Macronix — Capital/Financing Update 2014

Aug 20, 2014

O F F E R I N G C I R C U L A R

Macronix International Co��Ltd�

(Incorporated in Taiwan, the Republic of China)

US$140�000�000 0�5% Convertible Bonds Due 2007

The 0.5% Convertible Bonds Due 2007 (the ‘‘Bonds’’) will mature on February 7, 2007 at a redemption price equal to their principal amount, together with Redemption Premium (as defined herein). The Bonds bear interest at 0.5% per annum payable annually in arrears on February 7 of each year, commencing on February 7, 2003. Unless previously redeemed or repurchased and cancelled, the Bonds, at the option of the holders of the Bonds, are convertible at any time, except during a Closed Period (as defined herein), on or after March 11, 2002 and on or before January 23, 2007, into our Common Shares, par value NT$10.00 per share (‘‘Common Shares’’) (initially in the form of Entitlement Certificates (as defined herein), representing the right to receive Common Shares), or on or after April 17, 2002 and on or before January 23, 2007, into our American depositary shares, each representing the right to receive 10 Common Shares (‘‘ADSs’’) (initially in the form of temporary American depositary shares (‘‘Temporary ADSs’’)). As fully described below, as long as ADSs (or Temporary ADSs) are ‘‘restricted securities’’ within the meaning of Rule 144 under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), they are subject to certain transfer restrictions described herein and will not be fungible with our ADSs that are currently quoted on the Nasdaq National Market (‘‘Nasdaq’’). The initial conversion price will be NT$31.32 per Common Share (which is equivalent to US$0.895 per Common Share based on a fixed rate of exchange of NT$34.98 = US$1.00), or US$8.95 per ADS, subject to adjustment in certain events. The outstanding Common Shares are listed on the Taiwan Stock Exchange (the ‘‘TSE’’). On January 31, 2002, the closing price of the Common Shares on the TSE was NT$26.10 per share. On January 31, 2002, the closing price of the ADSs on Nasdaq was US$7.06 per ADS.

We have the option to redeem the Bonds, in whole or in part, at any time on or after February 7, 2005 and prior to February 7, 2007, at a redemption price equal to their principal amount, together with Redemption Premium (as defined herein), if the Closing Price (as defined herein) of the Common Shares translated into U.S. Dollars at the Prevailing Rate (as defined herein) for each of 30 consecutive Trading Days (as defined herein), the last of which occurs not more than five days prior to the date upon which notice of such redemption is published, is at least 130% of the Share Conversion Price (as defined herein) in effect on each such Trading Day translated into U.S. Dollars at the rate of NT$34.98 = US$1.00. We may also redeem the Bonds, in whole but not in part, at any time prior to February 7, 2007 at a redemption price equal to their principal amount, together with Redemption Premium (as defined herein), if at least 90% in principal amount of the Bonds have already been redeemed, repurchased and cancelled, or converted. The Bonds are redeemable, in whole or in part, on August 9, 2004, at the option of the Holders (as defined herein), at the redemption prices set forth herein. We also may redeem the Bonds, in whole but not in part, at any time at the Early Redemption Amount (as defined herein) in the event of certain changes relating to taxation in the Republic of China (the ‘‘ROC’’). We are required in the event of a change of control (as specified herein) or of a delisting of our Common Shares on the TSE, to make an offer to repurchase all outstanding Bonds at a repurchase price set forth herein. The Bonds will be our unsecured obligations. See ‘‘Description of the Bonds’’ herein.

The Bonds to be offered and sold in reliance on Regulation S under the Securities Act (the ‘‘Regulation S Bonds’’) will be represented by beneficial interests in a global certificate (the ‘‘Regulation S Global Bond’’) in registered form, which will be deposited on or about the Closing Date (as defined below) with a custodian for, and registered in the name of, Cede & Co., as nominee for The Depository Trust Company (‘‘DTC’’), for the accounts of Euroclear Bank S.A./N.V., as operator of the Euroclear System (‘‘Euroclear’’) and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream’’). Bonds to be offered and sold in reliance on Rule 144A under the Securities Act (the ‘‘Restricted Bonds’’) will be represented by beneficial interests in a global certificate (the ‘‘Restricted Global Bond’’ and, together with the Regulation S Global Bond, the ‘‘Global Bonds’’) in registered form, which will be deposited on or about the Closing Date with a custodian for, and registered in the name of, Cede & Co., as nominee for DTC. Interests in the Restricted Global Bond will be subject to certain restrictions on transfer. Application has been made to list the Bonds on the Luxembourg Stock Exchange. Application has been made to have the Bonds designated as eligible for trading in The Portal Market of the United States National Association of Securities Dealers, Inc. (‘‘PORTAL’’).

For a discussion of certain factors that should be considered in connection with an investment in the Bonds, see ‘‘Risk Factors’’ on page 14 herein.

Offering price: 100%

THE BONDS, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) AND THE ADSs (OR TEMPORARY ADSs) ISSUABLE UPON CONVERSION OF THE BONDS HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. ACCORDINGLY, THE BONDS ARE BEING OFFERED AND SOLD IN THE UNITED STATES ONLY TO QUALIFIED INSTITUTIONAL BUYERS IN RELIANCE ON RULE 144A UNDER THE SECURITIES ACT AND OUTSIDE THE UNITED STATES PURSUANT TO REGULATION S UNDER THE SECURITIES ACT. PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT THE SELLER OF THE BONDS, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) OR THE ADSs (OR TEMPORARY ADSs) MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A. THE BONDS, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) AND THE ADSs (OR TEMPORARY ADSs) ISSUABLE UPON CONVERSION THEREOF ARE NOT TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS DESCRIBED UNDER ‘‘TRANSFER RESTRICTIONS.’’

We have granted the Joint Bookrunners (as defined herein) an option for 30 days from the date of this Offering Circular to purchase up to an additional US$29,224,000 principal amount of the Bonds at the initial offering price per Bond. See ‘‘Plan of Distribution.’’

The Bonds offered hereby are offered severally by the Initial Purchasers (as defined herein), subject to receipt and acceptance of the Bonds by the Initial Purchasers and subject to the right of the Initial Purchasers to reject any order in whole or in part. It is expected that delivery of Bonds will be made in book-entry form only through DTC on or about February 7, 2002 (the ‘‘Closing Date’’), against payment therefor in immediately available funds.

Joint Global Coordinators and Bookrunners

(listed alphabetically)

Deutsche Bank

Merrill Lynch Far East Limited

China Development Industrial Bank JPMorgan

Citicorp International Limited Asia Pacific Bank

The date of this Offering Circular is February 1, 2002.

TABLE OF CONTENTS

Summary ............................................................................................................................................................	1
Risk Factors .......................................................................................................................................................	14
Use of Proceeds .................................................................................................................................................	30
Market Price Information ..................................................................................................................................	31
Exchange Rates..................................................................................................................................................	33
Dividends and Dividend Policy.........................................................................................................................	34
Changes in Our Capital Structure......................................................................................................................	35
Capitalization .....................................................................................................................................................	36
Selected Financial Information..........................................................................................................................	38
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..........................	40
Unconsolidated Interim Financial Information .................................................................................................	64
Recent Developments ........................................................................................................................................	66
Business .............................................................................................................................................................	68
Management.......................................................................................................................................................	95
Related Party Transactions ................................................................................................................................	99
Major Shareholders............................................................................................................................................	101
Description of the Bonds...................................................................................................................................	103
Global Bonds .....................................................................................................................................................	121
Certain ROC Legal Requirements.....................................................................................................................	125
Information Relating to the Conversion Right..................................................................................................	127
Description of Common Shares.........................................................................................................................	130
Description of American Depositary Shares.....................................................................................................	136
Taxation..............................................................................................................................................................	146
Plan of Distribution............................................................................................................................................	157
Transfer Restrictions..........................................................................................................................................	160
General Information...........................................................................................................................................	164
Legal Matters .....................................................................................................................................................	166
Experts ...............................................................................................................................................................	166
Index to Consolidated Financial Statements .....................................................................................................	F-1
Appendix A—Certain Unaudited Unconsolidated Financial Data as of and for the Nine-Month Periods
ended September 30, 2000 and 2001 ............................................................................................................	A-1
Appendix B—Glossary of Technical Terms .....................................................................................................	B-1
Appendix C—The Securities Market of the ROC............................................................................................	C-1
Appendix D—Foreign Investment and Exchange Controls in the ROC..........................................................	D-1

No person has been authorized to give any information or to make any representations other than those contained in this Offering Circular and, if given or made, such information or representations must not be relied upon as having been authorized. This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person or by anyone in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Offering Circular nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to its date.

i

IN CONNECTION WITH THE OFFERING, DEUTSCHE BANK AG LONDON MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS (SUBJECT TO APPLICABLE LAW) AT A LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

This Offering Circular is being furnished by us in connection with an offering exempt from registration under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’) solely for the purpose of enabling a prospective investor to consider the purchase of the Bonds offered hereby.

We accept responsibility for the information contained in this Offering Circular. To the best of our knowledge and belief (after having taken all reasonable care to ensure that such is the case), the information for which we are responsible is in accordance with the facts and does not omit anything likely to affect the import of such information, provided that the information contained in ‘‘Appendix C—The Securities Market of the ROC’’ and ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC’’ includes extracts from summaries of information and data publicly released by official sources in the ROC and other sources indicated therein, and we accept responsibility for accurately reproducing such summaries and data but accept no further or other responsibility in respect of such information.

No person is authorized to give any information or to make any representation not contained in this Offering Circular, and any information or representation not contained in this Offering Circular must not be relied upon as having been authorized by us or the Initial Purchasers. 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.

This Offering Circular does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation. 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 Bonds 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. In particular, the Bonds have not been and will not be registered under the Securities Act and, subject to certain exceptions, the Bonds may not be offered or sold within the United States or to U.S. persons. For a further description of restrictions on offers and sales of the Bonds and on distribution of this Offering Circular, see ‘‘Plan of Distribution.’’

ii

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

We are a company limited by shares and incorporated under the ROC Company Law. Substantially all of our directors and executive officers, our supervisors and certain of the experts name 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 not be possible for investors to effect service of process upon us or such persons within the United States, or to enforce against them judgments obtained in United States courts, including those predicated upon the civil liability provisions of the federal securities laws of the United States. We have been advised by our ROC counsel, Baker & McKenzie, Taipei, Taiwan, that there is doubt as to whether ROC courts will enter judgments in original actions predicated solely upon the civil liability provisions of the federal securities laws of the United States and that any final judgment obtained against us in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the Bonds, the Common Shares, the Entitlement Certificates, the ADSs or the Temporary ADSs will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that: (i) the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC; (ii) the judgment is not contrary to the public order or good morals of the ROC; (iii) if the judgment was rendered by default by the court rendering the judgment, we were served within the jurisdiction of such court or process was served on us with judicial assistance in the ROC; and (iv) judgments of the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis. Judgments obtained in certain United States courts have been confirmed to be recognized and enforceable in the courts of the ROC on a reciprocal basis.

A party seeking to enforce a foreign judgment in the ROC would, except under limited circumstances, be required to obtain foreign exchange approval from the Central Bank of China (the ‘‘CBC’’) for the remittance out of the ROC of any amounts recovered in respect of such judgment denominated in a currency other than NT Dollars. See ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC.’’

FORWARD-LOOKING STATEMENTS

This Offering Circular contains certain forward-looking statements, including among other things, statements relating to developments in our industry, developments in technology that may affect the market acceptance and competitiveness of our products, development of applications for our products, competition from other participants in our industry, pricing levels of our and our competitors’ products, our development and marketing of new products, the development and maintenance of relationships with our current customers and strategic partners, our development of relationships with new customers or strategic partners, the planned expansion and enhancement of our manufacturing capacity, the improvement of our process technologies and development of new process technologies, our ability to obtain funding for our capital expenditure plans, developments in the Asia Pacific region and in the markets for the our products, our ability to obtain necessary raw materials and the prices for such materials and our ability to attract and retain qualified personnel. These forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by our management. Words such as ‘‘anticipates,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘seeks,’’ ‘‘estimates,’’ and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance or actual results and are subject to certain risks, uncertainties and assumptions that are difficult to predict.

iii

CONVENTIONS

The references to ‘‘Macronix,’’ ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘our company’’ or ‘‘the Company’’ in this Offering Circular refer to Macronix International Co., Ltd. All references herein to ‘‘Taiwan’’ or the ‘‘ROC’’ are to the island of Taiwan and other areas under the effective control of the Republic of China. All references herein to the ‘‘ROC Government’’ and the ‘‘ROC Company Law’’ are references to the government of the Republic of China and the Company Law of the Republic of China, respectively. All references herein to ‘‘ROC GAAP’’ and ‘‘U.S. GAAP’’ are to accounting principles generally accepted in the ROC and the United States, respectively. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding.

We publish our financial statements in New Taiwan Dollars, the lawful currency of the ROC. All references herein to ‘‘United States Dollars,’’ ‘‘U.S. Dollars’’, ‘‘U.S. dollars’’ and ‘‘US$’’ are to United States dollars and references to ‘‘New Taiwan Dollars,’’ ‘‘NT Dollars’’, ‘‘NT dollars’’ and ‘‘NT$’’ are to New Taiwan Dollars. All translations from New Taiwan Dollars to United States Dollars were made (unless otherwise indicated) on the basis of the noon buying rate 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 (the ‘‘Noon Buying Rate’’) on June 29, 2001 of NT$34.48 = US$1.00. On January 31, 2002, the Noon Buying Rate between New Taiwan Dollars and United States Dollars was NT$34.99 = US$1.00. See ‘‘Exchange Rates.’’ All amounts translated into United States Dollars as described above are provided solely for the convenience of the reader, and no representation is made that the New Taiwan Dollar or United States Dollar amounts referred to herein could have been or could be converted into United States Dollars or New Taiwan Dollars, as the case may be, at any particular rate, the above rates or at all.

For a definition of certain terms used and not otherwise defined herein, see ‘‘Appendix B—Glossary of Technical Terms.’’

PRESENTATION OF FINANCIAL INFORMATION

We prepare our financial statements in accordance with generally accepted accounting principles in the ROC (‘‘ROC GAAP’’), which differ in certain significant respects from generally accepted accounting principles in the United States (‘‘U.S. GAAP’’). For a discussion of certain differences between ROC GAAP and U.S. GAAP, see Note 20 to our audited consolidated financial statements included elsewhere in this Offering Circular.

Our audited consolidated financial statements included in this Offering Circular include the balance sheets as of December 31, 1999 and 2000 and June 30, 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000 and the six-month periods ended June 30, 2000 and 2001. The summary balance sheet data as of December 31, 1998 are derived from our audited financial statements not included in this Offering Circular which were also prepared on a consolidated basis. All other financial data included in this Offering Circular are based on our unaudited unconsolidated financial statements for the period specified therein.

AVAILABLE INFORMATION

We are subject to the information requirements applicable to foreign private issuers under the U.S. Securities Exchange Act of 1934, or the Exchange Act, and in accordance therewith file reports and other information with the Securities and Exchange Commission, or the SEC. We are required under the Exchange Act to file annual reports on Form 20-F and submit reports on Form 6-K and other information with the SEC. These reports and other information can be inspected and copied at prescribed rates at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, DC 20549 and at the SEC’s regional office at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.

iv

If at any time we are neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, we will furnish to Holders of Bonds, and to prospective purchasers of Bonds, upon request of such persons, the information required to be delivered under Rule 144A(d)(4) under the Securities Act.

The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are not required to use the EDGAR system. However, we intend to comply with the EDGAR filing requirements once those requirements are imposed on foreign issuers, which imposition is expected to be effective as early as the first half of 2002.

As a foreign private issuer, we are exempt from the rules under the Exchange Act which require the furnishing and content of proxy statements, and our executive officers, directors, supervisors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

A registration statement on Form F-6 is expected to be filed with the SEC prior to the Closing Date to include the ADSs (the ‘‘Listed ADSs’’) and Temporary ADSs that represent the Listed ADSs issuable under the depositary facility (the ‘‘Listed ADS Depositary Facility’’) with respect to our American depositary shares currently quoted on the Nasdaq against the deposit of our Common Shares into which the Bonds are convertible. For further information about the Listed ADSs, please refer to such registration statement. So long as the Restricted Bonds are, and the Common Shares into which they are convertible will be, ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act, if a holder of the Restricted Bonds elects to receive ADSs (or Temporary ADSs) upon conversion, the Common Shares (or Entitlement Certificates) issuable upon conversion of the Restricted Bonds will be deposited into a restricted ADS depositary facility (the ‘‘Restricted ADS Depositary Facility’’) which is separate from the Listed ADS Depositary Facility and restricted ADSs (‘‘Restricted ADSs’’) (or Temporary ADSs that represent the Restricted ADSs (the ‘‘Restricted Temporary ADSs’’)) will be issued. The Restricted ADSs (or the Restricted Temporary ADSs) are subject to the transfer restrictions described herein and are not fungible with the Listed ADSs (or the Temporary ADSs that represent such ADSs).

We will furnish the depositary with our annual reports, which will include a review of operations and annual audited financial statements prepared in accordance with ROC GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will at our request arrange for the mailing of these documents to holders of our ADSs. Please see ‘‘Description of American Depositary Shares’’ for further details on the responsibilities of the depositary. For a description of documents available to Holders of the Bonds, see ‘‘General Information.’’

Alternatively, a Holder may obtain such information at the offices of the Luxembourg paying agent, The Bank of New York (Luxembourg) S.A., at its office located at Aerogolf Center, 1A Hoehenhof, L-1736 Senningerberg, Luxembourg, as such information will be provided free of charge to any person in Luxembourg who requests it.

v

[This page is intentionally left blank]

SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere herein. Special terms used in the semiconductor industry are defined in the glossary that is included as Appendix B to this Offering Circular.

Our Business

We are an independent designer, producer and supplier of nonvolatile memory, logic and other application-specific integrated circuit products including system-on-a-chip, or SOC, solutions. We view ourselves as an integrated solutions provider, treating our clients as strategic partners and working closely with them in all aspects of product development to develop silicon chip solutions that meet their specific needs. These partners include Nintendo of Japan with whom we have had a relationship for over 10 years, and Hewlett-Packard of the United States, with whom we have had a relationship for over five years. Examples of our product offerings include mask ROM, flash, logic and SOC products. We differentiate ourselves by our ability to offer a full range of in-house design, product and process engineering capabilities.

Internally, we are organized into three strategic business units, each with its own end application focus:

• our memory products unit, which encompasses our mask ROM, flash and EPROM areas;

• our SOC unit, which focuses on our system-on-a-chip (including embedded memory) and foundry activities; and

• our multimedia unit, which focuses on our logic products for the audio, video and networking markets.

We generate our revenue from customers who are in the consumer electronics, computer and communications industries. For the six months ended June 30, 2001, of our total net sales, excluding sales made by agents, 59.0% was generated by our products for consumer electronics applications, 17.8% by our products for computer applications and 23.2% by our products for communications applications.

Our Track Record

In combination with our manufacturing capabilities, we have developed a range of core technologies, design capabilities and the intellectual property necessary to develop customer application-specific products. We believe that we were the first in Taiwan, in August 1992, to develop a digital signal processor, and that we were the world’s first manufacturer to announce the commercial availability of a 4Mb flash chip in October 1992. Additionally, in 1997, we became one of the first companies in Taiwan to produce an embedded flash microcontroller. Through our manufacturing capabilities and technological innovations, we have also established strong market positions in the various nonvolatile memory markets that we serve. According to Gartner Dataquest rankings in April 2001, based on sales revenue, we were the world’s largest supplier of mask ROMs in 2000, with an estimated global market share that has increased to approximately 53.9% in 2000 from 9.1% in 1995, and ranked fourth in the EPROM market in 2000. We believe that in the flash market, we ranked twelfth in 2000 in terms of market share (based on sales revenue).

In March 1995, our Common Shares were listed on the Taiwan Stock Exchange and we became the first company to be listed under that stock exchange’s ‘‘High Technology’’ category of companies. In May 1996, our ADSs were accepted for quotation on the Nasdaq National Market, and we became the first Taiwanese company with securities listed in the United States.

1

We were named by Business Week in June 2001 in a survey based on return on equity, revenue growth and total revenues as one of the top 100 information technology companies worldwide, ranking ninety-ninth largest among companies in this industry. In addition, our president, Miin Wu, was named by Business Week in July 2001 as one of 13 entrepreneurs among 50 ‘‘stars’’ of Asia.

Our Production Facilities

We operate our own wafer fabrication facilities, or fabs, and presently have two fabs, Fab I and Fab II, located in Hsinchu, Taiwan. Fab I commenced its commercial operations in 1992 and currently has a production capacity of 36,000 six-inch wafers per month. Fab II commenced its commercial operations in October 1997 and reached a production capacity of 42,000 eight-inch wafers per month at the end of 2001. We began to manufacture mask ROMs at Fab II at linewidths of 0.18 micron from the second half of 2000 and expect to begin to migrate to 0.15 micron process technology by the end of 2002.

We have also commenced construction of Fab III, a third wafer fabrication facility, on a parcel of land next to Fab II. Fab III is expected to commence commercial operations by the end of 2002. We currently expect Fab III to ultimately have a production capacity of approximately 40,000 eight-inch wafers per month when fully operational. Our capital expenditure plans in 2002 consist mainly of the construction of, and facility for, Fab III and further upgrade of Fab II. We intend to obtain funding for our capital expenditures, including a portion of the costs associated with Fab III, from this offering and additional debt and equity financing that we may consider from time to time, depending on market conditions, our financial performance and other relevant factors, and from internally generated funds. Although we may adjust our capital expenditures depending on the future market demand for our products and the general economic condition, we believe that we will have sufficient resources available to meet our current capital expenditure plan. See ‘‘Business—Property, Plant and Equipment’’.

Recent Developments

As used in this section, all financial data for the year ended December 31, 2001, as of and for the nine months ended September 30, 2000 and 2001, for the quarters ended September 30, 2000, June 30, 2001, September 30, 2001 and December 31, 2001, are based on our unaudited unconsolidated financial statements.

The semiconductor industry has experienced a downturn since the end of 2000. Average selling prices for our products, especially for flash products, continued to decline throughout 2001. Our net sales revenue was approximately NT$17,036 million for the first nine months in 2001, a decrease of 16% compared to approximately NT$20,381 million for the same period in 2000. Net sales revenue for the third quarter in 2001 was approximately NT$5,086 million, representing a 1% decrease compared to approximately NT$5,117 million for the second quarter in 2001 and a 43% decrease compared to approximately NT$8,876 million for the third quarter in 2000. Our gross margin also declined from approximately 50% in the second quarter of 2001 to approximately 43% in the third quarter of 2001, and further decreased in the fourth quarter of 2001. Income before taxes was approximately NT$129 million for the third quarter of 2001, representing an 84% decrease compared to approximately NT$795 million for the second quarter in 2001 and a 96% decrease from approximately NT$3,236 million for the third quarter in 2000. Our income before taxes also further decreased in the fourth quarter of 2001. We believe that these results reflect a deteriorating general economic environment and declining demand for our products.

Our capacity utilization rate, which is the utilization rate prior to any production bottleneck, was 100% in 2000 but decreased to approximately 76% in the third quarter in 2001 and further declined to approximately 70% in the fourth quarter in 2001. Our capacity utilization rate may continue to decline if market conditions do not improve in the future.

2

Net inventory was approximately NT$8,263 million as of September 30, 2001, an increase of 84% compared to approximately NT$4,496 million as of September 30, 2000. We recorded approximately NT$700 million for inventory loss provision for the nine months ended September 30, 2001, compared with no loss provision for the nine months ended September 30, 2000. We held approximately 221 days worth of net inventory as of September 30, 2001, compared to 105 days as of September 30, 2000. Flash products accounted for approximately 49% of our product inventory, a result of soft demand for flash as a consequence of the economic downturn. We recorded an inventory loss provision of NT$206 million and NT$1,860 million during the third and fourth quarters of 2001, respectively. We expect to continue to record a significant amount of inventory loss provision due to inventory obsolescence and additional price declines in future periods if market conditions do not improve.

Nintendo continued to be our largest customer through the end of 2001. Nintendo successfully launched its GameCube in Japan and United States in 2001 as scheduled. We currently supply various chips including flash for the GameCube. However, sales of Game Boy Advance did not meet anticipated levels in the fourth quarter in 2001 and, as a result, our sales of mask ROM for use in Game Boy Advance software cartridges did not meet our anticipated target. See ‘‘Risk Factors—Risks Relating to Our Financial Condition and Business—We depend on Nintendo for a substantial portion of our revenue; delays in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue’’.

The market downturn in 2001 also affected some of our invested companies, which experienced significant declines in their respective operating results. We incurred a net investment loss from our investments of approximately NT$447 million for the nine months ended September 30, 2001, a decrease of approximately NT$137 million compared to approximately NT$584 million for the nine months ended September 30, 2000. In the fourth quarter of 2001, we incurred further investment losses due to the writedown of equity investments in, or losses incurred by, our invested companies, principally Caesar Technologies, Inc. and Chantek Electronic Co. Ltd., and a reduction of the value of the share interest in our invested companies. On December 26, 2001, the shareholders of Caesar Technology, Inc. approved a voluntary winding up of the company. Chantek Electronic Co., Ltd. experienced difficulty in securing sufficient funding for its operations in the fourth quarter of 2001. As a result, we wrote off all of our remaining investments in these two companies in the amount of approximately NT$370 million during the fourth quarter of 2001. Our total capital expenditure for 2001 was approximately NT$7.5 billion, which primarily consisted of the construction of, and facility for, Fab III and further upgrade of Fab II. In the second half of 2001, we entered into a syndicated loan for an amount of up to NT$12.0 billion and issued NT$3.0 billion principal amount of corporate bonds in Taiwan to fund our capital expenditure. None of the NT$12.0 billion syndicated loan was drawn as of the date of this Offering Circular. In the third quarter of 2001, we entered into a capital lease agreement with Nintendo in the amount of up to US$75 million for the use of manufacturing equipment. As of December 31, 2001, under the capital lease agreement, we had lease obligations of approximately US$53 million payable to Nintendo over a four year period in monthly installments. At the end of the lease term, title to the leased equipment will be transferred to us.

Our research and development expenses, which include royalty expenses on an ROC GAAP basis, were approximately NT$2,832 million for the nine months ended September 30, 2001, an increase of 32% compared to NT$2,143 million for the nine months ended September 30, 2000. Research and development as a percentage of net sales revenue was 17% for the nine months ended September 30, 2001, compared to 11% for the nine months ended September 30, 2000.

In the fourth quarter of 2001, we recorded an additional tax provision of NT$457 million which relates primarily to deferred tax assets that based on our estimates will not be realized.

3

On November 29, 2001, our Board of Directors approved the establishment of an employee stock option plan pursuant to which our employees may receive options to purchase an aggregate of 80,000,000 of our Common Shares. In January 2002, our Board of Directors approved the issuance of options to purchase an aggregate of 71,768,500 of our Common Shares.

On January 30, 2002, we prepaid a syndicated loan which had an outstanding amount of JPY3.17 billion (NT$844 million).

Our Strategy

We believe we are unique among our peers in Taiwan in terms of our strengths in both design and manufacturing. Our business model goes beyond that of a traditional integrated device manufacturer to cover strategic partnerships and value-added services to customers. We view our relationships with our strategic partners as the key factor to our ongoing success and to achieving our objective of being one of the pre-eminent semiconductor companies from Taiwan. We are confident that this overall strategy will help us build a core base of strategic clients that will position us to take advantage of both the opportunities and challenges of the various phases of the semiconductor business cycle. The components of our strategic initiatives are as follows:

• further enhance our product design capabilities and system level expertise;

• capitalize on our strengths in nonvolatile memory and embedded techniques to provide customized cost effective solutions for our partner clients;

• continue to upgrade our process technology and expand capacity prudently;

• acquire additional capabilities in logic and multimedia devices; and

• continue to focus on wireless communications and portable consumer electronics applications.

Our Corporate Information

Our principal executive offices are located at No. 16 Li-Hsin Road, Science-Based Industrial Park, Hsinchu, Taiwan, Republic of China, and our telephone number is (8863) 578-6688. Our website is: www.macronix.com . The information on our website is not part of this Offering Circular.

4

	The Offering
Issuer...................................................	Macronix International Co., Ltd.
Securities Offered...............................	US$140,000,000 aggregate principal amount of 0.5% Convertible
	Bonds Due 2007 (the ‘‘Bonds’’) (not including up to US$29,224,000
	aggregate principal amount of the Bonds subject to the over-allotment
	option of the Joint Bookrunners (as defned in ‘‘Plan of
	Distribution’’)).
Over-allotment Option.......................	We have granted the Joint Bookrunners an option exercisable within
	thirty days from the date of this Offering Circular to purchase up to an
	additional US$29,224,000 principal amount of the Bonds, solely to
	cover over-allotments.
Offering Price.....................................	100% of the principal amount of the Bonds.
Status of the Bonds............................	The Bonds will constitute direct, unconditional, unsubordinated and,
	subject to the restriction on liens described in the next sentence,
	unsecured obligations and will at all times rank pari passu among
	themselves and all of our other present and future direct,
	unconditional, unsubordinated and unsecured obligations.
Negative Pledge..................................	So long as any of the Bonds remains outstanding, we shall not create
	or permit to be outstanding any mortgage, charge, lien, pledge or
	other security interest upon the whole or part of our property, assets or
	revenues, present or future, in respect of any International Investment
	Securities or to secure any guarantee or indemnity in respect thereof
	without granting equivalent security for the Bonds. ‘‘International
	Investment Securities’’ means bonds, debentures, notes or other
	similar investment securities of our company or any other person
	evidencing indebtedness with a maturity of not less than one year
	from the issue date thereof, or any guarantees thereof, which (i) either
	(x) are by their terms payable, or confer a right to receive payment, in
	any currency other than New Taiwan Dollars or (y) are denominated
	in New Taiwan Dollars and more than 50% of the aggregate principal
	amount thereof is initially distributed outside the ROC by or with our
	authorization and (ii) are for the time being, or are intended to be,
	quoted, listed, ordinarily dealt in or traded, in each case primarily, on
	any stock exchange or over-the-counter or other securities market
	outside the ROC.
Interest.................................................	The Bonds bear interest at 0.5% per annum payable annually in
	arrears on February 7 of each year, commencing February 7, 2003.
	Interest on the Bonds is computed on the basis of a 360-day year of
	twelve 30-day months.
Taxation...............................................	All payments of principal, premium (if any) and interest by us with
	respect to the Bonds will be made after any deduction or withholding

5

for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of the government of the ROC or any authority thereof or therein having power to tax; provided that with respect to any such deduction or withholding from any such payment, we will, subject to certain exceptions set forth herein, pay such additional amounts as will result in the receipt by the Holders of the amounts which would have been receivable in the absence of any such withholding or deduction. See ‘‘Description of the Bonds—Taxation.’’

Form, Denomination and
Registration of Bonds....................	The Bonds will be issued only in fully registered form and
	denominated in principal amounts of US$1,000 and integral multiples
	thereof.
	Benefcial interests in the Regulation S Bonds will be represented by
	the Regulation S Global Bond, which will be registered in the name of
	a nominee of DTC and deposited on or about the Closing Date with
	The Bank of New York, as trustee (the ‘‘Trustee’’), as custodian for
	DTC for the accounts of Euroclear and Clearstream. Benefcial
	interests in the Restricted Bonds will be represented by the Restricted
	Global Bond, which will be registered in the name of a nominee of
	DTC, and deposited on or about the Closing Date with the Trustee as
	custodian for DTC. Interests in the Restricted Global Bond will be
	subject to certain restrictions on transfer.
	Benefcial interests in the Global Bonds will be shown on, and
	transfers thereof will be effected only through, records maintained by
	DTC and its direct and indirect participants, including Euroclear and
	Clearstream. Except as described herein, certifcates for Bonds will
	not be issued in exchange for benefcial interests in the Global Bonds.
	The Restricted Global Bond, and the Regulation S Global Bond on or
	prior to the 40th day after the later of the commencement of this
	offering and the latest closing date of this offering, will bear such
	appropriate legends as required under the Securities Act. Any of such
	Global Bonds, or any interest therein, may not be transferred except in
	compliance with the transfer restrictions set forth in the respective
	legends. In addition, no interest in the Restricted Global Bond may be
	transferred to a person taking delivery thereof through an interest in
	the Regulation S Global Bond unless the transferor provides the
	Trustee with a written certifcation regarding compliance with certain
	of such transfer restrictions. A transfer of an interest in the Regulation
	S Global Bond to a person taking delivery through an interest in the
	Restricted Global Bond, if made on or prior to the 40th day after the
	later of the commencement of this offering and the latest closing date
	of this offering, is also subject to certifcation requirements.

6

Conversion..........................................	Unless previously redeemed or repurchased and cancelled and subject
	as otherwise provided herein, holders of the Bonds (‘‘Holders’’) have
	the right to convert the Bonds (a ‘‘Conversion Right’’) during the
	Conversion Period (as defned herein) into our common shares, par
	value NT$10.00 per share (the ‘‘Common Shares’’) (initially in the
	form of Entitlement Certifcates (as defned herein), representing the
	right to receive Common Shares). In addition, in compliance with and
	subject to restrictions in the terms and conditions of the applicable
	deposit agreement and the Bonds, Holders may direct us to procure
	that Common Shares (or Entitlement Certifcates) issued upon the
	exercise of the Conversion Right be deposited with the The Bank of
	New York, as depositary (the ‘‘Depositary’’), for the issuance of
	ADSs (or Temporary ADSs). Each ADS represents 10 of our
	Common Shares. Holders of the Regulation S Bonds may not elect to
	receive ADSs (or Temporary ADSs) until the expiration of 40 days
	after the later of the commencement of the offering of Regulation S
	Bonds and the latest closing date of this offering. Holders of the
	Restricted Bonds may elect to receive Listed ADSs (or Temporary
	ADSs representing such ADSs) only if such Restricted Bonds
	intended to be converted are not, and the Common Shares into which
	they are convertible will not be, ‘‘restricted securities’’ within the
	meaning of Rule 144 under the Securities Act. So long as the
	Restricted Bonds are, and the Common Shares into which they are
	convertible will be, ‘‘restricted securities’’ within the meaning of Rule
	144 under the Securities Act, if a Holder of the Restricted Bonds
	elects to receive ADSs (or Temporary ADSs) upon conversion, the
	Common Shares (or Entitlement Certifcates) issuable upon
	conversion of the Restricted Bonds will be deposited into the
	Restricted ADS Depositary Facility, and the Restricted ADSs (or the
	Restricted Temporary ADSs) will be issued. The Restricted ADSs (or
	the Restricted Temporary ADSs) are subject to the transfer restrictions
	described herein and are not fungible with the Listed ADSs (or the
	Temporary ADSs that represent such ADSs). See ‘‘Description of the
	Bonds—Conversion.’’See ‘‘Transfer Restrictions—Transfer
	Restrictions on the ADSs (or Temporary ADSs) Issuable Upon
	Conversion of the Bonds.’’
	In the case of the Regulation S Global Bond, the Conversion Notice
	(as defned herein) will, among other things, require the Holder (or the
	benefcial owner of interests in such Global Bond) to represent and
	warrant that such Bonds do not constitute ‘‘restricted securities’’
	within the meaning of Rule 144 under the Securities Act and that such
	Holder is not our ‘‘affliate’’ as defned in Rule 144 under the
	Securities Act. In the case of the Restricted Global Bond, the
	Conversion Notice will require, among other things, the Holder (or the
	benefcial owner of an interest in such Global Bond) to represent and
	warrant that such Holder or benefcial owner is, or is acting for, a
	qualifed institutional buyer (as defned in Rule 144A under the
	Securities Act) and that such person is acquiring the Common Shares
	(or Entitlement Certifcates) or Restricted ADSs (or Restricted

7

Temporary ADSs) for its own account or the account of such qualified institutional buyer, as the case may be, and to agree, by or on behalf of such person, to comply with the restrictions on transfer of the Common Shares (or Entitlement Certificates) or Restricted ADSs (or Restricted Temporary ADSs) described under ‘‘Transfer Restrictions.’’

Upon conversion of the Bonds, we will issue Entitlement Certificates to the Holders. Entitlement Certificates will be exchanged for Common Shares as soon as possible after the Consolidation Date (as defined below) and in any event within 30 days after we receive all required approvals to increase our registered paid-in share capital. We currently expect that the Common Shares will be delivered to holders of Entitlement Certificates within 50 to 60 calendar days following each Consolidation Date. Upon conversion of the Bonds, a converting Holder may request us to deposit the Entitlement Certificates issued on conversion in exchange for Temporary ADSs to be issued by the Depositary pursuant to and in accordance with the provisions of the applicable deposit agreement. Once the Entitlement Certificates are exchanged for Common Shares, the Temporary ADSs will be exchanged for ADSs representing Common Shares issued under the terms of the applicable deposit agreement. With certain exceptions relating to the preemptive right in rights issues and the right to receive dividends, Entitlement Certificates will enable the holder thereof generally to enjoy the same rights and privileges as a holder of Common Shares, including the right to vote at shareholders’ meetings. See ‘‘Description of the Bonds—Conversion.’’

‘‘Consolidation Date’’ shall mean a date on which all Entitlement Certificates issued or to be issued for the Bonds converted on a Conversion Date which occurs on or prior to such Consolidation Date will be consolidated for the purpose of issuance of Common Shares (or Entitlement Certificates). Each of the following dates will be a Consolidation Date: the close of business on each of (i) seven business days in the ROC prior to the date of the Board of Directors’ meeting at which the Board of Directors prepares its dividend proposal for the annual shareholders’ meeting, (ii) the record date (or, if more than one dividend is declared, the latest of such record dates) set for the determination of shareholders entitled to receive the annual dividend payment (or, if during the annual shareholders’ meeting no annual dividends were declared, July 9), (iii) September 9 and (iv) December 9 of each year. In addition to the Consolidation Dates set forth in the preceding sentence, we shall set Consolidation Dates on the Trading Day following the maturity of the Bonds and on the Trading Day following any full or partial redemption of the Bonds at our election. See ‘‘Description of the Bonds—Conversion.’’

Conversion Period ..............................

The period on or after March 11, 2002, in the case of conversion of the Bonds into Common Shares (or Entitlement Certificates), or

8

	April 17, 2002, in the case of conversion of the Bonds into ADSs,
	including the Restricted ADSs (or Temporary ADSs, including
	Restricted Temporary ADSs), in each case up to the close of business
	on January 23, 2007, or if any of the Bonds shall have been called for
	redemption on or before January 30, 2007, then, with respect to such
	Bonds called for redemption, up to the close of business on the date
	seven days prior to the date fxed for redemption thereof; provided,
	however, that the Conversion Right shall be suspended during, and the
	Conversion Period shall not include, any period under the laws of the
	ROC we shall close our stock transfer books, which period currently
	includes 60 days prior to the date of the annual general shareholders’
	meeting, 30 days prior to a special shareholders’ meeting and 5 days
	prior to the record date for annual dividend distributions or other
	benefts or such other period determined by ROC law applicable from
	time to time (each such period, a ‘‘Closed Period’’); and provided
	further, however, that if we shall default in making payment in full
	with respect to any Bonds which shall have been called for
	redemption prior to February 7, 2007 on the date fxed for redemption
	therefor, the Conversion Right attaching to such Bonds will continue
	to be exercisable up to and including the close of business (at the
	place where the Bonds are deposited for conversion) on the date upon
	which the full amount payable with respect to such Bonds has been
	duly received by the Trustee (as defned herein) or the Paying Agents
	(as defned herein) and notice of such receipt has been duly given to
	the Holders. We have agreed to give Holders notice of any Closed
	Period.
Conversion Price................................	The initial Share Conversion Price will be NT$31.32 per Common
	Share, determined on the basis of a fxed exchange rate of
	NT$34.98 = US$1.00, or US$8.95 per ADS. The Share Conversion
	Price will be subject to adjustment for, among other things,
	subdivision or consolidation of Common Shares, bonus issues, rights
	issues, distributions of cash and stock dividends and other dilutive
	events.
Redemption at Maturity....................	Unless previously converted, redeemed or repurchased and cancelled,
	the Bonds will be redeemed on February 7, 2007 at a redemption
	price equal to 100% of the unpaid principal amount thereof, together
	with Redemption Premium (as defned herein). See ‘‘Description of
	the Bonds—Redemption, Repurchase and Cancellation.’’
	‘‘Redemption Premium’’ means an amount which represents (i) an
	annual yield to redemption to a Holder of 3.55% per annum from and
	including February 7, 2002 to but excluding the date of redemption
	(calculated on the basis of a year of 360 days consisting of 12 months
	of 30 days each) minus(ii) any interest accrued and paid by us prior
	to the date of redemption.

9

Redemption at Our Option...............	We may redeem all or only some (being US$1,000,000 in principal
	amount or an integral multiple thereof) of the Bonds at any time on or
	after February 7, 2005 and prior to February 7, 2007, at 100% of the
	principal amount thereof, together with Redemption Premium (as
	defned herein) and accrued but unpaid interest to the date of
	redemption if the Closing Price of the Common Shares translated into
	U.S. Dollars at the Prevailing Rate described below of the Common
	Shares for each of 30 consecutive Trading Days, the last of which
	occurs not more than fve days prior to the date upon which notice of
	such redemption is published, is at least 130% of the Share
	Conversion Price in effect on each such Trading Day translated into
	U.S. Dollars at the rate of NT$34.98 = US$1.00. The Prevailing Rate
	for the translation of the Closing Prices shall be the arithmetic average
	of the middle rate for the purchase of U.S. Dollars with NT Dollars
	quoted by the Bank of Taiwan at the close of business on each day of
	the relevant 30 consecutive Trading Day period. We may also redeem
	the Bonds, in whole but not in part, at any time prior to February 7,
	2007 at a redemption price equal to their principal amount, together
	with Redemption Premium (as defned herein), if at least 90% in
	principal amount of the Bonds have already been redeemed,
	repurchased and cancelled, or converted.
Redemption at the Option of the
Holders............................................	The Bonds are redeemable at the option of the Holders, in whole or in
	part, on August 9, 2004 at 107.845% of the principal amount thereof,
	together with accrued but unpaid interest to the date of redemption.
Repurchase at the Option of the
Holders upon Change of
Control.............................................	Upon the occurrence of a change of control (as defned herein), we are
	required to make an offer to repurchase all outstanding Bonds at a
	repurchase price equal to 100% of the principal amount of the Bonds,
	together with Repurchase Premium (as defned below).
	‘‘Repurchase Premium’’ means an amount which represents (i) an
	annual yield to redemption to a Holder of 3.55% per annum from and
	including February 7, 2002 to but excluding the repurchase date
	(calculated on the basis of a year of 360 days consisting of 12 months
	of 30 days each) minus(ii) any interest accrued and paid by us prior
	to the repurchase date.
Repurchase in the Event of
Delisting...........................................	If the Common Shares cease to be listed or admitted to trading on the
	Taiwan Stock Exchange, at your option, you may require us to
	repurchase all, but not less than all, of the Bonds you own on the 20th
	business day after the occurrence of such event at a price equal to
	100% of the principal amount of the Bonds, together with the
	Repurchase Premium.

10

Tax Redemption..................................	The Bonds may be redeemed, at our option, in whole but not in part,
	at the Early Redemption Amount (as defned herein) if we have or
	will become obliged to pay additional amounts as provided or referred
	to above under ‘‘—Taxation’’ in excess of the additional amounts
	payable with respect to a deduction or withholding at a rate of 20% of
	the amount of the relevant payment as a result of any change in, or
	amendment to, the laws or regulations of the ROC or any political
	subdivision or any authority thereof or therein having power to tax, or
	any change in the general application or offcial interpretation of such
	laws or regulations, which change or amendment becomes effective
	on or after February 7, 2002, and such obligation cannot be avoided
	by us taking reasonable measures available to us.
	The ‘‘Early Redemption Amount’’ of each Bond means its principal
	amount plus Redemption Premium.
Governing Law...................................	The Indenture (as defned herein) and the Bonds are governed by the
	laws of the State of New York.
Trustee.................................................	The Bank of New York.
Paying Agents, Conversion Agents
and Transfer Agents..........................	The Bank of New York and The Bank of New York (Luxembourg)
	S.A.
Listing..................................................	Applications have been made to list the Bonds on the Luxembourg
	Stock Exchange and to have the Restricted Bonds designated for
	trading in The Portal Market of the U.S. National Association of
	Securities Dealers, Inc. (‘‘PORTAL’’). The outstanding Common
	Shares are listed on the TSE and application will be made for the
	Common Shares and the Entitlement Certifcates to be issued upon
	conversion of the Bonds to be listed on the TSE. The Listed ADSs are
	quoted on Nasdaq.
Use of Proceeds...................................	The net proceeds of this offering will be used to fund the purchase of
	machinery and equipment for Fab III. See ‘‘Use of Proceeds.’’
Lock-Up...............................................	We have generally agreed not to offer or sell any of our Common
	Shares (or Entitlement Certifcates) or ADSs (or Temporary ADSs)
	without the permission of the Joint Bookrunners for a period of 90
	days from the date of this Offering Circular.
Risk Factors........................................	For a discussion of certain factors that should be considered in
	connection with an investment in the Bonds, see ‘‘Risk Factors’’.

11

Summary Financial Information

The summary statement of operations data for the years ended December 31, 1998, 1999 and 2000 and for the six months ended June 30, 2000 and 2001, and the summary balance sheet data as of December 31, 1999 and 2000 and as of June 30, 2001 presented below are derived from our audited financial statements included in this Offering Circular, which were prepared on a consolidated basis. The summary balance sheet data as of December 31, 1998 presented below are derived from our audited financial statements not included in this Offering Circular, which were also prepared on a consolidated basis. The summary statement of operations data for the six months ended June 30, 2001 may not be indicative of our results of operations for the full year 2001.

The financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, our financial statements and the related notes included in this Offering Circular, ‘‘Selected Financial Information’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. Our financial statements are prepared and presented in accordance with accounting principles generally accepted in the Republic of China, which are referred to as ROC GAAP in this Offering Circular. For a discussion of certain differences between ROC GAAP and accounting principles generally accepted in the United States, which are referred to as U.S. GAAP in this Offering Circular, see Note 20 to our financial statements included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—U.S. GAAP Reconciliation’’.

12

Consolidated Statement of Operations Data: ROC GAAP Net sales revenue............................................................................... Cost of goods sold............................................................................. Gross proft........................................................................................ Operating expenses ........................................................................... Operating income (loss).................................................................... Total other income............................................................................. Total other expenses.......................................................................... Income (loss) before taxes ................................................................ Income tax beneft (expense) ............................................................ Net income (loss) .............................................................................. Net income (loss) per share—basic(1) ............................................. Net income (loss) per share—diluted(1)........................................... U.S. GAAP Gross proft........................................................................................ Operating income (loss).................................................................... Net income (loss)(2).......................................................................... Net income (loss) per common share—basic(3) .............................. Net income (loss) per common share—diluted(3) ........................... Balance Sheet Data: ROC GAAP Total current assets............................................................................ Net property, plant and equipment.................................................... Total assets ........................................................................................ Total current liabilities ...................................................................... Long-term liabilities.......................................................................... Total liabilities................................................................................... Total shareholders’ equity................................................................. U.S. GAAP Total assets ........................................................................................ Total shareholders’ equity................................................................. Other Data: ROC GAAP Capital expenditures.......................................................................... Depreciation and amortization.......................................................... Net cash provided by operating activities ........................................ Net income (loss) per ADS—basic................................................... Net income (loss) per ADS—diluted................................................ Number of shares outstanding Shares (weighted, as adjusted)(4) ..................................................... Stock dividend per share Shares(5)............................................................................................

Year ended, and as of, December 31, Six months ended, and as of, June 30, 1998 1999 2000 2000 2000 2001 2001 (NT$) (NT$) (NT$) (US$) (NT$) (NT$) (US$) (in millions, except per share and per ADS data and percentages) 12,580 16,957 33,493 971 12,008 12,230 355 (9,888) (12,124) (15,498) (449) (7,212) (5,431) (158) 2,692 4,833 17,995 522 4,796 6,799 197 (3,055) (3,258) (5,856) (170) (2,746) (2,959) (86) (363) 1,575 12,139 352 2,050 3,840 111 698 846 945 27 1,069 572 16 (2,288) (1,830) (2,073) (60) (840) (1,603) (46) (1,953) 591 11,011 319 2,279 2,809 81 406 316 (398) (11) 229 (380) (11) (1,547) 907 10,613 308 2,508 2,429 70 (0.52) 0.30 3.22 0.09 0.78 0.72 0.02 (0.52) 0.30 3.18 0.09 0.77 0.71 0.02 1,548 4,558 17,615 511 4,582 4,348 126 (1,620) 1,237 11,069 321 1,313 (1,843) (53) (3,072) 1,861 8,016 232 1,748 (2,606) (76) (1.06) 0.64 2.54 0.07 0.56 (0.80) (0.02) (1.06) 0.64 2.49 0.07 0.56 (0.80) (0.02) 15,898 14,303 29,027 842 22,031 25,170 730 28,491 32,028 38,006 1,102 36,350 39,188 1,137 49,604 51,197 72,451 2,101 62,534 72,294 2,096 5,841 8,868 11,786 342 9,525 9,454 274 18,714 15,946 16,091 466 16,547 15,974 463 24,555 24,814 27,877 808 26,072 25,428 737 25,049 26,383 44,573 1,293 36,462 46,866 1,359 49,604 51,578 72,342 2,098 63,068 72,194 2,094 23,945 26,433 41,831 1,213 35,867 44,941 1,303 6,136 8,129 11,803 342 7,005 5,114 148 4,255 4,855 6,048 175 2,745 3,878 112 2,766 5,062 16,123 468 5,282 5,637 163 (5.20) 3.00 32.20 0.90 7.80 7.20 0.20 (5.20) 3.00 31.80 0.90 7.70 7.10 0.20 2,987 3,014 3,295 3,295 3,229 3,359 3,359 22% 10% 13% 13% 13% 30% 30%

1998 (NT$) (in 12,580 (9,888) 2,692 (3,055) (363) 698 (2,288) (1,953) 406 (1,547) (0.52) (0.52) 1,548 (1,620) (3,072) (1.06) (1.06) 15,898 28,491 49,604 5,841 18,714 24,555 25,049 49,604 23,945 6,136 4,255 2,766 (5.20) (5.20) 2,987 22%

(1) Retroactively adjusted for all subsequent stock dividends and employee bonuses declared.

(2) The difference between net income under ROC GAAP and U.S. GAAP was largely derived from different treatments under these two accounting principles with respect to employee bonus shares and derivative contracts. The difference in accounting treatment with respect to employee bonus shares under the two accounting principles resulted in an additional expense of NT$516 million in 1998, no additional expense or income in 1999, an additional expense of NT$1,622 million (US$47 million) in 2000, an additional expense of NT$384 million for the six months ended June 30, 2000, and an additional expense of NT$5,298 million (US$154 million) for the six months ended June 30, 2001. The differences of accounting treatment with respect to derivative contracts under the two accounting principles resulted in an additional expense of NT$1,056 million in 1998, an increased income of NT$1,301 million in 1999, an additional expense of NT$898 million (US$26 million) in 2000, an increased income of NT$76 million for the six months ended June 30, 2000, and an additional expense of NT$204 million (US$6 million) for the six months ended June 30, 2001.

(3) Retroactively adjusted for all stock dividends declared. See Note 20 to our financial statements included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—U.S. GAAP Reconciliation’’.

(4) Shares outstanding weighted, as adjusted for any employee share bonus and any subsequent stock dividends declared.

(5) The percentage of our stock dividend is determined by the number of shares we distributed to existing Shareholders divided by the shares outstanding immediately prior to the share issuance. We did not distribute any cash dividends in any of the periods presented.

13

RISK FACTORS

The following important factors could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of our company.

Risks Relating to Our Financial Condition and Business

We are vulnerable to cyclical downturns in the semiconductor industry.

The semiconductor industry is highly cyclical. Economic downturns historically have caused reduced product demand, rapid declines in product prices, low capacity utilization and production over-capacity. For example, during 1997 and 1998, intense competition in the semiconductor industry worldwide, coupled with a general economic downturn in the Asia Pacific region, caused the prices of and demand for many of our products to decline significantly. In addition, since the end of 2000, the semiconductor industry has been adversely impacted by the sudden and rapid decline in worldwide demand for electronic products such as personal computers, computer peripherals, consumer electronics and other communications devices. As such, electronics systems and applications companies started to scale back their orders for semiconductor devices to avoid further inventory accumulation. As a result, our capacity utilization rate has declined and the average selling prices for most of our products have also declined. These declines reduced our gross margins and seriously harmed our operating results. We cannot predict when the semiconductor industry will recover. Even after the industry recovers, our product prices, sales volumes and margins may again significantly decline in future cyclical downturns, and our business, financial condition and results of operations may seriously suffer accordingly.

Our periodic results of operations fluctuate significantly, which may affect the value of your investment.

Our historical net sales revenue and other results of operations have varied, at times significantly, from quarter to quarter and from year to year. For example, we recorded a net loss under ROC GAAP of NT$1,547 million in 1998 compared with net income of NT$907 million in 1999, NT$10,613 million (US$308 million) in 2000 and NT$2,429 million (US$70 million) for the six months ended June 30, 2001. Our future net sales revenue, gross profit, operating income and net income may vary significantly due to a combination of many factors, including:

• the cyclical nature of both the semiconductor industry (as discussed above) and the markets served by our customers;

• shifts by integrated device manufacturers between internal and outsourced production;

• our customers’ adjustments in their inventory;

• the loss of a key customer or the postponement or cancellation of an order from a key customer;

• the timing and volume of orders relative to our available production capacity;

• our ability to obtain raw materials and equipment on a timely and economic basis;

• environmental events or industrial accidents such as earthquakes or fire;

• the long lead times required for building and equipping new facilities;

• the long lead times in securing a qualification from our customers;

• currency and interest rate fluctuations that may not be fully hedged; and

• technological changes.

14

Due to these factors and other risks discussed in this section, many of which are beyond our control, you should not rely on quarter-to-quarter comparisons to predict our future performance. Unfavorable changes in any of the above factors may seriously harm our company. In addition, it is possible that in some future periods our operating results may be below the expectations of public market analysts and investors. In this event, the prices of our securities may fall.

If we continue to experience significant investment losses from our investments, our financial results may be adversely affected.

We have made and expect to continue to make a series of equity joint venture and strategic investments in companies located in Taiwan and elsewhere. The market downturn in 2001 affected some of our invested companies, which experienced significant declines in their operating results. Our investment in Tower Semiconductor, Ltd., or Tower, in Israel, has also been affected by this downturn. Several U.S. companies in the semiconductor industry have written down their investments in Tower. However, our internally prepared unaudited unconsolidated financial information prepared under ROC GAAP do not reflect any writedown in connection with this investment. We incurred a net investment loss from our investments of approximately NT$447 million for the nine months ended September 30, 2001, a decrease of approximately NT$137 million compared to approximately NT$584 million for the nine months ended September 30, 2000. In the fourth quarter of 2001, we incurred further investment losses due to losses incurred by our invested companies, principally Caesar Technology, Inc. and Chantek Electronic Co., Ltd., and a reduction of the value of the share interest in our invested companies. On December 26, 2001, the shareholders of Caesar Technology, Inc. approved a voluntary winding up of the company. Chantek Electronic Co., Ltd. experienced difficulty in securing sufficient funding for its operations in the fourth quarter in 2001. As a result, we wrote off all of our remaining investments in these two companies in the amount of NT$370 million during the fourth quarter of 2001. Any further significant losses from our investments in the future may materially and adversely affect our

You should not rely on our financial forecasts reported by us from time to time pursuant to the requirements of the Taiwan Stock Exchange.

We urge you not to rely on the forecasts published by us from time to time pursuant to the requirements of the Taiwan Stock Exchange as such forecasts are based upon a number of estimates and assumptions regarding our industries, investments and general market, political and economic conditions, many of which are beyond our control, and are inherently subject to significant uncertainties and contingencies. None of the information included in this Offering Circular has formed or will form the basis of our future forecasts. We do not undertake any obligation to update these forecasts, except as required by applicable laws and regulations.

Internally prepared annual financial information published by us from time to time pursuant to recent requirements of the Taiwan Stock Exchange may be inaccurate and incomplete.

Effective as of January 1, 2002, the Taiwan Stock Exchange requires companies listed on the Taiwan Stock Exchange that publish financial forecasts to report to the Taiwan Stock Exchange and publish by the end of January each year certain internally prepared unaudited information regarding the statement of operations of such companies during the prior fiscal year. We have complied with this requirement for the year ended December 31, 2001 and we intend to continue to comply with this requirement. The information we publish in response to this requirement will not be subject to the same review and scrutiny, including internal auditing procedures and review by independent auditors, to which we subject quarterly financial information we publish from time to time pursuant to the requirements of the Taiwan Stock Exchange, or to our audited semi-annual or annual financial statements. Further, because this information is neither audited nor reviewed, it may vary from our audited ROC GAAP financial statements for the same period. Any such variance may be material and adverse.

15

Our business may be harmed, and the price of the Bonds, the Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) may be adversely affected, by changes in general economic and business conditions resulting from, among other things, the recent terrorist attacks on the United States.

On September 11, 2001, terrorist attacks on the United States caused significant loss of life and property damage and disruptions in U.S. and global markets. The long term impact of these events, including United States military action or possible economic or diplomatic sanctions, is unclear, but could have a material effect on general economic conditions and market liquidity. An economic downturn may further reduce the demand for our products and services and negatively impact our results of operations. In addition, the market value of the Bonds, the Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) may also be adversely affected due to increased market volatility and the reasons stated above.

A decrease in demand for consumer electronics, computer and computer peripheral and other communications products may significantly decrease the demand for our products.

A significant percentage of our net sales revenue, that is, our gross sales revenue less sales returns and discounts, is derived from customers who use our products for consumer electronics, computers and computer peripherals and other communications products. A significant decrease in the demand for consumer electronics, computers and computer peripherals and other communications products may decrease the demand for our products and could seriously harm our results of operations. Since the end of 2000, worldwide demand for electronic products such as personal computers, computer peripherals, consumer electronics and certain other communication devices has experienced a rapid and sudden decline. Declining average selling prices of these products have placed significant pressure on the prices of our products that are used in these devices. If these average selling prices continue to decrease, pricing pressure on our products may continue to reduce our net sales revenue and therefore seriously harm our operating results.

If we cannot compete successfully, our current and potential customers may not purchase our products, which would seriously harm our business.

The semiconductor industry is intensely competitive. We compete with major international semiconductor companies, including Intel, SanDisk, Atmel, Sharp, Advanced Micro Devices, STMicroelectronics, Samsung Electronics, NEC, Fujitsu, Hynix Semiconductor and Toshiba, and various other industry participants. Many of our competitors have substantially greater financial, technical, marketing, distribution and other resources than we do. We compete with these companies in different product lines to various degrees on the basis of numerous factors both within and outside of our control, including:

• price;

• manufacturing and product performance;

• product mix and features;

• product system compatibility;

• manufacturing yields;

• customized design;

16

• availability;

• quality; and

• sales and technical support.

Moreover, since the basic manufacturing processes for the production of volatile and nonvolatile memory chips are similar, manufacturers of volatile memory products may migrate into our nonvolatile memory markets creating additional competition. If growth in demand fails to match growth in supply, or occurs more slowly than anticipated, competitive and product pricing pressures may increase, eroding our profit margins and weakening our earnings.

We depend on mask ROM sales for a substantial portion of our revenue; a significant decrease in mask ROM sales could result in the loss of a significant portion of our revenue.

In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 63.7%, 63.1%, 58.6% and 54.4%, respectively, of our gross sales revenue was derived from mask ROM sales. Historically, most of our mask ROM products have been used in video game cartridges. Competing technological alternatives, such as CD-ROMs, DVD-ROMs, magnetic disks and telephone-linked and internet databases, are now available to video game machine producers for some applications. Any significant reduction in the use of mask ROMs in the video game manufacturing industry could cause our net sales revenue or profitability to decline. We are seeking to sustain our mask ROM sales volumes by diversifying our customer base to include telecommunications, handheld computing and information devices and office automation equipment manufacturers. If these initiatives fail, our mask ROM sales may decline significantly in the future resulting in the loss of a significant portion of our revenue.

We depend on Nintendo for a substantial portion of our revenue; delays in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue.

In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 52.4%, 46.0%, 32.5% and 35.7%, respectively, of our net sales revenue was derived from sales to Megachips Corporation, which is the exclusive distributor of our products to Nintendo. Nintendo may not continue to place orders with us in the future at the same levels as in prior periods or at all. The loss of Nintendo as a customer, delayed or reduced orders by Nintendo, decreases in product prices or significant changes in delivery schedules to Nintendo could materially and adversely affect our results of operations. In addition, any negative development in the relationship between us and Megachips or the relationship between Nintendo and Megachips could harm our sales to Nintendo. Nintendo faces intense competitive pressure in the electronics entertainment market, which is characterized by frequent new product introductions and rapidly shifting consumer preferences. Nintendo’s new game platform, the GameCube, utilizes a DVD-ROM-based storage system in place of mask ROM-based cartridges as used in the Nintendo 64. This new game platform came to market in Japan in September 2001, in the United States in November 2001, and is expected to come to market in Europe in 2002. As a result, we have been shifting additional production toward the output of mask ROMs for Nintendo’s Game Boy series of handheld gaming devices and other semiconductor solutions for the GameCube and related accessories. Unit sales volumes or prices of mask ROMs and other products sold through Megachips to Nintendo may fluctuate significantly depending on the products offered by Nintendo and its need for our products. If we cannot successfully market and sell our mask ROM products for inclusion in other devices such as game cartridges used in Nintendo’s Game Boy Advance devices, or if Nintendo delays its orders from us, or if we cannot replace Nintendo with a customer purchasing our products at the same levels as Nintendo’s, our sales may decline significantly and our business, financial condition and results of operations will suffer.

17

We depend on our technology partners to advance our portfolio of process technologies; we may not be able to advance our portfolio of process technologies if we fail to maintain our relationships with our technology partners.

Enhancing our product design and manufacturing process technologies is critical to our ability to provide products and services for our customers. We have an internal research and development team focusing on developing new semiconductor manufacturing process technologies. We also depend on our technology alliances with leading integrated device manufacturers and fabless semiconductor companies, consumer electronics and communications companies and other technology providers to advance our portfolio of process technologies. We currently have joint development or technology sharing arrangements with Nintendo (through Megachips), Mitsubishi, Infineon, Philips and Tower Semiconductor. We believe our alliances with these companies also reduce our development costs and capital expenditures and increase the utilization rates in our fabrication plants. If we are unable to maintain successful technology alliances on mutually beneficial economic terms, or are unable to enter into new technology alliances with other leading semiconductor companies, electronics companies and other technology providers, we may not be able to continue providing our customers with leading-edge process technologies, which could seriously harm our company.

We depend on key personnel; our failure to attract or retain these personnel may disrupt our business.

Our success depends greatly on our ability to continue to attract, retain and motivate qualified personnel, including key senior executives and research and development, engineering, sales and marketing, manufacturing, support and other personnel. We do not carry key person insurance on any of our personnel. There is intense competition for these personnel in Taiwan. We expect this competition to intensify in the near future as we and our competitors hire additional personnel to support capacity expansion. The loss of key personnel without adequate replacement, or the inability to attract new qualified personnel, could have a material adverse effect on us. In order to attract and retain personnel, we must devote significant resources to training and benefits. These benefits have historically and may in the future include bonuses in the form of our Common Shares and our stock performance-based employee bonuses.

If needed capital resources are unavailable to us, we will be unable to implement successfully our capital expenditure plans.

We will need significant amounts of capital to build, expand, maintain and upgrade our facilities, including the construction and outfitting of Fab III. Our total capital expenditure for 2001 was approximately NT$7.5 billion, of which we spent NT$3.7 billion for the construction of, and facility for, Fab III. We currently expect to fund our further capital expenditures from external sources, including the proceeds of this offering, additional debt and equity financing and internally generated funds. Our ability to do so will depend on market conditions, our financial performance and other factors, many of which are beyond our control. Necessary funding to implement our planned capital expenditure program may not be available to us on satisfactory terms, or at all.

If needed cash resources are unavailable to us, we will be unable to implement successfully our research and development plans.

To keep up with the rapid pace of technological change and to develop attractive, cost-effective products, we need to invest significantly on research and development. We currently intend to spend no less than 10% of our net sales revenue on research and development. We may not be able to generate cash flow from operations in sufficient amounts to allow us to maintain this level of spending on research and development. Any failure to maintain adequate research and development spending could jeopardize our longterm prospects.

18

Fluctuations in the semiconductor industry have caused our inventory levels to increase and we have suffered losses on inventories; we may continue to suffer inventory losses if the market condition does not improve in the near future.

Historically, companies in the semiconductor industry have expanded aggressively during periods of increased demand. As a result, periods of excess capacity, overproduction, inventory buildup, rapid declines in average selling prices and technological obsolescence in the semiconductor industry have frequently followed periods of increased demand. The semiconductor industry has experienced such adverse effects since the end of 2000. This has resulted in a rapid increase in our inventory levels, a decline in average selling prices for our products and a corresponding decrease in the stated value of our inventories. Any provision of inventory loss is recognized as a non-operating loss under ROC GAAP. We held approximately 221 days worth of net inventory as of September 30, 2001, compared to 105 days as of September 30, 2000. We recorded an inventory loss provision of NT$700 million for the nine months ended September 30, 2001, compared with no loss provision for the nine months ended September 30, 2000. We recorded an inventory loss provision of NT$206 million and NT$1,860 million during the third and fourth quarters of 2001, respectively. We may be required to further increase our inventory loss provision or provide a significant writedown of our inventory due to inventory obsolescence and price declines in future periods if market conditions do not improve. Given the significant inventory risk exposure characteristics of the semiconductor industry, there can be no assurance that we will be able to maintain our inventories at a satisfactory level and not incur additional losses on inventories in the future.

If we are unable to manage our growth effectively, our expansion plans could be jeopardized.

We have experienced in the past, and may experience again in the future, rapid growth in the scale and complexity of our operations and in the number of our employees. This growth may strain our managerial, financial, manufacturing and other resources. For example, whenever process technology is upgraded, as in the case of a decrease in linewidths, the efficiency of our manufacturing operations may be negatively affected. To manage our growth, we must continue to implement additional operating and financial controls and hire and train additional personnel. We may be unable to do so in the future. Any failure to do so could jeopardize our expansion plans and seriously harm our operations.

If we are unable to manage seasonal fluctuations in our production levels and capabilities successfully, our profitability would be adversely affected.

In years when we operated at full capacity or close to full capacity, at certain times of the year, particularly in the first and fourth quarters, we lengthened our delivery schedules on some products because of capacity constraints. If we operate in the future at or close to full capacity and, as a result, our delivery schedules are lengthened, our customers could seek other sources for products. If we are unable to expand our manufacturing capacity to meet seasonal or additional future demand, we may lose customers, which could materially and adversely affect our operating results. Conversely, if demand for our products is insufficient to absorb the additional capacity, increases in fixed costs and operating expenses related to the additional capacity may materially and adversely affect our results of operations.

Delays or other constraints in the expansion or construction of our fabrication plants could delay increases in our capacity, adversely affecting our operating results.

We have commenced construction of Fab III. Due to our concern over market conditions, we may not begin commercial operation of Fab III until the end of 2002. We could delay the commencement of commercial operation of Fab III beyond 2002 if our concerns regarding market conditions continue. In addition, various events beyond our control could further delay this project or increase its cost. These events include:

• a major design and/or construction change caused by changes to the initial building space utilization plan or equipment layout;

19

• shortages or late delivery of building materials and equipment;

• a shortage of construction workers or a change in immigration laws preventing workers from entering Taiwan;

• strikes and labor disputes;

• on-site construction problems such as industrial accidents, fires and structural collapse;

• delays in securing the necessary governmental approvals; and

• delays in the achievement of full commercial operations following the construction of Fab III.

If we experience delays or other constraints in the expansion or construction of our fabrication plants, planned increases in our capacity could be delayed and our results of operations could be negatively affected.

We have limited number of suppliers, and could suffer shortages if any of them were to interrupt supplies or increase prices.

Our manufacturing operations depend upon our ability to obtain adequate supplies of raw materials such as six-inch wafers, currently used in Fab I, and eight-inch wafers, currently used in Fab II, chemicals and gases and other inputs on a timely basis. We purchase these raw materials from a limited number of suppliers. Our future growth will depend in large part on securing a continuous supply of both six-inch and eight-inch wafers. Our operating results would be adversely affected if we fail to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials significantly increase. Wafer capacity and supply in the semiconductor industry in Taiwan have from time to time been, and in the future may be, limited, resulting in periodic shortages.

If we are unable to obtain new equipment, we may be forced to delay our expansion plans.

We expect to purchase a significant amount of new equipment to expand our operations. Our plans for the enhancement of Fabs I and II, as well as the construction of Fab III, will require additional advanced and costly equipment. If we are unable to obtain additional equipment we need on a timely and cost-effective basis, our plans to increase our production capacity could be significantly delayed and our operating results may be materially and adversely affected. Moreover, any increase in production may be limited by long delivery times from equipment vendors. Failures or delays in the delivery of equipment could delay the implementation of our expansion plans and impair our ability to meet customer orders. If we are unable to implement our expansion plans or meet customer orders, we could lose potential and existing customers and our results of operations could be negatively affected.

If the trading price of our Common Shares decreases significantly or if the exchange rate between the Japanese yen and the U.S. dollar fluctuates significantly, we may suffer substantial losses as a result of derivative contracts to which we are or may become a party.

We from time to time enter into derivative contracts with the underlying reference being our Common Shares. Certain of these contracts also include a reference to foreign currency exchange rates. Gains of NT$1,341 million in 1999, losses of NT$297 million (US$9 million) in 2000 and losses of NT$124 million (US$4 million) for the six months ended June 30, 2001 with respect to these derivative contracts (which occur primarily due to the market price movement of our Common Shares, and for certain contracts, also due to foreign exchange rate movements, particularly exchange rates between the U.S. dollar and the Japanese yen) were recorded under U.S. GAAP. See ‘‘Management’s Discussion and Analysis of Financial Condition and

20

Results of Operations—Introduction—Equity Derivative Contracts’’. The effect of these contracts in the future may increase our net income or loss for any given period. If we settle one or more of these contracts in cash following a significant decrease in the trading price of our Common Shares or if the exchange rate between the Japanese yen and the U.S. dollar fluctuates significantly, our net income would be substantially reduced or our net loss would substantially increase and our results of operations would suffer accordingly.

If we fail to successfully manage our exposure to financial markets risks through derivative contracts that we enter or may enter into, our operating results could suffer.

We from time to time enter into a variety of derivative transactions for purposes of both hedging and trading. Such derivative contracts may expose us to or increase our exposure to financial market risks, including foreign currency exchange rates, marketable securities prices (including those of our Common Shares and bonds) and changes in interest rates. Even when we enter into derivative contracts for hedging purposes to mitigate financial market risks, there may be imperfect correlation, or even no correlation, between price movements of a derivative instrument and price movements of the underlying item being hedged, which will result in a less effective or ineffective hedge. Moreover, although successful hedging strategies can reduce our risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the hedged item, hedging strategies can also reduce our opportunity for gain by offsetting the positive effect of favorable price movements in the hedged item.

We may also be required to maintain assets as ‘‘cover’’, maintain segregated accounts or make margin payments when we take positions in derivative instruments involving obligations to third parties (i.e., derivative instruments other than purchased options). If we were to be unable to close out our positions in such derivative instruments, we might be required to continue to maintain such assets or accounts or make such payments until the positions expired or matured. Our ability to close out a position in a derivative instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of a counterparty to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to us.

A failure by a counterparty to honor the terms of its derivatives contracts with us would also adversely affect us.

We are vulnerable to natural disasters and other events beyond our control, the occurrence of which may seriously harm our business.

All of our existing manufacturing operations are in Hsinchu, Taiwan, which is vulnerable to natural disasters. Disruption of operations at our manufacturing facilities for any reason, including work stoppages, power outages, fires, typhoons, earthquakes or other natural disasters, would cause delays in shipments of our products, which could lead our customers to obtain products from other sources. As a result of the rapid growth of the Taiwan semiconductor industry primarily based in Hsinchu, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could have a material and adverse effect on our operations. For example, we have in the past experienced major power outages, each of which resulted in a brief suspension of production. In September 1999, a major earthquake occurred, with its epicenter in central Taiwan. The earthquake caused interruptions to power supplies and significant damage to buildings across Taiwan. As a result of the earthquake, production at Fab I and Fab II was suspended for a week, and some of the equipment in both Fab I and Fab II had to be repaired and re-calibrated. Following the 1999 earthquake, there have been a number of other earthquakes in Taiwan, some of which have affected our operations. We have had to re-calibrate some of the equipment in both Fab I and Fab II. Similar incidents may occur in the future, which could have a material adverse effect on our results of operations.

21

Our failure to comply with environmental regulations or successful assertions against us of environmental claims could expose us to serious liabilities.

We are subject to a variety of laws and regulations relating to the use, storage, discharge and disposal of waste products and emissions. The disposal of waste water, for example, is a necessary part of the semiconductor manufacturing process as water is needed to cool and cleanse wafers during production. Environmental claims or the failure to comply with any present or future regulations could result in the assessment of damages and clean-up costs or imposition of fines against us, suspension of production or a cessation of operations. New environmental regulations could require us to acquire costly equipment or to incur other significant expenses. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances could subject us to future liabilities.

The differences between ROC GAAP and U.S. GAAP result in different amounts of net income under those standards, which makes evaluating our financial performance difficult.

Our financial statements are prepared under ROC GAAP which differs in many significant respects from U.S. GAAP. For example, ROC GAAP does not require the recognition of the value of shares distributed as bonuses to employees when calculating net income, and ROC GAAP and U.S. GAAP differ in some important respects in accounting for gains and losses on derivative financial investments. Largely as a result of the differences in accounting for employee bonuses in the form of our Common Shares and derivative instruments, we reported under U.S. GAAP net loss of NT$3,072 million in 1998, net income of NT$1,861 million in 1999, net income of NT$8,016 million (US$232 million) in 2000 and net loss of NT$2,606 million (US$76 million) for the six months ended June 30, 2001, as compared to, under ROC GAAP, net loss of NT$1,547 million, net income of NT$907 million, net income of NT$10,613 million (US$308 million) and net income of NT$2,429 million (US$70 million) for the same periods, respectively. See Note 20 to our financial statements included in this Offering Circular. For the year ended December 31, 2001, we may be required to record a significant investment writedown under U.S. GAAP in connection with our investment in Tower Semiconductor Ltd. This investment writedown may contribute an additional difference on our results of operations between ROC GAAP and U.S. GAAP.

Risks Relating to Technology and Intellectual Property

If we cannot respond to rapid technological changes in the semiconductor industry, our profitability will suffer.

The markets for semiconductors and electronic systems that use semiconductor products are subject to rapid technological change. This rapid change results in:

• introduction of new and increasingly complex and powerful products;

• rapidly evolving industry standards;

• rapid and significant product price declines; and

• rapid product obsolescence.

Our success depends on our ability to improve and develop our core technologies in the face of this rapid technological change. Achieving this goal requires significant research and development spending. We may fail to identify new product opportunities or to develop and market new products timely or successfully. We may also experience delays in developing or achieving volume production of new products. New products, if introduced, may fail to gain market acceptance. Existing products may also become obsolete. In addition, our sales of mask ROM products have fallen and may continue to fall as Nintendo begins employing DVD-ROM technology in its products. In the fourth quarter of 2001, we recorded a significant amount of inventory loss provision because of reduced demands for and declining average selling prices of our principal products. If we fail to improve and develop products that compete effectively on the basis of price and performance, our operating results will suffer.

22

If we are unable to manage our manufacturing process successfully, we will not be able to achieve satisfactory production yields and our results of operations will suffer.

The semiconductor manufacturing process is complex and involves a number of precise steps. Defective production can result from a number of factors, including:

• the cleanliness of the manufacturing environment;

• human error;

• equipment malfunction;

• use of defective raw materials; and

• inadequate testing.

From time to time, we experience lower than anticipated production yields as a result of these factors, particularly in connection with the expansion of our capacity or changes in our processing methods. Our yield on new products is often lower as time is required for us to develop expertise and experience in producing these products. If we fail to maintain high quality production standards and yields, our reputation and profitability may suffer and our customers may cancel their orders or return our products for reworking.

Our business depends in part on our ability to obtain and preserve intellectual property rights.

Our ability to compete successfully and achieve future growth will depend, in part, on our ability to protect our proprietary technology. We rely on patents, copyrights and trade secret protection rights to protect some of our proprietary technologies and products. These measures may not provide meaningful protection of our intellectual property or commercial advantage. For example, our competitors may be able to use our technologies to develop similar or superior products, and we may not have sufficient financial and legal resources to protect and enforce our rights. We intend to continue to file patent applications when appropriate to protect our proprietary technologies, but the process of seeking patent protection can be lengthy and expensive. Patents may not be issued for pending or future applications. If patents are issued, they may be challenged, invalidated or circumvented. The various countries in which we market our products may not protect our intellectual property rights to the same extent as does the United States. See ‘‘Business—Research and Development’’ and ‘‘Business—Intellectual Property’’.

We may be subject to intellectual property rights disputes which could expose us to serious liabilities.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. Our ability to compete successfully depends on our ability to operate without infringing the proprietary rights of others. We have no means of knowing what patent applications have been filed in the United States or elsewhere until the applications or resulting patent (if one is granted) are made available to the public. We are currently involved in certain litigation matters involving patent infringement. See ‘‘Business—Legal Proceedings’’. As is typical in the semiconductor industry, from time to time we receive communications from third parties asserting patents that cover certain of our technologies and alleging infringement of intellectual property rights. We expect to receive similar communications in the future. If a valid claim is made against us or our customers, we may be required to:

• discontinue using process technologies which could cause us to stop manufacturing particular semiconductors;

• pay substantial monetary damages;

• seek to develop non-infringing technologies, which may not be feasible; or

23

• seek to acquire licenses to the infringed technology which may not be available on reasonable commercial terms, or at all.

We could be seriously harmed by any of these developments. Litigation, which could result in substantial costs to us and divert our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend against claimed infringement of the rights of others. Our failure to obtain necessary licenses or the occurrence of patent infringement or other intellectual property litigation could seriously harm our company. In addition, although we have from time to time made a royalty payment reserve in anticipation of royalty payments we may potentially be required to make in relation to any possible claims or allegations, we cannot assure you that we have made, or will continue to make, sufficient reserve for all claims and allegations against our company for any patent infringement. See ‘‘Business—Legal Proceedings’’.

Political and Economic Risks

Disruptions in Taiwan’s political environment could seriously harm our business and the market price of our securities.

We are incorporated in Taiwan. Most of our assets are located in, and most of our revenue is derived from, our operations in Taiwan. Accordingly, our business and financial condition and the market price of our Common Shares (or Entitlement Certificates) may be affected by changes in local governmental policies, and local political and social instability. In addition, Taiwan has a unique international political status. The People’s Republic of China asserts sovereignty over all of China, including Taiwan, and does not recognize the legitimacy of the Taiwan government. Although significant economic and cultural relations have been established in recent years between Taiwan and the People’s Republic of China, the People’s Republic of China has refused to renounce the possibility that it may at some point use force to gain control over Taiwan. Relations between Taiwan and the People’s Republic of China and aspects of Taiwan’s political environment could negatively affect our business and the market prices of our securities.

Fluctuations in the value of the New Taiwan dollar against the U.S. dollar or the Japanese yen may seriously reduce our profitability or the value of our securities.

Approximately 39.0% of our accounts receivable were denominated in Japanese yen as of June 30, 2001. In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 86.9%, 86.3%, 92.5% and 94.2%, respectively, of our net sales revenue was denominated in currencies other than the NT dollar, primarily the Japanese yen and the U.S. dollar. In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 72.8%, 83.3%, 79.8% and 61.3%, respectively, of the cost of machinery acquisitions were denominated in currencies other than the NT dollar, primarily the Japanese yen and the U.S. dollar. Fluctuations in exchange rates between the U.S. dollar, the Japanese yen or other currencies and the NT dollar could materially and adversely affect our results of operations. A corresponding depreciation of the Japanese yen against the U.S. dollar could make our products more expensive to Japanese customers. Fluctuations in the exchange rate between the NT dollar and the U.S. dollar will also affect the U.S. dollar value of our Common Shares. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations— Quantitative and Qualitative Disclosures About Market Risk—Currencies’’.

