Macronix — Capital/Financing Update 2014

Aug 20, 2014

OFFERING CIRCULAR

Macronix International Co., Ltd.

(Incorporated in Taiwan, the Republic of China)

13,125,000 Global Depositary Shares Representing 525,000,000 Common Shares

We are oÅering 13,125,000 global depositary shares, or GDSs, representing 525,000,000 common shares of Macronix International Co., Ltd. The GDSs will be issued pursuant to a deposit agreement dated as of April 5, 2004 by Citibank, N.A. as depositary (the ""Depositary'') and our company in relation to the global depositary receipts (""GDRs'') issued thereunder, which evidence the GDSs. Each GDS represents 40 of our common shares. Until the listing of a master certiÑcate of payment in scripless form evidencing the right to receive the underlying common shares of the GDSs on the Taiwan Stock Exchange, you will not be able to sell or withdraw the underlying common shares from our GDS facility. Neither the GDSs nor the underlying common shares are being oÅered or sold in Taiwan, Republic of China.

Application has been made to list the GDSs on the Luxembourg Stock Exchange and for the GDSs to be quoted on the International Order Book of the London Stock Exchange plc. Our common shares are listed on the Taiwan Stock Exchange. Our American depositary shares, or ADSs are quoted on the Nasdaq National Market under the symbol ""MXICY''. On 31 March 2004, the last sale price of our common shares as reported on the Taiwan Stock Exchange was NT$12.10 per share, which is equivalent to approximately US$0.366, based on an exchange rate of NT$33.02 • US$1.00. On 30 March, 2004, the last sale price of our outstanding ADSs as quoted on the Nasdaq National Market was US$3.759 per ADS. The GDSs will not be fungible with our ADSs.

Investing in our GDSs involves risks that are described in the ""Risk Factors'' section beginning on page 13 of this OÅering Circular.

OÅer Price: US$13.20 per GDS

The GDSs have not been and will not be registered under the U.S. Securities Act of 1933 (the ""Securities Act'') and, subject to certain exceptions, may not be oÅered or sold within the United States, or for the account or beneÑt of, U.S. persons (as deÑned in Regulation S under the Securities Act (""Regulation S'')).

The GDSs will be evidenced by a master GDR (the ""Master GDR'') which will be deposited on or about April 5, 2004 with a common depositary for, and registered in the name of a nominee of, Euroclear Bank S.A./N.V., as operator of the Euroclear System (""Euroclear'') and Clearstream Banking, soci πet πe anonyme (""Clearstream, International'').

Global Coordinator and Sole Bookrunner Deutsche Bank

Joint Lead Manager Credit Suisse First Boston

Co-Manager

Chinatrust Securities

The date of this OÅering Circular is March 31, 2004.

TABLE OF CONTENTS

TABLE OF CONTENTS
Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recent DevelopmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk FactorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forward-Looking Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Use Of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Market Price Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Exchange Rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selected Financial Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Management's Discussion And Analysis Of Financial Condition And Results Of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Semiconductor IndustryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Related Party Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Major Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Securities Market Of Taiwan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign Investment And Exchange Controls In TaiwanÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Description Of Common SharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Description of the DepositaryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Description Of Global Depositary Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common Shares Eligible For Future SaleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subscription and Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAP ÏÏÏÏÏÏÏÏ Index To Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Index to Unconsolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Appendix A Ì Glossary of Technical Terms ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Page
	1 8 13 33 35 36 38 39 40 41 43 71 74 99 105 107 108 112 117 124 125 148 149 151 154 156 F-1 F-57 A-1

Having made all reasonable enquiries we conÑrm that this document contains all information with respect to us and the GDSs which is material in the context of the issue and oÅering of the GDSs, the statements contained in it relating to us, are in every material particular true, accurate and not misleading, the opinions and intentions expressed in this document with regard to us are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions. There are no other facts in relation to us or the GDSs the omission of which would, in the context of the issue and oÅering of the GDSs, make any statement in this document misleading in any material respect and all reasonable enquiries have been made by us to ascertain such facts and to verify the accuracy of all such information and statements. In addition, we accept responsibility for the information contained in this document.

This OÅering Circular does not constitute an oÅer of, or an invitation by or on behalf of us or the underwriters to purchase, any of the GDSs. The distribution of this OÅering Circular and the oÅering of the GDSs in certain jurisdictions may be restricted by law. Persons into whose

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possession this OÅering Circular comes are required by us and the underwriters to inform themselves about and to observe any such restrictions. For a description of certain further restrictions on oÅers and sales of GDSs and distribution of this OÅering Circular see ""Foreign Investment and Exchange Controls In Taiwan'' and ""Subscription and Sale'' below.

We publish our Ñnancial statements in New Taiwan dollars, the lawful currency of Taiwan. All references in this prospectus to ""United States dollars'', ""U.S. dollars'' and ""US$'' are to United States dollars and references to ""New Taiwan dollars'', ""NT dollars'' and ""NT$'' are to New Taiwan dollars. All translations from New Taiwan dollars to United States dollars in this prospectus were provided solely for the convenience of the reader and were made, unless otherwise indicated, on the basis of the noon buying rate in The City of New York for cable transfers in NT dollar per U.S. dollar as certiÑed for customs purposes by the Federal Reserve Bank of New York, or the noon buying rate, on June 30, 2003 of NT$34.61 • US$1.00. We make no representation that the NT dollar or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or NT dollars, as the case may be, at any particular rate or at all. On March 30, 2004, the noon buying rate was NT$33.09 • US$1.00. See ""Exchange Rates''.

In connection with this issue, Deutsche Bank AG London or any person acting for it may over-allot or, to the extent permitted by law, eÅect transactions with a view to supporting the market price of the GDSs or the Shares at a level higher than that which might otherwise prevail for a limited period. However, there may be no obligation on Deutsche Bank AG London or any agent of its to do this. Such stabilizing, if commenced, may be discontinued at any time, and must be brought to an end after a limited period.

You should rely only on the information contained in this document or to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with diÅerent information. If anyone provides you with diÅerent or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an oÅer to sell these securities in any jurisdiction where the oÅer or sale is not permitted. You should assume that the information appearing in this OÅering Circular is accurate only as of the date on the front cover of this OÅering Circular. Our business, Ñnancial condition, results of operations and prospects may have changed since that date.

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SUMMARY

You should read the following summary together with the more detailed information regarding our company and the global depositary shares, or GDSs, being sold in this oÅering and our Ñnancial statements and related notes appearing elsewhere in this OÅering Circular. Special terms used in the semiconductor industry are deÑned in the glossary that is included as Appendix A to this OÅering Circular.

In this prospectus, ""we'', ""us'' or ""our'' generally refers to Macronix International Co., Ltd. and our subsidiaries; ""Taiwan'' or the ""ROC'' refers to the island of Taiwan and other areas under the eÅective control of the Republic of China; the ""ROC Government'' refers to the government of the Republic of China; and ""ROC Company Law'' refers to the Company Law of the Republic of China.

Our Business

We are an independent semiconductor designer, producer and supplier. Our product portfolio includes Mask ROM, Flash, EPROM, strategic manufacturing services, or SMS, and system logic center, or SLC, products. Based on sales revenues in 2002, we were ranked Ñrst in the global Mask ROM market with 52.6% of market share, fourth in the global EPROM market with 5.8% of market share and 10th in the global NOR Flash market with 2.2% of market share, according to a report published by Gartner Dataquest on May 9, 2003.

We view ourselves as an integrated provider and treat our principal clients as strategic partners. We work closely with them starting from early stages of product development to design silicon chip solutions that meet their speciÑc needs. These partners include Nintendo and Hewlett-Packard, with whom we have had relationships for over ten years. We diÅerentiate ourselves by our ability to oÅer a full range of in-house design, product and process engineering capabilities.

Our Strategy

We aim to be a global leader in the non-volatile memory market by oÅering our customers a total non-volatile memory solution for their electronic system requirements. We seek to distinguish ourselves from traditional integrated device manufacturers and wafer foundries by forging strategic partnerships with our key customers from an early stage of their product development to ensure our products meet their present and future requirements.

The components of our strategic initiatives are as follows:

• ‚ focus our management eÅorts, research and development initiatives and technology development on select businesses in order to improve our Ñnancial performance and results of operations;

• ‚ maintain our leadership in Mask ROM and multiple-time-programmable products;

• ‚ invest in Flash technologies to develop cost-competitive solutions, particularly for the handheld device and wireless markets;

• ‚ leverage our competitive position in the non-volatile memory market to eÅectively crosssell and diversify our product mix and customer base;

• ‚ capitalize on our strengths in the non-volatile memory for embedded applications to provide integrated solutions; and

• ‚ continue to upgrade our process technology and in-house manufacturing capabilities while expanding capacity prudently.

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Our principal executive oÇces are located at No. 16 Li-Hsin Road, Science Park, Hsinchu, Taiwan, Republic of China, and our telephone number is (886-3) 578-6688. Our website is: www.macronix.com. The information on our website is not part of this OÅering Circular.

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	The OÅering
GDSs oÅered ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	13,125,000 GDSs representing 525,000,000 common shares.
Price per GDS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	US$13.20.
GDS:common share ratio ÏÏÏ	1:40
DepositaryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Citibank, N.A.
Common shares
outstanding before and
after this oÅering ÏÏÏÏÏÏÏÏÏ	Immediately before this oÅering, there were 4,430,251,943
	common shares outstanding, and immediately after this oÅer-
	ing, there will be 4,955,251,943 common shares outstanding.
ROC share issuance
procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Under ROC share issuance procedures applicable to oÅerings of
	GDSs representing newly issued shares of ROC companies, on
	the closing date of the oÅering we will initially deliver to
	Citibank, N.A. Ì Taipei Branch, as custodian (the ""Custo-
	dian'') of Citibank, N.A., as depositary (the ""Depositary''),
	one certiÑcate of payment representing the irrevocable right to
	receive common shares that will be represented by the GDSs
	oÅered by us in this oÅering. No later than the second business
	day following the closing date of this oÅering, we will apply to
	the Taiwan Stock Exchange for listing of a master certiÑcate of
	payment in scripless form in respect of the underlying common
	shares oÅered by us (the ""Master Scripless CertiÑcate of
	Payment''). It is expected that the Taiwan Stock Exchange will
	approve the listing of the Master Scripless CertiÑcate of
	Payment on the fourth ROC business day following the closing
	date of this oÅering. Immediately upon the listing of the Master
	Scripless CertiÑcate of Payment on the Taiwan Stock Ex-
	change, the certiÑcate of payment we deliver to the Custodian
	on the closing date of this oÅering will be replaced by the
	Master Scripless CertiÑcate of Payment.
	We will deliver the common shares underlying the GDSs sold in
	the oÅering in physical certiÑcate form or scripless form to the
	Custodian in exchange of the Master Scripless CertiÑcate of
	Payment upon completion of all required ROC share issuance
	procedures. Until that exchange has been completed, the GDSs
	oÅered by us in this oÅering will represent interests in the
	certiÑcate of payment or the Master Scripless CertiÑcate of
	Payment held by the Custodian. Until the underlying common
	shares have been so issued and delivered, the GDSs will
	represent common shares evidenced by the certiÑcate of
	payment (from the closing date of this oÅering to the date
	immediately prior to the listing of the Master Scripless CertiÑ-
	cate of Payment) or the Master Scripless CertiÑcate of
	Payment (on and after the date of listing of the Master
	Scripless CertiÑcate of Payment). When the Master Scripless
	CertiÑcate of Payment is listed on the Taiwan Stock Exchange,
	except that holders of GDSs will receive individual scripless

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	certiÑcates of payment (rather than the underlying common
	shares in physical certiÑcate form or scripless form) in case of
	a withdrawal of the underlying common shares, such holders
	will be entitled to the same rights as if the Depositary were
	holding the underlying common shares in physical certiÑcate
	form or scripless form. Except where the context otherwise
	requires, all references in this OÅering Circular to the common
	shares represented by our GDSs assume that we have com-
	pleted the exchange of share certiÑcates representing common
	shares for the certiÑcate of payment, and during the period
	prior to completion of this exchange those references shall be
	deemed as references to the certiÑcate of payment or the
	Master Scripless CertiÑcate of Payment initially delivered to the
	Custodian.
Restriction on sale or with-
drawal of common shares	Until the Master Scripless CertiÑcate of Payment is listed on the
	Taiwan Stock Exchange, you will not be entitled to sell or
	withdraw from the GDS facility the individual scripless certiÑ-
	cate of payment or common shares, as applicable.
Non-fungibility of oÅered
GDSs and outstanding
ADSsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	GDSs oÅered in this oÅering will trade and settle separately
	from our outstanding ADSs under separate trading symbols
	and security identiÑcation numbers.
Lock-up period ÏÏÏÏÏÏÏÏÏÏÏÏÏ	We have agreed not to issue, oÅer or sell any of our common
	shares or securities of the same class as the GDSs or our
	common shares without the permission of Deutsche Bank AG
	London between the date of this OÅering Circular and the date
	which is 120 days after the Closing Date. See ""Subscription
	and Sale''.
Listing and quotation ÏÏÏÏÏÏÏ	Application has been made to list the GDSs on the Luxembourg
	Stock Exchange. The EU Transparency Obligations Directive is
	currently being Ñnalized and may be implemented in Luxem-
	bourg in a manner that is unduly burdensome for our company.
	In such circumstances, we may decide to seek an alternative
	listing for the GDSs on a stock exchange outside the European
	Union. Application has also been made for the GDSs to be
	quoted on the International Order Book of the London Stock
	Exchange plc.
Security Codes ÏÏÏÏÏÏÏÏÏÏÏÏÏ	ISIN: XS0190054709
	Common Code: 019005470
Trading market for common
shares and ADSs ÏÏÏÏÏÏÏÏÏ	Our common shares have been listed on the Taiwan Stock
	Exchange, under ticker number 2337, since March 15, 1995.
	Our outstanding ADSs are quoted on the Nasdaq National
	Market under the symbol ""MXICY''.
Use of proceeds ÏÏÏÏÏÏÏÏÏÏÏÏ	The net proceeds to us from this oÅering will primarily be used
	to fund repayment of our debts and our acquisition of
	machinery and equipment. See ""Use of Proceeds'' and ""Man-

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	agement's Discussion and Analysis of Financial Condition and
	Results of Operations Ì Liquidity and Capital Resources''.
Risk factors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	See ""Risk Factors'' for a discussion of risk factors you should
	consider before deciding to invest in the GDSs oÅered by us in
	this oÅering.
Voting rights ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Subject to certain restrictions, holders of GDSs may exercise
	limited voting rights with respect to the underlying common
	shares. See ""Description of Global Depositary Shares Ì Voting
	Rights'' and ""Risk Factors Ì Risks Relating to our Common
	Shares and our GDSs Ì GDS holders do not have the same
	voting rights as our common shareholders, which may aÅect
	the value of the GDSs''.
Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Holders of the GDSs will be entitled to receive dividends,
	subject to the terms of the Deposit Agreement, to the same
	extent as the holders of common shares, less the fees and
	expenses payable under the Deposit Agreement and any ROC
	tax applicable to such dividends. See ""Dividends'' ""Description
	of the Global Depositary Shares Ì Cash Distributions, Distribu-
	tions of Shares, Distributions other than in Cash or Shares'' and
	""Taxation Ì ROC Taxation Ì GDSs Ì Dividends.''
Governing law ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	The GDSs will be governed by English law.

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Summary Consolidated Financial Information

The summary statement of operations data and cashÖow data for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003, and the summary balance sheet data as of December 31, 2000, 2001 and 2002 and as of June 30, 2002 and 2003, presented below are derived from our audited Ñnancial statements, which were prepared on a consolidated basis.

The consolidated Ñnancial data set forth below should be read in conjunction with, and are qualiÑed in their entirety by reference to, our consolidated Ñnancial statements for the years ended and as of December 31, 2000, 2001 and 2002 and the six months ended and as of June 30, 2002 and 2003 and the related notes included in this OÅering Circular, see ""Selected Financial Information'' and ""Management's Discussion and Analysis of Financial Condition and Results of Operations''. In addition, you should also read carefully our unaudited unconsolidated Ñnancial statements for the nine months ended and as of September 30, 2002 and 2003 and the related notes, included elsewhere in this OÅering Circular and ""Recent Developments''. Our Ñnancial statements are prepared and presented in accordance with accounting principles generally accepted in the Republic of China (""ROC GAAP''), which diÅer in certain signiÑcant respects from accounting principles generally accepted in the United States (""U.S. GAAP''). For a discussion of certain signiÑcant diÅerences between ROC GAAP and U.S. GAAP, see ""Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAP''.

Consolidated Income Statement Data: Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Unrealized proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gross proÑt (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxes and minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt (expense) ÏÏÏÏÏÏÏÏÏÏ Income (loss) before minority interest ÏÏ Minority interest loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì diluted(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	a	Year ended, and s of, December 31,
	2000 (NT$) 33,493 (15,494) Ì 17,999 (5,856) 12,143 945 (2,077) 11,011 (398) 10,613 Ì 10,613 2.93 2.91

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Balance Sheet Data: Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net property, plant and equipment ÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Data: Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activities Net income (loss) per GDS Ì basic ÏÏÏÏ Net income (loss) per GDS Ì dilutedÏÏÏ Number of common shares outstanding (weighted, as adjusted)(2)ÏÏÏÏÏÏÏÏÏÏÏÏ Stock dividend per common share(3)ÏÏÏÏÏ	a	Year ended, and s of, December 31,
	2000 (NT$) 29,027 38,006 72,451 11,786 16,091 27,877 44,574 11,803 6,048 16,123 117.2 116.4 3,625 13%

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

• (2) Common shares outstanding weighted, as adjusted for any employee share bonus and any subsequent stock dividends declared.

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

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RECENT DEVELOPMENTS

Share OÅering

In October 2003, we commenced an oÅering of 475,000,000 common shares at NT$8.11 per share to the public in Taiwan. As of November 12, 2003, all shares in the oÅering had been subscribed and paid for pursuant to the terms of the oÅering.

In addition, on 31 March 2004, we announced a proposed increase in our issued share capital for the issue of up to 1,300,000,000 common shares. The common shares are expected to be issued by means of a rights issue or for the purpose of an overseas depositary receipt oÅering. The size and the price of the proposed issue is to be determined by our board of directors upon approval by the ROC SFC.

Conversion of Bonds

In the fourth quarter of 2003, a total of NT$241,800,000 principal amount of unsecured domestic convertible debentures were converted into our common shares, which resulted in the issuance of 27,493,638 additional common shares.

Amendment of Tower Purchase Agreement

In November 2003, we agreed to amend the share purchase agreement with Tower Semiconductor Ltd. (""Tower Semiconductor'') subject to the approval of the shareholders of Tower Semiconductor, to, among other things (i) advance the entirety of the remaining Ñfth milestone payment of US$6,718,950, (ii) defer the use of our wafer credits in Tower Semiconductor and (iii) extend the lock-up on our Tower Semiconductor shares until January 29, 2006, except that we may sell 30% of the Tower Semiconductor shares held as of January 29, 2004. See note 19 to our audited consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular. We advanced Tower Semiconductor the Ñfth milestone payment on December 10, 2003. See ""Business Ì Manufacturing and Quality Control Ì Tower Semiconductor'' for a more detailed discussion of our relationship with Tower Semiconductor.

Memorandum of Understanding with Renesas Technology Corp.

On October 14, 2003, we announced the signing of a Memorandum of Understanding with Renesas Technology Corp. (""Renesas''), a joint venture formed by Hitachi Electric Co. and Mitsubishi Electric Co. (""Mitsubishi''). Under the Memorandum of Understanding, we agreed to cooperate with Renesas with respect to provision of 0.13 micron DINOR Flash foundry service by us and with respect to the joint development of 0.13 micron DINOR Flash process technology.

Unaudited Unconsolidated Financial Information as of and for the Nine Months Ended September 30, 2002 and 2003

As a result of our common shares being listed on the Taiwan Stock Exchange, we are required on an on-going basis to Ñle with the Taiwan Stock Exchange unaudited unconsolidated Ñnancial statements as of and for the year-to-date period ending on each of March 31 and September 30. We also regularly release unconsolidated Ñnancial statements as of and for the six months ended June 30 and as of and for the year ended December 31. These unconsolidated Ñnancial statements are prepared in accordance with ROC GAAP, which diÅer in certain material respects from U.S. GAAP. See ""Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAP''.

