduated with an M.S. in electrical engineering from National Taiwan University.

PRINCIPAL SHAREHOLDERS

The table below sets forth information relating to our five largest shareholders as of July 31, 2003. For information relating to our relationship with the ROC government, see ‘‘Selling Shareholder’’.

Name The Ministry of Economic Affairs, Republic of China(1). . . . . . . . . . . . Bureau of Labor Insurance(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee’s Stock Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depositary Bank for the GDSs(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supervisory Committee of the Worker’s Retirement Fund. . . . . . . . . . .	Number of Shares Held 3,774,874,784 408,719,600 168,591,682 164,083,921 89,402,301	Percentage of Total Outstanding Shares 39.94% 4.32% 1.78% 1.73% 0.95%	Percentage of Total Outstanding Shares and Preferred Shares
			39.74% 4.30% 1.77% 1.73% 0.94%

(1) In August 2003, the MOEA sold 336,803,000 Shares and reduced its ownership to 36.37% of our total outstanding Shares and 36.19% of our outstanding capital stock.
(2) The Bureau of Labor Insurance is a government entity controlled by the ROC government. In August 2003, the Bureau of Labor Insurance sold 80,000,000 Shares and reduced its ownership to 3.47% of our total outstanding Shares and 3.46% of our total outstanding capital stock.
(3) In May 1992, 10,500,000 International GDSs and 7,500,000 Rule 144A GDSs, and in February 1997, 10,037,550 International GDSs and 131,800 Rule 144A GDSs, each representing 20 Shares, were offered to non-ROC investors by the MOEA as part of the privatization program undertaken by the ROC government with respect to our company. Such International GDSs and Rule 144A GDSs were issued respectively pursuant to the International Deposit Agreement and the Rule 144A Deposit Agreement under each of which Citibank, N.A. currently acts as Depositary. The Shares represented by the International GDSs and Rule 144A GDSs are held in the name of such Depositary or its nominees.

Other than as set forth in the table above and to our best knowledge, there is no single shareholder who held, directly or indirectly, as of July 31, 2003, more than 5% of the outstanding Shares or 5% of our outstanding capital stock. As of July 31, 2003, our employees, as a group, owned approximately 2.9% of our outstanding capital stock.

CHANGES IN ISSUED SHARE CAPITAL

The table below sets forth changes in our share capital since May 1988.

Month and Year of Issue May 1988. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . July 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Number of Shares Issued (thousands of Shares) 135,076.6 137,913.2 140,809.4 136,920.3 139,658.7 142,451.9 181,626.2 5,758.0 744,667.4 3,984.8 409,818.6 13,018.6 172,218.1 48,912.6 263,884.2 27,645.8 179,178.7 44,589.0 139,735.9	Types of Issue Stock Dividend Stock Dividend Stock Dividend Stock Dividend Stock Dividend Stock Dividend Stock Dividend Employee Bonus Stock Dividend Employee Bonus Stock Dividend Employee Bonus Stock Dividend Employee Bonus Stock Dividend Employee Bonus Stock Dividend Employee Bonus Stock Dividend	Number of Shares Outstanding After Issuance
			(thousands of Shares) 6,567,294.3 6,705,207.5 6,846,016.9 6,982,937.2 7,122,595.9 7,265,047.9 7,446,674.1 8,197,099.5 8,610,902.9 8,796,139.6 9,108,936.4 9,315,760.9 9,500,085.8

TRANSACTIONS WITH RELATED PARTIES

From time to time we have engaged in a variety of transactions with our affiliates. Our policy on transactions with affiliates is that they must be conducted on terms that are substantially the same as those for comparable transactions with non-affiliates on an arm’s-length basis. Set forth below is a summary of our transaction with related parties for the periods indicated.

Sales and Purchases of Goods

We sold slabs, hot rolled products and cold rolled products in the aggregate amount of NT$1,413.2 million, NT$3,881.4 million and NT$4,818.3 million (US$139.2 million) and NT$912.7 million (US$26.4 million) to Yieh Loong in 2000, 2001, 2002 and the six months ended on June 30, 2003, respectively.

We sold hot rolled products in the aggregate amount of NT$2,140.9 million, NT$2,288.7 million and NT$1,972.9 million (US$57.0 million) and NT$1,252.6 million (US$36.2 million) to Ornasteel Enterprise Corp. (M) Sdn. Bhd in 2000, 2001, 2002 and the six months ended June 30, 2003, respectively.

We sold steel plates in the aggregate amount of NT$1,602.4 million, NT$1,498.3 million and NT$1,885.6 million (US$54.5 million) and NT$1,213.2 million (US$35.1 million) to CSSC in 2000, 2001, 2002 and the six months ended June 30, 2003, respectively. Our total sales to related parties amounted to NT$6,638.5 million, NT$8,635.5 million, NT$10,455.0 million (US$302.1 million) and NT$4,772.6 million (US$137.9 million) in 2000, 2001, 2002 and the six months ended June 30, 2003.

We paid freight in the aggregate amount of NT$5,132.9 million, NT$5,399.6 million, NT$5,225.8 million (US$151.0 million) and NT$3,759.2 million (US$108.6 million) to CSE in 2000, 2001, 2002 and the six months ended June 30, 2003, respectively. We purchased slabs from Yieh Loong in the aggregate amount of NT$1,020.4 million (US$29.5 million) for the six months ended on June 30, 2003. Total purchases from related parties amounted to NT$7,283.7 million, NT$5,879.6 million, NT$5,851.3 million (US$169.1 million) and NT$5,687.4 million (US$164.3 million) in 2000, 2001, 2002 and the six months ended June 30, 2003.

In 2002, we purchased from Hi-mag Magnetic Corporation certain parcels of land and factories for NT$202.7 million, the purchase price of which was determined based on independent appraisals.

Real Estate Leases and Equipment Leases

We leased factory land, offices and factory equipment to our related parties. We typically charge an annual rent that is equal to 4% to 10% of government published land value or the prevailing market rent. The table below sets forth, for the periods indicated, the annual rent collected from our related parties.

Rental Income

			Rental Income	Rental Income	Rental Income
China Steel Chemical Corporation . . . . . . . . China Steel Machinery Corporation . . . . . . . . China Steel Structure Corporation . . . . . . . . China Hi-ment Corporation Universal Exchange Incorporated . . . . . . . . C.S. Aluminium . . . . . . . Others . . . . . . . . . . . . . . Total . . . . . . . . . . . . .	Expiry Date		Year Ended December 31,			Six Months Ended June 30,
		2000	2001	2002		2002	2003
	Dec. 2010 Nov. 2011 May 2018 April 2012 Sept. 2003 Feb. 2016	NT$20,211 — 15,626 4,740 — — 469						US$ 182 331 227 73 — 679 73
		NT$41,046	NT$49,766	NT$76,354	US$2,206	NT$61,598	NT$54,177	US$1,565

Factoring of Notes Receivables

We sold some of our outstanding notes receivables without recourse pursuant to a factoring agreement to Jyh Yang Management Consulting Corporation. The aggregate amount of notes sold was of NT$3,336.8 million, NT$2,615.6 million, NT$3,630.9 million (US$104.9 million) and NT$1,579.7 million (US$45.6 million) in 2000, 2001, 2002 and the six months ended June 30, 2003, respectively. The annual interest expenses relating to such notes were NT$81.8 million, NT$57.9 million, NT$51.4 million (US$1.5 million) and NT$16.1 million (US$0.5 million) in 2000, 2001, 2002 and the six months ended June 30, 2003, respectively.

Other Services

Our related parties have provided certain furnace slag and cleansing, property maintenance or construction, export shipping, and export and import services and other services to us for customary fees. The table below sets forth, for the period indicated, amount of fees paid by us to our related parties for services provided.

	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Mo	nths Ended June 30,	nths Ended June 30,
2000	2001	2002		2002	2003
NT$1,006,059 — 310,811 241,151 302,389 — 366,444						US$ 8,542 3,081 7,634 3,822 3,577 3,859 11,999
NT$2,226,857	NT$3,323,957	NT$2,994,941	US$86,534	NT$1,378,358	NT$1,471,393	US$42,514

We provided labor staffing, products processing, liquid waste processing and recycling, and other services to related parties at customary fees. The table below sets forth, for the periods indicated, the amount of fees paid to us by our related parties for services we provided.

	Year Ended December 31,	Year Ended December 31,	Year Ended December 31,	Six Mo	nths Ended June 30,	nths Ended June 30,
2000	2001	2002		2002	2003
NT$1,467,613 52,319 29,610 2,051 — — — — 243,857						US$10,794 — 706 — 567 6,981 2,183 528 883
NT$1,795,450	NT$849,504	NT$881,568	US$25,471	NT$594,239	NT$783,652	US$22,642

DESCRIPTION OF CAPITAL STOCK

Set forth below is certain information relating to our capital stock, including brief summaries of certain provisions of our Articles of Incorporation, the Securities and Exchange Law of the ROC (the ‘‘ROC Securities and Exchange Law’’) and regulations promulgated thereunder and the laws of the ROC relating to corporations (the ‘‘ROC Company Law’’).

General

As of October 16, 2003, our authorized capitalization, under our Articles of Incorporation, was 10,600,000,000 shares of capital stock, par value NT$10 per share. As of October 16, 2003, 9,452,323,763 shares of our common stock, par value NT$10 per share, were issued and outstanding, and 47,762,000 shares of our preferred stock, par value NT$10 per share (‘‘Preferred Shares’’), were issued and outstanding.

The ROC Company Law and the ROC Securities and Exchange Law provide that any change in the issued share capital of a public issuance company, such as us, requires approval of the board of directors, an amendment to its Articles of Incorporation (which requires shareholders’ approval if it also involves a change in our authorized share capital), and the approval of the ROC Securities and Futures Commission and the MOEA. See ‘‘Appendix A — The Securities Market of the ROC — Regulation and Supervision’’.

Article 2 of our Articles of Incorporation sets forth the scope of the businesses in which we may engage as follows:

. planning and construction of an iron and steel mill;
. casting iron and steel and production of iron and steel products, by-products and processed products;
. storage and transportation (for our use) and the purchase and sale of raw materials for the iron and steel industry;
. storage and transportation (for our use) and the purchase and sale of iron and steel products, processed products, associated products and by-products;
. designing, manufacturing and the purchase and sale of steel structures and other related businesses;
. providing engineering and management consulting and technical services related to the iron and steel industry and other related industries;
. developing, designing, manufacturing and selling various equipment, apparatus and materials required by the iron and steel industry and other related industries;
. manufacturing, processing and the purchase and sale of light metals;
. developing, designing, manufacturing and the purchase and sale of computer hardware, peripheral devices and software;
. conducting businesses relating to high-technology materials (such as precision ceramic, magnetic materials and high functional composite materials);
. providing contract services relating to environmental protection engineering (other than construction) and the design, manufacture, purchase, sale and servicing of related environmental protection equipment and products;

. processing of waste materials;
. import and export of the above-mentioned products;
. sale of the electricity, to the extent permitted by ROC law, generated by our own power generating facilities that are not consumed by us;
. the contracting of services relating to equipment, facilities and engineering works in the areas of mechanical engineering, chemical engineering, electrical engineering, electrical appliances, transportation, telecommunications, co-generation and aerospace;
. manufacturing of industrial rubber products;
. manufacturing of batteries;
. manufacturing of beverage;
. manufacturing of wooden containers;
. manufacturing of other industrial products (industrial pure water);
. construction of refrigeration, ventilation and air-conditioning;
. copper rolling, drawing and extruding;
. other non-ferrous metal basic industries (slices, blocks and ingots of nonmetal combinations of gold, silver, nickel, magnesium, tin, zinc, tungsten, titanium, vanadium, niobium, tantalum, chromium, molybdenum, zirconium, palladium, platinum, indium, germanium, antimony or others); and
. all businesses that are not prohibited or restricted by laws and do not require special permits.

Dividends and Distributions

Except under limited circumstances as permitted by the ROC Company Law, an ROC company is not permitted to distribute dividends or to make any other distributions to shareholders at a time other than when it is generating net profits after tax (‘‘earnings’’). 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, referred to as the ‘‘Legal Reserve’’, equal to 10% of its earnings until such time as its Legal Reserve equals the amount of its total paid-in capital. Subject to compliance with these requirements, a company may pay dividends from its earnings or make other distributions from its reserves as set forth below.

Under the ROC Company Law, following approval by the shareholders at a shareholders’ meeting, dividends may be paid annually to shareholders from a company’s earnings, in proportion to the number of shares held, to shareholders listed on the register of shareholders as of the relevant record date (‘‘annual dividends’’). Annual dividends declared out of earnings may be distributed either in the form of cash, stock or a combination thereof. The ratio of cash dividends to stock dividends is determined by the shareholders at a shareholders’ meeting, unless otherwise stipulated under the company’s articles of incorporation. In case stock dividends are distributed, the approvals of the ROC Securities and Futures Commission and MOEA would be required for the increase of authorized capital and/or paid-in capital resulting from the distribution of the stock dividends.

In addition to permitting dividends to be paid out of earnings, the ROC Company Law also permits a company to make distributions to its shareholders in the form of cash or additional shares of stock from recapitalization of reserves (including the Legal Reserve and any special reserve or capital reserve). In the 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 exceeds 50% of the paid-in capital of the company.

Under our Articles of Incorporation and subject to compliance with the ROC Company Law requirements described in the first paragraph under this caption, each holder of a Preferred Share is currently entitled to be paid annual dividends, at a rate of 14% of the par value of each Preferred Share held, out of our annual earnings. Such Preferred Share dividends have priority over any dividends payable to holders of the Shares. If in any year there are insufficient earnings to pay Preferred Share dividends, any unpaid Preferred Share dividends for such year shall be carried over to succeeding years and shall be entitled to priority payment out of any earnings from each succeeding year until all unpaid Preferred Share dividends are fully paid.

For information on the dividends on Shares paid by us during recent years, see ‘‘Dividends’’. For information on ROC taxes on dividends and distributions, see ‘‘Taxation — ROC Taxation’’.

Preemptive Rights and Issuances of Additional Capital Stock

An ROC company may issue authorized shares of any class at such times and, subject to applicable provisions of the ROC Company Law and the ROC Securities and Exchange Law described below, upon such terms as its board of directors may determine. When an ROC company issues new shares of capital stock for cash (i) 10% to 15% of the issue must be offered to its employees, (ii) 10% (or such higher percentage as approved by a resolution passed at a shareholders’ meeting) of the issue must be offered to the public (if the company is a public company listed on the Taiwan Stock Exchange or whose shares are traded on the GreTai Securities Market), unless otherwise exempted by the ROC Securities and Futures Commission and (iii) existing shareholders will have preemptive rights to acquire the remaining 75% to 80% of the shares to be issued. Shares with respect to which no preemptive rights are exercised may either be publicly offered to any person or privately offered to specified persons. In connection with this Offering, our shareholders will not have preemptive rights with respect to the Shares to be sold by the MOEA.

Meetings of Shareholders

The general meeting of our shareholders is generally held in Kaohsiung, or an alternative location in Taiwan determined by our Board of Directors, within the first six months following the end of our financial year. Notice in writing of general meetings, stating the place, time and purpose thereof, must be given to shareholders at least 30 days prior to the date set for such meeting. Extraordinary meetings of shareholders may be convened by resolution of the Board of Directors or by the Board of Directors upon the request of one or more shareholders that have held 3% or more of our outstanding capital stock for more than one year. Extraordinary meetings of shareholders may also be convened by a Supervisor. Notice in writing of extraordinary meetings, stating the place, time and purpose thereof, must be given to shareholders at least 15 days prior to the date set for such meeting.

Voting Rights

Our Articles of Incorporation provide that a holder of Shares has one vote for each Share and that a holder of Preferred Shares has one vote for each Preferred Share (except that holders of Preferred Shares have no voting rights in respect of the election of Directors or Supervisors). There is cumulative voting for the election of Directors and Supervisors. Except as otherwise provided by ROC law, a resolution can be adopted by the holders of at least a majority of the outstanding Shares and Preferred Shares represented at a shareholders’ meeting at which the holders of at least a majority of outstanding Shares and Preferred Shares are present.

The ROC Company Law also provides that in order to approve certain major corporate actions of an ROC company, including the dissolution or amalgamation of a company, any amendment of articles of incorporation (which is required for, among other things, any increase in authorized share capital), or the transfer of all or an important part of its business or properties, the taking over of the whole or any part of the business or properties 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 capital stock at which the holders of at least a majority of the capital stock represented at the meeting vote in favor thereof. Alternatively, in the case of a public company, such as us, such a resolution may be adopted by the holders of at least two-thirds of the capital stock represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding capital stock are present.

A shareholder may be represented at a general or extraordinary meeting by proxy. A valid proxy form must be delivered to us at least five days prior to the date fixed for the general or extraordinary meeting.

The owners of the GDSs will have limited rights to exercise voting rights with respect to the Shares represented by such GDSs. See ‘‘Description of the Global Depositary Shares — Voting Rights’’.

Redemption and Conversion of Preferred Shares

We may, at our option, redeem Preferred Shares out of our retained earnings or the proceeds from the issuance of new Shares. Holders of Preferred Shares may also, at their option, convert Preferred Shares into Shares, on a one-to-one basis. As of October 16, 2003, we have not redeemed any Preferred Shares and holders of Preferred Shares had converted an aggregate number of 28,928,000 Preferred Shares into 28,928,000 Shares. As of October 16, 2003, 47,762,000 Preferred Shares were outstanding and convertible into 47,762,000 Shares.

Register of Shareholders and Record Dates

Grand Cathay Securities Corporation (the ‘‘Registrar’’) currently acts as our registrar. The Registrar maintains our register of shareholders at its offices in Kaohsiung and Taipei and enters transfers of Shares and Preferred Shares in such register upon presentation of certificates for the Shares or Preferred Shares transferred accompanied by executed certificates of transfer and executed applications for registration of transfer.

Record dates for annual dividends on our capital stock are determined and announced by us. As provided in our Articles of Incorporation, our registers of Shares and Preferred Shares are closed for a period of sixty days, thirty days and five days immediately before each general meeting of shareholders, extraordinary meeting of shareholders and record date, respectively.

Annual Financial Statements

Pursuant to the ROC Company Law, ten days before the general meeting of shareholders, our annual financial statements must be made available at our principal office in Kaohsiung for inspection by our shareholders.

Transfers of Capital Stock

Pursuant to the ROC Company Law, a transfer of Shares or Preferred Shares is effected by endorsement and delivery of the related share certificates. However, before a transferee may assert its rights as a shareholder against us, such transferee must have his name and address registered on our register of shareholders. Shareholders are required to register their respective specimen seals or chops with us. The settlement of trading of the Shares is normally carried out on the book-entry system maintained by Taiwan Securities Central Depository Co., Ltd.

Acquisitions of Shares by Us

Except as set forth below, we may not acquire our Shares under the ROC Company Law.

Under the ROC Securities and Exchange Law, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase our Shares on Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the ROC Securities and Futures Commission, for the following purposes: (i) to transfer shares to our employees, (ii) to convert bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us into Shares and (iii) if necessary, to maintain our credit and our shareholders’ equity, provided that the Shares so purchased pursuant to (iii) shall be cancelled thereafter. Shares purchased by us pursuant to (i) and (ii) above shall be transferred to the intended transferees within three years after the purchase date; otherwise, such Shares shall be cancelled. For Shares to be cancelled pursuant to (iii) above, we are required to complete the amendment registration within six months after the purchase date.

We are not allowed to purchase more than 10% of our total issued and outstanding Shares. In addition, we 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 our Shares.

We may not pledge or hypothecate any purchased Shares. In addition, we may not exercise any shareholders’ rights attaching to such Shares. In the event that we purchase our Shares on the Taiwan Stock Exchange, our affiliates (as defined in Article 369-1 of the ROC Company Law), Directors, Supervisors, managers and their respective spouses and minor children and/or nominees are prohibited from selling any of our Shares during the period in which we purchase our Shares.

In addition, effective from November 14, 2001, under the revised ROC Company Law, our subsidiaries may not acquire our Shares. This restriction does not, however, affect any of our Shares acquired by our subsidiaries prior to November 14, 2001.

Liquidation Rights

Pursuant to the ROC Company Law, in the event of the liquidation of our company, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed to the shareholders on a pro rata basis. Under our Articles of Incorporation, holders of Shares and Preferred Shares will have the same rights in any such distribution.

DESCRIPTION OF THE GLOBAL DEPOSITARY SHARES

Citibank, N.A. is acting as the Depositary for the Global Depositary Shares, or ‘‘GDSs’’. Citibank’s depositary offices are located at 111 Wall Street, New York, New York 10043. In this summary, we intend to use the term ‘‘GDSs’’ to refer to the Rule 144A GDSs and to the International GDSs. Unless we otherwise state, you should assume that the term ‘‘GDSs’’ encompasses both Rule 144A GDSs and International GDSs. The GDSs we are selling in the United States are referred to and will be issued as Rule 144A GDSs and the GDSs we are selling outside the United States are referred to and will be issued as the International GDSs. GDSs represent ownership interests in securities that are on deposit with the Depositary. GDSs are represented by certificates that are commonly known as ‘‘Global Depositary Receipts’’ or ‘‘GDRs’’. One Master Rule 144A GDR will represent all Rule 144A GDSs and one Master International GDR will represent all International GDSs. The Master Rule 144A GDR and the Master International GDR are referred to together as the ‘‘Master GDRs’’.

The Depositary has appointed a Custodian to safekeep the securities on deposit. In this case, the Custodian is Citibank, N.A. (Taipei), having its principal office at B1, No. 16, Nanking East Road, Section 4, Taipei, Taiwan, ROC.

We have appointed Citibank as Depositary pursuant to two separate Deposit Agreements. We have entered into a Restricted Amended and Restated Deposit Agreement relating the Rule 144A GDSs and an Unrestricted Amended and Restated Deposit Agreement relating to the International GDSs, in each case as amended in connection with this Offering. Unless we state otherwise, in this Offering Circular we refer to the Restricted Amended and Restated Deposit Agreement as the ‘‘Rule 144A Deposit Agreement’’ and the Unrestricted Amended and Restated Deposit Agreement as the ‘‘International Deposit Agreement’’, and together as the ‘‘Deposit Agreements’’. Copies of the Deposit Agreements and any amendments thereto may be obtained from the Depositary. This is a summary description of the material terms of the Deposit Agreements and the Master GDRs and of your material rights as an owner of GDSs. Please remember that summaries by their nature lack the precision of the information summarized and that the rights and obligations of an owner of GDSs will be determined by reference to the terms of the applicable Deposit Agreement and not by this summary. We urge you to review the Deposit Agreements in their entirety.

Each GDS represents the right to receive twenty Shares, or the evidence of the right to receive twenty Shares, on deposit with the Custodian. A GDS also represents the right to receive any other property received by the Depositary or the Custodian on behalf of the owner of the GDS but that has not been distributed to the owners of GDSs because of legal restrictions or practical considerations.

If you become an owner of GDSs, you will become a party to the applicable Deposit Agreement and therefore will be bound to its terms and to the terms of the relevant GDR that represents your GDSs. The Deposit Agreements and the GDRs specify our rights and obligations as well as your rights and obligations as owner of GDSs and those of the Depositary. As a GDS owner you appoint the Depositary to act on your behalf for the Shares represented by your GDSs, either upon (1) your specific instructions when we call a meeting of shareholders, distribute an elective dividend or make a rights offering, or (2) the specific terms of the applicable Deposit Agreement to receive any dividends we distribute in NT dollars or Shares and to convert the NT dollars received. The Deposit Agreements are governed by New York law. However, our obligations to the holders of Shares will continue to be governed by the laws of the ROC, which may be different from the laws in New York. In addition, we note that the laws and regulations of the ROC may restrict the deposit and withdrawal of the Shares into or from the depositary receipt facilities.

Under the laws and regulations of the ROC, as currently in effect, after the initial deposit in connection with this Offering pursuant to the Deposit Agreements, without obtaining regulatory approval from the ROC Securities and Futures Commission, no Shares may be accepted for deposit and no GDSs may be issued under the terms of the Deposit Agreements except in the following circumstances:

(1) upon dividend on or a free distribution of Shares to existing shareholders;
(2) upon the exercise by existing shareholders of their preemptive rights in connection with capital increases for cash;
(3) as permitted under the Deposit Agreements, the purchase directly by a person or through the Depositary of Shares on the Taiwan Stock Exchange or the delivery by any person of Shares held by such person for the deposit in the depositary receipt facility; and
(4) upon the exchange of Rule 144A GDSs for International GDSs and vice versa;

provided that the total number of GDSs outstanding after an issuance described in clause (3) or (4) does not exceed the number of GDSs issued and previously approved by the ROC Securities and Futures Commission in 1992, 1997 and in connection with this Offering plus any GDSs created under clauses (1) and (2) described above and subject to any adjustment on the number of Shares represented by each GDS; provided that the deposit described in clause (3) may only be made to the extent previously issued GDSs have been cancelled.

Under the laws and regulations of the ROC, the Shares deposited under the Deposit Agreements may be withdrawn upon cancellation of the corresponding GDSs pursuant to the respective Deposit Agreement subject to the following conditions:

. the appointment of an eligible agent in the ROC to open (1) a securities trading account with an ROC brokerage firm with ROC approval and (2) a bank account to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal;
. the appointment of a tax guarantor in the ROC; and
. the appointment of a custodian bank to hold the securities in safekeeping, make confirmations and settle trades.

In addition, you are required to register with the Taiwan Stock Exchange and, if you are an offshore foreign institutional investor, you are also required to obtain approval from the Central Bank of China prior to withdrawing Shares.

For a more complete description of these deposit or withdrawal restrictions see ‘‘Appendix B — Foreign Investment and Exchange Controls in the ROC — General’’.

Presently, you may hold your GDSs only through a brokerage or safekeeping account. As such, you must rely on the procedures of your broker or bank to assert your rights as GDS owner. Please consult with your broker or bank to determine what those procedures are. When we refer to ‘‘you’’, we assume the reader owns GDSs and will own GDSs at the relevant time. When we refer to a ‘‘holder’’, we assume the person owns GDSs and such person’s agent, which may be a broker, custodian, bank or trust company, is the holder of the applicable GDR.

Distinctions Between Rule 144A GDSs and International GDSs

The Rule 144A GDSs and the International GDSs are similar in many ways but are different primarily on account of the requirements of the U.S. securities laws. The Rule 144A GDSs are ‘‘restricted securities’’ under the U.S. securities laws and as such are subject to limitations on their issuance, transfer and cancellation. The International GDSs are not ‘‘restricted securities’’ per se under the U.S. securities laws, but we have imposed certain contractual restrictions on the International GDSs in an effort to prevent the transfer of International GDSs in violation of the U.S. securities laws. The restrictions we have imposed on the International GDSs will be in place for a period of 40 days after we close this Offering of the International GDSs described in this Offering Circular. We will refer to this 40-day period as the ‘‘distribution compliance period’’.

The differences between the International GDSs and the Rule 144A GDSs and the restrictions imposed on the Rule 144A GDSs and the International GDSs relate primarily to the following:

. The persons who may own and trade the GDSs:
. only ‘‘qualified institutional buyers’’ (as defined in Rule 144A) and persons outside the United States (as defined in Regulation S) may trade Rule 144A GDSs;
. during the ‘‘distribution compliance period’’, only persons outside the United States may own and trade the International GDSs; and
. upon the expiration of the ‘‘distribution compliance period’’, any person may own and trade International GDSs.
. The persons who may create additional GDSs:
. only persons other than ‘‘U.S. persons’’ (as defined in Regulation S) may deposit Shares to receive International GDSs; and
. only ‘‘qualified institutional buyers’’ (as defined in Rule 144A) and persons other than ‘‘U.S. persons’’ (as defined in Regulation S) may deposit Shares to receive Rule 144A GDSs.
. The persons to whom you may transfer the GDSs, upon sale or otherwise:
. during the ‘‘distribution compliance period’’, you may transfer the International GDSs sold hereunder only in transactions outside the United States (in compliance with Regulation S) or to ‘‘qualified institutional buyers’’ (as defined in Rule 144A) in transactions meeting the requirements of Rule 144A but in this latter case only after ‘‘converting’’ the International GDSs into Rule 144A GDSs; and
. you may transfer Rule 144A GDSs only to ‘‘qualified institutional buyers’’ (as defined in Rule 144A) or outside the United States in accordance with Regulation S.
. The restrictions on the transfer and withdrawal of the Shares represented by the GDSs.
. Please refer to ‘‘— Legends’’ below.
. The eligibility for book-entry transfer.
. Please refer to ‘‘— Clearance, Settlement and Safekeeping’’ below.

These distinctions and the requirements of the U.S. securities laws may require us and the Depositary to treat the International GDSs and the Rule 144A GDSs differently at any time in the future. There can be no guarantee that holders of Rule 144A GDSs will receive the same entitlements as holders of International GDSs and vice versa.

Clearance, Settlement and Safekeeping

Rule 144A GDSs

The Depositary has made arrangements with The Depository Trust Company (‘‘DTC’’) to act as securities depository for the Rule 144A GDSs. All Rule 144A GDSs issued in this Offering will be registered in the name of Cede & Co., DTC’s nominee. One Master Rule 144A GDR will represent all Rule 144A GDSs issued to and registered in the name of Cede & Co. Transfers of ownership interests in Rule 144A GDSs are to be accomplished by entries made on the books of DTC and of the participants in DTC acting on behalf of Rule 144A GDS owners. Owners of Rule 144A GDSs will not receive physical certificates representing their ownership interests in the Rule 144A GDSs, except in the event that a successor securities depository cannot be appointed. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer Rule 144A GDSs evidenced by the Master Rule 144A GDR to such persons may be limited. Because DTC can only act on behalf of DTC participants, who in turn act on behalf of indirect participants, the ability of a person owning Rule 144A GDSs evidenced by the Master Rule 144A GDR to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take action in respect of such interest, may be affected by the lack of physical individual definitive securities in respect of such interest.

So long as DTC or its nominee is the registered holder of the Master Rule 144A GDR, DTC or such nominee, as the case may be, will be considered the sole holder of the Rule 144A GDSs evidenced thereby for all purposes under the Rule 144A Deposit Agreement and the Rule 144A GDSs.

DTC may discontinue its services as securities depository with respect to the Rule 144A GDSs at any time by giving reasonable notice to the Depositary. Under such circumstances, in the event that a successor securities depository cannot be appointed, Rule 144A GDRs will be printed and delivered to the applicable Rule 144A GDS owners.

DTC is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a ‘‘clearing corporation’’ within the meaning of the New York Uniform Commercial Code, and a ‘‘clearing agency’’ registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants (‘‘Direct Participants’’) deposit and facilitates the clearance and settlement of securities transactions among Direct Participants in such securities through electronic computerized book-entry changes in accounts of Direct Participants, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom own DTC, and may include the Managers (and/or their affiliates). Indirect access to the DTC system is also available to others that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (‘‘Indirect Participants’’). Transfers of ownership or other interests in DTC are to be accomplished by entries made on the books of Direct Participants or Indirect Participants acting on behalf of beneficial owners of Rule 144A GDSs. In addition, beneficial owners of Rule 144A GDSs in DTC will receive all distributions of dividends, GDSs, shares, rights and other distributions, if any, on the Rule 144A GDSs from the Depositary through Direct Participants and Indirect Participants.

International GDSs

The International GDSs are not eligible for settlement in DTC. Arrangements have been made with Clearstream Banking, socie´te´ anonyme (‘‘Clearstream’’) and Euroclear Bank S.A./N.V., as operator of the Euroclear system (‘‘Euroclear’’) to act as securities depositories for the International GDSs. All International GDSs issued in this Offering will be registered in the name of a common depositary for Clearstream and Euroclear (the ‘‘Common Depositary’’). One Master International GDR will represent all International GDSs issued to and registered in the name of the Common Depositary. Transfers of ownership interests in International GDSs are to be accomplished by entries made on the books of Clearstream and Euroclear and participants in Clearstream and Euroclear, acting on behalf of International GDS owners. Owners of International GDSs will not receive physical certificates representing their ownership interests in the International GDSs, except in the event that use of the Euroclear and Clearstream book-entry systems for the International GDSs are discontinued. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer International GDSs evidenced by the Master International GDR to such persons may be limited. Because Euroclear and Clearstream can only act on behalf of participants in their book-entry systems, who in turn act on behalf of indirect participants, the ability of a person owning International GDSs evidenced by the Master International GDR to pledge such interest to persons or entities that do not participate in the Euroclear and Clearstream systems, or otherwise take action in respect of such interest, may be affected by the lack of physical individual definitive securities in respect of such interest.

So long as the Common Depositary (as nominee for Euroclear and Clearstream) is the registered holder of the Master International GDR, the Common Depositary will be considered the sole holder of the International GDSs evidenced thereby for all purposes under the International Deposit Agreement and the International GDRs.

If at any time Clearstream or Euroclear, as the case may be, ceases to make its respective book-entry settlement systems available for the International GDSs, we and the Depositary will attempt to make other arrangements for book-entry settlement. If alternative book-entry settlement arrangements cannot be made, the Depositary will make available International GDSs in physical certificated form.

Settlement

So long as the Rule 144A GDSs are represented by Master GDRs registered in the name of DTC or its nominee, the Rule 144A GDSs will settle in DTC’s Same-Day Funds Settlement System and secondary market trading activity in the Rule 144A GDSs will be required by DTC to settle in immediately available funds. So long as the International GDSs are represented by Master GDRs registered in the name of the Common Depositary or its nominee, the International GDSs will settle in Euroclear and Clearstream in accordance with their respective rules and operating procedures.

Subject to compliance with the transfer restrictions applicable to the GDSs described below, in cross market transfers from the account of a DTC Participant to the account of a Euroclear or Clearstream accountholder, the DTC Participant will deliver instructions for delivery to the relevant Euroclear or Clearstream accountholder to DTC by 3: 00 p.m., New York City time, on the settlement date. On the settlement date, the Depositary will (1) decrease the amount of the Rule 144A GDSs registered in the name of DTC or its nominee and evidenced by the Master Rule 144A GDR and (2) increase the amount of International GDSs registered in the name of the Common Depositary or its nominee and evidenced by the Master International GDR. Book-entry interests will be delivered to Euroclear or Clearstream, as the case may be, for credit to the relevant accountholder on the first business day following the settlement date.

Subject to compliance with the transfer restrictions applicable to the GDSs described below, when beneficial interests in the GDSs represented by the relevant Master GDR are to be transferred from the account of a Euroclear or Clearstream accountholder holding a beneficial interest in the International GDSs represented by the Master International GDR to the account of a DTC Participant wishing to hold a beneficial interest in the Rule 144A GDSs represented by the Master Rule 144A GDR, the Euroclear or Clearstream accountholder must send delivery instructions to Euroclear by 10: 00 a.m., Brussels time, for custody exchange instructions received by telex and by 3: 00 p.m., Brussels time, for custody exchange instructions through SWIFT or Euclid, and to Clearstream by 7: 45 p.m., Luxembourg time, one business day prior to the settlement date. Euroclear or Clearstream, as the case may be, will in turn transmit an appropriate instruction to the Depositary to arrange delivery to the DTC Participant on the settlement date. On the settlement date, the Depositary will (1) deliver such Rule 144A GDSs by book-entry transfer to the relevant account of the DTC Participant and (2)(a) decrease the amount of International GDSs registered in the name of the Common Depositary or its nominee and evidenced by the Master International GDR and (b) increase the amount of Rule 144A GDSs registered in the name of DTC or its nominee and evidenced by the Master Rule 144A GDR.

DTC will take any action permitted to be taken by an owner of Rule 144A GDSs only at the direction of one or more DTC Participants to whose account or accounts with DTC interests in the Rule 144A GDSs evidenced by the Master Rule 144A GDR are credited and only in respect of such portion of the number of Rule 144A GDSs as to which such DTC Participant or DTC Participants has or have given such direction. Owners of indirect interests in securities evidenced by the Master Rule 144A GDR through DTC Participants have no direct rights to enforce such interests while the securities are in global form.

The Common Depositary will take any action permitted to be taken by an owner of International GDSs only at the direction of one or more participants of Euroclear or Clearstream to whose account or accounts are credited with interests in the International GDSs evidenced by the Master International GDR held by the Common Depositary and only in respect of such portion of the number of International GDSs as to which such participant or participants has or have given such direction. Owners of indirect interests in securities evidenced by the Master International GDR through the participants of Euroclear and Clearstream have no direct rights to enforce such interests while the securities are in global form.

Although DTC, Clearstream and Euroclear have procedures in order to facilitate the transfer of interests in the Master GDRs among participants in their respective settlement systems, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. None of us, the Depositary, the Custodian or any of their agents will have any responsibility for the performance by DTC, Clearstream or Euroclear or their respective participants of their respective obligations under the rules and procedures governing their operations.

Transfer Restrictions

The GDSs may be resold, pledged or otherwise transferred only in compliance with the U.S. securities laws and are subject to the following restrictions:

Rule 144A GDSs

International GDSs

The Rule 144A GDSs may be resold, pledged or otherwise transferred only:

During the ‘‘distribution compliance period’’, International GDSs sold hereunder may be resold, pledged or otherwise transferred only:

(i) outside the U.S. in accordance with Regulation S;
or
(ii) to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A;
- (i) outside the U.S. in accordance with Regulation S;
  - or
- (ii) to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A.
or
(iii) pursuant to Rule 144 under the Securities Act, if available;

If the International GDSs are transferred to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, the transferor is required to convert the International GDSs into Rule 144A GDSs and make delivery of the Rule 144A GDSs to the transferee.

After the ‘‘distribution compliance period’’, the International GDSs sold hereunder shall be freely transferable.

Shares will be accepted for deposit only if delivered by, or on behalf of, a person that is:

(a) not us or our affiliate or a person acting on behalf of us or our affiliate, and
(b) is (i) a ‘‘qualified institutional buyer’’ (as defined in Rule 144A), or (ii) a person other than a ‘‘U.S. person’’.
(a) not us or our affiliate or a person acting on behalf of us or our affiliate, and
(b) is a person other than a ‘‘U.S. person’’ (as defined in Regulation S) and located outside the United States.

Rule 144A GDSs

International GDSs

Shares may be withdrawn under the Rule 144A Deposit Agreement only by:

During the ‘‘distribution compliance period’’ Shares may be withdrawn under the International Deposit Agreement by persons who purchased International GDSs in this Offering only if such person is:
(i) a person located outside the United States who will be the beneficial owner of the Shares upon withdrawal;

or

(ii) a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) who:
(i) a person other than a ‘‘U.S. person’’ (as defined in Regulation S) who will be the beneficial owner of the Shares upon withdrawal or who has sold the Shares to a person other than a U.S. person or to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A), in which case Shares will be deposited under the Rule 144A Deposit Agreement and delivered to the purchaser in the form of Rule 144A GDSs,

(ii) a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) who will take all action necessary to deposit the Shares withdrawn under the Rule 144A Deposit Agreement and to take delivery in the form of Rule 144A GDSs.
(x) has sold the Rule 144A GDSs to another ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, or in accordance with Regulation S,
- After the ‘‘distribution compliance period’’ Shares may be withdrawn by any person and are freely transferable.
or
(y) will be the beneficial owner of the Shares and agrees to observe the transfer restrictions applicable to Rule 144A GDSs in respect of the Shares so withdrawn.

