Macronix - Capital/Financing Update 2014

OFFERING CIRCULAR

US$80,000,000

Macronix International Co., Ltd.

(Incorporated in Taiwan, the Republic of China)

Zero Coupon Convertible Bonds Due 2008

The Zero Coupon Convertible Bonds Due 2008 (the ‘‘Bonds’’) will mature on February 10, 2008 (the ‘‘Maturity Date’’) at a redemption price equal to 100% of the outstanding principal amount thereof. The Bonds will not bear any interest except in limited circumstances as described herein. Unless previously redeemed or repurchased and cancelled, the Bonds, at the option of the holders, are convertible at any time, except during a Closed Period (as defined herein), on or after March 12, 2003 and on or before January 11, 2008, into our common shares, par value NT$10 per share. The initial Share Conversion Price (as defined herein) will be NT$12.06 per common share (which is equivalent to US$0.348 per common share based on a fixed exchange rate of NT$34.66 = US$1.00), subject to adjustment in certain events. Our outstanding common shares are listed on the Taiwan Stock Exchange. On January 27, 2003, the closing price of our common shares on the Taiwan Stock Exchange was NT$11.90 per share.

We have the option to redeem the Bonds, in whole or in part, on or at any time on or after November 11, 2003 and prior to August 10, 2004 (the ‘‘First Optional Redemption Period’’), and any time on or after August 11, 2004 and prior to February 10, 2008 (the ‘‘Second Optional Redemption Period’’), at a price equal to the Early Redemption Amount (as defined herein), if the average Market Price (as defined herein) translated into U.S. dollars at the Prevailing Rate (as defined herein) for a period 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, in the case of the First Optional Redemption Period, 125%, and in the case of the Second Optional Redemption Period, 120%, of the Share Conversion Price in effect on each such Trading Day translated into U.S. dollars at the fixed exchange rate of NT$34.66 = US$1.00. We may also redeem the Bonds, in whole but not in part, at any time prior to February 10, 2008 at a price equal to the Early Redemption Amount, if at least 90% in aggregate principal amount of the Bonds have already been redeemed, repurchased and cancelled, or converted. The Bonds are redeemable, in whole or in part, on each of February 10, 2004, February 10, 2005, February 10, 2006 and February 10, 2007 at the option of the holders, at the redemption prices equal to 100%, 102%, 104% and 106% of the outstanding principal amount, respectively. We also may redeem the Bonds, in whole but not in part, at any time at the Early Redemption Amount in the event of certain changes relating to taxation in the Republic of China (the ‘‘ROC’’). We are required in the event of a delisting of our common shares on the Taiwan Stock Exchange to make an offer to repurchase all outstanding Bonds at a price equal to the Early Redemption Amount. The Bonds will be our unsecured obligations. See ‘‘Description of the Bonds’’.

The Bonds will be represented by a global bond in registered form (the ‘‘Global Bond’’), which will be deposited with The Bank of New York, acting as a common depositary, for Euroclear Bank S.A./N.V., as operator of the Euroclear System (‘‘Euroclear’’), and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream’’), on or about the Closing Date (as defined herein). The Global Bond will be exchangeable only in the limited circumstances described herein, in whole but not in part, for definitive Bonds in registered form in denominations of US$1,000. Application has been made to list the Bonds on the Socie´te´ de la Bourse de Luxembourg S.A. (the ‘‘Luxembourg Stock Exchange’’).

Investing in the Bonds involves risks. See ‘‘Risk Factors’’ beginning on page 12.

Price: 100%

The Bonds have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’). The Bonds are being offered outside the United States by the Initial Purchasers named in the ‘‘Plan of Distribution’’ section of this offering circular in reliance on Regulation S under the Securities Act and may not be offered, sold or delivered in the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) unless they have been so registered.

We have granted the Initial Purchasers (as defined herein) an option for 30 days from the date of this offering circular to purchase up to an additional US$20,000,000 aggregate principal amount of the Bonds at the initial offering price per Bond. See ‘‘Plan of Distribution’’.

The Bonds are offered severally by the Initial Purchasers, 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. Delivery of the Bonds is expected to be made on or about February 10, 2003 (the ‘‘Closing Date’’).

Sole Bookrunner

Credit Suisse First Boston

Co-Lead Manager

KGI Securities Co. Ltd.

The date of this offering circular is January 28, 2003.

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARYCONSOLIDATEDFINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . RISKFACTORS . . . . . . . . . . . . . . . . . . . . . . . . USE OFPROCEEDS . . . . . . . . . . . . . . . . . . . . . MARKETPRICEINFORMATION . . . . . . . . . . . EXCHANGERATES . . . . . . . . . . . . . . . . . . . . . DIVIDENDS ANDDIVIDENDPOLICY . . . . . . . CHANGES INOURCAPITAL STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . SELECTEDCONSOLIDATEDFINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIALCONDITION ANDRESULTS OFOPERATIONS . . . . . . . . . UNCONSOLIDATEDINTERIM FINANCIALINFORMATION . . . . . . . . . . . . . RECENTDEVELOPMENTS . . . . . . . . . . . . . . . . BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . RELATEDPARTYTRANSACTIONS . . . . . . . . . MAJORSHAREHOLDERS . . . . . . . . . . . . . . . . . DESCRIPTION OF THEBONDS . . . . . . . . . . . . THEGLOBALBOND . . . . . . . . . . . . . . . . . . . .	Page 1 10 12 29 30 31 32 33 34 36 39 69 73 76 104 109 112 113 128 CERTAINREPUBLIC OFCHINALEGAL REQUIREMENTS . . . . . . . . . . . . . . . . . . . . DESCRIPTION OFCOMMONSHARES . . . . . . TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . PLAN OFDISTRIBUTION . . . . . . . . . . . . . . . . TRANSFERRESTRICTIONS . . . . . . . . . . . . . . GENERAL INFORMATION . . . . . . . . . . . . . . . LEGALMATTERS . . . . . . . . . . . . . . . . . . . . . EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . INDEX TOCONSOLIDATEDFINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . APPENDIXA-1 —CERTAINUNAUDITED UNCONSOLIDATEDFINANCIALDATA AS OF AND FOR THE NINE-MONTHPERIODS ENDEDSEPTEMBER 30, 2001 AND 2002 . . . APPENDIXA-2 —CERTAINUNCONSOLIDATED FINANCIALDATA AS OF AND FORYEARS ENDEDDECEMBER 31, 2001 AND 2002 . . . . APPENDIXB —GLOSSARY OFTECHNICAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . APPENDIXC —THESECURITIESMARKET OF THEREPUBLIC OFCHINA . . . . . . . . . . APPENDIXD —FOREIGNINVESTMENT AND EXCHANGECONTROLS IN THE REPUBLIC OFCHINA . . . . . . . . . . . . . . . .	Page
		130 131 136 139 143 145 146 146 F-1 A-1 A-2 B-1 C-1 D-1

You should rely only on the information contained in this offering circular or to which we have referred you. We have not authorized anyone to provide you with information that is different. This offering circular may only be used where it is legal to sell the Bonds. The information in this offering circular may only be accurate on the date of this offering circular.

IN CONNECTION WITH THE OFFERING, CREDIT SUISSE FIRST BOSTON (EUROPE) LIMITED, OR ANY PERSON ACTING ON ITS BEHALF, MAY OVER-ALLOT OR EFFECT TRANSACTIONS WITH A VIEW TO MAINTAIN THE MARKET PRICE OF THE BONDS, SUBJECT TO APPLICABLE LAW, AT A LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE ‘‘PLAN OF DISTRIBUTION’’.

This offering circular is being furnished by us in connection with an offering exempt from registration under 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 with respect to Macronix International Co., Ltd. and its subsidiaries. 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 Republic of China’’ and ‘‘Appendix D — Foreign Investment and Exchange Controls in the Republic of China’’ 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 if given or made, such information or representation 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 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’’.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE REPUBLIC OF CHINA

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 named herein are residents of the ROC and substantially all of our assets and the assets of such persons are located in the ROC. As a result, it may not be possible for investors to effect service of process upon us or such persons outside the ROC, or to enforce against them judgments obtained in courts outside of the ROC, 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 or our common shares 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 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 Republic of China’’.

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 our products, our ability to obtain necessary raw materials and the prices for such materials and our ability to attract and retain qualified personnel. Words such as ‘‘anticipate’’, ‘‘believe’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘plan’’, ‘‘seek’’ and similar expressions are intended to identify these forward-looking statements. These forwardlooking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by our management and on information from other sources we believe to be reliable. Some of these forward-looking statements are derived from projections made and published by Gartner Dataquest and certain other third-party sources. We were not involved in the preparation of these projections. You should not place undue reliance on these forward-looking statements, which convey our belief only as of the date of this offering circular. Our actual results may be materially less favorable than those expressed or implied by these forward-looking statements as a result of risks and other factors noted throughout this offering circular.

iii

CONVENTIONS

Unless the context requires otherwise the references to ‘‘Macronix’’, ‘‘we’’, ‘‘us’’, ‘‘our’’, ‘‘our company’’ or ‘‘the Company’’ in this offering circular refer to Macronix International Co., Ltd. and its subsidiaries. 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 Republic of China government and the Republic of China Company Law, respectively. All references herein to ‘‘ROC GAAP’’ and ‘‘U.S. GAAP’’ are to generally accepted accounting principles in the ROC and the United States, respectively.

We publish our financial statements in New Taiwan dollars, the lawful currency of the ROC. All references herein to ‘‘U.S. dollars’’ and ‘‘US$’’ are to United States dollars and references to ‘‘New Taiwan dollars’’ and ‘‘NT$’’ 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 28, 2002 of NT$ 33.46 = US$1.00. On January 27, 2003, the Noon Buying Rate between New Taiwan dollars and United States dollars was NT$34.51 = 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 ROC GAAP, which differ in certain significant respects from U.S. GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see note 19 to our audited consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included elsewhere in this offering circular.

Our audited consolidated financial statements included in this offering circular include the consolidated balance sheets as of December 31, 2000 and 2001 and June 30, 2001 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years ended December 31, 1999, 2000 and 2001 and the six-month periods ended June 30, 2001 and 2002. The summary consolidated balance sheet data as of December 31, 1999 are derived from our audited consolidated 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, as amended (the ‘‘Exchange Act’’), and in accordance therewith file reports and other information with the Securities and Exchange Commission (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.

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 of November 4, 2002, we are required to file annual reports on Form 20-F and submit reports on Form 6-K and other information with the SEC through the EDGAR system.

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.

For a description of the documents available to holders of the Bonds, see ‘‘General Information’’. Alternatively, a holder of the Bonds 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.

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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 in this offering circular. 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 semiconductor designer, producer and supplier. Our product portfolio includes mask ROM, flash, EPROM, logic, application-specific integrated circuit products and highly integrated system-on-a-chip (‘‘SOC’’) solutions. We view ourselves as an integrated solutions provider. In particular, we treat our clients as strategic partners and work closely with them starting from early stages of product development to design silicon chip solutions that meet their specific needs. These partners include Nintendo Company, Ltd. (‘‘Nintendo’’), with whom we have had a relationship for over ten years, and HewlettPackard Corporation (‘‘Hewlett-Packard’’), with whom we have had a relationship for over five years. We differentiate ourselves by our ability to offer a full range of in-house design, product and process engineering capabilities.

We focus our product and technology development efforts to serve the needs of the consumer electronics and communications end markets. Our consumer electronics products focus on end-use applications such as flat panel digital televisions, digital cameras, personal digital assistants, educational toys, video game consoles, cable set-top boxes (‘‘STBs’’) and DVD players, while our communications products focus on end-use applications such as mobile voice and data communications, data networking, wireless and wireline networking. We believe that our expertise in nonvolatile memory technologies, in combination with our logic and SOC design capability, uniquely position us to compete effectively in the consumer electronics and communications markets, and particularly in the wireless communications market, as new applications in those markets increasingly move towards the use of lower power consumption and highly integrated system level semiconductors with embedded nonvolatile memories to meet the requirements of smaller size, longer battery life and lower cost.

We believe that we will benefit from our focus on the consumer electronics end market. According to a report published by Gartner Dataquest on November 15, 2002, semiconductor consumption by the consumer electronics sector is expected to grow at an average of 13.1% per year from 2001 to 2006. For the six months ended June 30, 2002, of our total net sales, excluding sales made by agents, 62.2% was generated by our products for consumer electronics applications, 22.6% by our products for computer applications and 14.0% by our products for communications applications.

Our Track Record

In order to provide our customers with industry-leading nonvolatile semiconductor memory integrated circuits and customer application-specific products, we have developed a range of core process technologies, advanced design processes, highly efficient wafer manufacturing capabilities and the intellectual property necessary to keep us competitive. 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. In addition, 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 a report published by Gartner Dataquest on June 24, 2002, we were the world’s largest supplier of mask ROMs in 2001 based on sales revenue, with an estimated global market share that has increased to approximately 53.1% in 2001 from 9.1% in 1995, and we were ranked fourth in the EPROM market in 2001 based on sales revenue. We believe that, based on sales revenue, we ranked thirteenth in the flash market in 2001.

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 American depositary shares (‘‘ADSs’’) were accepted for quotation on the Nasdaq National Market (‘‘Nasdaq’’), and we became the first ROC company with securities listed in the United States.

Our Production Facilities

We operate our own wafer fabrication facilities, or fabs, and presently have three fabrication facilities, Fab I, Fab II and Fab III, located in Hsinchu, Taiwan. Fab I commenced its commercial operations in 1992 and currently has a production capacity of 35,000 six-inch wafers per month at the end of 2002. Fab II commenced its commercial operations in October 1997 and currently has a production capacity of 42,000 eight-inch wafers per month. We began to manufacture mask ROMs at Fab II at linewidths of 0.18 micron from the second half of 2000 and successfully migrated to 0.15 micron process technology for both flash and Mask ROM in the fourth quarter of 2002.

We completed construction of Fab III, our third wafer fabrication facility, on a parcel of land next to Fab II, in July 2002. However, due to the adverse market conditions currently prevailing in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2003 or later. We currently expect Fab III to have a production capacity of approximately 20,000 eight-inch wafers per month when fully loaded and operational. Depending on the then prevailing market conditions, we expect to expand our production in Fab III in the future. Our capital expenditure plans in 2003 consist mainly of expenses related to the purchase of machinery and equipment for Fab III and the 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 a result of our common shares being listed on the Taiwan Stock Exchange, we are required to publish by the end of January of each year certain internally prepared unaudited unconsolidated financial information for the prior fiscal year. This subsection discusses our unaudited unconsolidated financial information for the year ended December 31, 2002 that we have published in response to that requirement. Such unaudited unconsolidated information is generated internally by us and is not subject to the same review and scrutiny, including internal auditing procedures and review by independent auditors, to which we subject quarterly unaudited unconsolidated financial information we publish from time to time pursuant to the requirements of the Taiwan Stock Exchange, or to our audited consolidated semiannual or annual financial statements. Furthermore, as this information is neither audited nor reviewed, it may vary materially from our audited consolidated financial statements for the same period. See ‘‘Risk Factors — Internally prepared annual financial information published by us from time to time pursuant to Taiwan Stock Exchange reporting requirements may be inaccurate and incomplete’’. In addition, by their nature, such unaudited unconsolidated financial information is not comparable in material respects with our audited consolidated financial statements, and should not be compared with our audited consolidated financial statements for prior periods. The financial data discussed below are unconsolidated and do not include the results of Macronix America, Inc. (‘‘Macronix America’’), Macronix (B.V.I.) Co. Ltd., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd. and Rui Hong Investment Inc. and the four wholly-owned subsidiaries of Macronix (B.V.I.) Co. Ltd. — Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. — and therefore is not representative of our consolidated results of operations. Any evaluation of the information presented should also take into account our audited consolidated financial statements and the notes to those statements included elsewhere in this offering circular. The following unaudited unconsolidated financial data for the year ended December 31, 2002 are not indicative of our results for any future period.

Summary Unconsolidated Internal Financial Information

Statement of Operations Data:
Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expenses . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) per share — basic . . . . . . . . . . . . .
Net income (loss) per share — diluted . . . . . . . . . . . .
Unconsolidated Balance Sheet Data:
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . .
Net property, plant and equipment. . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . .

2001
2002
(NT$)
(NT$)
(US$)
(Unaudited)
(in millions, except share and per share data)
21,361
16,075
480
(11,570)
(16,843)
(503)
9,791
(768)
(23)
(5,534)
(5,694)
(170)
4,257
(6,462)
(193)
689
460
14
(4,895)
(5,355)
(160)
51
(11,357)
(339)
(917)
—
—
(866)
(11,357)
(339)
(0.26)
(3.10)
(0.09)
(0.26)
(3.10)
(0.09)
23,824
19,363
579
38,767
39,241
1,173
70,543
64,953
1,941
7,872
15,284
457
19,508
19,339
578
27,403
34,738
1,038
43,140
30,214
903

Year Ended December 31, 2002 (unaudited) compared to Year Ended December 31, 2001

Net Sales Revenue. Our unconsolidated net sales revenue decreased 24.7% to NT$16,075 (US$480 million) in 2002 from NT$21,361 million in 2001. This decrease was primarily due to a decline in unconsolidated average selling prices as a result of the continued market downturn, despite an overall increase in sales volume in the relevant period.

Cost of Goods Sold and Gross Profit. Our unconsolidated cost of goods sold increased 45.6% to NT$16,843 million (US$503.4 million) in 2002 from NT$11,570 million in 2001. This increase was primarily due to the increased unconsolidated sales volume, which resulted in an increase in unconsolidated raw materials costs and subcontracting expenses for outsourced services such as testing and packaging. The increase also reflected a change in our product mix towards a higher proportion of flash products which have a higher manufacturing cost.

As a result of the foregoing we incurred an unconsolidated gross loss of NT$768 million (US$22.9 million) in 2002, compared to an unconsolidated gross profit of NT$9,791 million in 2001.

Operating Expenses. Unconsolidated operating expenses increased 2.9% to NT$5,694 million (US$170 million) in 2002 from NT$5,534 million in 2001. This increase was primarily due to an increase in selling expenses.

Operating Income (Loss). As a result of the foregoing, we incurred an unconsolidated operating loss in 2002 of NT$6,462 million (US$193 million), compared to unconsolidated operating income of NT$4,257 million in 2001.

Other Income. Unconsolidated other income decreased 33.2% to NT$460 million (US$13.7 million) in 2002 from NT$689 million in 2001. This decrease was largely due to a decrease in interest income.

Net Income (Loss). As a result of the forgoing, we had an unconsolidated net loss of NT$11,357 million (US$339.4 million) in 2002 compared to an unconsolidated net loss of NT$866 million in 2001.

Tender Offer

Under the terms of our outstanding 1% convertible bonds due 2005, the holders of such bonds have the option to require us to repurchase such bonds on February 1, 2003 at 121.422% of the principal amount thereof, together with accrued but unpaid interest to the date of redemption. In order to exercise such option, holders must deposit such bonds with the trustee or any paying agent not more than 60 days nor fewer than 30 days prior to the date of redemption. We provided notice of the commencement of the period for the deposit of such bonds for redemption on November 29, 2002.

As of November 30, 2002, we had repurchased in the open market approximately US$79 million aggregate principal amount of the outstanding 1% convertible bonds due 2005. On December 20, 2002, we repurchased an additional US$8 million aggregate principal amount of such bonds. We commenced a tender offer to repurchase the remaining outstanding bonds, and filed a Schedule TO relating to the tender offer with the SEC on December 24, 2002. Upon the expiration of the tender offer at 5: 00 p.m., New York time, on January 24, 2003, approximately US$61 million aggregate principal amount of such bonds had been tendered. In addition, approximately US$11 million aggregate principal amount of such bonds were redeemed pursuant to the holders’ option to require us to repurchase such bonds, and approximately US$0.3 million aggregate principal amount of such bonds remained outstanding. We accepted, and made payments totaling approximately US$75 million for, the bonds tendered pursuant to the tender offer on January 28, 2003.

Reorganization

In order to better serve the increasingly sophisticated needs of our customers, we recently announced a plan to reorganize our organizational and business unit structure. Our existing organizational and business unit structure is organized on the basis of on the principal types of products and services we provide, which consist of memory products, SOC products and services, and multimedia products. Under our new organizational and business unit structure, we intend to organize our operations into two main strategic business groups. We believe that our new organizational and business unit structure will increase our operational efficiency and effectiveness in meeting the needs of our customers, as well as improve our overall competitiveness.

Integrated Solutions Group

The integrated solutions group will be responsible for focusing on applications excellence and providing value-added design services and system-level platform solutions to our customers based upon the type of end-market application that such services and solutions are designed to serve. In addition, this business group will be responsible for developing strategic partnerships with our customers and leveraging on our close relationships with our platform and system partners to provide integrated solutions for customers. This business group will also be the channels and marketing arm of our company. In particular, this business group will be responsible for the implementation of our strategic initiative to leverage on our current strengths to penetrate key customers through the cross-selling of our products and services.

Integrated Technology and Manufacturing Group

operation and capacity planning of our manufacturing facilities. This business group will also be responsible for the management of the our relationship and technology arrangements with our strategic manufacturing partners to advance our portfolio of process technologies.

The implementation of this new organizational and business unit structure has already commenced and we expect to complete the reorganization and to fully execute and integrate our new organizational and business unit structure in the second quarter of 2003. See ‘‘Risk Factors — If we are unable to successfully execute or integrate our new organizational and business unit structure, our operations and future profitability may be adversely affected’’.

Our 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 preeminent 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:

. maintain our leadership in the nonvolatile memory market by enhancing our product design capabilities and upgrading our technology;
. capitalize on our strengths in nonvolatile memory and embedded applications to provide SOC design and production services;
. leverage our strengths in nonvolatile memory and a broad range of product and process capabilities to penetrate key customers through cross-selling;
. continue to focus on providing system-level solutions on wireless communications and portable consumer-electronics applications; and
. continue to upgrade our process technology and expand capacity prudently.

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 a part of this offering circular.

	The Offering
Issuer . . . . . . . . . . . . . .	Macronix International Co., Ltd.
Securities Offered . . . . . .	US$80,000,000 aggregate principal amount Zero Coupon Convertible Bonds
	Due 2008 (not including up to US$20,000,000 aggregate principal amount of
	the Bonds subject to the over-allotment option of the Initial Purchasers).
Over-allotment Option . . .	We have granted the Initial Purchasers an option exercisable within 30 days
	from the date of this offering circular to purchase up to an additional
	US$20,000,000 aggregate principal amount of the Bonds, solely to cover
	over-allotments. This over-allotment option is exercisable by the
	Bookrunner on behalf of the Initial Purchasers.
Offering Price. . . . . . . . .	100% of the aggregate 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 rankpari passuamong 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 (as defined
	herein) 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 of which is initially distributed outside the ROC
	by us 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 will not bear any interest except in limited circumstances
	described herein.
Taxation . . . . . . . . . . . .	All payments of principal, premium (if any) and interest (if any) 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, 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.

The Bonds will be represented by the Global Bond, which will be deposited with The Bank of New York, acting as a common depositary for Euroclear and Clearstream, on or about the Closing Date. Except as described herein, definitive certificates for the Bonds will not be issued in exchange for beneficial interests in the Global Bond.

The 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 the legend set forth under ‘‘Transfer Restrictions’’. The Global Bond, or any interest therein, may not be transferred except in compliance with the transfer restrictions set forth in such legend. See ‘‘The Global Bond’’.

Conversion . . . . . . . . . . . Unless previously redeemed or repurchased and cancelled and subject as otherwise provided herein, holders of the Bonds have the right to convert the Bonds during the Conversion Period (as defined herein) into our common shares, par value NT$10 per share.

The Conversion Notice (as defined herein) will, among other things, require the holder (or the beneficial owner of interests in the 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 ‘‘affiliate’’ as defined in Rule 144 under the Securities Act.

Conversion Period . . . . . . The period on or after March 12, 2003, up to the close of business on January 11, 2008, or if any of the Bonds shall have been called for redemption on or before January 18, 2008, then, with respect to such Bonds called for redemption, up to the close of business on the date seven days prior to the date fixed for redemption thereof; provided, however, that the Conversion Right (as defined herein) shall be suspended during, and the Conversion Period shall not include, any period under the laws and regulations of the ROC where the Conversion Right cannot be exercised, which period currently includes 60 days prior to the date of the annual ordinary shareholders’ meeting, 30 days prior to an extraordinary shareholders’ meeting, the period starting from three Trading Days prior to our notification to the Taiwan Stock Exchange of the record date for determination of shareholder rights with respect to distributions of stock dividends, cash dividends, shares from rights issues or other benefits or bonuses to such record date, or any such other period as 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 10, 2008 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 (as defined herein) 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.

Conversion Price. . . . . . . The initial Share Conversion Price will be NT$12.06 per common share, determined on the basis of a fixed exchange rate of NT$34.66 = US$1.00. 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. Special Conversion Price Reset . . . . . . . . . The Share Conversion Price may be adjusted downward after we send a notice to the holders within 30 days prior to the occurrence of a Put Date (as defined herein) or the Maturity Date, giving them an option to convert all or part of the Bonds at such adjusted Share Conversion Price). See ‘‘Description of the Bonds — Special Conversion Price Reset’’.

Redemption at Maturity . . Unless previously converted, redeemed or repurchased and cancelled, the Bonds will be redeemed on the Maturity Date at a redemption price equal to 100% of the outstanding principal amount thereof.

Redemption at Our Option We may redeem the Bonds (being US$1,000,000 in principal amount or an integral multiple thereof), in whole or in part during the First Optional Redemption Period or the Second Optional Redemption Period at a price equal to the Early Redemption Amount if the average Market Price of our common shares translated into U.S. dollars at the Prevailing Rate described below of our common shares for a period of 30 consecutive Trading Days, the last of which occurs not more than 5 days prior to the date upon which notice of such redemption is published, is at least, in the case of the First Optional Redemption Period, 125%, and in the case of the Second Optional Redemption Period, 120% of the Share Conversion Price in effect on each such Trading Day translated into U.S. dollars at the rate of NT$34.66 = US$1.00. The Prevailing Rate for the translation of the average Market 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 the Maturity Date at a price equal to the Early Redemption Amount, 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 each of February 10, 2004, February 10, 2005, February 10, 2006 and February 10, 2007, at the redemption prices equal to 100%, 102%, 104% and 106% of the outstanding principal amount, respectively. See‘‘Description of Bonds — Redemption at the Option of Holders’’.

Repurchase in the Event of Delisting . . . . If our 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 we notify you of the occurrence of such event at a price equal to the Early Redemption Amount.

Tax Redemption . . . . . . . The Bonds may be redeemed, at our option, in whole but not in part, at a price equal to the Early Redemption Amount if we have or will become obliged to pay additional amounts as provided or referred to under ‘‘Description of Bonds — 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 official interpretation of such laws or regulations, which change or amendment becomes effective on or after the Closing Date, and such obligation cannot be avoided by us taking reasonable measures available to us.

Governing Law . . . . . . . . The Indenture (as defined 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. . . . . . . . . . . . . . Application has been made to list the Bonds on the Luxembourg Stock Exchange. Our outstanding common shares are listed on the Taiwan Stock Exchange and application will be made for the common shares to be issued upon conversion of the Bonds to be listed on the Taiwan Stock Exchange.
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 Arrangements . . We have agreed not to, among other things, offer or sell any of our common shares or ADSs or securities convertible into or exchangeable or excisable for any of our common shares or ADSs without the permission of the Bookrunner for a period of 90 days from the date of this offering circular. See ‘‘Plan of Distribution’’.
Risk Factors . . . . . . . . . . For a discussion of certain factors that should be considered in connection with an investment in the Bonds, see ‘‘Risk Factors’’.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The summary consolidated statement of operations data for the years ended December 31, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002, and the summary balance sheet data as of December 31, 2000 and 2001 and as of June 30, 2002 presented below are derived from our audited consolidated financial statements included in this offering circular. These financial statements have been audited by Diwan, Ernst & Young, independent public accountants. The summary consolidated balance sheet data as of December 31, 1999 presented below are derived from our audited consolidated financial statements not included in this offering circular. These financial statements have also been audited by Diwan, Ernst & Young, independent public accountants. The summary consolidated statement of operations data for the six months ended June 30, 2002 may not be indicative of our results of operations for the full year 2002.

The financial data set forth below should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the related notes included in this offering circular, ‘‘Selected Consolidated Financial Information’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. Our consolidated financial statements are prepared and presented in accordance with ROC GAAP, which differ in certain significant respects from U.S. GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — U.S. GAAP Reconciliation’’.

Consolidated Statement of Operations Data: ROC GAAP Net sales revenue . . . . . . . . . . . . Cost of goods sold. . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . Operating income (loss) . . . . . . . . Total other income . . . . . . . . . . . Total other expenses . . . . . . . . . . Income (loss) before taxes . . . . . . Income tax benefit (expense) . . . . Net income (loss) . . . . . . . . . . . . Net income (loss) per share — basic(1) . . . . . . . . . . . . . . . Net income (loss) per share — diluted(1) . . . . . . . . . . U.S. GAAP Gross profit . . . . . . . . . . . . . . . . Operating income (loss) . . . . . . . . Net income (loss)(2) . . . . . . . . . . . Net income (loss) per common share — basic(3) . . . . . . . . . . . . . . . Net income (loss) per common share — diluted(3) . . . . . . . . . . . . . .		Year ended and as of December 31,
	1999 (NT$) 16,957 (12,124) 4,833 (3,258) 1,575 846 (1,830) 591 316 907 0.27 0.27 4,558 1,237 1,861 0.58 0.58

Consolidated 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,
	1999 (NT$) 14,303 32,028 51,197 8,868 15,946 24,814 26,383 51,578 26,433 8,129 4,855 5,062 2.73 2.73 3,315 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 no additional expense or income in 1999, an additional expense of NT$1,622 million in 2000, and an additional expense of NT$4,273 million (US$128 million) in 2001. The differences of accounting treatment with respect to derivative contracts under the two accounting principles resulted in an increased income of NT$1,301 million in 1999, an additional expense of NT$898 million in 2000, and increased income of NT$228 million (US$7 million) in 2001.
(3) Retroactively adjusted for all stock dividends declared. See note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 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.

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 Company

We are vulnerable to cyclical downturns in the semiconductor industry and conditions in the markets for the end use applications of our products.

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. This most recent downturn resulted in an even more significant deterioration in the average selling prices, as well as demand, for most of our products and adversely affected 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 continue to be adversely affected during future cyclical downturns, and our business, financial condition and results of operations may suffer accordingly.

Our 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 had net income under ROC GAAP of NT$907 million in 1999 and NT$10,613 million in 2000, and a net loss of NT$866 million (US$26 million) in 2001. In addition, we had a net loss of NT$7,184 million (US$215 million) in the six months ended June 30, 2002 compared to a net loss of NT$2,429 million in the same period in 2001. We also experienced a net loss of NT$9,333 million (US$279 million) in the nine months ended September 30, 2002 compared to a net income of NT$2,468 million in the same period in 2001. Our future net sales revenue, gross profit, operating income, net income and more generally, our business and operations, may vary significantly due to a combination of many factors, including:

. changes in general economic and business conditions;
. the cyclical nature of both the semiconductor industry and the markets served by our customers;
. changes in average selling prices of our products;
. 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;
. our ability to obtain adequate labor, equipment, components, raw materials, electricity, water and other required production inputs on a timely and cost-efficient basis;
. capital expenditures and production uncertainties relating to the roll-out of new facilities;

. our ability to achieve target production yields, especially for new products;
. our ability to accurately predict customer demand, as we must commit to significant capital expenditures in anticipation of future orders;
. natural disasters, such as fires, droughts, floods and earthquakes, or industrial accidents;
. 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.

Due to these factors and other risks, many of which are beyond our control, you should not rely on quarter-to-quarter or year-to-year comparisons to predict our future performance. Unfavorable changes in any of the above factors may adversely affect our business and operations. In addition, it is possible that in some future periods our operating results may be below the expectations of public market analysts and investors, which may in turn cause the prices of our securities to fall.

We have experienced increasing net losses since 2001; if this continues, the value of your investment may be adversely affected.

We experienced net losses of NT$866 million (US$26 million) in 2001, NT$7,184 million (US$215 million) in the six months ended June 30, 2002 and NT$9,333 million (US$279 million) in the nine months ended September 30, 2002, primarily due to a decline in the average selling prices of our products resulting from the continued semiconductor industry downturn. We cannot assure you that our net losses will not continue or increase or that we will return to being profitable in the future. If we continue to experience net losses from our results of operations, the value of your investment may be adversely affected. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ for a discussion of our results of operations.

Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations.

We are a party to numerous loan and other agreements relating to the incurrence of debt, many of which include restrictive covenants and broad default provisions. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. In the event of a prolonged downturn in the demand for our services as a result of a downturn in the worldwide semiconductor industry or otherwise, we cannot assure you that we will be able to remain in compliance with our financial covenants which, as a result, may lead to a default. Furthermore, a default under one agreement may also trigger cross-defaults under our other agreements. In the event of default, we may not be able to cure the default or obtain a waiver on a timely basis, and our operations could be significantly disrupted or harmed. An event of default under any agreement governing our existing or future debt, if not cured or waived, could have a material adverse effect on our liquidity, financial condition and results of operations.

As a result of the reduced levels of operating cash flow due primarily to the recent downturn in the worldwide semiconductor industry, we had failed to comply with certain financial covenants in one of our loan agreements. We have obtained waivers from the relevant lender relating specifically to such noncompliance. However, there is no assurance that such non-compliance may not, through broadly worded cross-default provisions, result in default under some of the agreements governing our other existing debt.

If we continue to experience significant investment losses from our investments, our financial condition and results of operations 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. As a result of the market downturn in 2001, which continued through 2002, many of our invested companies experienced significant declines in their operating results. This in turn caused us to incur substantial investment losses as well as a reduction in the value of our equity interests in these companies. We incurred a net investment loss from our investments of approximately NT$780 million (US$23 million) in 2001, an increase of approximately NT$163 million compared to approximately NT$617 million in 2000. In particular, we recorded an unrealized loss in Tower Semiconductor Ltd. (‘‘Tower Semiconductor’’) of NT$646 million (US$19 million) as of December 31, 2001 due to a decline in the market value of the shares of Tower Semiconductor. This unrealized loss was charged to shareholders’ equity. We incurred a net investment loss from our investments of approximately NT$1,005 million (US$30 million) for the nine months ended September 30, 2002. Any further significant losses from our investments in the future may materially and adversely affect our financial condition and results of operations.

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 Taiwan Stock Exchange reporting requirements may be inaccurate and incomplete.

Effective as of January 1, 2002, the Taiwan Stock Exchange requires listed companies that publish financial forecasts to report to the Taiwan Stock Exchange and publish by the end of January each year certain internally prepared unaudited unconsolidated financial information regarding such companies during the prior fiscal year. We have complied with this requirement for the years ended December 31, 2001 and 2002 and we intend to continue to comply with this requirement. The unaudited unconsolidated 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 unaudited unconsolidated financial information we publish from time to time pursuant to the requirements of the Taiwan Stock Exchange, or to our audited consolidated semiannual or annual financial statements. Furthermore, as this information is neither audited nor reviewed, it may vary materially from our audited consolidated financial statements for the same period.

A decrease in demand for consumer electronics, computer and computer peripheral and other communications products may significantly decrease the average selling prices for our products and reduce our revenue and profitability.

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 adversely affect our results of operations. Since the end of 2000, worldwide demand for electronic products has experienced a rapid and sudden decline. In particular, declining average selling prices of these products have resulted in significant downward pressure on the

prices of our products that are used in these products. If the average selling prices for these products continue to decrease, the average selling prices for our products will also continue to decrease, and our revenue and profitability will suffer.

If we cannot compete successfully in our industry, we may lose customers and our revenue may decrease.

The semiconductor industry is highly competitive. We compete with major international semiconductor companies, including Intel Corporation (‘‘Intel’’), SanDisk Corporation, Atmel Corporation (‘‘Atmel’’), Sharp Corporation (‘‘Sharp’’), Advanced Micro Devices, Inc. (‘‘Advanced Micro Devices’’), STMicroelectronics N.V. (‘‘STMicroelectronics’’), Samsung Electronics Co., Ltd. (‘‘Samsung’’), NEC Corporation (‘‘NEC’’), Fujitsu Limited (‘‘Fujitsu’’), Hynix Semiconductor Inc., Toshiba Corporation (‘‘Toshiba’’), Oki Semiconductor Co. (‘‘Oki’’) and various other industry participants. Many of our competitors have greater access to capital and technology and substantially greater production, research and development, sales and marketing and other resources than we do. As a result, these companies may be able to compete more aggressively over a longer period of time than our company.

The principal elements of competition in our industry include:

. technological expertise and technical competence;
. time-to-market;
. ability to obtain raw materials and components on a timely and cost-effective basis;
. research and development capabilities;
. available capacity;
. manufacturing capabilities and yields;
. customer service; and
. price.

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, which would create additional competition. Many of our competitors have shown a willingness to quickly and sharply reduce prices, as they did in 2001, in order to maintain high capacity utilization in their facilities during periods of reduced demand. Any renewed erosion in the prices for our products could cause our profits to decrease and have a material adverse effect on our financial condition and results of operations.

Due to our high percentage of fixed costs, we will be unable to maintain our profitability at past levels if we are unable to achieve relatively high capacity utilization rates.

Our operations are characterized by relatively high fixed costs, and we expect to continue to incur substantial depreciation and other expenses. Our profitability depends in part not only on absolute pricing levels for our products, but also on utilization rates for our equipment, commonly referred to as ‘‘capacity utilization rates’’. In particular, increases or decreases in our capacity utilization rates can have a significant effect on gross margins since per-unit costs generally decrease as fixed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization rates in our operations due to relatively low growth in demand, which leads to reduced margins during that period. During 2001, we experienced lower than anticipated utilization rates in our operations due to a significant decline in worldwide demand for our products, which led to reduced margins during that period. Although

our capacity utilization rates have improved recently, we cannot assure you that we will be able to maintain or surpass our past profitability levels if we cannot consistently achieve or maintain relatively high capacity utilization rates.

Our customers generally do not place purchase orders in advance, which makes it difficult for us to predict our future revenues, adjust production costs and allocate capacity efficiently and on a timely basis.

Our customers generally place purchase orders between one to two months before the desired shipment date, and our contracts with customers generally do not require minimum purchases of our products. In addition, due to the cyclical nature of the semiconductor industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significantly backlog. The lack of significant backlog makes it difficult for us to forecast our revenues and allocate resources for future periods. Moreover, our expense levels are based in part on our expectations of future revenue and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls. We expect that our future revenue in any quarter will continue to be substantially dependent upon purchase orders received in that quarter. We cannot assure you that any of our customers will continue to place orders with us in the future at the same level as in prior periods. We also cannot assure you that the volume of our customers’ orders will be consistent with our expectations when we plan our expenditures for raw materials, components, labor and equipment.

As 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 1999, 2000, 2001 and the six months ended June 30, 2002, approximately 62.8%, 57.6%, 56.8% and 45.6%, 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. For example, Nintendo, which is our largest customer, began marketing in September 2001 a new game platform that utilizes a DVD-ROM-based storage system. 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. We cannot assure you, however, that these initiatives will be successful. Any significant reduction in the use of mask ROMs in the video game manufacturing industry will significantly reduce our revenue and adversely affect our business, financial condition and results of operations.

We intend to increase our manufacturing capacity in flash products, which may expose our business and operations to additional risks that may adversely affect our financial condition and results of operations.

We intend to increase our manufacturing capacity in flash products in order to diversify our product profile and capitalize on the growing demand for these products. However, unlike certain semiconductor products that require advance technology and substantial design capacity, flash products are commodity products. As a result, flash products generally compete on the basis of price and volume and require a large scale of production to sustain profit margins. Furthermore, the flash products market is dominated by large players, including Advanced Micro Devices, Intel, Sharp and ST Microelectronics, all of which have greater financial and other resources than our company. Flash products are also subject to inventory obsolescence much more quickly. As of December 31, 2001 and the six months ended June 30, 2002, flash products accounted for approximately 55.6% and 65.4% of our product inventory, respectively. Our business and profitability will suffer if we are unable to compete effectively in the flash products market. Moreover, any inventory loss from flash products may adversely affect our financial condition and results of operations.

If we are unable to successfully execute or integrate our new organizational and business unit structure, our operations and future profitability may be adversely affected.

We recently announced a reorganization of our organizational and business unit structure, under which our existing organizational and business unit structure organized on the basis of memory products, SOC products and services, and multimedia products will be reorganized into two main strategic business groups. However, we may not be able to effectively and efficiently assimilate our business, operations and personnel under the new organizational and business unit structure, and may experience disruption to our business and encounter difficulty in implementing effective operational, management and financial information systems. Moreover, we cannot assure you that our new organizational and business unit structure will be compatible with our existing business model. Any failure to successfully execute or integrate our new organizational and business unit structure may adversely affect our operations and future profitability.

Any delay or reduction 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 1999, 2000, 2001 and the six months ended June 30, 2002, approximately 46.0%, 32.5%, 38.7% and 24.7%, respectively, of our net sales revenue was derived from sales to Megachips Corporation (‘‘Megachips’’), 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 business, financial condition and 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, which is different from mask ROMbased cartridges used in Nintendo’s other game platforms. This new game platform came to market in Japan in September 2001, in the United States in November 2001 and in Europe in May 2002. As a result, we have been shifting our 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 or reduces its orders from us, or if we cannot replace Nintendo with a customer purchasing our products at similar levels, our sales may decline significantly and our business, financial condition and results of operations will be adversely affected.

We depend on our technology partners to advance our portfolio of process technologies, and we may not be able to advance our portfolio of process technologies if we fail to maintain our existing arrangements with our technology partners or enter into new arrangements with other technology providers.

Enhancing our product design and manufacturing process technologies is critical to our ability to provide products and services for our customers. In particular, we have an internal research and development team focusing on developing new semiconductor manufacturing process technologies. We also depend on our technology arrangements 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 Mitsubishi Electric Corporation (‘‘Mitsubishi’’) and Tower Semiconductor. We believe these arrangements also reduce our development costs and capital expenditures and increase the capacity utilization rates in our fabrication plants. If we are unable to maintain successful technology arrangements on mutually beneficial economic terms, or are unable to enter

into new technology arrangements 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 may adversely affect our competitiveness as well as our business and prospects.

We depend on select personnel and could be affected by the loss of their services.

We depend on the continued service of our executive officers and skilled technical and other personnel. Our business could suffer if we lose the services of any of these personnel and cannot adequately replace them. Although some of these management personnel have entered into employment agreements with us, most of these employment agreements do not specify the duration of employment. Therefore, the relevant management personnel may, subject to the terms of the relevant agreements, terminate such agreements at any time. We are not insured against the loss of any of our personnel. In particular, we may be required to substantially increase the number of these employees in connection with our future expansion plans, and there is intense competition for their services in the semiconductor industry. We may not be able to either retain our present personnel or attract additional qualified personnel as and when needed. In addition, we may need to increase employee compensation levels in order to attract and retain our existing officers and employees and the additional personnel that we expect to require. Moreover, 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.

Because of the highly cyclical nature of our industry, our capital requirements are difficult to plan. If we cannot obtain additional capital when we need it, our growth prospects and future profitability may be adversely affected.

Our capital requirements are difficult to plan in our highly cyclical and rapidly changing industry. We will need capital to fund the expansion of our facilities as well as research and development activities in order to remain competitive. We believe that our existing cash and cash equivalents, short-term investments, expected cash flow from operations and existing credit lines under our short-term loan facilities will be sufficient to meet our capital expenditures, working capital, cash obligations under our existing debt and lease arrangements, and other requirements for at least the next twelve months. However, future capacity expansions or market or other developments may cause us to require additional funds. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:

. our future financial condition, results of operations and cash flows;
. general market conditions for financing activities by semiconductor companies; and
. economic, political and other conditions in Taiwan and elsewhere.

If we are unable to obtain funding in a timely manner or on acceptable terms, our growth prospects and future profitability may decline.

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 and cost-effective products, we need to invest significantly in research and development. We currently intend to spend annually 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 reduce our competitiveness and jeopardize our long-term prospects.

Our results of operations may continue to be adversely affected by the writedown of inventory resulting from an industry downturn.

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 deteriorating market conditions 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. Inventory loss provisions are recognized as non-operating losses under ROC GAAP. We held approximately 298 days of net inventory as of September 30, 2002, compared to 285 days as of September 30, 2001. In addition, we recorded inventory losses of NT$3,133 million (US$94 million) in the nine months ended September 30, 2002, compared with NT$700 million in the same period in 2001. 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. Furthermore, due to the cyclical nature of the semiconductor industry, we cannot assure you that we will be able to maintain our inventories at a satisfactory level or that we will not incur additional losses on inventories in the future.

If we are unable to manage our expansion effectively, our growth prospects may be limited and our future profitability may be affected.

We have significantly expanded our operations in recent years, and expect to continue to expand our operations in the future. Rapid expansion puts strain on our managerial, technical, financial, operational and other resources. As a result of our expansion, we have implemented and will continue to need to implement additional operational and financial controls and hire and train additional personnel. Any failure to manage our expansion effectively could lead to inefficiencies and redundancies and result in reduced growth prospects and profitability.

If we are unable to effectively manage seasonal fluctuations in the demand for our products, our business and profitability may be adversely affected.

We have in the past experienced, and we expect to continue to experience, seasonal fluctuations in the demand for our products. In particular, we generally operate at a higher capacity utilization level during the first and fourth quarters of the year. If we are unable to increase our manufacturing capacity to meet seasonal or additional future demand on a timely basis, our customers may seek other manufacturing sources to meet their needs and our business and profitability may be adversely affected. In addition, if we are unable to effectively manage our manufacturing capacity during a seasonal downturn in demand, our results of operations would also be adversely affected.

Delays or other constraints in the expansion or construction of our fabrication plants could delay increases in our capacity, which may adversely affect our growth and prospects.

We completed construction of Fab III in July 2002. However, due to the adverse market conditions currently prevailing in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2003 or later. We expect to utilize part of the space in Fab III to house equipment relating to the planned upgrade of the manufacturing facilities in Fab II. We could delay the commencement of full commercial operation of Fab III beyond 2003 if there is no significant improvement in market conditions.

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

Our revenues and profitability may decline if we are unable to obtain adequate supplies of raw materials in a timely manner and at a reasonable price.

Our manufacturing operations require that we obtain adequate supplies of raw materials on a timely basis. Our primary raw materials include six-inch and eight-inch wafers, chemicals and gases and other inputs, which we purchase from a limited number of suppliers. In particular, wafer manufacturing capacity and supply in the Taiwan semiconductor industry have from time to time been, and in the future may be, limited, and our future growth will depend in large part on securing a continuous supply of six-inch and eight-inch wafers. We cannot assure you that we will be able to obtain adequate supplies of raw materials in a timely manner and at a reasonable price. Our revenue and net income could decline if we are unable to obtain adequate supplies of high quality raw materials in a timely manner or if there are significant increases in the costs of raw materials that we could not pass on to our customers.

If we are unable to obtain additional equipment in a timely manner and at reasonable cost, our competitiveness and future profitability may be adversely affected.

We expect to purchase a significant amount of additional equipment to expand our operations. In particular, our plans for the enhancement of Fab I and Fab II, as well as the commencement of full commercial operations of Fab III, will require additional advanced and expensive equipment. The market for our equipment is characterized, from time to time, by intense demand, limited supply and long delivery cycles. In addition, we do not have binding supply agreements with any of our suppliers and acquire our equipment on a purchase order basis, which exposes us to changing market conditions and other substantial risks. As a result, if we are unable to obtain equipment in a timely manner and at a reasonable cost, we may not be able to expand our manufacturing capacity and fulfill our customers’ orders, which could adversely affect our growth prospects as well as our financial condition and results of operations.

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 enter into derivative contracts from time to time with our common shares as the underlying reference securities. Certain of these contracts also include a reference to foreign currency exchange rates. These contracts may significantly affect our net income or loss for any given period. We recorded losses of NT$297 million in 2000 and NT$171 million (US$5 million) in 2001 with respect to these derivative contracts under U.S. GAAP. These losses were primarily attributable to a significant decline in the trading price of our common shares, as well as significant fluctuations in the exchange rate between the Japanese yen and the U.S. dollar. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction — Equity Derivative Contracts’’. Future decreases in the trading price of our common shares or fluctuations in the exchange rate between the Japanese yen and the U.S. dollar may adversely affect our financial condition and results of operations.

Derivative contracts may expose us to risks that may adversely affect our financial condition and results of operations.

We enter into a variety of derivative transactions from time to time for both hedging and trading purposes. These 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, 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 could reduce our risk of loss by wholly or partially offsetting the negative effect of unfavorable price movements in the hedged item, hedging strategies could 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 pledge assets as collateral security, 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 these derivative instruments, we may be required to continue to pledge such assets, maintain such accounts or make such payments until the positions expire or mature. Our ability to close out a position in a derivative instrument prior to its 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. We cannot assure you that we will be able to close out a derivative position at a time and price that is favorable to us.

We are also exposed to the credit risk of the counterparties to our derivatives contracts. In particular, any failure by a counterparty to honor the terms of its derivatives contracts with us may adversely affect our financial condition and results of operations.

We are vulnerable to natural disasters and other events beyond our control, which could severely disrupt the normal operation of our business and adversely affect our earnings.

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 result in the loss of customers. As a result of the rapid growth of the Taiwan semiconductor industry, which is 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 addition, many areas in Taiwan experienced a severe drought in 2002, causing the Taiwan authorities to announce water-rationing measures in the northern parts of Taiwan. If a drought occurs again and the authorities are unable to source water from alternative sources in sufficient quantities, we may be required to temporarily shut down or substantially reduce the operations of our facilities in the affected areas, which would seriously affect our operations. Taiwan is also susceptible to earthquakes and has experienced severe earthquakes which caused significant property damage and loss of life, particularly in the central and eastern parts of Taiwan. These earthquakes damaged production facilities and equipment, and adversely affected the operations of many companies involved in the semiconductor and other industries, including our company. Moreover, there were interruptions to our production schedule primarily as a result of power outages caused by the earthquakes.

While we maintain several insurance policies relating to our business, including business interruption insurance, we cannot assure you that the insurance coverage will be sufficient to protect us from the losses resulting from natural disasters and other events beyond our control. In addition, we cannot assure you that the premium payable for these insurance policies upon renewal will not increase substantially, which may adversely affect our financial condition and results of operations. Furthermore, any failure or inability to obtain the necessary insurance coverage on a timely basis, or at all, may severely affect or materially disrupt our business and operations.

Our production facilities as well as many of our suppliers and customers and providers of semiconductor manufacturing services, including foundries, are located in Taiwan. If our customers are affected by an earthquake, a drought or other natural disasters, it could result in a decline in the demand for our products and services. If our suppliers and providers of semiconductor manufacturing services are affected, our production schedule could be interrupted or delayed. As a result, a major earthquake, drought or other natural disaster in Taiwan could severely disrupt the normal operation of business and have a material adverse effect on our financial condition and results of operations.

If we violate environmental regulations, we may be required to pay significant fines, our operations may be delayed or interrupted and our business could suffer.

We are subject to environmental regulations relating to our manufacturing processes, including the use, storage, discharge and disposal of chemical by-products of, and water used in, our production process. A failure, or a claim that we have failed, to comply with these environmental regulations could result in the assessment of damages or imposition of significant fines, delays in our production and capacity expansion and negative publicity, all of which could harm our business. New regulations could also require us to acquire costly equipment or to incur other significant expenses. In addition, any failure by us to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to future liabilities that may have a material adverse effect on our financial condition and results of operations.

We are an ROC company and, because the rights of shareholders under ROC law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.

Our corporate affairs are governed by our articles of incorporation and by the laws governing corporations incorporated in the ROC. The rights of shareholders and the responsibilities of management and the members of the board of directors under ROC law are different from those applicable to a corporation incorporated in the United States. As a result, public shareholders of ROC companies may have more difficulty in protecting their interests in connection with actions taken by management or members of the board of directors than they would as public shareholders of a U.S. corporation.

Any impairment charges required under U.S. GAAP may have a material adverse effect on our net income on a U.S. GAAP reconciled basis.

Under currently effective U.S. GAAP, we are required to evaluate our equipment, goodwill and other long-lived assets for impairment whenever there is an indication of impairment. If certain criteria are met, we are required to record an impairment charge. We can give no assurance that impairment charges will not be required in periods subsequent to December 31, 2001. We are currently not able to estimate the extent and timing of any goodwill impairment charge for future years. Any goodwill impairment charge required under U.S. GAAP may have a material adverse effect on our net income for periods subsequent to December 31, 2001 on a U.S. GAAP-reconciled basis. Please see note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular for a discussion of the criteria which, if met, may require impairment charges.

The determination of an impairment charge at any given time is based significantly on our expected results of operation over a number of years subsequent to that time. As a result, an impairment charge is more likely to occur during a period when our operating results are otherwise already depressed.

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 consolidated financial statements are prepared under ROC GAAP, which differ in many significant respects from U.S. GAAP. For example, ROC GAAP do 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 instruments. 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 income of NT$1,861 million in 1999, net income of NT$8,016 million in 2000 and net loss of NT$4,463 million (US$133 million) in 2001, as compared to, under ROC GAAP, net income of NT$907 million, net income of NT$10,613 million and net loss of NT$866 million (US$26 million) for the same periods, respectively. See note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular.

Risks Relating to Technology and Intellectual Property

Our profitability depends on our ability to respond to rapid technological changes in the semiconductor industry.