The summary income statement data and cash Öow data for the nine months ended September 30, 2002 and 2003 and the summary balance sheet data as of September 30, 2002 and 2003 set forth below are derived from the unaudited unconsolidated Ñnancial

8

statements included in this OÅering Circular and should be read in conjunction with, and is qualiÑed in its entirety by reference to, those unconsolidated Ñnancial statements, including the notes to those Ñnancial statements.

The unaudited unconsolidated Ñnancial statements, including the information summarized below, do not consolidate the Ñnancial position and operations of any of our subsidiaries. Instead, the unconsolidated Ñnancial statements account for our investments in our subsidiaries by using equity method accounting, which diÅers materially from consolidation.

For a discussion of the accounting policies used in the unaudited unconsolidated Ñnancial statements, see note 2 to the unaudited unconsolidated Ñnancial statements included in this OÅering Circular. Because we account for subsidiaries in our unconsolidated accounts based on the equity method, our unaudited unconsolidated net assets and net income would generally be the same as in our consolidated accounts. Other amounts in other line items may be materially diÅerent in our unconsolidated Ñnancial statements from our consolidated Ñnancial statements. We can give no assurance as to what the relative level of unconsolidated and consolidated net assets, net sales, net income or any other Ñnancial statement line item will be for the year ending December 31, 2003. In addition, unconsolidated results of operations for the nine months ended September 30, 2003 may not be indicative of our unconsolidated or consolidated results of operations for the full year ending December 31, 2003.

Unconsolidated Income Statement Data: Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Unrealized proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gross proÑt (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxes and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì basic(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance Sheet Data: Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Data: Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by (used in) operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per GDS Ì basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per GDS Ì dilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Number of common shares outstanding (weighted, as adjusted)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock dividend per common share(3)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Nine months ended, and as of, September 30, 2002 2003 (NT$) (NT$) (unaudited and unconsolidated) (in millions, except per share and GDS data) 11,402 11,925 (11,926) (15,475) 61 0 (463) (3,550) (4,204) (3,403) (4,667) (6,953) 368 1,450 (5,034) (1,900) (9,333) (7,403) Ì Ì (9,333) (7,403) Ì Ì (9,333) (7,403) (2.55) (1.98) (2.55) (1.98) 21,356 14,950 39,798 33,638 67,109 54,707 13,651 14,433 21,100 15,124 34,751 29,557 32,358 25,150 7,335 1,403 6,502 7,168 528 643 (102) (79.2) (102) (79.2) 3,666 3,737 Ì Ì

9

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

• (2) Common shares outstanding weighted, as adjusted for any employee share bonus and any subsequent stock dividends declared.

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

Nine Months Ended September 30, 2003 (Unaudited and unconsolidated) Compared to Nine Months Ended September 30, 2002 (Unaudited and unconsolidated)

Net Sales Revenue. Our total net sales revenue increased 4.6% to NT$11,925 million in the nine months ended September 30, 2003 from NT$11,402 million in the nine months ended September 30, 2002. This increase was primarily due to increases in sales volume of Flash products and SMS products, which were partially oÅset by the decreases in sales volume of Mask ROM, EPROM and SLC products.

Our net sales revenue from Mask ROM products decreased 5.6% to NT$5,186 million in the nine months ended September 30, 2003 from NT$5,493 million in the nine months ended September 30, 2002. This decrease was primarily due to the declines in overall demand for Mask ROM products worldwide. The average selling prices for Mask ROM products increased to NT$56.8 per die in the nine months ended September 30, 2003 from NT$54.0 per die in the nine months ended September 30, 2002, principally as a result of oÅering high-density Mask ROM products. The proportion of our net sales revenue from Mask ROM products decreased to 43.5% in the nine months ended September 30, 2003 from 48.2% in the nine months ended September 30, 2002.

Our net sales revenue from Flash products increased 46.9% to NT$4,081 million in the nine months ended September 30, 2003 from NT$2,778 million in the nine months ended September 30, 2002. This increase was primarily due to an increase in the sales volume of our Flash products, which was partially oÅset by a decrease in the average selling prices for Flash products. Average selling prices for Flash products decreased to NT$41.0 per die in the nine months ended September 30, 2003 from NT$48.6 per die in the nine months ended September 30, 2002, principally as a result of signiÑcant price competition worldwide. The proportion of our net sales revenue from Flash products increased to 34.2% in the nine months ended September 30, 2003 from 24.4% in the nine months ended September 30, 2002.

Our net sales revenue from EPROM products decreased 46.1% to NT$256 million in the nine months ended September 30, 2003 from NT$475 million in the nine months ended September 30, 2002. This decrease was primarily due to the migration from EPROM products to Flash products by our customers. The average selling prices for EPROM products decreased to NT$18.6 per die in the nine months ended September 30, 2003 from NT$22.4 per die in the nine months ended September 30, 2002, principally as a result of the downward price trend of our EPROM products. The proportion of our net sales revenue from EPROM products decreased to 2.1% in the nine months ended September 30, 2003 from 4.2% in the nine months ended September 30, 2002.

Our net sales revenue from SMS products increased 235.8% to NT$1,350 million in the nine months ended September 30, 2003 from NT$402 million in the nine months ended September 30, 2002. This increase was mainly due to increases in purchase orders from our major existing contract customers. The proportion of our net sales revenue from our SMS products increased to 11.3% in 2003 from 3.5% in 2002.

Our net sales revenue from SLC products decreased 55.1% to NT$951 million in the nine months ended September 30, 2003 from NT$2,116 million in the nine months ended

10

September 30, 2002. This decrease was principally due to the decline in the demand of SLC products from one of our key customers. The proportion of our net sales revenue from our SLC products decreased to 8.0% in the nine months ended September 30, 2003 from 18.6% in the nine months ended September 30, 2002.

Other sales revenue includes royalty revenues, masking charges, proÑt-sharing revenues and other operating revenues. Other sales revenue decreased 26.8% to NT$101 million in the nine months ended September 30, 2003 from NT$138 million in the nine months ended September 30, 2002. This decrease was primarily due to the decrease in proÑt sharing received from Philips and re-classiÑcation of our other sales into diÅerent product lines. The proportion of our net sales revenue from others decreased to 0.8% in the nine months ended September 30, 2003 from 1.2% in the nine months ended September 30, 2002.

Cost of Goods Sold and Gross ProÑt (Loss). Cost of goods sold increased 29.8% to NT$15,475 million in the nine months ended September 30, 2003 from NT$11,926 million in the nine months ended September 30, 2002. This signiÑcant increase was primarily due to the change in the product mix toward a higher proportion of Flash products, which have higher manufacturing costs per unit, and a 11.7% increase in depreciation expense resulting from commencing depreciation at Fab III in July 2002.

As a result of the foregoing, our realized gross loss increased 666.7% to NT$3,550 million in the nine months ended September 30, 2003 from NT$463 million in the nine months ended September 30, 2002. We had a negative gross margin of 29.8% in the nine months ended September 30, 2003 compared to a negative gross margin of 4.1% in the nine months ended September 30, 2002.

Operating Expenses. Total operating expenses decreased 19.0% to NT$3,403 million in the nine months ended September 30, 2003 from NT$4,204 million in the nine months ended September 30, 2002. Selling expenses increased 1.7% to NT$490 million in the nine months ended September 30, 2003 from NT$482 million in the nine months ended September 30, 2002. This increase primarily derived from the increase of net sales. Administrative expenses decreased 9.6% to NT$819 million in the nine months ended September 30, 2003 from NT$907 million in the nine months ended September 30, 2002. This decrease was primarily due to our strategic policy of integrating our resources and streamlining the number of our research and development projects. Research and development expenses decreased 25.6% to NT$2,094 million in the nine months ended September 30, 2003 from NT$2,815 million in the nine months ended September 30, 2002, due to choice to focus on selected R&D projects.

Operating Loss. As a result of the foregoing, our operating loss increased 49.0% to NT$6,953 million in the nine months ended September 30, 2003 from NT$4,667 million in the nine months ended September 30, 2002.

Other Income. Total other income increased 294.0% to NT$1,450 million in the nine months ended September 30, 2003 from NT$368 million in the nine months ended September 30, 2002. This increase was primarily due to a signiÑcant provision in the prior year compared with a reversal of provision in the current year and increases in foreign exchange gains and other income, which were partially oÅset by a decrease in interest income. We recorded an inventory loss provision reversal of NT$874 million in the nine months ended September 30, 2003 largely as a result of the increased sales out of inventory that was written oÅ for obsolescence in prior periods, compared to an inventory loss provision of NT$3,133 million in the nine months ended September 30, 2002 resulting from inventory obsolescence due to aging and price declines. Our foreign exchange gains increased 1,161.9% to NT$265 million in the nine months ended September 30, 2003 from NT$21 million in the nine months ended September 30, 2002, principally as a result of the appreciation of the NT dollar to the U.S. dollar as well as the Japanese yen to the U.S. dollar in the nine months ended September 30, 2003. Other income increased 38.4% to NT$245 million in the nine months

11

ended September 30, 2003 from NT$177 million in the nine months ended September 30, 2002. Interest income decreased 67.5% to NT$53 million in the nine months ended September 30, 2003 from NT$163 million in the nine months ended September 30, 2002, primarily due to decreases in our cash position following the repayment of certain indebtedness.

Other Expenses. Total other expenses decreased 62.3% to NT$1,900 million in the nine months ended September 30, 2003 from NT$5,034 million in the nine months ended September 30, 2002. This decrease was primarily due to decreases in inventory loss provision and interest expense, which were partially oÅset by an increase in net loss from equity investment. As discussed above, we recorded an inventory loss provision reversal of NT$874 million in the nine months ended September 30, 2003, compared to an inventory loss provision of NT$3,133 million in the nine months ended September 30, 2002. Interest expense decreased 16.3% to NT$721 million in the nine months ended September 30, 2003 from NT$861 million in the nine months ended September 30, 2002, principally as a result of declining interest rates and repayments of certain indebtedness. Net loss from equity investment increased 13.6% to NT$1,142 million in the nine months ended September 30, 2003 from NT$999 million in the nine months ended September 30, 2002 because of a markdown in equity investments in 2003 as a result of adverse market conditions.

Net Loss. As a result of the foregoing, our net loss decreased 20.7% to NT$7,403 million in the nine months ended September 30, 2003 from NT$9,333 million in the nine months ended September 30, 2002.

The Company released its annual results on January 30, 2004. The following table highlights several key line items.

Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net non-operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

As of December

Our total net sales revenue increased 8.0% to NT$17,395 million in 2003 from NT$16,075 million in 2002. The increase in sales was due to an increase in seasonal demand for Flash, SLC and SMS products particularly in the fourth quarter of 2003. Our net loss decreased 28.0% to NT$8,198 million in 2003 from NT$11,357 million in 2002. Our operating expenses decreased 23.0% to NT$4,406 million in 2003 from NT$5,694 million in 2002. This decrease was primarily due to our strategic policy of integrating resources and streamlining the number of research and development projects.

12

RISK FACTORS

Holders of our securities should note that investment in our securities involves risks and uncertainties that could aÅect our future business success or Ñnancial results. The following important factors could adversely aÅect our results of operations and could cause our results of operations to diÅer materially from those expressed in any forward-looking statements made by, or on behalf of, our company.

Risks Relating to Our Company

We recorded gross, operating and net losses in 2001 and 2002, and we forecast that we will record losses in 2003. Continued losses could materially adversely aÅect the value of your investment.

The severe and protracted semiconductor industry downturn that began in the second half of 2000 continued throughout 2001, 2002 and the Ñrst half of 2003, with a continued drop in demand and decline in the average selling prices of our products. In 2002, net sales revenues declined by 24.2% compared to 2001, and our cost of goods sold, a substantial portion of which consists of Ñxed costs such as depreciation and amortization, exceeded our net sales revenue. For the year ended December 31, 2001, we realized a net loss of NT$866 million. For the year ended December 31, 2002, we realized a gross loss of NT$615 million (US$17.8 million) and an operating loss of NT$6,827 million (US$197.3 million), and due to the price decline discussed above and related inventory losses, we recorded a net loss of NT$11,357 million (US$328.1 million). Furthermore, for the same reasons, we recorded a net loss of NT$6,209 million (US$179.4 million) in the six months ended June 30, 2003, and we forecast that we will incur gross, operating and net losses for the full year 2003.

As a result of the net losses we incurred and unrealized losses on long-term investments of NT$540 million and NT$331 million (US$9.6 million) in 2001 and 2002, respectively, shareholders' equity declined by 3.2% in 2001, and by a further 30% in 2002, to NT$30,214 million (US$873.0 million) as of December 31, 2002. In the six months ended June 30, 2003, our net loss resulted in a decline in our shareholders' equity by 16.7% to NT$25,165 million (US$727.1 million).

We cannot assure you that these losses will not continue or increase in the future. If we continue to record losses, the value of your investment may be materially adversely aÅected.

We have limited liquidity and may be unable to repurchase our outstanding debt securities when requested by holders, pay certain other obligations as they become due or otherwise meet our working capital needs.

We have a substantial amount of obligations that will or may come due within the next year, and we may not have suÇcient funds to pay these obligations. These obligations include the potential mandatory redemption of some of our convertible bonds, payment of our shortterm debt, payment of the current portion of our long-term debt, expenditures required under contractual obligations and the payment of the costs of the day-to-day operation of our business. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations Ì Liquidity and Capital Resources.''

The holders of certain of our outstanding debt securities may require us to redeem all or a portion of their debt securities. In particular, we currently have outstanding US$90 million principal amount of zero coupon convertible bonds due February 10, 2008, which are redeemable at the option of the holders on February 10, 2004 and on the same date each year thereafter until maturity, and US$169.2 million principal amount of 0.5% convertible bonds due February 7, 2007, which are redeemable at the option of the holders on August 9, 2004. By the terms of the agreements related to these bonds, we would be required to redeem these

13

bonds at a premium. As of the deadline for the holders of the bonds due February 10, 2008 to request redemption on February 10, 2004, holders of US$78.1 million aggregate principal amount of the bonds have tendered their bonds for redemption and the amount of cash required to redeem such bonds is NT$2,703 million (US$78.1 million). As of March 31, 2004, the balance of the outstanding bonds due February 10, 2008 was NT$374 million (US$10.8 million) and the aggregate principal amount of the outstanding bonds due February 7, 2007 was NT$5,856 million (US$169.2 million). At the same date, the price of the Company's shares was NT$12.1. To the extent that the current price per share of the Company's shares remains below the adjusted conversion price, the likelihood increases that bondholders will elect to require the Company to redeem the bonds rather than convert. As of the date of this oÅering, we do not have suÇcient cash on hand to meet these and our other planned and expected payment obligations.

In addition to the convertible bonds discussed above, during the 12 months from January 31, 2004 we will also be required to pay short-term debt and notes in the aggregate principal amount of NT$813 million (US$23.5 million) and current portion of long-term debt and capital lease obligations in the aggregate principal amount of NT$10,286 million (US$297.2 million). In addition, we also have obligations under contracts which we have entered into for goods and services and for other purposes, which require us to make minimum payments for our day-to-day business operations of approximately NT$18,476 million (US$533.8 million) in 2004.

If our cash Öow from operations and the proceeds from this oÅering are not suÇcient, we may not be able to meet these payment obligations when due. At December 31, 2003, we had NT$9,859 million (US$284.9 million) of unrestricted cash and cash equivalents. We cannot assure you that we will be able to Ñnance any of these payment obligations by using our current loan facilities or other means of Ñnancing. We currently have available to us a syndicated loan under which we may drawdown up to an additional principal amount of NT$6,090 million (US$176.0 million). We intend to drawdown NT$500 million by the end of March 2004. However, we may only drawdown these amounts for the purchase of certain speciÑed equipment, must still meet certain other conditions for drawdown and there is no assurance that we would be able to satisfy such conditions for new borrowings. We also cannot assure you that any alternate means of Ñnancing will be available to us on acceptable terms or at all. Further, our ability to repurchase the outstanding debt securities may also be limited by applicable law as well as the terms of our other outstanding indebtedness. See ""Ì Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely aÅect our liquidity, Ñnancial condition and results of operations''.

InsuÇcient liquidity could materially restrict our operations, require us to reduce our budgeted capital expenditures and otherwise adversely aÅect our Ñnancial condition and results of operations. Borrowing funds, raising additional equity capital or converting long-term investments to liquid funds to meet our payment obligations and/or working capital requirements could adversely aÅect our Ñnancial condition or cause our shareholders to suÅer dilution, and thereby adversely aÅect the price of our common shares, ADSs or GDSs. In addition, if we are or appear to be unable to make payments when due, we may be unable to continue, bankruptcy or insolvency proceedings could be commenced against us and, if this occurs, the value of our common shares, ADSs and GDSs would be materially impaired.

14

Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely aÅect our liquidity, Ñnancial 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. Our loan agreements contain covenants that require us to maintain speciÑed debt to equity ratio and ratio of current assets to current liabilities. In November 2003, we sold 475,000,000 new common shares for cash to increase shareholders' equity pursuant to a share oÅering in Taiwan. Had we not conducted this share oÅering, we would have had diÇculty in meeting the debt to equity ratio contained in our loan covenants as of the end of 2003. We may need to issue additional shares, ADSs or GDSs after this oÅering to increase shareholders' equity, and we cannot assure you that we will be successful in selling all or any of such common shares, ADSs or GDSs. If we continue to incur losses, resulting in an erosion of our shareholders' equity, and are unable to raise additional equity funding or renegotiate the terms of our loan agreements, we may be in default of Ñnancial covenants in the future. Such a default or defaults would seriously impair our ability to secure debt Ñnancing, and could require us to delay or cancel capital expansion plans, dispose of assets or take other steps to meet the Ñnancial ratios. Defaults or potential defaults in our Ñnancial covenants could also impair our ability to raise additional equity capital.

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, repurchase our outstanding debt securities, pay dividends, make certain investments and payments and encumber or dispose of assets. 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 signiÑcantly 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 eÅect on our liquidity, Ñnancial condition and results of operations and could seriously impair our ability to secure debt Ñnancing.

We are vulnerable to cyclical downturns in the semiconductor industry, and our business, Ñnancial condition and results of operations may suÅer in future downturns.

The semiconductor industry is highly cyclical. Economic downturns historically have caused reduced product demand, rapid declines in product prices, low capacity utilization and production over-capacity. Since the second half of 2000, the semiconductor industry has been adversely aÅected 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 have drastically reduced their orders for semiconductor devices to avoid further inventory accumulation. The severe and protracted downturn throughout 2001, 2002 and the Ñrst half of 2003 has resulted in a serious deterioration in the average selling prices of, as well as demand for, most of our products and materially adversely aÅected our operating results and Ñnancial condition. Although the semiconductor industry has improved during the third and fourth quarters of 2003, we cannot predict whether this improvement will continue. Even after the industry recovers, our product prices, sales volumes and margins may continue to be adversely aÅected during future cyclical downturns and our business, Ñnancial condition and results of operations may suÅer accordingly.

Our results of operations Öuctuate signiÑcantly, which may aÅect the value of your investment.

Our historical net sales revenue and other results of operations have varied, at times signiÑcantly, from quarter-to-quarter and from year-to-year. For example, we had net income

15

under ROC GAAP of NT$10,613 million in 2000, a net loss of NT$866 million in 2001, a net loss of NT$11,357 million (US$328.1 million) in 2002 and a net loss of NT$6,209 million (US$179.4 million) in the six months ended June 30, 2003. Our future net sales revenue, gross proÑt (loss), operating income, net income (loss) and more generally, our business and results of operations, may vary signiÑcantly 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;

• ‚ seasonality in demand for our customers' products;

• ‚ changes in demand for our products and our customers' products;

• ‚ technology development of our products and competing products;

• ‚ changes in the average selling prices of our products;

• ‚ inventory obsolescence;

• ‚ our customers' adjustments in their inventory;

• ‚ the loss of or reduction of sales to 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-eÇcient 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 signiÑcant capital expenditures in anticipation of future orders;

• ‚ changes in our business strategy or technology roadmap;

• ‚ natural disasters, such as Ñres, droughts, Öoods and earthquakes, or industrial accidents;

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

• ‚ currency and interest rate Öuctuations 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 materially and adversely aÅect our business and results of 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.

If we continue to experience signiÑcant investment losses from our investments, our Ñnancial condition and results of operations may be adversely aÅected.

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 principally related to the semiconductor industry. As a result of the market downturn in the second half of 2000, which continued throughout 2001, 2002 and the Ñrst half of 2003, many of our invested companies experienced signiÑcant 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 NT$617 million in

16

2000, NT$780 million in 2001, NT$415 million (US$12.0 million) in 2002 and NT$811 million (US$23.4 million) in the six months ended June 30, 2003. Any further signiÑcant losses from our investments in the future may materially and adversely aÅect our Ñnancial condition and results of operations.