Dividends and Distributions

As a holder, you generally have the right to receive the distributions we make on the securities deposited with the Custodian. Your receipt of these distributions may be limited, however, by practical considerations and legal limitations. Holders will receive such distributions under the terms of the Deposit Agreements in proportion to the number of GDSs held as of a specified record date.

Distributions of Cash

Subject always to the laws and regulations of the ROC, whenever we make a cash distribution for the securities on deposit with the Custodian, we will notify the Depositary and deposit the funds with the Custodian. Upon receipt of such notice and of confirmation of the deposit of the requisite funds, the Depositary will arrange for the funds to be converted into U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to the laws and regulations of the ROC.

The conversion into U.S. dollars will take place only if the U.S. dollars are convertible on a reasonable basis and are transferable to the United States. The amounts distributed to holders will be net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the Deposit Agreements. The Depositary will apply the same method for distributing the proceeds of the sale of any property (such as undistributed rights) held by the Custodian in respect of securities on deposit.

The distribution of cash will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the Deposit Agreements.

Distributions of Shares

Subject always to the laws and regulations of the ROC, whenever we make a free distribution of Shares for the securities on deposit with the Custodian, we will notify the Depositary and deposit the applicable number of Shares with the Custodian. Upon receipt of notice of such deposit, the Depositary may, if we so consent, or will, if we so request, either distribute to holders new GDSs representing the Shares deposited or, to the extent permitted by applicable laws, modify the GDS-to-Shares ratio, in which case each GDS you hold will represent rights and interests in the additional Shares so deposited. Only whole new GDSs will be distributed. If such distribution is not practical or feasible, the Depositary may, after consultation or notice to us, adopt such method of distribution as it may deem equitable or practicable or refrain from making a distribution. Fractional entitlements will be sold and the proceeds of such sales will be distributed as in the case of a cash distribution.

The distribution of new GDSs or, to the extent permitted by applicable laws, the modification of the GDS-to-Shares ratio upon a distribution of Shares will be made net of the fees, expenses, taxes and governmental charges payable by holders under the terms of the Deposit Agreements. In order to pay such taxes or governmental charges, the Depositary may sell all or a portion of the new Shares so distributed.

No such distribution of new GDSs will be made if it would violate U.S. law, including the U.S. securities laws, or if it is not practical or feasible.

Distributions of Rights

If we make available to the holders of Shares rights to subscribe for additional Shares or rights of any other nature, the Depositary shall, after consulting us and subject to applicable law, have discretion as to the procedure to be followed in (i) making the rights available to holders of GDSs, (ii) disposing of such rights and distributing the net proceeds thereof to holders of GDSs or (iii) allowing such rights to lapse (if distribution or sale thereof is not permitted under the terms of the rights offer or under applicable law).

If we so request, the Depositary (i) shall distribute warrants or other instruments or use such other method as it may deem feasible to facilitate the exercise, sale or transfer of rights by holders of GDSs or the sale or resale of securities obtainable upon the exercise of rights (if the Depositary determines that making the rights available to holders of GDSs is lawful and feasible); or (ii) shall use its reasonable efforts to sell such rights (at public or private sales) at such place and upon such terms as it may deem proper and distribute the proceeds thereof net of all applicable fees, taxes and expenses (if the Depositary determines that it is not lawful or feasible to make such rights available to holders of GDSs or if such rights are not exercised and appear about to lapse); or (iii) may, in its discretion, take such actions as are necessary for certain rights to be exercised (subject to deduction or payment of the Depositary’s expenses and receipt of the documentation it may specify) by certain holders for whom the exercise does not require registration under the Securities Act, if such actions are lawful and feasible.

If registration of rights or securities under the Securities Act may be required in order to distribute the rights to holders of GDSs or to sell to them the securities to which the rights relate, such rights will not be distributed unless and until the registration statement is in effect or unless such distribution and sale is exempt from registration. We have no obligation to so register the rights or the securities unusable upon exercise of rights.

Other Distributions

In the event that the Custodian or the Depositary or its nominee receives any distribution upon any deposited Shares in property (other than cash, rights or Shares), the Depositary is obligated under the Deposit Agreements to distribute such property to the holders of GDSs entitled thereto, after deduction or upon payment of the fees and expenses of the Depositary, in proportion to their holdings in any manner that the Depositary deems equitable and practicable. If in the opinion of the Depositary, however, the distribution of such property cannot be made proportionately among such holders of GDSs, or if for any other reason (including any requirement that we, the Depositary or the Custodian withhold an amount on account of taxes or other governmental charges or that such property consists of securities that must be registered under the Securities Act in order to be distributed to holders of GDSs) the Depositary deems such distribution not feasible, after consultation with us, the Depositary may adopt such method as it may deem equitable or practicable, after consultation with us, in order to effect such distribution, including the sale (public or private) of all or any part of such property and the distribution to holders of GDSs of the net proceeds of any such sale.

Changes Affecting Shares

The Shares held on deposit for your GDSs are subject to change from time to time. For example, there may be a change in nominal or par value, a split-up, cancellation, consolidation or reclassification of such Shares or a recapitalization, reorganization, merger, consolidation or sale of assets.

If any such change were to occur, your GDSs would, to the extent permitted by law, represent the right to receive the property received or exchanged in respect of the Shares held on deposit. The Depositary may in such circumstances deliver new GDSs to you or call for the exchange of your existing GDSs for new GDSs.

Issuance of GDSs Upon Deposit of Shares

Subject to limitations set forth in the Deposit Agreements and the GDR, the Depositary may create GDSs on your behalf if you or your broker deposit Shares with the Custodian. The Depositary will deliver these GDSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the Shares to the Custodian and you provide the applicable deposit certification. Your ability to deposit Shares and receive GDSs may be limited by U.S. and ROC legal considerations applicable at the time of deposit.

Under current ROC law, after the initial deposit in connection with this Offering pursuant to the Deposit Agreements, no deposits of Shares may be made in a depositary receipt facility, and no GDSs may be issued against such deposits, without specific approval of the ROC Securities and Futures Commission, except in connection with this Offering and the issuance of additional GDSs in connection with (i) dividends on, or free distributions of, Shares, (ii) the exercise by holders of existing GDSs of their preemptive rights in the event of capital increases for cash or (iii) to the extent that previously issued GDSs have been canceled, reissuances of GDSs up to an aggregate amount of outstanding GDSs equal to the total number of GDSs (subject to adjustment for the issuances described in clauses (i) and (ii)) that were originally approved by the ROC Securities and Futures Commission in 1992, 1997 and in connection with this Offering or (iv) the exchange of Rule 144A GDSs for International GDSs and vice versa.

The Depositary will refuse to accept Shares for deposit whenever it is notified in writing that such deposit would result in any violation of applicable laws, including ownership restrictions under the laws of the ROC. The Depositary will also refuse to accept Shares for deposit under the Rule 144A Deposit Agreement if notified in writing that such Shares are listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system, unless accompanied by evidence satisfactory to the Depositary that any Shares presented for deposit are eligible for resale pursuant to Rule 144A.

The issuance of GDSs may be delayed until the Depositary or the Custodian receives confirmation that all required approvals have been given and that the Shares have been duly transferred to the Custodian. The Depositary will only issue GDSs in whole numbers.

When you make a deposit of Shares, you will be responsible for transferring good and valid title to the Depositary. As such, you will be deemed to represent and warrant that:

. such Shares are validly issued, fully paid and non-assessable;
. you are duly authorized to deposit such Shares; and
. in the case of a deposit under the International Deposit Agreement, that the deposit of such Shares does not violate the registration requirements of the Securities Act.

If any of the representations or warranties are incorrect in any way, we and the Depositary may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentations.

When you deposit Shares to receive Rule 144A GDSs, you will be required to provide the Depositary with a deposit certification stating, inter alia, that:

. you acknowledge that the Shares and the Rule 144A GDSs have not been and will not be registered under the Securities Act or with any securities regulatory authority in any state or other jurisdiction in the United States;
. you are not an ‘‘affiliate’’ of ours and you are not acting on behalf of us or one of our ‘‘affiliates’’;
. you certify that you are, or are acting on behalf of, (i) a ‘‘qualified institutional buyer’’ (as defined in Rule 144A), or (ii) a person other than a ‘‘U.S. person’’ (as defined in Regulation S) and are located outside the United States and will acquire the Shares to be deposited outside the United States; and
. you agree, as the owner of the Rule 144A GDSs, to offer, sell, pledge and otherwise transfer the Rule 144A GDSs or the Shares represented by the Rule 144A GDSs in accordance with the applicable U.S. state securities laws and only:
(a) to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A,
(b) outside the United States in accordance with Regulation S, or
(c) in accordance with Rule 144 under the Securities Act, if available.

A copy of the form of deposit certification for Rule 144A GDSs is attached to the Rule 144A Deposit Agreement and may be obtained from the Depositary upon request.

When you deposit Shares to receive International GDSs, you will be required to provide the Depositary with a deposit certificate stating, inter alia, that:

. you acknowledge that the Shares and the International GDSs have not been and will not be registered under the Securities Act or with any securities regulatory authority in any state or other jurisdiction in the United States;

. you are not an ‘‘affiliate’’ of ours and you are not acting on behalf of us or one of our ‘‘affiliates’’;
. you certify that you are, or are acting on behalf of, a person other than a ‘‘U.S. person’’ (as defined in Regulation S) and are located outside the United States; and
. you agree, as the owner of the International GDSs (or the person whom you are acting on behalf of has confirmed its agreement to you), to offer, sell, pledge and otherwise transfer the International GDSs or the Shares represented by the International GDSs in accordance with the applicable U.S. state securities laws and during the ‘‘distribution compliance period’’ only:
(a) to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, in which case you or such person are required to ‘‘convert’’ the International GDSs into Rule 144A GDSs prior to making delivery to the transferee, or
(b) outside the United States to a person other than a ‘‘U.S. person’’ (as defined in Regulation S) in accordance with Regulation S.

A copy of the form of deposit certification for International GDSs is attached to the International Deposit Agreement and may be obtained from the Depositary upon request.

Withdrawal of Shares Upon Cancellation of GDSs

Subject to the withdrawal of deposited property being permitted under ROC laws and regulations, as a holder, you will be entitled to present your GDSs to the Depositary for cancellation and then receive the corresponding number of underlying Shares at the Custodian’s offices or by way of book-entry credit to your account through Taiwan Central Depository Co., Ltd. Your ability to withdraw the Shares may be limited by U.S. and ROC laws considerations applicable at the time of withdrawal.

Under current ROC law, if you wish to withdraw and hold underlying Shares from a depositary receipt facility, you will be required to appoint an eligible agent in the ROC to open a securities trading account with a local brokerage firm (after receiving an approval from the Taiwan Stock Exchange) and a bank account (the securities trading account and the bank account collectively, the ‘‘Accounts’’), to pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other functions as you may designate upon such withdrawal. In addition, you will be required to appoint a custodian bank to hold the securities in safekeeping, make confirmation and settle trades and report all relevant information. Without the opening of such Accounts, the withdrawing owner would be unable to hold or subsequently sell the underlying Shares withdrawn from the depositary receipt facility on the Taiwan Stock Exchange or otherwise. In addition, you are required to register with the Taiwan Stock Exchange and, if you are an offshore foreign institutional investor, you are also required to obtain approval from the Central Bank of China prior to withdrawing Shares. These laws may change from time to time. We cannot assure you that current ROC law will remain in effect or that future changes in ROC law will not adversely affect your ability to withdraw the Shares from the GDS facility.

Holders of GDSs withdrawing Shares represented by GDSs are also required under current ROC laws and regulations to appoint an agent in the ROC for filing tax returns and making tax payments. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing owner’s ROC tax obligations. Evidence of the appointment of such agent and the approval of such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the proceeds from the sale of the withdrawn Shares. There can be no assurance that such withdrawing holder will be able to appoint and obtain approval for such agent in a timely manner.

Subject to the withdrawal of deposited property being permitted under ROC laws and regulations, you may also request that our Shares represented by your GDSs be sold on your behalf. The Depositary may require that you deliver your request for sale in writing. Any sale of our Shares will be conducted according to applicable ROC law through a securities company in the ROC on the Taiwan Stock Exchange or in another manner as is permitted under applicable ROC law. Any sale will be at your risk and expense. There can be no assurance that the Depositary will be able to effectuate the sale of Shares in a timely manner or at a specified price, particularly during periods of illiquidity and volatility with respect to the Shares. You may also be required to enter into a separate agreement to cover the terms of the sale of our Shares.

Upon receipt of any proceeds from any sale, subject to any restrictions imposed by ROC laws and regulations, the Depositary shall convert the proceeds into U.S. dollars and distribute the proceeds to you, net of any fees, expenses, taxes or governmental charges (including, without limitation, any ROC and U.S. taxes) incurred in connection with the sale. Although not currently subject to ROC taxation on capital gains, sales of our Shares may in the future be subject to ROC taxation on capital gains. Sale of our Shares is subject to a securities transaction tax in the ROC, currently at the rate of 0.3% of the gross amount received.

In order to withdraw or instruct the sale of the Shares represented by your GDSs, you will be required to pay to the Depositary the fees for cancellation of GDSs and any charges and taxes payable upon the transfer of the Shares being withdrawn and you will be required to provide to the Depositary the applicable withdrawal certification. You assume the risk for delivery of all funds and securities upon withdrawal. Once canceled, the GDSs will not have any rights under the corresponding Deposit Agreement.

If you hold a GDR registered in your name, the Depositary may ask you to provide proof of identity and genuineness of any signature and such other documents as the Depositary may deem appropriate before it will cancel your GDRs. The withdrawal of the Shares represented by your GDSs may be delayed until the Depositary receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the Depositary will only accept GDSs for cancellation that represent a whole number of securities on deposit.

We have reporting obligations under ROC law in respect of the GDS facilities. In order to enable us to gather the information necessary for these reporting obligations, you will be asked to complete and sign a certification upon withdrawal of Shares from the applicable GDS facility. In this certification you will be asked to disclose, among other information, the name, nationality and address of the beneficial owner of the GDSs presented for cancellation, the number of Shares owned by the beneficial owner and whether certain affiliations exist between the beneficial owner and us. The Depositary will refuse to release Shares to you until you deliver a completed and signed certification to it.

If the Shares are withdrawn from the depositary facility, such holder will be required to provide information to enable our compliance with our obligations set forth under the laws and regulations of the ROC, including a certification that:

. the holder is or is not a ‘‘related person’’, as such term is defined in the applicable Deposit Agreement, to us;
. the holder will own a certain number of our Shares after cancellation of the GDSs surrendered thereby, as well as a certain number of GDSs representing our Shares after cancellation of the GDSs surrendered thereby;
. the holder, or the person on whose account he acts, is the beneficial owner of the GDSs surrendered to the Depositary thereby;
. the name, address and nationality of the beneficial owner of the GDSs, as included upon presentation of GDSs for cancellation, is true and correct;
. the number of GDSs surrendered, and the number of Shares withdrawn, as included upon presentation of GDSs for cancellation, is true and correct; and

. if the presenter is a broker-dealer, the owner of the account for which he is acting has confirmed the accuracy of the above representations.

In addition, such holder may be required to certify to other information that we or the Depositary may deem necessary or desirable to comply with any ROC disclosure or reporting requirement.

You will have the right to withdraw the Shares represented by the GDSs unless there are:

. temporary delays because (1) the transfer books for our Shares or GDSs are closed, or (2) our Shares are frozen due to a shareholders’ meeting, a payment of dividends or a rights offering;
. obligations to pay fees, taxes and similar charges; and
. restrictions imposed by law or regulation.

When you request the withdrawal of the Shares represented by your Rule 144A GDSs, you will be required to provide the Depositary with a withdrawal certification stating, inter alia, that:

. you acknowledge that the Shares represented by your Rule 144A GDSs have not been and will not be registered under the Securities Act or with any securities regulatory authority in any state or other jurisdiction in the United States; and
. you certify that either:
(X) you are a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) who is the beneficial owner of the Rule 144A GDSs presented for cancellation, or you are acting on behalf of a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) who is the beneficial owner of the Rule 144A GDSs presented for cancellation and
- (i) you have, or the person on whose behalf you are acting has, sold or agreed to sell the Rule 144A GDSs or Shares in accordance with Regulation S,
- (ii) you have, or the person on whose behalf you are acting has, sold or agreed to sell the Rule 144A GDSs or Shares to another ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, or
- (iii) you, or the person on whose behalf you are acting, will be the beneficial owner of the Shares upon withdrawal and you, or the person on whose behalf you are acting, (x) will not deposit the Shares in any depositary receipts facility that is not a ‘‘restricted’’ depositary receipts facility and (y) will sell the Shares only
  - (a) to another ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A,
  - (b) outside the United States in accordance with Regulation S,
  - (c) in accordance with Rule 144 (if available), or
  - (d) pursuant to an effective registration statement under the Securities Act;

OR

(Y) you are a person located outside the United States and you acquired or agreed to acquire the Rule 144A GDSs or Shares outside the United States and will be the beneficial owner of the Rule 144A GDSs or Shares upon withdrawal.

When you request the withdrawal of the Shares represented by your International GDSs at any time during the ‘‘distribution compliance period’’, you will be required to provide the Depositary with a withdrawal certification stating, among other things, that:

. you acknowledge that the Shares represented by your International GDSs have not been and will not be registered under the Securities Act or with any securities regulatory authority in any state or other jurisdiction in the United States; and
. you certify that either:
(X) you did not purchase the International GDSs as part of this Offering

OR

(Y) you are a person other than a ‘‘U.S. person’’ (as defined in Regulation S) who is the beneficial owner of the International GDSs presented for cancellation and you are located outside the United States, and either
(i) you have sold or agreed to sell the International GDSs or Shares to a person other than a ‘‘U.S. person’’ (as defined in Regulation S) in accordance with Regulation S,
(ii) you have sold or agreed to sell the International GDSs or Shares to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, and will make delivery thereof in the form of Rule 144A GDSs, or
(iii) you will be the beneficial owner of the Shares upon withdrawal and you agree that you will not at any time during the ‘‘distribution compliance period’’ sell the Shares to any person other than
- (a) to a ‘‘qualified institutional buyer’’ (as defined in Rule 144A) in a transaction meeting the requirements of Rule 144A, or
- (b) to a person other than a ‘‘U.S. person’’ (as defined in Regulation S) in accordance with Regulation S,

OR

(Z) you are a ‘‘qualified institutional buyer’’ (as defined in Rule 144A), acting on your own behalf or on behalf of qualified institutional buyers, and you (or the person on whose behalf you are acting) have agreed to acquire the International GDSs or the Shares in a transaction made in reliance on Rule 144A and you (or the person on whose behalf you are acting) will take all action necessary to cause the Shares to be withdrawn and deposited under the Rule 144A Deposit Agreement for the purpose of receiving Rule 144A GDSs.

Voting Rights

Except as described below, you generally have no right under the Deposit Agreements to instruct the Depositary to exercise the voting rights for the Shares represented by your GDSs. Instead, by accepting GDSs or any beneficial interest in GDSs, you will be deemed to have authorized and directed the Depositary to appoint our Chairman or his designee (or such person designated by the MOEA) to represent you at our shareholders’ meeting and to vote, without liability, the Shares deposited with the Custodian according to the terms of the GDSs. The voting rights of holders of Shares are described in ‘‘Description of Capital Stock — Voting Rights’’.

The Depositary will mail to you notices of shareholders’ meetings received from us together with information explaining how to instruct the Depositary to exercise the voting rights of the securities represented by GDSs.

If we fail to timely provide the Depositary with our notice of meeting or other materials related to any meeting of owners of Shares, the Depositary will endeavor to cause all the deposited securities represented by GDSs to be present at the applicable meeting, insofar as practicable and permitted under applicable law, but will not cause those securities to be voted. According to the ROC Company Law, a shareholder’s voting rights must, as to all matters brought to a vote of shareholders, be exercised as to all shares held by the shareholder in the same manner, except in the case of an election of directors and supervisors, which may be conducted by means of cumulative voting or other mechanisms adopted in our Articles of Incorporation. Pursuant to ROC Company Law and our Articles of Incorporation, the election of directors and supervisors is by means of cumulative voting.

If the Depositary timely receives voting instructions from holders of more than 50% of the outstanding GDSs to vote in the same manner regarding one or more resolutions to be considered at the meeting, other than the election of Directors and Supervisors, the Depositary will (unless ROC law does not require a holder of Shares to vote all Shares in the same manner and subject to its receipt of satisfactory opinions of counsel) notify and instruct our Chairman or his designee of the instructions to attend the meeting and vote all the securities represented by the holders’ GDSs in accordance with the direction received from holders of more than 50% of the outstanding GDSs.

If we have timely provided the Depositary with the materials described in the applicable Deposit Agreement and the Depositary has not timely received instructions from holders of more than 50% of the outstanding GDSs to vote in the same direction regarding any resolution to be considered at the meeting, excluding the election of Directors and Supervisors, and the Depositary has secured satisfactory opinion of counsel, then you will be deemed to have authorized and directed the Depositary to give a discretionary proxy to our Chairman or his designee (or a person designated by the MOEA, if the Chairman is not a representative of the MOEA) to attend and vote at the meeting the Shares represented by your GDSs in any manner such person may wish (which may not be in the interests of holders) unless the Chairman, or such designated person, shall have informed the Depositary that he does not wish to be so authorized and directed.

The Depositary shall, subject to receipt of satisfactory opinion of counsel, instruct the Chairman (or his or MOEA’s designee) to attend the meetings and vote the Shares represented by GDSs as to which the Depositary has received voting instructions from GDS holders in respect of the election of Directors and Supervisors in the manner instructed by the GDS holders.

By accepting and continuing to hold GDSs or any interest therein, a holder will be deemed to have agreed to the voting provisions set forth in the applicable Deposit Agreement, as such provisions may be amended from time to time to comply with applicable ROC law. The voting procedures of the Deposit Agreement may not be amended without the prior written consent of the MOEA.

Please note that the ability of the Depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the Depositary in a timely manner.

100

Fees and Charges

As a GDS holder, you will be required to pay the following service fees to the Depositary:

Service Issuance of GDSs upon deposit of Shares . . . . Cancellation of GDSs . . . . . . . . . . . . . . . . . . Distribution of cash and/or stock dividends or other cash and/or free stock distributions (i.e. sale of rights and other entitlements) . . . Distribution of GDSs pursuant to exercise of rights to purchase GDSs . . . . . . . . . . . . . . . Transfer of GDRs . . . . . . . . . . . . . . . . . . . . .	Fees
	Up to 5 U.S. dollars per 100 GDS (or fraction thereof) issued Up to 5 U.S. dollars per 100 GDS (or fraction thereof) canceled Up to 2 U.S. dollars per 100 GDS (or fraction thereof) held Up to 2 U.S. dollars per 100 GDS (or fraction thereof) held 1.50 U.S. dollars per certificate presented for transfer

Service
Issuance of GDSs upon deposit of Shares . . . .
Cancellation of GDSs . . . . . . . . . . . . . . . . . .
Distribution of cash and/or stock dividends or
other cash and/or free stock distributions
(i.e. sale of rights and other entitlements) . . .
Distribution of GDSs pursuant to exercise of
rights to purchase GDSs . . . . . . . . . . . . . . .
Transfer of GDRs . . . . . . . . . . . . . . . . . . . . .

Fees

Up to 5 U.S. dollars per 100 GDS (or fraction thereof)
issued
Up to 5 U.S. dollars per 100 GDS (or fraction thereof)
canceled
Up to 2 U.S. dollars per 100 GDS (or fraction thereof)
held
Up to 2 U.S. dollars per 100 GDS (or fraction thereof)
held
1.50 U.S. dollars per certificate presented for transfer

As a GDS holder you will also be responsible to pay certain fees and expenses incurred by the Depositary and certain taxes and governmental charges such as:

. Fees for the transfer and registration of Shares and other deposited securities charged by the registrar and transfer agent for the Shares in the ROC upon deposits and withdrawals of Shares.
. Expenses incurred for converting foreign currency into U.S. dollars.
. Expenses for cable, telex and fax transmissions and for delivery of securities.
. Taxes and duties upon the transfer of securities when Shares are deposited or withdrawn from deposit, and other governmental charges.
. Fees and expenses in connection with compliance with exchange control regulations and other regulatory requirements applicable to Shares, deposited securities and GDSs.
. Fees and expenses for delivery of deposited securities.

We have agreed to pay certain other charges and expenses of the Depositary. Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the Depositary. You will receive prior notice of such changes.

Amendments and Termination

We may agree with the Depositary to modify the Deposit Agreements at any time. We undertake to give you 90-day prior notice of any modifications that would impose or increase any fees, charges or expenses or would materially prejudice any of your substantial rights under the Deposit Agreements.

You will be bound by the modifications to the Deposit Agreements if you continue to hold your GDSs after the modifications to the applicable Deposit Agreements become effective. The Deposit Agreements cannot be amended to prevent you from withdrawing the Shares represented by your GDSs (except as mandated by law).

We have the right to direct the Depositary to terminate the Deposit Agreements. Similarly, the Depositary may in certain circumstances on its own initiative terminate the Deposit Agreements. In either case, the Depositary must give notice to the holders at least 90 days before termination.

101

Upon termination, the following will occur under the applicable Deposit Agreement:

. For a period of six months after termination, you will be able to request the cancellation of your GDSs and the withdrawal of the Shares represented by your GDSs and the delivery of all other property held by the Depositary in respect of those Shares on the same terms as prior to the termination. During such six-months period the Depositary will continue to collect all distributions received on the Shares on deposit, including dividends, but will not distribute any such property to you until you request the cancellation of your GDSs.
. After the expiration of such six-months period, the Depositary will sell the securities held on deposit. The Depositary will hold the proceeds from such sale and any other funds then held for the holders of GDSs without liability for interest. At that point, the Depositary will have no further obligations to holders other than to account for the funds then held for the holders of GDSs still outstanding.

Books of the Depositary

The Depositary will maintain GDS holder records at its depositary offices. You may inspect such records at such offices during reasonable times but solely for the purpose of communicating with other holders in the interest of business matters relating to the GDSs and the Deposit Agreements.

The Depositary will maintain facilities in New York to execute, deliver, register, register the transfers of and surrender of, the GDSs. These facilities may be closed from time to time, when deemed expedient or requested by us.

Limitations on Obligations and Liabilities

The Deposit Agreements limit our obligations and the Depositary’s obligations to you. Neither the Depositary nor we will be liable to any holder or beneficial owner if prevented or delayed in performing their or our obligations under the Deposit Agreements by law, by governmental authority or by circumstances beyond their control, or, in the case of the Depositary, any provision of the Articles of Incorporation or of the securities deposited pursuant to the Deposit Agreements. Our obligations and those of the Depositary under the Deposit Agreements are expressly limited to performing the respective duties specified therein in good faith and reasonable judgment. We and the Depositary have each agreed to indemnify the other in certain circumstances arising out of acts performed or omitted in connection with the Deposit Agreements as well as arising out of the offer or sale of the GDSs, GDRs or Shares and any offering document relating thereto, except for liability arising out of negligence or bad faith.

In addition, we and the Depositary disclaim any liability for any action or inaction in reliance on the advice or information received from legal counsel, accountants, any person presenting Shares for deposit, any holder of GDSs or beneficial owners of GDSs, or any other person believed in good faith to be competent to give such advice or information. We and the Depositary may rely without any liability upon any written notice, request or other document believed to be genuine and to have been signed or presented by the proper parties. We and the Depositary disclaim any liability by reason of an exercise of, or failure to exercise, any discretion provided to us by the Deposit Agreements or in our Articles of Incorporation, or any of the provisions of the securities on deposit.

Pre-Release

To the extent permitted by applicable laws and regulations, the Depositary may, in certain circumstances, issue GDSs before receiving a deposit of Shares or cancel GDSs and release Shares before receiving copies for cancellation. These transactions are commonly referred to as ‘‘pre-release transactions’’ or ‘‘pre-releases’’. The Deposit Agreements limit the aggregate size of pre-release transactions and impose a

102

number of conditions on such transactions, including the need to receive collateral, the type of collateral required and the representations required from brokers. The Depositary may retain the compensation received from the pre-release transactions.

Taxes

You will be responsible for the taxes and other governmental charges payable on the GDSs and the securities represented by the GDSs. We, the Depositary and the Custodian may deduct from any distribution or payment the taxes and governmental charges payable by us, or for which we will become liable, and may sell any and all property on deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are due.

The Depositary may refuse to issue GDSs, to deliver, transfer, split and combine GDRs or to release securities on deposit until all taxes and charges are paid by the applicable holder. You may be required to provide to the Depositary and to the Custodian proof of taxpayer status and residence and such other information as the Depositary and the Custodian may require to fulfill their respective legal obligations. We have no obligation to any holder to apply a rate under any treaty or arrangement unless the holder has provided evidence of residency of such holder. You are required to indemnify us, the Depositary and the Custodian for any claims with respect to taxes based on any tax benefit obtained for you.

Foreign Currency Conversion

Subject to ROC law, the Depositary will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practicable, and it will distribute the U.S. dollars in accordance with the terms of the Deposit Agreements. You may have to pay fees and expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental requirements.

If the conversion of foreign currency is not practicable or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within a reasonable period, the Depositary may take the following actions in its discretion:

. Convert the foreign currency to the extent practicable and lawful and distribute the U.S. dollars to the holders for whom the conversion and distribution is lawful and practicable.
. Distribute the foreign currency to holders for whom the distribution is lawful and practicable.
. Hold the foreign currency (without liability for interest) for the applicable holders.

Legends

The Rule 144A GDR(s) issued to represent the Rule 144A GDSs offered in this Offering shall contain, and all owners of Rule 144A GDSs shall be bound by the terms of, the following legend:

NEITHER THIS SECURITY NOR THE UNDERLYING SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND SUCH SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), IN EACH CASE IN ACCORDANCE

103

WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144A FOR RESALES OF THIS SECURITY OR THE UNDERLYING SECURITIES.

NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE FOREGOING, THE SHARES REPRESENTED HEREBY MAY NOT BE DEPOSITED TO ANY UNRESTRICTED DEPOSITARY RECEIPT FACILITY IN RESPECT OF SHARES ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK (INCLUDING CITIBANK, N.A.), UNLESS AND UNTIL SUCH TIME AS SUCH SHARES ARE NO LONGER RESTRICTED SECURITIES WITHIN THE MEANING OF THE SECURITIES ACT.

The International GDR(s) issued to represent the International GDSs offered in this Offering shall contain, and all owners of International GDSs shall be bound by the terms of, the following legend:

THIS INTERNATIONAL GLOBAL DEPOSITARY RECEIPT, THE INTERNATIONAL GLOBAL DEPOSITARY SHARES AND SHARES OF CHINA STEEL CORPORATION (‘‘SHARES’’) REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND, PRIOR TO THE EXPIRATION OF THE APPLICABLE DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS 40 DAYS AFTER THE LATER OF (I) THE COMMENCEMENT OF THE OFFERINGS OF (A) INTERNATIONAL GDSs OUTSIDE THE UNITED STATES IN RELIANCE ON REGULATION S AND ANY OTHER APPLICABLE LAW IN TRANSACTIONS EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND (B) RULE 144A GDSs IN THE UNITED STATES TO QUALIFIED INSTITUTIONAL BUYERS AND (II) THE CLOSING DATE WITH RESPECT TO THE INTERNATIONAL GDSs), MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN THE FORM OF RULE 144A GLOBAL DEPOSITARY SHARES REPRESENTING SHARES TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A OR (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES.

UPON THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD, THIS INTERNATIONAL GDR, THE INTERNATIONAL GDSs EVIDENCED HEREBY AND THE DEPOSITED SECURITIES REPRESENTED THEREBY SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS ON TRANSFER PROVIDED IN THIS LEGEND, PROVIDED THAT AT THE TIME OF SUCH EXPIRATION THE OFFER AND SALE OF THE INTERNATIONAL GDSs EVIDENCED HEREBY AND THE DEPOSITED SECURITIES REPRESENTED THEREBY BY THE HOLDER THEREOF IN THE UNITED STATES WOULD NOT BE RESTRICTED UNDER THE SECURITIES LAWS OF THE UNITED STATES OR ANY STATE, TERRITORY OR POSSESSION OF THE UNITED STATES.

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS INTERNATIONAL GDR OR A BENEFICIAL INTEREST IN THE INTERNATIONAL GDSs EVIDENCED HEREBY, AS THE CASE MAY BE, AT ANY TIME DURING THE DISTRIBUTION COMPLIANCE PERIOD, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

104

INFORMATION RELATING TO THE DEPOSITARY

Citibank, N.A. (‘‘Citibank’’) has been appointed as Depositary pursuant to the Deposit Agreements. Citibank is a wholly owned subsidiary of Citicorp, a Delaware corporation whose principal office is located in New York, New York, which in turn is a wholly owned subsidiary of Citigroup Inc. Citibank is a commercial bank that, along with its subsidiaries and affiliates, offers a wide range of banking and trust services to its customers throughout the United States and the world.

Citibank was originally organized on June 16, 1812, and is now a national banking association organized under the National Bank Act of 1864 of the United States of America. Citibank is primarily regulated by the United States Office of the Comptroller of the Currency. Its principal office is at 399 Park Avenue, New York, NY 10043.

The Consolidated Balance Sheets of Citibank as of December 31, 2002 and December 31, 2001 are set forth in the 2002 Citicorp Annual Report on Form 10-K and as of June 30, 2003 are set forth in the June 2003 Quarterly Report on Form 10-Q. Citicorp’s 2002 Annual Report on Form 10-K and June 2003 Quarterly Report on Form 10-Q are on file with the United States Securities and Exchange Commission.

Citibank’s Articles of Association and By-laws, each as currently in effect, together with Citicorp’s 2002 Annual Report on Form 10-K and June 2003 Quarterly Report on Form 10-Q will be available for inspection at the Depositary Receipt office of Citibank, 111 Wall Street, New York, New York 10043 and at the offices of the listing agent in Luxembourg.

105

TRANSFER RESTRICTIONS

Notice to Purchasers of Rule 144A GDSs

Because of the following restrictions, purchasers are advised to consult with legal counsel prior to making any resale, pledge or transfer of Rule 144A GDSs.

Each purchaser of Rule 144A GDSs offered in this Offering will be deemed to have represented and agreed as follows (terms used in this paragraph that are defined in Rule 144A under the Securities Act or Regulation S under the Securities Act are used herein as defined therein):

(1) It understands that the Rule 144A GDSs and the Shares underlying the Rule 144A GDSs have not been registered under the Securities Act, and that if, in the future it decides to offer, resell, pledge or otherwise transfer such Rule 144A GDSs or Shares, such Rule 144A GDSs or Shares may be offered, sold, pledged or otherwise transferred only (i) to a person whom the seller reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule 144A, (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (iii) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), in each case in accordance with any applicable securities laws of any state of the United States. No representation can be made as to the availability of the exemption provided by Rule 144 for resales of the Rule 144A GDSs or Shares. In particular, the deposit of Shares under the Rule 144A Deposit Agreement from time to time, including in connection with the Offering, may limit the availability of the exemption provided by Rule 144 to future holders of Rule 144A GDSs.
(2) It understands that the Master Rule 144A GDR will bear a legend to the following effect unless we determine otherwise, consistent with applicable law:

NEITHER THIS SECURITY NOR THE UNDERLYING SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND SUCH SECURITIES MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 FOR RESALES OF THIS SECURITY OR THE UNDERLYING SECURITIES.

NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE FOREGOING, THE SHARES REPRESENTED HEREBY MAY NOT BE DEPOSITED INTO ANY UNRESTRICTED DEPOSITARY RECEIPT FACILITY IN RESPECT OF SHARES ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK (INCLUDING CITIBANK, N.A.), UNLESS AND UNTIL SUCH TIME AS SUCH SHARES ARE NO LONGER RESTRICTED SECURITIES WITHIN THE MEANING OF THE SECURITIES ACT.

In addition, each purchaser of Rule 144A GDSs will be deemed to have represented and agreed that it is a qualified institutional buyer as defined in Rule l44A, that it is aware that the sale to it is being made in reliance on Rule 144A and that it is acquiring the Rule 144A GDSs for its own account or for the account of a qualified institutional buyer.

106

Notice to Purchasers of International GDSs

Because of the following restrictions, purchasers are advised to consult with legal counsel prior to making any resale, pledge or transfer of International GDSs.

Each purchaser of International GDSs offered in this Offering will be deemed to have represented and agreed as follows:

(1) It understands that the International GDSs and the Shares underlying the International GDSs have not been registered under the Securities Act, and that if, prior to the effectiveness of a Registration Statement under the Securities Act relating to the International GDSs, it decides to offer, resell, pledge or otherwise transfer such International GDSs or the Shares, such International GDSs or Shares may be offered, sold, pledged or otherwise transferred only (i) in an offshore transaction in accordance with Regulation S or (ii) in the form of Rule 144A GDSs, to a person whom the seller reasonably believes is a qualified institutional buyer within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A, in each case in accordance with any applicable securities laws of any state of the United States.
(2) It understands that the Master International GDR and International GDRs will bear a legend to the following effect unless we determine otherwise consistent with applicable law:

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS INTERNATIONAL GDR CERTIFICATE OR A BENEFICIAL INTEREST IN THE INTERNATIONAL GDRs EVIDENCED HEREBY, AS THE CASE MAY BE, AT ANY TIME DURING THE DISTRIBUTION COMPLIANCE PERIOD, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

107

TAXATION

ROC Taxation

The following is a summary of the principal ROC tax consequences of the ownership and disposition of the GDSs and shares to a Non-Resident Individual or Non-Resident Entity that owns the GDSs or Shares (each a ‘‘Non-ROC Holder’’). A ‘‘Non-Resident Individual’’ refers to a foreign national individual who is not physically present in the ROC for 183 days or more during any calendar year and a ‘‘Non-Resident Entity’’ is a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the ROC and has no fixed place of business or other permanent establishment in the ROC. You should consult your own tax advisors concerning the tax consequences of owning the GDSs or Shares in the ROC and any other relevant taxing jurisdiction to which you are subject.

Dividends

Dividends (whether in cash or shares) declared by us out of retained earnings and paid out to a NonROC Holder in respect of Shares represented by the GDSs are normally subject to ROC income tax collected by way of withholding, for which we are responsible, at the time of distribution. The current rate of withholding for Non-ROC Holders is 20% of the amount of the distribution (in the case of cash dividends) or of the par value of the common stock (in the case of stock dividends). We are subject to a 10% retained earnings tax on our after-tax earnings generated after January 1, 1998 that are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future dividend distributions. When we declare dividends out of those retained earnings, a maximum amount of up to 10% of the declared dividends will be credited against the 20% withholding tax imposed on the Non-ROC Holder of Shares represented by the GDSs. Consequently, the effective rate of withholding on dividends paid out of retained earnings previously subject to the retained earnings tax may be less than 20%. Stock dividends with respect to the Shares represented by the GDSs declared and distributed by us out of capital reserves are not subject to ROC withholding tax.