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 a rapidly changing technological environment. In particular, we expect that we will need to constantly offer more sophisticated technologies and processes in order to respond to competitive industry conditions and customer requirements. We cannot assure you, however, that we will be able to identify new product opportunities or to timely develop and successfully market new products. We may also experience delays in developing or achieving volume production of new products. Moreover, new products may fail to gain market acceptance, and existing products may become obsolete. For example, our sales of mask ROM products have been falling and may continue to fall as Nintendo shifts to DVD-ROM technology in its newer products. If we fail to develop, or obtain access to, advances to technologies and processes, we may become less competitive and less profitable.

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can significantly increase our costs and delay product shipments to our customers.

Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of products in process. As system complexity has increased and process technology has become more sophisticated, requirements for precision have become even more stringent. In particular, 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 business and profitability may suffer and our customers may cancel their orders or return our products.

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. We cannot assure you that these measures will 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. In addition, patents may not be issued for pending or future applications. Furthermore, if patents are issued, they may be challenged, invalidated or circumvented. Moreover, 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
. 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 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

Strained relations between the ROC and the People’s Republic of China could adversely affect our business and the market value of your investment.

Our principal executive offices and most of our assets are located in, and most of our revenue is derived from, our operations in Taiwan. The ROC has a unique international political status. The People’s Republic of China asserts sovereignty over all of China, including Taiwan. The People’s Republic of China

government does not recognize the legitimacy of the ROC government. Although significant economic and cultural relations have been established in recent years between the ROC and the People’s Republic of China, relations have often been strained and the People’s Republic of China government, has indicated that it may use military force to gain control over Taiwan in some circumstances, such as the declaration of independence by the ROC. Relations between the ROC and the People’s Republic of China have been particularly strained in recent years. Past developments in relations between the ROC and the People’s Republic of China have on occasion depressed the market price of the securities of ROC companies. Relations between the ROC and the People’s Republic of China and other factors affecting the political or economic conditions in Taiwan could have a material adverse effect on our financial condition and results of operations, as well as the market price and the liquidity of our securities.

Fluctuations in exchange rates could result in foreign exchange losses.

Currently, the majority of our revenue is denominated in Japanese yen and U.S. dollars. Our costs of revenues and operating expenses, on the other hand, are incurred in several currencies, including NT dollars and U.S. dollars. In addition, a substantial portion of our capital expenditures has been, and is expected to continue to be, primarily denominated in Japanese yen and U.S. dollars. Fluctuations in exchange rates, primarily among the U.S. dollar, the NT dollar and the Japanese yen, will affect our costs and operating margins. In addition, these fluctuations could result in exchange losses and increased costs in NT dollar and other local currency terms. Despite hedging and mitigating techniques implemented by us, fluctuations in exchange rates have affected, and may continue to affect, our financial condition and results of operations. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk — Foreign Currencies’’.

Disruptions in the international trading environment may significantly reduce our international sales and revenue.

A substantial portion of our net sales revenue is derived from sales from Taiwan to customers located outside Taiwan. In 1999, 2000 and 2001 and the six months ended June 30, 2002, export sales from Taiwan to our customers outside Taiwan accounted for 78%, 74%, 73% and 72%, 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 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 may significantly reduce our international sales and revenue.

The trading prices of the Bonds may be adversely affected by the general activities of the Taiwan Stock Exchange, the trading price of our common shares and the economic performance of Taiwan.

Our common shares are listed on the Taiwan Stock Exchange. The trading prices of the Bonds may be affected by the trading price of our common shares on the Taiwan Stock Exchange and the economic performance of Taiwan. The Taiwan Stock Exchange is smaller and, as a market, more volatile than the securities markets in the United States and a number of European countries. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities, and there are currently limits on the range of daily price movements on the Taiwan Stock Exchange. 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. On March 13, 2000, the Taiwan Stock Exchange Index experienced a 618 point drop, which represented the single largest decrease in the Taiwan Stock Exchange Index in its history. The Taiwan Stock Exchange Index experienced a 17% increase in 2001 and a 15% decrease in the nine months ended September 30, 2002. From January 1, 2002 to January 27, 2003, daily closing prices of our common shares ranged from NT$9.20 per share to NT$29.73 per share. On January 27, 2003, the Taiwan Stock

Exchange Index closed at 4,972.59, and the daily closing value of our common shares was NT$11.90 per share. The Taiwan Stock Exchange is particularly volatile during times of political instability, such as when relations between Taiwan and the People’s Republic of China are strained. Moreover, the Taiwan Stock Exchange has experienced problems such as market manipulation, insider trading and payment defaults, and the ROC government has from time to time intervened in the stock market by purchasing stocks listed on the Taiwan Stock Exchange. The recurrence of these or similar problems could decrease the market prices and liquidity of the Bonds and our common shares.

Risks Relating to the Bonds, our Common Shares and our ADSs

An active trading market for the Bonds may not develop.

The Bonds constitute a new issue of securities for which there is no existing market. Application has been made to list the Bonds on the Luxembourg Stock Exchange. Trading is expected to commence after the Bonds are first issued. We cannot assure you that such listing will be received or, if received, will provide sufficient liquidity for the Bonds. Although the Initial Purchasers currently intend to make a market in the Bonds they are not obligated to do so, and any market-making activity with respect to the Bonds, if commenced, may be discontinued at any time.

Holders of the Bonds will bear the risk of fluctuations in the price of our common shares and ADSs.

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

Holders of the Bonds will have no rights as holders of our common shares until the conversion of the Bonds

Unless and until the holders of the Bonds acquire common shares upon conversion thereof, the holders of the Bonds will have no rights with respect to the common shares, including any voting rights or rights to receive any regular dividends or other distributions with respect to the common shares. Upon conversion of the Bonds, these holders will be entitled to exercise the rights of holders of common shares as applicable only as to actions for which the applicable record date occurs after the date of the conversion.

We cannot assure you that the market for our common shares 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 27, 2003, the average daily trading volume for our common shares was 61,625,616 common shares. We cannot assure you that the liquidity of our common shares will be maintained or enhanced after this offering. Since the holders of the Bonds cannot convert the Bonds into our common shares until March 12, 2003, and may elect never to exercise their conversion rights, the sale of the Bonds will not result in additional liquidity of our common shares until such dates, if at all. 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 may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results.

We have limited liquidity and may be unable to repurchase our Bonds or our other outstanding debt securities when requested by holders.

Under certain circumstances summarized in this offering circular and set forth in detail in the Indenture, the holders of the Bonds may require us to repurchase all or a portion of the Bonds. The terms of some of our other outstanding debt securities contain similar provisions. We cannot assure you that we will have enough funds or would be able to arrange for sufficient funding to repurchase all the Bonds or our other outstanding debt securities tendered by the holders. Our ability to repurchase the Bonds or our other outstanding debt securities may also be limited by applicable law as well as the terms of our outstanding indebtedness.

We may have to spend significant amounts of capital to repurchase the Bonds or our other outstanding debt securities put to us under such circumstances, and obligations to make such purchases may occur at a time, or from time to time, when we have insufficient liquidity to make such purchases. Such purchases may require us to borrow funds to otherwise convert long-term investments to liquid funds, which could adversely affect our financial condition and the price of our Bonds, common shares or ADSs.

Future sales of securities by our company or existing shareholders or future issuances of securities by our company may have a dilutive effect and decrease the value of your investment.

The market price of the Bonds, our common shares and ADSs could decline as a result of future sales of a large number of ADSs or common shares or the perception that such sales could occur. If we or the holders of our common shares sell a large number of common shares or the holders of ADSs sell a large number of ADSs, the market price for the Bonds, common shares or ADSs could be depressed. Although we have agreed not to offer, sell, contract to sell, announce an intention to sell, pledge or otherwise dispose of, directly or indirectly, any additional Bonds or common shares or securities convertible into or exchangeable or exercisable for any of the Bonds or common shares without the prior written consent of the Initial Purchasers for a period of 90 days from the date of this offering circular, if the Initial Purchasers consent, in their sole discretion, to an earlier sale, or when the 90-day period expires, we will be able to sell such securities in the public market, subject to applicable legal restrictions.

In addition, we plan to issue, from time to time, additional common shares in connection with employee compensation as well as to finance possible future investments or acquisitions. The issuance of additional shares may have a dilutive effect on other shareholders and may cause the price of our common shares to decrease. See ‘‘Management — Share Option Plan’’ for a discussion of the share option plan that we have adopted for the benefit of all of our officers and employees and those of our subsidiaries.

Holders of the Bonds will be required to appoint several local agents in Taiwan if they convert the Bonds into our common shares, which may make ownership burdensome.

Non-ROC persons wishing to convert the Bonds into our common shares are required under current ROC laws and regulations to appoint an agent (a ‘‘Tax Guarantor’’) in Taiwan for filing tax returns and making tax payments on their behalf. A Tax Guarantor must meet certain qualifications set by the ROC Ministry of Finance 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 received upon conversion or cash dividends or interest derived from any such common shares, 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.

In addition, under current ROC law, holders of the Bonds who exercise their conversion rights 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.

A holder of the Bonds or its designee requesting the conversion of the Bonds into common shares may be required to provide certain information to us, and failure to provide such information may cause the conversion to be delayed.

A holder of Bonds or its designee requesting the conversion of its Bonds into common shares may be required to provide certain information to us or the conversion agent, including the name and nationality of the person to be registered as the shareholder and the number of common shares such person is acquiring and 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 Securities and Futures Commission if the person to be registered as a shareholder: (i) is a ‘‘related party’’ of our company as defined in the ROC Statement of Financial Accounting Standards No. 6 or (ii) 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. The conversion of the Bonds may be delayed if such information is not provided.

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deduction of underwriting discounts and commissions, will be approximately US$78.2 million, or US$97.8 million if the Initial Purchasers’ option to purchase additional Bonds is exercised in full. We intend to use the net proceeds of this offering for the purchase of machinery and equipment for the expansion of our fabrication plants, in particular Fab III.

We expect our total expenditure for the construction of, and the purchase of machinery and equipment for, Fab III for the production of eight-inch wafers to be approximately NT$33.2 billion. Our total capital expenditure in 2001 and for the nine months ended September 30, 2002 for the construction of, and the purchase of machinery and equipment for, Fab III was approximately NT$3,726 million (US$111 million) and NT$3,939 million (US$118 million), respectively. We expect to obtain a portion of the funding for the additional capital expenditure requirements for Fab III from additional debt and equity financing and from internally generated funds, including the proceeds from: (1) a syndicated loan for an amount of up to NT$12.0 billion we entered into in September 25, 2001, of which NT$3.0 billion has been drawn down as of the date of this offering circular, (2) approximately NT$3.0 billion aggregate principal amount of corporate bonds which we issued in Taiwan in the period between October and November of 2001, and (3) approximately NT$3.2 billion aggregate principal amount of corporate bonds which we issued in Taiwan on November 15, 2002. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources’’ and ‘‘Business — Property, Plant and Equipment’’.

MARKET PRICE INFORMATION

Our common shares have been listed on the Taiwan Stock Exchange 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 Taiwan Stock Exchange for our common shares and the highest and lowest of the daily closing values of the Taiwan Stock Exchange Index.

1997 . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . First Quarter. . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . July. . . . . . . . . . . . . . . . . . . . . August. . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . December. . . . . . . . . . . . . . . . . 2003 January (through January 27, 2003)	Closing price	per share(1) Low (NT$) 12.75 12.65 13.87 26.62 34.35 52.91 33.57 24.20 14.55 30.28 27.97 15.27 14.55 9.20 22.45 17.00 10.50 9.20 13.64 12.80 10.50 9.20 11.30 10.80 10.80	Average daily trading volume (in thousands of shares) 93,457 41,789 84,074 74,956 119,000 78,620 50,077 86,286 65,318 101,000 35,498 34,427 92,208 58,504 100,000 41,508 29,683 68,462 48,013 17,462 22,046 49,243 96,880 60,554 59,008	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High (NT$) 36.64 31.55 41.52 76.15 56.01 69.23 57.69 42.31 40.21 40.21 36.71 32.91 27.18 29.73 28.64 29.73 16.36 14.60 16.36 14.40 12.25 12.40 13.90 14.60 12.75			High 10,116.84 9,277.09 8,608.91 10,202.20 10,202.20 10,186.17 8,585.52 6,353.67 6,104.24 6,104.24 5,608.50 4,886.86 5,551.24 6,462.30 6,242.64 6,462.30 5,416.50 4,823.69 5,417.00 4,969.00 4,668.00 4,601.00 4,813.53 4,823.67 5,078.80	Low
					6,820.35 6,251.38 5,474.79 4,614.63 8,536.05 8,120.89 6,185.14 4,614.63 3,446.26 4,894.79 4,768.55 3,493.78 3,446.26 3,850.04 5,488.33 5,071.76 4,185.95 3,850.04 4,855.00 4,572.00 4,186.00 3,850.00 4,500.55 4,452.45 4,524.87

Source: Bloomberg L.P. and Commodity Systems, Inc.

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

On January 27, 2003, the closing price of our common shares on the Taiwan Stock Exchange was NT$11.90 per share.

The Taiwan Stock Exchange 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 prices of the Bonds may be adversely affected by the general activities of the Taiwan Stock Exchange, the trading price of our common shares and the economic performance of Taiwan’’, ‘‘Appendix C — The Securities Market of the Republic of China — The Taiwan Stock Exchange’’ and ‘‘Appendix C — The Securities Market of the Republic of China — Taiwan Stock Exchange Index’’.

EXCHANGE RATES

The following table sets forth the average, high, low and period-end 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, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002: July. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August. . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . December. . . . . . . . . . . . . . . . . . . . . . . . . . 2003: January (through January 27) . . . . . . . . . . . .	Average (of month- end rates) 33.50 32.28 31.37 33.89 34.53 Average (of daily rates) 33.27 33.88 34.57 34.95 34.67 34.80 34.55	High 34.88 33.17 33.17 35.13 35.16 High 33.76 34.24 34.98 35.16 34.82 34.89 34.76	Low 32.20 31.39 30.48 32.23 32.85 Low 32.85 33.52 34.12 34.75 34.46 34.70 34.40	At Period-end
				32.27 31.39 33.17 35.08 34.70 At Period-end
				33.61 34.24 34.92 34.75 34.76 34.70 34.51

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

DIVIDENDS AND DIVIDEND POLICY

The following table sets forth the stock dividends per common share paid in each year for the period between 1998 and 2002 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.

Year 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Stock dividends per 100 shares 22 10 13 30 10	Effective date
		July 1998 July 1999 July 2000 June 2001 August 2002

We are generally not permitted under the 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. The 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 shares or cash or a combination of shares and cash, except that any employee bonuses and shareholder dividends will normally be distributed in shares 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’’, note 12 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 and note 13 to our consolidated financial statements for the six months ended June 30, 2000 and 2001 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 for information relating to ROC withholding taxes payable on dividends, see ‘‘Taxation — ADSs — Dividends’’ and ‘‘Taxation — Common Shares — Dividends’’.

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 . . . . . . August 2002 . . . . .	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 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 1,822,651 884,933,469 331,934,262	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 3,691,276,875

CAPITALIZATION

The following table presents, as of September 30, 2002, our unaudited unconsolidated cash and cash equivalents, short-term debt and capitalization on: (1) an actual basis, (2) as adjusted to give effect to certain transactions effected after September 30, 2002, and (3) as further adjusted to give effect to this offering, assuming that the over-allotment option of the Initial Purchasers is exercised in full.

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 September 30, 2002 except for:

(1) The issuance of approximately NT$3.2 billion aggregate principal amount of corporate bonds in Taiwan on November 15, 2002. We received the proceeds of the issuance on December 12, 2002.
(2) The repurchases in the open market of, and the tender offer for, our outstanding 1% convertible bonds due 2005. As of November 30, 2002, we had repurchased in the open market approximately US$79 million aggregate principal amount of the outstanding 1% convertible bonds due 2005. On December 20, 2002, we repurchased an additional US$8 million aggregate principal amount of such bonds. We commenced a tender offer to repurchase the remaining outstanding bonds, and filed a Schedule TO relating to the tender offer with the SEC on December 24, 2002. Upon the expiration of the tender offer at 5: 00 p.m., New York time, on January 24, 2003, approximately US$61 million aggregate principal amount of such bonds had been tendered. In addition, approximately US$11 million aggregate principal amount of such bonds were redeemed pursuant to the holders’ option to require us to repurchase such bonds, and approximately US$0.3 million aggregate principal amount of such bonds remained outstanding. We accepted, and made payments totaling approximately US$75 million for, the bonds tendered pursuant to the tender offer on January 28, 2003.

Cash and cash equivalents . . . . . . . . . . . . . . Short-term debt: Short-term notes . . . . . . . . . . . . . . . . . . . . . Short-term debt. . . . . . . . . . . . . . . . . . . . . . Current portion of debentures . . . . . . . . . . . . Current portion of long-term debt . . . . . . . . . Current portion of capital lease obligations. . . Total short-term debt(2) . . . . . . . . . . . . . . . . Long-term debt: Convertible bonds Convertible bonds due 2003–2005(3) . . . . . Convertible bonds due 2007 . . . . . . . . . . . Convertible bonds due 2008 . . . . . . . . . . . Other long-term debt(4)(5) . . . . . . . . . . . . . Total long-term debt . . . . . . . . . . . . . . . . Shareholders’ equity: Common shares, NT$10 par value, 5,350,000,000 shares authorized; 3,691,276,875 shares issued. . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . Subscription received. . . . . . . . . . . . . . . . . . Capital reserve . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . Unrealized losses on long-term investment . . . Legal reserve . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . Special reserve . . . . . . . . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . Total capitalization(6) . . . . . . . . . . . . . . . . . .	Unaudited and Unconsolidated As of September 30, 2002 Actual As adjusted to give effect to certain transactions effected after September 30, 2002(1) As further adjusted to give effect to this offering (NT$) (US$) (NT$) (US$) (NT$) (US$) (in millions) 9,125 273 6,517 195 9,788 293 — — — — — — 556 17 556 17 556 17 4,917 147 3,511 105 3,511 105 2,116 63 2,116 63 2,116 63 624 19 624 19 624 19 8,213 245 6,807 204 6,807 204 4,415 132 13 — 13 — 6,061 181 9,261 277 9,261 277 — — — — 3,346 100 10,533 315 10,533 315 10,533 315 21,009 628 19,807 592 23,153 692 36,913 1,103 36,913 1,103 36,913 1,103 2,631 79 2,631 79 2,631 79 — — — — — — — — — — — — (7,446) (222) (7,446) (222) (7,446) (222) (868) (26) (868) (26) (868) (26) 1,709 51 1,709 51 1,709 51 229 7 229 7 229 7 378 11 378 11 378 11 (1,188) (36) (1,188) (36) (1,188) (36) 32,358 967 32,358 967 32,358 967 53,367 1,595 52,165 1,559 55,511 1,659	Unaudited and Unconsolidated As of September 30, 2002 Actual As adjusted to give effect to certain transactions effected after September 30, 2002(1) As further adjusted to give effect to this offering (NT$) (US$) (NT$) (US$) (NT$) (US$) (in millions) 9,125 273 6,517 195 9,788 293 — — — — — — 556 17 556 17 556 17 4,917 147 3,511 105 3,511 105 2,116 63 2,116 63 2,116 63 624 19 624 19 624 19 8,213 245 6,807 204 6,807 204 4,415 132 13 — 13 — 6,061 181 9,261 277 9,261 277 — — — — 3,346 100 10,533 315 10,533 315 10,533 315 21,009 628 19,807 592 23,153 692 36,913 1,103 36,913 1,103 36,913 1,103 2,631 79 2,631 79 2,631 79 — — — — — — — — — — — — (7,446) (222) (7,446) (222) (7,446) (222) (868) (26) (868) (26) (868) (26) 1,709 51 1,709 51 1,709 51 229 7 229 7 229 7 378 11 378 11 378 11 (1,188) (36) (1,188) (36) (1,188) (36) 32,358 967 32,358 967 32,358 967 53,367 1,595 52,165 1,559 55,511 1,659	Unaudited and Unconsolidated As of September 30, 2002 Actual As adjusted to give effect to certain transactions effected after September 30, 2002(1) As further adjusted to give effect to this offering (NT$) (US$) (NT$) (US$) (NT$) (US$) (in millions) 9,125 273 6,517 195 9,788 293 — — — — — — 556 17 556 17 556 17 4,917 147 3,511 105 3,511 105 2,116 63 2,116 63 2,116 63 624 19 624 19 624 19 8,213 245 6,807 204 6,807 204 4,415 132 13 — 13 — 6,061 181 9,261 277 9,261 277 — — — — 3,346 100 10,533 315 10,533 315 10,533 315 21,009 628 19,807 592 23,153 692 36,913 1,103 36,913 1,103 36,913 1,103 2,631 79 2,631 79 2,631 79 — — — — — — — — — — — — (7,446) (222) (7,446) (222) (7,446) (222) (868) (26) (868) (26) (868) (26) 1,709 51 1,709 51 1,709 51 229 7 229 7 229 7 378 11 378 11 378 11 (1,188) (36) (1,188) (36) (1,188) (36) 32,358 967 32,358 967 32,358 967 53,367 1,595 52,165 1,559 55,511 1,659
	Actual (NT$) (US$) 9,125 273 — — 556 17 4,917 147 2,116 63 624 19 8,213 245 4,415 132 6,061 181 — — 10,533 315 21,009 628 36,913 1,103 2,631 79 — — — — (7,446) (222) (868) (26) 1,709 51 229 7 378 11 (1,188) (36) 32,358 967 53,367 1,595	As adjusted to give effect to certain transactions effected after September 30, 2002(1) (NT$) (US$) (in millions) 6,517 195 — — 556 17 3,511 105 2,116 63 624 19 6,807 204 13 — 9,261 277 — — 10,533 315 19,807 592 36,913 1,103 2,631 79 — — — — (7,446) (222) (868) (26) 1,709 51 229 7 378 11 (1,188) (36) 32,358 967 52,165 1,559
	(NT$) 9,125 — 556 4,917 2,116 624 8,213 4,415 6,061 — 10,533 21,009 36,913 2,631 — — (7,446) (868) 1,709 229 378 (1,188) 32,358 53,367		(NT$) 9,788 — 556 3,511 2,116 624 6,807 13 9,261 3,346 10,533 23,153 36,913 2,631 — — (7,446) (868) 1,709 229 378 (1,188) 32,358 55,511

(1) Adjusted to give effect to (1) the issuance of approximately NT$3.2 billion aggregate principal amount of corporate bonds in Taiwan in November 2002 and (2) the repurchases in the open market of, and tender offer for, our outstanding 1% convertible bonds due 2005.

(2) Of this amount of short-term debt, NT$2,740 million was secured and NT$5,473 million was unsecured, and NT$3,511 million was guaranteed and NT$4,702 million was not guaranteed.

(3) None of these convertible bonds plus interest were secured.

(4) Excludes current portion.

(5) Of this amount, NT$7,533 million was secured long-term debt, less current portion, and NT$3,000 million was guaranteed.

(6) Total capitalization is equal to the sum of long-term debt and shareholders’ equity.

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’’.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected consolidated statement of operations data for the years ended December 31, 1999, 2000 and 2001, and for the six months ended June 30, 2001 and 2002, and the selected consolidated balance sheet data as of December 31, 2000 and 2001 and as of June 30, 2002 presented below are derived from our audited consolidated financial statements included in this offering circular. These financial statements have been audited by Diwan, Ernst & Young, independent public accountants. The selected consolidated statement of operations data for the years ended December 31, 1997 and 1998 and the selected consolidated balance sheet data as of December 31, 1997, 1998 and 1999 and as of June 30, 2001 presented below are derived from our audited consolidated financial statements not included in this offering circular. These financial statements have also 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 consolidated 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 consolidated financial statements are prepared and presented in accordance with ROC GAAP, which differ in certain significant respects from U.S. GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — U.S. GAAP Reconciliation’’.

Consolidated Statement of Operations Data: ROC GAAP Net sales revenue . . . . . . . . . . Cost of goods sold. . . . . . . . . . Gross profit . . . . . . . . . . . . . . Operating expenses . . . . . . . . . Operating income (loss) . . . . . . Total other income . . . . . . . . . Total other expenses . . . . . . . . Income (loss) before taxes . . . . Income tax benefit (expense) . . Net income (loss) . . . . . . . . . . Net income (loss) per share — basic(1) . . . . . . . . . . . . . . . Net income (loss) per share — diluted(1) . . . . . . . . . . . . . . U.S. GAAP Gross profit . . . . . . . . . . . . . . Operating income (loss) . . . . . . Net income (loss)(2). . . . . . . . . Net income (loss) per common share — basic(3) . . . . . . . . . Net income (loss) per common share — diluted(3) . . . . . . . . Consolidated 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 a	Year ended and a	s of December 31,	s of December 31,		Six and	Six and
	1997	1998	1999	2000	2001	2001	2001	2002

(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 no additional expense or income

in 1999, an additional expense of NT$1,622 million in 2000, and an additional expense of NT$4,273 million (US$128 million) in 2001. The differences of accounting treatment with respect to derivative contracts under the two accounting principles resulted in an increased income of NT$1,301 million in 1999, an additional expense of NT$898 million in 2000, and increased income of NT$228 million (US$7 million) in 2001.

(3) Retroactively adjusted for all stock dividends declared. See note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 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.

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 consolidated 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 significant respects from U.S. GAAP. See note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular and ‘‘— U.S. GAAP Reconciliation’’.

Introduction

We are an independent semiconductor designer, producer and supplier. Our product portfolio includes mask ROM, flash, EPROM, logic, application-specific integrated circuit products and highly integrated SOC solutions. We view ourselves as an integrated solutions provider. In particular, we treat our clients as strategic partners and work closely with them starting from early stages of product development to design silicon chip solutions that meet their specific needs. These partners include Nintendo, with whom we have had a relationship for over ten years, and Hewlett-Packard, with whom we have had a relationship for over five years. We differentiate ourselves by our ability to offer a full range of in-house design, product and process engineering capabilities.

From mid-1999 and throughout most of 2000, we benefited from growing worldwide demand for semiconductors and experienced significant growth in net sales revenue and operating income. Our net sales revenue increased 97.5% from 1999 to 2000 principally as a result of:

. increases in the average selling prices of our products due to improved market conditions; and
. high-density products, particularly flash products, accounting for a larger share of our overall product mix.

Towards the end of 2000, the semiconductor industry began to show decreased growth rates and a trend reversal. This most recent worldwide downturn resulted in an even more significant deterioration in the average selling price, as well as demand, of our products in 2001. As a result, our net sales revenue in 2001 decreased by 35.1% from 2000. Furthermore, as there is a lag between any slowdown in the endmarket and our financial results, the extent and impact of the industry downturn may not be fully reflected in our financial results until 2003 or thereafter. We are also unable to predict if the downturn will be protracted or how protracted the downturn may be.

Our capacity utilization rate, which is the utilization rate for our equipment prior to any production bottleneck, was approximately 100% in 2000 but decreased to approximately 76% in the third quarter of 2001, 70% in the fourth quarter of 2001 and 65% in the third quarter of 2002. In the six months ended June 30, 2002, our capacity utilization rate was approximately 58% compared to 87% in the same period in 2001. We do not expect our capacity utilization rates to improve unless there is a significant recovery in the semiconductor industry, and we cannot assure you that our capacity utilization rates will not continue to decline in the foreseeable future.

As a result of the market downturn in 2001, which continued through 2002, many of our investee companies experienced significant deterioration in their operating results. This in turn caused us to incur substantial investment losses as well as a reduction in the value of our equity interests in these companies. Our net investment loss and net loss from equity investment increased by 29.8% to NT$780 million (US$23 million) in 2001 from NT$617 million in 2000. In particular, we recorded an unrealized loss in Tower Semiconductor of NT$646 million (US$19 million) as of December 31, 2001.

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 ‘‘— Introduction — High Fixed Costs’’ and ‘‘— Liquidity and Capital Resources’’. Unless demand for our products recovers and grows further, this expansion could lead to over capacity, reduced prices and lower margins. See ‘‘Business — Property, Plant and Equipment’’.

Nintendo continued to be our single largest customer in 2001 and the six months ended June 30, 2002. Nintendo recently launched its new GameCube video game platform, which utilizes a DVD-ROM-based storage system instead of the mask ROM-based cartridges traditionally used in other Nintendo game platforms, in Japan, the United States and Europe. As a result, we have been shifting our production towards the output of mask ROMs for Nintendo’s Game Boy series of handheld computing devices, including the Game Boy Advance. In addition, we currently supply other accessories for the GameCube video game platform. Although sales of the Game Boy Advance did not meet anticipated levels in the fourth quarter of 2001 and the first half of 2002, our sales of mask ROM to Nintendo in 2001 and the six months ended June 30, 2002 for use in Game Boy Advance software cartridges continued to account for a large portion of our total sales of mask ROM. See ‘‘Risk Factors — Risks Relating to Our Company — Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue’’.

For certain material developments of our company since July 1, 2002 with respect to our financial condition and results of operations, please refer to the discussion set forth in ‘‘Recent Developments’’ included elsewhere in this offering circular.

Sales Revenue

We derive our sales revenue primarily from the manufacture and sale of four types of semiconductors: mask ROM, flash, EPROM, SOC and multimedia products. We also derive a portion of our sales 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 experienced rapid growth in net sales revenue in 1999 and 2000. However, net sales revenue decreased by 35.1% to NT$21,747 million (US$650 million) in 2001 from NT$33,493 million in 2000 as we experienced a severe market downturn that commenced in the fourth quarter of 2000. Our net sales revenue in the six months ended June 30, 2002 decreased by 43.2% to NT$6,949 million (US$208 million) from NT$12,230 million in the same period in 2001. This decrease was primarily attributable to a decrease in our sales volume and a decline in the average selling prices of our products.

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 as well as interest charges accruing from the debt incurred to finance our capital expansion. Depreciation and amortization expense increased by 32.4% to NT$8,006 million (US$239 million) in 2001 from NT$6,048 million in 2000. This increase was primarily

due to increased depreciation arising from our capital expansion program for Fab II. In the six months ended June 30, 2002, depreciation and amortization was NT$4,294 million (US$128 million) while interest expense was NT$581 million (US$17 million). See ‘‘— Liquidity and Capital Resources’’.

The semiconductor industry has experienced deteriorating market conditions 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. We held approximately 298 days of net inventory as of September 30, 2002, compared to 285 days as of September 30, 2001. We recorded an inventory loss provision of NT$3,133 million (US$94 million) for the nine months ended September 30, 2002, compared with NT$700 million for the same period in 2001.

We make provisions for inventory loss based on our evaluation of historical data and projected sales volume to determine current trends so as to identify products or product classes that are at risk of obsolescence or are slow moving. Our inventory loss provision decreased slightly in the fourth quarter of 2002 due to certain adjustments made for over-provision in the previous periods.

Product Pricing Trends

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

Mask ROM . . . . . . . . . . . . . . . Flash . . . . . . . . . . . . . . . . . . . . EPROM . . . . . . . . . . . . . . . . . .		Year ended December 31,	2001 89.6 74.3 40.1	Six months ended June 30,	Six months ended June 30,
	1997 95.4 70.0 39.1	1998 1999 2000 (NT$ per die) 101.6 94.9 105.8 76.0 53.0 110.4 36.1 35.5 55.0		2001 2002 (NT$ per die) 96.3 56.1 89.0 49.1 51.6 25.7	2002

The global semiconductor industry is highly competitive and average selling prices typically decrease over the life of a semiconductor product. Average selling prices for the memory products that we sell have generally declined on an annual basis 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 and maintain our gross profit margins despite general industry-wide declines. However, throughout most of 2000, we experienced a general improvement in the selling prices for almost all memory products, which resulted in increases in the 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, primarily as a result of the overall decrease in global demand for memory products. In 2001, we experienced a decrease in the selling prices for almost all of our memory products, particularly flash products, as compared to 2000. These price declines continued throughout 2001 and the first quarter of 2002, before stabilizing in the second quarter of 2002. As a result, we also experienced a general decline in our gross profit margins during these periods. The average selling price for memory products decreased in the third quarter of 2002 as a result of a continued decrease in demand for high-density memory products.

High Fixed Costs

Our operations are capital intensive and our primary capital requirements are for the purchase of manufacturing equipment. In particular, fixed costs, primarily depreciation expense, are a major component of our cost of goods sold. As a result, increases or decreases in capacity utilization rates can have a significant effect on gross profit margins, as per-unit costs generally decrease as fixed costs, such as equipment depreciation expenses, are allocated over a larger number of units. Our ability to maintain or improve our margins will continue to depend to a large extent on our ability to effectively manage capacity utilization levels.

In 1999, 2000 and 2001, our depreciation expense as a percentage of net sales revenue was 27.1%, 16.8% and 34.2%, respectively. In the six months ended June 30, 2002, our depreciation expense as a percentage of net sales revenue was 57.4%. The significant increase in depreciation expense as a percentage of net sales revenue in 2001 and the first half of 2002 primarily reflected the significant decrease in net sales revenue during those periods. We expect our depreciation expense to increase in the foreseeable future as a result of our capital expenditure program.

We begin depreciating our equipment when it is placed into service. There may sometimes be a time lag between when our equipment is placed into service and when it achieves high levels of utilization. In periods of depressed industry conditions, such as 2001, we may experience lower than expected demand from customers and a sharp decline in average selling price, resulting in an increase in depreciation expense relative to net sales revenue.

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 successfully migrated to 0.15 micron process technology for both flash and mask ROM in the fourth quarter of 2002.

Our wafer production in terms of eight-inch wafer equivalents increased 46.1% to 621,587 wafers in 2000 from 425,479 wafers in 1999, but decreased 36.1% to 206,207 wafers in the same period in 2002 from 322,930 wafers in the six months ended June 30, 2001. We have supplemented our capacity by contracting for wafer fabrication on a foundry basis by third parties, including Taiwan Semiconductor Manufacturing Co., Ltd and Tower Semiconductor. We have also pursued the enlargement of our manufacturing capacity through the enhancement of Fab I and Fab II. In addition, we completed the construction of Fab III in July 2002, which we expect will further increase our manufacturing capacity by approximately 20,000 eight-inch wafers per month when fully operational. However, due to the adverse market conditions currently prevailing in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2003 or later.

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

		Year ended	December 31,	December 31,			Six months e	nded June 30,	nded June 30,
1999		2	000	2	001	2	001	2	002
(number of wafers) 283,455 79,622 20,659 9,103 32,640	(% of total wafer production) 66.6 18.7 4.9 2.1 7.7	(number of wafers) 338,634 144,758 17,205 8,019 62,971	(% of total wafer production) 62.5 23.3 2.8 1.3 10.1	(number of wafers) 289,538 260,859 11,531 7,815 23,918	(% of total wafer production) 48.8 43.9 1.9 1.3 4.1	(number of wafers) 156,197 132,290 7,022 3,651 23,770	(% of total wafer production) 48.4 40.9 2.2 1.1 7.4	(number of wafers) 73,186 118,365 7,447 7,209 0	(% of total wafer production) 35.5 57.4 3.6 3.5 0.0
425,479	100.0	621,587	100.0	593,661	100.0	322,930	100.0	206,207	100.0

(1) Includes data for core SOC products and multimedia products. Excludes logic wafers fabricated by Tower Semiconductor 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.

(2) Production of DRAM under a cooperative arrangement with Matsushita for 1999, 2000 and 2001, and production of SRAMs for Mitsubishi during 2001 and the six months ended June 30, 2002.

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.

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

Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
1999		2000		2001		2001		2002
(millions in NT$) 9,642 3,562 1,736 1,505 512	(% of total net sales revenue) 56.9 21.0 10.2 8.9 3.0	(millions in NT$) 15,633 7,384 4,753 3,175 2,548	(% of total net sales revenue) 46.7 22.0 14.2 9.5 7.6	(millions in NT$) 11,279 5,711 2,702 1,422 633	(% of total net sales revenue) 51.9 26.3 12.4 6.5 2.9	(millions in NT$) 5,384 3,921 1,384 1,065 476	(% of total net sales revenue) 44.0 32.1 11.3 8.7 3.9	(millions in NT$) 2,672 1,528 1,767 801 181	(% of total net sales revenue) 38.5 22.0 25.4 11.5 2.6
16,957	100.0	33,493	100.0	21,747	100.0	12,230	100.0	6,949	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 1999, 2000, 2001 and the six months ended June 30, 2002, approximately 86.3%, 92.5%, 90.8% and 92.0%, 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 enter into derivative contracts from time to time with our common shares as the underlying reference securities. Certain of these contracts also include a reference to foreign currency exchange rates. These contracts may significantly affect our net income or loss for any given period. We recorded losses of NT$297 million in 2000 and NT$171 million (US$5 million) in 2001 with respect to these derivative contracts under U.S. GAAP. These losses were primarily attributable to a significant decline in the trading price of our common shares as well as significant fluctuations in the exchange rate between the Japanese yen and the U.S. dollar. Future decreases in the trading price of our common shares or fluctuations in the exchange rate between the Japanese yen and the U.S. dollar may adversely affect our financial condition and results of operations. See ‘‘— Quantitative and Qualitative Disclosures About Market Risk-Interest Rates’’ and ‘‘Equity swap contracts’’ in note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with ROC GAAP. We also provide a reconciliation from our ROC GAAP financial statements to U.S. GAAP in note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001. The preparation of our consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We record estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies are the more significant policies used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with ROC GAAP and SEC Staff Accounting Bulletin No. 101, ‘‘Revenue Recognition in Financial Statements’’, as amended (‘‘SAB No. 101’’), and other related guidance. SAB No. 101 requires that four basic criteria must be met before revenue may be recognized: (1) pervasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. We record revenue when all four of these criteria have been met.

Our customers have the right to return defective products. The costs of replacement items are recorded as costs of sales. We generally experience an insignificant amount of returns for our products, primarily because we co-develop our products with our customers and we have an extensive quality control program, which includes the testing of products prior to shipment.

Inventories

A principal risk in our industry is the rapid rate of obsolescence of products due to changes in technology or other economic factors. We had total provisions for inventory loss under ROC GAAP of NT$2,560 million (US$77 million) in 2001 and NT$3,376 million (US$101 million) in the six months ended June 30, 2002 due to obsolete or slow moving items. Our financial and production management evaluates historical experience, current trends and projected sales volumes to identify products or classes of products that are at risk for obsolescence or are slow moving. Our projected sales volumes are based on projected demand information provided by our customers and our estimates of general market conditions. See ‘‘Risk Factors — Risks Relating to Our Company — Our results of operations may continue to be adversely affected by the writedown of inventory resulting from an industry downturn’’.

We recorded a production variance under U.S. GAAP of NT$628 million (US$19 million) to our cost of goods sold in 2001. The capacity variance was calculated based on a standard production capacity of 100%. Our standard costing system is updated every six months for all components of our fixed production costs. The primary fixed cost in our production process is depreciation.

Our provision for inventory loss under U.S. GAAP in 2001 is approximately NT$100 million higher when compared with the corresponding provision under ROC GAAP, because the production variance was allocated between cost of goods sold and inventory on a U.S. GAAP basis.

Stock Appreciation Right Program

Our stock appreciation right (‘‘SAR’’) program, which is based on the market value of our shares, is a key component of the compensation package for many of our employees. The costs related to the SAR program are recorded as costs of goods sold or as administrative expenses based on the employees’ responsibilities.

We record expenses related to the SAR program under ROC GAAP in the period in which the shares vest. As of June 30, 2002, approximately 33 million SAR rights were vested. The exercise price was NT$19.8 and NT$37.3 for 15 million and 18 million of the shares, respectively. We have the right to and we have periodically revised the exercise prices related to the SAR program at our discretion, although we currently have no intention to further revise the exercise prices. As explained further below, a portion of the SAR obligation recorded for vested shares is based on the excess, if any, of the average fair market value of our underlying shares compared with the exercise price for a 30 day period prior to the end of the reporting period.

We have entered into a derivative contract to hedge our risk related to the SAR program. We receive or pay the benefit or obligation represented by the fair market value of our share price in NT dollars divided by the then prevailing exchange rates between the NT dollar and the U.S. dollar compared with the strike price in the contract. The current expiration date of the contract is December 31, 2002. We can settle portions of the contract at our discretion up to the expiration date. Under ROC GAAP, we allocate a portion of the gains or losses from the derivative contract to SAR expense by correlating the number of shares in the SAR plan that have vested with the same number of shares referenced in the derivative contract. We record gains or losses on the portion of the derivative contract related to the SAR based on the difference between the strike price in the derivative contract and the employees’ exercise price. We record as investment gains or losses changes in the value of the derivative contract that do not correlate with vested shares. Therefore, to the extent the employees’ exercise price on vested SARs exceeds the fair market value of our shares, a portion of the derivative obligation is not recorded. To the extent that employees vest in SARs for which the exercise price exceeds the fair market value of our shares, the obligation recorded related to the derivative contract may be reduced, having a positive impact on our earnings. As of June 30, 2002, the unrecorded obligation related to the derivative contract was NT$332,169 million (US$9,927 million). Furthermore, since the strike price of the derivative contract is in U.S. dollars, changes in the value of the contract may not be consistent with changes in our obligation under the SAR program.

Under U.S. GAAP, the derivative contract is marked to market through earnings at each reporting date as non-operating gains or losses. The SAR appreciation right obligation is recorded based on the excess, if any, of the fair market value of the underlying shares over the exercise price using a graded vesting approach to record the expense.

Net Deferred Tax Assets

Under ROC GAAP, our income tax expense is recorded based on calculations using the statutory tax rate of each entity’s jurisdiction of incorporation. As of June 30, 2002, our deferred tax assets exceed our deferred tax liabilities by NT$5,675 million (US$170 million), and we recorded a valuation allowance of NT$3,348 million (US$100 million) against our tax assets resulting in a net deferred tax asset of NT$1,957 million (US$58 million). Our deferred tax assets relate principally to income tax credits that expire between 2002 and 2005. The realization of these assets is based upon estimates of future taxable income. In preparing estimates of future taxable income, we have used the same assumptions and projections utilized in our internal 5-year forecasts. Based on these projections, we estimate that a portion of these tax credits will be fully utilized prior to their expiration. We expect to achieve our future earnings through the expansion of our business, which includes Fab III. We cannot assure you that we will be able to generate sufficient additional income to fully utilize our deferred tax assets. In particular, an additional valuation allowance may be required to the extent we are not able to fully utilize our deferred tax assets.

Undistributed earnings generated after 1997 are subject to 10% tax in compliance with the ROC Income Tax Law. Under U.S. GAAP, we measure our income tax expense, including the tax effect of temporary differences, using a tax rate that includes the tax on undistributed earnings. Our income tax expense is significantly different on a U.S. GAAP basis due to this difference. In addition, this resulted in an increase of the valuation allowance under U.S. GAAP, compared with ROC GAAP, of NT$286 million as of December 31, 2001.

Cost Method Investments

Under ROC GAAP, the unrealized losses on short-term marketable equity securities are recorded as investment loss in the statement of operations and the unrealized gains are not recognized. Unrealized losses on long-term marketable equity securities are reported as a reduction of shareholders’ equity and the unrealized gains are not recorded. Non-marketable equity securities are recorded at cost. In determining if and when a cost method investee’s decline in value below cost is not recoverable, we evaluate the market conditions, offering prices, trends of earnings, price multiples and other key measures for our investments accounted for at cost. When such a decline in value is deemed to be a permanent diminution, we recognize an impairment loss in the current period operating results to the extent of the decline. As of June 30, 2002, we recorded an unrealized loss of NT$655 million (US$20 million), which was primarily attributable to our investment in Tower Semiconductor.

U.S. GAAP requires that certain investments be classified as trading securities, 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. U.S. GAAP 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. If an other than temporary decline in value of a long-term investment exists, the unrealized loss should be charged to the statement of operations. In determining if and when a decline in value below cost is an other than temporary decline in value, we evaluate the market conditions, offering prices, trends of earnings, price multiples and other key measures for our investments accounted for at cost. When such a decline in value is deemed to be an other than temporary decline in value, we recognize an impairment loss in the current period operating results to the extent of the decline. As of December 31, 2001, we believe the decline in the market value of our investment in Tower Semiconductor met U.S. GAAP’s more prescriptive threshold of an other than temporary decline in value and as a result we recorded the unrealized loss to income.

Fixed Assets

We evaluate our property, plant, and equipment for impairment whenever indicators of impairment exist. Our current estimates as of June 30, 2002 support the recoverability for approximately NT$70,715 million (US$2,113 million) of long-lived assets. Our recoverability estimates are based on current volume and pricing levels.

Derivatives

Other than the derivative contract relating to the SAR program, we have another significant derivative contract outstanding. On May 5, 1998, we issued US$150 million aggregate principal amount of zero coupon convertible debentures, which were privately placed with a financial institution. We subsequently entered into a call option contract with the financial institution with the underlying reference securities being the convertible debentures. The terms of the contract provided that the notional amount of US$150 million is divided into fifteen options of US$10 million each, and that we are entitled to exercise the options separately during the life of the contract, but at a minimum of two times and a maximum of fifteen times. We 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 United States dollars. Subsequently, the option contract and the currency swaps were combined into a single contract. We exercised two options on January 22, 2000 and five options on June 26, 2000, respectively. The contract expires in May 2003. Under ROC GAAP, we do not account for the option portion of this compound derivative until the options are

exercised. In addition, we record a premium or discount upon entering into currency swaps, which are subsequently amortized, and we record subsequent changes in spot rates underlying the contract during reporting periods. Gains and losses are recorded as foreign exchange gains and losses. As of June 30, 2002, the outstanding portion of this compound derivative contract has a negative fair value of NT$505 million (US$15 million), and the carrying amount has a negative fair value of NT$121 million (US$4 million).

We also enter into other derivative contracts in the ordinary course of business. We believe such other derivative contracts do not have a significant impact on our financial condition and results of operations.

Under U.S. GAAP, all of our derivative contracts are marked to market through earnings at each reporting date as non-operating gains or losses. Accordingly, as of December 31, 2001, the carrying value of all derivative contracts is at fair value. Please see ‘‘— Quantitative and Qualitative Disclosures About Market Risk’’ for information on how we estimate the fair value of our derivatives contracts.

We do not believe that we are exposed to more than a nominal amount of credit risk as the counterparties to our derivative contracts parties are established, well-capitalized financial institutions.

Allowance for Doubtful Accounts

We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit scores), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time the receivables are past due, ranging from 3% for current amounts to 100% for amounts more than 270 days past due based on our historical experience. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due to us could be reduced by a material amount.

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 . . . . . . . . . . . . . . . . . . . . . . SOC: Core SOC . . . . . . . . . . . . . . . . . . . . . . . . Value-added services . . . . . . . . . . . . . . . . . Multimedia. . . . . . . . . . . . . . . . . . . . . . . . . Royalties and commissions . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Sales returns. . . . . . . . . . . . . . . . . . . . Sales discounts . . . . . . . . . . . . . . . . . . Net sales revenue . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 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 benefit (expense) . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . .	Year ended December 31, 1999 2000 2001 102.1% 100.9% 101.4% 62.8 57.6 56.8 12.3 19.3 14.8 7.7 3.7 4.5 82.8 80.6 76.1 1.9 1.2 2.4 3.5 9.3 12.4 9.5 4.5 7.3 0.2 0.3 0.4 4.2 5.0 2.8 (1.2) (0.8) (1.0) (0.9) (0.1) (0.4) 100.0 100.0 100.0 (71.5) (46.3) (53.8) 28.5 53.7 46.2 (3.0) (2.8) (2.8) (4.7) (5.3) (9.8) (11.5) (9.4) (17.6) (19.2) (17.5) (30.2) 9.3 36.2 16.0 5.0 2.8 6.2 (10.8) (6.2) (21.9) 3.5 32.9 0.4 1.9 (1.2) (4.4) 5.3% 31.7% (4.0)%	Year ended December 31, 1999 2000 2001 102.1% 100.9% 101.4% 62.8 57.6 56.8 12.3 19.3 14.8 7.7 3.7 4.5 82.8 80.6 76.1 1.9 1.2 2.4 3.5 9.3 12.4 9.5 4.5 7.3 0.2 0.3 0.4 4.2 5.0 2.8 (1.2) (0.8) (1.0) (0.9) (0.1) (0.4) 100.0 100.0 100.0 (71.5) (46.3) (53.8) 28.5 53.7 46.2 (3.0) (2.8) (2.8) (4.7) (5.3) (9.8) (11.5) (9.4) (17.6) (19.2) (17.5) (30.2) 9.3 36.2 16.0 5.0 2.8 6.2 (10.8) (6.2) (21.9) 3.5 32.9 0.4 1.9 (1.2) (4.4) 5.3% 31.7% (4.0)%	Six months ended June 30, 2001 2002 101.0% 101.2% 54.4 45.6 14.2 23.0 4.7 4.6 73.3 73.2 3.1 5.1 16.0 3.8 5.1 14.5 0.3 4.1 3.2 0.5 (0.7) (0.3) (0.3) (0.9) 100.0 100.0 (44.4) (104.8) 55.6 (4.8) (2.8) (3.7) (6.3) (12.3) (15.1) (26.7) (24.2) (42.7) 31.4 (47.5) 4.7 4.3 (13.1) (60.0) 23.0 (103.2) (3.1) (0.2) 19.9% (103.4)%
	1999 102.1% 62.8 12.3 7.7 82.8 1.9 3.5 9.5 0.2 4.2 (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 100.9% 57.6 19.3 3.7 80.6 1.2 9.3 4.5 0.3 5.0 (0.8) (0.1) 100.0 (46.3) 53.7 (2.8) (5.3) (9.4) (17.5) 36.2 2.8 (6.2) 32.9 (1.2) 31.7%	2001 101.0% 54.4 14.2 4.7 73.3 3.1 16.0 5.1 0.3 3.2 (0.7) (0.3) 100.0 (44.4) 55.6 (2.8) (6.3) (15.1) (24.2) 31.4 4.7 (13.1) 23.0 (3.1) 19.9%

Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001

Net Sales Revenue. Our total net sales revenue decreased 43.2% to NT$6,949 million (US$208 million) in the six months ended June 30, 2002 from NT$12,230 million in the same period in 2001. This decrease was primarily due to a decline in average selling prices resulting from the continued market downturn, despite an overall increase in sales volume in the relevant period.

The proportion of our net sales revenue from mask ROM products decreased to 45.6% in the six months ended June 30, 2002 from 54.4% in the same period in 2001. This decrease was primarily due to decreased demand for mask ROM products from Nintendo following its introduction of the GameCube and a decrease in the average selling prices for our mask ROM products. The average selling prices for mask ROM products decreased to NT$56.1 per die in the six months ended June 30, 2002 from NT$96.3 per die in the same period in 2001, principally as a result of a decrease in demand for high-density mask ROM products.

The proportion of our net sales revenue from flash products increased to 23.0% in the six months ended June 30, 2002 from 14.2% in the same period in 2001. This increase was primarily due to an increase in the sales volume of our flash products, which was partially offset by a decrease in the average selling prices for flash products. The increase in sales volume was primarily due to an overall increase in demand. Average selling prices for flash products decreased to NT$49.1 per die in the six months ended June 30, 2002 from NT$89.0 per die in the same period in 2001, principally as a result of increased price competition.

The proportion of our net sales revenue from EPROM products decreased to 4.6% in the six months ended June 30, 2002 from 4.7% in the same period in 2001. This decrease was primarily due to a decrease in the sales volume and average selling prices of our EPROM products. We expect such proportion to further decrease in the third and fourth quarters of 2002 as a result of the continued decrease in demand for EPROM products. The average selling prices for EPROM products decreased to NT$25.7 per die in the six months ended June 30, 2002 from NT$51.6 per die in the same period in 2001, principally as a result of an overall decrease in demand.

The proportion of our net sales revenue from our SOC products decreased to 8.9% in the six months ended June 30, 2002 from 19.1% in the same period in 2001. This decrease was principally due to a decrease in the sales volume of our SOC products and a decrease in the average selling prices of our SOC products as a result of an overall decrease in demand.

The proportion of our net sales revenue from our multimedia products increased to 14.5% in the six months ended June 30, 2002 from 5.1% in the same period in 2001. This increase was mainly due to an increase in the sales volume of our multimedia products as a result of increased end-use applications for our multimedia products, which was partially offset by a decrease in the average selling prices of our multimedia products. The decrease in the average selling prices of multimedia products is due to continued industry downturn.

Cost of Goods Sold and Gross Profit. Cost of goods sold increased 34.1% to NT$7,285 million (US$218 million) in the six months ended June 30, 2002 from NT$5,431 million in the same period in 2001. This increase was primarily due to an increase of 11.8% in depreciation and amortization expenses and the increased sales volume, which resulted in an increase in raw materials costs and subcontracting expenses for outsourced services such as testing and packaging. This increase also reflected a change in our product mix towards a higher proportion of flash products, which have higher manufacturing costs.

As a result of the foregoing, we had a gross loss of NT$336 million (US$10 million) in the six months ended June 30, 2002 compared to gross profit of NT$6,799 million the same period in 2001. In addition, we had a negative gross margin of 4.8% in the six months ended June 30, 2002 compared to a positive gross margin of 55.6% in the same period in 2001.