Disruptions in the international trading environment may seriously decrease our international sales.

A substantial portion of our net sales revenue is derived from sales from Taiwan to customers located outside Taiwan. In 1998, 1999, 2000 and the six months ended June 30, 2001, export sales from Taiwan to our customers outside Taiwan accounted for 68.1%, 77.8%, 74.0% and 66.2%, respectively, of our net sales revenue. We expect sales to customers outside Taiwan to continue to represent a significant portion of our net sales revenue. Accordingly, our financial condition and results of operations and the market price of our securities may be affected by changes in governmental policies, inflation, increasing interest rates, social instability and other political, economic, or social developments in or affecting the countries in which we sell our products which are not within our control. As a result, our business will continue to be vulnerable to

24

disruptions in the international trading environment, including adverse changes in foreign government regulations, political unrest and international economic downturns. These disruptions in the international trading environment affect the demand for our products and the terms upon which we sell our products overseas, which could seriously decrease our international sales.

The trading price of our Common Shares may be seriously harmed by trading activity on the Taiwan Stock Exchange.

The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States, Europe and certain other countries. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of securities. In the past decade, the Taiwan Stock Exchange Index peaked at 12,495.34 in February 1990 and subsequently fell to a low of 2,560.47 in October 1990. From the beginning of 2000 to December 31, 2001, the Taiwan Stock Exchange Index reached a high of 10,202.20 on February 17, 2000, and a low of 3,446.26 on October 3, 2001. Over the same period, the daily closing value of our Common Shares ranged from a high of NT$76.15 per share to a low of NT$16.00 per share. The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between Taiwan and the People’s Republic of China are strained. Several investment funds affiliated with the Taiwan government have also from time to time purchased securities from the Taiwan Stock Exchange to support the trading level of the Taiwan Stock Exchange. In addition, the Taiwan Stock Exchange has experienced market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems or circumstances could influence the market price and liquidity of our securities. See ‘‘Appendix C—The Securities Market of the ROC’’.

Risks Related to the Bonds, the Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) and Our Trading Markets

An active trading market for the Bonds may not develop.

The Bonds are a new issue of securities for which there is currently no trading market. We have been advised that the Initial Purchasers intend to make a market in the Bonds, but they are not obligated to do so and may discontinue such market making activity at any time without notice. Such market-making activity is limited by the anti-manipulation rules under the Securities Act and the Exchange Act. The Bonds are being offered pursuant to exemptions from registration under the Securities Act and, as a result, the Initial Purchasers will only be able to resell their Bonds in transactions that have been registered under the Securities Act or in transactions not subject to or exempt from registration under the Securities Act. We cannot predict whether an active trading market for the Bonds will develop or to be sustained. If an active trading market were to develop, the Bonds could trade at prices that may be lower than the offering price. Whether or not the Bonds could trade at lower prices depends on many factors, including:

• prevailing interest rates and the markets for similar securities;

• general economic conditions and our financial condition; and

• historic financial performance and future prospects.

If an active market for the Bonds fails to develop or be sustained, the trading price of such Bonds could be materially adversely affected. Application has been made to have the Bonds listed on the Luxembourg Stock Exchange and the National Association of Securities Dealers Inc.’s PORTAL system. However there can be no assurance that we will be able to obtain or be able to maintain such listings or that, if listed, a trading market will develop on such exchanges. We do not intend to apply for listing of the Bonds on any securities exchange other than the Luxembourg Stock Exchange and the National Association of Securities Dealers Inc.’s PORTAL system. The Bonds may not be publicly offered, sold, pledged or otherwise transferred in any jurisdiction where registration may be required.

25

Transfers of the Bonds, Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) may be restricted and we do not plan to register any of the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) for resale in the United States.

You may only offer to sell or sell the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) which are ‘‘restricted securities’’ within the meaning of Rule 144 of the Securities Act pursuant to an effective registration statement or in reliance on an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. See ‘‘Transfer Restrictions.’’

The Bonds, Common Shares (or Entitlement Certificates) and Restricted ADSs (or Restricted Temporary ADSs) have not been, and will not be, registered under the securities laws of the United States or elsewhere and may not be publicly offered, sold, pledged or otherwise transferred in any jurisdiction where such registration may be required. See ‘‘Transfer Restrictions.’’ The Bonds may not be publicly offered or sold, directly or indirectly, in the ROC.

There are limitations on your ability to exercise conversion rights.

You will not be able to exercise your conversion rights during certain Closed Periods.

Under current ROC law, regulations and policy, PRC persons are not permitted to hold or convert the Bonds or to register as our shareholders or holders of the Entitlement Certificates. Upon conversion of the Bonds you will initially receive Entitlement Certificates, which will be exchanged for Common Shares only on specific dates, or you may elect to receive Temporary ADSs which may have a less liquid market than that for ADSs.

On exercise of your conversion rights, you will initially receive Entitlement Certificates pending actual issuance and delivery of our Shares. Under current ROC law, the converting bondholder (or its designee) will be registered as a holder of Entitlement Certificates in our register as of the conversion date and will be entitled to enjoy generally the rights and privileges of our shareholders, including the right to vote at shareholders’ meetings. A holder of Entitlement Certificates generally will not, however, be entitled to receive dividends and other distributions and to participate in rights issues. Entitlement Certificates are tradeable in the ROC, but are usually traded at a lower price than the price of the relevant shares. Unless the ROC SFC provides otherwise, our Common Shares may only be issued in exchange for Entitlement Certificates after we complete the registration for an increase in our paid-in share capital with the relevant ROC government agencies, which registration is expected to be completed approximately 50 to 60 days following each consolidation date and the delivery of our Common Shares is expected to be made within 30 days upon completion of the registration. Under current ROC law, we are required to issue new Common Shares in exchange for rights represented by Entitlement Certificates at least once a year. However, we will be obligated under the Indenture to issue new Common Shares in exchange for rights represented by Entitlement Certificates four times each year. See ‘‘Description of the Bonds—Conversion.’’

If you request to receive ADSs upon your exercise of the conversion rights, we will deliver to the custodian Entitlement Certificates in respect of the relevant Bonds, registered in the name of the depositary or its nominee, for deposit into a temporary depositary facility. The depositary will initially issue to you Temporary ADSs, which will be exchanged for ADSs automatically on exchange of the underlying Entitlement Certificates for our Common Shares. The Temporary ADSs will not be listed or quoted on any exchange; accordingly, the market for Temporary ADSs may be substantially less liquid than the market for our ADSs.

We cannot assure you that the market for our Common Shares (or Entitlement Certificates) or our ADSs (or Temporary ADSs) will be active and liquid; the offering of the Bonds will not result in additional liquidity to those markets until the commencement of the Conversion Period, if at all.

Between March 15, 1995, the first trading day of our Common Shares on the Taiwan Stock Exchange, and January 31, 2002, the average daily trading volume for our Common Shares on the Taiwan Stock Exchange

26

was 57,015,346 Common Shares. Between May 9, 1996, the first trading day of our ADSs on Nasdaq, and January 31, 2002, the average daily trading volume for our Listed ADSs on the Nasdaq was 108,747 ADSs. We cannot assure you that the liquidity of our Common Shares (or Entitlement Certificates) or our Listed ADSs (or Temporary ADSs) will be maintained or enhanced after the offering of the Bonds. Since the holders of the Bonds cannot convert the Bonds into our Common Shares (or Entitlement Certificates) until March 11, 2002 or our ADSs (or Temporary ADSs) until April 17, 2002, respectively, and may elect never to exercise their conversion rights, the sale of the Bonds will not result in additional liquidity of our Common Shares (or Entitlement Certificates) or our Listed ADSs (or Temporary ADSs) until such dates, if at all. In addition, the Restricted ADSs (or Restricted Temporary ADSs) are not and will not be listed or quoted on any stock exchange and are not transferable except in accordance with the restrictions described under ‘‘Transfer Restrictions.’’ Accordingly, the market for the Restricted ADSs will be substantially less liquid than the market for the Listed ADSs. Further, if a significant number of our ADS holders withdraw from our ADS program and no additional ADSs are issued in the future, the liquidity of our ADSs would be substantially affected. Market prices of technology companies’ shares have been and continue to be extremely volatile. As a result, volatility in the price of our Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results.

Restrictions on the ability to deposit Common Shares (or Entitlement Certificates) into our ADS program (or Temporary ADS program) may adversely affect the liquidity and price of the ADSs.

The ability to deposit Common Shares (or Entitlement Certificates) into our ADS program (or Temporary ADS program) is restricted by ROC law. Under current ROC law, no person or entity, including you and us, may deposit Common Shares (or Entitlement Certificates) into our ADS program (or Temporary ADS program) without specific approval of the Securities and Futures Commission of the ROC except for the deposit of the Common Shares (or Entitlement Certificates) into our ADS program (or Temporary ADS program) and for the issuance of additional ADSs (or Temporary ADSs) in connection with:

• (1) distribution of share dividends or free distribution of our Common Shares (or Entitlement Certificates);

• (2) exercise of the preemptive rights of ADS (or Temporary ADS) holders applicable to the Common Shares (or Entitlement Certificates) evidenced by ADSs (or Temporary ADSs) in the event of capital increases for cash; or

• (3) purchases of our Common Shares (or Entitlement Certificates) in the domestic market in Taiwan by the investor directly or through the depositary and delivery of such Common Shares (or Entitlement Certificates) to the custodian for deposit into our ADS program (or Temporary ADS program), subject to the following conditions: (a) the depositary may accept deposit of those Common Shares (or Entitlement Certificates) and issue the corresponding number of ADSs (or Temporary ADSs) with regard to such deposit only if the total number of ADSs (or Temporary ADSs) outstanding after the deposit does not exceed the number of ADSs (or Temporary ADSs) previously approved by the Securities and Futures Commission of the ROC, plus any ADSs (or Temporary ADSs) issued pursuant to the events described in (1) and (2) above and (b) this deposit may only be made to the extent previously issued ADSs have been cancelled and the corresponding Common Shares or Entitlement Certificates which are withdrawn from our ADS program (or Temporary ADSs) by holders have been sold in the domestic market in Taiwan.

Such limitations will not apply to the Common Shares (or Entitlement Certificates) issuable in the form of ADSs (or Temporary ADSs) immediately upon conversion of the Bonds, for which such Securities and Futures Commission approval has already been obtained. As a result of the limited ability to deposit Common Shares (or Entitlement Certificates) into our ADS program (or Temporary ADS program), the prevailing market price of our ADSs on Nasdaq may differ from the prevailing market price of the equivalent number of our Common Shares (or Entitlement Certificates) on the Taiwan Stock Exchange.

27

Holders of our ADSs (or Temporary ADSs) will not have the same voting rights as the holders of our Common Shares (or Entitlement Certificates), which may affect the value of your investment.

Except as described in this Offering Circular and in the applicable deposit agreement, holders of our ADSs (or Temporary ADSs) will not be able to exercise voting rights attaching to the Common Shares (or Entitlement Certificates) evidenced by our ADSs (or Temporary ADSs) on an individual basis. Holders of our ADSs (or Temporary ADSs) will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the Common Shares (or Entitlement Certificates) represented by the ADSs (or Temporary ADSs). The voting rights attaching to the Common Shares (or Entitlement Certificates) evidenced by our ADSs (or Temporary ADSs) must be exercised as to all matters brought to a vote of shareholders collectively in the same manner.

If holders of at least 51% of the ADSs (or Temporary ADSs) outstanding at the relevant record date instruct the depositary to vote in the same manner regarding a resolution, excluding election of directors and/or supervisors, the depositary will appoint the chairman of our board of directors, or his designee, to represent the holders of ADSs (or Temporary ADSs) at the shareholders’ meetings and to vote the Common Shares (or Entitlement Certificates) represented by the ADSs (or Temporary ADSs) outstanding in the manner so instructed. If by the relevant record date the depositary has not received instructions from holders of ADSs (or Temporary ADSs) holding at least 51% of the ADSs (or Temporary ADSs) to vote in the same manner forany resolution (excluding election of directors and/or supervisors), then the holders will be deemed to have instructed the depositary to authorize and appoint the chairman of our board of directors, or his designee, to vote all the Common Shares represented by ADSs (or Temporary ADSs) at his sole discretion, which may not be in your interest.

The rights of holders of our Entitlement Certificates and ADSs (or Temporary ADSs) to participate in our rights offerings may be limited, which may cause dilution to their holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Subject to certain exceptions, holders of our Entitlement Certificates will not be entitled to participate in these rights offerings. In addition, under the applicable deposit agreement, the depositary will not offer those rights to holders of ADSs (or Temporary ADSs) unless both the rights and the underlying securities to be distributed to holders of ADSs (or Temporary ADSs) are either registered under the Securities Act or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. Accordingly, holders of our ADSs (or Temporary ADSs) may be unable to participate in our rights offerings and may experience dilution in their holdings.

Our public shareholders may have more difficulty protecting their interests than they would as shareholder of a U.S. corporation.

Our corporate affairs are governed by our articles of incorporation and by laws governing ROC corporations. The rights of our shareholders to bring shareholders’ suits against us or our board of directors under ROC law are much more limited than those of the shareholders of U.S. corporations. Therefore, our public shareholders may have more difficulty in protecting their interests in connection with actions taken by our management, members of our board of directors or controlling shareholders than they would as shareholders of a U.S. corporation. Please refer to ‘‘Description of Common Shares—Other Rights of Shareholders’’ elsewhere in this Offering Circular for a detailed discussion of the rights of our shareholders to bring legal actions against us or our directors under ROC law.

Future sales of securities by our company or existing shareholders may hurt the value of your investment.

The market price of the Bonds, Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) could decline as a result of future sales of a large number of ADSs (or Temporary ADSs) or Common

28

Shares (or Entitlement Certificates) or the perception that such sales could occur. As of January 31, 2002, we had an aggregate of 3,698,372 ADSs and 3,359,342,613 Common Shares issued and outstanding, which are freely tradable. If we or the holders of our Common Shares (or Entitlement Certificates) sell a large number of our Common Shares (or Entitlement Certificates) or the holders of our ADSs (or Temporary ADSs) sell a large number of our ADSs (or Temporary ADSs), the market price for the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) could be depressed. Although we have agreed, subject to certain exceptions, not to offer, sell or agree to sell, directly or indirectly, or otherwise dispose of the Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) subject to lock-up agreements without the prior written consent of the Joint Bookrunners for a period of 90 days from the date of this Offering Circular, if the Joint Bookrunners consent, in their sole discretion, to an earlier sale, or when the 90-day period expires, we will be able to sell Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) in the public market, subject to legal restrictions.

Holders of the Bonds and our ADSs (or Temporary ADSs) will be required to appoint several local agents in Taiwan if they convert the Bonds into our Common Shares (or Entitlement Certificates) or if they withdraw Common Shares (or Entitlement Certificates) from our ADS program (or Temporary ADS program) and become our shareholders, which may make ownership burdensome.

Non-ROC persons wishing to convert the Bonds into our Common Shares (or Entitlement Certificates) or to withdraw Common Shares (or Entitlement Certificates) represented by their ADSs (or Temporary ADSs) from our ADS program (or Temporary ADS program) and hold our Common Shares (or Entitlement Certificates) represented by those ADSs (or Temporary ADSs) are required under current ROC laws and regulations to appoint an agent, also referred to as a Tax Guarantor in this offering circular, in Taiwan for filing tax returns and making tax payments on their behalf. A Tax Guarantor must meet certain qualifications set by the Ministry of Finance of the ROC and, upon appointment, becomes a guarantor of the holder’s ROC tax obligations. Holders wishing to repatriate profits derived from the sale of Common Shares (or Entitlement Certificates) received upon conversion or withdrawn Common Shares (or Entitlement Certificates) or cash dividends or interest derived from any such Common Shares (or Entitlement Certificates), will be generally required to submit evidence of appointment of a Tax Guarantor and the approval of the appointment by the ROC tax authorities. We cannot assure you that you will be able to appoint and obtain approval for a Tax Guarantor in a timely manner.

Under ROC law and regulations, citizens of the People’s Republic of China are not permitted to hold our Common Shares (or Entitlement Certificates) or withdraw Common Shares (or Entitlement Certificates) represented by ADSs (or Temporary ADSs) from our ADS program (our Temporary ADSs program).

In addition, under current ROC law, holders of the Bonds who exercise their conversion rights to receive Common Shares (or Entitlement Certificates) and holders of our ADSs (or Temporary ADSs) who elect to withdraw our Common Shares (or Entitlement Certificates) will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage firm, remit funds and exercise shareholders’ rights. They must also appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Without this local agent, the custodian and the opening of the trading account, they will not be able to hold, sell or otherwise transfer our Common Shares on the Taiwan Stock Exchange.

29

USE OF PROCEEDS

The net proceeds to us from the sale of the Bonds being offered by us hereby after deduction of estimated fees incurred by us will be approximately US$136 million or US$164 million if the Joint Bookrunners’ option to purchase additional bonds is exercised in full. We expect that the net proceeds will be used to fund the purchase of machinery and equipment for Fab III.

Our total capital expenditure in 2001 for the construction of, and facility for, our Fab III was approximately NT$3.7 billion. We expect to obtain a portion of the funding for the additional capital expenditure requirements for our Fab III from additional debt and equity financing and from internally generated funds, including the proceeds from a syndicated loan for an amount of up to NT$12.0 billion which we entered into, and approximately NT$3.0 billion principal amount of corporate bonds which we issued in Taiwan, in the second half of 2001. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources’’ and ‘‘Business—Property, Plant and Equipment’’.

30

MARKET PRICE INFORMATION

Our Common Shares have been listed on the TSE since March 15, 1995. The table below presents, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the TSE for our Common Shares and the highest and lowest of the daily closing values of the TSE Index.

1996................................................................................. 1997................................................................................. 1998................................................................................. First Quarter................................................................ Second Quarter............................................................ Third Quarter .............................................................. Fourth Quarter............................................................. 1999................................................................................. First Quarter................................................................ Second Quarter............................................................ Third Quarter .............................................................. Fourth Quarter............................................................. 2000................................................................................. First Quarter................................................................ Second Quarter............................................................ Third Quarter .............................................................. Fourth Quarter............................................................. 2001: First Quarter................................................................ Second Quarter............................................................ Third Quarter .............................................................. Fourth Quarter............................................................. 2002: January ........................................................................	Closing price per share(1) High Low (NT$) (NT$) 15.10 9.78 40.31 14.02 31.55 12.65 31.55 20.53 28.29 15.52 19.18 12.65 18.69 13.68 41.52 13.87 20.59 14.36 20.40 16.13 27.69 13.87 41.52 25.00 76.15 26.62 61.61 37.78 76.15 58.20 63.46 36.92 46.54 26.62 44.23 33.31 40.38 30.77 36.20 16.80 29.90 16.00 30.40 25.10	Average daily trading volume (in thousands of shares) 23,181 84,961 41,789 64,596 35,606 23,070 47,089 84,074 61,467 56,964 104,000 111,000 74,956 108,000 71,473 45,525 78,442 91,473 32,271 31,297 83,825 105,000	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High (NT$) 15.10 40.31 31.55 31.55 28.29 19.18 18.69 41.52 20.59 20.40 27.69 41.52 76.15 61.61 76.15 63.46 46.54 44.23 40.38 36.20 29.90 30.40		High 6,982.81 10,116.84 9,277.09 9,277.09 9,266.68 8,047.67 7,435.84 8,608.91 7,043.23 8,608.91 8,593.35 8,448.84 10,202.20 10,202.20 10,186.17 8,585.52 6,353.67 6,104.24 5,608.50 4,886.86 5,551.24 6,007.33	Low
				4,690.22 6,820.35 6,251.38 7,375.14 7,117.11 6,251.38 6,418.43 5,474.79 5,474.79 7,018.68 6,823.52 7,362.69 4,614.63 8,536.05 8,120.89 6,185.14 4,614.63 4,894.79 4,768.55 3,493.78 3,446.26 5,488.33

Source: Bloomberg L.P. (1) As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid in the periods indicated.

On January 31, 2002, the closing price of our Common Shares as reported by the TSE was NT$26.10 per share.

The TSE has experienced substantial fluctuations in the prices of listed securities and there are currently limits on the range of daily price movements. See ‘‘Risk Factors—Political and Economic Risks— The trading price of our Common Shares may be seriously harmed by trading activity on the Taiwan Stock Exchange’’, ‘‘Appendix C—The Securities Markets of the ROC—The Taiwan Stock Exchange’’ and ‘‘—The Securities Market of the ROC—Taiwan Stock Exchange Index’’.

Entitlement Certificates, if and when issued, will be tradeable on the TSE.

31

Each ADS represents ten of our Common Shares. Our ADSs have been listed on the Nasdaq National Market since May 9, 1996. The table below presents, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Nasdaq National Market for our outstanding ADSs and the highest and lowest of the daily closing values of the Nasdaq Composite Index. For a recent closing price of our ADSs, see the cover page of this Offering Circular.

1996............................................................................................... 1997............................................................................................... 1998............................................................................................... First Quarter.............................................................................. Second Quarter ......................................................................... Third Quarter ............................................................................ Fourth Quarter........................................................................... 1999............................................................................................... First Quarter.............................................................................. Second Quarter ......................................................................... Third Quarter ............................................................................ Fourth Quarter........................................................................... 2000............................................................................................... First Quarter.............................................................................. Second Quarter ......................................................................... Third Quarter ............................................................................ Fourth Quarter........................................................................... 2001 First Quarter.............................................................................. Second Quarter ......................................................................... Third Quarter ............................................................................ Fourth Quarter........................................................................... 2002 January ......................................................................................	Closing price per ADS(1) High Low (US$) (US$) 5.57 3.77 14.31 5.27 9.80 3.59 9.80 6.19 8.70 4.55 6.06 3.59 5.70 4.14 13.15 4.53 6.41 4.53 6.56 4.88 9.62 4.61 13.15 8.03 25.03 8.83 20.15 12.63 25.03 19.25 20.52 11.93 14.41 8.83 13.97 10.09 12.61 9.74 10.65 4.25 8.70 4.50 8.65 6.80	Average daily trading volume 421,538 100,971 34,220 61,180 35,769 24,278 18,739 10,718 13,593 6,806 13,014 10,867 97,357 85,075 117,051 127,670 59,631 59,205 62,586 66,822 47,375 51,776	Nasdaq Composite Index	Nasdaq Composite Index
	High (US$) 5.57 14.31 9.80 9.80 8.70 6.06 5.70 13.15 6.41 6.56 9.62 13.15 25.03 20.15 25.03 20.52 14.41 13.97 12.61 10.65 8.70 8.65		High 1,316.27 1,745.85 2,192.69 1,835.68 1,917.61 2,014.25 2,192.69 4,069.31 2,510.09 2,686.12 2,887.06 4,069.31 5,048.62 5,048.62 4,446.45 4,274.67 3,568.90 2,859.15 2,313.85 2,148.72 2,054.27 2,059.38	Low
				1,042.36 1,201.00 1,419.12 1,503.22 1,715.75 1,499.25 1,419.12 2,208.05 2,208.05 2,345.85 2,490.11 2,688.18 2,332.70 3,727.13 3,164.55 3,656.30 2,332.70 1,820.57 1,638.80 1,423.19 1,480.46 1,882.57

Source: Bloomberg L.P.

(1) As adjusted retroactively by Bloomberg L.P. to give effect to stock dividends paid in the periods indicated.

On January 31, 2002, the closing price of our ADSs as reported by Nasdaq was US$7.06 per share.

32

EXCHANGE RATES

The following table sets forth the average, high, low and period-end Federal Reserve noon buying rates between NT Dollars and U.S. Dollars (in NT Dollars per U.S. Dollar) for the periods indicated:

Year ended December 31, 1996................................................................................................. 1997................................................................................................. 1998................................................................................................. 1999................................................................................................. 2000................................................................................................. 2001................................................................................................. January ........................................................................................ February ...................................................................................... March .......................................................................................... April ............................................................................................ May ............................................................................................. June ............................................................................................. July.............................................................................................. August......................................................................................... September.................................................................................... October........................................................................................ November.................................................................................... December .................................................................................... 2002: January ........................................................................................	Average (of month-end rates) 27.48 29.06 33.50 32.28 31.37 Average (of daily rates) 32.72 32.33 32.62 32.94 33.20 34.33 34.82 34.64 34.59 34.58 34.50 34.68 35.03	High 27.68 32.80 34.88 33.17 33.17 High 33.65 32.40 32.92 33.00 34.05 34.52 35.05 34.77 34.70 34.62 34.55 35.13 35.08	Low 27.17 27.45 32.20 31.39 30.48 Low 32.23 32.27 32.38 32.85 32.89 34.08 34.45 34.56 34.49 34.53 34.44 34.46 34.94	At Period-end
				27.52 32.80 32.27 31.39 33.17 At Period-end
				32.35 32.40 32.85 32.94 33.95 34.48 34.80 34.58 34.56 34.55 34.47 35.00 34.99

Sources: Federal Reserve Bank of New York; Bloomberg L.P.

33

DIVIDENDS AND DIVIDEND POLICY

The following table sets forth the stock dividends per Common Share paid in each year for the period 1996 to 2001 in respect of earnings and accumulated capital surplus for the prior year. We did not pay any cash dividends for this period and do not expect to pay cash dividends in the foreseeable future.

1996...................................................................................................................... 1997...................................................................................................................... 1998...................................................................................................................... 1999...................................................................................................................... 2000...................................................................................................................... 2001......................................................................................................................	Stock dividends per share (%) 50 30 22 10 13 30	Effective date
		September 1996 June 1997 July 1998 July 1999 July 2000 June 2001

We generally are not permitted under ROC Company Law and our Articles of Incorporation to distribute dividends or make other distributions to shareholders for any year in which we have no current or retained earnings (excluding reserves). Before we can distribute a dividend or make any other distribution to shareholders from net income, we must first apply our net income to any losses we incurred in previous years and pay all of our outstanding taxes. ROC Company Law also requires that 10% of annual net income, less prior years’ losses, if any, and applicable income taxes be set aside as a legal reserve until our accumulated legal reserve equals our paid-in capital. In addition, we may set aside a special reserve in accordance with applicable laws and regulations. Our Articles of Incorporation further provide that, after we pay our income taxes, recover any losses incurred in prior years and deduct the legal and/or special reserve from our net income, the remaining portion of our net income may be appropriated or distributed in the proportions specified in our Articles of Incorporation. We may pay these distributions in stock or cash or a combination of stock and cash, except that any employee bonuses and shareholder dividends will normally be distributed in stock unless we determine otherwise, and provided that not more than 20% of our distributable net income may be distributed in the form of cash. All or part of the dividends to shareholders may be reserved at the relevant annual shareholders’ meeting as retained earnings for distribution in later years. See ‘‘Description of Common Shares—Dividends and Distributions’’ and Note 13 to our financial statements included in this Offering Circular.

Our shareholders on a dividend record date will be entitled to the full dividend declared without regard to any prior or subsequent transfer of these Common Shares, which will be declared at our next annual general meeting of shareholders currently expected to be held by June 30, 2002. The record date for the annual shareholders’ meeting and a recommendation for the annual dividend is determined by the Board of Directors at a meeting which will be held by June 30, 2002. As required by ROC law, such recommendation will be publicly announced after such Board of Directors meeting.

For information relating to ROC withholding taxes payable on dividends, see ‘‘Taxation—ROC Taxation—Dividends’’.

34

CHANGES IN OUR CAPITAL STRUCTURE

The following table sets out the changes in our issued share capital since January 1, 1998.

Date of issue April 1998................................. July 1998................................... July 1999................................... March 2000............................... March 2000............................... March 2000............................... July 2000................................... August 2000.............................. December 2000......................... June 2001 ..................................	Type of issue Issuance upon conversion of convertible bonds Issuance of stock dividend Issuance of stock dividend Issuance for cash Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance of stock dividend Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance of stock dividend	Number of Common Shares Issued 519,565 343,488,695 178,582,370 135,590,000 26,078,521 1,452,267 276,578,492 68,481,150 1,822,651 884,933,469	Total Number of issued Common Shares after the issue
			1,442,334,998 1,785,823,693 1,964,406,063 2,099,996,063 2,126,074,584 2,127,526,851 2,404,105,343 2,472,586,493 2,474,409,144 3,359,342,613

35

CAPITALIZATION

The following table presents, as of June 30, 2001, our cash and cash equivalents, short-term debt and capitalization on an actual basis, and as adjusted to give effect to this offering.

This table should be read in conjunction with our financial statements and the related notes included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’.

There have been no material changes to our capitalization since June 30, 2001, except:

• the prepayment of a syndicated loan which had an outstanding amount of JPY3.17 billion (NT$844 million);

• the establishment of a syndicated loan facility for an amount up to NT$12.0 billion, of which none has been drawn as of the date of this Offering Circular;

• the issuance of NT$3.0 billion principal amount of corporate bonds in Taiwan; and

• the establishment of an equipment leasing facility with Nintendo in the amount of up to US$75 million, of which approximately US$53 million has been used as of the date of this Offering Circular.

Cash and cash equivalents............................................................................ Short-term debt: Short-term debt ............................................................................................ Current portion of long-term debt ............................................................... Current portion of capital lease obligations ................................................ Total short-term debt(1)........................................................................... Long-term debt: Convertible bonds Convertible bonds due 2003-2005(2).......................................................... Convertible bonds due 2007........................................................................ Other long-term debt(3)(4) .......................................................................... Total long-term debt................................................................................. Shareholders’ equity: Common shares, NT$10 par value, 4,500,000,000 shares authorized; 3,359,342,613 shares issued .................................................................... Additional paid-in capital ............................................................................ Subscription received................................................................................... Capital reserve.............................................................................................. Retained earnings......................................................................................... Unrealized losses on long-term investment................................................. Legal reserve................................................................................................ Cumulative translation adjustments............................................................. Total shareholders’ equity............................................................................. Total capitalization(5)....................................................................................

As of June 30, 2001 Actual As adjusted (NT$) (US$) (NT$) (US$) (in millions) 12,587 365 17,274 501 707 21 707 21 3,177 92 3,177 92 4 — 4 — 3,888 113 3,888 113 9,238 268 9,238 268 — — 4,827 140 6,708 194 6,708 194 15,946 462 20,773 602 33,593 974 33,593 974 5,944 172 5,944 172 — — — — 24 1 24 1 5,545 161 5,545 161 (183) (5) (183) (5) 1,707 49 1,707 49 235 7 235 7 46,865 1,359 46,865 1,359 62,811 1,821 67,638 1,961

(NT$) 12,587 707 3,177 4 3,888 9,238 — 6,708 15,946 33,593 5,944 — 24 5,545 (183) 1,707 235 46,865 62,811

(1) Of this amount of short-term debt, NT$3,177 million was secured and NT$711 million was unsecured, and NT$666 million was guaranteed and NT$3,222 million was not guaranteed.

(2) NT$3,245 million of convertible bonds plus interest were secured. (3) Excludes current portion.

(4) Of this amount, NT$6,695 million was secured long-term debt, less current portion, and NT$13 million was unsecured capital lease obligations, less current portion. Correspondingly, NT$333 million of this amount was guaranteed and NT$6,375 million of this amount was not guaranteed.

(5) Total capitalization is the summation of long-term debt and shareholders’ equity.

36

In the future, we may consider additional debt and equity financing, depending on market conditions, our financial performance and other relevant factors. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources’’ and ‘‘Business—Strategy’’.

37

SELECTED FINANCIAL INFORMATION

The selected statement of operations data for the years ended December 31, 1998, 1999 and 2000, and for the six months ended June 30, 2000 and 2001, and the selected balance sheet data as of December 31, 1999 and 2000 and as of June 30, 2001 presented below are derived from our audited financial statements included in this Offering Circular. The selected statement of operations data for the years ended December 31, 1996 and 1997 and the selected balance sheet data as of December 31, 1996, 1997 and 1998 and as of June 30, 2000 presented below are derived from our audited financial statements not included in this Offering Circular. The financial data presented below should be read in conjunction with our financial statements and the related notes included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. Our audited financial statements for the years ended December 31, 1996, 1997, 1998, 1999 and 2000, and for the six months ended June 30, 2000 and 2001 and as of December 31, 1996, 1997, 1998, 1999 and 2000 and as of June 30, 2000 and 2001 were prepared on a consolidated basis. Our financial statements have been audited by Diwan, Ernst & Young, independent public accountants.

The financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, our financial statements and the related notes included in this Offering Circular, ‘‘Selected Financial Information’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. Our financial statements are prepared and presented in accordance with ROC GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see Note 20 to our financial statements included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—U.S. GAAP Reconciliation’’.

38

Consolidated Statement of Operations Data: ROC GAAP Net sales revenue .............................................. Cost of goods sold............................................. Gross proft........................................................ Operating expenses ........................................... Operating income (loss).................................... Total other income............................................. Total other expenses.......................................... Income (loss) before taxes ................................ Income tax beneft (expense) ............................ Net income (loss) .............................................. Net income (loss) per share—basic(1) ............. Net income (loss) per share—diluted(1) .......... U.S. GAAP Gross proft........................................................ Operating income (loss).................................... Net income (loss)(2).......................................... Net income (loss) per common share— basic(3) .......................................................... Net income (loss) per common share— diluted(3) ....................................................... Balance Sheet Data: ROC GAAP Total current assets............................................ Net property, plant and equipment.................... Total assets ........................................................ Total current liabilities ...................................... Long-term liabilities.......................................... Total liabilities................................................... Total shareholders’ equity................................. U.S. GAAP Total assets ........................................................ Total shareholders’ equity................................. Other Data: ROC GAAP Capital expenditures.......................................... Depreciation and amortization.......................... Net cash provided by operating activities ........ Net income (loss) per ADS—basic .................. Net income (loss) per ADS—diluted................ Number of shares outstanding Shares (weighted, as adjusted)(4) ..................... Stock dividend per shares Shares(5)............................................................		**Year ended, and as **	**Year ended, and as **	of, December 31,
	1996 (NT$) 10,222 (5,082) 5,140 (1,844) 3,296 510 (547) 3,259 102 3,361 1.46 1.46 4,241 1,740 2,080 0.93 0.93 10,913 17,422 29,641 6,340 4,274 10,614 19,027 30,164 18,408 10,721 1,294 3,323 14.60 14.60 2,307 50%	1997 (NT$) 10,667 (6,756) 3,911 (2,359) 1,552 563 (1,023) 1,092 849 1,941 0.72 0.72 1,725 (1,475) (650) (0.25) (0.25) 14,138 26,637 43,441 6,672 10,142 16,814 26,627 43,414 26,253 11,373 2,399 1,832 7.20 7.20 2,696 30%	1998 1999 (NT$) (NT$) (in millions, except 12,580 16,957 (9,888) (12,124) 2,692 4,833 (3,055) (3,258) (363) 1,575 698 846 (2,288) (1,830) (1,953) 591 406 316 (1,547) 907 (0.52) 0.30 (0.52) 0.30 1,548 4,558 (1,620) 1,237 (3,072) 1,861 (1.06) 0.64 (1.06) 0.64 15,898 14,303 28,491 32,028 49,604 51,197 5,841 8,868 18,714 15,946 24,555 24,814 25,049 26,383 49,604 51,578 23,945 26,433 6,136 8,129 4,255 4,855 2,766 5,062 (5.20) 3.00 (5.20) 3.00 2,987 3,014 22% 10%

(1) Retroactively adjusted for all subsequent stock dividends and employee bonuses declared.

(2) The difference between net income under ROC GAAP and U.S. GAAP was largely derived from different treatments under these two accounting principles with respect to employee bonus shares and derivative contracts. The difference in accounting treatment with respect to employee bonus shares under the two accounting principles resulted in an additional expense of NT$516 million in 1998, no additional expense or income in 1999, an additional expense of NT$1,622 million (US$47 million) in 2000, an additional expense of NT$384 million for the six months ended June 30, 2000, and an additional expense of NT$5,298 million (US$154 million) for the six months ended June 30, 2001. The differences of accounting treatment with respect to derivative contracts under the two accounting principles resulted in an additional expense of NT$1,056 million in 1998, an increased income of NT$1,301 million in 1999, an additional expense of NT$898 million (US$26 million) in 2000, an increased income of NT$76 million for the six months ended June 30, 2000, and an additional expense of NT$204 million (US$6 million) for the six months ended June 30, 2001.

(3) Retroactively adjusted for all stock dividends declared. See Note 20 to our financial statements included in this Offering Circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—U.S. GAAP Reconciliation’’.

(4) Shares outstanding weighted, as adjusted for any employee share bonus and any subsequent stock dividends declared.

(5) The percentage of our stock dividend is determined by the number of shares we distributed to existing Shareholders divided by the shares outstanding immediately prior to the share issuance. We did not distribute any cash dividends in any of the periods presented.

39

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

The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes included in this Offering Circular. These financial statements have been prepared in accordance with ROC GAAP, which differ in certain material respects from U.S. GAAP. See Note 20 to our financial statements included in this Offering Circular and ‘‘—U.S. GAAP Reconciliation’’.

Introduction

We are an independent designer, producer and supplier of nonvolatile memory, logic and other ASIC products including system-on-a-chip, or SOC, solutions. We view ourselves as an integrated solutions provider, treating our clients as strategic partners and working closely with them in all aspects of product development to develop silicon solutions that meet their specific needs. These partners include Nintendo of Japan with whom we have had a relationship for over 10 years and Hewlett-Packard of the United States, with whom we have had a relationship for over five years. Examples of our product offerings include mask ROM, flash, logic and SOC products. We differentiate ourselves by our ability to offer a full range of in-house design, product and process engineering capabilities.

Since mid-1999 and throughout much of 2000, we benefited from growing worldwide demand for integrated circuits and experienced significant growth in net sales revenue and operating income. In addition, during this period we generally experienced increases in average selling prices for our products as a result of improved market conditions, and also due to higher-density products in general and flash products in particular accounting for a larger share of our overall product mix. As a result of these factors, our net sales revenue increased 97.5% from 1999 to 2000.

Towards the end of 2000, the semiconductor industry began to show decreased growth rates and a trend reversal. Our results of operations for 2001 were adversely affected by the downturn in the industry as the result of a deteriorating general economic environment and harsh end-market inventory corrections that have reduced demand for some of our products and services. As a result, our net sales revenue for the six months ended June 30, 2001 increased only marginally by 1.8% as compared to the same period in 2000. Further, as there is a lag between any slowdown in the end-market and our financial results, the extent and impact of the recent downturn may not be fully reflected in our financial results until 2002 or thereafter. We are also unable to predict if the current downturn will be protracted or how protracted it may be.

We are now in the process of expanding our production capacity through the construction and upgrading of fabrication facilities, which will require substantial capital expenditures by us, will demand a significant portion of our management’s time and attention and will have a significant impact on our financial condition and results of operations over the next several years. See ‘‘—Liquidity and Capital Resources’’. Unless demand recovers and grows further, this expansion could lead to capacity under utilization, reduced prices and lower margins.

For certain material developments of our company since July 1, 2001 with respect to our financial condition and results of operations, please refer to the discussions in ‘‘Recent Developments’’ included elsewhere in this Offering Circular.

Revenue

We derive our revenue primarily from the manufacture and sale of four types of integrated circuits: mask ROM, flash, EPROM and logic. We also derive a portion of our revenue from value-added manufacturing or foundry services that we provide on a contract basis to integrated device manufacturers. In addition, we earn royalty income from products under joint development with our strategic partners and from the production of wafer and other products under limited term arrangements. We have experienced rapid growth in net sales

40

revenue in recent years up to the end of 2000. Net sales revenue grew at a compound annual rate of 63.2%, from NT$12,580 million in 1998 to NT$33,493 million (US$971 million) in 2000. Our net sales revenue for the six months ended June 30, 2001 was NT$12,230 million (US$355 million). The increases in net sales revenue were primarily attributable to increases in sales volumes of our integrated circuits and changes in our product mix reflecting a wider range of nonvolatile memory products including higher-priced, higher-density mask ROM and devices.

Cost of Goods Sold

Our cost of goods sold consists principally of:

• overhead, including depreciation of property, plant and equipment and amortization of intangible assets;

• costs of raw materials, including wafers, chemicals and other inputs, for semiconductor fabrication;

• costs of outsourcing production to third parties;

• direct labor costs; and

• service charges paid for testing and packaging services.

An additional element affecting our overall profitability is the impact of our capital expenditure program, which will result in higher depreciation costs and interest charges accruing from the debt financing secured to fund this capital expansion. In 2000, depreciation and amortization expense was NT$6,048 million (US$175 million), reflecting an increase of 24.6% over 1999, due primarily to increased depreciation for Fab II as a result of additional capital expenditure arising from our expansion program for Fab II. For the six months ended June 30, 2001, depreciation and amortization was NT$3,878 million (US$112 million) while interest expense was NT$574 million (US$17 million). See ‘‘—Liquidity and Capital Resources’’.

Gross Margin

Our gross margin for the six months ended June 30, 2001 was 55.6%, compared with 39.9% for the same period in 2000 and 53.7% for the year ended December 31, 2000. The increase in gross margins for the six months ended June 30, 2001, as compared with the same period in 2000, was largely due to lower cost of goods sold and, to a lesser extent, increases in average selling prices. Cost of goods sold is impacted by our production volume (as fixed costs is allocated to our products produced), direct materials, labor and other overhead costs. Subcontracting expenses related to packaging and testing services is also included. However, we expect that our gross margin will decline for the second half of 2001 as a result of expected declines in average selling prices of our products and in our capacity utilization rates. We expect our capacity utilization rates to decline and our production to decrease in the second half of 2001, as we have built up significant inventory levels as of June 30, 2001 and also due to expected weak demand for our products caused by the global economic slowdown.

Operating Income

Our operating income has increased significantly over 1999 and 2000 from NT$1,575 million in 1999 to NT$12,139 million (US$352 million) in 2000. Our operating income for the six months ended June 30, 2001 was NT$3,840 million (US$111 million).

Our profitability in 1998 and the first half of 1999 was adversely affected by substantial decreases in the average selling price of our memory products as a result of:

• an oversupply in the world-wide memory market;

• the impact of a depreciation in the Japanese yen (in which a significant portion of our sales is denominated) against the NT dollar; and

41

• increased depreciation and amortization expense from Fab II beginning in October 1997.

Since the second half of 1999 and throughout much of 2000, our capacity utilization improved, as we maximized our production capacity at Fab I and Fab II. Overall sales volumes for our products also continued to increase, reinforced by the growing demand for integrated circuits in consumer electronics, information and communication devices. Average selling prices declined slightly during 1999, but we experienced increases in average selling prices in all of our products in 2000. Towards the end of 2000, selling prices for memory products started to decline due to the semiconductor market downturn and continued to decline in 2001. Sales volumes for our products also decreased and our inventory level increased.

Product Pricing Trends

The following table sets forth the average selling prices of each category of our memory products for the periods indicated:

Mask ROM........................................................................ Flash .................................................................................. EPROM .............................................................................		Year ended December 31,
	1996 113.9 78.1 61.4	1997 95.4 70.0 39.1

The global semiconductor industry is highly competitive and average selling prices typically decrease over the life of an integrated circuit product. Average selling prices for the memory products that we sell have generally declined since 1995. We seek to offset this general decline in average selling prices by constantly improving the density, sophistication and performance of our products and by customizing our products to suit the needs of our strategic partners and other customers. Where this approach is successful, we may avoid declines in the average selling prices of our products despite general industry-wide declines. However, throughout much of 2000, we saw general improvement in the selling prices for almost all memory products, which resulted in increases in annual average selling prices for all of our products, wholly apart from increases due to product improvement. Towards the end of 2000, selling prices for memory products started to decline due primarily to the overall decrease in global demand for memory products. In the first half of 2001, we saw a decline in selling prices for flash products as compared to the same period in 2000. While the average selling prices for mask ROM and EPROM products increased between the six months ended June 30, 2000 and the six months ended June 30, 2001, those prices for the six months ended June 30, 2001 represented sharp declines from the price levels of the same products since the end of 2000. We expect the average selling prices of most of our products to continue to decline in future periods as the demand for our products is relatively weak due to global economic slowdown.

Cost Reduction Initiatives

We seek to reduce our variable manufacturing costs and our unit fixed costs by maximizing sales volumes and capacity utilization. Under this approach, declines in the average selling prices of our products in 1998 and 1999 were wholly or partially offset by declines in our unit costs. We have been able to obtain cost reductions through our continuing efforts to improve yields of functional dies per wafer, decrease line widths by improving die size technology and increase economies of scale. We employ 0.35 micron process technology, and 0.32 micron process technology for certain chips at Fab I and 0.25 micron process technology at Fab II for our primary mask ROM products. We migrated to 0.18 micron process technology for our mask ROM products produced at Fab II in the second half of 2000, and expect to begin to migrate to 0.15 micron process technology in 2002.

42

Our wafer production increased from 634,505 wafers in 1998 to 756,874 wafers in 1999 and to 1,105,862 wafers in 2000, representing increases of 19.3% and 46.1% in our production of six-inch wafer equivalents. Our wafer production increased 22.7% to 574,581 wafers for the six months ended June 30, 2001 from 468,300 wafers for the same period in 2000. We have supplemented our capacity by contracting for the fabrication of wafers on a foundry basis by third parties, including Taiwan Semiconductor Manufacturing Co., Ltd, or TSMC and Tower Semiconductor Ltd. We have also pursued the enlargement of our manufacturing capacity through the enhancement of Fab I and Fab II. In addition, we have commenced construction of Fab III, which we expect will further increase our manufacturing capacity by ultimately adding approximately 40,000 eight-inch wafers per month when fully operational. We expect Fab III to begin commercial operations by the end of 2002.

The following table sets forth six-inch and eight-inch wafer production (in six-inch wafer equivalents) in our facilities for each of the periods indicated:

19 (number of wafers) Mask ROM.. 438,036 Flash...... 85,924 EPROM.. 51,440 Logic(1)(2).. 11,305 Foundry(3).. 47,800 Total....... 634,505			Year ended D	ecember 31,		00 (% of total wafer production) 62.5 23.3 2.8 1.6 9.8 100.0		Six months en	ded June 30,
	19	98 (% of total wafer production) 69.0 13.6 8.1 1.8 7.5 100.0	19	99 (% of total wafer production) 66.6 18.7 4.9 2.1 7.7 100.0	20		20	00 (% of total wafer production) 62.7 21.3 2.9 1.9 11.2 100.0	20	01
			(number of wafers) 504,298 141,565 36,728 16,184 58,099 756,874		(number of wafers) 691,444 257,490 30,586 17,556 108,786 1,105,862		(number of wafers) 293,562 99,695 13,832 8,791 52,420 468,300		(number of wafers) 277,934 235,361 12,484 6,491 42,311 574,581	(% of total wafer production)
										48.4 40.9 2.2 1.1 7.4 100.0

(1) Includes SOC and multimedia products.

(2) Excludes logic wafers fabricated by Tower Semiconductor Ltd. and Mitsubishi on a contract basis for us. Yields of dies per wafer vary with each type of logic product manufactured by us and a change in product mix may cause variations in both wafer production and dies per wafer.

• (3) Includes production of DRAM under a cooperative arrangement with Matsushita for 1998, 1999 and 2000, and production of SRAMs for Mitsubishi during 2000 and the six months ended June 30, 2001.

Geographic Markets

We distribute our products to a wide variety of customers in a number of geographical markets, including:

• Japan;

• Taiwan;

• Hong Kong, Singapore and South Korea;

• the United States; and

• Europe and other countries.

43

The following table sets forth the breakdown of our net sales revenue and percentages of net sales revenue by geographic regions:

Japan............................. Taiwan .......................... Hong Kong, Singapore and South Korea....... United States................. Europe and other countries.................... Total..............................		Y	**ear ended **	December 31,	December 31,	00 (% of total net sales revenue) 46.7 22.0 14.2 9.5 7.6 100.0	S	ix months en	ded June 30,	ded June 30,	ded June 30,
	19	98 (% of total net sales revenue) 57.3 20.9 7.0 11.5 3.3 100.0	19	99 (% of total net sales revenue) 56.9 21.0 10.2 8.9 3.0 100.0	20		20	00 (% of total net sales revenue) 41.1 26.4 12.1 11.6 8.8 100.0	20	01
	(millions in NT$) 7,205 2,636 881 1,445 413 12,580		(millions in NT$) 9,642 3,562 1,736 1,505 512 16,957		(millions in NT$) 15,633 7,384 4,753 3,175 2,548 33,493		(millions in NT$) 4,935 3,166 1,450 1,394 1,063 12,008		(millions in NT$) 5,384 3,921 1,384 1,065 476 12,230	(% of total net sales revenue)
											44.0 32.1 11.3 8.7 3.9 100.0

Our sales to Japan are generally denominated in Japanese yen, our sales to Taiwan are generally denominated in NT dollars, Japanese yen and U.S. dollars, and our sales to other countries are generally denominated in U.S. dollars. In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 86.9%, 86.3%, 92.5% and 94.2%, respectively, of our net sales revenue was denominated in currencies other than NT dollars, primarily Japanese yen and U.S. dollars.

We use hedging techniques such as foreign currency borrowings, forward exchange rate contracts and foreign currency swaps to mitigate these risks.

Equity Derivative Contracts

We from time to time enter into derivative contracts with the underlying reference being our Common Shares. Certain of these contracts also include a reference to foreign currency exchange rates. Gains of NT$1,341 million in 1999, losses of NT$297 million (US$9 million) in 2000 and losses of NT$124 million (US$4 million) for the six months ended June 30, 2001 (which occured primarily due to the market price of our Common Shares, and for certain contracts, also due to foreign exchange rate movements, particularly exchange rates between the U.S. dollar and the Japanese yen) were recorded under U.S. GAAP. See ‘‘—U.S. GAAP Reconciliation’’. The effect of these contracts in the future may increase our net income or loss for any given period. See ‘‘—Quantitative and Qualitative Disclosures About Market Risk—Interest Rates’’ and ‘‘Equity swap contracts’’ in Note 19 to our financial statement included in this Offering Circular.

44

Results of Operations

The following table sets forth, for the periods indicated, certain financial data from our statements of operations, expressed in each case as a percentage of net sales revenue:

Sales revenue............................................................................................... Memory: Mask ROM.......................................................................................... Flash .................................................................................................... EPROM............................................................................................... Total memory .............................................................................. Logic ....................................................................................................... Foundry ................................................................................................... Royalties and commissions..................................................................... Others ...................................................................................................... Less: Sales returns .................................................................................. Sales discounts .............................................................................. Net sales revenue ................................................................................ Cost of goods sold ...................................................................................... Gross proft.................................................................................................. Operating expenses: Selling expenses.................................................................................. Administrative expenses ..................................................................... Research and development expenses.................................................. Total operating expenses............................................................................. Operating income (loss).............................................................................. Other income and gains .............................................................................. Other expenses and losses .......................................................................... Income before taxes.................................................................................... Income tax beneft (expense)...................................................................... Net income (loss)........................................................................................	Year ended December 31, 1998 1999 2000 101.4 102.1 100.9 63.7 63.1 58.6 9.3 12.7 19.9 11.3 7.8 3.7 84.3 83.6 82.2 8.8 12.2 5.7 7.0 3.1 9.4 —(1) 0.2 0.3 1.3 3.0 3.3 (0.7) (1.2) (0.8) (0.7) (0.9) (0.1) 100.0 100.0 100.0 (78.6) (71.5) (46.3) 21.4 28.5 53.7 (3.7) (3.0) (2.8) (4.9) (4.7) (5.3) (15.7) (11.5) (9.4) (24.3) (19.2) (17.5) (2.9) 9.3 36.2 5.6 5.0 2.8 (18.2) (10.8) (6.2) (15.5) 3.5 32.9 3.2 1.9 (1.2) (12.3) 5.3 31.7	Year ended December 31, 1998 1999 2000 101.4 102.1 100.9 63.7 63.1 58.6 9.3 12.7 19.9 11.3 7.8 3.7 84.3 83.6 82.2 8.8 12.2 5.7 7.0 3.1 9.4 —(1) 0.2 0.3 1.3 3.0 3.3 (0.7) (1.2) (0.8) (0.7) (0.9) (0.1) 100.0 100.0 100.0 (78.6) (71.5) (46.3) 21.4 28.5 53.7 (3.7) (3.0) (2.8) (4.9) (4.7) (5.3) (15.7) (11.5) (9.4) (24.3) (19.2) (17.5) (2.9) 9.3 36.2 5.6 5.0 2.8 (18.2) (10.8) (6.2) (15.5) 3.5 32.9 3.2 1.9 (1.2) (12.3) 5.3 31.7	Six months ended June 30, 2000 2001 100.5 101.0 50.5 54.4 26.7 14.2 5.0 4.7 82.2 73.3 8.8 8.2 8.2 16.1 0.5 0.3 0.8 3.2 (0.4) (0.8) (0.1) (0.3) 100.0 100.0 (60.1) (44.4) 39.9 55.6 (2.0) (2.8) (10.0) (6.3) (10.8) (15.1) (22.8) (24.2) 17.1 31.4 8.9 4.7 (7.0) (13.1) 19.0 23.0 1.9 (3.1) 20.9 19.9
	1998 101.4 63.7 9.3 11.3 84.3 8.8 7.0 —(1) 1.3 (0.7) (0.7) 100.0 (78.6) 21.4 (3.7) (4.9) (15.7) (24.3) (2.9) 5.6 (18.2) (15.5) 3.2 (12.3)	1999 102.1 63.1 12.7 7.8 83.6 12.2 3.1 0.2 3.0 (1.2) (0.9) 100.0 (71.5) 28.5 (3.0) (4.7) (11.5) (19.2) 9.3 5.0 (10.8) 3.5 1.9 5.3	2000 100.5 50.5 26.7 5.0 82.2 8.8 8.2 0.5 0.8 (0.4) (0.1) 100.0 (60.1) 39.9 (2.0) (10.0) (10.8) (22.8) 17.1 8.9 (7.0) 19.0 1.9 20.9

(1) less than 0.1.

Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000

Sales Revenue. Our total sales revenue increased 2.5% to NT$12,364 million (US$359 million) in the six months ended June 30, 2001 from NT$12,068 million in the six months ended June 30, 2000. This increase resulted primarily from higher sales revenue from our foundry services and increases in the average selling prices of our mask ROM and EPROM products between these two periods. Net sales revenue increased 1.8% to NT$12,230 million (US$355 million) in the six months ended June 30, 2001 from NT$12,008 million in the six months ended June 30, 2000.

The proportion of our net sales revenue from mask ROM products increased to 54.4% in the six months ended June 30, 2001 from 50.5% in the six months ended June 30, 2000, partially as a result of increasing sales of mask ROM products for use in the Game Boy series of Nintendo’s handheld computing devices. The average selling prices for mask ROM products increased from NT$92.0 per die in the six months ended June 30, 2000 to NT$96.3 per die in the six months ended June 30, 2001, primarily as a result of increased demand and increased sales of higher-priced products.

45

The proportion of our net sales revenue from flash products decreased to 14.2% in the six months ended June 30, 2001 from 26.7% in the six months ended June 30, 2000, primarily due to decreasing demand and average selling prices for flash products resulted from a weaker flash market in the six months ended June 30, 2001 in which supply exceeded demand. The average selling prices for flash products decreased from NT$91.1 per die in the six months ended June 30, 2000 to NT$89.0 per die in the six months ended June 30, 2001.

The proportion of our net sales revenue from EPROM products declined to 4.7% in the six months ended June 30, 2001 from 5.0% in the six months ended June 30, 2000. Sales revenue for EPROM remained stable in the two periods.

The proportion of our net sales revenue from our logic products, primarily multimedia and SOC products, decreased to 8.2% in the six months ended June 30, 2001 from 8.8% in the six months ended June 30, 2000. Of our logic products, sales revenue from communication related products decreased but sales revenue from consumer related products increased.

The proportion of our net sales revenue from our foundry services increased to 16.1% in the first six months ended June 30, 2001 from 8.2% in the first six months ended June 30, 2000, due primarily to increasing shipments of SRAMs and flash to Mitsubishi, which accounted for 15.6% of our net sales revenue in the six months ended June 30, 2001, as compared to 7.7% of our net sales revenue in the six months ended June 30, 2000. The portion of our net sales revenue from our foundry services is expected to decline as Mitsubishi has indicated its intention of discontinuing its use of our foundry services to produce SRAMs in the second half of 2001.

Cost of Goods Sold and Gross Profit. Cost of goods sold decreased 24.7% to NT$5,431 million (US$158 million) in the six months ended June 30, 2001 from NT$7,212 million in the six months ended June 30, 2000, largely as a result of a substantial increase in the level of our inventory of work-in-progress which resulted from our increased production in the six months ended June 30, 2001 and the last six months of 2000, each compared with the six months ended June 30, 2000. The decrease in cost of goods sold was also attributable to a decrease of 18.2% in subcontracting expense for services such as testing and packaging due to an overall reduction of charges for such services which resulted from a weaker market. In addition, compensation expense decreased by 24.6% from NT$1,012 million in the six months ended June 30, 2000 to NT$763 million in the six months ended June 30, 2001 mainly due to a decrease in compensation expense relating to our stock performance-based employee bonus plan for production personnel. These decreases were partially offset by an increase of 41.3% in depreciation and amortization, which increased to NT$3,878 million (US$112 million) in the six months ended June 30, 2001 from NT$2,745 million in the six months ended June 30, 2000 primarily as a result of our additional capital expenditure investments in Fab I and Fab II in 2000. Our gross margin increased to 55.6% in the six months ended June 30, 2001 from 39.9% in the six months ended June 30, 2000.

Operating Expenses. Total operating expenses increased 7.8% in the six months ended June 30, 2001 to NT$2,959 million (US$86 million) from NT$2,746 million in the six months ended June 30, 2000. Selling expenses increased by 35.1% in the six months ended June 30, 2001 to NT$335 million (US$10 million) from NT$248 million in the six months ended June 30, 2000, largely due to increases in selling efforts in Macronix America and our two sales offices in Japan. Administrative expenses decreased by 35.4% in the six months ended June 30, 2001 to NT$775 million (US$22 million) from NT$1,199 million in the six months ended June 30, 2000, due primarily to a decrease in the compensation expenses relating to our stock performance-based employee bonus plan for non-production personnel. See ‘‘—U.S. GAAP Reconciliation— Stock Performance-Based Employee Bonus Plan’’ and Note 20 to our financial statements included in this Offering Circular. Research and development expenses increased 42.4% to NT$1,850 million (US$54 million) in the six months ended June 30, 2001, from NT$1,299 million in the six months ended June 30, 2000, as we increased our development activities and continued to pursue our long-term objective of spending not less than 10% of net sales revenue on research and development. See ‘‘Business—New Product Development’’.

46

Operating Income (Loss). We reported operating income in the six months ended June 30, 2001 of NT$3,840 million (US$111 million), as compared to an operating income of NT$2,050 million in the six months ended June 30, 2000.

Other Income. Total other income decreased 46.5% in the six months ended June 30, 2001 to NT$572 million (US$17 million), from NT$1,069 million in the six months ended June 30, 2000. Other income decreased largely as a result of the absence of net investment income and reversals of market value decline of inventory in the six months ended June 30, 2001 similar to those in the amounts of NT$482 million and NT$90 million, respectively, in the six months ended June 30, 2000. In addition, foreign exchange gain decreased 53.6% from NT$196 million in the six months ended June 30, 2000 to NT$91 million (US$3 million) in the six months ended June 30, 2001 as the value NT dollars depreciated substantially in the six months ended June 30, 2001. These decreases outpaced the increase in interest income of 19.4% from NT$253 million in the six months ended June 30, 2000 to NT$302 million (US$9 million) in the six months ended June 30, 2001 largely from increased interest received from financial institutions due to our higher deposits resulting from increased sales revenue in the second half of 2000 and a significant increase in other income from NT$38 million in the six months ended June 30, 2000 to NT$179 million (US$5 million) in the six months ended June 30, 2001 primarily because we recorded a gain from reversal of allowance for doubtful account in the amount of NT$83 million (US$2 million) and product design revenue in the amount of NT$21 million (US$1 million).

Other Expenses. Total other expenses increased 90.8% in the six months ended June 30, 2001 to NT$1,603 million (US$46 million) from NT$840 million in the six months ended June 30, 2000. Our inventory loss provision increased in the six months ended June 30, 2001 to NT$552 million (US$16 million) from zero in the six months ended June 30, 2000, due to a one-time provision of NT$116 million (US$3 million) of certain products and an additional provision in accordance with our inventory policy as a result of the increase in inventory level and aging of our inventory. We incurred a net investment loss of NT$55 million (US$2 million) compared to zero in the six months ended June 30, 2000, due to a general reduction of the value of the share interest in our invested companies. Interest expense increased 1.6% in the six months ended June 30, 2001 to NT$574 million (US$17 million) from NT$565 million in the six months ended June 30, 2000, due to increased financing in 2000 for our capital expenditures. Finally, we incurred other expenses of NT$242 million (US$7 million) in the six months ended June 30, 2001, compared to NT$58 million in the six months ended June 30, 2000, largely as a result of a provision for doubtful insurance receivable in the amount of NT$227 million (US$7 million). These increases in other expenses were partially offset by a decrease of 19.2% in net loss from equity investment of NT$213 million in the six months ended June 30, 2000 to NT$172 million (US$5 million) in the six months ended June 30, 2001. These losses resulted primarily from our investment in Caesar Technology, Inc. that was accounted for under the equity method of accounting. See ‘‘Business—Subsidiaries and Strategic Investments—Strategic Investments’’.

Net Income (Loss). We recorded net income of NT$2,429 million (US$70 million) in the six months ended June 30, 2001 compared to a net income of NT$2,508 million in the six months ended June 30, 2000.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Sales Revenue. Our total sales revenue increased 95.3% to NT$33,811 million (US$981 million) in 2000 from NT$17,315 million in 1999. This increase reflected increases in sales revenue from higher sales volumes and the sales of additional higher priced, higher density integrated circuits, as well as a wider range of flash products, and increases in the average selling prices of most of our integrated circuits during 2000. Net sales revenue increased 97.5% to NT$33,493 million (US$971 million) in 2000 from NT$16,957 million in 1999.

The proportion of our net sales revenue from mask ROM products decreased to 58.6% in 2000 from 63.1% in 1999, partially as a result of large increases in flash product sales. The average selling prices for mask

47

ROM products increased from NT$94.9 per die in 1999 to NT$105.8 per die in 2000, primarily as a result of increased demand and higher market prices.

The proportion of our net sales revenue from flash products increased to 19.9% in 2000 from 12.7% in 1999, primarily as a result of increased average selling prices and increased unit sales of a wider range of flash products as we increased production capacity to meet additional demand and fulfill increased customer orders.

The proportion of our net sales revenue from EPROM products declined to 3.7% in 2000 from 7.8% in 1999, as we continued to shift our overall product mix toward other nonvolatile memory devices in response to weakened demand for EPROM products. We believe the increasing popularity of flash products has weakened demand for EPROM products.

The proportion of our net sales revenue from our logic products, primarily multimedia and SOC products, decreased to 5.7% in 2000 from 12.2% in 1999, despite an increase in the sales of these products from NT$2,069 million in 1999 to NT$2,278 million (US$66 million) in 2000. This was primarily a result of the larger increases in other product sales.

The proportion of our net sales revenue from our foundry services increased to 9.4% in 2000 from 3.1% in 1999, due primarily to the commencement of shipment of SRAMs and flash to Mitsubishi, which accounted for 8.0% of our net sales revenue in 2000. This increase was partially offset by a decrease in the proportion of our net sales revenue from DRAMs produced primarily for Matsushita to 0.3% in 2000 from 2.9% in 1999.

Cost of Goods Sold and Gross Profit. Cost of goods sold increased 27.8% to NT$15,498 million (US$449 million) in 2000 from NT$12,124 million in 1999, largely as a result of the increase in sales and increases in production volumes at Fab I and Fab II. These increases also resulted in an increase of 36.2% in subcontracting expense for services such as testing and packaging, an increase of 24.6% in depreciation and amortization, which increased to NT$6,048 million (US$175 million) in 2000 from NT$4,855 million in 1999 and an increase in the compensation expenses relating to our stock performance-based employee bonus plan for production personnel. However, our gross margin increased to 53.7% in 2000 from 28.5% in 1999 primarily as a result of the growth in average selling prices of our nonvolatile memory products outpacing the increased costs of production. In addition, gross margin improved due to improved productivity and the use of more advanced technology, which caused our unit costs to decline.

Operating Expenses. Total operating expenses increased 79.8% in 2000 to NT$5,857 million (US$170 million) from NT$3,258 million in 1999. Selling expenses increased by 84.2% in 2000 to NT$940 million (US$27 million) from NT$511 million in 1999, largely due to the growth of our sales force and increased sales and the corresponding increases in the amount of commissions paid. Administrative expenses increased by 120.8% in 2000 to NT$1,772 million (US$51 million) from NT$803 million in 1999, due primarily to increases in the number of employees and increased operating activities in relation to increased sales revenue and partially to the increase in the compensation expenses relating to our stock performancebased employee bonus plan for non-production personnel. See ‘‘—U.S. GAAP Reconciliation—Stock Performance-Based Employee Bonus Plan’’ and Note 20 to our financial statements included in this Offering Circular. Research and development expenses increased 61.6% to NT$3,144 million (US$91 million) in 2000, from NT$1,945 million in 1999, as we increased our development activities. We have a long-term objective of spending no less than 10% of net sales revenue on research and development. However, in 2000, due to the substantial increases in our net sales revenue, research and development expenses accounted for only 9.4% of our net sales revenue. See ‘‘Business—Research and Development’’.

Operating Income (Loss). We reported operating income in 2000 of NT$12,139 million (US$352 million), as compared to NT$1,575 million in 1999.

48

Other Income. Total other income increased 11.8% in 2000 to NT$945 million (US$27 million) from NT$845 million in 1999. Other income increased primarily as a result of an increase in interest income to NT$541 million (US$16 million) in 2000 from NT$377 million in 1999 largely from increased interest received from financial institutions due to our higher deposits resulting from increased sales revenue. Also contributing to the increase in other income was a foreign exchange gain of NT$293 million (US$9 million) in 2000, as compared to a gain of NT$272 million in 1999, largely as a result of gains on our settlement of foreign currency and forward contracts following the appreciation of the New Taiwan dollar and Japanese yen against the U.S. dollar. In addition, other income increased as a result of increased research and development subsidies from the ROC government from NT$10 million in 1999 to NT$31 million (US$0.9 million) in 2000 and increased gain on disposal of property, plant and equipment from NT$5 million in 1999 to NT$16 million (US$0.5 million) in 2000 largely due to disposal of two testing machines in 2000. These increases, on the whole, more than compensated for the absence of any insurance recovery in 2000 similar to the gain on insurance claim from earthquake in the amount of NT$162 million in 1999.

Other Expenses. Total other expenses increased 13.3% in 2000 to NT$2,073 million (US$60 million) from NT$1,830 million in 1999. Interest expense increased 13.4% in 2000 to NT$1,266 million (US$37 million) from NT$1,116 million in 1999, due to additional financing, including bank loans and the issuance of 1% convertible bonds in 2000 for our capital expenditures. Our inventory loss provision lessened in 2000 to NT$77 million (US$2 million) from NT$106 million in 1999, due to the fluctuation in market price of our inventory and changes in our obsolete inventory. In addition, we incurred a net loss from equity investments under equity method accounting of NT$601 million (US$17 million) in 2000, compared to a net loss of NT$453 million in 1999, primarily as a result of losses of NT$495 million from our investments in Caesar Technology, Inc., NT$49 million from our investments in Prominent Communications, Inc., NT$51 million from our investments in Biomorphic VLSI, Inc. and NT$8 million from our investments in Raio Technology, Inc. See ‘‘Business—Subsidiaries and Strategic Investments—Strategic Investments’’. Finally, we incurred other expenses of NT$107 million (US$3 million) in 2000, compared to NT$9 million in 1999, as a result of repair and maintenance of machinery, the disposal of assets and utility interruption resulting from the September 1999 earthquake and a second earthquake in June 2000.

Net Income (Loss). We recorded net income of NT$10,613 million (US$308 million) in 2000 compared to NT$907 million in 1999.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Sales Revenue. Our total sales revenue increased 35.7% to NT$17,315 million in 1999 from NT$12,760 million in 1998. This increase resulted primarily from increased utilization of Fab I and Fab II driven by rising demand. It also reflected increases in sales revenue from the sales of additional higher priced, higher density integrated circuits from Fab I and Fab II in the second half of 1999, and increased production capacity at Fab II during this period. Net sales revenue increased 34.8% to NT$16,957 million in 1999 from NT$12,580 million in 1998. Net sales revenue increased less rapidly than total sales revenue due to higher sales returns and discounts on newly introduced products.

The proportion of our net sales revenue from mask ROM products remained largely unchanged, decreasing slightly to 63.1% in 1999 from 63.7% in 1998. The average selling prices for mask ROM products decreased from 1998 to 1999, primarily as a result of changes in our product mix in this area through increases in the proportion of lower priced, lower density chips. Our sales of higher density products increased significantly in the fourth quarter of 1999 over the fourth quarter of 1998. In particular, sales to Nintendo in the fourth quarter of 1999 increased as Nintendo rolled out additional games for its Nintendo 64 game machines which use our higher density mask ROMs. See ‘‘Business—Customers—Nintendo’’.

The proportion of our net sales revenue from flash products increased to 12.7% in 1999 from 9.3% in 1998, primarily as a result of increased unit sales of these products, including higher priced, higher density devices.

49

The proportion of our net sales revenue from EPROM products declined to 7.8% in 1999 from 11.3% in 1998 as we shifted our overall product mix toward other nonvolatile memory devices in response to weakened demand for EPROM products. We believe that the increasing popularity of flash products, and the decline in the prices of these products in 1999, weakened demand for EPROM products in 1999. As a result of this weakened demand, the sales volume of our EPROM products continued to decline.

The proportion of our net sales revenue from our logic products, primarily multimedia and SOC products, increased to 12.2% in 1999 from 8.8% in 1998, as a result of an increase in multimedia and SOC unit sales.

The proportion of our net sales revenue from foundry services, DRAMs produced for Matsushita decreased to 3.1% in 1999 from 7.0% in 1998, due partially to an increase in unit sales resulting from proportionately larger increases in other product sales.

Cost of Goods Sold and Gross Profit. Cost of goods sold increased 22.6% to NT$12,124 million in 1999 from NT$9,888 million in 1998, largely as a result of increases in production volumes at Fab II, which resulted in an increase of 148.6% in subcontracting expense for services such as testing and packaging, and depreciation and amortization, which increased 14.1% to NT$4,855 million in 1999 from NT$4,255 million in 1998. Our gross margin increased to 28.5% in 1999 from 21.4% in 1998, as a result of improved productivity and the use of more advanced technology, which caused our unit costs to decline.

Operating Expenses. Total operating expenses increased 6.6% in 1999 to NT$3,258 million from NT$3,055 million in 1998. Selling expenses increased 10.9% to NT$511 million in 1999 from NT$460 million in 1998, largely due to the growth of our sales force and increased sales, offset by declines in commission rates. Administrative expenses increased 30.1% in 1999 to NT$803 million from NT$617 million in 1998, largely due to the growth of our support network and an increase of 107.4% in depreciation related to computer software. Research and development expenses remained largely unchanged, decreasing 1.6% to NT$1,945 million in 1999 from NT$1,977 million in 1998, as we continued to pursue our long-term objective of spending no less than 10% of net sales revenue on research and development. Research and development expenses in 1998 represented 15.7% of net sales revenue, as lower net sales revenue increased the proportionate amount spent on this area. See ‘‘Business—Research and Development’’.

Operating Income (Loss). We reported operating income in 1999 of NT$1,575 million, as compared to an operating loss of NT$363 million in 1998.

Other Income. Total other income increased 21.1% in 1999 to NT$845 million from NT$698 million in 1998. Other income increased as a result of an estimated net gain of NT$162 million in 1999 from zero in 1998, resulting from a casualty insurance settlement for property damage and business interruption loss suffered by us following the September 1999 earthquake.

Other Expenses. Total other expenses decreased 20.0% in 1999 to NT$1,830 million from NT$2,288 million in 1998. Interest expense increased 15.1% in 1999 to NT$1,116 million from NT$970 million in 1998, due to financing in 1999 for our capital expenditures. Our inventory loss provision lessened in 1999 to NT$106 million from NT$789 million in 1998, due to the fluctuation in market price of our inventory and changes in our obsolete inventory. In addition, we incurred a net loss from equity investments under equity method accounting of NT$453 million in 1999, compared to a net loss of NT$337 million in 1998, primarily as a result of our investments in Caesar Technology, Inc. Also included in other expenses for 1999 were investment losses of NT$144 million, relating primarily to investments held through Wedgewood International Ltd. These losses were partially offset by investment income reflecting a gain from Hui Ying Investment, Inc. of NT$107 million in 1999 from zero in 1998. Of this amount, NT$98 million resulted from gains from the purchase and sale by Hui Ying Investment, Inc. of our Common Shares.

Net Income (Loss). We recorded net income of NT$907 million in 1999 compared to a net loss of NT$1,547 million in 1998.

50

We do not believe that inflation in Taiwan has had a material impact on our results of operations. The average annual rate of change in Taiwan’s Wholesale Price Index, was approximately 0.1% in 1998, (4.4)% in 1999 and (2.7)% in 2000.

Taxation

Because our facilities are located in the Hsinchu Science-Based Industrial Park, we enjoy preferential tax treatment in some respects under the Statute for the Establishment and Administration of Science-Based Industrial Park (referred to in this section as the ‘‘Science Park regulations’’). The income tax rate applicable to us through 2000 was 20%, rather than the 25% rate applicable to corporations located outside the Science Park. Beginning in 2001, the preferential income tax rate of 20% is no longer available to business operations in the Science Park. In addition, we are entitled to an initial exemption from income taxes for the amount of our income attributable to the manufacture and sale of our products produced at Fab I and Fab II, less any valueadded amount attributable to third party contractors, for a period of five years for Fab I and four years for Fab II, from the first date of sales, and we may defer the commencement of this exemption for up to four years. We chose the period from January 1, 1994 to December 31, 1998 to be the five year exemption period for Fab I. We have chosen the period from January 1, 2001 to December 31, 2004 to be the four year period for Fab II. As such tax exemption benefit was rescinded under an amendment to the Science Park regulations taking effect on January 20, 2000, after the expiration of the relevant exemption periods, we would no longer qualify for any new exemptions under the amended Science Park regulations.

Under the Statute for Upgrading Industries, we are also entitled to other tax incentives generally available to Taiwanese companies. We may take tax credits currently at rates ranging between 5% and 20% of the amount spent on qualifying machinery and equipment, and at rates ranging between 5% and 25% (which has been increased to the maximum rate of 35% subject to the announcement of the President) for qualifying research and development costs and employee training expenses. An additional tax credit may also be available to us, equal to 50% of the amount by which the qualifying research and development costs or employee training expenses in a given year exceed the average qualifying research and development costs or employee training expenses for the previous two years. If the tax credit cannot be fully utilized in the current year, the balance may be carried forward for up to four years. The available tax credit in each year is limited to 50% of the corporate tax payable in that year, except for the last of the four years for which there is no limit.

We did not utilize any tax credits in either 1998 or 1999. We utilized NT$1,849 million of tax credits in 2000 and expect to utilize NT$813 million of tax credits related to the six months ended June 30, 2001.

Net operating losses may be carried forward for a period of five years. As of June 30, 2001, all of our losses carried forward had been used to offset income. See Note 14 to our financial statements included in this Offering Circular.

In the fourth quarter of 2001, we recorded an additional tax provision of NT$457 million which relates primarily to deferred tax assets that based on our estimates will not be realized.

U.S. GAAP Reconciliation

General

Our financial statements are prepared in accordance with ROC GAAP, which differ in certain material respects from U.S. GAAP. In 1999, we restated our reconciliation to U.S. GAAP required under United States Securities and Exchange Commission regulations with respect to our financial statements for 1998. The financial statements have been restated to properly account for certain derivative contracts at their fair values as of December 31, 1998, which is required by applicable U.S. GAAP but was not previously accounted for under U.S. GAAP. As a result of the restatement, the approximate net loss of our company under U.S. GAAP in 1998

51

increased by NT$1,056 million (US$31 million) to NT$3,072 million (US$89 million). Our results of operations for 1998 under ROC GAAP were unaffected by the restatement.

The following tables set forth comparisons of our net income (loss) and shareholders’ equity in accordance with ROC GAAP and U.S. GAAP:

Net income (loss) in accordance with: ROC GAAP................................................................. U.S. GAAP .................................................................. Shareholders’ equity in accordance with: ROC GAAP................................................................. U.S. GAAP ..................................................................	Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) (1,547) 907 10,613 308 (3,072) 1,861 8,016 232 Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) 25,049 26,384 44,573 1,293 23,945 26,433 41,831 1,213	Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) (1,547) 907 10,613 308 (3,072) 1,861 8,016 232 Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) 25,049 26,384 44,573 1,293 23,945 26,433 41,831 1,213	Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) (1,547) 907 10,613 308 (3,072) 1,861 8,016 232 Year ended December 31, 1998 1999 2000 2000 (NT$) (NT$) (NT$) (US$) 25,049 26,384 44,573 1,293 23,945 26,433 41,831 1,213	Six months ended June 30, 2001 (NT$) (US$) 2,429 70 (2,606) (76) Six months ended June 30, 2001 (NT$) (US$) 46,866 1,359 44,941 1,303
	1998 (NT$) 25,049 23,945	1999 (NT$) 26,384 26,433	2000 (NT$) 44,573 41,831

Note 20 to our financial statements included in this Offering Circular provides a description of the principal differences between ROC GAAP and U.S. GAAP as they relate to us, and a reconciliation to U.S. GAAP of specific items, including net income (loss) and shareholders’ equity.

Our gross profit in accordance with U.S. GAAP was NT$1,548 million in 1998, NT$4,558 million in 1999, NT$17,615 million (US$511 million) in 2000, NT$4,582 million for the six months ended June 30, 2000 and NT$4,348 million (US$126 million) for the six months ended June 30, 2001. On a U.S. GAAP basis, our gross profit margin in 1998 was 12.3%, as compared to 26.9% in 1999, 52.6% in 2000, 28.7% for the six months ended June 30, 2000 and 35.6% for the six months ended June 30, 2001. Under U.S. GAAP we had an operating loss of NT$1,620 million in 1998, an operating income of NT$1,237 million in 1999, an operating income of NT$11,069 million (US$321 million) in 2000, an operating income of NT$1,313 million for the six months ended June 30, 2000 and an operating loss of NT$1,843 million (US$53 million) for the six months ended June 30, 2001.

Differences between ROC GAAP and U.S. GAAP, which have an effect on our net income or loss as reported under ROC GAAP, relate to:

• compensation expense pertaining to employee bonuses and distributions to directors and supervisors;

• income taxes;

• additional pension gain on an actuarial basis;

• the effect of the capitalization of intangible assets;

• marketable securities;

• derivative financial instruments; and

• compensation expense pertaining to stock performance-based employee bonuses.

Employee Bonuses

Subject to shareholder approval, we expect to pay all or some portion of employee bonuses for future periods in the form of Common Shares. In this case, the number of Common Shares distributed is obtained by

52

dividing the total nominal NT dollar amount of the bonus by the par value of our Common Shares, or NT$10 per share, rather than their market value, which has generally been substantially higher than par value. Under ROC GAAP, the distribution of employee bonus shares is treated as an allocation from retained earnings, and we are not required to, and do not, charge the value of the employee bonus shares to income.

Under U.S. GAAP, however, we are required to charge the market value of the employee bonus shares to employee compensation expense in the period to which they relate, correspondingly reducing our net income and income per share calculated in accordance with U.S. GAAP. However, since the form of the payment of the compensation expense is only determinable at the annual shareholders’ meeting, which is generally held after the issuance of our financial statements, the compensation expense is initially accrued in the period to which it relates based on the sum of the NT dollar amount of the aggregate bonus payable in cash in accordance with our articles of incorporation and amounts payable in stock. The difference between the amount initially accrued and the market value of the Common Shares issued as payment of all or any part of the bonus is recorded as employee compensation expense in the period in which shareholder approval is obtained. See Note 20 to our financial statements included in this Offering Circular.