Capital Gains

Under current ROC law, capital gains on securities transactions (including sale of common shares) are exempt from income tax. Sales of the GDSs by Non-ROC Holders are regarded as transactions relating to property located outside the ROC and thus any resultant gains are currently not subject to ROC income tax.

Preemptive Rights

Our distribution of statutory preemptive rights for the shares in compliance with the ROC Company Law is currently not subject to ROC tax. Proceeds derived from sales of statutory preemptive 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 amount received. Proceeds derived from sales of statutory subscription rights that are not evidenced by securities are subject to capital gains tax at the rate of (1) 25% of the gross amount received for Non-Resident Entities and (2) 35% of the gross amount received for NonResident Individuals. Subject to compliance with ROC law, at our sole discretion we may determine whether statutory subscription rights are evidenced by securities.

Securities Transaction Tax

Securities transaction tax, currently at the rate of 0.3% of the gross amount received, is payable by the seller on the sale of Shares. Transfers of the GDSs by Non-ROC Holders are not subject to ROC securities transaction tax.

108

Estate Taxation and Gift Tax

ROC estate tax is payable on any property within the ROC of a deceased individual who is a NonResident Individual, and ROC gift tax is payable on any property located within the ROC donated by any such person. Estate tax is currently payable at rates ranging from 2% of the first NT$600,000 to 50% of amounts over NT$100,000,000. Gift tax is payable at rates ranging from 4% of the first NT$600,000 to 50% of amounts over NT$45,000,000. Under ROC estate and gift tax laws, the shares will be deemed located in the ROC irrespective of the location of the owner. It is unclear whether a holder of the GDSs will be considered to own shares for this purpose.

Tax Treaties

At present, the ROC does not have a double taxation treaty with the United States, but does have double taxation treaties with Indonesia, Singapore, Australia, South Africa, Malaysia, Gambia, Swaziland, Macedonia, Vietnam, New Zealand, the United Kingdom and the Netherlands, which limit the rate of withholding tax on dividends paid with respect to shares in ROC companies. It is unclear whether a NonROC Holder will be considered to own shares for the purposes of such treaties. Accordingly, if you are otherwise entitled to the benefits of a treaty, you should consult your own tax advisors concerning eligibility for benefits under the treaty with respect to the GDSs. The ROC government has announced a plan to suspend or terminate the tax treaty with South Africa in reaction to South Africa’s decision to discontinue its diplomatic recognition of the ROC.

Tax Guarantor

Any holder of the GDSs withdrawing Shares represented by such GDSs is required under current ROC laws and regulations to appoint an agent in the ROC. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of such withdrawing holder’s ROC tax obligations. Evidence of the appointment of such agent and the approval for such appointment by the ROC tax authorities may be required as conditions to such withdrawing holder’s repatriation of the profit derived from the sale of withdrawn Shares. There can be no assurance that such withdrawing holder will be able to appoint and obtain approval for such agent in a timely manner.

Under current ROC law, repatriation of profits by any holder of Shares sold within the ROC is subject to the submission of evidence of the appointment of a tax guarantor to, and approval thereof by, the tax authority or submission of tax clearance certificates to the tax authority so long as the capital gains from securities transactions are exempt from ROC income tax. Notwithstanding the above requirements for the appointment of a tax guarantor or submission of tax clearance certificates as provided in the ROC regulations, the Central Bank of China has not required submission of such evidence or tax clearance certificates as a condition to repatriation of sale proceeds of Shares from sales that take place within the ROC. However, there can be no assurance that the Central Bank of China will not require submission of such evidence or tax clearance certificates in the future.

U.S. Federal Income Taxation

The following is a discussion of the principal U.S. federal income tax consequences of the acquisition, ownership and disposition of Rule 144A GDSs and Shares, but does not purport to be a complete analysis of all potential tax consequences relating thereto. This discussion is based on the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), Treasury Regulations and administrative and judicial decisions, all of which are subject to change, possibly with retroactive effect.

As used in this discussion, the term ‘‘U.S. Holder’’ means a beneficial owner of Rule 144A GDSs or Shares that is, for U.S. federal income tax purposes, (i) a corporation, or other entity taxed as a corporation for U.S. federal income tax purposes, organized under the laws of the United States or any political subdivision thereof; or (ii) an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

109

This discussion deals only with tax consequences to purchasers of Rule 144A GDSs or Shares who hold the Rule 144A GDSs or Shares as capital assets. It does not discuss all of the tax consequences that may be relevant to a purchaser in light of such person’s particular circumstances or to purchasers subject to special rules, such as financial institutions, tax-exempt entities, dealers in securities or foreign currencies, traders in securities that elect to mark to market, persons holding Rule 144A GDSs or Shares as part of a hedge, straddle or other integrated transaction, persons whose functional currency is not the U.S. dollar, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, persons subject to the alternative minimum tax, persons owning 10% or more of our voting shares and persons carrying on a trade or business in the ROC through a permanent establishment or other fixed place of business.

This discussion is also based in part on representations by the Depositary and assumes that each obligation under the Deposit Agreements and any related agreement will be performed in accordance with its terms. For U.S. federal income tax purposes, a U.S. Holder of a Rule 144A GDS will be treated as the owner of the Shares underlying the Rule 144A GDS. The U.S. Treasury has expressed concern that parties to whom depositary receipts such as the Rule 144A GDSs are issued may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. Holders of Rule 144A GDSs. Accordingly, the analysis of the creditability of ROC taxes described below could be affected by future actions that may be taken by the U.S. Treasury.

Persons considering the purchase of Rule 144A GDSs should consult their own tax advisors with regard to the application of the U.S. federal income tax laws to their particular situations as well as any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction.

Taxation of Dividends

Dividends received with respect to Rule 144A GDSs or Shares, other than certain pro rata distributions of Rule 144A GDSs or Shares, will constitute foreign source dividend income for U.S. federal income tax purposes to the extent of our current or accumulated earnings and profits (determined in accordance with U.S. federal income tax principles). The amount of any dividend paid will include the amount of any ROC taxes withheld therefrom (reduced by any credit against such withholding tax on account of the 10% retained earnings tax paid by us), and will equal the U.S. dollar value of the NT dollars distribution calculated by reference to the exchange rate in effect on the date the dividend is received by the Depositary, in the case of Rule 144A GDSs, or by the holder, in the case of Shares (regardless of whether the NT dollars are actually converted into U.S. dollars). Gain or loss, if any, realized on a sale or other disposition of such NT dollars will be ordinary income or loss. If dividends paid in NT dollars are converted into U.S. dollars on the day such currency is received by the Depositary, in the case of Rule 144A GDSs, or by the holder, in the case of Shares, U.S. Holders generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. U.S. Holders will not be entitled to claim a dividends received deduction with respect to distributions by us.

Subject to certain limitations and restrictions, the ROC taxes withheld (reduced by any credit against such withholding tax on account of the 10% retained earnings tax paid by us) from dividends distributions will be eligible for credit against the U.S. Holder’s federal income taxes. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends paid by us with respect to the Rule 144A GDSs or Shares will constitute ‘‘passive income’’ or, in the case of certain holders, ‘‘financial services income’’.

110

Pro rata distributions of Shares to our shareholders (including holders of Rule 144A GDSs) will generally not be subject to U.S. federal income tax. Accordingly, any such distributions will generally not give rise to U.S. federal income against which ROC withholding tax on the distribution may be credited. Any ROC withholding tax on such distributions will generally only be creditable against a U.S. Holder’s U.S. federal income tax liability with respect to ‘‘general limitation income’’ and not ‘‘passive income’’ or ‘‘financial services income’’ subject to generally applicable conditions and limitations.

Exchange of Rule 144A GDSs or International GDSs for Shares

No gain or loss will be recognized by a U.S. Holder of Rule 144A GDSs upon the withdrawal of Shares from the depositary facility in exchange for such Rule 144A GDSs. A U.S. Holder’s tax basis in the withdrawn Shares will be the same as the U.S. Holder’s tax basis in the Rule 144A GDSs or International GDSs surrendered, and the holding period of the Shares will include the holding period of the Rule 144A GDSs or International GDSs.

Taxation of Capital Gains

A U.S. Holder will recognize capital gain or loss for U.S. federal income tax purposes on a sale or other disposition of Rule 144A GDSs or Shares in the same manner as on the sale or other disposition of any other shares. Any ROC securities transaction tax on the sale or other disposition of the Shares will not be creditable against the U.S. Holder’s federal income tax liability.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries may be subject to information reporting and to backup withholding unless (i) the U.S. Holder is a corporation or other exempt recipient or (ii) the U.S. Holder provides a correct taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred.

The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the holder’s United States federal income tax liability and may entitle the holder to a refund, provided that the required information is furnished to the Internal Revenue Service.

111

PLAN OF DISTRIBUTION

The Offering

Under the terms and subject to the conditions contained in a Purchase Agreement, dated October 16, 2003 (the ‘‘Purchase Agreement’’), the Managers named below (the ‘‘Managers’’) have severally but not jointly agreed to purchase from the MOEA, and the MOEA has agreed to sell, the following respective number of GDSs:

Managers Citigroup Global Markets Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UBS AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Normura International plc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Number of GDSs
	24,890,000 24,890,000 2,620,000
	52,400,000

Managers
Citigroup Global Markets Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
UBS AG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Normura International plc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
GDSs

24,890,000
24,890,000
2,620,000

52,400,000

The Purchase Agreement provides that the obligations of the Managers are subject to certain conditions precedent and that the Managers will be obligated to purchase all the GDSs, if any are purchased. The Purchase Agreement provides that, in the event of a default by a Manager, in certain circumstances the purchase commitments of non-defaulting Managers may be increased or the Purchase Agreement may be terminated.

The MOEA has granted to the Managers an option exercisable within 30 days after the date of this Offering Circular to purchase up to on the aggregate of 7,759,800 additional GDSs.

We and the MOEA have agreed that, during the period commencing on the date of this Offering Circular and ending 180 days after the latest closing date of this Offering (the ‘‘Lock-up Period’’), we or the MOEA will not, nor will any person acting on our or their behalf, without the prior written consent of the Managers, (i) issue, offer, encumber, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, any (A) GDSs, (B) Shares or securities convertible into or exercisable or exchangeable for the Shares, (C) securities of the same class as the GDSs or the Shares or (D) other instruments representing interests in securities of the same class as the GDSs or the Shares (collectively, the ‘‘Lock-up Securities’’); or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-up Securities, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of the GDSs or the Shares or such other securities, in cash or otherwise, or otherwise make public an intention to do any of the foregoing.

In connection with this Offering, UBS AG, on behalf of the Managers, may over-allot or effect transactions which stabilize or maintain the market price of the GDSs at a level above that which might otherwise prevail in the open market. Such activities, if commenced, may be discontinued at any time. UBS AG will only conduct such activities insofar as it is permitted by applicable law and regulations in the relevant jurisdictions.

The Managers propose to offer the GDSs at the initial offering price. After the GDSs are released for sale, the offering price and other selling terms may from time to time be varied by the Managers.

Pursuant to the Purchase Agreement, we and the MOEA have agreed to indemnify the Managers against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments which the Managers may be required to make in respect thereof. The Purchase Agreement provides that the obligations of the Managers are subject to certain conditions precedent, and entitles the Managers to terminate such agreement in certain circumstances prior to payments being made to us.

112

Certain of the Managers and their affiliates perform from time to time various investment banking, commercial banking or advisory services for us and our affiliates, for which they have received and may in the future receive customary compensation.

Selling Restrictions

United States

The GDSs and the Shares underlying the GDSs have not been and will not be registered under the Securities Act and may not be offered or sold in the United States except pursuant to an effective registration statement or in accordance with an applicable exemption from the registration requirements of the Securities Act. Accordingly, the GDSs are being offered and sold respectively by the Managers only (i) in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act and (ii) outside the United States in reliance upon Regulation S.

The International GDSs are being sold outside the United States in reliance on Regulation S. The Purchase Agreement provides that Managers may, through their respective U.S. broker-dealer affiliates, arrange for the offer and resale of the Rule 144A GDSs within the United States only to qualified institutional buyers in reliance on Rule 144A. As used in this paragraph and the immediately preceding paragraph, the term ‘‘United States’’ has the meaning given to it by Regulation S under the Securities Act.

In addition, until the expiration of 40 days after the later of the commencement of this Offering and the latest issue date with respect to any GDSs to be offered in this Offering, an offer or sale of any GDSs within the United States by a dealer that is not participating in this Offering may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.

Canada

The distribution of the GDSs in Canada is being made only on an exemption from the requirement that we prepare and file a prospectus with the securities regulatory authorities of each province or territory where trades of GDSs are effected. The dealer registration requirements of the securities regulatory authorities in each province and territory where trades of GDSs are effected must be complied with. Any offer or sale of the GDSs in Canada must be made in accordance with applicable securities laws in each relevant jurisdiction in Canada, including the filing of any required reports or documents with the securities regulatory authorities in each relevant jurisdiction in Canada. The distribution of the GDSs shall not be advertised in Canada.

United Kingdom

Prior to the date six months after this Offering, the GDSs may not be sold to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their businesses or otherwise in circumstances which have not constituted and will not constitute an offer to the public in the United Kingdom within the meaning of The Public Offers of Securities Regulations 1995. The Managers will 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 of 2000 (the ‘‘FSMA’’)), received by it in connection with the issue and sale of any GDSs in circumstances in which Section 21(1) of the FSMA does not apply to us. All applicable provisions of FSMA must be satisfied with respect to anything done in relation to the GDSs in, from or otherwise involving the United Kingdom.

113

France

. Neither this Offering Circular nor any offering material such as a prospectus relating to the GDSs has been or will be submitted to the ‘‘Commission des Ope´rations de Bourse’’ (which is shortly to be replaced by the ‘‘Autorite´ des Marche´s Financiers’’) for approval (‘‘visa’’) in France.
. The GDSs may not be offered or sold nor may any copies of this Offering Circular nor any offering material such as a prospectus relating to the GDSs be distributed, directly or indirectly, except to qualified investors (‘‘investisseurs qualifie´s’’) or to a restricted group of investors (‘‘cercle restreint d’investisseurs’’) consisting of either a group of no more than 100 persons or a group of persons, other than qualified investors, having professional or family links with our management, all as defined in Article L. 411-2 of the Monetary and Financial Code (previously the Article 6 of ‘‘Ordinance’’ no. 67-833 dated 28 September 1967 (as amended)) and in ‘‘De´cret’’ no. 98-880 dated 1 October 1998, in each case acting for their own account.

ROC

The GDSs may not be offered, sold or delivered at any time, directly or indirectly, as part of this Offering in the ROC.

Japan

It is expected that a public offering without a listing of the GDSs will be made in Japan. No GDSs have been or will be offered or sold, directly or indirectly, in Japan or to or for the account of any resident of Japan, except in accordance with the terms and conditions of the public offering without a listing of the GDSs in Japan, as stated in the securities registration statement filed on October 1, 2003, as amended, with the Japanese authority under, or pursuant to any exemption from the registration requirements of, the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law. Each Manager will send any dealer who purchases from it any GDSs a notice stating in substance that, by purchasing such GDSs, the dealer represents and agrees that it has not offered or sold, and will not offer or sell, any GDSs, directly or indirectly, in Japan or to or for the account of any resident thereof, except in accordance with the terms and conditions of the public offering without a listing of the GDSs in Japan, as stated in the securities registration statement filed on October 1, 2003, as amended, with the Japanese authority under, or pursuant to any exemption from the registration requirements of, the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law, and that such dealer will send to any other dealer to whom it sells any of such GDSs a notice containing substantially the same statement as is contained in this sentence. As used in this paragraph, "resident of Japan" means any person residing in Japan, including any corporations or other entities organized under the laws of Japan. Each Manager has also acknowledged that it may not conduct marketing activities in Japan.

Hong Kong

The GDSs may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. No advertisement, invitation or document relating to the GDSs, whether in Hong Kong or elsewhere, has been or will be issued, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the GDSs which are or are intended to be disposed of only to persons outside Hong Kong or only to ‘‘professional investors’’ within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.

114

Singapore

This Offering Circular has been lodged as an information memorandum with the Monetary Authority of Singapore pursuant to Division 1, Part XIII of the Securities and Futures Act (Cap. 289) of Singapore (the ‘‘Securities and Futures Act’’) and our GDSs will be offered in Singapore pursuant to exemptions invoked under Sections 274 and 275 of the Securities and Futures Act. Accordingly, the GDSs may not be offered or sold or made the subject of an invitation for subscription or purchase nor may this Offering Circular or any other document or material in connection with the offer or sale, or invitation for subscription or purchase of such GDSs be circulated or distributed, whether directly or indirectly, to the public or any members of the public in Singapore other than (i) to an institutional investor or other person falling within Section 274 of the Securities and Futures Act, (ii) to a sophisticated investor, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act, or (iii) otherwise than pursuant to, and in accordance with the conditions of any other applicable provision of the Securities and Futures Act.

Italy

This Offering of GDSs has not been registered with the Commissione Nazionale per la Societa` e la Borsa (‘‘CONSOB’’) (the Italian securities exchange commission) pursuant to the Italian securities legislation. The GDSs may not be offered, sold or delivered in the Republic of Italy nor may any copies of this Offering Circular or any other document relating to the GDSs be distributed in the Republic of Italy in a solicitation to the public at large. The sales of the GDSs in the Republic of Italy shall only be negotiated:

(i) with professional investors (operatori qualificati), as defined in Article 31, second paragraph of CONSOB Regulation No. 11522 of 1 July, 1998 (the ‘‘Regulation No. 11522’’), as amended and effected, in compliance with the terms and procedures provided therein; or
(ii) in circumstances which are exempted from the rules of solicitation of investments pursuant to Article 100 of Legislative Decree No. 58 of 24 February, 1998 (the ‘‘Financial Services Act’’) and Article 33, first paragraph, of CONSOB Regulation No. 11971 of 14 May, 1999, as amended from time to time (the ‘‘Regulation No. 11971’’); or
(iii) with an Italian resident who submits an unsolicited offer to purchase the GDSs, and shall in any event be effected in accordance with all relevant Italian securities, tax and exchange control and other applicable laws and regulations.

Accordingly, and only in relation to the cases under (i), (ii) and (iii) above, in which the private placement of the GDSs is admitted, the GDSs may not be offered, sold or delivered and neither this Offering Circular nor any other material relating to the GDSs may be distributed or made available in the Republic of Italy unless such offer, sale or delivery of GDSs or distribution or availability of copies of this Offering Circular or any other material relating to the GDSs in the Republic of Italy is:

(a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with the Financial Services Act, Legislative Decree No. 385 of 1 September, 1993, the Regulation No. 11522 and any other applicable laws and regulations; and
(b) in compliance with any other applicable requirement or limitation which may be imposed by CONSOB or the Bank of Italy.

The Netherlands

The GDSs may not be, directly or indirectly, offered, sold, transferred or delivered in or from The Netherlands, as part of their initial distribution or as part of any re-offering, and neither this Offering Circular nor any other document in respect of this Offering may be distributed or circulated in The Netherlands, other than to individuals or legal entities which include, but are not limited to, banks, brokers, dealers, institutional investors and undertakings with a treasury department, who or which trade or invest in securities in the conduct of a business or profession.

115

LEGAL MATTERS

Certain legal matters with respect to the GDSs and the Shares will be passed upon for the MOEA and us by Lee and Li, Taipei, Taiwan, ROC and for the Managers by Davis Polk & Wardwell. Davis Polk & Wardwell will rely upon Lee and Li with respect to certain matters of ROC law and Lee and Li will rely upon Davis Polk & Wardwell with respect to certain matters of United States law.

INDEPENDENT AUDITOR

Our interim financial statements as of June 30, 2002 and 2003 and for the six months ended June 30, 2002 and 2003 and our annual financial statements as of December 31, 2000, 2001 and 2002 and for each of the years in the three-year period ended December 31, 2002 included in this Offering Circular have been audited by Deloitte & Touche, independent auditor, as indicated in their audit reports with respect thereto appearing herein. T N Soong & Co and Deloitte & Touche (Taiwan) established Deloitte & Touche effective June 1, 2003.

116

GENERAL INFORMATION

Listing

Application has been made to list the International GDSs on the Luxembourg Stock Exchange. The legal notice relating to the issue of the International GDSs, our Articles of Incorporation, the International Deposit Agreement and the Articles of Association of Citibank N.A., the Depositary, will be registered prior to the listing with the Registre de Commerce et des Socie´te´s a` Luxembourg, where such documents will be available for inspection and where copies thereof can be obtained upon request. As long as the International GDSs are listed on the Luxembourg Stock Exchange, The Bank of New York (Luxembourg) S.A. will serve as the intermediary between our company and the Luxembourg Stock Exchange and the holders of the International GDSs.

According to Chapter VI, Article 3, point A/II/2 of the Rules and Regulations of the Luxembourg Stock Exchange, the International GDSs shall be freely transferable and therefore no transaction made on the Luxembourg Stock Exchange shall be cancelled.

Authorizations

We were established on December 3, 1971 in Taiwan, ROC and are registered with the Ministry of Economic Affairs of the ROC under a uniform registration number of 30414175.

This Offering was authorized and approved by our Board of Directors on August 27, 2003 and by the ROC Securities and Futures Commission on September 12, 2003.

Material Change

Except as described in this Offering Circular, there has been no significant change in our financial position and our subsidiaries since December 31, 2002, the date of our latest audited consolidated financial statements, and no material adverse change in our financial condition since June 30, 2003, the date of our latest audited unconsolidated financial statements.

Litigation

Other than as set forth in this Offering Circular, neither we nor any of our subsidiaries are involved in any litigation or arbitration proceedings that may have, or have had during the twelve months preceding the date of this Offering Circular, a material adverse effect on our financial condition or our subsidiaries, nor, so far as any of them is aware, is any such proceeding pending or threatened.

Documents Available

Copies (and certified English translations where the documents are not in English) of the following documents may be inspected (and in the case of financial statement, obtainable also) at the specified office of The Bank of New York (Luxembourg) S.A. in Luxembourg for as long as the International GDSs are listed on the Luxembourg Stock Exchange:

. Our Articles of Incorporation;
. a copy of our audit report of the independent auditor and our audited financial statements for the years ended December 31, 2000, 2001 and 2002, and the report of the independent auditor on our financial statements for the six months ended June 30, 2003;
. the Purchase Agreement relating to the GDSs; and
. the Deposit Agreement relating to the International GDSs.

117

In addition, copies of our most recent annual audited unconsolidated financial statements, any semiannual audited unconsolidated financial statements, quarterly unaudited unconsolidated summary financial information and annual reports published by us will be available free of charge at the specified office of The Bank of New York (Luxembourg) S.A. in Luxembourg for as long as the International GDSs are listed on the Luxembourg Stock Exchange.

We will publish all notices to holders of the International GDSs in the Luxemburger Wort.

Clearing Systems

The Rule 144A GDSs have been accepted for clearance through the facilities of DTC. The International GDSs have been accepted for clearance and settlement through the facilities of Euroclear and Clearstream. The CUSIP number for the Rule 144A GDSs is 169417102 and the ISIN for the Rule 144A GDSs is US1694171026. The CUSIP for the International GDSs is Y1504l125 and the ISIN for the International GDSs is USY150411251. The International GDSs have been accepted for clearance and settlement through Clearstream and Euroclear under Common Code number 003768317. The SEDOL code for the International GDSs is 5081873. The PORTAL code for the Rule 144A GDSs is CISEY. The International GDSs offered in this Offering will be fully fungible with our previously issued International GDSs.

Euroclear and Clearstream have only accepted for clearance the International GDSs represented by the Master International GDR. Investors holding the Rule 144A GDSs represented by the Master Rule 144A GDR wishing to effect trades of such Rule 144A GDSs on the Luxembourg Stock Exchange must exchange such Rule 144A GDSs for the International GDSs, which are represented by the Master International GDR, in accordance with the Deposit Agreements.

118

SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN ROC GAAP AND U.S. GAAP

Certain of the differences between ROC GAAP and U.S. GAAP, including but not limited to, the accounting for derivatives and impairment of long-lived assets and bonuses to employees, directors and supervisors, could have a material impact on reported net income and shareholders’ equity. Given the number and nature of differences between ROC GAAP and U.S. GAAP, users of ROC GAAP financial statements should not assume that such financial statements are comparable to financial statements prepared in accordance with U.S. GAAP.

Our financial statements are prepared and presented in accordance with ROC GAAP. Certain principal differences between ROC GAAP applicable to us and U.S. GAAP are summarized below. Such presentation should not be taken as inclusive of all differences between ROC GAAP and U.S. GAAP. Additionally, no attempt has been made herein to identify all disclosure, presentation or classification differences that would affect the manner in which events and transactions are presented in the financial statements or notes thereto. Further, no attempt has been made to identify future differences between ROC GAAP and U.S. GAAP as a result of prescribed changes in accounting standards.

If the Company and its subsidiaries were to prepare a complete reconciliation between ROC GAAP and U.S. GAAP, additional accounting and disclosure differences might have come to our attention.

Presentation of non- consolidated financial statements Revaluation of assets Gains on disposition of property, plant and equipment Capital surplus	ROC GAAP Under ROC GAAP, non-consolidated financial statements of a company are presented as the primary financial statements and consolidated financial statements as supplemental financial statements. ROC GAAP permits property, plant and equipment to be recorded at cost plus appreciation in respect of assets revalued in accordance with ROC government regulations. For land revaluation, an estimated land value increment tax equal to between 40% and 60% of the appreciation amount must be recorded as long-term land value incremental tax payable. The remainder of the appreciation amount is either credited to capital surplus (only to offset a deficit) or transferred to capital. For revaluation of properties other than land, a new basis of such assets for depreciation purposes is established. Gains on the dispositions of property, plant and equipment generated before 2001 are first credited to non-operating income and then transferred, after deducting the applicable income tax, to capital surplus in the applicable fiscal year. Starting in 2001, the treatment of gains on disposition of property, plant and equipment is the same under both ROC GAAP and U.S. GAAP. Under ROC GAAP, the following items are treated as capital surplus: (a) premium on issuance of common stock; (b) prior to 2001, gain, net of applicable income tax, on disposal of properties; (c) donated surplus; (d) revaluation increment on properties, and (e) the value of the assets of a company acquired in a merger in excess of assumed liabilities and the consideration paid for shares of such company in connection with the acquisition.	U.S. GAAP
		Under U.S. GAAP, parent-company-only non- consolidated financial statements are not allowed to be presented as the primary financial statements for any period. Revaluation of assets is not permitted. Any gains on the dispositions of property, plant and equipment is credited to operating income, with no transfer to capital surplus. Under U.S. GAAP, items (a) and (c) of the preceding column are the same as in ROC GAAP; item (b) of the preceding column is recorded as part of net income which is then included as a component of retained earnings; items (d) and (e) of the preceding column are not permitted.

119

Accounting for pensions Consolidation Compensated absences Proposed dividends	ROC GAAP ROC Statement of Financial Accounting Standards (‘‘SFAS’’) No. 18 ‘‘Accounting for Pensions’’, is similar to U.S. SFAS No. 87 and provides accounting regulations regarding an employer’s accounting for employee retirement plans, including pension of companies covered by the Labor Standards Law which require contribution of a percentage of wages and salaries costs to an independent fund. ROC SFAS No. 18 is effective for financial statements in the year ended December 31, 1995. In the year of adoption, certain additional disclosures are required related to pension-related assets and liabilities as determined pursuant to an actuarial valuation; however, net periodic pension cost is not calculated pursuant to an actuarial valuation until the year ended December 31, 1996. Prior to 1996, pension expense under ROC GAAP was generally calculated as a fixed percentage of total annual salaries and wages. A company is required to include in its consolidated financial statements only those subsidiaries which are 50% or more owned (directly or indirectly through its 50% or more owned subsidiaries) and of which total assets or operating revenues exceed 10% of those of such company on a non-consolidated basis. For subsidiaries whose individual total assets or operating revenues are less than 10 percent but their aggregate total exceeds 30 percent of those of their parent company then the accounts between 3 percent and 10 percent of those of their parent company, should be included in the consolidated statements. However, a company is not required to prepare interim financial statements on a consolidated basis. Instead, the company is only required to recognize investment income/loss in majority- owned subsidiaries under the equity method. There is no specific accounting practice regarding compensated absences. Dividends are charged against retained earnings when they are formally approved by shareholders.	U.S. GAAP
		Under U.S. GAAP, the annual pension provision is recognized in accordance with SFAS No. 87. U.S. 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 the plan assets upon adoption of ROC SFAS No. 18, would be different under U.S. SFAS No. 87, as U.S. SFAS No. 87 would have been implemented prior to December 31, 1995. Under U.S. GAAP, consolidation of majority owned subsidiaries is required when the parent controls the subsidiary, which is generally indicated by ownership of more than 50% of the voting shares of the subsidiary. However, control can be overcome by parties having significant participating rights over the activities of the subsidiary. An employer is required to accrue liability for employees’ rights to receive compensation for future absences when certain conditions are met. Dividends are charged against retained earnings when they are formally approved by the board of directors.

120

ROC GAAP

U.S. GAAP

Investment in debt and Short-term investments are stated at the lower of equity securities of cost or market value, investments in debt securities less than 20% are stated at the lower of amortized cost or market value and unrealized losses are reported in current earnings. Long-term investments in listed equity securities in respect of which the company does not exercise significant influence on operating and financial decisions of the investee are stated at the lower of cost or market value, and unrealized losses are deducted from shareholders’ equity. Investments in non-listed equity securities in respect of which the company does not exercise significant influence on operating and financial decisions of the investee are stated at cost, subject to the permanent impairment test. Shares dividends received are recorded as an increase in voting shares and not as investment income.

Investments in marketable debt securities can be classified in one of three categories: trading, heldto-maturity or available-for-sale. Marketable debt securities that are held principally for selling them in the near term or for speculative purposes should be classified as trading, while debt securities wherein the holder has the intent and ability to hold the security to maturity can be classified as held-tomaturity. All debt securities not classified as either trading or held-to-maturity must be classified as available-for-sale. Marketable equity securities can be classified in one of two categories: trading or available-for-sale. Marketable equity securities that are held principally for selling them in the near term or for speculative purposes are classified as trading, while any marketable equity securities not classified as trading will be classified as availablefor-sale. Held-to-maturity securities are carried at amortized cost. Trading securities are carried at fair value with changes in fair value recorded in current earnings. Available-for-sale securities are carried at fair value with changes in fair value recorded as a separate component of equity until the securities mature or are sold. Share dividends and interest received on marketable securities are recorded as investment income.

121

ROC GAAP

U.S. GAAP

Equity investments of at	Under ROC GAAP, equity investments where a
least 20%	company has voting rights of at least 20% are
	generally required to be accounted for under the
	equity method. However, when a company has not
	received the audited financial statements of the
	equity-method investee company in time to
	recognize its equity in the investee company’s
	income (loss), the company may delay the
	recognition of its equity in the investee company’s
	income (loss) until the subsequent year, unless the
	company meets the following criteria, in which
	case no delay in recognition is possible; (i) the
	beginning balance of the company’s long-term
	investment balance exceeds NT$50 million and 5%
	of the investor company’s paid-in capital; (ii) direct
	ownership of the investee company exceeds 30%,
	or direct ownership plus indirect ownership through
	directors, supervisors, and management exceeds
	50%; and (iii) the investor company is one of the
	top three shareholders of the investee company or
	the investee company’s chairperson or general
	manager was appointed by the investor company.
	Under ROC GAAP, when an investee issues
	additional shares and the investor’s ownership
	interest changes as a result, any resulting difference
	between the investor’s investment balance and its
	proportionate share of the investee’s net equity is
	adjusted to its investment account with an
	offsetting entry in the investor’s capital reserve or
	retained earnings. Upon subsequent disposition of
	the investment, amounts previously recorded to
	capital reserve or retained earnings relating to the
	respective investment will be reversed and recorded
	as part of the gain or loss recorded on disposal.
	With respect to intercompany transactions between
	an investor company and an unconsolidated
	investee affiliate, ROC GAAP provides that any
	resulting profit on such transactions be eliminated
	in the investor company’s financial statements. In
	general, net intercompany profit on such
	transactions is deferred and offset against the long-
	term investment account, with the deferred net
	intercompany profit amortized to income over
	future periods based on the nature of the transaction
	which give rise to the deferred intercompany profit.

Bonus to employees, According to ROC regulations and our Articles of compensation to Incorporation, a portion of distributable earnings directors and should be appropriated as bonuses to employees, supervisors directors and supervisors. Bonuses to directors and supervisors are always paid in cash, while bonuses to employees may be granted in cash or stock or both. These appropriations, including stock bonuses which are valued at par value of NT$10, are charged against retained earnings under ROC GAAP, after such appropriations are formally approved by the shareholders in the following year.

Under U.S. GAAP, the equity method of accounting is generally required for investments with an ownership percentage of greater than 20% but less than 50%, unless (i) the investment is considered temporary, or (ii) the investor does not possess the ability to exercise significant influence over the investee. There are no provisions which allow the investor company to delay recognition of its equity in the investee company’s income (loss). Under U.S. GAAP, when an investee issues additional shares at an amount over/under the carrying value of the shares held by the investor, and the investor’s ownership interest decreases as a result of not fully subscribing to the issue, the resulting difference between the investor’s investment balance and its proportionate share of the investee’s net equity is adjusted to its investment account with an offsetting entry either to (i) gain or loss to record the deemed disposition of shares or (ii) paid-in capital. If an adjustment has been made to paid-in capital to recognize investee capital transactions, U.S. GAAP would not permit the adjustment of such amounts on the subsequent disposition of all or a part of the adjustment. Under U.S. GAAP, the gross impact as well as the net intercompany profit arising from intercompany transactions between an investor company and an unconsolidated investee affiliate are generally eliminated in the investor company’s financial statements. This elimination is either complete or partial to the extent of the investor company’s interest in the investee affiliate.

Under U.S. GAAP, such bonuses and remuneration are charged to income currently in the year incurred. Stock issued as part of these bonuses is recorded at fair market value. Since the amount and form of such bonuses are not finally determinable until the 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 our Articles of Incorporation. Any difference between the initially accrued amount and the fair market value of the bonuses settled by the issuance of shares is recognized in the year of approval by shareholders.

122

ROC GAAP

U.S. GAAP

Treasury stock issued to Treasury stock purchased and reissued to employees employees is recorded at the price charged to employees. If the price paid by the employee is less than the purchase price, the difference is recorded to capital surplus generated from previous treasury stock transactions if sufficient. If capital is not sufficient for the entire difference, the remaining is recorded to retained earnings.
Stock dividends Stock dividends are recorded as a reduction to retained earnings for the par value of the stock issued, and a like amount is recorded to the capital stock account.
Impairment of longROC GAAP has no specific standards which lived assets and longaddress impairment of long-lived assets held and lived assets to be used by an entity. Normally such assets would be disposed of carried at cost less accumulated depreciation. Assets purchased for use in the business but not subsequently used for that purpose are generally recorded as idle assets and reclassified from fixed assets to other assets. There is a requirement to assess the net realizable value such that idle assets are not recorded at an amount in excess of net realizable value.

Under U.S. GAAP, shares of treasury stock may be sold to employees at a discount amount up to 15% from the market price on date of issue with no compensation expense required to be recorded. If the discount is greater than 15% of the market price, the company is required to record the entire discount amount as compensation expense and amortize over the holding period, if any.

Generally stock dividends are recorded as a reduction to retained earnings, based on the fair value of the stock issued, and a like amount is recorded to the capital stock and capital surplus accounts.

U.S. SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’ requires entities to perform separate calculation 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 charges, is less than an asset’s carrying value, an impairment loss is recognized; if the sum of the expected future cash flows is greater than an asset’s carrying value, an impairment gain can not be recognized. Measurement of an impairment loss is based on the fair value of the asset. U.S. SFAS No. 144 also requires that longlived assets to be disposed of be reported at the lower of the carrying value or fair value less cost to sell.

123

ROC GAAP

U.S. GAAP

Derivative financial	There are no definitive accounting standards under
instrument	ROC GAAP that address accounting for derivative
transactions	financial instruments such as interest rate or foreign
	currency options, futures or swaps.
	Forward exchange transactions entered into as
	hedge for foreign-currency net assets or net
	liabilities are recorded in New Taiwan dollars at the
	spot rates on the date of each forward contract. The
	differences between spot rates and forward rates are
	amortized over the period of each forward contract
	and recognized as gains or losses. Year-end
	balances of forward exchange contracts are restated
	at the prevailing exchange rates and the resulting
	adjustments are credited or charged to income.
	Exchange gains or losses on forward exchange
	transactions entered into as hedge for foreign-
	currency commitments are deferred as adjustments
	to transaction prices. If the adjusted transaction
	prices are over their market value, the exchange
	loss is recognized when it occurs.

Deferred expenses Under ROC GAAP, deferred expenses include issuance costs of bonds, testing costs of reinstallation of machinery and equipment. The deferred expenses shall be amortized by systematic charges to income over the periods estimated to be benefited. Retained earnings tax Companies in the ROC are subject to a 10% surtax on profits retained and earned after December 31, 1997. If the retained profits are distributed to the shareholders in the following fiscal year, the surtax can be avoided. Under ROC GAAP, surtax is recorded in the statement of income in the following fiscal year if the earnings are not distributed to the shareholders.

Under U.S. 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 that 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 risks, are accounted for at fair value with all gains and losses recognized currently in earnings. Derivative financial instruments that (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 transactions or commitments that are being hedged (i.e. either by recording the gains and losses on derivative financial instruments currently when they are used as hedges of existing (non-balance sheet) transactions or by deferring the gains and losses on derivative financial instruments in the equity section of the balance sheet when they are used as hedges of forecasted transactions). In addition, U.S. SFAS No 133 also defines the concept of embedded derivatives that may now exist due to a broader definition of a derivative instrument. Embedded derivatives include certain contracts for the purchase or sale of commodities and if determined to be a derivative would be required to be recorded on the books and adjusted to fair value at each period end.

Under U.S. GAAP, start-up costs are generally expensed as incurred.

Under U.S. GAAP, income tax expense related to the 10% retained profit tax is recorded in the statement of income in the year that the profits were earned based on the full amount of the earnings.

In addition, all material temporary differences between the carrying amounts of assets and liabilities and their respective tax bases are recognized using a tax rate that includes the 10% retained profit tax.