Operating Expenses. Total operating expenses increased 0.3% to NT$2,968 million (US$89 million) in the six months ended June 30, 2002 from NT$2,959 million in the same period in 2001. Selling expenses decreased 22.4% to NT$260 million (US$8 million) in the six months ended June 30, 2002 from NT$335 million in the same period in 2001. This decrease was primarily due to decreases in compensation for sales personnel as a result of lower net sales revenue and selling expenses of certain overseas subsidiaries. Administrative expenses increased 9.9% to NT$852 million (US$25 million) in the six months ended June 30, 2002 from NT$775 million in the same period in 2001. This increase was primarily due to higher administrative expenses at certain overseas subsidiaries. Research and development expenses increased 0.3% to NT$1,855 million (US$55 million) in the six months ended June 30, 2002 from NT$1,850 million in the same period in 2001, as we increased our development activities and continued to pursue our longterm objective of spending not less than 10% of net sales revenue on research and development. See ‘‘Business — Research and Development’’ and ‘‘Business — New Product Development’’.

Operating Income (Loss). As a result of the foregoing, we incurred an operating loss in the six months ended June 30, 2002 of NT$3,304 million (US$99 million) compared to an operating income of NT$3,839 million in the same period in 2001.

Other Income. Total other income decreased 47.5% to NT$301 million (US$9 million) in the six months ended June 30, 2002 from NT$573 million in the same period in 2001, largely as a result of a decrease in foreign exchange gain and interest income. Foreign exchange gain decreased 47.5% to NT$48 million (US$1 million) in the six months ended June 30, 2002 from NT$91 million in the same period in 2001 because we recorded significantly lower gains from our Japanese yen based currency derivative contracts. Interest income decreased 59.3% to NT$123 million (US$4 million) in the six months ended June 30, 2002 from NT$302 million in the same period in 2001, principally as a result of lower interest rates and lower cash deposits.

Other Expenses. Total other expenses increased to NT$4,170 million (US$125 million) in the six months ended June 30, 2002 from NT$1,603 million in the same period in 2001. Our inventory loss provision increased to NT$3,376 million (US$101 million) in the six months ended June 30, 2002 from NT$552 million in the same period in 2001, largely as a result of an 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. Net investment loss increased 41.8% to NT$78 million (US$2 million) in the six months ended June 30, 2002 from NT$55 million in the same period in 2001 because our past substantial net investment losses were mostly written off in 2001. Interest expense increased 1.2% to NT$581 million (US$17 million) in the six months ended June 30, 2002 from NT$574 million in the same period in 2001, due to a marginal increase in our outstanding indebtedness. Other expenses decreased 88.4% to NT$28 million (US$0.8 million) in the six months ended June 2002 from NT$242 million in the same period in 2001. Other expenses were significantly higher in the six months ended June 30, 2001 because we recorded a provision for doubtful accounts receivable for an insurance claim in the amount of NT$227 million.

Net Income (Loss). As a result of the foregoing, we recorded a net loss of NT$7,184 million (US$215 million) in the six months ended June 30, 2002 compared to a net income of NT$2,429 million in the same period in 2001.

Year Ended December 31, 2001 compared to Year Ended December 31, 2000

Net Sales Revenue. Our total net sales revenue decreased 35.1% to NT$21,747 million (US$650 million) in 2001 from NT$33,493 million in 2000. This decrease resulted primarily from lower sales volume and declining average selling prices due to the market downturn.

The proportion of our net sales revenue from mask ROM products decreased to 56.8% in 2001 from 57.6% in 2000. This decrease was primarily due to decreasing sales of mask ROM products to Nintendo following its introduction of the GameCube and a decrease in the average selling prices of mask ROM

products. The average selling prices for mask ROM products decreased to NT$89.6 per die in 2001 from NT$105.8 per die in 2000, primarily as a result of a decrease in demand for high-density mask ROM products.

The proportion of our net sales revenue from flash products decreased to 14.8% in 2001 from 19.3% in 2000. This decrease was primarily due to decreasing demand and average selling prices for flash products as a result of an oversupply in the flash market in 2001. The average selling prices for flash products decreased to NT$74.3 per die in 2001 from NT$110.4 per die in 2000.

The proportion of our net sales revenue from EPROM products increased to 4.5% in 2001 from 3.7% in 2000. Sales revenue for EPROM were generally stable during the two periods. The average selling prices for EPROM products decreased to NT$40.1 per die in 2001 from NT$55.0 per die in 2000, principally as a result of a continued downturn in the industry.

The proportion of our net sales revenue from our SOC products increased to 14.8% in 2001 from 10.5% in the same period in 2000. This increase was primarily due to increasing shipments of SRAMs and flash to Mitsubishi, which accounted for 11.8% of our net sales revenue in 2001, as compared to 8.0% of our net sales revenue in 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.

The proportion of our net sales revenue from our multimedia products increased to 7.3% 2001 from 4.5 % in the same period in 2000. This increase was mainly due to an increase in the sales volume of our multimedia products as a result of increased end-use applications for our multimedia products, which was partially offset by a decrease in the average selling prices of our multimedia products. The decrease in the average selling prices of our multimedia products is due to a continued industry downturn.

Cost of Goods Sold and Gross Profit. Cost of goods sold decreased 24.5% to NT$11,701 million (US$350 million) in 2001 from NT$15,498 million in 2000, largely as a result of lower sales volume and lower utilization rates for our manufacturing facilities in 2001. The decrease in cost of goods sold was also attributable to a decrease of 27.9% in subcontracting expense for services, such as testing and packaging, resulting from an overall reduction of charges for such services during the market downturn. In addition, compensation expense decreased by 36.3% mainly due to a decrease in compensation expense for production personnel. These decreases were partially offset by an increase of 30.8% in depreciation and amortization expenses.

As a result of the foregoing, our gross profit decreased to NT$10,046 million (US$300 million) in 2001 from NT$17,995 million in 2000. In addition, our gross margin decreased to 46.2% in 2001 from 53.7% in 2000.

Operating Expenses. Total operating expenses increased 12.0% to NT$6,557 million (US$196 million) in 2001 from NT$5,857 million in 2000. Selling expenses decreased 35.0% to NT$611 million (US$18 million) in 2001 from NT$940 million in 2000. This decrease was primarily due to decreases in compensation for sales personnel as a result of lower net sales revenue. Administrative expenses increased 19.7% to NT$2,121 million (US$63 million) in 2001 from NT$1,772 million in 2000. This increase was primarily due to an increase in the compensation expenses relating to our stock performance-based bonus plan. Research and development expenses increased 21.7% to NT$3,825 million (US$114 million) in 2001 from NT$3,144 million in 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.

Operating Income (Loss). As a result of the foregoing, we had operating income of NT$3,489 million (US$104 million) in 2001 compared to NT$12,139 million in 2000.

Other Income. Total other income increased 43.5% to NT$1,356 million (US$41 million) in 2001 from NT$945 million in 2000. This increase was primarily due to (i) an increase in foreign exchange gain of 54.9% to NT$454 million (US$14 million) in 2001 from NT$293 million in 2000 attributable to our Japanese yen based currency derivatives contracts as a result of the depreciation of the Japanese yen and (ii) an increase in other income to NT$309 million (US$9 million) in 2001 from NT$64 million in 2000 primarily as a result of a reversal of allowance for doubtful account, damage reimbursement from our supplier and other miscellaneous items. These increases were partially offset by a decrease in interest income of 8.3% to NT$496 million (US$15 million) in 2001 from NT$541 million in 2000, largely resulting from lower interest rates and our lower level of cash deposits and a net investment gain of NT$76 million (US$2 million).

Other Expenses. Total other expenses increased to NT$4,768 million (US$143 million) in 2001 from NT$2,073 million in 2000. Our inventory loss provision increased substantially to NT$2,560 million (US$77 million) in 2001 from NT$77 million in 2000. This increase was primarily due to an 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. Interest expense decreased 7.3% to NT$1,173 million (US$35 million) in 2001 from NT$1,266 million in 2000, due to declining interest rates. Net loss from equity investment decreased 8.5% to NT$550 million (US$16 million) in 2001 from NT$601 million in 2000. We incurred substantial losses in our equity investment primarily as a result of the write off of our investments in Caesar Technology, Inc. (‘‘Caesar Technology’’) and Chantek Electronic Co, Ltd. (‘‘Chantek’’). Other expenses increased to NT$248 million (US$7 million) in 2001 from NT$107 million in 2000. This increase was principally a result of a provision for insurance claim relating to an earthquake in Taiwan in 1999. See ‘‘Business — Strategic Investments’’.

Net Income (Loss). As a result of the foregoing, we had a net loss of NT$866 million (US$26 million) in 2001 compared to net income of NT$10,613 million in 2000.

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

Net Sales Revenue. Our total net sales revenue increased 97.5% to NT$33,493 million in 2000 from NT$16,957 million in 1999. This increase was primarily due to higher sales volumes and a shift of our product mix towards higher priced, high-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.

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 ROM products increased to NT$105.8 per die in 2000 from NT$94.9 per die in 1999, 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 average selling prices for flash products increased to NT$110.4 per die in 2000 from NT$53.0 per die in 1999, primarily as a result of increased demand and higher market prices.

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 decreased demand for EPROM products. We believe the increasing popularity of flash products will continue to decrease demand for EPROM products. The average selling prices for EPROM products increased to NT$55.0 per die in 2000 from NT$35.5 per die in 1999, primarily as a result of increased demand and higher market prices.

The proportion of our net sales revenue from our SOC products increased to 10.5% in 2000 from 5.4% in 1999, primarily due 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 manufactured primarily for Matsushita Electric Industrial Co., Limited (‘‘Matsushita’’) to 0.3% in 2000 from 2.9% in 1999.

The proportion of our net sales revenue from our multimedia products decreased to 4.5% 2000 from 9.5% in the same period in 1999. This decrease was mainly due to the larger increases in other product sales.

Cost of Goods Sold and Gross Profit. Cost of goods sold increased 27.8% to NT$15,498 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 25.5% in depreciation and amortization expenses, which increased to NT$6,048 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.

As a result of the foregoing, our gross profit increased to NT$17,995 million in 2000 from NT$4,833 million in 1999. In addition, our gross margin increased to 53.7% in 2000 from 28.5% in 1999. The significant increase in gross margin was primarily due to the average selling prices of our nonvolatile memory products increasing at a faster rate than our costs of production. In addition, our unit costs declined as a result of improved productivity and the use of more advanced technology.

Operating Expenses. Total operating expenses increased 79.8% to NT$5,857 million in 2000 from NT$3,258 million in 1999. Selling expenses increased 84.2% to NT$940 million in 2000 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 to NT$1,772 million in 2000 from NT$803 million in 1999, primarily as a result of increases in the number of employees and increased operating activities and the increase 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 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001. Research and development expenses increased 61.6% to NT$3,144 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). As a result of the foregoing, we had operating income of NT$12,139 million in 2000 compared to NT$1,575 million in 1999.

Other Income. Total other income increased 11.8% to NT$945 million in 2000 from NT$845 million in 1999. Other income increased primarily as a result of an increase in interest income to NT$541 million in 2000 from NT$377 million in 1999. This increase was primarily due to our higher level of cash deposits resulting from the increase in net sales revenue. In addition, foreign exchange gain increased 7.7% to NT$293 million in 2000 from 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 of NT$31 million in 2000 compared to NT$10 million in 1999 and increased gain on disposal of property, plant and equipment of NT$16 million in 2000 compared to NT$5 million in 1999.

Other Expenses. Total other expenses increased 13.3% to NT$2,073 million in 2000 from NT$1,830 million in 1999. Interest expense increased 13.4% to NT$1,266 million in 2000 from NT$1,116 million in 1999, due to an increase in the level of our outstanding indebtedness. Our provision for inventory loss

decreased 27.4% to NT$77 million in 2000 from NT$106 million in 1999. This decrease was primarily due to fluctuations in the 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 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, NT$49 million from our investments in Prominent Communications, Inc. (‘‘Prominent Communications’’), NT$51 million from our investments in Biomorphic VLSI, Inc. (‘‘Biomorphic VLSI’’) and NT$8 million from our investments in Raio Technology, Inc. (‘‘Raio Technology’’). See ‘‘Business — Subsidiaries and Strategic Investments — Strategic Investments’’. Other expenses increased to NT$107 million in 2000 from NT$9 million in 1999, primarily 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). As a result of the foregoing, we had net income of NT$10,613 million in 2000 compared to NT$907 million in 1999.

Inflation

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 (4.4)% in 1999, (2.7)% in 2000, (1.3)% in 2001 and (0.8)% in the six months ended June 30, 2002.

Taxation

As our facilities are located in the Hsinchu Science-Based Industrial Park (the ‘‘Science Park’’), we enjoy preferential tax treatment in some respects under the ROC 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 value-added 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 ROC 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 up to 30% (25% prior to February 2002) 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. The tax credit may be utilized within five years from the date of its occurrence. 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 five years, for which there is no limit.

We utilized NT$1,849 million of tax credits in 2000, NT$738 million of tax credits in 2001 and NT$159 million of tax credits in the six months ended June 30, 2002.

Net operating losses may be carried forward for a period of five years. As of June 30, 2002, unused tax credits available to reduce future taxable income totaled NT$1,280 million (US$38 million). See note 13 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 and note 15 to our consolidated financial statements for the six-month periods ended June 30, 2001 and 2002 included in this offering circular.

In the six months ended June 30, 2002, we recorded an additional tax provision of NT$1,871 million (US$56 million) which relates primarily to deferred tax assets that, based on our estimates, will not be realized.

U.S. GAAP Reconciliation

General

Our consolidated financial statements are prepared in accordance with ROC GAAP, which differ in certain significant respects from U.S. GAAP. In 1999, we restated the U.S. GAAP reconciliation with respect to our consolidated financial statements for 1998. Those consolidated financial statements were 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, our approximate net loss in 1998 under U.S. GAAP increased by NT$1,056 million to NT$3,072 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,	2001 (US$) (26) (133) 2001 (US$) 1,289 1,294
	1999 (NT$) 907 1,861	2000 2001 (NT$) (NT$) (in millions) 10,613 (866) 8,016 (4,463) Year ended December 31,
	1999 (NT$) 26,384 26,433	2000 2001 (NT$) (NT$) (in millions) 44,573 43,144 41,831 43,300

Note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 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$4,558 million in 1999, NT$17,615 million in 2000 and NT$6,598 million (US$197 million) in 2001. Under U.S. GAAP, our gross profit margin in 1999 was 26.9%, as compared to 52.6% in 2000 and 30.3% in 2001. Under U.S. GAAP we had an operating income of NT$1,237 million in 1999, operating income of NT$11,069 million in 2000 and operating loss of NT$2,263 million (US$68 million) in 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 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 consolidated 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 19 to our consolidated financial statements for the three years ended December 31, 1999, 2000 and 2001 included in this offering circular.

Additional compensation expense in the amount of NT$1,622 million for 2000 and NT$4,273 million (US$128 million) in 2001 was reflected in our net income under U.S. GAAP with respect to employees bonuses and remuneration of directors and supervisors paid in the form of our common shares.

Gross Profit and Operating Income

ROC GAAP permits 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. Under U.S. GAAP, the inventory loss provision is included in the determination of gross profit, while the government subsidies for research and development and the reversal of bad debt expense are included in the determination of operating income.

Plant Capacity Expense Variances

As permitted under ROC GAAP, all plant capacity expense variances may either be charged to the statement of operations or allocated between cost of goods sold and inventory using an appropriate allocation method. Our policy is to expense such variances.

Under U.S. GAAP, such plant capacity variances may only be allocated between cost of goods sold and inventory. This may also result in additional inventory allowances.

Income Taxes

Our undistributed earnings generated after 1997 are subject to a 10% tax in compliance with the ROC Income Tax Law. 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 U.S. 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 statement of operations systematically over the estimated service lives of the employees covered by the pension plan. See note 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular. For U.S. GAAP reconciliation purposes, we amortize our related pension obligation differences in accordance with U.S. 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 1999, NT$3 million in 2000 and NT$3 million in 2001 (US$0.09 million).

Intangible Assets

Under ROC GAAP, we capitalize and amortize software acquired for research and development purposes, acquired expertise and other costs (including costs relating to the implementation of internal use software and purchased technical rights) 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. 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. 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 longlived assets for the years ended December 31, 1999, 2000, 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 in the statement of operations, 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. An other than temporary decline in value is not required to be recognized under ROC GAAP due to the less prescriptive nature of the principles.

U.S. SFAS No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’, requires that all applicable investments be classified as trading securities, available-for-sale securities or held-tomaturity 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. Under U.S. GAAP, if an other than temporary decline in value of a long-term investment exists, the unrealized loss should be charged to the statement of operations.

Derivative Financial Instruments

Under ROC GAAP, we are required to disclose certain information in our consolidated 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 prior to January 1, 2001. 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 U.S. Financial Accounting Standards Board (‘‘FASB’’) issued U.S. SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. U.S. 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.

U.S. SFAS No. 133 was to be effective for fiscal years beginning after June 15, 1999, but was postponed for one year by U.S. 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 U.S. 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 our consolidated statement of operations and a charge of zero 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 18 and 19 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular.

After application of these principles, our net income for U.S. GAAP purposes increased by NT$1,301 million in 1999, decreased by NT$898 million in 2000, and our net loss decreased by NT$228 million (US$7 million) in 2001.

Stock Performance-Based Employee Bonus Plan

In April 1999, our board of directors 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 of directors 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. In April 2002, our board of directors approved a revision of the plan, changing the vesting date for the final 25% to August 1, 2002 from March 31, 2003. Employees who discontinue their employment before the scheduled vesting dates will forfeit these rights to receive cash bonuses.

Between the establishment of the plan and June 30, 2002, rights to receive cash with respect to a total of 3,911,884 shares have been forfeited, and rights to receive cash bonuses with respect to a net additional 13,482,911 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, 2002, 70,750,527 shares were outstanding under the plan, including vested rights to 33,273,921 shares and unvested rights to 37,476,606 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 No. 25’’), ‘‘Accounting for Stock Issued to Employees’’. Under APB No. 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 an ROC GAAP basis, we recorded an increase in income adjustment of NT$598 million in 2000 and NT$496 million (US$15 million) in 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 these 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 (i) the fair market value of our shares plus additional costs related to the rights vested and (ii) 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$345 million (US$10 million) in 2001 and NT$0.39 million (US$0.01 million) in the six months ended June 30, 2002.

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 consolidated statement of operations.

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, a gain of NT$7 million in 2000 and a loss of NT$17 million (US$0.5 million) in 2001 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$1,614 million in 1999, NT$2,486 million in 2000 and NT$2,845 million (US$85 million) in 2001.

Rights Issues and Earnings Per Share

Under U.S. GAAP, a rights issue with exercise price less than the fair value of the shares 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 was generally 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 a subsidiary, for which the effective date is March 31, 2002) should be charged to shareholders’ equity, and that no gain or loss should be recognized in the statement of operations.

In September 2000, the ROC SFAS No. 31, ‘‘Accounting for Joint Ventures’’, was announced. This statement provides for accounting and reporting guidance for three types of joint ventures: jointly controlled operations, jointly controlled assets and jointly controlled entities. ROC SFAS No. 31 was effective for financial periods ended on or after December 31, 2001. Earlier application is permitted.

In July 2001, the FASB issued U.S. SFAS No. 141, ‘‘Business Combinations’’, and U.S. SFAS No. 142, ‘‘Goodwill and Other Intangible Assets’’. U.S. SFAS No. 141 eliminates the pooling method and requires that all business combinations be accounted for under the purchase method. U.S. SFAS No. 141 also requires that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. U.S. 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. U.S. 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 U.S. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. We do not expect U.S. SFAS No. 141 and U.S. SFAS No. 142 to have a significant impact on our consolidated financial statements.

In August 2001, the FASB issued U.S. SFAS No. 143, ‘‘Accounting for Asset Retirement Obligation’’. This Statement provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operations of a longlived assets. This Statement is effective January 1, 2003. We are reviewing the provisions of this Statement and have not yet determined the impact of this Statement on our consolidated financial statements.

In October 2001, the FASB issued U.S. SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’. U.S. SFAS No. 144 addresses significant issues relating to the implementation of U.S. SFAS No. 121, ‘‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of’’, and develops a single accounting model, based on the framework established in U.S. SFAS No. 121 for long-lived assets to be disposed of by sale, regardless of whether or not such assets are deemed to be a business. U.S. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations. This standard will be adopted from January 1, 2002. The impact of this Statement on our consolidated financial statements has not yet been determined.

In April 2002, the FASB issued U.S. SFAS No. 145, ‘‘Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections’’. This Statement rescinds U.S. SFAS No. 4, ‘‘Reporting Gains and Losses from Extinguishment of Debt’’, and U.S. SFAS No. 64, ‘‘Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements’’. As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Accounting Principles Board Opinion APB No. 30. Applying the provisions of APB No. 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item. This Statement also amends U.S. SFAS 13, ‘‘Accounting for Leases’’, to require sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also makes various technical corrections to existing pronouncements. Those corrections are not substantive in nature.

In June 2001, ROC SFAS No. 32, ‘‘Accounting for Revenue Recognition’’, was announced. This Statement provides revenue recognition accounting and reporting guidance for several kinds of transactions including product sales, service sales, interest, dividend and royalty. Under the provisions of ROC SFAS No. 32, product sales revenue shall not be recognized if an enterprise still bears the risk of the product after it is sold. Service sales revenue shall be recognized based on the degree of service completion at the balance sheet date if the result of the service transaction can be reasonably estimated. ROC SFAS No. 32 will be effective for financial periods ended on or after December 31, 2003. Earlier application is permitted.

Liquidity and Capital Resources

We have historically financed our business with cash flow from operations, long-term and short-term debt (including debt convertible into our common shares) and the proceeds from the issuance of equity securities. Our ability to meet our working capital needs through cash flow from operations will be affected by the demand for our products, which in turn may be affected by several factors. Many of these factors are outside of our control, such as economic downturns and declines in the prices of our products caused by a downturn in the semiconductor industry. See ‘‘Risk Factors — Risks Relating to Our Company — Our results of operations fluctuate significantly, which may affect the value of your investment’’. The average selling price of our products are likely to be subject to further downward pressure in the future. To the extent we do not generate sufficient cash flow from our operations to meet our cash requirements, we will have to rely on external financing.

We had negative net cash from operating activities of NT$131 million (US$4 million) in the six months ended June 30, 2002, after adjusting for, among other things, non-cash depreciation and amortization of NT$4,294 million (US$128 million) and for inventory provision of NT$3,376 million (US$101 million). The negative cash flow from operations was primarily due to our net loss of NT$7,184 million during this period. Our net cash provided by operating activities amounted to NT$8,837 million (US$264 million) in 2001, after adjusting for, among other things, non-cash depreciation and amortization of NT$8,006 million (US$239 million) as well as inventory loss provision of NT$2,560 million (US$77 million). Our net cash provided by operating activities amounted to NT$16,123 million in 2000, after adjusting for, among other things, non-cash depreciation and amortization of NT$6,048 million. The decline in net cash generated by operating activities was primarily a result of our net loss of NT$866 million (US$26 million) in 2001, compared to a net income of NT$10,613 million in 2000. Depreciation and amortization increased in 2001 compared to 2000 primarily due to the additional capital expenditure arising from our expansion plan for Fab II and our construction plan for Fab III. In 1999, our net cash provided by operating activities amounted to NT$5,062 million, after adjusting for, among other things, non-cash depreciation and amortization of NT$4,855 million. The increase of net cash generated by operating activities in 2000 compared to 1999 was primarily due to an increase in net income to NT$10,613 million in 2000 from NT$907 million in 1999. The increase in depreciation and amortization in 2000 compared to 1999 was primarily due to increased capital investment for the expansion of our manufacturing capacity.

Net cash used in investing activities was NT$6,387 million (US$191 million) in the six months ended June 30, 2002. The most significant component of these investing activities was the payment for the purchase of property, plant and equipment relating to the construction of Fab III. Net cash used in investing activities was NT$14,335 million (US$428 million) in 2001. The major components of these investing activities were the payment of NT$9,432 (US$282 million) for the purchase of property, plant and equipment relating to the construction of Fab III, sinking fund requirements relating to our outstanding convertible debentures, deposits of NT$1,722 million (US$51 million) relating to the Nintendo lease, and long-term investments of NT$1,492 million (US$45 million). Net cash used in investing activities was NT$12,683 million in 2000. The most significant components of these investing activities was the payment of NT$11,948 million for purchase of property, plant and equipment relating to the upgrade and expansion program for Fab II and the construction of Fab III. Net cash used in investing activities was NT$8,857 million in 1999. The most significant component of these investing activities was the payment of NT$7,226 million for purchase of property, plant and equipment relating to the upgrade and expansion program for Fab II.

Net cash provided by financing activities amounted to NT$5,649 million (US$169 million) in the six months ended June 30, 2002. This amount primarily reflects proceeds form long-term debt of NT$5,652 million (US$169 million), partially offset by the payment of NT$2,049 million (US$61 million) for payments of long-term debt and capital lease obligations. Net cash provided by financing activities amounted to NT$2,333 million (US$70 million) in 2001. This amount primarily reflects proceeds from long-term debt of NT$7,424 million (US$222 million) and proceeds from short-term debt of NT$5,025 million (US$150 million), partially offset by the payments of short-term debt of NT$5,878 million (US$176 million) and payments of long-term debt and capital lease obligations of NT$4,049 million (US$121 million). Net cash provided by financing activities amounted to NT$7,966 million in 2000. This amount primarily reflects proceeds from short-term debt of NT$7,209 million and proceeds from long-term debt of NT$6,170 million, partially offset by the payments of short-term debt of NT$6,833 million. Net cash used in financing activities amounted to NT$742 million in 1999. This amount primarily reflects payments of shortterm debt of NT$6,878 million and payments of long-term debt of NT$3,025 million, partially offset by the proceeds from short-term debt of NT$6,907 million and proceeds from short-term notes of NT$2,580 million.

As of June 30, 2002, our primary sources of liquidity were NT$11,647 million (US$348 million) of cash and cash equivalents and NT$1,208 million (US$36 million) of short-term investments. We held this amount in the form of cash, primarily checking and savings accounts with banks and other financial institutions in Taiwan and other jurisdictions and in the form of time deposits. Our short-term investments primarily consisted of investments in bond funds denominated in New Taiwan dollars. As of June 30, 2002,

we had total availability under existing short-term lines of credit of NT$18,968 million (US$567 million), of which we had borrowed NT$3,776 million (US$113 million). The interest rate for borrowings under these facilities ranged from 2.32% to 3.03% per year as of June 30, 2002. All of our short-term loans are revolving facilities with a term of one year, each of which may be extended on an annual basis with lender consent.

Our long-term liabilities consist primarily of long-term debt and capital lease obligations. As of June 30, 2002, we had aggregate long-term debt, net of the current portion, of NT$19,056 million (US$570 million). The long-term debt was provided pursuant to eight different facilities with ROC banks and financial institutions and four 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 long-term bank loans carried variable interest rates which ranged between 2.59% and 6.8% per annum as of June 30, 2002, mature between 2002 and 2016 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, 2002 — June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2003 — June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2004 — June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2005 — June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2006 — June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After June 30, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ in millions
	5,396 2,004 7,208 323 8,918 604
	24,453

Period
July 1, 2002 — June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2003 — June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2004 — June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2005 — June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2006 — June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After June 30, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NT$ in
millions

5,396
2,004
7,208
323
8,918
604

24,453

See note 10 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 and note 11 to our consolidated financial statements for the six-month periods ended June 30, 2001 and 2002 included in this offering circular. Our long-term loans and facilities contain various financial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain financial ratios, such as liquidity ratio, indebtedness ratio, interest coverage ratio and other technical requirements. In general, covenants in the agreements governing our existing debt, and debt we may incur in the future, may materially restrict our operations, including our ability to incur debt, pay dividends, make certain investments and payments and encumber or dispose of assets. A default under one debt instrument may also trigger cross-defaults under our other debt instruments. An event of default under any debt instrument, if not cured or waived, could have a material adverse effect on our liquidity, as well as our financial condition and operations. See ‘‘Risk Factors — Risks Relating to Our Company — Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations’’.

On September 25, 2001, we entered into a syndicated loan for an amount of up to NT$12.0 billion and we have drawn down NT$3.0 billion of the syndicated loan as of the date of this offering circular. We issued approximately NT$3.0 billion principal amount of corporate bonds in Taiwan in the period between October and November 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.

On January 30, 2002, we prepaid a syndicated loan which had an outstanding amount of 3.17 billion Japanese yen. On February 7, 2002, we issued US$169 million aggregate principal amount of 0.5% convertible bonds due 2007. On November 15, 2002, we issued approximately NT$3.2 billion aggregate principal amount of corporate bonds in Taiwan. We received the proceeds from such issuance on December 12, 2002.

As of June 30, 2002, we had aggregate lease obligations of NT$1,858 million (US$56 million). 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 (NT$2,510 million) for the use of certain manufacturing equipment. As of September 30, 2002, we had lease obligations of approximately US$51 million (NT$1,693 million) payable to Nintendo over a four year period in monthly installments. Title to the leased equipment will be transferred to us at the end of the lease term.

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$8,129 million in 1999, NT$11,803 million in 2000, NT$9,078 million (US$271 million) in 2001 and NT$4,864 million (US$145 million) in the six months ended June 30, 2002. The following table sets forth our principal capital expenditures incurred in 1999, 2000, 2001 and the six months ended June 30, 2002.

Fab I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fab II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fab III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year ended December
	1999 1,604 6,520 — 5 8,129

These amounts include the expansion and upgrade of Fab I and Fab II during 1999 and the expansion and upgrade of Fab II and the construction of Fab III during 2000, 2001 and the six months ended June 30, 2002 and the development of trainee and/or employee facilities and other areas.

We have budgeted capital expenditures of approximately NT$9,021 million (US$270 million) for 2002, primarily to purchase machinery and equipment for Fab III. We intend to obtain finding for our capital expenditures from this offering and additional debt and equity financing that we may consider from time to time. We may adjust the amount of our capital expenditure upward or downward based on cash flow from operations, the progress of our expansion plans and market conditions. We cannot assure you that we will be able to raise additional capital should it become necessary, on terms acceptable to us or at all. See ‘‘Risk Factors — Risks Relating to Our Company — Because of the highly cyclical nature of our industry, our capital requirements are difficult to plan. If we cannot obtain additional capital when we need it, our growth prospects and future profitability may be adversely affected’’.

We believe that our existing cash and cash equivalents, short-term investments, expected cash flow from operations and existing credit lines under our short-term and long-term loan facilities will be sufficient to meet our capital expenditures, working capital, cash obligations under our existing debt and lease arrangements, and other requirements for at least the next twelve months. We have contractual obligations of NT$16,466 million (US$492 million) due in the next three years. We intend to meet our payment

obligations through the expected cash flow from operation, long-term debt and the issuance of additional equity or equity-linked securities. We will continue to evaluate our capital structure and may decide from time to time to increase or decrease our financial leverage through equity offerings or debt borrowings. The issuance of additional equity or equity-linked securities may result in additional dilution to our shareholders.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rates

Our exposure to interest rate risk relates primarily to our long-term debt. We generally incur long-term debt to fund our corporate activities, primarily capital expenditures. We also have interest rate sensitive short-term assets and liabilities, mainly cash in banks and bank loans.

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

Notional Amount by Expected Maturity for Non-Trading Purposes

Rate sensitive assets Cash Variable rate. . . . . . . . . . . . Average interest rate . . . . . . . . . . Fixed rate. . . . . . . . . . . . . . . . . . Average interest rate . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . Rate sensitive liabilities Long term debt Zero coupon convertible debentures due 2003(2) . . . . 1% convertible debentures due 2005(3) . . . . . . . . . . . . Unsecured convertible . . . . . . . 0.5% convertible debentures due 2007(4) . . . . . . . . . . . . Fixed rate. . . . . . . . . . . . . US$ debt Variable rate. . . . . . . . . . . . . . Average interest rate . . . . . . . . NT$ debt Fixed rate. . . . . . . . . . . . . . . . Average interest rate . . . . . . . . Variable rate. . . . . . . . . . . . . . Average interest rate . . . . . . . . Purchased call option(2) Notional amount . . . . . . . . . . . Redemption price(2) . . . . . . . . .	2002(1)	2003	2004	2005	2006	Thereafter	Total	Fair value as of June 30, 2002
	1,835,204 0.52% 9,801,696 1.80% 9,811 — — — — — 562,633 6.71% — — 441,920 5.02% — —	— — — — — 3,325,903 — — — — 1,125,266.8 7.00% — — 991,430 5.00% 3,325,903 25.7649					1,835,204 0.52% 9,801,696 1.80% 9,811 3,325,903 — — — 11,977,970 2,846,697 — — — 6,302,530 — 3,325,903 —	1,835,204 — 9,801,696 — 9,811 3,168,272 — — — 12,559,084 2,846,697 — — — 6,302,530 — — —

(1) Figures shown are for the period between June 30, 2002 to December 31, 2002.

(2) In May 1998, we issued US$150 million aggregate principal amount of zero coupon convertible debentures due 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 financial 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 three-month London Inter-Bank Offered Rate (‘‘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 Y=135=US$1.00. 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 three-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 Y=135=US$1.00. 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, 2002, approximately US$80 million principal amount of these debentures and eight of the options remained outstanding.

(3) In January 2000, we issued US$200 million aggregate principal amount of 1% convertible debentures due 2005. As of June 30, 2002, approximately US$159 million aggregate principal amount of these debentures remained outstanding.
(4) In February 2002, we issued US$169 million aggregate principal amount of 0.5% convertible debentures due 2007. As of June 30, 2002, approximately US$169 million aggregate principal amount of these debentures remained outstanding.

Currencies

A significant portion of our revenue is denominated in currencies other than the NT dollar. As of June 30, 2002, most of our account payables 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, 2002, most of our long-term debt was denominated 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 most of our debt is denominated 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 counterparties would exercise the options. However, we would be compensated from the gain resulting from our underlying Japanese yen sales and use the U.S. dollars received to pay down the U.S. dollar debt. If the Japanese yen depreciates, it is highly likely the counterparties would not exercise the option, and the premiums received would provide us additional cash flow against the foreign exchange loss resulting from our sales as a result of the weak Japanese yen.

To mitigate the additional foreign exchange risk from writing the options described above, a number of the option contracts we entered into include ‘‘barriers’’. These barriers have the effect that, if the exchange rate between the Japanese yen and the U.S. dollar exceeds a given rate, the contracts are automatically terminated. As a result, 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 consolidated 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 consolidated statement of operations.

The table below sets forth our assets and liabilities denominated in currencies other than the NT dollar and the outstanding forward foreign exchange, cross currency interest rate swap and option contracts as of June 30, 2002 by expected year of maturity.

National Amount by Expected Maturity for Non-Trading Purposes

Liabilities denominated in foreign currencies Japanese Yen . . . . . . . . . . . . . . . . . . . . . . . . . US$(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial instruments Forward contracts . . . . . . . . . . . . . . . . . . . . . Buy Japanese Yen/Sell US$ Buy Japanese Yen Notional amount . . . . . . . . . . . . . . . . Average contractual rate. . . . . . . . . . . Sell US$ Notional amount . . . . . . . . . . . . . . . . Average contractual rate. . . . . . . . . . . Buy US$/Sell Japanese Yen Buy US$ Notional amount . . . . . . . . . . . . . . . . Average contractual rate. . . . . . . . . . . Sell Japanese Yen Notional amount . . . . . . . . . . . . . . . . Average contractual rate. . . . . . . . . . . Foreign exchange options. . . . . . . . . . . . . . . . Sell US$/Buy NT$ Sell US$ . . . . . . . . . . . . . . . . . . . . . . . Buy NT$ . . . . . . . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Sell US$/Buy Japanese Yen Sell US$ . . . . . . . . . . . . . . . . . . . . . . . Buy JPY . . . . . . . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Sell Japanese Yen/Buy US$ Buy US$ . . . . . . . . . . . . . . . . . . . . . . . Sell Japanese Yen . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Foreign exchange options with barrier(2) Sell Japanese Yen/Buy US$ Buy US$ . . . . . . . . . . . . . . . . . . . . . . . Sell Japanese Yen . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Sell Japanese Yen/Buy NT$ Sell Japanese Yen . . . . . . . . . . . . . . . . . Buy NT$ . . . . . . . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Sell US$/Buy Japanese Yen Sell US$ . . . . . . . . . . . . . . . . . . . . . . . Buy Japanese Yen . . . . . . . . . . . . . . . . . Average strike price . . . . . . . . . . . . . Cross currency swap . . . . . . . . . . . . . . . . . Sell Japanese Yen/Buy US$ Buy US$ . . . . . . . . . . . . . . . . . . . . . Sell Japanese Yen . . . . . . . . . . . . . . .	2002(1)	2003	2004	2005	Thereafter	Total	Fair value as of June 30, 2002
	— 856,797 380,671 123.1545 368,830 123.1545 268,240 129.08 290,172 129.08 502,950 521,250 34.75 33,530 35,847 127.57 603,540 629,713 124.4983 3,014,347 3,161,596 125.1527 56,200 53,800 0.2690 268,240 286,620 127.50 67,060 56,762	— 5,055,055 — — — — — — — — — — — — — — — — — — — — — — — — — — 134,120 113,524				— 19,994,049 — — — — — — — — — — — — — — — — — — — — — — — — — — — —	— 20,271,364 (9,181) — — — — — — — — (133,998) — — — — — — — — — — — — — — — — — — 30,980 — —

(1) Figures shown are for the period between June 30, 2002 and December 31, 2002.

(2) In May 1998, we issued US$150 million aggregate principal amount of zero coupon convertible debentures due 2003. As of December 31, 2001, approximately US$80 million aggregate principal amount of these debentures remained outstanding. In January 2000, we issued US$200 million aggregate principal amount of 1% convertible debentures due 2005. As of June 30, 2002, approximately US$159 million aggregate principal amount of these debentures remained outstanding. In February 2002, we issued US$169 million aggregate principal amount of 0.5% convertible debentures due 2007. As of June 30, 2002, approximately US$169 million of these debentures remained outstanding.

Market Price Sensitivity Analysis

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; the underlying reference securities were 47,727,535 of our common shares. The contract, as amended, will expire on December 31, 2002. As of June 30, 2002, the remaining underlying reference securities were 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 exchange rates between NT dollars and U.S. dollars in order to determine the settlement amount. Accordingly, if the NT dollar weakens against the U.S. dollar, any losses resulting from the contract would be increased and any gains resulting from the contract would be reduced. Conversely, if the NT dollar strengthens against the U.S. dollars, any losses resulting from the contract would be reduced and any gains resulting from the contract would be increased. The contract rate as of June 30, 2002 was US$1.50208. The carrying amount of this contract as of June 30, 2002 was a loss of NT$1,172 million (US$35 million) while fair value was a loss of NT$1,504 million (US$45 million).

UNCONSOLIDATED INTERIM FINANCIAL INFORMATION

Unaudited Unconsolidated Results of Operations

As a result of our common shares being listed on the Taiwan Stock Exchange, we are required to file on an ongoing basis with the Taiwan Stock Exchange unaudited unconsolidated financial statements as of and for the year-to-date period ending on each of March 31 and September 30. These unaudited unconsolidated financial statements must be prepared in accordance with ROC GAAP, which differ in some material respects from US GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see note 19 to our audited consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included in this offering circular. In addition, by their nature, unconsolidated financial statements are not comparable in material respects with consolidated financial statements, and should not be compared with consolidated financial statements for prior periods.

Our unconsolidated financial statements and the unconsolidated financial data discussed do not include the results of Macronix America, Macronix (B.V.I.) Co. Ltd., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd. and Rui Hong Investment Inc. and the four wholly-owned subsidiaries of Macronix (B.V.I.) Co. Ltd. — Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. — and therefore are not representative of our consolidated results of operations. Any evaluation of the information presented should also take into account our audited consolidated financial statements and the notes to those statements included elsewhere in this offering circular. These unaudited unconsolidated financial data for the nine months ended September 30, 2002 are not indicative of our results for any future period.

Nine Months Ended September 30, 2002 (unaudited) compared to Nine Months Ended September 30, 2001 (unaudited)

Net Sales Revenue. Our unconsolidated net sales revenue decreased 33.1% to NT$11,402 million (US$341 million) in the nine months ended September 30, 2002 from NT$17,036 million in the same period in 2001. This decrease was primarily due to a decline in unconsolidated average selling prices as a result of the continued market downturn, despite an overall increase in sales volume in the relevant period.

The proportion of our unconsolidated sales revenue from mask ROM products decreased to 48.2% in the nine months ended September 30, 2002 from 57.2% in the same period in 2001. This decrease was principally a result of a decrease in sales of mask ROM to Nintendo following its introduction of the GameCube and a decrease in the average selling prices for mask ROM products. The unconsolidated average selling prices for mask ROM products decreased to NT$57 per die in the nine months ended September 30, 2002 from NT$92 per die in the same period in 2001. This decrease was principally a result of a decrease in demand for high-density mask ROM products.

The proportion of our unconsolidated net sales revenue from flash products increased to 24.4% in the nine months ended September 30, 2002 from 14.1% in the same period in 2001. This increase was primarily due to an increase in the unconsolidated sales volume of our flash products, which was partially offset by a decrease in the unconsolidated average selling prices for flash products. The unconsolidated average selling prices for flash products decreased to NT$53 per die in the nine months ended September 30, 2002 from NT$84 per die in the same period in 2001, primarily as a result of increased price competition.

The proportion of our unconsolidated net sales revenue from EPROM products decreased to 4.2% in the nine months ended September 30, 2002 from 4.6% in the same period in 2001. This decrease was primarily due to a decrease in unconsolidated sales volume and unconsolidated average selling prices for our EPROM products. We expect such proportion to further decrease in the fourth quarter of 2002 as a result of the continued decrease in demand for EPROM products. The unconsolidated average selling prices for EPROM products decreased to NT$23 per die in the nine months ended September 30, 2002 from NT$48 per die in the same period in 2001, primarily as a result of an overall decrease in demand.

The proportion of our unconsolidated net sales revenue from our SOC products decreased to 7.5% in the nine months ended September 30, 2002 from 16.6% in the same period in 2001. This decrease was principally due to a decrease in the unconsolidated sales volume and unconsolidated average selling prices of our SOC products as a result of an overall decrease in demand.

The proportion of our unconsolidated net sales revenue from our multimedia products increased to 14.6% in the nine months ended September 30, 2002 from 6.3% in the same period in 2001. This increase was mainly due to an increase in the unconsolidated sales volume of our multimedia products as a result of an increase in the number of end-use applications of our multimedia products, which was partially offset by a decrease in the unconsolidated average selling prices of our multimedia products. The unconsolidated average selling prices for multimedia products decreased primarily as a result of a continued industry downturn.

Cost of Goods Sold and Gross Profit. Our unconsolidated cost of goods sold increased 43.5% to NT$11,866 million (US$355 million) in the nine months ended September 30, 2002 from NT$8,270 million in the same period in 2001. This increase was primarily due to the increased unconsolidated sales volume, which resulted in an increase in unconsolidated raw materials costs and subcontracting expenses for outsourced services such as testing and packaging. The increase also reflected a change in our product mix towards a higher proportion of flash products which have a higher manufacturing cost. The increase was also due to a 10.6% increase in unconsolidated depreciation and amortization expenses.

As a result of the foregoing we incurred an unconsolidated gross loss of NT$463 million (US$14 million) in the nine months ended September 30, 2002, compared to unconsolidated gross profit of NT$8,767 million in the same period in 2001. In addition, we had an unconsolidated negative gross margin of 4.1% in the nine months ended September 30, 2002 compared to a positive unconsolidated gross margin of 51.5% in the same period in 2001.

Operating Expenses. Unconsolidated operating expenses increased 1.4% to NT$4,204 million (US$126 million) in the nine months ended September 30, 2002 from NT$4,146 million in the same period in 2001. Unconsolidated selling expenses increased by 16.1% to NT$482 million (US$14 million) in the nine months ended September 30, 2002 from NT$415 million in the same period in 2001. This increase was primarily due to increases in commissions paid to manufacturers’ representatives as a result of an increase in sales through manufacturers’ representatives. Unconsolidated administrative expenses and research and development expenses remained flat.

Operating Income (Loss). As a result of the foregoing, we incurred an unconsolidated operating loss in the nine months ended September 30, 2002 of NT$4,668 million (US$140 million), compared to unconsolidated operating income of NT$4,621 million in the same period in 2001.

Other Income. Unconsolidated other income decreased 32.4% to NT$374 million (US$11 million) in the nine months ended September 30, 2002 from NT$553 million in the same period in 2001. This decrease was largely due to a decrease in interest income. Interest income decreased 58.7% to NT$163 million (US$5 million) in the nine months ended September 30, 2002 from NT$395 million in the same period in 2001, principally as a result of lower interest rates and our lower level of cash deposits.

Other Expenses. Unconsolidated other expenses increased to NT$5,040 million (US$151 million) in the nine months ended September 30, 2002 from NT$2,246 million in the same period in 2001. Our unconsolidated inventory loss provision increased to NT$3,133 million (US$94 million) in the nine months ended September 30, 2002 from NT$700 million in the same period in 2001, largely as a result of an increase in our inventory levels, a decline in unconsolidated average selling prices for our products and a corresponding decrease in the stated value of our unconsolidated inventories. Unconsolidated net investment loss increased to NT$1,005 million (US$30 million) in the nine months ended September 30, 2002 from NT$447 million in the same period in 2001. This increase was primarily due to increased investment losses attributable to a subsidiary of Macronix (B.V.I.) Co. Ltd. as a result of certain derivative transactions. Interest expense increased 4.1% to NT$861 million (US$26 million) in the nine months ended

September 30, 2002 from NT$827 million in the same period in 2001 due to a marginal increase in the level of our outstanding indebtedness. Other unconsolidated expenses decreased 83.3% to NT$41 million (US$1 million) in the nine months ended September 2002 from NT$245 million in the same period in 2001. Other unconsolidated expenses were significantly higher in the nine months ended September 30, 2001 because we recorded a provision for doubtful accounts receivable for an insurance claim in the amount of NT$227 million.

Net Income (Loss). As a result of the forgoing, we had an unconsolidated net loss of NT$9,333 million (US$279 million) in the nine months ended September 30, 2002 compared to unconsolidated net income of NT$2,468 million in the same period in 2001.

Our unconsolidated capital expenditure for 2001 and for the nine months ended September 30, 2002 was approximately NT$9,078 million (US$271 million) and NT$7,069 million (US$211 million), respectively, which primarily consisted of construction and other expenses relating to Fab III and further upgrade of Fab II.

Unaudited Unconsolidated Quarterly Information

The following table sets forth certain unaudited unconsolidated quarterly financial information for the periods indicated. The information presented below differs from our consolidated financial statements included elsewhere in this offering circular because the information does not consolidate the financial results of our subsidiaries. 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 Relating to Our Company — Our results of operations fluctuate significantly, which may affect the value of your investment’’. In addition, 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.

			Quarter ended	Quarter ended	Quarter ended
Sep. 30, 2000	Dec. 31, 2000	Mar. 31, 2001	Jun. 30, 2001	Sep. 30, 2001	Dec. 31, 2001	Mar. 31, 2002	Jun. 30, 2002
8,876 (3,732)	11,857 (4,221)	6,833 (2,788)				2,832 (3,071)	3,906 (4,093)
5,144 (170) (319) (795)	7,636 (148) (345) (996)	4,045 (164) (327) (861)	2,554 (114) (295) (970)	2,168 (137) (277) (1,001)	1,024 (94) (305) (989)	(239) (136) (274) (868)	(187) (164) (308) (966)
(1,284)	(1,489)	(1,352)	(1,379)	(1,415)	(1,388)	(1,278)	(1,438)
3,860 110 (734)	6,147 3 (744)	2,693 166 (855)	1,175 224 (604)	753 164 (788)	(364) 135 (2,648)	(1,517) 106 (1,309)	(1,625) 503 (3,342)
3,236 (100)	5,406 (437)	2,004 (110)	795 (260)	129 (90)	(2,877) (457)	(2,720) 0	(4,464) 0
3,136	4,969	1,894	535	39	(3,334)	(2,720)	(4,464)

Net sales revenue . . . . . . . . . . . . . . . Cost of goods sold. . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . Operating expenses Selling expenses . . . . . . . . . . . . . . Administrative expenses. . . . . . . . . Research and development expenses Total operating expenses . . . . . . . . . . Operating income (loss) . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . Income taxes (expense) benefit . . . . . . Net income (loss) . . . . . . . . . . . . . . .				Quarter ended	Quarter ended	Quarter ended
	Sep. 30, 2000	Dec. 31, 2000	Mar. 31, 2001	Jun. 30, 2001	Sep. 30, 2001	Dec. 31, 2001	Mar. 31, 2002	Jun. 30, 2002

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.

RECENT DEVELOPMENTS

As a result of our common shares being listed on the Taiwan Stock Exchange, we are required to publish by the end of January of each year certain internally prepared unaudited unconsolidated financial information for the prior fiscal year. This subsection discusses our unaudited unconsolidated financial information for the year ended December 31, 2002 that we have published in response to that requirement. Such unaudited unconsolidated information is generated internally by us and is not subject to the same review and scrutiny, including internal auditing procedures and review by independent auditors, to which we subject quarterly unaudited unconsolidated financial information we publish from time to time pursuant to the requirements of the Taiwan Stock Exchange, or to our audited consolidated semiannual or annual financial statements. Furthermore, as this information is neither audited nor reviewed, it may vary materially from our audited consolidated financial statements for the same period. See ‘‘Risk Factors — Internally prepared annual financial information published by us from time to time pursuant to Taiwan Stock Exchange reporting requirements may be inaccurate and incomplete’’. In addition, by their nature, such unaudited unconsolidated financial information is not comparable in material respects with our audited consolidated financial statements, and should not be compared with our audited consolidated financial statements for prior periods. The financial data discussed below are unconsolidated and do not include the results of Macronix America, Macronix (B.V.I.) Co. Ltd., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd. and Rui Hong Investment Inc. and the four wholly-owned subsidiaries of Macronix (B.V.I.) Co. Ltd. — Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. — and therefore is not representative of our consolidated results of operations. Any evaluation of the information presented should also take into account our audited consolidated financial statements and the notes to those statements included elsewhere in this offering circular. The following unaudited unconsolidated financial data for the year ended December 31, 2002 are not indicative of our results for any future period.

Summary Unconsolidated Internal Financial Information

Year Ended December 31, 2002 (unaudited) compared to Year Ended December 31, 2001

Net Sales Revenue. Our unconsolidated net sales revenue decreased 24.7% to NT$16,075 (US$480.4 million) in 2002 from NT$21,361 million in 2001. This decrease was primarily due to a decline in unconsolidated average selling prices as a result of the continued market downturn, despite an overall increase in sales volume in the relevant period.

As a result of the foregoing we incurred an unconsolidated gross loss of NT$768 million (US$22.9 million) in 2002, compared to an unconsolidated gross profit of NT$9,791 million in 2001.

Other Income. Unconsolidated other income decreased 33.2% to NT$460 million (US$13.7 million) in 2002 from NT$689 million in 2001. This decrease was largely due to a decrease in interest income.

Net Income (Loss). As a result of the forgoing, we had an unconsolidated net loss of NT$11,357 million (US$339.4 million) in 2002 compared to an unconsolidated net loss of NT$866 million in 2001.

Tender Offer

Reorganization

Integrated Solutions Group

Integrated Technology and Manufacturing Group

The integrated technology and manufacturing group will provide the technology to support our core business of providing semiconductor products and design services. This business group will focus mainly on the research and development of new advanced process technologies and design capabilities, as well as the operation and capacity planning of our manufacturing facilities. This business group will also be responsible for the management of the our relationship and technology arrangements with our strategic manufacturing partners to advance our portfolio of process technologies.

BUSINESS

General

We are an independent semiconductor designer, producer and supplier. Our product portfolio includes mask ROM, flash, EPROM, logic, application-specific integrated circuit products and highly integrated system-on a-chip (‘‘SOC’’) solutions. We view ourselves as an integrated solutions provider. In particular, we treat our clients as strategic partners and work closely with them starting from the early stages of product development to the design of silicon chip solutions that meet their specific needs. These partners include Nintendo, with whom we have had a relationship for over ten years, and Hewlett — Packard, with whom we have had a relationship for over five years. We differentiate ourselves by our ability to offer a full range of in-house design, product and process engineering capabilities.

Semiconductors are principally used in three end-use application markets: consumer electronics, computer and communications. We focus our product and technology development efforts to serve the needs of the consumer electronics and communications end markets. Our consumer electronics products focus on end-use applications such as flat panel digital televisions, digital cameras, personal digital assistants, educational toys, video game consoles, cable set-top boxes (‘‘STBs’’) and DVD players, while our communications products focus on end-use applications such as mobile voice and data communications, data networking, wireless and wireline networking. We believe that our expertise in nonvolatile memory technologies, in combination with our logic and SOC design capability, uniquely position us to compete effectively in the consumer electronics and communications markets, and particularly in the wireless communications market, as new applications in those markets increasingly move towards the use of lower power consumption and highly integrated system level semiconductors with embedded nonvolatile memories to meet the requirements of smaller size, longer battery life and lower cost.

We believe that we will benefit from our focus on the consumer electronics end market, which is projected to be the main growth driver for the semiconductor market. According to a report published by Gartner Dataquest on November 15, 2002, semiconductor consumption by the consumer electronics sector is expected to grow at an average of 13.1% per year from 2001 to 2006. In the six months ended June 30, 2002, based upon a survey of our current customers and excluding sales to distributors where the end-use application is unknown, 62.2% of our total net sales revenues was generated by our products for consumer electronics applications, 22.6% by our products for computer applications and 14.0% by our products for communications applications.