Additional compensation expense in the amount of NT$1,622 million (US$47 million) for 2000 and NT$5,298 million (US$154 million) for the six months ended June 30, 2001 was reflected in our net income under U.S. GAAP with respect to employees bonuses and remuneration of directors and supervisors paid in shares.

Gross Profit and Operating Income

Government subsidies for research and development, inventory loss provision and the reversal of bad debt expense are presented below the operating income subtotal in the statement of operations as permitted under ROC GAAP. Under U.S. GAAP, the inventory loss provision is included in the determination of gross profit. The government subsidies for research and development and the reversal of bad debt expense are included in the determination of operating income.

Income Taxes

Our undistributed earnings generated after 1997 are subject to a 10% tax in compliance with the Income Tax Law of the ROC. Under ROC GAAP, the 10% tax on undistributed earnings is recorded as an expense at the time our shareholders resolve that earnings be retained. Under U.S. GAAP, we measure income tax expense, including the tax effects of temporary differences, using the tax rate that includes the tax on undistributed earnings.

Pension Expense

Prior to 1996, in accordance with ROC GAAP, pension expense was recognized based on contributions required under government regulations, while under U.S. GAAP, pension obligations and expense are determined on an actuarial basis. Under the ‘‘Accounting for Pensions’’ guidelines issued by the ROC Accounting Research Development Foundation in 1991, which are substantially similar to Statement of Financial Accounting Standards (‘‘SFAS’’) No. 87 under U.S. GAAP, each ROC listed company, including our company, was required, beginning in 1996, to accrue its unfunded or underfunded ‘‘accumulated pension obligations’’ as a liability in its balance sheet on an actuarial basis and to expense amounts related to these obligations in its income statement systematically over the estimated service lives of the employees covered by the pension plan. See Note 20 to our financial statements included in this Offering Circular. For U.S. GAAP reconciliation purposes, we amortize our related pension obligation differences in accordance with SFAS No.87 over a period of 21 years, retroactive from 1993. This adjustment increased our net income before taxes under U.S. GAAP by NT$3 million in 1998 and 1999, by NT$3 million (US$0.09 million) in 2000 and by NT$1 million (US$0.03 million) for the six months ended June 30, 2001.

53

Intangible Assets

Under ROC GAAP, we capitalize and amortize software acquired for research and development purposes, acquired expertise and other costs over three years. Under U.S. GAAP, for the three years ended December 31, 1995, these amounts were expensed in the period incurred. Beginning in 1996, we ceased capitalizing internal development cost for these items but continued capitalizing and amortizing external cost for acquired software, acquired expertise, and other costs as permitted under U.S. GAAP. Adjustment of this item resulted in an increase of our income before income taxes under U.S. GAAP of approximately NT$26 million in 1998.

Impairment of Long-lived Assets

U.S. GAAP SFAS No.121, ‘‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,’’ requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required, and if so, to measure the impairment. If the sum of 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 loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. U.S. GAAP SFAS No.121 also generally requires that long-lived assets and certain identifiable intangible assets to be disposed of be recorded at the lower of the carrying value or fair value less cost to sell. Based on our assessment, no impairment loss was required to be made for our long-lived assets for the years ended December 31, 1998, 1999 and 2000, and for the six months ended June 30, 2001.

Marketable Securities

Under ROC GAAP, short-term marketable equity securities are carried at the lower of aggregate cost or market value. The unrealized losses of short-term marketable equity securities are recorded as investment loss on the income statement, while unrealized gains of short-term marketable equity securities are not recognized. Long-term marketable equity securities are carried at cost, or lower of aggregate cost or market value if the market price is available. The unrealized losses of long-term marketable equity securities are reported as a deduction of shareholders’ equity, while the unrealized gains are not recognized. Under U.S. GAAP, SFAS No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’, requires that all applicable investments be classified as trading, available-for-sale securities or held-to-maturity securities. We did not have any investments classified as trading securities or held-to-maturity securities during the periods presented. The statement further requires that available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings but reported in a separate component of shareholders’ equity until they are sold.

Derivative Financial Instruments

Under ROC GAAP, we are required to disclose certain information in our financial statements regarding derivative financial instruments; however, there are no specific accounting requirements for derivative financial instruments, except for foreign currency forward exchange contracts for which there is no significant difference in the accounting treatment under U.S. GAAP. In addition, ROC GAAP has no specific regulations with respect to the accounting of derivative financial instruments indexed to and potentially settled in our own Common Shares.

In June 1998, the Financial Accounting Standards Board (‘‘FASB’’) issued SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. SFAS No.133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

54

SFAS No. 133 was to be effective for fiscal years beginning after June 15, 1999, but was postponed for one year by SFAS No. 137, ‘‘Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133—an amendment of FASB Statement No. 133’’. The adoption of SFAS No. 133 on January 1, 2001 resulted in the cumulative effect of an accounting change loss of NT$621 million being recognized in earnings in the consolidated statement of operations and a charge of nil in other comprehensive income for U.S. GAAP purposes.

For derivative financial instruments indexed to and potentially settled in our own Common Shares, we are required to record those agreements which are required to be settled in cash at their fair values, with changes in fair value reported in earnings. See Notes 19 and 20 to our financial statements included in this Offering Circular.

After application of these principles, our net loss for 1998 for U.S. GAAP purposes increased by NT$1,056 million, our net income for U.S. GAAP purposes increased by NT$1,301 million for 1999 and decreased by NT$898 million (US$26 million) for 2000, and our net loss increased by NT$204 million (US$6 million) for the six months ended June 30, 2001.

Stock Performance-Based Employee Bonus Plan

In April 1999, our board approved a program similar to a stock appreciation rights plan under which our employees who are eligible to participate would receive cash bonuses based on increases in the market price of our Common Shares. Our board has authorized our chairman to use his discretion to alter the terms of this plan, including the vesting period and the amount of the bonus allocated to our employees. We initially allocated 61,179,500 shares upon the establishment of the plan. Rights to receive cash bonuses under the plan are scheduled to vest with respect to 25% of the Common Shares allocated to the plan on August 1 of each year, starting August 1, 2000 through 2002, except that the right to receive cash bonuses pertaining to the final 25% will vest on March 31, 2003. These rights to receive cash bonuses will be forfeited for employees who discontinue their employment before the scheduled vesting dates.

Between the establishment of the plan and June 30, 2001, rights to receive cash with respect to a total of 967,500 shares have been forfeited, and rights to receive cash bonuses with respect to a net additional 16,656,482 shares were allocated under the plan as a result of stock dividends made on the shares allocated to the plan, exercise of rights under the plan and allocation of additional rights. As of June 30, 2001, 76,868,482 shares were outstanding under the plan, including vested rights to 16,290,163 shares and unvested rights to 60,578,319 shares. We may from time to time increase the size of the plan in the future to allocate additional stock appreciation rights. U.S. GAAP requires us to account for this plan in accordance with Accounting Principles Board Opinion No. 25 (‘‘APB 25’’), ‘‘Accounting for Stock Issued to Employees’’. Under APB 25, we recognize compensation expense for the plan based on the amount by which the quoted market value of our shares covered by the grant exceeds the exercise price of the rights. Compensation determined in accordance with the preceding sentence will be accrued as a charge to expense over the vesting period the employee performs the related services. As a result, the compensation expense adjustment under U.S. GAAP for this plan in 1999 was NT$245 million of additional expense. Due to the reversal of compensation expense accrued on a ROC GAAP basis, we recorded an increase in income adjustment of NT$598 million (US$17 million) in 2000 and NT$84 million (US$2 million) for the six months ended June 30, 2001 for this plan under U.S. GAAP. Unlike U.S. GAAP, ROC GAAP has no specific accounting provisions for stock appreciation rights plans. For ROC GAAP reporting purposes, we do not recognize compensation expense until the year in which such appreciation right vests. In 1999, no rights vested and as a result, we did not recognize any compensation expense. When the rights vest, we recognize compensation expense that is calculated based on the difference between (a) the fair market value of our shares plus additional costs related to the rights vested and (b) the aggregate exercise price of the rights having vested in the period. We have entered into a number of equity derivative contracts to cover the rights under the plan. We recognized compensation expense for the stock appreciation rights under ROC GAAP of NT$1,093 million (US$32 million) in 2000 and NT$80 million (US$2 million) for the six months ended June 30, 2001.

55

Purchase and Sale of Our Own Shares

Under ROC GAAP, the net gain or loss resulting from the purchase and sale of our own Common Shares for trading purposes is recorded as non-operating income or loss in the income statement.

U.S. GAAP requires that if we or our affiliates acquire our own Common Shares for purposes other than retirement, the cost of the acquired shares may be shown separately as a deduction from the total of capital stock, additional paid-in capital and retained earnings, or may be accorded the accounting treatment appropriate for retired stock. ‘‘Gains’’ on sales of the repurchased stock not previously accounted for as constructively retired are credited to additional paid-in capital; losses may be charged to additional paid-in capital to the extent that previous net ‘‘gains’’ from sales or retirements of the same class of stock are included therein, otherwise to retained earnings. As a result of the gain of NT$86 million in 1999 and a gain of NT$7 million (US$0.2 million) in 2000 on the purchase and sale of our Common Shares for ROC GAAP purposes, a corresponding amount was credited to additional paid-in capital and deducted from net income for U.S. GAAP purposes.

Investment in Equity Investees

Under ROC GAAP, if an investee company issues new shares and the original shareholders do not purchase new shares proportionally such that the investor increases its percentage of ownership, the difference between the investment cost for the portion of the investee acquired and the acquired net assets is charged to equity.

Under U.S. GAAP, if an investee company issues new shares and the original shareholders do not purchase new shares proportionally such that the investor increases its percentage of ownership, the difference between the investment cost for the portion of investee acquired and the acquired net assets is recorded as part of the investment. The difference is assigned to individual assets and liabilities acquired on the basis of the assets’ and liabilities’ fair values. Any remaining difference between the cost of the investment and net assets acquired is allocated to goodwill.

Research and Development Expense

Under ROC GAAP, our royalty expense is included in research and development expense. Under U.S. GAAP, our royalty expense is included in selling expense or administrative expense depending on the nature of the expense. Accordingly, on a U.S. GAAP basis, research and development expenses were NT$1,729 million in 1998, NT$1,614 million in 1999, NT$2,486 million (US$72 million) in 2000, NT$1,069 million for the six months ended June 30, 2000 and NT$1,600 million (US$46 million) for the six months ended June 30, 2001.

Rights Issues and Earnings Per Share

Under U.S. GAAP, a rights issue with exercise price less than the fair value of the stock contains a bonus element that is similar to a stock dividend and is accounted for as such accordingly. As a result, the basic and diluted earnings per share shall be adjusted retroactively for the bonus element for all periods presented. There are no requirements under ROC GAAP to adjust earnings per share arising from the bonus element of a rights issue.

Under ROC GAAP, earnings per share is retroactively adjusted for shares issued for employee bonus. Under U.S. GAAP, shares issued for employee bonus will affect the current period’s earnings per share only.

New Accounting Pronouncements

In July 2000, ROC SFAS No. 30 ‘‘Accounting for Treasury Stock’’ was announced. ROC SFAS No. 30 will be effective for financial periods ended on or after December 31, 2001. Earlier application is permitted. ROC SFAS No. 30 provides guidance on the recognition, presentation and disclosure of treasury stock

56

transactions in financial statements. ROC SFAS No. 30 requires that treasury stock transactions (including parent company’s stock traded by subsidiary) should be charged to the equity account, and no gain or loss can be recognized into the profit and loss accounts.

In July 2001, the U.S. FASB issued SFAS No. 141, ‘‘Business Combinations’’, and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets’’. SFAS No. 141 eliminates the pooling method and requires that all business combinations be accounted for under the purchase method. SFAS No. 141 also requires that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires goodwill to be reviewed for impairment rather than amortized and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The impact of SFAS No. 141 and SFAS No. 142 on our financial statements has not yet been determined.

Liquidity and Capital Resources

We finance our business with cash from operations, long-term and short-term debt (including debt convertible into our Common Shares) and the proceeds from the issuance of equity securities.

As of June 30, 2001, we had a net decrease in cash and cash equivalents of NT$2,975 million (US$86 million) compared with December 31, 2000, bringing our cash and cash equivalents position as of June 30, 2001 to NT$12,587 million (US$365 million). We held this amount in the form of cash, primarily checking and savings accounts with banks and other financial institutions in Taiwan and overseas, and in the form of time deposits.

Our operating activities provided net cash of NT$5,637 million (US$163 million) for the six months ended June 30, 2001. Increases in net cash provided by our operating activities for the six months ended June 30, 2001 included:

• a decrease in notes and accounts receivable of NT$2,722 million (US$79 million), compared with a NT$349 million increase in notes and accounts receivable for the same period in 2000. This was due primarily to higher accounts receivable as of December 31, 2000 compared with December 31, 1999, resulting in higher collections of accounts receivable in the six months ended June 30, 2001 compared with the same period in 2000; and

• an increase in depreciation and amortization of intangibles of NT$3,878 million (US$112 million), compared with NT$2,745 million for the same period in 2000. This was due primarily to increased depreciation for Fab II as a result of additional capital expenditure arising from our expansion program for Fab II.

These increases were partially offset by a NT$2,733 million (US$79 million) increase in inventory levels, compared with a NT$479 million increase in inventory levels for the same period in 2000. Inventory levels increased primarily because we maintained our capacity utilization rate at a high level to build up our wafer inventories in anticipation of an expected seasonal increase in sales in the second half of the year, and because of lower than expected demand for our products caused by the global economic slowdown.

Net cash used in our investing activities for the six months ended June 30, 2001 amounted to NT$7,465 million (US$217 million). The most significant component of this amount was purchase of property,

57

plant and equipment amounting to NT$5,413 million (US$157 million), a majority of which was made in connection with the construction, upgrade and/or enhancement of Fabs I, II and III. The table below provides a more detailed description of capital expenditures incurred in connection with our fabs. Additions to other assets amounted to NT$960 million (US$28 million), reflecting our contribution to a sinking fund in a restricted cash account which was required to be made under the terms of our agreement with the Bank of America. Under such terms, we are required to contribute to a sinking fund if at any time in the 24 months prior to the maturity date of our five year secured convertible debentures due May 5, 2003, the aggregate amount of principal and accrued interest exceeds the lesser of a stated amount and an amount calculated based on related security letters of credit. We may therefore be required to contribute to the sinking fund again in the future under such terms.

Net cash used in financing activities for the six months ended June 30, 2001 was NT$1,275 million (US$37 million). Net cash provided by financing activities in 2000 was NT$7,966 million (US$231 million), principally due to our issuance of an additional 135,590,000 Common Shares in a rights offering which generated NT$4,062 million of net proceeds in January 2000 and the issuance of 1% convertible bonds due 2005 in the amount of US$200 million in February 2000.

As of June 30, 2001, we had aggregate long-term debt, net of the current portion, and capital lease obligations of NT$15,946 million (US$462 million) and aggregate short-term debt and notes and current portion of capital lease obligations and long-term debt of NT$3,888 million (US$113 million). The long-term debt was provided pursuant to eight different facilities with Taiwanese banks and financial institutions and two fixed rate corporate debentures, the issuance of one of which, our 1% convertible bonds due 2005, generated NT$6,014 million of net proceeds in February 2000. The loans bore interest at rates between 0.77% and 8.80% per annum as of June 30, 2001, mature between 2002 and 2007 and, in general, require payments of principal and interest on either a quarterly or monthly basis throughout the remainder of their terms. The maturity schedule of our existing long-term debt is as follows:

Period July 1, 2001-June 30, 2002 ................................................................................................................. July 1, 2002-June 30, 2003 ................................................................................................................. July 1, 2003-June 30, 2004 ................................................................................................................. July 1, 2004-June 30, 2005 ................................................................................................................. July 1, 2005-June 30, 2006 ................................................................................................................. After June 30, 2006 ............................................................................................................................. Total .....................................................................................................................................................	NT$ in millions	NT$ in millions
		3,177 6,410 1,853 6,820 141 709 19,110

See Note 11 to our financial statements included in this Offering Circular. The short-term indebtedness consists of letter of credit loans and a working capital loan with several banks, each of which accrues interest at variable rates, short-term notes, current portion of long-term debt and current portion of capital leases. Certain of our debt instruments require us to issue share capital for cash if the debt to equity ratio is greater than 1.85 to 1.0 and 1.2 to 1.0. The ratio as of June 30, 2001 was 0.5 to 1.0.

In the third quarter of 2001, we entered into a capital equipment lease agreement with Nintendo in the amount of up to US$75 million for the use of manufacturing equipment. As of December 31, 2001, we had lease obligations of approximately US$53 million payable to Nintendo over a four year period in monthly installments. At the end of the lease term title to the leased equipment will be transferred to us.

We entered into a syndicated loan for an amount of up to NT$12.0 billion, and issued approximately NT$3.0 billion principal amount of corporate bonds in Taiwan in the second half of 2001. We expect to use these proceeds primarily to fund the construction of our Fab III, as well as the purchase of machinery and equipment and other capital expenditures. We had not drawn down on the NT$12.0 billion syndicated loan as of the date of this Offering Circular.

On January 30, 2002, we prepaid a syndicated loan which had an outstanding amount of JPY3.17 billion (NT$844 million).

58

We operate our own fabrication facilities and therefore require significant amounts of capital to build, expand, modernize and maintain our facilities and equipment. Our total capital expenditures were NT$6,136 million in 1998, NT$8,129 million in 1999, NT$11,803 million (US$342 million) in 2000 and NT$5,114 million (US$148 million) for the six months ended June 30, 2001. The following table sets forth our capital expenditures for 1998, 1999, 2000 and the six months ended June 30, 2001.

Fab I......................................................................................................... Fab II........................................................................................................ Fab III ...................................................................................................... Others....................................................................................................... Total .........................................................................................................		Year ended December 31, Six months ended June 30, 1998 1999 2000 2001 (NT$ in millions) 3,269 1,604 1,553 1,019 2,674 6,520 9,913 2,546 — — 320 813 193 5 17 736 6,136 8,129 11,803 5,114	Year ended December 31, Six months ended June 30, 1998 1999 2000 2001 (NT$ in millions) 3,269 1,604 1,553 1,019 2,674 6,520 9,913 2,546 — — 320 813 193 5 17 736 6,136 8,129 11,803 5,114	Six months ended June 30, 2001	Six months ended June 30, 2001
		1998 3,269 2,674 — 193 6,136	1999 (NT$ 1,604 6,520 — 5 8,129
					1,019 2,546 813 736 5,114

These amounts include the expansion and upgrade of Fab I and Fab II, the construction of Fab III during 2000 and the six months ended June 30, 2001 and the development of trainee and/or employee facilities and other areas.

In 2001, our capital expenditure plans consisted mainly of the construction of, and facility for, Fab III and further upgrade of Fab II. Our total capital expenditure for 2001 was approximately NT$7.5 billion, of which approximately NT$0.5 billion was used for the maintenance of Fab I, NT$2.9 billion was used for the upgrade of Fab II, NT$3.7 billion was used for the construction of, and facility for, Fab III, and NT$0.4 billion was used for other capital expenditures. The total estimated capital expenditure required for the construction of, and facility for, our Fab III is approximately NT$33.2 billion. We intend to obtain funding for our capital expenditures, including a portion of the costs associated with Fab III, from this offering and additional debt and equity financing that we may consider from time to time, depending on market conditions, our financial performance and other relevant factors, and from internally generated funds.

We believe that we will have sufficient resources available to meet our planned capital expenditure requirements, as well as our present working capital requirements.

Total shareholders’ equity as of June 30, 2001 was NT$46,866 million (US$1,359 million), an increase of 5.1% from December 31, 2000. This increase was primarily due to the contribution of our net income to retained earnings. Our paid-in capital on Common Shares increased to NT$33,593 million (US$974 million) as of June 30, 2001, resulting from our issuance of additional Common Shares as share dividends and employee bonuses. The increase in paid-in capital was paid out of our additional paid-in capital and retained earnings.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rates

Our exposure to interest rate risk relates primarily to our long-term debt, which is normally entered into to fund our corporate activities, primarily for capital expenditures. Other interest rate sensitive short-term assets and liabilities include mainly cash in banks and bank loans.

59

The table below presents the period-end principal amounts outstanding and the contractual rate, where applicable, or the related weighted-average implied forward interest rate by year of maturity, of our debt obligations.

Principal (notional) amount by expected maturity for non-trading purposes

2001 2002 2003 2004 2005 Thereafter (NT$ in thousands, except for percentages) Long term debt Zero coupon convertible debentures(1)............................... 3,245,356 Unsecured convertible debentures due February 1, 2005(2).. Fixed rate ................................ 5,992,910 Average interest rate............... 1.20% US$ debt Variable rate............................ 1,156,813 1,156,813 1,156,813 595,642 17,235 Average interest rate............... 4.8% 4.8% 5.0% 5.0% 5.0% NT$ debt Fixed rate ................................ 666,000 633,000 Average interest rate............... 6.85% 7.09% Variable rate............................ 792,662 812,885 695,873 231,473 123,939 708,948 Average interest rate............... 7.45% 7.55% 7.65% 7.70% 7.70% JPY debt Variable rate............................ 561,690 561,690 Average interest rate............... 0.85% 0.85% Purchased call option(1) Notional amount ......................... 3,245,356 Redemption price(1)................... 25.7649	Total 3,245,356 5,992,910 4,083,316 1,299,000 3,365,780 1,123,380 3,245,356	Fair value as of June 30, 2001
		2,905,307 6,013,727 4,083,316 1,282,241 3,365,780 1,123,380

(1) In 1998, we issued zero coupon convertible debentures in the amount of US$150 million due in 2003. The debentures were privately placed with a financial institution. We subsequently purchased 15 call option contracts which in total cover the full principal amount of the debentures. Each option covers US$10 million of the debentures and can be exercised at our discretion on business days until the maturity of the debentures. We are required to exercise a minimum of two options at any given time. On exercise of an option we will receive from the financial institution the portion of the debentures covered by the option and will pay to the institution a settlement amount. The settlement amount is the sum of the ‘‘relevant hedge amount’’ plus the principal amount of the debentures under the option exercised. The ‘‘relevant hedge amount’’ is the sum of the net present value of a hypothetical swap transaction, plus an accrued interest amount.

The hypothetical swap transaction swaps a strip of U.S. dollar floating interest payments, calculated using 3 month LIBOR plus 0.45%, plus the U.S. dollar notional amount, paid at maturity, for a single Japanese yen payment at maturity. The Japanese yen payment is calculated as the U.S. dollar notional amount converted to the Japanese yen at a fixed exchange rate of 135. Under the hypothetical swap transaction we receive the U.S. dollar payments and pay the Japanese yen payment. The U.S. dollar notional amount of the hypothetical swap is the same as the principal amount of the options being exercised. The accrued interest amount is calculated on the swap notional using the last U.S. dollar 3 month LIBOR reset rate of the swap plus 0.45%. The accrual period is from the last reset date of the swap and the exercise date of the option.

If any options remain unexercised at the maturity of the contracts, the principal amount of those options multiplied by 129.755% will be exchanged with the financial institution for Japanese yen at a fixed exchange rate of 135. We receive U.S. dollars and pay Japanese yen. We exercised two of the options on January 22, 2000 and five of the options on June 26, 2000. As of June 30, 2001, approximately US$80 million principal amount of the debentures and eight of the options remain outstanding.

• (2) In January 2000, we issued US$200 million aggregate principal amount of our unsecured 1% convertible debentures due 2005. As of June 30, 2001, there was approximately US$159 million aggregate principal amount of these debentures outstanding.

60

Currencies

A significant portion of our revenues are denominated in currencies other than the NT dollar. As of June 30, 2001, most of our accounts payable and payables for purchases of capital goods were denominated in currencies other than the NT dollar, primarily in U.S. dollars and Japanese yen. In addition, as of June 30, 2001, most of our long-term debts were in U.S. dollars, including the long-term debentures. To protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates, we utilize derivative financial instruments to hedge our currency exposure. These hedging transactions are designed to reduce, but do not eliminate, the impact of foreign currency exchange rate movements. Our policy is to account for these contracts on a hedge accounting basis.

Most of our sales are denominated in Japanese yen and our debts are in U.S. dollars. An appreciation of the Japanese yen against the NT dollar would result in a foreign exchange gain to us from our underlying sales. However, a depreciation of the Japanese yen against the NT dollar would result in a foreign exchange loss to us. Conversely, an appreciation of the U.S. dollar against the NT dollar would result in a foreign exchange loss to us, while a depreciation of the U.S. dollar against the NT dollar would result in a foreign exchange gain to us. To reduce the foreign exchange loss from a depreciation of Japanese yen, we entered into foreign exchange option contracts.

If the Japanese yen appreciates, it is highly likely that the counter-parties would exercise the options. However, we would be compensated from the gain from our underlying Japanese yen sales and use the U.S. dollars received to pay down the U.S. dollar debts. If the Japanese yen depreciates, it is highly likely the counter-parties would not exercise the option, and the premiums received would provide us additional cash flow against the foreign exchange loss from our sales as a result of the weak Japanese yen.

In writing the options described, we could be considered to be taking on additional foreign exchange risk. To mitigate this risk, a number of the contracts we entered into include ‘‘barriers’’. These barriers have the effect that, if the Japanese yen exchange rate to U.S. dollar exceeds a given rate, the contracts are automatically terminated. The barriers have the impact of reducing the upfront cost of the options. The written option contracts, either entered into with or without barriers, do not qualify as hedges for accounting purposes and accordingly are carried in our financial statements at fair value. For U.S. GAAP purposes, beginning on January 1, 2001, all of our derivative contracts are accounted for at fair value through our statement of operations.

61

The table below presents our assets and liabilities denominated in currencies other than the NT dollar functional currency and the outstanding forward foreign exchange, cross currency interest rate swap and option contracts as of June 30, 2001 by expected year of maturity.

Principal (notional) amount by expected maturity for non-trading purposes

Liabilities denominated in foreign currency JPY ............................................................... US$(1) .......................................................... Financial instruments Forward contracts Buy NT$/Sell JPY Buy NT$ Notional amount................................... Average strike price ............................. Sell JPY Notional amount................................... Average strike price ............................. Buy US$/Sell JPY Buy US$ Notional amount................................... Average strike price ............................. Sell JPY Notional amount................................... Average strike price ............................. Foreign exchange options (no barrier) Sell JPY/Buy US$ Sell JPY................................................ Buy US$............................................... Average strike price ......................... (with barrier) Sell JPY/Buy US$ Sell JPY................................................ Buy US$............................................... Average strike price ......................... Sell US$/Buy JPY Sell US$ ............................................... Buy JPY ............................................... Average strike price ......................... Cross currency swap Sell JPY/Buy US$ Sell JPY................................................ Buy US$...............................................	2001 777,898 4,094,269 20,000 0.2362 23,453 0.2362 634,248 118.71 605,051 118.71 525,968 585,990 111.69 1,636,267 1,757,970 115.83 68,940 67,311 121.50 55,954 68,940	2002 2003 2004 Thereafter Total (NT$ in thousands, except average strike price) 561,290 1,339,188 1,156,813 4,402,169 595,642 6,010,145 16,259,038 20,000 40,000 0.2362 23,453 46,906 0.2362 634,248 605,051 525,968 585,990 1,636,267 1,757,970 68,940 67,311 111,908 111,908 279,770 137,880 137,880 344,700	Fair value as of June 30, 2001
			1,339,188 15,939,806 17,980 37,474 67,037

(1) In January 2000, we issued US$200 million unsecured 1% convertible debentures due 2005. As of June 30, 2001, there was approximately US$159 million aggregate principal amount of these debentures outstanding. In May 1998, we issued US$150 million unsecured zero coupon convertible debentures due 2003. As of June 30, 2001, there were approximately US$80 million aggregate principal amount of these debentures outstanding.

62

Market Price Sensitivity Analysis

Equity Swap

On July 16, 1999, we entered into an equity swap with a financial institution, with the underlying reference equity being our Common Shares. If the final average share price, which is evaluated monthly at a predetermined date over the life of the contract, is greater than the initial share price, we would be entitled to receive that value from the financial institution. If the final average share price is less than the initial share price, then we would pay this amount to the financial institution. However, the contract is subject to a floor of 95%, which limits our risk exposure should the final average share price fall by more than 5% of the initial share price. The notional amount of the contract is US$55 million (equivalent to NT$1.8 billion at the rate of US$1.00=NT$30.90).

We pay six-month LIBOR plus 1.75% on the notional amount to the financial institution for this equity swap. The interest rate sensitivity of these payments are included in the tabular presentation of interest rate sensitivity above.

The above equity swap would have expired on July 16, 2002 but was terminated early on February 2, 2000, which resulted in a gain of US$7 million (equivalent to NT$218 million) to us.

Equity Contract

In June 2000, we entered into a contract with a financial institution for the settlement of five options relating to our zero coupon convertible debenture due 2003 with the underlying reference being 47,727,535 of our Common Shares. The contract, as amended, will expire on December 31, 2002. As of June 30, 2001, the remaining underlying reference was 48,412,695 of our Common Shares. If the share price is greater than the predetermined contract price, we would be entitled to receive the excess over such price from the financial institution. If the share price is less than the predetermined contract price, then we would pay the difference between the two amounts to the financial institution. The contract rate at which the contract is settled is based in U.S. dollars, and our share price is converted into U.S. dollars using current NT dollars to U.S. dollars exchange rates in order to determine the settlement amount. Accordingly, if the NT dollar weakens against the U.S. dollar, our loss would be increased or gain would be reduced. Conversely, if the NT dollar strengthens against the U.S. dollars, our loss would be reduced or gains increased. The contract rate as of June 30, 2001 was US$1.50208. The carrying amount of this contract as of June 30, 2001 was a loss of NT$709 million (US$20 million) while fair value was a loss of NT$739 million (US$21 million).

63

UNCONSOLIDATED INTERIM FINANCIAL INFORMATION

The following table sets forth certain quarterly financial information for the periods indicated. The information presented below differs from our financial statements included elsewhere in this Offering Circular because the information does not consolidate the financial results of our operations. This information is not indicative of our results of operations on a consolidated basis and does not conform to U.S. GAAP.

In addition, our results of operations have varied and are expected to continue to vary from quarter to quarter and are therefore not necessarily indicative of the results for any future period. Our future revenues and results of operations may vary significantly due to a combination of factors, including the factors described in ‘‘Risk Factors—Risk Related to Our Financial Condition and Business—Our periodic results of operations fluctuate significantly, which may affect the value of your investment’’. In addition, we believe that you should not rely on historical period-to-period comparisons as an indication of our future performance.

This information includes only unaudited financial results for Macronix International Co., Ltd., where the entities outside Taiwan are accounted for using the equity method. We believe that we have included in the amounts stated below all necessary adjustments, for the purposes of preparing our unconsolidated quarterly data.

Statement of Operations (ROC GAAP) Net sales revenue............. Cost of goods sold ........... Gross proft................... Operating expenses Selling expenses ........... Administration expenses .................... Research and development expenses .................... Total operating expenses........................ Operating income (loss) .. Other income ................... Other expenses................. Income (loss) before taxes.............................. Income taxes (expense) benefts.......................... Net income (loss).............							Quarter ended	Quarter ended	Quarter ended
	Mar. 31, 1998	Jun. 30, 1998	Sep. 30, 1998	Dec. 31, 1998	Mar. 31, 1999	Jun. 30, 1999	Sep. 30, 1999	Dec. 31, 1999	Mar. 31, 2000	Jun. 30, 2000	Sep. 30, 2000	Dec. 31, 2000	Mar. 31, 2001	Jun. 30, 2001
	21 108
	129

64

Net sales revenue .................. Cost of goods sold................. Gross proft ........................ Operating expenses Selling expenses................. Administration expenses.... Research and development expenses.......................... Total operating expenses....... Operating income (loss)........ Other income......................... Other expenses ...................... Income (loss) before taxes .... Income taxes (expense) beneft................................. Net income (loss) ..................

Quarter ended Mar. 31, 1998 Jun. 30, 1998 Sep. 30, 1998 Dec. 31, 1998 Mar. 31, 1999 Jun. 30, 1999 Sep. 30, 1999 Dec. 31, 1999 Mar. 31, 2000 Jun. 30, 2000 Sep. 30, 2000 Dec. 31, 2000 Mar. 31, 2001 Jun. 30, 2001 Sep. 30, 2001 (as a percentage of net sales revenue) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 (69.4) (84.0) (82.5) (80.9) (82.9) (78.8) (74.6) (61.1) (65.6) (53.9) (42.0) (35.6) (40.8) (50.1) (57.4) 30.6 16.0 17.5 19.1 17.1 21.2 25.4 38.9 34.4 46.1 58.0 64.4 59.2 49.9 42.6 (3.5) (2.7) (3.8) (2.1) (3.3) (2.8) (2.6) (2.5) (3.4) (2.1) (1.9) (1.2) (2.4) (2.2) (2.7) (3.8) (4.5) (4.9) (4.7) (5.1) (5.1) (4.7) (3.3) (4.9) (4.8) (3.6) (2.9) (4.8) (5.8) (5.4) (17.3) (18.0) (17.1) (13.1) (14.1) (12.8) (13.2) (9.0) (11.0) (12.3) (9.0) (8.4) (12.6) (19.0) (19.7) (24.6) (25.2) (25.8) (19.9) (22.5) (20.7) (20.5) (14.8) (19.3) (19.2) (14.5) (12.5) (19.8) (27.0) (27.8) 6.0 (9.2) (8.3) (0.8) (5.4) 0.5 4.9 24.1 15.1 26.9 43.5 51.9 39.4 22.9 14.8 3.9 1.5 4.2 9.0 3.8 5.4 8.8 2.8 7.0 3.1 1.2 0.0 2.4 4.4 3.2 (9.1) (17.2) (17.0) (25.6) (18.2) (12.3) (12.3) (5.3) (6.4) (6.9) (8.3) (6.3) (12.5) (11.8) (15.5) 0.8 (24.9) (21.1) (17.4) (19.8) (6.4) 1.4 21.6 15.7 23.1 36.4 45.6 29.3 15.5 2.5 3.9 (0.3) 3.6 5.0 0.0 3.6 2.0 1.9 1.9 2.2 (1.1) (3.7) (1.6) (5.1) (1.8) 4.7 (25.2) (17.5) (12.4) (19.8) (2.8) 3.4 23.5 17.6 25.3 35.3 41.9 27.7 10.4 0.7

We have generally experienced a decline in unconsolidated quarterly net sales revenue and operating income in our first quarter operations as compared with the fourth quarter of the prior year, due in part to seasonally stronger demand for mask ROM chips used in video games during the holiday selling season. The decline in the first quarter as compared to the fourth quarter of the prior year is also attributable, in part, to a slowdown in production resulting from annual maintenance conducted during the first quarter as well as a general decline in sales and production during the Chinese Lunar New Year holiday period.

65

RECENT DEVELOPMENTS

As used in this section, all financial data for the year ended December 31, 2001, as of and for the nine months ended September 30, 2000 and 2001, for the quarters ended September 30, 2000, June 30, 2001, September 30, 2001 and December 31, 2001, are based on our unaudited unconsolidated financial statements.

The semiconductor industry has experienced a downturn since the end of 2000. Average selling prices for our products, especially for flash products, continued to decline throughout 2001. Our net sales revenue was approximately NT$17,036 million for the first nine months in 2001, a decrease of 16% compared to approximately NT$20,381 million for the same period in 2000. Net sales revenue for the third quarter in 2001 was approximately NT$5,086 million, representing a 1% decrease compared to approximately NT$5,117 million for the second quarter in 2001 and a 43% decrease compared to approximately NT$8,876 million for the third quarter in 2000. Our gross margin also declined from approximately 50% in the second quarter of 2001 to approximately 43% in the third quarter of 2001, and further decreased in the fourth quarter of 2001. Income before taxes was approximately NT$129 million for the third quarter of 2001, representing an 84% decrease compared to approximately NT$795 million for the second quarter in 2001 and a 96% decrease from approximately NT$3,236 million for the third quarter in 2000. Our income before taxes also further decreased in the fourth quarter of 2001. We believe that these results reflect a deteriorating general economic environment and declining demand for our products.

Our capacity utilization rate, which is the utilization rate prior to any production bottleneck, was 100% in 2000 but decreased to approximately 76% in the third quarter in 2001 and further declined to approximately 70% in the fourth quarter in 2001. Our capacity utilization rate may continue to decline if market conditions do not improve in the future.

Net inventory was approximately NT$8,263 million as of September 30, 2001, an increase of 84% compared to approximately NT$4,496 million as of September 30, 2000. We recorded approximately NT$700 million for inventory loss provision for the nine months ended September 30, 2001, compared with no loss provision for the nine months ended September 30, 2000. We held approximately 221 days worth of net inventory as of September 30, 2001, compared to 105 days as of September 30, 2000. Flash products accounted for approximately 49% of our product inventory, a result of soft demand for flash as a consequence of the economic downturn. We recorded an inventory loss provision of NT$206 million and NT$1,860 million during the third and fourth quarters of 2001, respectively. We expect to continue to record a significant amount of inventory loss provision due to inventory obsolescence and additional price declines in future periods if market conditions do not improve.

Nintendo continued to be our largest customer through the end of 2001. Nintendo successfully launched its GameCube in Japan and United States in 2001 as scheduled. We currently supply various chips including flash for the GameCube. However, sales of Game Boy Advance did not meet anticipated levels in the fourth quarter in 2001 and, as a result, our sales of mask ROM for use in Game Boy Advance software cartridges did not meet our anticipated target. See ‘‘Risk Factors—We depend on Nintendo for a substantial portion of our revenue; delays in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue’’.

The market downturn in 2001 also affected some of our invested companies, which experienced significant declines in their respective operating results. We incurred a net investment loss from our investments of approximately NT$447 million for the nine months ended September 30, 2001, a decrease of approximately NT$137 million compared to approximately NT$584 million for the nine months ended September 30, 2000. In the fourth quarter of 2001, we incurred further investment losses due to writedown of equity investments in, or

66

losses incurred by, our invested companies, principally Caesar Technologies, Inc. and Chantek Electronic Co. Ltd., and a reduction of the value of the share interest in our invested companies. On December 26, 2001, the shareholders of Caesar Technology, Inc. approved a voluntary winding up of the company. Chantek Electronic Co., Ltd. experienced difficulty in securing sufficient funding for its operations in the fourth quarter of 2001. As a result, we wrote off all of our remaining investments in these two companies in the amount of approximately NT$370 million during the fourth quarter of 2001.

Our total capital expenditure for 2001 was approximately NT$7.5 billion, which primarily consisted of the construction of, and facility for, Fab III and further upgrade of Fab II. In the second half of 2001, we entered into a syndicated loan for an amount of up to NT$12.0 billion and issued NT$3.0 billion principal amount of corporate bonds in Taiwan to fund our capital expenditure. None of the NT$12.0 billion syndicated loan was drawn as of the date of this Offering Circular. In the third quarter of 2001, we entered into a capital lease agreement with Nintendo in the amount of up to US$75 million for the use of manufacturing equipment. As of December 31, 2001, under the capital lease agreement, we had lease obligations of approximately US$53 million payable to Nintendo over a four year period in monthly installments. At the end of the lease term, title to the leased equipment will be transferred to us.

Our research and development expenses, which include royalty expenses on an ROC GAAP basis, were approximately NT$2,832 million for the nine months ended September 30, 2001, an increase of 32% compared to NT$2,143 million for the nine months ended September 30, 2000. Research and development as a percentage of net sales revenue was 17% for the nine months ended September 30, 2001, compared to 11% for the nine months ended September 30, 2000.

In the fourth quarter of 2001, we recorded an additional tax provision of NT$457 million which relates primarily to deferred tax assets that based on our estimates will not be realized.

On November 29, 2001, our Board of Directors approved the establishment of an employee stock option plan pursuant to which our employees may receive options to purchase an aggregate of 80,000,000 of our Common Shares. In January 2002, our Board of Directors approved the issuance of options to purchase an aggregate of 71,768,500 of our Common Shares.

On January 30, 2002, we prepaid a syndicated loan which had an outstanding amount of JPY3.17 billion (NT$844 million).

67

BUSINESS

General

We are an independent designer, producer and supplier of nonvolatile memory, logic and other application-specific integrated circuit products including system-on-a-chip, or SOC, solutions. We view ourselves as an integrated solutions provider, treating our clients as strategic partners and working closely with them in all aspects of product development to develop silicon chip solutions that meet their specific needs. These partners include Nintendo of Japan with whom we have had a relationship for over 10 years and Hewlett-Packard of the United States, with whom we have had a relationship for over five years. Examples of our product offerings include mask ROM, flash, logic and SOC products. We differentiate ourselves well by our ability to offer a full range of in-house design, product and process engineering capabilities.

Internally, we are organized into three strategic business units, each with its own end application

focus:

• Our memory products unit, which encompasses our mask ROM, flash and EPROM areas;

• Our SOC unit, which focuses on our system-on-a-chip (including embedded memory) and foundry activities; and

• Our multimedia unit, which focuses on our logic products for the audio, video and networking markets.

We were founded in 1989 by engineers who returned to Taiwan from Silicon Valley in the United States to launch an integrated technology-focused firm. Our founders chose to form our company in Taiwan to take advantage of the availability of capital and Taiwan’s manufacturing strengths. Today, many of the world’s leading semiconductor companies which design, market and sell critical components for communications, computing, consumer, industrial and other applications are located in Taiwan. Additionally, many companies outside of Taiwan outsource some or all of their semiconductor manufacturing needs to Taiwan’s semiconductor manufacturing service providers. We believe customers have been able to take advantage of the proximity of the facilities of many Taiwanese companies. In addition, Taiwan is a center for the design and manufacture of electronic systems that have semiconductor devices as their primary components.

We generate our revenue from customers who are in the consumer electronics, computer and communications industries. For the six months ended June 30, 2001, of our total net sales, excluding sales made by agents, 59.0% was generated by our products for consumer electronics applications, 17.8% by our products for computer applications and 23.2% by our products for communications applications.

In combination with our manufacturing capability, we have developed a range of core technologies, design capabilities and the intellectual property necessary to develop customer application-specific products. We believe that we were the first in Taiwan, in August 1992, to develop a digital signal processor, and that we were the world’s first manufacturer to announce the commercial availability of a 4Mb flash chip in October 1992. Additionally, in 1997, we became one of the first companies in Taiwan to produce an embedded flash microcontroller. Through our manufacturing capabilities and technological innovations, we have also established strong market positions in the various nonvolatile memory markets that we serve. According to Gartner Dataquest rankings in April 2001, based on sales revenue, we were the world’s largest supplier of mask ROMs in 2000, with an estimated global market share that has increased to approximately 53.9% in 2000 from 9.1% in 1995 and ranked fourth in the EPROM market in 2000. We believe that in the flash market, we ranked twelfth in 2000 in terms of market share (based on sales revenue).

In March 1995, our Common Shares were listed on the Taiwan Stock Exchange and we became the first company to be listed under that stock exchange’s ‘‘High Technology’’ category of companies. In May 1996, our ADSs were accepted for quotation on the Nasdaq National Market, and we became the first Taiwanese company with securities listed in the United States.

68

We were named by Business Week in June 2001 in a survey based on return on equity, revenue growth and total revenues as one of the top 100 information technology companies worldwide, ranking ninety-ninth largest among companies in this industry. In addition, our president, Miin Wu, was named by Business Week in July 2001 as one of 13 entrepreneurs among 50 ‘‘stars’’ of Asia.

Industry Background

The Semiconductor Industry

Semiconductors are critical components used in a wide and growing array of applications. In recent years, semiconductor performance has improved markedly and the size and cost of semiconductors have decreased. As a result, semiconductors have expanded from their original primary applications, first in mainframe and then in personal computers, to applications including consumer electronics, telecommunications systems, automation and control systems and security applications.

Personal computers have been historically a principal application for semiconductors. Future growth of the personal computer market is expected to be driven more by replacement cycles than by expanded new markets. Certain personal computer peripheral markets are expected to continue to grow. The storage solutions market is expected to create additional demand for semiconductors as enterprise-level storage shifts to storage attached to the server via a network.

Prior to 2001, the segment that had enjoyed the most rapid growth in semiconductor demand was the communications market, resulting from growth in demand for cellular and wireless phone products and enormous broadband internet infrastructure investments worldwide. Continued growth in wireless subscribers and the initial deployment of next-generation mobile networks resulted in rapid demand growth for semiconductors in 2000. In addition, potential new products including handheld computing devices, wireless communications devices and digital audio devices are expected to contribute to the growth in the communications market. These new applications require more and more semiconductors of increasing power and decreasing size. This is expected to drive innovation and product volume growth.

Demand for cable set-top box, or STB, devices is expected to be another driver for growth in the market for communications-related semiconductor products, as existing cable infrastructure is expected to become a platform for residential and commercial broadband Internet access in the U.S. and other countries.

The evolution and integration of computing and communications devices, particularly in the consumer market, is another significant new development. The longer term proliferation of new consumer electronics devices like DVD players, digital cameras and MP3 digital audio players are expected to spur substantial new demand for semiconductors.

After a downturn exacerbated by the economic crisis in the Asia Pacific region, the semiconductor industry experienced a recovery in 1999. Three years of global oversupply in most end-market segments gave way to renewed growth in 1999. Demand was strong across the industry, supported by a recovery in demand from Asia. By the end of 2000, the overall semiconductor market began a contraction caused by weak holiday sales and the resulting inventory build-up. Since the beginning of 2001, we have seen excess capacity, overproduction, significant inventory buildup, and declines in average selling prices in the semiconductor industry. In a report in October 2001, Gartner Dataquest forecasted that semiconductor revenue worldwide will drop between 33.5% to 36.6% in 2001 compared to 2000. It is not clear when the market downturn will end. However, Gartner Dataquest also forecasted a marginal positive outlook for 2002 and a strong market recovery of about 30% market revenue growth in 2003 for the semiconductor industry.

Semiconductor Products

Semiconductors may be classified based on the type of technology used—analog, digital or mixed. Analog semiconductors collect, monitor, condition and transform analog signals into electrical current, and vice versa. Digital semiconductors store information from digital signals or process data. Mixed signal semiconductors combine analog and digital devices to process both analog signals and digital data.

69

Digital semiconductors that store information are referred to as memory products and tend to be standardized products that are differentiated by cost, performance, capacity, size, power consumption and speed. Digital semiconductors that process data are referred to as logic devices and require greater intellectual property and more sophisticated design.

Memory products. Memory products are either volatile memories, which lose their data content when power supplies are switched off, or nonvolatile memories, which retain their data content without the need for constant power supply. Volatile memories can be used to store data in virtually all computer systems, from large and mid-range computers to personal computers and workstations. The primary volatile memory devices are dynamic random access memory, or DRAM, devices. Static random access memory, or SRAM, devices are another type of volatile memory devices that are faster, more complex and expensive, but less efficient, than DRAM devices.

Nonvolatile memories are typically used to store program instructions that control the operation of microprocessors and electronic systems. There are four basic types of nonvolatile memories: ROM, EPROM, EEPROM and

ROM: The earliest and most basic type of nonvolatile memory is the read-only memory, or ROM, which is permanently encoded when produced and cannot be reprogrammed after it is fabricated. Mask ROM is the least expensive measured by cost per Mb and the most cost-effective nonvolatile memory currently produced.

EPROM and EEPROM: EPROM can be reprogrammed by removing the device from the system, erasing the data through exposure to ultraviolet light and reprogramming and reinstalling the device in the system. Despite this costly and time-consuming erasure procedure, EPROM has achieved market acceptance in a wide variety of applications.

System manufacturers generally prefer nonvolatile memory devices that can be reprogrammed efficiently in the system to achieve several important advantages in terms of cost, speed, customization and data storage functions, such as storage of phone numbers for speed dialing in a cellular phone. These market opportunities were initially addressed by electronically erasable programmable ROM, or EEPROM devices, which could be electrically altered while remaining in the system. However, EEPROM has remained considerably more expensive than EPROM for a given amount of storage capacity or ‘‘density’’. As a result, their market acceptance has been limited, and the overall EEPROM market still remains substantially smaller than the EPROM market.

Flash: Flash products bridge a distinct product gap between EPROMs and EEPROMs. Like EEPROM, flash can be erased and reprogrammed without being removed from the system in which the chip is installed. However, the cost of flash products is substantially less than that of EEPROMs. In addition, flash products are smaller in size and have lower power consumption rates than RAMs. With flash integrated circuits, the user is able to erase selected blocks of data on a chip ‘‘in a flash’’, instead of byte by byte, while the device remains in the system. The flash market has grown as customers increasingly substitute flash for EPROM and the more expensive EEPROM. As flash continues to increase in performance and decrease in cost, the applications for flash are expected to expand rapidly. Flash products are competitive with DRAMs in speed, while providing the benefits of nonvolatile memory not offered by DRAMs.

Logic Products. Logic devices process digital data to control the operation of electronic systems. The largest segment of the logic market, standard logic devices, includes microprocessors, microcontrollers and digital signal processors, or DSPs. Microprocessors are the central processing units of computer systems. Standard devices are intended to be used by a large group of systems designers for a broad range of applications. Consequently, standard devices usually contain more functions than are actually required and, therefore, may not be cost-effective for some applications.

70

In addition to standard logic devices are application-specific integrated circuits, or ASICs, that are custom-designed semiconductors. These devices include a broad range of full-custom, semi-custom and application-specific standard product, or ASSP logic devices, which have been developed for a wide variety of applications. These devices are typically designed to meet particular customer requirements. Compared to memory markets, logic device markets are much more differentiated and dependent upon intellectual property and advanced product design skills.

The global market for logic products differs significantly from the various memory product markets, due largely to the special nature of these products, as they are often designed for specific applications. The production of these products tends to foster closer relationships with customers, resulting in early knowledge of their evolving requirements and opportunities to access their markets for other products. As a result, the pricing for these products reflects specific types of system solutions required by the customer and the nature of the customer relationship.

System-on-a-chip or SOC. SOC refers to a process of combining the functions of several integrated circuits on a single chip. SOC products are generally faster, smaller and use less power than a device employing independent integrated circuits. An SOC generally includes all of a system’s components, including a microprocessor, linear components, control components, power management and a variety of embedded memory. They differ from ASIC devices in that ASICs generally adapt a particular chip function to a specific product without integrating other chip functions onto the silicon.

The shift in the growth of semiconductor use from personal computers to communications and consumer electronics, such as cellular phones and personal digital assistants, which require low power consumption and smaller size, has given rise to increasing demands for SOC solutions.

Producers of SOC designs and wafers require access to both manufacturing capacity and product designs. They need to combine an ability to design an SOC product, which requires substantial design experience, with the ability to manufacture the product at a competitive price. SOC manufacturers generally possess existing product portfolios that they use to design their own ASICs or collaborate with other producers.

Strategy

In addition to manufacturing, our business model goes beyond that of a traditional integrated device manufacturer or wafer foundry to cover strategic partnerships and value-added design services to customers. We view our relationships with our strategic partners and our customers as the key factor to our ongoing success and to achieving our objective of being one of the pre-eminent semiconductor companies from Taiwan. We are confident that this overall strategy will help us build a core base of strategic clients that will position us to take advantage of both the opportunities and challenges of the various phases of the semiconductor business cycle.

The components of our strategic initiatives are as follows:

Further enhance our product design capabilities and system level expertise

We stress the importance of design capabilities and system level expertise, and believe that we have achieved desirable results in establishing proprietary product designs. For instance, our PAC-AND design architecture for flash is one of the three dominant designs in the market, competing with the other two market standards, namely, NOR and NAND. We are also developing core manufacturing technologies to enhance yields and reduce unit costs. In addition to reducing costs, we aim to further our technological advancements in other areas, including by developing ‘‘pin-to-pin compatibility’’, or the ability to alternate between flash and mask ROM devices of similar function within the same end product. We are also developing core technologies to achieve 2-bit per cell manufacturing capabilities. See ‘‘—Manufacturing and Quality Control—Manufacturing’’.

71

Capitalize on our strengths in nonvolatile memory and embedded techniques to provide customized cost effective solutions for our partner clients

In April 2001, Gartner Dataquest ranked our company, as measured by market share, first in the global mask ROM market and fourth in the global EPROM market in 2000 (based on sales revenue). We believe that in the flash market, we ranked twelfth in 2000 in terms of market share (based on sales revenue). Our leadership position is backed by our extensive intellectual property library and years of design and production expertise. We believe our information appliances customers are to a large extent dependent on our core nonvolatile memory capabilities to derive SOC solutions such as embedded flash. To further enhance our competitive position, we plan to continue to develop innovative products based on our strengths in nonvolatile memory. We have been and intend to continue to conduct such product development closely with our customers to take into consideration their specific needs.

Continue to upgrade our process technology and expand capacity prudently

We have been successfully migrating our production to more advanced process technologies by making significant investments in equipment and leveraging on our strategic partners’ expertise. We expect to continue to do so. Fab I is currently employing 0.35 micron process technology and 0.32 micron process technology for certain chips, compared with the 0.40 micron process technology primarily used in 1997. Fab II began commercial operation in 1997 with 0.35 micron process technology. It has been using 0.18 micron process technology since the second half of 2000. Our latest initiatives on process technology draw upon reduction of linewidths to a level of 0.15 micron and we expect to begin to migrate to 0.15 micron process technology by the end of 2002. We also intend to continue stressing quality control and operational discipline to enhance production yield.

We believe that our manufacturing facilities provide us with a strategic advantage that enables us to provide a full range of services to our clients while retaining control over manufacturing processes and benefiting from the cost savings that result. We will continue to maintain this capability in-house. We are currently constructing our Fab III, although the construction and completion schedule of Fab III has been slowed in response to prospective market demand. We plan to continue to explore ways to increase our manufacturing capacity in a prudent way. For example, we have entered into technology sharing arrangements with, and outsourced some wafer production to, Tower Semiconductor Ltd. We may also in the future consider establishing joint ventures with our strategic partners to build and operate new fabs.

Acquire additional capabilities in logic and multimedia devices

To complement our leading position in nonvolatile memory, we are seeking to develop further capabilities in logic and multimedia devices. We believe this will enable us to reduce our exposure to the cyclicality of the memory segment while building a broad range of product and process capabilities that will better enable us to develop SOC solutions for our clients. We view our future capability in providing complete SOC solutions as a key to success in the end markets that we are targeting.

Continue to focus on wireless communications and portable consumer electronics applications

We are seeking to take advantage of the growth in demand for non-personal computer platforms and, in particular, the demand for better and smaller integrated circuits for communications and consumer applications. Our products and customized solutions will continue to focus on delivering connectivity, interactivity and low power consumption at competitive prices.

Our Strategic Business Units

We have organized our personnel to focus product development and marketing efforts around our memory business unit, our SOC business unit and our multimedia business unit.

72

Memory Business Unit

Our principal product line consists of nonvolatile memory solutions. The following table sets forth our memory products, their characteristics and applications, and the percentage of net sales revenue represented by these products in 1998, 1999, 2000 and the six months ended June 30, 2001:

Products Nonvolatile Memory: Mask ROM ....... Flash.................. EPROM............. Other Memory: DRAM .............. SRAM...............	Characteristics Not reprogrammable Reprogrammable within the application system; less expensive than EEPROM Reprogrammable outside the application system using industrial processors Principal volatile memory High speed cache memory	Applications Games, PDAs, word processors, printers, fax modems, VCDs, cellulars, STBs Mobile phones, PDAs, digital cameras, STBs, Web TVs Fax modems, VCDs, cellulars, STBs Personal computers Cellular phones	% of net sales reve	nue
			Year ended December 31, Six months ended June 30, 2001 1998 1999 2000 63.7% 63.1% 58.6% 54.4% 9.3% 12.7% 19.9% 14.2% 11.3% 7.8% 3.7% 4.7% 7.0% 3.1% 0.3% —(1) —(1) 0.1% 8.0% 15.6%	Six months ended June 30, 2001

(1) Less than 0.1%.

Memory Business Unit—Mask ROMs

Applications. Mask ROMs are often used for the storage of video game software and data storage for office automation equipment, including fonts for laser printers and dictionary data for word processors. Recently, major new growth areas in the mask ROM market have developed, including applications such as pre-recorded MP3 music, mobile telecommunications and multimedia devices. We believe we are well positioned to capitalize on the growing demand for these products.

We manufacture mask ROMs using a patented 0.45-0.18 micron process technology in densities ranging from 1Mb to 256Mb and in a variety of configurations. We believe that our patented technology allows us to produce smaller, higher density mask ROM devices than many of our competitors. We migrated to 0.18 micron process technology in the second half of 2000 and expect to begin to migrate to 0.15 micron process technology by the end of 2002.

Although the majority of the circuitry in a mask ROM chip is relatively standard, we often incorporate customer design specifications into application-specific portions of the circuitry during the manufacturing process. For example, we are presently co-developing with a third party manufacturer 32 Mb mask ROM devices that will be used in its memory cards of different form factors in a variety of computing and consumer electronic devices.

73

The following table provides an overview of our principal mask ROM products and the percentage of net sales revenue represented by these products in 1998, 1999, 2000 and the six months ended June 30, 2001:

Density 1 Mb 2 Mb 4 Mb 8 Mb 16 Mb 24 Mb 32 Mb 64 Mb 96 Mb 128 Mb 256 Mb	Confguration 128K x 8 64K x 16 256K x 8 128K x 8 512K x 8 256K x 16 1M x 8 512K x 16 2M x 8 1M x 16 3M x 8 1.5M x 16 4M x 8 2M x 16 4M x 16 8M x 8 6M x 16 8M x 16 16M x 16	Voltage 3V/5V 5V 3V/5V 5V 3V/5V 3.3V/5V 5V 5V 5V 3.3V/5V 5V 5V 5V 3.3V/5V 3.3V 3.3V/5V 3.3V 3.3V 3.3V	Fastest access speed 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 100 ns 350 ns 120 ns 9yn@ 66MHz 350 ns 120 ns 350 ns	Introduction date(1) June 1992 June 1992 June 1992 June 1992 June 1992 August 1992 February 1993 February 1993 February 1993 February 1993 July 1995 July 1995 March 1995 March 1995 April 1996 May 1997 July 1999 January 1997 May 1997 September 1998	Sample applications Pagers, data banks STBs, BIOS Pagers, data banks GPS, STBs PHSs, data banks Games PHSs Sound cards, data banks BIOS, games, sound cards Games Word processors, games Games, networking Games Games, DVDs, data communications, Word processors, games Games, PDAs, STBs Word processors, data banks, high-end printers Games Games, PDAs Games, memory cards	% of our total mask ROM sales	% of our total mask ROM sales	% of our total mask ROM sales
						Year ended December 31, 1998 1999 2000 1.2% 0.4% 0.1% 3.1% 2.2% 1.4% 4.5% 3.5% 3.5% 4.0% 4.8% 7.1% 4.2% 6.6% 20.1% 1.1% 0.5% 0.2% 7.3% 7.3% 16.1% 9.3% 8.7% 10.5% 25.1% 5.3% 2.0% 23.0% 18.4% 7.9% 17.2% 42.2% 31.1%		Six months ended June 30,
						1998 1.2% 3.1% 4.5% 4.0% 4.2% 1.1% 7.3% 9.3% 25.1% 23.0% 17.2%	1999 0.4% 2.2% 3.5% 4.8% 6.6% 0.5% 7.3% 8.7% 5.3% 18.4% 42.2%	2001
								—(2) 0.2% 1.8% 5.9% 22.4% —(2) 20.9% 20.6% 0.6% 6.6% 21.0%

(1) Includes original introduction dates of the products with the stated characteristics, not introduction dates of subsequent updated or improved versions.

(2) Less than 0.1%.

Competition. The mask ROM industry is highly competitive. We compete with major international semiconductor companies, including NEC, Oki Semiconductor and Samsung, among others. We believe that with our broad range of mask ROM products, our relative flexibility in adjusting our product mix and our additional capacity in Fab II and later in Fab III, we should be well-positioned in the mask ROM market over the next few years. In particular, we believe that our focus on sophisticated mask ROM products will position us well to meet increasing market demand for these products.

We had an estimated 53.9% global market share for mask ROMs in 2000 according to Gartner Dataquest’s rankings in April 2001, ranking us first in the world in terms of revenue. Competing technologies to mask ROM such as CD-ROMs, DVD-ROMs, magnetic disks and on-demand software available through telephone-linked and Internet databases are available. In particular, our key customer, Nintendo, began to migrate its video game products from Nintendo 64 to its new game platform, the GameCube, during the second half of 2001. The GameCube utilizes a DVD-ROM-based storage system rather than the mask ROM-based system used in Nintendo 64. See ‘‘—Customers—Nintendo’’. We have been shifting a portion of our production toward the output of mask ROMs for Nintendo’s Game Boy series of handheld computing devices. We plan to protect and improve our mask ROM market by jointly developing with existing and prospective customers new applications for this product in high-end mobile consumer goods, such as mobile phones and MP3 players, which we believe will support the demand for mask ROMs. We may also seek to diversify our customer base to include telecommunication, personal digital assistant and office automation equipment providers.

74

Memory Business Unit—Flash

Applications. Applications for flash products range from most types of portable electronic equipment devices to high volume mass storage of data. Flash is particularly suitable for applications such as handheld devices, combining the need for portability, high density and lower power requirements. Flash products are also well-suited for audio products such as digital answering machines, mobile telephone systems and MP3 players, as well as other applications including networking devices, digital cameras and personal computer motherboards. Flash products are smaller and use less power than the hard disk drives now commonly used for mass data storage and, therefore, are considered candidates to replace disk drives in selected applications, particularly in handheld computers.

During the past eight years, we have continued to develop our flash products. Currently, we manufacture and distribute 1Mb to 32Mb devices in a range of designs down to 2.7 volts. Among them, for example, our Simultaneously Read/Write, 2.7 volt 16Mb device, is used in cellular phones.

Our proprietary PAC-AND design architecture for flash is one of three major competing architectural standards currently in the market. The other two competing technologies are the NOR and NAND standards. These architectural standards can be differentiated largely by the manner in which they write and erase data. The NOR design architecture, commonly known as code flash, produces fast devices but does not support high density products at a competitive price. NAND design architecture, commonly known as data flash, supports low-cost, high density products but cannot be used for random access code storage purposes. Our PAC-AND design architecture produces devices with a cost advantage similar to that of NAND devices that are generally comparable with most NOR devices in terms of speed. Our PAC-AND design architecture is suitable for both high density and high performance applications.

Beginning in the fourth quarter of 2000, we also provided 32 Mb flash products based on Mitsubishi’s DINOR flash design. DINOR offers the high-speed random-access capability of the NOR architecture, as well as the high-density and single power-supply characteristics of the NAND flash architecture. We believe that, with our PAC-AND design architecture and Mitsubishi’s DINOR design architecture, we can compete effectively with other flash manufacturers using other design architectures.

We are also developing core technologies to achieve 2-bit per cell manufacturing capabilities, which are expected to reduce our unit production costs. See ‘‘—Manufacturing and Quality Control—Manufacturing’’.

75

The following table provides an overview of our principal flash products and the percentage of net sales revenue represented by these products in 1998, 1999, 2000 and the six months ended June 30, 2001:

Density 512K 1M 2M 4M 8M 16M 32M ATA Cassette	Confguration 64K x 8 128K x 8 64K x 16 256K x 8 128K x 16 512K x 8 256K x 16 1M x 8 512K x 16 2M x 8 / 1M x 16 4M x 8 / 2M x 16 PCMCIA cards N/A	Voltage 5V 12V/5V/3V 5V 12V/5V 12V/5V 5V 5V/3V 5V/3V 5V / 3V 3.3V 5V/3V 5V	Introduction date (1) July 1998 March 1994 March 1999 March 1994 July 1996 March 1994 March 1999 June 1997 June 1997 June 1997 March 2000 June 1997 July 1997	Fastest access speed 70 ns 45 ns 55 ns 45 ns 55 ns 45 ns 55 ns 90 ns 90 ns 100 ns 100 ns / 50 ns 120 ns	Sample applications HDDs, graphic cards BIOS, HDDs, games DVD-ROM drives BIOS, HDDs CD R/W drives BIOS, HDDs, CD R/W drives, communication boxes BIOS BIOS, CD R/W drives, cable modems DVD players, STBs, ISDN boxes DVD players, STBs, ISDN boxes, PDAs STBs, communication boxes, printers, music, games, web TVs, mobile phones Printers Digital cameras Games	% of our total fash me	mory sales
						Year ended December 31, 1998 1999 2000 —(2) —(2) —(2) 15.7% 21.7% 9.9% 16.0% 20.1% 13.5% 0.1% 20.8% 30.4% 2.7% 4.6% 7.6% 52.3% 28.1% 36.0% — — 0.9% 0.2% 0.3% 0.2% 13.1% 4.4% 1.5%	Six months ended June 30, 2001
							0.3% 6.6% 9.0% 38.0% 9.9% 31.0% 4.7% 0.1% 0.4%

(1) Indicates original introduction dates of the products with the stated characteristics, not introduction dates of subsequent updated or improved versions.

(2) Less than 0.1%.

Competition. Flash has been one of the fastest growing segments of the memory products market. However, the flash market has been characterized by long production cycles, complex processes, competing technologies and intense overall competition. Currently, the market is dominated by Intel, Advanced Micro Devices, Fujitsu, Toshiba and Sharp, which together accounted for a global market share of approximately 63.2% in 2000 (based on sales revenue), and various other competitors. Before 2001, we did not have a significant share of the global flash market, primarily because of our limited capacity. However, with increasing market demand, and our commencement of mass production of single voltage flash products in 2000, we increased our sales of flash products from NT$2,199 million in 1999 to NT$6,608 million (US$192 million) in 2000. For the six months ended June 30, 2001, our sales of flash products totaled NT$1,659 million (US$48 million). We are aware that certain Taiwanese semiconductor companies intend to enter the flash product market.

Memory Business Unit—EPROMs

Applications. Applications using EPROMs include disk drives for personal computers, video games, fax machines and modems, cellular phones, pagers and notebook computers, among others. We believe our one-time programmable EPROM devices are among the least expensive EPROM memory solutions currently available. However, with the accelerated decline in prices for flash products, the price advantage of our EPROM products has eroded.

76

The following table provides an overview of our principal EPROM products and the percentage of net sales revenue represented by these products in 1998, 1999, 2000 and the six months ended June 30, 2001:

Density 256Kb 512Kb 1Mb 2Mb 4Mb 8Mb	Confguration 32K x 8 64K x 8 128K x 8 256K x 8 512K x 8 1M x 8	Voltage 3V/5V 3V/5V 3V/5V 3V/5V 3V/5V 5V	Introduction date(1) October 1992 October 1992 June 1992 October 1996 December 1992 February 1997	Fastest access speed 45 ns 45 ns 45 ns 70 ns 90 ns 100 ns	Sample applications GUI CD-ROM drives, GUI Fax modems, VCD players, cellular phones VCD player, cellular phones Printers, arcade games, STBs Printers, arcade games, STBs	% of our total EPROM sales	% of our total EPROM sales
						Year ended December 31, Six months ended June 30, 2001 1998 1999 2000 4.5% 1.9% 2.0% 2.9% 21.3%14.9% 8.6% 4.8% 20.1%14.1% 19.2% 15.3% 19.6%26.4% 29.1% 24.6% 27.1%24.5% 21.8% 26.0% 7.5%18.2% 19.3% 26.4%	Six months ended June 30, 2001

(1) Indicates original introduction dates of the products with the stated characteristics, not introduction dates of subsequent updated or improved versions.

Competition. In 2000, we were the world’s fourth largest supplier of EPROMs according to Gartner Dataquest’s rankings in April 2001, accounting for 5.7% of global market share (based on sales revenue). While EPROMs remain viable mainly for applications requiring low-cost solutions, flash has begun to replace EPROMs in certain applications as the prices of flash products have declined. In addition, over the last few years, as the long-term outlook for this market has weakened, industry production has declined. For example, Advanced Micro Devices, Intel, National Semiconductor Corporation and Texas Instruments have all reduced EPROM production during the last few years. If current conditions continue, we do not expect EPROM products to represent a significant growth area for us in the future.

System-on-a-Chip Business Unit

Applications. SOC products accounted for 48.5%, 36.4%, 70.2% and 79.1% of our logic product sales in 1998, 1999, 2000 and the six months ended June 30, 2001, respectively. Our SOC business unit focuses on providing application-specific solutions and promoting embedded flash products, which incorporate flash directly in logic devices embedded on a single integrated circuit chip. Our most important products in this area are microcontrollers with embedded flash that we have jointly developed with Philips.

Since 1999, we have provided an ASIC service for microcontrollers with embedded flash or ROM to our customers and released products used in CD-ROM, DVD-ROM and other consumer applications. We also provide customized manufacturing services to strategic customers. In addition to fabricating our customers’ products, we work closely with our customers on all aspects of product development. We have combined our SOC and strategic manufacturing operations in one unit as part of our strategy of leveraging our competitive manufacturing capability. In this way, we strive to better develop relationships centered on high value-added products and ultimately to provide SOC design and production services.

With this structure, our SOC business unit seeks to serve and to grow with our customers as strategic manufacturing partners. We also seek to provide our key customers with the benefits of our fab experience, focused on non-volatile memory technology in the information appliances market. We have targeted several key potential customers who will fit this strategic business objective.

Competition. The SOC product market is diversified. We compete with other SOC providers by establishing sustainable customer relationships and design expertise to provide customized and innovative solutions for specific customer needs. We face competition from numerous competitors in this market, including Atmel, Samsung, STMicroelectronics, Winbond and Lucent Technologies, among others.

77

Multimedia Business Unit

In 2000, we began to focus on extending our expertise in the nonvolatile memory market into the logic area, by combining logic products with embedded memory in order to offer comprehensive system solutions to our customers. Unlike memory products, our emphasis on logic products is centered more on product design than on fabrication. We have concentrated on four key logic technologies:

• digital signal processing;

• mixed signal processing;

• digital/analog conversion; and

• microcontrollers.

As we grow our multimedia and SOC businesses, we intend to concentrate on producing logic chips and chipsets for higher value-added applications in the consumer product and communications area. Examples of products with multimedia applications include video conferencing and video input/synthesis equipment.

Our multimedia business unit focuses on the following areas:

Audio and Video Devices. Audio and video logic products totaled 9.7%, 18.1%, 13.5% and 9.3% of our logic product sales in 1998, 1999, 2000 and the six months ended June 30, 2001, respectively. Substantially all of our audio device sales were of integrated circuits for use in digital answering machines and digital recorders. The most important technology in these integrated circuits is digital signal processor technology, which is also necessary for applications in voice messaging, cordless phones and cellular phones. In line with our strategy of moving towards higher value-added applications, we enhanced our current digital answering machine product offering in 1999 to include features such as a speakerphone and caller ID and to provide for compatibility with additional flash. Our video devices include scan converters, timing controllers for LCD flat panel applications, and chipsets for dual mode personal computer camera controllers. For example, we supply SXGA video controller devices to Minolta for digital still camera applications, and to Samsung, Benq Corporation, Philips and Chuntex, among others, for flat panel display applications.

Communications Devices. Products for communications devices totaled 5.9%, 12.2%, 5.2% and 1.4% of our logic product sales in 1998, 1999, 2000 and the six months ended June 30, 2001, respectively. Our main products in this area are 10/100 MHz integrated circuits for use in Ethernet network cards and 100MHz integrated circuits for use in Ethernet network hubs. Although we have experienced rapid average selling price declines for these products, we successfully integrated three previously separate logic and analog parts onto one chip for our network interface card, making our network interface card solution more affordable and competitive. In addition, we are developing integrated services design network chipsets for wide area networking applications.

Consumer Products. Consumer products totaled 35.9%, 33.3%, 11.1% and 10.2% of our logic product sales in 1998, 1999, 2000 and the six months ended June 30, 2001, respectively. Our main products in this area include personal digital assistant controllers, clock generators and joystick controllers.

78

The following table provides an overview of our logic products and the percentage of net sales revenue represented by these products in 1998, 1999, 2000 and the six months ended June 30, 2001:

		% of our total logic sales	% of our total logic sales	% of our total logic sales
	Year ended December 31, Six months ended
Description	1998	1999	2000	June 30, 2001
SOC ..........................................................................................................	48.5%	36.4%	70.2%	79.1%
Multimedia products.................................................................................
Products for audio-video devices.........................................................	9.7%	18.1%	13.5%	9.3%
Products for communication ................................................................	5.9%	12.2%	5.2%	1.4%
Consumer products...............................................................................	35.9%	33.3%	11.1%	10.2%
Total..........................................................................................................	100%	100.0%	100.0%	100.0%

Customers

General

We emphasize customer relations as a key to our growth and profitability. A key aspect of our customer development strategy is to have major global computer and electronics companies accept our products for use in their devices. We also strive to supply products to original equipment manufacturers and subcontractors, who in turn supply these products to computer, communications and consumer electronics companies.

We seek to develop system-related solutions with key consumers of memory and logic products for their requirements. Some of these key customers with which we are currently working include Nintendo, Hewlett-Packard, Philips, General Instrument, Motorola, Lexmark, Toshiba, Matsushita, Palm, Alcatel, Mitsubishi, Inventec, Siemens, Thomson, Samsung, Sony, Fujitsu, Yamaha and Benq Corporation. In addition,

• we have developed, and are developing, additional logic and memory devices with Nintendo for use in several of Nintendo’s game machines. We expect to continue cooperating with Nintendo to develop memory and logic and other ASIC devices;

• we have co-developed with Infineon a 32Mb multimedia card and are evaluating the joint development of flash technology and related products;

• we are working with Mitsubishi to jointly develop high density flash products for electronic communication devices including cellular phones and information appliances. Since the fourth quarter of 2000, we have provided 32 Mb flash products based on Mitsubishi’s DINOR flash design;

• we are working with Philips on the production of a series of 8-bit microcontrollers with flash embedded in the chip. We and Philips have also developed an embedded flash module for Philips’ 16-bit extended architecture microcontrollers, which we are now fabricating in mass production; and

• our past arrangements with Matsushita in the production of 16Mb and 64Mb DRAMs have provided us with experience in DRAM technology which we can incorporate into SOC solutions, and which can assist us in advancing our own internal process technology development. We currently expect that our cooperation with Matsushita will include other integrated circuit products in the future.

79

Top Customers

The following table sets forth key customers of our products by percentage of our total net sales revenue in 1998, 1999, 2000 and the six months ended June 30, 2001 and the type of product purchased:

Customers(1) Nintendo(2).......................................... Mitsubishi ............................................ Hewlett-Packard................................... Philips .................................................. Samsung...............................................	Year ended December 31, 1998 1999 2000 52.4% 46.0% 32.5% — — 8.0% 1.7% 2.6% 9.4% 0.5% 0.7% 1.3% 0.6% — 1.3%	Six months ended June 30, 2001 35.7% 15.6% 4.2% 3.3% 1.0%	Products purchased
			Mask ROM, fash, logic SRAM, fash Mask ROM, fash Logic Flash, EPROM, logic

(1) Excludes sales to NKK, a distributor of our products in the eastern region of Japan. See ‘‘—Sales and Marketing’’.

• (2) Represents our sales to Megachips, which on-sells our products to Nintendo.

80

Top Products and Applications

The following table sets forth the major product areas and applications of our products purchased by our key customers, and the percentage of total net sales revenue which these customers comprised in 1999, 2000 and the six months ended June 30, 2001:

Product area Consumer Electronics.................. Computer and Computer Peripheral.................................. Communications..........................	Sample applications Game, STB, data bank, DAM, musical instruments, CD-ROM, CD-RW, TV, DVD, VCD Notebook, HDD, motherboard, sound card, BIOS, printer, word processor, 64-bit GUI PHS, pager, LAN, WAN, modem, answering machine	% of our total net sales revenue(1) Customers Year ended December 31, Six months ended June 30, 2001 1999 2000 Nintendo, Sega, General Instrument, Inventec, GSL, Sharp, Sony, Midway Entertainment, Yamaha, Philips, Siemens, Thomson, Olivetti, Hughes 81.2% 63.9% 59.0% Hewlett-Packard, Apple, Lexmark International, Compaq, Dell, Brother, Cannon, Casio Computer, Fujitsu, Matsushita Electric Industrial, NEC, Oki, Benq Corporation, Mitac, Hitachi, Toshiba, Seagate Technology, Maxtor, Philips, Sony 11.4% 20.8% 17.8% NEC, Motorola, Accton Technology, Avnet Acquisition Services Group, Japan Radio, D-Link, Microdyne, Sonic Systems, AVM, Askey 7.4% 15.3% 23.2%

(1) Excludes sales made by agents.

Nintendo

In 1998, 1999, 2000 and the six months ended June 30, 2001, approximately 52.4%, 46.0%, 32.5% and 35.7%, respectively, of our total net sales revenue was derived from Megachips, which on-sells our products to Nintendo. Nintendo is one of the world’s largest users of mask ROMs, which are used in Nintendo game cartridges. Since 1996, we have been Nintendo’s largest supplier of mask ROMs for the Nintendo 64 and earlier generations of Nintendo gaming platforms. We believe that our long-term relationship with Nintendo is based on trust, as evidenced by the fact that Nintendo supplies sensitive game codes to us. Our relationship is also predicated on our ability to supply quality products in a timely manner at competitive prices.

81

In August 2000, Nintendo announced that its new video game platform, the GameCube, would utilize a DVD-ROM-based storage system to replace the current mask ROM-based cartridges. This new game platform went on sale in Japan in September 2001, in the United States in November 2001 and is expected to go on sale in Europe in 2002. We have been engaging in active discussions with Nintendo and Megachips since 2000 to assist in developing semiconductor solutions for the GameCube. Currently we provide product design, development and manufacturing services for multiple semiconductor devices to Nintendo for the production of the GameCube, notwithstanding Nintendo’s change of principal memory devices for this product. Our primary product offerings for the GameCube relate mainly to accessory products and include:

• logic controller integrated circuits;

• ethernet adaptors;

• radio frequency component integrated circuits used in a Nintendo wireless controller for use with the GameCube;

• 4Mb code flash used in conjunction with each game software; and

• 16Mb ROM used in the GameCube console’s operation system.

We have been shifting additional production towards the output of mask ROMs for Nintendo’s Game Boy series of handheld computing devices, including Game Boy Advance, which was released in the spring of 2001.

In the third quarter of 2001, we entered into a capital equipment lease agreement with Nintendo in the amount of up to US$75 million for the use of manufacturing equipment. As of December 31, 2001, we had lease obligations of approximately US$53 million payable to Nintendo over a four year period in monthly installments. At the end of the lease term title to the leased equipment will be transferred to us.

Property, Plant and Equipment

Our headquarters and Fabs I and II are located in Hsinchu, Taiwan. We are constructing Fab III in the same location. Fab I commenced its commercial operations in 1992. Fab I occupies approximately 172,000 square feet on land that is leased from the Science Park. The lease expires in March 2010 but is renewable at our option. The facility has a production area of approximately 67,888 square feet. Fab I’s test operations are located in a building adjacent to Fab I which sits on a lot of approximately 80,000 square feet.

Fab II commenced its commercial operations in October 1997. Fab II occupies approximately 883,000 square feet on land that is leased from the Science Park. The lease expires in June 2015. The facility has a production area of approximately 84,000 square feet and a production support area of approximately 32,000 square feet. Space has also been reserved for testing facilities in Fab II, although Fab II currently shares Fab I’s test operations plant for all of Fab II’s eight-inch wafers. Fab II has advanced and modernized production equipment, and incorporates advanced computer automated production systems. Fab II is equipped with a total energy management system and an advanced waste treatment system. Production capacity at Fab II reached 42,000 eight-inch wafers per month at the end of 2001. We began to manufacture mask ROMs at Fab II at linewidths of 0.18 micron from the second half of 2000 and expect to begin to migrate to 0.15 micron process technology by the end of 2002. We own all the facilities comprising Fab I and Fab II.

We have commenced construction of Fab III, a third wafer fabrication facility, on a parcel of leased land next to Fab II. The construction and completion schedule of Fab III has been slowed in response to prospective market demand. We expect to complete and commence commercial operation of Fab III by the end of 2002. We currently expect Fab III to ultimately have a production capacity of approximately 40,000 eightinch wafers per month when fully completed and operational. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Introduction—Cost Reduction Initiatives’’ and ‘‘Use of Proceeds’’.

82

The following table sets forth our wafer capacity, in terms of wafers per month, at Fab I and Fab II as of December 31, 1995 through 2001 and expected fabrication capacity for 2002:

Fab I (six-inch wafers)......................... Fab II (eight-inch wafers)....................	1995(1) 31,000 —	1996(1) 35,000 —	1997(1) 35,000 15,000	1998 35,000 15,000	1999 35,000 20,500	2000 36,000 40,000	2001 36,000 42,000	2002(2)
								35,000 42,000

(1) Includes capacity resulting from machines provided by TSMC.