As we depend on Mask ROM sales for a substantial portion of our revenue, a signiÑcant decrease in Mask ROM sales could result in the loss of a signiÑcant portion of our revenue.

In 2000, 2001, 2002 and in the six months ended June 30, 2002 and 2003, our Mask ROM net sales were NT$19,292 million, NT$12,309 million, NT$7,575 million (US$218.9 million), NT$3,132 million and NT$2,666 million (US$77.0 million) respectively, or 57.6%, 56.6%, 45.9%, 45.1% and 37.3%, respectively, of our net sales revenue in those periods. 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, have been adopted by some 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. Nintendo is one of our major customers and accounted for 53.7%, 61.6%, 43.9%, 38.0% and 44.5% of our net Mask ROM sales in 2000, 2001, 2002 and in the six months ended June 30, 2002 and 2003.

We are seeking to sustain our Mask ROM sales volume by diversifying our customer base to include telecommunications, handheld computing and information devices and oÇce automation equipment manufacturers and expanding the base of devices that may use Mask ROM. We cannot assure you, however, that these initiatives will be successful.

Further, there has been an overall shrinkage of the Mask ROM market as products move away from using Mask ROM technologies to competing technologies, in particular Flash. We also expect that our Mask ROM sales will continue to decline for the foreseeable future, although we believe that due to our market position we will continue to be one of the major providers of Mask ROM products.

Any signiÑcant reduction in the use of Mask ROMs in the video game manufacturing industry and generally will signiÑcantly reduce our revenue and adversely aÅect our business, Ñnancial condition and results of operations.

Our results of operations may continue to be adversely aÅected 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 experienced deteriorating market conditions from the end of 2000 through the Ñrst half of 2003. This decline resulted in 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. Although the semiconductor industry has improved during the third and fourth quarters of 2003, we cannot predict whether this improvement will continue. In addition, seasonal Öuctuations in the demand for our products causes a seasonal buildup in our inventory, which increases our risk of inventory loss due to obsolescence.

In addition, although we recorded an inventory loss reversal of NT$298 million (US$8.6 million) in the six months ended June 30, 2003, we recorded inventory losses of NT$2,929 million (US$84.6 million) in the year ended December 31, 2002 and NT$2,587 million in the year ended December 31, 2001. We may be required to further increase our inventory loss

17

provision or provide a signiÑcant writedown of our inventory due to inventory obsolescence and price declines in future periods if market conditions do not continue to 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.

Financial forecasts and internally prepared Ñnancial information published by us from time to time pursuant to Taiwan Securities and Futures Commission reporting requirements may be inaccurate and incomplete.

Since 1993, the Taiwan Securities and Futures Commission requires ROC companies that meet certain statutory criteria to publish Ñnancial forecasts and to report to the Taiwan Securities and Futures Commission certain internally prepared unaudited unconsolidated Ñnancial information regarding such companies during the prior Ñscal year. We have met the statutory criteria in each of the years beginning in 1995 and, accordingly, have complied with this reporting requirement. We intend to continue to comply with this requirement whenever necessary.

The unaudited unconsolidated information we publish in response to this requirement is not given the same scrutiny that we subject our quarterly, semi-annual and annual Ñnancial statements. Furthermore, as this information is neither audited nor consolidated, it may vary materially from our audited consolidated Ñnancial statements for the same period.

In addition, the Ñnancial forecasts published by us from time to time pursuant to these requirements are based upon a number of estimates and assumptions regarding our industry, investments and general market, political and economic conditions, many of which are beyond our control, and are inherently subject to signiÑcant uncertainties and contingencies. We do not undertake any obligation to update these forecasts, except as required by applicable laws and regulations. We urge you not to rely on these forecasts.

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

A signiÑcant percentage of our net sales revenue (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 signiÑcant decrease in the demand for consumer electronics, computers and computer peripherals and other communications products due to cyclicality or the non-acceptance of our customers' products in the market, may decrease the demand for our products and could adversely aÅect our results of operations. Since the second half of 2000, worldwide demand for consumer electronic products has experienced a rapid and sudden decline. In particular, declining average selling prices of these products have resulted in signiÑcant 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 proÑtability will suÅer.

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''), Atmel Corporation (""Atmel''), Sharp Corporation (""Sharp''), FASL LLC (""FASL''), STMicroelectronics NV (""STMicroelectronics''), NEC Corporation (""NEC''), Silicon Storage Technology, Inc. (""SST''), Hynix Semiconductor Inc. (""Hynix''), Toshiba Corporation (""Toshiba''), Oki Semiconductor Co.

18

(""Oki'') and various other industry participants. Many of our competitors have greater access to capital and technology and have 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-eÅective basis;

• ‚ research and development capabilities and plans;

• ‚ 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 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 proÑts to decrease and have a material adverse eÅect on our Ñnancial condition and results of operations.

Due to our high percentage of Ñxed costs, we will not be proÑtable if we are unable to achieve relatively high capacity utilization rates.

Our operations are characterized by relatively high Ñxed costs, such as depreciation, and we expect this to continue. Our proÑtability depends 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 signiÑcant eÅect on gross margins since per-unit costs generally decrease as Ñxed costs are allocated over a larger number of units. In periods of low demand, we experience relatively low capacity utilization rates in our operations, which lead to reduced margins during such periods, which occurred in 2001, 2002 and the Ñrst half of 2003. Although our capacity utilization rates have improved recently, we cannot assure you that we will be able to achieve or maintain proÑtability if we cannot consistently achieve or maintain relatively high capacity utilization rates. Furthermore, high capacity utilization rates in the absence of high demand could result in inventory buildup and absolescence, resulting in writedowns of inventory.

Our customers generally do not place purchase orders in advance, which makes it diÇcult for us to predict our future revenues, adjust production costs and allocate capacity eÇciently 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. Due to the cyclical nature of the semiconductor industry, our customers' purchase orders have varied signiÑcantly from period-to-period, and it is diÇcult to forecast future order quantities. As a result, we do not typically operate with any signiÑcant backlog. The lack of signiÑcant backlog makes it diÇcult for us to forecast our revenues, plan our production 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

19

timely manner to compensate for revenue shortfalls. We cannot assure you that any of our customers will continue to place orders with us in the future and 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.

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

We intend to increase our manufacturing capacity in Flash products in order to capitalize on the growing demand for these products. The Flash products market is dominated by large players, including FASL, Intel, Sharp and STMicroelectronics, all of which may have greater Ñnancial and other resources than our company. We speed up the amortization of Flash inventory because Flash products in inventory become obsolete more quickly. At December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, Flash products accounted for 45.3%, 54.5%, 66.6%, 60.2% and 61.3% of our product inventory, respectively. If we allocate resources and manufacturing capacity to Flash products but are unable to compete eÅectively in the Flash products market, our business and proÑtability will suÅer. Moreover, any inventory loss from Flash products may adversely aÅect our Ñnancial condition and results of operations.

Any delay or further reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a signiÑcant portion of our revenue.

In 2000, 2001, 2002 and in the six months ended June 30, 2002 and 2003, our sales to Megachips Corporation (""Megachips''), which resells our products to Nintendo, aggregated NT$11,001 million, NT$8,390 million, NT$5,646 million (US$163.1 million), NT$1,722 million and NT$1,443 million (US$41.7 million), respectively, or 32.8%, 38.6%, 34.2%, 24.8% and 20.2%, respectively, of our net sales revenue in those periods. 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 signiÑcant changes in delivery schedules to Nintendo could materially and adversely aÅect our business, Ñnancial 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 current game platform, the Game Cube, utilizes a DVD-ROM-based storage system, which is diÅerent from Mask ROM-based cartridges that were used in Nintendo's previous game platforms. This 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 Game Cube and related accessories. However, sales to Nintendo for Game Boy may not compensate for the loss of Mask ROM sales for Nintendo's console-card game platform, and in fact did not in 2002 or in the six months ended June 30, 2003. In addition, unit sales volumes or prices of Mask ROMs and other products sold through Megachips to Nintendo may Öuctuate signiÑcantly depending on the products oÅered 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, 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 signiÑcantly and our business, Ñnancial condition and results of operations will be adversely aÅected.

20

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

We recently reorganized our existing organizational and business unit structure (which was organized on the basis of memory products, SMS products and services, and multimedia products) into two main strategic business groups. However, we may not be able to eÅectively and eÇciently assimilate our business, operations and personnel under the new organizational and business unit structure, and may experience disruption to our business and encounter diÇculty in implementing eÅective operational, management and Ñnancial 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 aÅect our operations and future proÑtability.

We depend on select personnel and could be aÅected if we lose their services.

We depend on the continued service of our executive oÇcers and skilled technical and other personnel. Our business could suÅer if we lose the services of any of these personnel and cannot adequately replace them. At present, there is a shortage in Taiwan of persons with the special technical skill set we require. Further, although some of these personnel have entered into employment agreements with us, most of these employment agreements do not specify the duration of employment. Therefore, the relevant 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. When we commence operations at Fab III, we may be required to substantially increase the number of these employees 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 qualiÑed personnel as and when needed. In addition, we may need to increase employee compensation levels in order to attract and retain our existing oÇcers and employees and the additional personnel that we may require in the future. Moreover, in order to attract and retain personnel, we must devote signiÑcant resources to training and beneÑts. These beneÑts have historically and may in the future include bonuses in the form of our common shares or otherwise based on the performance of our stock.

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

Our capital requirements are diÇcult 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. Our ability to obtain external Ñnancing in the future is subject to a variety of uncertainties, including:

• ‚ our future Ñnancial condition, results of operations and cash Öows;

• ‚ our stock price and credit rating;

• ‚ general market conditions for Ñnancing activities by semiconductor companies; and

• ‚ economic, political and other conditions in Taiwan and elsewhere.

If we are unable to obtain external Ñnancing in a timely manner, on acceptable terms or at all, we may be unable to implement our expansion plans or conduct planned research and development and develop new products and our growth prospects and future proÑtability may decline.

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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 costeÅective products, we need to invest signiÑcantly in research and development. We may not be able to generate cash Öow from operations in suÇcient amounts to allow us to maintain our planned level of spending on research and development. Any failure to maintain adequate research and development spending could reduce our competitiveness and jeopardize our longterm prospects.

If we are unable to eÅectively manage seasonal Öuctuations in the demand for our products, our business and proÑtability may be adversely aÅected.

We have in the past experienced, and we expect to continue to experience, seasonal Öuctuations in the demand for our products. In particular, we typically generate higher sales during the third and fourth quarters of the year. In anticipation of the higher demand in these quarters and to smooth out and manage rationally the use of our capacity over the course of the full year, we typically build up inventory in the Ñrst and second quarters of the year. However, if we are unable to increase our manufacturing capacity or build up inventory ahead of demand 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 proÑtability may be adversely aÅected. In addition, if we are unable to eÅectively manage our manufacturing capacity during a seasonal downturn in demand or if we build up inventory in anticipation of demand that does not materalize, our results of operations would also be adversely aÅected.

Delays or other constraints in the expansion or construction of our fabrication plants could delay increases in our capacity, which may adversely aÅect 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 2005 or later. We are utilizing part of the space in Fab III to supplement production in Fab II. We could delay the commencement of full commercial operation of Fab III beyond 2005 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 aÅected.

Our revenues and proÑtability 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, in short supply, 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 signiÑcant increases in the costs of raw materials that we could not pass on to our customers.

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

We expect to purchase a signiÑcant 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 fulÑll our customers' orders, which could adversely aÅect our growth prospects as well as our Ñnancial condition and results of operations.

Derivative contracts may expose us to risks that may adversely aÅect our Ñnancial 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 Ñnancial 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 eÅective or ineÅective hedge. Moreover, although successful hedging strategies could reduce our risk of loss by wholly or partially oÅsetting the negative eÅect of unfavorable price movements in the hedged item, hedging strategies could also reduce our opportunity for gain by oÅsetting the positive eÅect of favorable price movements in the hedged item.

We entered into a derivative contract with our common shares as the underlying reference securities in connection with our stock appreciation rights plan. This contract also included a reference to foreign currency exchange rates. This derivative contract expired on May 5, 2003. However, based on mark-to-market principles, this derivative contract had in the past represented liability which was not reÖected in Ñnancial statements accompanying this OÅering Circular. These losses were primarily attributable to a signiÑcant decline in the trading price of our common shares. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations Ì Equity Derivative Contract''. Future decreases in the trading price of our common shares may adversely aÅect our Ñnancial 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 aÅect 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 earthquakes, droughts, power outages, typhoons or other events beyond our control, would cause delays in shipments of our products, which could result in the loss of revenue and/or customers.

Taiwan is also susceptible to earthquakes and has experienced severe earthquakes that caused signiÑcant property damage and loss of life, particularly in the central and eastern parts of Taiwan. These earthquakes damaged production facilities and equipment and adversely aÅected 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 these earthquakes.

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As a result of the rapid growth of the Taiwan semiconductor industry, which is primarily based in Hsinchu, there has been increased demand for water and electricity in that region. Any shortage of water or electricity could have a material and adverse eÅect on our operations. Many areas in Taiwan experienced a severe drought in 2002 causing Taiwan authorities to announce water-rationing measures in the northern parts of Taiwan. If a drought occurs again and authorities are unable to source water from alternative sources in suÇcient quantities, we may be required to temporarily shut down or substantially reduce production at our facilities in the aÅected areas, which would seriously aÅect our operations.

Many of our suppliers and customers and providers of semiconductor manufacturing services, including foundries, are located in Taiwan. If our customers are aÅected 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 aÅected, 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 eÅect on our Ñnancial condition and results of operations.

While we maintain several insurance policies relating to our business, including business interruption insurance, we cannot assure you that the insurance coverage will be suÇcient to protect us from potential 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 aÅect our Ñnancial 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 increase our operating risk.

We are subject to stringent environmental regulations and any violation could require us to pay signiÑcant Ñnes, which may delay or interrupt our business.

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 signiÑcant Ñnes, 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 signiÑcant 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 eÅect on our Ñnancial condition and results of operations.

New corporate governance legislation and regulations in the United States could increase the cost of compliance, while recent corporate scandals could increase the risks associated with non-compliance.

As a result of recent corporate governance scandals in the United States and the legislative and litigation environment resulting from those scandals, the costs of being a public reporting company in the United States generally are expected to increase in the near future. New legislation, such as the Sarbanes-Oxley Act of 2002, will have the eÅect of increasing the burdens and potential liabilities of being a public reporting company in the United States. This and other proposed legislation may increase the fees of our professional advisors and our insurance premiums. Any failure to comply with these requirements will increase our exposure and the exposure of our chief executive oÇcer and chief Ñnancial oÇcer, to the risk of enforcement actions and litigation, and could cause our share price to fall.

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Risks Relating to Technology and Intellectual Property

Our return to proÑtability 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 signiÑcant product price declines;

• ‚ rapid product obsolescence; and

• ‚ introduction of competing technologies and solutions.

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 oÅer 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, our new products may fail to gain market acceptance, and existing products may become obsolete. For example, our sales of Mask ROM products have fallen and may fall further 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 be unable to return to proÑtability.

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 our technology partners fail to advance their technology, if we fail to maintain our existing arrangements with our technology partners or if we are unable to 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 believe these arrangements help 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 beneÑcial 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 aÅect our competitiveness as well as our business and prospects.

Our manufacturing processes are highly complex, costly and potentially vulnerable to impurities and other disruptions that can signiÑcantly 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 modiÑed to improve manufacturing yields and product performance. Impurities or other diÇculties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in losses of

25

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. We typically sell our products on a per-die basis and lower yields can reduce the number of units we can sell, which causes our revenues and proÑts to suÅer. If we fail to maintain high quality production standards and yields, our business and proÑtability may suÅer and our customers may cancel their orders or return our products.

Our business depends in part on our ability to obtain and protect our 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 suÇcient Ñnancial resources to protect and enforce our rights. We intend to continue to Ñle 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 Ì Research and Development'' and ""Ì Intellectual Property''.

We may be subject to intellectual property rights disputes that 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 Ñled in the United States or elsewhere until the applications or resulting patent (if one is granted) are made available to the public. Because of the complexity of the technologies used and the multitude of patents, copyrights and other overlapping intellectual property rights, it is often diÇcult for semiconductor companies to determine infringement. We are currently involved in certain litigation matters involving patent infringement. See ""Business Ì 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

26

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, 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, suÇcient reserve for all claims and allegations against our company for any patent infringement. See ""Business Ì Legal Proceedings''.

Risks Relating to Political and Economic Environment

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

Our principal executive oÇces 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 signiÑcant 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. In particular, President Chen Shui-bian's recent announcement that Taiwan will hold its Ñrst island-wide referendum in March 2004 to vote on certain matters with respect security issues relating to the People's Republic of China has increased tensions between the ROC and the People's Republic of China. 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 aÅecting the political or economic conditions in Taiwan could have a material adverse eÅect on our Ñnancial 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 U.S. dollars and Japanese yen. 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 U.S. dollars and Japanese yen. Fluctuations in exchange rates, primarily among the U.S. dollar, the NT dollar and the Japanese yen, will aÅect our costs and operating margins. In addition, these Öuctuations could result in exchange losses and increased costs in NT dollar and other local

27

currency terms. Despite hedging and mitigating techniques implemented by us, Öuctuations in exchange rates have aÅected, and may continue to aÅect, our Ñnancial condition and results of operations. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations Ì Quantitative and Qualitative Disclosures About Market Risk''.

Disruptions in the international trading environment may signiÑcantly 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 2000, 2001, 2002 and the six months ended June 30, 2003, export sales from Taiwan to our customers outside Taiwan accounted for 78.2%, 73.7%, 82.5% and 68.7%, respectively, of our net sales revenue. We expect sales to customers outside Taiwan to continue to represent a signiÑcant portion of our net sales revenue. Accordingly, our Ñnancial condition and results of operations and the market price of our securities may be aÅected by changes in governmental policies, inÖation, increasing interest rates, social instability and other political, economic or social developments in or aÅecting the countries in which we sell our products that 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 aÅect the demand for our products and the terms upon which we sell our products overseas, which may signiÑcantly reduce our international sales and revenue.

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

Our common shares are listed on the Taiwan Stock Exchange. The trading price of our common shares may be aÅected by the general activities of 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 Öuctuations 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 10,202 in February 2000 and subsequently fell to a low of 3,446 in October 2001. During 2003, the Taiwan Stock Exchange Index peaked at 6,142 on November 5, 2003 and reached a low of 4,140 on April 28, 2003. During 2002 and 2003, daily closing prices of our common shares ranged from NT$32.7 per share on April 3, 2003 to NT$4.12 per share on May 22, 2003. On March 31, 2004, the Taiwan Stock Exchange Index closed at 6,522 and the daily closing value of our common shares was NT$12.10 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. The recurrence of these or similar problems could decrease the market prices and liquidity of our common shares, ADSs and GDSs.

In response to past declines and volatility in the securities markets in Taiwan, and in line with similar activities by other countries in Asia, the government of the ROC formed the Stabilization Fund, which has purchased and may from time to time purchase shares of Taiwan companies to support these markets. In addition, other funds associated with the ROC government have in the past purchased, and may from time to time purchase, shares of Taiwan companies on the Taiwan Stock Exchange or other markets. In the future, market activity by government entities, or the perception that such activity is taking place, may take place or has ceased, may cause Öuctuations in the market prices of our common shares, ADSs and GDSs.

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Any future outbreak of severe acute respiratory syndrome may materially and adversely aÅect our business and results of operations.

Taiwan, together with mainland China, Hong Kong, Singapore and certain other areas experienced in early 2003 an outbreak of severe acute respiratory syndrome, or SARS, a new and highly contagious form of atypical pneumonia. The outbreak of SARS commenced in early 2003 and reached its peak in Taiwan in May 2003. According to the World Health Organization, over 8,400 cases of SARS and more than 900 deaths had been reported in over 30 countries as of August 7, 2003. The outbreak of SARS in Taiwan earlier this year was contained by the health authorities and did not signiÑcantly impact our operations. A SARS outbreak may potentially result in a quarantine of infected employees and related persons, which may aÅect our operations at one or more of our fabs. We cannot predict at this time the impact any future outbreak could have on our business and results of operations.

During the last SARS outbreak, we took various preventive measures and established contingency plans to ensure the safety of our employees and of our fabs, and to reduce the adverse impact, if any, in case any of our employees contracts SARS. While our preventive measures worked well during the last SARS outbreak and there has been no major impact on our results of operations as a result of SARS, we cannot assure you that a future outbreak of SARS would not have a material adverse eÅect on our results of operations.