In order to provide our customers with industry leading nonvolatile memory semiconductors and customer application-specific products, we have developed a range of core process technologies, advanced design processes, highly efficient wafer manufacturing capabilities and the intellectual property necessary to keep us competitive. We believe that we were the first company 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. In addition, 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 a report published by Gartner Dataquest on June 24, 2002, based on sales revenue, we were the world’s largest supplier of mask ROMs in 2001, with an estimated global market share that has increased to approximately 53.1% in 2001 from 9.1% in 1995, and we were ranked fourth in the EPROM market in 2001 based on sales revenue. We believe that, based on sales revenue, we ranked thirteenth in the flash market in 2001.

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 Nasdaq, and we became the first ROC company with securities listed in the United States.

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 other applications including consumer electronics, telecommunications systems, automation and control systems and security applications. According to a report published by Gartner Dataquest on November 15, 2002, semiconductors used in communications electronics, consumer electronics and data processing electronics sectors are expected to grow at an average of 8.9%, 13.1% and 10.6% per year from 2001 to 2006, respectively.

Historically, personal computers have been the principal application for semiconductors. However, as the penetration rate of personal computers in many developed countries exceeds 70%, and as there is a general lack of new computing intensive applications to require the purchase of newer and more powerful personal computers, future growth of the personal computer market is expected to be driven more by replacement cycles than by expanded new markets. 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 significant 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 semiconductors of increasing power and decreasing size. This is expected to drive innovation and product volume growth. For example, next generation mobile phone handsets, such as third generation mobile phones and smartphones, will have features which support more data processing applications, multimedia applications and Internet applications, and these applications will drive the consumption of high performance logic and memory products, such as high-density mask ROM and flash products.

Demand for STBs is expected to be another driver for growth in the market for communicationsrelated semiconductor products, as existing cable infrastructure is expected to become a platform for residential and commercial broadband Internet access in the United States 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 digital consumer electronics appliances such as DVD players, flat panel digital televisions, digital cameras, MP3 digital audio players, Internet connecting video game consoles, electronic dictionaries and electronic books 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. Demand was strong across the industry, supported by a recovery in demand from Asia. By the end of 2000, the overall semiconductor market experienced another down cycle, caused by weak global macroeconomic conditions and slower growth in the computing and communications markets. Since the beginning of 2001, we have experienced excess capacity, overproduction, significant inventory buildup and decreases in average selling prices in the semiconductor industry. Gartner Dataquest has forecast in a report published on November 15, 2002 that semiconductor revenue worldwide will remain essentially unchanged between 2001 and 2002 with an estimated growth rate of 0.5%. In addition, Gartner Dataquest has forecast marginal positive growth in 2003 and a strong recovery is expected in 2004 with an approximately 26.2% annual market revenue growth 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.

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 classified as 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 (‘‘DRAM’’) devices. Static random access memory (‘‘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 flash.

ROM: The earliest and most basic type of nonvolatile memory is the read-only memory (‘‘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. Mask ROM is widely applied in the video game and printer applications given its nonerasable nature and cheap unit cost. Long-term proliferation of new consumer electronic products, such as electronic books, electronic dictionary and multimedia cards for third generation phone applications will increase the consumption of mask ROM.

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 (‘‘EEPROM’’) devices, which could be electronically 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. Flash demand has

increased significantly in recent years, driven by growing usage in cellular phones, VCD/DVD players, STBs, digital still camera and networking devices. The market is expanding in both the number of key applications and memory usage per system.

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 (‘‘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.

In addition to standard logic devices, there are also ASICs which are custom-designed semiconductors. These devices include a broad range of full-custom, semi-custom and applicationspecific standard product 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. 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. Furthermore, convergence of cellular phones and personal digital assistants will further increase the complexity and functionality of semiconductors and this trend will continue to drive the demands for SOC solutions.

Producers of SOC designs and wafers require access to both manufacturing capacity and product designs. In particular, 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

The components of our strategic initiatives are as follows:

Maintain our leadership in nonvolatile memory market by enhancing our product design capabilities and upgrading our technology

We are a leading supplier of nonvolatile memory semiconductor. Our leadership position is backed by our extensive proprietary product designs and advanced technologies. For our mask ROM products, we were the first company in the world to introduce a 512Mb ROM using 0.18 micron process technology in 2001. We plan to introduce 1Gb ROM products using 0.15 micron technology in 2003. We expect the end-use application market for these products to mature upon our launch of these new products. For our flash products, we are currently developing 128Mb and 256Mb products using 0.15 micron process technology and two-bit per cell technology, targeting high-density and embedded applications. We believe that our focus on and expertise in the development of advanced nonvolatile memory technologies will allow us to maintain our leading market position.

Capitalize our strengths in nonvolatile memory for embedded applications to provide SOC design and production services

To complement our leading position in nonvolatile memory market, we are seeking to extend further capabilities into the logic and multimedia devices. The shift in the growth of semiconductor use from personal computers to communications and consumer electronics has given rise to increasing demand for SOC solutions. As SOC solutions combine logic design with embedded memory and require substantial design and manufacturing capability, we believe our years of design and production expertise have enabled us to provide SOC solutions to our customers. We plan to continue to provide embedded flash products and work closely with our strategic customers to provide them customized and high value-added SOC products. We believe this will enable us to reduce our exposure to the cyclicality of the memory market while building a broad range of product and process capabilities that will better enable us to provide SOC solutions for our customers.

Leverage our strengths in nonvolatile memory and broad range of product and process capabilities to penetrate key customers through cross-selling

We plan to expand our business with our existing customers and increase our revenues by broadening the range of our products and increasing our cross-selling efforts, with a view towards satisfying the increasingly complex and specific needs of our customers. We intend to capitalize on our strength in mask ROM to cross-sell our other products. For example, we have successfully sold flash, logic and SOC products to Nintendo, which originally had been a customer for our mask ROM products only. We believe the increasing cross-selling opportunities allow us to better understand the needs of, and strengthen our relationships with, our customers.

Continue to focus on providing system level solutions on wireless communications and portable consumer electronics applications

We plan to focus on extending our expertise in the nonvolatile memory market into the logic market by combining logic products with embedded memory to offer comprehensive system solutions to our customers. We are seeking to take advantage of the growth in the demand for non-personal computer platforms such as portable consumer electronics platforms and, in particular, the demand for better and smaller integrated circuits for communications and consumer applications. We believe that our extensive design capability, strong research and development team and our close relationship with system vendors will enable us to provide complete system level solutions to our customers. We view our future capability in providing complete system level solutions as the key to success in the end markets that we are targeting.

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 successfully migrated to 0.15 micron process technology for both flash and mask ROM in the fourth quarter 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 have completed the construction of Fab III in July 2002. However, due to the adverse conditions currently prevailing in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2003 or later. We plan to continue to explore ways to increase our manufacturing capacity in a prudent manner. For example, we have entered into technology sharing arrangements with, and outsourced some wafer production to, Tower Semiconductor. We may also in the future consider establishing joint ventures with our strategic partners to build and operate new fabs.

Our Products and Services

Our principal products and services consists of memory products, SOC products and services, and multimedia products. The following table sets forth our main products, their characteristics and applications, and the percentage of net sales revenue represented by these products in 1999, 2000, 2001 and the six months ended June 30, 2002:

Products Nonvolatile Memory: Mask ROM . . . Flash . . . . . . . . EPROM . . . . . . SOC . . . . . . . . Multimedia. . . .	Characteristics Not reprogrammable Reprogrammable within the application system; less expensive than EEPROM Reprogrammable outside the application system using industrial processors Highly integrated system-on-a- chip solutions featuring embedded flash technology and value-added services Logic IC products for various audio, video and networking products	Applications Games, PDAs, word processors, printers, fax modems, VCDs, cellulars, STBs Mobile phones, PDAs, digital cameras, STBs, Web TVs Fax modems, VCDs, cellulars, STBs Internet applications, CDs, DVDs, microcontrollers with embedded flash technology Digital still cameras, flat panel displays, digital answering machines, digital recorders, home networking devices, various MSB, DVD and Ethernet controllers	% of net sales reven	ue
			Year ended December 31, 1999 2000 2001 62.8% 57.6% 56.8% 12.3% 19.3% 14.8% 7.7% 3.7% 4.5% 5.4% 10.5% 14.8% 9.5% 4.5% 7.3%	Six months ended June 30, 2002
				45.6% 23.0% 4.6% 8.9% 14.5%

Memory Products

Our memory products consist of Mask ROM, Flash and EPROM.

Memory Products — 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 wellpositioned 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 successfully migrated to 0.15 micron process technology for both flash and mask ROM in the fourth quarter 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.

The following table provides an overview of our principal mask ROM products and the percentage of net sales revenue represented by these products in 1999, 2000, 2001 and the six months ended June 30, 2002.

% of our total mask ROM	% of our total mask ROM	sales
Year ended December 31, 1999 2000 2001 0.4% 0.1% —(1) 2.2% 1.4% 0.2% 3.5% 3.5% 2.1% 4.8% 7.1% 4.7% 6.6% 20.1% 17.8% 0.5% 0.2% —(1) 7.3% 16.1% 24.9% 8.7% 10.5% 27.3% 5.3% 2.0% 0.8% 18.4% 7.9% 7.5% 42.2% 31.1% 14.7%		Six months ended June 30,
1999 0.4% 2.2% 3.5% 4.8% 6.6% 0.5% 7.3% 8.7% 5.3% 18.4% 42.2%	2000 0.1% 1.4% 3.5% 7.1% 20.1% 0.2% 16.1% 10.5% 2.0% 7.9% 31.1%	2002
		—(1) —(1) 4.4% 2.4% 20.1% —(1) 27.9% 31.9% 0.2% 11.0% 2.1%

(1) Less than 0.1%.

Competition. The mask ROM industry is highly competitive. We compete with major international semiconductor companies, including NEC, Oki 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.

According to a report published by Gartner Dataquest on June 24, 2002, we were ranked the first in terms of revenues with a 53.1% of market share in the global mask ROM market in 2001. 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’’. As a result, 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. In 2001, sales of Game Boy Advance amounted to a small portion of our net sales revenue due to the work demand. Our sales revenue for Game Boy Advance increased in the second half of 2002 as the demand increased. 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.

Memory Products — 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 128Mb 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 provided 32 Mb flash products based on Mitsubishi’s DINOR flash design. We started providing 64Mb and 128Mb flash products based on Mitsubishi’s DINOR flash design in the fourth quarter of 2002. 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 two-bit per cell manufacturing capabilities, which are expected to reduce our unit production costs. We have currently achieved multiple time programming standard for two-bit per cell manufacturing and expect to achieve flash standard in 2003. See ‘‘ — Manufacturing and Quality Control — Manufacturing’’.

The following table provides an overview of our principal flash products and the percentage of net sales revenue represented by these products in 1999, 2000, 2001 and the six months ended June 30, 2002:

% of our total flash sales	% of our total flash sales	% of our total flash sales
Year ended December 31, 1999 2000 2001 21.7% 9.9% 4.3% 20.1% 13.5% 6.6% 20.8% 30.4% 47.6% 4.6% 7.6% 9.9% 28.1% 36.0% 23.3% —(1) 0.9% 7.7% 0.3% 0.2% 0.1% 4.4% 1.5% 0.4% —(1) —(1) —(1)		Six months ended June 30,
1999 21.7% 20.1% 20.8% 4.6% 28.1% —(1) 0.3% 4.4% —(1)	2000 9.9% 13.5% 30.4% 7.6% 36.0% 0.9% 0.2% 1.5% —(1)	2002
		—(1) 0.2% 43.1% 11.2% 28.6% 16.6% —(1) —(1) 0.25%

(1) 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, STMicroelectronics, Toshiba and Sharp, which together accounted for a global market share of approximately 73.5% in 2001 (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. Our sales revenues for flash products decreased 5.1% to NT$1,574 million (US$47 million) in the six months ended June 30, 2002 from NT$1,659 million in the six months ended June 30, 2001.

See ‘‘Risk Factors — Risks Relating to Our Company — We intend to increase our manufacturing capacity in flash products, which may expose our business and operations to additional risks that may adversely affect our financial condition and results of operations’’.

Memory Products — 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.

The following table provides an overview of our principal EPROM products and the percentage of net sales revenue represented by these products in 1999, 2000 and 2001 and the six months ended June 30, 2002:

% of our total EPROM sales	% of our total EPROM sales	% of our total EPROM sales
Year ended December 31, 1999 2000 2001 1.9% 2.0% 2.1% 14.9% 8.6% 5.8% 14.1% 19.2% 12.8% 26.4% 29.1% 29.6% 24.5% 21.8% 19.4% 18.2% 19.3% 30.2%		Six months ended June 30,
1999 1.9% 14.9% 14.1% 26.4% 24.5% 18.2%	2000 2.0% 8.6% 19.2% 29.1% 21.8% 19.3%	2002
		0% 9.4% 0% 64.7% 11.0% 14.9%

Competition. In 2001, we were the world’s fourth largest supplier of EPROMs according to a report published by Gartner Dataquest on dated June 24, 2002, accounting for 5.3% 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 Incorporated 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 Products and Services

We focus on providing the following products and services:

. core SOC products, mainly embedded flash products which incorporate flash directly in logic devices embedded on a single semiconductor chip; and
. value-added services, which center on providing application-specific solutions to our strategic customers.

Core SOC products. Since 1999, we have provided an ASIC service for microcontrollers with embedded flash or ROM and products used in CD-ROM, DVD-ROM and other consumer electronics applications. Our most important products in this area are microcontrollers with embedded flash technology that we have jointly developed with Koninklijke Philips Electronics N.V. (‘‘Philips’’).

Value-added services. We have combined our SOC and strategic manufacturing operations in one unit as part of our strategy of leveraging our competitive manufacturing capability. With our extensive fab experience and advanced nonvolatile memory technology, we strive to work closely with our customers as

strategic manufacturing partners and to provide them high value-added services. By growing with our key strategic customers, we seek to provide SOC design and production services with a focus on the information appliances market.

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, among others, Atmel, Samsung, STMicroelectronics, International Business Machines Corporation (‘‘IBM’’) and Infineon Technologies AG.

Multimedia Products

In 2001, we focused 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
. microprocessors.

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 products focus on the following end-market applications:

Digital Still Camera. We are the first company to provide 16-million pixel digital still camera solution to our customers, including Minolta, for their high end digital cameras.

Flat Panel Display. Our products include flat panel display controllers for monitors, televisions and projectors, scan controllers and timing controllers for liquid crystal display flat panel applications. We supply video controller devices to, among others, Samsung, LG Electronics Investment, TopVision Technologies, Inc. and Chunghwa Picture Tubes Ltd., for flat panel display applications.

Home Customer Premises Equipment. Our home customer premises equipment products include 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 identification and to provide for compatibility with additional flash.

Home Networking Devices. Our main products in this area are 16 port and 24 port switch controllers. The controllers are memory embedded to provide cost effective solutions. Major OEM makers in Taiwan using the controllers include Accton Technology Corporations (‘‘Accton’’), D-Link Systems, Inc. (‘‘DLink’’) and Lite-On Technology Corporation (‘‘Lite-On’’).

Key Customer Accounts. In addition to the products mentioned above, we also design ASIC for major accounts, including USB controller, DVD controller and Ethernet controller for specific customers. For example, we design clock generators, joystick controllers, wireless game controllers and Ethernet controllers for Nintendo.

New Product Development

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

Mask ROM

. new 64/128/256Mb product designs for Game Boy Advance;
. introduce cost-effective two-bit per cell manufacturing technology;
. cost-effective four-bit per cell manufacturing technology; and
. a new low pin-count design for 64Mb products.

Flash

. a 256Mb data storage/code storage flash product;
. a 1.8 volt low voltage, synchronous, read-while-write product for portable devices and mobile internet appliance applications;
. a monochip design which combines flash and multiple time programmable devices that optimizes data storage and code storage by using two-bit per cell technology;
. extend the capacity of SPI products by using two-bit per cell technology;
. a 0.12 micron cost-effective two-bit per cell manufacturing technology; and
. a 0.11 micron high endurance PAC-AND cost-effective manufacturing technology.

EPROM

. a 0.25 micron, two-bit per cell, page mode high-speed model, 64/128Mb multiple time programmable product.

Memory Card

. 2Mb to 64Mb ROM multimedia card;
. 16/32/64Mb one-time-programmable multimedia card;
. 64/128/256Mb ROM secure digital card;
. 64/128/256Mb memorystick ROM card; and
. flash multimedia card and flash secure digital card.

Multimedia Products

. a Bluetooth[TM] chipset for communication devices;

. an intelligent multiple-port gigabit ethernet switch controller;
. a sound generator for cellular phone ring tones;
. a highly integrated controller for flat panel display and plasma display panel applications;
. a highly integrated controller for digital televisions;
. an audio control chip featuring long-time recording;
. a low-power consumption digital still camera control chip;
. an ultra-high resolution 16-million pixel control chip for digital still camera applications;
. customer-made control chips for educational devices and language learning machines; and
. a customer-made broadband bridge chip, wireless game controller, frequency generator, and high definition television display controller for video game platforms.

SOC

. an integrated chipset combined with a 32-bit ARM7[TM] microprocessor and embedded flash and mix signal for optical disk drive, internet appliance and laser printer applications;
. a new architecture for the provision of data storage for SOC devices;
. provide intellectual property libraries and design services on single voltage embedded flash compilers, embedded mix signal devices, logic devices and SRAM/ROM memory devices for SOC development of audio compact disc, general positioning system, internet appliance, LCD monitor and educational and learning systems applications;
. introduce 0.18/0.15 micron manufacturing technology for low power consumption embedded flash product;
. introduce new process technology for MEMS applications;
. develop embedded EEPROM intellectual property for smart card applications;
. introduce low-end derivative processes for consumer products; and
. new technology on FPGA logic process.

Reorganization

In order to better serve the increasingly sophisticated needs of our customers, we recently announced a plan to reorganize our organizational and business unit structure. Our existing organizational and business unit structure is organized on the basis of on the principal types of products and services we provides which consist of memory products, SOC products and services, and multimedia products. Under our new organizational and business unit structure, we intend to organize our operations into two main strategic business groups. We believe that our new organizational and business unit structure will increase our operational efficiency and effectiveness in meeting the needs of our customers, as well as improve our overall competitiveness.

Integrated Solutions Group

The integrated solutions group will be responsible for focusing on applications excellence and providing value-added design services and system-level platform solutions to our customers based upon the type of end-market application that such services and solutions are designed to serve. In addition, this business group will be responsible for developing strategic partnerships with our customers and leveraging on our close relationships with our platform and systems partners to provide integrated solutions for customers. This business group will also be the channels and marketing arm of our company. In particular, this business group will be responsible for the implementation of our strategic initiative to leverage on our current strengths to penetrate key customers through the cross-selling of our products and services.

Integrated Technology and Manufacturing Group

The technology and manufacturing group will provide the technology to support our core business of providing semiconductor products and design services. This business group will focus mainly on the research and development of new advanced process technologies and design capabilities, as well as the operation and capacity planning of our manufacturing facilities. This business group will also be responsible for the management of the our relationship and technology arrangements with our Strategic manufacturing partners to advance our portfolio of process technologies.

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, Toshiba, Matsushita, Palm Inc., Mitsubishi, Inventec Corporation (‘‘Inventec’’), Siemens AG (‘‘Siemens’’), Thomson Multimedia S.A. (‘‘Thomson’’), Samsung, Sony Corporation (‘‘Sony’’), Yamaha Corporation (‘‘Yamaha’’), Benq Corporation (‘‘Benq’’) and Leapfrog Enterprises, Inc. (‘‘Leapfrog’’). 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 are working with Mitsubishi to jointly develop high-density flash products for electronic communication devices including cellular phones and information appliances. We design 128 Mb flash products based on Mitsubishi’s DINOR flash design; and
. we are working with Philips on the production of a series of eight-bit microcontrollers with flash embedded in the chip. Philips and us have also developed an embedded flash module for Philips’ 16bit extended architecture microcontrollers, which we are now fabricating in mass production.

Top Customers

The following table sets forth key customers of our products by percentage of our total net sales revenue in 2001 and the six months ended June 30, 2002 and the type of product purchased:

Customers Nintendo(1). . . . . . . . . . . . . . Hewlett-Packard . . . . . . . . . . Philips . . . . . . . . . . . . . . . . . Mitsubishi . . . . . . . . . . . . . . Leapfrog . . . . . . . . . . . . . . . Samsung . . . . . . . . . . . . . . .	Year ended December 31, Six months ended June 30, 2002 1999 2000 2001 46.0% 32.5% 38.7% 24.70% 2.6% 9.4% 6.3% 12.11% 0.7% 1.3% 3.0% 5.24% —(2) 8.0% 11.8% 3.75% 0 0 0 3.00% —(2) 1.3% —(2) 0.7%	Products purchased
	1999 2000 46.0% 32.5% 2.6% 9.4% 0.7% 1.3% —(2) 8.0% 0 0 —(2) 1.3%
		Mask ROM, flash, logic Mask ROM, flash Logic SRAM, flash Mask ROM Flash, EPROM, logic

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

(2) Less than 0.1%.

Top Products and Applications

The following table sets forth, based upon survey of our current customers, 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, 2001 and the six months ended June 30, 2002:

% of our total net sales revenue

Product area Consumer Electronics . . . . . Computer and Computer Peripheral. . . . . . Communications . . .	Sample applications Games, STBs, data banks, digital answering machines, musical instruments, CD-ROM, CD-RW, TV, DVD, VCD Notebooks, HDDs, motherboards, sound cards, BIOS, printers, word processors, 64- bit GUI PHS, pagers, LAN, WAN, modems, answering machines	Customers Nintendo, Sega Corporation, General Instrument Corp., Inventec, Group Sense (International) Limited, Sharp, Sony, Midway Games Inc., Yamaha, Philips, Siemens, Thomson, Olivetti S.p.A., Hughes Electronic Corporation Hewlett-Packard, Apple, Lexmark International, Inc., Compaq Computer Corp., Dell Computer Corporation, Brother Industries. Ltd, Canon Inc., Casio Computer Co., Ltd, Fujitsu, Matsushita NEC, Oki, Benq MiTAC International Corporation, Hitachi, Ltd., Toshiba, Seagate Technology, Inc., Maxtor Corporation, Philips, Sony NEC, Motorola, Inc., Accton, Avnet Inc., New Japan Radio Co., Ltd., D-Link, Lite-On, Microdyne Outsourcing Inc., Sonic Systems, Inc., AVM Computersysteme Vertriebs GmbH, Askey Computer Corporation	Year ended December 31, 1999 2000 2001 81.2% 63.9% 66.9% 11.4% 20.8% 26.2% 7.4% 15.3% 6.9%	Year ended December 31, 1999 2000 2001 81.2% 63.9% 66.9% 11.4% 20.8% 26.2% 7.4% 15.3% 6.9%	Six months ended June 30,
			1999 81.2% 11.4% 7.4%	2000 63.9% 20.8% 15.3%	2002
					62.2% 22.6% 14.0%

(1) Excludes sales to distributors where the end-use application is unknown.

Nintendo

In 1999, 2000, 2001 and the six months ended June 30, 2002, approximately 46.0%, 32.5%, 38.7% and 24.7%, 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.

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 in Europe in May 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:

. clock generator integrated circuits;
. ethernet adaptors;
. radio frequency component integrated circuits used in a Nintendo wireless controller for use with the GameCube;
. 4Mb and 16Mb 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. See ‘‘Risk Factors — Risks Relating to Our Company — Any delay or reduction 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 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 September 30, 2002, we had lease obligations of approximately US$51 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, II and III 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 successfully migrated to 0.15 micron process technology for both flash and mask ROM in the fourth quarter of 2002. We own all the facilities comprising Fab I and Fab II.

In July 2002, we completed construction of Fab III, our third wafer fabrication facility, on a parcel of leased land next to Fab II, with a production area of 150,640 square feet. However, due to the adverse market conditions currently prevailing in the semiconductor industry, we expect full commencement of operations at Fab III to be delayed until 2003 or later. We currently expect Fab III to have a production capacity of approximately 20,000 eight-inch wafers per month when fully loaded and operational. Depending on the then prevailing market conditions, we expect to expand our production in Fab III in the future. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction_Cost Reduction Initiatives’’ and ‘‘Use of Proceeds’’.

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 fabrication capacity for 2002:

Fab I (six-inch wafers). . . . . . . . . . . . . . . . . . . . . . Fab II (eight-inch wafers). . . . . . . . . . . . . . . . . . . .	1998 35,000 15,000	1999 35,000 20,500	2000 36,000 40,000	2001 36,000 42,000	2002
					35,000 42,000

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 location in the Science Park 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 sub-contract this ‘‘backend’’ work to companies in Taiwan and Hong Kong, including Advanced Semiconductor Engineering Inc., Siliconware Precision Industries Co., Ltd. and other ROC assembly subcontractors, or perform the work ourselves. We sub-contract 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 whereby Tower Semiconductor will provide silicon wafer manufacturing processing services that can employ its microFLASH(r) technology. Such technology is based on proprietary technology licensed from Saifun Semiconductors Ltd. (‘‘Saifun Semiconductor’’). We also have entered into a separate agreement with Saifun Semiconductor that provides us with rights to develop and manufacture certain products related to the microFLASH(r) process technology. Under the agreement with Tower Semiconductor, Tower Semiconductor 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 Semiconductor to manufacture for us in 2001.

In December 2000, we entered into a foundry agreement with Tower Semiconductor. Until the agreement expires in 2011 or if we cease to own a minimum number of shares in Tower Semiconductor, Tower Semiconductor 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 Semiconductor’s new manufacturing facility, up to certain limits. Tower Semiconductor’s new manufacturing facility is not expected to be completed before 2003. So long as we own a minimum number of shares in Tower Semiconductor, Tower Semiconductor 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 100% final testing before shipment. In most cases, externally packaged chips are returned to us for final testing before shipment. We occasionally sub-contract final testing work, which allows us to use the sub-contractors’ drop shipment services.

Fab I and Fab II operate 360 days a year on a two-shift, twelve hours per shift basis which minimizes downtime 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. We believe that 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 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 one 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 to quality assurance organization, we adopt a matrix system. In this, we maintain a single, company-wide quality engineering center. Currently, we have approximately 110 engineers, technicians and other employees whose duty is to develop and maintain a quality system, perform qualifications for new products and new processes. In the meantime, quality control personnel in each strategic business unit monitor design and production processes to ensure high quality products, and are involved from initial design to production.

We received the International Standards Organization (‘‘ISO’’) 9001 certification in January 1994 from the Lloyd’s Register Inspection Limited for our quality management system. In August 1997, we received the ISO 14001 certification for our environmental management system. In September 2001, we received the Quality System 9000 certification from the International Automotive Sector Group for our quality system. In March 2002, we received the Occupation Health and Safety Assessment Series (‘‘OHSAS’’) 18001 certification for our occupational health and safety assessment. 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 1999, 2000, 2001 and the six months ended June 30, 2002, raw materials costs comprised approximately 5.4%, 4.2%, 6.7% and 6.3%, 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.

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 increased on average by approximately 15.9% in 2001 from 2000. Prices for six-inch wafers and for eight-inch wafers both decreased on average by approximately 3.5% between December 31, 2001 and June 30, 2002.

We obtain our six-inch and eight-inch wafer supplies principally from four suppliers, Toshiba Ceramics Co., Ltd., Shin-Etsu Handotai Europe Ltd. and Sumitomo Sitix Silicon Inc., all of which are overseas suppliers, and Taisil Electronic Materials Corp., an ROC company. 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 Chemical Co., Inc.. We obtain our supplies of bulk gases, such as nitrogen, oxygen and hydrogen, principally from our investee, United Industry Gas Co., Ltd. (‘‘United Industry Gas’’), 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 photo resist. 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 stateowned water company. The ROC 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. Since the beginning of 2002, Taiwan has experienced a serious water shortage problem, particularly in the northern Taiwan region. The ROC government has taken a series of measures to alleviate the impact of the water shortage problem, including restricting agricultural water usage. However, if the water shortage problem occurs again, the government may further restrict industrial water usage and our production may be materially adversely affected. See ‘‘Risk Factors — Risks Relating to Our Company — We are vulnerable to natural disasters and other events beyond our control, which could severely disrupt the normal operation of our business and adversely affect our earnings’’. 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 and 260 million kilowatt hours of electricity from the national power grid in 2000 and 2001 respectively and approximately 259 million kilowatt hours of electricity in the nine months ended September 30, 2002.

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.

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:

Year ended December 31, 1999 2000 2001 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 9,642 56.9% 15,633 46.7% 11,279 51.9% 3,562 21.0% 7,384 22.0% 5,711 26.3% 1,736 10.2% 4,753 14.2% 2,702 12.4% 1,505 8.9% 3,175 9.5% 1,422 6.5% 512 3.0% 2,548 7.6% 633 2.9% 16,957 100.0% 33,493 100.0% 21,747 100%	Year ended December 31, 1999 2000 2001 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 9,642 56.9% 15,633 46.7% 11,279 51.9% 3,562 21.0% 7,384 22.0% 5,711 26.3% 1,736 10.2% 4,753 14.2% 2,702 12.4% 1,505 8.9% 3,175 9.5% 1,422 6.5% 512 3.0% 2,548 7.6% 633 2.9% 16,957 100.0% 33,493 100.0% 21,747 100%	Year ended December 31, 1999 2000 2001 (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) (NT$ in millions) (% of total net sales revenue) 9,642 56.9% 15,633 46.7% 11,279 51.9% 3,562 21.0% 7,384 22.0% 5,711 26.3% 1,736 10.2% 4,753 14.2% 2,702 12.4% 1,505 8.9% 3,175 9.5% 1,422 6.5% 512 3.0% 2,548 7.6% 633 2.9% 16,957 100.0% 33,493 100.0% 21,747 100%	Six months ended June 30, 2002	Six months ended June 30, 2002
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%	2000 (NT$ in millions) (% of total net sales revenue) 15,633 46.7% 7,384 22.0% 4,753 14.2% 3,175 9.5% 2,548 7.6% 33,493 100.0%
(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) 11,279 5,711 2,702 1,422 633 21,747	(NT$ in millions) 2,672 1,528 1,767 801 181 6,949	(% of total net sales revenue)
				38.5% 22.0% 25.4% 11.5% 2.6%
				100%

We have relationships with over 45 distributors and manufacturers’ representatives to market our products worldwide. The distributors purchase our products at a discount while the manufacturers’ representatives generally receive a commission of 5% of the goods sold. We maintain sales offices in Taipei; San Jose, California; Chicago, Illinois; Brussels, Belgium; Tokyo and Osaka, Japan and Singapore. 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 receives a fixed percentage discount on all products purchased from us.

We sell our products in Japan (with the exception of sales to Nintendo, which is conducted solely through Megachips) through third-party distributors with marketing and technical support from our sales offices in Tokyo and Osaka. 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 Matsushita.

We sell and distribute our products in North America and Europe through our direct wholly-owned subsidiaries, Macronix America 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 and they 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.

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$1,945 million in 1999, NT$3,144 million in 2000, NT$3,825 million (US$114 million in 2001) and NT$1,855 million (US$55 million) for the six months ended June 30, 2002, on research and development, or 11.5%, 9.4%, 17.6% and 26.7% of net sales revenue in those periods, respectively. On an 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. Research and development expenses accounted for 17.6% and 26.7%, respectively of our total net sales revenue in 2001 and the six months ended June 30, 2002. 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, 2002, we had 682 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.

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 Corporation (‘‘AT&T’’), Agere Systems Inc. (‘‘Agere’’) and Lemelson Medical, Education & Research Foundation Limited Partnership. We own patents for a number of our mask ROM, flash, EPROM and logic products on processes in various countries, including the United States and Taiwan. As of September 30, 2002, we had a total of 214 U.S., 265 ROC, 8 Japanese, 3 German, 2 French, 2 U.K. and 2 Italian patents for products and technology developed through our own efforts or joint research and development efforts with other companies. Most of our patents expire between 2008 and 2019.

As of September 30, 2002, we had over 2,442 patent 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 Electric Co., for which we earn royalty income. We earned in royalties approximately NT$27 million in 1999, NT$85 million in 2000, NT$77 million (US$2 million) in 2001 and NT$37 million (US$1 million) for the six months ended June 30, 2002.

We have registered 15 types of trademarks including ‘‘MXIC’’, ‘‘Macronix’’, ‘‘MX’’ and ‘‘MTP EPROM’’. We have a total of 85 trademark registrations granted and 24 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 process. In addition, we have retained various patent counsel to review and document our own patent monitoring and enforcement process. Where appropriate, we will enter into license or cross license arrangements with existing patent holders. These payments amounted to NT$447 million in 1999, NT$217 million in 2000 and NT$176 million (US$5 million) in 2001 and NT$111 million (US$3 million) for the six months ended June 30, 2002. 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, 2002, we employed 3,771 full time employees, of whom 826 were executive officers and administrators, 1,371 were engineers and technicians and 1,574 were operators of machinery and equipment. Of all our operators, we employed 191 persons from overseas. Approximately 24.2% of our employees as of that date had undergraduate degrees, including approximately 1.2% who possessed doctoral degrees and approximately 23.2% who held master’s degrees. As of September 30, 2002, the average age of our employees was 30.7 years.

The following table sets forth, as of the dates indicated, the number of our full-time employees serving in the capacity indicated.

Year ended December 31, 1999 2000 2001 213 697 782 1,604 1,425 1,424 1,112 1,434 1,332 201 202 182 3,130 3,758 3,720	Year ended December 31, 1999 2000 2001 213 697 782 1,604 1,425 1,424 1,112 1,434 1,332 201 202 182 3,130 3,758 3,720	Nine months ended as of September 30,
1999 213 1,604 1,112 201 3,130	2000 697 1,425 1,434 202 3,758	2002
		826 1,371 1,383 191
		3,771

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 Company — We depend on select personnel and could be affected by the loss of their services’’. The competition for qualified engineers and managers with experience in the semiconductor industry is particularly intense. We have had considerable success in attracting engineers and managers of ROC 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 2% 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$567 million as of September 30, 2002. We have completed construction of modern athletic and recreational facilities located near our Fabs I and II in the fourth quarter of 2002.

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 ROC 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.

By the end of 2001, we had paid NT$790,000 in infringing the ROC Air Pollution Control Act, ROC Water Pollution Control Act and ROC Waste Disposal Act. We spent an aggregate of approximately NT$225 million in installing pollution prevention equipment, operation, waste treatment and pollutant composition in the year ended December 31, 2001 and NT$1,229 million in the nine months ended September 30, 2002. 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. In addition, 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 ROC Environmental Protection Administration. Fab II was designed as an environmentallyfriendly 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 ROC 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 filed an action against us and two other semiconductor manufacturers with the International Trade Commission (‘‘ITC’’). Atmel is engaged in the business of designing, manufacturing and selling semiconductor devices EEPROM and flash memory semiconductor devices. 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 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 Appeals 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 nor violate Section 337 of the Tariff Act.

In addition, on August 8, 1997, Atmel filed an action against Macronix America in the United States District Court for the Northern District of California. The complaint alleged that Macronix America was selling devices which infringe Atmel’s U.S. patent numbers 4, 419,747 (the ‘‘747 patent’’) and 4,833,096 (the ‘‘096 patent’’).

With respect to the 747 patent (which expired on September 14, 2001), Macronix America filed a motion in December 3, 1999 for summary judgment for the invalidity of the 747 patent. An evidentiary hearing was held on November 7 and November 8, 2001. On February 11, 2002 Atmel filed a motion to correct the inventorship of the 747 patent. On January 14, 2002, the court issued an order in favor of Macronix America denying Atmel’s motion to correct the inventorship of the 747 patent. Following the court’s order, Macronix America requested the court to grant its motion for summary judgment for invalidity of the 747 patent. The court has not issued its ruling as of the date of this offering circular.

With respect to the 096 patent, Macronix America filed a motion for summary judgment in November 15, 1999 for the invalidity of the 096 patent. On August 16, 2000, the court granted Macronix America’s motion for summary judgment against several independent claims of the 096 patent, leaving a single independent claim outstanding in the case. The outstanding claim is currently going through the discovery process and no trial date has been set as of the date of this offering circular.

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Although we believe Atmel’s claims are unwarranted and we intend to continue to contest vigorously Atmel’s allegations, it is not possible to predict the outcome of these 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 infringements.

On August 21, 2001, Agere, which was spun off by Lucent Technologies Inc. (‘‘Lucent’’) 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. AT&T subsequently transferred its right to receive royalties to Lucent. Agere claimed that the right to receive royalties under the agreement had been assigned to it as a result of internal reorganization, and that we owed them outstanding royalties and late fees for the period from January 1, 1999 to June 30, 2001. We filed a motion to dismiss Agere’s lawsuit because the dispute at issue arose out of a previous agreement that expressly provided that all disputes should be arbitrated. On February 11, 2002, the court granted our motion to compel arbitration and entered judgment dismissing the complaint. On February 19, 2002, Agere filed a demand for arbitration before the American Arbitration Association. After a period of negotiation, we executed a patent cross license agreement with Agere in January 2002 and the arbitration was settled and closed.

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$331 million in 1999, NT$658 million in 2000, NT$176 million (US$5 million) in 2001 and NT$111 million (US$3 million) in the six months ended June 30, 2002. As of June 30, 2002, the outstanding balance of this reserve was NT$181 million (US$5 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’’.

Subsidiaries and Strategic Investments

Subsidiaries

The following table sets forth the identity of our subsidiaries and their jurisdictions of incorporation as of September 30, 2002. We directly or indirectly own 92.5% of the equity of each of our subsidiaries.

Name of subsidiary Hui Ying Investment Inc. . . . . . . . . . . . . . . . Joytech Co. Ltd. . . . . . . . . . . . . . . . . . . . . . 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 Systems Solutions Sales and marketing Sales and marketing Investment IC design Investment Sales and marketing Investment Investment	Jurisdiction of incorporation Taiwan, ROC 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 NT$18,500,000 US$100,000 EUR 62,000 US$124,346,426 US$23,000,000 US$15,010,000 US$100,000 NT$500,000,000 NT$500,000,000	Direct Equity Interest
				100% 92.5% 100% 100% 100% 100% 100% 100% 100% 100%

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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 September 30, 2002, these participations include:

. Caesar Technology, Inc. We owned a 29.7% direct equity interest in Caesar Technology. We recorded investment losses from Caesar Technology of NT$351 million in 1999, NT$495 million in 2000 and NT$406 million (US$12 million) in 2001. For the nine months ended September 30, 2001, we recorded investment losses from Caesar Technology of NT$179 million. On December 26, 2001, the shareholders of Caesar Technology approved a voluntary winding up of the company. As a result of the planned dissolution of Caesar Technology, we wrote off all of our remaining NT$227 million investment in Caesar Technology in the fourth quarter of 2001.
. Tower Semiconductor, Ltd. We owned a 13% indirect interest in Tower Semiconductor. Tower Semiconductor is an independent foundry manufacturer of semiconductor integrated circuits on silicon wafers.
. Prominent Communications, Inc. We owned a 35.23% direct equity interest in Prominent Communications. Prominent Communications designs and sells integrated chipsets and applicationspecific integrated circuits for applications used in the wireless communications industry. We acquired our equity interest in Prominent Communications in late 1999 as part of an arrangement to jointly develop integrated circuits for 900MHz cordless phones. In July 2002, we purchased an additional 1, 200,000 shares of Prominent Communications at US$1.75 per share.
. Biomorphic VLSI Inc. We owned a 35.6% indirect equity interest in Biomorphic VLSI. Biomorphic VLSI develops and markets intelligent imaging sensors for digital cameras, automobiles and industrial applications.
. Chantek Electronic Co. Ltd. We owned a 3.7% direct and 0.6% indirect equity interest in Chantek. Chantek has experienced difficulty in securing sufficient funding for its operations. Therefore, we wrote off all of our remaining NT$206 million investment in Chantek in the fourth quarter of 2001.
. Ardentec Corporation. We owned an 11.8% direct equity interest in Ardentec Corp. (‘‘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 Corporation. We owned a 1.28% indirect and a 2.29% direct equity interest in Chipbond Technology Corporation (‘‘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. We owned a 28% indirect equity interest in Raio Technology, which provides intellectual property, software and ASIC design solutions for PC-peripheral products and consumer products.

Insurance

Our insurance coverage as of September 30, 2002 includes:

. property damage all-risk insurance on our fixed assets, equipment and inventory;
. business interruption insurance;

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. 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;
. employee group insurance;
. employer liability insurance; and
. construction all-risk coverage.

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

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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 currently 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 or her position with us, the date of his or her initial appointment and his or her age as of September 30, 2002. 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) . . . . Maria D.H. Lu(2). . . . . . . An Cheng(3) . . . . . . . . . . Ing-Jiunn Hai(3). . . . . . . . Hong-Hui Chen(4) . . . . . . Dang-Hsing Yiu . . . . . . . J. P. Peng(5) . . . . . . . . . . Fuja Shone(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 Director and Chief Operating Officer Director and Vice President 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 Initial Appointment November 25, 1989 November 25, 1989 and September 1, 1989 July 18, 1992 April 16, 1997 April 2, 2002 April 19, 2001 April 19, 2001 November 27, 1995 June 5, 1995 and June 29, 1998 April 19, 2001 April 25, 2002 June 29, 1998 and February 19, 1990 June 29, 1998 and September 1, 1995 June 5, 1995 July 18, 1992 November 27, 1993 April 19, 2001 July 1, 2001	Age
			60 53 64 62 52 38 53 68 49 46 47 47 52 52 55 61 61 46

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(1) Nominees of Hung Chih Investment Corporation.
(2) Nominees of Chiao Tung Commercial Bank. As of April 2, 2002, Mr. Wang resigned from office and Maria D.H. Lu replaced Mr. Wang as the nominee of Chiao Tung Commercial Bank.
(3) Nominee of Delta Electronics Ltd.
(4) Nominee of PICVUE Electronics Inc.
(5) Nominee of Hui Yin Investment, Ltd. As of April 25, 2002, Mr. Peng resigned from office and Fuja Shone replaced Mr. Peng as the nominee of Hui Yin Investment, Ltd.

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 and Maxspeed Corporation. He received a B.S. degree in electrical engineering from National Taiwan University, an M.S. degree in electronic engineering from the National Chiao Tung University in Taiwan, an M.S. degree in Management from Stanford University and a Ph.D. in electrical engineering from the University of Missouri.

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. degree and an M.S. degree in electrical engineering from National Cheng-Kung University in Taiwan as well as a M.S. degree in material science & engineering from Stanford University.

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. degree in economics from Soochow University.

Kao-Hsiung Wang was an executive director from 1997 to April 2001 and served as a director until April 2002. Prior to that, he had been a supervisor since 1994. He received a B.S. degree in economics from Soochow University in Taiwan, an M.A. degree in finance from National Chengchi University in Taiwan and an M.A. degree in economics from American University.

Maria D.H. Lu has been a director since 2002. She currently represents Chiao Tung Commercial Bank as a director. Mr. Lu is a senior vice president and general manager of the investment department of Chiao Tung Bank. She received a B.A. degree and an M.A. degree in public finance from National Chengchi University in Taiwan.

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. degree and an M.S. degree in electrical engineering from the University of Santa Clara.

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 Delta Electronics Group, Mr. Hai was the country president of GE Capital in Taiwan for several years. He also served 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 an M.A. degree in international business management from the University of Texas in Dallas.

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. degree in agricultural economics from National Taiwan University.

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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. degree in electrical engineering from National Taiwan University and an M.S. degree in electronic engineering from the University of California, Berkeley. He represents us on the board of directors of Chantek.

J. P. Peng served as a director between 2001 and April 2002. He is 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 an M.S. degree in electrical engineering from the University of Iowa.

Fuja Shone has been a director since 2002. He has been an associate vice president since 1998 and is a vice president in charge of our memory strategic business unit. He has over 20 years of experience in the semiconductor and technology related industries. Mr. Shone received a Ph.D in electrical engineering from Stanford University.

Y. S. Tan has been a director since 1998 and a vice president since February 19, 1990. He received a B.S. degree in electrophysics from National Chiao Tung University in Taiwan.

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, our United States subsidiary, since 1995. Before that, he was an executive officer of Macronix America from 1987 to 1995. Mr. Mak was the engineering manager of VLSI Technology Inc. in the United States from 1982 to 1987. He received a B.S. degree in electrical engineering from San Francisco State University.

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.

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. degree in economics from the Chinese Cultural University in Taiwan.

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.

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

Paul Yeh has been the associate vice president in charge of our finance center since July 2001. Prior to that, he had been the senior director of our finance center from 1995 to June 2001. He received an M.B.A. degree from National Chengchi University in Taiwan and a B.S. degree 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 Raymond Mak is Macronix America, Inc., 1338 Ridder Park Drive, San Jose, California 95131.

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Compensation of Directors and Senior Management

The following table sets forth cash remuneration paid to our individual directors, supervisors and executive officers in 2001 and as of September 30, 2002.

Name Ding-Hua Hu . . . . . . . . . . . Miin Wu . . . . . . . . . . . . . . H.C. Chen . . . . . . . . . . . . . Kao-Hsiung Wang(2) . . . . . . Maria D.H. Lu(3). . . . . . . . . An. Cheng . . . . . . . . . . . . . Ing-Jiunn Hai . . . . . . . . . . . Hong-Hui Chen. . . . . . . . . . Dang-Hsing Yiu . . . . . . . . . J. P. Peng(4) . . . . . . . . . . . . Fuja Shone(5) . . . . . . . . . . . Y. S. Tan . . . . . . . . . . . . . . Raymond S. Mak . . . . . . . . Wen-Lung Lee . . . . . . . . . . Roger Chu . . . . . . . . . . . . . Ping Tien Wu . . . . . . . . . . . Cheng Yi Fang . . . . . . . . . . Paul Yeh . . . . . . . . . . . . . . Bruce C.H. Chang(6) . . . . . . Hsueh-Li Chien(6) . . . . . . . . M.S. Chen(6). . . . . . . . . . . . Chien-Miin Lee(6) . . . . . . . . Jiing Fa Shiau(6) . . . . . . . . . Total . . . . . . . . . . . . . . . . .	Position with our Company Executive Director and Chairman Executive Director and President Executive Director Director Director Director Director Director Director and Chief Operating Officer Director and Vice President Director and Vice President Director and Vice President Director and Vice President Supervisor Supervisor Supervisor Supervisor Associate Vice President in charge of Finance Center Director Director Director Director Director	Total compensation for	Total compensation for
		Year ended December 31, 2001(1) NT$ 16,957,000 16,957,000 11,997,000 11,988,000 — 66,000 66,000 11,984,000 12,149,000 12,149,000 — 12,149,000 12,149,000 11,984,000 11,984,000 11,984,000 66,000 2,440,000 11,922,000 11,917,000 11,917,000 11,917,000 11,917,000 216,659,000	Nine months ended September 30, 2002(1)
			NT$ 3,508,000 3,508,000 85,000 23,000 50,000 75,000 75,000 75,000 2,963,000 1,124,000 1,370,000 2,641,000 513,000 75,000 75,000 75,000 75,000 1,780,000 — — — — —
			18,090,000

(1) Includes amounts to cover expenses associated with attending board meetings or duties as a supervisor.

(2) Resigned from office effective April 1, 2002.

(3) Appointed Director effective April 2, 2002.

(4) Resigned from office effective April 24, 2002.

(5) Appointed Director and Vice President effective April 25, 2002.

(6) Resigned from office effective April 18, 2001.

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Share Option Plans

We adopted two share option plans in November 29, 2001 and April 24 2002, respectively.

These share option plans provide that our officers and employees and those of our subsidiaries may, at the discretion of our board of directors, be granted options to purchase our common shares at an exercise price of the reported closing price of our common shares traded on the Taiwan Stock Exchange on the date the options are granted. According to the share option plan, upon expiry of the second anniversary of the date the options are granted, up to 50% of the granted options may be vested, and another 25% of the granted options may be vested upon the expiry of each of the third anniversary and fourth anniversary of the dates the options are granted. Each vested option can be exercised within a period of six years from the relevant date the options are granted. Our board of directors will have complete discretion to determine which eligible individuals are to receive option grants and the number of shares subject to each grant.

Under the November 2001 share option plan, we granted 71,768,500, 560,000 and 1,507,000 share options at exercise prices of NT$22.8, NT$22.3 and NT$11.5 on January 16, 2002, May 6, 2002 and October 1, 2002, respectively. Under the April 2002 share option plan, we granted 150,000,000 share options at an exercise of NT$11.5 on October 1, 2002.

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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:

. Maria D.H. Lu of Chiao Tung Commercial Bank, a lender to us and a shareholder of our company;
. Paul Yeh, who previously served as a supervisor of Caesar Technology;
. Miin Wu, who serves as a director of Tower Semiconductor;
. Dang-Hsing Yiu, who previously served as a director of Chantek;
. Y.C. Shih, who previously served as a director of United Industry Gas; and
. Fuja Shone, who serves as a director of Fuetrek.

We have in the past entered, and may in the future enter, into loan agreements and/or underwriting arrangements with Chiao Tung Commercial Bank. Chiao Tung Commercial Bank acted as the arranger and lender in a syndicated loan facility of NT$12.0 billion for us in the second half of 2001, of which NT$3.0 billion has been drawn down since the date of this offering circular. Chiao Tung Commercial Bank also acted as one of the underwriters of our NT$3.0 billion aggregate principal amount corporate bond offering in the period between October and November of 2001, and was also a member of the syndicate of banks that guaranteed the bonds. We believe that these transactions are on an arms-length commercial basis. As of December 31, 2001, NT$5.0 billion (US$151 million) were outstanding under loans provided by Chiao Tung Commercial Bank, and we paid interest to the amount of NT$337 million (US$10 million). For the six months ended June 30, 2002, the loans outstanding and interest paid to Chiao Tung Commercial Bank are NT$4.2 billion (US$126 million) and NT$77 million (US$2 million), respectively.

We subcontract a portion of our assembly and testing requirements to Powertech Systems Corporation (‘‘Powertech’’) and Ardentec. Previously, we also subcontracted a portion of our assembly and testing requirements to Caesar Technology and Chantek. For services performed by Caesar Technology, we incurred manufacturing processing charges of NT$675 million in 1999, NT$594 million in 2000 and NT$240 million (US$7 million) in 2001. For services performed by Chantek, we incurred manufacturing processing charges of NT$488 million in 1999, NT$390 million in 2000 and NT$104 million (US$3 million) in 2001. For services performed by Powertech, we incurred manufacturing processing charges of NT$96 million in 2000, NT$106 million (US$3 million) in 2001 and NT$45 million (US$1 million) in the six months ended June 30, 2002. For services performed by Ardentec, we incurred manufacturing processing charges of NT$64 million in 2000, NT$108 million (US$3 million) in 2001 and NT$57 million (US$2 million) in the six months ended June 30, 2002. We purchase industrial gases from United Industry Gas. We incurred NT$94 million in 1999, NT$117 million in 2000, NT$119 million (US$4 million) in 2001 and NT$57 million (US$2 million) in the six months ended June 30, 2002, in charges for industrial gases provided by United Industry Gas.

We entered into an equipment lease agreement with Caesar Technology, the term of which is from May 1, 1999 to April 30, 2005. Under the agreement, we were obliged to pay annual installments totaling NT$25 million over the six-year lease period. Caesar Technology was formally placed in liquidation in January 2002 and the lease agreement was renegotiated with the liquidator of Caesar Technology. As of April 30, 2002, our outstanding obligations under the lease agreement was NT$14 million. A settlement agreement was entered into on August 14, 2002. Pursuant to the terms of the settlement agreement, we paid an additional NT$3 million as consideration for the ownership of the lease equipment and we were consequently released from all further obligations under the lease agreement. We also purchased 6,395,000 shares of Powertech at NT$13 per share from Caesar Technology for a total cash consideration of NT$83 million.

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In August 2000, we entered into a five-year manufacturing and technology cooperation agreement with Tower Semiconductor, whereby Tower Semiconductor will provide silicon wafer manufacturing processing services that can employ Tower Semiconductor’s microFLASH[1] technology. This technology is based on proprietary technology licensed from Saifun Semiconductors, an integrated circuit design company. We also have entered into a separate agreement with Saifun Semiconductors that provides us with rights to develop and manufacture certain products related to the microFLASH[1] process technology. Under the agreement with Tower Semiconductor, Tower Semiconductor 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 Semiconductor 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 Semiconductor, together with a foundry agreement. Under the agreements, we are entitled to one seat on Tower Semiconductor’s board of directors and a guaranteed portion of the wafer manufacturing capacity of Tower Semiconductor’s new eight-inch fabrication facility, which is currently under construction. Under the agreements, we agreed to purchase approximately 2.7 million common shares of Tower Semiconductor, of which 866,551 shares were purchased at the initial closing of the share purchase agreement in January 2000 and 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 Semiconductor. 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 Semiconductor 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 Semiconductor’s shares other than under the additional purchase obligation agreements, or royalty payments. As of September 30, 2002, we owned approximately 13% of Tower Semiconductor’s outstanding ordinary shares and had approximately US$10 million in our prepaid credit account with Tower Semiconductor. If Tower Semiconductor 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 Semiconductor’s financial restructuring, we utilized approximately US$16 million of our prepaid credit account to purchase 1,255,848 shares of Tower Semiconductor for US$12.75 per share. At the time of the share purchase Tower Semiconductor’s market value per share was approximately US$7.128. As a result of this transaction we incurred additional investment losses during 2001. We also may incur additional investment losses on approximately US$5 million held in our prepaid credit account. In addition, Tower Semiconductor’s market value per share has declined substantially during 2001. As of December 31, 2001, Tower Semiconductor’s market value per share 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.