(2) Planned capacity.

We have been recently granted by the government of the ROC a parcel of land adjacent to our Fab II under a lease that is renewable annually for a maximum of 20 years. As of the date of this Offering Circular, we have not finalized our plan on how to use this land.

Manufacturing and Quality Control

Manufacturing

Currently, all of our internal wafer fabrication is carried out at Fabs I and II. Our Science Park location provides certain advantages, including preferential tax treatment, streamlined customs administration and government-subsidized development grants.

We use complementary metal oxide silicon process technology to manufacture our semiconductor products. This manufacturing technology involves a sequence of numerous complex processes in which 200 to 500 different steps are taken in the manufacture of a single chip. These steps include a series of cleaning, patterning, etching, deposition and implantation processes. At the end of these processes, the chips are tested for functionality and assembled. Depending on the product line, we either subcontract this ‘‘back-end’’ work to companies in Taiwan, Singapore and Korea or perform the work ourselves. We subcontract approximately 70% of the testing and assembly of our logic products, while testing most of our mask ROM products internally.

In August 2000, we entered into a five-year manufacturing and technology cooperation agreement with Tower Semiconductor Ltd., or Tower, an Israeli company, whereby Tower will provide silicon wafer manufacturing processing services that can employ Tower’s microFLASH� technology. Such technology is based on proprietary technology licensed from Saifun Semiconductors Ltd., or Saifun, an Israeli integrated circuit design company. We also have entered into a separate agreement with Saifun that provides us with rights to develop and manufacture certain products related to the microFLASH� process technology. Under the agreement with Tower, Tower will be obligated to manufacture for us up to an agreed number of six-inch wafers per month upon receiving our orders. Due to the market conditions in 2001, we have placed orders for less than the numbers of wafers that we could have required Tower to manufacture for us in 2001.

In December 2000, we entered into a foundry agreement with Tower. Until the agreement expires in 2011 or if we cease to own a minimum number of shares in Tower, Tower is obligated to make available to us, and we are obligated to purchase, certain minimum numbers of wafers based on percentages of the manufacturing capacity of a specified production line in Tower’s new manufacturing facility, up to certain limits. Tower’s new manufacturing facility is not expected to be completed before 2003. So long as we own a minimum number of shares in Tower, Tower is also obliged to grant us favorable pricing treatment for up to a designated amount of wafers per month.

Quality Control

All of our products undergo final testing before shipment. In most cases, externally packaged chips are returned to us for final testing before shipment. We occasionally subcontract final testing work, which allows us to use the subcontractors’ drop shipment services.

83

Fab I and Fab II operate 360 days a year on a two-shift, twelve hours per shift basis which minimizes lost time between shift changes as compared to operation on a three-shift, eight hours per shift basis. Operators at Fab I and Fab II work on a two-day-on, two-day-off rotation. These production arrangements, together with our operator discipline, quality of maintenance and level of equipment utilization, have resulted in a high level of productivity.

In order to minimize the introduction of particles into the manufacturing process, Fab I operates on a Class 1 clean room, with less than one particle of 0.1 micron or greater per cubic foot, and Fab II uses the SMIF Box system, an advanced system whereby we isolate and keep clean the localized manufacturing environment surrounding the integrated circuits, rather than the entire plant. Although the manufacturer guarantees our SMIF Box system to have less than 0.1 particle of 0.1 micron or greater per cubic foot, we believe that our system is cleaner than the guaranteed amount based on our manufacturing experience. Both Fab I and Fab II use advanced systems to filter our chemical, gas and water supplies.

As part of our quality assurance program, we conduct three tests during the production process:

• the wafer acceptance test, which detects faults from the manufacturing process;

• the wafer sort test, which probes defaults in circuitry; and

• the final test, which reviews the operation of each integrated circuit.

We also offer ‘‘burn-in’’ testing of our products when necessary. Burn-in is the process of electrically stressing a device, usually at high temperature and voltage, for a period of time long enough to cause the failure of marginal devices. In line with industry standards, we have experienced customer returns of less than 10 pieces per one million pieces shipped.

As part of our restructuring in December 1998, we established a single, company-wide Assistance and Support Engineering Center. We maintain a quality control staff of over 185 engineers, technicians and other employees whose duty is to monitor design and production processes to ensure high quality. Quality control personnel are involved from initial design to production.

We received the International Standards Organization, or ISO 9001 certification in January 1994 from the Lloyd’s Register Inspection Limited. In August 1997, we received ISO 14001 certification for environmental controls. The certification process involves subjecting our production processes and the quality management systems at our factories to review and surveillance for various periods. The ISO certifications also provide independent verification to our customers as to the quality control in our manufacturing processes.

Raw Materials

Our primary raw materials are silicon wafers and certain chemicals and gases. To date, all of these raw materials have generally been available to us from a limited number of sources, at competitive prices, in adequate quantities and on reasonable delivery terms. We typically order our target, specialty gases and chemicals on a just-in-time basis to minimize the cost of inventory.

The prices of most of the raw materials used by us, excluding wafers, have been relatively stable during the period of our operation. In 1998, 1999, 2000 and the six months ended June 30, 2001, raw materials costs comprised approximately 11.2%, 5.4%, 4.2% and 6.7%, respectively, of our net sales revenue. We currently believe that if we were to lose access to one or more of our suppliers, we would be able to obtain substitute quantities from other suppliers without any material interruption of our operations and without any material adverse effect on the price we would have to pay for the relevant supplies.

84

Silicon Wafers

Our future growth will depend in large part on securing a continuous supply of both six-inch and eight-inch wafers. Wafer capacity in the semiconductor industry has from time to time been, and in the future may be, limited. However, in anticipation of possible shortages, we maintain a one and one-half month inventory of six-inch wafers and a two-month inventory of eight-inch wafers. Prices for six-inch wafers and for eight-inch wafers both decreased on average by approximately 12.8% in 2000 from 1999. Prices for six-inch wafers and for eight-inch wafers both decreased on average by approximately 1.0% between December 31, 2000 and September 30, 2001.

We obtain our six-inch and eight-inch wafer supplies principally from four suppliers, Toshiba Ceramics, Shin-Etsu Handotai and Sumitomo Sitix, all of which are overseas suppliers, and Taisil in Taiwan. We settle all our wafer purchases in U.S. dollars.

Chemicals

We obtain our supplies of industrial chemicals principally from a Taiwan joint venture entity formed by Merck KgaA and Kanto Chemicals. We obtain our supplies of bulk gases, such as nitrogen, oxygen and hydrogen, principally from our investee, United Industry Gas Co., Ltd., an affiliate of Lian Hwa Gas Co., Ltd., and our specialty gases from several overseas suppliers. Other raw materials used in the production process include target metals and photoresist. These materials are also principally obtained from several overseas suppliers.

Water

Water is critical in the production of semiconductors. We obtain our water supplies from a water company owned by the ROC government. The government also operates a purified water supply system by which we clean our integrated circuits during the fabrication process. Fab I and Fab II both have advanced water recycling systems which allow us to reclaim approximately 65% of the water used in our fabrication process. Although we have experienced several water shortage incidences in the past, we are not currently experiencing any water shortage problems. In the event of any short-term water shortage, we have our own 5,000-ton water reserve that is capable of supplying two and a half days of water for Fab I and 21,000-ton water reserve that is capable of supplying seven days of water for Fab II. To alleviate long-term water supply problems, the government has constructed a major pipeline connecting the Science Park to the dam in Miao-li County. The government has also indicated that it intends to construct a dam in Hsinchu County by 2003 to meet the water supply requirements of the Science Park area.

Electricity

Electricity is our main source of energy and we receive all of our electricity supplies from Taiwan Power Company, the national power utility. As a resident of the Science Park, we have priority in obtaining our supply of electricity from the Taiwan Power Company over businesses outside the Science Park. Although we experience power supply reductions scheduled by the Taiwan Power Company from time to time during the summer season, we receive advance notice of the timing of these reductions and can rely on our own internal emergency generators during these periods. We purchased approximately 226 million kilowatt hours of electricity from the national power grid in 2000 and approximately 124 million kilowatt hours of electricity in the six months ended June 30, 2001.

In order to obtain and maintain reliable electric power supplies, we are connected to the national grid through a 69 kilovolt and a 161 kilovolt double loop electric supply system located within the Science Park. We maintain several back-up electricity generators to ensure continuous Fab I operation in the event of interruptions to the external power supply. We also maintain back-up generators at Fab II capable of supplying 64.7% of the power normally used to run Fab II. Fab II is one of the first semiconductor facilities in Taiwan to use a dynamic uninterrupted power supply system utilizing emergency power back-up generators that operate with no time delay.

85

Sales and Marketing

We distribute our products on a global basis. The following table sets forth the breakdown of our net sales revenue and percentages of net sales revenue by geographic regions:

Japan ........................................ Taiwan...................................... Hong Kong, Singapore and South Korea ......................... United States............................ Europe and other countries...... Total .........................................	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Year ended December 31, 1998 1999 2000 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 7,205 57.3 9,642 56.9 15,633 46.7 2,636 20.9 3,562 21.0 7,384 22.0 881 7.0 1,736 10.2 4,753 14.2 1,445 11.5 1,505 8.9 3,175 9.5 413 3.3 512 3.0 2,548 7.6 12,580 100.0 16,957 100.0 33,493 100.0	Six months ended June 30, 2001	Six months ended June 30, 2001	Six months ended June 30, 2001
	1998 (NT$ in millions) (% of total net sales revenue) 7,205 57.3 2,636 20.9 881 7.0 1,445 11.5 413 3.3 12,580 100.0		1999 (NT$ in millions) (% of total net sales revenue) 9,642 56.9 3,562 21.0 1,736 10.2 1,505 8.9 512 3.0 16,957 100.0
	(NT$ in millions) 7,205 2,636 881 1,445 413 12,580		(NT$ in millions) 9,642 3,562 1,736 1,505 512 16,957		(NT$ in millions) 15,633 7,384 4,753 3,175 2,548 33,493		(NT$ in millions) 5,384 3,921 1,384 1,065 476 12,230	(% of total net sales revenue)
									44.0 32.1 11.3 8.7 3.9 100.0

We have relationships with over 45 distributors and manufacturers’ representatives to market our products worldwide. We maintain sales offices in Taipei; San Jose, California; Chicago, Illinois; Brussels, Belgium; Tokyo and Osaka, Japan; Singapore; and Suzhou, China. These offices conduct sales efforts and monitor the effectiveness of distributors and manufacturers’ representatives.

We originate sales for our products within Taiwan either directly from our Taipei sales office or through non-exclusive distributorships. Sales to Asia, excluding Taiwan and Japan, are also conducted through these non-exclusive distributorships. Sales to Nintendo are made indirectly through Megachips. Megachips has the exclusive right to distribute our products in western Japan, although to date Megachips had not made any significant sales of our products to any company other than Nintendo. Megachips receives a fixed percentage discount on all products purchased from us.

We sell our products in eastern Japan through our sales offices in Tokyo and Osaka, which in turn distribute our products in eastern Japan through third-party distributors. These distributors usually maintain small inventories and they distribute our products in eastern Japan on a non-exclusive basis. Our customers in eastern Japan include major Japanese semiconductor and consumer electronics product producers, such as Sony, Yamaha and Fujitsu.

We sell and distribute our products in North America and Europe through our direct wholly-owned subsidiaries, Macronix America, Inc. and Macronix Europe N.V., using manufacturers’ representatives and distributors. Representatives generally do not maintain a product inventory; instead, their customers place orders directly with us. Distributors generally handle smaller volume orders. Distributors usually maintain small inventories but also carry competitors’ products. We recognize revenue when we ship products to distributors if such products cannot be returned except for defective products or, if applicable, when we ship products to customers directly. Our agreements with our representatives and domestic and international distributors are generally terminable by either party on short notice.

Backlog and Order Process

Our business is characterized by short-term order and shipment schedules. The majority of our sales are made primarily by way of standard purchase orders instead of long-term contracts. We foster customer relationships by focusing on timely delivery of product, competitive pricing, product performance and reliability, continuing customer service (including technical support), responsiveness to customer requirements and advanced technology.

86

We produce a portion of our products in advance of the receipt of a formal purchase order based on anticipated purchase schedules discussed between us and our significant customers. In addition, since the yield of dies in the production process varies, we must manufacture a slightly greater number of dies, usually 2% to 3% higher, than the actual number of dies our customers order. To the extent we improve our yield during the manufacturing process, we may produce additional dies beyond the number ordered by customers. These additional dies are kept in inventory to fill any additional purchase orders for the product involved.

Research and Development

We believe that research and development is critical to our future success, and we are committed to maintaining our level of research and development expenditures. We incurred expenses of NT$1,977 million in 1998, NT$1,945 million in 1999, NT$3,144 million (US$91 million) in 2000 and NT$1,850 million (US$54 million) for the six months ended June 30, 2001, on research and development, or 15.7%, 11.5%, 9.4% and 15.1% of net sales revenue in those periods, respectively. On a ROC GAAP basis, royalty payment is included in research and development expense. We have a long-term objective of spending no less than 10% of net sales revenue on research and development. However, in 2000, due to substantial increases in our net sales revenue, research and development expenses accounted for only 9.4% of our net sales revenue. In the future, we intend to continue to spend no less than 10% of our annual net sales revenue on research and development.

As of September 30, 2001, we had 740 persons engaged in research and new product development activities. We review our new product development plans at quarterly strategic meetings, utilizing the knowledge gained from close relationships with our key customers to determine future product requirements of the semiconductor industry. We also engage research firms that follow the semiconductor industry and publish data on the size of the markets and their historical and projected growth rates. These firms also generally publish a competition and market share profile for each market. By combining these sources of product development information, we endeavor to position our next generation of products competitively.

Through our research and development efforts, we have developed core design technologies in the following five areas: memory, system logic, communications, audio and video. In addition to our know-how in each of these core design technologies, we believe that one of our strengths is our ability to integrate these various core technologies, enabling us to develop and manufacture integrated circuit products for use in products with multimedia applications. Examples of products with these multimedia applications include video conferencing and voice input/synthesis equipment.

New Product Development

Examples of new products under development or recently developed are as follows:

Mask ROM

• 0.15 micron cost-effective 1Gb, 512Mb and 256Mb devices for memory storage cards;

• high speed synchronous and page mode devices for printer applications; and

• 1.8 volt high density 128Mb and 256Mb devices for portable applications.

Flash

• a cost-effective 64Mb, 3 volt device with a new cell structure for code storage applications;

• a 0.18 micron high performance 32Mb, 3 volt device for mobile phone applications;

• a 32Mb, 3 volt page mode, high speed device for printer applications which allows information to be read more quickly than standard devices;

• a 16Mb, 3 volt high speed device for set-top box applications;

87

• an 8Mb, 3 volt high speed device for DVD applications;

• a 4Mb, 3 volt high speed device for CD read/write applications;

• a combination solution of 32Mb flash and 4Mb SRAM for information appliance applications; and

• a 1.8 volt super low voltage device for information appliance applications.

EPROM

• cost-effective 32Mb and 8Mb devices with a new cell structure for general purposes, including electronic game and communication applications.

Memory Card

• 16/32/64Mb one-time-programmable MultiMedia Card for small volume software developers;

• 32 bit JavaCard for high end smart card applications;

• 64/128/256Mb SD (Secure Digital)/MultiMedia card; and

• 64/128/256Mb memory stick ROM card.

Multimedia Products

• a high resolution digital camera chip for digital camera applications;

• a multimedia camera chip for multi-function digital camera applications;

• a Spread Spectrum telephone chipset for wireless phone applications operating at a 900MHz frequency;

• a scan conversion chip for HDTV and LCD monitors;

• an integrated controller with MCU, mask ROM and LCD drivers;

• an audio engine chip for music compression/decompression and MIDI (Musical Instrument Digital Interface) playback;

• wireless chipset for peripherals and communication devices;

• 16/24 port Fast Ethernet switch controller with embedded memory; and

• 1Gb Ethernet controller chip.

SOC

• a microcontroller device with embedded flash on one chip for consumer applications;

• DSP for motor control with embedded flash for Analog Devices, Inc.;

• a general purpose microcontroller for data processing, audio/video and GPS devices;

• embedded microcontroller for DVD applications; and

• embedded MCU with flash for in-house appliance applications.

88

Intellectual Property

A number of elements of our products and technological processes are proprietary in nature, and are owned by us or utilized under license from others. We also have entered into patent license or cross-license agreements with other companies such as IBM, AT&T and Lemelson Medical, Education & Research Foundation Limited Partnership. As of December 31, 2001, we had a total of 153 U.S., 123 Taiwan, five Japan and nine Europe patents for products and technology developed through our own efforts or joint research and development efforts with other companies. We own patents for a number of our mask ROM, flash, EPROM and logic products in the United States and Taiwan. Patents for many of these products are also pending in Japan and Europe. Most of our patents expire between 2008 and 2019.

As of December 31, 2001, we had over 930 patents applications pending in various jurisdictions, including the United States, Taiwan, Japan and Europe. We intend to continue to seek patent protection on significant new inventions.

We license the manufacturing technology underlying a variety of our memory products, including mask ROM devices, to Sanyo in Japan, for which we earn royalty income. We earned in royalties approximately NT$15 million in 1998, NT$27 million in 1999, NT$85 million (US$2 million) in 2000 and NT$41 million (US$1 million) for the six months ended June 30, 2001.

We have registered 14 types of trademarks including ‘‘MSIC’’, ‘‘Macronix’’, ‘‘MX’’ and ‘‘MTP EPROM’’. We have a total of 75 trademark registrations granted and 35 applications pending in various jurisdictions including Australia, China, European Union, India, Japan, Korea, Singapore, Taiwan and the United States. The trademarks are used in our core business including integrated circuits, computer chips, electronic circuits and services of designing, manufacturing and testing of integrated circuit related products.

As is the case with many companies in the semiconductor industry, we have from time to time experienced incidents of patent infringement of our intellectual property rights and illegal copies of our products, including some incorporating our trademarks. None of these, however, has had any material adverse effect upon our results of operations.

To decrease the risk of infringing patented technologies of others, we have procedures to evaluate related patents as part of our product development prosecution. In addition, we have retained various patent counsel to review and document our own patent process. Where appropriate, we will enter into license or crosslicense arrangements with existing patent holders. These payments amounted to NT$238 million in 1998, NT$447 million in 1999, NT$217 million (US$6 million) in 2000 and NT$4 million (US$0.1 million) for the six months ended June 30, 2001. In spite of our efforts to decrease the risk of infringement, we are the subject of several patent infringement claims. See ‘‘—Legal Proceedings’’.

Employees

As of September 30, 2001, we employed 3,726 full time employees, of whom 751 were executive officers and administrators, 1,404 were engineers and technicians and 1,571 were operators of machinery and equipment. Of all our operators, we employed 200 persons from overseas. Approximately 24.8% of our employees as of that date had undergraduate degrees, including approximately 1.2% who possessed doctoral degrees and approximately 23.6% who held master’s degrees. As of September 30, 2001, the average age of our employees was 30.3 years.

Our future success will depend, in part, on our ability to continue to attract and retain highly qualified technical, marketing, engineering and management personnel. See ‘‘Risk Factors—Risks Relating to Our Financial Condition and Business—We depend on key personnel; our failure to attract or retain these personnel may disrupt our business’’. The competition for qualified engineers and managers with experience in the

89

semiconductor industry is particularly intense. We have had considerable success in attracting engineers and managers of Taiwanese origin working in the United States to emigrate back to Taiwan but this success may not continue. We have not experienced any strikes or significant work stoppages and believe that our relations with our employees are good.

We believe that our management policies and comprehensive benefits to employees have contributed to good employee relations and employee retention. Our employee benefits include subsidized meals and housing, health insurance, life insurance and education/training subsidies, as well as employee bonuses, which often involve distributions in the form of Common Shares. We have also recently introduced a stock performance-based employee bonus program. We also have an employee pension plan under which we contribute an amount equal to 5% of each employee’s annual salary to a pension fund deposited with the Central Trust of China. We have a 15-member pension fund committee consisting of five management representatives and 10 employee representatives to manage and administer the fund. The pension fund reserve was approximately NT$468 million as of June 30, 2001. We have constructed modern athletic and recreational facilities located near our Fab I and intend to construct similar facilities for Fab II.

We have also established an employee benefit committee for implementing a variety of employee programs including, among others, recreational activities, special group travel programs, emergency assistance programs, maternity assistance programs and holiday gift certificate programs.

Environmental Matters

Our manufacturing operations use a variety of chemicals and gases, and our use, storage, discharge and disposal of these chemicals and gases and other emissions and waste are regulated by Taiwanese environmental authorities. Over the course of our operating history, we have consistently invested in equipment and processes designed to comply fully with our environmental responsibilities.

As of June 30, 2001, we had spent an aggregate of approximately NT$670 million (US$19 million) to establish a comprehensive automated air pollution prevention and waste treatment system to dispose of our waste water and chemical gases. We also dispatch some of our industrial waste solvents for disposal by outside waste treatment companies approved by the ROC Environmental Protection Administration. Certain common waste gases are also processed and disposed of by the Science Park environmental cleaning team. Additionally, we have also established environmental protection policies, received certification of ISO 14001 Environment Management System in August 1997 and have put in place environmental management teams trained by the Environmental Protection Administration. Fab II was designed as an environmentally-friendly facility and includes a modern waste water treatment and recycling system.

In April 2000, we applied to the management bureau of the Hsinchu Science-Based Industrial Park Administration for the approval of the anticipated construction of Fab III and the commercial production of wafers at the facility. In July 2000, we received final approval for Fab III from the Environmental Protection Administration. We believe that our current and proposed operations comply in all material respects with all presently applicable environmental laws and regulations.

Legal Proceedings

On February 18, 1997, Atmel Corporation filed an action against us and two other semiconductor manufacturers with the International Trade Commission (‘‘ITC’’). The complaint alleged a violation of Section 337 of the 1930 Tariff Act for the infringement of the U.S. Patent No. 4,451,903 (the ‘‘903 patent’’) owned or controlled by Atmel and relating to a claimed invention named ‘‘Silicon Signature’’. At each stage of the proceedings during this four-year investigation, the independent ITC authorities who reviewed the substance of

90

the infringement claim lodged by Atmel concluded that we did not infringe the 903 patent. On June 1, 2001, the ITC issued a Notice of Final Determination and ruled again that our products did not infringe the 903 patent and that we did not violate Section 337 of the Tariff Act, and terminated the Section 337 investigation against us. Atmel filed a petition for reconsideration asking the ITC to reverse its non-infringement finding. On July 26, 2001, the ITC denied Atmel’s petition for reconsideration. The 903 patent expired on September 14, 2001. Atmel did not appeal the Notice of Final Determination with the United States Court of Appeal for the Federal Circuit before the required deadline. Accordingly, Atmel is bound by the ITC’s Final Determination finding that Macronix did not infringe the 903 patent or violate Section 337 of the Tariff Act.

In addition, on August 8, 1997, Atmel filed an action against Macronix America, Inc. in the United States District Court for the Northern District of California. The complaint alleges the infringement of two patents by Macronix America, Inc. The first patent is a patent similar to the one at issue in the ITC proceeding that relates to encoding identifying information in the ancillary memory array of nonvolatile memory products. The second patent relates to manufacturing processes used in manufacturing EEPROM and flash products.

In 1999, Macronix America, Inc. applied for summary judgment. With regard to the ancillary memory array patent claim, an evidentiary hearing on inventorship was held on November 7-8, 2001. On January 14, 2002, the court issued an order in favor of Macronix America denying Atmel’s motion to correct the inventorship of the patent. The court has not issued its ruling as of the date of this Offering Circular. With regard to the semiconductor manufacturing process patent claim, the court granted Macronix America’s motion for summary judgment against the main independent claim of Atmel’s patent on May 26, 2000. On August 16, 2000, the court issued a final order declaring that certain other claims relating to the semiconductor manufacturing process patent are unenforceable against Macronix America, leaving a single independent claim pending. This order is not subject to reconsideration by the court.

Although we believe Atmel’s claim is unwarranted and we intend to continue to contest vigorously Atmel’s allegations, it is not possible to predict the outcome of this litigation. If we are found to have infringed Atmel’s patents, Atmel has requested injunctive relief to prohibit Macronix America, Inc. from selling products violating Atmel’s patents and an award to Atmel of treble damages caused by the alleged infringement.

On August 21, 2001, Agere Systems Inc. (‘‘Agere’’), which was spun off by AT&T in March 2001, filed a complaint against us in the United States District Court for the Southern District of New York alleging, among other things, that certain royalty payments were overdue under a patent license agreement which we previously entered into with AT&T. Agere claims that the right to receive royalties under the agreement has been assigned to it as a result of internal reorganization, and that we owe them outstanding royalties and late fees for the period from January 1, 1999 to June 30, 2001. Although we believe that Agere’s claim is unwarranted and we intend to contest vigorously Agere’s allegations, it is not possible to predict the outcome of this litigation.

As is the case with many companies in the semiconductor industry, we from time to time receive communications from third parties asserting certain patents to our products. We have entered into discussions with some of these third parties as to their respective positions and the terms of any possible licenses. We could incur significant costs with respect to the defense of the claims which could have a material adverse effect on our results of operations or financial condition. For royalty payments under the existing license agreements or the potential new patent license agreements, we have estimated the royalty budgets based on historical experiences and specific arrangements. The royalty accrual was NT$248 million in 1998, NT$331 million in 1999, NT$658 million (US$19 million) in 2000 and NT$250 million (US$7 million) in the six months ended June 30, 2001. As of June 30, 2001, the outstanding balance of this reserve was NT$784 million (US$23 million).

Except as described above, we are currently not involved in any material legal proceedings, although we may become involved in other litigation in the future. See ‘‘—Intellectual Property’’.

91

Subsidiaries and Strategic Investments

Subsidiaries

The following table sets forth the identity of our subsidiaries and their jurisdictions of incorporation as of December 31, 2001. We directly or indirectly own 100% of the equity of each of our subsidiaries.

Name of subsidiary Hui Ying Investment Inc.................... Macronix America, Inc ...................... Macronix Europe N.V......................... Macronix (B.V.I.) Co., Ltd................. New Trend Technology Inc................ Wedgewood International Ltd............ Macronix Pte Ltd................................ Kang Bao Investment Inc................... Run Hong Investment Inc. .................	Main business Investment Sales and marketing Sales and marketing Investment IC design Investment Sales and marketing Investment Investment	Jurisdiction of incorporation Taiwan, ROC California, USA Belgium British Virgin Islands California, USA British Virgin Islands Singapore Taiwan, ROC Taiwan, ROC	Total Paid-in Capital of such Entity NT$500,000,000 US$100,000 EUR 62,000 US$112,345,726 US$23,000,000 US$15,010,000 US$100,000 NT$500,000,000 NT$500,000,000	Direct Equity Interest 100% 100% 100% 100% 100% 100% 100% 100% 100%

Strategic Investments

We have made and expect to continue to make a series of equity joint venture and strategic investments in companies located in Taiwan and elsewhere. We believe that our participation in these companies allows us to enhance and complement our product offerings, expand our capacity, secure access to raw materials and services and keep up-to-date with technological changes in the semiconductor industry. As of December 31, 2001, these participations include:

• Caesar Technology, Inc., or Caesar. We owned a 29.7% direct equity interest in Caesar. We recorded investment losses from Caesar of NT$269 million in 1998, NT$351 million in 1999 and NT$495 million (US$14 million) in 2000. For the nine months ended September 30, 2001, we recorded investment losses from Caesar of NT$179 million. On December 26, 2001, the shareholders of Caesar approved a voluntary winding up of the company. As a result of the planned dissolution of Caesar, we wrote off all of our remaining NT$227 million investment in Caesar in the fourth quarter of 2001.

• Tower Semiconductor Ltd., or Tower. We owned an 11.4% indirect interest in Tower. Tower is an independent foundry manufacturer of semiconductor integrated circuits on silicon wafers.

• Prominent Communications, Inc., or Prominent. We owned a 32.5% direct equity interest in Prominent. Prominent designs and sells integrated chipsets and application-specific integrated circuits for applications used in the wireless communications industry. We acquired our equity interest in Prominent in late 1999 as part of an arrangement to develop jointly with Prominent integrated circuits for 900MHz cordless phones.

• Biomorphic VLSI Inc., or Biomorphic. We owned a 35.6% indirect equity interest in Biomorphic. Biomorphic develops and markets intelligent imaging sensors for digital cameras, automobiles and industrial applications.

92

• Chantek Electronic Co. Ltd., or Chantek. We owned a 7.6% direct equity interest in Chantek. Chantek has experienced difficulty in securing sufficient funding for its operations. Therefore, we wrote off all of our remaining NT$143 million investment in Chantek in the fourth quarter of 2001.

• Ardentec Corp, or Ardentec. We owned an 11.8% direct equity interest in Ardentec, which is a semiconductor testing company to which we subcontract a portion of our operations on terms we believe to be market-based.

• Chipbond Technology Corp., or Chipbond. We owned a 7.3% indirect and a 1.3% direct equity interest in Chipbond, which specializes in wafer-level bumping in order to facilitate the latest semiconductor packaging technologies, such as ball grid array and flip chip.

• Raio Technology, Inc., or Raio. We owned a 26.2% indirect equity interest in Raio, which provides intellectual property, software and ASIC design solutions for PC-peripheral products and consumer products.

Insurance

Our insurance coverage as of June 30, 2001 includes:

• property damage all-risk insurance on our fixed assets, equipment and inventory;

• business interruption insurance;

• third-party liability insurance to cover claims in respect of personal injury or property damage arising from accidents;

• directors’ and officers’ liability insurance;

• position schedule bond insurance on all employees, providing coverage against losses due to employee fraud or dishonesty;

• marine cargo insurance;

• employer liability insurance; and

• construction all-risk coverage.

We believe our insurance is adequate and in conformity with industry standards prevailing in Taiwan.

Enforceability of Civil Liabilities

We are a company limited by shares and incorporated under the ROC Company Law. Substantially all of our directors and executive officers, our supervisors and some of the experts named in this Offering Circular are residents of the ROC and a substantial portion of our assets and such persons are located in the ROC. As a result, it may not be possible for investors to effect service of process upon us or such persons within the United States, or to enforce against them judgments obtained in the United States courts, including those predicated upon the civil liability provisions of the federal securities laws of the United States. We have been advised by Baker & McKenzie, Taipei, Taiwan, our ROC counsel, that in their opinion any final judgment obtained against us in any court other than the courts of the ROC in connection with any legal suit or proceeding arising out of or relating to the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that:

93

• the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;

• the judgment is 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, we were served within the jurisdiction of the court or process was served on us with judicial assistance of the ROC; and

• judgments of the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis.

A party seeking to enforce a foreign judgment in the ROC would be required to obtain foreign exchange approval from the Central Bank of China for the payment out of the ROC of any amounts recovered in connection with the judgment denominated in a currency other than NT dollars.

94

MANAGEMENT

Our shareholders elect the members of our board of directors. Our board of directors is currently composed of 11 directors, three of whom are members of our Executive Director Committee. The Chairman of our board of directors is elected from among our Executive Directors. The Chairman of our board of directors presides at meetings of our shareholders, meetings of our board of directors and meetings of the Executive Director Committee, and also represents us in connection with external matters. Between meetings of our board of directors, the Executive Director Committee regularly exercises power and authority on behalf of our board of directors in accordance with applicable law, our articles of incorporation and resolutions adopted at shareholders’ meetings and meetings of the board of directors. We do not have an audit committee or a remuneration committee.

All of our directors were elected April 19, 2001 for a three-year term. Our board of directors appoints our executive officers. In accordance with the ROC Company Law, our supervisors cannot concurrently serve as our directors, executive officers or other staff members. We currently have four supervisors, each of whom was elected in 2001 and serves a three-year term. Our supervisors’ duties and powers include, but are not limited to, investigation of our condition, inspection of corporate records, verification of statements by our board of directors at shareholders’ meetings, calling of shareholders’ meetings, representation of us in negotiations with our directors and giving notification, when appropriate, to our board of directors to cease acting in contravention of applicable law or regulation or our articles of incorporation or resolution adopted at our shareholders’ meeting.

Directors and Senior Management

The following table sets forth the name of each director, supervisor and executive officer, his position with us, the date of his initial appointment and his age as of December 31, 2001. We do not have any executive officers other than the directors, supervisors and executive officers listed below.

Name Ding-Hua Hu Miin Wu H. C. Chen(1) Kao-Hsiung Wang(2) An Cheng(3) Ing-Jiunn Hai(3) Hong-Hui Chen(4) Dang-Hsing Yiu J. P. Peng(5) Y. S. Tan Raymond S. Mak Wen-Lung Lee(4) Roger Chu(3) Ping Tien Wu Cheng Yi Fang Paul Yeh	Position with Our Company Executive Director and Chairman Executive Director and President Executive Director Director Director Director Director Director and Chief Operating Offcer Director and Vice President Director and Vice President Director and Vice President Supervisor Supervisor Supervisor Supervisor Associate Vice President in charge of Finance Center	Date of Appointment Age November 25, 1989 59 November 25, 1989 and September 1, 1989 53 July 18, 1992 63 April 16, 1997 61 April 19, 2001 37 April 19, 2001 52 November 27, 1995 67 June 5, 1995 and June 29, 1998 49 April 19, 2001 46 June 29, 1998 and February 19, 1990 46 June 29, 1998 and September 1, 1995 51 June 5, 1995 52 July 18, 1992 54 November 27, 1993 60 April 19, 2001 60 July 1, 2001 45

(1) Nominee of Hung Chih Investment Corporation.

(2) Nominee of Chiao Tung Commercial Bank.

(3) Nominees of Delta Electronics Ltd.

• (4) Nominees of PICVUE Electronics Inc.

• (5) Nominee of Hui Yin Investment Inc.

95

Dr. Ding-Hua Hu is an Executive Director and has been our Chairman and a director since our inception in 1989. He is also the Chairman of Champion Consulting Group, Inc., a shareholder of our company. Dr. Hu has additionally served as the Chairman of Zyxel Communications Corporation, as well as a director of Accton Technology Corporation and Maxspeed. He received a B.S. in Electrical Engineering from National Taiwan University, a M.S. in Electronic Engineering from the National Chiao Tung University in Taiwan, a M.S. in Management from Stanford University and a Ph.D. in Electrical Engineering from the University of Missouri.

Mr. Miin Wu is an Executive Director and our President. Mr. Wu has been one of our executive officers since our inception in 1989. He has over 20 years of experience in the semiconductor industry. Mr. Wu received both a B.S. and a M.S. in Electrical Engineering from National Cheng-Kung University in Taiwan as well as a M.S. in Material Science & Engineering from Stanford University. Mr. Wu was named by Business Week in July 2001 as one of 13 entrepreneurs among 50 ‘‘stars’’ of Asia.

Mr. H. C. Chen has been a director since 1992. He has also been the President of Chin Ho Fa Steel & Iron Consent Order., Ltd. for over six years. He received a B.S. in Economics from Soochow University in Taiwan.

Mr. Kao-Hsiung Wang was an Executive Director from 1997 to April 2001 and is currently a director. Prior to that, he had been a supervisor since 1994. He is also a Senior Vice President and the General Manager of the Planning Department and Credit Department of Chiao Tung Bank and has been with Chiao Tung Bank, a shareholder of our company, since 1983. He received a B.S. in Economics from Soochow University in Taiwan, a M.A. in Finance from National Chengchi University in Taiwan and an M.A. in Economics from American University.

Mr. An Cheng has been a director since 2001. Mr. Cheng is Vice President of the Video Display Business Unit for Delta Electronics Ltd. Mr. Cheng holds a B.S. and a M.S. degree in Electrical Engineering from the University of Santa Clara.

Mr. Ing-Jiunn Hai has been a director since 2001. Mr. Hai is the Head of Global Strategic Planning of Delta Electronics Group, one of our shareholders. Before joining the Delta Group, Mr. Hai was the Country President of GE Capital in Taiwan for several years. He served also in key positions of several international financial institutions such as Citibank, JP Morgan and Lehman Brothers. Mr. Hai holds a B.A. degree from National Taiwan University and a M.A. in International Business Management from the University of Texas in Dallas.

Mr. Hong-Hui Chen has been a director since 1995. He has also been the Chairman of PICVUE Electronics, Ltd. since 1994. PICVUE Electronics Ltd. is a shareholder of our company. He received a B.S. in Agricultural Economics from National Taiwan University.

Mr. Dang-Hsing Yiu has been a director since 1995 and our Chief Operating Officer since 1998. Mr. Yiu has been an executive officer of our company since 1990. He has also worked in the semiconductor and technology related industries since 1979. Mr. Yiu received a B.S. in Electrical Engineering from National Taiwan University and a M.S. in Electronic Engineering from the University of California, Berkeley. He represents us on the board of directors of Chantek Electronic Company Ltd.

Mr. J. P. Peng has been a director since 2001 and our Vice President in charge of our Multimedia Strategic Business Unit. He has over 20 years of experience in the semiconductor and technology related industries. Mr. Peng received a M.S. degree in Electrical Engineering from the University of Iowa.

Mr. Y. S. Tan has been a director since 1998 and a Vice President since February 19, 1990. He received a B.S. in Electrophysics from National Chiao Tung University in Taiwan.

Mr. Raymond S. Mak has been a director since 1998 and a Vice President since September 1, 1995. He has also served as Chairman of Macronix America, Inc., our United States subsidiary, since 1995. Before that, he was an executive officer of Macronix, Inc. from 1987 to 1995. Mr. Mak was the Engineering Manager of

96

VLSI Technology Inc. in the United States from 1982 to 1987. He received a B.S. in Electrical Engineering from San Francisco State University.

Mr. Wen-Lung Lee has been a supervisor since 1995, and has also been the President of Yung-Kwang Hwa Steel, Inc. since 1985. He also serves as a director of Hsin Steel, Chun Yuan Steel, Innova Technology, Inc. Technology Associates Corp. and Tech Alliance Corp. Mr. Lee graduated from Shing-Wu Junior College in Taiwan.

Mr. Roger Chu has been a supervisor since 1992. He is also the Financial Controller of Delta Electronics, Ltd. and has been with that company since 1986. He received a B.S. in Economics from the Chinese Cultural University in Taiwan.

Mr. Ping Tien Wu has been a supervisor since 1993. Mr. Wu is also President of Trace Storage Technology Corporation, and before that, was President of Asia Chemical Corporation. He received a Ph.D. in Physics from the University of Iowa.

Mr. Cheng Yi Fang has been a supervisor since 2001. Mr. Fang is a director of Mercuries & Associate Ltd. and president of Avnet Mercuries Company. He received a B.A. degree from the Business Administration department of National Taiwan University.

Mr. Paul Yeh has been the Associate Vice President in charge of Finance Center since July 2001. Prior to that, he had been the senior director of our finance center from 1995 to June 2001 and was then also in charge of our finance center. He received a M.B.A. from National Chengchi University in Taiwan and a B.S. in Management Science from National Chiao Tung University in Taiwan.

The business address for all of our directors and senior management is our principal executive offices at No. 16 Li-Hsin Road, Science-Based Industrial Park, Hsinchu, Taiwan, Republic of China, except that the business address for Mr. Raymond Mak is Macronix America, Inc., 1338 Ridder Park Drive, San Jose, CA 95131.

97

Compensation of Directors and Senior Management

The following table sets forth cash remuneration paid to our individual directors, executive officers and supervisors in 2000.

and supervisors in 2000.
Name Ding-Hua Hu .................................................................. Miin Wu.......................................................................... Bruce C.H. Cheng(2)...................................................... Kao-Hsiung Wang........................................................... Hsueh-Li Chien(2).......................................................... M.S. Chen(2) .................................................................. Chien-Min Lee(2) ........................................................... H.C. Chen ....................................................................... Hong-Hui Chen............................................................... Dang-Hsing Yiu.............................................................. Wen-Lung Lee ................................................................ Roger Chu....................................................................... Ping Tien Wu.................................................................. Jiing-Fa Shiau(2) ............................................................ Y.S. Tan........................................................................... Raymond S. Mak............................................................ Paul Yeh.......................................................................... Total ................................................................................	Position with our Company in 2000 Executive Director and Chairman Executive Director and President Executive Director Executive Director Director Director Director Executive Director Director Director and Chief Operating Offcer Supervisor Supervisor Supervisor Supervisor Director and Vice President Director and Vice President Senior Director of Finance Center	Total Compensation(1)
		NT$5,521,000 5,520,000 113,000 113,000 100,000 100,000 100,000 113,000 100,000 4,660,000 100,000 100,000 100,000 100,000 4,110,000 1,107,000 2,510,000 NT$24,567,000

(1) Includes amounts to cover expenses associated with attending board meetings or duties as a supervisor. (2) Resigned from office effective April 18, 2001.

98

RELATED PARTY TRANSACTIONS

Members of our board of directors also serve or have served as directors of companies with which we do business. These individuals include Mr. Kao-Hsiung Wang of Chiao Tung Bank, a lender to us and a shareholder of our company, Mr. Paul Yeh, who previously served as a supervisor of Caesar, Mr. Miin Wu, who serves as a director of Tower, Mr. Dang-Hsing Yiu, who previously served as a director of Chantek, Mr. DingHua Hu, who previously served as a director of United Industry Gas Co., Ltd. and Mr. J.P. Peng, who serves as a director of Raio. A consortium of Taiwanese and foreign commercial banks led by Chiao Tung Bank arranged a syndicated loan facility of approximately US$300 million for us in 1996. In addition, Chiao Tung Bank arranged a syndicated loan facility of NT$12.0 billion for us in the second half of 2001. Chiao Tung Bank also arranged our issuance of NT$3.0 billion principal amount of corporate bonds in the second half of 2001, and was a member of the bank syndicate that guaranteed the bonds. We believe that the transactions we conduct with these parties are on an arms-length commercial basis. See ‘‘Business—Strategic Investments’’ and Note 15 to our financial statements included in this Offering Circular.

We subcontract a portion of our assembly and testing requirements to Powertech Co. Ltd, or Powertech, and Ardentech. Previously, we also subcontracted a portion of our assembly and testing requirements to Caesar and Chantek. For services performed by Caesar, we incurred manufacturing processing charges of NT$762 million in 1998, NT$675 million in 1999, NT$594 million (US$17 million) in 2000 and NT$134 million (US$4 million) for the six months ended June 30, 2001. For services performed by Chantek, we incurred manufacturing processing charges of NT$451 million in 1998, NT$488 million in 1999, NT$390 million (US$11 million) in 2000 and NT$61 million (US$2 million) for the six months ended June 30, 2001. For services performed by Powertech, we incurred manufacturing processing charges of NT$96 million (US$3 million) in 2000 and NT$37 million (US$1 million) for the six months ended June 30, 2001. For services performed by Ardentech, we incurred manufacturing processing charges of NT$64 million (US$2 million) in 2000 and NT$57 million (US$2 million) for the six months ended June 30, 2001. We purchase industrial gases from United Industry Gas. We incurred NT$100 million in 1998, NT$94 million in 1999, NT$117 million (US$3 million) in 2000 and NT$60 million (US$2 million) for the six months ended June 30, 2001, in charges for industrial gases provided by United Industry Gas.

We entered into an equipment lease agreement with Caesar, the term of which is from May 1, 1999 to April 30, 2005. The cost of the equipment amounted to NT$25 million. Future obligations are repayable over the six-year lease period and will amount to NT$17 million. We also purchased 6,395,000 shares of Powertech Technology Inc. from Caesar for a total cash consideration of NT$83 million.

In August 2000, we entered into a five-year manufacturing and technology cooperation agreement with Tower Semiconductor Ltd., or Tower, an Israeli company, whereby Tower will provide silicon wafer manufacturing processing services that can employ Tower’s microFLASH� technology. This technology is based on proprietary technology licensed from Saifun Semiconductors Ltd., or Saifun, an Israeli integrated circuit design company. We also have entered into a separate agreement with Saifun that provides us with rights to develop and manufacture certain products related to the microFLASH� process technology. Under the agreement with Tower, Tower will be obligated to manufacture for us up to an agreed number of six-inch wafers per month upon receiving our orders. Due to the market conditions in 2001, we have placed orders for less than the numbers of wafers that we could have required Tower to manufacture for us in 2001.

In December 2000, we entered into a share purchase agreement and related additional purchase obligation agreements to invest a total of US$75 million in Tower, together with a foundry agreement. Under the agreements, we are entitled to one seat on Tower’s board of directors and a guaranteed portion of the wafer manufacturing capacity of Tower’s new eight-inch fabrication facility, which is currently under construction. Under the agreements, we agreed to purchase approximately 2.7 million Tower ordinary shares, of which 866,551 shares were purchased at the initial closing of the share purchase agreement in January 2000 and

99

366,690 shares were or are to be purchased in each of five additional closings which occurred or will occur upon the completion of certain milestones by Tower. We made a payment of US$20 million at the initial closing and were or are required to make a payment of US$11 million at each of the five additional closings. Two of the additional closings occurred in March 2001 and May 2001, respectively. The purchase price of the Tower shares at each closing is based on fair market value, subject to a minimum of US$12.50 and a maximum of US$30 per share. The excess of the amount we pay over the share purchase price at each closing is credited into a prepaid credit account, which we may generally use for future purchases of wafers, future purchases of Tower’s shares other than under the additional purchase obligation agreements, or royalty payments. As of December 31, 2001, we owned approximately 11.4% of Tower ordinary shares and had approximately US$5 million in our prepaid credit account with Tower. If Tower is unable to meet the milestones, under certain circumstances, we would be released from our obligations under the additional purchase obligation agreements.

In September 2001, in connection with Tower’s financial restructuring, we utilized approximately US$16 million of our prepaid credit account to purchase 1,255,848 Tower shares for US$12.75 per share. At the time of the share purchase Tower’s market value per share was approximately US$7.128. As a result of this transaction we may incur additional investment losses during 2001 and periods thereafter. We also may incur additional investment losses on approximately US$5 million held in our prepaid credit account. Additionally, Tower’s share price has declined substantially during 2001. As of December 31, 2001, Tower’s share price was US$6.31. In addition to the 1,255,848 shares we acquired in September 2001, we previously acquired 1,599,931 shares purchased at an average price of US$12.91 share. Due to Tower’s share price decline we may incur additional investment losses for the year ended December 31, 2001 and periods thereafter.

In connection with the issuance of our convertible bonds in May 1998, options to purchase all of the Common Shares issuable upon exercise of the convertible bonds were sold by the purchaser of the convertible bonds to a wholly-owned subsidiary of ours. This sale was made on an arm’s-length basis. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk’’.

100

MAJOR SHAREHOLDERS

The following table sets forth certain information, as of May 28, 2001, with respect to the Common Shares of our company owned of record by our top five shareholders and all directors, supervisors and executive officers as a group. To our knowledge, as of May 28, 2001, no shareholder beneficially owned 5% or more of our Common Shares.

Name of shareholder Delta Electronics, Ltd.(1)...................................................................................... The Bank of New York(2) .................................................................................... National Stabilization Fund................................................................................... Standard Chartered Bank(3).................................................................................. Chiao Tung Commercial Bank.............................................................................. Directors, supervisors and executive offcers as a group(4).................................	Number of Common Shares 73,941,273 65,513,949 59,797,400 47,458,616 43,651,565 88,877,115	Percentage of total outstanding Common Shares
		2.20% 1.95% 1.78% 1.41% 1.30% 2.65%

• (1) Messrs. Ing-Jiunn Hai and An Cheng were nominated by Delta Electronics and currently serving on our board of directors. Mr. Roger Chu was nominated by Delta Electronics and currently serving as our supervisor.

• (2) In its capacity as depositary of our existing ADS facility.

• (3) Nominee of Credit Suisse Financial Products.

• (4) Excludes 71,791,148 Common Shares held by other entities (exclusive of Delta Electronics), officers of which currently serve on our board of directors.

101

The following table sets forth the personal share ownership of our directors, supervisors and executive officers and their immediate families as of May 28, 2001.

Title Executive Director and Chairman.......... Executive Director and President .......... Executive Director ................................. Director................................................... Director................................................... Director................................................... Director................................................... Director and Chief Operating Offcer.... Director and Vice President................... Director and Vice President................... Director and Vice President................... Supervisor............................................... Supervisor............................................... Supervisor............................................... Supervisor............................................... Associate Vice President in charge of Finance Center ...................................	Name Ding-Hua Hu Miin Wu H. C. Chen(1) Kao-Hsiung Wang(2) An Cheng(3) Ing-Jiunn Hai(3) Hong-Hui Chen(4) Dang-Hsing Yiu J. P. Peng(5) Y. S. Tan Raymond S. Mak Wen-Lung Lee(4) Roger Chu(3) Ping Tien Wu Cheng Yi Fang Paul Yeh	Share ownership Number of Shares Percentage 2,666,621 0.08% 28,029,738 0.83% 5,069,065 0.15% 0 0 0 0 0 0 1,212,959 0.04% 17,371,018 0.52% 7,864,334 0.23% 5,341,872 0.16% 5,946,035 0.18% 4,228,647 0.13% 46,252 0.001% 180,445 0.01% 987,945 0.03% 9,932,184 0.3%	Shares owned by spouses and minor children Number of Shares Percentage 4,480,060 0.13% 0 0% 16,413,004 0.49% 0 0% 341,549 0.01% 0 0% 727,775 0.02% 1,923,365 0.06% 0 0% 13,826 0.001% 0 0% 4,406,252 0.13% 32,292 0.001% 0 0% 328,087 0.01% 39,146 0.001%
		Number of Shares 2,666,621 28,029,738 5,069,065 0 0 0 1,212,959 17,371,018 7,864,334 5,341,872 5,946,035 4,228,647 46,252 180,445 987,945 9,932,184	Number of Shares 4,480,060 0 16,413,004 0 341,549 0 727,775 1,923,365 0 13,826 0 4,406,252 32,292 0 328,087 39,146

(1) Nominee of Hung Chih Investment Corporation.

(2) Nominee of Chiao Tung Commercial Bank.

(3) Nominees of Delta Electronics Ltd.

(4) Nominees of PICVUE Electronics Inc.

(5) Nominee of Hui Yin Investment Inc.

102

DESCRIPTION OF THE BONDS

The Bonds are to be issued under an Indenture, to be dated as of February 7, 2002 (the ‘‘Indenture’’), between us and The Bank of New York, as trustee (the ‘‘Trustee’’). The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indenture, including the definitions therein of certain terms.

General

The Bonds will be unsecured obligations of our company, will be limited to US$140,000,000 aggregate principal amount (plus any Bonds issued pursuant to the Joint Bookrunners’ over-allotment option) and will mature on February 7, 2007. On December 13, 2001, our board of directors authorized the issuance of the Bonds in an amount up to US$250 million in connection with the Offering. The Bonds will be denominated in principal amounts of US$1,000 and integral multiples thereof.

The Bonds will bear interest at the rate per annum shown on the front cover of this Offering Circular from February 7, 2002 or from the most recent Interest Payment Date to which interest has been paid or provided for, payable annually in arrears on February 7 of each year, commencing February 7, 2003, to the Person in whose name the Bond (or any predecessor Bond) is registered at the close of business on the preceding January 23 of each year. Interest on the Bonds is computed on the basis of a 360-day year of twelve 30-day months. Principal of and premium, if any, and interest on the Bonds will be payable, and the transfer of Bonds will be registrable, at the corporate trust office of the Trustee in New York City. In addition, payment of interest may, at the our option, be made by check mailed to the address of the Person entitled thereto as it appears in the Security Register.

As long as the Bonds are listed on the Luxembourg Stock Exchange, The Bank of New York (Luxembourg) S.A. will serve as the Paying Agent, Conversion Agent and Transfer Agent in Luxembourg. Payments and transfers in Luxembourg will be executed through Euroclear and Clearstream. In the event that definitive bonds are issued, payments and transfers with respect thereto will be executed at the office of The Bank of New York (Luxembourg) S.A. in Luxembourg.

Form and Denomination

The statements set forth herein under ‘‘Form and Denomination’’ and in the section entitled ‘‘Global Bonds’’ include summaries of certain rules and operating procedures of DTC (as defined below), Euroclear and Clearstream which effect transfers of interests in the Global Bonds.

The Bonds will be issued only in fully registered form and in denominations of US$1,000 and integral multiples thereof.

All Bonds initially sold in the United States or to U.S. persons will be Restricted Bonds. The Restricted Bonds will be issued in definitive, fully registered form to qualified institutional buyers pursuant to Rule 144A (‘‘Rule 144A’’) under the Securities Act, in the form of beneficial interests in a global certificate (the ‘‘Restricted Global Bond’’) registered in the name of a nominee of The Depository Trust Company (‘‘DTC’’), and will be deposited with the Trustee as custodian for DTC.

The Global Bonds (and any Bonds issued in exchange for either of them) will be subject to certain restrictions on transfer set forth therein and in the Indenture (the ‘‘Transfer Restrictions’’) and will bear the legends relating to such restrictions set forth under ‘‘Transfer Restrictions’’ in this Offering Circular.

Bonds sold to persons other than U.S. persons in offshore transactions in reliance on Regulation S under the Securities Act (‘‘Regulations S Bonds’’) will initially be represented by a global certificate (the

103

‘‘Regulation S Global Bond’’ and, together with the Restricted Global Bond, the ‘‘Global Bonds’’) registered in the name of a nominee of DTC, and will be deposited with the Trusteee, as custodian for DTC, for the accounts of Euroclear and Clearstream.

Except in the limited circumstances described in the Indenture, owners of interests in Bonds represented by the Restricted Global Bond and the Regulation S Global Bond will not be entitled to receive definitive certificates in respect of their individual holding of the Bonds.

If Bonds in definitive form are issued, the principal amount of the Bonds in definitive form will be payable at the corporate trust office of the Trustee in New York City, and, subject to applicable laws and regulations, in such other place or places as designated by us, provided that payment of any principal of any Bond in definitive form will be made only upon presentment of such Bond, and provided further that payments of interest shall be made, subject to applicable laws and regulations, by check mailed to the address of the person entitled thereto as shown in the register maintained by the Trustee at the close of business on each Record Date and payments of principal may be made to addresses provided by the person entitled thereto at the time of presentment.

Transfer of Bonds; Issue of Certificate

Transfers Within Global Bonds

Subject to the procedures and limitations described below under ‘‘Global Bonds’’, transfers of beneficial interests within a Global Bond may be made without delivery to us or the Trustee of any written certifications or other documentation by the transferor or transferee.

Transfers Between Global Bonds

Prior to the expiration of the 40th day after the later of (i) the day that the Initial Purchasers for the offering of the Bonds advise us and the Trustee in writing is the day on which such Bonds were first offered to persons other than distributors (as defined in Regulation S) in reliance on Regulation S and (ii) the latest closing date of the offering (the ‘‘Restricted Date’’), a beneficial interest in the Regulation S Global Bond may be transferred to a person who takes delivery in the form of an interest in the Restricted Global Bond only upon receipt by the Trustee of a written certification from the transferee or the transferor, as the case may be, (in the form provided in the Indenture) to the effect that either (i) such transferee is purchasing the Bonds for its own account or for accounts as to which it exercises sole investment discretion and that it and, if applicable, each such account, is a qualified institutional buyer within the meaning of Rule 144A, in each case, in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction or (ii) the transferor did not purchase such Bonds as part of the initial distribution thereof and the transfer is being effected pursuant to and in accordance with an applicable exemption from the registration requirements of the Securities Act and the transferor has delivered to the Trustee such additional evidence that we or the Trustee may require as to compliance with such available exemption. On and after the Restricted Date, the certifications contemplated by the previous sentence shall no longer be required.

Beneficial interests in the Restricted Global Bond may be transferred to a person who takes delivery in the form of an interest in the Regulation S Global Bond, whether before, on or after the Restricted Date, only upon receipt by the Trustee of a written certification from the transferor (in the forms provided in the Indenture) to the effect that such transfer is being made in accordance with Rule 903 or Rule 904 of Regulation S (as applicable) under the Securities Act and that, if such transfer occurs prior to the Restricted Date, the interest transferred will be held immediately thereafter through Euroclear or Clearstream.

Any beneficial interest in any Global Bond that is transferred to a person who takes delivery in the form of an interest in the other type of Global Bond will, upon transfer, cease to be an interest in such Global Bond and become an interest in the other type of Global Bond and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in such other type of Global Bond for as long as it remains such an interest. Except in the circumstances described below and in the section entitled

104

‘‘Global Bonds’’, owners of beneficial interests in Global Bonds will not be entitled to receive physical delivery

Transfers of Restricted Bonds and interests therein are also subject to the restrictions described under ‘‘Plan of Distribution’’ and ‘‘Transfer Restrictions’’.

Delivery of Certificates

Issues of certificates upon transfer of Bonds are subject to compliance by the transferor and transferee with the transfer restrictions and the certification procedures described above and in the Indenture, and, in the case of Restricted Global Bonds, compliance with the legend requirement specified in the Indenture.

Each new certificate to be issued on transfer of Bonds will, within three business days of receipt by the Registrar or the relevant Transfer Agent of the original certificate and the form of transfer, be mailed at the risk of the Holder entitled to the Bonds to the address specified in the form of transfer. Where some but not all the Bonds in respect of which a certificate is issued are to be transferred, converted, repurchased or redeemed, a new certificate in respect of the Bonds not so transferred, converted, repurchased or redeemed will, within three business days of deposit or surrender of the original certificate with or to the Registrar or the relevant Transfer Agent, Conversion Agent or Paying Agent, be mailed at the risk of the Holder of the Bonds not so transferred, converted, repurchased or redeemed to the address of such Holder appearing on the register of Holders.

Conversion

General

On exercise of the Conversion Right, the converting Holder, pursuant to the election made by such Holder: (a) will receive the Common Shares initially in the form of Entitlement Certificates representing the right to receive the Common Shares, or (b) subject to compliance with and restrictions in the terms and conditions of the applicable deposit agreement and the Bonds, may elect to direct us to procure that the Common Shares initially in the form of Entitlement Certificates, issued upon conversion of the Bonds, be deposited with a custodian for the issuance and delivery of ADSs initially in the form of Temporary ADSs by the Depositary. Holders of Regulation S Bonds may not elect to receive ADSs (or Temporary ADSs) until the expiration of 40 days after the later of the commencement of the offering of the Regulation S Bonds and the latest closing date of this offering. Holders of the Restricted Bonds may elect to receive Listed ADSs (or Temporary ADSs representing such ADSs) only if such Restricted Bonds intended to be converted are not, and the Common Shares into which they are convertible will not be, ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act. So long as the Restricted Bonds are, and the Common Shares into which they are convertible will be, ‘‘restricted securities’’ within the meaning of Rule 144 of the Securities Act, if a holder of the Restricted Bonds elects to receive ADSs (or Temporary ADSs) upon conversion, the Common Shares (or Entitlement Certificates) issuable upon conversion of the Restricted Bonds will be deposited into the Restricted ADS Depositary Facility and Restricted ADSs (or Restricted Temporary ADSs) will be issued. Restricted ADSs (or Restricted Temporary ADSs) are subject to the transfer restrictions described herein and are not fungible with the Listed ADSs (or Temporary ADSs that represent such ADSs). We have undertaken to exchange Entitlement Certificates for Common Shares at least four times a year, which involves, among other steps, our seeking permission each time from the ROC SFC and the Science-Based Industrial Park Administration (‘‘SIPA’’) for an increase in the our registered paid-in share capital. Entitlement Certificates will enable the holder thereof generally to enjoy the same rights and privileges as a holder of Common Shares, including the rights to vote at shareholders’ meetings, but with certain exceptions relating to the right to receive dividends and other distributions and to participate in rights issue.

The Indenture provides, in summary, that the term ‘‘Common Shares’’ means, when used to refer to the class or classes of our capital stock into which the Bonds are convertible and when used in certain other instances, only our Common Shares, NT$10 par value per share, but that when used elsewhere, including as

105

used in ‘‘—Adjustments to Share Conversion Price’’ below, the term also includes shares of any other class or classes of the share capital of our company authorized after the date of the Indenture which have no preference with respect to dividends or to amounts payable in the event of any voluntary or involuntary liquidation or winding-up of our company.

We have agreed in the Indenture that, in the event ROC law changes such that we may issue Common Shares upon conversion of the Bonds without first issuing Entitlement Certificates, we shall promptly issue Common Shares upon conversion of Bonds in accordance with the then current ROC law; provided, however, that we shall have the option to continue to issue Entitlement Certificates initially upon conversion of the Bonds (i) from the date of the board meeting proposing annual cash and/or stock dividend distributions for approval at the next annual general shareholders’ meeting to the record date for the determination of shareholders entitled to receive such annual cash and/or stock dividend distributions (whichever record date is later) and (ii) from the date of the board meeting proposing a rights issue to the record date for the determination of shareholders entitled to receive such rights issue. We shall provide the Holders with at least seven days’ prior notice of such period and of our decision to issue Entitlement Certificates during such period in accordance with ‘‘—Notices’’ below. There can be no assurance, however, that ROC law will change to permit such issuance of Common Shares.

Conversion Terms

Each Holder has the right under the terms of the Bonds to convert any Bond into Common Shares (initially in the form of Entitlement Certificates representing the right to receive Common Shares) or ADSs (including Restricted ADSs (or Temporary Restricted ADSs) in the event of a conversion of Restricted Bonds) (initially in the form of Temporary ADSs representing the right to receive Entitlement Certificates) on and subject to the terms set forth herein. In compliance with and subject to restrictions in the terms and conditions of the applicable deposit agreement and the Bonds, Holders may direct us to procure that Common Shares (initially in the form of Entitlement Certificates) issued upon the exercise of the Conversion Right be deposited with the Depositary for the issuance of ADSs (initially in the form of Temporary ADSs). Subject to and upon compliance with the provisions of the Indenture, the Conversion Right attaching to any Bond may be exercised, at the option of the Holder thereof and as and to the extent provided therein and in the Indenture, at any time on or after March 11, 2002, in the case of conversion of the Bonds into Common Shares (or Entitlement Certificates), or April 17, 2002, in the case of conversion of the Bonds into ADSs (or Temporary ADSs), in each case up to the close of business (at the place where such Bond is deposited for conversion) on January 23, 2007, or, if such Bond shall have been called for redemption on or before January 30, 2007, then, with respect to such Bonds called for redemption, up to the close of business (at the place aforesaid) on the date seven days prior to the date fixed for redemption thereof (the ‘‘Conversion Period’’); provided, however, that the Conversion Right shall be suspended during, and the Conversion Period shall not include, any period during which under the laws of the ROC we shall close our stock transfer books, which period currently includes 60 days prior to the date of the annual general shareholders’ meeting, 30 days prior to a special shareholders’ meeting and five days prior to the record date for annual dividend distributions or other benefits or such other period determined by ROC law applicable from time to time (each such period, a ‘‘Closed Period’’); and provided further, however, that, if we shall default in making payment in full with respect to any Bonds which shall have been called for redemption prior to February 7, 2007 on the date fixed for redemption therefor, the Conversion Right attaching to such Bonds will continue to be exercisable up to and including the close of business (at the place where the Bonds are deposited for conversion) on the date upon which the full amount payable with respect to such Bonds has been duly received by the Trustee or the Paying Agent and notice of such receipt has been duly given to the Holders. We have agreed to give Holders notice of any Closed Period in accordance with the Indenture.

Under current ROC law, regulations and policy, ‘‘PRC persons’’ are not permitted to hold or convert the Bonds or to register as shareholders (or holders of Entitlement Certificates) of our company. Under current ROC law, ‘‘PRC person’’ means an individual holding a passport issued by the PRC, a resident of any area of China under the effective control or jurisdiction of the PRC (but not including a special administrative region of the

106

PRC, such as Hong Kong and Macau), any agency or instrumentality of the PRC and any corporation, partnership or other entity organized under the laws of any such area or controlled or beneficially owned by any such person, resident, agency or instrumentality.

Under current ROC law, a non-ROC Holder of the Bonds who converts and receives Common Shares (initially in the form of Entitlement Certificates) is required to appoint a local agent in the ROC, with such qualifications as are set by the ROC SFC, to open a securities trading account with a local securities brokerage firm, pay ROC taxes, remit funds, exercise shareholders’ rights and perform such other matters as may be designated by such holder of Entitlement Certificates or Common Shares, on behalf of and as agent for such holder. In addition, such holder must appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Under existing ROC laws and regulations, without such an account such non-ROC Holder of the Bonds would not be able to hold or to sell or otherwise transfer the Common Shares or Entitlement Certificates into which the Bonds may have been converted on the TSE or otherwise. See ‘‘Risk Factors—Risks Relating to the Bonds, the Common Shares and the ADSs—Limitation on Holding and Sale of Common Shares’’ and ‘‘Appendix D— Foreign Investment and Exchange Controls in the ROC’’.

The number of Common Shares (initially in the form of Entitlement Certificates) to be issued upon conversion of any Bond will be determined by us by dividing the principal amount of the Bond (translated into New Taiwan Dollars at the fixed rate of NT$34.98 = US$1.00) by the Share Conversion Price (as hereinafter defined) in effect on the Conversion Date. The number of ADSs (initially in the form of Temporary ADSs) to be delivered upon conversion of any Bond will be determined by us by dividing the aggregate principal amount of all the Bonds to be converted by such Holder (translated into NT dollars at the exchange rate of NT$34.98 = US$1.00) by the Share Conversion Price in effect on the date of conversion, and dividing such quotient by the number of Common Shares or Entitlement Certificates represented by each ADS or Temporary ADS, as the case may be, at the time of deposit of such Common Shares with the depositary. On conversion, the right of the converting Holder to repayment of the principal amount of the Bond to be converted shall be extinguished and released, and in consideration and in exchange therefore we shall transfer the Common Shares to the converting Holder (or its agents) or to the depositary for the issuance of ADSs, as the case may be, credited as paid up in full. If more than one Bond shall be deposited for conversion at any one time by the same Holder, the number of Common Shares (or Entitlement Certificates) or ADS (or Temporary ADSs) to be issued upon conversion thereof will be calculated on the basis of the aggregate principal amount of the Bonds so deposited. Fractions of Common Shares (or Entitlement Certificates) or ADS (or Temporary ADSs) will not be issued on conversion, and cash adjustments will not be made with respect thereto by us. Notwithstanding the foregoing, to the extent applicable, we will upon conversion of the Bonds pay in U.S. Dollars a sum equal to such portion of the principal amount of the Bond or Bonds deposited for conversion as corresponds to any fraction of a Common Share (or Entitlement Certificate) or ADS (or Temporary ADS) not issued as aforesaid if such sum exceeds US$10. For the purpose of calculating the amount of such payment, we shall use the Closing Price of the Common Shares on the Trading Day prior to the Conversion Date and the exchange rate referred to above in this paragraph.

The price at which Common Shares (in the form of Entitlement Certificates) or ADSs (in the form of Temporary ADSs) will be issued upon conversion (the ‘‘Share Conversion Price’’) will initially be NT$31.32 per Common Share and US$8.95 per ADS, but will be subject to adjustment in the manner provided in ‘‘— Adjustments to Share Conversion Price’’ below.

Exercise of Conversion Right

To convert any Bond, the Holder thereof must complete, execute and deposit at his own expense during business hours on any business day during the Conversion Period or Closed Period at the specified office of the Trustee or any conversion agent at which the Bond is presented for conversion a notice of conversion (a ‘‘Conversion Notice’’) in duplicate, duly completed and signed, in the then current form obtainable from the specified office of the Trustee or any conversion agent together with the Bonds to be converted and any certificates and other documents as may be required under the laws of the ROC or the jurisdiction in which the Trustee’s office or such conversion agent shall be located. The Conversion Notice

107

shall contain, inter alia , (i) the election by the converting Holders as to whether to receive Common Shares or ADSs, (ii) in the case of a conversion by Holders of the Restricted Bonds and an election to receive ADSs, a certification to the effect that such converting Holders will receive Restricted ADSs upon conversion of the Restricted Bonds, which, so long as the Restricted Bonds are ‘‘restricted securities’’ within the meaning of Rule 144 of the Securities Act, will be subject to transfer restrictions applicable to ‘‘restricted securities’’ under the Securities Act, (iii) in the case of election to receive Common Shares, an appointment of a local agent in the ROC as well as other information required by ROC laws and regulations, and (iv) an irrevocable instruction authorizing and directing us to exchange into Common Shares any Entitlement Certificates issued pursuant to the terms of the Indenture, as soon as Common Shares are available following the next occurring Consolidation Date and an irrevocable instruction to deliver such Entitlement Certificates and Common Shares to the converting Holder of the Bonds, and if such Holder is a non-ROC person, to its local agent in the ROC. ‘‘Consolidation Date’’ shall mean a date on which all Entitlement Certificates issued or to be issued for the Bonds converted on a Conversion Date which occurs on or prior to such date will be consolidated for the purpose of issuance of Common Shares. Each of the following dates will be a Consolidation Date: the close of business on each of (i) seven business days in the ROC prior to the date of the Board of Directors’ meeting at which the Board of Directors prepares its dividend proposal for the annual shareholders’ meeting, (ii) the record date (or, if more than one dividend is declared, the latest of such record dates) set for the determination of shareholders entitled to receive the annual dividend payment (or, if during the annual shareholders’ meeting no annual dividends were declared, July 9), (iii) September 9 and (iv) December 9 of each year. In addition to the Consolidation Dates set forth above, we shall set additional Consolidation Dates on the Trading Day following the maturity of the Bonds and on the Trading Day following any full or partial redemption of the Bonds at our election. A Conversion Notice once deposited may not be withdrawn without our consent in writing.

Bonds surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (except Bonds or portions thereof called for redemption on a Redemption Date within such period) must be accompanied by payment of an amount equal to the interest thereon which the registered Holder is to receive. Except where Bonds surrendered for conversion must be accompanied by payment as described above, no interest on converted Bonds will be payable by us on any Interest Payment Date subsequent to the date of conversion. No other payment or adjustment for interest or dividends is to be made upon conversion.

Holders who deposit a Conversion Notice on the final day prior to a Closed Period or who deposit a Conversion Notice during a Closed Period will not be permitted to convert their Bonds until a Conversion Date after the end of the Closed Period. Such Holders will not be registered as shareholders and will retain the rights of a Holder with respect to the Bonds until the Conversion Date. The price at which such Bonds will be converted will be the Share Conversion Price in effect on the Conversion Date.

We will pay any and all taxes arising in the ROC that may be payable with respect to the issue or delivery of Entitlement Certificates representing the right to receive Common Shares on conversion of Bonds. We shall not, however, be required to pay any tax arising in the jurisdiction in which the Bonds are deposited for conversion with respect to the issue or delivery of Entitlement Certificates representing the right to receive Common Shares on conversion of Bonds nor to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Entitlement Certificates representing the right to receive Common Shares in a name other than that of the Holder of the Bond or Bonds to be converted, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to us the amount of any such tax, or has established to our satisfaction that such tax has been paid. The date on which any Bond and the Conversion Notice (in duplicate) relating thereto are deposited with the Trustee or any conversion agent and the payments, if any, required to be paid by the Holder are made is hereinafter referred to as the ‘‘Deposit Date’’. The ‘‘Conversion Date’’ applicable to a Bond shall mean the next day following the Deposit Date which day both is a Trading Day for the Common Shares and occurs during a Conversion Period.

108

With effect from the opening of business in Taiwan on the Conversion Date, we will deem the converting Holder, or if the converting Holder elects to receive ADSs (initially in the form of Temporary ADSs), we will deem the Depositary, as indicated in the Conversion Notice to have become the holder of record of the number of Common Shares in the form of scrip known as ‘‘Certificates Exchangeable for Shares’’ (such scrip or other evidence being referred to herein as ‘‘Entitlement Certificates’’) to be issued upon such conversion (disregarding any retroactive adjustment of the Share Conversion Price referred to below prior to the time such retroactive adjustment shall have become effective) and, at such time, the rights of such converting Holder as a Holder with respect to the Bonds deposited for conversion shall cease. Entitlement Certificates will enable the holder thereof generally to enjoy the same rights and privileges as a holder of Common Shares, including the rights to vote at shareholders’ meetings, but with certain exceptions relating to the right to receive dividends and other distributions and to participate in rights issue.

We initially shall make available 188,999,213 Common Shares for transfer and delivery in accordance with the requirements for the Conversion Right. As a result of any possible adjustments to the Share Conversion Price set out in ‘‘—Adjustments to Share Conversion Price’’ below that requires such number of Common Shares in excess of the 188,999,213 Common Shares to be designated for conversion, we undertake to procure such additional Common Shares for transfer and delivery to all converting Holders, their designees or agents, or the depositary, as the case may be, in accordance with the requirements describled below.

We have agreed to make sufficient Common Shares available as soon as possible (which is currently expected to be 50 to 60 calendar days) after each Consolidation Date for the exchange of all Entitlement Certificates outstanding (including those for which certificates have not yet been delivered, but have been registered as holders of Entitlement Certificates in our register of shareholders) on such Consolidation Date (except for outstanding Entitlement Certificates which are in the process of being exchanged because they were outstanding on a prior Consolidation Date); specifically, we (a) shall exercise our best efforts to obtain approval to increase our registered paid-in share capital from the ROC SFC and SIPA and obtain all other ROC governmental approvals as soon as possible after each Consolidation Date and (b) shall deliver Common Shares within 30 days after receiving all required approvals to increase our paid-in share capital.

The Entitlement Certificates are to be exchanged when we make Common Shares available. We will, without further action by a holder of Entitlement Certificates, make Common Shares available to holders of Entitlement Certificates for exchange. To obtain such Common Shares, the related Entitlement Certificates must be surrendered to us. Entitlement Certificates may be surrendered at our office or agency maintained therefor. When we make such Common Shares available for exchange, the Entitlement Certificates will be delisted from the TSE and we will refuse to register any further transfer of such Entitlement Certificates on our register of shareholders.

On the Conversion Date, we will register the converting Holder (or its designee) or, if the Converting Holder elects to receive ADSs (initially in the form of Temporary ADSs), the Depositary (or its nominee), in our register of shareholders as the owner of the number of Entitlement Certificates to be issued pursuant to the terms of the Bonds and the Indenture upon conversion of such Bonds and, subject to any applicable limitations then imposed by ROC laws and regulations, according to the request made in the relevant Conversion Notice, procure that, as soon as practicable, and in any event within five Trading Days after we receive the notice of the Trustee thereof, we deliver to the local agent appointed by the converting Holder (if the Holder has elected to receive Common Shares, initially in the form of Entitlement Certificates) or if the Holder elects to receive ADSs (initially in the form of Temporary ADSs), the ADS Depositary, a certificate or certificates for the relevant Common Shares or Entitlement Certificates, registered in the name of the converting Holder specified for that purpose in the relevant Converson Notice, together with any other property or cash (including, without limitation, cash payable pursuant to the terms of the Bonds and the Indenture) required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the delivery thereof. The delivery of Listed ADSs by the depositary to the converting Holders or their designees will be governed by the terms in the deposit agreement providing for our Listed ADS Depositary Facility (the ‘‘Deposit Agreement’’) and, in the case of the Restricted ADSs, a Rule 144A Deposit Agreement, dated February 7, 2002 (the ‘‘Rule 144A Deposit Agreement’’).

109

The Depositary has agreed to issue and deliver ADSs representing the Common Shares registered in the name specified for that purpose in the relevant Conversion Notice upon receipt of Common Shares deposited by us with its custodian in the ROC and payment by us of the ADS issuance fees: (a) in respect of ADSs to be delivered in book-entry form, to DTC in accordance with the terms of the Deposit Agreement, or (b) in respect of ADSs to be delivered in physical form, to the converting Holders or their designees as soon as practicable. It is expected that ADSs into which the Regulation S Bonds are convertible, immediately upon conversion, will not be subject to the transfer and other restrictions outlined in ‘‘Transfer Restrictions’’ and such ADSs will be delivered by the depositary in book-entry through DTC or physical form. It is expected that the Restricted ADSs will be ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act and accordingly will be subject to the transfer and other restrictions outlined in ‘‘Transfer Restrictions.’’ Such Restricted ADSs will be delivered by the Depositary in physical form. For those converting Holders who elect to receive Restricted ADSs in the Conversion Notice, the Depositary will issue and deliver to such converting Holders Restricted ADSs in physical form with the appropriate legends. See ‘‘Transfer Restrictions.’’ Such Restricted ADSs will not be fungible with the Listed ADSs until after the expiration of two years following the original issuance of the Bonds and they cease to be ‘‘restricted securities’’ within the meaning of Rule 144 of the Securities Act.

Converting Holders who elect to receive Restricted ADSs on exercise of their Conversion Rights will be required, under the terms and conditions of the Rule 144A Deposit Agreement, prior to the issue of Restricted ADSs, to provide certain written acknowledgments, certifications and agreements to the effect that

• (a) the Restricted ADSs and the Common Shares represented thereby have not been registered under the Securities Act;

• (b) it is a QIB acquiring such beneficial ownership for its own account or for the account of one or more QIBs, each of whom is able to and who does represent, acknowledge and agree to the same extent that would be required if it is invested directly into Restricted ADSs;

• (c) it will comply with the restrictions set forth under ‘‘Transfer Restrictions’’ on transfers of the Restricted ADSs and the underlying Common Shares;

• (d) it is not an affiliate (within the meaning of Rule 144 under the Securities Act) of our company;

• (e) the Bonds from which the Common Shares being deposited were converted have not, since their original issuance, been previously acquired by our company or our affiliates (within the meaning of Rule 144 under the Securities Act); and

• (f) the Common Shares being deposited were acquired directly from the conversion of a Bond pursuant to the Indenture.

Such converting Holders will also be required to furnish a written opinion of counsel to the effect stated in paragraph (e) above.

If the Conversion Date in relation to any Bond shall be on or after a date with effect from which an adjustment to the Share Conversion Price takes retroactive effect pursuant to the Indenture and the relevant Conversion Date falls on a date when the relevant adjustment has not been reflected in the Share Conversion Price, we have agreed that the provisions of the fourth preceding paragraph shall be applied, mutatis mutandis , to such number of Common Shares in the form of Entitlement Certificates as is equal to the number of additional Common Shares in the form of Entitlement Certificates that would have been required to be issued on conversion of such Bond if the relevant retroactive adjustment had been made as of the said Conversion Date over the number of such Common Shares previously issued pursuant to such conversion, and, in such event and with respect to such number of Common Shares, references in the fourth preceding paragraph to the Conversion Date shall be deemed to refer to the date upon which such retroactive adjustment becomes effective (disregarding the fact that it becomes effective retroactively).

The Common Shares or the Entitlement Certificates issued upon conversion of the Bonds will in all respects rank pari passu with the Common Shares in issue on the date such Common Shares are delivered in exchange for Entitlement Certificates (except for any right, dividends, allotments or other distributions, the

110

record date for which precedes the date on which such Common Shares are delivered in exchange for Entitlement Certificates; with respect to preemptive rights in connection with rights issues and rights to dividends, except in the case where the record date for closure of our register of shareholders for a shareholders’ meeting precedes the date on which such Common Shares are delivered in exchange for Entitlement Certificates; and except for any other right excluded by mandatory provisions of applicable law).

We have reserved the right, subject to the provisions of the Indenture (or any agency agreement), at any time to vary or terminate the appointment of any conversion agent and to appoint further or other conversion agents, provided that we shall give notice of any such termination or appointment in accordance with the Indenture, and, provided further that we will at all times maintain a conversion agent (which conversion agents may be the Trustee) having specified offices in New York and, at any time when Bonds are issued in definitive form, in London.

Notwithstanding the provisions described above, if we default in making payment in full in respect of any Bond that has been called for redemption prior to February 7, 2007 on the date fixed for redemption thereof, the Conversion Right attaching to such Bond will continue to be exercisable up to, and including, the close of business (at the place where the certificate evidencing such Bond is deposited for conversion) on the date upon which the full amount of the monies payable in respect of such Bond has been duly received by the Trustee or the Paying Agent and notice of such receipt has been duly given to the Holders.