124

ROC GAAP

U.S. GAAP

Income tax	Prior to January 1, 1995, generally income tax	Under U.S. GAAP, current tax liabilities are
	expenses were provided based on current taxable	recognized for estimated taxes payable for the
	income; deferred income tax was not recognized	current period. U.S. SFAS No. 109 requires that all
	for timing differences. ROC Statements of	material temporary differences between the
	Financial Accounting Standards No. 22 (ROC	carrying values of assets and liabilities and their
	SFAS No. 22) ‘‘Accounting for Income Taxes’’,	respective tax bases be recognized as deferred tax
	was issued in June 1994, and has been adopted as of	liabilities or assets. A valuation allowance is
	January 1, 1995. ROC SFAS No. 22 is substantially	provided on tax assets to the extent that it is ‘‘more
	similar to U.S. GAAP. However, under ROC	likely than not’’ that such deferred tax assets will
	GAAP, the cumulative effect of adoption is	not be realized. A change in tax rate or law requires
	included in the current year’s provision for income	an adjustment to such deferred liabilities in the
	tax rather than being separately presented as the	period of enactment, and is reported as a part of
	cumulative effect of a change in accounting	results of operations.
	principle.
Depreciation lives of	In practice, depreciation is generally provided	Depreciation is provided over the asset’s estimated
fixed assets	using the guideline service lives as prescribed by	useful life which is based on economic and
	ROC Internal Revenue Code plus one additional	operational considerations, rather than tax or legal
	year as salvage value. ROC Securities and Futures	consideration. No additional depreciation is
	Commission regulations applicable to public	provided on fully depreciated assets which continue
	companies require that when fixed assets have been	to be used in the business. In general, 55 years
	fully depreciated over the prescribed service life	would be considered too long a period over which
	and the underlying asset continues to be used, the	to depreciated fixed assets.
	remaining unamortized value (i.e. the salvage value
	portion) is depreciated over the asset’s remaining
	economic life. The estimated life of buildings under
	ROC GAAP can be depreciated over a period of 55
	years.
Earnings per share	Under ROC GAAP, when a simple capital structure	Basic and diluted earnings per share calculations
	exists, basic earnings per share is based on the	are not retroactively adjusted for new common
	weighted average number of shares outstanding.	stock issued through unappropriated earnings and
	When a complex capital structure exists, diluted	capital surplus.
	earnings per share is based on the weighted average
	number of shares outstanding plus the number of
	additional shares that would have been outstanding
	if dilutive potential common shares had been
	issued, with appropriate adjustments to income or
	loss that would result from the assumed
	conversions of those potential common shares. The
	materiality of the dilutive effect is not considered.
	A company computes earnings per share based on
	the weighted average number of outstanding shares,
	retroactively adjusted for stock dividends and new
	common stock issuance issued through
	unappropriated earnings and capital surplus. No
	consideration is required to be given to convertible
	securities with a less 3% dilutive effect.
Comprehensive income	There is no requirement to present comprehensive	Effective for fiscal year beginning after December
	income.	31 1997 comprehensive income and its

Effective for fiscal year beginning after December 31, 1997, comprehensive income and its components (revenues, expenses, gains and losses) must be presented in a full set of financial statements under U.S. GAAP. Comprehensive income includes all changes in shareholders’ equity during a period, except those resulting from investments by or distributions by or distributions to owners, including certain items not included in the current results of operations.

125

ROC GAAP

U.S. GAAP

Economic dependency ROC GAAP has no specific disclosure requirements concerning economic dependency.

Economic dependency	ROC GAAP has no specific disclosure	Disclosure of economic dependency on one or more
	requirements concerning economic dependency.	parties, as appropriate, including such parties as
		sole/major customer, supplier, franchiser,
		distributor, general agent, customer or lender is
		required.
Segment reporting	ROC SFAS No. 20 ‘‘Disclosure of Segment	Under U.S. SFAS 131, a public business enterprise
	Information’’ establishes standards for reporting	is required to present segment information based on
	information about industry and foreign operating	operating segments. Several operating segments
	segments, and information on export sales and sales	may, provided aggregation criteria are met, be
	to major customers. ROC SFAS No. 20 defines	aggregated to reportable segments for which the
	industry segment as a revenue generating unit of an	required information is disclosed. Disclosure is
	enterprise which sells certain products or provides	based on the management’s approach for reporting
	services, or a group of related products or services	segments information to the company’s chief
	to customers and a foreign operating segment as a	operating decision-makers.
	revenue generating unit.
Interim reporting	Prior to fiscal 2000, in accordance with ROC SFAS	Under U.S. GAAP, tax provisions in interim
	No. 23, in the first and third quarters of any fiscal	quarterly financial statements are provided based
	year, deferred tax consequences of temporary	on an estimated effective tax rate expected to be
	differences and other tax attributes arising in such	applicable to the full fiscal year. Such estimated
	quarterly periods are not required to be recognized	effective tax rate takes into account all anticipated
	in such periods.	tax attributes for the full fiscal year.
Statement of cash flows	Under ROC GAAP, cash flows are generally	Under U.S. GAAP, cash flows are generally
	reported at their net amount for the period. In	reported at their gross amounts, rather than netting
	addition, disclosures of non-cash investing and	inflows against outflows for related items (such as
	financing activities are required.	netting payments on long-term debt against
		proceeds from issuance of new long-term debt
		instruments). In addition, separate disclosure is
		required of all investing and financing activities
		that do not result in cash flows, such as conversion
		of debt instruments to equity and lease financing
		activities.
Disclosure of new	Under ROC GAAP, disclosure of recently issued	U.S. GAAP requires disclosure of the impact that
accounting	accounting standards not yet effective as of the	recently issued accounting standards will have on
pronouncements	balance sheet date is required.	the financial statements when adopted in the future.

The information set forth above does not in any way attempt to quantify the effects of the aforementioned differences between ROC GAAP and U.S. GAAP and the impact such differences would have on net income or shareholders’ equity under U.S. GAAP.

126

INDEX TO FINANCIAL STATEMENTS

Page

Audited Consolidated Annual Financial Statements
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-2
Consolidated Balance Sheets as of December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . .	F-3
Consolidated Statements of Income for the Years Ended
December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-10
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-12
Audited Unconsolidated Semi-annual Financial Statements
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-45
Balance Sheets as of June 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-46
Statements of Income for the Six Months Ended June 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . .	F-48
Statements of Changes in Stockholders’ Equity for the Six Months
Ended June 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-50
Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-52
Notes to Financial Statements for the Six Months Ended
June 30, 2002 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-54

F-1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

China Steel Corporation

We have audited the accompanying consolidated balance sheets of China Steel Corporation, a corporation incorporated under the laws of the Republic of China, and its consolidated subsidiary (the Corporation) as of December 31, 2000, 2001 and 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three years period ended December 31, 2002, all prepared in accordance with accounting principles generally accepted in the Republic of China and expressed in New Taiwan Dollars. These consolidated financial statements are the responsibility of the Corporation’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 Regulations for Audit of Financial Statements by Certified Public Accountants and auditing standards generally accepted in the Republic of China. 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 in the first paragraph present fairly, in all material respects, the consolidated financial position of the Corporation as of December 31, 2000, 2001 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three years period ended December 31, 2002, in conformity with accounting principles generally accepted in the Republic of China.

As disclosed in Note 3 to the consolidated financial statements, on January 1, 2002, the Corporation adopted Republic of China Statement of Financial Accounting Standards No. 30, ‘‘Accounting for Treasury Stock’’.

Also, in our opinion, the translated U.S. dollars in the accompanying consolidated financial statements have been made on the basis as set forth in Note 2.

Deloitte & Touche

(T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003) Kaohsiung, Taiwan The Republic of China

January 24, 2003

(Except for the translation to U.S. dollars (Note 2) which is dated as of August 23, 2003)

Notice to Readers

The accompanying consolidated financial statements are intended only to present the financial position, results of operations and cash flows in accordance with 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.

F-2

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars, Except Par Value)

	December 31	December 31	December 31
2000 NT$ $ 16,165,385 7,506,680 344,596 1,845,102 21,678,221 8,500,000 585,285 56,625,269 29,485,856 5,915,847 4,320,544 36,657,435 211,759,519 1,584,727 2,691,043 262,929,115 18,536,364 281,465,479 159,329,203 122,136,276 4,628,072 126,764,348 2,920,937 $215,796,410	2001 NT$ $ 4,807,101 13,580,585 175,887 2,009,016 20,437,473 8,700,000 1,374,190 51,084,252 29,866,484 7,550,804 4,320,544 36,913,806 215,132,634 1,610,060 2,712,768 268,240,616 18,405,855 286,646,471 169,766,907 116,879,564 3,532,195 120,411,759 3,881,409 $205,243,904	2002
		NT$ $ 3,203,159 21,400,375 389,297 1,904,178 17,590,505 6,900,000 608,709 51,996,223 30,040,350 7,932,789 4,320,544 37,073,607 216,086,846 1,612,645 2,907,635 269,934,066 18,403,007 288,337,073 180,053,766 108,283,307 6,998,363 115,281,670 3,338,827 $200,657,070	US$
			$ 92,550 618,329 11,248 55,018 508,249 199,364 17,589
			1,502,347
			867,967
			229,205 124,835 1,071,182 6,243,480 46,595 84,011
			7,799,308 531,725
			8,331,033 5,202,362
			3,128,671 202,206
			3,330,877
			96,471
			$5,797,662

F-3

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS — (Continued)

(In Thousands of Dollars, Except Par Value)

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Short-term bank loans and overdraft (Notes 9 and 19) Commercial paper payable (Note 10). . . . . . . . . . . Accounts payable (Note 18) . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . Other payable (Note 13). . . . . . . . . . . . . . . . . . . . Bonds payables — current portion (Note 11). . . . . . Long-term debts — current portion (Note 12) . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . LONG-TERM LIABILITIES Bonds (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . Debts (Notes 12 and 19) . . . . . . . . . . . . . . . . . . . Total long-term liabilities . . . . . . . . . . . . . . . RESERVE FOR LAND VALUE INCREMENT TAX (Note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER LIABILITIES (Note 14). . . . . . . . . . . . . . . . COMMITMENTS AND CONTINGENCIES Minority interest in consolidated subsidiary . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . STOCKHOLDERS’ EQUITY (Notes 2, 7 and 15) Capital stock — NT$10 par values Authorized — 9,900,000,000 shares in 2000, 10,600,000,000 shares in 2001, and 10,600,000,000 shares in 2002 Issued — Common stock 8,748,362,583 shares in 2000, 9,661,168,389 shares in 2001, and 9,267,993,933 shares in 2002 . . . . Preferred stock 47,777,000 shares in 2000, 47,768,000 shares in 2001, and 47,767,000 shares in 2002 . . . . . . . . . Total capital stock. . . . . . . . . . . . . . . . . . . . Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on investees’ long-term investments Cumulative translation adjustments . . . . . . . . . . . . Investees’ unrecognized net loss on pension cost . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		December 31 2001 2002 NT$ NT$ US$ $ 7,698,312 $ 2,069,235 $ 59,787 4,460,839 998,347 28,846 2,423,510 2,418,225 69,871 19,115 3,730,522 107,787 4,480,004 5,106,533 147,545 6,345,000 9,710,000 280,556 2,415,707 2,985,045 86,247 2,009,131 2,102,909 60,760 29,851,618 29,120,816 841,399 35,960,000 26,250,000 758,451 3,755,071 1,774,107 51,260 39,715,071 28,024,107 809,711 3,370,813 3,370,813 97,394 5,540,979 4,987,324 144,101 133,716 148,614 4,294 78,612,197 65,651,674 1,896,899 90,611,684 92,679,939 2,677,837 477,680 477,670 13,802 91,089,364 93,157,609 2,691,639 416,570 481,597 13,915 37,434,024 44,960,063 1,299,049 (569,837) (555,491) (16,050) 198,881 222,391 6,425 (15,508) (15,696) (454) (1,921,787) (3,245,077) (93,761) 126,631,707 135,005,396 3,900,763 $205,243,904 $200,657,070 $5,797,662	December 31 2001 2002 NT$ NT$ US$ $ 7,698,312 $ 2,069,235 $ 59,787 4,460,839 998,347 28,846 2,423,510 2,418,225 69,871 19,115 3,730,522 107,787 4,480,004 5,106,533 147,545 6,345,000 9,710,000 280,556 2,415,707 2,985,045 86,247 2,009,131 2,102,909 60,760 29,851,618 29,120,816 841,399 35,960,000 26,250,000 758,451 3,755,071 1,774,107 51,260 39,715,071 28,024,107 809,711 3,370,813 3,370,813 97,394 5,540,979 4,987,324 144,101 133,716 148,614 4,294 78,612,197 65,651,674 1,896,899 90,611,684 92,679,939 2,677,837 477,680 477,670 13,802 91,089,364 93,157,609 2,691,639 416,570 481,597 13,915 37,434,024 44,960,063 1,299,049 (569,837) (555,491) (16,050) 198,881 222,391 6,425 (15,508) (15,696) (454) (1,921,787) (3,245,077) (93,761) 126,631,707 135,005,396 3,900,763 $205,243,904 $200,657,070 $5,797,662
	2000 NT$ $ 4,917,663 1,996,213 2,766,569 3,368,839 5,744,604 10,257,000 3,119,121 1,823,072 33,993,081 31,055,000 6,988,232 38,043,232 3,370,813 5,624,702 126,292 81,158,120 87,483,626 477,770 87,961,396 409,005 46,380,081 (149,728) 53,726 — (16,190) 134,638,290 $215,796,410	2001 NT$ $ 7,698,312 4,460,839 2,423,510 19,115 4,480,004 6,345,000 2,415,707 2,009,131 29,851,618 35,960,000 3,755,071 39,715,071 3,370,813 5,540,979 133,716 78,612,197 90,611,684 477,680 91,089,364 416,570 37,434,024 (569,837) 198,881 (15,508) (1,921,787) 126,631,707 $205,243,904
			NT$ $ 2,069,235 998,347 2,418,225 3,730,522 5,106,533 9,710,000 2,985,045 2,102,909 29,120,816 26,250,000 1,774,107 28,024,107 3,370,813 4,987,324 148,614 65,651,674 92,679,939 477,670 93,157,609 481,597 44,960,063 (555,491) 222,391 (15,696) (3,245,077) 135,005,396 $200,657,070

The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 24, 2003)

F-4

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, Except Earnings Per Share)

REVENUES (Notes 2 and 18) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF REVENUES (Notes 2 and 18) Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSES Selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-OPERATING INCOME Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposal of investments . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-operating income . . . . . . . . . . . . . . . . . . . . . . . NON-OPERATING EXPENSES Interest (Notes 7 and 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment loss (Note 6). . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-operating expenses . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX AND MINORITY INTEREST. INCOME TAX (Notes 2 and 16). . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE MINORITY INTEREST . . . . . . . . . . . . . . . . MINORITY INTEREST IN NET INCOME OF SUBSIDIARY . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EARNINGS PER SHARE (Note 17) Based on weighted average number of outstanding shares 8,747,498,286 in 2000, 9,031,243,389 in 2001, and 9,021,183,532 in 2002 Basic Before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted Before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $90,319,197 $106,773,977 $3,085,061 2,368,607 1,615,152 46,668 92,687,804 108,389,129 3,131,729 78,511,978 81,530,105 2,355,681 1,525,880 807,278 23,325 80,037,858 82,337,383 2,379,006 12,649,946 26,051,746 752,723 1,671,798 1,894,432 54,737 2,153,940 1,949,316 56,322 896,846 866,313 25,031 4,722,584 4,710,061 136,090 7,927,362 21,341,685 616,633 720,600 255,384 7,379 — 1,514,211 43,750 4,081,649 282,800 8,171 941,588 554,660 16,026 5,743,837 2,607,055 75,326 3,024,811 2,385,394 68,922 1,770,275 — — 391,456 765,571 22,120 5,186,542 3,150,965 91,042 8,484,657 20,797,775 600,917 1,017,017 3,933,100 113,640 7,467,640 16,864,675 487,277 (7,890) (25,595) (739) $ 7,459,750 $ 16,839,080 $ 486,538 $ 0.93 $ 2.29 $ 0.07 $ 0.82 $ 1.86 $ 0.05 $ 0.93 $ 2.28 $ 0.07 $ 0.82 $ 1.86 $ 0.05	Year Ended December 31 2001 2002 NT$ NT$ US$ $90,319,197 $106,773,977 $3,085,061 2,368,607 1,615,152 46,668 92,687,804 108,389,129 3,131,729 78,511,978 81,530,105 2,355,681 1,525,880 807,278 23,325 80,037,858 82,337,383 2,379,006 12,649,946 26,051,746 752,723 1,671,798 1,894,432 54,737 2,153,940 1,949,316 56,322 896,846 866,313 25,031 4,722,584 4,710,061 136,090 7,927,362 21,341,685 616,633 720,600 255,384 7,379 — 1,514,211 43,750 4,081,649 282,800 8,171 941,588 554,660 16,026 5,743,837 2,607,055 75,326 3,024,811 2,385,394 68,922 1,770,275 — — 391,456 765,571 22,120 5,186,542 3,150,965 91,042 8,484,657 20,797,775 600,917 1,017,017 3,933,100 113,640 7,467,640 16,864,675 487,277 (7,890) (25,595) (739) $ 7,459,750 $ 16,839,080 $ 486,538 $ 0.93 $ 2.29 $ 0.07 $ 0.82 $ 1.86 $ 0.05 $ 0.93 $ 2.28 $ 0.07 $ 0.82 $ 1.86 $ 0.05
	2000 NT$ $104,498,446 3,181,126 107,679,572 78,730,672 2,208,503 80,939,175 26,740,397 1,828,506 2,161,182 919,795 4,909,483 21,830,914 1,220,399 — 1,819,455 662,763 3,702,617 3,559,285 115,572 370,327 4,045,184 21,488,347 2,886,138 18,602,209 (20,674) $ 18,581,535 $ 2.46 $ 2.12 $ 2.46 $ 2.11	2001 NT$ $90,319,197 2,368,607 92,687,804 78,511,978 1,525,880 80,037,858 12,649,946 1,671,798 2,153,940 896,846 4,722,584 7,927,362 720,600 — 4,081,649 941,588 5,743,837 3,024,811 1,770,275 391,456 5,186,542 8,484,657 1,017,017 7,467,640 (7,890) $ 7,459,750 $ 0.93 $ 0.82 $ 0.93 $ 0.82
			NT$ $106,773,977 1,615,152 108,389,129 81,530,105 807,278 82,337,383 26,051,746 1,894,432 1,949,316 866,313 4,710,061 21,341,685 255,384 1,514,211 282,800 554,660 2,607,055 2,385,394 — 765,571 3,150,965 20,797,775 3,933,100 16,864,675 (25,595) $ 16,839,080 $ 2.29 $ 1.86 $ 2.28 $ 1.86

F-5

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME — (Continued)

(In Thousands of Dollars, Except Earnings Per Share)

	Year Ended December 31	Year Ended December 31	Year Ended December 31
2000 NT$ $2.32 $2.00 $2.32 $1.99	2001 NT$ $0.90 $0.80 $0.90 $0.80	2002
		NT$ $16,983,408 $ 2.28 $ 1.86 $ 2.27 $ 1.85	US$
			$490,708
			$ 0.07
			$ 0.05
			$ 0.07
			$ 0.05

The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 24, 2003)

F-6

				Total	Stockholders’	Equity	NT$	$127,426,962	—		—	—	(39,056)		(62,115)		(11,132,059)	—	18,581,535		(29,094)	(148,627)		38,385	2,359	134,638,290	—		—	—		(48,913)		(71,652)		(13,122,557)	—	(1,905,059)	7,459,750		6,317		(33,469)	(420,109)		145,155		(538)	$ (15,508)	$126,631,707
					Treasury	Stock	NT$	$ (16,190)	—		—	—	—		—		—	—	—		—	—		—	—	(16,190)	—		—	—	—	—		—		—	—	(1,905,059)	—		—		—	—		—		(538)	$ —	$(1,921,787)
			Investees’	Unrecognized	Net Loss on	Pension Cost	NT$	$ —	—		—	—	—		—		—	—	—		—	—		—	—	—	—		—	—	—	—		—		—	—	—	—		—		—	—		—		—	$(15,508)	$(15,508)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	(In Thousands of Dollars)	Unrealized	Loss on	Issued Retained Earnings Investees’ Cumulative	Long-term Translation Common Preferred Capital Legal Special Unappro-	Investments Adjustments stock stock Surplus reserve reserve priated Total	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	BALANCES, JANUARY 1, 2000 . . . . . . . . . . . . . $85,621,689 $487,340 $363,995 $15,965,075 $9,815,701 $15,175,112 $40,955,888 $ (1,101) $ 15,341	Conversion of preferred stock to common stock . . . 9,570 (9,570) — — — — — — —	Appropriation of prior year’s earnings — 1999	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . — — — 1,512,123 — (1,512,123) — — —	Bonus to employees. . . . . . . . . . . . . . . . . . . . 130,187 — — — — (130,187) (130,187) — —	Compensation to directors and supervisors . . . . — — — — — (39,056) (39,056) — —	Cash dividends to preferred	stockholders — 13%. . . . . . . . . . . . . . . . . — — — — — (62,115) (62,115) — —	Cash dividends to common	stockholders — 13%. . . . . . . . . . . . . . . . . — — — — — (11,132,059) (11,132,059) — —	Stock dividends — 2%. . . . . . . . . . . . . . . . . . 1,722,180 — — — — (1,722,180) (1,722,180) — —	Net income for 2000 . . . . . . . . . . . . . . . . . . . . . . — — — — — 18,581,535 18,581,535 — —	Adjustment of equity in investees due to change in	percentage of ownership . . . . . . . . . . . . . . . . . — — 42,506 — — (71,600) (71,600) — —	Unrealized loss on investees’ long-term investments — — — — — — — (148,627) —	Translation adjustments of investees’ long-term	investments . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 38,385	Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,504 — — (145) (145) — —	BALANCES,DECEMBER 31,2000 . . . . . . . . . . . . 87,483,626 477,770 409,005 17,477,198 9,815,701 19,087,182 46,380,081 (149,728) 53,726	Conversion of preferred stock to common stock . . . 90 (90) — — — — — — —	Appropriations of prior years’ earnings — 2000	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . — — — 1,858,154 — (1,858,154) — — —	Special reserve . . . . . . . . . . . . . . . . . . . . . . . — — — — 96,001 (96,001) — — —	Bonus to employees. . . . . . . . . . . . . . . . . . . . 489,126 — — — — (489,126) (489,126) — —	Compensation to directors and supervisors . . . . — — — — — (48,913) (48,913) — —	Cash dividends to preferred stock	holders — 15% . . . . . . . . . . . . . . . . . . . . — — — — — (71,652) (71,652) — —	Cash dividends to common	stock — 15%. . . . . . . . . . . . . . . . . . . . . . — — — — — (13,122,557) (13,122,557) — —	Stock dividends — 3%. . . . . . . . . . . . . . . . . . 2,638,842 — — — — (2,638,842) (2,638,842) — —	Purchases of treasury stock. . . . . . . . . . . . . . . . . . — — — — — — — — —	Net income for 2001 . . . . . . . . . . . . . . . . . . . . . . — — — — — 7,459,750 7,459,750 — —	Compensation payable to directors and supervisors	transferred to capital surplus . . . . . . . . . . . . . . — — 6,317 — — — — — —	Adjustment of equity in investees due to change in	percentage of ownership . . . . . . . . . . . . . . . . . — — 1,248 — — (34,717) (34,717) — —	Unrealized loss on investees’ long-term investments — — — — — — — (420,109) —	Translation adjustments of investees’ long-term	investments . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — 145,155	Shares held by subsidiaries accounted for as treasury	stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — —	Investee’s unrecognized net loss on pension cost . . . $ — $ — $ — $ — $ — $ — $ — $ — $ —	BALANCES, DECEMBER 31, 2001 . . . . . . . . . . . $90,611,684 $477,680 $416,570 $19,335,352 $9,911,702 $8,186,970 $37,434,024 $(569,837) $198,881

F-7

			Total		Stockholders’	Equity	NT$	—		(1,339,757)		—		—	—	—	(27,646)	(57,322)	(7,128,935)	—		—	16,839,080		14,346		(46,707)	23,510	20,698	(188)		76,610	$135,005,396
					Treasury	Stock	NT$	—		(1,339,757)		—		—	—	—	—	—	—	—		—	—		—		1,773	—	14,694	—		—	$3,245,077
(In Thousands of Dollars)	Unrealized	Loss on Investees’	Issued Retained Earnings Investees’ Cumulative Unrecognized		Long-term Translation Net Loss on Common Preferred Capital Legal Special Unappro-	Investments Adjustments Pension Cost stock stock Surplus reserve reserve priated Total	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	Conversion of preferred stock to common stock . . . 10 (10) — — — — — — — —	Shares held by subsidiaries accounted for as treasury	stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — —	Transfer of special reserve to unappropriated retained	earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — (2,200,000) 2,200,000 — — — —	Appropriation of earnings for 2001	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . — — — 745,975 — (745,975) — — — —	Special reserve . . . . . . . . . . . . . . . . . . . . . . . — — — — 290,463 (290,463) — — — —	Bonus to employees. . . . . . . . . . . . . . . . . . . . 276,458 — — — — (276,458) (276,458) — — —	Compensation to directors and supervisors . . . . — — — — — (27,646) (27,646) — — —	Cash dividends to preferred stock — 12% . . . . — — — — — (57,322) (57,322) — — —	Cash dividends to common stock — 8%. . . . . . — — — — — (7,128,935) (7,128,935) — — —	Stock dividends — 2%. . . . . . . . . . . . . . . . . . 1,791,787 — — — — (1,791,787) (1,791,787) — — —	Transfer of capital surplus from gain on disposal of	properties to unappropriated earnings . . . . . . . . — — (20,514) 2,051 — 18,463 20,514 — — —	Net income for 2002 . . . . . . . . . . . . . . . . . . . . . . — — — — — 16,839,080 16,839,080 — — —	Reversal of unrealized loss on investees’ long-term	investments . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — 14,346 — —	Adjustments of equity in investees due to change in	percentage of ownership . . . . . . . . . . . . . . . . . — — 2,927 — — (51,407) (51,407) — — —	Translation adjustment of long-term investments . . . — — — — — — — — 23,510 —	Sales of the Corporation’s shares held by subsidiaries — — 6,004 — — — — — — —	Investee’s unrecognized net loss on pension cost . . . — — — — — — — — — (188)	Cash dividends declared by the Corporation and	received by subsidiaries . . . . . . . . . . . . . . . . . — — 76,610 — — — — — — —	BALANCE, DECEMBER 31, 2002 . . . . . . . . . . . . $92,679,939 $477,670 $481,597 $20,083,378 $8,002,165 $16,874,520 $44,960,063 $(555,491) $222,391 $(15,696)

F-8

			Total		Stockholders’	Equity	US$	$3,658,818	—		(38,710)		—		—	—	—	(799)	(1,656)	(205,979)	—		—	486,538		415		(1,349)	679	598	(6)		2,214	$3,900,763
					Treasury	Stock	US$	$(55,527)	—		(38,710)		—		—	—	—	—	—	—	—		—	—		—		51	—	425	—		—	$(93,761)
(In Thousands of Dollars)	Unrealized	Loss on Investees’	Par Value Issued Retained Earnings Investees’ Cumulative Unrecognized		Capital Long-term Translation Net Loss on Common Preferred Legal Special Unappro-	Surplus Investments Adjustments Pension Cost stock stock reserve reserve priated Total	US$ US$ US$ US$ US$ US$ US$ US$ US$ US$	BALANCES, JANUARY 1, 2002 . . . . . . . . . . . . . $2,618,078 $13,802 $12,036 $558,664 $286,383 $236,549 $1,081,596 $(16,465) $5,746 $(448)	Conversion of preferred stock to common stock . . . — — — — — — — — — —	Shares held by subsidiaries accounted for as treasury	stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — — — —	Transfer of special reserve to unappropriated retained	earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — (63,565) 63,565 — — — —	Appropriation of earnings for 2001	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . — — — 21,554 — (21,554) — — — —	Special reserve . . . . . . . . . . . . . . . . . . . . . . . — — — — 8,392 (8,392) — — — —	Bonus to employees. . . . . . . . . . . . . . . . . . . . 7,989 — — — — (7,989) (7,989) — — —	Compensation to directors and supervisors . . . . — — — — — (799) (799) — — —	Cash dividends to preferred stock — 12% . . . . — — — — — (1,656) (1,656) — — —	Cash dividends to common stock — 8%. . . . . . — — — — — (205,979) (205,979) — — —	Stock dividends — 2%. . . . . . . . . . . . . . . . . . 51,770 — — — — (51,770) (51,770) — — —	Transfer of capital surplus from gain on disposal of	properties to unappropriated earnings . . . . . . . . — — (593) 59 — 534 593 — — —	Net income for 2002 . . . . . . . . . . . . . . . . . . . . . . — — — — — 486,538 486,538 — — —	Reversal of unrealized loss on investees’ long-term	investments . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — — — 415 — —	Adjustments of equity in investees due to change in	percentage of ownership . . . . . . . . . . . . . . . . . — — 85 — — (1,485) (1,485) — — —	Translation adjustment of long-term investments . . . — — — — — — — — 679 —	Sales of the Corporation’s shares held by subsidiaries — — 173 — — — — — — —	Investee’s unrecognized net loss on pension cost . . . — — — — — — — — — (6)	Cash dividends declared by the Corporation and	received by subsidiaries . . . . . . . . . . . . . . . . . — — 2,214 — — — — — — —	BALANCE, DECEMBER 31, 2002 . . . . . . . . . . . . $2,677,837 $13,802 $13,915 $580,277 $231,210 $487,562 $1,299,049 $(16,050) $6,425 $(454)

F-9

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income of other stockholders’ interest . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision (reversal of allowance) for of loss on short- term investments . . . . . . . . . . . . . . . . . . . . . . . Provision (reversal of allowance) for inventory loss Investment loss (income) under equity method . . . . Investment loss under cost method. . . . . . . . . . . . . Loss on decline value of idle assets . . . . . . . . . . . . Loss on disposal of properties. . . . . . . . . . . . . . . . Cash dividends on long-term investments under equity method. . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposal of long-term investments . . . . . . . Gain on disposal of short-term investments. . . . . . . Amortization discount (premium) and exchange loss (gain) on forward exchange . . . . . . . . . . . . . . . Changes in operating assets and liabilities Notes receivable . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . Other payable . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in short-term investments . . . . . . . . . . . . . Increase in long-term investments . . . . . . . . . . . . . Acquisition of properties . . . . . . . . . . . . . . . . . . . Disposal of other properties . . . . . . . . . . . . . . . . . Decrease (increase) in other assets. . . . . . . . . . . . . Return of cost on long-term investments. . . . . . . . . Proceeds from disposal of long-term investments. . . Decrease (increase) in pledged time deposits. . . . . . Net cash used in investing activities . . . . . . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $ 7,459,750 $ 16,839,080 $ 486,538 7,890 25,595 739 12,416,339 11,819,775 341,513 651,852 406,489 11,745 (63,043) 419,824 12,130 1,940 (1,940) (56) (241,685) 33,836 978 1,783,888 (2,080,693) (60,118) — 597,214 17,256 25,488 116,535 3,367 43,865 69,605 2,011 156,425 1,191,223 34,418 — — — (4,081,649) (282,800) (8,171) (33,141) 5,073 147 168,709 (213,410) (6,166) (197,513) 103,578 2,993 1,473,799 2,813,132 81,281 (820,032) (216,149) (6,245) (299,776) 632,254 18,268 (3,349,724) 3,711,407 107,235 (1,272,246) 607,415 17,550 186,059 93,778 2,710 (592) 12,083 348 14,016,603 36,702,904 1,060,471 (1,994,734) (7,535,050) (217,713) (2,645,378) (1,148,397) (33,181) (6,110,175) (6,789,953) (196,184) — 1,110 32 (1,626,670) 49,110 1,419 — 4,476 129 69 — — (200,000) 1,800,000 52,008 $(12,576,888) $(13,618,704) $ (393,490)	Year Ended December 31 2001 2002 NT$ NT$ US$ $ 7,459,750 $ 16,839,080 $ 486,538 7,890 25,595 739 12,416,339 11,819,775 341,513 651,852 406,489 11,745 (63,043) 419,824 12,130 1,940 (1,940) (56) (241,685) 33,836 978 1,783,888 (2,080,693) (60,118) — 597,214 17,256 25,488 116,535 3,367 43,865 69,605 2,011 156,425 1,191,223 34,418 — — — (4,081,649) (282,800) (8,171) (33,141) 5,073 147 168,709 (213,410) (6,166) (197,513) 103,578 2,993 1,473,799 2,813,132 81,281 (820,032) (216,149) (6,245) (299,776) 632,254 18,268 (3,349,724) 3,711,407 107,235 (1,272,246) 607,415 17,550 186,059 93,778 2,710 (592) 12,083 348 14,016,603 36,702,904 1,060,471 (1,994,734) (7,535,050) (217,713) (2,645,378) (1,148,397) (33,181) (6,110,175) (6,789,953) (196,184) — 1,110 32 (1,626,670) 49,110 1,419 — 4,476 129 69 — — (200,000) 1,800,000 52,008 $(12,576,888) $(13,618,704) $ (393,490)
	2000 NT$ $ 18,581,535 20,674 12,511,837 573,841 (733,691) — (197,356) 130,340 — 55,341 38,813 131,511 (1,541,563) (277,892) (18,949) 81,067 (651,521) (4,426,259) 226,172 244,990 2,076,431 1,652,380 (249,935) (208) 28,227,558 (4,507,709) (9,360,765) (2,770,341) — (1,428,132) — 1,955,654 (77,299) $(16,188,592)	2001 NT$ $ 7,459,750 7,890 12,416,339 651,852 (63,043) 1,940 (241,685) 1,783,888 — 25,488 43,865 156,425 — (4,081,649) (33,141) 168,709 (197,513) 1,473,799 (820,032) (299,776) (3,349,724) (1,272,246) 186,059 (592) 14,016,603 (1,994,734) (2,645,378) (6,110,175) — (1,626,670) — 69 (200,000) $(12,576,888)
			NT$ $ 16,839,080 25,595 11,819,775 406,489 419,824 (1,940) 33,836 (2,080,693) 597,214 116,535 69,605 1,191,223 — (282,800) 5,073 (213,410) 103,578 2,813,132 (216,149) 632,254 3,711,407 607,415 93,778 12,083 36,702,904 (7,535,050) (1,148,397) (6,789,953) 1,110 49,110 4,476 — 1,800,000 $(13,618,704)

F-10

CHINA STEEL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) (In Thousands of Dollars)

CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in commercial paper payable . . . Increase (decrease) in short-term bank loans and overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in long-term debts . . . . . . . . . . Purchases of treasury stock. . . . . . . . . . . . . . . . . . Decrease in payable on properties purchased. . . . . . Increase (decrease) in bonds payable . . . . . . . . . . . Compensation to directors and supervisors . . . . . . . Net increase (decrease) in cash resulting from purchased forward exchange . . . . . . . . . . . . . . . Decrease in other stockholders’ interest . . . . . . . . . Net cash used in financing activities . . . . . . . . . NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS, END OF YEAR . SUPPLEMENTAL INFORMATION Interest paid, excluding capitalized amounts . . . . . . Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . NON-CASH FINANCING ACTIVITIES Long-term liabilities due within one year . . . . . . . . The Corporations’ shares acquired and held by subsidiaries accounted for as treasury stock . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $(13,180,003) $ (7,166,275) $(207,058) 2,464,626 (3,462,492) (100,043) 2,780,649 (5,629,077) (162,643) (3,936,575) (1,411,626) (40,787) (1,905,059) — — (4,202) (637,539) (18,421) 993,000 (6,345,000) (183,329) (48,913) (27,646) (799) 38,478 2,210 65 — (10,697) (309) (12,797,999) (24,688,142) (713,324) (11,358,284) (1,603,942) (46,343) 16,165,385 4,807,101 138,893 $ 4,807,101 $ 3,203,159 $ 92,550 $ 3,251,262 $ 2,659,785 $ 76,850 $ 4,430,435 $ 46,857 $ 1,354 $ 8,760,707 $12,695,045 $366,803 $ — $ 1,332,133 $ 38,490	Year Ended December 31 2001 2002 NT$ NT$ US$ $(13,180,003) $ (7,166,275) $(207,058) 2,464,626 (3,462,492) (100,043) 2,780,649 (5,629,077) (162,643) (3,936,575) (1,411,626) (40,787) (1,905,059) — — (4,202) (637,539) (18,421) 993,000 (6,345,000) (183,329) (48,913) (27,646) (799) 38,478 2,210 65 — (10,697) (309) (12,797,999) (24,688,142) (713,324) (11,358,284) (1,603,942) (46,343) 16,165,385 4,807,101 138,893 $ 4,807,101 $ 3,203,159 $ 92,550 $ 3,251,262 $ 2,659,785 $ 76,850 $ 4,430,435 $ 46,857 $ 1,354 $ 8,760,707 $12,695,045 $366,803 $ — $ 1,332,133 $ 38,490
	2000 NT$ $(11,150,096) (5,186,990) (23,065) 311,309 — (498,995) (41,000) (39,056) (12,541) — (16,640,434) (4,601,468) 20,766,853 $16,165,385 $ 3,581,125 $ 1,564,757 $13,376,121 $ —	2001 NT$ $(13,180,003) 2,464,626 2,780,649 (3,936,575) (1,905,059) (4,202) 993,000 (48,913) 38,478 — (12,797,999) (11,358,284) 16,165,385 $ 4,807,101 $ 3,251,262 $ 4,430,435 $ 8,760,707 $ —
			NT$ $ (7,166,275) (3,462,492) (5,629,077) (1,411,626) — (637,539) (6,345,000) (27,646) 2,210 (10,697) (24,688,142) (1,603,942) 4,807,101 $ 3,203,159 $ 2,659,785 $ 46,857 $12,695,045 $ 1,332,133

The accompanying notes are an integral part of the consolidated financial statements. (With Deloitte & Touche report dated January 24, 2003)

F-11

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

1. HISTORY AND ORGANIZATION

China Steel Corporation (the Corporation), a corporation incorporated under the laws of the Republic of China (ROC), was incorporated in December 1971. It is a major manufacturer and seller of steel products.

The Corporation’s stock is traded on the Taiwan Stock Exchange under the symbol ‘‘2002’’. The Corporation and its consolidated subsidiary are together referred to as the ‘‘CSC Group’’. As of December 31, 2002, the Ministry of Economic Affairs, Republic of China (MOEA-ROC) owned 40.8% of the Corporation’s outstanding common stock.