On March 22, 2002, an amendment to the above-mentioned additional purchase obligation agreements was implemented. Under the amendment, we are required to make the payments in connection with the third and fourth additional closings no later than April 2002 and October 2002, respectively, without regard to whether each respective milestone is achieved. For 60% of each of the payments in connection with the third and fourth additional closings, Tower Semiconductor is required to issue shares based on the average closing price of Tower Semiconductor’s shares on NASDAQ in the 30 trading days preceding the date of payments, provided, however, that the average price per share shall not exceed US$12.50. For the remaining 40%, Tower Semiconductor is required to increase our prepaid credit account. Accordingly, we made the third and the fourth milestone payments on April 23 and October 1, 2002. For these two payments, we acquired 1,071,497 and 1,344,829 shares of Tower Semiconductor at US$6.16 and US$4.91 per share, respectively.

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In connection with our issuance in May 1998 of zero coupon convertible bonds due 2003, 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’’.

We acted as guarantor for a loan to Biomorphic VLSI entered into on December 28, 2001. As of June 30, 2002, we are obligated to guarantee a total amount of US$3 million outstanding under the loan.

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MAJOR SHAREHOLDERS

The following table sets forth certain information, as of September 30, 2002, 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 July 13, 2002, no shareholder beneficially owned 5% or more of our common shares.

Name of shareholder Delta Electronics, Ltd.(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Stabilization Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . Civil Servant Retirement Pension Fund . . . . . . . . . . . . . . . . . . . . Postal Saving Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Labor Retirement Fund Supervisory Committee. . . . . . . . . . . . . . . Directors, supervisors and executive officers as a group(2) . . . . . . .	Number of common shares 81,335,400 65,777,140 54,114,940 43,368,945 40,006,347 215,232,901	Percentage of total outstanding common shares
		2.2% 1.8% 1.5% 1.2% 1.1% 5.8%

(1) Messrs. Ing-Jiunn Hai and An Cheng were nominated by Delta Electronics, Ltd. and are currently serving on our board of directors. Mr. Roger Chu was nominated by Delta Electronics, Ltd. and is currently serving as our supervisor.
(2) Includes common shares held by other entities as directors (exclusive of Delta Electronics, Ltd.), officers of which currently serve on our board of directors.

The following table sets forth the personal share ownership of our directors, supervisors and executive officers and their immediate families as of September 30, 2002.

Title Executive Director and Chairman Executive Director and President Executive Director . . . . . . . . . Director . . . . . . . . . . . . . . . . . Director . . . . . . . . . . . . . . . . . Director . . . . . . . . . . . . . . . . . Director . . . . . . . . . . . . . . . . . Director and Chief Operating Officer . . . . . . . . . . . . . . . . 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) Maria D.H. Lu(2) An Cheng(3) Ing-Jiunn Hai(3) Hong-Hui Chen(4) Dang-Hsing Yiu Fuja Shone(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 2,933,283 0.08% 30,832,711 0.84% 4,329,971 0.12% 0 0.00% 0 0.00% 0 0.00% 1,334,254 0.04% 19,108,119 0.52% 33,327 0.00% 4,073,159 0.11% 6,430,638 0.17% 4,651,511 0.13% 50,877 0.00% 198,489 0.01% 1,086,739 0.03% 9,514,102 0.26%	Shares owned by spousesand minor children	Shares owned by spousesand minor children
		Number of Shares 2,933,283 30,832,711 4,329,971 0 0 0 1,334,254 19,108,119 33,327 4,073,159 6,430,638 4,651,511 50,877 198,489 1,086,739 9,514,102	Number of Shares 4,928,066 0 2,493,417 0 375,703 0 800,552 2,115,701 0 47,526 0 4,846,875 35,521 0 360,895 55,264	Percentage
				0.13% 0.00% 0.07% 0.00% 0.01% 0.00% 0.02% 0.06% 0.00% 0.00% 0.00% 0.13% 0.00% 0.00% 0.01% 0.00%

(1) Nominee of Hung Chih Investment Corporation.

(2) Nominee of Chiao Tung Commercial Bank.
(3) Nominee of Delta Electronics, Ltd.
(4) Nominee of PICVUE Electronics Inc.
(5) Nominee of Hui Yin Investment Inc.

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DESCRIPTION OF THE BONDS

The Bonds are to be issued under an indenture, to be dated as of February 10, 2003 (the ‘‘Indenture’’), between us and The Bank of New York, as trustee (the ‘‘Trustee’’) for the holders of the Bonds. The following summary of certain provisions of the Bonds and the Indenture is subject to, and is qualified in its entirety by reference to, the provisions of the Bonds and the Indenture, including the definitions of certain terms therein. Whenever particular sections or defined terms of the Indenture not otherwise defined herein are referred to, such sections or definitions of such defined terms are incorporated herein by reference. Copies of the Indenture will be available for inspection by the holders on or after the Closing Date at the corporate trust office of the Trustee in London during normal business hours.

General

The Bonds will be unsecured obligations of our company, will be limited to US$100,000,000 aggregate principal amount (including any Bonds issued pursuant to the Initial Purchasers’ over-allotment option) and will mature on February 10, 2008. On September 19, 2002, our board of directors authorized the issuance of the Bonds in an amount up to US$100,000,000 in connection with this offering.

The Bonds will not bear any interest except in the limited circumstances described in the Indenture. Principal of, premium (if any) on and interest (if any) on the Bonds will be payable, and the transfer of Bonds will be registrable, at the corporate trust office of the Trustee in London or The Bank of New York (Luxembourg) S.A. in Luxembourg.

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. In the event that Bonds in definitive form are issued, payments, transfers or conversions with respect thereto may 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 ‘‘The Global Bond’’ include summary of certain rules and operating procedures of Euroclear and Clearstream, which effect transfers of interests in the Global Bond.

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

The Bonds will be represented by the Global Bond, which will be deposited with The Bank of New York, acting as a common depositary, for Euroclear and Clearstream on or about the Closing Date.

The Global Bond (and any Bonds in definitive form issued in exchange for the Global Bond) will be subject to certain restrictions on transfer set forth therein and in the Indenture and will bear the legends relating to such restrictions set forth under ‘‘Transfer Restrictions’’ in this offering circular.

Except in the limited circumstances described in the Indenture, owners of interests in Bonds represented by the 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 London or The Bank of New York (Luxembourg) S.A. in Luxembourg, 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 payments of principal, premium (if any) or interest (if any) may be made by check mailed to addresses provided by the person entitled thereto.

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Transfer of Bonds; Issue of Certificate

Transfer of Bonds

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

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.

Conversion

General

We currently have 1,200,000,000 authorized common shares available for issuance upon the conversion of the Bonds into our common shares, 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 1,200,000,000 common shares are required to be issued by us in connection with the exercise of all conversion rights relating to the Bonds or conversion rights associated with any other bonds issued or to be issued by us, we will be required to amend our articles of incorporation to increase our authorized capital for 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 Securities and Futures Commission, the Science Park and the ROC Ministry of Economic Affairs.

On exercise of the Conversion Right (as defined herein), the converting holder will receive our common shares.

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 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.

Conversion Terms

Each holder has the right under the terms of the Bonds to convert any Bond into common shares on and subject to the terms set forth in the Indenture (the ‘‘Conversion Right’’). 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 12, 2003, up to the close of business (at the place where such Bond is deposited for conversion) on January 11, 2008, or, if such Bond shall have been called for redemption on or before January 18, 2008, 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 and regulations of the ROC the Conversion Right cannot be exercised, which period currently includes 60 days prior to the date of the annual ordinary shareholders’ meeting, 30 days prior to an extraordinary shareholders’ meeting, the period starting from three Trading Days prior to our notification to the Taiwan Stock Exchange of the record date for the determination of shareholder rights with respect to distributions of stock dividends, cash dividends,

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shares from rights issues or other benefits or bonuses to such record date, or any such other period as determined by ROC law applicable from time to time (each such period, a ‘‘Closed Period’’). We have agreed to give holders of the Bonds 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 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 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 is required to appoint a local 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. A non-ROC holder of Bonds who converts and receives common shares is also required to appoint a local agent, with such qualifications as are set by the ROC Securities and Futures Commission, 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 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 obtaining approval from the Taiwan Stock Exchange and opening 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 into which the Bonds may have been converted on the Taiwan Stock Exchange or otherwise. See ‘‘Risk Factors — Risks Relating to the Bonds, our Common Shares and our ADSs — Holders of the Bonds will be required to appoint several local agents in Taiwan if they convert the Bonds into our common shares, which may make ownership burdensome’’ and ‘‘Appendix D — Foreign Investment and Exchange Controls in the Republic of China’’.

Under current ROC laws, we are required to report to the ROC Securities and Futures Commission if the person to be registered as a shareholder: (i) is a ‘‘related party’’ to us as defined in ROC SFAS No. 6, or (ii) 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. As a result, a holder requesting the conversion of its Bonds into common shares or its designee may be required to provide certain information to us, including the name and nationality of the person to be registered as the shareholder and the number of common shares such person is acquiring and has acquired in the past through conversion of Bonds held by it, and supporting documents, before such conversion will be effected.

The number of common shares 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$34.66 = US$1.00) by the Share Conversion Price in effect on the Conversion Date (as defined herein). 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 therefor we shall transfer the common shares to the converting holder (or its agents), 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 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 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 not issued as aforesaid if such sum exceeds US$10. For the purpose of calculating the amount of such payment, we shall use the Market Price on the Trading Day prior to the Conversion Date and the exchange rate referred to above in this paragraph.

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The price at which common shares will be issued upon conversion (the ‘‘Share Conversion Price’’) will initially be NT$12.06 per common share, 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 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 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 office of the conversion agent shall be located. The Conversion Notice shall contain, inter alia, (i) an appointment of a local agent in the ROC as well as other information required by ROC laws and regulations, and (ii) an irrevocable instruction directing us to deliver the 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.

Holders of the Bonds 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.

The date on which any Bond and the Conversion Notice (in duplicate) relating thereto are deposited with the 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.

We initially shall make available 287,396,352 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 287,396,352 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 described below.

On the Conversion Date, we will register the converting holder (or its designee) in our register of shareholders as the owner of the number of common shares 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, subject to any changes to the applicable ROC laws and regulations, within five Trading Days after the Conversion Date, we deliver to the local agent appointed by the converting holder common shares, registered in the name of the converting holder specified for that purpose in the relevant Conversion 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.

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 preceding paragraph shall be applied, mutatis mutandis, to such number of common shares as is equal to the number of additional common shares 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

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conversion, and, in such event and with respect to such number of common shares, references in the 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).

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 transfer, paying or conversion agent and to appoint further or other transfer, paying or 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 transfer, paying or conversion agents (which transfer, paying or conversion agents may be the Trustee) having specified offices in (1) London, (2) as long as the Bonds are listed on the Luxembourg Stock Exchange, Luxembourg, and (3) at any time when Bonds are issued in definitive form, Luxembourg.

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 the Maturity Date 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 of the Bonds.

Adjustment to Share Conversion Price

The Share Conversion Price will be subject to adjustment (each a ‘‘non-reset 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 herein) 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 herein) 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 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 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

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(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 non-reset adjustment unless, under applicable law then in effect, the Bonds could be converted at such reduced Share Conversion Price into fully paid legally issued common shares. No non-reset adjustment to the Share Conversion Price will be made unless such non-reset 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 non-reset adjustment will be notified promptly by us to the holders of the Bonds in accordance with ‘‘— Notices’’ below.

‘‘Capital Distribution’’ means any cash dividend, distribution of cash or distribution of assets in specie made by our 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 September 30, 2002) exceed 5% of the Market Capitalization (as defined herein) of our company at the time of announcement of such dividend or distribution;
(2) 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
(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.

‘‘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 such ADSs 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.

‘‘ADS Market Price’’ means for any ADS Trading Day with respect to the ADSs the reported last sale price of the ADSs on 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.

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‘‘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.

‘‘Current Market Price’’ on any date means the average of the Market Prices for the 30 consecutive Trading Days 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 commencing 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 our 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 our 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 our 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.

Special Conversion Price Reset

We may send a notice to the holders of the Bonds, within 30 Trading Days prior to the occurrence of a Put Date or the Maturity Date (each a ‘‘Special Reset Date’’), giving them an option to convert all or part of the Bonds at an adjusted Share Conversion Price (a ‘‘special conversion price reset’’) in accordance the following formula, provided that the Deposit Date with respect to such Conversion Notice shall not be more than seven business days.

Adjusted Share Conversion Price = Special Reset Market Price x Specified Percentage

The Specified Percentage shall correspond to the relevant Put Date and the Maturity Date as set forth below:

Put Date February 10, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Specified Percentage
	90.9% 89.1% 87.4% 85.8% 84.2%

Put Date
February 10, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 10, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 10, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 10, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maturity Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Specified Percentage

90.9%
89.1%
87.4%
85.8%
84.2%

‘‘Special Reset Market Price’’ means the lowest of the average of the Market Prices for the 10, 15 or 20 consecutive Trading Days immediately preceding (and including) the Special Reset Date.

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Such adjusted Share Conversion Price shall be rounded upwards, if necessary, to the nearest NT$$0.01, provided that:

(i) the terms and conditions of non-reset adjustments shall apply mutatis mutandis to any special conversion price resets to ensure that appropriate adjustments shall be made to any Market Price to reflect any non-reset adjustments made to the Share Conversion Price during the period of calculation of the Special Reset Market Price;
(ii) the Share Conversion Price shall not be reduced below the par value of the common shares unless, under applicable law then in effect, the Bonds could be converted at such reduced Share Conversion Price into legally issued, non-assessable and fully-paid common shares; and
(iii) for the avoidance of doubt (x) any special conversion price resets to the Share Conversion Price made shall only be downward adjustments and (y) an special conversion price reset may be made in respect of any Special Reset Date notwithstanding that an adjustment may have been made in respect of a preceding Special Reset Date, if any.

Any such special conversion price reset shall become effective as of the relevant Special Reset Date and shall be notified to the holders of Bonds within five days of the relevant Special Reset Date in accordance with the Indenture.

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 the Bonds 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 and 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 Indenture. The above provisions of this paragraph will apply in the same way to any subsequent consolidations, amalgamation, mergers, sales or transfers.

Redemption, Repurchase and Cancellation

Redemption at Maturity

Unless previously redeemed, converted or repurchased and cancelled as herein provided, we will redeem the Bonds at a redemption price equal to 100% of the outstanding amount thereof on the Maturity Date. 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 the holders of the Bonds as set forth under ‘‘— Events of Default’’).

Redemption at the Option of our Company

During the First Optional Redemption Period or the Second Optional Redemption Period, we may, having given not less than 30 days’ or more than 60 days’ notice to the holders of the Bonds (which notice shall be irrevocable), redeem as a whole or only in part (being US$1,000,000 in principal amount or an

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integral multiple thereof) the Bonds at a price equal to the Early Redemption Amount. However, no such redemption may be made unless the average Market Price translated into U.S. dollars at the Prevailing Rate described below of our common shares for a period of 30 consecutive Trading Days, the last of which occurs not more than 5 days prior to the date upon which notice of such redemption is published, is at least, in the case of the First Optional Redemption Period, 125%, and in the case of the Second Optional Redemption Period, 120% of the Share Conversion Price in effect on each such Trading Day translated into U.S. dollars at the rate of NT$34.66 = US$1.00.

The ‘‘Prevailing Rate’’ for the translation of the average Market 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 the Maturity Date at a price equal to the Early Redemption Amount, if at least 90% in principal amount of the Bonds have already been redeemed, repurchased and cancelled, or converted.

The ‘‘Early Redemption Amount’’ of a Bond, for each US$1,000 principal amount of the Bonds, is the redemption amount of 100% of the principal amount of the Bonds plus an amount of interest equal to the applicable Adjustment Amount. The ‘‘Adjustment Amount’’ of a Bond, for each US$1,000 principal amount of the Bonds, means the amount that, together with the principal amount of the Bonds, represents for the holder a gross yield to the relevant redemption date identical to the yield per annum set for that relevant period calculated on an annual basis. The applicable Early Redemption Amount is calculated in accordance with the following formula, rounded to two decimal places with 0.005 being rounded upwards (provided that if the date fixed for redemption is a Redemption Date, the Redemption Amount shall be set out in the table below in respect of such Redemption Date):

Next Redemption Amount Early Redemption Amount = (1 + r)[d/p]

Next Redemption Amount = the Redemption Amount for each US$1,000 principal amount of the Bonds on the Redemption Date immediately after the date fixed for redemption as set out below (or if the Bonds are to be redeemed prior to February 10, 2004, US$1,000):

Redemption Date February 10, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Redemption Amount (US$) 1,000 1,020 1,040 1,060 1,000	Yield (r)
		0.00% 1.00% 1.32% 1.47% 0.00%

r = the percentage yield, as set out above corresponding to the relevant Redemption Date and Redemption Amount.
d = number of days before the next relevant Redemption Date but excluding the date fixed for redemption calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed.
p = 360

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

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Redemption for Taxation Reasons

At any time (but not if notice of redemption as provided above has already been given to holders of the Bonds), we may, having given not less than 30 days’ nor more than 60 days’ notice to the holders of the Bonds (which notice shall be irrevocable), redeem as a whole but not in part the Bonds at a price equal to the 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 general application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after February 10, 2003 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 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 of the Bonds. See ‘‘Taxation — Bonds — Interest’’.

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 require 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 the dates specified below (each a ‘‘Put Date’’) at the redemption prices corresponding to the relevant Put Date.

Put Date February 10, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February 10, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Redemption Price
	(Outstanding Principal Amount) 100% 102% 104% 106%

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 days’ nor less than 30 days prior to the relevant Put Date. No Bond so deposited may be withdrawn (except as provided in the Indenture) without our prior consent. We shall give the holders not less than 30 days’ nor more than 60 days’ prior notice of the commencement of the period for the deposit of Bonds for redemption pursuant to this paragraph.

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’’), we will give the holders written notice of the Delisting not later than the day on which the Delisting becomes effective, and each holder of the Bonds 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 written notice of the Delisting at a price equal to the Early Redemption Amount.

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Selection of Bonds

In the case of a redemption of only some of the Bonds at our election, we will give notice of such redemption to the Trustee, and 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 of a denomination larger than US$1,000.

Cancellation

All Bonds surrendered for payment, redemption, registration of transfer or exchange or conversion

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, we shall not create or permit to be outstanding any mortgage, charge, lien, pledge or other security interest (each an ‘‘Encumbrance’’) upon the whole or part of our property, assets or revenues, present or future, to secure for the benefit of the holders of any International Investment Securities: (i) payment of any sum due 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 distributed outside the ROC by us 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 Bonds of the issuance of any International Investment Securities the terms or manner of issuance of which requires security to be granted to the holders of the Bonds 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 principal, premium (if any) or interest (if any) 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 our 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 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

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(iv) any person entitled to the benefit of an Encumbrance shall commence proceedings to enforce any such Encumbrance upon the whole or any part of the property, assets or revenues of our company or any subsidiary material to our 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 adjudicated 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 of 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
(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 (or such longer period as the Trustee may reasonably consider appropriate in relation to the jurisdiction concerned).

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 of the Bonds, 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, premium (if any) on, or interest (if any) on, all Bonds 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, premium (if any) or interest (if any) 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 nonpayment 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.

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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 and unless also the holders of not less than 25% in aggregate 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, premium (if any) on, or interest (if any) 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 our obligations under the Indenture and as to any default in such performance.

Modification and Waiver

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 aggregate 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 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, premium (if any) or interest (if any) 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 or to require us to redeem the Bonds, (f) reduce the above-stated percentage of outstanding Bonds necessary to modify or amend the Indenture or (g) reduce the percentage of 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 (if any) or interest (if any).

Replacement of Bonds

In case any Bond shall become mutilated, destroyed, lost or stolen, it may be replaced at the office of the Trustee or The Bank of New York (Luxembourg) S.A. in Luxembourg 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 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 by other means with the approval of the Trustee shall constitute sufficient notice to such holders for every purpose hereunder.

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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 non-exclusive jurisdiction of the courts of the State 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 has irrevocably appointed Macronix America at its office at 1338 Ridder Park Drive, San Jose, California 95131 as our agent for service of process.

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

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THE GLOBAL BOND

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

Global Bond

The Bonds will be represented by a the Global Bond, which will be deposited with The Bank of New York, acting as a common depositary, for Euroclear and Clearstream on or about the Closing Date.

Upon the issuance of the Global Bond, Euroclear and Clearstream will credit, on their internal systems, the respective principal amounts of the individual beneficial interests in the Bonds represented by the Global Bond to the accounts of persons who have accounts with Euroclear and Clearstream (‘‘participants’’). These accounts will initially be designated by or on behalf of the Bookrunner. Ownership of beneficial interests in the Global Bond will be limited to participants and persons who hold interests through participants. Beneficial interests in the Global Bond will be shown on, and transfers thereof will be effective only through, records maintained by Euroclear and Clearstream and their participants.

We expect that Euroclear and Clearstream, or their nominee, upon receipt of any payment of principal, premium (if any) or interest (if any) in respect of the Bonds represented by the Global Bond will credit the accounts of the participants with payments of principal, premium (if any) or interest (if any) on the date payable in amounts proportionate to their respective interests in such Bonds as shown on the records of Euroclear and Clearstream or their nominees. We also expect that payments by such participants to owners of beneficial interests in the Bonds held through such participants will be governed by standing instructions and customary practices. Such payments will be the responsibility of the participants.

Payments, transfers, exchanges and other matters relating to interests in the Bonds may be subject to various policies and procedures adopted by Euroclear and Clearstream from time to time. Transfers between participants in Euroclear and Clearstream, and conversion through participants in Euroclear and Clearstream (if any), will be effected in the ordinary way in accordance with the rules and operating procedures of Euroclear and Clearstream. Neither we, the Trustee or any of their respective agents will have any responsibility or liability for the performance by Euroclear and Clearstream or their participants of their respective obligations under the rules and procedures governing their operations, or for payments made on account of, or records relating to, interests in the Bonds held through Euroclear and Clearstream and their participants.

The Global Bond will be exchangeable in whole but not in part (free of charge to the holder) for the definitive Bonds in registered form, in denominations of US$10,000 (or integral multiples thereof), only under the following circumstances: (i) on an Event of Default, (ii) if the Global Bond is held on behalf of a clearing system and such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so or (iii) at any time at our option. Thereupon (in the case of (ii) above) the holder may give notice to the Trustee, and (in the case of (iii) above) we may give notice to the Trustee and the holders, of our intention to exchange the Global Bond for definitive Bonds on or after the exchange date specified in the notice.

The holder of a registered Bond in definitive form may transfer or exchange such Bond by surrendering it at the office or agency maintained by us for such purpose in London and, for so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, in Luxembourg, which offices will initially be the corporate trust offices of the Trustee maintained in London or such other offices as may be notified by the Trustee from time to time and, the offices of the paying agent in Luxembourg, respectively.

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Euroclear and Clearstream each hold Bonds for participating organizations and facilitate the clearance and settlement of Bond transactions between their 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 Euroclear and Clearstream have agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Bond among participants of 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 Euroclear or Clearstream, or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

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CERTAIN REPUBLIC OF CHINA 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) exercises its Conversion Right, such holders will be required to appoint 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 or submission of a tax clearance certificate of the ROC tax authorities are required as conditions to repatriating the holder’s profits derived from the sale of common shares. 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 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 an 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 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 on conversion will not be able to receive and hold or otherwise transfer common shares on the Taiwan Stock Exchange.

Securities Transaction Tax

The ROC government imposes a securities transaction tax that will apply to sales of the Bonds and common shares. The transaction tax, which is payable by the seller, is generally levied on sale of the common shares at the rate of 0.3% of the transaction price. According to the amended Statute of Upgrading Industries which becomes effective on February 1, 2002, no securities transaction tax will be imposed on the transfer of the Bonds until December 31, 2009.

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 is acquiring and 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 Securities and Future Commission if the person to be registered as a shareholder: (i) is a ‘‘related party’’ to us as defined in ROC SFAS No. 6 or (ii) 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.

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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 rules and regulations under these laws.

General

Our authorized capital is NT$53.5 billion, divided into 5.35 billion shares, including up to 450 million shares reserved for the exercise of employee stock options. As of September 30, 2002, 3,691,276,875 of our common shares had been fully paid-in and were outstanding. All of our common shares are in registered form.

As of September 30, 2002, 15,016,263 common shares underlying ADSs were held in the name of The Bank of New York, as depositary for our ADS facility. The Bank of New York has advised us that, as of June 30, 2002, 1,741,752 ADSs, representing 17,417,520 common shares, were held of record by Cede & Co. and five registered holders. We have no further information as to our common shares held, or beneficially owned, by U.S. persons. As of September 30, 2002, we had outstanding US$80 million aggregate principal amount of zero coupon convertible bonds due 2003, US$141 million aggregate principal amount of 1% convertible bonds due 2005 and US$169 million aggregate principal amount of 0.5% convertible bonds due 2007, convertible into 112,766,302, 105,546,757 and 207,899,339 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 publicly-listed company, such as our company, 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 number of any new shares issued, exceeds the number of shares specified in the articles of incorporation; and
. the approval of the ROC Securities and Futures Commission and the ROC Ministry of Economic Affairs or the Hsinchu Science-Based Industrial Park Administration, 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 Hsinchu Science-Based Industrial Park Administration of our amendment to our corporate registration.

An amendment to the ROC Company Law was passed by the ROC Legislative Yuan on October 25, 2001 and became effective on November 14, 2001. Under the amended ROC Company Law, when a public company, such as our company, 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. (the ‘‘Central Depositary’’); or

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(3) register the new shares with the Central Depositary in lieu of issuing share certificates.

Dividends and Distributions

Except in limited circumstances, we are not permitted under the ROC Company Law and our articles of incorporation 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 shares or cash or a combination of shares and cash, except that any employee bonuses and shareholder dividends will normally be distributed in shares 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 addition, distribution of shares as bonuses to employees is applicable to the employees of our affiliated companies that satisfy the requirements set by our board of directors. In 2000, we did not distribute any employee bonuses. 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 per share. See ‘‘Dividends and Dividend Policy’’ and note 12 to our consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 and note 13 to our consolidated financial statements for the six months ended June 30, 2000 and 2001 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 ordinary meeting of shareholders, our board of directors submits for shareholder approval our consolidated financial statements for the preceding year and the proposal of the board of directors for the distribution of dividends and bonuses from our net income, subject to compliance with the requirements described above, for the preceding year. All of 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 shares 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 ROC taxes on dividends and distributions, see ‘‘Taxation’’.

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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 ROC Securities and Exchange Law and the relevant securities regulations require that, if a company listed on the Taiwan Stock Exchange or whose shares are traded on the GreTai Securities Market 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 ROC 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. Unless the percentage of shares to be offered to the public is increased by the shareholders, existing shareholders who are listed on the shareholders’ register as of the record date have a preemptive right to acquire the remaining 75% to 80% of the issue. 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 ROC Securities and Exchange Law, which became effective on February 8, 2002, the preemptive rights provisions will not apply to offerings of new shares through a private placement approved at a shareholders’ meeting. These preemptive rights also do not apply to this offering.

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 the ROC Securities and Exchange Law, upon the terms as our board of directors may determine.

Meetings of Shareholders

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 meetings of our shareholders, 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. 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 director and supervisor 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;

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. 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 share dividend.

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-listed company such as our company, the resolution may be adopted by the holders of at least two-thirds 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 amalgamations or spin-offs, 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 a 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 on behalf of the company against a director for losses suffered by the company as a result of the director’s unlawful actions or failure to act by sending a written request to a supervisor. In addition, one or more shareholders who have held more than 3% 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 Central Depositary.

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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 pledgees that are entitled to certain rights pertaining to our common shares by giving advance public notice.

Under the amended ROC Company Law, a public company’s shareholder register, such as ours, is closed for a period of 60 days before each ordinary shareholders’ meeting, 30 days before each extraordinary shareholders’ meeting and a period of five days before each record date.

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 ROC Securities and Exchange Law, we may, in accordance with ROC 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 GreTai Securities 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 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.

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 GreTai Securities Market by such person per day (unless the number of shares transferred does not exceed 10,000).

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TAXATION

The following discussion is a summary of the material ROC tax considerations relevant to an investment decision by certain non-ROC holders.

The following summary addresses the principal ROC tax consequences of the ownership and disposition of Bonds or common shares to a non-resident individual or non-resident entity that holds such Bonds or common shares (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 or common shares 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 or common shares that may affect them.

Bonds

Interest

Payments of premium (if any) or interest (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 premium or interest. 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 of the Bonds.

Sale

Securities transaction tax will be imposed on the sales of the common shares at the rate of 0.3% of the transaction price. According to the amended Statute of Upgrading Industries, which became effective on February 1, 2002, no securities transaction tax will be imposed on the transfer of corporate bonds and financial debentures (including the Bonds) until December 31, 2009.

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

ROC law currently provides no specific provisions regarding the ROC income tax consequences of a conversion of Bonds into common shares. Without further clarification from the ROC tax authorities, it is impossible to conclude definitively that gain on the conversion of Bonds into common shares will not be deemed as taxable gain, additional interest income (subject to the 20% withholding tax) or otherwise subject to other ROC tax.

In addition, securities transaction tax, gift tax and/or income tax may be imposed in relation to the converting holder’s designation of other persons to be the holder of common shares upon conversion of the Bonds.

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.

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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 share dividends).

Distributions of common shares declared by us out of capital reserves are not subject to ROC withholding tax.

Sale

Securities transaction tax will be withheld at the rate of 0.3% of the transaction price upon a sale of 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 ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3% of the gross sales amount. Proceeds derived from sales of statutory subscription rights that are not evidenced by securities are subject to capital gains tax at the rate of (i) 25% of the gains realized by Non-ROC 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.

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 that 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.

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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 ROC 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 that 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.

Proposed European Union Withholding Tax Directive

In June 2000 the European Council agreed to amend a proposed European Union Directive of June 1998 regarding the taxation of interest, discounts and premiums payable to individual residents of other European Union 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 European Union 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 European Union 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.

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PLAN OF DISTRIBUTION

Under the terms and subject to the conditions contained in a purchase agreement dated January 28, 2003, the initial purchasers named below (the ‘‘Initial Purchasers’’) have severally but not jointly agreed to purchase from us the respective principal amounts of the Bonds indicated in the following table. Credit Suisse First Boston (Europe) Limited is acting as the global coordinator and sole bookrunner (the ‘‘Bookrunner’’) of this offering.

Initial Purchaser Credit Suisse First Boston (Europe) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . KGI Securities Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Principal Amount
	US$76,000,000 US$ 4,000,000
	US$80,000,000

The purchase agreement provides that the Initial Purchasers are obligated to purchase all of the Bonds if any are purchased, other than those Bonds covered by the over-allotment option described below. The purchase agreement also provides that if an Initial Purchaser defaults, the purchase commitments of nondefaulting Initial Purchasers may be increased or this offering may be terminated.

The Initial Purchasers propose to offer the Bonds initially at the offering price on the cover page of this offering circular and may include selling group members who would be granted a selling concession. After the initial offering, the offering price may be changed.

We have granted to the Initial Purchasers a 30-day option to purchase on a pro rata basis up to an additional US$20,000,000 aggregate principal amount of the Bonds at the initial offering price less underwriting discounts and commissions. This over-allotment option is exercisable by the Bookrunner on behalf of the Initial Purchasers.

United States

The Bonds and the common shares issuable upon conversion thereof have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except to persons in offshore transactions in reliance on Regulation S under the Securities Act. Each of the Initial Purchasers has agreed that, except as permitted by the purchase agreement, it will not offer, sell or deliver 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 last closing date, within the United States or to, or for the account or benefit of, U.S. persons, and it will have sent to each broker/ dealer to which it sells Bonds in reliance on Regulation S during such 40-day period, a confirmation or other notice detailing the restrictions on offers and sales of the Bonds within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them in Regulation S under the Securities Act. Hedging transactions involving these securities may not be conducted unless in compliance with the Securities Act. Resales of the Bonds are restricted as described under ‘‘Transfer Restrictions’’.

In addition, until 40 days after the commencement of the offering, an offer or sale of Bonds within the United States by a broker/dealer (whether or not it is participating in this offering), may violate the registration requirements of the Securities Act.

United Kingdom

Each of the Initial Purchasers severally represents and agrees that:

. it has not offered or sold and prior to the expiry of a period of six months from the closing date, will not offer or sell any Bonds 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

139

agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;

. it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the ‘‘FSMA’’)) received by it in connection with the issue or sale of any Bonds in circumstances in which section 21(1) of the FSMA does not apply to our company; and
. it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom.

France

Each of the Initial Purchasers has acknowledged that neither this offering circular nor any offering material relating to the Bonds has been or will be submitted to the Commission des Ope´rations de Bourse for approval in France, and each of the Initial Purchasers has agreed that the Bonds may not be offered or sold and this offering circular or any offering material may not be distributed or caused to be distributed or used in connection with any offer for subscription or sale of the Bonds, directly or indirectly, in France, except (i) with the prior authorization of the French Ministry for Economy and Finance in accordance with Articles 9 and 10 of the De´cret n8 89-938 of 29th December 1989 regulating financial relations between France and foreign countries and (ii) in accordance with Article L. 411-2 of the French Monetary and Financial Code to qualified investors (‘‘investisseurs qualifie´s’’) or to a restricted group of investors (‘‘cercle restreint d’investisseurs’’), qualified investors and members of the restricted group of investors in each case acting for their own account, all as defined in Article L. 411-2 of the French Monetary and Financial Code and in the De´cret n8 98-880 of 1st October 1998. The Bonds may be resold only in compliance with Articles L. 411-1, L. 411-2, L. 412-1 and L. 621-8 of the French Monetary and Financial Code.

Netherlands

Each of the Initial Purchasers has agreed that the Bonds may not be offered, sold, transferred or delivered in or from the Netherlands as part of their initial distribution or at any time thereafter, directly or indirectly, other than to certain individuals or legal entities which include but are not limited to banks, brokers, dealers, institutional investors and undertakings with a treasury department who or which trade or invest in securities in the conduct of business or a profession.

Each of the Initial Purchasers has acknowledged that pursuant to the Netherlands Saving Certificates Act (Wet inzake spaarbewijzen or the ‘‘Saving Certificate Act’’) of 21st May 1985, any transfer or acceptance of securities (including interests in any global securities) which are bearer zero-coupon securities, or otherwise fall within the definition of savings certificates (spaarbewijzen) in the Savings Certificates Act, is prohibited unless the transfer and acceptance is done through the mediation of either the issuer thereof or an institution admitted to the Amsterdam Stock Exchange. The aforesaid prohibition does not apply to a transfer and acceptance by natural persons not acting in the course of their business or profession. In addition, pursuant to the Savings Certificates Act, certain administration procedures and identification requirements in relation to the issue of, transfer of, or payment on securities qualifying as saving certificates have to be complied with. The Savings Certificates Act is not applicable to the issue and trading of securities which are physically issued outside The Netherlands and are not immediately thereafter distributed within the Netherlands in the course of primary trading.

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 Bonds directly or indirectly in the ROC.

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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 Hong Kong 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 Monetary Authority of Singapore. Accordingly, each Initial Purchaser has agreed that this offering circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Bonds may not be circulated or distributed, nor may the Bonds be offered or sold, or be made the subject of an invitation for subscription or purchase, 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 274 of the Securities and Futures Act 2001 of Singapore (the ‘‘SFA’’), (ii) to a sophisticated investor, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

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.

Purchasers of Bonds sold outside the United States may be required to pay stamp taxes and other charges in compliance with the laws and practices of the country of purchase in addition to the price to investors on the cover page of this Offering Circular.

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any of our common shares (including ADSs and other depositary shares) or securities convertible into or exchangeable or exercisable for any of our common shares (including ADSs and other depositary shares), or publicly disclose our intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the Bookrunner for a period of 90 days after the date of this offering circular.

We have agreed to indemnify the Initial Purchasers against liabilities or to contribute to payments which they may be required to make in that respect.

We expect that delivery of the Bonds will be made against payment therefor on or about the closing date specified on the cover page of this offering circular, which will be the ninth business day following the date of pricing of the Bonds (this settlement cycle being referred to as ‘‘T+9’’).

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The Bookrunner, or any person acting on its behalf, may engage in over-allotment, stabilizing transactions, covering transactions and penalty bids in accordance with the applicable laws of each relevant jurisdiction. These stabilizing transactions, covering transactions and penalty bids may cause the price of the Bonds to be higher than it would otherwise be in the absence of these transactions. These transactions, if commenced, may be discontinued at any time.

The Bonds are a new issue of securities for which there currently is no existing trading market. Application has been made to list the Bonds on the Luxembourg Stock Exchange.

The Initial Purchasers and their affiliates engage and may in the future engage in investment banking and commercial banking transactions with us. In addition, certain of the Initial Purchasers and their affiliates are, and may in the future be, counterparties in derivatives transactions with us.

In connection with the sale of the Bonds, the Bookrunner (or its affiliates) may, for its own accounts, enter into (i) asset swaps, credit derivatives or other derivative transactions relating to the Bonds and/or the underlying common shares, (ii) credit derivatives including asset swaps and credit default swaps relating to us or (iii) equity derivatives and stock loan transactions relating to the underlying common shares at the same time as the offer and sale of the Bonds or in secondary market transactions. As a result of such transactions, the Bookrunner (or its affiliates) may hold long or short positions in such Bonds or derivatives or in the underlying common shares. No disclosure will be made of any such positions. The Bookrunner (or its affiliates) may purchase the Bonds and be allocated Bonds for asset management and/or proprietary purposes and not with a view to distribution.

As of November 30, 2002, we had repurchased in the open market approximately US$79 million aggregate principal amount of the outstanding 1% convertible bonds due 2005. On December 20, 2002, we repurchased an additional US$8 million aggregate principal amount of such bonds. We commenced a tender offer to repurchase the remaining outstanding bonds, and filed a Schedule TO relating to the tender offer with the SEC on December 24, 2002. Upon the expiration of the tender offer at 5: 00 p.m., New York time, on January 24, 2003, approximately US$61 million aggregate principal amount of such bonds had been tendered. In addition, approximately US$11 million aggregate principal amount of such bonds were redeemed pursuant to the holders’ option to require us to repurchase such bonds, and approximately US$0.3 million aggregate principal amount of such bonds remained outstanding. We accepted, and made payments totaling approximately US$75 million, for the bonds tendered pursuant to the tender offer on January 28, 2003. The Bookrunner (or its affiliates) acted as dealer manager in connection with the tender offer. The Bookrunner (or its affiliates) have from time to time rendered, and may in the future continue to render, banking services to our company.

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TRANSFER RESTRICTIONS

As a result of the following restrictions, we encourage you to consult legal counsel prior to making any offer, resale, pledge or other transfer of Bonds and the common shares issuable upon conversion of the Bonds.

The Bonds may not be offered or sold directly or indirectly in the ROC. The Bonds and the common shares issuable upon conversion of the Bonds have not been, and will not be, registered under the Securities Act. The Bonds and the common shares 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. The Bonds are being offered and sold outside the United States in accordance with Regulation S under the Securities Act. Terms used in this section are defined Regulation S under the Securities Act. Except in certain limited circumstances, interests in the Bonds may only be held through interests in the Global Bond. Such interests in the Global Bond will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream and their participants. See ‘‘The Global Bond’’.

No transfer of any interest in the Global Bond may be made to any U.S. person outside the United States or any person in the United States for a period of 40 days after the later of the commencement of this offering and the latest closing date of this offering.

Transfer Restrictions on Bonds

Each purchaser of the Bonds, by accepting delivery of this offering circular, will be deemed to have acknowledged and represented and agreed to as follows:

The Bonds and the common shares issuable upon conversion of the 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 restrictions on transfer.
The common shares issuable upon conversion of the Bonds may not be deposited in any unrestricted depositary receipt facility at any time that such shares constitute ‘‘restricted securities’’ within the meaning of Rule 144(a)(3) of the Securities Act.
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 Bonds in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S.
The Bonds will not be sold, pledged or transferred to, or for the account or benefit of, any U.S. person outside the United States or any person in the United States during the Distribution Compliance Period.
Such owner will not offer, sell, pledge or otherwise transfer any interest in the Bonds and the common shares issuable upon conversion of the Bonds except as permitted by the applicable legend set forth in paragraph (6) below.
The Bonds will bear legends to the following effect, unless we determine otherwise in compliance with applicable law, and that each owner will observe the restrictions contained therein:

THE BONDS EVIDENCED HEREBY AND THE COMMON SHARES OF MACRONIX INTERNATIONAL CO., LTD. (‘‘MACRONIX’’) ISSUABLE UPON CONVERSION OF THE BONDS EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED

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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 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 AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF REGULATION S UNDER THE SECURITIES ACT TO A PERSON OTHER THAN A U.S. PERSON, OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, 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 THE BONDS EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

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GENERAL INFORMATION

The Bonds have been accepted for clearance through the facilities of Euroclear and Clearstream. The ISIN number for the Global Bond is XS0162112063 and the Common Code for the Global Bond is 016211206.
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 integrated circuits. Our authorized capital is NT$53,500,000,000 divided into 5,350,000,000 common shares.
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.
The issuance of the Bonds was authorized by resolution dated September 19, 2002 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.
Except as disclosed in this offering circular, there has been no material adverse change in our capitalization, financial position or prospects (i) since June 30, 2002, the date of our most recent audited consolidated financial statements, and (ii) from June 30, 2002 to December 31, 2002, the date of our most recent unaudited unconsolidated financial statements.
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 12 months preceding the date of this offering circular, 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.
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 SEC, 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.
According to Chapter VI, Article 3, point A/II/2 of the Rules and Regulations of the Luxembourg Stock Exchange the Bonds shall be freely transferable and therefore no transaction made on the Luxembourg Stock Exchange shall be cancelled.
In accordance with ROC GAAP, our interim financial statements are only prepared on an unconsolidated basis. We publish audited consolidated annual and semi-annual 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.

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LEGAL MATTERS

Certain legal matters with respect to ROC law in connection with this offering will be passed upon for us by Baker & McKenzie. The Initial Purchasers are being represented by Sullivan & Cromwell LLP as to matters of New York State and United States Federal securities law, and by Lee and Li as to matters of ROC law.

EXPERTS

The consolidated financial statements of Macronix International Co., Ltd. as of December 31, 2000 and 2001 and as of June 30, 2002, and for each of the three years in the period ended December 31, 2001 and for the six-month periods ended June 30, 2001 and 2002, 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.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-3
Consolidated Balance Sheets as of December 31, 2000 and 2001. . . . . . . . . . . . . . . . . . . . .	F-4
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-6
Consolidated Statements of Cash Flows for each of the three years in the period
ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-7
Consolidated Statements of Shareholders’ Equity for each of the three years
in the period ended December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-10
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-57
Consolidated Balance Sheets as of June 30, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . .	F-58
Consolidated Statements of Operations for the six-month periods
ended June 30, 2001 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-60
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 2001 and 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-61
Consolidated Statements of Shareholders’ Equity for the six-month periods
ended June 30, 2001 and 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-63
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-64

F-1

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F-2

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, 2000 and 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, 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 Republic of China and 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, 2000 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 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, 2000 and 2001, and the consolidated results of its operations for each of the three years in the period ended December 31, 2001, to the extent summarized in note 19 to the consolidated financial statements.

DIWAN, ERNST & YOUNG CERTIFIED PUBLIC ACCOUNTANTS

Taipei, Taiwan, R.O.C February 7, 2002

F-3

ASSETS Current assets Cash and cash equivalents . . . . . . . . . . . . . Restricted investments-current. . . . . . . . . . . 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 . . . . . Office furniture and equipment . . . . . . . . . . Leased 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. . . . . . . . . . . . Restricted investments-noncurrent . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . .	Notes 3 10 4 5 6 13 10,15,16 13 7	2000 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 37,321,702 908,738 870,854 24,946 6,137,087 57,652,487 (19,646,446) 38,006,041 1,594,072 781,701 1,330,568 — 1,711,205	2001 NT$ US$ 12,560,954 375,402 34,000 1,016 1,243,907 37,176 2,319,225 69,314 7,298,502 218,126 761,889 22,770 566,709 16,937 572,709 17,116 25,357,895 757,857 1,359,287 40,624 13,362,736 399,364 41,038,791 1,226,503 1,216,401 36,354 904,795 27,041 966,347 28,881 7,103,107 212,287 65,951,464 1,971,054 (26,389,547) (788,689) 39,561,917 1,182,365 1,193,526 35,670 854,535 25,539 1,502,672 44,910 1,721,801 51,458 2,116,436 63,252
			NT$ 12,560,954 34,000 1,243,907 2,319,225 7,298,502 761,889 566,709 572,709 25,357,895 1,359,287 13,362,736 41,038,791 1,216,401 904,795 966,347 7,103,107 65,951,464 (26,389,547) 39,561,917 1,193,526 854,535 1,502,672 1,721,801 2,116,436

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS — Continued December 31, 2000 and 2001

(Amounts in thousands except share and per share data)

LIABILITIES & SHAREHOLDERS’ EQUITY Current liabilities Short-term debts . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies. . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . Common shares NT$10 par value, authorized 3,500,000,000 and 4,500,000,000 shares as of December 31, 2000 and 2001, and issued 2,474,409,144 and 3,359,342,613 shares as of December 31, 2000 and 2001, respectively. . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . Capital reserve . . . . . . . . . . . . . . . . . . . . . Legal reserve . . . . . . . . . . . . . . . . . . . . . . Special reserve . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . Unrealized losses on long-term investments . Cumulative translation adjustments . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . Total liabilities and shareholders’ equity. . . .	Notes 8 9 10 14 13 9 10 11 15 12	2000 NT$ 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	2001 NT$ US$ 733,950 21,935 322,073 9,626 2,877,581 86,001 1,095,469 32,740 133,177 3,980 1,010,363 30,196 2,958,637 88,423 403,963 12,073 96,905 2,896 9,632,118 287,870 1,615,738 48,288 17,892,680 534,748 24,533 733 88 3 29,165,157 871,642 33,593,426 1,003,988 5,943,929 177,643 22,395 669 1,707,054 51,018 1,425 42 2,249,995 67,244 (647,618) (19,355) 273,019 8,160 43,143,625 1,289,409 72,308,782 2,161,051
			NT$ 733,950 322,073 2,877,581 1,095,469 133,177 1,010,363 2,958,637 403,963 96,905 9,632,118 1,615,738 17,892,680 24,533 88 29,165,157 33,593,426 5,943,929 22,395 1,707,054 1,425 2,249,995 (647,618) 273,019 43,143,625 72,308,782

See accompanying notes to consolidated financial statements.

F-5

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 1999, 2000 and 2001 (Amounts in thousands except share and per share data)

Sales revenue. . . . . . . . . . . . . . . . . Less: Sales returns. . . . . . . . . . . . . Sales discounts . . . . . . . . . . . Net sales revenue . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . Operating expenses Selling expenses . . . . . . . . . . . . . Administrative expenses. . . . . . . . Research and development . . . . . . Operating income (loss) . . . . . . . . . Other income Research and development subsidies Interest income . . . . . . . . . . . . . . Foreign exchange gain . . . . . . . . . Gain on disposal of property, plant and equipment . . . . . . . . . Gain on insurance claim from earthquake. . . . . . . . . . . . Net investment gain. . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . Other expenses Interest expense . . . . . . . . . . . . . . . Inventory loss provision . . . . . . . . . . Loss on disposal of property, plant and equipment . . . . . . . . . . . Net loss from equity investment . . . . Net investment loss . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . Income tax benefit (expense). . . . . . Net income (loss) for the year. . . . . Earnings Per Common Share: Net income (loss) per common share — basic . . . . . . . . . . . . . . . . . . . Net income (loss) per common share — diluted. . . . . . . . . . . . . . . . . .	Notes 13	1999 NT$ 17,315,276 (209,410) (148,372) 16,957,494 (12,124,116) 4,833,378 (510,536) (802,590) (1,944,875) (3,258,001) 1,575,377 10,243 377,475 271,786 4,907 161,999 — 18,731 845,141 (1,116,392) (106,301) (1,052) (452,814) (144,176) (9,262) (1,829,997) 590,521 316,100 906,621 NT$0.30 NT$0.30	2000 NT$ 33,810,791 (273,154) (44,529) 33,493,108 (15,497,646) 17,995,462 (940,347) (1,772,441) (3,143,896) (5,856,684) 12,138,778 30,914 541,387 293,480 15,543 — — 63,695 945,019 (1,265,902) (76,796) (5,935) (601,187) (15,941) (107,115) (2,072,876) 11,010,921 (398,097) 10,612,824 NT$3.22 NT$3.18	2001 NT$ US$ 22,036,281 658,586 (208,920) (6,244) (80,131) (2,395) 21,747,230 649,947 (11,700,753) (349,694) 10,046,477 300,253 (611,406) (18,273) (2,120,718) (63,381) (3,825,049) (114,317) (6,557,173) (195,971) 3,489,304 104,282 — — 495,611 14,812 453,965 13,567 21,284 636 — — 75,582 2,259 309,497 9,250 1,355,939 40,524 (1,173,312) (35,066) (2,559,855) (76,505) (7,262) (217) (549,806) (16,432) (229,720) (6,865) (248,273) (7,420) (4,768,228) (142,505) 77,015 2,301 (943,495) (28,197) (866,480) (25,896) (NT$0.26) (US$0.01) (NT$0.26) (US$0.01)
				NT$ 22,036,281 (208,920) (80,131) 21,747,230 (11,700,753) 10,046,477 (611,406) (2,120,718) (3,825,049) (6,557,173) 3,489,304 — 495,611 453,965 21,284 — 75,582 309,497 1,355,939 (1,173,312) (2,559,855) (7,262) (549,806) (229,720) (248,273) (4,768,228) 77,015 (943,495) (866,480) (NT$0.26) (NT$0.26)

See accompanying notes to consolidated financial statements.

F-6

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1999, 2000 and 2001 (Amounts in thousands except share and per share data)

Cash flows 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 (net gain) on short-term investment . . . . . . . . . . . . Allowance (reversal of allowance) for bad debt . . . . . . . . . . . . . . . . . . Inventory provision . . . . . . . . . . . . . . . Net loss from equity investment . . . . . . Write off on long term investments . . . . 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. . . . . . . . . . . . . . . . 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 flows 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 . . . . .	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$ 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)	2001 NT$ US$ (866,480) (25,896) 7,443,341 222,455 562,415 16,809 849,259 25,381 (6,446) (193) 9,431 282 2,559,855 76,505 395,088 11,808 384,438 11,489 — — (14,022) (419) 3,005,685 89,829 (4,571,121) (136,614) 124,968 3,735 (158,460) (4,736) (555,561) (16,604) (172,956) (5,169) 335,752 10,034 (294,655) (8,806) (196,083) (5,860) (404) (12) 3,265 98 8,837,309 264,116 182,000 5,439 (926,516) (27,690) (1,492,004) (44,591) 3,038 91 (9,432,281) (281,897) 92,658 2,769 (405,231) (12,111) (635,249) (18,985) (1,721,801) (51,458) (14,335,386) (428,433)
			NT$ (866,480) 7,443,341 562,415 849,259 (6,446) 9,431 2,559,855 395,088 384,438 — (14,022) 3,005,685 (4,571,121) 124,968 (158,460) (555,561) (172,956) 335,752 (294,655) (196,083) (404) 3,265 8,837,309 182,000 (926,516) (1,492,004) 3,038 (9,432,281) 92,658 (405,231) (635,249) (1,721,801) (14,335,386)

See accompanying notes to consolidated financial statements.

F-7

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued For the years ended December 31, 1999, 2000 and 2001 (Amounts in thousands except share and per share data)

Cash flows from financing activities: Proceeds from short-term debt . . . . . . . Payments of short-term debt . . . . . . . . . Proceeds from short-term notes . . . . . . . Payments of short-term notes . . . . . . . . Proceeds from long-term debt . . . . . . . . Payments of long-term debt and capital lease obligations . . . . . . . . . . Subscriptions received . . . . . . . . . . . . . Distribution of directors and supervisors’ remuneration . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . Cash and cash equivalents at the beginning of year. . . . . . . . . . . . . . . . . Cash and cash equivalents at the end of year . . . . . . . . . . . . . . . . . . . . . Supplemental disclosures of cash flow information: Interest paid during the year . . . . . . . . . Income tax paid during the year . . . . . . Non-cash activities: Current portion of long-term debts and capital lease obligations transferred to current liabilities . . . . . . . . . . . . . . . . . . . . Payment for purchases of property, plant and equipment: Payable to equipment suppliers (beginning balance) . . . . . . . . . . . . Add: Purchases of property, plant and equipment . . . . . . . . . . . . Less: Payable to equipment suppliers (ending balance). . . . . . . . Payment for purchases of property, plant and equipment . . . . . . . . . . . . Convertible bonds converted to common stock . . . . . . . . . . . . . . . .	1999 NT$ 6,906,833 (6,877,875) 2,580,000 (3,025,217) 462,151 (1,236,813) 448,812 — (742,109) (7,400) (4,544,517) 8,699,405 4,154,888 1,152,733 93,287 3,203,358 607,107 8,128,635 (1,510,163) 7,225,579 —	2000 NT$ 7,209,095 (6,832,979) — (248,409) 6,170,000 (1,944,964) 3,613,555 — 7,966,298 1,189 11,407,006 4,154,888 15,561,894 1,225,134 55,795 3,263,543 1,510,163 11,802,871 (1,364,891) 11,948,143 4,022,584	2001 NT$ US$ 5,025,485 150,194 (5,878,037) (175,674) 2,600,000 77,705 (2,600,000) (77,705) 7,424,432 221,890 (4,048,757) (121,003) — — (190,148) (5,683) 2,332,975 69,724 164,162 4,906 (3,000,940) (89,687) 15,561,894 465,089 12,560,954 375,402 1,157,978 34,608 568,013 16,976 3,199,654 91,419 1,364,891 40,791 9,077,753 271,302 (1,010,363) (30,196) 9,432,281 281,897 — —
			NT$ 5,025,485 (5,878,037) 2,600,000 (2,600,000) 7,424,432 (4,048,757) — (190,148) 2,332,975 164,162 (3,000,940) 15,561,894 12,560,954 1,157,978 568,013 3,199,654 1,364,891 9,077,753 (1,010,363) 9,432,281 —

See accompanying notes to consolidated financial statements.