Adjustment to Share Conversion Price

The Share Conversion Price will be subject to adjustment (in the manner set forth in the Indenture) upon the occurrence of certain events set out in the Indenture, including:

• (i) the declaration of a dividend in, or the making of a free distribution of, Common Shares (including any bonus issue of Common Shares);

• (ii) subdivisions, consolidations or reclassifications of Common Shares;

• (iii) the grant, issue or offer to the holders of Common Shares of options, rights or warrants to subscribe for or purchase Common Shares at less than the then Current Market Price (as defined in the Indenture) or to subscribe for or purchase any securities convertible into or exchangeable for Common Shares at less than the then Current Market Price;

• (iv) any Capital Distribution (as defined below) or the distribution to the holders of Common Shares of evidences of indebtedness of our company or of shares of our capital stock (other than Common Shares), assets (excluding regular periodic dividends in cash not constituting a Capital Distribution) or of options, rights or warrants to subscribe for or purchase shares or securities (other than those mentioned in subparagraph (iii) above);

• (v) the issue of securities (other than the Bonds inter alia , in any of the circumstances described in subparagraph (iii) above) convertible into or exchangeable for Common Shares, or the grant, issue or offer of options, rights or warrants to subscribe for or purchase Common Shares or securities convertible into or exchangeable for Common Shares (other than those options, rights and warrants mentioned in subparagraphs (iii) and (iv) above), in any case at less than the then Current Market Price;

• (vi) the issue of Common Shares (other than Common Shares issued (a) on conversion or exchange of any convertible or exchangeable securities (including the Bonds) issued by us; or (b) on exercise of any options, rights or warrants granted, offered or issued by us; or (c) in any of the circumstances described in (i) to (iii) above; or (d) to shareholders of any company which merges

111

into our company, in proportion to their shareholding in such company immediately prior to such merger, upon such merger) at less than the then Current Market Price; and

• (vii) any other event or circumstance that would have an analogous effect on the Share Conversion Price;

provided that the Share Conversion Price will not be reduced below the par value of the Common Shares (currently NT$10 per Common Share) as a result of any such adjustment unless, under applicable law then in effect, Bonds could be converted at such reduced Share Conversion Price into fully paid legally issued Common Shares. No adjustment to the Share Conversion Price will be made unless such adjustment would require an increase or decrease of at least 1% of the then prevailing Share Conversion Price; provided that any adjustment not made as a result of the preceding sentence should be carried forward and combined with subsequent adjustment or adjustments until such adjustments, on a cumulative basis, would require an increase or decrease of at least 1%, in which case such adjustment shall be made. Any adjustment will be notified promptly by us to the Holders in accordance with ‘‘Notices’’ below.

‘‘ADS Market Price’’ means for any ADS Trading Day with respect to the ADSs the reported last sale price of the ADSs on Nasdaq National Market (‘‘Nasdaq’’) or other applicable securities exchange on which the ADSs are quoted or listed on such day or, if no reported sales take place on such day, the average of the reported closing bid and offered prices, in either case as reported by Nasdaq or other applicable securities exchange on which the ADSs are quoted or listed for such days furnished by a reputable and independent broker-dealer selected from time to time by our company for this purpose.

‘‘ADS Trading Day’’ means with respect to the ADSs, a day when Nasdaq or other applicable securities exchange on which the ADSs are quoted or listed is open for business; provided, however, if no transaction price or closing bid and offered prices are reported by Nasdaq (or furnished by a broker-dealer as aforesaid) in respect of the ADSs for one or more ADS Trading Days, such day or days will be disregarded in any relevant calculation and will be deemed not to have existed when ascertaining any period of consecutive ADS Trading Days.

‘‘ADS Current Market Price’’ on any date means the average of the ADS Market Prices for the 30 consecutive ADS Trading Days commencing 45 ADS Trading Days before such date, and when used with respect to any issuance or distribution, means the average of the ADS Market Prices for the 30 consecutive ADS Trading Days selected by our company commencing not more than 45 ADS Trading Days before the first date on which the ADSs delivered upon conversion of the Bonds trade in a regular way on Nasdaq or such other applicable securities exchange or in any applicable securities market without the right to receive such issuance or distribution

‘‘Capital Distribution’’ means any cash dividend, distribution of cash or distribution of assets in specie made by the Company for any fiscal year unless:

• (1) (and to the extent that) it does not (when taken together with all dividends or distributions by us of cash or assets previously made or paid in respect of all periods ending after December 31, 2001) exceed 5% of the Market Capitalization of our company at the time of announcement of such dividend or distribution;

• (2) if it would exceed the amount available under (1) above, (and to the extent that) it (when taken together with all other dividends or distributions by our company of cash or assets charged or provided for in the accounts of our company for that period) does not exceed the aggregate amount of dividends (excluding stock dividends) and distributions on such class of capital charged or provided for in the accounts of our company for the immediately preceding fiscal year. In computing such amounts, the value of such dividends and distributions and adjustments as are in the opinion of our company’s auditors appropriate to the circumstances shall be taken into account; or

112

• (3) it comprises a purchase or redemption of share capital of our company, provided , in the case of purchases of Common Shares or ADSs by our company, that the average price (before expenses) in any one day in respect of such purchases does not exceed, (x) in the case of Common Share purchases or redemption, by more than 5% of the Current Market Price or (y) in the case of ADS purchases or redemption, by more than 5% of the ADS Current Market Price, in each case either (A) on that day, or (B) where an announcement has been made of the intention to purchase Common Shares or ADSs at some future date at a specified price, on the Trading Day or ADS Trading Day, as the case may be, immediately preceding the date of such announcement.

‘‘Current Market Price’’ on any date means the average of the Market Prices for the 30 consecutive Trading Days (as defined below) commencing 45 Trading Days before such date, and when used with respect to any issuance or distribution, means the average of the Market Prices for the 30 consecutive Trading Days selected by the Company and agreed by the Trustee commencing not more than 45 Trading Days before the first date on which the Common Shares delivered upon conversion of the Bonds trade in a regular way on the Taiwan Stock Exchange or such other applicable securities exchange or in any applicable securities market without the right to receive such issuance or distribution.

‘‘Market Capitalization’’ on any date means the product of (i) the Current Market Price and (ii) the number of our outstanding Common Shares.

‘‘Market Price’’ means for any Trading Day with respect to the Common Shares, the closing sales price of the Common Shares on the Taiwan Stock Exchange on such day, if no reported sales take place on such day, the average of the reported closing bid and offered prices, in either case as reported by the Taiwan Stock Exchange for such day as furnished by a leading independent securities firm in Taiwan selected from time to time by the Company and approved by the Trustee for this purpose.

‘‘Trading Day’’ means with respect to the Common Shares, a day when the Taiwan Stock Exchange is open for business; provided, however, if no transaction price or closing bid and offered prices are reported by the Taiwan Stock Exchange (or furnished by a reputable independent securities firm in Taiwan selected by the Company and approved by the Trustee) in respect of the Common Shares for one or more Trading Days, such day or days will be disregarded in any relevant calculation and will be deemed not to have existed when ascertaining any period of consecutive Trading Days.

Mergers and Amalgamations

We have agreed that we will not merge, amalgamate or consolidate with or into any other corporation or entity (with our company not being the continuing entity) or sell or transfer all, or substantially all, of our business or assets, whether as a single transaction or a number of transactions, related or not, to any corporation, entity or person or to one or more members of any group under the common control of any corporation, entity or person unless we shall have notified the Holders of such event in accordance with the Indenture and our company and such corporation, entity or person shall have executed an indenture supplemental to the Indenture in form satisfactory to the Trustee providing that such corporation, entity or person shall assume our obligations under the Bonds, the Indenture and providing that each Bond then outstanding shall be convertible into the class and amount of shares and other securities and property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of Common Shares into which such Bond would have been convertible immediately prior to such consolidation, amalgamation, merger, sale or transfer and assuming that the Bonds were convertible at the time of such consolidation, amalgamation, merger, sale or transfer at the initial Share Conversion Price as adjusted from time to time pursuant to the Indenture. Such supplemental indenture will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing paragraph. The above provisions of this paragraph will apply in the same way to any subsequent consolidations, amalgamation, mergers, sales or transfers.

113

Redemption, Repurchase and Cancellation

Redemption at Maturity

Unless previously redeemed, converted or purchased and cancelled as herein provided, we will redeem the Bonds at a redemption price equal to 100% of the unpaid principal amount thereof, together with the Redemption Premium (as defined below), in U.S. Dollars on February 7, 2007. The Bonds may be redeemed in whole or in part prior to that date only as provided below (but without prejudice to the rights of Holders as set forth under ‘‘Events of Default’’).

Redemption at the Option of our Company

On or at any time after February 7, 2005 and prior to February 7, 2007, we may, having given not less than 30 or more than 60 days’ notice to the Holders (which notice will be irrevocable), redeem as a whole or only in part (being US$1,000,000 in principal amount or an integral multiple thereof) the Bonds at a redemption price equal to 100% of their principal amount, together with a premium (the ‘‘Redemption Premium’’) equal to an amount which represents (i) an annual yield to redemption to a Holder of 3.55% per annum from and including February 7, 2002 to but excluding the date of redemption (calculated on the basis of a year of 360 days consisting of 12 months of 30 days each) minus (ii) any interest accrued and paid by us prior to the date of redemption. However, no such redemption may be made unless the Closing Price of the Common Shares translated into U.S. Dollars at the Prevailing Rate described below of the Common Shares for a period of 30 consecutive Trading Days, the last of which occurs not more than five days prior to the date upon which notice of such redemption is published, is at least 130% of the Share Conversion Price in effect on each such Trading Day translated into U.S. Dollars at the rate of NT$34.98 = US$1.00. The ‘‘Prevailing Rate’’ for the translation of the Closing Price shall be the arithmetic average of the middle rate for the purchase of U.S. Dollars with NT Dollars quoted by the Bank of Taiwan at the close of business on each day of the relevant 30 consecutive Trading Day period. We may also redeem the Bonds, in whole but not in part, at any time prior to February 7, 2007 at a redemption price equal to their principal amount, together with the Redemption Premium, if at least 90% in principal amount of the Bonds have already been redeemed, repurchased and cancelled, or converted.

The term ‘‘Trading Day’’ means a day on which the TSE is open for business. For the purposes of the foregoing, the term ‘‘Closing Price’’ for any Trading Day means the last reported transaction price or, if no transaction takes place on such day, the average of the closing bid and asked prices of Common Shares for such day as furnished by a leading independent securities firm licensed to trade on the TSE selected from time to time by us for that purpose.

Upon the expiry of any such notice, we will be bound to redeem the Bonds to which such notice relates at the price aforesaid applicable at the date fixed for redemption together with interest accrued to the date of redemption.

Redemption for Taxation Reasons

At any time (but not if notice of redemption as provided above has already been given to Holders), we may, having given not less than 30 nor more than 60 days’ notice to the Holders (which notice shall be irrevocable), redeem as a whole but not in part the Bonds at their Early Redemption Amount if (i) we provide the Trustee with an opinion of legal counsel or our auditors immediately prior to the giving of such notice that we have or will become obliged to pay additional amounts as provided or referred to below under ‘‘Taxation’’ in excess of the additional amounts payable with respect to a deduction or withholding at a rate of 20% of the amount of the relevant payment as a result of any change in, or amendment to, the laws or regulations of the ROC or any political subdivision or any authority thereof or therein having power to tax, or any change in the

114

general application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after February 7, 2002 and (ii) such obligation cannot be avoided by us taking reasonable measures available to us, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which we would be obliged to pay such additional amounts were a payment with respect to the Bonds then due. Prior to the publication of any notice of redemption pursuant to this paragraph, we shall deliver to the Trustee a certificate signed by two specified officers of our company stating that the obligation referred to in (i) above cannot be avoided by us taking reasonable measures available to it and the Trustee shall be entitled to accept such certificate as sufficient evidence of the satisfaction of the condition precedent set out in (ii) above in which event it shall be conclusive and binding on the Holders.

The ‘‘Early Redemption Amount’’ of each Bond means its principal amount plus Redemption Premium.

Redemption at the Option of Holders

The Holder of any Bond, at his election, is entitled, in accordance with the applicable provisions of the Indenture, to cause us to redeem such Bond (or any portion of the principal amount thereof which is US$1,000 or any integral multiple thereof), provided that the unredeemed portion of such principal amount is US$1,000 or any integral multiple thereof, on August 9, 2004 at a redemption price equal to 107.845% of its principal amount, together with accrued but unpaid interest. To exercise such option, the Holder must deposit the Bond with the Trustee or any paying agent together with a duly completed redemption notice in the form obtainable from the Trustee or any paying agent, not more than 60 nor less than 30 days prior to the date of redemption. No Bond so deposited may be withdrawn (except as provided in the Indenture) without our prior consent. Not less than 30 nor more than 60 days’ notice of the commencement of the period for the deposit of Bonds for redemption pursuant to this paragraph shall be given to the Holders by us.

Repurchase of Bonds in the Event of Delisting

In the event our Common Shares cease to be listed or admitted to trading on the Taiwan Stock Exchange (a ‘‘Delisting’’), each Holder shall have the right, at such Holder’s option, to require us to repurchase all (but not less than all) of such Holder’s Bond, on the 20th business day after the Delisting at a price equal to 100% of the principal amount of the Bonds, together with the Repurchase Premium (defined below).

Repurchase at Option of Holders Upon a Change of Control

If a ‘‘change of control’’ occurs, we are required, within not more than 60 days nor less than 30 days following the occurrence of the change of control, to make an offer to repurchase all of the outstanding Bonds at a repurchase price equal to 100% of the principal amount of the Bonds, together with a premium (‘‘Repurchase Premium’’) equal to an amount which represents (i) an annual yield to redemption to a Holder of 3.55% per annum from and including February 7, 2002 to but excluding the repurchase date (calculated on the basis of a year of 360 days consisting of 12 months of 30 days each) minus (ii) any interest accrued and paid by us prior to the repurchase date.

Any portion of the principal amount of the Bonds that is equal to US$1,000 or an integral multiple of US$1,000 may be repurchased if properly tendered and not withdrawn by the Holder. Our offer to repurchase the Bonds will remain open until the close of business on the business day prior to the repurchase date.

In order to effect the repurchase, we will mail to each Holder a notice to that effect, not later than 30 days after the occurrence of the change of control. The notice will govern the terms of our offer to repurchase the Bonds and will describe the procedures that the Holders must follow in order to accept the offer.

115

If the Holders exercise their right to require us to purchase the Bonds, and the repurchase constitutes a ‘‘tender offer’’ for purposes of Rule 14e-1 under the Exchange Act, we will comply with the requirements of Rule 14e-1 as then in effect with respect to any repurchase.

A ‘‘change of control’’ means the occurrence of any of the following events:

• any ‘‘person’’ or ‘‘group’’ (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the ‘‘beneficial owner’’ (as defined below), directly or indirectly, of more than 50% of the total voting power of our company; or

• we consolidate with, or merge with or into, another person or sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of our assets to any person (other than our affiliated companies) (or any person consolidates with, or merges with or into, us), pursuant to a transaction in which our voting shares are converted into or exchanged for cash, securities or other property, except a transaction where (A) our voting shares are converted into or exchanged for voting shares of the surviving or transferee corporation (other than voting shares that mature or are redeemable for cash or debt securities prior to the maturity date of the notes) and (B) immediately after such transaction no ‘‘person’’ or ‘‘group’’ is the ‘‘Beneficial Owner’’ directly or indirectly, of more than 50% of the total voting power of the surviving or transferee corporation.

‘‘Beneficial Owner’’ will be determined in accordance with Rules 13d-3 and 13d-5 under the Exchange Act, except that the term will include, with respect to any securities, any person having the right to acquire those securities, whether immediately or after the passage of time, upon the happening of an event or otherwise.

Any Change of Control event will be notified promptly by us to the Holders in accordance with ‘‘Notices’’ below.

Selection of Bonds

In the case of a redemption of only some of the Bonds at our election, the Bonds to be redeemed shall be selected not more than 70 days and not less than 40 days prior to the date fixed for redemption by the Trustee from the Outstanding Bonds not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to US$1,000 or any integral multiple thereof) of Bonds.

Cancellation

All Bonds surrendered for payment, redemption, registration of transfer or exchange or conversion shall, if surrendered to any person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. We may at any time deliver to the Trustee for cancellation any Bonds which we may have acquired in any manner whatsoever, and all Bonds so delivered shall be promptly cancelled by the Trustee.

Redemption Notices; Priority of Notices

All notices of redemption to Holders given by us or on our behalf will specify the date fixed for redemption, the redemption amount and the Share Conversion Price as of the date of the relevant notice, the Closing Price of the Common Shares and the ADSs, as the case may be, and the aggregate principal amount of the Bonds outstanding as of the latest practicable date prior to the publication of the notice and, in the case of a partial redemption, a list of the Bonds called for redemption.

116

Any notice of redemption shall be without prejudice to the rights of Holders to redeem at their election as provided above and shall not apply with respect to any Bonds with respect to which the option to redeem at their election as provided above shall be or has been exercised.

Taxation

All payments of principal, premium (if any) and interest by us with respect to the Bonds will be made after any deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of the government of the ROC or any authority thereof or therein having power to tax; provided that with respect to any such deduction or withholding from any such payment, we will pay such additional amounts as will result in the receipt by the Holders of the amounts which would have been receivable in the absence of any such withholding or deduction, except that no such additional amounts shall be payable with respect to any Bond:

• (i) to a Holder (or to a third party on behalf of a Holder) who is subject to such taxes, duties, assessments or governmental charges with respect to such Bond by reason of his being connected with the ROC otherwise than by merely holding such Bond or by the receipt of principal, premium or interest with respect to any Bond or the enforcement of payment on such Bond; or

• (ii) more than 30 days after the relevant date except to the extent that the Holder thereof would have been entitled to such additional amount on presenting the same for payment on the last day of such 30-day period.

For this purpose, the ‘‘relevant date’’ in relation to any Bond means (a) the due date for payment with respect thereto, or (b) (if the full amount payable on such due date has not been received in New York City by the Trustee or any paying agent on or prior to such due date) the date on which notice is duly given to the Holders that such amount has been so received.

Status of the Bonds

The Bonds will constitute direct, unconditional, unsubordinated and, subject to the following restriction on liens, unsecured obligations of our company and will at all times rank pari passu among themselves and all of our other present and future direct, unconditional unsubordinated and unsecured obligations.

Negative Pledge

So long as any of the Bonds remains Outstanding (as defined in the Indenture), we shall not create or permit to be outstanding any mortgage, charge, lien, pledge or other security interest (an ‘‘Encumbrance’’) upon the whole or part of its property, assets or revenues, present or future, to secure for the benefit of the holders of any International Investment Securities (as hereinafter defined) (i) payment of any sum due with respect to any such International Investment Securities or (ii) any payment under any guarantee of any such International Investment Securities or (iii) any payment under any indemnity or other like obligation relating to any such International Investment Securities, without in any such case at the same time granting to the registered Holders of the Bonds either the same security as is granted to or is outstanding with respect to such International Investment Securities, guarantee, indemnity or other like obligation or such other security as shall be approved by all of the Holders of the Outstanding Bonds or by the Trustee.

As used in the Indenture, ‘‘International Investment Securities’’ means bonds, debentures, notes or other similar investment securities of our company or any other person evidencing indebtedness with a maturity of not less than one year from the issue date thereof, or any guarantees thereof, which (i) either (x) are by their terms payable, or confer a right to receive payment, in any currency other than New Taiwan Dollars or (y) are denominated in New Taiwan Dollars and more than 50% of the aggregate principal amount thereof is initially

117

distributed outside the ROC by or with our authorization and (ii) are for the time being, or are intended to be, quoted, listed, ordinarily dealt in or traded, in each case primarily, on any stock exchange or over-the-counter or other securities market outside the ROC.

We shall give written notice to the Trustee and the Holders of the issuance of any International Investment Securities the terms or manner of issuance of which requires security to be granted to the Holders pursuant to the second preceding paragraph.

Events of Default

The following will be Events of Default under the Indenture:

• (i) a default for more than seven days in the payment of the principal of (or premium, if any) or interest with respect to any Bond after the date the same is due and payable; or

• (ii) a default by us in the performance or observance of any other covenant, condition or provision contained in the Indenture or in the Bonds on its part to be performed or observed which default continues for a period of 60 days following the date on which a written notice requiring such default to be remedied is delivered by the Trustee to us or by the Holders of not less than 25% in principal amount of the Bonds then Outstanding to us, with a copy to the Trustee; or

• (iii) any other bonds, debentures, notes or other indebtedness for money borrowed having an aggregate principal amount of at least US$15,000,000 (or its equivalent in any other currency) (hereinafter collectively called ‘‘Indebtedness’’) of our company or any Subsidiary (as defined in the Indenture) shall become immediately due and payable in advance of its scheduled maturity following a default, or our company or any Subsidiary defaults in the repayment of any such Indebtedness at the maturity thereof (after giving effect to any applicable grace period therefor), or any guarantee of or indemnity with respect to any Indebtedness of others given by our company or any Subsidiary shall not be honored when due and called upon (after giving effect to any applicable grace period therefor); or

• (iv) any person entitled to the benefit thereof shall commence proceedings to enforce any Encumbrance upon the whole or any part of the assets or revenues of our company or any Subsidiary material to the Company and its Subsidiaries taken as a whole unless our company or such Subsidiary is contesting such proceedings in good faith by appropriate proceedings; or

• (v) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging our company or any Subsidiary bankrupt or insolvent, or approving a petition seeking reorganization of our company or any Subsidiary under any applicable bankruptcy, insolvency or reorganization law, or for the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of our company or any Subsidiary or of all or substantially all of the business or assets, or for the winding up or liquidation of the affairs, of our company or any Subsidiary; or

• (vi) our company or any Subsidiary shall institute proceedings to be abjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or arrangement under any applicable bankruptcy, insolvency or reorganization law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of all or substantially all its business or assets, or shall make an assignment for the benefit of its creditors, or shall admit in writing its inability to pay its debts generally as they become due, or corporate action shall be taken by our company or any Subsidiary in furtherance of any of the aforesaid purposes; or

118

• (vii) proceedings shall have been initiated against our company or any Subsidiary under any applicable bankruptcy, insolvency or reorganization law and such proceedings shall not have been discharged or stayed within a period of 60 days.

For the purposes of (iii) above, any Indebtedness which is in a currency other than U.S. Dollars shall be translated into U.S. Dollars at the spot rate for the sale of U.S. Dollars against the purchase of the relevant currency quoted by any leading bank in the relevant market selected by the Trustee on any day when the Trustee requests such a quotation for such purposes.

Subject to the provisions of the Indenture relating to the duties of the Trustee in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee indemnity to its satisfaction. Subject to such provisions for the indemnification of the Trustee, the Holders of a majority in aggregate principal amount of the Outstanding Bonds will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee.

If an Event of Default shall occur and be continuing, either the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Bonds may declare the principal of all Bonds and Redemption Premium on the date for repayment to be due and payable immediately, by a notice in writing to us (and to the Trustee if given by Holders), and upon any such declaration such principal and Redemption Premium on the date for repayment shall become immediately due and payable; provided, however, that after such declaration of acceleration has been made and before a judgment or decree based on acceleration, the Holders of a majority in principal amount of Outstanding Bonds may, under certain circumstances, rescind and annul such declaration if all Events of Default, other than the non-payment of accelerated principal, have been cured or waived as provided in the Indenture. For information as to waiver of defaults, see ‘‘—Modification and Waiver’’ below.

No Holder of any Bond will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default (as defined) and unless also the Holders of not less than 25% in principal amount of the Outstanding Bonds shall have made written request, and offered indemnity, to the Trustee to its satisfaction to institute such proceeding as Trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the Outstanding Bonds a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a Holder of a Bond for enforcement of payment of the principal of and premium, if any, or interest on such Bond on or after the respective due dates expressed in such Bond or of the right to convert such Bond in accordance with the Indenture.

We will be required to furnish to the Trustee annually a written statement as to the performance by us of certain of its obligations under the Indenture and as to any default in such performance.

Modifications and amendments of the Indenture may be made by us and the Trustee with the written consent of the Holders of not less than 66[2] ⁄3% in principal amount of the Outstanding Bonds; provided, however, that no such modification or amendment may, without the consent of the Holder of each Outstanding Bond affected thereby, (a) change the Stated Maturity of the principal of, or any installment of interest on, any Bond, (b) reduce the principal amount of, or the rate of interest on, or any premium payable upon the redemption or repurchase of, any Bond, (c) change the place or currency of payment of principal of, or premium or interest on, any Bond, (d) impair the right to institute suit for the enforcement of any payment on or with respect to any Bond, (e) adversely affect the right to convert Bonds, (f) reduce the above-stated percentage of Outstanding Bonds necessary to modify or amend the Indenture or (g) reduce the percentage of

119

aggregate principal amount of Outstanding Bonds necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults.

The Holders of a majority in aggregate principal amount of the Outstanding Bonds may waive any past default under the Indenture, except a default in the payment of principal, premium or interest.

Replacement of Bonds

In case any Bond shall become mutilated, destroyed, lost or stolen, it may be replaced at the office of the Trustee upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as our company and the Trustee may require.

Mutilated or defaced Bonds must be surrendered before replacements will be issued.

Notices

All notices to the Holders of Bonds required to be given by the Indenture shall be deemed to have been duly given if (i) mailed to such Holders at their respective addresses as shown on the register of Holders maintained by the Trustee and (ii) published in an English language newspaper of general circulation in the United States approved by the Trustee, currently expected to be The Wall Street Journal (U.S. eastern edition), published in an English language newspaper of general circulation in Europe approved by the Trustee, currently expected to be the Financial Times , and, so long as the Bonds are listed on the Luxembourg Stock Exchange, published in a newspaper of general circulation in Luxembourg approved by the Trustee, currently expected to be the Luxemburger Wort . Any such notice shall be deemed to have been given on the first date on which both conditions shall have been met.

In case by reason of any other cause it shall be impracticable to publish any notice to Holders of Bonds as provided above, then such notification to such Holders as shall be given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder.

Governing Law, Jurisdiction and Waiver

The Bonds and the Indenture shall be governed by and construed in accordance with the laws of the State of New York. In relation to any legal action or proceedings brought by a Holder or by the Trustee in order to enforce any right or remedy under the Indenture or under the Bonds, we have under the Indenture irrevocably submitted to the nonexclusive jurisdiction of the courts of the City of New York sitting in the Borough of Manhattan, The City of New York, or any federal court of the United States sitting in the Borough of Manhattan, The City of New York, and in relation to such courts of or in The City of New York has irrevocably appointed Macronix America, Inc. at its office at 1338 Ridder Park Drive, San Jose, California 95131 as its agent for service of process.

Under current ROC law, ROC courts may not recognize a foreign judgment where a default judgment was rendered by the foreign court and where the defendant was not personally served while within the jurisdiction of such foreign court. The ROC courts may further decide that the process served on its agent for service of process of our company does not constitute a service of process in person. Therefore, to ensure the recognition of a foreign judgment by the ROC courts, it may be necessary to serve us through the judicial assistance of an ROC court.

Holders should note that exercise of a Conversion Right is subject not only to the provisions of the Indenture but also to applicable ROC law.

120

GLOBAL BONDS

Terms used in this section and not otherwise defined shall have the meanings given to them in ‘‘Description of the Bonds.’’

Global Bonds

Upon the issue of the Restricted Global Bond, DTC or its custodian will credit, in its internal system, the respective principal amount of the individual interests represented by such Restricted Global Bond to the accounts of persons who have accounts with DTC. Such accounts initially will be designated by or on behalf of the Initial Purchasers (as defined in ‘‘Plan of Distribution’’). Ownership of beneficial interests in a Global Bond will be limited to persons who have accounts with DTC (‘‘DTC Participants’’) or persons who hold interests through DTC Participants. Ownership of beneficial interests in the Global Bonds will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of DTC Participants) and the records of DTC Participants (with respect to interests of persons other than DTC Participants).

So long as DTC, or its nominee, is the registered owner or holder of the Restricted Global Bond, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Restricted Bonds represented by such Restricted Global Bond for all purposes under the Indenture and the Bonds. Unless DTC or any successor to DTC notifies us that it is unwilling or unable to continue as depositary for the Restricted Global Bond, or ceases to be a ‘‘clearing agency’’ registered under the United States Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) and a successor depositary is not appointed by us within 90 days, or any of the Bonds has become immediately due and payable in accordance with the Indenture, owners of interests in the Restricted Global Bond will not be entitled to have any portions of such Global Bond registered in their names, will not receive or be entitled to receive physical delivery of certificates in individual definitive form and will not be considered the owners or holders of the Restricted Global Bond (or any Bonds represented thereby) under the Indenture. In addition, no beneficial owner of an interest in the Restricted Global Bond will be able to transfer that interest except in accordance with DTC’s applicable procedures (in addition to those under the Indenture referred to herein and, if applicable, those of Euroclear and Clearstream).

Investors may hold their interests in the Regulation S Global Bond through Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations which are participants in such systems. Beginning 41st day after the later of the commencement of the offering and the latest closing date of the offering (but not earlier), investors may also hold such interests through organizations other than Euroclear and Clearstream that are participants in the DTC system. Euroclear and Clearstream will hold interests in the Regulation S Global Bond on behalf of their accountholders through customers’ securities accounts in their respective names on the books of their respective specialized depositaries, which in turn will hold such interests in the Regulation S Global Bond in customers’ securities accounts in the depositaries’ names on the books of DTC. Investors may hold their interests in the Restricted Global Bonds directly through DTC, if they are DTC Participants, or indirectly through organizations which are DTC Participants.

Payments of the principal of and premium and interest on, Global Bonds will be made to DTC and its nominee as the registered owners thereof. Neither we nor any of the Trustee, the depositaries for the Bonds, the Paying Agents or any custodian, transfer agent or registrar will have any responsibility or liability for the accuracy of any of the records relating to, or payments made on account of, ownership interests in the Global Bonds or for any notice permitted or required to be given to holders of Bonds or any consent given or actions taken by such registered holders of Bonds. We expect that upon receipt of any payment of principal and premium and interest on Global Bonds representing any Bonds held by it or its nominee, DTC will immediately credit DTC Participants’ accounts with payments in amounts proportionate to their respective interests in the principal amount of such Global Bonds as shown on the records of DTC or its nominee. We also expect that payments by DTC Participants to owners of interest in such Global Bonds held through such

121

DTC Participants will be governed by standing instructions registered in the names of nominees for such customers. Such payments will be the responsibility of such DTC Participants.

Transfers between DTC Participants will be effected in DTC’s Same-Day Funds Settlement System. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer interests in the Restricted Global Bond 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 and certain banks, the ability of a person having an interest in the Restricted Global Bond to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical individual definitive certificate in respect of such interest. Conversion through participants in DTC will be effected in accordance with DTC’s procedures.

Subject to compliance with the transfer restrictions applicable to the Bonds described above, crossmarket transfers between DTC Participants, on the one hand, and directly or indirectly through Euroclear or Clearstream accountholders, on the other, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the Regulation S Global Bonds in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear and Clearstream accountholders may not deliver instructions directly to the depositaries for Euroclear or Clearstream.

Because of time zone differences, the securities account of a Euroclear or Clearstream accountholder purchasing an interest in a Global Bond from a DTC Participant will be credited during the securities settlement processing day (which must be a business day for Euroclear or Clearstream, as the case may be) immediately following the DTC settlement date and such credit of any transactions in interests in a Global Bond settled during such processing day will be reported to the relevant Euroclear or Clearstream accountholder on such day. Cash received by Euroclear or Clearstream as a result of sales of interests in a Global Bond by or through a Euroclear or Clearstream accountholder to a DTC Participant will be received for value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream cash account only as of the business day following settlement in DTC.

DTC has advised us that it will take any action permitted to be taken by a Holder of Bonds (including the presentation of Bonds for exchange as described below) only at the direction of one or more DTC Participants to whose account or accounts with DTC interests in the Global Bonds are credited and only in respect of such portion of the aggregate principal amount of the Bonds as to which such DTC Participant or DTC Participants has or have given such direction. However, in the limited circumstances described below, DTC will exchange the Global Bonds for individual definitive Certificates bearing a restrictive legend, which will be distributed to its participants.

The giving of notices and other communications by DTC to DTC Participants, by DTC Participants to persons who hold accounts with them and by such persons to holders of beneficial interests in a Global Bond will be governed by arrangements between them, subject to any statutory or regulatory requirements as may exist from time to time.

DTC has advised us as follows: 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

122

of the Uniform Commercial Code and a ‘‘clearing agency’’ registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for DTC Participants and facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entry changes in accounts of DTC Participants, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (‘‘indirect participants’’).

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

Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures in order to facilitate transfers of interests in the Regulation S Global Bond and in the Restricted Global Bond among participants and account holders of DTC, Clearstream and Euroclear, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither we nor any of the Trustee, the depositary, the paying agents, any custodian, any transfer agent, any registrar or any other agent of our company will have any responsibility for the performance by DTC, Euroclear or Clearstream, or their respective participants, indirect participants or account holders of their respective obligations under the rules and procedures governing their operations.

If (i) DTC or any successor to DTC advises us in writing that it is at any time unwilling or unable to continue as a depositary for the reasons described in ‘‘Global Bonds’’ and a successor depositary is not appointed by us within 90 days or (ii) the Trustee advises us in writing that any of the Bonds has become immediately due and payable as a result of an event of default under the Indenture, we will issue individual certificates in registered form in exchange for the Regulation S Global Bond and the Restricted Global Bond, as the case may be. Upon receipt of such notice from DTC or the Trustee, as the case may be, we will use our best efforts to make arrangements with DTC for the exchange of interests in the relevant Global Bond for individual definitive certificates and cause the requested individual definitive certificates to be executed and delivered to the Registrar in sufficient quantities and authenticated by the Registrar for delivery to Holders. Persons exchanging interests in a Global Bond for individual definitive certificates will be required to provide to the Trustee, through DTC, (i) written instructions and other information required by us and the Registrar to complete, execute and deliver such individual definitive certificates and (ii) in the case of an exchange of an interest in the Restricted Global Bond, such certification as the Registrar shall require and, in either case, individual definitive certificates delivered in exchange for any Global Bonds or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by DTC.

In the case of individual definitive certificates issued in exchange for the Restricted Global Bond, such individual definitive certificates will bear, and be subject to, such legend as we require in order to assure compliance with any applicable law. The holder of a restricted individual definitive certificate may transfer the Bonds represented by such certificate, subject to compliance with the provisions of such legend. Upon the

123

transfer, exchange or replacement of certificates bearing the legend, or upon specific request for removal of the legend on a certificate, we will deliver only certificates that bear such legend, or will refuse to remove such legend, as the case may be unless there is delivered to us such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by us that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.

124

CERTAIN ROC LEGAL REQUIREMENTS

Tax Guarantor for Repatriation of Profits

When a non-ROC person (other than PRC persons who, under current ROC law, regulations and policy, are not permitted to hold or convert the Bonds or to register as our shareholder or holder of Entitlement Certificate) exercises its conversion right to receive Common Shares (or Entitlement Certificates), or when a non-ROC holder of ADSs (or Temporary ADSs) elects to withdraw Common Shares (or Entitlement Certificates) represented by ADSs (or Temporary ADSs) and register as our shareholder, such holders will be required to appoint an agent, referred to as a Tax Guarantor, in the ROC. A Tax Guarantor will be required to meet the qualifications set by the ROC Ministry of Finance and will act as the guarantor of the holder’s tax payment obligations. Evidence of the appointment of a Tax Guarantor and the approval of such appointment are required as conditions to repatriating the holder’s profits derived from the sale of Common Shares (or Entitlement Certificates). There can be no assurance that holders will be able to appoint and obtain approval for a Tax Guarantor in a timely manner.

Appointment of Local Agent

Under current ROC law, a non-ROC Holder of Bonds wishing to convert the Bonds into Common Shares or a non-ROC holder of ADSs electing to withdraw Common Shares (excluding PRC citizens who, under current ROC law, regulations and policy, are not permitted to hold or convert the Bonds or to register as our shareholder or holder of Entitlement Certificate), is required to appoint a local agent (with such qualifications as are set by the ROC Securities and Futures Commission) in the ROC to, among other things, open a securities trading account with a local securities brokerage firm and a NT dollar bank account, remit funds, pay taxes and exercise shareholder’s rights. Further, a non-ROC Holder wishing to convert Bonds into Common Shares (or Entitlement Certificates) or non-ROC holders of ADSs (or Temporary ADSs) who withdraw and hold Common Shares (or Entitlement Certificates) represented thereby must appoint a local bank to act as custodian for confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Unless these requirements are satisfied, converting non-ROC Holders of Bonds that receive Common Shares (or Entitlement Certificates) on conversion or non-ROC holders of ADSs (or Temporary ADSs) that withdraw and hold Common Shares (or Entitlement Certificates) represented thereby, will not be able to receive and hold or otherwise transfer Common Shares (or Entitlement Certificates) on the Taiwan Stock Exchange.

Securities Transaction Tax

The ROC government imposes a securities transaction tax that will apply to sales of the Bonds, Common Shares and Entitlement Certificates. The transaction tax, which is payable by the seller, is generally levied on sale of the Common Shares and Entitlement Certificates at the rate of 0.3% of the sales proceeds and on sale of the Bonds at the rate of 0.1% of sales proceeds. However, according to a letter issued by the ROC Ministry of Finance, dated January 17, 2001, sales of the Bonds outside of the ROC are exempted from the securities transaction tax. In addition, according to the amended Statute of Upgrading Industries which was passed on January 4, 2002 by the Legislative Yuan and will be effective once announced by the President, no securities transaction tax will be imposed on the transfer of the bonds.

Before the amended Statute of Upgrading Industries becomes effective, the securities transaction tax is payable by the seller of the Bonds if trading of the Bonds occurs within the ROC. However, a purchaser of the Bonds is obligated to collect such tax from the seller of the Bonds and pay such tax to the taxing authority on the day following trading. In violation of the above, a purchaser of the Bonds may be subject to a penalty, among others, in an amount ranging from 10 to 30 times of the securities transaction tax.

125

Disclosure Obligations

A Holder requesting the conversion of its Bonds into Common Shares or its designee may be required to provide certain information to us or the Paying Agent, including the name and nationality of the person to be registered as the shareholder and the number of Common Shares such person has acquired in the past through conversion of Bonds held by it, and supporting documents, before such conversion will be effected. Under applicable ROC laws, we are required to report to the ROC SFC if the person to be registered as a shareholder (1) is a ‘‘related party’’ to us as defined in Statement of Financial Accounting Standard No. 6 of the ROC or (2) will hold immediately following such conversion, more than 10% of the total number of Common Shares deliverable upon the conversion of the aggregate principal amount of all Bonds at the time of issue.

126

INFORMATION RELATING TO THE CONVERSION RIGHT

1. On exercise of your conversion right, you or your designee will initially receive Entitlement Certificates pending issuance and delivery of Common Shares. Alternatively, subject to compliance with the terms and conditions of the applicable deposit agreement, you may elect to direct us to cause our Entitlement Certificates issued upon conversion of the Bonds to be deposited with a depositary for the issuance of Temporary ADSs. Under current ROC law, you or your designee will be deemed to be registered as a holder of our Entitlement Certificates as of the conversion date and will be entitled to enjoy generally the rights and privileges of a shareholder, including the right to vote at shareholders’ meetings, but with certain important exceptions relating to the right to receive dividends and other distributions and to participate in rights issues. A summary of the rights to dividends of Entitlement Certificate holders is set out below. Because the rights attaching to Entitlement Certificates with respect to dividend entitlements may differ according to the date of issue of the Entitlement Certificates, and Entitlement Certificates with different dividend entitlements may be outstanding at the same time, we may issue Entitlement Certificates of two or more series that will not be fungible. Entitlement Certificates are tradable on the Taiwan Stock Exchange from the date of issue to the date of delisting upon issuance of the Common Shares into which they are exchangeable but usually trade at a discount to the price of our Common Shares. The delisting of Entitlement Certificates will occur when Common Shares are issued and delivered in exchange for the Entitlement Certificates.

2. We currently have 188,999,213 authorized Common Shares reserved for issuance upon the conversion of the Bonds into Common Shares (or Entitlement Certificates), which amount we believe is sufficient to issue the number of Common Shares prescribed by the indenture relating to the Bonds upon exercise of all conversion rights with respect to all of the Bonds. If more than 188,999,213 Common Shares are required to be issued by us in connection with the exercise of all conversion rights or conversion rights associated with any other bonds to be issued by us, we will be required to amend our articles of incorporation to permit the issuance of Common Shares upon conversion within our authorized share capital. Such amendment would require (i) the approval of our board of directors, (ii) the approval of our shareholders and (iii) the reporting to and recordation of such amendment with the ROC SFC, SIPA and the Ministry of Economic Affairs of the ROC, or the MOEA.

3. We have undertaken to exchange Entitlement Certificates for Common Shares at least four times each year, which involves, among other steps, our seeking permission each time from the MOEA for an increase in our registered paid-in share capital. These undertakings will commence at each of the following dates, which are referred to as Consolidation Dates:

4. (a) First Consolidation Date —seven business days in the ROC prior to the date of the Board of Directors’ meeting at which the Board of Directors prepares its dividend proposal for the annual shareholders’ meeting;

5. (b) Second Consolidation Date —the record date (or, if more than one dividend is declared the latest of such record dates) set for the determination of shareholders entitled to receive the annual dividend payment (or, if during the annual shareholders’ meeting no annual dividends were declared, July 9);

6. (c) Third Consolidation Date —September 9 in each year; and

7. (d) Fourth Consolidation Date— December 9 in each year.

In addition, we have also undertaken to exchange all outstanding Entitlement Certificates for Common Shares if the applicable ROC law changes to allow us to issue Common Shares to you upon your exercise of your conversion right, and thereafter we will directly issue Common Shares rather than Entitlement Certificates to you upon your exercise of the conversion right in accordance with the provisions described in ‘‘Description of the Bonds’’ included elsewhere in this Offering Circular.

127

1. Entitlement Certificates will be exchanged for Common Shares as soon as possible after each Consolidation Date and in any event within 30 days after we receive all required approvals to increase our registered paid-in share capital. We currently expect that the Common Shares will be delivered to holders of Entitlement Certificates within approximately 50 to 60 calendar days following each Consolidation Date.

2. Holders of Entitlement Certificates will not be entitled to participate in dividends, distributions, or other benefits and rights issues made available to shareholders generally. Holders converting their Bonds prior to the First Consolidation Date in a year may, however, be entitled to dividends, distributions, or other benefits approved at the annual general meeting of shareholders in that year. Although our record date usually occurs in June or July, we have not yet determined our record date for 2002. Bonds must be deposited for conversion in accordance with the conditions described in ‘‘Description of the Bonds’’ included elsewhere in this Offering Circular, at least one business day (in the city of the relevant conversion agent) before the trading day of the Taiwan Stock Exchange in Taiwan which precedes a Consolidation Date in order to require us to initiate upon that Consolidation Date the procedures for exchange into Common Shares of the Entitlement Certificates issuable on conversion.

Accordingly, you must deposit your Bonds for conversion on a business day before the last trading day of the Taiwan Stock Exchange which precedes the First Consolidation Date in any year in order to be entitled to receive any cash or stock dividend or other distribution approved at the annual general meeting of shareholders in the year the conversion occurs.

1. Conversion of Bonds will not be permitted during any Closed Period. A Closed Period shall mean any period, during which, under the laws of the ROC, we shall close our shareholders’ register, which period includes 60 days prior to the date of the annual general meeting of our shareholders, 30 days prior to a special shareholders’ meeting, and five days prior to a record date for determination of shareholders entitled to receive annual dividend distributions or other benefits or such other periods determined by ROC law applicable from time to time. We will procure that you are given timely notice of any Closed Period.

2. You or your designee who receives Entitlement Certificates on conversion will continue to enjoy anti-dilutive protection under the terms of the Bonds in respect of dilutive events occurring prior to the date you receives shares in exchange for the Entitlement Certificates following the relevant conversion date if you are not, as Entitlement Certificate holders, entitled generally to receive the benefits to which our shareholders are entitled.

3. Subject to certain conditions and applicable legal requirements, in your conversion notice, you may elect to direct us to deposit the Common Shares (initially in the form of Entitlement Certificates) issued on conversion of Bonds into our ADS facilities.

The number of ADSs (initially in the form of Temporary ADSs) to be issued upon conversion to converting Holders who elect to receive ADSs (initially in the form of Temporary ADSs) will be determined by dividing the aggregate principal amount of all the Bonds to be converted by such Holder (translated into NT dollars at the exchange rate of NT$34.98 = US$1.00) by the conversion price in effect on the date of conversion, and dividing such quotient by the number of Common Shares or Entitlement Certificates represented by each ADS or Temporary ADS, as the case may be, at the time of deposit of such Common Shares with the depositary. As of the date of this Offering Circular, each ADS (or Temporary ADS) represents ten Common Shares (or Entitlement Certificates). Converting Holders electing to receive ADSs (or Temporary ADSs) will be entitled, upon conversion, only to a number of Common Shares (or Entitlement Certificates) to be represented by an integral number of ADSs (or Temporary ADSs). We will, upon conversion, pay in U.S. dollars a sum equal to such portion of the principal amount of the Bonds deposited for conversion as corresponds to any fraction of a Common Share (or Entitlement Certificate) or ADS (or Temporary ADS) not issued if such sum exceeds US$10.

128

We will deliver to and deposit with the custodian under the applicable deposit agreement the number of Common Shares (or Entitlement Certificates) which a Holder is entitled to receive upon exercising its conversion right if such Holder elects to receive ADSs. Such Common Shares (or Entitlement Certificates) will be registered in the name of the depositary, the custodian or a nominee of either and deposited in accordance with the terms of the applicable deposit agreement.

It is expected that the Temporary ADSs representing the right to receive Listed ADSs will be accepted into the book-entry systems maintained by DTC. The Temporary ADSs are not expected to be listed or quoted on any exchange.

1. ROC regulatory approval has been received for ADSs to be issued upon deposit of Common Shares or Entitlement Certificates issuable upon conversion of the Bonds.

129

DESCRIPTION OF COMMON SHARES

Set forth below is a description of our Common Shares, including summaries of the material relevant provisions of our Articles of Incorporation, the ROC Company Law, the ROC Securities and Exchange Law and the regulations under these laws.

General

Our authorized capital is NT$45 billion, divided into 4.5 billion shares, including up to 400 million shares reserved for the conversion of convertible bonds and exercise of bonds with warrants and 450 million shares reserved for the exercise of employee stock options. As of June 30, 2001, 3,359,342,613 of our Common Shares had been fully paid-in and were outstanding. All of our Common Shares are in registered form.

As of June 30, 2001, 59,294,180 Common Shares underlying Listed ADSs were held in the name of The Bank of New York, the depositary under the Deposit Agreement. The Bank of New York has advised us that, as of June 30, 2001, 5,929,418 ADSs, representing 59,294,180 Common Shares, were held of record by Cede & Co. and four other U.S. persons. We have no further information as to Common Shares of our company held, or beneficially owned, by U.S. persons. As of June 30, 2001, we had outstanding US$159 million aggregate principal amount of 1% convertible bonds due 2005 and US$80 million aggregate principal amount of zero coupon convertible bonds due 2003, convertible into 107,786,958 and 102,514,661 of our Common Shares, respectively.

The ROC Company Law, the ROC Statute for Establishment and Administration of Science-Based Industrial Park and the ROC Securities and Exchange Law provide that any change in the issued share capital of a public company, such as ours, requires various approvals. These include:

• the approval of the board of directors;

• an amendment to the articles of incorporation (which requires shareholder approval) if the original paid-in share capital plus the number of the shares to be converted from the convertible bonds or exercised from bonds with warrants, or to be exercised from employee options, or the issuance of any new shares exceeds the number of shares specified in the articles of incorporation; and

• the approval of the Securities and Futures Commission and the Ministry of Economic Affairs or Science-Based Industrial Park Adminstration, as applicable.

Increase in Capital; Delivery of Certificates

We are required under ROC law to file an amendment to our corporate registration within 15 days after the capital increase record date. Under the ROC Securities and Exchange Law and applicable regulations, we are required to deliver Common Share certificates to the relevant purchasers within 30 days after receiving approval from the Science-Based Industrial Park Administration in Hsinchu of our amendment to our corporate registration.

The amendment of ROC Company Law (‘‘ROC New Company Law’’) has been passed by ROC Legislative Yuan on October 25, 2001 and became effective on November 14, 2001. Under ROC New Company Law, when a public company, such as us, issues new shares, it could;

• (1) issue multiple share certificates and deliver them to shareholders;

• (2) issue a single share certificate representing the total number of new shares and deposit the certificate with the Taiwan Securities Central Depositary Co., Ltd. (‘‘TSCD’’); or

• (3) register the new shares with the TSCD is lieu of issuing share certificates.

130

Dividends and Distributions

Except in limited circumstances, under the ROC Company Law and our Articles of Incorporation we are not permitted to distribute dividends or make other distributions to shareholders for any year in which we did not have current or retained earnings (excluding reserves). The ROC Company Law also requires that 10% of our annual net income, less prior years’ losses, if any, and applicable income taxes be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. In addition, we may set aside a special reserve in accordance with applicable laws and regulations. Our Articles of Incorporation further provide that, after we pay our income taxes, deduct losses incurred in prior years and deduct the legal reserve and any special reserve, the remaining portion of our net income for any year may be appropriated or distributed by our board of directors, subject to the approval of our shareholders, as described in the following paragraph, in the following sequence:

• (1) 83% as a dividend to shareholders;

• (2) 15% for bonuses to employees; and

• (3) 2% for remuneration to directors and supervisors.

We may pay these distributions in stock or cash or a combination of stock and cash, except that any employee bonuses and shareholder dividends will normally be distributed in stock unless we determine otherwise, and provided that not more than 20% of our distributable net income may be distributed in the form of cash. All or part of the dividends to shareholders as described in item (1) may be reserved at the relevant annual shareholders’ meeting as retained earnings for distribution in subsequent years.

Our Articles of Incorporation also provide that employee bonuses will be distributed in the same form as the distribution of dividends to shareholders. In 1998, we distributed approximately 26 million Common Shares in the form of employee bonuses for 1997. In 1999 and 2000, we did not distribute any employee bonuses for 1998 and 1999, respectively. In 2001, we distributed approximately 143 million Common Shares in the form of employee bonuses for 2000. The number of Common Shares issued as a bonus is obtained by dividing the total nominal NT dollar amount of the bonus by the par value of our Common Shares, or NT$10. See ‘‘Dividends and Dividend Policy’’ and Note 13 to our financial statements included in this Offering Circular. Subject to compliance with the above requirements, we may pay dividends or make other distributions from our earnings or reserves as permitted by the ROC Company Law.

At our annual general meeting of shareholders, our board of directors submits for shareholder approval our financial statements for the preceding year and the board’s proposal for the distribution of dividends and bonuses from our net income, subject to compliance with the requirements described above, for the preceding year. All our Common Shares outstanding and fully paid as of the relevant record date are entitled to share equally in any approved dividend or other distribution.

In addition to permitting dividends to be paid out of net income if we do not have losses, the ROC Company Law permits us to make distributions of additional Common Shares to our shareholders by capitalizing reserves, including the legal reserve and capital surplus of premium from issuing stock and earnings from gifts received. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve, and only if and to the extent the accumulated legal reserve exceeds 50% of our paid-in-capital.

For information as to Taiwanese taxes on dividends and distributions, see ‘‘Taxation—ROC Taxation’’.

Preemptive Rights and Issues of Additional Common Shares

According to the ROC Company Law, when a company issues new common shares for cash, 10% to 15% of the issue must be offered to its employees. In addition, the Securities and Exchange Law and the relevant securities regulations require that, if a public company listed on the Taiwan Stock Exchange or whose

131

shares are traded on the Over-the-Counter Securities Exchange intends to offer new shares for cash, at least 10% of the issue must be offered to the public, except under certain circumstances or when exempted by the Securities and Futures Commission. This percentage can be increased by a resolution passed at a shareholders’ meeting, thereby reducing the number of new shares subject to the preemptive rights of existing shareholder. The shares not subscribed for by the employees and shareholders at the expiration of the period for the exercise of their rights should be sold to the public or specified persons at the direction of our board of directors. According to the amended Securities and Exchange Law which was passed by the Legislative Yuan on January 15, 2002 and is expected to become effective upon the public announcement of the President, the preemptive rights provisions will not apply to offerings of new shares through a private placement approved at a shareholders’ meeting.

Authorized but unissued shares of any class may be issued, subject to the above-mentioned provisions of the ROC Company Law, the ROC Statute for Establishment and Administration of Science-Based Industrial Park and ROC Securities and Exchange Law, upon the terms as our board of directors may determine.

Meetings of Shareholders

General meetings of our shareholders may be ordinary or extraordinary. Ordinary meetings of our shareholders generally are held in Hsinchu, Taiwan, within six months after the end of our fiscal year. Extraordinary meetings of our shareholders may be convened by resolution of our board of directors whenever it deems necessary, or under certain circumstances, by shareholders or our supervisors. Notice in writing of general meetings, stating the place, time and purpose of the meeting, must be sent to each shareholder at least 30 days, in the case of ordinary meetings, and 15 days, in the case of extraordinary meetings, before the date set for each such meeting.

Voting Rights

Under the ROC Company Law, a shareholder has one vote for each common share. As previously required by law, our Articles of Incorporation provide that the vote cast by a shareholder of more than 3% of the total issued and outstanding Common Shares will be discounted by 1% of that portion of the holding in excess of the 3% level. However, the ROC New Company Law eliminates this voting discount requirement. In the event our Articles of Incorporation are not amended to remove the voting discount in a timely manner or for any reason, our calculation of the voting and its right shall nevertheless be governed by the ROC New Company Law. Except as otherwise provided by law, a resolution may be adopted by the holders of a simple majority of the common shares represented at the shareholders’ meeting. At least a majority of the holders of the total issued and outstanding common shares must be present at the meeting for the resolution to be binding. The election of directors and supervisors at a shareholders’ meeting is by means of cumulative voting unless the articles of incorporation provide otherwise. Ballots for the election of directors are cast separately from those for the election of supervisors. Candidates for the offices of directors and supervisors may be nominated at the shareholders’ meeting at which ballots for the election are cast.

The ROC Company Law also provides that shareholder approval is required for major corporate actions, including:

• any amendment to the articles of incorporation, which is required, among other things, for any increase in authorized share capital;

• entering into, modification or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations;

• the dissolution, amalgamation or spin-off of a company;

• the removing of directors or supervisors;

• the transfer of the whole or an important part of a company’s business or properties;

• the taking over of the whole 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.

132

To obtain this approval, a shareholders’ meeting must be convened. The holders of at least two-thirds of all of the issued and outstanding common shares must be present at this meeting. Then, the holders of at least a majority of the common shares represented at the meeting must vote in favor of the action. However, in the case of a publicly-held company such as ours, the resolution may be adopted by the holders of at least twothirds of the common shares represented at a meeting of shareholders at which holders of at least a majority of the issued and outstanding common shares are present. However, if a controlling company holds not less than 90% of its subordinate company’s outstanding shares, the controlling company’s merger with the subordinate company can be approved by board resolution adopted by majority consent at a meeting with two-thirds of directors present. A shareholder may be represented at a shareholders’ meeting by proxy. A valid proxy must be delivered to us at least five days before the commencement of the meeting.

Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders of our company are entitled to appraisal rights in the event of amalgamation, spin-off and various other major corporate actions within 20 days of the resolution enacting the event. A dissenting shareholder may request that we redeem all of the shares owned by the shareholder at a fair price to be determined by mutual agreement. If an agreement cannot be reached, the valuation will be determined by a court order. For amalgamation or spin off, a dissenting shareholder may exercise its appraisal right by serving written notice on us before or during the related shareholders’ meeting or by raising and registering its objection at the shareholders’ meeting. For other major corporate actions, a dissenting shareholder may exercise its appraisal right by serving written notice on us before the related shareholders’ meeting and by raising and registering its objection at the shareholders’ meeting.

In addition to appraisal rights, within 30 days after the date of the shareholders’ meeting, any shareholder has the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedures were legally defective. However, if the court is of the opinion that such violation is not material and does not affect the result of the resolution, the court may reject or dismiss the shareholder’s lawsuit. One or more shareholders who have held more than 3% of our issued and outstanding shares for over a year may require a supervisor to bring a derivative action against a director for the director’s liability to our company as a result of the director’s unlawful actions or failure to act. In addition, one or more shareholders who have held more than three percent of our issued and outstanding shares for over a year may require our board of directors to convene an extraordinary shareholders’ meeting by sending a written request to the board of directors.

Register of Shareholders and Record Dates

We maintain our shareholder register at our office in Taipei, Taiwan, and enter transfers of our Common Shares in the register upon presentation of, among other documents, the certificates for the Common Shares transferred. Under the ROC Company Law, the transfer of common shares is effected by endorsement and delivery of the related share certificates. In order, however, to assert shareholders’ rights against us, the transferee must have his name and address registered on the shareholder register. Shareholders are required to file their respective specimen seals with us. The settlement of trading in our Common Shares is normally carried out on the book-entry system maintained by the Taiwan Securities Central Depositary Co., Ltd. The ROC Company Law permits us to set a record date and close our shareholder register for a specified period in order for us to determine the shareholders or pledges that are entitled to certain rights pertaining to our Common Shares by giving advance public notice. As provided in our Articles of Incorporation, our shareholder register is closed for a period of one month before each ordinary meeting of shareholders, a period of 15 days before each extraordinary meeting of shareholders and a period of five days before each record date.

However, under the ROC New Company Law, a public company’s shareholder register, such as ours, is closed for a period of 60 and 30 days before each ordinary or extraordinary shareholders’ meeting, respectively. The ROC New Company Law will prevail over conflicting provisions regarding the close period provided by our Articles of Incorporation.

133

Annual Financial Statements

Under the ROC Company Law, ten days before the ordinary meeting of shareholders, our annual financial statements must be available at our principal office in Hsinchu for shareholder inspection.

Acquisition of Common Shares by Our Company

With minor exceptions, we may not acquire our Common Shares under the ROC Company Law and any Common Shares we acquire must be sold at the current market price within six months after our acquisition of the shares.

Under the amended Securities and Exchange Law which took effect on July 21, 2000, we may, in accordance with Securities and Futures Commission procedures and a resolution adopted by a majority of our board of directors at a meeting attended by more than two-thirds of the directors, purchase our shares on the Taiwan Stock Exchange or the Over-the-Counter market or by a tender offer for the following purposes:

• (1) for share transfer to our employees;

• (2) for the delivery of shares following the conversion or exercise of bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us; and

• (3) for maintaining our credit and our shareholders’ equity, except that the shares so purchased shall be cancelled thereafter.

The total shares purchased by us may not exceed 10% of our total issued and outstanding shares. In addition, the total cost of the purchased shares may not exceed the aggregate amount of our retained earnings, any premium from share issuances and the realized portion of our capital reserve. The shares purchased by us pursuant to items (1) and (2) above will be transferred to the intended transferees within three years after the purchase; otherwise the shares will be cancelled. For the shares to be cancelled under item (3) above, we are required to complete an amendment registration for the cancellation within six months after the purchase. The shares purchased by us may not be pledged or hypothecated. In addition, we may not exercise any shareholders’ rights attaching to these shares. 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 our shares during the period we purchase our own shares.

Liquidation Rights

In the event of the liquidation of our company, the assets remaining after payment of all debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to the shareholders in accordance with the ROC Company Law and our Articles of Incorporation.

Transfer Restrictions

The ROC Securities and Exchange Law requires each director, supervisor, manager or shareholder who, together with such shareholder’s spouse, minor children or nominees, holds more than 10% of our shares, to report the amount of such person’s holding to us and limits the number of shares that can be sold or transferred on the Taiwan Stock Exchange or on the Over-the-Counter Securities Exchange by such person per day (unless the number of shares transferred does not exceed 10,000).

134

Our Articles of Incorporation

We last amended our Articles of Association on April 19, 2001. In these amendments,

• our authorized capital was increased to NT$45,000,000,000, divided into 4,500,000,000 Common Shares, of which NT$4,500,000,000 was reserved for the issue of employee stock options and NT$4,000,000,000 was reserved for the issue of convertible bonds and bonds with warrants;

• we were authorized to issue corporate bonds with warrants; and

• cash dividends eligible to be distributed to our shareholders were limited to 20% of our total distributable net income.

135

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

American Depositary Shares

ADSs are represented by certificates that are commonly known as American depositary receipts, or ADRs. Our depositary, The Bank of New York, will execute and deliver the ADRs. Each ADS will represent ownership interests in 10 of our Common Shares (or the right to receive 10 Common Shares) which we will deposit with the custodian, The International Commercial Bank of China, in Taipei, Taiwan. Each ADS will also represent securities, cash or other property deposited with the depositary but not distributed to ADS holders. The depositary’s corporate trust office is located at 101 Barclay Street, New York, New York 10286. Its principal executive office is located at One Wall Street, New York, New York 10286. The custodian’s office is located at 3rd Floor, #2, Chung-King South Road, Section 1, Taipei, Taiwan.

You may hold ADS either directly or indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADR holder. This description assumes you hold your ADS directly. If you hold the ADRs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.

The Restricted ADSs (or Restricted Temporary ADSs) are not transferable except in accordance with the restrictions described under ‘‘Transfer Restrictions.’’ So long as the Restricted Bonds are, and the Common Shares (or Entitlement Certificates) into which they are convertible will be, ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act, if a holder of Restricted Bonds elects to receive Restricted ADSs (or Restricted Temporary ADSs) upon conversion, the Common Shares (or Entitlement Certificates) issuable upon conversion of the Restricted Bonds will be deposited into the Restricted ADS Depositary Facility and Restricted ADSs (or Restricted Temporary ADSs) will be issued. The Restricted ADSs (or the Restricted Temporary ADSs) are subject to the transfer restrictions described herein and are not fungible with the Listed ADSs (or Temporary ADSs that represent such ADSs). To provide for the Restricted ADS Depositary Facility, we have entered into the Rule 144A Deposit Agreement, which contains substantially the same provisions as the Deposit Agreement, except for changes required in connection with the applicable restrictions.

Because the depositary will actually hold the Common Shares, you must rely on it to exercise the rights of a shareholder. The obligations of the depositary are set out in the deposit agreements among us, the depositary and you, as an ADS holder.

The deposit agreements and the ADS (or Temporary ADSs) are generally governed by New York law. However, our obligations to our shareholders will continue to be governed by the laws of Taiwan, which are different from the laws in the United States. In addition, we note that Taiwan laws and regulations may restrict the deposit and withdrawal of our Common Shares in or from the ADS facility. See ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC—Depositary Receipts’’.

The following is a summary of the deposit agreements and certain of your rights as an owner of ADSs. Because it is a summary, it does not contain all the information that may be important to you. For more complete information, you should read the entire applicable agreement and the ADR. Directions on how to obtain copies of these are provided under the caption ‘‘Where You Can Find More Information’’.

Temporary ADSs

Under the terms of the deposit agreement, the depositary may issue Temporary ADSs representing the Entitlement Certificates that represent the right to receive our newly issued Common Shares, also called TemporaryADSs, rather than ADSs representing our Common Shares. Temporary ADSs will be treated as ADSs issued under the terms of the deposit agreements except that:

• Temporary ADSs will not be fungible with ADSs and will be separately identified until exchanged for ADSs by the depositary;

136

• Temporary ADSs may not be surrendered for delivery of Common Shares; however, Temporary ADSs representing Entitlement Certificates may be surrendered for cancellation for delivery of Entitlement Certificates;

• Temporary ADSs will only be issued in book-entry form through The Depository Trust Company; and

• distributions made on Temporary ADSs shall be made only on the basis of distributions received in respect of the Entitlement Certificates held by the depositary.

We undertake to exchange Entitlement Certificates represented by the Temporary ADSs for Common Shares four times a year.

Temporary ADSs will be exchanged automatically for ADSs representing Common Shares upon receipt by the depositary of share certificates in exchange for Entitlement Certificates. Until that exchange has been completed, the Temporary ADSs will represent interests in the Entitlement Certificates held by the depositary.

The provisions of the Temporary ADSs representing the Entitlement Certificates are substantially consistent with the provisions set forth herein, except as the italicized language indicates.

Dividends and Other Distributions

How will you receive dividends and other distributions on the shares?

The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Common Shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Common Shares your ADRs represent.

• Cash . The depositary will convert any cash dividend or other cash distribution we pay on the Common Shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any approval from the Taiwanese government is needed and cannot be obtained, the agreement allows the depositary to distribute the New Taiwan dollars only to those ADS holders to whom it is possible to do so. It will hold the New Taiwan dollars it cannot convert for the account of the ADS holders who have not been paid. It will not invest the New Taiwan dollars and it will not be liable for any interest.

• Before making a distribution the depositary will deduct any withholding taxes that must be paid under Taiwan law. See ‘‘Taxation—ROC Taxation’’. The depositary will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the Taiwan currency, you may lose some or all of the value of the distribution.

• Common Shares . The depositary may distribute new ADSs representing any Common Shares we distribute as a dividend or free distribution, if we furnish it promptly with satisfactory evidence that it is legal to do so. The depositary will only distribute whole ADSs. It will sell Common Shares which would require it to issue a fractional ADS and distribute the net proceeds in the same way as it does with cash. If the depositary does not distribute additional ADSs, subject to applicable laws and regulations, each ADS will also represent the new Common Shares.

• Rights to receive additional Common Shares. If we offer holders of our securities any rights to subscribe for additional Common Shares or any other rights, the depositary may make these rights available to you. We must first instruct the depositary to do so and furnish it with satisfactory evidence that it is legal to do so. If we don’t furnish this evidence and/or give these instructions, and the depositary decides it is practical to sell the rights, the depositary will sell the rights that are not exercised or distributed. The proceeds of the sale will be distributed to holders as a cash distribution. See ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC

137

—Depositary Receipts’’. The depositary may allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.

• If the depositary makes rights available to you, it will exercise the rights and purchase the Common Shares on your behalf. The depositary will then deposit the Common Shares and issue ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay.

• U.S. securities laws may restrict the sale, deposit, cancellation, and transfer of the ADSs issued after exercise of rights. For example, you may not be able to trade the ADSs freely in the United States. In this case, the depositary may issue the ADSs under a separate restricted deposit agreement which will contain the same provisions as the agreement, except for changes needed to put the restrictions in place.

• Other Distributions . The depositary will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the depositary has a choice. It may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case ADSs will also represent the newly distributed property.

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, Common Shares, rights or other securities under the U.S. Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, Common Shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our Common Shares or any value for them if it is illegal or impractical for us to make them available to you.

A holder of Entitlement Certificates may generally not, however, be entitled to dividends, but will be entitled to receive additional Entitlement Certificates in order to adjust for such dilutive events. Accordingly, Temporary ADS holders may receive additional Temporary ADSs.

Deposit, Withdrawal and Cancellation

How does the depositary issue ADSs?

Subject to the procedures required by ROC law described below, the depositary will issue ADSs if you or your broker deposit Common Shares or evidence of rights to receive Common Shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs at its office to the persons you request.

Converting Holders who elect to receive Restricted ADSs on exercise of their Conversion Rights will be required, under the terms and conditions of the Rule 144A Deposit Agreement, prior to the issue of Restricted ADSs, to provide certain written acknowledgments, certifications and agreements to the effect that

• (a) the Restricted ADSs and the Common Shares represented thereby have not been registered under the Securities Act;

• (b) it is a QIB acquiring such beneficial ownership for its own account or for the account of one or more QIBs, each of whom is able to and who does represent, acknowledge and agree to the same extent that would be required if it is invested directly into Restricted ADSs;

138

• (c) it will comply with the restrictions set forth under ‘‘Transfer Restrictions’’ on transfers of the Restricted ADSs and the underlying Common Shares;

• (d) it is not an affiliate (within the meaning of Rule 144 under the Securities Act) of our company;

• (e) the Bonds from which the Common Shares being deposited were converted have not, since their original issuance, been previously acquired by our company or our affiliates (within the meaning of Rule 144 under the Securities Act); and

• (f) the Common Shares being deposited were acquired directly from the conversion of a Bond pursuant to the Indenture.

Such Converting Holders will also be required to furnish a written opinion of counsel to the effect stated in paragraph (e) above.

Under current ROC law, no additional deposits of Common Shares may be made in the depositary facility, and no ADSs may be issued against such deposits, without specific approval of the Securities and Futures Commission, except in connection with the issuance of additional ADSs in connection with:

• (1) dividends on, or free distributions of, Common Shares;

• (2) the exercise of preemptive rights in the event of capital increases for cash; or

• (3) the purchase of Common Shares on the Taiwan Stock Exchange for deposit in the depositary facility, as permitted under the applicable deposit agreement and the custodian agreement, but only to the extent that previously issued ADSs have been cancelled, the Common Shares represented by the ADSs have been sold on the Taiwan Stock Exchange and the additional ADSs to be issued does not exceed the amount previously cancelled and previously sold. The total number of issued and outstanding ADSs may not exceed the number previously approved by the Securities and Futures Commission, plus any ADSs issued under clauses (1) and (2) above. See ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC’’.

How do ADR holders cancel an ADS and obtain Common Shares?

You will be entitled to present your ADSs representing our Common Shares to the depositary for cancellation and receive the corresponding number of underlying Common Shares after satisfying the ROC legal requirements described below. In order to withdraw our Common Shares represented by your ADSs, you will be required to pay to the depositary the fees and expenses for cancellation of ADSs and any charges and taxes, including stamp taxes or stock transfer taxes or fees, payable upon the transfer of our Common Shares. In the case of the Restricted ADS Depositary Facility, under the Rule 144A Deposit Agreement, so long as the Restricted ADSs remain ‘‘restricted securities’’ within the meaning of Rule 144A under the Securities Act, you will also be required to execute a written certificate and agreement in the form provided in the Rule 144A Deposit Agreement in order to ensure that the applicable restrictions on transfers of the underlying Common Shares are observed. You assume the risk for delivery of all funds and securities upon withdrawal. Once cancelled, the ADSs will not have any rights under the applicable deposit agreement.

Upon surrender of ADRs and upon payment of the fees and expenses of the depositary and any taxes or other governmental charges, you will be entitled (i) to request that such deposited securities be sold on your behalf, or (ii) to deliver, to an account registered with the us maintained by you in the ROC, the number of deposited securities at the time represented by the ADSs evidenced by such ADR, or (iii) if applicable ROC law should change to prohibit one of the foregoing options, to whichever option remains, or (iv) to such other provisions as the depositary and we may agree, in accordance with applicable ROC law and the provisions of General Instructions I.A.1 to Form F-6 under the Securities Act of 1933. The depositary may require you to execute written instructions before it will arrange the sale. These sales will be conducted through a securities brokerage firm in Taiwan on the Taiwan Stock Exchange. You assume the risk and expense of any sale.

139

You will have the right to withdraw the Common Shares represented by your ADSs except for:

• temporary delays that may arise because (1) the transfer books for our Common Shares or ADSs are closed or (2) our Common Shares are temporarily transfer restricted due to shareholders’ meeting or a payment of dividends;

• obligations to pay fees, taxes and similar charges; and

• restrictions imposed by law. See ‘‘Appendix D—Foreign Investment and Exchange Controls in the ROC ’’.

The deposit agreements may not be modified to impair your right to withdraw our Common Shares represented by your ADSs unless otherwise required by law.

If you wish to withdraw Common Shares from the ADS facility, you will be required to appoint a local agent in Taiwan and to open a securities trading account with a local brokerage firm to remit funds, exercise stockholders’ rights. Without a securities trading account, you will not be able to hold or to sell or otherwise transfer our Common Shares on the Taiwan Stock Exchange. In addition, you will be required to appoint a local bank to act as custodian and for handling confirmation and settlement of trades, safekeeping of securities or cash proceeds and declaration of information. You will also be required to appoint a tax guarantor for the filing of tax returns and the making of tax payments.

Taiwan Disclosure Obligations

Upon the withdrawal of ADSs, we may have various Taiwan government disclosure obligations and reporting obligations if:

• the person to be registered as our shareholder is our ‘‘related party’’ under Statements of Financial Accounting Standard No. 6 of Taiwan and this person beneficially owns common shares withdrawn from the depositary facility; or

• the person to be registered as our shareholder owns common shares withdrawn from the depositary facility and the common shares withdrawn exceed 10% of the common shares in the depositary facility.

Because of these obligations, the depositary may ask you to disclose the name of the beneficial owner of the ADSs delivered for cancellation and provide proof of identity and genuineness of any signature and other documents before it will cancel your ADSs. The withdrawal of shares represented by your ADSs may be delayed until the depositary receives the information and proof so requested and satisfactory evidence of your compliance with all laws and regulations. The information you are required to provide may include the name and nationality of the beneficial owner and the number of shares the beneficial owner is withdrawing or has withdrawn in the past.

Voting Rights

You may direct the exercise of voting rights with respect to the Common Shares represented by ADSs only in accordance with the provisions of the applicable deposit agreement as described below and applicable ROC law. See ‘‘Risk Factors—Risks Related to the Bonds, the Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) and Our Trading Market—Holders of our ADSs (or Temporary ADSs) will not have the same voting rights as the holders of our Common Shares (or Entitlement Certificates), which may affect the value of your ADSs’’. If you wish to withdraw the Common Shares, you must appoint a local agent and open a securities trading account with a local brokerage firm as discussed above. Even if you do all this, however, you might not know about the meeting early enough in advance to withdraw the shares or you may not have enough time to register your Common Shares for voting purposes before the shareholder register is closed. See ‘‘Description of Common Shares—Meetings of Shareholders’’ and ‘‘—Register of Shareholders and Record Dates’’.

140

Except as described below, you will not be able to exercise voting rights attaching to the Common Shares represented by the ADSs on an individual basis. According to the ROC Company Law, a shareholder’s voting rights attaching to shareholdings in a ROC company must, as to all matters subject to a vote of shareholders (other than the election of directors and supervisors), be exercised as to all shares held by the shareholder in the same manner. Accordingly, the voting rights attaching to the Common Shares represented by ADSs must be exercised as to all matters subject to a vote of shareholders by the depositary or its nominee, who represents all holders of ADSs, collectively in the same manner, except in the case of an election of directors and supervisors. Directors and supervisors are elected by cumulative voting.

In the applicable deposit agreement, you will appoint the depositary as your representative to exercise the voting rights with respect to the Common Shares represented by your ADSs. We will provide the depositary with copies (including English translations) of notices of meetings of our shareholders and the agenda of these meetings. These materials will contain an indication of the number of directors or supervisors to be elected if an election of directors or supervisors is to be held at the meeting. The depositary will also mail to holders a voting instruction form. In order to be valid, the holder of ADSs must complete, sign and return to the depositary the voting instruction form by a date specified by the depositary. The number of directors or supervisors to be elected may change after the depositary has mailed the voting instruction form to you. If a change were to occur, the depositary would be unable to follow your exact voting instructions and may calculate your votes according to procedures not inconsistent with the provisions of the applicable deposit agreement.

We can not assure you that you will receive the materials in time to ensure that you can instruct the depositary to vote the Common Shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions if such act or failure to act is in good faith. This means that you may not be able to exercise your right to vote and there may be nothing you can do if the Common Shares represented by your ADSs are not voted as you requested.

Subject to the provisions described in the second succeeding paragraph, which will apply to the election of directors and supervisors, if persons together holding at least 51% of the ADSs outstanding at the relevant record date instruct the depositary to vote in the same manner in respect of one or more resolutions to be proposed at the meeting (other than the election of directors or supervisors), the depositary will notify the instructions to our president, or if he is no longer an officer or director of our company, then the Chairman of our board of directors (the ‘‘designated representative’’), or such person as he may designate. The depositary will appoint the president or his designated person to serve as your designated representative and that of the depositary’s or its nominee. The designated representative will attend the meeting and vote all the Common Shares represented by ADSs in the manner so instructed.

If, for any reason, the depositary has not by the date specified by it received instructions from persons together holding at least 51% of all the ADSs outstanding at the relevant record date to vote in the same manner in respect of any resolution specified in the agenda for a meeting (other than the election of directors or supervisors), then you will be deemed to have instructed the depositary or its nominee to authorize and appoint the designated representative as your representative and that of the depositary’s or its nominee to attend the meeting and vote all the Common Shares represented by all ADSs as the designated representative deems appropriate with respect to the resolution or resolutions, which may not be in your interests. However, no authorization will be given with respect to any matter as to which the designated representative informs the depositary that he does not wish to be so authorized, in which event the depositary will not vote at the relevant meeting. The depositary will, however, take such action as is necessary to cause all the Common Shares represented by ADSs to be counted for the purpose of satisfying applicable quorum requirements.

The depositary will notify the designated representative of the instructions for the election of directors and supervisors received from you and appoint the designated representative as your representative and that of the depositary’s or its nominee to attend any meeting and vote the Common Shares represented by ADSs as to which the depositary has received instructions from you for the election of directors and supervisors, subject to any restrictions imposed by ROC law and our articles of incorporation. If, by the date specified by the

141

depositary, you have not delivered instructions to the depositary, you will be deemed to have instructed the depositary to authorize and appoint the designated representative as your representative and that of the depositary’s or its nominee to attend the meeting and vote, at his sole discretion, all the Common Shares represented by ADSs as to which the depositary has not received instructions from you for the election of directors and supervisors as the designated representative deems appropriate, which may not be in your best interests. However, no authorization will be given with respect to any election of directors or supervisors as to which the designated representative informs the depositary that he does not wish to be so authorized, in which event the depositary will attend such meeting and will vote those Common Shares represented by the ADSs as to which it has received instructions from you for the election of directors and supervisors in the manner so instructed. The depositary will not vote at the relevant meeting any Common Shares represented by ADSs, as to which the depositary has not received instructions from you for the election of directors any supervisors but will take such action as is necessary to cause all the Common Shares represented by ADSs to be counted for the purpose of satisfying applicable quorum requirements.

By continuing to hold ADSs or any interest in the ADSs, you will be deemed to have agreed to the voting provisions set forth in the applicable deposit agreement, as these provisions may be amended from time to time.

The ROC Company Law and our articles of incorporation provide that the votes of Common Shares held by a holder of more than three percent of the total outstanding Common Shares represented by your ADSs will be discounted by one percent for the holding in excess of three percent. The designated representative, when exercising voting rights on behalf of the depositary, will be subject to that discount. When exercising votes on a cumulative basis for the election of directors and supervisors, the aggregate votes to be cast for each candidate will be reduced by the applicable amount. However, the ROC New Company Law eliminates this voting discount requirement. In the event our Articles of Incorporation are not amended to remove the voting discount in a timely manner or for any reason, our calculation of the voting and its right shall nevertheless be governed by the ROC New Company Law.

Fees and Expenses

ADS holders must pay:

• $5.00 (or less) per 100 ADSs (or portion thereof)

For:

• Each issuance of an ADS, including as a result of a distribution of Common Shares or rights or other property

• Each cancellation of an ADS, including if the applicable deposit agreement terminates

• $0.02 (or less) per ADS (or portion thereof)

• Registration or transfer fees

Expenses of the depositary

• Any cash payment

• Transfer and registration of Common Shares on the Common Share register of the Registrar in Taiwan from your name to the name of the depositary or its agent when you deposit or withdraw Common Shares

• Conversion of New Taiwan dollars to U.S. dollars

• Cable, telex and facsimile transmission expenses as are expressly provided in the deposit agreement

• Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or Common Share underlying an ADS

• $0.02 (or less) per ADS per calendar year

• As necessary

• Depositary services; provided that this fee will not be charged if a fee of $0.02 was charged in the same calendar year for a cash distribution

142

Payment of Taxes

You will be responsible for any taxes or other governmental charges payable on your ADSs or on the Common Shares underlying your ADSs. The depositary may refuse to transfer or allow you to withdraw the Common Shares underlying your ADSs until such taxes or other charges are paid. The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, subject to applicable laws and regulations, to pay any taxes owed. You will remain liable if the proceeds of the sale are not enough to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.

Reclassifications, Recapitalizations and Mergers

If we:

Then:

• change the nominal or par value of our Common Shares, or

• reclassify, split up or consolidate any of the deposited securities, or

• distribute securities on the Common Shares that are not distributed to you, or

• recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action,

• the cash, Common Shares or other securities received by the depositary will become deposited securities. Subject to applicable laws and regulations, each ADS will automatically represent its equal Common Share of the new deposited securities. The depositary may, and will if we ask them to, distribute some or all of the cash, Common Shares or other securities it received. Subject to applicable laws and regulations, it may also issue new ADSs or ask you to surrender your outstanding ADSs in exchange for new ADSs identifying the new deposited securities.

Amendment and Termination

How may the depositary agreement be amended?