As of December 31, 2002, the subsidiaries, in which the Corporation directly owns more than 50% of the outstanding shares, include:

a. C. S. Aluminium Corporation (CAC), the Corporation owning 98% shareholdings, which is engaged mainly in the design, production, and trading of aluminum and non-ferrous metal products.
b. China Steel Express Corporation (CSE), a wholly-owned subsidiary, which is engaged mainly in shipment of bulk merchandise, such as iron ore and coal.
c. China Steel Global Trading Corporation (CSGT), a wholly-owned subsidiary, which is mainly engaged in the trading of steel and aluminum products and other industrial materials.
d. China Steel Asia Pacific Holdings Pte Ltd (CSAPH), a wholly-owned subsidiary, which is mainly engaged in the manufacturing and marketing of steel products.
e. GAINS Investment Corporation (GIC), a wholly-owned subsidiary, which is mainly engaged in investment and consulting business.
f. Goang Yaw Investment Corporation and other two companies (GYIC), wholly-owned subsidiaries, which are mainly engaged in investment activities. They have invested in YLEC with 15.6% shareholdings.
g. China Prosperity Development Corporation (CPDC), a wholly owned subsidiary, which is mainly engaged in the development business of real estates.
h. China Steel Security Corporation (CSS), a wholly owned subsidiary, which is mainly engaged in planning, design, maintenance, repair and installation of security systems and related equipment and appliances.
i. China Steel Machinery Corporation (CSMC), a wholly owned subsidiary, which is mainly engaged in the machinery manufacturing.
j. Info-Champ Systems Corporation (ICSC), the Corporation owning 99% shareholdings, which is mainly engaged in the system design, development, maintenance service and sales of software and related products.
k. Hi-Mag Magnetic Corporation (HMC), the Corporation owning 50% shareholdings, which is engaged in the manufacture, processing, distribution, trading, and technical services of materials and products of ferrite materials, powder metallurgy, and accuracy ceramics.

F-12

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

2. SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principle in the ROC (‘‘ROC GAAP’’). Unless otherwise stated, amounts presented are in thousands of NT dollars (NT$) and U.S. dollars (US$). The significant accounting policies of the CSC Group are summarized below:

Consolidation

The consolidated financial statements include the accounts of the Corporation and CAC.

The Corporation has prepared the consolidated financial statements, including the entities of the Corporation and CAC, the only subsidiary with individual total assets or total operating revenue more than 10% of those of the Corporation in 2002 and 2001. For other subsidiaries, the total assets or total revenues of individual subsidiaries, to which the Corporation owned more than 50% shareholdings, are less than 10% of that of the Corporation, respectively. Other subsidiaries would be included in the consolidation if their total assets and total revenues were collectively not less than 30% of those of the Corporation. However, both the total assets and total revenues of all subsidiaries are less than 30% of the Corporation’s total assets and revenues, respectively.

In 2000, the Corporation was not required to prepare the consolidated financial statements because no subsidiaries met ROC GAAP requirements as mentioned above to be included in consolidated financial statements. However, for better comparison and presentation, the Corporation has prepared consolidated financial statements for 2000 which include CAC.

Significant intercompany transactions and account balances have been eliminated and the minority shareholders’ interests in the equity and earnings of the subsidiary are presented separately in the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in conformity with ROC GAAP requires management to make estimates and judgments that affect the recorded amounts of assets, liabilities, revenues and expense of the Corporation. The Corporation continually evaluates these estimates, including those related to doubtful accounts, inventories valuation, useful lives of properties, consolidated debits, valuation allowances for deferred income tax, pension costs, loss from lawsuits and the fair value of financial instruments. The Corporation bases its estimates on historical experience and assumptions, which it believes to be reasonable under the circumstance. Actual results may differ from these estimates under different assumptions and conditions.

Assets and Liabilities Classified as Current and Non-current

Current assets include cash and other assets that are reasonably expected to be realized in cash, or to be consumed within one year from the balance sheet date; otherwise are non-current assets. Current liabilities are liabilities that are reasonably expected to be liquidated within one year; otherwise are non-current liabilities.

Cash Equivalents

Cash equivalents represent commercial papers within three months of maturity.

F-13

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

Short-term Investments

Short-term investments consist of bond funds, security investment trust funds, commercial papers over three months maturities and stocks traded on the Taiwan Stock Exchange without longterm holding intent and are stated at the lower of weighted average cost or market value. Loss on declined market value is charged to income when it occurs. The allowance for investment loss is created to account for the loss resulting from the excess of total costs over the market value. When the market price recovers, the allowance account will be reversed to the extent of remaining balance. The cost of sale of investment is calculated under the weighted average method. Market value represents net assets value at balance sheet date for bond funds and security investment funds, and average price in the latest month of the period for listed stocks.

Stock dividends received from investees are not recorded as investment income but as an increase in shares. Accordingly, the carry value per share is recalculated on the basis of totally owned shares. Cash dividends are recorded as investment income for current year, except for as a deduction to its original investment for the initial investing year.

Allowance for Doubtful Accounts

Allowance for doubtful accounts is provided on the basis of aging accounts and the evaluation of collectibility of individual receivable.

Inventories

Inventories consist of raw materials, supplies, fuel, finished products, work in process, byproducts and construction in progress. Inventories, except construction in progress, are stated at the lower of total moving weighted average cost or market value. Market value represents net realizable value for finished products, work in process, by-products and construction in progress, and replacement costs for raw materials, supplies and fuel. Construction projects over one year are recognized by the percentage-of-completion method, and construction in progress is valued by the costs incurred plus (less) the estimated gain (loss).

Long-term Investments in Shares of Stock

Long-term stock investments of which the CSC Group owns at least 20% of the outstanding voting shares or where the CSC Group has significant influence on the investees are accounted for by the equity method. When the equity method is first applied or when a stock is acquired, the difference between the carrying value of an investment and the proportionate equity in the investee is amortized over five years. If the financial statements of investee cannot be obtained in time, the CSC Group will recognize investment income or loss on related investments in the semi-annual financial statements; otherwise, investment income or loss is recognized in the same period. Unrealized income or loss from transactions with investees and from transactions between investees is eliminated. Cash dividends received from investees are recorded as a deduction in the investment carrying value. Translation adjustments, unrealized loss on investees’ long-term investments and unrecognized net loss on pension cost are recognized proportionately by the CSC Group’s shareholdings. When the investee issues additional shares but the CSC Group does not acquire shares at a ratio equal to its initial equity, the CSC Group’s ownership percentage is changed. As a result, capital surplus is adjusted for the difference between the carrying values of the investments and the CSC Group’s equity in the investees’ net assets. If the carrying value is less than equity in net assets, the difference is credited to capital surplus. If the carrying value is more than equity in net assets, the difference is debited to

F-14

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

capital surplus or unappropriated earnings while capital surplus is unavailable. If the market prices of investees decline significantly and not temporarily, the investment loss should be recognized as realized loss in the same year of the decline. Such investment will be reevaluated by the equity method if an investee’s market value becomes higher than book value per share. The difference between the new cost of the investment and proportionate equity in the investee is amortized over five years.

Other long-term investments in shares of stock are accounted for by the cost method. If certain evidence indicates that the market value of investments has significantly declined, not temporarily, the decline should be recognized as a realized investment loss. The previous carrying value less the amount of write-down becomes the new cost basis for such investments. Cash dividends received from investees are recorded as a deduction in the investment carrying value for the initial year; otherwise, they are recorded as investment income. Upon sale of investment, the cost of investment sold is calculated under the weighted average method.

Properties, Leased Assets and Idle Assets

Properties and leased assets (under other assets) are stated at cost or cost plus appreciation, less accumulated depreciation. Idle assets are valued at the lower of cost or net realizable value. Interest expense arising from the purchase or construction of properties is capitalized as cost. Major additions, renewals and betterments are capitalized while maintenance and repairs are expensed currently.

Depreciation of properties is provided by the straight-line method over service lives estimated as follows: land improvements, 10 to 40 years; buildings and improvements, 4 to 60 years; machinery and equipment, 2 to 25 years; transportation equipment, 2 to 25 years; miscellaneous equipment, 2 to 14 years. Depreciation on appreciation is provided by the straight-line method over the remaining service lives of the revalued assets. When a property reaches its original service life but is still in use, its residual value is written off over its reestimated service life.

Depreciation of machinery and equipment leased to CAC is calculated by the working hour method.

Upon sale or disposal of properties, the related cost, appreciation and accumulated depreciation are removed from the accounts. Gains or losses are credited or charged to current income. Before 2000, any such gains, net applicable income tax, are transferred to capital surplus at years-end, and the accumulated accounts were retransferred to retained earnings under the resolution of the Corporation’s 2002 annual stockholders’ meeting.

Unamortized Repair Expense

Unamortized repair expense refers to the major repair of blast furnaces and is amortized by the straight-line method over five years.

Treasury Stock

The Corporation’s outstanding shares acquired by itself are recorded as treasury stock which is stated at cost and is presented as a deduction of stockholder’s equity.

Effective 2002, the Corporation’s shares acquired and held by subsidiaries are accounted for as treasury stock, adjusted from the long-term investments, at the carry value (recorded as short-term or long-term investments by subsidiaries) as of January 1, 2002.

F-15

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

Revenue Recognition

Revenues are recognized when titles to products and risks of ownership are transferred to customers: domestic sales — when products are out of the Corporation’s premises for delivery to customers; exports — when products are loaded onto vessels. Allowance for sales returns and discounts are estimated based on probability.

Sales is measured by fair value which is a price (net of trade discounts and sales discounts) agreed by the Corporation and customers.

Pension

Pension costs are recognized on the basis of actuarial calculations and that amount is contributed to pension funds (note 13). Unamortized net transition assets and actuarial gains or loss are amortized over 11 years and the average remaining service life of existing employees, respectively.

Income Tax

Income tax is provided on inter-period allocation basis. Tax effects on deductible temporary differences and unused tax credits are recognized as deferred income tax assets. Valuation allowance is provided for deferred tax assets with uncertain realizability. Tax effects of taxable temporary differences are recognized as deferred tax liabilities. Deferred tax asset or liability is classified as current or noncurrent depending on the classification of the related asset or liability for financial reporting. But if the deferred income tax asset or liability cannot be related to an asset or liability for financial reporting, the classification is based on the expected reversal or realization date of the temporary difference.

The tax credits from expenditures for purchase of equipment, research and development, and employees’ training costs are recognized when those credits are eligible by relevant regulations.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Annual earnings should be appropriated under a resolution made in the stockholders’ meeting in the next year. Under tax regulations, unappropriated earnings are subject to 10% income taxes. Such taxes are recorded as expenses when the stockholders resolve to retain the earnings.

Foreign-currency Transactions

Foreign-currency transactions, except derivative financial instruments, are recorded in New Taiwan dollars at the rates of exchange in effect when the transactions occur. Gains or losses, resulting from the application of different exchange rates when foreign-currency assets and liabilities are settled, are credited or charged to income in the year of settlement. On the balance sheet date, foreigncurrency assets and liabilities are restated at the prevailing exchange rates and resulting adjustments are credited or charged to income. Long-term investments accounted for by cost method are adjusted as translation adjustment under stockholder’s equity if the translated New Taiwan dollar amount is lower than cost; if higher, no adjustment is made. Those investments accounted for by equity method are translated based on investees’ foreign-currency financial statements, and the change in investment from exchange rate is shown as cumulative translation adjustment under stockholders’ equity.

F-16

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

Derivative Financial Instruments

Forward exchange transactions entered into as hedge for foreign-currency net assets or net liabilities are recorded in New Taiwan dollars at the spot rates on the date of each forward contract. The differences between spot rates and forward rates are amortized over the period of each forward contract and recognized as gains or losses. Year-end balances of forward exchange contracts are restated at the prevailing exchange rates and the resulting adjustments are credited or charged to income. Exchange gains or losses on forward exchange transactions entered into as hedge for foreigncurrency commitments are deferred as adjustments to transaction prices. If the adjusted transaction prices are over their market values, the exchange loss is recognized when it occurs.

The related receivable and payable balances for forward contracts are netted against each other and the resulting balance is presented as either current asset or liability.

U.S. Dollar Amount

The Corporation prepares its consolidated financial statements in NT dollars. Translations into U.S. dollars for 2002 financial statements are included solely for the convenience of the reader, and are based on the U.S. Federal Reserve Bank of New York noon buying rate of NT$34.61 to US$1.00 in effect as at June 30, 2003. The convenience translations should not be construed as representations that the NT dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.

3. ACCOUNTING CHANGE

Effective January 1, 2002, the CSC Group adopted the ROC Statement of Financial Accounting Standards No. 30 — ‘‘Accounting for Treasury Stock’’. As a result of the adoption, shares of the Corporation held by subsidiaries should be reclassified from long-term investments to treasury stock under stockholders’ equity. The effects of this accounting change on the consolidated financial statements as of December 31, 2002 were as follows: (a) decreases in long-term investments of NT$1,875,547, retained earnings of NT$144,328 and net income of NT$144,328; and (b) increases in treasury stock of NT$1,332,133, unrealized loss on long-term investments of NT$481,700 and capital surplus of NT$82,614.

4. SHORT-TERM INVESTMENTS

	December 31	December 31	December 31
2000 NT$ $4,909,197 2,468,921 1,000 127,562 7,506,680 — $7,506,680	2001 NT$ $12,609,880 971,645 1,000 — 13,582,525 1,940 $13,580,585	2002
		NT$ $20,427,730 971,645 1,000 — 21,400,375 — $21,400,375	US$
			$590,226 28,074 29 —
			618,329 —
			$618,329

F-17

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

5. INVENTORIES

	December 31	December 31	December 31
2000 NT$ $ 7,298,746 6,416,149 24,116 4,016,550 3,285,724 73,962 850,300 96,212 22,061,759 383,538 $21,678,221	2001 NT$ $ 5,682,605 7,413,829 46,540 3,116,638 3,507,425 78,605 733,684 — 20,579,326 141,853 $20,437,473	2002
		NT$ $ 4,462,461 5,157,269 35,723 3,274,408 3,562,007 84,580 1,187,201 2,545 17,766,194 175,689 $17,590,505	US$
			$128,935 149,011 1,032 94,609 102,918 2,444 34,302 74
			513,325 5,076
			$508,249

F-18

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

6. LONG-TERM INVESTMENTS

		December 31	December 31	December 31
2000		2001			2002
Amount	% of Owner- ship	Amount	% of Owner- ship	Amount	Amount	% of Owner- ship
NT$	100 100 100 31 100 35 100 — 31 30 32 18 100 36 24 100 100 50 6 6 — 14 4 — — — 2 4 2 9 5 3 3 6 — — — —	NT$	100 100 100 37 100 35 100 100 31 30 20 18 100 36 24 100 100 50 6 6 17 14 4 — — — 2 4 2 9 5 3 1 6 — — — —	NT$	US$	100 100 100 31 100 35 100 100 31 30 20 18 99 36 24 100 100 50 6 6 — — 4 27 21 100 2 4 2 9 5 3 1 6 — — 17 5
$ 4,413,181 4,312,754 4,085,176 1,475,890 1,631,167 1,047,510 738,892 — 717,423 923,655 460,901 416,112 377,510 364,228 2,399,469 183,380 1,162,983 119,287 91,300 58,983 — 47,330 5,903 — — —		$ 5,519,921 4,189,482 4,090,900 3,012,620 1,646,053 1,009,937 861,286 803,300 778,433 592,916 480,268 465,463 462,204 365,502 249,768 193,051 168,097 103,571 69,625 61,368 60,990 50,831 5,529 — — —		$ 5,492,165 4,936,000 4,070,362 3,139,515 2,164,996 1,031,691 1,055,353 755,105 810,063 557,098 489,784 467,871 506,463 364,215 370,175 205,383 279,294 — 75,654 63,182 — — 10,386 160,647 100,000 74,211	$158,687 142,618 117,606 90,711 62,554 29,809 30,493 21,818 23,405 16,096 14,152 13,518 14,633 10,525 10,696 5,934 8,070 — 2,186 1,825 — — 300 4,641 2,889 2,144
25,033,034 —		25,241,115 —		27,179,613 1,332,133	785,310 38,490
25,033,034		25,241,115		25,847,480	746,820
1,300,000 1,000,000 757,920 597,214 500,000 182,200 29,200 50,000 4,605 40 — —		1,300,000 1,000,000 715,550 597,214 500,000 182,200 29,200 50,000 9,161 — — —		1,300,000 1,000,000 757,919 — 500,000 249,349 29,200 50,000 4,581 — 60,990 120,000	37,561 28,893 21,899 — 14,447 7,205 844 1,445 132 — 1.762 3,467
4,421,179		4,383,325		4,072,039	117,655
— — —		120,000 5,160 18,090		— — —	— — —
—		143,250		—	—
31,643		98,794		120,831	3,492
$29,485,856		$29,866,484		$30,040,350	$867,967

F-19

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

In February 2000, the Corporation acquired 99% shares of Goang Yaw Investment Corporation (GYIC) and eight other investment companies, which totally owned 22.5% shares of YLEC, for the amount of NT$1,377,325. Based on the acquisition agreement, the Corporation has the power for the management and operation of YLEC. In June 2000, YLEC increased its capital by 350,000 thousand shares for the amount of NT$3,500,000, and the Corporation subscribed 271,487 thousand shares, at a cost of NT$2,714,874. As of December 31, 2002, the Corporation’s total shareholdings in YLEC was 39.3%; 23.7% directly owned and 15.6% indirectly owned.

In March 2000, the Corporation sold its shares of MoBiTai Communications Co., Ltd. at the price of NT$1,960,000, resulting in a gain of NT$1,541,563, net of securities trading taxes.

In November 2000, the Corporation obtained the approval from the government to incorporate China Steel Asia Pacific Holdings Pte. Ltd. (CSAPH) in Singapore, a holding Company with capital of NT$1,631,167 (US$49,290). The CSAPH acquired the shareholdings of Ornasteel Enterprise Corporation (M) Sdn. Bhd. (70%) and Group Steel Corporation (M) Sdn. Bhd. (60%), both are Malaysian companies, from several shareholders, at the respective price of NT$1,012,287 and NT$607,372 (RM115,780 thousands and RM69,468 thousands).

In September 2001, the Corporation invested NT$799,930 in CSMC, a wholly owned subsidiary. The subsidiary mainly manufactures, sells and maintains machinery and equipment.

In September 2001, the Corporation invested NT$60,000 in GMB, representing 22% shareholdings. GMB does biotechnology research and related production and sales. In December 2001, GMB had a capital increase, but the Corporation did not acquire shares in proportion to its original equity. Thus, the Corporation’s ownership decreased to 17%, and the Corporation’s investment in GMB started to be accounted for by cost method in 2002.

In January 2002, CAC incorporated ALU Investment Offshore Corporation and in March transferred its stockholdings in USIDC to abovementioned subsidiary which is registered in the British Virgin Islands for the purpose of investing in Mainland China and overseas area. The upper-limit of its capital is US$15,000. CAC obtained the approval from the government for changes in overseas investment planning.

In August 2002, the Corporation increased the investment in CSAPH by NT$169,022 (US$5,001). CSAPH used this fund to increase its investment in Ornasteel Enterprise Corporation (M) Sdn. Bhd. Thus, the Corporation’s stockholdings in Ornasteel Enterprise was increased from 70% to 72.27%.

In September 2002, the Corporation invested NT$120,000 in CDIB BioScience Ventures I, Inc., representing 4.8% stockholdings.

In October 2002, the Corporation invested NT$160,000 in TRSC, representing 27% stockholdings. TRSC is mainly engaged in the manufactures, sales and leases of motor-trolleys and parts.

In October 2002, the Corporation invested NT$100,000 in PBG, representing 21% stockholdings. PBG mainly is mainly engaged in biochip research and production.

In October 2002, GYIC and other eight investment companies were decreased in capital and merged into three companies.

F-20

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

In 2002, the Corporation’s shareholdings in KRTC and ICSC were decreased because the Corporation did not acquire shares in proportion to the original equity when KRTC issued additional shares and because ICSC issued stock bonus to its employees.

In 2002 and 2001, the Corporation’s Board of Directors approved plans for additional investments of up to NT$3,641,802 in GIC, KRTC, KYIC and CPDC. The related implementation schedule depends on the investees’ capital increase requirements. As of December 31, 2002, the Corporation has effected the investment of NT$1,137,340 to such entities.

The CSC Group’s affiliates together own over 20% stockholdings of WIC, AVCC, UEC, and USIDC. Therefore, such investees are accounted for by the equity method.

Reported investment income (loss) under the equity method is recognized based on the investees’ audited financial statements as follows:

CSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSGT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ICSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CPDC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USIDC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AVCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goang Yaw Investment Corporation and other two companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . YLEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KYIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CSAPH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KRTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GMB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TRSC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ALU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $1,078,403 $ 942,184 $27,223 238,318 168,695 4,874 152,440 170,643 4,930 102,891 200,083 5,781 84,691 83,858 2,423 71,051 18,959 548 38,127 42,180 1,219 22,656 8,390 242 9,672 11,674 337 5,724 (7,682) (222) 5,510 5,737 166 3,914 11,214 324 3,370 (48,195) (1,393) 2,385 3,098 90 (994,887) 111,202 3,213 (2,150,506) 120,407 3,479 (330,739) (30,518) (882) (70,166) 350,737 10,134 (37,573) 21,754 629 (15,763) (103,564) (2,992) (2,510) (1,108) (32) (522) — — (374) (303) (9) — 647 19 — 601 17 $(1,783,888) $2,080,693 $60,118	Year Ended December 31 2001 2002 NT$ NT$ US$ $1,078,403 $ 942,184 $27,223 238,318 168,695 4,874 152,440 170,643 4,930 102,891 200,083 5,781 84,691 83,858 2,423 71,051 18,959 548 38,127 42,180 1,219 22,656 8,390 242 9,672 11,674 337 5,724 (7,682) (222) 5,510 5,737 166 3,914 11,214 324 3,370 (48,195) (1,393) 2,385 3,098 90 (994,887) 111,202 3,213 (2,150,506) 120,407 3,479 (330,739) (30,518) (882) (70,166) 350,737 10,134 (37,573) 21,754 629 (15,763) (103,564) (2,992) (2,510) (1,108) (32) (522) — — (374) (303) (9) — 647 19 — 601 17 $(1,783,888) $2,080,693 $60,118
	2000 NT$ $ 985,303 598,734 173,069 80,446 27,590 16,578 51,468 40,024 1,978 3,934 4,610 1,130 — (1,017) (169,637) (346,492) (1,804,791) — 254,599 3,341 (49,110) — (2,097) — — $ (130,340)	2001 NT$ $1,078,403 238,318 152,440 102,891 84,691 71,051 38,127 22,656 9,672 5,724 5,510 3,914 3,370 2,385 (994,887) (2,150,506) (330,739) (70,166) (37,573) (15,763) (2,510) (522) (374) — — $(1,783,888)
			NT$ $ 942,184 168,695 170,643 200,083 83,858 18,959 42,180 8,390 11,674 (7,682) 5,737 11,214 (48,195) 3,098 111,202 120,407 (30,518) 350,737 21,754 (103,564) (1,108) — (303) 647 601 $2,080,693

The Corporation has invested in KYIC with 30% stockholdings. Preliminarily, the Corporation recognized the investment income or loss based on KYIC’s preceding year’s audited financial statements. In September 2000, KYIC occurred a serious management fraud which caused financial crisis to KYIC. And then, the Corporation’s representative was elected as the KYIC’s Chairman of Board of Directors. Consequently, the Corporation has substantial control over KYIC, and has to recognize its investment loss

F-21

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

or income based on the financial statements of the same period. Accordingly, in 2001 and 2000 the Corporation recognized the investment loss of NT$330,739 and $1,804,791, which includes the KYIC’s 1999 loss of $208,700 and 2000 loss of $1,596,091, respectively.

In 2001, the stock price of YLEC dropped significantly. The Corporation recognized an investment loss based on the year-end market price. However, in 2002, the stock price of YLEC recovered to a level higher than its book value per share, and YLEC had profitable operations in 2002. The investment in YLEC started to be accounted for by the equity method effective November 2002, according to the interpretation issued by the Accounting Research and Development Foundation of the Republic of China.

Investment income (loss) as presented in the statements of income are as follows:

	Year Ended December 31	Year Ended December 31	Year Ended December 31
2000 NT$ $(130,340) — 14,768 $(115,572)	2001 NT$ $(1,783,888) — 13,613 $(1,770,275)	2002
		NT$ $2,080,693 (597,214) 30,732 $1,514,211	US$
			$60,118 (17,256) 888
			$43,750

The Corporation fully recognized the balances of its investments in HMC and TEIWC as losses to reflect these investees’ operation losses.

7. PROPERTIES

December 31, 2000 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost NT$ $ 5,915,847 4,320,544 36,657,435 211,759,519 1,584,727 2,691,043 262,929,115 2,259,609 11,162,114 131,967,304 1,147,906 2,027,783 148,564,716 4,628,072 $118,992,471	Appreciation NT$ $ 5,850,597 492,990 2,445,462 9,661,524 50,279 35,512 18,536,364 314,519 1,298,262 9,074,231 44,896 32,579 10,764,487 — $ 7,771,877	Total
			NT$
			$ 11,766,444 4,813,534 39,102,897 221,421,043 1,635,006 2,726,555
			281,465,479
			2,574,128 12,460,376 141,041,535 1,192,802 2,060,362
			159,329,203
			4,628,072
			$126,764,348

F-22

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

December 31, 2001 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2002 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost NT$ $ 7,550,804 4,320,544 36,913,806 215,132,634 1,610,060 2,712,768 268,240,616 2,489,748 12,075,979 140,593,005 1,197,642 2,081,028 158,437,402 3,532,195 $113,335,409 Cost NT$ $7,932,789 4,320,544 37,073,607 216,086,846 1,612,645 2,907,635 269,934,066 2,668,538 13,014,277 149,493,549 1,278,250 2,188,670 168,643,284 6,998,363 $108,289,145	Appreciation NT$ $ 5,850,597 492,990 2,445,529 9,542,254 39,186 35,299 18,405,855 336,638 1,398,209 9,520,466 38,936 35,256 11,329,505 — $ 7,076,350 Appreciation NT$ $5,850,597 492,990 2,445,529 9,539,413 39,186 35,292 18,403,007 356,083 1,456,137 9,523,943 39,058 35,261 11,410,482 — $6,992,525	Total
			NT$
			$ 13,401,401 4,813,534 39,359,335 224,674,888 1,649,246 2,748,067
			286,646,471
			2,826,386 13,474,188 150,113,471 1,236,578 2,116,284
			169,766,907
			3,532,195
			$120,411,759
			Total
			NT$
			$ 13,783,386 4,813,534 39,519,136 225,626,259 1,651,831 2,942,927
			288,337,073
			3,024,621 14,470,414 159,017,492 1,317,308 2,223,931
			180,053,766
			6,998,363
			$115,281,670

F-23

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

December 31, 2002 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost US$ $ 229,205 124,835 1,071,182 6,243,480 46,595 84,011 7,799,308 77,103 376,026 4,319,374 36,933 63,238 4,872,674 202,206 $3,128,840	Appreciation US$ $169,044 14,244 70,660 275,626 1,132 1,019 531,725 10,289 42,073 275,179 1,128 1,019 329,688 — $202,037	Total
			US$
			$ 398,249 139,079 1,141,842 6,519,106 47,727 85,030
			8,331,033
			87,392 418,099 4,594,553 38,061 64,257
			5,202,362
			202,206
			$3,330,877

The CSC Group constructed and acquired the properties (e.g., factories or equipment) partially through bank loans. Information of interest capitalization is as follows:

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . Interest expense capitalized (under constructions in progress) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate for capitalization . . . . . . . . . . . . . . . . . .	2000 NT$ $3,761,833 202,548 5.52%–5.86%	2001 NT$ $3,191,070 166,259 4.92%–5.66%	2002	2002
			NT$ $2,528,313 142,919 3.36%–5.23%	US$
				$73,052 4,129 3.36%–5.23%

In 1981 and 1994, the Corporation revalued its properties and patents in accordance with government regulations, resulting in appreciation or increment NT$17,662,343. After the deduction of reserve for land value increment tax of NT$3,370,813, the balance of NT$14,291,530 was credited to capital surplus. Up to December 31, 2002, such capital surplus of NT$13,952,356 has been transferred to capital account.

F-24

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

8. OTHER ASSETS

	December 31	December 31	December 31
2000 NT$ $ 530,539 1,745,467 105,529 539,402 $2,920,937	2001 NT$ $2,165,495 1,114,329 90,073 511,512 $3,881,409	2002
		NT$ $2,180,241 717,408 — 441,178 $3,338,827	US$
			$62,995 20,728 — 12,748
			$96,471

In 2000, CAC phased out its old aluminum foil mill. The related properties and equipment were accounted for as idle assets.

The Corporation has leased its partial plant land to its subsidiaries. Since 2001, the Corporation leased to CSMC the land acquired in 2001 with cost of $1,634,956.

9. SHORT-TERM BANK LOANS AND OVERDRAFT

	December 31
2000 Interest Rate (%) NT$ 4.60–5.275 $3,850,000 0.69–7.42 240,522 4.85–7.20 827,141 $4,917,663	2001 Interest Rate (%) NT$ 2.45–3.70 $6,300,000 0.32–4.56 323,360 2.65–6.79 1,074,952 $7,698,312		2002
Interest Rate (%) 4.60–5.275 0.69–7.42 4.85–7.20	Interest Rate (%) 2.45–3.70 0.32–4.56 2.65–6.79	Interest Rate (%) 1.77–1.88 0.26–4.50 6.375	NT$ $1,375,000 651,868 42,367 $2,069,235	US$
				$39,728 18,835 1,224
				$59,787

As of December 31, 2002, the unused credit lines for the Corporation’s short-term financing and CAC’s short-term and long-term borrowings aggregated approximately NT$49,223,031 and NT$4,598,971, respectively.

10. COMMERCIAL PAPER PAYABLE

	December 31
2000 Interest Rate (%) NT$ 4.43-5.28 $2,010,000 13,787 $1,996,213	2001 Interest Rate (%) NT$ 2.00-3.47 $4,470,000 9,161 $4,460,839		2002
Interest Rate (%) 4.43-5.28	Interest Rate (%) 2.00-3.47	Interest Rate (%) 1.49	NT$ $1,000,000 1,653 $ 998,347	US$
				$28,893 47
				$28,846

F-25

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

11. LONG-TERM BONDS PAYABLE

	December 31	December 31	December 31
2000 NT$ $ — — — 5,000,000 2,250,000 7,750,000 5,000,000 5,000,000 3,350,000 1,462,000 — 1,500,000 5,000,000 5,000,000 41,312,000 (10,257,000) $31,055,000	2001 NT$ $ 3,500,000 1,500,000 5,000,000 5,000,000 2,250,000 7,750,000 5,000,000 3,350,000 1,700,000 — 1,250,000 1,005,000 5,000,000 — 42,305,000 (6,345,000) $35,960,000	2002
		NT$ $ 3,500,000 1,500,000 5,000,000 5,000,000 2,250,000 7,750,000 2,500,000 1,700,000 — — 1,250,000 510,000 5,000,000 — 35,960,000 (9,710,000) $26,250,000	US$
			$ 101,127 43,340 144,467 144,467 65,010 223,924 72,233 49,119 — — 36,117 14,736 144,467 —
			1,039,007 280,556
			$ 758,451

F-26

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

12. LONG-TERM DEBTS

Import equipment loans: Sumitomo Bank — payable in ten equal installments from August 1998 to February 2003, interest at 6.715% p.a. . . . . . . . . . . . . . . . . . . . . . . . . . . Kreditanstalt Fu¨r Wiederaufbau — interest at 6.4%– 6.99% p.a., repaid in September 2002 . . . . . . . . West Merchant Bank — interest at 5.38% p.a., repaid in April 2002 . . . . . . . . . . . . . . . . . . . . . . . . . Hitachi Zosen Corp. — interest at 6.99% p.a., repaid in February 2002. . . . . . . . . . . . . . . . . . . . . . . Nippon Steel Corp. — interest at 6.99% p.a., repaid in November 2001 . . . . . . . . . . . . . . . . . . . . . . . Chiao Tung bank — interest at 6.225–6.475%, repaid in March 2002 . . . . . . . . . . . . . . . . . . . . . . . . Mortgage bank loan on machinery and equipment: Payable through June 2004, float rate at 4.95% p.a. and 3.125% p.a. as of December 31, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payable through March 2003, float rate at 5.25%, 4.95% p.a. and 3.125% p.a. as of December 31, 2000, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . Payable through December 2003, interest at 1.050% as of December 31, 2000, and 1.0466% p.a. as of December 31, 2001 and 2002 . . . . . . . . . . . . . . Loan from National Defense Industrial Development Fund (NDIDF) — float rate at 5.88% p.a. and 5.60% as of December 31, 2000 and 2001, repaid in May 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan for production of military products interest at 5.88% p.a. and 5.60% p.a. as of December 31, 2000 and 2001, repaid in March 2002 . . . . . . . . . . . . . . Revolving loans — interest at 4.43%–5.28%, 1.35%– 1.72% as of December 31, 2000 and 2002 . . . . . . . Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . .		December 31 2001 2002 NT$ NT$ US$ $ 525,000 $ 173,765 $ 5,020 1,023,992 — — 286,287 — — 68,133 — — — — — 363,680 — — 50,000 50,000 1,445 2,050,000 2,050,000 59,231 698,360 761,280 21,996 1,043,790 — — 61,536 — — — 1,724,107 49,815 6,170,778 4,759,152 137,507 (2,415,707) (2,985,045) (86,247) $3,755,071 $1,774,107 $51,260	December 31 2001 2002 NT$ NT$ US$ $ 525,000 $ 173,765 $ 5,020 1,023,992 — — 286,287 — — 68,133 — — — — — 363,680 — — 50,000 50,000 1,445 2,050,000 2,050,000 59,231 698,360 761,280 21,996 1,043,790 — — 61,536 — — — 1,724,107 49,815 6,170,778 4,759,152 137,507 (2,415,707) (2,985,045) (86,247) $3,755,071 $1,774,107 $51,260
	2000 NT$ $ 827,500 2,540,032 817,676 193,302 63,495 405,000 — 2,050,000 756,600 1,043,790 92,304 1,317,654 10,107,353 (3,119,121) $ 6,988,232	2001 NT$ $ 525,000 1,023,992 286,287 68,133 — 363,680 50,000 2,050,000 698,360 1,043,790 61,536 — 6,170,778 (2,415,707) $3,755,071
			NT$ $ 173,765 — — — — — 50,000 2,050,000 761,280 — — 1,724,107 4,759,152 (2,985,045) $1,774,107

The Corporation assumed the balance of NDIDF’s loan (repayable from July 1989 to June 2003) and acquired the related machinery and equipment (M&E) from a third party. The repayment of this loan is based on the M&E depreciation charges based on the quantity of aluminum products sold by CAC and a percentage of CAC’s profit based on the ratio of the M&E cost to CAC’s aluminum-producing M&E. In May 2002, the Corporation fully settled the loans and got the titles to the M&E, which the Corporation later leased to CAC.

F-27

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

13. PENSION PLAN

The CSC Group has defined benefit pension plans for all regular employees, which provides pension benefits based on length of service and average salary for six months before retirement.

The CSC Group makes contributions, equal to certain percentage of salaries, to a pension reserve fund which is administered by, and deposited with the Central Trust of China in the name of, the employees pension reserve fund administration committee. The changes in the fund are summarized as follows:

Balance, beginning of year . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of benefits . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . .		December 31 2001 2002 NT$ NT$ US$ $5,732,393 $6,959,638 $201,087 879,384 1,130,446 32,662 403,406 263,734 7,620 (55,545) (46,451) (1,341) $6,959,638 $8,307,367 $240,028	December 31 2001 2002 NT$ NT$ US$ $5,732,393 $6,959,638 $201,087 879,384 1,130,446 32,662 403,406 263,734 7,620 (55,545) (46,451) (1,341) $6,959,638 $8,307,367 $240,028
	2000 NT$ $4,879,461 868,626 — (15,694) $5,732,393	2001 NT$ $5,732,393 879,384 403,406 (55,545) $6,959,638
			NT$ $6,959,638 1,130,446 263,734 (46,451) $8,307,367

Starting August 1999, the Corporation has also made contributions, equal to certain percentage of salaries of management personnel (vice president and above), to another pension fund, which is administered by, and deposited with the International Commercial Bank of China in the name of, the officers’ pension fund management committee. The changes in the fund are summarized as follows:

Balance, beginning of year . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of benefits . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $17,350 $16,462 $476 2,746 2,787 80 840 546 16 (4,474) (3,478) (101) $16,462 $16,317 $471	Year Ended December 31 2001 2002 NT$ NT$ US$ $17,350 $16,462 $476 2,746 2,787 80 840 546 16 (4,474) (3,478) (101) $16,462 $16,317 $471
	2000 NT$ $ 9,965 6,866 519 — $17,350	2001 NT$ $17,350 2,746 840 (4,474) $16,462
			NT$ $16,462 2,787 546 (3,478) $16,317

Pension information from the actuarial calculations related to both pension plans is as follows:

a. Pension cost Service cost . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . Unrecognized net assets at transition . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . .		Year Ended December 31 2001 2002 NT$ NT$ US$ $966,534 $1,065,742 $30,793 330,796 357,706 10,335 (394,647) (380,552) (10,995) (295) (682) (20) (11,682) (3,679) (106) $890,706 $1,038,535 $30,007	Year Ended December 31 2001 2002 NT$ NT$ US$ $966,534 $1,065,742 $30,793 330,796 357,706 10,335 (394,647) (380,552) (10,995) (295) (682) (20) (11,682) (3,679) (106) $890,706 $1,038,535 $30,007
	2000 NT$ $939,196 266,062 (328,872) (682) (18,569) $857,135	2001 NT$ $966,534 330,796 (394,647) (295) (11,682) $890,706
			NT$ $1,065,742 357,706 (380,552) (682) (3,679) $1,038,535

F-28

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

b. Reconciliation of the funded status of the plan and accrued pension cost:

	December 31	December 31	December 31
2000 NT$ $ 82,148 3,148,894 3,231,042 2,294,386 5,525,428 (6,132,159) (606,731) 139,978 615,304 — $ 148,551	2001 NT$ $ 98,176 4,425,471 4,523,647 2,622,386 7,146,033 (7,221,377) (75,344) 129,760 92,438 — $ 146,854	2002
		NT$ $ 129,809 6,628,730 6,758,539 2,693,583 9,452,122 (8,497,869) 954,253 119,542 (1,027,974) 27,177 $ 72,998	US$
			$ 3,751 191,526
			195,277 77,827
			273,104 (245,532
			27,572 3,454 (29,702 785
			$ 2,109

The differences between the pension fund and the fair value of plan assets as of December 31, 2000, 2001 and 2002 mainly represented the accrued interest income of the fund.

	December 31	December 31	December 31
2000 NT$ $87,456 6.0% 3.0%–4.5% 6.0%	2001 NT$ $100,765 5.0%–5.5% 3.0%–4.0% 5.0%–5.5%	2002
		NT$ $140,564 3.5%–4.0% 2.7%–3.0% 3.5%–4.0%	US$
			$4,061
			3.5%–4.0% 2.7%–3.0% 3.5%–4.0%

14. OTHER LIABILITIES

Deferred income tax liabilities (Note 16) . . . . . . . . . . Deferred credits . . . . . . . . . . . . . . . . . . . . . . . . . . .	2000 NT$ $4,219,662 1,405,040 $5,624,702	2001 NT$ $4,135,939 1,405,040 $5,540,979	2002	2002
			NT$ $3,582,284 1,405,040 $4,987,324	US$
				$103,505 40,596
				$144,101

Deferred credits represent the unrealized gain from the sale of lands to a subsidiary, China Prosperity Development Corporation, in February 1999. These credits will be recognized as income when the subsidiary sells such land.