F-8

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUTIY For the years ended December 31, 1999, 2000 and 2001 (Amounts in thousands except share and per share data)

Common shares	Additional paid-in- capital	Subscriptions received	Capital reserve	Legal reserve	Special reserve	Retained earnings (accumulated deficit)	Unrealized losses on long-term investments	Translation adjustments	Total
NT$ 17,858,237 — — 1,785,823 — — — — —	NT$ 6,580,983 — — (1,785,823) — — — — —	NT$ — 448,812 — — — — — — —	NT$ 6,034 — — — — — 3,925 1,854 —	NT$ 936,609 — (379,864) — — — — — —	NT$ — — — — — — — — —	NT$ (379,864) — 379,864 — — 906,621 (3,925) — —	NT$ — — — — (23,289) — — — —	NT$ 47,274 — — — — — — — 373	NT$ 25,049,273 448,812 — — (23,289) 906,621 — 1,854 373
19,644,060	4,795,160	448,812	11,813	556,745	—	902,696	(23,289)	47,647	26,383,644
— 2,765,785 1,355,900 978,346 — — — — —	— (2,127,527) 2,706,467 3,044,238 — — — — —	— — (448,812) — — — — — —	— — — — 12,435 — — (1,853) —	90,270 — — — — — — — —	— — — — — — — — —	(90,270) (638,258) — — (12,435) — 10,612,824 (31,544) —	— — — — — (84,011) — — —	— — — — — — — — 58,228	— — 3,613,555 4,022,584 — (84,011) 10,612,824 (33,397) 58,228
24,744,091	8,418,338	—	22,395	647,015	—	10,743,013	(107,300)	105,875	44,573,427
— — 8,849,335 — — — —	— — (2,474,409) — — — —	— — — — — — —	— — — — — — —	— 1,060,039 — — — — —	1,425 — — — — — —	(1,425) (1,060,039) (6,374,926) (190,148) — (866,480) —	— — — — (540,318) — —	— — — — — — 167,144	— — — (190,148) (540,318) (866,480) 167,144
33,593,426	5,943,929	—	22,395	1,707,054	1,425	2,249,995	(647,618)	273,019	43,143,625
1,003,988	177,643	—	669	51,018	42	67,244	(19,355)	8,160	1,289,409

See accompanying notes to consolidated financial statements.

F-9

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except share, per share, and percentage data)

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’’) 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., Hui Ying Investment, Ltd., Kang Bao Investment Inc., Rui Hong Investment Inc., 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 inter-company 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 (‘‘US GAAP’’). Application of US GAAP would have affected shareholders’ equity as of December 31, 2000 and 2001, and the results of operations for each of the three years in the period ended December 31, 2001 to the extent summarized in note 19.

Use of Estimates

The preparation of financial statements in conformity with ROC GAAP 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

Macronix International Co. Ltd. maintains its accounting records in New Taiwan dollars (‘‘NT dollars’’ or ‘‘NT$’’), the national currency of the ROC. Transactions denominated in foreign currencies are recorded in NT dollars using the exchange rates in effect at the date of the transactions.

F-10

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Assers and liabilities denominated in 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 statemenrs of operations.

The assers 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 accounrs are translated using a weighted average exchange rate for the period. Translation gains and losses are included as a component of shareholders�equity.

Financial instrumenrs

a. Foreign exchange forward contracrs

A forward foreign exchange contract obligates the Company to exchange predetermined amounrs of specified foreign currencies at specified exchange rates for another currency on a specified date. The Company’s forward contracrs 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 contracr, are accreted or amortized to the income statemenr over the contracr lives using the straightline method. Realized gains and losses from settlemenr or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the statemenr of operations as foreign exchange gains or losses in the period in which they relate. The related amounrs due to or from counrer-parties are included in other currenr assets or other currenr liabilities.

b. Currency option contracrs

Ar 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 amounr denominated in one currency and pay a said amounr in a differenr currency. The conversion rate is stated in the contracr.

For options, premiums are amortized over the contracr lives using the straight-line method. Gains and losses are dealr with in the statemenr of operations upon exercise.

c. Cross currency and interest rate swaps

Cross currency and interesr rate swaps are enrered into to hedge currency positions and interesr rate variations related to foreign currency debts with floating interesr rates. The difference between the spot rate at the contracr date and the contracred forward rate is amortized over the life of the contracr. Realized gains and losses from settlemenr or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the statemenr 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 dealr with in the statemenr of operations. The realized gains and losses upon settlemenr are dealr with in the statemenr of operations.

F-11

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 pre-determined 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.

Information Expressed in US Dollars

The financial statements are stated in NT dollars, the national currency of the ROC. Translation of NT dollar amounts into US dollar amounts is included solely for the convenience of the readers outside Taiwan and has been made at the rate of NT$33.46 to US$1, the approximate exchange rate at June 30, 2002. No representation is made that the NT dollar amounts could have been, or could be, converted into US dollars at that or any other rate.

Inventories

Inventories are carried at the lower of cost and 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 the 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 shareholders’ equity. There is no recognition of unrealized gains.

F-12

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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:

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5 to 20 years
Production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1 to 5 years
Research and development equipment . . . . . . . . . . . . . . . . . . . . . . . . .	1 to 5 years
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1 to 5 years
Leased equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5 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, until December 27, 2001 gains from the disposal of property, plant and equipment, after income tax, are transferred from retained earnings to capital reserve. Interest incurred associated with the additions of property, plant and equipment are capitalized until those assets are ready for use.

Effective December 28, 2001, the reclassification of a gain on the sale of property, plant and equipment from retained earnings to capital reserve is no longer required pursuant to an amendment to the regulations.

Intangible Assets

Intangible assets are originally recorded at cost and are amortized over their estimated useful lives (one to ten years) using the straight-line method. Accumulated amortization of intangibles amounted to NT$1,091,419 and NT$1,653,834 (US$49,427) as of December 31, 2000 and 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 consolidated 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

F-13

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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.

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 revenue in the period the qualifying research and development activities are undertaken.

Earnings Per Common Share

Earnings per common share is computed by dividing the results of operations for the period by the weighted average number of common shares outstanding during the period with retroactive adjustment for stock dividends and employee bonuses.

F-14

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The weighted average numbers of outstanding common shares for the calculation of basic earnings per share are computed as follows:

Number of common shares outstanding on January 1 . . . . . . . . . . . . . . . . . . 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 1999 stock dividend . . . . . . . . . . . . . . . . . . . . . Weighted average effect of 2000 stock dividend . . . . . . . . . . . . . . . . . . . . . Stock dividends and transfer of capital reserve to capital on May 28, 2001 . . . Employee bonus transfer to capital on May 28, 2001 . . . . . . . . . . . . . . . . . . Weighted average effect of 2001 stock dividend . . . . . . . . . . . . . . . . . . . . .	1999 1,785,823,693 — — — — — 178,582,369 255,372,788 — 127,935,298 665,933,655 3,013,647,803	2000 1,964,406,063 128,160,411 22,720,465 1,193,644 35,460,102 264,659 — 275,142,476 — 139,898,381 728,204,346 3,295,450,547	2001
			2,474,409,144 — — — — — — — 742,322,744 142,610,725 —
			3,359,342,613

F-15

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Basic and diluted earnings per share (the ‘‘EPS’’) were calculated as follows:

Basic EPS: Income (loss) available to common shares . . . . . . . . . . . . . . . Weighted 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 conversion of convertible bonds. . . . . . . . . . . . Adjusted weighted average shares . . . . Diluted EPS . . . . . . . . . . . . . . . . . . . . .	1999 906,621 3,013,647,803 0.30 906,621 — 906,621 3,013,647,803 — 3,013,647,803 0.30	2000 10,612,824 3,295,450,547 3.22 10,612,824 487,451 11,100,275 3,295,450,547 195,006,994 3,490,457,541 3.18	2001
			(866,480
			3,359,342,613
			(0.26
			(866,480
			—
			(866,480
			3,359,342,613 —
			3,359,342,613
			(0.26

The diluted earnings per share calculation excludes the statement of operations impact of NT$203,684 and NT$433,525 related to the assumed conversion of convertible bonds into 138,959,444 weighted average shares and 210,301,619 weighted average shares for 1999 and 2001, respectively. The impact of the assumed conversion has been excluded due to the anti-dilutive effect.

3. CASH AND CASH EQUIVALENTS

	December 31,	December 31,
2000 NT$ 6,398 5,569,445 9,986,051 — 15,561,894	2001
	NT$ 49,690 1,681,924 8,247,274 2,582,066 12,560,954	US$ 1,485 50,267 246,481 77,169
		375,402

F-16

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

4. SHORT-TERM INVESTMENTS

Marketable securities . . . . . . . . . . . . . . . . . . Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for market value decline . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		December 31, 2001 NT$ US$ 159,061 4,754 1,135,272 33,929 (50,426) (1,507) 1,243,907 37,176
	2000 NT$ 134,392 190,195 (13,642) 310,945
		NT$ 159,061 1,135,272 (50,426) 1,243,907

5. NOTES AND ACCOUNTS RECEIVABLE (NET)

Notes receivable . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for doubtful accounts . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		December 31, 2001 NT$ US$ 68,798 2,056 2,446,443 73,116 2,515,241 75,172 (196,016) (5,858) 2,319,225 69,314
	2000 NT$ 216,096 5,402,648 5,618,744 (284,403) 5,334,341
		NT$ 68,798 2,446,443 2,515,241 (196,016) 2,319,225

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, 2001 NT$ US$ 16,343 489 1,695,219 50,664 8,287,946 247,697 361,175 10,794 165,468 4,945 16,017 479 10,542,168 315,068 (3,243,666) (96,942) 7,298,502 218,126
	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
		NT$ 16,343 1,695,219 8,287,946 361,175 165,468 16,017 10,542,168 (3,243,666) 7,298,502

The insurance coverage for inventories amounted to $6,128,719 and $9,752,705 (US$291,474) as of December 31, 2000 and 2001, respectively.

F-17

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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. . . . . . . . . . . . . . . . . . . . . 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 23,987,500 6,395,000 632 9,187,500 74,129,603 6,100,000 4,660,252 3,140,000	NT$ Percent owned 206,301 8.89% 58,500 4.50% 23,419 14.64% 80,000 15.38% 237,500 11.85% 83,135 3.20% 81 —* 129,559 7.66% 818,495 (107,300) 711,195 405,542 29.65% 98,006 33.17% 85,613 35.83% 30,212 26.17% 619,373 1,330,568

F-18

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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. . . . . . . . . . . PicoNetics Inc. . . . . . . . . . . . . . . . . . . . Global Strategic Investment Fund . . . . . . . FueTrek Co., Ltd. . . . . . . . . . . . . . . . . . Tower Semiconductor Inc. . . . . . . . . . . . . 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, 2001	December 31, 2001
	Shares 15,211,746 5,274,212 4,538,333 8,000,000 23,987,500 7,034,500 714 11,988,450 1,000,000 2,000,000 480 2,855,779 74,129,603 6,100,000 4,660,252 3,140,000	NT$ — 58,500 — 80,000 237,500 83,135 81 189,936 31,455 69,900 43,342 1,281,408 2,075,257 (647,618) 1,427,639 — 42,022 14,126 18,885 75,033 1,502,672	US$ Percent owned — 8.89% 1,748 3.41% — 14.64% 2,391 15.38% 7,098 11.78% 2,485 3.17% 2 —* 5,677 8.57% 940 4.00% 2,089 2.52% 1,295 17.65% 38,298 11.28% 62,023 (19,355) 42,668 — 29.65% 1,256 32.54% 422 35.60% 564 26.17% 2,242 44,910

No long-term equity investments were pledged as of December 31, 2000 and 2001.

Less than 0.01%

8. SHORT-TERM DEBTS

	December 31,	December 31,
2000 NT$ 924,680 661,822 1,586,502	2001
	NT$ — 733,950 733,950	US$ — 21,935
		21,935

F-19

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The weighted average interest rate of the short-term debt was 6.39% and 2.66% as of December 31, 2000 and 2001, respectively.

The short-term debt represents a foreign currency facility with a balance outstanding as of December 31, 2001 of US$21,000 (NT$702,660).

The Company’s unused short-term lines of credit amounted to NT$10,709,670 and NT$18,202,678 (US$544,013) as of December 31, 2000 and 2001, respectively.

9. 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. Caesar Technology, Inc. was under voluntary liquidation at December 31, 2001. It is expected that the above lease agreement will be renegotiated by the liquidator. The long-term lease obligations outstanding at year end have been reclassified as short term obligations as the ownership of the leased equipment will be resolved within the next twelve months from the balance sheet date.

In 2001, the Company entered into another lease agreement with Nintendo for equipment with a cost of NT$1,922,250, of which NT$928,278 was treated as leased equipment and NT$993,972 was treated as a prepayment for leased equipment. The lease term is from July 31, 2001 to June 30, 2005. The lease obligation is repayable in 36 monthly installments from July 31, 2002 to June 30, 2005.

Future lease obligations resulting from the above leases as of December 31, 2001 are as follows:

Years 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: unrealized interest expense . . . . . . . . . . . . . . . . . . . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ 398,297 666,567 670,909 337,173 2,072,946 (135,135) 1,937,811	US$ 11,904 19,921 20,051 10,077 61,953 (4,039) 57,914

F-20

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

10. LONG-TERM DEBT

Secured Medium term loans from one bank, repayable in 8 semi-annual installments beginning May 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 fixed interest rate . . . . . . . . . . . . . . . . . . . . . . . . . Debentures, repayable in full at maturity with interest paid annually at a fixed 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 fixed interest rate . . . . . . Medium term loan from one bank, repayable in July 2000 with a fixed interest rate . . . . . . . . . . . . Medium term loan 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. . . . . . . . . . . . . . . . . . . . . . Medium term loan from one bank, repayable in 17 quarterly installments with a variable interest rate Medium term loan from one bank, repayable in 8 semi-annual installments beginning June 2003 with a variable interest rate . . . . . . . . . . . . . . Unsecured Debentures, 5 year unsecured convertible debentures due February 1, 2005. . . . . . . . . . . . . . . . . . . Add: Interest payable . . . . . . . . . . . . . . . . . . . . Less: Current portion . . . . . . . . . . . . . . . . . . . .	Interest Rate 2000 2001 % % 6.96 5.16 6.755–8.88 — 6.63 6.35 7.00 — — 3.3 1.275–1.3092 0.775–0.8092 7.69 6.525 6.005–7.88 3.025–7.6 6.85 — 7.35 — 7.64 6.655 — — — 6.475 — 5.150 1.00 1.00	December 31, 2000 2001 NT$ NT$ US$ 400,000 300,000 8,966 47,600 — — 190,000 114,000 3,407 100,000 — — — 3,000,000 89,659 1,365,507 844,349 25,234 277,400 233,600 6,981 6,427,979 4,938,036 147,580 1,332,000 — — 300,000 — — 229,900 889,000 26,569 2,646,400 2,796,000 83,563 — 400,000 11,955 — 400,000 11,955 5,257,140 5,554,324 165,999 18,573,926 19,469,309 581,868 739,303 1,300,952 38,881 (3,259,688) (2,877,581) (86,001) 16,053,541 17,892,680 534,748	December 31, 2000 2001 NT$ NT$ US$ 400,000 300,000 8,966 47,600 — — 190,000 114,000 3,407 100,000 — — — 3,000,000 89,659 1,365,507 844,349 25,234 277,400 233,600 6,981 6,427,979 4,938,036 147,580 1,332,000 — — 300,000 — — 229,900 889,000 26,569 2,646,400 2,796,000 83,563 — 400,000 11,955 — 400,000 11,955 5,257,140 5,554,324 165,999 18,573,926 19,469,309 581,868 739,303 1,300,952 38,881 (3,259,688) (2,877,581) (86,001) 16,053,541 17,892,680 534,748
	2000 % 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 — — — 1.00	2000 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 18,573,926 739,303 (3,259,688) 16,053,541
			NT$ 300,000 — 114,000 — 3,000,000 844,349 233,600 4,938,036 — — 889,000 2,796,000 400,000 400,000 5,554,324 19,469,309 1,300,952 (2,877,581) 17,892,680

F-21

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

On October 29, 2001, the Company issued five-year secured debentures amounting to NT$3,000 million with a stated interest rate of 3.3%. The interest expense is repayable annually and the bonds are to be repaid in full at maturity.

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 December 31, 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$3,473,282). The Company has deposited NT$1,459,676 (US$43,625) in compliance with the sinking fund requirements as of December 31, 2001.

The 1% (net of tax) 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 December 31, 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 the convertible debentures, as of December 31, 2001 is repayable in US$101,680 (NT$3,402,213), in Japanese Yen 3,167,100 (NT$844,349) and in NT$3,720,920.

Maturity of existing long-term debt for the 5 years succeeding December 31, 2001 are as follows:

Years
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NT$

NT$ 2,877,581
2,064,414
1,714,346
1,964,900
4,873,520
7,275,500

NT$20,770,261

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. In addition certain debt agreements have covenants related to working capital, interest coverage and others which the Company is required to maintain.

F-22

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The Company’s assets pledged as collateral as of December 31, 2000 and 2001 were as follows:

Assets Restricted investments-current. . . . . . . . Restricted investments-current. . . . . . . . Restricted investments-current. . . . . . . . Restricted investments-current. . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . Assets Restricted investments-current. . . . . . . . Restricted investments-current. . . . . . . . Restricted investments-current. . . . . . . . Restricted investments-noncurrent . . . . . Restricted investments-noncurrent . . . . . Property, plant and equipment. . . . . . . . Property, plant and equipment. . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . .	December 31, 2000 NT$ US$ 10,000 299 5,000 149 35,600 1,064 165,400 4,943 9,448,613 282,385 1,481,612 44,280 978,952 29,258 326,130 9,747 264,249 7,898 5,773,998 172,564 18,489,554 552,587 December 31, 2001 NT$ US$ 17,000 508 12,000 359 5,000 149 1,459,676 43,624 262,125 7,834 5,441,195 162,618 4,881,826 145,900 2,091,509 62,508 1,406,480 42,035 752,897 22,501 626,272 18,717 69,458 2,076 928,279 27,743 17,953,717 536,572	Secured financial institutions I.C.B.C. Customs, HSIP Industrial Bureau of the Ministry of Economic Affairs Chiao Tung Commercial Bank Chiao Tung Commercial Bank Land Bank ABN AMRO BANK The Chase Manhattan Bank China Development Industrial Bank Bank of America Secured financial institutions Chiao Tung Commercial Bank I.C.B.C. Customs, HSIP Bank of America Nintendo Bank of America Chiao Tung Commercial Bank Chiao Tung Commercial Bank, HSIP Branch Land Bank China Development Industrial Bank ABN AMRO Bank The Export-Import Bank of the Republic of China Nintendo	Contents
			Security for foreign labors Customs clearance deposit Subsidy Income Security loan Security loan Secured loan Secured loan Secured loan Secured loan Secured loan Contents
	NT$ 17,000 12,000 5,000 1,459,676 262,125 5,441,195 4,881,826 2,091,509 1,406,480 752,897 626,272 69,458 928,279 17,953,717		Secured loan Security for foreign labors Customs clearance deposit Compensated deposit Leased equipment Convertible bonds Secured loan Secured loan Secured loan Secured loan Secured loan Secured loan Leased equipment

F-23

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

11. 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 in May 1996 was changed to 5% of the wages and salaries paid . 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.

The key assumptions underlying the value of the pension assets and obligations are as follows:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . Salary increase . . . . . . . . . . . . . . . . . . . . . . Expected investment return . . . . . . . . . . . . . .	1999 6.5% 6.0% 6.5%	2000 6.0% 5.5% 6.0%	2001
			5.0% 4.5% 5.0%

The funded status of the Company’s pension plan as of December 31, 2000 and 2001 was as follows:

	December 31,	December 31,
2000 NT$ — (147,815) (147,815) (274,676) (422,491) 420,695 (1,796) 61,843 30,712 (112,027) (21,268)	2001
	NT$ — (291,447) (291,447) (389,883) (681,330) 535,118 (146,212) 58,751 29,410 33,518 (24,533)	US$ — (8,710)
		(8,710) (11,653)
		(20,363) 15,993
		(4,370) 1,756 879 1,002
		(733)

F-24

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The components of the 1999, 2000 and 2001 net pension costs are as follows:

		1999		2000
		NT$		NT$	NT$	US$
Service Cost . . . . . . . . . . . . .	. . . . . . .	61,942		79,843	100,021	2,989
Interest Cost . . . . . . . . . . . . .	. . . . . . .	20,384		24,146	25,349	758
Expected return on plan assets .	. . . . . . .	(19,025)		(23,387)	(28,193)	(842)
Amortization . . . . . . . . . . . . .	. . . . . . .	2,832		3,226	1,487	44
Net pension cost . . . . . . . . . .	. . . . . . .	66,133		83,828	98,664	2,949
Additional pension disclosures:
				December 31,
			2000		2001
			NT$		NT$	US$
Benefit obligation at January 1	. . . . . . . . . . .			371,470	422,491	12,627
Service cost . . . . . . . . . . . . . .	. . . . . . . . . . .			79,843	100,021	2,989
Interest cost . . . . . . . . . . . . . .	. . . . . . . . . . .			24,146	25,349	758
Paid to retirees . . . . . . . . . . .	. . . . . . . . . . .			(866)	(223)	(7)
Increase in unrecognized transit cost . . . . . . . .				—	—	—
Increase in unrecognized prior service cost . . .				—	—	—
Increase in unrecognized actuarial (gain) loss .				(52,102)	133,692	3,996
Benefit obligation at end of year	. . . . . . . . . .			422,491	681,330	20,363
Change in plan assets
Fair value of plan assets at beginning of year .				321,369	420,695	12,573
Actual return on plan assets . . .	. . . . . . . . . . .			18,136	19,247	576
Contributions . . . . . . . . . . . . .	. . . . . . . . . . .			82,056	95,399	2,851
Paid . . . . . . . . . . . . . . . . . . .	. . . . . . . . . . .			(866)	(223)	(7)
Fair value of plan assets at end of year . . . . . .				420,695	535,118	15,993

12. 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.

Following the resolution of the shareholders’ meeting on August 15, 1999, the Company transferred NT$379,863 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 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-25

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

During the year ended December 31, 2000, convertible debentures totaling NT$4,022,584 were converted to the Company’s common shares and additional paid-in capital 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 a 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 paidin capital, 50% of such reserve may be distributed to the Company’s shareholders through the issuance of additional common shares.

Special Reserve

According to the ROC Security Exchange Law, the Company must provide for a special reserve for any debit balance, normally arising from unrealized losses on long-term investments or cumulative translation adjustments, in shareholders’ equity. The reserve related to the debit balance is recorded upon shareholder approval in the period following the fiscal year end in which the debit balance arises.

Capital reserve

Capital reserve is comprised of gains on disposal of fixed assets (net of tax) and the 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 to cover such a 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;

F-26

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)
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.

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 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.

13. 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.

The Company is entitled to a 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 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.

F-27

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 (‘‘Separate SUI Program’’), 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 in the year the costs were incurred.

As of December 31, 2001, unused tax credits available to reduce future taxable income amounted to NT$2,979,508. Details are as follows:

Expiration Years 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ 613,186 1,155,632 134,651 1,076,039 2,979,508	US$
		18,326 34,538 4,024 32,159
		89,047

The components of income tax expense (benefit) and deferred income tax assets and liabilities are as follows:

Components of income tax expense (benefit):

	December 31,	December 31,	December 31,
1999 NT$ 210,038 (526,138) (316,100)	2000 NT$ 524,210 (126,113) 398,097	2001
		NT$ 94,236 849,259 943,495	US$ 2,817 25,381
			28,198

F-28

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 is summarized below:

Expected income tax expense (benefit) . . . . . . . . . . . . . . . . . . Undistributed earnings tax . . . . . . . Additional tax assessment . . . . . . . Effect of tax exempt earnings . . . . Tax credits earned . . . . . . . . . . . . Change in valuation allowance . . . . Net gain on long-term equity investment . . . . . . . . . . . . . . . . Effect of rate change . . . . . . . . . . Impact of industrial park reduced tax rates. . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . .		December 31, 2000 2001 NT$ NT$ US$ 2,202,184 19,254 575 — 465,488 13,912 93,246 58,879 1,760 — (256,260) (7,659) (1,548,034) (920,993) (27,525) (630,739) 1,255,102 37,511 120,237 (20,466) (612) 104,973 — — — 317,936 9,502 56,230 24,555 734 398,097 943,495 28,198	December 31, 2000 2001 NT$ NT$ US$ 2,202,184 19,254 575 — 465,488 13,912 93,246 58,879 1,760 — (256,260) (7,659) (1,548,034) (920,993) (27,525) (630,739) 1,255,102 37,511 120,237 (20,466) (612) 104,973 — — — 317,936 9,502 56,230 24,555 734 398,097 943,495 28,198
	1999 NT$ 118,104 — 224,830 — (674,118) (156,313) 142,743 — — 28,654 (316,100)	2000 NT$ 2,202,184 — 93,246 — (1,548,034) (630,739) 120,237 104,973 — 56,230 398,097
			NT$ 19,254 465,488 58,879 (256,260) (920,993) 1,255,102 (20,466) — 317,936 24,555 943,495

Components of deferred income tax assets and liabilities:

Deferred tax liabilities Tax depreciation in excess of book depreciation . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . Deferred tax assets Tax credits . . . . . . . . . . . . . . . . . . . Inventory provision . . . . . . . . . . . . . Bad debts allowance . . . . . . . . . . . . . Accrued royalty expense . . . . . . . . . . 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 . . . . . . . . .		December 31, 2001 NT$ US$ 536,015 16,020 536,015 16,020 2,979,508 89,047 501,304 14,982 25,917 775 132,543 3,961 114,461 3,421 235,088 7,026 3,988,821 119,212 (1,497,391) (44,752) 2,491,430 74,460 1,955,415 58,440 761,889 22,770 1,193,526 35,670 1,955,415 58,440
	2000 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$ 536,015 536,015 2,979,508 501,304 25,917 132,543 114,461 235,088 3,988,821 (1,497,391) 2,491,430 1,955,415 761,889 1,193,526 1,955,415

F-29

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

14. 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 was represented on Chantek Electronic Co., Ltd.’s board of directors up to October 29, 2001.
United Industry Gases Co., Ltd. (‘‘UIG’’) . . . The Company is represented on United Industry Gas Co., Ltd.’s board of directors.
Powertech Technology, Inc. (‘‘Powertech’’) . The Company is represented on Powertech Technology, Inc.’s board of directors.
Ardentech Technology, Inc. (‘‘Ardentech’’). . The Company is represented on Ardentech Technology, Inc.’s board of directors.
Tower Semiconductor, Inc. (‘‘Tower’’) . . . . . The Company is represented on Tower Semiconductor Inc.’s board of directors.
Chiao Tung Commercial Bank Chiao Tung Commercial Bank is represented (‘‘Chiao Tung’’) . . . . . . . . . . . . . . . . . . . on the Company’s board of directors.
Biomorphic VLSI. Inc. (‘‘Biomorphic’’) . . . . Equity investee of the Company

b. Transactions with related parties

(a) Manufacturing processing charges to related parties for the years ended December 31, 1999, 2000 and 2001, are summarized as follows:

Caesar . . . . . . . . . . . . . . . . Chantek . . . . . . . . . . . . . . . Powertech . . . . . . . . . . . . . . Ardentech . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . .	1999 NT$ 675,371 488,274 — — 1,163,645	2000 NT$ 593,965 390,190 96,197 63,538 1,143,890	2001	2001
			NT$ 240,003 103,873 106,263 108,329 558,468	US$ 7,173 3,104 3,176 3,238
				16,691

Such charges form part of inventory costs.

(b) The Company purchased industrial gases from UIG totaling NT$94,044, NT$116,944 and NT$119,137(US$3,561) for the years ended December 31, 1999, 2000, and 2001 respectively. Such purchases form part of cost of goods sold.
(c) During the year ended December 31, 2001, the Company purchased wafers from Tower totaling NT$157,263 (US$4,700). Such purchases form part of cost of goods sold. In September 2001, the Company utilized US$16 million of its prepaid credit account to purchase 1,255,848 Tower shares for US$12.75 per share. As of December 31, 2001, NT$186,807 (US$5,583) remained in the prepaid credit account.
(d) During the year ended December 31, 2000, the Company purchased 6,395,000 common shares of Powertech from Caesar at NT$13 per share.

F-30

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)
(e) Refer to note 9 for the Company’s capital lease agreement with Caesar.
(f) Payables to related parties as of December 31, 2000 and 2001 were as follows:

	December 31,	December 31,
2000 NT$ 140,060 76,131 9,803 51,196 — 28,623 320 306,133	2001
	NT$ 28,538 20,321 10,290 34,723 11,183 24,290 3,832 133,177	US$ 853 607 307 1,038 334 726 115
		3,980

(g) Loans

Year	ending December 31, 2000	ending December 31, 2000
Maximum balance Amount Month $7,705,406 January Year	Ending balance Interest rate $6,640,162 2.5%–7.89% ending December 31, 2001		Interest expense
Amount $7,705,406
			$517,418

Maximum balance Amount Month $6,275,370 March	Ending balance $5,052,036	Interest rate 1.5%–7.79%	Interest expense
Amount $6,275,370
			$337,381

(h) The Company acted as guarantor for a loan to Biomorphic. As of December 31, 2001, such loan amounted to US$3,400.

15. COMMITMENTS AND CONTINGENCIES

The Company’s commitments and contingencies, not included in the financial statements, as of December 31, 2001 were as follows:

a. Letters of credit issued for future deliveries of inventories and equipment amounted to US$8,575 (NT$286,920), Japanese Yen 444,487 (NT$118,500).
b. The Company’s significant construction and machinery contracts totaled approximately NT$12,518,984 (US$374,148). The Company has paid NT$4,460,796 (US$133,317) pursuant to these contracts as of December 31, 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.

F-31

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Future minimum payments under non-cancelable operating leases as of December 31, 2001 are as follows:

Operating Leases 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total minimum lease payments . . . . . . . . . . . . . . . . . . . . .	NT$ 64,064 64,064 64,064 64,064 64,064 479,692 800,012	US$
		1,915 1,915 1,915 1,915 1,915 14,336
		23,911

Rental expenses under the operating leases amounted to NT$54,314, NT$65,524 and NT$71,746 (US$2,144) for the years ended December 31, 1999, 2000 and 2001, respectively.

d. On February 18, 1997, Atmel Corporation (‘‘Atmel’’) filed a legal action against MXA, one of the Company’s subsidiaries, with the International Trade Commission (‘‘ITC’’) for violation of Atmel’s patent No. 903. On June 1, 2001, the ITC issued a Notice of Final Determination and ruled again that MXA did not infringe the 903 patent. Atmel filed a petition to 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 final determination and therefore is bound by the ITC’s finding that MXA did not infringe the 903 patent.

In August 1997, Atmel filed another legal action against MXA for violation of Atmel’s patents No. 096 and 747. The first patent is a patent similar to the one in issue with the ITC. The second relates to manufacturing processes used by the Company. The Company applied for summary judgment for both patents. The Court has not yet issued its ruling on the first patent. The court granted summary judgment on the second patent in 2000. In light of the results to date, the Company believes that there will be no significant impact on its business, financial condition and results of operations related to this 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 financial condition and results of operations. 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, an Israel public company listed on NASDAQ, to purchase silicon wafers to be manufactured by Tower 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 wafers 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

F-32

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Obligation shall, from the third quarter of the expected production date, be reduced by 950 wafers 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 memory passes 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 installments 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.

In September 2001, in connection with Tower’s financial restructuring, the Company (together with the other wafer manufacturers) exchanged US$16 million of its prepaid credit account to purchase 1,255,848 Tower shares at US$12.75 per share.

As of December 31, 2001, the Company owned approximately 11.28% of Tower’s shares and had NT$187 million or about US$5 million remaining on deposit. If Tower is unable to meet the remaining 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 agreement.

16. OTHER DISCLOSURES

a) Property, plant and equipment

Total capitalized interest amounted to NT$269,530, NT$310,082 and NT$153,373 (US$4,583) for the years ended December 31, 1999, 2000 and 2001, respectively.

The insurance coverage for property, plant and equipment amounted to NT$ 24,494,764, NT$38,575,907 and NT$59,526,195 (US$1,779,026) as of December 31, 1999, 2000 and 2001, respectively.

b) Royalty Revenue

Royalty revenue earned amounted to NT$27,101, NT$84,973 and NT$76,759 (US$2,294) for the years ended December 31, 1999, 2000 and 2001, respectively.

F-33

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

c) Significant Subsequent Events

The Company issued 0.5% Convertible Bonds (the ‘‘Bonds’’) totaling US$140,000 on February 7, 2002. The Bonds will mature on February 7, 2007 at a redemption price equal to their principal amount, together with redemption premium. 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 anytime, except during a closed period, on or after March 11, 2002 and on or before January 23, 2007, into common shares, par value NT$10.00 per share, or on or after April 17, 2002 and on or before January 23, 2007, into the Company’s American depositary shares, each representing the right to receive 10 ADSs. The initial conversion price will be NT$31.32 per common share, or US$8.95 per ADS, subject to adjustment in certain events.

On January 16 and May 6, 2002 (unaudited) pursuant to the board of directors’ approval, the Company granted its employees 71,768,500 and 560,000 stock options, respectively, which entitled the holder to purchase the Company’s stock at NT$25.1 and NT$24.5 per share, respectively.

(Unaudited)-On April 23, 2002, the Company together with the other wafer producers agreed with Tower to advance the payment of the third milestone. It was further agreed that milestone payments would be settled in return for shares based on the average closing price of Tower shares on the NASDAQ in the 30 trading days preceding the date of payment however the price per share will not exceed US$12.50. For this milestone the Company purchased an additional 1,071,497 Tower shares at USD 6.16 per share. The market value for Tower shares was USD 5.88 per share.

(Unaudited)-On October 1, 2002, pursuant to the board of directors’ approval, the Company granted its employees 151,507,000 stock options, which entitled the holder to purchase the Company’s stock at NT$11.5 per share.

(Unaudited)-On October 1, 2002, the Company made the fourth milestone payment US$11,000 to Tower. For this milestone, the Company acquired 1,344,829 Tower shares at US$4.908 per share and increased its deposit in Tower by NT$4,400.

d) Other

Certain accounts in the 2000 financial statements of the Company have been reclassified to conform to the current year’s presentation.

17. 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.

F-34

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

1999 Sales to unaffiliated customers . . Sales between geographic areas. . Net Sales . . . . . . . . . . . . . . . . . Operating income (loss), including other expenses . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . Interest expense . . . . . . . . . . . . Income before taxes . . . . . . . . . Tax benefit. . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . Identifiable assets . . . . . . . . . . . Capital expenditures . . . . . . . . . Depreciation and amortization. . . 2000 Sales to unaffiliated customers . . Sales between geographic areas. . Net Sales . . . . . . . . . . . . . . . . . Operating income (loss), including other expenses . . . . . Interest revenue . . . . . . . . . . . . Interest expense . . . . . . . . . . . . Income before taxes . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . Identifiable assets . . . . . . . . . . . Capital expenditures . . . . . . . . . Depreciation and amortization. . .	Domestic NT$ 15,611,684 1,041,705 16,653,389 1,342,236 50,483,234 8,125,825 4,849,933 Domestic NT$ 28,086,268 4,151,714 32,237,982 11,602,123 71,205,052 11,785,823 6,045,466	USA NT$ 1,314,264 33,706 1,347,970 (7,441) 442,756 2,810 5,453 USA NT$ 3,244,508 61,526 3,306,034 117,140 1,493,371 4,807 2,734	Others NT$ 31,546 — 31,546 (315,129) 1,552,718 — — Others NT$ 2,162,332 — 2,162,332 (275,948) 2,407,247 12,241 —	Elimination NT$ — (1,075,411) (1,075,411) 309,772 (1,281,344) — — Elimination NT$ — (4,213,240) (4,213,240) 292,121 (2,655,039) — —	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 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

F-35

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

2001 Sales to unaffiliated customers . . Sales between geographic areas. . Net Sales . . . . . . . . . . . . . . . . . Operating income (loss), including other expenses . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . Interest expense . . . . . . . . . . . . Income before taxes . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . Identifiable assets . . . . . . . . . . . Capital expenditures . . . . . . . . . Depreciation and amortization. . .	Domestic NT$ 19,315,375 2,045,346 21,360,721 567,227 71,974,574 8,294,353 7,996,672	USA NT$ 1,625,430 73,754 1,699,184 (156,008) 4,076,899 777,500 5,237	Others NT$ 806,425 — 806,425 19,402 212,175 5,900 3,847	Elimination NT$ — (2,119,100) (2,119,100) 324,095 (3,958,924) — —	Consolidated
					NT$ 21,747,230 —
					21,747,230
					754,716
					495,611 (1,173,312
					77,015 (943,495
					(866,480
					72,304,724
					9,077,753
					8,005,756

Major customers

Revenues from customers representing over 10% of total net sales were as follows:

Customers	1999		2000			2001
Megachips Corporation . . Mitsubishi Corporation. . .	NT$ 7,805,576 13,892	% 46.03 —* 46.03	NT$ 10,871,630 2,684,798	% 32.46 8.02	NT$ 9,181,228 2,556,058	% 42.22 11.75	US$ 274,394 76,392
	7,819,468		13,556,428	40.48	11,737,286	53.97	350,786

Less than 0.01%

Exports

The Company’s export sales accounted for 78%, 74% and 73% of total net sales for the years ended December 31, 1999, 2000, and 2001, respectively.

Export sales from the ROC were as follows:

Japan. . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . Hong Kong. . . . . . . . . . . . . . . . . . Singapore. . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . . . . . Europe. . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . .	1999 NT$ 9,776,492 1,232,261 989,206 547,601 199,510 441,261 13,186,331	2000 NT$ 15,502,559 2,639,938 2,814,773 1,971,024 — 1,862,740 24,791,034	2001	2001
			NT$ 10,932,611 1,454,140 1,592,119 1,148,113 — 650,391 15,777,374	US$ 326,736 43,459 47,583 34,313 — 19,438
				471,529

F-36

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

18. 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 US dollars and Japanese Yen. As of December 31, 2001, approximately 67.25% of the Company’s long-term debt was in US dollars and approximately 34.75% 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, 2000 and 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 dollar. 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.

December 31,	December 31,	December 31,
2000 Buy Sell — — — 73,407	2001
Buy — —	Buy 314,550 —	Sell
		— 333,660

As of December 31, 2000 and 2001, the net receivable (payable) resulting from the above exchange contracts amounted to NT$(13,407) and NT$699, respectively.

Net exchange gains (losses) related to foreign currency forward contracts for the years ended December 31, 1999, 2000 and 2001 were, NT$13,218, NT$(6,267), and NT$47,821, respectively.

b. Option contracts

The Company enters into foreign currency option contracts for hedging purposes. The option contracts are entered into to mitigate foreign exchange risk. The contracts are 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 US 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. This has the impact of reducing the upfront cost of the options.

F-37

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

c. Cross currency and interest rate swaps

To hedge against the Company’s long-term debt denominated in US 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 US 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. 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$ NT$ 15,561,894 15,561,894 206,382 99,082 (1,586,502) (1,586,502) (19,313,229) (18,144,311)	2001
	Carrying amount NT$ 15,561,894 206,382 (1,586,502) (19,313,229)	Carrying amount NT$ US$ 12,560,954 375,402 1,502,672 44,910 (733,950) (21,935) (20,770,261) (620,749)	Fair value
			NT$ US$ 12,560,954 375,402 1,436,804 42,941 (733,950) (21,935) (18,402,577) (549,987)

Off balance sheet:

Off balance sheet:
Derivative financial instruments Hedging: Cross currency interest rate swap Foreign exchange forwards Options Trading: Structured deposit	December 31,
	2000 Carrying Amount Fair Value NT$ NT$ 43,260 52,260 13,407 (15,408) — 2,261 496,200 496,194	2001
	Carrying Amount NT$ 43,260 13,407 — 496,200	Carrying Amount NT$ 62,830 699 — —	Fair Value
			NT$ 64,882 1,119 21,310 —

F-38

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

f. 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 amount of US$150 million is divided into fifteen options and the Subsidiary is entitled to exercise the options separately, at the discretion of the Subsidiary during the life of the contract, but at a minimum number of two and a maximum number fifteen. The Company simultaneously entered into currency swaps, based on the notional amount of the debt, converting Japanese Yen into New Taiwan dollars and New Taiwan dollars into United States dollars. Subsequently, the option contract and the currency swaps were combined into one contract. The Subsidiary exercised two options and five options on January 22, 2000 and June 26, 2000, respectively. As of December 31, 2001, the fair value of the outstanding portion of the contract was NT$(12,280) (US$(367)), and the carrying amount was NT$434,444(US$12,984).

In June 2000, the Company entered into a contract with a financial institution for the settlement of five options relating to a zero coupon convertible debenture due 2003 with the underlying reference being 47,727,535 of the Company’s common shares. The contract, as amended, will expire on December 31, 2002. As of December 31, 2001, the remaining underlying reference was 48,412,695 of the Company’s common shares. If the price is greater than the predetermined contract price, then the Company would pay the difference between the two amounts to the financial institution. The contract rate at which the contract is settled is based in US dollars, and the Company’s share price is converted into US dollars using current NT dollar to US dollar exchange rates in order to determine the settlement amount. The contract rate as of December 31, 2001 was US$1.50208. The carrying amount of this contract as of December 31, 2001 was a loss of NT$ 1,042,067 (US$ 31,144) while the fair value was a loss of NT$ 1,239,250 (US$ 37,037)

Under the stock appreciation right program 19,051,451 of the Company’s shares vested in the current year with an exercise price of $37.25. With respect to the contract referenced to the 48,412,695 shares, the Company recorded a liability relating to a portion of the contract representing 19,051,451 of the shares based on the difference between the contract strike price and NT$37.25, this resulted in a total liability related to the contract of NT$1,042,067. The Company’s additional obligation related to the contract, based on the fair value of the underlying shares of NT$26.90 as of December 31, 2001, is NT$197,183.

In entering into financial instruments, the Company is subject to credit, price, liquidity and cash flow risks 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 at the balance sheet date. The Company minimizes exposure to credit risk by only dealing with reputable banks.

F-39

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The notional amounts of the financial instruments as of December 31, 2000 and 2001 are as follows (amounts in thousands):

Financial instruments: Currency forward-hedging . . . . . . . . . . . . . . . . . . . . . . . Buying options-hedging . . . . . . . . . . . . . . . . . . . . . . . . . Selling options-hedging . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency interest rate swaps-hedging . . . . . . . . . . . . Structured deposit-trading. . . . . . . . . . . . . . . . . . . . . . . . Call options relating to convertible debentures . . . . . . . . .	December 31,	December 31,
	2000 YEN254,003 — YEN105,800 NT$175,000 US$12,000 US$15,000 US$80,000	2001
		YEN1,251,538 YEN4,574,400 YEN2,874,600 US$8,000 — US$80,000

Price risk

There are three types of price risk: currency, interest rate and market risks. 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 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. Therefore, if the foreign exchange option embedded in the structured deposits favors the financial institutions, 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 are highly liquid and are entered into, pursuant to binding agreements, for hedging purposes 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

F-40

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

structured deposit contracts, there are no additional cash flows required since the principal has been deposited with the counter-parties. However, the Company might receive an amount less than the principal deposited should the counter-parties 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 the financial instruments were determined as follows:

Cash and cash equivalents:

The carrying amounts reported in the balance sheet for cash and cash equivalents approximate its 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 the discounted cash flow method, 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 contract was entered into by the Subsidiary to redeem the Company’s convertible debentures, which were privately placed with a bank. Upon the redemption of the convertible debenture 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 the financial statements.

19. 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 US 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.

F-41

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

US 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 US 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. Plant capacity expense variances

As permitted under ROC GAAP, all plant capacity expense variances can either be charged to the statement of operations or allocated between cost of goods sold and inventory using an appropriate allocation method. The Company’s policy is to expense such variances.

Under US GAAP, such plant capacity variances can only be allocated between cost of goods sold and inventory. This may also result in additional inventory allowances.

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 loss in the statement of operations, 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. An other than temporary decline in value is not required to be recognized under ROC GAAP due to the less prescriptive nature of the principles. The Company’s policy is to account for all unrealized losses as a charge to shareholders’ equity.

Under US GAAP, SFAS No. 115, ‘‘Accounting for Certain Investments in Debt and Equity Securities’’, requires that certain investments be classified as trading securities, 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 US GAAP if an other-than-temporary decline in value of a long-term investment exists, the unrealized loss should be charged to the statement of operations.

F-42

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Under US GAAP, available-for-sale securities as of December 31, 2000 and 2001 are as follows:

	December 31	December 31	December 31
2000 Market value Cost NT$ NT$ 169,565 190,195 93,559 206,382	2001
Market value NT$ 169,565 93,559	Market value NT$ US$ 1,107,494 33,099 631,812 18,883	Cost
	NT$ 1,107,494 631,812	NT$ 1,135,272 1,281,489	US$ 33,929
			38,299

As of December 31, 2000 and 2001, under ROC GAAP unrealized gains (losses) on short-term investments were NT$(13,642) and NT$(50,426)((US$1,507)), respectively, resulting in charges to the statement of operations for the gains and losses.

Realized gains from sale of securities classified as available-for-sale for the years ended December 31, 1999 and 2000, and 2001 were NT$15,231, NT$28,022 and NT$42,697 (US$1,276), respectively. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification.

During 2001, an other-than-temporary decline in value of NT$649,614 (US$19,415) was recognized under US GAAP for the Company’s investment in Tower. At December 31, 2001 the price of Tower’s shares was US$6.31 compared to the average cost to the Company of US$12.91.

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 US 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.

F-43

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Prior to January 1, 2001, under US 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 agreements which are required to be settled in cash at their fair values, with changes in fair value reported in earnings(See note 18(f)). Differences between ROC GAAP and US GAAP in accounting for derivative financial instruments are detailed below:

(i). Options 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, US GAAP requires that unrealized gains and losses on option contracts that do not qualify as hedges be recorded in the statement of operations. The majority of option contracts entered into by the Company for hedging purposes, 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 statement of operations. Unrealized gains and losses are not recognized.

For periods prior to January 1, 2001, under US 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 are 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 statement of operations only upon the settlement of the contracts.

US GAAP requires 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 (‘‘U.S. FASB’’) issued Statement 133, ‘‘Accounting for Derivative Instruments and Hedging Activities’’. The Statement requires the Company to recognize all derivatives on the balance sheet date 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

F-44

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

consolidated statement of operations and a charge of nil to other comprehensive income. Subsequent to December 31, 2000, none of the Company’s derivative positions qualified as hedges under U.S. GAAP.

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 derivative financial instruments intended to fund the costs of the SAR. The Company allocates a portion of the gains or losses from a derivative contract designated as a hedge of the SAR program for ROC GAAP purposes by correlating the number of shares in the SAR plan that have vested with a number of shares referenced in the derivative contract. The Company records gains or losses on the portion of the derivative contract related to the SAR plan based on the difference between the strike price in the derivative contract and the employees’ exercise price. The Company’s additional unrecorded obligation related to the derivative contract, based on the fair value of the underlying shares of NT$26.90 at December 31, 2001, is NT$197,183. See also note 18f.

US 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’s 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 statements of operations.

US GAAP require 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 US 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.

F-45

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

i. Impairment of Long-lived Assets

US GAAP SFAS 121, ‘‘Accounting for the Impairment of Long-Lived Assets and for LongLived 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 selling costs. 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, 1999, 2000 and 2001.

j. Investment in Equity Investees

Under US 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 US 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$1,614 million in 1999, NT$2,486 million in 2000, NT$ 2,845 million (US$85 million) in 2001.

m. Rights Issues and Earnings Per Share

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

F-46

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Under US GAAP, a rights issue with an 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.

The number of weighted average shares outstanding under US GAAP is presented below:

Year ended December 31,	Year ended December 31,	Year ended December 31,
1999 1,785,823,693 — 45,181,339 — — — — 178,582,369 255,372,788 — — 665,933,655 2,930,893,844	2000 1,964,406,063 128,160,411 2,723,259 22,720,465 1,193,644 35,460,102 264,659 — 275,142,476 — — 728,204,346 3,158,275,425	2001
		2,474,409,144 — — — — — — — — 742,322,744 84,785,006 —
		3,301,516,894

F-47

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Net income (loss) for US 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) Plant capacity loss . . . . . . . . . . . . . . . . . . . . . . . (d) Unrealized (loss) gain on marketable securities . . . . (d) Unrealized loss on marketable securities . . . . . . . . . (e) Derivative financial instruments: (i) Net gains (losses) on derivative financial instruments held for trading purposes . . . . . . (ii) Losses on derivative financial instruments held for hedging purposes . . . . . . . . . . . . . . . . . (f) Compensation cost recognized for stock appreciation rights (Note II) . . . . . . . . . . . . . . . . . . . . . . . . . . (g) Purchase and sale of the Company’s own shares . . . (j) Investment in equity investees. . . . . . . . . . . . . . . . (k) Adjustment for taxes . . . . . . . . . . . . . . . . . . . . . . Tax effect on the above reconciled items . . . . . . . . Net income (loss) before cumulative effect of change in accounting principle in accordance with US GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (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: (d) Unrealized gains (losses) on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in translation adjustment . . . . . . . . . . . . Reclassification adjustment for realized gains (losses) on available-for-sale securities. . . . . . Comprehensive income (loss) in accordance with US 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 19e) . . . . . . . . . . . . . . . . . . . . . . . . . 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 19e) . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income (loss) per share.. . . . . . . . . .	1999 NT$ 906,621 — 2,696 — (17,667) — 1,300,663 — (245,323) (85,825) — — — 1,861,165 — 1,861,165 72,260 373 17,667 1,951,465 0.64 — 0.64 0.64 — 0.64	2000 NT$ 10,612,824 (1,621,861) 2,696 — — — (242,542) (655,937) 598,489 (6,988) (3,914) (666,498) — 8,016,269 — 8,016,269 (112,823) 58,228 (72,260) 7,889,414 2.54 — 2.54 2.49 — 2.49	2001 NT$ US$ (866,480) (25,896) (4,272,717) (127,696) 2,696 81 527,987 15,780 33,731 1,008 (645,556) (19,294) 227,908 6,811 — — 496,347 14,834 16,695 499 (29,484) (881) 666,498 19,919 — — (3,842,375) (114,835) (620,503) (18,544) (4,462,878) (133,379) (27,841) (832) 167,144 4,995 112,823 3,372 (4,210,752) (125,844) (1.16) (0.03) (0.19) (0.01) (1.35) (0.04) (1.16) (0.03) (0.19) (0.01) (1.35) (0.04)
			NT$ (866,480) (4,272,717) 2,696 527,987 33,731 (645,556) 227,908 — 496,347 16,695 (29,484) 666,498 — (3,842,375) (620,503) (4,462,878) (27,841) 167,144 112,823 (4,210,752) (1.16) (0.19) (1.35) (1.16) (0.19) (1.35)

F-48

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The diluted earnings per share calculation excludes the statement of operations impact of NT$203,684 and $433,525 related to the assumed conversion of convertible bonds into 138,959,444 weighted average shares and 210,301,619 weighted average shares for 1999 and 2001, respectively. The impact of the assumed conversion has been excluded due to the anti-dilutive effect.

Note I: At the shareholders’ meeting on April 19, 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$4,272,717, which is reflected in the year ended December 31, 2001. Additional compensation expense for employees bonuses and remuneration of directors and supervisors in the amount of nil, NT$1,621,861 and $4,272,717 was reflected in the statement of operations under US GAAP for the years ended December 31, 1999, 2000 and 2001.

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 December 31, 2001 there were 73,415,260 shares outstanding which resulted from the forfeiture of 2,470,900 shares, the exercise of 3,868,880 shares and a stock dividend of 17,736,808 shares during the year. The 2001 outstanding shares also represent vested rights to 35,081,684 shares and unvested rights to 38,333,576 shares.

The general terms of the SAR plan are as follows:

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.
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$19.78 for SAR vested August 1, 2000, NT$37.25 for SAR vested August 1, 2001, NT$34.15 for SAR vested August 1, 2002, NT$32.26 for SAR vested March 31, 2003.