Risks Relating to our Common Shares and our GDSs

We cannot assure you that the market for our common shares and GDSs will be active and liquid.

The average daily trading volumes for our common shares and ADSs have Öuctuated greatly in the past. During 2003, the daily trading volume of our common shares ranged from approximately 217,633,760 to approximately 3,486,579. During the same period, the average daily trading volume of our ADSs ranged from approximately 255,632 to approximately 100. Application has been made to list our GDSs on the Luxembourg Stock Exchange. The GDSs, however, will be a new issue of securities with no established trading market. We cannot assure you that the liquidity of our common shares or ADSs will be maintained or enhanced or that the liquidity of our GDSs will develop. 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 and GDSs may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results.

In addition, the EU Transparency Obligations Directive is currently being Ñnalized and may be implemented in Luxembourg in a manner that is unduly burdensome for our company. In particular, we may be required to publish Ñnancial statements in the EU prepared in accordance with, or reconciled to, International Financial Reporting Standards. In such circumstances we may decide to seek an alternative listing for the GDSs on a stock exchange outside the European Union.

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

The market price of our common shares, ADSs and GDSs could decline as a result of future sales of a large number of common shares, ADSs or GDSs or the perception that such sales could occur. If we or the holders of our common shares, ADSs or GDSs sell a large number of common shares, ADSs or GDSs, or the perception develops that such an event may occur, the market price for the common shares, ADSs or GDSs could be depressed. In particular, if cash Öow from operations is insuÇcient to allow us to conduct our day-to-day operations or to redeem or otherwise repay our debt or if net losses reduce our equity near or below the

29

minimum level stipulated in covenants under our bank loans, we may need to issue more common shares, ADSs or GDSs in the future, or the perception may arise that we need to do so.

In addition, we plan to issue, from time to time, additional common shares in connection with employee compensation as well as to Ñnance possible future investments or acquisitions. The issuance of additional shares may have a dilutive eÅect on other shareholders and may cause the price of our common shares, ADSs and GDSs to decrease. The conversion of our convertible bonds into common shares (and, where applicable, exercise of the right to deposit those common shares in exchange for ADSs or GDSs) may also have a dilutive eÅect. See ""Management Ì Stock Plans Ì Share Option Plans'' for a discussion of the share option plan that we have adopted for the beneÑt of all of our oÇcers and employees and those of our subsidiaries.

Restrictions on the ability to deposit our common shares into our GDR facility may adversely aÅect the liquidity and price of our GDSs.

The ability to deposit our common shares into our GDR facility is restricted by ROC law. A signiÑcant number of withdrawals of our common shares underlying our GDSs would reduce the liquidity of our GDSs by reducing the number of GDSs outstanding. As a result, the prevailing market price of our GDSs may diÅer from the prevailing market price of our common shares on the Taiwan Stock Exchange. Under current ROC law, no person or entity, including you and us, may deposit our common shares into our GDR facility without speciÑc approval of the ROC Securities and Futures Commission except where:

• (1) we pay stock dividends on our common shares;

• (2) we make a free distribution of our common shares;

• (3) you exercise preemptive rights in the event of a capital increase for cash, or

(4) if permitted by the deposit agreement and the relevant custody agreement, you purchase our common shares, directly or through the Depositary, on the Taiwan Stock Exchange and deliver our common shares or deliver our common shares held by you to the Custodian for deposit into our GDR facility. The Depositary may issue GDSs against the deposit of our common shares only if the total number of GDSs outstanding following the deposit will not exceed the number of GDSs previously approved by the ROC Securities and Futures Commission, plus any additional GDSs issued pursuant to the events described in items (1) through (3) above. Issuance of additional GDSs under this item (4) is permitted only to the extent that previously issued GDSs have been cancelled.

In addition, in the case of a deposit of common shares requested as described above, the Depositary may from time-to-time refuse to accept our common shares in order to comply with any applicable laws or regulations or any provisions of the deposit agreement.

Your ability to withdraw common shares will be restricted for a limited period of time after the initial delivery of the GDSs

Under ROC share issuance procedures applicable to oÅerings of GDSs representing newly issued shares of ROC companies, on the closing date of the oÅering we will initially deliver to the Custodian, one certiÑcate of payment representing the irrevocable right to receive common shares that will be represented by the GDSs oÅered by us in this oÅering. No later than the second ROC business day following the closing date of this oÅering, we will apply to the Taiwan Stock Exchange for listing of the Master Scripless CertiÑcate of Payment. It is expected that the Taiwan Stock Exchange will approve the listing of the Master Scripless CertiÑcate of Payment on the fourth ROC business day following the closing date of this oÅering. Immediately upon such listing, the certiÑcate of payment we deliver to the Custodian on the closing date of

30

this oÅering will be replaced by the Master Scripless CertiÑcate of Payment. To the extent that GDSs represent the Master Scripless CertiÑcate of Payment, holders of such GDSs will receive upon withdrawal individual scripless certiÑcates of payment.

On and subsequent to the listing of the Master Scripless CertiÑcate of Payment on the Taiwan Stock Exchange, we will replace the certiÑcate of payment deposited with the Custodian with the Master Scripless CertiÑcate of Payment, and you will be entitled, subject to the relevant provisions of the Deposit Agreement and ROC law, as applicable, to withdraw the underlying individual scripless certiÑcate of payment. We expect to deliver the newly issued common shares within approximately 45 days to the Custodian in exchange of the Master Scripless CertiÑcate of Payment upon completion of all required ROC share issuance procedures. After the underlying common shares have been so issued and delivered, you will be entitled, subject to the relevant provisions of the deposit agreements and ROC law, as applicable, to withdraw the underlying common shares.

Therefore, before the listing of the Master Scripless CertiÑcate of Payment on the Taiwan Stock Exchange, if the Depositary receives your request for withdrawal of individual scripless certiÑcates of payment or common shares, as applicable, the Depositary will not be able to comply with your request until after the listing of the Master Scripless CertiÑcate of Payment. See ""Description of the Global Depositary Shares Ì Withdrawal or Sale of Deposited Property and Further Issues of GDSs.''

GDS holders do not have the same voting rights as our common shareholders, which may aÅect the value of the GDSs.

The voting rights of GDS holders as to the common shares represented by the GDSs are limited to the extent set forth in the Deposit Agreement. With respect to matters other than the election of our directors or supervisors, GDS holders generally are not able to exercise voting rights on an individual basis. With respect to matters other than the election of our directors or supervisors, if holders representing 51% of the outstanding GDSs instruct the Depositary to vote in a particular manner, the Depositary will cause all common shares represented by the GDSs to be voted in that manner. If the Depositary does not receive instructions representing at least 51% of the outstanding GDSs to vote in a particular manner, GDS holders will be deemed to have instructed the Depositary to authorize all the common shares represented by their GDSs to be voted at the discretion of our designated representative, which may not be in the interest of all GDS holders.

The ROC Company Law and our articles of incorporation provide that a shareholder has one vote for each common share. There is also cumulative voting for the election of directors and supervisors.

GDS holders may be required to appoint agents in Taiwan to handle various tax and administrative matters if they withdraw common shares from our GDS facility and become shareholders, which may make share ownership burdensome.

Non-ROC persons wishing to withdraw their common shares from our GDR facility and become shareholders are required under current ROC laws and regulations to appoint a local agent or representative (a ""Tax Guarantor'') in Taiwan for making tax payments on their behalf. A Tax Guarantor must meet certain qualiÑcations set by the ROC Ministry of Finance and, upon appointment, becomes a guarantor of the holder's ROC tax obligations. Holders wishing to repatriate proÑts derived from the sale of common shares 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.

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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, such GDS holders will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage Ñrm, remit funds and exercise shareholder's rights. They must also appoint a local bank to act as custodian for handling conÑrmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. In addition, you will be required to register with the Taiwan Stock Exchange for making investments in the ROC securities market (and if you are an oÅshore foreign institutional investor, to obtain the prior approval of the Central Bank of China) prior to withdrawing common shares. Without meeting these requirements, non-ROC persons will not be able to hold, subsequently sell or otherwise transfer our common shares on the Taiwan Stock Exchange.

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

Under current ROC law, a holder of our GDSs who withdraws and becomes a holder of our common shares may be required to obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights for new common shares. Although it is expected that the Central Bank of China will grant this approval as a routine matter, we cannot assure you that in the future any approval will be obtained in a timely manner, or at all. See ""Foreign Investment and Exchange Controls in Taiwan''.

Furthermore, pursuant to the ROC Foreign Exchange Control Law, the Executive Yuan of the ROC government may, without prior notice but subject to subsequent legislative approval, impose foreign exchange controls in the event of, among others, a material change in international economic conditions. We cannot assure you that foreign exchange controls or other restrictions will not be introduced in the future.

When withdrawing the underlying common shares of the GDSs, you may be required to provide certain information to us or the Depositary, and failure to provide such information may result in a delay of the withdrawal.

When withdrawing the underlying common shares of GDSs, you may be required to provide certain information to us or the Depositary, including the name and nationality of the person to be registered as the shareholder, the number of common shares to be acquired by such person and the number of common shares acquired by such person in the past through the date of the withdrawal of the underlying common shares. Under applicable ROC laws, we are required to report to the ROC Securities and Futures Commission (the ""ROC SFC'') if the person to be registered as a shareholder (i) is a ""related party'' of ours as deÑned in the ROC Statement of Financial Accounting Standard No. 6 or (ii) will hold, immediately following such withdrawal, more than 10% of the underlying common shares of the GDSs. Failure to provide such information may cause the delay of such withdrawal of the underlying common shares.

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FORWARD-LOOKING STATEMENTS

This OÅering Circular contains various forward-looking statements. These include statements about:

• ‚ industry and product pricing trends;

• ‚ developments in technology aÅecting the market acceptance and competitiveness of our products;

• ‚ applications for our products;

• ‚ competition from other industry participants;

• ‚ pricing levels of our and our competitors' products;

• ‚ our business strategies;

• ‚ our development and marketing of new products;

• ‚ our development and maintenance of relationships with our customers and strategic partners;

• ‚ the expansion and enhancement of our manufacturing capacity;

• ‚ our development of new process technologies;

• ‚ our capital expenditure plans and our ability to obtain funding for these plans;

• ‚ economic, political and Ñnancial developments in the markets for our products;

• ‚ our ability to obtain the necessary raw materials and the prices for these materials; and

• ‚ our ability to attract and retain qualiÑed personnel.

These forward-looking statements are based on current expectations, estimates and projections about our industry and our management's beliefs and assumptions. Words such as ""anticipates'', ""expects'', ""intends'', ""plans'', ""believes'', ""seeks'', ""estimates'' and similar expressions are intended to identify these forward-looking statements. Although we believe that these expectations and projections are reasonable, such forward-looking statements are not guarantees of future performance or actual results and are inherently subject to risks, uncertainties and assumptions about us, including, among other things:

• ‚ our dependence on frequent introduction of new services and technologies;

• ‚ the intensely competitive semiconductor industry;

• ‚ risks associated with international business activities;

• ‚ our dependence on key personnel;

• ‚ natural disasters, such as earthquakes, which are beyond our control;

• ‚ general economic and political conditions, including those related to the semiconductor industry;

• ‚ possible disruptions in commercial activities caused by natural and human-induced disasters, including terrorist activity and armed conÖict, that may reduce end-user purchases relative to expectations and orders;

• ‚ Öuctuations in foreign currency exchange rates; and

• ‚ those other risks identiÑed in ""Risk Factors'' of this OÅering Circular.

We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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You should note that an investment in our GDSs or common shares involves risks and uncertainties that could aÅect our future business success or Ñnancial results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this OÅering Circular might not occur and our actual results could diÅer materially from those anticipated in these forward-looking statements.

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USE OF PROCEEDS

Assuming that the GDSs being oÅered in this oÅering are issued at a price of US$13.20 per GDS, the net proceeds from the oÅering are estimated to amount to approximately US$173.25 million. We expect that the net proceeds will primarily be used to fund repayment of our debts and our acquisition of machinery and equipment.

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MARKET PRICE INFORMATION

Common Shares

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. For a recent closing price of our common shares, see the cover page of this OÅering Circular.

1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 January ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FebruaryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Closing price per share(1) High Low (NT$) (NT$) 63.0 20.7 41.5 13.9 76.2 26.6 29.9 16.0 44.2 33.3 40.4 30.8 36.2 16.8 29.9 16.0 32.7 9.2 31.5 24.7 32.7 18.7 18.0 10.5 14.6 9.2 12.75 4.12 12.8 8.8 9.6 4.1 10.45 7.55 10.2 7.15 9.25 8.0 10.7 8.55 13.15 10.40	Average daily trading volume (in thousands of shares) 22,623 55,173 54,549 55,503 91,473 32,271 31,297 83,825 55,503 91,149 37,731 29,608 68,462 43,983 32,568 50,876 46,987 44,134 53,560 97,284 110,905	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High (NT$) 63.0 41.5 76.2 29.9 44.2 40.4 36.2 29.9 32.7 31.5 32.7 18.0 14.6 12.75 12.8 9.6 10.45 10.2 9.25 10.7 13.15		High 9,277 8,609 10,202 6,104 6,104 5,609 4,887 5,551 6,462 6,243 6,462 5,417 4,824 6,142 5,079 5,049 5,758 6,142 6,386 6,751 7,034	Low
				6,251 5,475 4,615 3,446 4,895 4,769 3,494 3,446 3,850 5,488 5,072 4,186 3,850 4,140 4,260 4,140 5,018 5,582 6,042 6,241 6,133

Source: Bloomberg L.P.

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

The Taiwan Stock Exchange has experienced substantial Öuctuations in the prices of listed securities and there are currently limits on the range of daily price movements, as set forth in Article 63 of the operating rules of the Taiwan Stock Exchange Corporation. See ""Risk Factors Ì Risks Relating to Political and Economic Environment Ì The trading price of our common shares may be adversely aÅected by the general activities of the Taiwan Stock Exchange and the economic performance of Taiwan'', ""The Securities Market of Taiwan Ì The Taiwan Stock Exchange'' and ""The Securities Market of Taiwan Ì Taiwan Stock Exchange Index''.

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ADSs

Each ADS represents ten of our common shares. Our ADSs have been listed on the Nasdaq National Market since May 9, 1996. The table below presents, for the periods indicated, the high and low closing prices on the Nasdaq National Market for our outstanding ADSs. For a recent closing price of our ADSs, see the cover page of this OÅering Circular.

1998 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 January ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Closing Price Per ADS(1) High Low (US$) (US$) 8.91 3.26 11.95 4.11 22.76 8.01 12.70 3.86 12.70 9.16 11.47 8.84 9.68 3.86 7.91 4.09 8.55 2.73 8.09 6.18 8.55 5.31 4.92 3.00 4.09 2.73 3.65 1.20 3.65 2.55 2.70 1.20 2.91 2.19 3.14 2.10 2.69 2.39 3.12 2.50 3.90 3.07	Average daily trading volume (in thousands of shares) 37.642 11.789 107.092 64.705 65.125 68.844 73.504 52.113 53.248 75.64 40.851 45.848 52.361 26.498 16.036 51.385 29.817 16.749 21.045 33,994 29,556	Nasdaq Composite Index	Nasdaq Composite Index
	High (US$) 8.91 11.95 22.76 12.70 12.70 11.47 9.68 7.91 8.55 8.09 8.55 4.92 4.09 3.65 3.65 2.70 2.91 3.14 2.69 3.12 3.90		High 2,192.69 4,069.31 5,048.62 2,859.15 2,859.15 2,313.85 2,148.72 2,054.27 2,059.38 2,059.38 1,862.62 1,448.36 1,487.94 2,009.88 1,460.99 1,677.14 1,909.55 1,976.37 2,153.83 2,089.66 2,057.80	Low
				1,419.12 2,208.05 2,332.78 1,423.19 1,820.57 1,638.80 1,423.19 1,480.46 1,114.11 1,716.24 1,423.99 1,172.06 1,114.11 1,271.47 1,271.47 1,348.30 1,640.13 2,006.68 2,005.44 1,901.80

Source: Bloomberg L.P.

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

37

EXCHANGE RATES

In portions of this OÅering Circular, we have translated New Taiwan dollar amounts into U.S. dollars for the convenience of investors. Except where otherwise indicated, the rate we used for the translations was NT$34.61 • US$1.00, which was the noon buying rate announced by the Federal Reserve Bank of New York on June 30, 2003. The noon buying rate on March 30, 2004 was NT$33.09 • US$1.00. The translation is for convenience only and does not mean that New Taiwan dollars could actually be converted into U.S. dollars at that rate or at all. The following table shows the noon buying rates, for the periods indicated, for New Taiwan dollars expressed in New Taiwan dollars per US$1.00.

New Taiwan dollars expressed in New Taiwan dollars per US$1.00.
Period-End 1998: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001: First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002: First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003: First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 January ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ February ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ March (through March 30)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$per US$1.00
	32.27 31.39 33.17 32.85 34.48 34.56 35.00 35.00 33.46 34.92 34.70 34.72 34.61 33.78 33.99 33.39 33.21 33.09

Source: The noon buying rate in New York for cable transfers payable in foreign currencies as certiÑed for customs purposes by the Federal Reserve Bank of New York.

38

DIVIDENDS

We generally are not permitted under ROC Company Law and our articles of incorporation to distribute dividends or make other distributions to shareholders for any year in which we have no current or retained earnings (excluding reserves). 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, deduct 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 speciÑed in our articles of incorporation. We may pay these distributions in stock or cash or a combination of stock and cash, except that any employee bonuses and shareholder dividends will normally be distributed in stock unless we determine otherwise, and provided that not more than 20% of our distributable net income may be distributed in the form of cash. All or part of the dividends to shareholders may be reserved at the relevant annual shareholders' meeting as retained earnings for distribution in later years. See ""Description of Common Shares Ì Dividends and Distributions''.

Year 1995ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1996ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Dividends paid by Capital Reserve Ì 840,000,000 1,891,648,270 1,153,868,000 1,785,823,700 2,127,526,860 2,474,409,150 3,319,342,620	Ratio (Shares Dividends distributed/ per 1000 shares) N/A 140 100 80 100 100 100 100	Dividends paid by Earnings 700,000,000 2,160,000,000 945,824,140 2,019,269,000 Ì 638,258,060 4,948,818,290 Ì	Ratio (Shares Dividends distributed/ per 1000 shares)
				200 360 200 140 N/A 30 200 N/A

Units: NT$

For information relating to ROC withholding taxes payable on dividends, see ""Taxation Ì ROC Taxation''.

39

CAPITALIZATION

The following table presents, as of June 30, 2003 and September 30, 2003, our audited consolidated and unaudited unconsolidated, respectively, cash and cash equivalents, short-term debt and capitalization on an actual basis and as adjusted for the issuance of 13,125,000 GDSs, representing 525,000,000 common shares, oÅered by us at the oÅering price of NT$10.9 per share, or US$13.20 per GDS, before deducting underwriting discounts and estimated expenses payable by us in the oÅering.

This table should be read in conjunction with our consolidated Ñnancial statements for the years ended December 31, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular and ""Management's Discussion and Analysis of Financial Condition and Results of Operations''.

Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏ Short-term debt: Short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of debentures ÏÏÏÏÏÏÏ Current portion of long-term debt ÏÏÏ Current portion of capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total short-term debt(1)ÏÏÏÏÏÏÏÏÏ Long-term debt: Convertible bonds due 2007 ÏÏÏÏÏÏÏÏ Convertible bonds due 2008 ÏÏÏÏÏÏÏÏ Other long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total long-term debt(2)(3)ÏÏÏÏÏÏ Shareholders' equity: GDSs being oÅered(4)ÏÏÏÏÏÏÏÏÏÏÏÏÏ Common shares, NT$10 par value, 6,550,000,000 shares authorized; 3,779,349,500 shares issued as at June 30, 2003 and 3,927,758,305 shares issued as of September 30, 2003, respectively(5) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏ Subscription receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated deÑcits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized losses on long-term investmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative translation adjustments ÏÏ Treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏ Total capitalization(6)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

As of June 30, 2003 As of September 30, 2003 Audited Consolidated Unaudited Unconsolidated Actual As adjusted Actual As adjusted (NT$) (US$) (NT$) (US$) (NT$) (US$) (NT$) (US$) (in millions) 6,143 177 11,866 343 5,623 162 11,346 328 297 9 297 9 299 9 299 9 2,419 70 2,419 70 1,098 32 1,098 32 2,724 79 2,724 79 8,745 253 8,745 253 2,040 59 2,040 59 1,892 55 1,892 55 634 18 634 18 624 18 624 18 8,114 235 8,114 235 12,658 367 12,658 367 8,527 246 8,527 246 1,035 30 1,035 30 415 12 415 12 407 12 407 12 11,661 337 11,661 337 10,846 313 10,846 313 20,603 595 20,603 595 12,288 355 12,288 355 Ì Ì 5,723 165 Ì Ì 5,723 165 37,793 1,092 37,793 1,092 39,278 1,135 39,278 1,135 7 0 7 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 1 0 1 0 (10,960) (317) (10,960) (317) (12,312) (356) (12,312) (356) (704) (20) (704) (20) (792) (23) (792) (23) 216 6 216 6 163 5 163 5 (1,188) (34) (1,188) (34) (1,188) (34) (1,188) (34) 25,165 727 30,888 892 25,150 727 30,873 892 45,768 1,322 51,491 1,487 37,438 1,082 43,161 1,247

Actual (NT$) (US$) 6,143 177 297 9 2,419 70 2,724 79 2,040 59 634 18 8,114 235 8,527 246 415 12 11,661 337 20,603 595 Ì Ì 37,793 1,092 7 0 0 0 1 0 (10,960) (317) (704) (20) 216 6 (1,188) (34) 25,165 727 45,768 1,322

• (1) Of this amount of short-term debt, NT$2,674 million and NT$2,516 million was secured, and NT$5,440 million and NT$10,142 million was unsecured as of June 30, 2003 and September 30, 2003, respectively and all short-term debt was not guaranteed.

• (2) Excludes current portion.

• (3) Of this amount, NT$11,661 million and NT$10,846 million was secured long-term debt, less current portion, and NT$3,000 million and NT$3,000 million was guaranteed as of June 30, 2003 and September 30, 2003, respectively.

• (4) Figures represent the net proceeds from this oÅering.

• (5) We commenced an oÅering of 475,000,000 common shares in October 2003, which had been subscribed and paid for as of November 12, 2003. See ""Recent Development''.

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

40

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The selected statement of operations data and cashÖow data for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003, and the selected balance sheet data as of December 31, 2000, 2001 and 2002 and as of June 30, 2002 and 2003 presented below are derived from our audited Ñnancial statements included in this OÅering Circular.

The Ñnancial data presented below should be read in conjunction with, and are qualiÑed in their entirety by reference to, our audited consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003 and as of December 31, 2000, 2001 and 2002 and as of June 30, 2002 and 2003 and the related notes thereto and ""Management's Discussion and Analysis of Financial Condition and Results of Operations''. In addition, you should read carefully our unaudited unconsolidated Ñnancial statements for the nine months ended September 30, 2002 and 2003 and as of September 30, 2003 and the related notes, included elsewhere in this OÅering Circular and ""Recent Developments''. The results for the six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year 2003. Except for the Ñnancial statements for the six months ended June 30, 2002 and as of June 30, 2002, our Ñnancial statements have been audited by Diwan, Ernst & Young, independent public accountants.

Our Ñnancial statements are prepared and presented in accordance with ROC GAAP, which diÅer in certain signiÑcant respects from U.S. GAAP. For a discussion of certain signiÑcant diÅerences between ROC GAAP and U.S. GAAP, see ""Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAP''.

Consolidated Income Statement Data: Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Unrealized proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gross proÑt (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxes and minority interestÏÏÏÏÏÏÏÏ Income tax beneÑt (expense)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì basic(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per share Ì diluted(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏ Balance Sheet Data: Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net property, plant and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended, and as of, Six months ended, and December 31, as of, June 30, 2000 2001 2002 2002 2002 2003 2003 (NT$) (NT$) (NT$) (US$) (NT$) (NT$) (US$) (in millions except per share and GDS data) 33,493 21,747 16,492 477 6,949 7,154 207 (15,494) (11,674) (17,105) (494) (7,279) (9,834) (284) Ì Ì (2) Ì (6) Ì Ì 17,999 10,073 (615) (17) (336) (2,680) (77) (5,856) (6,557) (6,212) (180) (2,968) (2,540) (74) 12,143 3,516 (6,827) (197) (3,304) (5,220) (151) 945 1,356 466 13 301 451 13 (2,077) (4,795) (4,976) (143) (4,170) (1,419) (41) 11,011 77 (11,337) (327) (7,173) (6,188) (179) (398) (943) (20) (1) (11) (23) 0 10,613 (866) (11,357) (328) (7,184) (6,211) (179) Ì Ì 0.4 Ì Ì 2 Ì 10,613 (866) (11,357) (328) (7,184) (6,209) (179) 2.93 (0.23) (3.10) (0.09) (1.95) (1.69) (0.05) 2.91 (0.23) (3.10) (0.09) (1.95) (1.69) (0.05) 29,027 25,358 21,301 615 24,828 16,575 479 38,006 39,562 40,029 1,157 40,256 36,381 1,051 72,451 72,309 68,120 1,968 71,033 59,962 1,732 11,786 9,632 18,357 530 15,932 11,193 323 16,091 19,533 19,549 565 20,443 23,604 682 27,877 29,165 37,906 1,095 36,375 34,797 1,005 44,574 43,144 30,214 873 34,658 25,165 727	Six months ended, and as of, June 30,	Six months ended, and as of, June 30,
	2000 2001 2002 (NT$) (NT$) (NT$) (in millions except 33,493 21,747 16,492 (15,494) (11,674) (17,105) Ì Ì (2) 17,999 10,073 (615) (5,856) (6,557) (6,212) 12,143 3,516 (6,827) 945 1,356 466 (2,077) (4,795) (4,976) 11,011 77 (11,337) (398) (943) (20) 10,613 (866) (11,357) Ì Ì 0.4 10,613 (866) (11,357) 2.93 (0.23) (3.10) 2.91 (0.23) (3.10) 29,027 25,358 21,301 38,006 39,562 40,029 72,451 72,309 68,120 11,786 9,632 18,357 16,091 19,533 19,549 27,877 29,165 37,906 44,574 43,144 30,214		2003
			(US$) 207 (284) Ì (77) (74) (151) 13 (41) (179) 0 (179) Ì (179) (0.05) (0.05) 479 1,051 1,732 323 682 1,005 727

41

Other Data: Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per GDS Ì basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per GDS Ì diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Number of common shares outstanding (weighted, as adjusted)(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock dividend per common share(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended, and as of, Six months ended, and December 31, as of, June 30, 2000 2001 2002 2002 2002 2003 2003 (NT$) (NT$) (NT$) (US$) (NT$) (NT$) (US$) (in millions except per share and GDS data) 11,803 9,078 8,975 259 4,864 998 29 6,048 8,006 8,742 253 4,294 4,796 139 16,123 8,837 86 2 (131) (469) (14) 117.2 (9.2) (124.0) (3.6) (78.0) (67.6) (2.0) 116.4 (9.2) (124.0) (3.6) (78.0) (67.6) (2.0) 3,625 3,695 3,660 3,660 3,676 3,674 3,674 13% 30% 10% 10% 10% Ì Ì	Six months ended, and as of, June 30,	Six months ended, and as of, June 30,
	2000 2001 2002 (NT$) (NT$) (NT$) (in millions except 11,803 9,078 8,975 6,048 8,006 8,742 16,123 8,837 86 117.2 (9.2) (124.0) 116.4 (9.2) (124.0) 3,625 3,695 3,660 13% 30% 10%		2003
			(US$) 29 139 (14) (2.0) (2.0) 3,674 Ì

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

• (2) Common shares outstanding weighted, as adjusted for any employee share bonus and any subsequent stock dividends declared.

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

42

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

The following discussion and analysis should be read in conjunction with our consolidated Ñnancial statements and the related notes included in this OÅering Circular. These Ñnancial statements have been prepared in accordance with ROC GAAP, which diÅer in certain material respects from U.S. GAAP. See ""Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAP''.

Overview

General

The semiconductor industry has been cyclical, with periods of growth being followed by downturns due to global economic growth trends, inventory adjustments as well as periodic mismatches between semiconductor demand and manufacturing capacity. From mid-1999 through mid-2000, we experienced signiÑcant 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. In 2000, we recorded a realized gross proÑt of NT$17,999 million, operating income of NT$12,143 million and net income of NT$10,613 million.

The severe and protracted semiconductor industry downturn began in the second half of 2000 and continued throughout 2001 and 2002, with continued erosion of the average selling prices of our products. In 2001, net sales revenue declined by 35.1% compared to 2000, and we recorded a realized gross proÑt of NT$10,073 million, operating income of NT$3,516 million and net loss of NT$866 million. In 2002, net sales revenues declined by 24.2% compared to 2001, and our cost of goods sold, a substantial portion of which consists of depreciation and amortization, exceeded our net sales revenue, resulting in a realized gross loss of NT$615 million (US$17.8 million) and an operating loss of NT$6,827 million (US$197.3 million). Due primarily to price erosion and related inventory losses, we recorded a net loss of NT$11,357 million (US$328.1 million) in 2002.

The semiconductor industry began to show signs of recovery at the end of the second quarter of 2003. In particular, we recorded an inventory loss provision reversal of NT$298 million (US$8.6 million) in the six months ended June 30, 2003. During that period, net sales revenue increased by 3.0% compared to the six months ended June 30, 2002, but our cost of goods sold continued to exceed our net sales revenue, resulting in a realized gross loss of NT$2,680 million (US$77.4 million) and an operating loss of NT$5,220 million (US$150.8 million). For the six months ended June 30, 2003, we recorded a net loss of NT$6,209 million (US$179.4 million).

Although there were continued signs of improvement in the semiconductor industry during the third and fourth quarters of 2003, we cannot predict whether this improvement will continue. We cannot assure you that these losses will not continue or increase, or that we will be proÑtable in the future. In addition, it will take some time before the positive impact of any improvement that may occur in the end-markets for our products to be reÖected in our Ñnancial performance.

Our capacity utilization rate is calculated using our actual production in the respective period divided by total production capacity. We operated at full capacity in 2000 but our quarterly capacity utilization rates decreased to approximately 87%, 88%, 76% and 70% in 2001. In 2002, our quarterly capacity utilization rates were 50%, 64%, 65%, and 57%, respectively. In the Ñrst nine months of 2003, our quarterly capacity utilization rates were 49%, 64% and 89%, respectively. Our capacity utilization rate continued to increase in the fourth quarter of 2003.

43

We do not expect our capacity utilization rates in 2004 to remain at the level achieved in the second half of 2003 unless there is a signiÑcant recovery in the semiconductor industry. We cannot assure you that our capacity utilization rates will not decline in the future.

Nintendo continued to be our single largest customer in 2001, 2002 and the six months ended June 30, 2003. In 2001 and 2002, Nintendo launched its new Game Cube 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. 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 Game Cube video game platform. Although sales by Nintendo of the Game Boy Advance did not meet anticipated levels in the fourth quarter of 2001, 2002 and the six months ended June 30, 2003, our sales of Mask ROMs to Nintendo in 2001, 2002 and the six months ended June 30, 2003 for use in Game Boy Advance software cartridges continued to account for a large portion of our total sales of Mask ROMs. See ""Risk Factors Ì Risks Relating to Our Company Ì Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a signiÑcant portion of our revenue''.

We completed a reorganization of our operations in 2003. Under our new organizational and business unit structure, we organize our operations into two strategic business units, namely, our Microelectronics and Memory Solution Group and our Integrated Solution Group. Our Microelectronics and Memory Solution Group is primarily responsible for the management and operation of our business relating to our non-volatile memory products, such as Mask ROM, Flash and EPROM products, and for our SMS products. Our Integrated Solution Group is responsible for the management and operation of our business relating to our SLC products. See ""Business Ì Our Reorganization''. In addition, we continue to make adjustments in our product mix and in our customer proÑle on an on-going basis. See ""Business Ì Our Strategy''.

For certain material developments with respect to our Ñnancial condition and results of operations since June 30, 2003, please refer to the discussion set forth in ""Recent Developments''.

Sales Revenue

We derive our sales revenue primarily from the provision and sale of Ñve categories of semiconductor products and services: Mask ROM, Flash, EPROM, SMS and SLC products. We earn additional revenues primarily from royalty income, masking charges and proÑt sharing arrangements.

The majority of our products are used in consumer electronics applications. We have experienced in the past, and we expect to continue to experience, seasonal Öuctuations in the demand for our products. In particular, we generally earn higher sales revenues during the third and fourth quarters of the year.

Product Pricing Trends

The global semiconductor industry is highly competitive, and average selling prices typically decrease over the life of a semiconductor product. Average selling prices for our Mask ROM and Flash memory products have generally declined on an annual basis since 1995, with the exception of 2000 and Mask ROM products in the Ñrst half of 2003, as discussed below. We seek to oÅset 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. In addition, we rely on our leadership, market share and technology in the Mask ROM market to minimize the impact of a general decline in average selling prices. When this approach is successful, particularly in the Mask ROM

44

market, we may be able to minimize declines in the average selling prices of our products and maintain our gross proÑt margins despite general industry-wide declines.

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, apart from increases due to product improvement. In the second half of 2000, selling prices for memory products started to decline, primarily as a result of the overall decrease in global demand and increase in supply for memory products. In 2001, we experienced a decrease in the average selling prices for almost all of our memory products, particularly Flash products, as compared to 2000. These price declines continued throughout 2001 and 2002. In the Ñrst six months of 2003, prices for Flash products continued to decline while prices for Mask ROM products increased slightly due to more shipments of higher density Mask ROM products.

The following table sets forth the average selling prices per die for our Mask ROM and Flash memory products for the periods indicated:

Flash memory products for the periods indicated:
Mask ROMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Flash MemoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Six months Year ended ended December 31, June 30, 2000 2001 2002 2002 2003 (NT$ per die) 105.8 89.6 54.8 55.7 61.2 110.4 74.3 49.0 46.4 41.7	Six months ended June 30,
	2000 105.8 110.4		2003
			61.2 41.7

The following table sets forth the average megabit (Mb) per die for our Mask ROM and Flash memory products for the periods indicated:

Mask ROM(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Flash Memory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Six months Year ended ended December 31, June 30, 2000 2001 2002 2002 2003 (Mb per die) 56.8 43.4 39.4 35.5 62.6 4.8 6.1 9.5 8.0 11.6	Six months ended June 30,	Six months ended June 30,
	2000 56.8 4.8		2003
			62.6 11.6

• (1) The decrease in megabit per die for Mask ROM products from 2000 to 2002 was a result of a decrease in demand for high-density Mask ROM products following Nintendo's introduction of the Game Cube. The products we produce for Nintendo's Game Boy Advance are lower in density than the products we produced previously for Nintendo 64.

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.

As a result of the price trend discussed above, beginning in 2002 our cost of goods sold, a substantial portion of which consists of depreciation and amortization, was higher than our net sales revenue. We realized a gross loss of NT$615 million (US$17.8 million) and an operating loss of NT$6,827 million (US$197.2 million) in 2002. For the same reason, in the Ñrst six

45

months of 2003 our cost of goods sold remained higher than our net sales revenue, which resulted in a realized a gross loss of NT$2,680 million (US$77.4 million) and an operating loss of NT$5,220 million (US$150.8 million).

We anticipate that our cost of goods sold will exceed our net sales revenue for the year ended December 31, 2003, and we cannot assure you that these gross losses will not continue or increase. See ""Capital Expenditures and Depreciation Trend'' discussed below.

Capital Expenditures and Depreciation Trend

The semiconductor industry is capital intensive. This requires us to invest in plant and equipment on an on-going basis in order to increase capacity and upgrade technology. In particular, Ñxed costs, primarily depreciation expenses, are a major component of our cost of goods sold. As a result, increases or decreases in capacity utilization rates can have a signiÑcant eÅect on gross proÑt or loss margins. Higher capacity utilization results in lower Ñxed costs per-unit as Ñxed 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 eÅectively manage capacity utilization levels.

An additional element aÅecting our overall proÑtability 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 Ñnance our capital expansion. Depreciation and amortization expense increased by 32.4% to NT$8,006 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 completed in 2001. In 2002, depreciation and amortization increased by 9.2% to NT$8,742 million (US$252.6 million), arising from a full year of increased depreciation at Fab II following our capital expansion program discussed above and the commencement of depreciation at Fab III. In the six months ended June 30, 2003, depreciation and amortization increased by 11.7% to NT$4,796 million (US$138.6 million) compared to NT$4,294 million for the six months ended June 30, 2002. Based on our current depreciation schedule following the capital expansion program at Fab II and the commencement of depreciation at Fab III discussed above, we expect that we will record our highest level of depreciation expense in 2003. Although we anticipate that our depreciation expense will decrease beginning in 2004, our future depreciation expense depends on our capital expenditure program.

In 2000, 2001 and 2002, our depreciation expense was NT$5,657 million, NT$7,443 million and NT$8,107 million, and represented 16.9%, 34.2% and 49.2% of net sales revenue, respectively. In the six months ended June 30, 2002 and 2003, our depreciation expense was NT$3,987 million and NT$4,487 million, and represented 57.4% and 62.7% of net sales revenue, respectively. The signiÑcant increase in depreciation expense as a percentage of net sales revenue in 2001, 2002 and the six months ended June 30, 2002 and 2003 primarily reÖected the signiÑcant decrease in net sales revenue during those periods, as well as increases in depreciation expenses following our capital expansion program at Fab II and commencement of depreciation at Fab III.

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 commercial levels of utilization. In periods of depressed industry conditions, such as those that have prevailed in 2001, 2002 and the Ñrst half of 2003, we may experience lower than expected demand from customers and a sharp decline in average selling prices, resulting in an increase in depreciation expense relative to net sales revenue.

Inventory

Due to seasonal Öuctuations in the demand for our products, we choose to build up inventory during low demand periods to decrease customer turnaround time and to minimize

46

Öuctuations in levels of production during the year. This seasonal buildup in our inventory increases our risk of inventory loss due to obsolescence.

Deteriorating market conditions in the semiconductor industry since the second half of 2000 has resulted in a decline in average selling prices for our products and a corresponding decrease in the stated value of our inventories. We make provisions for inventory loss based on product age and our evaluation of historical data and projected sales price and volume to determine current trends so as to identify products or product classes that are at risk of obsolescence or are slow moving. We recorded an inventory loss provision of NT$2,929 million (US$84.6 million) for the year ended December 31, 2002, compared with NT$2,587 million for the year ended December 31, 2001 and NT$81 million for the year ended December 31, 2000. We recorded a reversal of inventory loss provision of NT$298 million (US$8.6 million) for the six months ended June 30, 2003 due to improving market conditions, compared with an inventory loss provision of NT$3,376 million for the six months ended June 30, 2002.

Research and Development

We believe that research and development is critical to our future success. We incurred expenses of NT$3,144 million in 2000, NT$3,825 million in 2001, NT$3,806 million (US$110.0 million) in 2002 and NT$1,428 million (US$41.3 million) for the six months ended June 30, 2003 on research and development, or 9.4%, 17.6%, 23.1% and 20.0% of net sales revenue in those periods, respectively. See ""Ì Results of Operations'' for a more detailed discussion of our research and development expenditures.

Our reorganization in 2003 enabled us to consolidate our research and development eÅorts and reduce the total number of projects by approximately two-thirds. As a result, we have reduced our level of research and development expenditures. See ""Business Ì Research and Development''.

Cost Reduction Initiatives

As discussed above, average selling prices for our products have generally declined over time. As a result, we need to reduce our costs continuously in order to maintain the margins on our products. The need for such measures will increase following our strategy to increase our production of Flash products, which have a higher per unit cost. We seek to reduce our unit Ñxed costs by focusing on technology migration and product development, as well as improving manufacturing capabilities and maximizing sales volumes and capacity utilization. In addition, we seek to leverage our memory products capabilities for strategic manufacturing services for certain key customers in order to minimize capacity loss during slow demand periods. For example, we have been able to obtain cost reductions through our continuing eÅorts to improve yields of functional dies per wafer, decrease line widths by improving die-size technology and increase economies of scale. We currently employ 0.4 micron process technology, 0.35 micron process technology and, to a limited extent, 0.32 micron process technology for certain chips at Fab I. We originally employed 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. We began mass production using 0.15 micron process technology for Flash in the second quarter of 2003. We plan to migrate to 0.13 micron process technology for Flash products produced at Fab II in late 2004.

47

Production Capacity

Due to decline in demand as a result of the market downturn in the semiconductor industry, our wafer production in terms of eight-inch wafer equivalents decreased 4.5% to 593,661 wafers in 2001 from 621,587 wafers in 2000 and further decreased 28.5% to 424,594 wafers in 2002. For the six months ended June 30, 2003, our wafer production decreased 7.0% to 191,788 wafers compared to 206,207 wafers in the six months ended June 30, 2002.