We may agree with the depositary to amend the deposit agreements and the ADSs without your consent for any reason. If the amendment adds or increases fees or charges, except for taxes and other governmental charges or certain expenses of the depositary, or prejudices an important right of ADS holders, it will only become effective 30 days after the depositary notifies you of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADSs and the agreement as amended.

How may the depositary agreement be terminated?

The depositary will terminate the applicable deposit agreement if we ask it to do so. The depositary may also terminate the agreement if the depositary has told us that it would like to resign and we have not appointed a new depositary bank within 30 days. In both cases, the depositary must notify you at least 30 days before termination.

After termination, the depositary and its agents will be required to do only the following under the agreement:

• advise you that the agreement is terminated;

143

• collect distributions on the deposited securities; and

• deliver Common Shares and other deposited securities upon cancellation of ADSs.

One year after termination, the depositary will, if practicable, sell any remaining deposited securities by public or private sale, subject to applicable laws and regulations. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the agreement for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash and with respect to indemnification. After termination, our only obligations will be with respect to indemnification and to pay certain amounts to the depositary.

Limitations On Obligations and Liability To ADS Holders

Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of ADSs

The deposit agreements expressly limits our obligations and the obligations of the depositary. It also limits our liability and the liability of the depositary. We and the depositary:

• are only obligated to take the actions specifically set forth in the applicable deposit agreement without negligence or bad faith;

• are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the applicable deposit agreement;

• are not liable if either of us exercises discretion permitted under the applicable deposit agreement;

• have no obligation to become involved in a lawsuit or other proceeding related to the ADSs or the applicable deposit agreement on your behalf or on behalf of any other party; and

• may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party.

In the deposit agreements, we and the depositary agree to indemnify each other under certain circumstances.

Requirements for Depositary Actions

Before the depositary will issue or register a transfer of an ADS, make a distribution on an ADS, or permit withdrawal of Common Shares, the depositary may require:

• payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any Common Shares or other deposited securities;

• production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and

• compliance with regulations it may establish, from time to time, consistent with the applicable deposit agreement, including presentation of transfer documents.

The depositary may refuse to deliver, transfer, or register transfers of ADSs generally when the transfer books of the depositary, our company or the registrar in Taiwan are closed or at any time if the depositary or our company thinks it is advisable to do so.

144

Pre-Release of ADSs

In certain circumstances, subject to the provisions of the applicable deposit agreement and to the extent permitted by law, the depositary may issue ADSs before deposit of the underlying Common Shares. This is called a pre-release of the ADS. To the extent permitted by law, the depositary may also deliver Common Shares upon cancellation of pre-released ADSs, even if the ADSs are cancelled before the pre-release transaction has been closed out. A pre-release is closed out as soon as the underlying Common Shares are delivered to the depositary. The depositary may receive ADSs instead of Common Shares to close out a prerelease. The depositary may pre-release ADSs only under the following conditions:

• before or at the time of the pre-release, the person to whom the pre-release is being made must represent to the depositary in writing that it or its customer owns the Common Shares or ADSs to be deposited;

• the pre-release must be fully collateralized with cash or other collateral that the depositary considers appropriate; and

• the depositary must be able to close out the pre-release on not more than five business days’ notice.

In addition, the depositary will limit the number of ADSs that may be outstanding at any time as a result of pre-release, although the depositary may disregard the limit from time to time, if it thinks it is appropriate to do so.

145

TAXATION

The following discussion is a summary of the material ROC and United States federal income tax considerations relevant to an investment decision by certain non-ROC holders.

ROC Taxation

The following summary addresses the principal ROC tax consequences of the ownership and disposition of Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) to a nonresident individual or non-resident entity that holds such Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) (a ‘‘Non-ROC Holder’’). As used in the preceding sentence, a ‘‘non-resident individual’’ (a ‘‘Non-ROC Individual’’) is a foreign national individual who is not physically present in the ROC for 183 days or more during any calendar year in which he or she owns Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) and a ‘‘non-resident entity’’ (a ‘‘Non-ROC Entity’’) is a corporation or a noncorporate body that is organized under the laws of a jurisdiction other than the ROC for profit-making purposes and does not have a fixed place of business or other permanent establishment in the ROC.

Prospective purchasers of Bonds are urged to consult their own tax advisors as to the particular ROC tax consequences of owning the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) which may affect them.

Bonds

Interest

Payments of stated interest or premium (if any) on a Bond to a Non-ROC Holder are subject to ROC withholding tax at a 20% rate at the time of payment. We have agreed to pay additional amounts in respect of withholding taxes on the payment of interest or premium. See ‘‘Description of the Bonds—Taxation’’. As used in the preceding sentences, ‘‘premium’’ refers to the difference between redemption price (including the accrued but unpaid interest) and the initial issue price irrespective of whether the redemption is made at maturity or at the option of our company or Holders.

Sale

Securities transaction tax will be imposed on the transfer of securities issued by ROC companies at the rate of 0.1% or 0.3%, depending upon the type of securities transferred. Securities transaction tax will be withheld at the rate of 0.1% of the transaction price upon sale of Bonds. However, this securities transaction tax is not applicable to the sale of the Bonds outside the ROC pursuant to a ruling from the Ministry of Finance dated January 17, 2001. In addition, 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 the Bonds.

Under current ROC law, capital gains on transactions of securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of Bonds.

Conversion into Common Shares or ADSs

ROC law currently provides no specific provisions regarding the ROC income tax consequences of a conversion of Bonds into Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs). Without further clarification from the ROC tax authorities, it is impossible to conclude definitively that gain on the conversion of Bonds into Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) will not be deemed as taxable gain, additional interest income (subject to the 20% withholding tax) or otherwise subject to other ROC tax.

Stamp Duty

There is no ROC stamp, issue or registration tax imposed on the issuance of Common Shares, or ADSs upon conversion of the Bonds.

146

ADSs

Dividends

Dividends, whether in cash or stock declared by us out of retained earnings and distributed to a NonROC Holder in respect of our shares represented by ADRs are subject to ROC withholding tax, currently at a rate of 20% on the amount of the distribution, in the case of cash dividends, or on the par value of the distributed shares, in the case of stock dividends. The Depositary may dispose of a portion of the dividends to pay such tax.

Distributions of stock dividends out of capital reserves are not subject to ROC withholding tax.

Sale

Under current ROC law, transfers of ADRs are not subject to ROC securities transaction tax.

Gains on sale of ADRs are not subject to ROC income tax.

Common Shares

Dividends

Dividends (whether in cash or Common Shares) declared by us out of retained earnings and distributed to a Non-ROC Holder in respect of Common Shares are subject to ROC withholding tax, currently at the rate of 20%, on the amount of the distribution (in the case of cash dividends) or on the par value of the Common Shares (in the case of stock dividends).

Distributions of Common Shares declared by us out of capital reserves are not subject to ROC withholding tax.

Sale

Security transaction tax will be withheld at the rate of 0.3% of the transaction price upon a sale of Common Shares.

Under current ROC law, capital gains on transactions in securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of Common Shares.

Preemptive Rights

Distributions of statutory subscription rights for the Common Shares in compliance with the Company Law are not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3% of the gross sales amount. Proceeds derived from sales of statutory subscription rights which are not evidenced by securities are subject to capital gains tax at the rate of (i) 25% of the gains realized by NonROC Entity Holders and (ii) 35% of gains realized by Non-ROC Individual Holders. Subject to compliance with ROC law, we have the sole discretion to determine whether statutory subscription rights shall be evidenced by the issuance of securities.

Inheritance Tax and Gift Tax

ROC inheritance tax is payable on any property situated within the ROC of a deceased Non-ROC Individual, and ROC gift tax is payable on any property situated within the ROC donated by such person. Inheritance tax is 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 inheritance and gift tax law, bonds and shares issued by ROC companies are deemed situated within the ROC irrespective of the location of the owner. It is unclear whether a holder of ADRs will be considered to own common shares for this purpose.

147

Tax Treaties

The United States does not have an income tax treaty with the ROC. At present, the ROC has income tax treaties with Australia, Gambia, Indonesia, Malaysia, Macedonia, the Netherlands, New Zealand, Singapore, South Africa, Swaziland and Vietnam which limit the rate of withholding tax on dividends or interest paid with respect to shares or bonds in ROC companies. It is unclear whether a Non-ROC Holder will be considered to own Bonds or Common Shares for the purposes of such income tax treaties. Accordingly, holders of Bonds or Common Shares who are otherwise entitled to the benefits of the relevant income tax treaty should consult their own tax advisors concerning their eligibility for benefits under the treaty with respect to the Bonds or Common Shares. 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 diplomatic recognition of the ROC.

In order to increase Taiwan’s competitive ability, an amendment to the ROC Income Tax Law (the ‘‘Amendment’’) was enacted on January 1, 1998, to integrate the corporate income tax and the shareholder dividend tax with the aim of eliminating the double taxation effect for resident shareholders of Taiwanese corporations. In accordance with the Amendment, a 10% retained earnings tax will be imposed on a company for its after-tax earnings generated after January 1, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares 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 Holders.

United States Federal Income Taxation

The following discussion addresses the principal United States federal income tax consequences to United States Holders, as defined below, of purchasing, owning and disposing of Bonds, ADSs or Common Shares, but it does not purport to be a comprehensive description of all of the United States federal income tax considerations that may be relevant to a decision to purchase, own, or dispose of the Bonds, ADSs or Common Shares and does not address the tax treatment under applicable state or local tax laws or the laws of any jurisdiction other than the United States. The following discussion only applies to United States Holders (as defined below) that:

• acquire their Bonds upon original issuance at the offering price;

• own Bonds, ADSs and Common Shares as capital assets; and

• actually and constructively own less than 10% of our voting stock.

Investors that purchase Bonds at a price other than the offering price should consult their own tax advisors as to the possible application to them of the amortizable bond premium or market discount rules.

In particular, this discussion does not address special United States federal income tax situations, such as the consequences applicable to persons who are subject to special treatment because they are:

• dealers in securities or currencies;

• traders in securities who elect to use a mark-to-market method of accounting for their securities holdings;

• banks;

• financial institutions;

• insurance companies;

• regulated investment companies;

148

• real estate investment trusts;

• tax-exempt organizations;

• persons liable for alternative minimum tax;

• persons who hold Bonds, ADSs or Common Shares as part of a hedging, integrated or conversion transaction, constructive sale or straddle;

• persons who are citizens or residents of a possession or territory of the United States;

• persons who hold Bonds, ADSs or Common Shares pursuant to certain retirement plans;

• • persons who receive Bonds, ADSs or Common Shares as compensation for services; • persons whose ‘‘functional currency’’ is not the U.S. dollar; or

• partners in a partnership that hold Bonds, ADSs and Common Shares.

The following discussion of United States federal income tax matters is based:

• on the federal income tax laws of the United States as in effect on the date of this Offering Circular, including the Internal Revenue Code of 1986, as amended (the ‘‘Code’’), judicial decisions, administrative pronouncements and Treasury regulations, changes to any of which after the date of this Offering Circular could apply on a retroactive basis and affect the tax consequences described in this Offering Circular;

• in part, on representations by the depositary, and assumes that each obligation under the applicable deposit agreement and any related agreements will be performed in accordance with their terms; and

• in part, on certain representations made by us with respect to the nature of our past, present and future income and assets.

As used in this discussion, the term ‘‘United States Holder’’ means a beneficial owner of Bonds, ADSs and Common Shares that is:

• an individual who is a citizen or resident (as defined below) of the United States;

• a corporation organized under the laws of the United States or any State or the District of Columbia (‘‘U.S. Corporation’’);

• an estate the income of which is subject to United States federal income taxation regardless of its source;

• a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust; or

• a trust that has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

If a partnership holds our Bonds, ADSs or Common Shares, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. We encourage any such partners to consult their own tax advisor.

A ‘‘ resident ’’ of the United States generally includes an individual that (i) is lawfully admitted for permanent residence in the United States; (ii) is present in the United States for 183 days or more during a calendar year; or (iii)(a) is present in the United States for 31 days or more during a calendar year, (b) is present in the United States for an aggregate of 183 days or more, on a weighted basis, over a three-year period ending with such calendar year, and (c) does not have a closer connection to a ‘‘tax home’’ that is located outside the United States.

149

A ‘‘ Non-United States Holder ’’ is any beneficial owner of Bonds, ADSs or Common Shares that is not a United States Holder

PROSPECTIVE PURCHASERS OF BONDS, ADSs OR COMMON SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF BONDS, ADSs OR COMMON SHARES, INCLUDING PARTICULARLY THE POSSIBLE IMPLICATIONS OF THE PASSIVE FOREIGN INVESTMENT COMPANY RULES DISCUSSED BELOW AS WELL AS THE EFFECT OF ANY STATE OR LOCAL TAX LAWS OR THE LAWS OF ANY JURISDICTION OTHER THAN THE UNITED STATES.

Interest on Bonds

Stated interest on a Bond (which will include additional amounts paid by us with respect to ROC withholding tax) will be taxable to a United States Holder as foreign source ordinary interest income at the time it accrues or is paid in accordance with the United States Holder’s method of accounting for tax purposes.

Subject to specified limitations, ROC taxes withheld from interest payments may be eligible for credit against the United States Holder’s United States federal income taxes or, at the United States Holder’s option, for deduction from United States taxable income. Under the Code, the limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, interest paid by us will generally be ‘‘high withholding tax interest.’’ Due to the complexity of the rules governing foreign tax credits, we encourage United States Holders to consult their own tax advisors concerning the availability of foreign tax credits under their particular circumstances.

Original Issue Discount on Bonds

The Bonds will be redeemed at maturity at 116.372% of their principal amount (the ‘‘Redemption Amount’’). Accordingly, for United States federal income tax purposes, the Bonds will be considered to have been issued with original issue discount (‘‘Original Issue Discount’’) (within the meaning of section 1273(a) of the Code) in an amount equal to the difference between (i) the Redemption Amount and (ii) the ‘‘issue price’’ of the Bonds. The ‘‘issue price’’ of a Bond will be equal to the first price at which a substantial amount of Bonds are sold (other than to underwriters, placement agents or wholesalers) and the Bonds will therefore be original issue discount Bonds.

As a result of a Bond containing Original Issue Discount, in addition to taking into account the stated interest paid on a Bond, each initial United States Holder of a Bond will be required to include in gross income, in each taxable year during which the Bond is held, a portion of the Original Issue Discount calculated on a yield to maturity basis, regardless of the United States Holder’s method of accounting for tax purposes. Such holder will be required to include increasingly greater amounts of Original Issue Discount in gross income in each successive accrual period in advance of the receipt of the cash attributable to such Original Issue Discount.

A United States Holder must include in gross income the sum of the daily portions of Original Issue Discount for each day during the taxable year such Holder holds a Bond. The daily portion is determined by allocating to each day of the accrual period a ratable portion of the excess of (i) the Adjusted Issue Price (as defined below) of the Bond at the beginning of the accrual period multiplied by the yield to maturity of the Bond (determined by compounding at the close of each accrual period and adjusted for the length of the accrual period) over (ii) the amount payable as stated interest on the Bond during such accrual period. United States Holders may accrue Original Issue Discount using accrual periods of any length, and such accrual periods may vary in length over the term of the Bond, provided that each accrual period must be no longer than one year and each scheduled payment of principal or interest must occur either on the final day of an accrual period or on the first day of an accrual period.

150

The Adjusted Issue Price of a Bond at the start of any accrual period is the issue price of the Bond increased by the amount of Original Issue Discount accrued during all prior accrual periods and decreased by payments other than stated interest, if any.

Sale or Redemption of Bonds

A United States Holder’s original tax basis in a Bond will be its U.S. dollar cost. Such holder’s original tax basis in a Bond will be increased by the net amount of accrued Original Issue Discount included in income and will be decreased by payments other than stated interest received by the Holder with respect to a Bond, if any.

Subject to the discussion under ‘‘—Passive Foreign Investment Company Status,’’ upon the sale, redemption or other disposition of a Bond, a United States Holder will recognize a gain or loss in an amount equal to the difference between the amount realized (excluding accrued but unpaid interest) and the United States Holder’s adjusted basis in the Bond. The gain or loss will be a long-term or short-term capital gain or loss, depending on whether the Bond has been held for more than one year. Long-term capital gain of a noncorporate United States Holder is generally subject to a maximum tax rate of 20%. For corporate United States Holders, a capital gain is currently taxed at the same rate as ordinary income. The deductibility of capital losses is subject to limitations for both corporate and non-corporate United States Holders. Any gain or loss recognized by a United States Holder will generally be treated as United States source gain or loss.

Conversion of Bonds into Common Shares or ADSs

Subject to the discussion under ‘‘—Passive Foreign Investment Company Status,’’ on conversion of a Bond into Common Shares or ADSs, in general, a United States Holder will not recognize gain or loss. A United States Holder’s obligation to include in gross income daily portions of the Original Issue Discount with respect to a Bond will terminate on the date of conversion. A United States Holder’s basis in the Common Shares or ADSs received on conversion will equal its adjusted basis in the Bond at the time of the conversion, and the holding period of the Common Shares or ADSs received on conversion will include the holding period of the converted Bond.

Any cash received in lieu of a fractional interest in Common Shares or ADSs upon conversion would be treated as a payment in exchange for the fractional interest in such Common Share or ADS. Accordingly, the receipt of cash in lieu of a fractional interest in a Common Share or ADS would generally result in a capital gain or loss, if any, measured by the difference between the cash received for the fractional interest in a Common Share or ADS and the United States Holder’s adjusted tax basis in such fractional Common Share or ADS interest (see ‘‘—Sale or Redemption of Bonds’’).

As discussed above, under the caption ‘‘Taxation—ROC Taxation—Conversion into Common Shares or ADSs,’’ it is possible that the ROC may impose a withholding tax upon the conversion of the Bonds into Common Shares or ADSs, which we will pay. Even though the conversion is not a taxable event for United States federal income tax purposes, a United States Holder would have taxable income on the conversion to the extent of ROC taxes paid by us on their behalf. However, because the conversion is generally not a taxable event for United States federal income tax purposes, United States Holders may not be able to use the credit attributable to ROC taxes imposed on a conversion unless it can be applied to other foreign source income in the appropriate limitation category.

Adjustment of Conversion Price of Bonds

The conversion price of the Bonds is subject to adjustment under certain circumstances. Section 305 of the Code and the regulations issued thereunder may treat the holders of the Bonds as having received a

151

constructive distribution, resulting in ordinary income to the extent of our current and accumulated earnings and profits, if, and to the extent that, certain adjustments of the conversion price increase the proportionate interest of a holder of the Bonds in the Common Shares, whether or not such holder exercises his conversion right. Moreover, if there is not a full adjustment of the conversion price of the Bonds to reflect a stock dividend or other event increasing the proportionate interest of the holders of the outstanding shares in the assets or earnings and profits of our company, or possibly, if in certain circumstances holders of Bonds were to receive cash in lieu of Common Shares on conversion, then such increase in the proportionate interest of the holders of the Common Shares generally will be treated as a distribution to such holders, taxable as described below under ‘‘—Taxation of Dividends.’’

ADSs, Entitlement Certificates and Temporary ADSs

For United States federal income tax purposes, a United States Holder will be treated as the beneficial owner of the Common Shares underlying its ADSs, and exchanges of Common Shares for ADSs, and ADSs for Common Shares, will not be subject to United States federal income tax. The ownership of Entitlement Certificates is considered to be ownership of the underlying Common Shares, and the ownership of Temporary ADSs is considered to be ownership of the underlying ADSs.

Taxation of Dividends

Subject to the discussion under ‘‘—Passive Foreign Investment Company Status’’ below, distributions, other than certain pro rata distributions of Common Shares and rights to acquire Common Shares discussed below, in respect of ADSs and Common Shares to United States Holders, including the amount of any ROC tax withheld, will constitute foreign source dividend income for United States federal income tax purposes to the extent these distributions are made from our current or accumulated earnings and profits, as determined in accordance with United States federal income tax principles. These dividends will not be eligible for the dividends received deduction otherwise allowed to U.S. Corporations. Such dividend income will be includable in the gross income of a United States Holder as ordinary income on the day it is actually or constructively received by the United States Holder, in the case of Common Shares, or by the depositary, in the case of ADSs. To the extent, if any, that the amount of any distribution of this type exceeds our current and accumulated earnings and profits as so computed, it will be treated first as a tax-free return of the United States Holder’s tax basis in its ADSs and Common Shares, and then, to the extent that any distribution of this type is in excess of the United States Holder’s tax basis, as capital gain. Any such distributions in excess of our current and accumulated earnings and profits will not give rise to foreign source income, and a United States Holder will not be able to use the foreign tax credit arising from any ROC withholding tax imposed on such distribution unless such credit can be applied (subject to applicable limitations) against United States federal income tax due on other foreign source income in the appropriate category for foreign tax credit purposes. The amount of any cash distribution paid in NT dollars will generally equal the U.S. dollar value of the NT dollar distribution, including the amount of any ROC tax withheld, calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received by the United States Holder, in the case of Common Shares, or by the depositary, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars on that date. If the NT dollars received are not converted into U.S. dollars on the date of receipt, a United States Holder will have a basis in the NT dollars equal to their U.S. dollar value on the date of receipt. Generally, gain or loss, if any, realized on a subsequent conversion or other disposition of the NT dollars will be ordinary income or loss. This gain or loss will generally be treated as United States source income for United States foreign tax credit limitation purposes. The amount of any distribution of property other than cash will be the fair market value of the property on the date of distribution.

Subject to specified limitations, including holding period requirements, ROC taxes withheld from dividend distributions may be eligible for credit against the United States Holder’s United States federal income taxes or, at the United States Holder’s option, for deduction from United States taxable income. Under the

152

Code, 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 will generally be ‘‘passive’’ income or, in the case of certain United States Holders, ‘‘ financial services’’ income. Due to the complexity of the rules governing foreign tax credits, we encourage United States Holders of ADSs and Common Shares to consult their own tax advisors concerning the availability of foreign tax credits under their particular circumstances.

Certain distributions of Common Shares and rights to acquire Common Shares that are made on a pro rata basis to our stockholders, including holders of ADSs, will not be subject to United States federal income tax. Accordingly, any distributions of this type will not give rise to United States federal income tax against which ROC tax withheld with respect to the distribution, if any, may be credited. Any ROC tax of this kind generally will be creditable only against a United States Holder’s United States federal income tax liability with respect to ‘‘general limitation income’’ and not ‘‘passive income’’ or ‘‘ financial services income.’’ The basis of any Common Shares or rights to acquire Common Shares received pro rata in a tax-free distribution by United States Holders will be determined by allocating the United States Holder’s basis in his existing Common Shares or rights to acquire Common Shares between the existing Common Shares or rights to acquire Common Shares and the newly issued Common Shares or rights to acquire Common Shares in proportion to their relative fair market values on the date of distribution. However, the basis of the rights will be zero if (i) the fair market value of the rights is less than 15% of the fair market value of the existing Common Shares at the time of distribution (unless the United States Holder makes an election to allocate the basis in his existing Common Shares as described above) or (ii) the rights are not exercised and thus expire.

Sale or Other Disposition of Common Shares or ADSs

Subject to the discussion under ‘‘—Passive Foreign Investment Company Status’’ below, a United States Holder will recognize capital gain or loss for United States federal income tax purposes on a sale or other disposition of ADSs or Common Shares in an amount equal to the difference between the United States Holder’s adjusted basis in the ADSs or Common Shares and the amount realized on the disposition. This capital gain or loss will be long-term capital gain or loss if the United States Holder has held the ADSs or Common Shares for more than one year at the time of the sale or exchange. The holding period of the ADSs or Common Shares will include the holding period of the converted Bonds. Long-term capital gain of a noncorporate United States Holder is generally subject to a maximum rate of 20% in respect of property held for more than one year. For corporate United States Holders, a capital gain is currently taxed at the same rate as ordinary income. The deductibility of capital losses is subject to limitations for both corporate and noncorporate United States Holders. Any gain or loss recognized by a United States Holder will generally be treated as United States source gain or loss. United States Holders should note that any ROC securities transaction taxes imposed on a sale may not be eligible for credit and may not be eligible for deduction against the United States Holder’s United States federal income taxes. In the event that any ROC securities taxes are not eligible for deduction, however the amount of any such taxes will reduce the amount realized by the United States Holder upon the disposition of the Common Shares or ADSs.

Passive Foreign Investment Company Status

Certain adverse United States federal income tax rules apply to United States persons who are holders of equity interests in a corporation classified as a ‘‘passive foreign investment company’’ (‘‘PFIC’’). The PFIC tax rules suggest that holders of Bonds are subject to PFIC rules in connection with a disposition of the Bonds.

Based on current and projected financial data, we believe that we will not currently be treated as a PFIC for United States federal income tax purposes and we do not expect to become one in the future, but this conclusion is a factual determination made annually and thus may be subject to change based on future

153

operations and the composition and valuation of our assets. In general, we will be a PFIC with respect to a United States Holder if, for any taxable year in which the United States Holder holds ADSs or Common Shares (or Bonds), after the application of certain ‘‘look through’’ rules to the assets and income of 25% or greater owned subsidiaries, either:

• at least 75% of our gross income for the taxable year is passive income; or

• at least 50% of the average percentage by value of our assets during the taxable year is attributable to assets that produce or are held for the production of passive income.

If we are treated as a PFIC, a United States Holder will be subject to taxation under one of three alternative tax regimes. Under the first regime, a United States Holder that does not make a qualified electing fund election or a mark-to-market election, as described below, would be subject to special, generally unfavorable, rules with respect to:

• any gain realized on the sale or other disposition of ADSs or Common Shares (or Bonds); and

• any ‘‘excess distribution’’ by us to the United States Holder.

Generally, ‘‘excess distributions’’ are any distributions to the United States Holder in respect of the ADSs or Common Shares during a single taxable year that are greater than 125% of the average annual distributions received by the United States Holder in respect of the ADSs or Common Shares during the three preceding taxable years or, if shorter, the United States Holder’s holding period for the ADSs or the Common Shares (which would include the holding period of the converted Bonds).

Under the PFIC rules, if no special election is made:

• the gain or excess distribution would be allocated ratably over the United States Holder’s holding period;

• the amount allocated to the taxable year in which the gain or excess distribution was realized would be taxable as ordinary income;

• the amount allocated to each prior year, with certain exceptions, would be subject to tax at the highest tax rate in effect for that year; and

• an interest charge, which may be nondeductible in the case of United States Holders that are individuals, generally applicable to underpayments of tax would be imposed in respect of the deferred tax attributable to each such year.

Under the second regime, a United States Holder actually or constructively owning ‘‘marketable stock’’ (within the meaning of the Code and regulations promulgated thereunder) of a PFIC may be able to avoid the imposition of the PFIC tax rules described above by making a mark-to-market election. Under current law, the mark-to-market election is only available for stock traded on certain designated United States exchanges and foreign exchanges that meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable United States Treasury regulations. The Common Shares are listed on the Taiwan Stock Exchange and existing ADSs are listed on Nasdaq. The Temporary ADSs issuable upon conversion of the Bonds and the Restricted ADSs will not be listed on Nasdaq or any other stock exchange. Consequently, the mark-to-market election will not be available for the Temporary ADSs and the Restricted ADSs. However, application will be made to have the ADSs issuable upon conversion of Regulation S Bonds listed on Nasdaq after the relevant Consolidation Date. Nasdaq is a qualified exchange for purposes of ‘‘marketable stock’’ and the mark-to-market election, but the Taiwan Stock Exchange would need to meet the trading, listing, financial disclosure and other requirements of the United States Treasury regulations. In addition, both the ADSs listed on Nasdaq and the Common Shares listed on the Taiwan Stock Exchange would need to be regularly traded on such exchanges in order for the ADSs and Common Shares to be potentially eligible for the mark-to-market election. Under current law, the mark-to-market election is not available for the Bonds.

Generally, pursuant to this election, such holder would include in ordinary income an amount equal to the increase in the market value of such stock during the taxable year and would be allowed to recognize an

154

ordinary loss for any decrease in such market value to the extent of prior gain recognized. The mark-to-market election would be effective for the taxable year for which made and all subsequent taxable years, unless the stock ceased to be marketable, or the Internal Revenue Service consented to the revocation of the election. United States Holders desiring to make the mark-to-market election should consult their tax advisors with respect to the application and effect of making such election.

In the case of a United States Holder who does not make a mark-to-market election, the special PFIC tax rules described above will not apply to such United States Holder if the United States Holder makes an election to have us treated as a ‘‘qualified electing fund’’ and we provide certain required information to such holders.

Under this third regime, a United States Holder that makes a qualified electing fund election will be currently taxable on its pro rata share of our net capital gain (the excess of net long-term capital gain over net short-term capital loss) and ordinary earnings, at long-term capital gains and ordinary income rates, respectively, for each of our taxable years during which we are treated as a PFIC, regardless of whether or not such amounts are actually distributed. The United States Holder’s basis will be increased to reflect such taxed but undistributed amounts of income. Distributions of income that have previously been taxed will result in a corresponding reduction in the United States Holder’s basis and will not be taxed again as a distribution to the United States Holder. United States Holders desiring to make a qualified electing fund election should consult their tax advisors with respect to the advisability of making such election. For a United States Holder to make a qualified electing fund election, we would have to satisfy certain reporting requirements. We have not determined whether we will undertake the necessary measures to be able to satisfy such requirements, in the event that we are treated as a PFIC.

United States Federal Income Taxation of Non-United States Holders

Subject to the discussion of United States backup withholding tax below, a Non-United States Holder of Bonds, ADSs or Common Shares will not be subject to United States federal income or withholding tax on payments of principal or interest on a Bond, distributions on a Common Share or ADS or gains realized on the sale of Bonds, ADSs or Common Shares, provided that (i) such income items are not effectively connected with the conduct by the Non-United States Holder of a trade or business within the United States (or, in the case where a Non-United States Holder is eligible for the benefits of an income tax treaty with the United States, the Non-United States Holder does not have a permanent establishment or fixed place of business in the United States to which such income is attributable), (ii) the Non-United States Holder is not or was not present in or does not have or did not have a permanent establishment or fixed place of business in the United States, (iii) there has not been a present or former connection between the Non-United States Holder and the United States, including, without limitation, such Non-United States Holder’s status as a citizen or former citizen, or resident or former resident, of the United States, and (iv) in case of a gain from the sale or disposition of Bonds, ADS or Common Shares by an individual, the Non-United States Holder is not present in the United States for 183 days or more during the taxable year of the sale. Where a Non-United States Holder that is also a corporation for United States federal income tax purposes is subject to United States federal income tax in respect of such items of income in the same manner as a United States Holder, such items of income, net of United States federal corporate income taxes, may also be subject to an additional ‘‘ branch profits tax’’ of 30% (or such lower rate as may be specified by a tax treaty for whose benefits the Non-United States Holder corporation is eligible).

United States Backup Withholding Tax and Information Reporting

Payments made by a paying agent within the United States to the United States Holders other than corporations and other exempt recipients in respect of the Bonds, ADSs or Common Shares may be subject to information reporting to the United States Internal Revenue Service. A backup withholding tax on amounts received will apply to those payments if a non-exempt United States Holder fails to provide certain identifying information, such as the holder’s taxpayer identification number, and to comply with certain other requirements

155

concerning backup withholding. Currently, this backup withholding rate is 30% for payments made in 2002 and 2003, but this rate will be reduced to 29% for payments made in 2004 and 2005, and 28% for payments made in 2006 and thereafter. Non-United States Holders may be required to comply with applicable certification procedures to establish that they are not United States Holders in order to avoid the application of such information reporting requirements and backup withholding tax.

Any amounts withheld under the backup withholding tax rules from a payment to a holder generally will be allowed as a refund or a credit against such holder’s United States federal income tax, provided that the required information is furnished to the Internal Revenue Service.

Proposed European Union (‘‘EU’’) Withholding Tax Directive

In June 2000 the European Council agreed to amend a proposed EU Directive of June 1998 regarding the taxation of interest, discounts and premiums payable to individual residents of other EU Member States. Member States would be obliged either (a) to exchange information with other Member States regarding such savings income paid to individuals resident in another Member State or (b) withhold tax on such income at a rate to be agreed, provided that Member States that operate a withholding system must implement the exchange of information system as soon as conditions permit and in any case no later than seven years after implementation of the proposed Directive. Further to an agreement reached at the ECOFIN meeting in November 2000 the withholding tax and information reporting requirements would only apply to payments after 2002 with respect to debt issued on or after March 1, 2001. It is impossible at this time to predict whether or in what form the proposed EU Directive, which requires the unanimous approval of all Member States, will eventually be adopted or what the effective dates of any withholding tax system that is adopted will be.

156

PLAN OF DISTRIBUTION

Under the terms and subject to the conditions contained in a purchase agreement dated February 1, 2002 (the ‘‘Purchase Agreement’’), the initial purchasers named below (the ‘‘Initial Purchasers’’), for whom Deutsche Bank AG London and Merrill Lynch Far East Limited are acting as representatives (the ‘‘Joint Bookrunners’’), have severally but not jointly agreed to purchase from us the following respective principal amounts of the Bonds:

Initial Purchaser Deutsche Bank AG London.......................................................................................................... Merrill Lynch Far East Limited.................................................................................................... China Development Industrial Bank Inc. .................................................................................... Citicorp International Limited ...................................................................................................... J.P.Morgan Securities Ltd. ........................................................................................................... Total...............................................................................................................................................

Principal Amount

US$ 66,500,000 66,500,000 2,800,000 2,800,000 1,400,000 US$140,000,000

The Purchase Agreement provides that the obligations of the Initial Purchasers are subject to certain conditions precedent and that the Initial Purchasers will be obligated to purchase all the Bonds, if any are issued. The Purchase Agreement provides that, in the event of a default by an Initial Purchaser, in certain circumstances the purchase commitments of non-defaulting Initial Purchasers may be increased or the Purchase Agreement may be terminated.

The purchase price for the Bonds will be the initial offering price set forth on the cover page of this Offering Circular (the ‘‘Offering Price’’) less the combined management and underwriting commission and selling concession equal to 2.50% of the principal amount of the Bonds purchased. Pursuant to the Purchase Agreement the Initial Purchasers have agreed to reimburse certain of our expenses in connection with the issue of the Bonds. The Initial Purchasers propose to offer the Bonds at the Offering Price. After the Bonds are released for sale, the Offering Price and other selling terms may from time to time be varied by the Initial Purchasers.

United States

The Bonds and the Common Shares (or Entitlement Certificates) issuable upon conversion of the Bonds and the Restricted ADSs (or the Restricted Temporary ADSs) issuable upon the deposit of Common Shares (or Entitlement Certificates) 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 Bonds, the Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds are being offered and sold by the Initial Purchasers only (i) in the United States to qualified institutional buyers (‘‘QIBs’’) pursuant to Rule 144A under the Securities Act and (ii) outside the United States in reliance upon Regulation S.

Each Initial Purchaser has agreed in the Purchase Agreement that it will not offer, sell or deliver any Bonds, the Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds, (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the latest closing date of the offering (the ‘‘Distribution Compliance Period’’), within the United States or to, or for the account or benefit of, U.S. persons except, in either case, in accordance with Regulation S or to persons who it reasonably believes to be QIBs pursuant to Rule 144A, and that it will have sent to each dealer to which it sells Bonds, Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds during the Distribution Compliance Period (unless such sale is made in accordance with Rule 144A) a confirmation or other notice setting forth the restriction on offers and sales of Bonds, the Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds within the United States or to, or for the account or benefit of, U.S. persons.

157

In addition, until 40 days after the later of the commencement of this offering and the latest closing date of this offering, an offer or sale of the Bonds and the Common Shares (or Entitlement Certificates) and the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds, within the United States by a dealer (whether or not participating in the offering) may violate the registration requirement of the Securities Act if such offer or sale is made otherwise than pursuant to Rule 144A. As used in this paragraph and the immediately preceding paragraph, the terms ‘‘United States’’ and ‘‘U.S. person’’ have the meanings given to them by Regulation S under the Securities Act.

United Kingdom

Each of the Initial Purchasers severally represents and agrees that (i) it has not offered or sold, and prior to the expiry of six months from the Closing Date will not offer or sell, any Bonds, Common Shares (or Entitlement Certificates) or the ADSs (or Temporary ADSs) 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, (ii) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’) with respect to anything done by it in relation to the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) in, from or otherwise involving the United Kingdom and (iii) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) in circumstances in which Section 21(1) of the FSMA does not apply to our company.

Republic of China

Each of the Initial Purchasers has agreed that, as part of the distribution of the Bonds, it has not offered or sold, and will not offer or sell, any Bond, Common Shares (or Entitlement Certificates) or the ADSs (or Temporary ADSs) directly or indirectly in the ROC. As used in this paragraph, ‘‘ROC’’ means Taiwan and other areas under the effective jurisdiction and control of the Republic of China.

Hong Kong

Each of the Initial Purchasers has agreed that (i) it has not offered or sold, and will not offer or sell in Hong Kong, by means of any document, any Bonds other than to persons whose ordinary business 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; and (ii) it has not issued or had in its possession and will not issue or have in its possession any document, invitation or advertisement relating to the Bonds in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Bonds intended to be disposed of to persons outside Hong Kong or to be disposed of in Hong Kong only to persons whose business involves the acquisition, disposal, or holding of securities, whether as principal or agent.

Singapore

Each of the Initial Purchasers has acknowledged that this Offering Circular has not been registered as a prospectus with the Registrar of Companies and Businesses in Singapore. Accordingly, each Initial Purchaser has represented and agreed that it has not offered or sold and will not offer or sell the Bonds, nor will it circulate or distribute the Offering Circular or any other offering document or material relating to the Bonds, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor or other person specified in Section 106C of the Companies Act, Chapter 50 of Singapore (the ‘‘Singapore Companies Act’’), (ii) to a sophisticated investor, and in accordance with the conditions,

158

specified in Section 106D of the Singapore Companies Act or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the Singapore Companies Act.

Japan

Each of the Initial Purchasers has acknowledged that (i) the Bonds have not been registered under the Securities and Exchange Law of Japan (the ‘‘Securities and Exchange Law’’), and (ii) it has not offered or sold and will not offer or sell, directly or indirectly, the Bonds in Japan or to or for the account of any resident of Japan, except (a) pursuant to an exemption from the registration requirements of the Securities and Exchange Law and (b) in compliance with any other applicable requirements of Japanese Law.

We have agreed that we will not, and that we will not permit our subsidiaries to, without the prior written consent of the Joint Bookrunners, directly or indirectly offer, sell, contract to sell, announce our intention to sell, pledge or otherwise dispose or, directly of indirectly, or file with the Commission a registration statement under the Securities Act relating to, any additional Bonds, Common Shares (or Entitlement Certificates), ADSs (or Temporary ADSs) or securities convertible into or exchangeable or exercisable for any of its Bonds, Common Shares (or Entitlement Certificates) or ADSs (or Temporary ADSs) for a period of 90 days after the date of this Offering Circular, other than the Bonds, Common Shares (or Entitlement Certificates) and ADSs (or Temporary ADSs) issued in respect of such Bonds.

We have granted the Joint Bookrunners an option exercisable for 30 days after the date of this Offering Circular to purchase up to an aggregate of US$29,224,000 additional principal amount of Bonds, as the Joint Bookrunners elect, at the offering price set forth on the cover of this Offering Circular, solely to cover over-allotments.

It is expected that delivery of the Bonds will be made against payment therefor on or about the date specified in the last paragraph of the cover page of this Offering Circular, which will be the fourth business day following the date of pricing of the Bonds. Pursuant to Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in three business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Bonds on the day of pricing or the next succeeding business day may be required to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of Bonds who wish to trade Bonds on the date of pricing or the next succeeding business day should consult their own advisor.

In connection with the offering, Deutsche Bank AG London may over-allot or effect transactions which stabilize or maintain the market price of the Bonds (subject to applicable law) at a level which might not otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time.

We have agreed to indemnify the Initial Purchasers against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments which the Initial Purchasers may be required to make in respect thereof.

Application has been made to list the Bonds on the Luxembourg Stock Exchange and to have the Restricted Bonds designated for trading in the PORTAL System.

The Initial Purchasers and their affiliates engage and may in the future engage in investment banking and commercial banking transactions with us.

159

TRANSFER RESTRICTIONS

Because of the following restrictions, we encourage you to consult legal counsel prior to making any offer, resale, pledge or other transfer of Bonds offered and sold to qualified institutional buyers within the United States pursuant to Rule 144A, Bonds offered and sold in reliance on Regulation S, the Common Shares (or Entitlement Certificates) or the ADSs (or Temporary ADSs) issuable upon conversion of the Bonds.

The Bonds may not be offered or sold directly or indirectly in the ROC. The Restricted Bonds and the Regulation S Bonds, the Common Shares, Entitlement Certificates, the ADSs and Temporary ADSs, issuable upon conversion of the Bonds have not been, and will not be, registered under the Securities Act. The Bonds and the Common Shares, Entitlement Certificates and the Restricted ADSs (and Temporary ADSs) issuable upon conversion of the Bonds, may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Therefore, the Bonds are being offered and sold in the United States only to qualified institutional buyers (‘‘QIBs’’) in reliance upon Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. Terms used in this section are defined in Rule 144A or Regulation S under the Securities Act. Except in certain limited circumstances, interests in the Bonds may only be held through interests in the Global Bonds. Such interests in the Global Bonds will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct and indirect participants, including Euroclear and Clearstream. See ‘‘The Global Bonds—Global Bonds.’’

Transfer Restrictions on the Restricted Bonds

Each purchaser of the Restricted Bonds by accepting delivery of this Offering Circular will be deemed to have acknowledged and represented and agreed to as follows:

1. The Restricted Bonds, Common Shares, Entitlement Certificates, ADSs and Temporary ADSs issuable upon conversion of the Restricted Bonds, have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer.

2. Such owner is (a) a QIB, (b) purchasing the Restricted Bonds for its own account, or for an account of a QIB, and (c) aware and each beneficial owner of the Restricted Bonds has been advised that the sale of such Bonds to it is being made in reliance on Rule 144A.

3. Such owner will not offer, sell, pledge or otherwise transfer any interest in the Restricted Bonds except as permitted by the applicable legend set forth in paragraph 4 below.

4. The Restricted Bonds will bear a legend to the following effect, unless we determine otherwise in compliance with applicable law, and that we will observe the restrictions contained therein:

THE RESTRICTED BONDS EVIDENCED HEREBY, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) AND THE RULE 144A AMERICAN DEPOSITARY SHARES (‘‘ADS’’) (OR RULE 144A TEMPORARY AMERICAN DEPOSITARY SHARES (‘‘RULE 144A TEMPORARY ADSs’’)) OF MACRONIX INTERNATIONAL CO., LTD. (‘‘MACRONIX’’) ISSUABLE UPON CONVERSION OF THE RESTRICTED BONDS EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT IS (A) A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR A PURCHASER THAT THE SELLER

160

AND ANY PERSON ACTING ON THE SELLER’S BEHALF REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, IN EACH CASE PURCHASING FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, AND (B) AWARE THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (2) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT TO A PERSON OTHER THAN A U.S. PERSON (AS DEFINED IN REGULATION S), (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR (4) 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 THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS. EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS RESTRICTED BOND, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS AND THAT NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 FOR RESALES OF THIS RESTRICTED BOND, THE COMMON SHARES, THE ENTITLEMENT CERTIFICATES, THE ADSs AND THE TEMPORARY ADSs.

THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THE RESTRICTED BONDS EVIDENCED HEREBY PURSUANT TO CLAUSE (3) ABOVE, OR THE LATER OF THE EXPIRATION OF TWO YEARS FROM THE ORIGINAL ISSUANCE OF THE RESTRICTED BONDS EVIDENCED HEREBY OR AT SUCH TIME THE RESTRICTED BONDS ARE NO LONGER ‘‘RESTRICTED SECURITIES’’ UNDER THE SECURITIES ACT.

1. The Restricted Bonds will initially be represented by the Restricted Global Bond. Before any Restricted Bonds evidenced by such Restricted Global Bond may be sold or otherwise transferred to a person who takes delivery in the form of Regulation S Bonds evidenced by the Regulation S Global Bond, the transferor will be required to provide written certifications in the forms set forth in the Indenture.

2. No resale or other transfer, or attempted resale or other transfer, of the Restricted Bonds will be effected unless such transaction is made in compliance with the above-stated restrictions.

Transfer Restrictions on the Regulation S Bonds

Each purchaser of the Regulation S Bonds, by accepting delivery of this Offering Circular, will be deemed to have acknowledged and represented and agreed to as follows:

1. The Regulation S Bonds, Common Shares, Entitlement Certificates, ADSs and Temporary ADSs issuable upon conversion of the Regulation S Bonds have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer.

2. Each owner purchasing prior to the expiration of 40 days after the later of the commencement of the offering and the latest closing date of the offering (the ‘‘Distribution Compliance Period’’) is purchasing the Regulation S Bonds in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S.

3. Such owner will not offer, sell, pledge or otherwise transfer any interest in the Regulation S Bonds, Common Shares, Entitlement Certificates, ADSs and Temporary ADSs issuable upon conversion of the Regulation S Bonds except as permitted by the applicable legend set forth in paragraph (4) below.

4. The Regulation S Bonds will bear legends to the following effect, unless we determine otherwise in compliance with applicable law, and that we will observe the restrictions contained therein:

THE REGULATION S BONDS EVIDENCED HEREBY, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) AND ADSs (OR TEMPORARY ADSs) OF MACRONIX

161

INTERNATIONAL CO., LTD. (‘‘MACRONIX’’) ISSUABLE UPON CONVERSION OF THE REGULATION S BONDS EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND PRIOR TO THE EXPIRATION OF 40 DAYS AFTER THE LATER OF THE COMMENCEMENT OF THE OFFERING OF THE REGULATION S BONDS AND THE LATEST CLOSING DATE OF THE OFFERING (THE ‘‘DISTRIBUTION COMPLIANCE PERIOD’’), SUCH BONDS MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE SECURITIES ACT TO A PERSON THAT IS (A) A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR A PURCHASER THAT THE SELLER AND ANY PERSON ACTING ON THE SELLER’S BEHALF REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER, IN EACH CASE PURCHASING FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, AND (B) AWARE THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (IN WHICH CASE ADDITIONAL TRANSFER RESTRICTIONS MAY APPLY), (2) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT TO A PERSON OTHER THAN A U.S. PERSON, (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (4) 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 THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS; PROVIDED THAT IN CONNECTION WITH ANY TRANSFER UNDER (1) ABOVE, THE TRANSFEROR SHALL, PRIOR TO THE SETTLEMENT OF SUCH SALE, APPLY TO THE TRUSTEE TO CONVERT THE BONDS INTO RESTRICTED BONDS UNDER THE TERMS OF THE INDENTURE AND INSTRUCT THE TRUSTEE TO DELIVER SUCH RESTRICTED BONDS TO OR FOR THE ACCOUNT OF THE QUALIFIED INSTITUTIONAL BUYER WHO AGREED TO PURCHASE THE BONDS IN A TRANSACTION UNDER (1) ABOVE. EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THE REGULATION S BONDS EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING AND FOLLOWING RESTRICTIONS.

THIS LEGEND WILL BE REMOVED AFTER THE END OF DISTRIBUTION COMPLIANCE PERIOD, AFTER WHICH THE REGULATION S BONDS EVIDENCED HEREBY, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) AND LISTED ADSs (OR TEMPORARY ADSs THAT REPRESENT SUCH ADSs) OF MACRONIX ISSUABLE UPON CONVERSION OF THE REGULATION S BONDS SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS PROVIDED IN THIS LEGEND, PROVIDED THAT AT SUCH TIME AND THEREAFTER THE OFFER OR SALE OF REGULATION S BONDS EVIDENCED HEREBY, THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES), LISTED ADSs (OR TEMPORARY ADSs THAT REPRESENT SUCH ADSs) OF MACRONIX ISSUABLE UPON CONVERSION OF THE REGULATION S BONDS WOULD NOT BE RESTRICTED UNDER ANY APPLICABLE SECURITIES LAWS OF THE UNITED STATES OR OF THE STATES OR TERRITORIES OF THE UNITED STATES.

Transfer Restrictions on the ADSs (or Temporary ADSs) Issuable Upon Conversion of the Bonds

The ADSs (or Temporary ADSs) which are not ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act will not bear any legends. Upon conversion of a Restricted Bond, the converting Holder will be required to make certain representations in the conversion notice at the time of signing and delivery of such notice. In addition, so long as the Restricted Bonds are, and the Common Shares (or Entitlement Certificates) into which they are convertible will be, ‘‘restricted securities’’ within the meaning of Rule 144 under the Securities Act, if such Bondholder or beneficial owner who is a QIB elects to receive ADSs (or Temporary ADSs) upon conversion, the Common Shares (or Entitlement Certificates) issuable upon conversion of the Restricted Bonds will be deposited into the Restricted ADS Depositary Facility and

162

Restricted ADSs or Restricted Temporary ADSs, as the case may be, will be issued, and such Bondholder or beneficial owner will agree to hold the Restricted ADSs (or Restricted Temporary ADSs) which it agrees not to sell except (a) pursuant to a registration statement which has been declared effective under the Securities Act, (b) in accordance with Rule 144A to a person such holder or beneficial owner reasonably believes is a QIB within the meaning of Rule 144A purchasing for its own account or for the account of a QIB, (c) in an offshore transaction to non-U.S. persons in accordance with Regulation S under the Securities Act, or (d) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), and except, in each case, to a person who is not our company or any of our affiliates (within the meaning of Rule 144 under the Securities Act). The Restricted ADSs (or Restricted Temporary ADSs) will bear the following legend until after the expiration of two years following the original issuance of the Bonds:

THIS RULE 144A AMERICAN DEPOSITARY RECEIPT, THE RULE 144A AMERICAN DEPOSITARY SHARES (OR RULE 144A TEMPORARY AMERICAN DEPOSITARY SHARES) EVIDENCED HEREBY AND THE COMMON SHARES (OR ENTITLEMENT CERTIFICATES) OF MACRONIX INTERNATIONAL CO., LTD. (‘‘MACRONIX’’) REPRESENTED THEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘SECURITIES ACT’’), AND THE HOLDER AGREES THAT THESE SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (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 EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION PURSUANT TO 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, AND THAT THESE SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY TO A PERSON WHO IS NOT MACRONIX OR AN ‘‘AFFILIATE’’ (WITHIN THE MEANING OF RULE 144(a)(1) UNDER THE SECURITIES ACT) OF MACRONIX. EACH HOLDER, BY ITS ACCEPTANCE OF THIS RULE 144A AMERICAN DEPOSITARY RECEIPT, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS. THE BENEFICIAL OWNER OF COMMON SHARES (OR ENTITLEMENT CERTIFICATES) RECEIVED UPON CANCELLATION OF ANY RULE 144A AMERICAN DEPOSITARY RECEIPT MAY NOT DEPOSIT OR CAUSE TO BE DEPOSITED SUCH COMMON SHARES (OR ENTITLEMENT CERTIFICATES) INTO ANY DEPOSITARY RECEIPT FACILITY ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK, OTHER THAN A RULE 144A AMERICAN DEPOSITARY RECEIPT FACILITY, SO LONG AS SUCH COMMON SHARES ARE ‘‘RESTRICTED SECURITIES’’ WITHIN THE MEANING OF RULE 144(a)(3) UNDER THE SECURITIES ACT.

THE DEPOSITARY WILL REQUIRE A CERTIFICATION AS TO COMPLIANCE WITH THE ABOVE RESTRICTIONS SIGNED BY THE TRANSFEREE AS A CONDITION OF EFFECTING ANY REGISTRATION OF TRANSFER OF THIS RULE 144A AMERICAN DEPOSITARY RECEIPT.

163

GENERAL INFORMATION

1. The Bonds will be accepted for clearance through the facilities of the Depositary Trust Company, New York, New York (and its direct and indirect participants, including Euroclear and Clearstream). The CUSIP number for the Restricted Global Bond is 556103AC3 and the ISIN is US556103AC37. The CUSIP number for the Regulation S Global Bond is Y5369AAD6 and the ISIN is USY5369AAD64. The Common Code for the Regulation S Global Bond is 014291822.

2. The issuer of the Bonds is Macronix International Co., Ltd., a company limited by shares and incorporated under the laws of the ROC on December 9, 1989. Our company is an independent semiconductor designer, developer, manufacturer and marketer of nonvolatile memory ICs. Our authorized capital is NT$45,000,000,000 divided into 4,500,000,000 Common Shares. Our company holds 100% of the issued share capital of Macronix America, Inc., our wholly-owned sales organization in the United States. Macronix America, Inc. has an authorized and issued share capital of 100,000 shares, par value US$1.00 share.

3. Application has been made to list the Bonds on the Luxembourg Stock Exchange. The legal notice relating to the issue of the Bonds and our Articles of Incorporation will be registered prior to the listing with the Registrar of the District Court in Luxembourg ( Greffier en Chef du Tribunal d’Arrondissement de et a` Luxembourg ), where such documents are available for inspection and where copies thereof can be obtained upon request.

4. The issuance of the Bonds was authorized by resolution dated December 13, 2001 of our Board of Directors. We have obtained all necessary consents, approvals and authorizations as may be required in connection with the issue and performance of the Bonds, except as disclosed in this Offering Circular.

5. Except as disclosed in this Offering Circular, there has been no material adverse change in our capitalization, financial position or prospects since June 30, 2001, the date of our last audited financial statements.

6. Other than as referred to elsewhere in the Offering Circular, neither our company nor any of our subsidiaries is involved in any material litigation or arbitration proceedings that may have, or have had during the twelve months preceding the date of this document, a material adverse effect on the financial position of our company or of our subsidiaries, nor is our company or any of our subsidiaries aware that any such proceedings are pending or threatened.

7. For so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of such exchange so require, The Bank of New York (Luxembourg) S.A. will, in its capacity as Paying, Transfer and Conversion Agent, serve as the intermediary between us and the holders of the Bonds. A copy of our Articles of Incorporation and copies of the Indenture and the Purchase Agreement (or, pending execution thereof, drafts thereof subject to modification) will, for so long as the Bonds are listed on the Luxembourg Stock Exchange, be available for inspection during usual business hours on any weekday (except public holidays) at the offices of the Conversion Agent and the Transfer Agent in Luxembourg. As long as any of the Bonds remain outstanding, copies of our most recent annual report in English containing our audited financial statements (both unconsolidated and, to the extent we are required by ROC regulations to publish consolidated financial statements, consolidated), our most recent audited unconsolidated semi-annual financial statements and unaudited unconsolidated quarterly financial information submitted to the United States Securities and Exchange Commission, each in English, will be delivered to and be obtainable from the specified offices of the Conversion Agent and the Transfer Agent one of which offices shall be located in Luxembourg for as long as the Bonds are listed on the Luxembourg Stock Exchange.

164

1. In accordance with the generally accepted accounting principles of the ROC, our interim financial statements are only prepared on an unconsolidated basis. We publish audited unconsolidated annual and semiannual financial statements and unaudited unconsolidated quarterly financial statements for the first and third quarters of each year in the ROC. The unconsolidated financial statements will also be obtainable from the specified offices of the Conversion Agent and the Transfer Agent in Luxembourg for as long as the Bonds are listed on the Luxembourg Stock Exchange.

165

LEGAL MATTERS

The validity of the Bonds will be passed upon for us as to ROC law by Baker & McKenzie, Taipei, Taiwan, ROC. Certain legal matters in connection with the offering of the Bonds as to New York State and United States federal law will be passed upon by Baker & McKenzie, Hong Kong. The Initial Purchasers are being represented by Simpson Thacher & Bartlett as to matters of New York State and United States federal law and by Lee and Li as to matters of ROC law.

EXPERTS

The consolidated financial statements of Macronix International Co., Ltd. at December 31, 1999 and 2000 and at June 30, 2001, and for each of the three years in the period ended December 31, 2000 and for the six month periods ended June 30, 2000 and 2001, appearing in this Offering Circular have been audited by Diwan, Ernst & Young, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing.

166

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors’ Report..........................................................................................................................	F-2
Consolidated Balance Sheets as of December 31, 1999, 2000 and June 30, 2001 ........................................	F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31,
2000 and for the six-month periods ended June 30, 2000 and 2001 ..........................................................	F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31,
2000 and for the six-month periods ended June 30, 2000 and 2001 ..........................................................	F-6
Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended
December 31, 2000 and for the six-month period ended June 30, 2000 and 2001....................................	F-8
Notes to Consolidated Financial Statements....................................................................................................	F-10

F-1

[This page is intentionally left blank]

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors, Supervisors, and Shareholders of Macronix International Co., Ltd.

We have audited the accompanying consolidated balance sheets of Macronix International Co., Ltd. as of December 31, 1999 and 2000 and June 30, 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2000 and the six-month periods ended June 30, 2000 and 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 above present fairly, in all material respects, the consolidated financial position of Macronix International Co., Ltd. as of December 31, 1999 and 2000 and June 30, 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 and the six-month periods ended June 30, 2000 and 2001, in conformity with accounting principles generally accepted in the Republic of China.

Accounting principles generally accepted in the Republic of China vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of generally accepted accounting principles in the United States of America would have affected the consolidated shareholders’ equity as of December 31, 1999 and 2000 and June 30, 2001, and the consolidated results of its operations for each of the three years in the period ended December 31, 2000 and the six-month periods ended June 30, 2000 and 2001, to the extent summarized in note 20 to the consolidated financial statements.

DIWAN, ERNST & YOUNG CERTIFIED PUBLIC ACCOUNTANTS

Taipei, Taiwan, R.O.C August 6, 2001

F-2

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS

December 31, 1999 and 2000, and June 30, 2001 (Amounts in thousands except share data)

ASSETS Current assets Cash and cash equivalents ... Restricted investments ......... Short-term investments ........ Notes and accounts receivable (net)................. Inventories (net) ................... Deferred income taxes (net) .................................. Prepaid expenses .................. Others ................................... Total current assets........... Property, plant and equipment............................ Land...................................... Buildings .............................. Production equipment .......... Research and development equipment......................... Offce furniture and equipment......................... Construction in progress ...... Total property, plant and equipment......................... Less: Accumulated depreciation ...................... Net property, plant and equipment..................... Deferred income taxes (net).. Intangible assets (net)............ Long-term equity investments.......................... Prepayment to a supplier...... Other assets............................. Total assets..............................	Notes 3 11 4 5 6 14 11,16,17 14 7	December 31, 1999 2000 NT$ NT$ US$ 4,154,888 15,561,894 451,331 990,375 216,000 6,265 122,719 310,945 9,018 3,225,452 5,334,341 154,708 3,655,096 5,283,815 153,243 1,204,907 1,210,602 35,110 331,818 411,670 11,939 618,149 697,677 20,234 14,303,404 29,026,944 841,848 384,289 598,076 17,346 10,207,955 11,791,084 341,969 23,492,346 37,321,702 1,082,416 831,127 908,738 26,356 728,727 895,900 25,983 10,543,909 6,137,087 177,990 46,188,353 57,652,587 1,672,060 (14,160,464) (19,646,446) (569,793) 32,027,889 38,006,141 1,102,267 1,473,654 1,594,072 46,232 623,851 781,701 22,671 1,341,653 1,330,568 38,590 — — — 1,426,913 1,711,205 49,629 51,197,364 72,450,631 2,101,237	December 31, 1999 2000 NT$ NT$ US$ 4,154,888 15,561,894 451,331 990,375 216,000 6,265 122,719 310,945 9,018 3,225,452 5,334,341 154,708 3,655,096 5,283,815 153,243 1,204,907 1,210,602 35,110 331,818 411,670 11,939 618,149 697,677 20,234 14,303,404 29,026,944 841,848 384,289 598,076 17,346 10,207,955 11,791,084 341,969 23,492,346 37,321,702 1,082,416 831,127 908,738 26,356 728,727 895,900 25,983 10,543,909 6,137,087 177,990 46,188,353 57,652,587 1,672,060 (14,160,464) (19,646,446) (569,793) 32,027,889 38,006,141 1,102,267 1,473,654 1,594,072 46,232 623,851 781,701 22,671 1,341,653 1,330,568 38,590 — — — 1,426,913 1,711,205 49,629 51,197,364 72,450,631 2,101,237	June 30, 2001 NT$ US$ 12,587,290 365,061 224,950 6,525 388,766 11,275 2,694,518 78,147 7,466,378 216,542 828,526 24,029 502,262 14,566 476,937 13,832 25,169,627 729,977 1,353,941 39,267 12,269,604 355,847 38,904,304 1,128,315 1,138,882 33,030 951,262 27,589 7,651,020 221,897 62,269,013 1,805,945 (23,080,846) (669,398) 39,188,167 1,136,547 1,666,263 48,326 1,004,575 29,135 1,914,140 55,515 735,914 21,343 2,614,914 75,839 72,293,600 2,096,682
		1999 NT$ 4,154,888 990,375 122,719 3,225,452 3,655,096 1,204,907 331,818 618,149 14,303,404 384,289 10,207,955 23,492,346 831,127 728,727 10,543,909 46,188,353 (14,160,464) 32,027,889 1,473,654 623,851 1,341,653 — 1,426,913 51,197,364
			NT$ 15,561,894 216,000 310,945 5,334,341 5,283,815 1,210,602 411,670 697,677 29,026,944 598,076 11,791,084 37,321,702 908,738 895,900 6,137,087 57,652,587 (19,646,446) 38,006,141 1,594,072 781,701 1,330,568 — 1,711,205 72,450,631	NT$ 12,587,290 224,950 388,766 2,694,518 7,466,378 828,526 502,262 476,937 25,169,627 1,353,941 12,269,604 38,904,304 1,138,882 951,262 7,651,020 62,269,013 (23,080,846) 39,188,167 1,666,263 1,004,575 1,914,140 735,914 2,614,914 72,293,600

See accompanying notes to consolidated financial statements.

F-3

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS—(Continued)

December 31, 1999 and 2000, and June 30, 2001 (Amounts in thousands except share data)

LIABILITIES & SHAREHOLDERS’ EQUITY Notes Current liabilities Short-term debts ............................................................ 8 Short-term notes ............................................................ 9 Current portion of capital lease obligations.................. 10 Current portion of long-term debt................................. 11 Notes and accounts payable .......................................... Payables to related parties............................................. 15 Payable to equipment suppliers..................................... Accrued expenses .......................................................... Income taxes payable .................................................... 14 Others............................................................................. Total current liabilities .............................................. Long-term liabilities Capital lease obligations, less current portion.............. 10 Long-term debt, less current portion............................. 11 Accrued pension cost .................................................... 12 Other liabilities .............................................................. Total liabilities.................................................................. Commitments and contingencies ...................................... 16 Shareholders’ equity.......................................................... 13 Common shares NT$10 par value, authorized 2,500,000,000, 3,500,000,000 and 4,500,000,000 shares as of December 31, 1999, 2000 and June 30, 2001, and issued 1,964,406,098, 2,474,409,144 and 3,359,342,613 shares as of December 31, 1999, 2000 and June 30, 2001, respectively............. Additional paid-in capital.............................................. Subscription received .................................................... Capital reserve............................................................... Legal reserve ................................................................. Retained earnings .......................................................... Unrealized losses on long-term investments ................ Cumulative translation adjustments .............................. Total shareholders’ equity.............................................. Total liabilities and shareholders’ equity......................	December 31, 1999 2000 NT$ NT$ US$ 1,209,197 1,586,502 46,012 248,409 — — 4,962 3,855 112 3,198,396 3,259,688 94,539 1,274,027 1,651,030 47,883 284,998 306,133 8,879 1,510,163 1,364,891 39,585 807,927 2,622,885 76,070 266,366 698,618 20,262 63,190 292,988 8,497 8,867,635 11,786,590 341,839 17,764 15,313 444 15,908,825 16,053,541 465,590 19,496 21,268 617 — 492 14 24,813,720 27,877,204 808,504 19,644,060 24,744,091 717,636 4,795,160 8,418,338 244,151 448,812 — — 11,813 22,395 650 556,745 647,015 18,765 902,696 10,743,013 311,572 (23,289) (107,300) (3,112) 47,647 105,875 3,071 26,383,644 44,573,427 1,292,733 51,197,364 72,450,631 2,101,237	December 31, 1999 2000 NT$ NT$ US$ 1,209,197 1,586,502 46,012 248,409 — — 4,962 3,855 112 3,198,396 3,259,688 94,539 1,274,027 1,651,030 47,883 284,998 306,133 8,879 1,510,163 1,364,891 39,585 807,927 2,622,885 76,070 266,366 698,618 20,262 63,190 292,988 8,497 8,867,635 11,786,590 341,839 17,764 15,313 444 15,908,825 16,053,541 465,590 19,496 21,268 617 — 492 14 24,813,720 27,877,204 808,504 19,644,060 24,744,091 717,636 4,795,160 8,418,338 244,151 448,812 — — 11,813 22,395 650 556,745 647,015 18,765 902,696 10,743,013 311,572 (23,289) (107,300) (3,112) 47,647 105,875 3,071 26,383,644 44,573,427 1,292,733 51,197,364 72,450,631 2,101,237	June 30,	June 30,
	1999 NT$ 1,209,197 248,409 4,962 3,198,396 1,274,027 284,998 1,510,163 807,927 266,366 63,190 8,867,635 17,764 15,908,825 19,496 — 24,813,720 19,644,060 4,795,160 448,812 11,813 556,745 902,696 (23,289) 47,647 26,383,644 51,197,364		2001
		NT$ 1,586,502 — 3,855 3,259,688 1,651,030 306,133 1,364,891 2,622,885 698,618 292,988 11,786,590 15,313 16,053,541 21,268 492 27,877,204 24,744,091 8,418,338 — 22,395 647,015 10,743,013 (107,300) 105,875 44,573,427 72,450,631	NT$ 707,136 — 4,011 3,177,165 1,162,228 146,059 1,066,354 2,661,650 383,599 145,527 9,453,729 13,267 15,932,577 23,537 4,936 25,428,046 33,593,426 5,943,929 — 23,820 1,707,053 5,545,326 (182,860) 234,860 46,865,554 72,293,600	US$ 20,509 — 116 92,145 33,707 4,236 30,927 77,194 11,126 4,220 274,180 385 462,082 683 143 737,473 974,287 172,388 — 691 49,508 160,827 (5,303) 6,811 1,359,209 2,096,682

See accompanying notes to consolidated financial statements.

F-4

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 1998, 1999 and 2000 and the six-month periods ended June 30, 2000 and 2001 (Amounts in thousands except share data)

			Year ended December 31,	Year ended December 31,		Six-months ended June 30,	Six-months ended June 30,	Six-months ended June 30,
	Notes	1998	1999	2000		2000	2001
		NT$	NT$	NT$	US$	NT$	NT$	US$
Sales revenue.................................		12,760,126	17,315,276	33,810,791	980,591	12,068,435	12,364,350	358,594
Less: Sales returns .......................		(85,596)	(209,410)	(273,154)	(7,922)	(55,341)	(92,906)	(2,694)
Sales discounts ...................		(94,215)	(148,372)	(44,529)	(1,291)	(5,128)	(41,699)	(1,209)
Net sales revenue............................		12,580,315	16,957,494	33,493,108	971,378	12,007,966	12,229,745	354,691
Cost of goods sold.........................	15	(9,888,473)	(12,124,116)	(15,497,646)	(449,468)	(7,212,238)	(5,431,159)	(157,516)
Gross proft....................................		2,691,842	4,833,378	17,995,462	521,910	4,795,728	6,798,586	197,175
Operating expenses
Selling expenses..........................		(460,497)	(510,536)	(940,347)	(27,272)	(247,604)	(334,871)	(9,713)
Administrative expenses.............		(616,983)	(802,590)	(1,772,441)	(51,405)	(1,199,187)	(774,654)	(22,467)
Research and development.........		(1,977,222)	(1,944,875)	(3,143,896)	(91,180)	(1,299,433)	(1,849,856)	(53,650)
		(3,054,702)	(3,258,001)	(5,856,684)	(169,857)	(2,746,224)	(2,959,381)	(85,830)
Operating income (loss)...............		(362,860)	1,575,377	12,138,778	352,053	2,049,504	3,839,205	111,345
Other income
Research and development
subsidies..................................		18,587	10,243	30,914	897	9,673	114	3
Interest income............................		365,562	377,475	541,387	15,701	253,287	301,987	8,758
Foreign exchange gain................		275,907	271,786	293,480	8,512	196,166	91,411	2,651
Gain on disposal of property,
plant and equipment ...............		4,663	4,907	15,543	451	790	—	—
Net investment income...............		—	—	—	—	481,805	—	—
Gain on insurance claim from
earthquake...............................		—	161,999	—	—	—	—	—
Reversals of market value
decline of inventory................		—	—	—	—	90,000	—	—
Others..........................................		33,427	18,731	63,695	1,847	37,846	179,458	5,204
		698,146	845,141	945,019	27,408	1,069,567	572,970	16,616
Other expenses
Interest expense ..........................		(969,870)	(1,116,392)	(1,265,902)	(36,714)	(565,119)	(574,193)	(16,653)
Inventory loss provision .............		(788,631)	(106,301)	(76,796)	(2,227)	—	(552,406)	(16,021)
Loss on disposal of property,
plant and equipment ...............		(10,791)	(1,052)	(5,935)	(172)	(3,962)	(6,668)	(193)
Net loss from equity
investment...............................		(337,346)	(452,814)	(601,187)	(17,436)	(212,779)	(171,945)	(4,987)
Net investment loss.....................		(145,430)	(144,176)	(15,941)	(462)	—	(55,297)	(1,604)
Others..........................................		(36,065)	(9,262)	(107,115)	(3,107)	(57,880)	(242,218)	(7,025)
		(2,288,133)	(1,829,997)	(2,072,876)	(60,118)	(839,740)	(1,602,727)	(46,483)
Income (loss) before taxes............		(1,952,847)	590,521	11,010,921	319,343	2,279,331	2,809,448	81,478
Income tax beneft (expense).......	14	405,714	316,100	(398,097)	(11,546)	229,181	(380,599)	(11,038)
Net income (loss) for the year.....		(1,547,133)	906,621	10,612,824	307,797	2,508,512	2,428,849	70,440
Earnings Per Common Share:
Net income (loss) per common
share—basic...............................		(NT$0.52)	NT$0.30	NT$3.22	US$0.09	NT$0.78	NT$0.72	US$0.02
Net income (loss) per common
share—diluted...........................		(NT$0.52)	NT$0.30	NT$3.18	US$0.09	NT$0.77	NT$0.71	US$0.02

See accompanying notes to consolidated financial statements.

F-5

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 1998, 1999 and 2000 and the six-month periods ended June 30, 2000 and 2001 (Amounts in thousands except share data)

Cash fows from operating activities: Net income (loss) ...................................... Adjustments to reconcile net income (loss) to net cash provided by Operating activities: Depreciation .......................................... Amortization.......................................... Deferred income taxes .......................... Net loss on investment.......................... Allowance (reversal of allowance) for bad debt ............................................. Inventory provision ............................... Net loss from equity investment........... Loss from charge on long-term investee.............................................. Net loss on disposal of property, plant and equipment ................................... Net changes in operating assets and liabilities: Notes and accounts receivable.......... Inventories......................................... Other current assets........................... Prepaid expenses ............................... Prepayment to a supplier .................. Notes and accounts payable.............. Payables to related parties ................ Accrued expenses.............................. Income taxes payable........................ Other current liabilities ..................... Other liabilities.................................. Accrued pension cost ........................ Net cash provided by operating activities .... Cash fows from investing activities: (Increase) decrease in restricted investments............................................ Increase in short-term investments ........... Additions to long-term equity investments............................................ Proceed from disposals of long-term equity investments................................. Payments for purchase of property, plant and equipment ....................................... Proceed from disposals of property, plant and equipment ....................................... Other assets ............................................... Additions to intangible assets ................... Deduction (Additions) to other assets— refundable deposit ................................. Net cash used in investing activities ............	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (1,547,133) 906,621 10,612,824 307,797 3,888,318 4,590,558 5,656,781 164,060 366,682 264,828 391,419 11,352 (450,791) (526,138) (126,113) (3,658) 145,430 144,176 (77,059) (2,235) 42,277 30,365 91,048 2,641 788,631 106,301 79,995 2,320 337,346 452,814 601,187 17,436 — — 93,000 2,697 6,128 (3,855) (9,608) (279) (38,708) (858,254) (2,199,937) (63,803) (635,083) (101,762) (1,708,714) (49,557) (16,613) (410,083) (79,528) (2,306) (64,035) (80,083) (79,852) (2,316) — — — — (21,967) 442,221 377,003 10,934 (28,890) (34,270) 21,135 613 47,803 (58,332) 1,814,958 52,638 46,880 219,486 432,252 12,536 (83,035) (20,753) 229,798 6,665 (25,152) (41) 492 14 7,852 (1,841) 1,772 51 2,765,940 5,061,958 16,122,853 467,600 297,430 (958,810) 774,375 22,459 (341,902) (20,444) (111,167) (3,224) (1,030,230) (317,701) (754,784) (21,890) — — 12,500 363 (6,908,796) (7,225,579) (11,948,143) (346,524) 14,597 5,007 177,446 5,146 (448,290) 58,234 (125,105) (3,628) (181,221) (536,495) (549,269) (15,930) (1,196,297) 138,822 (159,187) (4,617) (9,794,709) (8,856,966) (12,683,334) (367,845)	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (1,547,133) 906,621 10,612,824 307,797 3,888,318 4,590,558 5,656,781 164,060 366,682 264,828 391,419 11,352 (450,791) (526,138) (126,113) (3,658) 145,430 144,176 (77,059) (2,235) 42,277 30,365 91,048 2,641 788,631 106,301 79,995 2,320 337,346 452,814 601,187 17,436 — — 93,000 2,697 6,128 (3,855) (9,608) (279) (38,708) (858,254) (2,199,937) (63,803) (635,083) (101,762) (1,708,714) (49,557) (16,613) (410,083) (79,528) (2,306) (64,035) (80,083) (79,852) (2,316) — — — — (21,967) 442,221 377,003 10,934 (28,890) (34,270) 21,135 613 47,803 (58,332) 1,814,958 52,638 46,880 219,486 432,252 12,536 (83,035) (20,753) 229,798 6,665 (25,152) (41) 492 14 7,852 (1,841) 1,772 51 2,765,940 5,061,958 16,122,853 467,600 297,430 (958,810) 774,375 22,459 (341,902) (20,444) (111,167) (3,224) (1,030,230) (317,701) (754,784) (21,890) — — 12,500 363 (6,908,796) (7,225,579) (11,948,143) (346,524) 14,597 5,007 177,446 5,146 (448,290) 58,234 (125,105) (3,628) (181,221) (536,495) (549,269) (15,930) (1,196,297) 138,822 (159,187) (4,617) (9,794,709) (8,856,966) (12,683,334) (367,845)	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (1,547,133) 906,621 10,612,824 307,797 3,888,318 4,590,558 5,656,781 164,060 366,682 264,828 391,419 11,352 (450,791) (526,138) (126,113) (3,658) 145,430 144,176 (77,059) (2,235) 42,277 30,365 91,048 2,641 788,631 106,301 79,995 2,320 337,346 452,814 601,187 17,436 — — 93,000 2,697 6,128 (3,855) (9,608) (279) (38,708) (858,254) (2,199,937) (63,803) (635,083) (101,762) (1,708,714) (49,557) (16,613) (410,083) (79,528) (2,306) (64,035) (80,083) (79,852) (2,316) — — — — (21,967) 442,221 377,003 10,934 (28,890) (34,270) 21,135 613 47,803 (58,332) 1,814,958 52,638 46,880 219,486 432,252 12,536 (83,035) (20,753) 229,798 6,665 (25,152) (41) 492 14 7,852 (1,841) 1,772 51 2,765,940 5,061,958 16,122,853 467,600 297,430 (958,810) 774,375 22,459 (341,902) (20,444) (111,167) (3,224) (1,030,230) (317,701) (754,784) (21,890) — — 12,500 363 (6,908,796) (7,225,579) (11,948,143) (346,524) 14,597 5,007 177,446 5,146 (448,290) 58,234 (125,105) (3,628) (181,221) (536,495) (549,269) (15,930) (1,196,297) 138,822 (159,187) (4,617) (9,794,709) (8,856,966) (12,683,334) (367,845)	Six months ended June 30, 2000 2001 NT$ NT$ US$ 2,508,512 2,428,849 70,440 2,565,609 3,616,057 104,874 179,177 262,402 7,610 (248,238) 309,885 8,987 — 55,297 1,604 19,134 (82,660) (2,397) (90,000) 552,406 16,021 212,779 171,945 4,987 — — — 3,172 6,668 193 (349,233) 2,722,483 78,959 (478,684) (2,733,159) (79,268) (18,223) 220,740 6,402 (4,218) (92,402) (2,680) — (735,914) (21,343) 110,920 (488,802) (14,176) (131,999) (160,074) (4,643) 895,875 38,765 1,125 (1,188) (315,019) (9,136) 107,707 (147,461) (4,277) 246 4,444 129 280 2,269 66 5,281,628 5,636,719 163,477 945,375 (8,950) (260) (893,658) (87,373) (2,534) (372,658) (856,531) (24,841) — 2,535 74 (5,996,469) (5,413,024) (156,990) 11,436 6,266 182 1,164,649 (960,428) (27,855) (257,530) (147,421) (4,276) — — — (5,398,855) (7,464,926) (216,500)	Six months ended June 30, 2000 2001 NT$ NT$ US$ 2,508,512 2,428,849 70,440 2,565,609 3,616,057 104,874 179,177 262,402 7,610 (248,238) 309,885 8,987 — 55,297 1,604 19,134 (82,660) (2,397) (90,000) 552,406 16,021 212,779 171,945 4,987 — — — 3,172 6,668 193 (349,233) 2,722,483 78,959 (478,684) (2,733,159) (79,268) (18,223) 220,740 6,402 (4,218) (92,402) (2,680) — (735,914) (21,343) 110,920 (488,802) (14,176) (131,999) (160,074) (4,643) 895,875 38,765 1,125 (1,188) (315,019) (9,136) 107,707 (147,461) (4,277) 246 4,444 129 280 2,269 66 5,281,628 5,636,719 163,477 945,375 (8,950) (260) (893,658) (87,373) (2,534) (372,658) (856,531) (24,841) — 2,535 74 (5,996,469) (5,413,024) (156,990) 11,436 6,266 182 1,164,649 (960,428) (27,855) (257,530) (147,421) (4,276) — — — (5,398,855) (7,464,926) (216,500)
	1998 NT$ (1,547,133) 3,888,318 366,682 (450,791) 145,430 42,277 788,631 337,346 — 6,128 (38,708) (635,083) (16,613) (64,035) — (21,967) (28,890) 47,803 46,880 (83,035) (25,152) 7,852 2,765,940 297,430 (341,902) (1,030,230) — (6,908,796) 14,597 (448,290) (181,221) (1,196,297) (9,794,709)	1999 NT$ 906,621 4,590,558 264,828 (526,138) 144,176 30,365 106,301 452,814 — (3,855) (858,254) (101,762) (410,083) (80,083) — 442,221 (34,270) (58,332) 219,486 (20,753) (41) (1,841) 5,061,958 (958,810) (20,444) (317,701) — (7,225,579) 5,007 58,234 (536,495) 138,822 (8,856,966)		2000 NT$ 2,508,512 2,565,609 179,177 (248,238) — 19,134 (90,000) 212,779 — 3,172 (349,233) (478,684) (18,223) (4,218) — 110,920 (131,999) 895,875 (1,188) 107,707 246 280 5,281,628 945,375 (893,658) (372,658) — (5,996,469) 11,436 1,164,649 (257,530) — (5,398,855)
			NT$ 10,612,824 5,656,781 391,419 (126,113) (77,059) 91,048 79,995 601,187 93,000 (9,608) (2,199,937) (1,708,714) (79,528) (79,852) — 377,003 21,135 1,814,958 432,252 229,798 492 1,772 16,122,853 774,375 (111,167) (754,784) 12,500 (11,948,143) 177,446 (125,105) (549,269) (159,187) (12,683,334)		NT$ 2,428,849 3,616,057 262,402 309,885 55,297 (82,660) 552,406 171,945 — 6,668 2,722,483 (2,733,159) 220,740 (92,402) (735,914) (488,802) (160,074) 38,765 (315,019) (147,461) 4,444 2,269 5,636,719 (8,950) (87,373) (856,531) 2,535 (5,413,024) 6,266 (960,428) (147,421) — (7,464,926)

See accompanying notes to consolidated financial statements.