F-49

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Gross profit for US GAAP purposes is reconciled as follows:

Gross profit as reported under ROC GAAP 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 . . . . . . . . Plant capacity loss. . . . . . . . . . . . . . . . . Gross profit in accordance with US GAAP	1999 NT$ 4,833,378 (106,301) — (171,726) 2,696 — 4,558,047	2000 NT$ 17,995,462 (79,995) (521,189) 217,969 2,696 — 17,614,943	2001 NT$ US$ 10,046,477 300,253 (2,559,855) (76,505) (1,606,114) (48,001) 186,577 5,576 2,696 81 527,987 15,780 6,597,768 197,184
			NT$ 10,046,477 (2,559,855) (1,606,114) 186,577 2,696 527,987 6,597,768

Operating income for US 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 . . . . . . . . Reversal of allowance for bad debt . . . . . Inventory loss provision and research and development subsidies . . . . . . . . . . . . Plant capacity loss. . . . . . . . . . . . . . . . . Operating income (loss) in accordance with US GAAP. . . . . . . . . . . . . . . . . . . . .	1999 NT$ 1,575,377 (245,323) — 2,696 — (96,058) — 1,236,692	2000 NT$ 12,138,778 598,489 (1,621,861) 2,696 — (49,081) — 11,069,021	2001 NT$ US$ 3,489,304 104,283 496,347 14,834 (4,272,717) (127,696) 2,696 81 54,810 1,638 (2,561,244) (76,547) 527,987 15,780 (2,262,817) (67,627)
			NT$ 3,489,304 496,347 (4,272,717) 2,696 54,810 (2,561,244) 527,987 (2,262,817)

F-50

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Shareholders’ equity for US GAAP purposes is reconciled as follows:

Shareholders’ equity as reported under ROC GAAP . . . . . . . . . . . . . . . . . . . (a) Compensation cost recognized for stock appreciation rights . . . . . . . . (b) Accrual for pension costs under actuarial method . . . . . . . . . . . . . . (c) Net unrealized gain (loss) on available-for-sale securities . . . . . . (d) Net loss on derivative financial instruments . . . . . . . . . . . . . . . . . (e) Compensation expense relating to employee bonuses and remuneration of directors and supervisors . . . . . . (f) Treasury stock . . . . . . . . . . . . . . . (g) Goodwill on investment . . . . . . . . (h) Additional tax on undistributed earnings . . . . . . . . . . . . . . . . . . . (i) Plant capacity loss . . . . . . . . . . . . Shareholders’ equity in accordance with US GAAP . . . . . . . . . . . . . . . . .		December 31, 2000 2001 NT$ NT$ US$ 44,573,427 43,143,625 1,289,409 353,166 849,513 25,389 (43,127) (40,431) (1,208) (5,523) 7,952 238 (653,670) (1,046,265) (31,269) (1,621,861) — — (134,392) (142,366) (4,255) 29,483 — — (666,498) — — — 527,987 15,779 41,831,005 43,300,015 1,294,083	December 31, 2000 2001 NT$ NT$ US$ 44,573,427 43,143,625 1,289,409 353,166 849,513 25,389 (43,127) (40,431) (1,208) (5,523) 7,952 238 (653,670) (1,046,265) (31,269) (1,621,861) — — (134,392) (142,366) (4,255) 29,483 — — (666,498) — — — 527,987 15,779 41,831,005 43,300,015 1,294,083
	1999 NT$ 26,383,644 (245,323) (45,823) 95,549 244,809 — — — — — 26,432,856	2000 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$ 43,143,625 849,513 (40,431) 7,952 (1,046,265) — (142,366) — — 527,987 43,300,015

Shareholders’ equity consists of the following:

Common shares . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . Accumulated deficit . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . .		December 31, 2001 NT$ US$ 33,593,426 1,003,988 17,309,224 517,311 (9,421,479) (281,574) 245,178 7,327 (159,061) (4,754) 1,732,727 51,785 43,300,015 1,294,083
	2000 NT$ 24,744,091 20,454,128 (3,897,137) (6,948) (134,392) 671,263 41,831,005
		NT$ 33,593,426 17,309,224 (9,421,479) 245,178 (159,061) 1,732,727 43,300,015

F-51

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Accumulated other comprehensive income consists of the following:

Unrealized gains (losses) on marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2000 NT$ (112,823) 105,875 (6,948)	2001 NT$ US$ (27,841) (832) 273,019 8,159 245,178 7,327
		NT$ (27,841) 273,019 245,178

Domestic and international components of pre-tax income (loss) are as follows:

Domestic . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	1999 NT$ 865,840 679,225 1,545,065	2000 NT$ 9,273,553 (192,689) 9,080,864	2001 NT$ US$ (3,964,937) (118,498) (220,944) (6,603) (4,185,881) (125,101)
			NT$ (3,964,937) (220,944) (4,185,881)

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 (benefit) . . Additional income tax on undistributed earnings . . . . . . . . . . . . . . . . . . . . . . Additional income tax assessed . . . . . . . Tax exemption . . . . . . . . . . . . . . . . . . . Tax credit earned . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . Net gain on long-term equity investment . Non-deductible employee bonus . . . . . . . Non-taxable net (gains) losses on financial instruments . . . . . . . . . . . . . . . . . . . Non-deductible compensation cost recognized for stock appreciation rights Effect of rate change . . . . . . . . . . . . . . Impact of industrial park reduced tax rates Others, net . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . .	1999 NT$ 309,013 123,605 224,830 — (674,118) (272,114) 199,841 — (364,187) 68,691 — — 68,339 (316,100)	2000 NT$ 1,816,173 858,394 93,246 — (1,548,034) (873,028) 168,332 291,934 251,574 (167,577) 92,561 — 81,020 1,064,595	2001 NT$ US$ (1,046,470) (31,275) (710,771) (21,242) 58,879 1,760 (256,260) (7,659) (920,993) (27,525) 1,783,776 53,311 (20,466) (612) 1,068,179 31,924 98,149 2,933 (124,087) (3,709) — — 329,430 9,845 17,631 527 276,997 8,278
			NT$ (1,046,470) (710,771) 58,879 (256,260) (920,993) 1,783,776 (20,466) 1,068,179 98,149 (124,087) — 329,430 17,631 276,997

The per share effect of the tax exemption for 2001 was NT$0.08.

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

F-52

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

customer, Megachips, and the Company’s largest five customers accounted for 41.66 % and 64.49% of the Company’s total sales, respectively, for the year ended December 31, 2001. The Company’s sales are primarily denominated in currencies other than NT Dollars, primarily US Dollars and Japanese Yen.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and 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, 2000 and 2001, the three largest accounts receivable balances amounted to NT$3,008,678 and NT$1,340,501 (US$40,063), 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, inventory and royalty accruals:

Allowance for doubtful accounts: Balance as at beginning of period Bad debt expense . . . . . . . . . . . Reversal of bad debt provision . . Bad debts written off . . . . . . . . Balance at the end of the year . . Allowance for inventory losses (under ROC GAAP): Balance as at beginning of period Amount expensed during the period . . . . . . . . . . . . . . . . . Write-off of inventories . . . . . . Balance at the end of the year . . Royalty accruals: Balance as at beginning of period Amount expensed during the period . . . . . . . . . . . . . . . . . Payments made during the period Balance at the end of the year . .		December 31, 2000 2001 NT$ NT$ US$ 231,136 284,403 8,500 91,048 9,431 282 — (54,810) (1,638) (37,781) (43,008) (1,286) 284,403 196,016 5,858 1,091,457 1,054,883 31,527 79,995 2,583,084 77,199 (116,569) (394,301) (11,784) 1,054,883 3,243,666 96,942 — — — — 278,645 8,328 — — — — 278,645 8,328	December 31, 2000 2001 NT$ NT$ US$ 231,136 284,403 8,500 91,048 9,431 282 — (54,810) (1,638) (37,781) (43,008) (1,286) 284,403 196,016 5,858 1,091,457 1,054,883 31,527 79,995 2,583,084 77,199 (116,569) (394,301) (11,784) 1,054,883 3,243,666 96,942 — — — — 278,645 8,328 — — — — 278,645 8,328
	1999 NT$ 207,440 30,365 — (6,669) 231,136 1,313,388 106,301 (328,232) 1,091,457 — — — —	2000 NT$ 231,136 91,048 — (37,781) 284,403 1,091,457 79,995 (116,569) 1,054,883 — — — —
			NT$ 284,403 9,431 (54,810) (43,008) 196,016 1,054,883 2,583,084 (394,301) 3,243,666 — 278,645 — 278,645

F-53

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

20. SUMMARIZED FINANCIAL INFORMATION OF EQUITY INVESTEES

The following table presents summarized financial information in accordance with US GAAP for equity investees with an ownership percentage between 20-50% as of December 31, 2000 and 2001 and for the years ended December 31, 2000 and 2001.

Current assets . . . . . . . . . . . . . . . . . . . . . Non-current assets . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . Non-current liabilities . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . Net sales . . . . . . . . . . . . . . . . . . . . . . . Sales less cost of sales . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . .	. . . . . . . . . . . . . . .
	1999 NT$ 1,660,595 (572,987) (1,412,354)		2000 NT$ 1,396,132 (565,033) (1,919,582)

At December 31, 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$5,792(US$173). Such difference is amortized over 3-5 years from the date of the investment.

21. 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 was generally 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 a subsidiary for which the effective date is March 31, 2002) should be charged to shareholders’ equity, and that no gain or loss should be recognized in the statement of operations.

July 2001, the U.S. Financial Accounting Standards Board (‘‘U.S. FASB’’) issued Statement of Financial Accounting Standards (‘‘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 Company does not expect SFAS No. 141 and SFAS No. 142 to have a significant impact on the Company’s financial statements.

F-54

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

In August 2001, the U.S. FASB issued SFAS Statement No. 143, ‘‘Accounting for Asset Retirement Obligation’’. The statement provides accounting and reporting guidance for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction or normal operations of a long-lived assets. The standard is effective January 1, 2003. The Company is reviewing the provisions of this standard and has not yet determined the impact of the statement on the financial statements.

In October 2001, the U.S. FASB issued SFAS No. 144, ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’. SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, ‘‘Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of’’ and develops a single accounting model, based on the framework established in SFAS No. 121 for longlived assets to be disposed of by sale, whether such assets are or are not deemed to be a business. SFAS No. 144 also modifies the accounting and disclosure rules for discontinued operations. This standard will be adopted from January 1, 2002. The impact of SFAS on the Company’s financial statements has not yet been determined.

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F-56

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 June 30, 2001 and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the six-month periods ended June 30, 2001 and 2002. 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 Republic of China. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Macronix International Co., Ltd. as of June 30, 2001 and 2002, and the consolidated results of its operations and its cash flows for the six-month periods ended June 30, 2001 and 2002, in conformity with accounting principles generally accepted in the Republic of China.

DIWAN, ERNST & YOUNG CERTIFIED PUBLIC ACCOUNTANTS

Taipei, Taiwan, R.O.C July 25, 2002

F-57

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS June 30, 2001, and 2002

(Amounts in thousands except share 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 . . . . . . . . . . . . . . . . . Office furniture and equipment . . . . Leased 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. . . . . Restricted investments — noncurrent Other assets. . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . .	Notes 3 11 4 5 6 15 10, 11, 17, 18 15 7 11		June 30, 2002 NT$ US$ 11,646,711 348,079 2,431,557 72,670 1,208,338 36,113 2,564,423 76,641 4,932,097 147,403 1,023,410 30,586 405,084 12,107 616,520 18,426 24,828,140 742,025 1,328,359 39,700 13,904,545 415,557 41,796,597 1,249,151 1,305,498 39,017 926,388 27,686 1,775,604 53,067 9,563,110 285,807 70,600,101 2,109,985 (30,343,808) (906,868) 40,256,293 1,203,117 933,368 27,895 908,090 27,140 1,762,232 52,666 251,475 7,516 2,097,251 62,679 71,036,849 2,123,038
		2001 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 1,138,882 915,112 36,150 7,651,020 62,269,013 (23,080,846) 39,188,167 1,666,263 1,004,575 1,914,140 717,873 2,632,955 72,293,600
			NT$ 11,646,711 2,431,557 1,208,338 2,564,423 4,932,097 1,023,410 405,084 616,520 24,828,140 1,328,359 13,904,545 41,796,597 1,305,498 926,388 1,775,604 9,563,110 70,600,101 (30,343,808) 40,256,293 933,368 908,090 1,762,232 251,475 2,097,251 71,036,849

See accompanying notes to consolidated financial statements.

F-58

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS — Continued June 30, 2001, and 2002

(Amounts in thousands except share 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 debts. . Notes and accounts payable . . . . . . Payables to related parties . . . . . . . Payables to equipment suppliers . . . Accrued expenses . . . . . . . . . . . . . Income taxes payable. . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . Long-term liabilities Capital lease obligations, less current portion . . . . . . . . . . . . . . . . . . . Long-term debts, less current portion Accrued pension cost. . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . Commitments and contingencies. . . Shareholders’ equity . . . . . . . . . . . Common shares NT$10 par value, authorized 4,500,000,000 and 5,350,000,000 shares as of June 30, 2001 and 2002, and issued 3,359,342,613 and 3,359,342,613 shares as of June 30, 2001 and 2002, respectively . . . . . . . . . . . Additional paid-in capital . . . . . . . . Stock dividends to be distributed. . . Capital reserve . . . . . . . . . . . . . . . Legal reserve . . . . . . . . . . . . . . . . Special reserve . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . Unrealized losses on long-term investments . . . . . . . . . . . . . . . . Cumulative translation adjustments . Treasury stock . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . .	Notes 8 9 10 11 16 15 10 11 12 17 13		June 30, 2002 NT$ US$ 2,094,848 62,608 1,680,691 50,230 607,442 18,154 5,396,407 161,279 1,453,528 43,441 115,512 3,452 1,072,779 32,062 2,922,558 87,345 363,173 10,854 225,038 6,725 15,931,976 476,150 1,250,666 37,378 19,056,023 569,517 66,994 2,002 69,028 2,063 36,374,687 1,087,110 33,593,426 1,003,988 2,624,586 78,440 3,319,343 99,203 6,035 180 1,708,689 51,067 378,657 11,317 (5,296,868) (158,305) (654,863) (19,572) 171,593 5,128 (1,188,436) (35,518) 34,662,162 1,035,928 71,036,849 2,123,038
		2001 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 — 22,395 1,707,053 1,425 5,545,326 (182,860) 234,860 — 46,865,554 72,293,600
			NT$ 2,094,848 1,680,691 607,442 5,396,407 1,453,528 115,512 1,072,779 2,922,558 363,173 225,038 15,931,976 1,250,666 19,056,023 66,994 69,028 36,374,687 33,593,426 2,624,586 3,319,343 6,035 1,708,689 378,657 (5,296,868) (654,863) 171,593 (1,188,436) 34,662,162 71,036,849

See accompanying notes to consolidated financial statements.

F-59

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS For the six-month periods ended June 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Sales revenue. . . . . . . . . . . . . . . . . Less: Sales returns. . . . . . . . . . . . . . Sales discounts . . . . . . . . . . . . Net sales revenue . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . Operating expenses Selling expenses . . . . . . . . . . . . . . Administrative expenses. . . . . . . . . Research and development . . . . . . . Operating income (loss) . . . . . . . . . Other income Research and development subsidies Interest income . . . . . . . . . . . . . . . Foreign exchange gain . . . . . . . . . . Gain on disposal of property, plant and equipment . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . Other expenses Interest expense . . . . . . . . . . . . . . Inventory loss provision . . . . . . . . . Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . Net loss from equity investment . . . Net investment loss . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . Income tax benefit (expense). . . . . . Net income (loss). . . . . . . . . . . . . . Earnings Per Common Share: Net income (loss) per common share — basic . . . . . . . . . . . . . . . . . . . Net income (loss) per common share — diluted. . . . . . . . . . . . . . . . . . Pro-forma data: assuming that the Company’s shares owned by subsidiaries were not treated as treasury stock Net loss. . . . . . . . . . . . . . . . . . . . . Net loss per common share — basic .	Notes 16 15	Six months ended June 30, 2001 2002 NT$ NT$ US$ 12,364,350 7,032,296 210,170 (92,906) (19,524) (583) (41,699) (63,916) (1,910) 12,229,745 6,948,856 207,677 (5,431,159) (7,284,629) (217,712) 6,798,586 (335,773) (10,035) (334,871) (260,445) (7,783) (774,654) (852,182) (25,469) (1,849,856) (1,855,443) (55,453) (2,959,381) (2,968,070) (88,705) 3,839,205 (3,303,843) (98,740) 114 — — 301,987 122,672 3,666 91,411 48,244 1,442 — 3,083 92 179,458 127,118 3,799 572,970 301,117 8,999 (574,193) (581,143) (17,368) (552,406) (3,376,071) (100,899) (6,668) — — (171,945) (106,947) (3,196) (55,297) (78,199) (2,337) (242,218) (27,638) (826) (1,602,727) (4,169,998) (124,626) 2,809,448 (7,172,724) (214,367) (380,599) (11,632) (348) 2,428,849 (7,184,356) (214,715) NT$0.66 (NT$1.95) (NT$0.06) NT$0.65 (NT$1.95) (NT$0.06) (7,206,751) (215,384) (NT$1.96) (NT$0.06)	Six months ended June 30, 2001 2002 NT$ NT$ US$ 12,364,350 7,032,296 210,170 (92,906) (19,524) (583) (41,699) (63,916) (1,910) 12,229,745 6,948,856 207,677 (5,431,159) (7,284,629) (217,712) 6,798,586 (335,773) (10,035) (334,871) (260,445) (7,783) (774,654) (852,182) (25,469) (1,849,856) (1,855,443) (55,453) (2,959,381) (2,968,070) (88,705) 3,839,205 (3,303,843) (98,740) 114 — — 301,987 122,672 3,666 91,411 48,244 1,442 — 3,083 92 179,458 127,118 3,799 572,970 301,117 8,999 (574,193) (581,143) (17,368) (552,406) (3,376,071) (100,899) (6,668) — — (171,945) (106,947) (3,196) (55,297) (78,199) (2,337) (242,218) (27,638) (826) (1,602,727) (4,169,998) (124,626) 2,809,448 (7,172,724) (214,367) (380,599) (11,632) (348) 2,428,849 (7,184,356) (214,715) NT$0.66 (NT$1.95) (NT$0.06) NT$0.65 (NT$1.95) (NT$0.06) (7,206,751) (215,384) (NT$1.96) (NT$0.06)
		2001 NT$ 12,364,350 (92,906) (41,699) 12,229,745 (5,431,159) 6,798,586 (334,871) (774,654) (1,849,856) (2,959,381) 3,839,205 114 301,987 91,411 — 179,458 572,970 (574,193) (552,406) (6,668) (171,945) (55,297) (242,218) (1,602,727) 2,809,448 (380,599) 2,428,849 NT$0.66 NT$0.65
			NT$ 7,032,296 (19,524) (63,916) 6,948,856 (7,284,629) (335,773) (260,445) (852,182) (1,855,443) (2,968,070) (3,303,843) — 122,672 48,244 3,083 127,118 301,117 (581,143) (3,376,071) — (106,947) (78,199) (27,638) (4,169,998) (7,172,724) (11,632) (7,184,356) (NT$1.95) (NT$1.95) (7,206,751) (NT$1.96)

See accompanying notes to consolidated financial statements.

F-60

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS For the six-month periods ended June 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows 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 . . . . . . . . . . . . . . . . . . Net gain (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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (used in) operating activities . . . . . . . . Cash flows 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 . . . . . . . . . . . . . . . . . .	Six months ended June 30, 2001 2002 NT$ NT$ US$ 2,428,849 (7,184,356) (214,715) 3,616,057 3,986,850 119,153 262,402 307,630 9,194 309,885 (1,363) (41) 55,297 1,167 35 (82,660) 6,528 195 552,406 3,376,071 100,899 171,945 106,947 3,196 6,668 (3,083) (92) 2,722,483 (262,923) (7,858) (2,733,159) (1,012,493) (30,260) 220,740 (43,811) (1,309) (92,402) 157,865 4,718 (488,802) 358,059 10,701 (160,074) (17,665) (528) 38,765 (36,079) (1,078) (315,019) (40,790) (1,219) (147,461) 128,133 3,829 4,444 170 5 2,269 42,461 1,269 6,372,633 (130,682) (3,906) (726,823) (927,231) (27,711) (87,373) (137,966) (4,123) (856,531) (391,312) (11,695) 2,535 59,193 1,769 (5,413,024) (4,801,673) (143,505) 6,266 6,023 180 (943,833) 280,842 8,393 (147,421) (213,178) (6,371) (34,636) (261,657) (7,820) (8,200,840) (6,386,959) (190,883)	Six months ended June 30, 2001 2002 NT$ NT$ US$ 2,428,849 (7,184,356) (214,715) 3,616,057 3,986,850 119,153 262,402 307,630 9,194 309,885 (1,363) (41) 55,297 1,167 35 (82,660) 6,528 195 552,406 3,376,071 100,899 171,945 106,947 3,196 6,668 (3,083) (92) 2,722,483 (262,923) (7,858) (2,733,159) (1,012,493) (30,260) 220,740 (43,811) (1,309) (92,402) 157,865 4,718 (488,802) 358,059 10,701 (160,074) (17,665) (528) 38,765 (36,079) (1,078) (315,019) (40,790) (1,219) (147,461) 128,133 3,829 4,444 170 5 2,269 42,461 1,269 6,372,633 (130,682) (3,906) (726,823) (927,231) (27,711) (87,373) (137,966) (4,123) (856,531) (391,312) (11,695) 2,535 59,193 1,769 (5,413,024) (4,801,673) (143,505) 6,266 6,023 180 (943,833) 280,842 8,393 (147,421) (213,178) (6,371) (34,636) (261,657) (7,820) (8,200,840) (6,386,959) (190,883)
	2001 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) (488,802) (160,074) 38,765 (315,019) (147,461) 4,444 2,269 6,372,633 (726,823) (87,373) (856,531) 2,535 (5,413,024) 6,266 (943,833) (147,421) (34,636) (8,200,840)
		NT$ (7,184,356) 3,986,850 307,630 (1,363) 1,167 6,528 3,376,071 106,947 (3,083) (262,923) (1,012,493) (43,811) 157,865 358,059 (17,665) (36,079) (40,790) 128,133 170 42,461 (130,682) (927,231) (137,966) (391,312) 59,193 (4,801,673) 6,023 280,842 (213,178) (261,657) (6,386,959)

See accompanying notes to consolidated financial statements.

F-61

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued For the six-month periods ended June 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows from financing activities: Proceeds from short-term debt . . . . . . . . . . . . . . . . . . . . . Payments of short-term debt . . . . . . . . . . . . . . . . . . . . . . . Proceeds from short-term notes . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . Payments of long-term debt and capital lease obligations . . . Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . Distribution of directors and supervisors’ remuneration . . . . Net cash provided by (used in) financing activities . . . . . . . Effect of exchange rate changes on cash and cash equivalents. Net decrease 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 flow information: Interest paid during the period . . . . . . . . . . . . . . . . . . . . . Income tax paid during the period . . . . . . . . . . . . . . . . . . . Non-cash activities: Current portion of long-term debts and capital lease obligations transferred to current liabilities . . . . . . . . . . . Payment for purchases of property, plant and equipment: Payable to equipment suppliers (beginning balance). . . . . Add: Purchases of property, plant and equipment . . . . . . Less: Payable to equipment suppliers (ending balance). . . Payment for purchases of property, plant and equipment . Convertible bonds converted to common stock . . . . . . . . . .	Six months ended June 30, 2001 2002 NT$ NT$ US$ 2,641,369 1,771,670 52,949 (3,520,735) (359,528) (10,745) — 1,680,691 50,230 1,304,523 5,651,927 168,916 (1,509,901) (2,049,461) (61,251) — (1,046,071) (31,263) (190,148) — — (1,274,892) 5,649,228 168,836 128,495 (45,830) (1,370) (2,974,604) (914,243) (27,323) 15,561,894 12,560,954 375,402 12,587,290 11,646,711 348,079 571,556 541,166 16,174 401,398 54,611 1,632 1,425,488 6,003,849 179,434 1,364,891 1,010,363 30,196 5,114,487 4,864,089 145,370 (1,066,354) (1,072,779) (32,061) 5,413,024 4,801,673 143,505 — — —	Six months ended June 30, 2001 2002 NT$ NT$ US$ 2,641,369 1,771,670 52,949 (3,520,735) (359,528) (10,745) — 1,680,691 50,230 1,304,523 5,651,927 168,916 (1,509,901) (2,049,461) (61,251) — (1,046,071) (31,263) (190,148) — — (1,274,892) 5,649,228 168,836 128,495 (45,830) (1,370) (2,974,604) (914,243) (27,323) 15,561,894 12,560,954 375,402 12,587,290 11,646,711 348,079 571,556 541,166 16,174 401,398 54,611 1,632 1,425,488 6,003,849 179,434 1,364,891 1,010,363 30,196 5,114,487 4,864,089 145,370 (1,066,354) (1,072,779) (32,061) 5,413,024 4,801,673 143,505 — — —
	2001 NT$ 2,641,369 (3,520,735) — 1,304,523 (1,509,901) — (190,148) (1,274,892) 128,495 (2,974,604) 15,561,894 12,587,290 571,556 401,398 1,425,488 1,364,891 5,114,487 (1,066,354) 5,413,024 —
		NT$ 1,771,670 (359,528) 1,680,691 5,651,927 (2,049,461) (1,046,071) — 5,649,228 (45,830) (914,243) 12,560,954 11,646,711 541,166 54,611 6,003,849 1,010,363 4,864,089 (1,072,779) 4,801,673 —

See accompanying notes to consolidated financial statements.

F-62

			Total	NT$	44,573,427			—	—	—		—	(190,147)	(75,560)		2,428,849	128,985	46,865,554	43,143,625			—	—	—			—	(7,245)		(7,184,356)	(101,426)	(1,046,071)	(142,365)	34,662,162	1,035,928
		Treasury	stock	NT$	—			—	—	—		—	—	—		—	—	—	—			—	—	—			—	—		—	—	(1,046,071)	(142,365)	(1,188,436)	(35,518)
		Translation	adjustments	NT$	105,875			—	—	—		—	—	—		—	128,985	234,860	273,019			—	—	—			—	—		—	(101,426)	—	—	171,593	5,128
	Unrealized losses	on long-term	investments	NT$	(107,300)			—	—	—		—	—	(75,560)		—	—	(182,860)	(647,618)			—	—	—			—	(7,245)		—	—	—	—	(654,863)	(19,572)
Retained	earnings	(accumulated	deficit)	NT$	10,743,013			(1,425)	(1,060,038)	(4,948,819)		(1,426,107)	(190,147)	—		2,428,849	—	5,545,326	2,249,996			(377,232)	14,724	—			—	—		(7,184,356)	—	—	—	(5,296,868)	(158,305)
		Special	reserve	NT$	—			1,425	—	—		—	—	—		—	—	1,425	1,425			377,232	—	—			—	—		—	—	—	—	378,657	11,317
			Legal reserve	NT$	647,015			—	1,060,038	—		—	—	—		—	—	1,707,053	1,707,053			—	1,636	—			—	—		—	—	—	—	1,708,689	51,067
		Capital	reserve	NT$	22,395			—	—	—		—	—	—		—	—	22,395	22,395			—	(16,360)	—			—	—		—	—	—	—	6,035	180
	Stock	dividends to be	distributed	NT$	—			—	—	—		—	—	—		—	—	—	—			—	—	—			3,319,343	—		—	—	—	—	3,319,343	99,203
	Additional	paid-in-	capital	NT$	8,418,338			—	—	(2,474,409)		—	—	—		—	—	5,943,929	5,943,929			—	—	—			(3,319,343)	—		—	—	—	—	2,624,586	78,440
		Common	shares	NT$	24,744,091			—	—	7,423,228		1,426,107	—	—		—	—	33,593,426	33,593,426			—	—	—			—	—		—	—	—	—	33,593,426	1,003,988
					Balance as of January 1, 2001	Appropriation and distribution of 2000	retained earnings:	Special reserve	Legal reserve	Stock dividends (742,322,743 shares)	Settlement of employee bonus	(142,610,725 shares)	Remuneration of directors and supervisors	Unrealized losses on long-term investments	Net income for the six months ended June	30, 2001	Cumulative translation adjustment	Balance as of June 30, 2001	Balance as of January 1, 2002	Appropriation and distribution of 2001	retained earnings:	Special reserve	Capital reserve	Legal reserve	Additional paid-in capital transferred to	common stock	(3,319,342,620 shares)	Unrealized losses on long-term investments	Net loss for the six months ended June 30,	2002	Cumulative translation adjustment	Common stock repurchased	Treasury stock owned by subsidiaries	Balance as of June 30, 2002	Balance as of June 30, 2002(US$)

F-63

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except share, per share, and percentage data)

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., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd., Run Hong 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 inter-company 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’’).

Use of Estimates

Cash Equivalents

Foreign Currency Translation

The Company maintains its accounting records in New Taiwan dollars (‘‘NT dollars’’ or ‘‘NT$’’), the national currency of the ROC. 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 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 statements of operations.

F-64

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 straightline 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. Currency 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.

d. Structured deposits

F-65

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Information Expressed in US Dollars

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.

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:

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5 to 20 years
Production equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2 to 5 years
Research and development equipment . . . . . . . . . . . . . . . . . . . . . . . . .	5 years
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1 to 15 years
Leased equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5 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.

Effective from January 1, 2001, the reclassification of a gain on the disposal of property, plant and equipment from retained earnings to capital reserve is no longer required pursuant to an amendment to the regulations.

F-66

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 (one to ten years) using the straight-line method. Accumulated amortization of intangibles amounted to NT$1,353,821 and NT$1,961,464 (US$58,621) as of June 30, 2001 and 2002, 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. Effective from January 1, 2002, the Company was authorized to change the monthly contribution rate to 2%. 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 consolidated 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

Revenue Recognition

F-67

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Employee Bonuses

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 . . . .
Stock dividends and transfer of capital reserve to capital on
May 28, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee bonus transferred to capital on May 28, 2001. .
Weighted-average number of treasury stock . . . . . . . . . .
Capital reserve transferred to common stock on July 13,
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Six months ended June 30,
2001
2002
2,474,409,144
3,359,342,613
742,322,744
—
142,610,725
—
—
(18,205,008)
335,934,261
334,716,076
3,695,276,874
3,675,853,681

2001
2,474,409,144
742,322,744
142,610,725
—
335,934,261
3,695,276,874

F-68

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Basic and diluted earning per share (the ‘‘EPS’’) were calculated as follows:

Basic EPS:
Income available to common shares. . . . . . . . . . . . . . .
Weighted 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 . . . . . . .
Assumed effect of employees’ bonus . . . . . . . . . . . . . .
Weighted average assumed conversion of convertible
bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted weighted-average shares . . . . . . . . . . . . . . . .
Diluted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Six months ended June 30,
2001
2002
2,428,849
(7,184,356)
3,695,276,874
3,675,853,681
0.66
(1.95)
2,428,849
(7,184,356)
61,755
—
2,490,604
(7,184,356)
3,695,276,874
3,675,853,681
26,231,578
—
116,832,427
—
3,838,340,879
3,675,853,681
0.65
(1.95)

2001
2,428,849
3,695,276,874
0.66
2,428,849
61,755
2,490,604
3,695,276,874
26,231,578
116,832,427
3,838,340,879
0.65

The diluted earnings per share calculation excludes the income statement impact of NT$310,417 related to the assumed conversion of convertible bonds into 439,231,166 weighted average shares for first half of 2002. The impact of the assumed conversion has been excluded due to the anti-dilutive effect.

Assuming that the Company’s shares owned by its subsidiaries were not treated as treasury stock for the six months ended June 30, 2002, the loss per share would be as follows:

Basic EPS Net loss . . . . .	Amount (numerator) Before tax After tax $(7,195,119) $(7,206,751)	Shares (Denominator) 3,675,853,681	Net loss per Share Before tax After tax $(1.96) $(1.96)
	Before tax $(7,195,119)		Before tax $(1.96)

Treasury Stock

In accordance with the ROC Statement of Financial Accounting Standards No. 30, ‘‘Accounting for Treasury Stock’’, treasury stock is accounted for under the cost method. Under the cost method, the gross cost of shares reacquired is charged to treasury stock which is presented as a contra-equity account in the financial statements. Any surplus or deficit on treasury stock transactions are credited or charged to capital reserves. In addition, effective from January 1, 2002, the Company’s shares owned by its subsidiaries were treated as treasury stock. Retroactive adjustments were not required.

F-69

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Reason and Effect of a Change in Accounting Policy

Effective from January 1, 2002, the Company’s shares owned by its subsidiaries were treated as treasury stock according to ROC Statement of Financial Accounting Standards No. 30, ‘‘Accounting for Treasury Stock’’. The adoption of this Statement reduced the net loss and loss per share for the six months ended June 30, 2002 by NT$22,395 (US$669) and NT$0.01, respectively. Long-term equity investments and shareholders’ equity were reduced by NT$142,365 (US$4,255) as well.

3. CASH AND CASH EQUIVALENTS

	June 30,	June 30,
2001 NT$ 69,687 3,227,900 9,289,703 — 12,587,290	2002
	NT$ 53,340 1,759,878 8,767,173 1,066,320 11,646,711	US$ 1,594 52,596 262,020 31,869
		348,079

4. SHORT-TERM INVESTMENTS

	June 30,	June 30,
2001 NT$ 135,027 268,389 (14,650) 388,766	2002
	NT$ — 1,276,463 (68,125) 1,208,338	US$ — 38,149 (2,036)
		36,113

5. NOTES AND ACCOUNTS RECEIVABLE (NET)

	June 30,	June 30,
2001 NT$ 55,905 2,826,395 2,882,300 (187,782) 2,694,518	2002
	NT$ 188,387 2,573,016 2,761,403 (196,980) 2,564,423	US$ 5,630 76,898
		82,528 (5,887)
		76,641

F-70

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

6. INVENTORIES (NET)

Merchandise . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . . . Raw materials. . . . . . . . . . . . . . . . . . . . . . . Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for market value decline and obsolescence . . . . . . . . . . . . . . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		June 30, 2002 NT$ US$ 27,007 807 2,035,581 60,836 8,952,816 267,568 368,030 10,999 125,837 3,761 5,343 160 11,514,614 344,131 (6,582,517) (196,728) 4,932,097 147,403
	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
		NT$ 27,007 2,035,581 8,952,816 368,030 125,837 5,343 11,514,614 (6,582,517) 4,932,097

The insurance coverage for inventories amounted to $10,183,089 and $10,848,106 (US$324,211) as of June 30, 2001 and 2002, respectively.

7. LONG-TERM EQUITY INVESTMENTS

Accounted for under cost method: Chantek Electronic Co., Ltd.. . . . . . . . . . . United Industrial Gas 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 Inc. . . . . . . . . . . . . . . . . . . . . Global Strategic Investment Fund . . . . . . . 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	Percent owned 8.89% 3.41% 14.64% 15.38% 11.85% 3.20% — 7.66% 7.70% 18.94% 4.00% * 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

F-71

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Accounted for under cost method: Chantek Electronic Co., Ltd.. . . . . . . United Industrial Gas Co., Ltd. . . . . . Quality Test System Inc. . . . . . . . . . Chien Cheng Venture Capital Co., Ltd. Ardentec Corp. . . . . . . . . . . . . . . . . Powertech Co. Ltd. . . . . . . . . . . . . . Taiwan Mask Corp. . . . . . . . . . . . . . Chipbond Technology Corp. . . . . . . . FueTrek Co. Ltd. . . . . . . . . . . . . . . Tower Semiconductor, Inc. . . . . . . . . Pico Netics Inc. . . . . . . . . . . . . . . . Global Strategic Investment Fund . . . 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 . . . . . . . . . . . . . . . . . . . . . Prepaid Investment: Honbond Venture Capital Co., Ltd. . . Chaohong Electronic Co.,. . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . .		June 30, 2001	June 30, 2001	Percent owned 8.89% 3.41% 14.64% 15.38% 11.78% 3.17% — 7.17% 17.65% 13.00% 3.73% ** 32.18% 35.57% 26.17%
	Shares 15,211,746 5,274,212 4,538,333 8,000,000 23,987,500 7,034,500 714 10,028,450 480 3,927,276 1,000,000 2,000,000 — 6,100,000 4,660,252 3,140,000	NT$ — 58,500 — 80,000 237,500 83,135 81 156,899 41,581 1,450,657 30,177 67,060 2,205,590 (650,805) 1,554,785 — 21,636 **** 15,811 37,447 120,000 50,000 170,000 1,762,232	US$ — 1,748 — 2,391 7,098 2,484 2 4,689 1,243 43,355 902 2,004 65,916 (19,450) 46,466 — 647 — 472 1,119 3,587 1,494 5,081 52,666

Less than 0.01%.
** Mutual fund.

*** Caesar Technology Inc. applied for formal compulsory liquidation in January, 2002. The Company wrote-off the entire book value of this investment in 2001.

**** The balance sheet of Biomorphic VLSI Inc. (Biomorphic) as of June 30, 2002 has shown a shareholders’ deficiency of US$2,325. However, the Company continued recognizing investment losses in Biomorphic as the Company intended to keep supporting Biomorphic. As of June 30, 2002, the balance of the Company’s long-tern equity investment in Biomorphic was (NT$68,770). The credit balance has been reclassified to a liability account.

No long-term equity investments were pledged as of June 30, 2001 and 2002.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

8. SHORT-TERM DEBTS

	June 30,	June 30,
2001 NT$ 410 706,726 707,136	2002
	NT$ — 2,094,848 2,094,848	US$ — 62,608
		62,608

The weighted average interest rate of the short-term debt was 4.65% and 1.95% as of 200 June 30, 2001 and 2002, respectively.

The short-term debt represents a foreign currency facility with a balance outstanding as of June 30, 2002 of US$41,600,000 (NT$1,394,848).

The Company’s unused short-term lines of credit amounted to NT$15,121,061 and NT$18,134,084 (US$541,963) as of June 30, 2001 and 2002, respectively.

9. SHORT-TERM NOTES

	June 30,	June 30,
2001 NT$ — — —	2002
	NT$ 1,690,000 (9,309) 1,680,691	US$ 50,508 (278
		50,230

The interest rate of short-term notes ranged from 2.3% to 2.65% as of June 30, 2002.

The Company’s unused short-term lines of credits amounted to NT$27,300,000 (US$815,900) as of June 30, 2002.

10. CAPITAL LEASE OBLIGATIONS

The Company entered into an equipment lease agreement 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 24 quarterly installments from May 31, 1999 to April 30, 2005. Caesar Technology, Inc. was formally placed in liquidation in January, 2002. It is expected that the above lease agreement will be renegotiated by the liquidator. The long-term lease obligations outstanding at the period end have been reclassified as shortterm obligations as the ownership of the leased equipment will be resolved within the next twelve months from the balance sheet date.

In 2001, the Company entered into another lease agreement with Nintendo for equipment with a cost of NT$1,750,658. The lease term is from July 31, 2001 to June 30, 2005. The lease obligation is repayable in 36 monthly installments from July 31, 2002 to June 30, 2005.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Future obligation resulting from the lease as of June 30, 2002 is as follows:

Years July 1, 2002–June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . Less: unrealized interest expense. . . . . . . . . . . . . . . . . . . . . . Current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2003–June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . July 1, 2004–June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . Less: unrealized interest expense. . . . . . . . . . . . . . . . . . . . . . Lease obligation — long-term. . . . . . . . . . . . . . . . . . . . . . . . Total lease obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ 722,828 (115,386) 607,442 648,253 648,253 1,296,506 (45,840) 1,250,666 1,858,108	US$
		21,603 (3,449)
		18,154
		19,374 19,374
		38,748 (1,370)
		37,378
		55,532

11. LONG-TERM DEBTS

Interest Rate June 30, 2001 2002 % % 5.40–8.80 3.525–6.8 6.55 5.82 — 3.3 0.77–0.8092 — 6.73 5.92 5.925–7.8 2.5875–5.82 6.85 — 7.35 —		Balance
June		June 30,
2001 % 5.40–8.80 6.55 — 0.77–0.8092 6.73 5.925–7.8 6.85 7.35	2001 NT$ 400,000 152,000 — 1,123,379 255,500 5,752,597 999,000 300,000	2002
		NT$ US$ 250,000 7,472 76,000 2,271 3,000,000 89,659 — — 211,700 6,327 3,946,057 117,934 — — — —

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Interest Rate June 30, 2001 2002 % % 6.655 5.92 — — — 5.545 — 5.150 1.00 1.00 — 0.50		Balance June 30, 2002 NT$ US$ 889,000 26,569 2,682,400 80,167 376,470 11,251 400,000 11,955 5,328,655 159,255 5,674,081 169,578 22,834,363 682,438 1,618,067 48,358 (5,396,407) (161,279) 19,056,023 569,517
June
2001 % 6.655 — — — 1.00 —	2001 NT$ 889,000 2,757,600 — — 5,478,041 — 18,107,117 1,002,625 (3,177,165) 15,932,577
		NT$ 889,000 2,682,400 376,470 400,000 5,328,655 5,674,081 22,834,363 1,618,067 (5,396,407) 19,056,023

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, 2002, 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$6,121,192). The Company has deposited NT$2,095,787 (US$70,125) in compliance with the sinking fund requirements as of June 30, 2002.

The 1% (net of tax) 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 121.422% of par on February 1, 2003.

The 0.5% (net of tax) 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$31.32 per share. As of June 30, 2001, the split adjusted conversion price is NT$31.32 per share. However, the conversion price is

F-75

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 107.845% of par on August 9, 2004.

The above long-term debt, excluding the convertible debentures, as of June 30, 2002 is repayable in US$84,900 (NT$2,840,754) and in NT$6,302,530.

Maturities of existing long-term debt for the 5 years succeeding June 30, 2002 are as follows:

Years
July 1, 2002–June 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2003–June 30, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2004–June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2005–June 30, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July 1, 2006–June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After June 30, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

NT$

5,396,407
2,003,492
7,207,781
323,061
8,918,299
604,060

24,453,100

The Company’s assets pledged as collateral as of June 30, 2001 and 2002 were as follows:

Assets Restricted investments — current . . . . . . . . Restricted investments — current . . . . . . . . Restricted investments — current . . . . . . . . Restricted investments — current . . . . . . . . Restricted investments — noncurrent . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	June30,2001 NT$ 12,000 5,000 35,600 172,350 717,873 8,399,420 1,437,819 804,305 268,891 612,479 6,013,515 18,479,252	Secured financial institutions I.C.B.C. Customs, HSIP Industrial Bureau of the Ministry of Economic Affairs Chiao Tung Commercial Bank Bank of America Chiao Tung Commercial Bank Land Bank ABN AMRO Bank The Chase Manhattan Bank China Development Industrial Bank Bank of America	Contents
			Security for foreign labors Customs clearance deposit Subsidy Income Secured loan Compensated deposit Secured loan Secured loan Secured loan Secured loan Secured loan Secured loan

F-76

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Assets Restricted investments — current Restricted investments — current Restricted investments — current Restricted investments — current Restricted investments — current Restricted investments — noncurrent Property, plant and equipment 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,	2002 US$ 9,019 358 149 508 62,636 7,516 144,809 100,242 49,662 41,506 20,096 1,878 52,321 490,700	Secured financial institutions C.S.F.B. I.C.B.C. Customs, HSIP Chiao Tung Commercial Bank Bank of America Nintendo Bank of America Chiao Tung Commercial Bank Chiao Tung Commercial Bank China Development Industrial Bank China Development Industrial Bank The Export-Import Bank of the Republic of China Nintendo	Contents
	NT$ 301,770 12,000 5,000 17,000 2,095,787 251,475 4,845,316 3,354,103 1,661,689 1,388,772 672,411 62,843 1,750,658 16,418,824			Credit of security Security for foreign labors Customs clearance deposit Secured loan Compensated deposit Leased equipment Convertible bonds Secured loan Secured loan Secured loan Secured loan Secured loan Leased equipment

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 in May 1996 was changed to 5% of the wages and salaries paid. However, effective from January 1, 2002, the monthly contribution rate was changed back to 2%. Contributions to the fund are deposited in the Employees’ Retirement Fund Committee’s name.

F-77

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The key assumptions underlying the value of the pension assets and obligations are as follows:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected investment return. . . . . . . . . . . . . . . . . . . . . . . . . .	Six months ended June 30,	Six months ended June 30,
	2001 5.0% 5.0% 5.0%	2002
		4.5% 4.0% 4.5%

The funded status of the Company’s pension plan as of June 30, 2001 and 2002 were as follows:

	June 30,	June 30,
2001 NT$ — (218,678) (218,678) (359,229) (577,907) 476,667 (101,240) 60,297 30,061 (12,655) — (23,537)	2002
	NT$ — (340,949) (340,949) (382,998) (723,947) 563,801 (160,146) 57,205 28,759 11,525 (4,337) (66,994)	US$ — (10,190)
		(10,190) (11,446)
		(21,636) 16,850
		(4,786) 1,710 859 344 (129)
		(2,002)

The components of the June 30, 2001 and 2002 net pension costs are as follows:

Six	months ended June 30,	months ended June 30,
2001 NT$ 50,010 12,675 (14,097) 743 49,331	2002
	NT$ 57,679 16,987 (14,644) 2,197 62,219	US$ 1,724 508 (437) 65
		1,860

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Additional pension disclosures:

Benefit obligation at January 1 . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . Paid to retirees . . . . . . . . . . . . . . . . . . . . . . Increase in unrecognized actuarial (gain) loss . Benefit obligation at end of period . . . . . . . . Change in plan assets Fair value of plan assets at beginning of period Actual return on plan assets . . . . . . . . . . . . . Contribution . . . . . . . . . . . . . . . . . . . . . . . . Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of period . . . .	Six	months ended June 30, 2002 NT$ US$ 681,330 20,362 57,679 1,724 16,987 508 (1,532) (46) (14,644) (437) 739,820 22,111 534,770 15,982 24,095 720 6,467 193 (1,531) (45) 563,801 16,850
	2001 NT$ 422,491 50,010 12,675 (223) 92,954 577,907 420,695 9,132 47,063 (223) 476,667
		NT$ 681,330 57,679 16,987 (1,532) (14,644) 739,820 534,770 24,095 6,467 (1,531) 563,801

13. SHAREHOLDERS’ EQUITY

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 2001.

During the year ended December 31, 2000, convertible debentures totaling NT$4,022,584 were converted to the Company’s common shares which resulted in the issuance of 97,834,589 additional common shares.

F-79

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The Company has two stock option plans (‘‘2001 plan’’ and ‘‘2002 plan’’) that provide for the granting of options to qualified employees for purchase of the Company’s common shares at the market price of the grant date. Stock options expire in six years from the date granted and vest over service periods that range from two to four years. The Company is authorized to grant options for up to 80,000,000 shares and 170,000,000 shares under 2001 plan and 2002 plan, respectively. The Company has granted 72,328,500 shares for the 2001 plan and no shares have yet been granted for the 2002 plan. For the six months ended June 30, 2002 and 2001, no stock option has been exercised.

On May 30, 2002, the Company’s shareholders resolved in the annual meeting to increase the authorized share capital to NT$53,500,000, divided to 5,350,000,000 shares (including 450,000,000 shares reserved for future exercises of stock options). In addition, the shareholders also resolved to declare a 10% stock dividend which resulted in the issuance of 331,934,262 common shares.

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 paidin capital, 50% of such reserve may be distributed to the Company’s shareholders through the issuance of additional common shares.

Special Reserve

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

a. Dividend to shareholders at 10% of the Company’s paid-in capital;

F-80

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, 2001, 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.

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 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

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Effective from January 1, 2002, the Company’s shares owned by its subsidiaries were treated as treasury stock. The treasury stock transactions during the six months ended June 30, 2002 are as follows:

Subsidiary Hui Ying Investment Ltd.	January 1,2002 Shares Amount 5,475,593 142,365	Additions Shares Amount — —	Disposals Shares Amount — —	June 30, 2002 Selling price Shares Amount — 5,475,593 142,365	June 30, 2002 Selling price Shares Amount — 5,475,593 142,365	Market Value
	Shares 5,475,593	Shares —	Shares —	Selling price —	Shares 5,475,593
						119,970

15. INCOME TAXES

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.

As of June 30, 2002, unused tax credits available to reduce future taxable income amounted to NT$3,617,243 (US$108,106). Details are as follows:

Expiration Years 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ 613,186 1,155,632 119,795 1,138,922 589,708 3,617,243	US$
		18,326 34,538 3,580 34,038 17,624
		108,106

F-82

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Six	months ended June 30, 2002 NT$ US$ 12,995 388 (1,363) (40) 11,632 348
	2001 NT$ 70,714 309,885 380,599
		NT$ 12,995 (1,363) 11,632

Expected income tax expense (benefit). . . . . . 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 (benefit) . . . . . . . . . . . .	Six	months ended June 30, 2002 NT$ US$ (1,802,204) (53,861) 318,378 9,515 874 26 — — (956,113) (28,575) 1,871,332 55,927 186,126 5,563 380,693 11,378 12,546 375 11,632 348
	2001 NT$ 702,362 465,488 58,879 (347,691) (771,674) 168,738 42,986 — 61,511 380,599
		NT$ (1,802,204) 318,378 874 — (956,113) 1,871,332 186,126 380,693 12,546 11,632

F-83

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 . . . . . . . . . . . . . . . . . Long-term investment loss . . . . . . . . . . . . Accrued royalty expense . . . . . . . . . . . . . Losses carried forward . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . .		June 30, 2002 NT$ US$ 353,648 10,569 13,785 412 2,916 87 370,349 11,068 3,617,243 108,106 527,862 15,776 15,092 451 134,875 4,031 71,840 2,147 1,280,038 38,256 — — 28,232 843 5,675,182 169,610 (3,348,055) (100,061) 2,327,127 69,549 1,956,778 58,481 1,023,410 30,586 933,368 27,895 1,956,778 58,481
	2001 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
		NT$ 353,648 13,785 2,916 370,349 3,617,243 527,862 15,092 134,875 71,840 1,280,038 — 28,232 5,675,182 (3,348,055) 2,327,127 1,956,778 1,023,410 933,368 1,956,778

16. RELATED PARTY TRANSACTIONS

a. Related Parties and Relationships

Related parties Relationships Caesar Technology, Inc. (‘‘Caesar’’) . . . . . . . . Equity investee of the Company Chantek Electronic Co, Ltd. (‘‘Chantek’’) . . . . . The Company was represented on Chantek Electronic Co., Ltd.’s board of directors up to October 29,2001. United Industry Gases Co., Ltd. (‘‘UIG’’) . . . . . The Company is United Industry Gas Co., Ltd.’s supervisor. Powertech Technology, Inc. (‘‘Powertech’’) . . . The Company is Powertech Technology, Inc.’s supervisor. Ardentech Technology, Inc. (‘‘Ardentech’’). . . . The Company is represented on Ardentech Technology, Inc.’s board of directors. Tower Semiconductor, Inc. (‘‘Tower’’) . . . . . . . The Company is represented on Tower Semiconductor, Inc.’s board of directors.

Chiao Tung Commercial Bank (‘‘Chiao Tung’’).

Biomorphic VLSI. Inc. (‘‘Biomorphic’’) . . . . . . Prominent Communications, Inc. . . . . . . . . . . .

Chiao Tung Commercial Bank is represented on the Company’s board of directors. Equity investee of the Company Equity investee of the Company

F-84

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

b. Transactions with related parties
(a) Manufacturing processing charges to related parties for June 30, 2001 and 2002, are summarized as follows:

Six	months ended June 30,	months ended June 30,
2001 NT$ 134,103 61,075 37,346 57,246 289,770	2002
	NT$ — — 44,999 57,513 102,512	US$ — — 1,345 1,719
		3,064

Such charges form part of inventory costs.

(b) The Company purchased industrial gases from UIG totaling NT$59,787 and NT$57,418 (US$1,716) for the six months ended June 30, 2001 and 2002, respectively. Such purchases form part of cost of goods sold.
(c) During the six months ended June 30, 2001 and 2002, the Company purchased wafers from Tower totaling NT$97,170 and NT$53,153 (US$1,589). Such purchases form part of cost of goods sold. In September 2001, the Company utilized US$16 million of its prepaid credit account to purchase 1,255,848 Tower shares for US$12.75 per share. Moreover, as stated on 17.e, the Company made the third milestone payment to Tower on April 23, 2002 that increased the Company’s investment in Tower by US$6,600 (NT$220,850) and prepaid credit by US$4,400 (NT$147,233), respectively. As of June 30, 2002, NT$325,800 (US$9,737) remained in the prepaid credit account.
(d) Please refer to note 10 for the Company’s capital lease agreement with Caesar.
(e) Payables to related parties as of June 30, 2001 and 2002 were as follows:

	June 30,	June 30,
2001 NT$ 59,987 21,266 10,735 19,218 22,481 12,305 — 67 146,059	2002
	NT$ — — 10,204 31,838 42,225 11,166 19,686 393 115,512	US$ — — 305 952 1,262 333 588 12
		3,452

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

(f) Loans

Six months ended June 30, 2001	Six months ended June 30, 2001	Six months ended June 30, 2001
Maximum balance Ending balance Interest rate Amount Month 6,275,370 March 6,275,370 5.975%–7.8% Six months ended June 30, 2002			Interest expense
Amount 6,275,370
			203,606

Maximum balance Amount Month 4,244,982 January	Ending balance 4,200,302	Interest rate 2.4625%–5.92%	Interest expense
Amount 4,244,982
			76,568

(g) The Company acted as guarantor for a loan to Biomorphic. As of June 30, 2002 such loan amounted to US$3,400.