In order to decrease customer turnaround time and to utilize greater economies of scale in the future, we have supplemented and increased our manufacturing capacity. We have supplemented our logic process manufacturing capacity by contracting for wafer fabrication on a foundry basis by third parties, including Taiwan Semiconductor Manufacturing Co., Ltd and Tower Semiconductor. We also have increased our overall 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 overall manufacturing capacity by approximately 15,000 eight-inch wafers and 25,000 twelve-inch wafers (56,520 eight-inch wafer equivalents) per month when it is placed in operation. Although we currently are utilizing a portion of the space in Fab III to increase our production capacity at Fab II, due to the adverse market conditions currently prevailing in the semiconductor industry, we expect commencement of full ramp-up of operations at Fab III to be delayed until 2005 or later.

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

Mask ROMÏÏÏÏ Flash ÏÏÏÏÏÏÏÏÏ EPROM ÏÏÏÏÏÏÏ SMSÏÏÏÏÏÏÏÏÏÏ SLC(1) ÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏ			Year ended December 31,	Year ended December 31,	2002 (number of (% of total wafers) production) 151,384 35.7 248,899 58.6 12,990 3.1 99 Ì 11,222 2.6 424,594 100.0	2002 (number of (% of total wafers) production) 151,384 35.7 248,899 58.6 12,990 3.1 99 Ì 11,222 2.6 424,594 100.0	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	2000 (number of (% of total wafers) production) 388,634 62.5 144,758 23.3 17,205 2.8 62,971 10.1 8,019 1.3 621,587 100.0		2001 (number of (% of total wafers) production) 289,538 48.8 260,859 43.9 11,531 1.9 23,918 4.1 7,815 1.3 593,661 100.0				2002 (number of (% of total wafers) production) 73,186 35.5 118,365 57.4 7,447 3.6 Ì Ì 7,209 3.5 206,207 100.0		2003
	(number of wafers) 388,634 144,758 17,205 62,971 8,019 621,587		(number of wafers) 289,538 260,859 11,531 23,918 7,815 593,661		(number of wafers) 151,384 248,899 12,990 99 11,222 424,594		(number of wafers) 73,186 118,365 7,447 Ì 7,209 206,207		(number of wafers) 63,068 114,610 1,246 Ì 12,863 191,787	(% of total production)
											32.9 59.8 0.6 Ì 6.7 100.0

• (1) 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.

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.

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The following table sets forth the breakdown of our net sales revenue and percentages of net sales revenue by geographic regions, based on sales generated by our sales branches located in such regions:

Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hong Kong, Singapore and South Korea ÏÏÏÏÏÏÏ United States ÏÏÏÏÏÏÏÏ Europe and other countries ÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended December 31, 2000(1) 2001(1) 2002(1) (millions (% of (millions (% of (millions (% of in NT$) total net in NT$) total net in NT$) total net sales sales sales revenue) revenue) revenue) 15,633 46.7 10,893 50.1 7,983 48.4 7,306 21.8 5,711 26.3 2,891 17.5 4,753 14.2 2,702 12.4 3,656 22.2 3,235 9.7 1,808 8.3 1,617 9.8 2,566 7.6 633 2.9 345 2.1 33,493 100.0 21,747 100.0 16,492 100.0	Year ended December 31, 2000(1) 2001(1) 2002(1) (millions (% of (millions (% of (millions (% of in NT$) total net in NT$) total net in NT$) total net sales sales sales revenue) revenue) revenue) 15,633 46.7 10,893 50.1 7,983 48.4 7,306 21.8 5,711 26.3 2,891 17.5 4,753 14.2 2,702 12.4 3,656 22.2 3,235 9.7 1,808 8.3 1,617 9.8 2,566 7.6 633 2.9 345 2.1 33,493 100.0 21,747 100.0 16,492 100.0	Six months ended June 30,	Six months ended June 30,
	2000(1) (millions (% of in NT$) total net sales revenue) 15,633 46.7 7,306 21.8 4,753 14.2 3,235 9.7 2,566 7.6 33,493 100.0	2001(1) (millions (% of in NT$) total net sales revenue) 10,893 50.1 5,711 26.3 2,702 12.4 1,808 8.3 633 2.9 21,747 100.0	2002(1) (millions (% of in NT$) total net sales revenue) 2,672 38.5 1,528 22.0 1,767 25.4 801 11.5 181 2.6 6,949 100.0	2003(1)
				(millions (% of in NT$) total net sales revenue) 2,729 38.2 2,236 31.3 1,641 22.9 368 5.1 180 2.5 7,154 100.0

• (1) See note 20 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 for a discussion of our export sales. The numbers in this table do not represent sales by shipping destination or by end customer origin.

Our sales to Japan are generally denominated in U.S. dollars and Japanese yen, our sales to Taiwan are generally denominated in U.S. dollars and NT dollars, and our sales to other countries are generally denominated in U.S. dollars. In 2000, 2001 and 2002, 92.5%, 90.8% and 99.2%, respectively, of our net sales revenue was denominated in currencies other than NT dollars, primarily U.S. dollars and Japanese yen. In the six months ended June 30, 2003, approximately 96.3% of our net sales revenue was denominated in currencies other than NT dollars, primarily U.S. dollars and Japanese yen, compared to 94.3% in the six months ended June 30, 2002.

We use hedging techniques such as foreign currency borrowings, forward exchange rate contracts and foreign currency swaps to mitigate our currency exposure risks. See ""Ì Quantitative and Qualitative Disclosure About Market Risk.''

Critical Accounting Policies

The preparation of our consolidated Ñnancial statements requires management to make estimates and judgments that aÅect 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 diÅer from these estimates under diÅerent assumptions or conditions.

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

Inventories

A principal risk in our industry is the rapid rate of obsolescence of products due to changes in technology or other economic factors. Our Ñnancial and production management evaluates historical experience, current trends and projected sales prices and volumes to identify products or classes of products that are at risk for obsolescence or are slow moving. Our projected sales

49

volumes are based on projected demand information provided by our customers and our estimates of general market conditions. We recorded an inventory loss provision under ROC GAAP of NT$81 million in 2000, NT$2,587 million in 2001 and NT$2,929 million (US$84.6 million) in 2002 due to obsolete or slow moving items. We recorded an inventory loss provision under ROC GAAP of NT$3,376 million for the six months ended June 30, 2002, compared to a reversal of inventory loss provision of NT$298 million (US$8.6 million) for the six months ended June 30, 2003 due to improving market conditions.

Stock Appreciation Right Program

We have entered into a derivative contract to hedge our risk related to our stock appreciation right (""SAR'') program which expired in April 2003. We receive or pay the beneÑt 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 May 5, 2004. 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 rights 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 diÅerence 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 rights. Therefore, to the extent the employees' exercise price on vested rights exceeds the fair market value of our shares, a portion of the derivative obligation is not recorded. To the extent that employees vest in rights 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 December 31, 2002, the unrecorded obligation related to the derivative contract was NT$503 million (US$14.5 million). In April 2003, we recorded the additional obligation on a ROC GAAP basis in the amount of NT$744 million based on market price of the underlying shares of NT$9.5 per share at that time. Furthermore, since the strike price of the derivative contract is in U.S. dollars, changes in the value of the contract may not correlate with changes in our obligations under the SAR program.

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. Our deferred tax assets relate principally to income tax credits that expire between 2003 and 2007. 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 forecasts. Based on these projections, we estimate that a portion, but not all, of these tax credits will be fully utilized prior to their expiration. We expect to achieve future earnings through the expansion of our business. However, we may not be able to generate suÇcient 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. As of June 30, 2003, our deferred tax assets exceeded our deferred tax liabilities by NT$7,415 million (US$214.3 million), and we recorded a valuation allowance of NT$5,522 million (US$159.6 million) against our tax assets resulting in net deferred tax assets of NT$1,893 million (US$54.7 million).

Cost Method Investments

Under ROC GAAP, unrealized losses on marketable equity securities held for short-term investment are recorded as investment loss in the statement of operations, and unrealized gains

50

are not recognized. Unrealized losses on marketable equity securities held for long-term investment 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, oÅering prices, trends of earnings, price multiples and other key measures for our investments. 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 December 31, 2002, we recorded a cumulative unrealized loss of NT$979 million (US$28.3 million), which was primarily attributable to our investment in Tower Semiconductor. As of June 30, 2003, we recorded a cumulative unrealized loss of NT$704 million (US$20.3 million), which was primarily attributable to the decline in the fair market value of the investment in Tower Semiconductor.

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Results of Operations

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

Sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Sales returns ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sales discountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MMSG: Mask ROMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Flash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EPROM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SMSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ISG: SLC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses Selling expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and development expenses ÏÏÏÏÏ Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax beneÑt (provision)ÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended December 31, 2000 2001 2002 100.9 101.4 100.9 (0.8) (1.0) (0.2) (0.1) (0.4) (0.7) 100.0 100.0 100.0 57.6 56.6 45.9 19.2 14.0 26.4 3.7 4.5 3.6 9.3 12.8 2.5 5.6 9.2 17.6 4.6 2.9 4.0 (46.2) (53.7) (103.7) 53.8 46.3 (3.7) (2.8) (2.8) (3.5) (5.3) (9.7) (11.1) (9.4) (17.6) (23.1) (17.5) (30.1) (37.7) 36.3 16.2 (41.4) 2.8 6.2 2.8 (6.2) (22.0) (30.2) 32.9 0.4 (68.8) (1.2) (4.3) (0.1) 31.7 (3.9) (68.9)	Year ended December 31, 2000 2001 2002 100.9 101.4 100.9 (0.8) (1.0) (0.2) (0.1) (0.4) (0.7) 100.0 100.0 100.0 57.6 56.6 45.9 19.2 14.0 26.4 3.7 4.5 3.6 9.3 12.8 2.5 5.6 9.2 17.6 4.6 2.9 4.0 (46.2) (53.7) (103.7) 53.8 46.3 (3.7) (2.8) (2.8) (3.5) (5.3) (9.7) (11.1) (9.4) (17.6) (23.1) (17.5) (30.1) (37.7) 36.3 16.2 (41.4) 2.8 6.2 2.8 (6.2) (22.0) (30.2) 32.9 0.4 (68.8) (1.2) (4.3) (0.1) 31.7 (3.9) (68.9)	Six months ended June 30,	Six months ended June 30,	Six months ended June 30,
	2000 100.9 (0.8) (0.1) 100.0 57.6 19.2 3.7 9.3 5.6 4.6 (46.2) 53.8 (2.8) (5.3) (9.4) (17.5) 36.3 2.8 (6.2) 32.9 (1.2) 31.7	2001 101.4 (1.0) (0.4) 100.0 56.6 14.0 4.5 12.8 9.2 2.9 (53.7) 46.3 (2.8) (9.7) (17.6) (30.1) 16.2 6.2 (22.0) 0.4 (4.3) (3.9)	2002 101.2 (0.3) (0.9) 100.0 45.1 22.6 4.4 4.0 19.4 4.5 (104.8) (4.8) (3.7) (12.3) (26.7) (42.7) (47.5) 4.3 (60.0) (103.2) (0.2) (103.4)		2003
					100.9 (0.6) (0.3) 100.0 37.3 35.5 3.0 10.8 10.7 2.7 (137.5) (37.5) (3.8) (11.7) (20.0) (35.5) (73.0) 6.3 (19.8) (86.5) (0.3) (86.8)

• (1) Other sales revenue includes royalty revenues, masking charges, proÑt-sharing revenues and other operating revenues.

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

Net Sales Revenue. Our total net sales revenue increased 3.0% to NT$7,154 million (US$206.7 million) in the six months ended June 30, 2003 from NT$6,949 million in the six months ended June 30, 2002. This increase was primarily due to increases in sales volume of Flash products and SMS products, which were partially oÅset by the decreases in sales volume of Mask ROM, EPROM and SLC products.

Our net sales revenue from Mask ROM products decreased 14.9% to NT$2,666 million (US$77.0 million) in the six months ended June 30, 2003 from NT$3,132 million in the six months ended June 30, 2002. This decrease was primarily due to a continued decrease in sales volume of Mask ROM products in the six months ended June 30, 2003, which was partially

52

oÅset by an increase in the average selling prices for Mask ROM products. Sales volume decreased to 43.3 million dies in the six months ended June 30, 2003 compared to 56.2 million dies in the six months ended June 30, 2002 as a result of decreased demand for Mask ROM products from Nintendo following its introduction of the Game Cube products. The average selling prices for Mask ROM products increased to NT$61.2 per die in the six months ended June 30, 2003 from NT$55.7 per die in the six months ended 2002, principally as a result of increased sales of high-density Mask ROM products. The proportion of our net sales revenue from Mask ROM products decreased to 37.3% in the six months ended June 30, 2003 from 45.1% in the six months ended June 30, 2002.

Our net sales revenue from Flash products increased 61.7% to NT$2,543 million (US$73.5 million) in the six months ended June 30, 2003 from NT$1,573 million in the six months ended June 30, 2002. This increase was primarily due to an increase in the sales volume of our Flash products, which was partially oÅset by a decrease in the average selling prices for Flash products. Sales volume increased to 62.8 million dies in the six months ended June 30, 2003 compared to 36.9 million dies in the six months ended June 30, 2002 due to an increased demand in Game Cube products, printers and LANs. Average selling prices for Flash products decreased to NT$41.7 per die in the six months ended June 30, 2003 from NT$46.4 per die in the six months ended June 30, 2002, principally as a result of signiÑcant price competition worldwide. The proportion of our net sales revenue from Flash products increased to 35.5% in the six months ended June 30, 2003 from 22.6% in the six months ended June 30, 2002.

Our net sales revenue from EPROM products decreased 31.2% to NT$212 million (US$6.1 million) in the six months ended June 30, 2003 from NT$308 million in the six months ended June 30, 2002. This decrease was primarily due to the migration from EPROM products to Flash products by our customers. Sales volume decreased to 11.5 million dies in the six months ended June 30, 2003 compared to 13.9 million dies in the six months ended June 30, 2002 as a result of the decline of the demand from our customers. The average selling prices for EPROM products decreased to NT$18.6 per die in the six months ended June 30, 2003 from NT$23.7 per die in the six months ended June 30, 2002, principally as a result of the downward price trend of our EPROM products. The proportion of our net sales revenue from EPROM products decreased to 3.0% in the six months ended June 30, 2003 from 4.4% in the six months ended June 30, 2002.

Our net sales revenue from SMS products increased 180.0% to NT$770 million (US$22.2 million) in the six months ended June 30, 2003 from NT$275 million in the six months ended June 30, 2002. This increase was mainly due to the increased demand for the foundry service we provide for Renesas Technology Corporation as well as increases in purchase orders from our major existing contract customers. The proportion of our net sales revenue from our SMS products increased to 10.8% in 2003 from 4.0% in 2002.

Our net sales revenue from SLC products decreased 43.1% to NT$765 million (US$22.1 million) in the six months ended June 30, 2003 from NT$1,345 million in the six months ended June 30, 2002. This decrease was principally due to the decline in demand of SLC products from one of our key customers, which was partially oÅset by an increase in the average selling prices for SLC products. The proportion of our net sales revenue from our SLC products decreased to 10.7% in the six months ended June 30, 2003 from 19.4% in the six months ended June 30, 2002.

Other sales revenue includes royalty revenues, masking charges, proÑt-sharing revenues and other operating revenues. Other sales revenue decreased 37.8% to NT$198 million (US$5.7 million) in the six months ended June 30, 2003 from NT$316 million in the six months ended June 30, 2002. This decrease was primarily due to the decrease of proÑt sharing received from Phillips. The proportion of our net sales revenue from others decreased to

53

2.7% in the six months ended June 30, 2003 from 4.5% in the six months ended June 30, 2002.

Cost of Goods Sold and Gross ProÑt (Loss). Cost of goods sold increased 35.1% to NT$9,834 million (US$284.1 million) in the six months ended June 30, 2003 from NT$7,279 million in the six months ended June 30, 2002. This signiÑcant increase was primarily due to the change in our product mix towards a higher proportion of Flash products, which have higher manufacturing costs per unit, and a 12.5% increase in depreciation expense resulting from commencing depreciation at Fab III in July 2002. See ""Ì Overview Ì Cost of Goods Sold Ì Capital Expenditures and Depreciation Trend''. The higher per unit manufacturing costs for our Flash products reÖect that our Flash technology is in the process of migrating to more advanced technology and therefore is not yet price competitive.

As a result of the foregoing, our realized gross loss increased 697.6% to NT$2,680 million (US$77.4 million) in the six months ended June 30, 2003 from NT$336 million in the six months ended June 30, 2002. We had a negative gross margin of 37.5% in the six months ended June 30, 2003 compared to a negative gross margin of 4.8% in the six months ended June 30, 2002.

Operating Expenses. Total operating expenses decreased 14.4% to NT$2,540 million (US$73.4 million) in the six months ended June 30, 2003 from NT$2,968 million in the six months ended June 30, 2002. This decrease was primarily due to decreases in research and development expenses and administrative expenses, which were partially oÅset by an increase in selling expenses. Research and development expenses decreased 23.0% to NT$1,428 million (US$41.3 million) in the six months ended June 30, 2003 from NT$1,855 million in the six months ended June 30, 2002, due to our strategic policy of integrating our resources and streamlining the number of research and development projects. See ""Business Ì Research and Development.'' Administrative expenses decreased 1.5% to NT$839 million (US$24.2 million) in the six months ended June 30, 2003 from NT$852 million in the six months ended June 30, 2002. This decrease was primarily due to cost control measures that we implemented during the six months ended June 30, 2003. Selling expenses increased 5.0% to NT$273 million (US$7.9 million) in the six months ended June 30, 2003 from NT$260 million in the six months ended June 30, 2002. This increase primarily resulted from higher sales volume in the six months ended June 30, 2003.

Operating Loss. As a result of the foregoing, our operating loss increased 58.0% to NT$5,220 million (US$150.8 million) in the six months ended June 30, 2003 from NT$3,304 million in the six months ended June 30, 2002.

Non-Operating Income. Non-operating income increased 49.8% to NT$451 million (US$13.0 million) in the six months ended June 30, 2003 from NT$301 million in the six months ended June 30, 2002. This increase was primarily due to an inventory loss provision reversal and an increase in foreign exchange gains, which were partially oÅset by a decrease in interest income and other income. We recorded an inventory loss provision reversal of NT$298 million (US$8.6 million) in the six months ended June 30, 2003 largely as a result of the increased sales out of inventory that was written oÅ for obsolescence in prior periods, compared to an inventory loss provision of NT$3,376 million in the six months ended June 30, 2002 resulting from inventory obsolescence due to aging and price declines. Our foreign exchange gains increased 37.5% to NT$66 million (US$1.9 million) in the six months ended June 30, 2003 from NT$48 million in the six months ended June 30, 2002, principally as a result of the appreciation of the NT dollar against the U.S. dollar as well as the appreciation of the Japanese yen against the U.S. dollar in the six months ended June 30, 2003. Interest income decreased 60.2% to NT$49 million (US$1.4 million) in the six months ended June 30, 2003 from NT$123 million in the six months ended June 30, 2002, primarily due to declining interest rates. Other income decreased 74.8% to NT$32 million (US$0.9 million) in the six

54

months ended June 30, 2003 from NT$127 million in the six months ended June 30, 2002. The higher amount of other income in the six months ended June 30, 2002 was principally the result of insurance claims received in 2002 for earthquake damage that occurred in 1999 and the electricity shutdown that occurred in 2000.

Non-Operating Expenses. Non-operating expenses decreased 66.0% to NT$1,419 million (US$41.0 million) in 2003 from NT$4,170 million in 2002. This decrease was primarily due to an inventory loss provision reversal and decreases in interest expense and other expenses, which were partially oÅset by an increase in net loss from equity investment. As discussed above, we recorded an inventory loss provision reversal of NT$298 million (US$8.6 million) in the six months ended June 30, 2003, compared to an inventory loss provision of NT$3,376 million in the six months ended June 30, 2002. Interest expense decreased 4.8% to NT$553 million (US$16.0 million) in the six months ended June 30, 2003 from NT$581 million in the six months ended June 30, 2002, principally as a result of declining interest rates. Other expenses increased 96.4% to NT$55.0 million (US$1.6 million) in the six months ended June 30, 2003 from NT$28 million in the six months ended June 30, 2002, primarily due to an increase in other expenses from our consolidated subsidiaries. Net loss from equity investment and net investment loss increased 338.4% to NT$811 million (US$23.4 million) in the six months ended June 30, 2003 from NT$185 million in the six months ended June 30, 2002 because of a mark-down in equity investments in 2003 as a result of adverse market conditions.