F-6

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

For the years ended December 31, 1998, 1999 and 2000 and the six-month periods ended June 30, 2000 and 2001 (Amounts in thousands except share data)

	Year ended December 31,	Year ended December 31,	Year ended December 31,		Six month ended June 30,	Six month ended June 30,	Six month ended June 30,
	1998	1999	2000		2000	2001
	NT$	NT$	NT$	US$	NT$	NT$	US$
Cash fows from fnancing activities:
Proceeds from short-term debt.....................	5,577,310	6,906,833	7,209,095	209,080	1,157,587	2,641,369	76,606
Payments of short-term debt ........................	(6,226,514)	(6,877,875)	(6,832,979)	(198,172)	(2,283,907)	(3,520,735)	(102,109)
Proceeds from short-term notes....................	6,485,403	2,580,000	—	—	—	—	—
Payments of short-term notes.......................	(6,410,000)	(3,025,217)	(248,409)	(7,204)	(248,408)	—	—
Proceeds from long-term debt......................	10,054,813	462,151	6,170,000	178,944	6,442,886	1,304,523	37,835
Payments of long-term debt and capital
lease obligations .......................................	(700,149)	(1,236,813)	(1,944,964)	(56,408)	(1,692,870)	(1,509,901)	(43,791)
Subscriptions received..................................	—	448,812	3,613,555	104,801	3,613,555	—	—
Distribution of directors and supervisors’
remuneration .............................................	(34,900)	—	—	—	—	(190,148)	(5,515)
Net cash provided by (used in) fnancing
activities........................................................	8,745,963	(742,109)	7,966,298	231,041	6,988,843	(1,274,892)	(36,974)
Effect of exchange rate changes on cash and
cash equivalents............................................	(5,851)	(7,400)	1,189	34	103,281	128,495	3,727
Net increase (decrease) in cash and cash
equivalents ....................................................	1,711,343	(4,544,517)	11,407,006	330,830	6,974,897	(2,974,604)	(86,270)
Cash and cash equivalents at the beginning of
year................................................................	6,988,062	8,699,405	4,154,888	120,501	4,154,888	15,561,894	451,331
Cash and cash equivalents at the end of year..	8,699,405	4,154,888	15,561,894	451,331	11,129,785	12,587,290	365,061
Supplemental disclosures of cash fow
information:
Interest paid during the year.........................	781,908	1,152,733	1,225,134	35,532	629,301	571,556	16,576
Income tax paid during the year ..................	22,937	93,287	55,795	1,618	17,781	401,398	11,641
Non-cash activities:
Current portion of long-term debts and
capital lease obligations transferred to
current liabilities.......................................	1,212,138	3,203,358	3,263,543	94,650	3,299,519	1,425,488	41,342
Payment for purchases of property, plant
and equipment:
Payable to equipment suppliers
(beginning balance) ..............................	1,380,235	607,107	1,510,163	43,798	1,510,163	1,364,891	39,585
Add: Purchases of property, plant and
equipment..............................................	6,135,668	8,128,635	11,802,871	342,311	7,004,710	5,114,487	148,332
Less: Payable to equipment suppliers
(ending balance) ...................................	(607,107)	(1,510,163)	(1,364,891)	(39,585)	(2,518,404)	(1,066,354)	(30,927)
Payment for purchases of property, plant
and equipment.......................................	6,908,796	7,225,579	11,948,143	346,524	5,996,469	5,413,024	156,990
Convertible bonds converted to common
stock..............................................................	19,623	—	4,022,584	116,664	3,968,958	—	—

See accompanying notes to consolidated financial statements.

F-7

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the years ended December 31, 1998, 1999 and 2000 and the six-month periods ended June 30, 2000 and 2001 (Amounts in thousands except share data)

Balance as of January 1, 1998 ......... Appropriation and distribution of 1997 retained earnings: Legal reserve................................. Stock dividends (317,313,700 shares) ....................................... Employee bonuses (26,174,995 shares) ....................................... Remuneration of directors and supervisors ................................ Conversion of convertible bonds (519,565 shares)............................ Net loss, 1998................................... Gain on disposal of property, plant and equipment transferred to capital reserve ............................... Cumulative translation adjustment... Balance as of December 31, 1998 ... Subscriptions received...................... Legal reserve transferred to retained earnings......................................... Stock dividends (178,582,370 shares) ........................................... Unrealized losses on long-term investments ................................... Net income, 1999.............................. Gain on disposal of property, plant and equipment transferred to capital reserve ............................... Cost of investment less than purchased assets of an equity investee ......................................... Cumulative translation adjustment... Balance as of December 31, 1999 ... Appropriation and distribution of 1999 retained earnings: Legal reserve................................. Stock dividends (276,578,492 shares) ....................................... Issuance of additional common shares for cash (135,590,000 shares) ........................................... Conversion of convertible bonds...... Gain on disposal of property, plant and equipment transferred to capital reserve ............................... Unrealized losses on long-term investments ................................... Net Income for the six months ended June 30, 2000..................... Cumulative translation adjustment... Balance as of June 30, 2000.............	Common shares NT$ 14,418,154 — 3,173,137 261,750 — 5,196 — — — 17,858,237 — — 1,785,823 — — — — — 19,644,060 — 2,765,785 1,355,900 960,119 — — — — 24,725,864	Additional paid-in- capital NT$ 7,717,680 — (1,153,868) — — 17,171 — — — 6,580,983 — — (1,785,823) — — — — — 4,795,160 — (2,127,527) 2,706,467 3,008,839 — — — — 8,382,939	Subscriptions received NT$ 2,744 — — — — (2,744) — — — — 448,812 — — — — — — — 448,812 — — (448,812) — — — — — —	Capital reserve NT$ 2,304 — — — — — — 3,730 — 6,034 — — — — — 3,925 1,854 — 11,813 — — — — 633 — — — 12,446	Legal reserve NT$ 742,720 193,889 — — — — — — — 936,609 — (379,864) — — — — — — 556,745 90,270 — — — — — — — 647,015	Retained earnings (accumulated defcit) NT$ 3,680,807 (193,889) (2,019,269) (261,750) (34,900) — (1,547,133) (3,730) — (379,864) — 379,864 — — 906,621 (3,925) — — 902,696 (90,270) (638,258) — — (633) — 2,508,512 — 2,682,047	Unrealized losses on long-term investments NT$ — — — — — — — — — — — — — (23,289) — — — — (23,289) — — — — — 15,935 — — (7,354)	Translation adjustments NT$ 62,193 — — — — — — — (14,919) 47,274 — — — — — — — 373 47,647 — — — — — — — (28,475) 19,172	Total NT$ 26,626,602 — — — (34,900) 19,623 (1,547,133) — (14,919) 25,049,273 448,812 — — (23,289) 906,621 — 1,854 373 26,383,644 — — 3,613,555 3,968,958 — 15,935 2,508,512 (28,475) 36,462,129

See accompanying notes to consolidated financial statements.

F-8

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY—(Continued)

For the years ended December 31, 1998, 1999 and 2000 and the six-month periods ended June 30, 2000 and 2001 (Amounts in thousands except share data)

Conversion of convertible bonds (97,834,589 shares)..................... Gain on disposal of property, plant and equipment transferred to capital reserve ............................. Unrealized losses on long-term investments.................................. Net income, 2000............................ Cost of investment in excess of purchased assets of an equity investee........................................ Cumulative translation adjustment ................................... Balance as of December 31, 2000.. Appropriation and distribution of 2000 retained earnings: Capital reserve............................. Legal reserve............................... Stock dividends (742,322,743 shares)...................................... Settlement of employee bonus (142,610,725) .............................. Renumeration of directors and supervisors................................... Unrealized losses on long-term investments.................................. Net income, 2001............................ Cumulative translation adjustment ................................... Balance as of June 30, 2001........... Balance as of June 30, 2001(US$)...................................	Common shares NT$ 18,227 — — — — — 24,744,091 — — 7,423,228 1,426,107 — — — — 33,593,426 974,287	Additional paid-in- capital NT$ 35,399 — — — — — 8,418,338 — — (2,474,409) — — — — — 5,943,929 172,388	Subscriptions received NT$ — — — — — — — — — — — — — — — — —	Capital reserve NT$ — 11,802 — — (1,853) — 22,395 1,425 — — — — — — — 23,820 691	Legal reserve NT$ — — — — — — 647,015 — 1,060,038 — — — — — — 1,707,053 49,508	Retained earnings (accumulated defcit) NT$ — (11,802) — 8,104,312 (31,544) — 10,743,013 (1,425) (1,060,038) (4,948,819) (1,426,107) (190,147) — 2,428,849 — 5,545,326 160,827	Unrealized losses on long-term investments NT$ — — (99,946) — — — (107,300) — — — — — (75,560) — — (182,860) (5,303)	Translation adjustments NT$ — — — — — 86,703 105,875 — — — — — — — 128,985 234,860 6,811	Total NT$ 53,626 — (99,946) 8,104,312 (33,397) 86,703 44,573,427 — — — — (190,147) (75,560) 2,428,849 128,985 46,865,554 1,359,209

See accompanying notes to consolidated financial statements.

F-9

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except shares, per share, and percentages)

1. Organization and Business

The Company

Macronix International Co., Ltd. was incorporated in the Hsinchu Science Based Industrial Park (‘‘HSIP’’) under the laws of the Republic of China (the ‘‘ROC’’ or ‘‘Taiwan’’) on December 9, 1989. Macronix International Co., Ltd. operates principally as a designer, manufacturer, and supplier of integrated circuits and memory chips.

Consolidation

The accompanying consolidated financial statements include all domestic and foreign subsidiaries that are more than 50% owned and controlled. The wholly-owned subsidiaries of Macronix International Co., Ltd. include Macronix America, Inc. (‘‘MXA’’), Macronix (B.V.I.) Co. Ltd., Huiv Ying Investment, Ltd., and the four wholly-owned subsidiaries of Macronix (B.V.I.) Co. Ltd., including Wedgewood International Ltd., New Trend Technology Inc., Macronix Europe N.V., and Macronix Pte Ltd. Macronix International Co., Ltd. and its subsidiaries are hereinafter collectively referred to as the ‘‘Company’’ or ‘‘Macronix’’. All significant intercompany balances and transactions have been eliminated.

2. Summary of Significant Accounting Policies

Generally Accepted Accounting Principles

The financial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (‘‘ROC GAAP’’). ROC GAAP varies in certain significant respects from accounting principles generally accepted in the United States of America (‘‘U.S. GAAP’’). Application of U.S. GAAP would have affected shareholders’ equity as of December 31, 1999 and 2000 and June 30, 2001, and the results of operations for each of the three years in the period ended December 31, 2000 and the six months ended June 30, 2000 and 2001 to the extent summarized in note 20.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the Republic of China requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, and so near to their maturity that they present insignificant risk of changes in interest rates. Commercial paper, negotiable certificates of deposit, and bank acceptances with original maturities of three months or less are considered to be cash equivalents.

Foreign Currency Translation

The Company maintains its accounting records in New Taiwan dollars (‘‘NT dollars’’ or ‘‘NT$’’), the national currency of the Republic of China. Transactions denominated in foreign currencies are recorded in NT dollars using the exchange rates in effect at the date of the transactions. Assets and liabilities denominated in

F-10

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

foreign currencies are translated into NT dollars using the exchange rates in effect at the balance sheet date. Foreign exchange gains or losses are included in the Consolidated Statements of Operations.

The assets and liabilities of the foreign subsidiaries are translated into NT dollars, with the local currency of each foreign subsidiary as its functional currency, at current exchange rates in effect at the balance sheet date. Revenue and expense accounts are translated using a weighted average exchange rate for the period. Translation gains and losses are included as a component of shareholders’ equity.

Financial Instruments

a. Foreign exchange forward contracts

A forward foreign exchange contract obligates the Company to exchange predetermined amounts of specified foreign currencies at specified exchange rates for another currency on a specified date. The Company’s forward contracts are designated as hedges; discounts or premiums, being the difference between the spot exchange rate and the forward exchange rate at the inception of the contract, are accreted or amortized to the income statement over the contract lives using the straight-line method. Realized gains and losses from settlement or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the income statement as foreign exchange gains or losses in the period in which they relate. The related amounts due to or from counter-parties are included in other current assets or other current liabilities.

b. Option contracts

At maturity the Company or the financial institution, depending upon which party has the right of the option, may exercise the option to receive a said amount denominated in one currency and pay a said amount in a different currency. The conversion rate is stated in the contract.

For options, premiums are amortized over the contract lives using the straight-line method. Gains and losses are dealt with in the statement of operations upon exercise.

c. Cross currency and interest rate swaps

Cross currency and interest rate swaps are entered into to hedge currency positions and interest rate variations related to foreign currency debts with floating interest rates. The difference between the spot rate at the contract date and the contracted forward rate is amortized over the life of the contract. Realized gains and losses from settlement or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the statement of operations as foreign exchange gains or losses in the period in which they relate.

The difference between the related floating rate interest and fixed rate interest at the balance sheet date is dealt with in the statement of operations. The realized gains and losses upon settlement are dealt with in the statement of operations.

F-11

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

d. Structured deposits

A structured deposit represents a deposit with an embedded currency option placed with a financial institution to earn higher interest income. At maturity the financial institution that accepts the deposit has an option to pay the remittance and the predetermined accrued interest in the original currency or in an alternative currency based on the terms of the structured deposit contract.

The respective interest is accrued. The realized and unrealized gains and losses arising from the currency portion of the contracts are dealt with in the statement of operations in the period incurred.

e. Other derivative financial instruments

The Company has entered into other derivative financial instruments for trading and hedging purposes. The related gains and losses on hedging instruments are recorded in the income statement upon the exercise of the contracts or in the same period as the hedged transaction. The changes in the fair value of trading instruments are recorded in the period of change.

Information Expressed in U.S. Dollars

The financial statements are stated in NT dollars, the national currency of the ROC. Translation of NT dollar amounts into U.S. dollar amounts is included solely for the convenience of the readers outside Taiwan and has been made at the rate of NT$34.48 to US$1, the approximate exchange rate at June 30, 2001. No representation is made that the NT dollar amounts could have been, or could be, converted into U.S. dollars at that or any other rate.

Inventories

Inventories are carried at the lower of cost or market value using the weighted average cost method. Replacement cost is used to determine the market value of raw materials and supplies. Net realizable value is used to determine the market value of work in process and finished goods.

Short-Term Investments

Short-term investments are carried at lower of cost or market value at the balance sheet date using the weighted average cost method.

Long-Term Investments

Long-term investments in which the Company holds an interest of 20% or more and has the ability to exercise significant influence are accounted for under the equity method of accounting. The difference between the cost of the investment and the fair value of the identifiable assets at the date of acquisition is amortized over five years. Other long-term investments are carried at the lower of cost or market, with unrealized losses recorded as a separate component of equity. There is no recognition of unrealized gains.

F-12

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the following useful lives:

on the straight-line basis over the following useful lives:
Buildings...............................................................................................................................	4 to 20 years
Production equipment...........................................................................................................	4 to 8 years
Research and development equipment.................................................................................	4 to 5 years
Offce furniture and equipment ............................................................................................	3 to 10 years

Improvements and replacements are capitalized and depreciated over their estimated useful lives while ordinary repairs and maintenance are expensed as incurred. Gains or losses resulting from the disposal of property, plant and equipment are presented under other income or expenses. In addition, gains from the disposal of property, plant and equipment, after income tax, are transferred from retained earnings to capital reserve in the year incurred. Interest incurred associated with the additions of property, plant and equipment are capitalized until those assets are ready for use.

Intangible Assets

Intangible assets consist primarily of internal use software and purchased technical rights. Intangible assets are originally recorded at cost and are amortized over their estimated useful lives (two to ten years) using the straight-line method. Accumulated amortization of intangibles amounted to, NT$700,000, NT$1,091,419 (US$31,654) and NT$1,353,821 (US$39,264) as of December 31, 1999 and 2000 and June 30, 2001, respectively.

Employee Retirement Benefits

The Company has a defined benefit pension plan covering substantially all of its employees. The plan provides for a lump sum payment upon retirement based on years of service and the employee’s compensation during the last six months of employment. In accordance with the Labor Standards Law of the ROC, the Company makes a monthly contribution equal to 2% of the wages and salaries paid during the period to a pension fund maintained with the Central Trust of China. On the basis of an actuarial report, the monthly contribution was changed during May 1996 to 5% of the wages and salaries paid. The fund, established during 1990 to meet employees’ retirement benefit entitlements, is administered by the Employees’ Retirement Fund Committee and is deposited in the committee’s name. Therefore, the pension fund is not included in the financial statements of the Company.

The Company adopted, on a prospective basis, ROC Statement of Financial Accounting Standards No. 18, ‘‘Accounting for Pensions’’ in 1996. The Statement requires that the pension plan assets and the benefit obligation be determined on an actuarial basis. Based on the actuarial report with the measurement date of December 31, 1995, the minimum pension liability was recorded for the excess of accumulated pension obligation over the fair value of plan assets. The Company has been recognizing the related net pension cost since January 1, 1996. Net transition asset or obligation, prior service cost, and gains or losses from the plan assets are amortized on the straight-line basis over the employees’ average remaining service period.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their tax bases, including investment and research and development tax credits. A valuation allowance is provided based on the expected realization of the deferred tax assets. Undistributed earnings generated after 1997 are subject to a 10% tax in compliance with the Income Tax Law of the ROC. The 10% tax on undistributed earnings is recorded as an expense at the time the shareholders resolve that its earnings shall be retained.

F-13

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Revenue Recognition

Revenue is recognized when it is realized or realizable and when it is earned. Revenue from the sale of products is recognized when ownership is transferred to the customer, which normally is when shipment is made. Provisions for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded.

Employee Bonuses

Amounts distributed to employees, directors and supervisors pursuant to the Company’s articles of incorporation on the distribution of earnings, are recorded as an appropriation from retained earnings in the period shareholder approval is obtained for the distribution of the Company’s earnings. If such distribution is made in the form of common shares, the amount transferred from retained earnings is based on the par value of the common shares issued.

Research and Development Subsidies

Government subsidies for research and development are recorded as other income in the period the qualifying research and development activities are undertaken.

Net Income Per Common Share

Net income per common share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period with retroactive adjustment for stock dividends and employee bonuses.

The weighted average numbers of outstanding common shares for the calculation of basic net income per share are computed as follows:

Number of common shares outstanding on January 1.................................................................... Bonds converted to common shares on March 5, 1998 ........................................................................... Employee bonuses on August 10, 1998........................ Issuance of common shares for cash on January 22, 2000 ........................................................................... Bonds converted to common shares on February 18, 2000 ........................................................................... Bonds converted to common shares on March 7, 2000 ........................................................................... Bonds converted to common shares on June 26, 2000 ........................................................................... Bonds converted to common shares on November 9, 2000 ........................................................................... Weighted average effect of 1998 stock dividend.......... Weighted average effect of 1999 stock dividend.......... Weighted average effect of 2000 stock dividend.......... Stock dividends and transfer of capital reserve to capital on May 28, 2001 (30%) ................................ Employee bonus transfer to capital on May 28, 2001.. Weighted average effect of 2001 stock dividend..........	Year ended December 31, 1998 1999 2000 1,441,815,433 1,785,823,698 1,964,406,098 431,310 — — 10,254,861 — — — — 128,160,411 — — 22,720,465 — — 1,193,644 — — 35,460,102 — — 264,659 317,294,283 — — 176,979,589 178,582,369 — 253,080,812 255,372,788 275,142,476 — — — 126,787,076 127,935,298 139,898,380 659,956,886 665,933,655 728,204,346 2,986,600,250 3,013,647,808 3,295,450,581	Year ended December 31, 1998 1999 2000 1,441,815,433 1,785,823,698 1,964,406,098 431,310 — — 10,254,861 — — — — 128,160,411 — — 22,720,465 — — 1,193,644 — — 35,460,102 — — 264,659 317,294,283 — — 176,979,589 178,582,369 — 253,080,812 255,372,788 275,142,476 — — — 126,787,076 127,935,298 139,898,380 659,956,886 665,933,655 728,204,346 2,986,600,250 3,013,647,808 3,295,450,581	Six months ended June 30,	Six months ended June 30,
	1998 1,441,815,433 431,310 10,254,861 — — — — — 317,294,283 176,979,589 253,080,812 — 126,787,076 659,956,886 2,986,600,250	1999 1,785,823,698 — — — — — — — — 178,582,369 255,372,788 — 127,935,298 665,933,655 3,013,647,808	2000 1,964,406,098 — — 119,200,000 19,057,381 917,641 1,505,080 — — — 273,465,541 — 137,086,053 713,565,512 3,229,203,306	2001
				2,474,409,144 — — — — — — — — — — 742,322,744 142,610,725 —
				3,359,342,613

F-14

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Basic and diluted earning per share (the ‘‘EPS’’) were calculated as follows:

Basic EPS: Income available to common shares ........................ Weight average common shares outstanding ........... Basic EPS...................................................................... Diluted EPS: Income available to common shares ........................ Income impact of assumed conversion of convertible bonds .................................................. Income available to common shares plus assumed conversions............................................................ Weighted average common shares outstanding........ Weighted average assumed effect of employees’ bonus ..................................................................... Weighted average assumed conversion of convertible bonds .................................................. Adjusted weighted-average shares............................ Diluted EPS...............................................................	Year ended December 31, 1998 1999 2000 (1,547,133) 906,621 10,612,824 2,986,600,250 3,013,647,808 3,295,450,581 (0.52) 0.30 3.22 (1,547,133) 906,621 10,612,824 — — 487,451 (1,547,133) 906,621 11,100,275 2,986,600,250 3,013,647,808 3,295,450,581 — — — — — 195,006,994 2,986,600,250 3,013,647,808 3,490,457,575 (0.52) 0.30 3.18	Year ended December 31, 1998 1999 2000 (1,547,133) 906,621 10,612,824 2,986,600,250 3,013,647,808 3,295,450,581 (0.52) 0.30 3.22 (1,547,133) 906,621 10,612,824 — — 487,451 (1,547,133) 906,621 11,100,275 2,986,600,250 3,013,647,808 3,295,450,581 — — — — — 195,006,994 2,986,600,250 3,013,647,808 3,490,457,575 (0.52) 0.30 3.18	Six months ended June 30,	Six months ended June 30,
	1998 (1,547,133) 2,986,600,250 (0.52) (1,547,133) — (1,547,133) 2,986,600,250 — — 2,986,600,250 (0.52)	1999 906,621 3,013,647,808 0.30 906,621 — 906,621 3,013,647,808 — — 3,013,647,808 0.30	2000 2,508,512 3,229,203,306 0.78 2,508,512 86,721 2,595,233 3,229,203,306 — 131,662,897 3,360,866,203 0.77	2001
				2,428,849
				3,359,342,613
				0.72
				2,428,849
				61,755
				2,490,604
				3,359,342,613 26,231,578 116,832,427
				3,502,406,618
				0.71

The diluted earnings per share calculation excludes the income statement impact of NT$751,728, NT$203,684, NT$177,865 and NT$169,693 related to the assumed conversion of convertible bonds into 433,812,081 weighted average shares, 138,959,444 weighted average shares, 100,360,801 weighted average shares and 104,378,783 weighted average shares for years 1998, 1999, first half of 2000 and 2001, respectively. The impact of the assumed conversion has been excluded due to the anti-dilutive effect.

3. Cash and Cash Equivalents

Petty cash ................................................................... Checking and savings accounts ................................. Time deposits ............................................................. Cash equivalents ........................................................ Total............................................................................	December 31,	December 31,	US$ 186 161,526 289,619 — 451,331	June 30,	June 30,
	1999 NT$ 3,862 2,647,487 1,502,978 561 4,154,888	2000		2001
		NT$ 6,398 5,569,445 9,986,051 — 15,561,894		NT$ 69,687 3,227,900 9,289,703 — 12,587,290	US$ 2,021 93,617 269,423 —
					365,061

F-15

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

4. Short-Term Investments

Marketable securities .................................................................... Mutual funds ................................................................................. Less: Allowance for market value decline ................................... Net .................................................................................................	December 31,	December 31,	US$ 3,898 5,516 (396) 9,018	June 30, 2001 NT$ US$ 135,027 3,916 268,389 7,784 (14,650) (425) 388,766 11,275
	1999 NT$ 120,045 2,674 — 122,719	2000
		NT$ 134,392 190,195 (13,642) 310,945		NT$ 135,027 268,389 (14,650) 388,766

5. Notes and Accounts Receivable (Net)

Notes receivable............................................................... Accounts receivable ......................................................... Total.................................................................................. Less: Allowance for doubtful accounts........................... Net....................................................................................	December 31, 1999 2000 NT$ NT$ US$ 74,622 216,096 6,267 3,381,966 5,402,648 156,689 3,456,588 5,618,744 162,956 (231,136) (284,403) (8,248) 3,225,452 5,334,341 154,708	December 31, 1999 2000 NT$ NT$ US$ 74,622 216,096 6,267 3,381,966 5,402,648 156,689 3,456,588 5,618,744 162,956 (231,136) (284,403) (8,248) 3,225,452 5,334,341 154,708	June 30, 2001 NT$ US$ 55,905 1,621 2,826,395 81,972 2,882,300 83,593 (187,782) (5,446) 2,694,518 78,147
	1999 NT$ 74,622 3,381,966 3,456,588 (231,136) 3,225,452		2001
		NT$ 216,096 5,402,648 5,618,744 (284,403) 5,334,341	NT$ 55,905 2,826,395 2,882,300 (187,782) 2,694,518

6. Inventories (Net)

Merchandise ............................................................... Finished goods ........................................................... Work in process.......................................................... Raw materials............................................................. Supplies...................................................................... Others ......................................................................... Total............................................................................ Less: Allowance for market value decline and obsolescence........................................................... Net..............................................................................	December 31,	December 31,	US$ 253 61,487 99,777 13,338 5,780 3,201 183,836 (30,593) 153,243	June 30, 2001 NT$ US$ 14,083 408 1,553,265 45,048 6,711,640 194,653 384,709 11,157 168,803 4,896 5,783 168 8,838,283 256,330 (1,371,905) (39,788) 7,466,378 216,542
	1999 NT$ 18,185 1,430,566 2,921,679 227,861 145,134 3,128 4,746,553 (1,091,457) 3,655,096	2000 NT$ 8,725 2,120,073 3,440,313 459,910 199,295 110,382 6,338,698 (1,054,883) 5,283,815		2001
				NT$ 14,083 1,553,265 6,711,640 384,709 168,803 5,783 8,838,283 (1,371,905) 7,466,378

The insurance coverage for inventories amounted to $4,101,794, $6,128,719 (US$177,747) and $10,183,089 (US$295,333) as of December 31, 1999 and 2000 and June 30, 2001, respectively.

F-16

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

7. Long-Term Equity Investments

Accounted for under cost method: Chantek Electronic Co., Ltd. .................................................................... United Industrial Gases Co., Ltd. ............................................................. Quality Test System Inc. .......................................................................... Chien Cheng Venture Capital Co., Ltd. ................................................... Ardentec Corp. .......................................................................................... Chipbond Technology Corp. ..................................................................... Prepayments for Investment and other...................................................... Subtotal ...................................................................................................... Less: Allowance for market value decline................................................ Net.............................................................................................................. Accounted for under equity method: Caesar Technology, Inc. ............................................................................ Prominent Communication Inc. ................................................................ Biomorphic VLSI Inc. .............................................................................. Raio Electronic Corp. Ltd. ....................................................................... Subtotal ...................................................................................................... Total ...................................................................................................................	December 31, 1999	December 31, 1999
	Shares 15,211,746 4,023,046 11,345,833 8,000,000 25,000,000 5,250,000 63,188,853 4,000,000 3,360,000 800,000	NT$ 206,302 58,500 116,418 80,000 250,000 60,866 12,081 784,167 (23,289) 760,878 512,465 21,777 39,985 6,548 580,775 1,341,653	Percent owned
			8.89% 4.50% 14.64% 15.38% 14.25% 3.75% 27.19% 35.56% 35.55% 25.00%

Accounted for under cost method: Chantek Electronic Co., Ltd. ..................................................... United Industrial Gases Co., Ltd. .............................................. Quality Test System Inc. ........................................................... Chien Cheng Venture Capital Co., Ltd. .................................... Ardentec Corp. ........................................................................... Powertech Co. Ltd. .................................................................... Taiwan Mask Corp. .................................................................... Chipbond Technology Corp. ...................................................... Subtotal ....................................................................................... Less: Allowance for market value decline................................. Net............................................................................................... Accounted for under equity method: Caesar Technology, Inc. ............................................................. Prominent Communication Inc. ................................................. Biomorphic VLSI Inc. ............................................................... Raio Electronic Corp. Ltd. ........................................................ Subtotal ....................................................................................... Total ....................................................................................................		**December 31, **	2000
	Shares 15,211,746 4,626,502 11,345,833 8,000,000 23,750,000 6,395,000 632 9,187,500 74,129,603 6,100,000 4,660,252 3,140,000	NT$ 206,301 58,500 23,419 80,000 237,500 83,135 81 129,559 818,495 (107,300) 711,195 405,542 98,006 85,613 30,212 619,373 1,330,568	US$ 5,983 1,697 679 2,320 6,888 2,411 2 3,758 23,738 (3,112) 20,626 11,762 2,843 2,483 876 17,964 38,590	Percent owned
				8.89% 4.50% 14.64% 15.38% 11.85% 3.20% — * 7.66% 29.65% 33.17% 35.83% 26.17%

F-17

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in thousands except shares, per share, and percentages)

Accounted for under cost method: Chantek Electronic Co., Ltd. ..................................................... United Industrial Gases Co., Ltd. .............................................. Quality Test System Inc. ................................................................... Chien Cheng Venture Capital Co., Ltd. ............................................ Ardentec Corp. ................................................................................... Powertech Co. Ltd. ............................................................................ Taiwan Mask Corp. ............................................................................ Chipbond Technology Corp. .............................................................. Tower Semiconductor, Inc. ................................................................ FueTrek Co. Ltd. ............................................................................... Pico Netic............................................................................................ Global Strategic .................................................................................. Subtotal ............................................................................................... Less: Allowance for market value decline......................................... Net....................................................................................................... Accounted for under equity method: Caesar Technology, Inc. ............................................................. Prominent Communication Inc. ................................................. Biomorphic VLSI Inc. ............................................................... Raio Electronic Corp. Ltd. ........................................................ Subtotal ....................................................................................... Total ....................................................................................................		June 30, 2001	June 30, 2001	Percent Owned 8.89% 3.41% 14.64% 15.38% 11.85% 3.20% — 7.66% 7.70% 18.94% 4.10% — * 29.65% 32.82% 35.75% 26.17%
	Shares 15,211,746 4,626,502 11,345,833 8,000,000 23,750,000 6,395,000 632 9,187,500 1,599,931 430 1,000,000 68,940 74,129,603 6,100,000 4,660,252 3,140,000	NT$ 206,301 58,500 — 80,000 237,500 83,135 81 130,565 711,874 37,152 31,023 68,940 1,645,071 (182,860) 1,462,211 297,463 69,187 60,016 25,263 451,929 1,914,140	US$ 5,983 1,697 — 2,320 6,888 2,411 2 3,787 20,646 1,077 900 1,999 47,710 (5,303) 42,407 8,627 2,007 1,741 733 13,108 55,515

• Less than 0.01%.

** Mutual fund.

No long-term equity investments were pledged as of December 31, 1999, 2000 and June 30, 2001.

8. Short-Term Debts

Letter of credit loans within 180 days at variable interest rates ................................................................................... Working capital loan due within 180 days at variable interest rates ......................................................................	December 31,	December 31,	US$ 26,818 19,194 46,012	June 30,	June 30,
	1999 NT$ 23,941 1,185,256 1,209,197	2000		2001
		NT$ 924,680 661,822 1,586,502		NT$ 410 706,726 707,136	US$ 12 20,497
					20,509

The weighted average interest rate of the short-term debt was 6.33%, 6.39% and 4.65% as of December 31, 1999 and 2000 and June 30, 2001, respectively.

F-18

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Short-term debt as of June 30, 2001 is repayable in US$20,494 (NT$706,635), in ¥1,480 (NT$410), in ECU3,145 (NT$91).

The Company’s unused short-term lines of credit amounted to NT$6,185,850, NT$10,709,670 and NT$15,121,061 as of December 31, 1999, 2000 and June 30, 2001, respectively.

9. Short-Term Notes

Short-term notes.............................................................................. Less: discount on short-term notes.................................................	December 31, 1999 2000 NT$ NT$ US$ 250,000 — — (1,591) — — 248,409 — —	June 30,
	1999 NT$ 250,000 (1,591) 248,409	2001
		NT$ US$ — — — — — —

The interest rate for short-term notes was 5.28% as of December 31, 1999.

10. Capital Lease Obligations

The Company entered into a lease agreement for equipment with Caesar Technology, Inc. in 1999. The lease term is from May 1, 1999 to April 30, 2005. The equipment shall, upon expiration of the agreement, belong to the Company. Cost of the equipment amounted to NT$24,946. The lease obligation is repayable in 72 monthly installments from May 31, 1999 to April 30, 2005.

Future obligation resulting from the lease as of June 30, 2001 is as follows:

Years July 1, 2001-June 30, 2002......................................................................................................... Less: unrealized interest expense................................................................................................ Current portion............................................................................................................................ July 1, 2002-June 30, 2003......................................................................................................... July 1, 2003-June 30, 2004......................................................................................................... July 1, 2004-June 30, 2005......................................................................................................... Less: unrealized interest expense................................................................................................ Lease obligation—long-term ...................................................................................................... Total lease obligation..................................................................................................................

NT$ US$ 5,249 152 (1,238) (36) 4,011 116 5,249 152 5,249 152 4,374 127 14,872 431 (1,605) (46) 13,267 385 17,278 501

F-19

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

11. Long-Term Debts

Secured Medium term loans from one bank, repayable in 8 semi-annual installments beginning November 2001 with a variable interest rate .......................................... Medium term loans from 7 banks, repayable in 21 quarterly installments from March 1996 to March 2001 with variable interest rates................................... Loan from one bank, repayable in 21 quarterly installments from May 1998 to January 2003 with a variable interest rate .......................................................... Debentures, repayable in 5 semi-annual installments from January 1999 to January 2001 with a fxed interest rate.................................................................... Medium term loans from 7 banks, repayable in 10 semi-annual installments from December 1998 to June 2003 with variable interest rates.......................... Medium term loans from one bank, repayable in 96 monthly installments from April 1999 to March 2007 with a variable interest rate .......................................... Medium term loan from 14 banks, repayable in 19 quarterly installments from July 1999 to January 2004 with variable interest rates................................... Medium term loan from one bank, repayable in 6 semi- annual installments from April 2000 to October 2002 with a fxed interest rate ............................................... Medium term loan from one bank, repayable in July 2002 with a fxed interest rate...................................... Medium term loans from one bank, repayable in 36 monthly installments from April 2004 with a variable interest rate.................................................................... Debentures, 5 year secured convertible debentures due May 5, 2003.................................................................. Unsecured Debentures, 10 year unsecured convertible debentures due February 4, 2007.................................................... 5 year unsecured convertible debentures due February 1, 2005........................................................................... Add: interest payable ........................................................ Less: current portion.........................................................	Interest Rate December 31, June 30, 1999 2000 2001 % % % 6.35- 8.80 6.96 5.40- 8.80 8.89- 6.765 6.755- 8.88 — 6.64 6.63 6.55 7.00 7.00 — 0.9625- 0.9967 1.275- 1.3092 0.77- 0.8092 7.69 7.69 6.73 6.015- 7.89 6.005- 7.88 5.925- 7.8 6.85 6.85 6.85 7.35 7.35 7.35 7.64 7.64 6.75 — — — 1.25 1.25 1.25 — — 1.25	Interest Rate December 31, June 30, 1999 2000 2001 % % % 6.35- 8.80 6.96 5.40- 8.80 8.89- 6.765 6.755- 8.88 — 6.64 6.63 6.55 7.00 7.00 — 0.9625- 0.9967 1.275- 1.3092 0.77- 0.8092 7.69 7.69 6.73 6.015- 7.89 6.005- 7.88 5.925- 7.8 6.85 6.85 6.85 7.35 7.35 7.35 7.64 7.64 6.75 — — — 1.25 1.25 1.25 — — 1.25	Balance	Balance	Balance	June 30, 2001	June 30, 2001
	December 31,		December 31,
	1999	2000	1999	2000	2000
	% 6.35- 8.80 8.89- 6.765 6.64 7.00 0.9625- 0.9967 7.69 6.015- 7.89 6.85 7.35 7.64 — 1.25 —	% 6.96 6.755- 8.88 6.63 7.00 1.275- 1.3092 7.69 6.005- 7.88 6.85 7.35 7.64 — 1.25 —	NT$ 400,000 156,100 266,000 300,000 1,877,133 321,200 7,749,510 2,000,000 300,000 229,900 5,123,363 384,015 —	NT$ 400,000 47,600 190,000 100,000 1,365,507 277,400 6,427,979 1,332,000 300,000 229,900 2,646,400 — 5,257,140	US$ 11,601 1,381 5,510 2,900 39,603 8,045 186,426 38,631 8,701 6,668 76,752 — 152,469		US$ 11,601 — 4,408 — 32,581 7,410 166,839 28,973 8,701 25,783 79,977 — 158,876 525,149 29,078 (92,145) 462,082
			15,908,825	16,053,541	465,590

F-20

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

The non-interest bearing 5-year secured convertible debentures are convertible at the option of the holder into the Company’s common stock at an initial conversion price of NT$53.728 per share. As of June 30, 2001, the split adjusted conversion price is NT$25.7649 per share. However, the conversion price is subject to adjustment if there is a capital increase or the issue of other convertible bonds for which the conversion price is less than the market price at the time of such subsequent issue. The convertible debentures are redeemable at 129.775% of par at maturity, or at the option of the Company after May 6, 2001, or at the option of bondholders on May 5, 2003. Sinking fund requirement will apply if, at any time in the 24 months immediately prior to the maturity date of the bonds, the aggregate outstanding amount of principal and accrued interest is greater than the lesser of US$45 million and an amount equal to 30% of the related security letters of credit of US$103,804 (NT$3,578,124). As of June 30, 2001, the Company maintained NT$717,893 with the bank to comply with the sinking fund requirement.

The 1.25% 10-year unsecured convertible debentures are convertible at the option of the holder into the Company’s common stock at an initial conversion price of NT$42.3457 per share. However, the conversion price is subject to adjustment if there is a capital increase or the issue of other convertible bonds for which the conversion price is less than the market price at the time of such subsequent issue. The convertible debentures are redeemable at par at maturity or at the option of bondholders at 135.06% of par on February 4, 2002. As of December 31, 2000, these convertible debentures were fully converted.

The 1.25% bearing 5-year unsecured convertible debentures are convertible at the option of the holder into the Company’s common stock at an initial conversion price of NT$69 per share. As of June 30, 2001, the split adjusted conversion price is NT$45.4855 per share. However, the conversion price is subject to adjustment if there is a capital increase or the issue of other convertible bonds for which the conversion price is less than the market price at the time of such subsequent issue. The convertible debentures are redeemable at par at maturity or at the option of bondholders at 121.386% of par on February 1, 2003.

The above long-term debt, excluding convertible debentures, as of June 30, 2001 is repayable in US$118,460 (NT$4,083,317) in Japanese Yen 4,055,520 (NT$1,123,379) and in NT$4,664,780.

Maturities of existing long-term debt for the 5 years succeeding June 30, 2001 are as follows:

Years July 1, 2001-June 30, 2002.................................................................................................................... July 1, 2002-June 30, 2003.................................................................................................................... July 1, 2003-June 30, 2004.................................................................................................................... July 1, 2004-June 30, 2005.................................................................................................................... July 1, 2005-June 30, 2006.................................................................................................................... After June 30, 2006................................................................................................................................ Total........................................................................................................................................................	NT$
	3,177,165 6,409,744 1,852,686 6,820,024 141,174 708,949
	19,109,742

Certain of the debt agreements require the Company to issue new share capital for cash if the debt to equity ratio is greater than 1.85 to 1.0 and 1.2 to 1.0 for respective loans.

F-21

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

The Company’s assets pledged as collateral as of June 30, 2001 were as follows:

Assets Restricted investments.............. Restricted investments.............. Restricted investments.............. Restricted investments.............. Property, plant and equipment.. Property, plant and equipment.. Property, plant and equipment.. Property, plant and equipment.. Property, plant and equipment.. Property, plant and equipment.. Total ..........................................	June 30, 2001 NT$ US$ 12,000 348 5,000 145 35,600 1,032 172,350 4,999 8,399,420 243,603 1,437,819 41,700 804,305 23,327 268,891 7,798 612,479 17,763 6,013,515 174,406 17,761,379 515,121	Secured fnancial institutions I.C.B.C. Customs, HSIP Industrial Bureau of the Ministry of Economic Affairs Chiao Tung Bank Chiao Tung Bank Land Bank ABN AMRO Bank The Chase Manhattan Bank China Development Industrial Bank Bank of America	Contents
	NT$ 12,000 5,000 35,600 172,350 8,399,420 1,437,819 804,305 268,891 612,479 6,013,515 17,761,379		Security for foreign labors Customs clearance deposit Subsidy Income Security loan Secured loan Secured loan Secured loan Secured loan Secured loan Secured loan

12. Retirement Pension Plan

In 1990, the Company enacted provisions for employees’ retirement. The provisions state that employees are entitled to 2 base points for every year of service for the first 15 years and 1 base point for every additional year of service up to a maximum of 45 base points. Employee pension obligation is computed based on years of service and average salaries or wages for the 6 months prior to approved retirement. Prior to May 1996 the Company made a monthly contribution equal to 2% of the wages and salaries to the pension fund maintained with the Central Trust of China. On the basis of an actuarial report, the monthly contribution was changed to 5% of the wages and salaries paid in May 1996. Contributions to the fund are deposited in the Employees’ Retirement Fund Committee’s name.

In August 1999, the Company revised its pension plan to allow early retirement under certain conditions. The resulting prior service cost amounted to NT$32,557 and is amortized on the straight-line basis over the employees’ average remaining service period.

Discount rate............................................................................... Salary increase ............................................................................ Expected investment return ........................................................	Year ended December 31, 1998 1999 2000 7.0% 6.5% 6.0% 6.5% 6.0% 5.5% 7.0% 6.5% 6.0%	Year ended December 31, 1998 1999 2000 7.0% 6.5% 6.0% 6.5% 6.0% 5.5% 7.0% 6.5% 6.0%	Six months ended June 30, 2001
	1998 7.0% 6.5% 7.0%	1999 6.5% 6.0% 6.5%
			5.0% 5.0% 5.0%

F-22

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

The funded status of the Company’s pension plan as of December 31, 1999, 2000 and June 30, 2001 were as follows:

Pension obligation Vested beneft obligation.............................................. Non-vested beneft obligation ...................................... Accumulated beneft obligation ................................... Effect of future pay increases ...................................... Projected beneft obligation.......................................... Plan assets at fair value........................................................ Projected beneft obligation in excess of plan assets .......... Unrecognized net transition obligation................................ Unrecognized prior service cost........................................... Unrecognized net gain.......................................................... Accrued pension cost ...........................................................	December 31, 1999 2000 NT$ NT$ US$ — — — (127,711) (147,815) (4,287) (127,711) (147,815) (4,287) (243,759) (274,676) (7,966) (371,470) (422,491) (12,253) 321,369 420,695 12,201 (50,101) (1,796) (52) 64,935 61,843 1,793 32,014 30,712 891 (66,344) (112,027) (3,249) (19,496) (21,268) (617)	December 31, 1999 2000 NT$ NT$ US$ — — — (127,711) (147,815) (4,287) (127,711) (147,815) (4,287) (243,759) (274,676) (7,966) (371,470) (422,491) (12,253) 321,369 420,695 12,201 (50,101) (1,796) (52) 64,935 61,843 1,793 32,014 30,712 891 (66,344) (112,027) (3,249) (19,496) (21,268) (617)	**June 30, **	2001 US$ — (6,342) (6,342) (10,419) (16,761) 13,824 (2,937) 1,749 872 (367) (683)
	1999 NT$ — (127,711) (127,711) (243,759) (371,470) 321,369 (50,101) 64,935 32,014 (66,344) (19,496)
		NT$ — (147,815) (147,815) (274,676) (422,491) 420,695 (1,796) 61,843 30,712 (112,027) (21,268)	NT$ — (218,678) (218,678) (359,229) (577,907) 476,667 (101,240) 60,297 30,061 (12,655) (23,537)

The components of the 1998, 1999 and 2000 and June 30, 2000 and 2001 net pension costs are as

follows:

Service Cost...................................................... Interest Cost...................................................... Expected return on plan assets......................... Amortization..................................................... Others................................................................ Net pension cost ...............................................	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 69,682 61,942 79,843 2,316 17,698 20,384 24,146 700 (14,229) (19,025) (23,387) (678) 3,092 2,832 3,226 94 19 — — — 76,262 66,133 83,828 2,432	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 69,682 61,942 79,843 2,316 17,698 20,384 24,146 700 (14,229) (19,025) (23,387) (678) 3,092 2,832 3,226 94 19 — — — 76,262 66,133 83,828 2,432	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 69,682 61,942 79,843 2,316 17,698 20,384 24,146 700 (14,229) (19,025) (23,387) (678) 3,092 2,832 3,226 94 19 — — — 76,262 66,133 83,828 2,432	Six months ended June 30, 2000 2001 NT$ NT$ US$ 36,721 50,010 1,450 12,073 12,675 368 (11,694) (14,097) (409) 1,613 743 22 — — — 38,713 49,331 1,431	Six months ended June 30, 2000 2001 NT$ NT$ US$ 36,721 50,010 1,450 12,073 12,675 368 (11,694) (14,097) (409) 1,613 743 22 — — — 38,713 49,331 1,431
	1998 NT$ 69,682 17,698 (14,229) 3,092 19 76,262	1999 NT$ 61,942 20,384 (19,025) 2,832 — 66,133		2000 NT$ 36,721 12,073 (11,694) 1,613 — 38,713
			NT$ 79,843 24,146 (23,387) 3,226 — 83,828		NT$ 50,010 12,675 (14,097) 743 — 49,331

F-23

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Additional pension disclosures:

Beneft obligation at January 1................................................... Service cost ................................................................................. Interest cost ................................................................................. Paid to retirees ............................................................................ Increase in unrecognized transit cost.......................................... Increase in unrecognized prior service cost ............................... Increase in unrecognized actuarial (gain) loss ........................... Beneft obligation at end of year ................................................ Change in plan assets Fair value of plan assets at beginning of year ........................... Actual return on plan assets........................................................ Contribution ................................................................................ Paid.............................................................................................. Fair value of plan assets at end of year......................................	Year ended December 31, 1999 2000 NT$ NT$ US$ 279,442 371,470 10,773 61,942 79,843 2,316 20,384 24,146 700 — (866) (25) — — — 32,557 — — (22,855) (52,102) (1,511) 371,470 422,491 12,253 237,288 321,369 9,320 16,107 18,136 536 67,974 82,056 2,380 — (866) (25) 321,369 420,695 12,211	Year ended December 31, 1999 2000 NT$ NT$ US$ 279,442 371,470 10,773 61,942 79,843 2,316 20,384 24,146 700 — (866) (25) — — — 32,557 — — (22,855) (52,102) (1,511) 371,470 422,491 12,253 237,288 321,369 9,320 16,107 18,136 536 67,974 82,056 2,380 — (866) (25) 321,369 420,695 12,211	**June 30, **	2001 US$ 12,253 1,450 368 (6) — — 2,696 16,761 12,200 265 1,365 (6) 13,824
	1999 NT$ 279,442 61,942 20,384 — — 32,557 (22,855) 371,470 237,288 16,107 67,974 — 321,369
		NT$ 371,470 79,843 24,146 (866) — — (52,102) 422,491 321,369 18,136 82,056 (866) 420,695	NT$ 422,491 50,010 12,675 (223) — — 92,954 577,907 420,695 9,132 47,063 (223) 476,667

13. Shareholders’ Equity

Common Shares

According to the ROC Company Law, when a company issues new shares of common stock for cash, 10% to 15% of the issue must be offered to the company’s employees. According to the Securities and Exchange Law of the ROC, at least 10% of the issue must also be offered to the public.

On March 5, 1998, convertible debentures totaling NT$16,464 were converted to the Company’s common shares which resulted in the issuance of 519,565 additional common shares.

On June 29, 1998, the Company’s shareholders resolved in the annual general meeting to issue 26,174,995 common shares in settlement of the 1997 employee bonus. In addition, the shareholders also resolved to declare a 22% stock dividend which resulted in the issuance of 317,313,700 shares.

Following the resolution of the shareholders’ meeting on August 15, 1999, the Company transferred NT$379,863 (US$11,017) of legal reserve to make up its deficiencies. In addition, the shareholders also resolved to declare a 10% stock dividend which resulted in the issuance of 178,582,369 additional common shares.

On August 25, 1999, the Company effected a rights offering for the issuance of 135,590,000 common shares at NT$30 per share. As of December 31, 1999, the Company had received subscriptions totaling NT$448,812, representing 14,960,400 common shares. As a result of this right offering, the Company issued 135,590,000 shares for a total consideration of NT$4,067,700 in January 2000.

F-24

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

During the year ended December 31, 2000, convertible debentures totaling NT$3,859,549 were converted to the Company’s common shares which resulted in the issuance of 97,834,589 additional common shares.

On May 3, 2000, the Company’s shareholders resolved in the annual general meeting to increase the authorized share capital to NT$35,000,000. At the same date, the shareholders also resolved to declare a 13% stock dividend which resulted in the issuance of 276,578,492 common shares. The board of directors resolved that the ex-right date was June 13, 2000.

On April 19, 2001, the Company’s shareholders resolved in the annual general meeting to increase the authorized share capital to NT$45,000,000. The shareholders also declared a 30% stock dividend, which resulted in the issuance of 742,322,744 common shares. The board of directors resolved that the ex-right date was May 28, 2001. The Company’s shareholders also resolved to issue 142,610,725 common shares in settlement of the 2000 employee bonus.

Legal Reserve

According to the ROC Company Law, 10% of the Company’s net income, after deducting previous years’ losses, if any, is appropriated as legal reserve prior to any distribution until such reserve is equal to the Company’s paid-in capital. When the legal reserve is equal to 50% of the paid-in capital, 50% of such reserve may be distributed to the Company’s shareholders through the issuance of additional common shares.

Capital reserve

Capital reserve is comprised of gain on disposal of fixed assets (net of tax) and cost of investment in excess of purchased assets in an equity investee. According to the ROC Company Law, the capital reserve can only be used for making up deficiencies or distribution of stock dividends. The Company shall not use the capital reserve to make up its loss unless the legal reserve is insufficient for making up such loss.

Income distributions

Prior to May 2000, the Company’s articles of incorporation provide that the net income, after deducting the previous years’ losses and the appropriation of the legal reserve (‘‘Distributable Earnings’’), may be appropriated or distributed in the following sequence:

• a. Dividend to shareholders at 10% of the Company’s paid-in capital;

• b. Employee bonuses at 15% of Distributable Earnings;

• c. Remuneration for directors and supervisors’ services at 2% of Distributable Earnings; d. Shareholders’ bonuses.

The Company’s articles of incorporation, revised on May 3, 2000, provide that the net income, after deducting the previous years’ losses and the appropriation to the legal reserve (‘‘Distributable Earnings’’), may be appropriated or distributed proportionally as follows:

• a. Dividend to shareholders at 83% of the Company’s Distributable Earnings;

• b. Employee bonuses at 15% of Distributable Earnings; and

• c. Remuneration for directors and supervisors’ services at 2% of Distributable Earnings.

F-25

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Distributions, except for the remuneration for directors and supervisors which must be made in cash, may be made in cash, in the form of common shares or a combination thereof, as determined by the shareholders at the annual general meeting of the Company’s shareholders. The Company’s articles of incorporation provide that no more than 20% of any distribution to shareholders and employees may be in cash and employee bonuses will be distributed in the same form as the distribution of dividends to shareholders on a proportionate basis. Further, with the approval of the shareholders at such meeting, the dividend and shareholders’ bonuses may be held wholly or partially as retained earnings for distribution in future years.

Distributions are not deductible in the determination of taxable income.

14. Income Taxes

The Company is located in the HSIP. In order for business operations to be eligible to locate in the HSIP, the operations must be high technology related manufacturing activities. Based on the HSIP regulations, a preferential income tax rate of 20%, instead of 25% applicable to other business entities located in Taiwan, is imposed on profits generated from HSIP business operations through 2000. Beginning 2001, the preferential income tax rate of 20% is no longer available to HSIP business operations. Business operations located within the HSIP are also entitled to an initial income tax exemption period of five consecutive years on income generated from certain qualifying high technology manufacturing activities. The Company elected to start this tax exemption period in 1994 and the tax exemption period expired in 1998.

Subsequent to the initial tax exemption period, the Company is also entitled to an additional four year income tax exemption period on income generated from the expansion of operations located in the HSIP. Such exemption period must start within four years from the date the expanded operations begin operational activities. Alternatively, the Company may irrevocably elect to utilize tax credits at 15% of the cost of expansion operations located in the HSIP, during a five year period beginning in the year taxable income is first generated from the expanded operations. The Company has elected to start the additional four year tax exemption period in 2001.

Pursuant to the Statute for Upgrading Industries (the ‘‘SUI’’) and by an irrevocable election by the shareholders, shareholders who have invested in the Company, where such investments were used to establish or expand qualifying operations, may be eligible for income tax credits up to 20% of the amount invested. Shareholders may use the credits over a five-year period beginning two years from the date on which the investment was made. The amount of credits that may be utilized each year may not exceed 50% of the shareholder’s income tax liability. In order to be eligible, shareholders must own the newly invested shares for at least two years. Alternatively, under SUI, the shareholders may irrevocably elect for the Company to be eligible for a five-year income tax exemption period. The election to use the tax exemption period must be made within two years from the date the expanded operation began its intended activities and the exemption period must begin no later than four years from the start of the expanded operations. A company that is eligible for benefits under Regulations of the HSIP as well as SUI is only able to utilize tax benefits of one regime on any one eligible operation expansion project. The Company is not currently receiving benefits provided by the election of shareholders under SUI and the shareholders have not yet made any elections to provide the Company with benefits in the future.

Separately under SUI, the Company is also entitled to other tax credits generally available to ROC companies. The Company earns tax credits currently at rates ranging between 5 to 20% of certain acquisition costs of qualifying machinery and equipment, qualifying research and development costs and employee training expenses. Such tax credits may be utilized over a period of five years beginning the year the costs were incurred.

F-26

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

As of June 30, 2001, unused tax credits available to reduce future taxable income amounted to NT$2,987,727 (US$86,651). Details are as follows:

Expiration Years 2001................................... 2002................................... 2003................................... 2004................................... 2005................................... Total...................................	NT$ 673,513 619,942 1,160,243 134,651 399,378 2,987,727	US$
		19,533 17,980 33,650 3,905 11,583
		86,651

The components of income tax expense (benefit) and deferred income tax assets and liabilities are as follows:

Components of income tax expense (benefit):

Current.................................................. Deferred................................................ Total......................................................	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 45,077 210,038 524,210 15,203 (450,791) (526,138) (126,113) (3,657) (405,714) (316,100) 398,097 11,546	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 45,077 210,038 524,210 15,203 (450,791) (526,138) (126,113) (3,657) (405,714) (316,100) 398,097 11,546	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 45,077 210,038 524,210 15,203 (450,791) (526,138) (126,113) (3,657) (405,714) (316,100) 398,097 11,546	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	1998 NT$ 45,077 (450,791) (405,714)	1999 NT$ 210,038 (526,138) (316,100)		2000 NT$ 20,249 (249,430) (229,181)	2001
			NT$ 524,210 (126,113) 398,097		NT$ 70,714 309,885 380,599	US$ 2,051 8,987
						11,038

The reconciliation of book income tax expense (benefit) computed at the Company’s preferential 20% tax rate through 2000 and a 25% tax rate beginning in 2001 to income tax expense (benefit) recorded:

Expected income tax expense (beneft)..................................... Undistributed earnings tax............ Additional tax assessment ............ Effect of tax exempt earnings ...... Tax credits earned......................... Change in valuation allowance .... Net loss on long-term equity investment................................. Effect of rate change..................... Others............................................ Income tax expense (beneft)........		Year ended December 31,	Year ended December 31,	US$ 63,868 — 2,704 — (44,897) (18,293) 3,487 3,044 1,631 11,544	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	1998 NT$ (390,569) — — — (880,502) 739,983 112,691 — 12,683 (405,714)	1999 NT$ 118,104 — 224,830 — (674,118) (156,313) 142,743 — 28,654 (316,100)	2000		2000 NT$ 455,866 — — — (482,281) (238,161) 37,526 — (2,131) (229,181)	2001
			NT$ 2,202,184 — 93,246 — (1,548,034) (630,739) 120,237 104,973 56,230 398,097			NT$ 702,362 465,488 58,879 (347,691) (771,674) 168,738 42,986 — 61,511 380,599	US$ 20,370 13,500 1,707 (10,084) (22,380) 4,894 1,247 — 1,784
							11,038

F-27

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Components of deferred income tax assets and liabilities:

Deferred tax liabilities Tax depreciation in excess of book depreciation... Unrealized foreign exchange gain.......................... Others...................................................................... Total deferred tax liabilities............................................ Deferred tax assets Tax credits............................................................... Inventory provision................................................. Bad debt allowance................................................. Accrued royalty expense ........................................ Loss carryforward................................................... Unrealized foreign exchange loss........................... Others...................................................................... Total deferred tax assets ................................................. Valuation allowance........................................................ Net deferred tax assets.................................................... Total net deferred tax assets ........................................... Net deferred tax assets-current....................................... Net deferred tax assets-noncurrent................................. Total net deferred tax assets ...........................................	Year ended December 31, 1999 2000 NT$ NT$ US$ 330,409 369,659 11,144 166,727 — — 3,471 — — 500,607 369,659 11,144 3,207,578 3,029,232 91,324 219,945 132,459 3,993 38,892 24,565 741 33,044 67,251 2,027 537,734 — — — 103,160 3,110 15,003 59,955 1,808 4,052,196 3,416,622 103,003 (873,028) (242,289) (7,304) 3,179,168 3,174,333 95,699 2,678,561 2,804,674 84,555 1,204,907 1,210,602 36,497 1,473,654 1,594,072 48,058 2,678,561 2,804,674 84,555	Year ended December 31, 1999 2000 NT$ NT$ US$ 330,409 369,659 11,144 166,727 — — 3,471 — — 500,607 369,659 11,144 3,207,578 3,029,232 91,324 219,945 132,459 3,993 38,892 24,565 741 33,044 67,251 2,027 537,734 — — — 103,160 3,110 15,003 59,955 1,808 4,052,196 3,416,622 103,003 (873,028) (242,289) (7,304) 3,179,168 3,174,333 95,699 2,678,561 2,804,674 84,555 1,204,907 1,210,602 36,497 1,473,654 1,594,072 48,058 2,678,561 2,804,674 84,555	June 30, 2001 NT$ US$ 475,670 13,796 — — — — 475,670 13,796 2,987,727 86,651 164,652 4,775 20,576 597 73,973 2,145 — — 54,121 1,570 80,437 2,333 3,381,486 98,071 (411,027) (11,920) 2,970,459 86,151 2,494,789 72,355 828,526 24,029 1,666,263 48,326 2,494,789 72,355
	1999 NT$ 330,409 166,727 3,471 500,607 3,207,578 219,945 38,892 33,044 537,734 — 15,003 4,052,196 (873,028) 3,179,168 2,678,561 1,204,907 1,473,654 2,678,561
		NT$ 369,659 — — 369,659 3,029,232 132,459 24,565 67,251 — 103,160 59,955 3,416,622 (242,289) 3,174,333 2,804,674 1,210,602 1,594,072 2,804,674	NT$ 475,670 — — 475,670 2,987,727 164,652 20,576 73,973 — 54,121 80,437 3,381,486 (411,027) 2,970,459 2,494,789 828,526 1,666,263 2,494,789

15. Related Party Transactions

a. Related Parties and Relationships

Related parties

Relationships

Caesar Technology, Inc. (Caesar).............. The Company is represented on Caesar Technology Inc.’s board of directors.

Chantek Electronic Co, Ltd. (Chantek).....

The Company is represented on Chantek Electronic Co., Ltd.’s board of directors.

United Industry Gas Co., Ltd. (UIG)........ The Company is represented on United Industry Gas Co., Ltd.’s board of directors.

Powertech Technology, Inc. (Powertech).. Ardentech Technology, Inc. (Ardentech) ..

Tower Semiconductor, Inc. .......................

The Company is represented on Powertech Technology Inc.’s board of directors.

The Company is represented on Ardentech Technology Inc.’s board of directors.

The Company is represented on Tower Semiconductor Inc.’s board of directors.

F-28

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

b. Transactions with related parties

(a) Manufacturing processing charges to related parties for the years ended December 31, 1998, 1999, 2000 and June 30, 2000 and 2001, are summarized as follows:

Caesar................................................. Chantek .............................................. Powertech........................................... Ardentech........................................... Total....................................................	Year ended December 31,	Year ended December 31,	Year ended December 31,	US$ 17,226 11,316 2,790 1,843 33,175	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	1998 NT$ 762,457 451,017 — — 1,213,474	1999 NT$ 675,371 488,274 — — 1,163,645	2000		2000 NT$ 281,828 193,324 — — 475,152	2001
			NT$ 593,965 390,190 96,197 63,538 1,143,890			NT$ 134,103 61,075 37,346 57,246 289,770	US$ 3,890 1,771 1,083 1,660
							8,404

Such charges form part of inventory costs.

(b) The Company purchased industrial gases from UIG totaling NT$100,352, NT$94,044 and NT$116,944 (US$3,392), NT$52,925, NT$59,787 (US$1,734) for the years ended December 31, 1998, 1999, 2000 and June 30, 2000 and 2001, respectively. Such purchases form part of cost of goods sold.

(c) During the year ended December 31, 2000, the Company purchased 6,395,000 common shares of Powertech from Caesar for NT$13 per share.

(d) Please refer to note 10 for the Company’s capital lease agreement with Caesar.

(e) Payables to related parties as of December 31, 1999, 2000 and June 30, 2001 were as follows:

Caesar.................................................................................... Chantek ................................................................................. UIG........................................................................................ Powertech.............................................................................. Ardentech .............................................................................. Tower..................................................................................... Others .................................................................................... Total.......................................................................................	December 31,	December 31,	US$ 4,062 2,208 285 1,485 830 — 9 8,879	June 30,	June 30,
	1999 NT$ 154,600 114,747 13,257 — — — 2,394 284,998	2000		2001
		NT$ 140,060 76,131 9,803 51,196 28,623 — 320 306,133		NT$ 59,987 21,266 10,735 19,218 22,481 12,305 67 146,059	US$ 1,740 617 311 557 652 357 2
					4,236

16. Commitments and Contingencies

The Company’s commitments and contingencies, not recorded in the financial statements, as of June 30, 2001 were as follows:

a. Letters of credit issued for future deliveries of inventories and equipment amounted to US$3,861 (NT$133,085) and ¥80,700 (NT$22,354).

F-29

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

b. The Company’s significant construction and machinery contracts totaled approximately NT$7,098,933 (US$205,886). The Company has paid NT$1,959,746 (US$56,837) pursuant to these contracts as of June 30, 2001.

• c. Capital and operating leases:

The land on which the Company’s buildings are located are leased from the HSIP. The leases expire in the years 2010 to 2015 and are renewable at the Company’s option.

Future minimum payments under non-cancelable operating leases as of June 30, 2001 are as follows:

July 1, 2001-June 30, 2002............................................................. July 1, 2002-June 30, 2003............................................................. July 1, 2003-June 30, 2004............................................................. July 1, 2004-June 30, 2005............................................................. July 1, 2005-June 30, 2006............................................................. Thereafter ........................................................................................ Total minimum lease payments ......................................................	Operating Leases	Operating Leases
	NT$ 32,812 64,064 64,064 64,064 64,064 517,655 806,723	US$ 952 1,858 1,858 1,858 1,858 15,013
		23,397

Rental expenses under the operating leases amounted to NT$52,037, NT$54,314, NT$65,524, NT$30,501 and NT$31,145 (US$903) for the years ended December 31, 1998, 1999, 2000 and the six months ended June 30, 2000 and 2001, respectively.

d. On February 18, 1997, Atmel Corporation filed a legal action against MXA, one of the Company’s subsidiaries, for violation of Atmel’s patent No. 903. The International Trade Commission ruled on March 19, 1998 in favor of MXA with regard to patent No. 903. In August 1997, Atmel Corporation also filed legal action against MXA for violation of Atmel’s patents No. 096 and 747. The Company has not yet received a ruling with regard to patent No. 096 and 747. Although Atmel appealed and the result is yet unforeseeable, MXA intends to defend itself vigorously. In light of the preliminary nature of the proceedings, as well as the procedural posture of the investigation, the Company believes that there will be no significant impact on its operations or financial position related to the dispute.

As is the case with many companies in the semiconductor industry, the Company may from time to time receive communications from third parties asserting patent or process technology rights to the Company’s products. The Company may enter into discussions with these third parties as to their respective positions and the terms of any possible licenses in respect of these patent or process technology rights. Irrespective of the validity or the successful assertion of these claims, the Company could incur significant costs with respect to the defense of the claims, which could have a material adverse effect on the Company’s results of operations or financial condition. For royalty costs related to potential patent infringement claims or payments that are required to be made in accordance with existing royalty arrangements, the Company accrues royalty expense based on historical experience and specific arrangements.

e. The Company entered into an agreement with Tower Semiconductor Ltd. (‘‘Tower’’), an Israel public company listed on NASDAQ, to purchase silicon wafers to be manufactured by Tower

F-30

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

(‘‘Wafer’’) in an amount of 25% of then available quarterly manufacturing capacity of a specified production line, after it passes qualification testing, but not more than 4,750 Wafer outs per month (the ‘‘Minimum Loading Obligation’’) commencing on the date manufacturing on a specified production line commences and ending 12 months following the expected production date, the Minimum Loading Obligation shall, from the third quarter of the expected production date, be reduced by 950 wafer outs per month each quarter. The minimum Loading Obligations may be limited to 15% of Tower’s capacity before Tower proves to the Company that the one time programmable or multiple time programmable pass the production qualification. If the Company maintains specified levels of investment in Tower’s shares, the Company will receive favorable pricing terms on the first 3,800 wafers purchased each month until the contract expires in 2011.

In conjunction with the foundry agreement in December 2000, the Company entered into share purchase agreements with Tower whereby the Company agreed to invest US$75 million in Tower. Following an initial payment of US$20 million made in January 2001, upon completion by Tower of certain milestones specified in the agreement, payments to Tower are made in five equal instalments of US$11 million each. Upon satisfaction of each milestone, the Company is required to purchase 367,000 shares of Tower. Payment for the first milestone was made in March 2001 and payment for the second milestone was made in April 2001. The payments are held on deposit with Tower and may be used to purchase Tower shares or wafers or make royalty payments. In accordance with the agreement, the purchase price of the Tower shares will be fair market value subject to a minimum of US$12.50 and maximum of US$30 per share. The amount of the deposit in excess of the cost of shares purchased will remain in the deposit account to be used for future purchases of wafers or shares or to make royalty payments. As of June 30, 2001, the Company owned approximately 7.7% of Tower’s shares and had NT$736 million remaining on deposit. If Tower is unable to meet the milestones, under certain circumstances, the Company may terminate the agreement and would no longer be required to purchase additional shares according to the terms of the arrangement.

17. Other Disclosures

Property, Plant and Equipment

Total capitalized interest amounted to NT$269,530, NT$310,082 (US$8,993), NT$234,477 and NT$63,216 (US$1,833) for the years ended December 31, 1999, 2000 and the six months ended June 30, 2000 and 2001, respectively.

The insurance coverage for property, plant and equipment amounted to NT$24,494,764 and NT$38,575,907 and NT$38,748,257 (US$1,123,789) as of December 31, 1999, 2000 and June 30, 2001, respectively.

Royalty Revenue

Royalty revenue earned amounted to NT$15,023, NT$27,101 and NT$84,973 (US$2,464) and NT$8,778, NT$40,934 (US$1,187) for the years ended December 31, 1998, 1999, 2000 and six months ended June 30, 2000 and 2001, respectively.

Information on Investments in Mainland China

None

Significant Subsequent Events

None

F-31

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

18. Segment Information

Segment and geographic data

The Company operates predominantly in one industry segment, the design, manufacturing, and supply of integrated circuits. The Company has two reportable segments, Macronix International Co., Ltd. and Macronix America, Inc. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All intersegment sales prices are market based. The Company evaluates performance based on operating income of the respective business units. Segment operating income is revenue less direct and allocable operating expenses. Segment identifiable assets are those which are directly used in or identified to segment operations. The geographic distributions of the Company’s identifiable assets, operating income and revenues are summarized in the following table.

1998 Sales to unaffliated customers............................... Sales between geographic areas ............................. Net Sales................................................................. Operating loss including other expenses................ Interest revenue....................................................... Interest expense ...................................................... Loss before taxes.................................................... Tax beneft .............................................................. Net loss ................................................................... Identifable assets.................................................... Capital expenditures ............................................... Depreciation and amortization ............................... 1999 Sales to unaffliated customers............................... Sales between geographic areas ............................. Net Sales................................................................. Operating income (loss), including other expenses.............................................................. Interest revenue....................................................... Interest expense ...................................................... Income before taxes................................................ Tax beneft .............................................................. Net income.............................................................. Identifable assets.................................................... Capital expenditures ............................................... Depreciation and amortization ...............................	Domestic NT$ 11,207,665 1,110,920 12,318,585 (1,088,863) 49,009,788 6,132,582 4,108,935 Domestic NT$ 15,611,684 1,041,705 16,653,389 1,342,236 50,483,234 8,125,825	U.S.A NT$ 1,372,650 15,805 1,388,455 (9,511) 435,895 3,086 5,737 U.S.A NT$ 1,314,264 33,706 1,347,970 (7,441) 442,756 2,810	Others NT$ — — — (253,962) 522,969 — 140,328 Others NT$ 31,546 — 31,546 (315,129) 1,552,718 —	Elimination NT$ — (1,126,725) (1,126,725) 3,797 (364,264) — — Elimination NT$ — (1,075,411) (1,075,411) 309,772 (1,281,344) —	Consolidated NT$ 12,580,315 — 12,580,315 (1,348,539) 365,562 (969,870) (1,952,847) 405,714 (1,547,133) 49,604,388 6,135,668 4,255,000 Consolidated NT$ 16,957,494 — 16,957,494 1,329,438 377,475 (1,116,392) 590,521 316,100 906,621 51,197,364 8,128,635 4,855,386
	4,849,933	5,453	—	—

F-32

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

2000 Sales to unaffliated customers........................... Sales between geographic areas ......................... Net Sales............................................................. Operating income (loss), including other expenses.......................................................... Interest revenue................................................... Interest expense .................................................. Income before taxes............................................ Tax expense ........................................................ Net income.......................................................... Identifable assets................................................ Capital expenditures ........................................... Depreciation and amortization ........................... Six months ended June 30, 2000 Sales to unaffliated customers........................... Sales between geographic areas ......................... Net Sales............................................................. Operating income (loss), including other expenses.......................................................... Interest revenue................................................... Interest expense .................................................. Income before taxes............................................ Tax expense ........................................................ Net income.......................................................... Identifable assets................................................ Capital expenditures ........................................... Depreciation and amortization ...........................	Domestic NT$ 28,086,268 4,151,714 32,237,982 11,602,123 71,205,052 11,785,823 5,654,047 Domestic NT$ 9,766,544 1,653,487 11,420,031 2,563,551 62,469,136 7,003,727 2,740,989	U.S.A NT$ 3,244,508 61,526 3,306,034 117,140 1,493,371 4,807 2,734 U.S.A NT$ 1,517,083 35,138 1,552,221 (32,482) 1,607,263 4,356 3,451	Others NT$ 2,162,332 — 2,162,332 (275,948) 2,407,247 12,241 — Others NT$ 724,339 50,445 774,784 46,897 480,363 682 346	Elimination NT$ — (4,213,240) (4,213,240) 292,121 (2,655,039) — — Elimination NT$ — (1,739,070) (1,739,070) 13,197 (2,022,682) — —	Consolidated NT$ 33,493,108 — 33,493,108 11,735,436 541,387 (1,265,902) 11,010,921 (398,097) 10,612,824 72,450,631 11,802,871 6,048,200 Consolidated NT$ 12,007,966 — 12,007,966 2,591,163 253,287 (565,119) 2,279,331 229,181 2,508,512 62,534,080 7,004,710 2,744,786

F-33

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Six months ended June 30, 2001 Sales to unaffliated customers.............................. Sales between geographic areas ............................ Net Sales................................................................ Operating income (loss), including other expenses............................................................. Interest revenue...................................................... Interest expense ..................................................... Income before taxes............................................... Tax expense ........................................................... Net income............................................................. Identifable assets................................................... Capital expenditures .............................................. Depreciation and amortization ..............................	Domestic NT$ 10,597,262 1,362,876 11,960,138 3,042,765 71,071,186 4,378,041 3,874,022	U.S.A NT$ 1,128,890 — 1,128,890 71,268 6,837,521 735,046 3,975	Others NT$ 503,593 — 503,593 5,290 229,705 1,400 462	Elimination NT$ — (1,362,876) (1,362,876) (37,669) (5,844,812) — —	Consolidated NT$ 12,229,745 — 12,229,745 3,081,654 301,987 (574,193) 2,809,448 (380,599) 2,428,849 72,293,600 5,114,487 3,878,459

Major customers

Revenues from customers representing over 10% of total net sales were as follows:

Customers Megachips......... NKK.................. MITSUBISHI ...	Customers Megachips......... NKK.................. MITSUBISHI ...		Year ended December 31,	Year ended December 31,	US$ 315,303 48,052 77,865 441,220	Six months ended June 30,	Six months ended June 30,
		1998 NT$ % 6,591,187 52.39 1,128,105 8.97 — — 7,719,292 61.36	1999 NT$ % 7,805,576 46.03 1,231,781 7.26 13,892 —* 9,051,249 53.29	2000		2000 NT$ % 3,656,993 30.45 1,275,448 10.62 927,717 7.72 5,860,158 48.79	2001
				NT$ % 10,871,630 32.46 1,656,822 4.95 2,684,798 8.02 15,213,250 45.43			NT$ % 4,370,935 35.74 — — 1,910,398 15.62 6,281,333 51.36	US$ 126,767 — 55,406
								182,173

• Less than 0.01%.

Exports

The Company’s export sales accounted for 68%, 78%, 74%, 74% and 66% of total net sales for the years ended December 31, 1998, 1999, and 2000 and the six months ended June 30, 2000 and 2001, respectively.

F-34

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Export sales from the ROC were as follows:

Japan................................... U.S.A.................................. Hong Kong......................... Singapore............................ South Korea ....................... Europe ................................ Total....................................		Year ended December 31,	Year ended December 31,	US$ 449,610 76,564 81,635 57,164 — 54,024 718,997	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	1998 NT$ 7,205,057 72,573 547,817 237,757 95,497 412,640 8,571,341	1999 NT$ 9,776,492 1,232,261 989,206 547,601 199,510 441,261 13,186,331	2000		2000 NT$ 4,934,617 1,393,676 716,011 537,972 195,854 1,063,842 8,841,972	2001
			NT$ 15,502,559 2,639,938 2,814,773 1,971,024 — 1,862,740 24,791,034			NT$ 5,406,649 863,757 734,804 683,223 — 403,196 8,091,629	US$ 156,805 25,051 21,311 19,815 — 11,694
							234,676

19. Financial Instruments

Significant portions of the Company’s revenues are denominated in currencies other than the NT dollar. Most of the Company’s debt and payables for purchases of capital goods are denominated in currencies other than the NT dollar, primarily in U.S. dollars and Japanese Yen. As of June 30, 2001, approximately 70% of the Company’s long-term debts were in U.S. dollars and approximately 39% of the Company’s accounts receivable were in Japanese Yen. To protect against reductions in value and volatility of future cash flows caused by changes in foreign exchange rates, the Company utilizes financial instruments to hedge its foreign currency exposure. These hedging transactions are designed to reduce the impact of foreign currency exchange rate movements.

The Company also entered into certain derivative contracts for trading purposes. To mitigate the credit risk associated with financial instruments, all the counter-parties of the contracts entered into by the Company are reputable global financial institutions. The outstanding financial instrument positions, identified as hedging or trading purposes, as of December 31, 1999, 2000 and June 30, 2001 are as follows:

a. Foreign currency forward contracts

The table below summarizes by major currency the notional amounts of forward exchange contracts in NT dollars. Foreign currency amounts are translated at rates current at the reporting date. The ‘‘buy’’ amounts represent the NT dollar equivalent of commitments to purchase foreign currencies, and the ‘‘sell’’ amounts represent the NT dollar equivalent of commitments to sell foreign currencies. Most of the Company’s foreign exchange forward contracts will mature in 2002, and were entered into for the purposes of hedging the foreign exchange exposures arising from the Company’s assets and liabilities.

U.S. dollar ......................................................................... Japanese Yen .....................................................................	**December **	31, 2000 Buy Sell — — — 73,407	June 30,	June 30,
	1999 Buy Sell 94,350 — — 224,266		2001
	Buy 94,350 —	Buy — —	Buy 634,248 —	Sell
				— 651,957

F-35

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

As of December 31, 1999, 2000 and June 30, 2001, the net payable resulting from the above exchange contracts amounted to NT$31,655, NT$(13,407) and NT$18,623, respectively.

Net exchange gains (losses) related to foreign currency forward contracts for the years ended December 31, 1998, 1999, 2000 and six months ended June 30, 2000 and 2001 were (NT$7,103), NT$13,218, NT$(6,267), NT$18,130 and NT$95,587, respectively.

b. Options contracts

The Company entered into foreign currency option contracts for hedging purposes. The option contracts were entered into to mitigate foreign exchange risk. The contracts were used to reduce the Company’s exposure to foreign currency risk from its receivables and payables resulting from its normal operations and its debt denominated in U.S. dollars.

A number of the contracts entered into by the Company include ‘‘barriers’’. Such ‘‘barriers’’ have the effect that, if the rate of one currency to the other currency in exchange, exceeds a given rate, the contracts are automatically terminated. These have the impact of reducing the upfront cost of the options.

c. Cross currency and interest rate swaps

To hedge against certain of the Company’s long-term debt denominated in U.S. dollars which bear interest at floating three-month SIBOR, the Company entered into cross currency and interest rate swaps which effectively converted the debts into Japanese Yen and the floating interest rate into a fixed interest rate. Since most of the Company’s receivables are denominated in Japanese Yen, the conversion from U.S. dollar to Japanese Yen mitigates the foreign exchange exposure.

d. Structured deposits

The Company entered into certain structured deposits, or dual currency deposits, to earn higher interest rates, but expose the Company to foreign exchange risk. The Company placed deposits with certain financial institutions which entitled the Company to earn interest rates in excess of the market rates for a ‘‘basic’’ deposit, however, the financial institutions have the option to settle the deposit and accrued interest in the original currency or settle the deposit and accrued interest with an alternative currency other than the original currency. The conversion rate is stated in the contracts. These contracts are entered into for trading purposes.

e. Equity swap contracts

The Company had no outstanding equity swap contracts as of December 31, 2000, June 30, 2000 and 2001. The equity swap contracts as of December 31, 1998 and 1999 were entered into by a wholly-owned Subsidiary of the Company, with the underlying reference equity being the stock of the Company, for trading purposes. If the share price of the Company increased above the strike price, it would result in a gain to the Subsidiary. Alternatively, if the share price of the Company decreased below the strike price, it would result in a loss to the Subsidiary.