F-29

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

15. STOCKHOLDERS’ EQUITY

a. Treasury stock

Thousand Shares Beginning of Year Increase Decrease — 150,000 — 150,000 — — 96,026 1,778 994 246,026 1,778 994	Thousand Shares Beginning of Year Increase Decrease — 150,000 — 150,000 — — 96,026 1,778 994 246,026 1,778 994	December 31	December 31	December 31
Beginning of Year — 150,000 96,026 246,026	Increase 150,000 — 1,778 1,778	Thousand Shares 150,000 150,000 96,810 246,810	Amount
			NT$ $1,905,059 $1,905,059 1,340,018 $3,245,077	US$
				$55,044
				$55,044 38,718
				$93,762

1. Shares acquired for transfer to employees

In 2001, the Corporation acquired its common stocks for transfer to employees of which 149,964 thousand shares have been transferred to employees in January 2003, resulting in decreases of NT$82,614 in capital surplus and NT$14,863 in retained earnings.

Under the Securities Exchange Law, the Corporation’s purchase of its own shares is restricted to up to 10% of outstanding shares, and the total purchase amount should not exceed retained earnings plus paid-in capital in excess of par value and realized capital surplus. In addition, the Corporation should transfer those shares to employees within three years. These shares are deemed unissued if they are not transferred on time and the Corporation should then register with the government as a capital decrease. Further, the Corporation should not pledge these stocks as collateral and is not entitled to dividends and/or the exercise of voting rights on these stocks.

2. Shares acquired and held by subsidiaries

As stated in Note 3, the Corporation’s shares acquired and held by subsidiaries were accounted for as treasury stocks at their book value (recorded as long-term or short-term investments by investees) as of January 1, 2002. As of December 31, 2002, carry value and market value of the treasury stock were NT$1,340,018 and NT$1,896,516, respectively.

Although these shares are treated as treasury stocks in the financial statements, the stockholders are entitled to exercise their rights on these stocks, except participation in capital increase effected by cash.

F-30

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

b. Overseas depositary receipts

In May 1992 and February 1997, the ROC’s Ministry of Economic Affairs sold 20,537,550 units of Global Depositary Receipts (International GDR) and 7,631,800 units of Rule 144A American Depositary Receipts (Rule 144A GDR) to international investors, with each unit representing 20 shares of the Corporation’s common stock. The depositary shares increased by 3,506,236 units when retained earnings were capitalized. Under relevant regulations, the International GDR or Rule 144A Holders may request, after holding the depositary receipts for three months, the domestic receipts of the shares represented by the International GDR or Rule 144A GDR. As of December 31, 2002, the outstanding depositary receipts were 9,950,197 units, equivalent to 199,004,056 common shares and 2% of the outstanding common shares.

c. Preferred stock

The holders of preferred stock have the following entitlements or rights:

(1) 14% annual dividends with dividend payments ahead of those to common stockholders;
(2) Preference over common stock in future payment of dividends in arrears;
(3) Redemption of stock, at the option of the Corporation out of its retained earnings or the proceeds from issuance of new shares;
(4) The same rights as common stockholders, except the right to vote for directors and supervisors; and
(5) Conversion of shares into common stock.

d. Capital surplus

Capital surplus consists of:

	December 31	December 31	December 31
2000 NT$ $339,174 — 47,535 20,514 1,782 $409,005	2001 NT$ $339,174 — 48,783 20,514 8,099 $416,570	2002
		NT$ $339,174 82,614 51,710 — 8,099 $481,597	US$
			$ 9,800 2,387 1,494 — 234
			$13,915

Under relevant regulations, the capital surplus from a revaluation increment on assets can only be used to offset a deficit. A capital surplus from treasury stock transaction can be used to offset a deficit or transferred to capital. Capital surplus from long-term investments accounted for under the equity method is prohibited from any use. The capital surplus from gain on disposal of properties can be transferred to retained earnings based on resolution of the stockholders meeting in 2002.

F-31

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

e. Appropriation of retained earnings

The Corporation’s Articles of Incorporation provides that the annual net income, less any deficit, shall be appropriated in order of presentation:

(1) 10% as legal reserve, until its balance equals the paid-in capital stock;
(2) Preferred stock dividends at 14% of par value;
(3) Of the remainder, 0.3% as compensation to directors and supervisors and 3% as bonus to employees;
(4) Common stock dividends at 14% of par value; and
(5) The remainder if any, as additional dividend distributed equally among the holders of preferred and common stocks.

The Board of Directors should propose the appropriation of annual income. If necessary, it may, after appropriating preferred stock dividends at 14% of par value, propose to retain certain earnings as a special reserve. These proposals shall be submitted to the stockholders’ meeting for approval.

The Corporation is required to appropriate a special reserve from annual earnings for any net debit balance resulting from the adjustments to the stockholders’ equity excluding treasury stock. Effective 2002, if the market price is lower than the carrying value of the Corporation’s shares held by subsidiaries, the Corporation should appropriate a special reserve equal to the difference between market price and carrying value. The Corporation may release a portion of this special reserve when that debit balances are partially or fully reversed.

The life cycle of the Corporation’s steel industry is in the phase of stable growth, the aforementioned appropriation of dividends and bonus shall be not less than 75% in cash and not more than 25% in stock. However, subject to the need for working capital, the Corporation may decrease the cash dividend appropriation.

Under the Company Law, the legal reserve may be used to offset a deficit. When the reserve has reached 50% of paid-in capital, up to 50% thereof may be transferred to capital.

F-32

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

f. Effect of bonus to employee and compensation to directors and supervisors

In their June 2002 meeting, the Corporation’s stockholders approved the 2001 earnings appropriation, which was proposed by the Board of Directors in March 2002. The appropriation of employee bonus and compensation to directors and supervisors was as follows:

Bonus to employee — stock . . . . . . . . . . . Compensation to directors and supervisors — cash . . . . . . . . . . . . . . . . . . . . . . .	Amount NT$ US$ $276,458 $7,988 27,646 799 $304,104 $8,787	Shares (Thousands) 27,646 —	Percentage to Common Shares Outstanding as of December 31, 2001 (%)
	NT$ $276,458 27,646 $304,104
			0.31 —

Had the bonus to employee and compensation to directors and supervisors been charged to expense in 2001 (stock bonus calculation was based on par value), the basic earnings per share (after tax) for 2001 would have decreased from NT$0.80 to NT$0.77, giving effect of the retroactive adjustment of capitalization of retained earnings in 2002.

As of the auditors’ report date, the appropriation of 2002 earnings had not been proposed by the Board of Directors. Information on the Board of Directors’ proposed appropriation of the 2002 earnings and related stockholders’ may be accessed through the Web site of the Taiwan Stock Exchange Corporation.

g. Imputation tax system

Under the Imputation Tax System, domestic stockholders are allowed a tax credit for the income tax paid by the Corporation on earnings generated since 1998. Non-resident stockholders, including holders of the overseas depositary receipts, are only allowed a tax credit from the 10% income tax on undistributed earnings, which can be used to deduct the withholding income tax on dividends paid.

As of December 31, 2002, the balance of the Imputation Credit Account (ICA) aggregated NT$94,023 equivalent to 22.78% of the 2001 undistributed earnings. This percentage may change depending on the balance of the ICA on the dividend distribution date. In June 2002, the Corporation distributed the 2001 earnings, and the ratio of tax credits allocated to stockholders was 29.38%.

As of December 31, 2002, undistributed earnings up to 1997 amounted to $86,848, which is not subject to the application of Imputation Tax System.

F-33

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

16. INCOME TAX

Tax on pretax income at statutory rate (25%) . . . . . . . Add (deduct) tax effects of differences: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income — net. . . . . . . . . . . . . . . . . . . Investment loss resulting from investees’ capital decrease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange loss — net . . . . . . . . . . . . . . . . Provision (reversal of allowance) for inventory loss . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit from investment tax credit. . . . . . . . . . . . Deferred tax adjustment . . . . . . . . . . . . . . . . . . . . . . Tax on undistributed earnings . . . . . . . . . . . . . . . . . . Separate income tax on interest income . . . . . . . . . . . Prior periods’ adjustments . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .		December 31 2001 2002 NT$ NT$ US$ $2,121,164 $5,199,444 $150,230 492,597 698,814 20,191 (584,207) (445,507) (12,872) — (355,490) (10,271) (90,682) (24,695) (714) (60,422) 8,459 244 (41,756) 30,253 874 1,836,694 5,111,278 147,682 (823,874) (1,879,910) (54,317) (63,043) 419,824 12,130 274,949 433,405 12,523 43,147 3,728 107 (250,856) (155,225) (4,485) $1,017,017 $3,933,100 $113,640	December 31 2001 2002 NT$ NT$ US$ $2,121,164 $5,199,444 $150,230 492,597 698,814 20,191 (584,207) (445,507) (12,872) — (355,490) (10,271) (90,682) (24,695) (714) (60,422) 8,459 244 (41,756) 30,253 874 1,836,694 5,111,278 147,682 (823,874) (1,879,910) (54,317) (63,043) 419,824 12,130 274,949 433,405 12,523 43,147 3,728 107 (250,856) (155,225) (4,485) $1,017,017 $3,933,100 $113,640
	2000 NT$ $5,372,087 716,344 (424,099) — (65,414) (49,339) (136,039) 5,413,540 (1,885,403) (733,691) — 101,837 (10,145) $2,886,138	2001 NT$ $2,121,164 492,597 (584,207) — (90,682) (60,422) (41,756) 1,836,694 (823,874) (63,043) 274,949 43,147 (250,856) $1,017,017
			NT$ $5,199,444 698,814 (445,507) (355,490) (24,695) 8,459 30,253 5,111,278 (1,879,910) 419,824 433,405 3,728 (155,225) $3,933,100

F-34

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

Deferred income tax assets (liabilities) are as follows:

Current (included in other current assets) Deferred income tax assets Investment tax credit . . . . . . . . . . . . . . . . . . . . Provision for inventory loss . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Difference between tax reporting and financial reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current (included in other liabilities) Deferred income tax assets Investment tax credit . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange loss. . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Valuation allowance . . . . . . . . . . . . . . . . . . Deferred income tax liabilities Temporary difference from depreciation methods between tax reporting and financial reporting . Total deferred income tax liabilities, net. . . . . . .		December 31 2001 2002 NT$ NT$ US$ $ 172,952 $ 292,897 $ 8,463 35,463 43,922 1,269 16,661 42,741 1,235 225,076 379,560 10,967 (94,818) (171,559) (4,957) 130,258 208,001 6,010 292,224 — — 32,766 8,070 233 8,285 5,714 165 333,275 13,784 398 (174,703) — — 158,572 13,784 398 (4,294,511) (3,596,068) (103,903) (4,135,939) (3,582,284) (103,505) $(4,005,681) $(3,374,283) $(109,515)	December 31 2001 2002 NT$ NT$ US$ $ 172,952 $ 292,897 $ 8,463 35,463 43,922 1,269 16,661 42,741 1,235 225,076 379,560 10,967 (94,818) (171,559) (4,957) 130,258 208,001 6,010 292,224 — — 32,766 8,070 233 8,285 5,714 165 333,275 13,784 398 (174,703) — — 158,572 13,784 398 (4,294,511) (3,596,068) (103,903) (4,135,939) (3,582,284) (103,505) $(4,005,681) $(3,374,283) $(109,515)
	2000 NT$ $ 50,000 95,885 11,358 157,243 (6,305) 150,938 423,741 126,139 14,904 564,784 (230,319) 334,465 (4,554,127) (4,219,662) $(4,068,724)	2001 NT$ $ 172,952 35,463 16,661 225,076 (94,818) 130,258 292,224 32,766 8,285 333,275 (174,703) 158,572 (4,294,511) (4,135,939) $(4,005,681)
			NT$ $ 292,897 43,922 42,741 379,560 (171,559) 208,001 — 8,070 5,714 13,784 — 13,784 (3,596,068) (3,582,284) $(3,374,283)

According to related regulations, CAC had tax credits with amounts of NT$292,897 as of December 31, 2002 which can be deducted to income tax payable in 2003.

The tax credits are eligible to deduct the tax payable within four years after the credits are granted. The investment tax credit are limited to deducted up to 50% of the income tax payable, except for the last creditable year, in which any remainder can be used entirely.

Income tax payable as shown in the balance sheets is net of prepaid taxes.

Income tax returns through the year ended December 31, 2000 for the Corporation and 2001 for CAC have been examined by tax authorities.

F-35

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

17. EARNINGS PER SHARE

Convertible preferred shares were included in the calculation of earnings per common share because such shares are considered as equivalent common shares in 2000 and 2002.

Following is the reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share (EPS) for the years ended December 31, 2000, 2001 and 2002:

2000 Net income belonging to common stockholders . . . . . . . . . . . . . Less: Dividends to preferred stocks . . . . . . . . . . . . . . Basic EPS . . . . . . . . . . . . . . . . Net income belonging to common stockholders. . . . . Effect of potential dilutive shares: 14% cumulative and convertible preferred stocks Diluted EPS Net income belonging to common stockholders and effect of potential dilutive shares . . . . . . . . . . . . . . .	Numerator	— Amount After Tax NT$ $18,581,535 Weighted average of issued common shares 66,888 Add: Retroactive adjustments for capitalization of retained earnings — 2000 — 2001 Less: Weighted average of treasury stocks — Purchased by the Corporation 18,514,647 66,888 $18,581,535	(Shares)
	Before Tax NT$ $21,605,547 77,774 21,527,773 77,774 $21,605,547
			8,748,362,583 312,796,806 206,824,544 864,297
			9,267,119,636 47,777,000
			9,314,896,636

F-36

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

2001 Net income belonging to common stockholders . . . . . . . . . . . . . Less: Dividends to preferred stocks . . . . . . . . . . . . . . Net income belonging to common stockholders . . . . . . . . . . . . . 2002 Net income. . . . . . . . . . . . . . . . Less: Dividends to preferred stocks . . . . . . . . . . . . . . Basic EPS . . . . . . . . . . . . . . . . Net income belonging to common stockholders. . . . . Effect of potential dilutive shares: 14% cumulative and convertible preferred stocks . . . . . . . . Diluted EPS Net income belonging to common stockholders and effect of potential dilutive shares . . . . . . . . . . . . . . .	Numerator	— Amount After Tax NT$ $7,459,750 Weighted average of issued common shares 66,875 Add: retroactive adjustments for capitalization of retained earnings — 2001 Less: Weighted average of treasury stocks — Purchased by the Corporation — Held by subsidiaries $7,392,875 — Amount After Tax NT$ $16,839,080 Weighted average of issued common shares 66,874 Less: Weighted average of treasury stocks — Purchased by the Corporation — Held by subsidiaries 16,772,206 66,874 $16,839,080	(Shares)
	Before Tax NT$ $8,406,799 75,365 $8,331,434 Numerator
			9,061,168,389 206,824,544
			29,925,000 847,350
			9,237,220,583
			(Shares)
	Before Tax NT$ $20,695,814 82,190 20,613,624 82,190 $20,695,814
			9,267,993,933 150,000,000 96,810,401
			9,021,183,532 47,767,000
			9,068,950,532

F-37

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

2002 Net income. . . . . . . . . . . . . . . . Less: Dividends to preferred stocks . . . . . . . . . . . . . . Basic EPS Net income belonging to common stockholders. . . . . Effect of potential dilutive shares: 14% cumulative and convertible preferred stocks Diluted EPS Net income belonging to common stockholders and effect of potential dilutive shares . . . . . . . . . . . . . . .	Numerator	— Amount
	Before Tax US$ $597,972 2,375 595,597 2,375 $597,972	After Tax
		US$
		$486,538 1,932
		484,606 1,932
		$486,538

The number of shares is retroactive adjusted for the effect of capitalization of 2000 and 2001 retained earnings in calculating the earnings per share. Consequently, basic earnings per share before tax and after tax are decreased from NT$2.46 to NT$2.32 and NT$2.12 to NT$2.00, and diluted earnings per share before tax and after tax decreased from NT$2.46 to NT$2.32 and from NT$2.11 to NT$1.99 for the year ended December 31, 2000. Basic earnings per share before tax and after tax are decreased from NT$0.93 to NT$0.90 and NT$0.82 and NT$0.80 for the year ended December 31, 2001.

18. RELATED PARTY TRANSACTIONS

a.

Related parties

Related Parties
China Steel Express Corporation (CSE) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Chemical Corporation (CSCC) . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Global Trading Corporation (CSGT) . . . . . . . . . . . . . . . . . . . . . .
China Hi-ment Corporation (CHC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Ecotek Corporation (CEC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Structure Corporation (CSSC) . . . . . . . . . . . . . . . . . . . . . . . . . .
Yieh Loong Enterprises Corporation (YLEC) . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Machinery Corporation (CSMC). . . . . . . . . . . . . . . . . . . . . . . . .
Info-Champ Systems Corporation (ICSC) . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Security Corporation (CSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Prosperity Development Corporation (CPDC). . . . . . . . . . . . . . . . . . . .
Hi-Mag Magnetic Corporation (HMC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kuei Yi Industrial Corporation (KYIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WABO Global Trading Corporation (WGTC) . . . . . . . . . . . . . . . . . . . . . . . .
Chung Mao Trading (BVI) Corporation (CSGT-BVI) . . . . . . . . . . . . . . . . . . .
Kaohsiung Rapid Transit Corporation (KRTC) . . . . . . . . . . . . . . . . . . . . . . .
Ornasteel Enterprise Corp. (M) Sdn. Bhd. (OEC). . . . . . . . . . . . . . . . . . . . . .
United Steel Engineering and Construction Corporation (USECC) . . . . . . . . . .
Jyh Yang Management Corporation (JYCC) . . . . . . . . . . . . . . . . . . . . . . . . .
Universal Exchange Inc. (UEI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tang Eng Iron Works Corporation (TEIWC). . . . . . . . . . . . . . . . . . . . . . . . .

Relationship

Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
CSC is a director of TEIWC

F-38

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

b. Significant related party transactions:

		Year Ended December 31	Year Ended December 31	Year Ended December 31
2000	% 1 2 1 2 6 7 3 10	2001	% 4 2 2 1 9 14 2 16		2002
NT$ $1,143,162 2,140,910 1,602,363 1,752,036 $6,638,471 $5,132,907 2,150,781 $7,283,688		NT$ $3,881,438 2,288,702 1,498,285 967,103 $8,635,528 $5,399,623 479,949 $5,879,572		NT$ $ 4,818,301 1,972,908 1,885,580 1,778,198 $10,454,987 $ 5,225,821 625,513 $ 5,851,334	US$ $139,217 57,004 54,481 51,378 $302,080 $150,992 18,073 $169,065	%
						5 2 2 1
						10
						13 2
						15

Sales to and purchases from related parties are made under normal arms-length terms, except those with OEC, CSCC, and CSE due to no comparison data.

Lease equipment and office lease

The Corporation leases its lands and office space to CSSC, CHC, CSCC and CSMC. Rentals are calculated based on 4% to 10% p.a. of land value as published by the government. The rental from CSCC is collected semi-annually except for the rent on the storage tank and pipelines which is collected monthly, and others are collected by half of a year. The related information of the leasing is as follows:

	Year Ended December 31	Year Ended December 31	Year Ended December 31
2000 NT$ $ — 15,626 4,364 4,740 — 469 $25,199	2001 NT$ $ — 15,738 25,018 5,134 3,258 618 $49,766	2002
		NT$ $24,858 15,716 26,311 5,012 2,724 1,733 $76,354	US$
			$ 718 454 760 145 79 50
			$2,206

CAC leased its Cheng-Kung factory land-site from CPDC since March 1999. Rental for 2000, 2001 and 2002 amounted to $14,302, $11,501 and $11,501, respectively. Those rentals are calculated at 4% of the land value as published by government.

F-39

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

Property purchase

In September 2002, the Corporation signed a contract with HMC to buy the latter’s land and factories for NT$202,704 based on independently appraised value. The Corporation had paid the amount as of December 31, 2002.

Factor of notes receivable

The Corporation sold some of its notes receivable to JYCC without recourse for NT$3,336,759, NT$2,615,582 and NT$3,630,860 in 2000, 2001 and 2002. The related interest expense was NT$81,816, NT$57,916 and NT$51,400 in 2000, 2001 and 2002.

Other expenditures

Other expenditures paid to related parties pertained to furnace slag and clearance services, property maintenance or construction, export shipping charges, commissions for export and import services, etc.

	Year Ended December 31	Year Ended December 31	Year Ended December 31
2000 NT$ $1,006,059 — 310,811 241,151 302,389 366,447 $2,226,857	2001 NT$ $ 788,156 485,431 321,875 466,924 326,452 935,119 $3,323,957	2002
		NT$ $ 562,095 436,723 394,070 350,291 323,828 927,934 $2,994,941	US$
			$16,240 12,621 11,386 10,121 9,356 26,810
			$86,534

Other revenues

Other revenues pertained to labor services, processing of products, liquid waste processing and recycling, and other services to related parties.

	Year Ended December 31	Year Ended December 31	Year Ended December 31
2000 NT$ $1,467,613 52,319 29,610 2,051 — 243,857 $1,795,450	2001 NT$ $618,027 7,887 52,207 34,363 17,185 119,835 $849,504	2002
		NT$ $588,434 99,987 49,832 38,818 44,801 59,696 $881,568	US$
			$17,002 2,889 1,440 1,122 1,294 1,724
			$25,471

F-40

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

c. Balance at period-end

		December 31	December 31	December 31
2000	% 3 5 — 7 15 8 — 8	2001	% 2 11 6 11 26 8 — 8		2002
NT$ 54,878 98,597 — 128,920 $282,395 $229,262 3,299 $232,561		NT$ 44,844 212,609 127,044 130,348 $514,845 $184,110 5,015 $189,125		NT$ 67,588 36,444 52,462 77,697 $234,191 $321,699 12,820 $334,519	US$ 1,953 1,053 1,516 2,245 $6,767 $9,295 370 $9,665	%
						3 2 3 4
						12
						13 1
						14

19. PLEDGED ASSETS

a. Time deposits of NT$8,548,881, NT$8,731,396 and NT$6,931,396 (included in pledged time deposits and other assets) as of December 31, 2000, 2001 and 2002, respectively, were pledged mainly as collateral for bank overdraft, etc.
b. The Corporation provided 20,000,000 shares of CAC’s stock as collateral for obtaining a credit line from China Development Industrial Bank (director of the Corporation) as of December 31, 2000, 2001 and 2002.
c. The CSC Group provided machinery and equipment with book values of NT$8,333,689, NT$10,355,131 and NT$6,033,570 as of December 31, 2000, 2001 and 2002, respectively, as collaterals for a long-term credit line.

20. COMMITMENTS AND CONTINGENCIES AS OF DECEMBER 31, 2002

a. The Corporation had several construction contracts, with guarantees of $531,037 granted by the International Commercial Bank of China.
b. Unused letters of credit amounted to $5,097,000.
c. The Corporation’s employees filed lawsuits against the Corporation that their seniority compensation was not calculated in accordance with the Labor Law when the Corporation privatized in April 1995. The claimed amount aggregates about $125,000 plus interest and were recorded as accrued liability in 2002. The Corporation failed the lawsuit in the judgment by the High Court of Taiwan. The Corporation filed an appeal for the judgment on the grounds that the Corporation calculated the compensation in accordance with related regulations which has been approved by government. The Corporation’s management believes that the final judgment will be favorable to the Corporation.

F-41

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

d. The Corporation sold its note receivables of $421,603 to Chung Hsing Bills Finance Corporation and also fully guaranteed these receivables. To reduce its risk on this guarantee, the Corporation acquired credit risk insurance from an insurance company and entered into an agreement with Chung Hsing Bills Finance Corporation to share any loss from credit risk.
e. The Corporation has raw material purchase contracts with suppliers from Australia, India, Brazil, Canada, Indonesia, Mainland China, Japan, Philippine, Russia, Vietnam and domestic companies with contract periods from one to ten years. Contracted annual purchases of 8,000,000 metric tons of coal, 15,300,000 metric tons of iron ore, and 2,800,000 metric tons of stones are at prices negotiable every year.
f. CAC, the subsidiary, entered into the contracts of purchases and construction for properties aggregating about $600,625 of which $353,335 is unpaid.

21. FINANCIAL INSTRUMENTS

There were no outstanding forward exchange contracts as of December 31, 2002.

As of December 31, 2000 and 2001, the outstanding balances of forward exchange contracts for the CSC Group were as follows:

a.
Contract amount (or nominal principal) and credit risk

2000	2001
Contract Amount (Nominal Principal) NT$ $1,385,749	Contract Amount (Nominal Principal) NT$ $967,937	Credit Risk
		NT$
		$14,646

b. The derivative financial instruments held by the CSC Group are for non-trading purposes, mainly for hedging the exchange rate or price risks from foreign-currency rights or obligations. Thus, the CSC Group chooses derivative financial instruments that reduce the risks associated with the hedged items and evaluates the effectiveness of hedging instruments periodically.
c. Forward exchange contracts for the CSC Group resulted in accounts receivable of $26,066 and $11,141 as of December 31, 2000 and 2001, and net exchange gains of $39,835 and $58,668 in 2000 and 2001, respectively and net exchange loss of NT$4,088 in 2002.

F-42

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

d. As of December 31, 2000, 2001 and 2002, the estimated fair values of consolidated financial instruments were as follows:

20	00	20	01	20	20	02
Carrying Value	Fair Value	Carrying Value	Fair Value	Carrying Value		Fair	Value
NT$	NT$	NT$	NT$	NT$	US$	NT$	US$
$16,165,385 7,506,680 344,596 1,845,102 8,548,881 29,485,856 4,917,663 1,996,213 2,766,569 5,744,604 41,312,000 10,107,353 $ 26,066 —	$ 16,165,385 121,424,299 344,596 1,845,102 8,548,881 30,992,748 4,917,663 1,996,213 2,766,569 5,744,604 42,726,780 10,107,353 $ 13,926 —	$ 4,807,101 13,580,585 175,887 2,009,016 8,731,396 29,866,484 7,698,312 4,460,839 2,423,510 4,480,004 42,305,000 6,170,778 $ 6,401 4,740	$ 4,807,101 16,673,307 175,887 2,009,016 8,731,396 30,648,723 7,698,312 4,460,839 2,423,510 4,480,004 45,669,103 6,170,778 $ 11,603 3,043	$ 3,203,159 21,400,375 389,297 1,904,178 6,931,396 30,040,350 2,069,235 998,347 2,418,225 5,106,533 35,960,000 4,759,152 $ — —	$ 92,550 618,329 11,248 55,018 200,271 867,967 59,787 28,846 69,871 147,545 1,039,007 137,507 $ — —	$ 3,203,159 23,146,215 389,297 1,904,178 6,931,396 33,771,594 2,069,235 998,347 2,418,225 5,106,533 38,811,575 4,759,152 $ — —	$ 92,550 668,772 11,248 55,018 200,271 975,776 59,787 28,846 69,871 147,545 1,121,398 137,507 $ — —
$ 26,066	$ 13,926	$ 11,141	$ 14,646	$ —	$ —	$ —	$ —

The assumptions and methods used to estimate the fair values of financial instruments are as follows:

(1) The carrying values of cash and cash equivalents, notes receivable, accounts receivable, pledged time deposits, short-term bank loans and overdraft, commercial paper payable and accounts payable approximate fair value because of the short maturity of these instruments.
(2) The fair values of marketable securities and long-term investments are determined at market values or net equity values.
(3) The fair values of long-term liabilities are determined on the estimated present values of future cash flows; discount rates are the interest rates of similar long-term debts available for the Corporation.
(4) The fair values of forward exchange contracts are calculated using the swap rates published by Moneyline (Hong Kong) Ltd., Taiwan branch, and forward rates of forward contracts.

F-43

CHINA STEEL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 2001 AND 2002

(In Thousands of Dollars, Unless Otherwise Stated)

22. SEGMENT INFORMATION

The CSC Group operates entirely in one industry segment-metal products and no customer is more than 10% of sales in 2000, 2001 and 2002. In compliance with SFAS No. 20, the disclosures for export information are as follows:

Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % to total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2000 NT$ $27,799,481 1,524,709 $29,324,190 27%	2001 NT$ $23,662,662 2,010,790 $25,673,452 28%	2002	2002
			NT$ $28,564,987 899,353 $29,464,340 28%	US$
				$825,339 25,985
				$851,324

F-44

English Translation of a Report Originally Issued in Chinese

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

China Steel Corporation

We have audited the accompanying balance sheets of China Steel Corporation (the Corporation), a Corporation incorporated under the laws of the Republic of China as of June 30, 2002 and 2003, and the related statements of income, changes in stockholders’ equity and cash flows for the six months then ended, all prepared in accordance with accounting principles generally accepted in the Republic of China and expressed in New Taiwan Dollars. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in the Republic of China. 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 financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of the Corporation as of June 30, 2002 and 2003, and the results of its operations and its cash flows for the six months then ended in conformity with generally accepted accounting principles in the Republic of China.

Also, in our opinion, the translated U.S. dollars in the accompanying financial statements have been made on the basis as set forth in Note 2.

Deloitte & Touche (T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003) Kaohsiung, Taiwan The Republic of China

July 25, 2003

(Except for the translation to U.S. dollars (Note 2) which is dated as of August 23, 2003)

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with 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.

F-45

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

BALANCE SHEETS

(In Thousands of Dollars, Except Par Value)

	June 30	June 30
2002 NT$ $ 2,544,344 13,946,106 235,223 1,467,568 1,445,436 15,631,915 8,200,000 627,185 44,097,777 29,280,922 3,751,109 120,000 98,794 33,250,825 7,065,078 4,316,764 35,683,172 207,512,531 1,593,668 2,798,064 258,969,277 18,404,182 277,373,459 172,747,077 104,626,382 4,332,371 108,958,753 3,929,833 46,447 31,396 1,059,516 5,067,192 $191,374,547	2003
	NT$ $ 1,207,467 30,585,976 504,189 2,079,795 383,168 16,363,556 6,600,000 420,475 58,144,626 33,818,478 4,883,455 — 120,831 38,822,764 7,146,632 4,316,764 36,112,632 211,814,568 1,546,516 2,909,732 263,846,844 18,319,960 282,166,804 181,567,628 100,599,176 4,300,772 104,899,948 3,824,816 68,832 331,694 688,582 4,913,924 $206,781,262	US$
		$ 34,888 883,732 14,568 60,092 11,071 472,798 190,696 12,149
		1,679,994
		977,130 141,100 — 3,491
		1,121,721
		206,490 124,726 1,043,416 6,120,040 44,684 84,072
		7,623,428 529,326
		8,152,754 5,246,103
		2,906,651 124,264
		3,030,915
		110,512 1,989 9,584 19,895
		141,980
		$5,974,610

F-46

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

BALANCE SHEETS — (Continued)

(In Thousands of Dollars, Except Par Value)

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Short-term bank loans and overdraft (Notes 8 and 19) . . . . . . . . . . . . Commercial paper payable (Note 9). . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends payable (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds payable — current portion (Note 10) . . . . . . . . . . . . . . . . . . . Long-term debts — current portion (Notes 11 and 19) . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . LONG-TERM LIABILITIES Bonds (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debts (Notes 11 and 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . RESERVE FOR LAND VALUE INCREMENT TAX (Note 6) . . . . . . . . OTHER LIABILITIES Deferred income tax liability — noncurrent portion (Note 15). . . . . . . Deferred credit — intercompany benefit (Note 13). . . . . . . . . . . . . . . Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STOCKHOLDERS’ EQUITY (Notes 2 and 14) Capital stock — NT$10 par values Authorized — 10,600,000,000 shares as of June 30, 2002 and 2003 Issued — Common stock 9,061,168,389 and 9,267,998,933 shares as of June 30, 2002 and 2003, respectively . . . . . . . — Preferred stock, respectively 47,768,000 and 47,762,000 shares as of June 30, 2002 and 2003. . . . . . . . . . . . Total capital stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on investees’ long-term investments . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . Investees’ unrecognized net loss on pension cost . . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . .		June 30 2003 NT$ US$ $ 213,181 $ 6,160 999,813 28,888 3,110,902 89,884 4,217,704 121,864 4,932,795 142,525 13,243,047 382,636 10,250,000 296,157 801,660 23,163 1,714,368 49,534 39,483,470 1,140,811 17,250,000 498,411 — — 17,250,000 498,411 3,370,813 97,394 3,464,573 100,103 1,405,040 40,596 4,869,613 140,699 64,973,896 1,877,315 92,679,989 2,677,838 477,620 13,800 93,157,609 2,691,638 413,939 11,960 50,003,304 1,444,766 (604,686) (17,471) 185,865 5,371 (15,687) (454) (1,332,978) (38,515) 141,807,366 4,097,295 $206,781,262 $5,974,610
	2002 NT$ $ 1,353,403 1,767,376 2,910,654 911,270 3,584,124 7,352,931 9,200,000 2,891,143 2,395,439 32,366,340 27,500,000 785,800 28,285,800 3,370,813 3,924,262 1,405,040 5,329,302 69,352,255 90,611,684 477,680 91,089,364 376,867 34,277,823 (536,190) 91,466 (15,508) (3,261,530) 122,022,292 $191,374,547
		NT$ $ 213,181 999,813 3,110,902 4,217,704 4,932,795 13,243,047 10,250,000 801,660 1,714,368 39,483,470 17,250,000 — 17,250,000 3,370,813 3,464,573 1,405,040 4,869,613 64,973,896 92,679,989 477,620 93,157,609 413,939 50,003,304 (604,686) 185,865 (15,687) (1,332,978) 141,807,366 $206,781,262

The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated July 25, 2003)

F-47

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

STATEMENTS OF INCOME

(In Thousands of Dollars, Except Earnings Per Share)

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $45,280,781 977,444 46,258,225 38,205,046 497,531 38,702,577 7,555,648 873,059 901,364 396,075 2,170,498 5,385,150 138,664 1,498,661 — 242,993 1,880,318 1,241,352 452,652 412,284 2,106,288 5,159,180 1,076,310 $ 4,082,870	2003
	NT$ $61,779,323 762,083 62,541,406 39,872,910 438,456 40,311,366 22,230,040 1,003,006 1,131,313 457,876 2,592,195 19,637,845 62,606 3,160,160 142,479 292,638 3,657,883 733,287 — 289,718 1,023,005 22,272,723 4,061,871 $18,210,852	US$
		$1,785,014 22,019
		1,807,033
		1,152,063 12,669
		1,164,732
		642,301
		28,980 32,687 13,230
		74,897
		567,404
		1,809 91,308 4,117 8,455
		105,689
		21,187 — 8,372
		29,559
		643,534 117,361
		$ 526,173

(Continued)

F-48

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

STATEMENTS OF INCOME — (Continued) (In Thousands of Dollars Except Earnings Per Share)

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $ 0.58 $ 0.46 $ 0.58 $ 0.46 $ 0.57 $ 0.45 $ 0.57 $ 0.45 $4,128,128 $ 0.57 $ 0.45 $ 0.57 $ 0.45	2003
	NT$ $ 2.43 $ 1.98 $ 2.42 $ 1.98 $18,216,780 $ 2.40 $ 1.96 $ 2.39 $ 1.96	US$
		$ 0.07
		$ 0.06
		$ 0.07
		$ 0.06
		$526,344
		$ 0.07
		$ 0.06
		$ 0.07
		$ 0.06

The accompanying notes are an integral part of the financial statements. (With Deloitte & Touche report dated July 25, 2003)

F-49

				Total	Stockholders’	Equity	NT$	$126,648,435	(1,356,485)	—		—	—	(27,646)	(57,322)	(7,128,934)		—	4,082,870		33,647		(64,875)	(107,415)	17	$122,022,292	$135,005,396	—		—	(44,589)	(66,867)	(12,975,148)	18,210,852	(49,195)	(36,526)	9	1,807,066	12,256	(55,888)	$141,807,366
				Treasury	Stock	(Note 14)	NT$	$(1,905,059)	(1,356,485)	—		—	—	—	—	—		—	—		—		—	—	14	$(3,261,530)	$(3,245,077)	—		—	—	—	—	—	—	—	—	1,904,543	7,603	(47)	$(1,332,978)
			Investees’	Unrecognized	Net Loss on	Pension Cost	NT$	$(15,508)	—	—		—	—	—	—	—		—	—		—		—	—	—	$(15,508)	$(15,696)	—		—	—	—	—	—	—	—	9	—	—	—	$(15,687)
			Cumulative	Translation	Adjustments	(Note 2)	NT$	$198,881	—	—		—	—	—	—	—		—	—		—		—	(107,415)	—	$91,466	$222,391	—		—	—	—	—	—	—	(36,526)	—	—	—	—	$185,865
(In Thousands of Dollars)	Unrealized	Loss on	Capital Stock Retained Earnings Investees’	Long-term Issued	Capital Investments Legal Special Unappro-	Surplus (Note 2) reserve reserve priated Total Common Preferred	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	$90,611,684 $477,680 $416,570 $19,335,352 $9,911,702 $ 8,186,970 $37,434,024 $(569,837)	— — — — — — — —	— — — — (2,200,000) 2,200,000 — —		— — — 745,975 — (745,975) — —	— — — — 290,463 (290,463) — —	— — — — — (27,646) (27,646) —	— — — — — (57,322) (57,322) —	— — — — — (7,128,934) (7,128,934) —		— — (20,513) 2,051 — 18,462 20,513 —	— — — — — 4,082,870 4,082,870 —		— — — — — — — 33,647		— — (19,193) — — (45,682) (45,682) —	— — — — — — — —	— — 3 — — — — —	$90,611,684 $477,680 $376,867 $20,083,378 $8,002,165 $6,192,280 $34,277,823 $(536,190)	$92,679,939 $477,670 $481,597 $20,083,378 $8,002,165 $16,874,520 $44,960,063 $(555,491)	50 (50) — — — — — —		— — — 1,683,908 — (1,683,908) — —	— — — — — (44,589) (44,589) —	— — — — — (66,867) (66,867) —	— — — — — (12,975,148) (12,975,148) —	— — — — — 18,210,852 18,210,852 —	— — — — — — — (49,195)	— — — — — — — —	— — — — — — — —	— — (82,614) — — (14,863) (14,863) —	— — 4,653 — — — — —	— — 10,303 — — (66,144) (66,144) —	$92,679,989 $477,620 $413,939 $21,767,286 $8,002,165 $20,233,853 $50,003,304 $(604,686)
								BALANCE, JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . .	Shares held by subsidiaries accounted for as treasury stocks .	Transfer of special reserve to unappropriated retained earnings	Appropriation of earnings for 2001	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Special reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Compensation to directors and supervisors . . . . . . . . . . .	Cash dividends to preferred stockholders — 12% . . . . . .	Cash dividends to common stockholders — 8%. . . . . . . .	Transfer of capital surplus from gain on disposal of properties	to unappropriated earnings. . . . . . . . . . . . . . . . . . . . . .	Net income for the six months ended June 30, 2002 . . . . . .	Reversal of unrealized loss on investees’ long-term	investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Adjustments of equity in investees due to change in percentage	of ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Translation adjustments of long-term investments . . . . . . . .	Sales of the Corporation’s shares held by subsidiaries . . . . .	BALANCE, JUNE 30, 2002 . . . . . . . . . . . . . . . . . . . . . . .	BALANCE, JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . .	Conversion of preferred stock to common stock . . . . . . . . .	Appropriation of earnings for 2002	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Compensation to directors and supervisors . . . . . . . . . . .	Cash dividends to preferred stockholders — 14% . . . . . .	Cash dividends to common stockholders — 14% . . . . . . .	Net income for the six months ended June 30, 2003 . . . . . .	Unrealized loss on investees’ long-term investments . . . . . .	Translation adjustments of long-term investments . . . . . . . .	Investees’ unrecognized net loss on pension cost . . . . . . . . .	Transfer of treasury stock to employees . . . . . . . . . . . . . . .	Sales of the Corporation’s shares held by subsidiaries . . . . .	Adjustment of equity in investees . . . . . . . . . . . . . . . . . . .	BALANCE, JUNE 30, 2003 . . . . . . . . . . . . . . . . . . . . . . .