Income Tax Expense. Total income tax expense increased 91.7% to NT$23 million (US$0.7 million) in the six months ended June 30, 2003 from NT$12 million in the six months ended June 30, 2002. This increase resulted primarily from a reversal of deferred tax assets recorded in prior periods because we revised our estimates regarding our ability to generate taxable income to utilize such tax credits before they expire.

Net Loss. As a result of the foregoing, our net loss decreased 13.6% to NT$6,209 million (US$179.4 million) in the six months ended June 30, 2003 from NT$7,184 million in the six months ended June 30, 2002.

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

Net Sales Revenue. Our total net sales revenue decreased 24.2% to NT$16,492 million (US$476.5 million) in 2002 from NT$21,747 million in 2001. This decrease was primarily due to a decline in average selling prices in all of our product categories resulting from the continued market downturn, despite an increase in overall sales volume in 2002.

Our net sales revenue from Mask ROM products decreased 38.5% to NT$7,575 million (US$218.9 million) in 2002 from NT$12,309 million in 2001. This decrease was primarily due to a decrease in average selling prices for our Mask ROM products. Sales volume remained Öat at 138.0 million dies in 2002 compared to 137.6 million dies in 2001. The average selling prices for Mask ROM products decreased to NT$54.8 per die in 2002 from NT$89.6 per die in 2001, principally as a result of a decrease in demand for high-density Mask ROM products following Nintendo's introduction of the Game Cube. The products we produce for Nintendo's Game Boy Advance are lower in density than the products we produced previously for Nintendo 64. The proportion of our net sales revenue from Mask ROM products decreased to 45.9% in 2002 from 56.6% in 2001.

Our net sales revenue from Flash products increased 43.1% to NT$4,356 million (US$125.9 million) in 2002 from NT$3,045 million in 2001. This increase was primarily due to an increase in the sales volume of our Flash products, which was partially oÅset by a decrease in the average selling prices for Flash products. Sales volume increased to 91.9 million dies in 2002 compared to 43.5 million dies in 2001 due to an increased demand in Game Cubes, printers and LANs. Average selling prices for Flash products decreased to NT$49.0 per

55

die in 2002 from NT$74.3 per die in 2001, principally as a result of signiÑcant price competition worldwide. The proportion of our net sales revenue from Flash products increased to 26.4% in 2002 from 14.0% in 2001.

Our net sales revenue from EPROM products decreased 39.5% to NT$592 million (US$17.1 million) in 2002 from NT$979 million in 2001. This decrease was primarily due to a decrease in average selling prices of our EPROM products. Sales volume increased to 28.3 million dies in 2002 compared to 24.2 million dies in 2001 as a result of the decline in the average selling price from EPROM products which increased demand. The average selling prices for EPROM products decreased to NT$22.0 per die in 2002 from NT$40.1 per die in 2001, principally as a result of the downward price trend of our EPROM products. The proportion of our net sales revenue from EPROM products decreased to 3.6% in 2002 from 4.5% in 2001.

Our net sales revenue from SMS products decreased 85.2% to NT$411 million (US$11.9 million) in 2002 from NT$2,784 million in 2001. This decrease was mainly due to a decrease in the sales volume of our SMS products as a result of a decline in demand. The proportion of our net sales revenue from SMS products decreased to 2.5% in 2002 from 12.8% in 2001.

Our net sales revenue from SLC products increased 44.6% to NT$2,894 million (US$83.6 million) in 2002 from NT$2,001 million in 2001. This increase was principally due to an increase in the sales volume of our SLC products, which was partially oÅset by a decrease in average selling prices of our SLC products and lower-priced products oÅered in our SLC product lines. The proportion of our net sales revenue from our SLC products increased to 17.6% in 2002 from 9.2% in 2001.

Other sales revenue increased 5.2% to NT$664 million (US$19.2 million) in 2002 from NT$631 million in 2001. This increase was primarily due to decreased masking charges and proÑt sharing. The proportion of our net sales revenue from others increased to 4.0% in 2002 from 2.9% in 2001.

Cost of Goods Sold and Gross ProÑt (Loss). Cost of goods sold increased 46.5% to NT$17,105 million (US$494.2 million) in 2002 from NT$11,674 million in 2001. This increase was primarily due to an increase of 9.2% in depreciation and amortization expenses following our capital expansion program at Fab II completed in 2001 and the commencement of depreciation at Fab III in 2002 and the increased overall sales volume, which resulted in increases in raw materials costs and subcontracting expenses for outsourced services such as testing and packaging. See ""Ì Overview Ì Cost of Goods Sold Ì Capital Expenditures and Depreciation Trend''. The increase also resulted from an adjustment of our product mix toward a higher proportion of Flash products, which require have higher manufacturing costs per unit.

As a result of the foregoing, we had a realized gross loss of NT$615 million (US$17.8 million) in 2002 compared to gross income of NT$10,073 million in 2001. We had a negative gross margin of 3.7% in 2002 compared to a positive gross margin of 46.3% in 2001.

Operating Expenses. Total operating expenses decreased 5.3% to NT$6,212 million (US$179.5 million) in 2002 from NT$6,557 million in 2001. This decrease was primarily due to decreases in administrative expenses and selling expenses. Administrative expenses decreased 13.3% to NT$1,838 million (US$53.1 million) in 2002 from NT$2,121 million in 2001, resulting from lower administrative expenses at certain overseas subsidiaries. Selling expenses decreased 7.0% to NT$568 million (US$16.4 million) in 2002 from NT$611 million in 2001. This decrease was primarily due to decreases in compensation for our sales force as a result of lower net sales revenue and decreases in selling expenses of certain overseas subsidiaries. Research and development expenses remained relatively unchanged at NT$3,806 million (US$110.0 million) in 2002 compared to NT$3,825 million in 2001.

56

Operating Income (Loss). As a result of the foregoing, we incurred an operating loss in 2002 of NT$6,827 million (US$197.2 million) compared to operating income of NT$3,516 million in 2001.

Non-operating Income. Non-operating income decreased 65.6% to NT$466 million (US$13.5 million) in 2002 from NT$1,356 million in 2001. This decrease was largely the result of decreases in foreign exchange gain, interest income and others. We incurred foreign exchange losses of NT$321 million (US$9.3 million) in 2002 as discussed below, compared to foreign exchange gains of NT$454 million in 2001. Interest income decreased 56.3% to NT$217 million (US$6.3 million) in 2002 from NT$496 million in 2001, principally as a result of lower interest rates and lower cash deposits. Others decreased 28.9% to NT$219 million (US$6.3 million) in 2002 from NT$308 million in 2001, primarily as a result of the reversal of the insurance claim for the earthquake damage that occurred in 1999.

Non-operating Expenses. Non-operating expenses increased 3.8% to NT$4,976 million (US$143.8 million) in 2002 from NT$4,795 million in 2001. This increase was primarily due to increases in inventory loss provision, foreign exchange losses and interest expense, which were partially oÅset by decreases in net loss from equity investment and other expenses. Our inventory loss provision increased 13.2% to NT$2,929 million (US$84.6 million) in 2002 from NT$2,587 million in 2001, largely as a result of a decline in average selling prices for our products and a corresponding decrease in the stated value of our inventories. Foreign exchange losses recorded under our Japanese yen-based currency derivative contracts were NT$321 million (US$9.3 million) in 2002 primarily due to the appreciation of the Japanese Yen against the US dollar in 2002, compared to foreign exchange gains of NT$454 million in 2001. Interest expense increased 5.5% to NT$1,238 million (US$35.8 million) in 2002 from NT$1,173 million in 2001, as a result of a 31.6% increase in the aggregate principal amount of our outstanding indebtedness, which was partially oÅset by a general decrease in interest rates. Net loss from equity investment and net investment loss decreased 46.8% to NT$415 million (US$12.0 million) in 2002 from NT$780 million in 2001 because our past substantial net investment losses were mostly written oÅ in 2001. See ""Business Ì Subsidiaries and Strategic Investments''. Other expenses decreased 70.6% to NT$73 million (US$2.1 million) in 2002 from NT$248 million in 2001. Other expenses were signiÑcantly higher in 2001 because we recorded a provision for doubtful accounts receivable for an insurance claim in the amount of NT$227 million.

Income Tax Expense. Total income tax expense decreased 97.9% to NT$20 million (US$0.6 million) in 2002 from NT$943 million in 2001. This decrease resulted primarily from the tax beneÑt arising from the realized loss before taxes and minority interest of NT$11,337 million (US$327.6 million) in 2002, compared with the tax expense provision made for the realized income before taxes and minority interest of NT$77 million in 2001.

Net Loss. As a result of the foregoing, our net loss increased 1,211.4% to NT$11,357 million (US$328.1 million) in 2002 from NT$866 million 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 in 2001 from NT$33,493 million in 2000. This decrease resulted primarily from lower overall sales volume across product categories and declining average selling prices in all of our product categories due to the market downturn.

Our net sales revenue from Mask ROM products decreased 36.2% to NT$12,309 million in 2001 from NT$19,292 million in 2000. This decrease was primarily due to decreases in sales volume and average selling prices of Mask ROM products. Sales volume decreased to 137.6 million dies in 2001 compared to 181.9 million dies in 2000 due to decreasing sales of Mask ROM products to Nintendo following its introduction of the Game Cube. The average

57

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 following Nintendo's introduction of the Game Cube. The products we produce for Nintendo's Game Boy Advance are lower in density than the products we produced previously for Nintendo 64. The proportion of our net sales revenue from Mask ROM products decreased to 56.6% in 2001 from 57.6% in 2000.

Our net sales revenue from Flash products decreased 52.7% to NT$3,045 million in 2001 from NT$6,431 million 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. Sales volume decreased to 43.5 million dies in 2001 compared to 58.5 million dies in 2000. 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 Flash products decreased to 14.0% in 2001 from 19.2% in 2000.

Our net sales revenue from EPROM products decreased 21.0% to NT$979 million in 2001 from NT$1,239 million in 2000. This decrease was primarily due to a decrease in average selling prices for our EPROM products, which was partially oÅset by an increase in sales volume of these products. Sales volume increased to 24.2 million dies in 2001 compared to 22.2 million dies in 2000. 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 semiconductor industry. The proportion of our net sales revenue from EPROM products increased to 4.5% in 2001 from 3.7% in 2000.

Our net sales revenue from SMS products decreased 10.6% to NT$2,784 million in 2001 from NT$3,115 million in 2000. This decrease was mainly due to a decrease in average selling prices for our SMS products, which was partially oÅset by an increase in the sales volume of these products. The proportion of our net sales revenue from SMS products increased to 12.8% in 2001 from 9.3% in the same period in 2000.

Our net sales revenue from SLC products increased 6.7% to NT$2,001 million in 2001 from NT$1,876 million 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. The proportion of our net sales revenue from our SLC products increased to 9.2% in 2001 from 5.6% in the same period in 2000.

Other sales revenue decreased 59.1% to NT$631 million in 2001 from NT$1,541 million in 2000. This decrease was primarily due to reclassiÑcation of the sales revenues into product lines. The proportion of our net sales revenue from others decreased to 2.9% in 2001 from 4.6% in 2000.

Cost of Goods Sold and Gross ProÑt. Cost of goods sold decreased 24.7% to NT$11,674 million in 2001 from NT$15,494 million in 2000, largely as a result of lower overall sales volumes across product categories. 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 oÅset by an increase of 32.4% in depreciation and amortization expenses resulting from our capital expansion program for Fab II completed in 2001. See ""Ì Overview Ì Cost of Goods Sold Ì Capital Expenditures and Depreciation Trend''.

As a result of the foregoing, our gross proÑt decreased 44.0% to NT$10,073 million in 2001 from NT$17,999 million in 2000. Our gross margin decreased to 46.3% in 2001 from 53.8% in 2000.

58

Operating Expenses. Total operating expenses increased 12.0% to NT$6,557 million in 2001 from NT$5,856 million in 2000. This increase was primarily due to increases in research and development expenses and administrative expenses, which were partially oÅset by a decrease in selling expenses. Research and development expenses increased 21.7% to NT$3,825 million in 2001 from NT$3,144 million in 2000, as we increased our development activities. Administrative expenses increased 19.7% to NT$2,121 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 and related derivative contracts. Selling expenses decreased 35.0% to NT$611 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.

Operating Income. As a result of the foregoing, our operating income decreased 71.0% to NT$3,516 million in 2001 from NT$12,143 million in 2000.

Non-operating Income. Non-operating income increased 43.5% to NT$1,356 million in 2001 from NT$945 million in 2000. This increase was largely the result of increases in foreign exchange gains, other income and net gain on short-term investments, which were partially oÅset by a decrease in interest income. Foreign exchange gain increased by 54.9% to NT$454 million in 2001 from NT$293 million in 2000, which was attributable to our Japanese yen-based currency derivatives contracts as a result of the depreciation of the Japanese yen against the U.S. dollar in 2001. Other income increased by 382.8% to NT$309 million in 2001 from NT$64 million in 2000 primarily as a result of a reversal of allowance for doubtful accounts, damage reimbursement from a parts supplier and other miscellaneous items. In addition, we recorded a net short-term investment gain of NT$76 million in 2001. Interest income decreased by 8.3% to NT$496 million in 2001 from NT$541 million in 2000, largely resulting from lower interest rates and our lower level of cash deposits.

Non-operating Expenses. Non-operating expenses increased to NT$4,795 million in 2001 from NT$2,077 million in 2000. This increase was largely the result of increases in inventory loss provision, net investment loss and other expenses, which were partially oÅset by decreases in net loss from equity investment and interest expense. Our inventory loss provision increased substantially to NT$2,587 million in 2001 from NT$81 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. Net investment loss increased 2,300.0% to NT$384 million in 2001 from NT$16 million in 2000, primarily due to substantial losses in our equity investment primarily as a result of the write oÅ of our investments in Caesar Technology Inc. (""Caesar'') and Chantek Electric Co., Ltd. (""Chantek'') in 2001. Other expenses increased to NT$248 million in 2001 from NT$107 million in 2000. This increase was principally a result of the increase in insurance premiums following an earthquake in Taiwan in September 1999. Net loss from equity investment decreased 34.3% to NT$395 million in 2001 from NT$601 million in 2000. Interest expense decreased 7.3% to NT$1,173 million in 2001 from NT$1,266 million in 2000 due to declining interest rates.

Income Tax Expense. Total income tax expense increase 137.0% to NT$943 million in 2001 from NT$398 million in 2000. This increase primarily reÖected the investment tax beneÑt for the investment in production equipment and machinery in Fab II that we recognized in 2000.

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

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InÖation

We do not believe that inÖation 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 (2.7)% in 2000, (1.3)% in 2001 and (0.05)% in 2002.

Taxation

Our facilities, Fab I, II and III, are located in the Science Park. See ""Business Ì Property, Plant and Equipment''. We enjoy preferential tax treatment in some respects under the ROC Statute for the Establishment and Administration of Science 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. In addition, we are entitled to a temporary exemption from income taxes for our income attributable to sales of our products manufactured at Fab I and Fab II after subtracting any value-added amount to our products attributable to third-party contractors. We were entitled to choose a tax exemption period of Ñve years for Fab I and four years for Fab II. The tax exemption period commences from the Ñrst date of sales, although we may defer the tax exemption for up to four years.

We chose the period from January 1, 1994 to December 31, 1998 as the Ñve-year exemption period for Fab I. Because we completed a substantial expansion of Fab II in 2001 as discussed in ""Ì Overview Ì Cost of Goods Sold Ì Capital Expenditures and Depreciation Trend'', we are entitled to choose separate tax expansion periods for Phase I and Phase II of Fab II. For Phase I of Fab II, we have chosen the period from January 1, 2001 to December 31, 2004 as the four-year tax exemption period. We have not chosen the tax exemption period for Phase II of Fab II. Although this tax exemption beneÑt has been rescinded under an amendment to the Science Park regulations eÅective on January 20, 2000, we are still entitled to claim the tax exemption period for Phase II of Fab II. We have not chosen the tax exemption period for Fab III. After the expiration of the relevant exemption periods, we will apply for new tax exemptions under the Statute of Upgrading Industries for the expansion of Fab II and Fab III in the future. In 2001, the beneÑt was NT$606 million based on exempted income of NT$2,426 million at 25% rate.

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 is also 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 Ñve 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 Ñve 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$318 million (US$9.2 million) of tax credits in 2002. We did not utilize any tax credits during the six months ended June 30, 2003. As of June 30, 2003, unused tax credits available to reduce future taxable income amounted to NT$4,211 million (US$121.7 million), which expire between the period 2003 and 2007. See note 16 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

Net operating losses may be carried forward for a period of Ñve years. As of June 30, 2003, loss carryforwards available to reduce future taxable income totaled NT$9,241 million

60

(US$267.0 million). NT$6,045 million and NT$3,196 million of these tax loss carryforwards expire in 2007 and 2008, respectively. See note 16 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

In 2000, we recorded a reversal of our tax provision of NT$631 million due to our estimate of our ability to generate taxable income to utilize our deferred tax assets. In 2001, we recorded an additional tax provision of NT$1,255 million, which relates primarily to deferred tax assets that, based on our estimates, will not be realized. For this same reason, we recorded an additional tax provision of NT$3,319 million (US$95.9 million) in 2002. For the six months ended June 30, 2003, we recorded an additional tax provision of NT$706 million (US$20.4 million) as compared to NT$1,871 million for the six months ended June 30, 2002. See note 16 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

Equity Derivative Contract

We entered into a derivative contract with our common shares as the underlying reference securities in connection with our stock appreciation rights plan in order to provide liquidity. This contract also included a reference to foreign currency exchange rates. This contract has signiÑcantly aÅected our net income or loss during the period 2000 through June 30, 2003. This contract had a carrying amount and fair value of NT$(1,385 million) and NT$(1,888 million) at December 31, 2002; and of NT$(2,017 million) and NT$(2,130 million) at June 30, 2003. The negative carrying amount and fair value were primarily attributable to a signiÑcant decline in the trading price of our common shares as well as signiÑcant Öuctuations in the exchange rate between the Japanese yen and the U.S. dollar. The portion of the contract with a reference to foreign currency exchange rates expired in May 2003. We extended the portion of the contract with a reference to our common shares as the underlying reference securities until May 2004. Future decreases in the trading price of our common shares may continue to adversely aÅect the value of this equity derivative contract. See ""Ì Quantitative and Qualitative Disclosures About Market Risk'' and note 21 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

Liquidity and Capital Resources

Liquidity

We have historically Ñnanced our business with cash Öow from operations, short-term and long-term debt (including debt convertible into our common shares) and proceeds from the issuance of equity securities. Our ability to meet our working capital needs through cash Öow from operations is aÅected by the demand for, and prices of, our products, which in turn may be aÅected by several factors. Many of these factors are beyond our control, such as economic downturns and declines in the prices of our products caused by a downturn in the semiconductor industry. The average selling prices of our products are likely to be subject to further downward pressure in the future.

To the extent we do not generate suÇcient cash Öow from our operations to meet our cash requirements, we will have to rely on external Ñnancing. However, our ability to access external sources of Ñnancing could be materially adversely aÅected by our recent and forecast gross, operating and net losses. We cannot give any assurances that we will be able to secure Ñnancing on satisfactory terms, or at all. See ""Risk Factors Ì Risks Related to Our Company Ì We recorded gross, operating and net losses in 2002, and we forecast that we will record losses in 2003. Continued losses could materially adversely aÅect the value of your

61

investment., Ì We have limited liquidity and may be unable to repurchase our outstanding debt securities when requested by holders, pay certain other obligations as they become due or otherwise meet our working capital needs. and Ì Restrictive covenants and broad default provisions in the agreements governing our existing debt may materially restrict our operations as well as adversely aÅect our liquidity, Ñnancial condition and results of operations.''

Our net cash used in operating activities was NT$469 million (US$13.5 million) in the six months ended June 30, 2003, after adjusting for, among other things, depreciation and amortization of NT$4,796 million (US$138.6 million) and an inventory loss provision reversal of NT$298 million (US$8.6 million). In addition, our net cash used in operating activities was aÅected by net changes in our operating assets and liabilities, primarily net decreases in inventories, prepaid expenses and other current liabilities of NT$1,059 million (US$30.6 million), NT$265 million (US$7.7 million) and NT$396 million (US$11.4 million), respectively.