17. COMMITMENTS AND CONTINGENCIES

The Company’s commitments and contingencies, not recorded in the financial statements, as of June 30, 2002 were as follows:

a. Letters of credit issued for future deliveries of equipment amounted to NT$1,064,188 (US$31,805).
b. The Company’s significant construction and machinery contracts totaled approximately NT$12,948,348 (US$386,980). The Company has paid NT$5,589,790 (US$167,059) pursuant to these contracts as of June 30, 2002.
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, 2002 are as follows:

July 1, 2002–June 30, 2003 . . . . . . . . . . . . . . . . . . . . . July 1, 2003–June 30, 2004 . . . . . . . . . . . . . . . . . . . . . July 1, 2004–June 30, 2005 . . . . . . . . . . . . . . . . . . . . . July 1, 2005–June 30, 2006 . . . . . . . . . . . . . . . . . . . . . July 1, 2006–June 30, 2007 . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total minimum lease payments . . . . . . . . . . . . . . . . . . .	Operating Leases	Operating Leases
	NT$ 64,064 64,064 64,064 64,064 64,064 381,991 702,311	US$ 1,915 1,915 1,915 1,915 1,915 11,416
		20,991

Rental expenses under the operating leases amounted to, NT$31,145 and NT$49,181 (US$1,470) for the six months ended June 30, 2001 and 2002, respectively.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

d. On February 18, 1997, Atmel Corporation (‘‘Atmel’’) filed a legal action against MXA, one of the Company’s subsidiaries, with the International Trade Commission (‘‘ITC’’) for violation of Atmel’s patent No. 903. On June 1, 2001, the ITC issued a Notice of Final Determination and ruled again that MXA did not infringe the 903 patent. Atmel filed a petition to 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 final determination and therefore is bound by the ITC’s finding that MXA did not infringe the 903 patent.

e. The Company entered into an agreement with Tower, an Israel public company listed on NASDAQ, to purchase silicon wafers to be manufactured by Tower 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 wafers 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 wafers 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 memory passes 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.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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.

On March 22, 2002, an amendment to the above-mentioned share purchase agreements was implemented. According to this amendment, the Company is required to make the third and fourth milestone payments no later than April 2002 and October 2002, respectively, without regard to whether each milestone is achieved. For 60% of each of the third and fourth milestone payment, Tower is required to issue shares based on the average closing price of Tower’s shares on the NASDAQ in the 30 trading days preceding the date of payments, provided, however, the average price per share shall not exceed US$12.50. For the remaining 40%, Tower is required to increase the Company’s prepayment account. Accordingly, the Company made the third milestone payment on April 23, 2002. For this payment, the Company acquired 1,071,497 of Tower’s shares at US$6.16 per share.

As of June 30, 2002, the Company owned approximately 13% of Tower’s shares and had NT$326 million or about US$10 million remaining on deposit. If Tower is unable to meet the remaining 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 agreements.

18. OTHER DISCLOSURES

Property, Plant and Equipment

Total capitalized interest amounted to NT$63,216 and NT$194,648 (US$5,817) for the six months ended June 30, 2001 and 2002, respectively.

The insurance coverage for property, plant and equipment amounted to NT$38,748,257 and NT$59,859,054 (US$1,788,974) as of June 30, 2001 and 2002, respectively.

Royalty Revenue

Royalty revenue earned amounted to NT$40,934 and NT$36,948 (US$1,104) for six months ended June 30, 2001 and 2002, respectively.

Significant Subsequent Events

(Unaudited) — On October 1, 2002, pursuant to the board of directors’ approval, the Company granted its employees 151,507,000 stock options, which entitled the holder to purchase the Company’s stock at NT$11.5 per share.

(Unaudited) — On October 1, 2002, the Company made the fourth milestone payment US$11,000 to Tower. For this milestone, the Company acquired 1,344,829 Tower shares at US$4.908 per share and increased its deposit in Tower by NT$4,400.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Information on Investments in Mainland China

None

Other

Certain accounts in the financial statements of the Company as of June 30, 2001 and for the six months period ended June 30, 2001 have been reclassified to conform to the current period’s presentation.

19. SEGMENT INFORMATION

Segment and geographic data

Six months ended June 30, 2001 Sales to unaffiliated customers . . Sales between geographic areas. . Net Sales . . . . . . . . . . . . . . . . . Operating income (loss), including other expenses . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . Interest expense . . . . . . . . . . . . Income before taxes . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . Identifiable 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	USA 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

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

Six months ended June 30, 2002 Sales to unaffiliated customers . . Sales between geographic areas. . Net Sales . . . . . . . . . . . . . . . . . Operating income (loss), including other expenses . . . . . . . . . . . . Interest revenue . . . . . . . . . . . . Interest expense . . . . . . . . . . . . Income before taxes . . . . . . . . . Tax expense . . . . . . . . . . . . . . . Net income. . . . . . . . . . . . . . . . Identifiable assets . . . . . . . . . . . Capital expenditures . . . . . . . . . Depreciation and amortization. . .	Domestic NT$ 6,183,135 554,876 6,738,011 (6,779,340) 69,881,728 4,859,173 4,288,149	USA NT$ 709,109 43,406 752,515 (678,323) 4,535,047 208 3,025	Others NT$ 56,612 180,886 237,498 1,315 106,503 4,708 3,306	Elimination NT$ — (779,168) (779,168) 742,095 (3,486,429) — —	Consolidated
					NT$ 6,948,856 —
					6,948,856
					(6,714,253
					122,672 (581,143
					(7,172,724 (11,632
					(7,184,356
					71,036,849
					4,864,089
					4,294,480

Major customers

Revenues from customers representing over 10% of total net sales were as follows:

Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
2001 NT$ % 4,370,935 35.74 1,910,398 15.62 6,281,333 51.36		2002
NT$ 4,370,935 1,910,398 6,281,333	NT$ 1,917,915 241,318 2,159,233	% 26.3 3.3 29.6	US$ 57,320 7,212
			64,532

Less than 0.01%.

Exports

The Company’s export sales accounted for 66% and 72% of total net sales for the six months ended June 30, 2001 and 2002, respectively.

Export sales from the ROC were as follows:

Japan. . . . . . . . . . . . . . . . . . . . . . . . . USA . . . . . . . . . . . . . . . . . . . . . . . . . Hong Kong. . . . . . . . . . . . . . . . . . . . . Singapore. . . . . . . . . . . . . . . . . . . . . . South Korea . . . . . . . . . . . . . . . . . . . . Europe. . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	Six 2001 NT$ 5,406,649 863,757 734,804 683,223 — 403,196 8,091,629	months ended June 30,	months ended June 30,
		2002
		NT$ 2,682,505 608,617 903,121 860,674 — 181,014 5,235,931	US$ 80,171 18,189 26,991 25,722 — 5,410
			156,483

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

20. 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 US dollars and Japanese Yen. As of June 30, 2002, approximately 70.16% of the Company’s long-term debts were in US dollars and approximately 35.01% 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.

a. Foreign currency forward contracts

June	30,	30,
2001 Buy Sell 634,248 — — 651,957	2002
Buy 634,248 —	Buy 368,830 —	Sell
		— 290,172

As of June 30, 2001 and 2002, the net payable resulting from the above exchange contracts amounted to NT18,623 and NT$(10,704), respectively.

Net exchange gains (losses) related to foreign currency forward contracts for six months ended June 30, 2001 and 2002 were NT$95,587 and NT$(1,651), 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 US 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.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

c. Cross currency and interest rate swaps

To hedge against certain of the Company’s long-term debt denominated in US 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 US dollar to Japanese Yen mitigates the foreign exchange exposure.

d. Structured deposits

e. The estimated fair values of the Company’s financial instruments are as follows:

On balance sheet:

	June 30,	June 30,
2001 Carrying amount Fair value NT$ NT$ 12,587,290 12,587,290 918,256 735,396 (707,136) (707,136) (19,109,742) (18,773,751)	2002
Carrying amount NT$ 12,587,290 918,256 (707,136) (19,109,742)	Carrying amount NT$ US$ 11,646,711 348,079 198,561 5,934 3,775,539 112,837 24,452,430 730,796	Fair value
		NT$ US$ 11,646,711 348,079 283,634 8,477 3,775,539 112,837 24,991,903 746,919

Off balance sheet:

June	30,	30,
2001 Carrying Amount Fair Value NT$ NT$ 62,554 67,037 18,623 17,980 — 37,474 — — — —	2002
Carrying Amount NT$ 62,554 18,623 — — —	Carrying Amount NT$ 30,256 (10,704) — — —	Fair Value
		NT$ 30,980 (9,181) (133,998) — —

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

f. 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 amount of US$150 million is divided into fifteen options and the Subsidiary is entitled to exercise the options separately, at the discretion of the Subsidiary during the life of the contract, but at a minimum number of two and a maximum number fifteen. The Company simultaneously entered into currency swaps, based on the notional amount of the debt, converting Japanese Yen into New Taiwan dollars and New Taiwan dollars into United States dollars. Subsequently, the option contract and the currency swaps were combined into one contract. The Subsidiary exercised two options and five options on January 22, 2000 and June 26, 2000, respectively. As of June 30, 2002, the fair value of the outstanding portion of the contract was NT$(505,047) (US$(15,063)), and the carrying amount was NT$(120,587) (US$(3,596)).

In June 2000, the Company entered into a contract with a financial institution for the settlement of five options relating to a zero coupon convertible debenture due 2003 with the underlying reference being 47,727,535 of the Company’s common shares. The contract, as amended, will expire on December 31, 2002. As of June 30, 2002, the remaining underlying reference was 48,412,695 of the Company’s common shares. If the price is greater than the predetermined contract price, then the Company would pay the difference between the two amounts to the financial institution. The contract rate at which the contract is settled is based in US dollars, and the Company’s share price is converted into US dollars using current NT dollar to US dollar exchange rates in order to determine the settlement amount. The contract rate as of June 30, 2002 was US$1.50208. The carrying amount of this contract as of June 30, 2002 was a loss of NT$1,171,752 (US$34,946) while the fair value was a loss of NT$1,503,921 (US$44,853).

Under the stock appreciation right program 18,505,246 of the Company’s shares vested in the current year with an exercise price of $37.25. With respect to the contract referenced to the 48,412,695 shares, the Company recorded a liability relating to a portion of the contract representing 18,505,246 of the shares based on the difference between the contract strike price and NT$37.25, this resulted in a total liability related to the contract of NT$1,171,752. The Company’s additional obligation related to the contract, based on the fair value of the underlying shares of NT$19.3 as of June 30, 2002, is NT$332,169.

In entering into financial instruments, the Company is subject to credit, price, liquidity and cash flow risks 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.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

The notional amounts of the financial instruments as of December 31, 2000, 2001 and June 30, 2002, 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 . . . . . .	June	30,
	2001 Y=2,353,635 Y=4,059,350 US$2,000 Y=3,746,550 US$10,000 — — US$80,000	2002
		Y=1,032,640 US$11,000 Y=4,313,150 US$9,000 Y=9,379,050 US$15,000 US$6,000 — — —

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, 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

The Company anticipates that the liquidity risk is minimal because the financial instruments are highly liquid and are entered into, pursuant to binding agreement, for hedging purposes 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

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued (Amounts in thousands except share, per share, and percentage data)

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 counter-parties. However, the Company might receive an amount less than the principal deposited should the counter-parties 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 the financial instruments 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 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 the financial statements.

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APPENDIX A-1

CERTAIN UNAUDITED UNCONSOLIDATED FINANCIAL DATA As of and for the nine-month periods ended September 30, 2001 and September 30, 2002

The following section presents unaudited unconsolidated financial data for Macronix International Co., Ltd. as of September 30, 2001 and September 30, 2002 and for the nine-month periods ended September 30, 2001 and September 30, 2002, 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 19 to our audited consolidated financial statements for the years ended December 31, 1999, 2000 and 2001 included elsewhere in this offering circular. In addition, by their nature, unconsolidated financial data are not comparable in material respects with consolidated financial statements, and should not be compared with consolidated financial statements for prior periods.

The financial data presented in this section are unconsolidated under ROC GAAP and do not include the results of Macronix America, Inc. (MXA), Macronix (B.V.I.) Co. Ltd., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd., Rui Hong Investment Inc. and the four wholly-owned subsidiaries of Macronix (BVI) Co. Ltd., — Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. — and therefore are not representative of our consolidated results of operations. Any evaluation of these unaudited unconsolidated financial data should also take into account the audited consolidated financial statements of Macronix International Co., Ltd. for the years ended December 31, 1999, 2000 and 2001 and for the six months ended June 30, 2001 and 2002 and the respective notes to those statements included elsewhere in this offering circular. These unaudited unconsolidated financial data for Macronix International Co., Ltd. for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for any period thereafter or for the year ended December 31, 2002.

A-1-1

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED BALANCE SHEETS September 30, 2002 and 2001

(Amounts in thousands except share and per share data)

ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted 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 . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepayments for equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term equity investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

September 30
2001
2002
NT$ NT$ 13,617,686
9,124,858
189,600
2,200,919
3,127,095
3,099,657
8,263,414
5,259,806
716,734
713,987
436,333
442,513
401,487
514,237
26,752,349
21,355,977
598,076
598,076
12,713,737
17,078,143
39,926,427
42,556,661
1,150,955
1,324,654
1,335,277
2,607,140
55,724,472
64,164,674
(24,817,920)
(32,239,757)
1,809,809
1,004,323
5,244,709
6,868,466
37,961,070
39,797,706
1,657,412
1,203,158
916,590
1,068,125
3,590,607
3,206,193
1,181,159
477,539
72,059,187
67,108,698

2001
NT$ 13,617,686
189,600
3,127,095
8,263,414
716,734
436,333
401,487
26,752,349
598,076
12,713,737
39,926,427
1,150,955
1,335,277
55,724,472
(24,817,920)
1,809,809
5,244,709
37,961,070
1,657,412
916,590
3,590,607
1,181,159
72,059,187

A-1-2

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED BALANCE SHEETS — Continued September 30, 2002 and 2001

(Amounts in thousands except share and per share data)

LIABILITIES & SHAREHOLDERS’ EQUITY
Current liabilities
Short-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . .
Debentures, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Shareholders’ equity
Common shares NT$10 par value, authorized 4,500,000,000 and
5,350,000,000 shares as of September 30, 2001 and September 30,
2002, and issued 3,359,342,613 and 3,691,276,875 shares as of
September 30, 2001 and September 30, 2002, respectively . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized losses on long-term investments . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity. . . . . . . . . . . . . . . . . . . . . .

September 30
2001
2002
NT$ NT$ —
556,300.00
298,376
—
—
4,916,735
154,859
623,837
3,250,375
2,115,920
1,063,855
1,635,010
227,535
277,231
1,064,283
1,396,618
1,748,221
1,666,114
358,075
358,075
122,566
105,556
8,288,145
13,651,396
1,760,046
1,145,262
5,997,436
6,388,232
9,391,141
13,475,230
19,069
90,642
88
174
25,455,925
34,750,936
33,593,426
36,912,769
5,967,073
2,630,621
1,425
378,657
1,707,054
1,708,689
5,583,685
(7,445,569)
(486,051)
(867,795)
236,650
228,826
—
(1,188,436)
72,059,187
67,108,698

2001
NT$ —
298,376
—
154,859
3,250,375
1,063,855
227,535
1,064,283
1,748,221
358,075
122,566
8,288,145
1,760,046
5,997,436
9,391,141
19,069
88
25,455,925
33,593,426
5,967,073
1,425
1,707,054
5,583,685
(486,051)
236,650
—
72,059,187

A-1-3

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF OPERATIONS For the nine-month periods ended September 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Sales returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plus: Unrealized profit as of January 1. . . . . . . . . . . . . . . . . . . . . . . . .
Less: Unrealized profit as of September 30. . . . . . . . . . . . . . . . . . . . . .
Realized gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . .
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 benefit (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Common Share:
Net income (loss) per common share — basic . . . . . . . . . . . . . . . . . .
Pro-forma data: assuming that the Company’s shares owned by
subsidiaries were not treated as treasury stock
Net income (loss) for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings Per Common Share:
Net income (loss) per common share — basic . . . . . . . . . . . . . . . . . .

Nine-month period ended
September 30
2001
2002
NT$ NT$ 17,230,403
11,514,737
(149,931)
(23,176)
(44,195)
(89,455)
17,036,277
11,402,106
(8,303,373)
(11,926,411)
8,732,904
(524,305)
112,862
118,249
(79,042)
(57,426)
8,766,724
(463,482)
(414,754)
(481,943)
(899,219)
(906,833)
(2,832,033)
(2,815,242)
(4,146,006)
(4,204,018)
4,620,718
(4,667,500)
395,389
162,687
—
21,110
—
3,070
158,067
187,357
553,456
374,224
(826,617)
(861,137)
(22,323)
—
(699,571)
(3,132,660)
(5,807)
—
(446,789)
(1,005,211)
(245,108)
(40,773)
(2,246,215)
(5,039,781)
2,927,959
(9,333,057)
(460,000)
—
2,467,959
(9,333,057)
NT$0.67
(NT$2.55)
(9,407,722)
(NT$2.56)

2001
NT$ 17,230,403
(149,931)
(44,195)
17,036,277
(8,303,373)
8,732,904
112,862
(79,042)
8,766,724
(414,754)
(899,219)
(2,832,033)
(4,146,006)
4,620,718
395,389
—
—
158,067
553,456
(826,617)
(22,323)
(699,571)
(5,807)
(446,789)
(245,108)
(2,246,215)
2,927,959
(460,000)
2,467,959
NT$0.67

A-1-4

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF CASH FLOWS For the nine-month periods ended September 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows 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) . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss from equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposal of short-term investments. . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in reserve for redemption of convertible bonds . . . . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from investing activities:
Increase in restricted investments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease 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 period ended
September 30
2001
2002
NT$ NT$ 2,467,959
(9,333,057)
5,496,259
6,028,303
5,105
11,456
699,571
3,132,660
—
14,485
438,646
1,009,677
(15,276)
(4,466)
411,867
473,868
401,121
—
5,807
(3,070)
2,250
67,938
181,045
(95,307)
1,505,936
(549,292)
531,231
(9,896)
(3,822,593)
(1,200,445)
291,443
51,033
(29,271)
114,804
(510,473)
547,404
(153,846)
96,570
13,817
(161,604)
(106,370)
(102,660)
404,250
440,094
(255,749)
—
7,962,729
528,495
(950,374)
(707,168)
15,276
4,466
(1,514,656)
(658,822)
(5,784,480)
(6,949,176)
7,266
6,023
5,853
(13,147)
(546,845)
(416,602)
(28,027)
8,016
(8,795,987)
(8,726,410)

2001
NT$ 2,467,959
5,496,259
5,105
699,571
—
438,646
(15,276)
411,867
401,121
5,807
2,250
181,045
1,505,936
531,231
(3,822,593)
291,443
(29,271)
(510,473)
(153,846)
13,817
(106,370)
404,250
(255,749)
7,962,729
(950,374)
15,276
(1,514,656)
(5,784,480)
7,266
5,853
(546,845)
(28,027)
(8,795,987)

A-1-5

MACRONIX INTERNATIONAL CO., LTD.

UNAUDITED UNCONSOLIDATED STATEMENTS OF CASH FLOWS — Continued For the nine-month periods ended September 30, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows from financing activities:
(Decrease) increase in short-term debts . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in short-term notes. . . . . . . . . . . . . . . . . . . . . . . .
Increase in refundable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of directors and supervisors’ remunerations. . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in long-term debts . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in capital lease obligations . . . . . . . . . . . . . . . . . .
Increase in debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing 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 flows 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 transferred to current liabilities . . . . . . . .
Current portion of capital lease obligation transferred to current liabilities
Unrealized losses on long-term investments . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issuance for capital reserve and retained earnings . . . . . . . . . . . .
Stock issuance for employee bonuses. . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock owned by the subsidiaries . . . . . . . . . . . . . . . . . . . . . .
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 period ended
September 30
2001
2002
NT$ NT$ (924,680)
556,300
298,376
—
—
86
(190,148)
—
—
(1,046,071)
(1,322,575)
385,167
1,895,737
(168,463)
244,048
5,300,595
758
5,027,614
(832,500)
(3,170,301)
14,450,186
12,295,159
13,617,686
9,124,858
883,983
802,410
353,834
36,955
3,250,375
2,115,920
—
4,916,735
154,859
623,837
378,750
220,177
(130,775)
40,135
7,423,227
3,319,343
1,426,108
—
—
142,365
5,483,872
7,335,431
300,608
(386,255)
5,784,480
6,949,176

2001
NT$ (924,680)
298,376
—
(190,148)
—
(1,322,575)
1,895,737
244,048
758
(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-1-6

APPENDIX A-2

CERTAIN UNCONSOLIDATED FINANCIAL DATA As of and for the years ended December 31, 2001 and 2002

The following section presents unconsolidated financial data for Macronix International Co., Ltd. for the year ended December 31, 2001 and unaudited unconsolidated financial data for the year ended December 31, 2002. Such unaudited and unconsolidated information is generated internally by us and is not subject to the same review and scrutiny, including internal auditing procedures and review by independent auditors, to which we subject quarterly unaudited unconsolidated financial information we publish from time to time pursuant to the requirements of the Taiwan Stock Exchange, or to our audited consolidated semiannual or annual financial statements. Furthermore, as this information is neither audited nor reviewed, it may vary materially from our audited consolidated ROC GAAP financial statements for the same period. In addition, by their nature, unconsolidated financial data are not comparable in material respects with consolidated financial statements, and should not be compared with consolidated financial statements for prior periods.

The financial data below do not include the results of Macronix America, Inc., Macronix (B.V.I.) Co. Ltd., Hui Ying Investment, Ltd., Kang Bao Investment, Ltd. and Rui Hong Investment Inc. and the four wholly-owned subsidiaries of Macronix (B.V.I.) Co. Ltd. — Wedgewood International Ltd., New Trend Technologies Inc., Macronix Europe N.V. and Macronix Pte. Ltd. — and therefore are not representative of our consolidated results of operations. Any evaluation of the information presented should also take into account our audited consolidated financial statements and the notes to those statements included elsewhere in this offering circular. These unaudited unconsolidated financial data for Macronix International Co., Ltd. for the year ended December 31, 2002 are not necessarily indicative of the results that may be expected for any period thereafter.

A-2-1

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED BALANCE SHEETS December 31, 2001 and 2002

(Amounts in thousands except share and per share data)

ASSETS Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Restricted investments-current. . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . Office furniture and equipment . . . . . . . . . . . . . . . . . . Leased 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. . . . . . . . . . . . . . . . . . . . Restricted investments-noncurrent . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2001 NT$ 12,295,159 34,000 — 2,456,618 7,187,307 723,620 562,031 565,270 23,824,005 598,076 13,361,244 41,020,975 1,216,401 887,357 953,225 7,095,247 65,132,525 (26,365,185) 38,767,340 1,193,526 851,583 3,974,210 1,721,801 210,358 70,542,822	2002 NT$ US$ (Unaudited) 7,179,104 214,558 3,034,823 90,700 — — 2,685,121 80,249 5,090,063 152,123 465,854 13,923 521,581 15,588 378,318 11,307 19,354,864 578,448 598,076 17,875 18,313,706 547,331 42,935,570 1,283,191 1,518,588 45,385 888,654 26,559 1,750,658 52,321 7,526,869 224,951 73,532,121 2,197,613 (34,291,327) (1,024,846) 39,240,794 1,172,767 1,451,292 43,374 1,048,850 31,347 3,388,474 101,269 260,625 7,789 207,675 6,207 64,952,574 1,941,201

A-2-2

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED BALANCE SHEETS — Continued December 31, 2001 and 2002

(Amounts in thousands except share and per share data)

LIABILITIES & SHAREHOLDERS’ EQUITY Current liabilities Short-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of capital lease obligations. . . . . . . . . . Current portion of long-term debt . . . . . . . . . . . . . . . . Current portion of debentures . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . Debentures less current portion . . . . . . . . . . . . . . . . . . Accrued pension cost. . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Shareholders’ equity Common shares NT$10 par value, authorized 3,500,000,000 and 4,500,000,000 shares as of December 31, 2001 and 2002, and issued 2,474,409,144 and 3,359,342,613 shares as of December 31, 2001 and 2002, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . Capital reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses on long-term investments . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity. . . . . . . . . . . .	2001 NT$ 0 321,934 2,877,581 1,087,606 180,661 1,010,363 1,827,718 358,076 208,216 7,872,155 1,615,628 5,241,404 12,651,276 22,704 88 27,403,255 33,593,426 5,949,964 16,360 1,707,054 1,425 2,249,995 (647,618) 268,961 0 43,139,567 70,542,822	2002 NT$ US$ (Unaudited) 696,176 20,806 625,858 18,705 2,157,640 64,484 6,563,788 196,168 1,371,672 40,994 229,992 6,874 1,554,574 46,461 1,726,498 51,599 300,783 8,989 57,004 1,704 15,283,985 456,784 980,525 29,304 6,070,139 181,415 12,288,062 367,246 115,420 3,450 149 4 34,738,280 1,038,203 36,912,769 1,103,191 2,630,621 78,620 356 10 1,708,690 51,067 378,657 11,317 (9,469,175) (283,000) (979,081) (29,261) 219,893 6,572 (1,188,436) (35,518) 30,214,294 902,998 64,952,574 1,941,201

A-2-3

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2001 and 2002 (Amounts in thousands except share and per share data)

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Sales returns. . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory loss provision . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of property, plant and equipment. . . . . . . Net investment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (expense). . . . . . . . . . . . . . . . . . . . . Net income (loss) for the year. . . . . . . . . . . . . . . . . . . . Earnings Per Common Share: Net income (loss) per common share — basic . . . . . . . . Net income (loss) per common share — diluted. . . . . . .	2001 NT$ 21,606,027 (165,175) (80,131) 21,360,721 (11,569,847) 9,790,874 (508,996) (1,204,158) (3,821,234) (5,534,388) 4,256,486 481,688 0 21,284 185,763 688,735 (1,075,745) (2,559,855) (7,262) (928,570) (77,858) (245,411) (4,894,701) 50,520 (917,000) (866,480) (0.26) (0.26)	2002 NT$ US$ (Unaudited) 16,239,768 485,349 (52,202) (1,560) (112,411) (3,360) 16,075,155 480,429 (16,842,950) (503,376) (767,795) (22,947) (637,916) (19,065) (1,251,576) (37,405) (3,804,237) (113,695) (5,693,729) (170,165) (6,461,524) (193,112) 199,318 5,957 70,005 2,092 3,085 92 187,630 5,608 460,038 13,749 (1,166,597) (34,865) (2,923,861) (87,384) (15) 0 (1,191,142) (35,599) 0 0 (73,562) (2,199) (5,355,177) (160,047) (11,356,663) (339,410) 0 0 (11,356,663) (339,410) (3.10) (0.09) (3.10) (0.09)

A-2-4

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows 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 (net gain) on short-term investment . . . . . . . . . . . . . . . . . . . . . . . Allowance (reversal of allowance) for bad debt. . . . . . . Inventory provision . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividend received . . . . . . . . . . . . . . . . . . . . . . . Net loss from equity investment . . . . . . . . . . . . . . . . . Write off on long term investments . . . . . . . . . . . . . . . Net gain on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . Net changes in operating assets and liabilities Notes and accounts receivable. . . . . . . . . . . . . . . . . Receivables from related parties . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . Notes and accounts payable . . . . . . . . . . . . . . . . . . Payables to related parties . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . Accrued pension cost. . . . . . . . . . . . . . . . . . . . . . . Increase in reserve for redemption of convertible bonds. . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . Cash flows from investing activities: (Increase) decrease in restricted investments . . . . . . . . . Increase in short-term investments. . . . . . . . . . . . . . . . Additions to 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 . . . . . . . . . . . . . . . .	2001 NT$ (866,480) 7,435,120 561,552 858,121 (26,202) (45,379) 2,559,855 — 633,218 321,553 (14,022) 2,583,782 354,986 (4,605,160) 127,660 (156,579) (486,722) (200,720) 93,314 (255,748) (20,720) 5,885 561,649 9,418,963 (1,539,801) 26,202 (2,543,641) (8,648,881) 92,445 (33,536) (631,522) 5,795 (13,272,939)	2002 NT$ US$ (Unaudited) (11,356,663) (339,410) 8,097,740 242,013 633,578 18,935 — — (5,228) (156) 16,144 482 2,923,861 87,384 14,485 433 1,206,918 36,070 — — (3,070) (92) (333,079) (9,954) 88,432 2,643 (822,497) (24,582) 186,952 5,587 36,330 1,086 284,066 8,490 49,331 1,474 (101,220) (3,025) (57,293) (1,712) (151,212) (4,519) 92,716 2,771 184,993 5,529 985,284 29,447 (1,539,647) (46,014) 5,228 156 (1,158,206) (34,615) (8,424,748) (251,786) 6,023 180 21,917 655 (436,034) (13,031) (19,234) (575) (11,544,701) (345,030)

A-2-5

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF CASH FLOWS — Continued For the years ended December 31, 2001 and 2002 (Amounts in thousands except share and per share data)

Cash flows from financing activities: (Decrease) increase in short-term debts . . . . . . . . . . . . Increase in refundable deposits . . . . . . . . . . . . . . . . . . Common stock repurchased . . . . . . . . . . . . . . . . . . . . (Decrease) increase in long-term debts . . . . . . . . . . . . . Increase (decrease) in capital lease obligations . . . . . . . Increase in debentures . . . . . . . . . . . . . . . . . . . . . . . . Distribution of directors and supervisors’ remuneration . Net cash provided by (used in) financing activities . . . . Net increase (decrease) in cash and cash equivalents . . . . . Cash and cash equivalents at the beginning of year . . . . . . Cash and cash equivalents at the end of year . . . . . . . . . . Supplemental disclosures of cash flow information: Interest paid during the year . . . . . . . . . . . . . . . . . . . . Income tax paid during the year . . . . . . . . . . . . . . . . . Non-cash activities: Current portion of long-term debts. . . . . . . . . . . . . . . . Current portion of debentures transferred to current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of capital lease obligation transferred to current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized losses on long-term investments . . . . . . . . . Cumulative translation adjustments . . . . . . . . . . . . . . . Stock issuance for capital reserve and retained earnings . Stock issuance for employee bonuses. . . . . . . . . . . . . . Treasury stock owned by the subsidiaries . . . . . . . . . . . Cash paid for purchase of property, plant and equipment Purchases of property, plant and equipment . . . . . . . . . (Increase) decrease in payable to equipment suppliers . . Cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2001 NT$ (924,680) — — (2,451,401) 1,918,394 3,346,784 (190,148) 1,698,949 (2,155,027) 14,450,186 12,295,159 1,121,579 501,635 2,877,581 — 321,934 540,318 163,086 7,423,227 1,426,108 — 8,294,353 354,528 8,648,881	2002 NT$ US$ (Unaudited) 696,176 20,806 61 2 (1,046,071) (31,263) 108,794 3,252 (331,179) (9,898) 6,015,581 179,784 — — 5,443,362 162,683 (5,116,055) (152,900) 12,295,159 367,458 7,179,104 214,558 1,143,482 34,175 76,346 2,282 2,157,640 64,484 6,563,788 196,168 625,858 18,705 331,463 9,906 49,068 1,466 3,319,343 99,203 — — 142,365 4,255 8,968,959 268,050 (544,211) (16,264) 8,424,748 251,786

A-2-6

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.
ARM 7TM . . . . . . . . . . .	The ARM 7TM family is a proprietary range of low-power 32-bit reduced
	instruction set computing microprocessor cores optimized for cost and
	power-sensitive consumer applications developed by ARM Holdings plc.
ASIC. . . . . . . . . . . . . . .	Application Specific Integrated Circuit. A custom designed integrated
	circuit that performs specific 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.
ATA . . . . . . . . . . . . . . .	Advanced Technology Attachment. The specification 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.
BluetoothTM . . . . . . . . . .	A worldwide wireless technology specification for a small-form factor, low-
	cost radio solution that provides links between mobile computers, mobile
	phones, other handheld devices and connectivity to the Internet. The
	specification is developed, published and promoted by the Bluetooth Special
	Interest Group.
CD-ROM . . . . . . . . . . . .	Compact Disc used for data storage on a read-only basis.
Die . . . . . . . . . . . . . . . .	A piece of a semiconductor wafer containing the circuitry of a single chip.
DINOR . . . . . . . . . . . . .	Divided bit-line NOR Mitsubishi-patented flash architecture used in its flash
	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 flash architecture. Programming occurs
	at a lower threshold voltage than erase in the DINOR flash architecture, the
	opposite of the NOR architecture.
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.

B-1

EPROM . . . . . . . . . . . . .	Erasable Programmable ROM. Nonvolatile memory that 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 nonvolatile 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 flash chip has been
	incorporated.
FPGA . . . . . . . . . . . . . .	Field Programmable Gate Array. A programmable device with an internal
	array of logic blocks, surrounded by a ring of programmable input/output
	blocks, connected together via programmable interconnects.
GPS . . . . . . . . . . . . . . .	Global Positioning Satellite System. A network of satellites that provides
	precise location determination to receivers.
GUI. . . . . . . . . . . . . . . .	Graphics User Interface. An interface that allows operation of a computer by
	manipulating graphical icons and windows (usually by pointing and clicking
	a mouse) rather than using text commands.
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 field is applied, the molecules align with the light passing
	through it. A polarized filter 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.

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MCU or Microcontroller	A complete computer system contained on a single integrated circuit that is
Unit . . . . . . . . . . . . . .	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.
MEMS. . . . . . . . . . . . . .	Micro-Electro-Mechanical-Systems. MEMS is an enabling technology
	resulting from the integration of mechanical elements, sensors, actuators,
	and electronics on a common silicon substrate through microfabrication
	technology.
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.
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 that 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.
OEM . . . . . . . . . . . . . . .	Original equipment manufacturer.
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.
RAM . . . . . . . . . . . . . . .	Random Access Memory. A type of volatile memory, forming the main
	memory of a computer where applications and files are run.

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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 first 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 that 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.
SPI . . . . . . . . . . . . . . . . Serial Peripheral Interface. A synchronous serial data protocol that operates in full duplex established by Motorola, Inc. It provides support for a high bandwidth (1 megabaud) network connection amongst host processors and peripherals.
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.
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 Disc. Volatile memory . . . . . . . Memory products that lose their data content when the power supply is switched off.
Wafer . . . . . . . . . . . . . . Thin, round, flat piece of silicon that is the base of most integrated circuits.

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APPENDIX C

THE SECURITIES MARKET OF THE REPUBLIC OF CHINA

The Taiwan Stock Exchange

In 1961, the ROC Securities and Futures Commission established the Taiwan Stock Exchange to provide a marketplace for securities trading. The Taiwan Stock Exchange is a corporation owned by government-controlled entities 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. Subject to limited exceptions, all transactions in listed securities by brokers, traders and securities firms must be made through the Taiwan Stock Exchange.

The Taiwan Stock Exchange commenced operations in 1962. During the early 1980s, the ROC Securities and Futures Commission actively encouraged new listings on the Taiwan Stock Exchange, and the number of listed companies grew from 119 in 1983 to 598 as of January 27, 2003. As of January 27, 2003, the market capitalization of companies listed on the Taiwan Stock Exchange was approximately NT$10.05 trillion.

Historically, ROC companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the ROC Securities and Futures Commission has encouraged companies to list other types of securities. In 1988, the ROC Securities and Futures Commission permitted the issuance of Taiwan’s first convertible bonds. Since 1989, there have been offerings of domestic convertible bonds and convertible preferred shares. In addition, beneficiary units evidencing beneficiary interests in closed-end investment funds and bonds issued by Asian Development Bank and other supranational banks are also listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market of Taiwan.

The ROC Securities and Futures Commission also has regulations that permit foreign issuers to list their equity securities directly on the Taiwan Stock Exchange or through the use of depositary receipts. Currently, only four non-ROC companies have listed bonds on the Taiwan Stock Exchange, each 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:

. shareholder diversification;
. length of time in business;
. amount of capital; and
. profitability.

However, special listing criteria apply to technology companies and key businesses engaging in national economic development.

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We, as a public company in Taiwan, are obligated to make reports to the ROC Securities and Futures Commission and the Taiwan Stock Exchange, including, without limitation:

. regular reports regarding monthly sales revenues; quarterly, semi-annual and annual financial information; public financial forecasts in the event of rights offerings; annual reports; minutes of shareholders’ meetings; regular reports regarding solicitations of proxies; the execution of internal audits; and statements of internal controls;
. special reports regarding events that have had a significant impact on shareholders’ rights or the price of our securities; resolutions of our board of directors relating to a merger; prospectuses for approved issuances of securities; material changes that have been made regarding share issuances for cash or corporate bond issuances; financial forecasts; and approvals of changes of accounting principles; and
. special reports regarding the issuance of securities; details of the issuance of overseas depositary receipts; revisions to procedures for acquiring or selling assets; and revisions to operating procedures for making third-party loans.

The GreTai Securities Market

To complement the Taiwan Stock Exchange, the GreTai Securities Market (formerly known as the Over-the-Counter Securities Exchange) was established in September 1982 at the initiative of the ROC 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 January 27, 2003, 404 companies had listed equity securities on the GreTai Securities Market. As of January 27, 2003, the total market capitalization of companies with equity securities listed on the GreTai Securities Market was approximately NT$638.5 billion. In addition, the Emerging Stock Board of the GreTai Securities Market was established on January 1, 2002 at the initiative of the ROC Securities and Futures Commission to encourage trading of securities of companies that are public companies but not qualified for listing on the Taiwan Stock Exchange or the GreTai Securities Market.

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. 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 on the Taiwan Stock Exchange 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.

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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 . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . .	Number of listed companies at theperiod end 199 221 256 285 313 347 375 404 437 462 474 584 593	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 6,462.30	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 3,850.04	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 4,452.45

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 block trade guidelines and conducted in after-hour trading. 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 (or to a reference price set by the Taiwan Stock Exchange if the previous day’s closing price is not available because of lack of trading activities) in the case of equity securities, and 5% in the case of debt securities. However, 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 a reporting of the changed rate 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 corporate bonds and financial debentures until December 31, 2009.

Sales of shares of listed companies on the Taiwan Stock Exchange are generally sold in ‘‘round lots’’ of 1,000 shares. Investors who desire to sell less than 1,000 shares of a listed company occasionally experience delays in making these sales and these sales must be executed under the Taiwan Stock Exchange guidelines and conducted in after-hour trading.

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National Financial Stabilization Fund

In response to the declines and volatility in the securities market in the ROC, the government has formed the National Financial Stabilization Fund, which has purchased and may from time to time purchase shares of ROC companies to support the market. The details of the transactions of the National Financial Stabilization Fund have not been disclosed to the public. In addition, the Labor Insurance Fund and other funds associated with the ROC government have in the past purchased, and may from time to time purchase, shares of ROC companies on the Taiwan Stock Exchange or the GreTai Securities Market.

Regulation and Supervision

The ROC Securities and Futures Commission has extensive regulatory authority over public companies. Public companies are generally required to obtain approval from, or registration with, the ROC Securities and Futures Commission for all securities offerings. The ROC Securities and Futures Commission requires periodic reporting of financial and operating information by all public companies. In addition, the ROC Securities and Futures Commission establishes standards for financial reporting and carries out licensing and supervision of participants in the securities market in the ROC.

The ROC Securities and Futures Commission has responsibility for implementing the ROC Securities and Exchange Law and for overall administration of governmental policies in the securities market in the ROC. It has extensive regulatory authority over the offering, issuing and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the ROC Securities and Futures Commission to promulgate necessary rules.

The ROC Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-term trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors, as well as spouses, minor children and nominees of these parties, and stockholders who (together with their spouses, minor children and nominees) hold 10% or more of the shares of the issuer. The ROC Securities and Exchange Law prohibits trading by ‘‘insiders’’ based on nonpublic information that materially affects share price movement. ‘‘Insiders’’ include:

. directors, supervisors and managers, as well as spouses, minor children and nominees of these parties, and shareholders who, together with their spouses, minor children and nominees, hold 10% or more of the issuing company;
. any person who has learned material, non-public information due to an occupational or controlling relationship with the issuing company; and
. any person who has learned material, non-public information from any of the above.

Sanctions include imprisonment. In addition, damages may be awarded to persons injured by the transaction.

The ROC Securities and Exchange Law also imposes criminal liability on certified public accountants and lawyers who intentionally make false certifications in their examination and audit of an issuer’s contracts, reports and other documents related to securities transactions. The ROC Securities and Futures Commission regulations require that financial reports of listed companies be audited by accounting firms consisting of at least three certified public accountants and be signed by at least two certified public accountants.

In addition, the ROC Securities and Exchange Law provides for, among other things:

. civil liability for material misstatements or omissions made by issuers;
. the regulation of tender offers; and

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. the regulation of private placements.

The ROC Securities and Futures Commission does not have criminal or civil enforcement powers under the ROC Securities and Exchange Law. Criminal actions may be pursued only by government prosecutors. Civil actions may only be brought by plaintiffs who assert that they have suffered damages. The ROC Securities and Futures Commission is empowered to curb abuses and violations of laws and regulations only through administrative measures including:

. issuance of warnings;
. temporary suspension of operation;
. imposition of administrative fines; and
. revocation of licenses.

In addition to providing a market for securities trading, the Taiwan Stock Exchange reviews applications by ROC 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 ROC Securities and Futures Commission, delist securities of these issuers.

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APPENDIX D

FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE REPUBLIC OF CHINA

The information presented in this section has been extracted from publicly available documents that 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. Citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations that are not discussed in this section.

General

Historically, foreign investments in the securities market of Taiwan were restricted. However, commencing in 1983, the ROC government has from time to time enacted legislation and adopted regulations to make foreign investment in the ROC securities market possible. Initially, only overseas investment trust funds of authorized securities investment trust enterprises established in ROC were permitted to invest in the ROC securities market. Since January 1, 1991, qualified foreign institutional investors (as discussed below) have been allowed to make investments in the ROC securities market. Since March 1, 1996, overseas Chinese, non-resident foreign institutional and individual investors (other than qualified foreign institutional investors), called ‘‘general foreign investors’’, have been permitted to make direct investments in the ROC listed securities market.

Qualified Foreign Institutional Investors

The ROC Executive Yuan has approved guidelines for direct investment in securities listed on the Taiwan Stock Exchange or the GreTai Securities Market by qualified foreign institutional investors. Qualified foreign institutional investors include:

. banks that hold securities assets of at least US$100 million;
. insurance companies that hold securities assets of at least US$100 million;
. fund management institutions that manage securities assets of at least US$100 million;
. offshore fund management companies of which more than 50% of their capital is owned by an ROC securities investment trust enterprise, provided that the funds to be invested are not derived from sources in Taiwan or the PRC or owned by these offshore fund management companies;
. general securities firms that have a net worth of at least US$50 million;
. offshore subsidiary securities firms that are more than 50% owned by an ROC 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 an ROC 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$100 million;
. trust companies that hold securities assets in trust of at least US$100 million;

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. academic or charitable institutions that, according to their articles of incorporation, may invest their funds, provided those institutions are managed externally by a third-party manager; and
. any other professional institutional investors that hold securities or assets of at least US$100 million.

Each qualified foreign institutional investor wishing to invest directly in the ROC securities market is required to apply for an investment permit from the ROC 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 ROC 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;
. an affidavit from the foreign investors applying for investment certifying that they are not also applying for other investor status;
. an affidavit to the ROC Securities and Futures Commission certifying that the applicant will not enter into quota sharing arrangements; and
. an affidavit regarding the source of funds.

Qualified foreign institutional investors who receive a permit may 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 by qualified foreign institutional investors may be repatriated at any time. The repatriated capital may be returned to Taiwan at any time within the approved two-year period without an ROC 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 share dividends that are realized may also be repatriated at any time.

General Foreign Investors

General foreign investors meeting qualifications set by the ROC Securities and Futures Commission may generally invest up to US$50 million in securities listed on the Taiwan Stock Exchange or quoted on the GreTai Securities Market if they are institutional investors and up to US$5 million if they are individual investors after obtaining approval 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 GreTai Securities Market-quoted company.

Foreign Investment Approval

Other than:

. qualified foreign institutional investors;
. general foreign investors; and

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. investors in overseas convertible bonds and depositary receipts,

foreign investors who wish to make direct investments in the shares of ROC companies may submit a ‘‘foreign investment approval’’ application to the Investment Commission of the ROC Ministry of Economic Affairs or other governmental authority to receive the benefits granted under the Regulations. 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-ROC 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-ROC persons in ROC companies, non-ROC persons are currently prohibited from investing in prohibited industries in Taiwan as stipulated by the ROC Executive Yuan from time to time. In addition, some industries are restricted so that non-ROC 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 prohibited or restricted industry under this legislation.

Depositary Receipts

In April 1992, the ROC Securities and Futures Commission began allowing ROC companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the ROC Ministry of Finance began allowing companies whose shares are traded on the GreTai Securities Market also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of its capital stock. Approvals for these issuances are still required.

No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific ROC Securities and Futures Commission approval, unless they are:

. stock dividends;
. free distributions of shares;
. due to the exercise by depositary receipt holders of their preemptive rights in the event of capital increases for cash; or
. issuances, if permitted under the deposit agreement and the custody agreement, due to the direct purchase by an investor of shares or the purchase of shares through the depositary on the Taiwan Stock Exchange or the GreTai Securities Market for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the number of issued depositary receipts previously approved by the ROC Securities and Futures Commission in connection with the offering plus any depositary shares issued pursuant to the events described in the three bullet points immediately above. These issuances may only be made to the extent that previously issued depositary receipts withdrawn by non-ROC holders have been cancelled and the shares have been sold on the Taiwan Stock Exchange or the GreTai Securities Market.

Commencing three months (if the deposited shares are new shares issued for cash) or immediately (if the deposited shares are existing shares) after the issuance of a depositary share, a holder of the depositary receipt evidencing the depositary share may request the depositary to cause the underlying share to be sold in Taiwan and to distribute the proceeds of the sale to or to withdraw the share and deliver it to the depositary receipt holder. A citizen of the PRC, or an entity organized under the laws of the PRC, is not permitted to withdraw and hold our shares.

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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 the ROC, convert NT dollars from:

. the proceeds of the sale of shares represented by depositary receipts or received as stock dividends on the shares and deposited into the depositary receipt facility; or
. cash distributions received,

into other currencies, including U.S. dollars. In addition, a depositary may convert into NT dollars inward remittances of payments for purchases of underlying shares for deposit in the depositary facility against the creation of depositary shares. If you withdraw the shares underlying your depositary receipts and become a holder of our shares, you may convert into NT dollars subscription payments for rights offerings. A depositary must obtain foreign exchange approval from the Central Bank of China on a payment-bypayment basis for conversion into foreign currencies from the proceeds from the sale of subscription rights for new shares. Although it is expected that the Central Bank of China will grant approval as a routine matter, required approvals may not be obtained in a timely manner or at all.

A holder of depositary shares may, after the withdrawal of the underlying shares, convert NT dollars into other currencies from proceeds from the sale of the underlying shares. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in securities listed on both the Taiwan Stock Exchange and the GreTai Securities Market, subject to limitations and restrictions applicable to qualified foreign institutional investors or general foreign investors, as described above.

Overseas Corporate Bonds

Since 1989, the ROC Securities and Futures Commission has approved a series of overseas corporate bond issues by ROC companies listed on the Taiwan Stock Exchange and traded on the GreTai Securities Market. Under current ROC laws, these overseas corporate bonds (if their terms so provide) with a Securities and Futures Commission approval may be converted by non-ROC persons, other than a citizen of the PRC, into shares of ROC companies or may be converted into depositary receipts issued under the sponsorship of the same ROC company or the shares of other companies, in the case of exchangeable bonds. Public issuing companies may issue corporate debt in offerings outside the ROC. 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 GreTai Securities Market. These reinvestments will need to comply with the limitations and restrictions that apply to qualified foreign institutional investors or general foreign investors discussed above.

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A non-ROC converting bondholder, when exercising the conversion right to convert the bonds into shares of an ROC 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 the ROC, the issuing company may convert NT dollars into other currencies for redemption of the bonds or the repayment of the principal or interest on the bonds. In addition, a converting bondholder may through its local agent convert net proceeds realized from the sale of 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 GreTai Securities Market. These reinvestments will need to comply with the limitations and restrictions that apply to qualified foreign institutional investors or general foreign investors discussed above.

Exchange Controls

The ROC Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the ROC Ministry of Finance and by the Central Bank of China to handle foreign exchange transactions. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, ROC companies and residents may, without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$50 million, or its equivalent, and US$5 million, or its equivalent, respectively, each calendar year. These limits apply to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies. In addition, all private enterprises are required to register all medium-and long-term foreign debt with the Central Bank of China.

In addition, a foreign person may, subject to certain requirements but without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if the required documentation is provided to the authorities in the ROC. This limit applies only to remittances involving a conversion between NT dollars and U.S. dollars or other foreign currencies.

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HEAD OFFICE OF THE ISSUER

Macronix International Co., Ltd. No. 16, Li-Hsin Road Science-Based Industrial Park Hsinchu, Taiwan Republic of China

PAYING, TRANSFER AND CONVERSION AGENTS

The Bank of New York The Bank of New York (Luxembourg) S.A. 48F, One Canada Square Aerogolf Center London E14 5AL 1A Hoehenhof United Kingdom L-1736 Senningerberg Luxembourg

REGISTRAR

The Bank of New York 101 Barclay Street New York, NewYork 10286

LEGAL ADVISERS

To the Issuer

as to Republic of China law

Baker & McKenzie

15/Fl., Hung Tai Centre No. 168, Tun Hwa North Road Taipei 105, Taiwan Republic of China

To the Initial Purchasers

as to Republic of China law as to United States law Lee and Li Sullivan & Cromwell LLP 7th Floor 28th Floor 201 Tun Hua North Road Nine Queen’s Road Central Taipei 105, Taiwan Hong Kong Republic of China

INDEPENDENT AUDITORS

Diwan, Ernst & Young 9th Floor, 333 Keelung Road Section 1, Taipei, Taiwan Republic of China

TRUSTEE

LISTING AGENT

The Bank of New York 48F, One Canada Square London E14 5AL United Kingdom

The Bank of New York (Luxembourg) S.A. Aerogolf Center 1A Hoehenhof L-1736 Senningerberg Luxembourg

Printed by ROMAN 8615-1

AI assistant

Macronix — Capital/Financing Update 2014

52013_rns_2014-08-20_9fd307f3-d3eb-44e7-85f6-231471d13699.pdf

Macronix International Co., Ltd.

Zero Coupon Convertible Bonds Due 2008

Price: 100%

Sole Bookrunner

Credit Suisse First Boston

Co-Lead Manager

KGI Securities Co. Ltd.

TABLE OF CONTENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE REPUBLIC OF CHINA

FORWARD-LOOKING STATEMENTS

CONVENTIONS

PRESENTATION OF FINANCIAL INFORMATION

AVAILABLE INFORMATION

SUMMARY

Our Business

Our Track Record

Our Production Facilities

Recent Developments

Tender Offer

Reorganization

Integrated Solutions Group

Integrated Technology and Manufacturing Group

Our Strategy

Our Corporate Information

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

RISK FACTORS

Risks Relating to Our Company

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

We have experienced increasing net losses since 2001; if this continues, the value of your investment may be adversely affected.

Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely affect our liquidity, financial condition and results of operations.

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

A decrease in demand for consumer electronics, computer and computer peripheral and other communications products may significantly decrease the average selling prices for our products and reduce our revenue and profitability.

If we cannot compete successfully in our industry, we may lose customers and our revenue may decrease.

Our customers generally do not place purchase orders in advance, which makes it difficult for us to predict our future revenues, adjust production costs and allocate capacity efficiently and on a timely basis.

As 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.

We intend to increase our manufacturing capacity in flash products, which may expose our business and operations to additional risks that may adversely affect our financial condition and results of operations.

Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a significant portion of our revenue.

If we are unable to manage our expansion effectively, our growth prospects may be limited and our future profitability may be affected.

If we are unable to effectively manage seasonal fluctuations in the demand for our products, our business and profitability may be adversely affected.

Delays or other constraints in the expansion or construction of our fabrication plants could delay increases in our capacity, which may adversely affect our growth and prospects.

Our revenues and profitability may decline if we are unable to obtain adequate supplies of raw materials in a timely manner and at a reasonable price.

If we are unable to obtain additional equipment in a timely manner and at reasonable cost, our competitiveness and future profitability may be adversely 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 are vulnerable to natural disasters and other events beyond our control, which could severely disrupt the normal operation of our business and adversely affect our earnings.

We are an ROC company and, because the rights of shareholders under ROC law differ from those under U.S. law, you may have difficulty protecting your shareholder rights.

Any impairment charges required under U.S. GAAP may have a material adverse effect on our net income on a U.S. GAAP reconciled basis.

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.

Risks Relating to Technology and Intellectual Property

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can significantly increase our costs and delay product shipments to our customers.

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

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

Political and Economic Risks

Fluctuations in exchange rates could result in foreign exchange losses.

Disruptions in the international trading environment may significantly reduce our international sales and revenue.

The trading prices of the Bonds may be adversely affected by the general activities of the Taiwan Stock Exchange, the trading price of our common shares and the economic performance of Taiwan.

Risks Relating to the Bonds, our Common Shares and our ADSs

An active trading market for the Bonds may not develop.

Holders of the Bonds will have no rights as holders of our common shares until the conversion of the Bonds

We cannot assure you that the market for our common shares 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.

Holders of the Bonds will be required to appoint several local agents in Taiwan if they convert the Bonds into our common shares, which may make ownership burdensome.

USE OF PROCEEDS

MARKET PRICE INFORMATION

EXCHANGE RATES

DIVIDENDS AND DIVIDEND POLICY

CHANGES IN OUR CAPITAL STRUCTURE

CAPITALIZATION

SELECTED CONSOLIDATED FINANCIAL INFORMATION

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

Introduction

Sales Revenue

Cost of Goods Sold

Product Pricing Trends

High Fixed Costs

Cost Reduction Initiatives

Geographic Markets

Equity Derivative Contracts

Critical Accounting Policies

Macronix Capital/Financing Update 2014