F-50

							Total	Stockholders’	Equity	US$	$3,900,763	—		—	(1,288)	(1,932)	(374,896)	526,173	(1,421)	(1,055)	—	52,212	354	(1,615)	$4,097,295
							Treasury	Stock	(Note 14)	US$	$(93,761)	—		—	—	—	—	—	—	—	—	55,028	220	(2)	$(38,515)
						Investees’	Unrecognized	Net Loss on	Pension Cost	US$	$(454)	—		—	—	—	—	—	—	—	—	—	—	—	$(454)
English Translation of Financial Statements Originally Issued in Chinese	CHINASTEELCORPORATION	STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)	(In Thousands of Dollars)	Unrealized	Loss on	Capital Stock Retained Earnings Investees’ Cumulative	Long-term Translation Issued	Capital Investments Adjustments Legal Special Unappro-	Surplus (Note 2) (Note 2) reserve reserve priated Total Common Preferred	US$ US$ US$ US$ US$ US$ US$ US$ US$	BALANCE, JANUARY 1, 2003 . . . . . . . . . . . . . . . . . . . . $2,677,837 $13,801 $13,915 $580,277 $231,210 $487,562 $1,299,049 $(16,050) $6,426	Conversion of preferred stock to common stock . . . . . . . . . 1 (1) — — — — — — —	Appropriation of earnings for 2002	Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 48,654 — (48,654) — — —	Compensation to directors and supervisors . . . . . . . . . . . — — — — — (1,288) (1,288) — —	Cash dividends to preferred stockholders — 14% . . . . . . — — — — — (1,932) (1,932) — —	Cash dividends to common stockholders — 14% . . . . . . . — — — — — (374,896) (374,896) — —	Net income for the six months ended June 30, 2003 . . . . . . — — — — — 526,173 526,173 — —	Unrealized loss on investees’ long-term investments . . . . . . — — — — — — — (1,421) —	Translation adjustments of long-term investments . . . . . . . . — — — — — — — — (1,055)	Investees’ unrecognized net loss on pension cost . . . . . . . . . — — — — — — — — —	Transfer of treasury stock to employees . . . . . . . . . . . . . . . — — (2,387) — — (429) (429) — —	Sales of the Corporation’s shares held by subsidiaries . . . . . — — 134 — — — — — —	Adjustment of equity in investees . . . . . . . . . . . . . . . . . . . — — 298 — — (1,911) (1,911) — —	BALANCE, JUNE 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . $2,677,838 $13,800 $11,960 $628,931 $231,210 $584,625 $1,444,766 $(17,471) $5,371	The accompanying notes are an integral part of the financial statements.	(With Deloitte & Touche report dated July 25, 2003)

F-51

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

CASH FLOWS FROM OPERATING ACTIVITIES Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for inventory loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposal of short-term investments. . . . . . . . . . . . . . . . . . . . Gain on disposal of long-term investment. . . . . . . . . . . . . . . . . . . . . Investment income under equity method. . . . . . . . . . . . . . . . . . . . . . Loss on disposal of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends on long-term investments under equity method . . . . . . Investment loss under cost method. . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of discount and exchange loss on forward exchange . . . . Changes in operating assets and liabilities Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial assets-current . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Increase in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of long-term investment . . . . . . . . . . . . . . . . . . . Acquisitions of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . .	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $ 4,082,870 $18,210,852 $526,173 5,857,816 5,689,976 164,403 246,258 168,582 4,871 (643,807) (86,919) (2,511) 76,057 — — (129,140) (138,559) (4,004) — (3,920) (113) (1,498,661) (3,160,160) (91,308) 21,187 12,665 366 — 1,638,771 47,350 597,214 — — 5,073 — — (90,429) (125,747) (3,633) 348,376 (437,718) (12,647) (1,234,680) (269,129) (7,776) 2,663,649 (895,080) (25,862) 2,016,326 (195,702) (5,654) 796,164 (103,931) (3,003) 911,270 487,182 14,077 (208,185) 137,609 3,976 75,977 (175,695) (5,078) 13,893,335 20,753,077 599,627 (1,610,442) (10,696,081) (309,046) (130,190) (1,904,154) (55,017) — 9,641 279 (2,542,341) (2,307,476) (66,671) 22,257 11,395 329 $(4,260,716) $(14,886,675) $(430,126)	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $ 4,082,870 $18,210,852 $526,173 5,857,816 5,689,976 164,403 246,258 168,582 4,871 (643,807) (86,919) (2,511) 76,057 — — (129,140) (138,559) (4,004) — (3,920) (113) (1,498,661) (3,160,160) (91,308) 21,187 12,665 366 — 1,638,771 47,350 597,214 — — 5,073 — — (90,429) (125,747) (3,633) 348,376 (437,718) (12,647) (1,234,680) (269,129) (7,776) 2,663,649 (895,080) (25,862) 2,016,326 (195,702) (5,654) 796,164 (103,931) (3,003) 911,270 487,182 14,077 (208,185) 137,609 3,976 75,977 (175,695) (5,078) 13,893,335 20,753,077 599,627 (1,610,442) (10,696,081) (309,046) (130,190) (1,904,154) (55,017) — 9,641 279 (2,542,341) (2,307,476) (66,671) 22,257 11,395 329 $(4,260,716) $(14,886,675) $(430,126)
	2002 NT$ $ 4,082,870 5,857,816 246,258 (643,807) 76,057 (129,140) — (1,498,661) 21,187 — 597,214 5,073 (90,429) 348,376 (1,234,680) 2,663,649 2,016,326 796,164 911,270 (208,185) 75,977 13,893,335 (1,610,442) (130,190) — (2,542,341) 22,257 $(4,260,716)
		NT$ $18,210,852 5,689,976 168,582 (86,919) — (138,559) (3,920) (3,160,160) 12,665 1,638,771 — — (125,747) (437,718) (269,129) (895,080) (195,702) (103,931) 487,182 137,609 (175,695) 20,753,077 (10,696,081) (1,904,154) 9,641 (2,307,476) 11,395 $(14,886,675)

(Continued)

F-52

English Translation of Financial Statements Originally Issued in Chinese

CHINA STEEL CORPORATION

STATEMENTS OF CASH FLOWS — (Continued) (In Thousands of Dollars)

CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term bank loans and overdraft . . . . . . . . . . . . . . . . Decrease in long-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in commercial paper payable . . . . . . . . . . . . . . . . Decrease in payable on purchased properties. . . . . . . . . . . . . . . . . . . Transfer of treasury stocks to employees . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . SUPPLEMENTAL INFORMATION Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid, excluding capitalized amounts . . . . . . . . . . . . . . . . . . . Income tax paid Withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on interest from commercial paper . . . . . . . . . . . . . . . . . . . . Payment for prior years’ income taxes . . . . . . . . . . . . . . . . . . . . . Acquisition of properties Purchase of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in equipment payable . . . . . . . . . . . . . . . . . . . . . . . . . . NONCASH FINANCING ACTIVITIES Long-term liabilities due within one year . . . . . . . . . . . . . . . . . . . . . The Corporation’s shares acquired and held by subsidiaries accounted for as treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $(4,594,510) $ (596,507) $ (17,235) (2,068,619) (2,233,385) (64,530) (3,350,000) (6,700,000) (193,586) (1,075,876) 1,466 42 (327,328) — — — 1,807,066 52,212 25,883 (6,541) (189) (11,390,450) (7,727,901) (223,286) (1,757,831) (1,861,499) (53,785) 4,302,175 3,068,966 88,673 $2,544,344 $1,207,467 $ 34,888 $1,618,205 $1,063,725 $ 30,735 (40,117) (103,438) (2,989) $1,578,088 $ 960,287 $ 27,746 $ 12,702 $ 6,111 $ 177 596 437 13 — 3,655,060 105,607 $ 13,298 $3,661,608 $105,797 $2,542,341 $3,067,848 $88,641 — (760,372) (21,970) $2,542,341 $2,307,476 $ 66,671 $3,950,874 $7,800,000 $225,368 $1,356,471 $1,332,462 $ 38,499	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $(4,594,510) $ (596,507) $ (17,235) (2,068,619) (2,233,385) (64,530) (3,350,000) (6,700,000) (193,586) (1,075,876) 1,466 42 (327,328) — — — 1,807,066 52,212 25,883 (6,541) (189) (11,390,450) (7,727,901) (223,286) (1,757,831) (1,861,499) (53,785) 4,302,175 3,068,966 88,673 $2,544,344 $1,207,467 $ 34,888 $1,618,205 $1,063,725 $ 30,735 (40,117) (103,438) (2,989) $1,578,088 $ 960,287 $ 27,746 $ 12,702 $ 6,111 $ 177 596 437 13 — 3,655,060 105,607 $ 13,298 $3,661,608 $105,797 $2,542,341 $3,067,848 $88,641 — (760,372) (21,970) $2,542,341 $2,307,476 $ 66,671 $3,950,874 $7,800,000 $225,368 $1,356,471 $1,332,462 $ 38,499
	2002 NT$ $(4,594,510) (2,068,619) (3,350,000) (1,075,876) (327,328) — 25,883 (11,390,450) (1,757,831) 4,302,175 $2,544,344 $1,618,205 (40,117) $1,578,088 $ 12,702 596 — $ 13,298 $2,542,341 — $2,542,341 $3,950,874 $1,356,471
		NT$ $ (596,507) (2,233,385) (6,700,000) 1,466 — 1,807,066 (6,541) (7,727,901) (1,861,499) 3,068,966 $1,207,467 $1,063,725 (103,438) $ 960,287 $ 6,111 437 3,655,060 $3,661,608 $3,067,848 (760,372) $2,307,476 $7,800,000 $1,332,462

The accompanying notes are an integral part of the financial statements. (Concluded) (With Deloitte & Touche report dated July 25, 2003)

F-53

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

1. HISTORY AND ORGANIZATION

China Steel Corporation (the Corporation), a Corporation incorporated under the laws of the Republic of China (ROC), was incorporated in December 1971. It is a major manufacturer and seller of steel products.

The Corporation’s stock is traded on the Taiwan Stock Exchange under the symbol ‘‘2002’’. As of June 30, 2003, the Ministry of Economic Affairs, Republic of China (MOEA-ROC) owned 40.1% of the Corporation’s outstanding common stock.

As of June 30, 2002 and 2003, the Corporation had approximately 8,700 and 8,600 employees, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the Corporation are prepared in conformity with generally accepted accounting principles in the ROC (ROC GAAP). Unless otherwise stated, amounts presented are in thousands of NT dollars (NT$) and US dollars (US$). The significant accounting policies are summarized below:

Use of Estimates

The preparation of financial statements in conformity with ROC GAAP requires management to make estimates and judgments that affect the recorded amounts of assets, liabilities, revenues and expense of the Corporation. The Corporation continually evaluates these estimates, including those related to doubtful accounts, inventories valuation, useful lives of properties, loss from lawsuits, pension costs and the fair value of financial instruments. The Corporation bases its estimates on historical experience and assumptions, which it believes to be reasonable under the circumstance. Actual results may differ from these estimates under different assumptions and conditions.

Assets and Liabilities Classified as Current and Non-current

Cash Equivalents

Cash equivalents represent commercial papers within three months of maturity.

Short-term Investments

Short-term investments consist of bond funds and stocks listed on the Taiwan Stock Exchange without long-term holding intent and are stated at the lower of weighted average cost or market value. Loss on declined market value is charged to income when it occurs. The allowance for investment loss is created to account for the loss resulting from the excess of total costs over the market value. While the market price is recovery, the allowance account will be reversed to the extent of remaining

F-54

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

balance. The cost of sale of investment is calculated under the weighted average method. Market value represents net assets value at balance sheet date for bond funds, and average price in the latest month of the period for listed stock.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is provided on the evaluation of the collectibility of individual receivables.

Inventories

Long-term Investments

Long-term stock investments of which the Corporation owns at least 20% of the outstanding voting shares or where the Corporation has significant influence on the investees are accounted for by the equity method. When the equity method is first applied or when a stock is acquired, the difference between the carrying value of an investment and the proportionate equity in the investee is amortized over five years. If the financial statements of investee cannot be obtained in time, the Corporation will recognize investment income or loss on related investments in the semi-annual financial statements; otherwise, investment income or loss is recognized in the same period. Unrealized income or loss from transactions with investees and from transactions between investees is eliminated. Cash dividends received from investees are recorded as a deduction in the investment carrying value. Translation adjustments, unrealized loss on investees’ long-term investments and unrecognized net loss on pension cost are recognized proportionately by the Corporation’s shareholdings. When the investee issues additional shares but the Corporation does not acquire shares at a ratio equal to its initial equity, the Corporation’s ownership percentage is changed. As a result, capital surplus is adjusted for the difference between the carrying values of the investments and the Corporation’s equity in the investees’ net assets. If the carrying value is less than equity in net assets, the difference is credited to capital surplus. If the carrying value is more than equity in net assets, the difference is debited to capital surplus or unappropriated earnings while capital surplus is unavailable. If the market prices of investees decline significantly and not temporarily, the investment loss should be recognized as realized loss in the same year of the decline. Such investment will be reevaluated by the equity method if investees’ market value becomes higher than book value per share. The difference between the new cost of the investment and proportionate equity in the investee is amortized over five years.

F-55

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Other investments are accounted for by cost method. If certain evidence indicates that the market value of investments has significantly declined, and such decline is not temporary, the decline should be recognized as a realized investment loss. The previous carrying value less the amount of writedown becomes the new cost basis for such investments. Cash dividends received from investee are recorded as a deduction in the investment carrying value for the initial year; otherwise are recorded as investment income. Upon sale of investment, the cost of investment sold is calculated under the weighted average method.

Properties and Leased Assets

Properties and leased assets (under other assets) are stated at cost or cost plus appreciation, less accumulated depreciation. Interest expense arising from the purchase or construction of properties is capitalized as cost. Major additions, renewals and betterments are capitalized while maintenance and repairs are expensed currently.

Depreciation of properties is provided by the straight-line method over service lives estimated as follows: land improvements, 10 to 40 years; buildings and improvements, 5 to 60 years; machinery and equipment, 3 to 25 years; transportation equipment, 3 to 25 years; miscellaneous equipment, 3 to 10 years. Depreciation on appreciation is provided by the straight-line method over the remaining service lives of the revalued assets. When a property reaches its original service life but is still in use, its residual value is written off over its reestimated service life.

Depreciation of machinery and equipment leased to the Corporation’s investee (under other assets-leased assets) is calculated by the working hour method.

Upon sale or disposal of properties, the related cost, appreciation and accumulated depreciation are removed from the accounts. Gains or losses are credited or charged to current income. Before 2000, any such gains, net of applicable income tax, are transferred to capital surplus at year-end, and the accumulated amounts were retransferred to retained earnings under the resolution of the Corporation’s 2002 annual stockholders’ meeting.

Unamortized Repair Expense

Unamortized repair expense refers to the major repair of blast furnaces and is amortized by the straight-line method over five years.

Treasury Stock

The Corporation’s outstanding shares acquired by itself are recorded as treasury stock which is stated at cost and is presented as a deduction of stockholder’s equity.

F-56

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Revenue Recognition

Sales are measured by fair value which is a price (net of trade discounts and sales discounts) agreed by the Corporation and customers.

Pension

Pension costs are recognized on the basis of actuarial calculations and that amount is contributed to pension funds (note 12). Unamortized net transition assets and actuarial gains or losses are amortized over 11 years and the average remaining service life of existing employees, respectively.

Income Tax

The tax credits from expenditures for purchase of equipment, research and development, and employees’ training costs are recognized when those credits are eligible by relevant regulations.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Foreign-currency Transactions

F-57

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Derivative Financial Instruments

The related receivable and payable balances for forward contracts are netted against each other and the resulting balance is presented as either current asset or liability.

U.S. Dollar Amount

The Corporation prepares its financial statements in NT dollars. Translations into U.S. dollars for 2003 financial statements are included solely for the convenience of the reader, and are based on the U.S. Federal Reserve Bank of New York noon buying rate of NT$34.61 to US$1.00 in effect as at June 30, 2003. The convenience translations should not be construed as representations that the NT dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.

3. SHORT-TERM INVESTMENTS

	June 30	June 30
2002 NT$ $12,978,650 967,456 $13,946,106	2003
	NT$ $29,618,520 967,456 $30,585,976	US$
		$855,779 27,953
		$883,732

4. INVENTORIES

	June 30	June 30
2002 NT$ $ 3,780,884 4,642,552 2,848,519 3,291,333 74,756 1,176,821 28,960 15,843,825 211,910 $15,631,915	2003
	NT$ $ 3,911,104 4,247,398 3,078,522 3,498,061 75,205 1,687,849 35,106 16,533,245 169,689 $16,363,556	US$
		$113,005 122,722 88,949 101,071 2,173 48,768 1,013
		477,701 4,903
		$472,798

F-58

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

5. LONG-TERM INVESTMENTS

	June 30
2002 NT$ % of Ownership $ 5,636,794 98 5,043,317 100 4,072,165 100 4,422,142 100 3,128,565 31 1,638,436 100 1,037,424 35 547,952 30 411,854 24 913,382 100 717,195 31 810,233 100 272,498 99 496,318 100 472,540 20 453,389 18 367,629 36 195,560 100 — — — — — — — 50 30,637,393 1,356,471 29,280,922 1,200,000 2 1,000,000 4 757,919 2 500,000 5 182,200 3 60,990 17 50,000 6 — — — — — 9 3,751,109 120,000 98,794 $33,250,825		2003
NT$ $ 5,636,794 5,043,317 4,072,165 4,422,142 3,128,565 1,638,436 1,037,424 547,952 411,854 913,382 717,195 810,233 272,498 496,318 472,540 453,389 367,629 195,560 — — — — 30,637,393 1,356,471 29,280,922 1,200,000 1,000,000 757,919 500,000 182,200 60,990 50,000 — — — 3,751,109 120,000 98,794 $33,250,825	NT$ $ 6,219,547 5,641,974 4,823,566 4,772,830 3,127,805 2,347,760 1,118,717 919,499 886,014 875,221 812,497 733,556 612,602 482,380 472,971 464,006 360,302 214,940 162,988 98,664 3,101 — 35,150,940 1,332,462 33,818,478 1,200,000 1,000,000 708,960 500,000 249,349 55,269 50,000 120,000 999,877 — 4,883,455 — 120,831 $38,822,764	US$ $ 179,704 163,016 139,369 137,903 90,373 67,835 32,324 26,567 25,600 25,288 23,476 21,195 17,700 13,938 13,666 13,407 10,410 6,210 4,709 2,851 89 — 1,015,630 38,500 977,130 34,672 28,893 20,484 14,447 7,205 1,597 1,445 3,467 28,890 — 141,100 — 3,491 $1,121,721	% of Ownership
			98 100 100 100 31 100 35 35 24 100 31 100 99 99 20 18 36 100 27 21 38 50
			2 4 2 5 3 15 6 5 100 9

F-59

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

As of June 30, 2003, the Corporation’s total shareholdings in YLEC was 39.3%, of which 23.7% directly owned and 15.6% indirectly owned through investees.

In August 2002, the Corporation increased its investment in CSAPH by NT$169,022 (US$5,001). CSAPH used this funds to increase its investment in Ornasteel Enterprise Corporation (M) Sdn. Bhd. Thus, the Corporation’s shareholdings in Ornasteel Enterprise was increased from 70% to 72.27%.

In September 2002, the Corporation invested NT$120,000 in CDIB BioScience Ventures I, Inc., representing 4.8% shareholdings.

In March 2003, the Corporation obtained approval from the government to invest NT$59,308 (US$1,714) in Wuxi Teco Electric & Machinery Co., Ltd., representing 10% shareholdings, through China Steel Asia Pacific Holdings Pte Ltd. The investee is mainly engaged in the manufacture and sale of electric machinery, inverter and AC & DC control system.

In October 2002, the Corporation invested NT$160,000 in TRSC, representing 27% shareholdings. TRSC is mainly engaged in the manufacture, sales, and lease of motor-trolleys and parts.

In October 2002, the Corporation invested NT$100,000 in PBG, representing 21% shareholdings. PBG is mainly engaged in biochip research and production.

In October 2002, GYIC and other eight investment companies were decreased in capital and merged into three companies.

In January 2003, the Corporation’s shareholdings in ICSC were decreased because ICSC issued stock bonus to its employees.

In February 2003, the Corporation increased the investment in CPDC by NT$749,998 and the shareholdings remain unchanged.

In January 2003, the Corporation increased its investment in KYIC in the amount of NT$91,350 (NT$2.03 per shares) through the acquisition of 45,000 thousand shares from GIC, and consequently, the shareholdings was increased to 35% as of June 30, 2003. Due to KYIC effected a capital decrease, the number of shares held by the Corporation were reduced from 315,000 thousands shares to 63,945 thousands shares as of January 20, 2003. In January, 2003, the Corporation acquired 99,998 thousand shares of preferred stocks with cost of NT$999,877. Those shares have dividend of 6% participating and cumulative, and entitled with vote right and election.

In March 2003, the Corporation subscribed 300 thousand shares of CSMCC, representing 38% shareholdings with the cost of NT$3,000. CSMCC is mainly engaged in management consulting and labor resource service.

In 2003, the Corporation sold its stockholdings of 469,000 shares investment in GMB resulting a gain of NT$3,920 to follow GMB’s dispersion-of-shareholding procedure before traded on GreTai Securities Market.

In 2002 and 2003, the Corporation’s Board of Directors approved plans for additional investments of up to NT$5,236,391 in Taiwan High Speed Rail Corporation, TRSC and CPDC etc. The related implementation schedule depends on the investees’ capital increase requirements. As of June 30, 2003, the Corporation has effected the investment of NT$1,230,806 to such entities.

F-60

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Reported investment income (loss) under the equity method is recognized based on the investees’ audited financial statements as follows:

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $ 527,988 181,815 281,781 104,401 (39,714) 55,853 76,908 86,317 27,487 228,973 34,138 25,406 2,509 11,619 6,008 — — (4,140) — (12,058) 6,934 (103,564) $1,498,661	2003
	NT$ $ 976,664 515,843 364,119 333,308 270,371 198,702 173,765 135,117 87,026 50,257 43,989 22,633 9,107 5,898 5,511 2,342 101 (497) (1,335) (11,212) (21,549) — $3,160,160	US$
		$28,219 14,904 10,521 9,631 7,812 5,741 5,021 3,904 2,514 1,452 1,271 654 263 170 159 68 3 (14) (38) (324) (623) —
		$91,308

Investment income (loss) as presented in the statements of income is as follows:

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $(597,214) — 129,140 15,422 $(452,652)	2003
	NT$ $ — 3,920 138,559 — $142,479	US$
		$ — 113 4,004 —
		$4,117

The Corporation fully recognized the balances of its investments in HMC and TEIWC as losses for the six months ended June 30, 2002, to reflect the investees’ operation losses.

In 2001, the stock price of YLEC declined significantly. The Corporation recognized an investment loss based on the year-end market price. However, in 2002, the stock price of YLEC recovered to a level higher than its book value per share, and YLEC had profitable operations in 2002. The investment in YLEC started to be accounted for by the equity method effective November 2002, according to the interpretation issued by the Accounting Research and Development Foundation of the Republic of China.

F-61

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

6. PROPERTIES

June 30, 2002 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June 30, 2003 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost NT$ $ 7,065,078 4,316,764 35,683,172 207,512,531 1,593,668 2,798,064 258,969,277 2,583,920 12,348,599 143,113,870 1,239,492 2,087,872 161,373,753 4,332,371 $101,927,895 $ 7,146,632 4,316,764 36,112,632 211,814,568 1,546,516 2,909,732 263,846,844 2,814,845 13,334,713 150,551,144 1,239,318 2,227,107 170,167,127 4,300,772 $ 97,980,489	Appreciation NT$ $ 5,850,597 492,990 2,445,529 9,540,588 39,186 35,292 18,404,182 347,668 1,427,176 9,524,211 39,012 35,257 11,373,324 — $ 7,030,858 $ 5,850,597 492,990 2,445,500 9,461,855 33,918 35,100 18,319,960 390,238 1,490,742 9,450,616 33,828 35,077 11,400,501 — $ 6,919,459	Total
			NT$
			$ 12,915,675 4,809,754 38,128,701 217,053,119 1,632,854 2,833,356
			277,373,459
			2,931,588 13,775,775 152,638,081 1,278,504 2,123,129
			172,747,077
			4,332,371
			$108,958,753
			$ 12,997,229 4,809,754 38,558,132 221,276,423 1,580,434 2,944,832
			282,166,804
			3,205,083 14,825,455 160,001,760 1,273,146 2,262,184
			181,567,628
			4,300,772
			$104,899,948

F-62

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

June 30, 2003 Cost and appreciation Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Constructions in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost US$ $ 206,490 124,726 1,043,416 6,120,040 44,684 84,072 7,623,428 81,330 385,285 4,349,932 35,808 64,349 4,916,704 124,264 $2,830,988	Appreciation US$ $169,044 14,244 70,659 273,385 980 1,014 529,326 11,276 43,073 273,060 977 1,013 329,399 — $199,927	Total
			US$
			$ 375,534 138,970 1,114,075 6,393,425 45,664 85,086
			8,152,754
			92,606 428,358 4,622,992 36,785 65,362
			5,246,103
			124,264
			$3,030,915

The Corporation constructed and acquired certain properties (e.g., buildings or equipment) partially through bank loans. Information on interest capitalization is as follows:

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $1,281,469 40,117 5.23%	2003
	NT$ $836,725 103,438 4.15%	US$
		$24,176 2,989 4.15%

The interest rate for capitalization is determined on the basis of weighed average interest rate of longterm liabilities.

In 1981 and 1994, the Corporation revalued its properties and patents in accordance with the government regulations, resulting in an increment of NT$17,662,343. After the deduction of the reserve for land value increment tax of NT$3,370,813, an increment of NT$14,291,530 was credited to capital surplus. Up to June 30, 2003, capital surplus of NT$13,952,356 has been transferred to a capital account.

F-63

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

7. LEASED ASSETS

	June 30	June 30
2002 NT$ $2,952,220 977,613 $3,929,833	2003
	NT$ $2,966,398 858,418 $3,824,816	US$
		$ 85,709 24,803
		$110,512

The Corporation has leased to its subsidiaries certain land and machinery acquired through a loan from the National Defense Industrial Development Fund.

8. SHORT-TERM BANK LOANS AND OVERDRAFT

	June 30	June 30
2002 NT$ $1,312,817 40,586 $1,353,403	2003
	NT$ $205,530 7,651 $213,181	US$
		$5,938 222
		$6,160

As of June 30, 2003, the Corporation provided time deposits of NT$6,900,000 as collaterals for shortterm borrowings. The unused credit lines for short-term borrowings aggregated approximately NT$43,624,376.

9. COMMERCIAL PAPER PAYABLE

	June 30	June 30
2002 NT$ $1,770,000 (2,624) $1,767,376	2003
	NT$ $1,000,000 (187) $ 999,813	US$
		$28,893 (5)
		$28,888

F-64

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

10. LONG-TERM BONDS PAYABLE

5-year unsecured bonds — issued at par in: November 2001, payable in November 2006, interest at 3.1% p.a., payable annually . . . . . . . . . . . . . . . . . . . . . . November 2001, payable in November 2006, interest at 3.0763% p.a., compounded semi-annually and payable annually . . . . . . . . . . . . . . June 2001, payable in June 2006, interest at 4.27% p.a., payable annually November 2000, payable in December 2005, interest at 5.18% p.a., payable annually . . . . . . . . . . . . . . . . . . . . . July 1999, payable in July 2004, interest at 5.99% p.a., compounded semi-annually and payable annually . . . . . . . . . . . . . . May 1999, payable in June 2004, interest at 5.69% p.a., compounded semi-annually and payable annually . . . . . . . . . . . . . . November 1998, payable in two equal installments in 2002 and 2003, interest at 6.785% p.a., compounded semi-annually and payable annually. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 1998, interest at 7.4% p.a., repaid in May 2002 . . . . . . . . . . . . . . 4-year unsecured bond — issued at par in March 1999, interest at 6.5% p.a., repaid in March 2003. . . . . . . . . . . . . . . . . . . . . Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		June 30 2003 NT$ US$ $ 3,500,000 $101,127 1,500,000 43,340 5,000,000 144,467 5,000,000 144,467 2,250,000 65,010 7,750,000 223,924 2,500,000 72,233 — — — — 27,500,000 794,568 (10,250,000) (296,157) $17,250,000 $498,411
	2002 NT$ $ 3,500,000 1,500,000 5,000,000 5,000,000 2,250,000 7,750,000 5,000,000 1,700,000 5,000,000 36,700,000 (9,200,000) $27,500,000
		NT$ $ 3,500,000 1,500,000 5,000,000 5,000,000 2,250,000 7,750,000 2,500,000 — — 27,500,000 (10,250,000) $17,250,000

11. LONG-TERM DEBTS

Bank Mortgage loan on machinery and equipment: Payable in December 2003, interest at 1.0466% (Note 19) . . . . . . . . . . Floating rate at 4.95% p.a., repaid in March 2003 (Note 19). . . . . . . . . Payable in June 2004, floating rate at 4.95% p.a. and 3.125% p.a. as of June 30, 2002 and 2003, respectively (Note 19). . . . . . . . . . . . Equipment import loans: Kreditanstalt fu¨r Wiederaufbau — interest at 6.4% p.a., repaid in September 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sumitomo Bank — interest at 6.715% p.a., repaid in February 2003 . . . Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		June 30 2003 NT$ US$ $751,660 $21,718 — — 50,000 1,445 — — — — 801,660 23,163 (801,660) (23,163) $ — $ —
	2002 NT$ $ 735,800 2,050,000 50,000 505,343 335,800 3,676,943 (2,891,143) $ 785,800
		NT$ $751,660 — 50,000 — — 801,660 (801,660) $ —

12. PENSION PLAN

The Corporation has a defined benefit pension plan for all regular employees, which provides pension benefits based on length of service and monthly average salary of the six-month before retirement.

F-65

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

The Corporation makes contributions, equal to a certain percentage of salaries, to a pension fund, which is administered by, and deposited in the Central Trust of China in the name of, the employees’ pension fund administration committee. The changes in the fund are summarized as follows:

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $6,735,145 $8,043,510 $232,404 597,168 543,595 15,706 258,276 171,581 4,958 (26,674) (53,119) (1,535) $7,563,915 $8,705,567 $251,533	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $6,735,145 $8,043,510 $232,404 597,168 543,595 15,706 258,276 171,581 4,958 (26,674) (53,119) (1,535) $7,563,915 $8,705,567 $251,533
	2002 NT$ $6,735,145 597,168 258,276 (26,674) $7,563,915
		NT$ $8,043,510 543,595 171,581 (53,119) $8,705,567

Starting August 1999, the Corporation has also made contributions, equal to a certain percentage of salaries of management personnel (vice president and above), to another pension fund, which is administered by, and deposited in the International Commercial Bank of China in the name of, the officers’ pension fund management committee. The changes in the fund are summarized as follows:

Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $16,462 $16,317 $471 1,573 5,062 146 207 67 2 — (15,788) (456) $18,242 $ 5,658 $163	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $16,462 $16,317 $471 1,573 5,062 146 207 67 2 — (15,788) (456) $18,242 $ 5,658 $163
	2002 NT$ $16,462 1,573 207 — $18,242
		NT$ $16,317 5,062 67 (15,788) $ 5,658

The pension costs, based on actual calculations, aggregated NT$520,764 and NT$609,109 for the six months ended June 30, 2002 and 2003, respectively.

13. DEFERRED CREDITS — GAIN ON INTERCOMPANY TRANSACTION

F-66

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

14. STOCKHOLDERS’ EQUITY

a. Treasury stock

	Thousand Shares	Thousand Shares	June 30	June 30
Beginning of Period 150,000 — 150,000 150,000 96,810 246,810	Increase — 96,026 96,026 — — —	Decrease — 1 1 149,964 546 150,510	Amount
			NT$ $1,905,059 1,356,471 $3,261,530 $ 516 1,332,462 $1,332,978	US$
				$55,044 39,193
				$94,237
				$ 15 38,500
				$38,515

(1) Shares acquired for transfer to employees

In 2001, the Corporation acquired its common stocks for transfer to employees of which 149,964 thousand shares have been transferred to employees in January 2003, resulting in a decrease in capital surplus of NT$82,614 and retained earnings of NT$14,863.

Under the Securities Exchange Law, the Corporation’s purchases of its own shares is restricted to up to 10% of outstanding shares, and the total purchase amount should not exceed retained earnings plus paid-in capital in excess of par value and realized capital surplus. In addition, the Corporation should transfer those shares to employees within three years. These shares are deemed unissued if they are not transferred on time and the Corporation should then register with the government as a capital decrease. Further, the Corporation should not pledge these stocks as collateral and is not entitled to dividends and/or the exercise of voting rights on these stocks.

(2) Shares acquired and held by subsidiaries

The Corporation’s shares acquired and held by subsidiaries were accounted for as treasury stocks at their book value (recorded as long-term or short-term investments by investees) as of January 1, 2002. The treasury stock’s market value amounted to NT$2,310,331, NT$1,669,119 as of June 30, 2002 and 2003, respectively.

F-67

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

b. Overseas depositary receipts

In May 1992 and February 1997, the MOEA-ROC sold 20,537,550 units of Global Depositary Receipts (‘‘International GDR’’) and 7,631,800 units of Rule 144A American Depositary Receipts (‘‘Rule 144A GDR’’) to international investors, with each unit representing 20 shares of the Corporation’s common stock. The depositary receipts increased by 3,506,236 units when retained earnings were capitalized. Under related regulations, the International GDR or Rule 144A Holders may request, after holding the depositary receipts for three months, for domestic receipts of the shares represented by the International GDR or Rule 144A GDR. As of June 30, 2003, the outstanding depositary receipts were 9,303,974 units, equivalent to 186,079,596 common shares and 2% of the outstanding common shares.

c. Preferred stock

Preferred stockholders have the following entitlements or rights:

(1) 14% annual dividends, with dividend payments ahead of those to common stockholders;
(2) Preference over common stock in future payment of dividends in arrears;
(3) Redemption of stock, at the option of the Corporation out of its retained earnings or the proceeds from issuance of new shares;
(4) The same rights as common stockholders, except the right to vote for directors and supervisors; and
(5) Conversion of shares into common stock.

d. Capital surplus

Capital surplus consists of:

	June 30	June 30
2002 NT$ $339,174 3 29,591 8,099 $376,867	2003
	NT$ $339,174 4,653 62,013 8,099 $413,939	US$
		$ 9,800 134 1,792 234
		$11,960

Under relevant regulations, the capital surplus from a revaluation increment on assets can only be used to offset a deficit. A capital surplus from treasury stock transaction can be used to offset a deficit or transferred to capital. Capital surplus from long-term investments accounted for under the equity method is prohibited from any use. The capital surplus from gain on disposal of properties has been transferred to retained earnings based on resolution of the stockholders’ meeting in 2002.

F-68

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

e. Appropriation of retained earnings

The Corporation’s Articles of Incorporation provides that the annual net income, less any deficit, should be appropriated in order of presentation:

(1) 10% as legal reserve, until its balance equals the paid-in capital stock;
(2) Preferred stock dividends at 14% of par value;
(3) Of the remainder, 0.3% as compensation to directors and supervisors and 3% as bonus to employees;
(4) Common-stock dividends at 14% of par value; and
(5) The remainder, if any, as additional dividends distributed equally among the holders of preferred and common stocks.

The Board of Directors should propose the appropriation of annual income. If necessary, it may, after appropriating preferred stock dividends at 14% of par value, propose to retain certain earnings as a special reserve. These proposals should be submitted to the stockholders meeting for approval.

The Corporation is required to appropriate a special reserve from annual earnings for any net debit balance resulting from adjustments to the stockholders equity, excluding treasury stock. Effective 2002, if the market price is lower than the carrying value of the Corporation’s shares held by subsidiaries, the Corporation should appropriate a special reserve equal to the difference between market price and carrying value. The Corporation may release a portion of this special reserve when debit balances are partially or fully reversed.

The life cycle of the Corporation’s steel industry is in the phase of stable growth, generally, the appropriation of dividends and bonus should be not less than 75% in cash and not more than 25% in stock.

Under the Company Law, legal reserve may be used to offset a deficit. When the reserve has reached 50% of paid-in capital, up to 50% thereof may be transferred to capital.

F-69

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

In June 2002 and 2003, the Corporation’s stockholders meeting respectively approved the 2002 and 2001 earnings appropriation, which was proposed by the Board of Directors in March 2002 and 2003 respectively, as follows:

	Amount 2003 NT$ US$ $ 1,683,908 $ 48,654 — — 12,975,148 374,896 66,867 1,932 1,390,194 40,167 7,164 207 44,589 1,288 445,890 12,883 $16,613,760 $480,027	Dividends Per Share	Dividends Per Share	Dividends Per Share
2002 NT$ $ 745,975 290,463 7,128,934 57,322 1,782,234 9,553 27,646 276,458 $10,318,585		2002 NT$ $0.80 1.20 0.20 0.20	2003
	NT$ $ 1,683,908 — 12,975,148 66,867 1,390,194 7,164 44,589 445,890 $16,613,760		NT$ $1.40 1.40 0.15 0.15	US$
				$0.040 0.040 0.004 0.004

Information on the Board of Directors’ proposed appropriation and resolution of stockholders’ meeting may be accessed through the Web site of the Taiwan Stock Exchange Corporation.