F-36

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

f. The estimated fair values of the Company’s financial instruments are as follows:

On balance sheet:

On balance sheet:
Cash and cash equivalents ......... Long-term equity investments ... Short-term debt and notes.......... Long-term debt (including current portion).......................		December 31, 2000 Carrying amount Fair value NT$ US$ NT$ US$ 15,561,894 451,331 15,561,894 451,331 206,382 5,986 99,082 2,874 (1,586,502) (46,012) (1,586,502) (46,012) (19,313,229) (560,129) (18,144,311) (526,227)
	1999 Carrying amount Fair value NT$ NT$ 4,154,888 4,154,888 206,302 273,661 (1,457,606) (1,457,606) (19,107,221) (18,564,239)
	Carrying amount NT$ 4,154,888 206,302 (1,457,606) (19,107,221)	Carrying amount NT$ US$ 15,561,894 451,331 206,382 5,986 (1,586,502) (46,012) (19,313,229) (560,129)

Cash and cash equivalents........................................................ Long-term equity investments.................................................. Short-term debt and notes ........................................................ Long-term debt (including current portion).............................	June 30, 2001 Carrying amount Fair value NT$ US$ NT$ US$ 12,587,290 365,061 12,587,290 365,061 918,256 26,631 735,396 21,328 (707,136) (20,509) (707,136) (20,509) (19,109,742) (554,227) (18,773,751) (544,482)
	Carrying amount NT$ US$ 12,587,290 365,061 918,256 26,631 (707,136) (20,509) (19,109,742) (554,227)

Off balance sheet:

Derivative fnancial instruments Hedging: Cross currency interest rate swap............................. Foreign exchange forwards ...................................... Options...................................................................... Trading: Structured deposit ..................................................... Equity swaps.............................................................	December 31, 1999 2000 Carrying Amount Fair Value Carrying Amount Fair Value NT$ NT$ NT$ NT$ — — 43,260 52,260 31,655 22,478 13,407 (15,408) — (88,327) — 2,261 — — 496,200 496,194 — 285,186 — —	December 31, 1999 2000 Carrying Amount Fair Value Carrying Amount Fair Value NT$ NT$ NT$ NT$ — — 43,260 52,260 31,655 22,478 13,407 (15,408) — (88,327) — 2,261 — — 496,200 496,194 — 285,186 — —	June 30, 2001 Carrying Amount Fair Value NT$ NT$ 62,554 67,037 18,623 17,980 — 37,474 — — — —
	1999 Carrying Amount Fair Value NT$ NT$ — — 31,655 22,478 — (88,327) — — — 285,186
	Carrying Amount NT$ — 31,655 — — —	Carrying Amount NT$ 43,260 13,407 — 496,200 —	Carrying Amount NT$ 62,554 18,623 — — —

g. Derivative contracts relating to convertible debentures

On May 5, 1998, the Company issued convertible debentures amounting to US$150 million, which were privately placed with a financial institution. A wholly-owned subsidiary (the ‘‘Subsidiary’’) of the Company subsequently entered into a call option contract with the financial institution, the underlying reference being the convertible debentures.

The terms of the contract provided that the notional amounting to US$150 million is divided into fifteen options and the Subsidiary is entitled to exercise the options separately, at the discretion of the Subsidiary during the life of the contract, but at a minimum number of two and a maximum number fifteen. The Company simultaneously entered into currency swaps, based on the notional amount of the debt, converting Japanese Yen into New Taiwan dollars and New Taiwan dollars into U.S. dollars. Subsequently, the option contract and currency swaps were combined into one contract.

F-37

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

The Subsidiary exercised two options and five options on January 22, 2000 and June 26, 2000, respectively.

As of June 30, 2001, the fair value of the outstanding portion of the contract amounted to NT$(453,811) US$(13,162).

In entering into financial instruments, the Company is subject to credit risk, price risk, liquidity risk and cash as discussed below.

Credit risk

Credit risk relates to the extent to which failures by counter-parties to discharge their obligations could reduce the amount of future cash flows from financial assets on hand as of the balance sheet date. The Company minimizes exposure to credit risk by only dealing with reputable banks.

The notional amounts of the financial instruments as of December 31, 1999, 2000 and June 30, 2001, are as follows (amounts in thousands):

Financial instruments: Currency forward-hedging .................................................................... Buying options-hedging ........................................................................ Selling options-hedging......................................................................... Cross currency interest rate swaps-hedging.......................................... Equity swaps.......................................................................................... Structured deposit-trading ..................................................................... Contracts relating to convertible debentures.........................................	December 31, 1999 2000 ¥22,644,558 ¥254,003 US$29,200 — — ¥105,800 NT$175,000 — US$12,000 US$55,217 — — US$15,000 US$150,000 US$80,000	June 30, 2001
	1999 ¥22,644,558 US$29,200 — — US$55,217 — US$150,000
		¥2,353,635 ¥4,059,350 US$2,000 ¥3,746,550 US$10,000 — — US$80,000

Price risk

There are three types of price risk: currency risk, interest rate risk and market risk. Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates; interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates and market risk is the risk that the value of financial instrument will fluctuate as a result of changes in market prices. The Company considers that the price risk related to the hedge transactions is minimal as gains or losses from contracts for hedging purposes are likely to be offset by gains or losses from the underlying assets and liabilities denominated in foreign currencies.

The Company entered into certain structured deposits, or dual currency deposits, to earn higher interest rates, but expose the Company to foreign exchange risk. The Company placed deposits with certain financial institutions which entitled the Company to earn interest rates in excess of the market rates for a ‘‘basic’’ deposit, however, the financial institutions have the options to settle the deposit and accrued interest in the original currency or settle the deposit and accrued interest with an alternative currency other than the original currency. The conversion rate is stated in the contracts. These contracts are entered into for trading purposes. Therefore, if the foreign exchange option embedded in the structured deposits favor the financial institutions,

F-38

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

they will settle the principal in a different currency than the original currency, which will result in a loss to the Company.

Liquidity and cash flow risks

Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value. Cash flow risk is the risk that future cash flows associated with a monetary financial instrument will fluctuate by a significant amount.

The Company anticipates that the liquidity risk is minimal because the financial instruments entered into for hedging purposes are liquid and have binding contracts with reputable banks. The purpose of entering into forward exchange contracts, option contracts and cross currency and interest rate swaps is to limit the Company’s exposure to losses resulting from adverse fluctuations in assets and liabilities denominated in foreign currency. Therefore, no significant additional cash requirement is anticipated. For structured deposit contracts, there are no additional cash flows required since the principal has been deposited to the counterparties, however, the Company might receive an amount less than the principal deposited should the counterparties settle the principal in a different foreign currency. In addition, the Company might be exposed to additional cash flow risk for written option contracts if the contracts are out of the money at maturity.

The fair values of were determined as follows:

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and cash equivalents approximates fair value.

Long-and short-term debt:

The carrying amounts of the Company’s short-term borrowings approximate their fair values. The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Off-balance sheet financial instruments

The fair values of foreign exchange forward contracts and foreign currency option contracts are estimated based on quoted forward rates, adjusted through interpolation where necessary. The fair values of the equity swaps were obtained from the financial institution, being the counter parties and calculation agents of the contracts.

The call option was entered into by a Subsidiary to redeem the Company’s convertible debentures, which were privately placed with a bank. Upon the redemption of the convertible debentures from the bank, the Subsidiary will pay 100% for the value of the debentures plus accrued interest as stipulated in the call option contract. The value of the related outstanding convertible debentures and the respective accrued interest have been included as liabilities in statements.

F-39

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

20. Reconciliation to Accounting Principles Generally Accepted in the United States of America

The Company’s financial statements have been prepared in accordance with ROC GAAP. ROC GAAP varies in certain significant respects from U.S. GAAP. Differences which have a significant effect on the Company’s consolidated results of operations and shareholders’ equity are as follows:

a. Employee Bonuses

Under ROC GAAP, the employee bonuses and the remuneration to directors and supervisors, paid in accordance with the provisions of the Company’s articles of incorporation applicable to the distribution of earnings, are recorded as an appropriation from retained earnings in the period shareholder approval is obtained for the distribution of the Company’s earnings. If the employee bonuses are settled through the issuance of common shares of the Company, the amount transferred from retained earnings is based on the par value of the common shares issued. The remuneration to directors and supervisors may not be settled through the issuance of common shares.

U.S. GAAP requires that such bonuses and remuneration to employees, directors and supervisors be recorded as compensation expense in the period to which they relate. In addition, if the employee bonuses are paid in the form of common shares, the fair value of the shares issued is used to determine the amount of the expense. However, since the form of the payment of the compensation expense is only determinable at the annual shareholders’ meeting, which is generally after the issuance of the Company’s annual financial statements, the compensation expense is initially accrued in accordance with the Company’s articles of incorporation in the period to which it relates. The difference between the compensation expense initially recorded and the fair value of the shares issued to settle the accrual, if any, is recorded in the period in which shareholder approval is obtained.

b. Employee Retirement Benefits

As permitted under ROC GAAP, prior to 1996, the pension expense recorded by the Company in connection with its defined benefit pension plan was based on the amount of the contributions made by the Company to the pension plan required by government regulations. Under U.S. GAAP, the accumulated pension obligation and the pension expense is determined on an actuarial basis, assuming the Company first adopted this policy at the beginning of 1993 since it was not feasible to apply the actuarial basis at an earlier date. The amount of the transition obligation is insignificant.

c. Intangibles

Under ROC GAAP, the Company capitalizes and amortizes software acquired for research and development purposes, acquired expertise and certain other costs over 3-5 years. Under U.S. GAAP, for the years ended December 31, 1993, 1994 and 1995, such amounts were expensed in the period incurred. Since 1996, the Company ceased capitalizing internal development costs for such items but continued capitalizing and amortizing external costs for acquired software, acquired expertise, and other costs as permitted under U.S. GAAP.

d. Marketable Securities

Under ROC GAAP, short-term marketable equity securities are carried at the lower of aggregate cost or market value. The unrealized losses of short-term marketable equity securities are recorded as investment

F-40

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

loss in the income statement, while unrealized gains of short-term marketable equity securities are not recognized. Long-term marketable equity securities are carried at cost, or lower of aggregate cost or market value if market price is available. The unrealized losses of long-term marketable equity securities are reported as a deduction of shareholders’ equity, while the unrealized gains are not recognized.

Under U.S. GAAP, SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities , requires that certain investments be classified as trading, available-for-sale securities or held-to-maturity securities. The Company did not have any investments classified as trading securities or held-to-maturity securities during the periods presented. The statement further requires that available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings but reported in a separate component of shareholders’ equity until they are sold.

Under U.S. GAAP, available-for-sale securities as of December 31, 1999, 2000 and June 30, 2001 are as follows:

Classifed as current assets: Open-end mutual funds, marketable securities ........................................... Classifed as non-current: Equity securities ...................................		December 31	December 31	Cost NT$ 324,587 206,382	June 30,	June 30,	June 30,
	1999	Cost NT$ 122,719 206,302	2000		2001
	Market Value NT$ 127,618 273,661		Market Value NT$ 310,945 93,559		Market Value NT$ US$ 388,766 6,866 688,346 19,964	Cost
					NT$ 388,766 688,346	NT$ 403,416 918,256	US$ 11,700
							26,632

As of December 31, 1999, 2000 and June 30, 2001, under ROC GAAP unrealized gains (losses) on short-term investments were NT$4,901, NT$(13,652) and NT$(14,650) (US$(425)), respectively, resulting in charges to the income statement for the gains and (losses).

Realized gains from the sale of securities classified as available for sale for the years ended December 31, 1999, 2000 and June 30, 2001 were NT$15,231, NT$28,022 and NT$10,747, respectively. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification.

e. Derivative Financial Instruments

Under ROC GAAP, the Company is required to disclose certain information in the financial statements regarding derivative financial instruments but there are no specific accounting requirements for derivative financial instruments (except for foreign currency forward exchange contracts for which the accounting is documented in note 2a and for which there is no significant difference in the accounting treatment with U.S. GAAP prior to January 1, 2001). In addition, ROC GAAP has no specific regulations with respect to the accounting for derivative financial instruments indexed to the Company’s own stock.

Prior to January 1, 2001 under U.S. GAAP, generally, written options are marked to market through earnings in all situations, unless they are part of a combination of options which also includes a purchased option of equal or greater fair value. Purchased options are eligible for hedge accounting and changes in the intrinsic value of the option are treated as an adjustment of the basis of the hedged assets or liabilities. For derivative financial instruments indexed to the Company’s own stock, the Company is required to record those

F-41

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

agreements which are required to be settled in cash at their fair values, with changes in fair value reported in earnings. See note 19(e). Differences between ROC GAAP and U.S. GAAP in accounting for derivative are detailed below.

(i). Option contracts

Under ROC GAAP, gains and losses on option contracts are recognized upon exercise. Unrealized gains and losses are not required to be recorded in the financial statements.

For periods prior to January 1, 2001, U.S. GAAP requires that unrealized gains and losses on option contracts that do not qualify as hedges be recorded in operations. The majority of the option contracts entered into by the Company for hedging purpose, did not qualify as hedges for financial reporting purposes and accordingly have been carried in the financial statements at fair value.

(ii). Structured deposits

Under ROC GAAP, the respective interest on the deposits is accrued. The gains and losses arising from the settlement of the contracts are dealt with in the income statement. Unrealized gains and losses are not recognized.

For periods prior to January 1, 2001, under U.S. GAAP, the option element of these contracts is measured at fair value and is recognized on the balance sheet, subsequent changes in the fair value of the option is recognized in earnings in the period of change.

(iii). Equity swap contracts

Under ROC GAAP, the related gains and losses from the equity swap contracts are dealt with in the income statement only upon the settlement of the contracts.

For periods prior to January 1, 2001, U.S. GAAP required that equity swap contracts entered into for trading purposes be recorded at fair value on the balance sheet date and the unrealized gains and losses be recorded as assets and liabilities on the balance sheet date.

In June 1998, the U.S. Financial Accounting Standards Board issued Statement 133, Accounting for Derivative Instruments and Hedging Activities . The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivatives’ change in fair value will be immediately recognized in earnings. The adoption of Statement No. 133 on January 1, 2001 resulted in the cumulative effect of an accounting change of NT$620,503 being recognized in earnings in the consolidated statement of operations and a charge of nil in other comprehensive income. Subsequent to January 1, 2001, none of the Company’s derivative positions qualify as hedges under U.S. GAAP.

F-42

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

f. Stock Appreciation Rights

ROC GAAP has no specific accounting provisions for stock appreciation rights (‘‘SAR’’) plans and the Company only recognizes compensation expense for the plan to the extent it is not covered by the gain on the instruments intended to fund the costs of the SAR.

U.S. GAAP requires the Company to account for its stock appreciation rights granted to employees in accordance with Accounting Principles Board Opinion No. 25 (APB 25), ‘‘Accounting for Stock Issued to Employees.’’ Under APB 25, the Company recognizes compensation expense for the plan based on the amount by which the quoted market value of the shares of the Company stock covered by the grant exceeds the exercise price of the rights. Compensation is accrued as a charge to expense over the vesting period based on current market values of the SAR at the end of each period.

g. Purchase and Sale of the Company’s Own Shares

Under ROC GAAP, the net gain or loss resulting from the purchase and sale of the Company’s own shares for trading purposes are recorded as non-operating income or loss in the statement of operations.

U.S. GAAP requires that if the Company acquires shares of its own capital stock for purposes other than retirement, the cost of the acquired stock should be shown separately as a deduction from the total of capital stock, additional paid-in capital, and retained earnings, or accorded the accounting treatment appropriate for retired stock. ‘‘Gains’’ on sales of the repurchased stock not previously accounted for as constructively retired should be credited to additional paid-in capital; losses should be charged to additional paid-in capital to the extent that previous net ‘‘gains’’ from sales or retirements of the same class of stock are included therein, otherwise the losses are charged to retained earnings.

h. Gross Profit and Operating Income

Government subsidies for research and development, inventory loss provision and the reversal of bad debt expense are presented below the operating income subtotal in the statement of operations as permitted under ROC GAAP. Under U.S. GAAP, the inventory loss provision is included in the determination of gross profit. The government subsidies for research and development and the reversal of bad debt expense are included in the determination of operating income.

i. Impairment of Long-lived Assets

U.S. GAAP SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of , requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required, and if so, to measure the impairment. If the sum of 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 loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. U.S. GAAP SFAS 121 also generally requires that long-lived assets and certain identifiable intangible assets to be disposed of be recorded at the lower of the carrying value or fair value less cost to sell. Based on an assessment by the Company’s management, no impairment loss was required to be made for the Company’s long-lived assets for the years ended December 31, 1998, 1999, 2000 and the six months ended June 30, 2000 and 2001.

F-43

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

j. Investment in Equity Investees

Under ROC GAAP, if an investee company issues new shares and the original shareholders do not purchase new shares proportionally such that the investor increases its percentage of ownership, the difference between the investment cost for the portion of the investee acquired and the acquired net assets is charged to equity.

Under U.S. GAAP, if an investee company issues new shares and the original shareholders do not purchase new shares proportionally such that the investor increases its percentage of ownership, the difference between the investment cost for the portion of investee acquired and the acquired net assets is recorded as part of the investment. The difference is assigned to individual assets and liabilities acquired on the basis of the assets’ and liabilities’ fair values. Any remaining difference between the cost of the investment and net assets acquired is allocated to goodwill.

k. Income Tax

Undistributed earnings generated after 1997 are subject to a 10% tax in compliance with the Income Tax Law of the ROC. Under ROC GAAP the 10% tax on undistributed earnings is recorded as an expense at the time shareholders resolve that its earnings shall be retained. Under U.S. GAAP, the Company would measure its income tax expense, including the tax effects of temporary differences, using the tax rate that includes the tax on undistributed earnings.

l. Research and Development Expense

On a ROC GAAP basis, royalty expense for the Company is included in research and development expense. On a U.S. GAAP basis, royalty expense for the Company is included in selling expense or administrative expense depending on the nature of the expense. Accordingly, on a U.S. GAAP basis, research and development expenses were NT$1,729 million in 1998, NT$1,614 million in 1999, NT$2,486 million (US$72 million) in 2000, NT$1,069 for the six months ended June 30, 2000 and NT$1,600 million (US$46 million) for the six months ended June 30, 2001.

m. Rights Issues and Earnings Per Share

Under U.S. GAAP, a rights issue with exercise price less than the fair value of the stock contains a bonus element that is similar to a stock dividend and is accounted for as such accordingly. As a result, the basic and diluted earnings per share shall be adjusted retroactively for the bonus element for all periods presented. There are no requirements under ROC GAAP to adjust earnings per share arising from the bonus element of a rights issue.

Under ROC GAAP, earnings per share is retroactively adjusted for shares issued for employee bonus. Under U.S. GAAP, shares issued for employee bonus will affect the current period’s earnings per share only.

F-44

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

The number of weighted average shares outstanding under U.S. GAAP is presented as follows:

Number of common shares outstanding on January 1 ...... Bonds converted to common shares on March 5, 1998 .... Employee bonuses on August 10, 1998............................. Issuance of common shares for cash on January 22, 2000.... Bonus element included in the rights issue on January 22, 2000 .......................................................................... Bonds converted to common shares on February 18, 2000 ................................................................................ Bonds converted to common shares on March 7, 2000 .... Bonds converted to common shares on June 26, 2000 ..... Bonds converted to common shares on November 9, 2000 ................................................................................ Weighted average effect of 1998 stock dividend............... Weighted average effect of 1999 stock dividend............... Weighted average effect of 2000 stock dividend............... Stock dividends and transfer of capital reserve to capital on May 28, 2001 (30%) ................................................. Employee bonus transfer to capital on May 28, 2001....... Weighted average effect of 2001 stock dividend...............	Year ended December 31, 1998 1999 2000 1,441,815,433 1,785,823,698 1,964,406,098 431,310 — — 10,254,861 — — — — 128,160,411 44,775,836 45,181,339 2,723,259 — — 22,720,465 — — 1,193,644 — — 35,460,102 — — 264,659 317,294,283 — — 176,979,589 178,582,369 — 253,080,812 255,372,788 275,142,476 — — — — — — 659,956,886 665,933,655 728,204,346 2,904,589,010 2,930,893,849 3,158,275,460	Year ended December 31, 1998 1999 2000 1,441,815,433 1,785,823,698 1,964,406,098 431,310 — — 10,254,861 — — — — 128,160,411 44,775,836 45,181,339 2,723,259 — — 22,720,465 — — 1,193,644 — — 35,460,102 — — 264,659 317,294,283 — — 176,979,589 178,582,369 — 253,080,812 255,372,788 275,142,476 — — — — — — 659,956,886 665,933,655 728,204,346 2,904,589,010 2,930,893,849 3,158,275,460	Six months ended June 30,	Six months ended June 30,
	1998 1,441,815,433 431,310 10,254,861 — 44,775,836 — — — — 317,294,283 176,979,589 253,080,812 — — 659,956,886 2,904,589,010	1999 1,785,823,698 — — — 45,181,339 — — — — — 178,582,369 255,372,788 — — 665,933,655 2,930,893,849	2000 1,964,406,098 — — 119,200,000 5,461,000 19,057,381 917,641 1,505,080 — — — 273,465,541 — — 713,565,512 3,097,578,253	2001
				2,474,409,179 — — — — — — — — — — — 742,322,743 26,788,755 —
				3,243,520,677

Net income (loss) for U.S. GAAP purposes is reconciled as follows:

Net income (loss) as reported under ROC GAAP.... (a) Compensation expense relating to employee bonuses and remuneration to directors and supervisors (Note I)........................................ (b) Additional pension gain on an actuarial basis ................................................................ (c) Effect of capitalization of certain intangibles, net of amortization...................... (d) Unrealized gain on marketable securities ...... (e) Derivative fnancial instruments: (i) Net gains (losses) on derivative fnancial instruments held for trading purpose........................................................ (ii) Gains (losses) on derivative fnancial instruments held for hedging purposes .. (f) Compensation cost recognized for stock appreciation right (Note II) ............................ (g) Purchase and sale of the Company’s own shares .............................................................. (j) Investment in equity investees ....................... (k) Income statement adjustment for taxes.......... Tax effect on the above reconciled items ...... Net income (loss) before cumulative effect of change in accounting principle in accordance with U.S. GAAP......................	Year ended December 31,	Year ended December 31,	Year ended December 31,	US$ 307,797 (47,038) 78 — — (7,034) (19,024) 17,358 (203) (114) (19,330) — 232,490	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	1998 NT$ (1,547,133) (515,648) 2,696 25,854 17,667 (1,055,854) — — — — — — (3,072,418)	1999 NT$ 906,621 — 2,696 — (17,667) 1,300,663 — (245,323) (85,825) — — — 1,861,165	2000		2000 NT$ 2,508,512 (383,706) 1,348 — — (243,106) 319,429 (454,057) — — — — 1,748,420	2001
			NT$ 10,612,824 (1,621,861) 2,696 — — (242,542) (655,937) 598,489 (6,988) (3,914) (666,498) — 8,016,269			NT$ 2,428,849 (5,298,098) 1,348 — — 416,244 — 84,349 — (5,223) 387,286 — (1,985,245)	US$ 70,440 (153,657) 39 — — 12,072 — 2,446 — (151) 11,232 —
							(57,579)

F-45

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

(e) Cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for FAS 133.................. Net income (loss) in accordance with U.S. GAAP ......................................................... Other comprehensive income: (l) Unrealized gains (losses) on available for sale securities.................................................. Change in translation adjustment................... Reclassifcation adjustment for realized gains (losses) on available—for—sale securities ..................................................... Comprehensive income (loss) in accordance with U.S. GAAP......................................... Per share amounts: Basic net income (loss) per share before cumulative effect of change in accounting principle in accordance with U.S. GAAP...... Basic net income (loss) per share for cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for FAS 133 (Note 20e)....................................................... Basic net income (loss) per share ...................... Diluted net income (loss) per share before cumulative effect of change in accounting principle in accordance with U.S. GAAP...... Basic net income (loss) per share for cumulative effect on prior years (to December 31, 2000) of a change in accounting principle for FAS 133 (Note 20e)....................................................... Diluted net income (loss) per share ...................	Year ended December 31,	Year ended December 31,	Year ended December 31,	US$ — 232,490 (3,272) 1,689 (2,096) 228,811 0.07 — 0.07 0.07 — 0.07	Six months ended June 30, 2000 2001 NT$ NT$ US$ — (620,503) (17,996) 1,748,420 (2,605,748) (75,575) 136,367 (121,245) (3,516) (28,475) 128,985 3,741 (4,901) 4,158 121 1,851,411 (2,593,850) (75,229) 0.56 (0.61) (0.02) — (0.19) — 0.56 (0.80) (0.02) 0.56 (0.61) (0.02) — (0.19) — 0.56 (0.80) (0.02)	Six months ended June 30, 2000 2001 NT$ NT$ US$ — (620,503) (17,996) 1,748,420 (2,605,748) (75,575) 136,367 (121,245) (3,516) (28,475) 128,985 3,741 (4,901) 4,158 121 1,851,411 (2,593,850) (75,229) 0.56 (0.61) (0.02) — (0.19) — 0.56 (0.80) (0.02) 0.56 (0.61) (0.02) — (0.19) — 0.56 (0.80) (0.02)
	1998 NT$ — (3,072,418) (17,667) (14,919) — (3,105,004) (1.06) — (1.06) (1.06) — (1.06)	1999 NT$ — 1,861,165 72,260 373 17,667 1,951,465 0.64 — 0.64 0.64 — 0.64	2000		2000 NT$ — 1,748,420 136,367 (28,475) (4,901) 1,851,411 0.56 — 0.56 0.56 — 0.56
			NT$ — 8,016,269 (112, 823) 58,228 (72,260) 7,889,414 2.54 — 2.54 2.49 — 2.49			NT$ (620,503) (2,605,748) (121,245) 128,985 4,158 (2,593,850) (0.61) (0.19) (0.80) (0.61) (0.19) (0.80)

The diluted earnings per share calculation excludes the income statement impact of NT$751,728, NT$203,684, NT$177,865 and NT$231,448 related to the assumed conversion of convertible bonds into 433,812,081 weighted average shares, 138,959,444 weighted average shares, 100,360,801 and 232,552,138 weighted average shares for 1998, 1999, June 30, 2000 and 2001, respectively. The impact of the assumed conversion has been excluded due to the antidilutive effect

Note I: At the shareholders’ meeting on April 29, 2001, the shareholders decided to pay the 2000 employee bonuses in the form of common shares of the Company. This resulted in additional compensation expense in the amount of NT$4,272,716, which is reflected in the period ended June 30, 2001. Additional compensation expense for employees bonuses and remuneration of directors and supervisors in the amount of NT$515,648, nil, NT$1,621,861, NT$383,706 and NT$5,298,098 was reflected in the statement of operations under U.S. GAAP for the periods ended December 31, 1998, 1999, 2000, and June 30, 2000 and 2001.

F-46

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Under the Company’s articles of incorporation, if the Company elects to pay such employee bonuses in the form of common shares, a dividend to shareholders in the form of common shares would also be required to be paid. The amount of the additional expense related to the employee bonus being paid in shares, if any, is dependent upon (i) shareholder approval and, if such approval is obtained, (ii) the amount of the bonus to be paid in shares and (iii) the market price of the common shares on the date of shareholder approval for the settlement of employee bonuses in the form of common shares. When the shareholders determine a bonus amount to be paid in shares, the number of shares is determined by dividing the bonus amount by the par value of the shares (NT$10). The resulting number of common shares is then fixed. Any subsequent declaration of stock dividend that increases the number of common shares outstanding without any consideration paid into the Company requires that the market price used to value the bonus shares be adjusted for the effect of the stock dividend.

Note II: In 1999 and 2000, the Company granted its employees stock appreciation rights (SAR), which entitled the holder to a cash payment per share equivalent to the excess of the quoted market price of the shares of the Company stock over the exercise price of the right. During 1999, the company granted 61,179,500 shares under the SAR plan. As of December 31, 1999, 967,500 shares had been forfeited and there were 60,212,000 shares outstanding. As of December 31, 2000, with the addition of 1,806,232 shares, there were 62,018,232 shares outstanding, including vested rights to 15,632,961 shares and unvested rights to 46,385,271 shares. As of June 30, 2001, with the addition of 14,850,250 shares, there were 76,868,482 shares outstanding, including vested rights to 16,290,163 shares and unvested rights to 60,578,319 shares.

The general terms of the SAR plan are as follows:

1. Vesting period: 25% of the SAR granted are vested on August 1, starting August 1, 2000 through 2002 and the remaining 25% on March 31, 2003.

2. Estimated grant price: The grant price is estimated in accordance with the SAR plan if the actual cost is not available. The Company’s management has the legal right to alter the grant price. Estimated grant prices after adjusting for the stock dividend in April 2001 are as follows:

NT$20.42 for SAR vested August 1, 2000, NT$38.46 for SAR vested August 1, 2001, NT$37.10 for SAR vested August 1, 2002, NT$38.70 for SAR vested March 31, 2003.

Gross profit for U.S. GAAP purposes is reconciled as follows:

Gross proft as reported under ROC GAAP............. (h) Inventory loss provision...................................... Compensation expense relating to employee bonuses and remuneration of directors and supervisors (cost of goods sold) ........................... Compensation cost recognized for stock appreciation rights................................................. Pension gain on actuarial basis................................. Gross proft in accordance with U.S. GAAP............	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 2,691,842 4,833,378 17,995,462 521,910 (788,631) (106,301) (79,995) (2,320) (358,021) — (521,189) (15,116) — (171,726) 217,969 6,322 2,696 2,696 2,696 78 1,547,886 4,558,047 17,614,943 510,874	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 2,691,842 4,833,378 17,995,462 521,910 (788,631) (106,301) (79,995) (2,320) (358,021) — (521,189) (15,116) — (171,726) 217,969 6,322 2,696 2,696 2,696 78 1,547,886 4,558,047 17,614,943 510,874	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ 2,691,842 4,833,378 17,995,462 521,910 (788,631) (106,301) (79,995) (2,320) (358,021) — (521,189) (15,116) — (171,726) 217,969 6,322 2,696 2,696 2,696 78 1,547,886 4,558,047 17,614,943 510,874	Six month ended June 30, 2000 2001 NT$ NT$ US$ 4,795,728 6,798,586 197,175 90,000 (552,406) (16,021) (139,746) (1,929,842) (55,970) (165,000) 30,720 891 1,348 1,348 39 4,582,330 4,348,406 126,114	Six month ended June 30, 2000 2001 NT$ NT$ US$ 4,795,728 6,798,586 197,175 90,000 (552,406) (16,021) (139,746) (1,929,842) (55,970) (165,000) 30,720 891 1,348 1,348 39 4,582,330 4,348,406 126,114
	1998 NT$ 2,691,842 (788,631) (358,021) — 2,696 1,547,886	1999 NT$ 4,833,378 (106,301) — (171,726) 2,696 4,558,047		2000 NT$ 4,795,728 90,000 (139,746) (165,000) 1,348 4,582,330
			NT$ 17,995,462 (79,995) (521,189) 217,969 2,696 17,614,943		NT$ 6,798,586 (552,406) (1,929,842) 30,720 1,348 4,348,406

F-47

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Operating income for U.S. GAAP purposes is reconciled as follows:

Operating income (loss) as reported under ROC GAAP ................................................................. Compensation cost recognized for stock appreciation rights .............................................. Compensation expense relating to employee bonuses and remuneration of directors and supervisors.......................................................... Pension gain on actuarial basis .............................. Capitalization of certain intangibles, net of amortization........................................................ (h) Inventory loss provision and research development subsidies, and reversal of allowance for bad debts...................................... Operating income (loss) in accordance with U.S. GAAP .................................................................	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (362,860) 1,575,377 12,138,778 352,053 — (245,323) 598,489 17,358 (515,648) — (1,621,861) (47,038) 2,696 2,696 2,696 78 25,854 — — — (770,044) (96,058) (49,081) (1,331) (1,620,002) 1,236,692 11,069,021 321,120	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (362,860) 1,575,377 12,138,778 352,053 — (245,323) 598,489 17,358 (515,648) — (1,621,861) (47,038) 2,696 2,696 2,696 78 25,854 — — — (770,044) (96,058) (49,081) (1,331) (1,620,002) 1,236,692 11,069,021 321,120	Year ended December 31, 1998 1999 2000 NT$ NT$ NT$ US$ (362,860) 1,575,377 12,138,778 352,053 — (245,323) 598,489 17,358 (515,648) — (1,621,861) (47,038) 2,696 2,696 2,696 78 25,854 — — — (770,044) (96,058) (49,081) (1,331) (1,620,002) 1,236,692 11,069,021 321,120	Six month ended June 30, 2000 2001 NT$ NT$ US$ 2,049,504 3,839,205 111,346 (454,057) 84,349 2,446 (383,706) (5,298,698) (153,657) 1,348 1,348 39 — — — 99,673 (469,632) (13,620) 1,312,762 (1,842,828) (53,446)	Six month ended June 30, 2000 2001 NT$ NT$ US$ 2,049,504 3,839,205 111,346 (454,057) 84,349 2,446 (383,706) (5,298,698) (153,657) 1,348 1,348 39 — — — 99,673 (469,632) (13,620) 1,312,762 (1,842,828) (53,446)
	1998 NT$ (362,860) — (515,648) 2,696 25,854 (770,044) (1,620,002)	1999 NT$ 1,575,377 (245,323) — 2,696 — (96,058) 1,236,692		2000 NT$ 2,049,504 (454,057) (383,706) 1,348 — 99,673 1,312,762
			NT$ 12,138,778 598,489 (1,621,861) 2,696 — (49,081) 11,069,021		NT$ 3,839,205 84,349 (5,298,698) 1,348 — (469,632) (1,842,828)

Shareholders’ equity for U.S. GAAP purposes is reconciled as follows:

Shareholders’ equity as reported under ROC GAAP................................ (f) Compensation cost recognized for stock appreciation right.............. (b) Accrual for pension costs under actuarial method ............................ (d) Net unrealized gain (loss) on available for sale securities................ (e) Net loss on derivative fnancial instruments...................................... (a) Compensation expense relating to employee bonuses and remuneration of directors and supervisors..................................... (g) Treasury stock..................................................................................... (j) Goodwill on investment ..................................................................... (k) Additional tax on undistributed earnings........................................... Shareholders’ equity in accordance with U.S. GAAP...............................	December 31, 1999 2000 NT$ NT$ US$ 26,383,644 44,573,427 1,292,733 (245,323) 353,166 10,243 (45,823) (43,127) (1,251) 95,549 (5,523) (160) 244,809 (653,670) (18,958) — (1,621,861) (47,038) — (134,392) (3,898) — 29,483 855 — (666,498) (19,330) 26,432,856 41,831,005 1,213,196	December 31, 1999 2000 NT$ NT$ US$ 26,383,644 44,573,427 1,292,733 (245,323) 353,166 10,243 (45,823) (43,127) (1,251) 95,549 (5,523) (160) 244,809 (653,670) (18,958) — (1,621,861) (47,038) — (134,392) (3,898) — 29,483 855 — (666,498) (19,330) 26,432,856 41,831,005 1,213,196	June 30,	June 30,
	1999 NT$ 26,383,644 (245,323) (45,823) 95,549 244,809 — — — — 26,432,856		2001
		NT$ 44,573,427 353,166 (43,127) (5,523) (653,670) (1,621,861) (134,392) 29,483 (666,498) 41,831,005	NT$ 46,865,554 437,515 (41,779) (47,050) (857,929) (1,025,382) (135,027) 24,260 (279,212) 44,940,950	US$ 1,359,209 12,689 (1,212) (1,365) (24,882) (29,738) (3,916) 704 (8,098) 1,303,391

Shareholders’ equity consists of the followings:

Common shares .......................................................................................... Subscriptions received................................................................................ Additional-paid-in capital........................................................................... Accumulated defcit.................................................................................... Accumulated other comprehensive income (loss)..................................... Treasury stock............................................................................................. Reserves......................................................................................................	December 31, 1999 2000 NT$ NT$ US$ 19,644,060 24,744,091 717,636 448,812 — — 14,696,435 20,454,128 593,217 (9,044,916) (3,897,137) (113,026) 119,907 (6,948) (202) — (134,392) (3,898) 568,558 671,263 19,468 26,432,856 41,831,005 1,213,195	December 31, 1999 2000 NT$ NT$ US$ 19,644,060 24,744,091 717,636 448,812 — — 14,696,435 20,454,128 593,217 (9,044,916) (3,897,137) (113,026) 119,907 (6,948) (202) — (134,392) (3,898) 568,558 671,263 19,468 26,432,856 41,831,005 1,213,195	June 30,	June 30,
	1999 NT$ 19,644,060 448,812 14,696,435 (9,044,916) 119,907 — 568,558 26,432,856		2001
		NT$ 24,744,091 — 20,454,128 (3,897,137) (6,948) (134,392) 671,263 41,831,005	NT$ 33,593,426 — 17,309,223 (7,564,348) 4,950 (135,027) 1,732,726 44,940,950	US$ 974,287 — 502,007 (219,383) 143 (3,916) 50,253 1,303,391

F-48

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Accumulated other comprehensive income consists of the followings:

Unrealized gains (losses) on marketable securities ........................................................... Cumulative translation adjustment..................................................................................... Total ....................................................................................................................................	December 31, 1999 2000 NT$ NT$ US$ 72,260 (112,823) (3,272) 47,647 105,875 3,070 119,907 (6,948) (202)	December 31, 1999 2000 NT$ NT$ US$ 72,260 (112,823) (3,272) 47,647 105,875 3,070 119,907 (6,948) (202)	June 30, 2001 NT$ US$ (229,910) (6,668) 234,860 6,812 4,950 144
	1999 NT$ 72,260 47,647 119,907
		NT$ (112,823) 105,875 (6,948)	NT$ (229,910) 234,860 4,950

Domestic and international components of pre-tax income (loss) are as follows:

		December 31,	December 31,			June 30,
	1998	1999	2000		2000	2001
	NT$	NT$	NT$	US$	NT$	NT$	US$
Domestic.....................................................................	(2,169,123)	865,840	9,273,553	268,955	1,572,025	(2,002,531)	(58,078)
International................................................................	(1,309,009)	679,225	(192,689)	(5,588)	(52,786)	10,599	307
Total............................................................................	(3,478,132)	1,545,065	9,080,864	263,367	1,519,239	(1,991,932)	(57,771)

A reconciliation of the significant differences between the expected income tax expense (benefit) and the income tax expense (benefit) is as follows:

Expected income tax expense (beneft) ............................ Impact of undistributed earnings tax accrual.................... Additional income tax assessed ........................................ Tax exemption ................................................................... Tax credit earned ............................................................... Change in valuation allowance ......................................... Net loss on long-term equity investment.......................... Non-deductible employee bonus....................................... Non-taxable net (gains) losses on fnancial instruments .. Non-deductible compensation cost recognized for stock appreciation right........................................................... Others, net.......................................................................... Effect of rate change ......................................................... Income tax expense (beneft) ............................................		December 31, 1999 2000 NT$ NT$ US$ 309,013 1,816,173 52,673 123,605 858,394 24,895 224,830 93,246 2,704 — — — (674,118) (1,548,034) (44,897) (272,114) (873,028) (25,320) 199,841 168,332 4,882 — 291,934 8,467 (364,187) 251,574 7,296 68,691 (167,577) (4,860) 68,339 81,020 2,350 — 92,561 2,684 (316,100) 1,064,595 30,874	December 31, 1999 2000 NT$ NT$ US$ 309,013 1,816,173 52,673 123,605 858,394 24,895 224,830 93,246 2,704 — — — (674,118) (1,548,034) (44,897) (272,114) (873,028) (25,320) 199,841 168,332 4,882 — 291,934 8,467 (364,187) 251,574 7,296 68,691 (167,577) (4,860) 68,339 81,020 2,350 — 92,561 2,684 (316,100) 1,064,595 30,874		June 30, 2001 NT$ US$ (497,983) (14,443) (126,926) (3,681) 58,879 1,708 (347,691) (10,084) (771,674) (22,380) 411,027 11,921 42,986 1,247 1,287,363 37,337 (104,061) (3,018) (21,087) (612) 62,480 1,812 — — (6,687) (193)
	1998 NT$ (695,625) (278,250) — — (880,502) 846,058 157,768 144,382 295,640 — 4,815 — (405,714)	1999 NT$ 309,013 123,605 224,830 — (674,118) (272,114) 199,841 — (364,187) 68,691 68,339 — (316,100)		2000 NT$ 303,848 121,539 — — (482,281) (434,666) 52,536 107,438 (21,370) 127,136 (3,361) — (229,181)
			NT$ 1,816,173 858,394 93,246 — (1,548,034) (873,028) 168,332 291,934 251,574 (167,577) 81,020 92,561 1,064,595

Concentration of Risk

The Company designs, develops, manufactures and markets a variety of semiconductor products. The Company’s revenues are derived primarily from the sale of mask ROMs and EPROMs. The Company’s other products include flash memory products, logic products and wafers. The Company distributes its products on a global basis but mainly to customers in Asia. The Company’s largest customer, Megachips, and the Company’s largest five customers accounted for 36% and 64% of the Company’s total sales, respectively, for the period ended June 30, 2001. The Company’s sales are primarily denominated in currencies other than NT Dollars, primarily U.S. Dollars and Japanese Yen.

F-49

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments, trade accounts and notes receivable.

The Company maintains cash and cash equivalents with various financial institutions. Most of these financial institutions are located in the ROC and Company policy is designed to limit exposure to any one institution.

Substantially all of the Company’s accounts receivable are due from companies in high technology industries located primarily in Asia. Further, as of December 31, 1999, 2000 and June 30, 2001, the three largest accounts receivable balances amounted to NT$2,470,371, NT$3,008,678 (US$87,259), and NT$1,289,196 (US$37,390), respectively. The Company performs periodic credit evaluations of its customers’ financial condition and generally does not require collateral. Receivables generally are due within 45 to 60 days.

Valuation and Qualifying Accounts

The following table summarizes the changes in the allowance for accounts and notes receivable and inventory:

Allowance for doubtful accounts: Balance as at beginning of period....................................... Bad debt expense................................................................. Bad debts written off........................................................... Reversal of bad debt provision ........................................... Balance at the end of the year ............................................ Allowance for inventory losses: Balance as at beginning of period....................................... Amount expensed during the period................................... Write-off of inventories....................................................... Balance at the end of the year ............................................		December 31, 1999 2000 NT$ NT$ US$ 207,440 231,136 6,703 30,365 91,048 2,641 (6,669) (37,781) (1,096) — — — 231,136 284,403 8,248 1,313,388 1,091,457 31,654 106,301 79,995 2,320 (328,232) (116,569) (3,381) 1,091,457 1,054,883 30,593	December 31, 1999 2000 NT$ NT$ US$ 207,440 231,136 6,703 30,365 91,048 2,641 (6,669) (37,781) (1,096) — — — 231,136 284,403 8,248 1,313,388 1,091,457 31,654 106,301 79,995 2,320 (328,232) (116,569) (3,381) 1,091,457 1,054,883 30,593	June 30, 2000 2001 NT$ NT$ US$ 231,136 284,403 8,248 19,134 — — (21,468) (13,961) (405) — (82,660) (2,397) 228,802 187,782 5,446 1,091,457 1,054,883 30,594 — 552,406 16,021 (108,800) (235,384) (6,827) 982,657 1,371,905 39,788	June 30, 2000 2001 NT$ NT$ US$ 231,136 284,403 8,248 19,134 — — (21,468) (13,961) (405) — (82,660) (2,397) 228,802 187,782 5,446 1,091,457 1,054,883 30,594 — 552,406 16,021 (108,800) (235,384) (6,827) 982,657 1,371,905 39,788	June 30, 2000 2001 NT$ NT$ US$ 231,136 284,403 8,248 19,134 — — (21,468) (13,961) (405) — (82,660) (2,397) 228,802 187,782 5,446 1,091,457 1,054,883 30,594 — 552,406 16,021 (108,800) (235,384) (6,827) 982,657 1,371,905 39,788
	1998 NT$ 165,163 42,277 — — 207,440 706,558 788,631 (181,801) 1,313,388	1999 NT$ 207,440 30,365 (6,669) — 231,136 1,313,388 106,301 (328,232) 1,091,457		2000 NT$ 231,136 19,134 (21,468) — 228,802 1,091,457 — (108,800) 982,657
			NT$ 231,136 91,048 (37,781) — 284,403 1,091,457 79,995 (116,569) 1,054,883		NT$ 284,403 — (13,961) (82,660) 187,782 1,054,883 552,406 (235,384) 1,371,905	US$ 8,248 — (405) (2,397) 5,446 30,594 16,021 (6,827) 39,788

F-50

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Amounts in thousands except shares, per share, and percentages)

21. Summarized Financial Information of Equity Investees

The following table presents summarized financial information in accordance with U.S. GAAP for equity investees with an ownership percentage between 20-50% as of December 31, 1999, 2000 and June 30, 2001 and for the three years in the period ended December 31, 2000 and the six months ended June 30, 2000 and 2001.

			December 31,	December 31,		June	30,
			1999	2000		2001
			NT$	NT$	US$	NT$	US$
Current assets.....................................................................			1,099,677	1,813,942	52,609	1,120,462	32,496
Non-current assets..............................................................			3,197,317	1,375,747	39,900	1,182,475	34,295
Current liabilities................................................................			2,331,589	1,449,508	42,309	1,106,309	32,086
Non-current liabilities ........................................................			547,868	214,741	6,228	114,838	3,331
Total shareholder’ equity ...................................................			1,417,537	1,525,440	44,241	1,081,790	31,374
		**December **	31,			June 30,
	1998*	1999	2000		2000	2001
	NT$	NT$	NT$	US$	NT$	NT$	US$
Net sales................................	1,862,196	1,660,595	1,396,132	40,491 687,971		277,028	8,034
Sales less cost of sales..........	(364,699)	(572,987)	(565,033)	(16,387) (283,750)		(210,748)	(6,112)
Net income (loss)..................	(992,109)	(1,412,354) (1,919,582)		(55,672) (623,520)		(460,188) (13,347)

• Note I: The information for the year ended December 31, 1998 does not include Raio Electronic Corp., Ltd. as it was not a 20-50% investee during the period.

At June 30, 2001, the unamortized difference between the amount of which the investments were carried and the amount of the Company’s underlying equity in the investees’ net assets amounted to NT$106,559 (US$3,091). Such difference is amortized over 3-5 years from the date of the investment.

22. New Accounting Pronouncements

In July 2000, ROC Statement of Financial Accounting Standards (‘‘SFAS’’) No. 30 ‘‘Accounting for Treasury Stock’’ was announced. ROC SFAS No. 30 will be effective for financial periods ended on or after December 31, 2001. Earlier application is permitted. ROC SFAS No. 30 provides guidance on the recognition, presentation and disclosure of treasury stock transactions in financial statements. ROC SFAS No. 30 requires that treasury stock transactions (including parent company’s stock traded by subsidiary) should be charged to the equity account, and no gain or loss can be recognized into the profit and loss accounts.

In July 2001, the U.S. FASB issued SFAS No. 141, ‘‘Business Combinations’’, and SFAS No. 142, ‘‘Goodwill and Other Intangible Assets.’’ SFAS No. 141 eliminates the pooling method and requires that all business combinations be accounted for under the purchase method. SFAS No. 141 also requires that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires goodwill to be reviewed for impairment rather than amortized and that intangible assets other than goodwill be amortized over their useful lives. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. The impact of SFAS No. 141 and SFAS No. 142 on the Company’s financial statements has not yet been determined.

F-51

CERTAIN UNAUDITED UNCONSOLIDATED FINANCIAL DATA AS OF AND FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 2001

The following section presents unaudited unconsolidated financial data for Macronix International Co., Ltd. as of September 30, 2000 and September 30, 2001 and for the nine-month periods ended September 30, 2000 and September 30, 2001, which financial data have been prepared and presented in accordance with ROC GAAP. ROC GAAP differs in many material respects from U.S. GAAP. For a discussion of these differences, see note 20 to our audited consolidated financial statements included elsewhere in this Offering Circular. The financial data presented in this section are unconsolidated under ROC GAAP and do not include the results of Macronix America Inc. (MXA), Macronix (BVI) Co. Ltd., Huiv Ying Investment, Ltd., and the four whollyowned subsidiaries of Macronix (BVI) Co. Ltd. including Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. Any evaluation of these unaudited unconsolidated financial data should also take into account the audited consolidated financial statements of Macronix International Co., Ltd. and Subsidiaries and the notes to those statements included elsewhere in this Offering Circular. The unaudited unconsolidated financial data for Macronix International Co., Ltd. for the nine-month period ended September 30, 2001 are not necessarily indicative of the results that may be expected for any period thereafter or for the year ended December 31, 2001.

A-1

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED BALANCE SHEETS

September 30, 2001 and 2000 (Amounts in thousands except shares and per share data)

ASSETS Current assets Cash and cash equivalents......................................................................................... Restricted investments............................................................................................... Short-term investments.............................................................................................. Notes and accounts receivable (net) ......................................................................... Inventories (net) ........................................................................................................ Deferred income taxes (net)...................................................................................... Prepaid expenses ....................................................................................................... Others......................................................................................................................... Total current assets................................................................................................ Property, plant and equipment.................................................................................. Land........................................................................................................................... Buildings.................................................................................................................... Production equipment................................................................................................ Research and development equipment...................................................................... Offce furniture and equipment................................................................................. Construction in progress ........................................................................................... Total property, plant and equipment ......................................................................... Less: Accumulated depreciation ............................................................................... Net property, plant and equipment........................................................................ Deferred income taxes (net)....................................................................................... Intangible assets (net)................................................................................................. Long-term equity investments................................................................................... Other assets.................................................................................................................. Total assets...................................................................................................................

September 30 2000 2001 NT$ NT$ 10,360,876 13,617,686 45,000 189,600 305,000 0 5,435,248 3,127,095 4,496,424 8,263,414 994,903 716,734 358,547 436,333 776,928 401,487 22,772,926 26,752,349 384,289 598,076 11,496,350 12,713,737 30,840,554 39,926,427 870,525 1,150,955 839,512 1,335,277 10,805,296 7,054,518 55,236,526 62,778,990 (18,028,951) (24,817,920) 37,207,575 37,961,070 1,820,658 1,657,412 671,608 916,590 2,712,386 3,590,607 163,062 1,181,159 65,348,215 72,059,187

2000 NT$ 10,360,876 45,000 305,000 5,435,248 4,496,424 994,903 358,547 776,928 22,772,926 384,289 11,496,350 30,840,554 870,525 839,512 10,805,296 55,236,526 (18,028,951) 37,207,575 1,820,658 671,608 2,712,386 163,062 65,348,215

A-2

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED BALANCE SHEETS—(Continued)

September 30, 2001 and 2000 (Amounts in thousands except shares and per share data)

LIABILITIES & SHAREHOLDERS’ EQUITY Current liabilities Short-term debts................................................................................................. Short-term notes................................................................................................. Current portion of capital lease obligations ...................................................... Current portion of long-term debt ..................................................................... Notes and accounts payable............................................................................... Payables to related parties ................................................................................. Payable to equipment suppliers ......................................................................... Accrued expenses............................................................................................... Income taxes payable......................................................................................... Others ................................................................................................................. Total current liabilities.................................................................................... Long-term liabilities Capital lease obligations, less current portion................................................... Long-term debt, less current portion ................................................................. Accrued pension cost......................................................................................... Other liabilities................................................................................................... Total liabilities...................................................................................................... Shareholders’ equity.............................................................................................. Common shares NT$10 par value, authorized 3,500,000,000 and 4,500,000,000 shares as of September 30, 2000 and September 30, 2001, and issued 2,472,586,493 and 3,359,342,613 shares as of September 30, 2000 and September 30, 2001, respectively .................................................. Additional paid-in capital .................................................................................. Subscription received......................................................................................... Capital reserve.................................................................................................... Legal reserve...................................................................................................... Retained earnings............................................................................................... Unrealized losses on long-term investments..................................................... Cumulative translation adjustments................................................................... Total shareholders’ equity.................................................................................. Total liabilities and shareholders’ equity..........................................................

September 30 2000 2001 NT$ NT$ 1,494,632 — — 298,376 3,452 154,859 3,113,329 3,250,375 1,263,036 1,063,855 446,132 227,535 1,569,235 1,064,283 1,277,981 1,748,221 264,830 358,075 166,987 122,566 9,599,614 8,288,145 16,632 1,760,046 16,108,702 15,388,577 16,069 19,069 88 88 25,741,105 25,455,925 24,725,865 33,593,426 8,415,522 5,967,073 4,708 — — 1,425 647,015 1,707,054 5,805,955 5,583,685 (45,204) (486,051) 53,249 236,650 39,607,110 46,603,262 65,348,215 72,059,187

2000 NT$ 1,494,632 — 3,452 3,113,329 1,263,036 446,132 1,569,235 1,277,981 264,830 166,987 9,599,614 16,632 16,108,702 16,069 88 25,741,105 24,725,865 8,415,522 4,708 — 647,015 5,805,955 (45,204) 53,249 39,607,110 65,348,215

A-3

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF OPERATIONS

For the nine-month periods ended September 30, 2000 and 2001 (Amounts in thousands except shares and per share data)

Sales revenue........................................................................................................................................................ Less: Sales returns.............................................................................................................................................. Sales discounts.......................................................................................................................................... Net sales revenue .................................................................................................................................................. Cost of goods sold................................................................................................................................................ Gross proft........................................................................................................................................................... Plus: Unrealized proft as of January 1................................................................................................................. Less: Unrealized proft as of September 30 ......................................................................................................... Realized gross proft............................................................................................................................................ Operating expenses Selling expenses ................................................................................................................................................ Administrative expenses ................................................................................................................................... Research and development................................................................................................................................ Operating income (loss)...................................................................................................................................... Other income Interest income .................................................................................................................................................. Foreign exchange gain ...................................................................................................................................... Gain on disposal of property, plant and equipment ......................................................................................... Unrealized proft as of September 30............................................................................................................... Others ................................................................................................................................................................ Other expenses Interest expense................................................................................................................................................. Foreign exchange loss....................................................................................................................................... Inventory loss provision.................................................................................................................................... Loss on disposal of property, plant and equipment.......................................................................................... Net investment loss ........................................................................................................................................... Others ................................................................................................................................................................ Income (loss) before taxes.................................................................................................................................. Income tax beneft (expense).............................................................................................................................. Net income (loss) for the year............................................................................................................................ Earnings Per Common Share: Net income (loss) per common share—basic....................................................................................................

Nine-month periods ended September 30 2000 2001 NT$ NT$ 20,451,309 17,230,403 (57,637) (149,931) (12,264) (44,195) 20,381,408 17,036,277 (10,539,210) (8,303,373) 9,842,198 8,732,904 20,695 112,862 (30,792) (79,042) 9,832,101 8,766,724 (475,769) (414,754) (875,307) (899,219) (2,143,386) (2,832,033) (3,494,462) (4,146,006) 6,337,639 4,620,718 356,239 395,389 237,854 — 15,543 1,000 19,515 — 44,259 158,067 673,410 554,456 (855,522) (826,617) — (22,323) — (699,571) (4,505) (6,807) (584,345) (446,789) (59,455) (245,108) (1,503,827) (2,247,215) 5,507,222 2,927,959 137,000 (460,000) 5,644,222 2,467,959 NT$1.72 NT$0.73

2000 NT$ 20,451,309 (57,637) (12,264) 20,381,408 (10,539,210) 9,842,198 20,695 (30,792) 9,832,101 (475,769) (875,307) (2,143,386) (3,494,462) 6,337,639 356,239 237,854 15,543 19,515 44,259 673,410 (855,522) — — (4,505) (584,345) (59,455) (1,503,827) 5,507,222 137,000 5,644,222 NT$1.72

A-4

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine-month periods ended September 30, 2000 and 2001 (Amounts in thousands except shares and per share data)

Cash fows from operating activities: Net income.......................................................................................................................................................... Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .................................................................................................................................................... Bad debt expense ............................................................................................................................................ Inventory loss provision (Reversal)................................................................................................................ Net loss from equity investment..................................................................................................................... Gain on disposal of short-term investments................................................................................................... Amortization ................................................................................................................................................... Deferred income taxes .................................................................................................................................... Gain on disposal of property, plant and equipment ....................................................................................... Loss on disposal of property, plant, and equipment ...................................................................................... Net changes in operating assets and liabilities: Accrued pension cost.................................................................................................................................. Notes receivable.......................................................................................................................................... Accounts receivable.................................................................................................................................... Receivables from related parties ................................................................................................................ Inventories................................................................................................................................................... Other current assets..................................................................................................................................... Prepaid expenses......................................................................................................................................... Notes and Accounts payable....................................................................................................................... Payables to related parties .......................................................................................................................... Accrued expenses........................................................................................................................................ Other current liabilities............................................................................................................................... Income tax payable..................................................................................................................................... Net cash provided by operating activities .............................................................................................................. Cash fows from investing activities: (Increase) decrease in restricted investments..................................................................................................... Decrease (increase) in short-term investments................................................................................................... Additions to long-term equity investments ........................................................................................................ Purchase of property, plant, and equipment....................................................................................................... Proceeds from disposal of property, plant, and equipment................................................................................ Decrease (increase) in refundable deposits ........................................................................................................ Additions to intangible assets............................................................................................................................. Increase in other receivables .............................................................................................................................. Net cash used in investing activities ......................................................................................................................

Nine-month periods ended September 30 2000 2001 NT$ NT$ 5,644,222 2,467,959 4,030,987 5,496,259 8,875 5,105 (19,515) 699,571 608,484 438,646 (24,139) (15,276) 286,061 411,867 (137,000) 401,121 (15,543) (1,000) 4,505 6,807 250 2,250 (138,084) 181,045 (1,042,671) 1,505,936 (926,854) 531,231 (903,237) (3,822,593) (75,872) 291,443 (31,570) (29,271) 63,525 (510,473) 86,320 (153,846) 584,135 13,817 101,104 (106,370) — (255,749) 8,103,983 7,558,479 945,375 (950,374) (280,861) 15,276 (1,375,060) (1,514,656) (9,468,521) (5,784,480) 176,983 7,266 (22,559) 5,853 (192,346) (546,845) (64,041) (28,027) (10,281,030) (8,795,987)

2000 NT$ 5,644,222 4,030,987 8,875 (19,515) 608,484 (24,139) 286,061 (137,000) (15,543) 4,505 250 (138,084) (1,042,671) (926,854) (903,237) (75,872) (31,570) 63,525 86,320 584,135 101,104 — 8,103,983 945,375 (280,861) (1,375,060) (9,468,521) 176,983 (22,559) (192,346) (64,041) (10,281,030)

A-5

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

For the nine-month periods ended September 30, 2000 and 2001 (Amounts in thousands except shares and per share data)

Cash fows from fnancing activities: (Decrease) increase in short-term debts.................................................................................................................. Increase (decrease) in short-term notes................................................................................................................... Increase in refundable deposits ............................................................................................................................... Distribution of directors and supervisors’ remuneration........................................................................................ Decrease in long-term debts.................................................................................................................................... Increase (decrease) in capital lease obligations...................................................................................................... Increase in debentures ............................................................................................................................................. Cash received from issuance of stock and subscriptions ....................................................................................... Net cash provided by fnancing activities................................................................................................................... Net (decrease) increase in cash and cash equivalents ................................................................................................ Cash and cash equivalents at the beginning of period ............................................................................................... Cash and cash equivalents at the end of period.......................................................................................................... Supplemental disclosures of cash fow information: Interest paid during the period (excluding capitalized interest)............................................................................. Income tax paid during the period .......................................................................................................................... Non-cash activities: Current portion of long-term debts ......................................................................................................................... Current portion of debentures ................................................................................................................................. Current portion of capital lease obligation ............................................................................................................. Convertible bonds converted to common shares .................................................................................................... Unrealized losses on long-term investments........................................................................................................... Cumulative translation adjustments ........................................................................................................................ Stock dividends........................................................................................................................................................ Common stocks issued for employee bonus........................................................................................................... Cash paid for purchase of property, plant and equipment Purchases of property, plant and equipment ....................................................................................................... (Increase) decrease in payable to equipment suppliers ...................................................................................... Cash paid .....................................................................................................................................................................	Nine-month periods ended September 30	Nine-month periods ended September 30
	2000 NT$ 1,470,691 (248,409) 88 — (2,256,807) (2,642) 6,353,617 3,613,555 8,930,093 6,753,046 3,607,830 10,360,876 859,362 31,949 3,113,329 100,000 3,452 3,982,004 21,914 5,602 2,675,785 — 9,527,593 (59,072) 9,468,521	2001 NT$ (924,680) 298,376 — (190,148) (1,322,575) 1,895,737 648,298 — 405,008 (832,500) 14,450,186 13,617,686 883,983 353,834 3,250,375 — 154,859 — 378,750 (130,775) 7,423,227 1,426,108 5,483,872 300,608 5,784,480

A-6

APPENDIX B

GLOSSARY OF TECHNICAL TERMS

AND circuit..................................................................	A circuit which has two or more input signal gates and
	which delivers an output only if and when every input
	signal gate is energized simultaneously.
ASIC.............................................................................	Application Specifc Integrated Circuit. A custom
	designed integrated circuit that performs specifc
	functions which would otherwise require a number of
	commodity integrated circuits to perform. The use of
	an ASIC in place of a conventional integrated circuit
	reduces product size and cost and also improves
	reliability.
ASSP ............................................................................	Application Specifc Standard Product. A standard
	integrated circuit designed for a specifc product or
	application, such as a VCR or microwave.
ATA ..............................................................................	AT attachment, or Advanced Technology Attachment.
	The specifcation for an Integrated Device Electronics
	interface which is a type of hardware interface widely
	used to connect various peripheral devices to a personal
	computer.
BIOS.............................................................................	Basic Input Output System. This software controls the
	basic power-up functioning of a computer system.
CD-ROM......................................................................	Compact Disc used for data storage on a read-only
	basis.
CD-R/W .......................................................................	CD-recordable and rewritable. Originally called ‘‘CD-
	erasable’’, CD-RW can be erased and new information
	can be re-recorded onto the same physical location on
	the disc by a CD-RW recorder.
DAM.............................................................................	Digital Answering Machine.
Die ................................................................................	A piece of a semiconductor wafer containing the
	circuitry of a single chip.
DINOR .........................................................................	Divided bit-line NOR Mitsubishi-patented fash
	architecture used in its fash product line. DINOR
	offers the high-speed random-access capability of the
	NOR architecture, without NOR’s over-erase problems
	or the need to set all bits to zero before erase. It also
	offers the high-density and single power-supply
	characteristics of the NAND fash architecture.
	Programming occurs at a lower threshold voltage than
	erase in the DINOR fash architecture, the opposite of
	the NOR architecture.

B-1

DRAM..........................................................................	Dynamic Random Access Memory. A type of volatile
	memory product that is used in electronic systems to
	store data and program instructions. It is the most
	common type of RAM and must be refreshed with
	electricity thousands of times per second or else it will
	fade away.
DSP...............................................................................	Digital Signal Processor. A type of integrated circuit
	that processes and manipulates digital information after
	it has been converted from an analog source. DSPs are
	parallel processors used for high complexity, high-
	speed real-time computations in a wide variety of
	applications, including digital cell telephone systems
	and data compression systems.
Embedded fash controller ...........................................	A device which incorporates fash on which other
	devices rely for access to a computer system. A disk
	controller, for example, controls access to one or more
	disk drives, managing physical and logical access to the
	drive or drives.
EPROM........................................................................	Erasable Programmable ROM. Nonvolatile memory
	which can be reprogrammed by removing the device
	from the system, erasing the data through exposure to
	ultraviolet light and reprogramming and reinstalling the
	device in the system.
EEPROM......................................................................	Electrically Erasable Programmable ROM. Similar to
	EPROM, except that it can be erased electronically
	before being reprogrammed.
Ethernet ........................................................................	A type of LAN.
Flash ............................................................................	A type of non-volatile memory, similar to an EEPROM
	in that it is erasable and reprogrammable. The
	difference is that it can be erased and reprogrammed in
	the electronic system into which the fash chip has been
	incorporated.
Gb.................................................................................	Gigabit. 1,073,741,824 bits as a unit of data size or
	memory capacity.
GPS...............................................................................	Global Positioning Satellite System. A network of
	satellites that provides precise location determination to
	receivers.
GSM .............................................................................	Global System for Mobile Communications, a standard
	for digital mobile telephone networks.
GUI...............................................................................	Graphics User Interface. An interface which allows
	operation of a computer by manipulating graphical
	icons and windows (usually by pointing and clicking a
	mouse) rather than using text commands.

B-2

HDD .............................................................................	Hard Disk Drive. An electro-mechanical device that
	records data onto spinning rigid magnetic disks in
	discrete data blocks each of which can be randomly
	accessed. The primary mass storage device of a
	computer.
Integrated Circuit .........................................................	A combination of two or more transistors on a base
	material, usually silicon. All semiconductor chips,
	including memory chips and logic chips, are essentially
	complicated integrated circuits with thousands of
	transistors.
LAN..............................................................................	Local Area Network. A short distance network
	designed to connect computers within a localized
	environment to enable the sharing of databases and
	other communications.
LCD..............................................................................	Liquid Crystal Display. A type of display that uses a
	liquid compound with a polar molecular structure,
	sandwiched between two transparent electrodes. When
	an electric feld is applied, the molecules align with the
	light passing through it. A polarized flter laminated
	over the electrodes can selectively ‘‘turn on’’ a cell or a
	pixel, containing the liquid crystal material, turning it
	dark.
Logic Product...............................................................	A product that contains digital integrated circuits that
	process, rather than store, information.
Mask.............................................................................	A piece of glass on which an integrated circuit’s
	circuitry design is laid out. Integrated circuits may
	require up to 20 different layers of design each with its
	own mask. In the integrated circuit production process
	a light shines through the mask leaving an image of the
	design on the wafer.
Mb ................................................................................	Megabit. 1,048,576 bits as a unit of data size or
	memory capacity.
MCU or Microcontroller Unit .....................................	A complete computer system contained on a single
	integrated circuit that is programmed to control the
	operation of electromechanical systems.
Memory ........................................................................	A group of integrated circuits that a computer uses to
	store data and programs, such as ROM, RAM, DRAM
	and SRAM.
MHz..............................................................................	Megahertz. One million cycles per second. Typically
	measures the clock speed of microprocessors.
Micron ..........................................................................	1/25,000 of an inch. Circuitry on an integrated circuit
	typically follows lines that are less than one micron
	wide.
	B-3

Motherboard.................................................................	The main piece of circuitry inside a personal computer.
MP3..............................................................................	Motion Picture Experts Group-I, Audio Layer 3. A
	digital data compression and storage technology for
	music.
NAND circuit...............................................................	Not AND. A logic circuit in which the output signal is
	a logical 1 if any of its input signals is a logical 0 and
	the output signal of which is a logical 0 if all of its
	input signals are logical 1s.
Nonvolatile memory ....................................................	Memory products which retain their data content
	without the need for constant power supply.
NOR circuit..................................................................	Not OR. A logic circuit in which the output signal is a
	logical 1 only when all of its input signals are logical
	0s.
OR circuit.....................................................................	A logic circuit in which the output signal is a logical 1
	if any one or more of its input signals is a logical 1.
PAC ..............................................................................	Paired Array Contact.
PCMCIA cards.............................................................	Personal computer cards, standardized by Personal
	Computer Memory Card International of San Jose,
	California or credit card sized, removable modules for
	portable computers.
PDA..............................................................................	Personal Digital Assistant, a hand-held multifunctional
	minicomputer used for, among other things, word
	processing, name card retention and appointment
	calendars.
PHS...............................................................................	Personal Hand Set A lower capability but less
	expensive mobile telephone communications system
	currently achieving substantial consumer acceptance in
	Japan.
PROM...........................................................................	Programmable Read-Only Memory. Similar to ROM in
	that once programmed it can be ‘‘read only’’ and not
	changed. Programmable ROM means that customers
	can program the integrated circuit themselves, rather
	than it being programmed when it is manufactured. The
	programming is possible because of a series of fuses in
	the circuitry that can be selectively blown to create a
	unique type of data.
RAM.............................................................................	Random Access Memory. A type of volatile memory,
	forming the main memory of a computer where
	applications and fles are run.

B-4

ROM.............................................................................	Read-Only Memory. Memory that is programmed by
	the manufacturer and cannot be changed. Typically,
	ROM is used to provide start-up data when a computer
	is frst turned on.
Semiconductor..............................................................	A material with electrical conducting properties in
	between those of metals and insulators. (Metals always
	conduct and insulators never conduct, but
	semiconductors sometimes conduct.) Essentially,
	semiconductors transmit electricity only under certain
	circumstances, such as when given a positive or electric
	charge. Therefore, a semiconductor’s ability to conduct
	can be turned on or off by manipulating those charges
	and this allows the semiconductor to act as an electric
	switch. The most common semiconductor material is
	silicon, used as the base of most semiconductor chips
	today because it is relatively inexpensive and easy to
	create.
SMIF Box System........................................................	Standard Mechanical Interface Box System. A system
	which links process microenvironments so that a wafer
	is never exposed to room air. With a SMIF Box
	System, traditional environmental conditions are
	replaced with a microenvironment that can be
	pressurized with air or nitrogen to keep out room air.
SRAM...........................................................................	Static Random Access Memory. A type of volatile
	memory product that is used in electronic systems to
	store data and program instructions. Unlike the more
	common DRAM, it does not need to be refreshed.
STB...............................................................................	Set top box. A device to differentiate signals from
	television and multimedia service providers.
SXGA...........................................................................	Super Extended Graphics Array. An enhanced set of
	Video Graphics Array standards that is capable of
	displaying an image ranging from 768 x 1024 pixels to
	1024 x 1280 pixels.
Transistor......................................................................	An individual circuit that can amplify or switch electric
	current. This is the building block of all integrated
	circuits and semiconductors.
VCD .............................................................................	Video Compact Disk.
Volatile memory...........................................................	Memory products which lose their data content when
	the power supply is switched off.
Wafer ............................................................................	Thin, round, fat piece of silicon that is the base of
	most integrated circuits.

B-5

[This page is intentionally left blank]

APPENDIX C

THE SECURITIES MARKET OF TAIWAN

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by our company, the Initial Purchasers or any of our respective affiliates or advisers in connection with this offering.

The Taiwan Stock Exchange

In 1961, the Securities and Futures Commission established the Taiwan Stock Exchange to provide a marketplace for securities trading. The Taiwan Stock Exchange is a corporation owned by governmentcontrolled 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 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 584 as of December 31, 2001. As of December 31, 2001, the market capitalization of companies listed on the Taiwan Stock Exchange was approximately NT$10,239 billion.

Historically, Taiwan companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the Securities and Futures Commission has encouraged companies to list other types of securities. In 1988, the Securities and Futures Commission permitted the issuance of the 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 Over-theCounter Securities Exchange of Taiwan. The 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, two 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 stockholders;

• length of time in business;

• shareholding concentration;

• amount of capital; and

• profitability.

However, special listing criteria apply to technology companies and key businesses engaging in national economic development.

The Over-the-Counter Securities Exchange

To complement the Taiwan Stock Exchange, the Over-the-Counter Securities Exchange was established in September 1982 on the initiative of the Securities and Futures Commission to encourage the trading of securities of companies who do not qualify for listing on the Taiwan Stock Exchange. As of December 31, 2001, 333 companies had listed equity securities on the Over-the-Counter Securities Exchange and the total market capitalization of those companies was NT$1,412 billion.

C-1

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 ended December 31, 1990......................................................................................... 1991......................................................................................... 1992......................................................................................... 1993......................................................................................... 1994......................................................................................... 1995......................................................................................... 1996......................................................................................... 1997......................................................................................... 1998......................................................................................... 1999......................................................................................... 2000......................................................................................... 2001.........................................................................................	Number of listed companies at theperiod end 199 221 256 285 313 347 375 404 437 462 474 584	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 5,551.24	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 8,349.91 4,646.61	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 8,842.63 5,551.24

Sources: Status of Securities Listed on Taiwan Stock Exchange.

As indicated above, the performance of the Taiwan Stock Exchange has in recent years been characterized by extreme price volatility.

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. Transactions that involve 500 trading lots (500,000 shares) or more must be registered and executed under Taiwan Stock Exchange guidelines. 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 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 securities transaction tax of 0.3% of the transaction price is payable by the seller of equity securities and a tax of 0.1% of the transaction price is payable by the seller of debt securities other than government bonds. 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 the bonds.

C-2

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 Securities and Futures Commission has extensive regulatory authority over public companies. Public companies are generally required to obtain approval from, or registration with, the Securities and Futures Commission for all securities offerings. The Securities and Futures Commission requires periodic reporting of financial and operating information by all public companies. In addition, the Securities and Futures Commission establishes standards for financial reporting and carries out licensing and supervision of participants in the Taiwan securities market.

The Securities and Futures Commission has responsibility for implementing the 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 Securities and Exchange Law specifically empowers the Securities and Futures Commission to promulgate necessary rules. The 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 and stockholders who (together with their spouses, minor children and nominees) hold 10% or more of the shares of the issuer, together with the spouses, minor children and nominees of these parties. The Securities and Exchange Law prohibits trading by ‘‘insiders’’ based on non-public information that materially affects share price movement. ‘‘Insiders’’ include:

• directors, supervisors, managers and shareholders who (together with their spouses, minor children and nominees) hold 10% or more of the issuing company’s shares (together with the spouses, minor children and nominees of these parties);

• 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 Securities and Exchange Law also imposes criminal liability on certified public accountants and lawyers who make false certifications in their examination and audit of an issuer’s contracts, reports and other documents related to securities transactions. The 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 Securities and Exchange Law provides for civil liability for material misstatements or omissions made by issuers, and regulation of tender offers.

The Securities and Futures Commission does not have criminal or civil enforcement powers under the 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 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;

C-3

• 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 significant difficulties, the Taiwan Stock Exchange may, with the approval of the Securities and Futures Commission, delist securities of these issuers.

C-4

APPENDIX D

FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN TAIWAN

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by our company, the Initial Purchasers or any of our respective affiliates or advisers in connection with this offering.

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.

Qualified Foreign Institutional Investors

The Executive Yuan has approved guidelines for direct investment in securities listed on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange in Taiwan by qualified foreign institutional investors. Qualified foreign institutional investors include:

• banks that hold securities assets of at least US$200 million, and have experience in the safekeeping or management of securities or assets and in international financial or trust business;

• insurance companies that hold securities assets of at least US$200 million;

• fund management institutions that manage securities assets of at least US$200 million;

• offshore fund management companies of which more than 50% of their capital is owned by a Taiwan securities investment trust enterprise, provided that the funds to be invested are not derived from sources in Taiwan or mainland China or owned by these offshore fund management companies;

• general securities firms that have a net worth of at least US$100 million and have experience in international securities investment;

• offshore subsidiary securities firms that are more than 50% owned by a Taiwan securities firm, or other securities firms that are wholly-owned by these offshore subsidiary securities firms;

• offshore subsidiary securities firms that are wholly-owned by a Taiwan securities firm, or other securities firms that are more than 51% owned by these offshore subsidiary securities firms;

• foreign government-owned investment institutions, provided that all of the funds to be invested are owned by the foreign government;

• pension funds;

• mutual funds, unit trusts or investment trusts that have assets of at least US$200 million;

D-1

• trust companies that hold securities assets in trust of at least US$200 million, and have experience in the safekeeping or management of securities or assets and in international financial or trust business; and

• any other professional institutional investors that hold securities or assets of at least US$200 million.

Each qualified foreign institutional investor wishing to invest directly in the Taiwan securities market is required to apply for an investment permit from the Securities and Futures Commission. If the investment amount exceeds US$50 million, an approval from the Central Bank of China is also required. The application to the Securities and Futures Commission and the Central Bank of China requires, among other things:

• the appointment of a local agent and custodian;

• proof of qualification;

• a copy of the custodian contract; and

• an affidavit certifying that the foreign institutional investor will not enter into any quota-sharing arrangement with other foreign investors.

Qualified foreign institutional investors who receive a permit may apply to invest up to US$3 billion and are required to remit the full amount into Taiwan within two years of receiving the investment permit.

Capital remitted into Taiwan for investments in the Taiwan securities market may be repatriated at any time. The repatriated capital may be returned to Taiwan at any time without a Securities and Futures Commission approval, as long as its aggregate inward remittance after netting off its aggregate outward remittance does not exceed the investment amount approved by the ROC Securities and Futures Commission and Central Bank of China (if applicable). Capital gains and income on investments may also be repatriated at any time.

General Foreign Investors

General foreign investors may generally invest in Taiwan Stock Exchange-listed securities or securities traded on the Over-the-Counter Securities Exchange up to a limit of US$50 million if they are institutional investors and US$5 million if they are individual investors, after obtaining the necessary approvals from the Taiwan Stock Exchange.

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 an Over-theCounter Securities Exchange-traded company.

Foreign Investment Approval

Other than:

• qualified foreign institutional investors;

• general foreign investors; and

• investors in overseas convertible bonds and depositary receipts,

D-2

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 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 a 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 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 Ministry of Finance began allowing companies whose shares are traded on the Over-theCounter Securities Exchange also to sponsor the issuance and sale of depositary receipts evidencing depositary shares. Approvals for these issuances are still required. Approvals are granted for a fixed number of depositary receipts, if the underlying shares are newly issued shares, which may not be increased without a separate Securities and Futures Commission approval. However, the number of depositary receipts may be decreased by the board of directors of the issuing company if such decrease has been authorized at the relevant shareholders’ meeting. Approvals are granted for a maximum number of depositary receipts if the underlying shares are not newly issued shares.

No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific 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

• due to the purchase by depositary receipt holders, directly or through the depositary, of shares on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange 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 Securities and Futures Commission; and

• the number of depositary shares created from stock dividends, free distributions of shares and rights offerings. These issuances of depositary receipts may only be made to the extent that previously issued depositary receipts have been cancelled and the shares have been sold on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange.

D-3

For depositary shares that represent new shares, three months after the issuance of a depositary receipt, a holder may request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder. For depositary shares that represent previously existing shares, a holder may immediately after the issuance of depositary receipts request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder.

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 securities account with a local securities brokerage firm, remit funds and exercise shareholders’ rights. In addition, the withdrawing holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and opening these accounts, 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.

A depositary may, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, convert New Taiwan 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 New Taiwan 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 Over-the-Counter Securities Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

Overseas Corporate Bonds

Since 1989, the 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 Over-the-Counter Exchange. Under current ROC laws, these overseas corporate bonds (if their terms so provide) may be converted by non-Taiwan persons, other than mainland Chinese persons, into shares of Taiwan companies or, with Securities and Futures Commission approval, 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. Proceeds from sales of the shares converted from overseas convertible bonds may be used for re-investment in securities listed on the Taiwan Stock Exchange or traded on the Over-the-Counter Securities Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

D-4

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 matters.

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 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 New Taiwan 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, onward 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 Over-the-Counter Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the 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 New Taiwan 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 New Taiwan dollars and U.S. dollars or other foreign currencies.

D-5

[This page is intentionally left blank]

[This page is intentionally left blank]

[This page is intentionally left blank]

HEAD OFFICE OF THE ISSUER

Macronix International Co., Ltd.

No.16 Li-Hsin Road Science-Based Industrial Park Hsinchu, Taiwan ROC

PAYING, TRANSFER AND CONVERSION AGENTS

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

The Bank of New York The Bank of New York 101 Barclay Street Aerogolf Center New York, N.Y. 10286 1A Hoehenhof L-1736 Senningerberg Luxembourg

REGISTRAR

The Bank of New York 101 Barclay Street New York, N.Y. 10286

LEGAL ADVISERS

To the Issuer

To the Initial Purchasers

as to United States law Baker & McKenzie 14/F, Hutchison House 10 Harcourt Road Central Hong Kong as to ROC law Baker & McKenzie 15/Fl., Hung Tai Centre No. 168, Tun Hwa North Road Taipei 105, Taiwan ROC

as to United States law Simpson Thacher & Bartlett Asia Pacific Finance Tower 7th Floor 3 Garden Road Central, Hong Kong

as to ROC law Lee and Li 7th Floor 201 Tun Hua North Road Taipei 105, Taiwan ROC

INDEPENDENT AUDITORS

Diwan, Ernst & Young

9th Floor, 333 Keelung Road Section 1, Taipei, Taiwan ROC

TRUSTEE

LISTING AGENT

The Bank of New York 101 Barclay Street New York, N.Y. 10286

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

Aerogolf Center 1A Hoehenhof L-1736 Senningerberg Luxembourg

US$140�000�000

0�5% Convertible Bonds due 2007

Macronix International Co��Ltd�

OFFERING CIRCULAR

Joint Global Coordinators and Bookrunners

(listed alphabetically)

Deutsche Bank

Merrill Lynch Far East Limited

China Development Industrial Bank

Citicorp International Limited

JPMorgan

Asia Pacific Bank

February 1, 2002