As of June 30, 2003, the above-mentioned stock dividends of 2002 amounting to NT$1,843,248 have been approved by ROC Securities & Futures Commission, and the Corporation is filing registration for capital increase.

f. Imputation tax system

Under the Imputation Tax System, domestic stockholders are allowed a tax credit for the income tax paid by the Corporation on earnings generated since 1998. Non-resident stockholders, including holders of overseas depositary receipts, are allowed only a tax credit from the 10% income tax on undistributed earnings, which can be used to deduct the withholding income tax on dividends paid.

As of June 30, 2003, the balance of the Imputation Credit Account (ICA) aggregated NT$4,000,616, equivalent to 24.17% of the 2003 undistributed earnings. This percentage may change depending on the ICA balance on the dividend distribution date. In June 2002, the Corporation distributed the 2001 earnings, and the ratio of tax credits allocated to stockholders was 29.38%.

As of June 30, 2003, undistributed earnings up to 1997 amounted to NT$35,440, which is not subject to the Imputation Tax System.

F-70

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

15. INCOME TAX

Tax on pretax income at statutory rate (25%) . . . . . . . . . . . . . . . . . . . . . Add (deduct) tax effects of differences: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income — net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment loss resulting from investees’ capital decrease . . . . . . . . . . Foreign exchange loss — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for inventory loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit from investment tax credit. . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax on undistributed earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Separate income tax on interest income . . . . . . . . . . . . . . . . . . . . . . . . . Prior periods’ adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $1,289,795 $5,568,181 $160,884 354,676 181,228 5,236 (261,502) (825,660) (23,856) — (537,975) (15,544) (18,851) (10,075) (291) 19,014 — — 15,139 3,620 104 1,398,271 4,379,319 126,533 (914,389) (284,351) (8,216) (643,807) (86,919) (2,511) 430,506 128,797 3,721 596 437 13 805,133 (75,412) (2,179) $1,076,310 $4,061,871 $117,361	Six Months Ended June 30 2002 2003 NT$ NT$ US$ $1,289,795 $5,568,181 $160,884 354,676 181,228 5,236 (261,502) (825,660) (23,856) — (537,975) (15,544) (18,851) (10,075) (291) 19,014 — — 15,139 3,620 104 1,398,271 4,379,319 126,533 (914,389) (284,351) (8,216) (643,807) (86,919) (2,511) 430,506 128,797 3,721 596 437 13 805,133 (75,412) (2,179) $1,076,310 $4,061,871 $117,361
	2002 NT$ $1,289,795 354,676 (261,502) — (18,851) 19,014 15,139 1,398,271 (914,389) (643,807) 430,506 596 805,133 $1,076,310
		NT$ $5,568,181 181,228 (825,660) (537,975) (10,075) — 3,620 4,379,319 (284,351) (86,919) 128,797 437 (75,412) $4,061,871

F-71

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Deferred income tax assets (liabilities) are as follows:

Current (included in other current assets) Deferred income tax assets Litigation loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit from investment tax credit. . . . . . . . . . . . . . . . . . . . . . Provision for inventory loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities Depreciation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current (included in other liabilities) Deferred income tax assets Unrealized foreign exchange loss. . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liabilities Depreciation difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred income tax liabilities, net. . . . . . . . . . . . . . . . . . . . . . . . .		June 30 2003 NT$ US$ $ 36,500 $ 1,055 — — 42,422 1,226 18,226 526 97,148 2,807 (60,078) (1,736) 37,070 1,071 — — 2,217 64 2,217 64 (3,464,785) (100,109) (2,005) (58) (3,466,790) (100,167) (3,464,573) (100,103) $(3,427,503) $ (99,032)
	2002 NT$ $ — 282,686 52,978 21,467 357,131 — 357,131 13,915 4,391 18,306 (3,942,568) — (3,942,568) (3,924,262) $(3,567,131)
		NT$ $ 36,500 — 42,422 18,226 97,148 (60,078) 37,070 — 2,217 2,217 (3,464,785) (2,005) (3,466,790) (3,464,573) $(3,427,503)

The above-mentioned tax benefits from investment tax credits represent the tax credits arising from the expenditure for purchase of machinery and equipment, research and development, and employees’ training costs in accordance with the related regulations.

Income tax payable as shown in the balance sheets is net of prepaid taxes.

The Corporation’s income tax returns through 2000 have been examined by tax authorities.

F-72

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

16. PERSONNEL EXPENDITURE, DEPRECIATION AND AMORTIZATION

The Six Months Ended June 30 2002 Cost of Revenues Operating Expense Total NT$ NT$ NT$ $ 4,646,156 $ 877,605 $ 5,523,761 221,003 37,701 258,704 446,819 81,327 528,146 69,469 13,462 82,931 5,383,447 1,010,095 6,393,542 5,623,957 185,805 5,809,762 238,022 935 238,957 $11,245,426 $1,196,835 $12,442,261 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	The Six Months Ended June 30 2002 Cost of Revenues Operating Expense Total NT$ NT$ NT$ $ 4,646,156 $ 877,605 $ 5,523,761 221,003 37,701 258,704 446,819 81,327 528,146 69,469 13,462 82,931 5,383,447 1,010,095 6,393,542 5,623,957 185,805 5,809,762 238,022 935 238,957 $11,245,426 $1,196,835 $12,442,261 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	The Six Months Ended June 30 2003	The Six Months Ended June 30 2003	The Six Months Ended June 30 2003
Cost of Revenues NT$ $ 4,646,156 221,003 446,819 69,469 5,383,447 5,623,957 238,022 $11,245,426 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Operating Expense NT$ $ 877,605 37,701 81,327 13,462 1,010,095 185,805 935 $1,196,835 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cost of Revenues Operating Expense Total NT$ NT$ NT$ $ 5,954,982 $1,079,233 $ 7,034,215 243,381 42,130 285,511 523,092 92,591 615,683 91,817 16,580 108,397 6,813,272 1,230,534 8,043,806 5,435,357 190,922 5,626,279 159,424 2,064 161,488 $12,408,053 $1,423,520 $13,831,573 The Six Months Ended June 30 2003		Total
				NT$
				$ 7,034,215 285,511 615,683 108,397
				8,043,806 5,626,279 161,488
				$13,831,573
		Cost of Revenues US$ $172,060 7,032 15,114 2,652 196,858 157,046 4,607 $358,511	Operating Expense US$ $31,182 1,217 2,675 480 35,554 5,516 60 $41,130	Total
				US$
				$203,242 8,249 17,789 3,132
				232,412 162,562 4,667
				$399,641

The difference of depreciation and amortization as shown above and that shown in the statements of cash flow represents the depreciation on leased assets and amortization on issuance costs of bond, which are included in nonoperating expense.

F-73

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

17. EARNINGS PER SHARE

Following is the reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share (EPS) for the six months ended June 30, 2002 and 2003:

Six months ended June 30, 2002 Net income. . . . . . . . . . . . . . . . . . . . Less: Dividends to preferred stockholders . . . . . . . . . . . . . . Six months ended June 30, 2003 Net income. . . . . . . . . . . . . . . . . . . . Less: Dividends to preferred stockholders . . . . . . . . . . . . . . Basic EPS Net income belonging to common stockholders . . . . . . . . . . . . . . Effect of potential dilutive shares: 14% cumulative and convertible preferred stocks . . . . . . . . . Diluted EPS Net income belonging to common stockholders and effect of potential dilutive shares . . . . . . Six months ended June 30, 2003 Net income. . . . . . . . . . . . . . . . . . . . Less: Dividends to preferred stockholders . . . . . . . . . . . . . . Basic EPS Net income belonging to common stockholders . . . . . . . . . . . . . . Effect of potential dilutive shares: 14% cumulative and convertible preferred stocks . . . . . . . . . Diluted EPS Net income belonging to common stockholders and effect of potential dilutive shares . . . . . .	Numerator	— Amount After Tax NT$ $ 4,082,870 Weighted average of issued common shares 33,438 Add: Retroactive adjustments for capitalization of retained earnings Less: Weighted average of treasury stocks — Purchased by the Corporation — Held by subsidiaries $ 4,049,432 $18,210,852 Weighted average of issued common shares 33,433 Less: Weighted average of treasury stocks — Purchased by the Corporation — Held by subsidiaries 18,177,419 33,433 $18,210,852 — Amount After Tax US$ $ 526,173 966 525,207 966 $ 526,173	Denominator (Thousand Shares)
	Before Tax NT$ $ 5,159,180 42,253 $ 5,116,927 $22,272,723 40,890 22,231,833 40,890 $22,272,723 Numerator
			9,061,168,389 206,824,544 150,000,000 97,945,485
			9,020,047,448
			9,267,998,933 6,285,000 96,263,795
			9,165,450,138 47,762,000
			9,213,212,138

	Before Tax US$ $ 643,534 1,181 642,353 1,181 $ 643,534

F-74

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

The number of outstanding shares is retroactively adjusted to reflect the effect of retained earnings capitalization on August 1, 2002, for EPS calculation. Thus, EPS before tax and after tax decreased from NT$0.58 to NT$0.57 and from NT$0.46 to NT$0.45, respectively, for the six months ended June 30, 2002.

The number of outstanding shares is retroactively adjusted for the effect of retained earnings capitalization on July 31, 2003 (Note 14). Information on retroactive adjustment for basic and diluted EPS are as follows:

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 Before Tax After Tax NT$ NT$ $0.56 $0.44 0.56 0.44 0.56 0.44 0.56 0.44	2003
Before Tax NT$ $0.56 0.56 0.56 0.56	Before Tax NT$ US$ $2.38 $0.069 2.37 0.068 2.35 0.068 2.35 0.068	After	Tax
	NT$ $2.38 2.37 2.35 2.35	NT$ $1.94 1.94 1.93 1.92	US$
			$0.056 0.056 0.056 0.055

18. RELATED PARTY TRANSACTIONS

a.

Related parties

Related Parties
C. S. Aluminium Corporation (CAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Express Corporation (CSE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Chemical Corporation (CSCC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Global Trading Corporation (CSGT) . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Hi-ment Corporation (CHC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Ecotek Corporation (CEC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Structure Corporation (CSSC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Yieh Loong Enterprises Corporation (YLEC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Machinery Corporation (CSMC). . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Info-Champ Systems Corporation (ICSC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Security Corporation (CSS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Prosperity Development Corporation (CPDC). . . . . . . . . . . . . . . . . . . . . . . . .
Hi-mag Magnetic Corporation (HMC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kuei Yi Industrial Corporation (KYIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WABO Global Trading Corporation (WGTC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chung Mao Trading (BVI) Corp. (CSGT-BVI) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
China Steel Management Consulting Corp. (CSMCC) . . . . . . . . . . . . . . . . . . . . . . .
Kaohsiung Rapid Transit Corp. (KRTC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ornasteel Enterprise Corp. (M) Sdn. Bhd (OEC) . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Steel Engineering and Construction Corporation (USECC) . . . . . . . . . . . . . . .
Jyh Yang Management Corporation (JYCC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tang Eng Iron Works Corp. (TEIWC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Relationship

Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Investee
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
Substantially owned
CSC is a director of TEIWC

F-75

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

b. Significant related-party transactions:

Six Months Ended June 30

2002 NT$ % $1,073,216 2 984,836 2 4,624,379 10 742,603 2 $7,425,034 16 $2,582,585 15 3,936 2 766,400 4 160,913 1 $3,513,834 22		2003
NT$ $1,073,216 984,836 4,624,379 742,603 $7,425,034 $2,582,585 3,936 766,400 160,913 $3,513,834	NT$ $1,252,618 1,213,197 912,684 1,394,070 $4,772,569 $3,759,240 1,020,450 811,076 96,600 $5,687,366	US$ $ 36,192 35,053 26,371 40,280 $137,896 $108,617 29,484 23,435 2,791 $164,327	%
			2 2 2 2
			8
			18 5 4 1
			28

Sales to and purchases from related parties are made under normal arms-length terms, except those with CAC and CSE due to no comparison data.

Land, equipment and office lease

The Corporation leases its land and office space to CAC, CSSC, CHC, CSCC and CSMC. Rentals are calculated based on 4% to 10% p.a. of land value as published by the government or under normal arms-length terms. Rentals are collected semi-annually, except for rentals from CAC and that from CSCC on the storage tank and pipelines which are collected monthly. Lease information is as follows:

CSMC . . . . . . . . . . . . . . . . . . . . . CAC . . . . . . . . . . . . . . . . . . . . . . CSSC . . . . . . . . . . . . . . . . . . . . . CSCC . . . . . . . . . . . . . . . . . . . . . CHC . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . .	Expiry Date November 2011 February 2016 May 2018 December 2010 April 2012 December 2006	Rental Income for Six Months Ended June 30 2002 2003 NT$ NT$ US$ $13,385 $11,473 $ 331 23,407 23,507 679 7,858 7,867 227 12,772 6,306 182 2,535 2,522 73 1,641 2,502 73 $61,598 $54,177 $1,565	Rental Income for Six Months Ended June 30 2002 2003 NT$ NT$ US$ $13,385 $11,473 $ 331 23,407 23,507 679 7,858 7,867 227 12,772 6,306 182 2,535 2,522 73 1,641 2,502 73 $61,598 $54,177 $1,565	Rental Income for Six Months Ended June 30 2002 2003 NT$ NT$ US$ $13,385 $11,473 $ 331 23,407 23,507 679 7,858 7,867 227 12,772 6,306 182 2,535 2,522 73 1,641 2,502 73 $61,598 $54,177 $1,565
			2003
			NT$ $11,473 23,507 7,867 6,306 2,522 2,502 $54,177	US$
				$ 331 679 227 182 73 73
				$1,565

F-76

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

Factoring of notes receivable

The Corporation sold some of its notes receivable to JYCC without recourse for NT$1,836,038 and NT$1,579,745 as of June 30, 2002 and 2003, respectively. The related interest expense was NT$27,941 and NT$16,103 for the six months ended June 30, 2002 and 2003.

Other expenditures

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $ 223,868 148,779 16,930 173,476 157,487 303,714 354,104 $1,378,358	2003
	NT$ $ 295,637 264,217 133,572 132,274 123,800 106,642 415,251 $1,471,393	US$
		$ 8,542 7,634 3,859 3,822 3,577 3,081 11,999
		$42,514

Other revenues

Other revenues pertained to labor services, processing of products, liquid waste processing and recycling, and other services to related parties.

Six Months Ended June 30	Six Months Ended June 30	Six Months Ended June 30
2002 NT$ $348,191 4,150 63,551 24,101 19,836 5,585 128,825 $594,239	2003
	NT$ $373,578 241,603 75,560 24,429 19,616 18,267 30,599 $783,652	US$
		$10,794 6,981 2,183 706 567 528 883
		$22,642

F-77

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

c. Balance at period-end

	June 30
2002 NT$ % $ 59,193 4 102,303 7 2,508 — 50,749 4 20,137 1 11,370 1 $246,260 17		2003
NT$ $ 59,193 102,303 2,508 50,749 20,137 11,370 $246,260	NT$ $ 79,422 78,624 55,963 43,323 40,636 32,662 $330,630 June 30	US$ $2,295 2,272 1,617 1,252 1,174 943 $9,553	%
			4 4 3 2 2 1
			16

2002 Amount % NT$ $245,393 8 — — 71,279 3 3,858 — $320,530 11		2003
Amount NT$ $245,393 — 71,279 3,858 $320,530	Amount NT$ $217,376 92,312 67,740 15,758 $393,186	Amount US$ $ 6,281 2,667 1,957 455 $11,360	%
			7 3 2 1
			13

19. PLEDGED ASSETS

a. Time deposits of NT$8,231,396 and NT$6,931,694 (included in pledged time deposits and other assets) as of June 30, 2002 and 2003, respectively, were pledged mainly as collateral for bank overdraft, etc.
b. The Corporation provided 20,000,000 shares of CAC’s stock as collateral for obtaining a credit line from China Development Industrial Bank (director of the Corporation) as of December 31, 2000, 2001 and 2002.
c. The Corporation provided machinery and equipment with book values of NT$8,907,152 and NT$5,742,953 as of June 30, 2002 and 2003, respectively, as collaterals for long-term loan.

20. COMMITMENTS AND CONTINGENT LIABILITIES AS OF JUNE 30, 2003

a. The Corporation had several construction contracts, with guarantees of NT$1,424,691 granted by the International Commercial Bank of China and Taipei Bank.
b. Unused letters of credit amounted to NT$4,400,000.
c. The Corporation’s employees filed lawsuits against the Corporation that their seniority compensation was not calculated in accordance with the Labor Law when the Corporation privatized in April, 1995. The claimed amount aggregates about $125,000 plus interest and were

F-78

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

recorded as accrued liability in 2002. The Corporation failed the lawsuit in the judgment by the High Court of Taiwan. The Corporation filed in appeal for the judgment on the grounds that the Corporation calculated the compensation in accordance with related regulations which has been approved by government. The Corporation’s management believes that the final judgment will be favorable to the Corporation.

d. The Corporation sold its note receivables of NT$792,072 to Chung Hsing Bills Finance Corporation and also fully guaranteed these receivables. To reduce its risk on this guarantee, the Corporation acquired credit risk insurance from an insurance company and entered into an agreement with Chung Hsing Bills Finance Corporation to share any loss from credit risk.
e. The Corporation has raw material purchase contracts with suppliers from Australia, India, Brazil, Canada, Indonesia, Mainland China, Japan, Philippine, Russia, Vietnam and domestic companies with contract period from one to ten years. Contracted annual purchases of 8,240,000 metric tons of coal, 15,800,000 metric tons of iron ore, and 2,800,000 metric tons of stones are at prices negotiable every year. Unfulfilled purchase amounts as of June 30, 2003 are 13,020,000 metric tons of coal, 51,950,000 metric tons of iron ore, and 1,390,000 metric tons of stones.

21. SUBSEQUENT EVENT

In May 2003, the Corporation signed a join venture contract with Sumitomo Metal Industries, Ltd. and Sumitomo Corporation. In July 2003, the joint venture company of Eastasia United Steel Corporation was established, with capital of Y=30.3 billion which is expected to be fully contributed in four installments by May 2007. The Corporation will invest a total of Y=10 billion, representing 33%, of which NT$9,530 (JPD 33,000 thousand) was paid in July 2003. The Corporation will have a stable supply of good quality slab from this joint venture.

22. FINANCIAL INSTRUMENTS

For the six months ended June 30, 2003, the Corporation had not been engaged with derivative instruments activities. No balances carried in forward exchange contracts as of June 30, 2002 and 2003.

a. The derivative financial instruments held by the Corporation are for nontrading purpose, mainly for hedging the exchange rate or price risks from the foreign currency rights or obligations. Thus, the Corporation chooses derivative financial instruments that reduce the risks associated with the hedged items and evaluates the effectiveness of hedging instruments periodically.
b. Forward exchange contracts resulted in a net exchange loss of NT$5,593 for the six months ended June 30, 2002.

F-79

English Translation of a Report Originally Issued in Chinese

CHINA STEEL CORPORATION

NOTES TO FINANCIAL STATEMENTS JUNE 30, 2002 and 2003 (In Thousands of Dollars, Unless Otherwise Stated)

As of June 30, 2002 and 2003, the estimated fair values of financial instruments were as follows:

	June 30	June 30	June 30
2002 Carrying Value Fair Value NT$ NT$ $ 2,544,344 $ 2,544,344 13,946,106 16,579,582 235,223 235,223 1,467,568 1,467,568 1,445,436 1,445,436 8,231,396 8,231,396 33,250,825 36,390,123 46,447 46,447 1,353,403 1,353,403 1,767,376 1,767,376 2,910,654 2,910,654 7,352,931 7,352,931 36,700,000 39,614,468 3,676,943 3,676,943 — — — —	2003
Carrying Value NT$ $ 2,544,344 13,946,106 235,223 1,467,568 1,445,436 8,231,396 33,250,825 46,447 1,353,403 1,767,376 2,910,654 7,352,931 36,700,000 3,676,943 — —	Carrying Value NT$ US$ $ 1,207,467 $ 34,888 30,585,976 883,732 504,189 14,568 2,079,795 60,092 383,168 11,071 6,931,694 200,280 38,822,764 1,121,721 68,832 1,989 213,181 6,160 999,813 28,888 3,110,902 89,884 13,243,047 382,636 27,500,000 794,568 801,660 23,163 — — — —	Fair Value
	NT$ $ 1,207,467 30,585,976 504,189 2,079,795 383,168 6,931,694 38,822,764 68,832 213,181 999,813 3,110,902 13,243,047 27,500,000 801,660 — —	NT$ $ 1,207,467 32,900,751 504,189 2,079,795 383,168 6,931,694 43,713,840 68,832 213,181 999,813 3,110,902 13,243,047 29,916,726 801,660 — —	US$
			$ 34,888 950,614 14,568 60,092 11,071 200,280 1,263,041 1,989 6,160 28,888 89,884 382,636 864,395 23,163 — —

The assumption and methods used to estimate the fair values of financial instruments are as follows:

a. The carrying values of cash and cash equivalents, notes receivable, accounts receivable, pledged time deposits, short-term bank loans and overdraft, commercial paper payable and accounts payable approximate fair value because of the short maturity of these instruments.
b. The fair values of short-term investments and long-term investments are determined at market values or net equity values.
c. The fair values of long-term liabilities are determined on the estimated present values of future cash flows; discount rates are the interest rates of similar long-term debts available for the Corporation.
d. The fair values of forward exchange contracts are calculated using the swap rates published by Moneyline (Hong Kong) Ltd., Taiwan branch, and forward rates of forward contracts.

F-80

APPENDIX A — THE SECURITIES MARKET OF THE ROC

The information presented in this section has been extracted from publicly available documents that have not been prepared or independently verified by us, the Managers or any of our respective affiliates or advisors in connection with this Offering.

In September 1960, the ROC government established the ROC Securities and Exchange Commission to supervise and control all aspects of the existing domestic securities market and the Taiwan Stock Exchange began to take shape soon thereafter. In the 1970s and the early 1980s, the ROC government implemented a number of steps designed to upgrade the quality and importance of the ROC securities markets, such as encouraging listing on the Taiwan Stock Exchange and establishing an over-the-counter securities exchange. In the mid-1980s, the ROC government began to revise its laws and regulations in a manner designed to facilitate the gradual internationalization of the ROC securities markets. In 1997, the ROC Securities and Exchange Commission was renamed as the ROC Securities and Futures Commission.

The Taiwan Stock Exchange

In 1961, the ROC Securities and Futures Commission established the Taiwan Stock Exchange to provide a marketplace for securities trading. The Taiwan Stock Exchange is a corporation owned and controlled by the government and private banks and enterprises. The Taiwan Stock Exchange 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 Taiwan Stock Exchange commenced operations in 1962. During the early 1980s, the ROC Securities and Futures Commission actively encouraged new listings on the Taiwan Stock Exchange and the number of listed companies grew from 119 in 1983 to 663 as of September 30, 2003. As of September 30, 2003, the market capitalization of companies listed on the Taiwan Stock Exchange was approximately NT$11,453.8 billion.

Historically, Taiwanese companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the ROC Securities and Futures Commission has encouraged companies to list other types of securities. In 1988, the ROC Securities and Futures Commission 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 Taiwan Stock Exchange or traded on the GreTai Securities Market. The ROC Securities and Futures Commission also has regulations which permit foreign issuers to list their equity securities directly on the Taiwan Stock Exchange or through the use of depositary receipts. To date, five foreign issuers have listed their equity securities on the Taiwan Stock Exchange through the use of depositary receipts in accordance with these regulations.

The Taiwan Stock Exchange 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; and
. profitability.

However, special listing criteria apply to technology companies and key businesses that are engaged in national economic development.

A-1

The ROC GreTai Securities Market

To complement the Taiwan Stock Exchange, the GreTai Securities Market was established in September 1982 on the initiative of the ROC Securities and Futures Commission to encourage the trading of securities of companies that do not qualify for listing on the Taiwan Stock Exchange.

As of September 30, 2003, 399 companies had listed equity securities on the GreTai Securities Market and the total market capitalization of those companies was NT$1,073.1 billion.

Taiwan Stock Exchange Index

The Taiwan Stock Exchange 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 Taiwan Stock Exchange Index is compiled by dividing the market value by the base day’s total market value for the index shares. The Taiwan Stock Exchange Index is the oldest and most widely quoted market index in Taiwan.

The weighting of stocks 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 shows for the periods indicated information relating to the Taiwan Stock Exchange Index.

Period 1990 . . . . . . . . . . . . . . . . . . . . . . . . . 1991 . . . . . . . . . . . . . . . . . . . . . . . . . 1992 . . . . . . . . . . . . . . . . . . . . . . . . . 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . 2003 (until September 30, 2003) . . . . . .	No. of Listed Companies at Period End 199 221 256 285 313 347 375 404 437 462 531 584 638 663	Stock Trading Values (in NT$ billions) 19,031.3 9,682.7 5,917.1 9,056.7 18,812.1 10,151.5 12,907.6 37,241.2 29,619.0 29,291.0 30,526.6 18,354.9 21,874.0 15,067.6	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 6,104.20 6,462.30 5,809.43	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 5,475.00 4,614.60 3,446.30 3,850.04 4,044.73	Index at Period End
					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 5,611.41

Source: Taiwan Stock Exchange; World Federation of Stock Exchanges (www.fibv.com) for ‘‘Number of Listed Companies at the Period End’’ information.

Price Limits, Commissions, Transaction Tax and Other Matters

The Taiwan Stock Exchange has placed limits on block trading and on the range of daily price movements. Fluctuations in the price of securities traded on the Taiwan Stock Exchange 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 the ROC Ministry of Finance 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 Taiwan Stock Exchange.

A-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. According to the amended Statute of Upgrading Industries, which became effective on February 1, 2002, no securities transaction tax will be imposed on the transfer of corporate bonds and financial debentures until December 31, 2009.

Sales of shares of listed companies on the Taiwan Stock Exchange 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 Taiwan Stock Exchange guidelines.

Regulation and Supervision

The ROC Securities and Futures Commission has extensive regulatory authority over public companies. Public companies are generally required to obtain approval from, or to register with, the ROC Securities and Futures Commission for all securities offerings. The ROC Securities and Futures Commission requires periodic reporting of financial and operating information by all public companies. In addition, the ROC Securities and Futures Commission establishes standards for financial reporting and carries out licensing and supervision of participants in the Taiwan securities market.

The ROC Securities and Futures Commission 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, issuing and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the ROC Securities and Futures Commission 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 examinations and audits of an issuer’s contracts, reports and other documents related to securities transactions. The ROC Securities and Futures Commission 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.

A-3

The ROC Securities and Futures Commission 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 Securities and Futures Commission 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.

In addition to providing a market for securities trading, the Taiwan Stock Exchange reviews applications by Taiwan issuers to list securities on the Taiwan Stock Exchange. If issuers of listed securities violate laws and regulations or encounter extended or severe negative results of operations, the Taiwan Stock Exchange may, with the approval of the ROC Securities and Futures Commission, delist securities of these issuers.

A-4

APPENDIX B — FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

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 authorized securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualified foreign institutional investors have been allowed to make investments in the Taiwan listed securities market. Since March 1, 1996, overseas Chinese, foreign institutional and foreign individual investors (other than qualified foreign institutional investors), called ‘‘general foreign investors’’, have been permitted to make direct investments in the Taiwan listed securities market. Certain new rules have been adopted by ROC Securities and Futures Commission since July 9, 2003, under which investment amount restrictions and qualification requirements in asset size imposed on qualified foreign institutional investors and the inward and outward remittance period limits have been removed.

On September 30, 2003, the Executive Yuan approved an amendment to the ROC Regulations Governing Investment in Securities by Overseas Chinese and Foreign National (the ‘‘Regulations’’). According to the Regulations, as amended, the ROC Securities and Futures Commission abolished the mechanism of the qualified foreign institutional investors and general foreign investors as stipulated in the Regulations before the amendment.

Under the Regulations, as amended, overseas Chinese and foreign nationals are classified as ‘‘onshore overseas Chinese and foreign nationals’’ and ‘‘offshore overseas Chinese and foreign nationals’’ according to their respective geographical location. Both onshore and offshore overseas Chinese and foreign nationals are allowed to invest in ROC securities after they have registered with the Taiwan Stock Exchange. In addition, for foreign exchange conversion purposes, offshore foreign institutional investors must obtain prior approval from the Central Bank of China, while offshore overseas Chinese and foreign nationals are not subject to such requirement. Offshore overseas Chinese and foreign nationals are instead subject to a maximum investment quota separately set by the ROC Securities and Futures Commission upon consultation with the Central Bank of China.

Foreign Ownership Limitations

Except for certain limits imposed by specific laws and regulations, there are generally no limits on the foreign ownership of the issued share capital in a Taiwan Stock Exchange listed company or a GreTai Securities Market traded company.

Foreign Investment Approval

In addition to the investments permitted under the Regulations, under existing ROC laws and regulations relating to foreign investments, foreign investors who wish to make direct investments in the shares of Taiwan companies may submit a ‘‘foreign investment approval’’ application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other governmental authority. Foreign investors who obtain this approval will be subject to the Law Governing Investments by Foreigners. The Investment Commission or other governmental 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

B-1

profits, interests and cash dividends attributable to an approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other governmental authority.

In addition to the general restrictions against direct investment by non-Taiwan persons in Taiwan companies, non-Taiwan persons are currently prohibited from investing in prohibited industries in Taiwan which are listed under the Negative List, as amended. The prohibition on direct foreign investment in the prohibited industries in the Negative List is absolute and provides no specific exemption from its application. Under the Negative List, some 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 governmental authority. We are not in a restricted industry under the Negative List.

Depositary Receipts

In April 1992, the ROC Securities and Futures Commission began allowing Taiwan companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the ROC 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. Approvals for these issuances are still required.

No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific ROC Securities and Futures Commission approval, unless they are:

. stock dividends;
. free distributions of shares;
. due to the exercise by depositary receipt holders of their preemptive rights in the event of capital increases for cash; or
. if permitted in the deposit agreement and the custody agreement, due to the purchase by depositary receipt holders, directly or through the depositary, of shares on the Taiwan Stock Exchange or the GreTai Securities Market or the delivery by any person of shares 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 ROC Securities and Futures Commission; and
the number of depositary shares created from stock dividends, free distributions of shares, conversion of bonds and rights offerings.

These issuances of depositary receipts may only be made to the extent that previously issued depositary receipts have been cancelled.

For depositary shares that represent new shares issued for cash, after the issuance of depositary receipts, and for depositary shares that represent previously existing shares, immediately after the issuance of depositary receipts, 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.

A depositary receipt holder wishing to withdraw shares represented by depositary receipts in order to hold the shares is required to appoint a qualified local agent to, among other things, open a general securities account with a local securities brokerage firm and a bank account, remit funds, exercise shareholders’ rights, and perform such other actions as may be designated by such depositary receipt holder.

B-2

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, opening these accounts and obtaining prior approval of the Taiwan Stock Exchange, the withdrawing holder would be unable to subsequently hold or sell the shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange or otherwise. The withdrawing holder is also required to appoint a tax guarantor for filing tax returns and making tax payments. In addition, the withdrawing holder is required to register with the Taiwan Stock Exchange. If the withdrawing holder is an offshore foreign institutional investor, the withdrawing holder is also required to obtain approval from the Central Bank of China, and then appoint a local agent to, among other things, open a general securities trading account with a local securities brokerage firm to hold or trade the withdrawn common shares.

A depositary may, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, convert NT dollars from:

. the proceeds of the sale of shares represented by depositary receipts or received as stock dividends on the shares and deposited into the depositary receipt facility; or
. cash distributions received, into other currencies, including U.S. dollars. In addition, a depositary may convert into NT dollars inward remittances of payments for purchases of underlying shares for deposit in the depositary facility against the creation of depositary shares. A depositary must obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion into foreign currencies from the proceeds from the sale of subscription rights for new shares. It is expected that the Central Bank of China will grant this approval as a routine matter. A depositary receipt holder may, after becoming a holder of shares, convert NT dollars into other currencies from proceeds from the sale of any underlying shares withdrawn from the depositary receipt facility. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in securities listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market.

Overseas Corporate Bonds

Since 1989, the ROC Securities and Futures Commission has approved a series of overseas corporate bond issues by Taiwan companies listed on the Taiwan Stock Exchange and traded on the GreTai Securities Market. Under current ROC law, these overseas corporate bonds (if their terms so provide), with ROC Securities and Futures Commission approval, may be converted by non-Taiwan persons, other than mainland Chinese persons, into shares of Taiwan companies or may be converted into depositary receipts issued under the sponsorship of the same Taiwanese company or the shares of other companies, in the case of exchangeable bonds. Public issuing companies may issue corporate debt in offerings outside Taiwan. A non-Taiwanese converting bondholder, when exercising the conversion right to convert the bonds into shares of a Taiwan company, is required to appoint a qualified local agent to:

. open a securities trading account with a local brokerage firm;
. remit funds;
. exercise shareholders’ rights; and
. perform other actions as may be designated by such converting bondholder.

In addition, the converting holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make confirmations and settle trades and report all relevant information. Without making this appointment and opening these accounts, the converting holder would be unable to subsequently hold or sell the shares converted from the bonds on the Taiwan Stock Exchange or otherwise. The converting holder is also required to appoint a tax guarantor for filing tax returns and making tax

B-3

payments. Without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, the issuing company may convert NT dollars into other currencies for redemption of the bonds or the repayment of the principal or interest on the bonds.

In addition, a converting bondholder may through its local agent convert net proceeds realized from the sale of entitlement certificates, shares or any stock dividends on the shares. In addition, a bondholder may also convert through its local agent any cash distributions relating to the shares and, after becoming a shareholder, inward remittances of subscription payments in connection with a rights offering. In addition, any funds received by the converting bondholder may be used for reinvestment in Taiwan securities listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market.

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the ROC Ministry of Finance and by the Central Bank of China to handle foreign exchange transactions. Current regulations favor 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, without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$50 million, or its equivalent, and US$5 million, or its equivalent, respectively, each calendar year. These limits apply to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

In addition, all private enterprises are required to register all medium and long-term foreign debt with the Central Bank of China. In addition, a foreign person may, subject to certain requirements, but without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if the required documentation is provided to the Taiwan authorities. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

B-4

This page is intentionally left blank

REGISTERED OFFICE OF THE COMPANY

China Steel Corporation No. 1 Chung Kang Road Lin Hai Industrial District Hsiao Kang Kaohsiung, Taiwan ROC

DEPOSITARY Citibank, N.A. 111 Wall Street New York, NY 10043 USA

CUSTODIAN

Citibank, N.A. (Taipei) B1, No. 16, Nanking East Road Section 4 Taipei, Taiwan ROC

LEGAL ADVISORS TO THE MOEA AND THE COMPANY

Lee and Li 201 Tun Hwa North Road 7th Floor Taipei, Taiwan ROC

U.S. LEGAL ADVISORS TO THE MANAGERS

Davis Polk & Wardwell The Hong Kong Club Building 3A Chater Road, Central Hong Kong

INDEPENDENT AUDITOR

Deloitte & Touche (T N Soong & Co and Deloitte & Touche (Taiwan) Established Deloitte & Touche Effective June 1, 2003)

Kaohsiung Office 168 Chung Cheng Fourth Road Kaohsiung, Taiwan ROC

LISTING AGENT

The Bank of New York (Luxembourg) S.A. Aerogolf Center 1A, Hoehenhof L-1736 Senningerberg Luxembourg

==> picture [83 x 56] intentionally omitted <==

Printed by ROMAN 8934-1

AI assistant

CSC — Capital/Financing Update 2013

51937_rns_2013-12-18_5b493671-57ea-4141-8eff-0828c9c0f6d4.pdf

CHINA STEEL CORPORATION

52,400,000 Global Depositary Shares Representing 1,048,000,000 Common Shares

US$15.56 per GDS

Investing in the GDSs involves risks. See ‘‘Risk Factors’’ beginning on page 10.

Citigroup

UBS Investment Bank

Nomura International

NOTICE TO NEW HAMPSHIRE RESIDENTS

AVAILABLE INFORMATION

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

SUMMARY

The Company

Strategy

Focus on higher margin, higher value-added products

Continue to strengthen existing long-term customer relationships and cultivate customer loyalty

Continue to improve our cost competitiveness through cost reduction and operational efficiency

Leverage our strengths to take advantage of growth opportunities in the PRC

Continue to leverage the benefits of vertical integration

Leverage our expertise and resources to pursue effective investment and diversification strategies

Maintain prudent capital structure management and consistent profitability in order to maximize shareholder value

The Offering

Rule 144A GDS Settlement

Summary of Financial Information and Operating Data

RISK FACTORS

Risks Relating to Our Industry and Our Business

The steel industry is cyclical; downward pricing pressure on steel products in response to excess capacity could harm our operating results.

We operate in a highly competitive environment and we may not be able to sustain our current market position if we fail to compete successfully.

We are dependent on imported raw materials and if we are unable to obtain raw materials in suitable quantity and quality from our suppliers at reasonable prices, our production schedules would be delayed and we may lose customers.

Our operations are concentrated at our Kaohsiung plant complex and any adverse developments affecting such complex will have a material adverse effect on our business.

Due to the limited land adjacent to our Kaohsiung plant complex available for development, any further production capacity expansion of our steel business that requires physical expansion would need to be constructed at a new site, which may result in additional costs.

We are subject to significant environmental laws and regulations which could adversely impact the availability of funds for capital expenditure or adversely affect our operations.

The steel industry is capital intensive and if we are not able to obtain the capital resources required to continue to modernize and upgrade our facilities, our results of operations and growth prospects may be adversely affected.

We depend on a small number of customers for a substantial portion of our revenues.

The ROC government effectively controls us and it may have interests contrary to the interests of our public shareholders.

Further sales of our Shares by the ROC government or other major shareholders may adversely affect the price of the GDSs or Shares.

Risks Relating to the GDSs and the Shares

Risks Relating to the Republic of China

Your investment may be adversely affected by political considerations relating to the ROC.

Due to our location in Taiwan, we and some of our customers are vulnerable to natural disasters and other events outside of our control, which may seriously disrupt our operations.

SELLING SHAREHOLDER

MARKET PRICE INFORMATION

DIVIDENDS

EXCHANGE RATES

CAPITALIZATION

SELECTED FINANCIAL INFORMATION AND OPERATING DATA

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

Overview

Cyclicality of the Steel Industry and Steel Prices

Production Efficiency and Capacity Utilization

Import Restrictions

Costs and Operating Expenses

Consolidation

Critical Accounting Policies and Estimates

Revenue Recognition

Long-term Investments

Properties and Leased Assets

Inventories

Short-term Investments

Results of Operations

Recent Events

Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Year Ended December 2001 Compared to Year Ended December 2000

Liquidity and Capital Resources

Liquidity

Capital Resources

Taxation

Interest Rate and Currency Risks

Interest Risk

Foreign Currency Exchange Rate Risk

Off-Balance Sheet Arrangements

INDUSTRY

General

The ROC Steel Market

Production and Consumption

CSC Capital/Financing Update 2013