Our net cash used in operating activities of NT$131 million in the six months ended June 30, 2002, after adjusting for, among other things, depreciation and amortization of NT$4,294 million and inventory provision of NT$3,376 million. In addition, our net cash used in operating activities was aÅected by net changes in our operating assets and liabilities, primarily net increases in inventories, notes and accounts receivable and notes and accounts payable of NT$1,012 million, NT$263 million and NT$358 million, respectively.

We had net cash provided by operating activities of NT$86 million (US$2.5 million) in 2002, after adjusting for, among other things, depreciation and amortization of NT$8,742 million (US$252.6 million) and inventory provision of NT$2,929 million (US$84.6 million). In addition, our net cash used in operating activities was aÅected by net changes in our operating assets and liabilities, primarily net increases in inventories, notes and accounts receivable and other current liabilities of NT$767 million, NT$406 million and NT$338 million, respectively.

Our net cash provided by operating activities amounted to NT$8,837 million in 2001, after adjusting for, among other things, depreciation and amortization of NT$8,006 million and inventory loss provision of NT$2,587 million. In addition, our net cash used in operating activities was aÅected by net changes in our operating assets and liabilities, primarily a net increase in inventories of NT$4,598 million and net decreases in notes and accounts receivable and notes and accounts payable of NT$3,006 million and NT$556 million, respectively.

Net cash provided by operating activities amounted to NT$16,123 million in 2000, after adjusting for, among other things, depreciation and amortization of NT$6,048 million and net loss from equity investment of NT$601 million. In addition, our net cash used in operating activities was aÅected by net changes in our operating assets and liabilities, primarily net increases in inventories, notes and accounts receivable and accrued expenses of NT$1,713 million, NT$2,197 million and NT$1,815 million, respectively.

Net cash provided by investing activities was NT$432 million (US$12.5 million) in the six months ended June 30, 2003, primarily resulting from a decrease in restricted investments of NT$2,674 million (US$77.3 million) relating to a sinking fund for our convertible bonds that matured in May 2003, which was partially oÅset by payments for purchase of property, plant and equipment of NT$1,815 million (US$52.4 million). In the six months ended June 30, 2002, net cash used in investing activities was NT$6,387 million due to an increase in restricted investments of NT$927 million and payments for purchase of property, plant and equipment of NT$4,802 million. Net cash used in investing activities was NT$11,596 million (US$335.0 million) in 2002. The most signiÑcant components of these investing activities were the payment of NT$8,434 million (US$243.7 million) for the purchase of property, plant and equipment relating to the construction of Fab III and increases in restricted investments of NT$1,856 million (US$53.6 million). Net cash used in investing activities was

62

NT$14,335 million in 2001. The major components of these investing activities were the payment of NT$9,432 million for the purchase of property, plant and equipment relating to the construction of Fab III, addition to other liabilities of NT$1,722 million, and additions to longterm investments of NT$1,492 million. Net cash used in investing activities was NT$12,683 million in 2000. The most signiÑcant component of these investing activities was the payment of NT$11,948 million for the purchase of property, plant and equipment relating to the upgrade and expansion program for Fab II and the construction of Fab III.

Our net cash used in Ñnancing activities was NT$1,217 million (US$35.2 million) in the six months ended June 30, 2003, primarily resulting from the net decrease in long-term debt and capital lease obligations of NT$1,790 million (US$51.7 million), partially oÅset by the net increase short-term debt and short-term notes of NT$564 million (US$16.3 million). Our net cash provided by Ñnancing activities was NT$5,649 million in the six months ended June 30, 2002. This reÖected the net increase in short-term debt and short-term notes of NT$3,093 million and long-term debt and capital lease obligations of NT$3,602 million, partially oÅset by repurchases of common shares of NT$1,046 million. Our net cash provided by Ñnancing activities amounted to NT$6,358 million (US$183.7 million) in 2002. This amount primarily reÖected the net increase in short-term debt of NT$1,425 million (US$41.2 million) and long-term debt and capital lease obligations of NT$5,978 million (US$172.7 million), partially oÅset by repurchases of common shares of NT$1,046 million (US$30.2 million). Net cash provided by Ñnancing activities amounted to NT$2,333 million in 2001. This amount primarily reÖected the net increase in long-term debt and capital lease obligations of NT$3,376 million, partially oÅset by the net decrease in short-term debt of NT$853 million. Net cash provided by Ñnancing activities amounted to NT$7,966 million in 2000. This amount primarily reÖected the net increase in long-term debt and capital lease obligations of NT$4,225 million and subscriptions received of NT$3,614 million.

As of June 30, 2003, our primary sources of liquidity were NT$6,143 million (US$177.5 million) of cash and cash equivalents and NT$1,148 million (US$33.2 million) of short-term investments. Our short-term investments primarily consisted of investments in bond funds denominated in New Taiwan dollars. As of June 30, 2003, we had total short-term lines of credit of NT$14,358 million (US$414.9 million), of which we had borrowed NT$2,719 million (US$78.6 million). The interest rate for borrowings under these facilities ranged from 1.80% to 2.96% per year as of June 30, 2003. 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. See notes 9 and 10 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

Capital Resources and Capital Expenditures

Our long-term liabilities consist primarily of long-term debt and capital lease obligations. As of June 30, 2003, we had aggregate long-term debt, net of the current portion, of NT$19,946 million (US$576.3 million). The long-term debt was provided pursuant to eight diÅerent facilities with ROC banks and Ñnancial institutions and four corporate bonds and debentures. The long-term bank loans carry variable interest rates that ranged between 1.9625% and 6.5% per annum as of June 30, 2003, mature between 2003 and 2016 and, in general, require payments of principal and interest on either a quarterly or monthly basis throughout the remainder of their terms. See note 12 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

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As of June 30, 2003, the maturity schedule of our existing long-term debt is as follows:

Period July 1, 2003 Ì December 31, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 1, 2004 Ì December 31, 2004(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 1, 2005 Ì December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 1, 2006 Ì December 31, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ January 1, 2007 Ì December 31, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ After December 31, 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$ in millions	NT$ in millions
		1,069 10,697 4,303 4,441 1,265 2,934 24,709

• (1) Includes NT$3,695 million in long-term debt maturing in the period January 1, 2004 to June 30, 2004.

See note 12 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

As a result of net losses of NT$866 million and NT$11,357 million (US$328.1 million) that we incurred in 2001 and 2002, respectively, and unrealized losses on long-term investments of NT$540 million and NT$331 million (US$9.6 million) in 2001 and 2002, respectively, shareholders' equity declined by 3.2% in 2001, and by 30% in 2002, to NT$30,214 million (US$873.0 million) as of December 31, 2002. In the six months ended June 30, 2003, our net loss was NT$6,209 million (US$179.4 million), which resulted in a decline in our shareholders' equity by 16.7%to NT$25,165 million (US$727.1 million) as of June 30, 2003.

Our long-term loans and facilities contain various Ñnancial and other covenants that could trigger a requirement for early payment. Among other things, these covenants require the maintenance of certain Ñnancial ratios, such as current ratio and debt to equity ratio. We may be unable to meet the speciÑed debt to equity ratios unless we are able to raise additional equity funding. In November 2003, we sold 475,000,000 new common shares for cash pursuant to a share oÅering in Taiwan. If we had not raised this additional equity in the share oÅering, we may not have been able to meet the Ñnancial ratios in our loan agreements.

We may need to issue additional shares in the future to further increase shareholders' equity, and we cannot assure you that we will be successful in selling all or any of such common shares. If we continue to have losses and are unable to raise additional equity funding or renegotiate the terms of our loan agreements, we may be in default of Ñnancial covenants in the future. Such a default or defaults would seriously impair our ability to secure debt Ñnancing, and could require us to delay or cancel capital expansion plans, dispose of assets or take other steps to meet the Ñnancial ratios.

In addition, 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 eÅect on our liquidity, as well as our Ñnancial condition and operations.

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Among our long-term debt as of June 30, 2003 were the following convertible bonds and debentures, all of which are convertible into common shares (or ADSs for the 0.5% convertible bonds due February 7, 2007) in accordance with their terms:

• ‚ US$169.2 million principal amount of 0.5% convertible bonds due February 7, 2007, issued in February 2002 and redeemable at the option of the holders in August 2004; the outstanding principal amount at June 30, 2003 was US$169.2 million (NT$5,856.0 million);

• ‚ US$90 million principal amount of zero coupon convertible bonds due February 10, 2008, issued in February and March 2003 and redeemable at the option annually each February; the outstanding principle amount at June 30, 2003 was US$90 million (NT$3,115 million);

• ‚ NT$3,200 million principal amount of zero coupon convertible debentures due December 11, 2007, issued in December 2002 and redeemable at the option of the holders in December 2005 and December 2006; the outstanding principal amount at June 30, 2003 was NT$2,314.7 million (US$66.9 million).

We expect to use the proceeds of this oÅering or cash on hand or from operations for repayment of any bonds redeemed by holders in February 2004 and August 2004.

Among our total long-term debt, net of current portion, as of June 30, 2003 of NT$19,946 million (US$576.3 million), a total of NT$11,661 million (US$336.9 million) was secured by our assets, principally property, plant and equipment.

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$5.9 billion (US$170.5 million) of the syndicated loan as of November 30, 2003. We expect to draw down approximately NT$700 million in the second quarter of 2004. In addition, we had another syndicated loan with an outstanding principal amount of NT$2,306 million as of June 30, 2003, which we are not able to make additional draw downs from in the future.

We issued approximately NT$3.0 billion principal amount of secured corporate bonds in Taiwan in the months of October and November 2001 to fund the construction of Fab III, as well as the purchase of machinery and equipment and other capital expenditures.

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, payable over a thirty-six month in monthly installments for the use of certain manufacturing equipment. As of June 30, 2003, we had aggregate lease obligations of NT$1,291 million (US$37.3 million) under the Nintendo lease. Title to the leased equipment will be transferred to us at the end of the lease term. See note 11 to our consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 and the six months ended June 30, 2002 and 2003 included in this OÅering Circular.

In addition to the foregoing, we may have obligations with respect to our equity derivative contract that expires in May 2004. We may roll-over, contract or settle these potential obligations, including by using U.S.$20 million already deposited with a Ñnancial institution as collateral for our exposure under this contract.

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We operate our own fabrication facilities and therefore require signiÑcant amounts of capital to build, expand, modernize and maintain our facilities and equipment. Our total capital expenditures were NT$11,803 million in 2000, NT$9,078 million in 2001 and NT$8,975 million (US$259.3 million) in 2002. In the six months ended June 30, 2002 and 2003, our total capital expenditures were NT$4,864 and NT$998 million (US$28.8 million), respectively. The following table sets forth our principal capital expenditures incurred in 2000, 2001, 2002 and the six months ended June 30, 2002 and 2003:

Fab I ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fab II ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fab III ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended December 31, 2000 2001 2002 (NT$ million) (NT$ million) (NT$ million) 1,553 609 370 9,913 2,915 1,184 320 3,726 4,720 17 1,828 2,701 11,803 9,078 8,975	Year ended December 31, 2000 2001 2002 (NT$ million) (NT$ million) (NT$ million) 1,553 609 370 9,913 2,915 1,184 320 3,726 4,720 17 1,828 2,701 11,803 9,078 8,975	Six months ended June 30,	Six months ended June 30,
	2000 (NT$ million) 1,553 9,913 320 17 11,803	2001 (NT$ million) 609 2,915 3,726 1,828 9,078	2002 (NT$ million) 193 872 3,055 744 4,864	2003
				(NT$ million) 45 493 134 326 998

These amounts include the expansion and upgrade of Fab II, the construction of Fab III during 2000, 2001 and 2002 and the development of trainee and/or employee facilities and other areas.

We estimate that we will incur capital expenditures of approximately NT$732 million for the year ended December 31, 2003, primarily to purchase machinery and equipment in connection with operations in Fab III. We currently anticipate capital expenditures of approximately the same amount in 2004. We intend to fund these capital expenditures with the proceeds of debt and equity Ñnancings that we may undertake from time to time. We may adjust the amount of our capital expenditure upward or downward based on cash Öow 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 satisfactory terms or at all.

We believe that our existing cash and cash equivalents, short-term investments, expected cash Öow from operations and existing credit lines under our short-term and long-term loan facilities will be suÇcient to meet our capital expenditures, working capital, payment obligations under our existing debt and lease arrangements, and other requirements.

Contractual Obligations

At June 30, 2003, we had the following contractual obligations:

Long-term loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital lease obligationsÏÏÏÏÏÏÏÏÏ Letters of credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction and equipment purchase obligations(1) ÏÏÏÏÏÏ License fees(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Total 24,709 1,291 455 4,685 519 31,659		Expected Maturity	Expected Maturity
		July 1, 2003 to December 31, 2003 1,069 314 455 4,685 519 7,042	January 1, 2004 to December 31, 2005 15,000 977 0 0 0 15,977	January 1, 2006 to December 31, 2007 5,706 0 0 0 0 5,706	Thereafter
						2,934 0 0 0 0 2,934

(1) We cannot forecast the time of cash-out of our construction and equipment purchase obligations and license fees.

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Commitments and Contingencies

As of June 30, 2003, we were obliged to make payment to Tower Semiconductor in respect of the Ñfth and Ñnal milestone payment under our original share purchase agreement, subject to Tower Semiconductor meeting certain conditions. See ""Related Party Transactions''. In December 2003, we agreed to amend the share purchase agreement with Tower Semiconductor and advanced the Ñnal milestone payment on December 10, 2003. See ""Recent Developments''.

See ""Business Ì Legal Proceedings'' for a description of the outstanding and pending legal proceedings to which we are a party.

OÅ Balance Sheet Items

We are a party to several operating leases relating to the land for our facilities, which do not appear in our Ñnancial statements. Except as stated in note 18 to our consolidated Ñnancial statements and otherwise herein, we have no other material oÅ balance sheet items as of the date of this OÅering Circular.

Quantitative and Qualitative Disclosure About Market Risk

For the purposes of compiling the respective tables, the following rates have been used:

• ‚ The exchange rates for Japanese yen as at June 30, 2003 is based on the oÇcial exchange rate as determined by the Bank of Taiwan, being NT$0.2893 • JPY1.00.

• ‚ The exchange rates for U.S. dollars as at June 30, 2003 is based on the oÇcial exchange rate as determined by the Bank of Taiwan being NT$34.605 • US$1.00.

• ‚ Interest rates are derived from the prevailing interest rate swap market in the respective currencies as at June 30, 2003.

Interest Rates

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

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

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

Rate sensitive assets Cash Variable rate ÏÏÏÏÏÏÏÏÏÏ Average interest rate ÏÏ Fixed rateÏÏÏÏÏÏÏÏÏÏÏÏÏ Average interest rate ÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate sensitive liabilities Long term debt Unsecured 0.5% convertible debentures due 2007(1) ÏÏÏÏÏÏÏÏÏÏÏ Zero coupon convertible debentures due 2007(2) ÏÏÏÏÏÏÏÏÏÏÏ Zero coupon convertible debentures due 2008(3) ÏÏÏÏÏÏÏÏÏÏÏ US$ debt Variable rate ÏÏÏÏÏÏÏÏÏÏ Average interest rate ÏÏ NT$ debt Fixed rateÏÏÏÏÏÏÏÏÏÏÏÏÏ Average interest rate ÏÏ Variable rate ÏÏÏÏÏÏÏÏÏÏ Average interest rate ÏÏ			Expected Maturity
	July 1, 2003 to December 31, 2003 2,156,005 0.87% 3,962,252 1.13% 24,566 Ì Ì Ì 580,672 2.02% Ì 488,113 3.30%	January 1, 2004 to December 31, 2004 Ì Ì Ì Ì Ì 6,171,114 Ì 2,723,766 1,161,344 2.02% Ì 641,426 3.30%

• (1) In February 2002, we issued US$169.2 million aggregate principal amount of our unsecured 0.5% convertible debentures due 2007.

• (2) In December 2002, we issued zero coupon convertible debentures in the amount of NT$3.2 billion due 2007.

• (3) In February 2003, we issued zero coupon convertible debentures in the amount of US$80 million due in 2008. In March 2003, we issued the over-allotment in the amount of US$10 million due in 2008.

Foreign Currencies

A signiÑcant portion of our revenues are denominated in currencies other than the NT dollar. As of June 30, 2003, most of our accounts payable and payables for purchases of capital goods were denominated in currencies other than the NT dollar, primarily in U.S. dollars and Japanese yen. In addition, as of June 30, 2003, most of our long-term debts were in U.S. dollars, including the long-term debentures. To protect against reductions in value and volatility of future cash Öows caused by changes in foreign exchange rates, we utilize derivative Ñnancial instruments to hedge our currency exposure. These hedging transactions are designed

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

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

In writing the options described, we could be considered to be taking on additional foreign exchange risk. To mitigate this risk, a number of the contracts we entered into include ""barriers''. These barriers have the eÅect that, if the Japanese yen exchange rate to U.S. dollar exceeds a given rate, the contracts are automatically terminated. The barriers have the impact of reducing the upfront cost of the options. The written option contracts, either entered into with or without barriers, do not qualify as hedges for accounting purposes and accordingly are carried in our Ñnancial statements at fair value.

The table below presents our assets and liabilities denominated in currencies other than the NT dollar functional currency and the outstanding forward foreign exchange, cross currency interest rate swap and option contracts as of June 30, 2003 by expected year of maturity.

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

Liabilities denominated in foreign currencies JPY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ US$(1) ÏÏÏÏÏÏÏÏÏÏÏ Financial instruments CCS Sell JPY/Buy US$ Buy US$ÏÏÏÏÏÏÏÏÏ Sell JPY ÏÏÏÏÏÏÏÏÏ			Expected Maturity		Thereafter Ì Ì Ì Ì Ì	Total Ì 13,846,331 Ì 69,210 58,439	Fair value June 30, 2003
	July 1, 2003 to December 31, 2003 Ì 2,364,053 Ì 69,210 58,439	January 1, 2004 to December 31, 2004 Ì 10,701,507 Ì Ì Ì	January 1, January 1, 2005 to 2006 to December 31, December 31, 2005 2006 (NT$ in thousands) Ì Ì 780,771 Ì Ì Ì Ì Ì Ì Ì	January 1, 2007 to December 31, 2007 Ì Ì Ì Ì Ì
							Ì 13,001,415 10,915 Ì Ì

• (1) In February 2002, we issued US$169.2 million aggregate principal amount of our unsecured 0.5% convertible debentures due 2007. In 2003, we issued US$90 million aggregate principal amount of our zero coupon convertible debentures due 2008.

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Market Price Sensitivity Analysis

Equity Contract

On May 5, 1998, we issued zero coupon convertible debentures amounting to US$150 million, which were privately placed with a Ñnancial institution. One of our wholly owned subsidiaries subsequently entered into a call option contract with the Ñnancial institution, with the underlying reference being the convertible debentures. The terms of the contract provided that the notional amount of US$150 million is divided into Ñfteen options and our 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. 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 one contract. The subsidiary exercised two options and Ñve options on January 22, 2000 and June 26, 2000, respectively. As of December 31, 2002, the outstanding portion of this compound derivative contract had a negative fair value of US$14.5 million (NT$502 million), and the carrying amount had a negative fair value of US$10.3 million (NT$356 million).

In May 2003, we settled the contract by paying US$13.1 million (NT$453 million).

In June 2000, we entered into a contract with a Ñnancial institution for the settlement of Ñve options relating to our zero coupon convertible debenture due 2003, described above, with the underlying reference being 47,727,535 of our common shares. The contract, as amended, will expire on May 5, 2004. As of December 31, 2002, the remaining underlying reference was 53,253,964 of our common shares. If the share price is less than the predetermined contract price, we would pay the diÅerences between the two amounts to the Ñnancial institution. The contract rate at which the contract is settled is based on US dollars, and our share price is converted into US dollars using current NT dollars to US dollars exchange rates in order to determine the settlement amount. The contract rate as of December 31, 2002 was US$1.3656. The carrying amount of this contract as of December 31, 2002 was a loss of NT$1,385 million (US$40.0 million) while the fair value was a loss of NT$1,888 million (US$54.6 million).

In April 2003, we extended this contract to May 2004 and recorded the additional obligation on a ROC GAAP basis in the amount of NT$719 million based on market price of the underlying shares of NT$9.5 per share at that time.

We entered into a derivative contract with our common shares as the underlying reference securities in connection with our stock appreciation rights plan in order to provide liquidity. This contract also included a reference to foreign currency exchange rates. As of June 30, 2003, the carrying amount of this contract was a loss of US$60.9 million (NT$2,107 million) while the fair value was a loss of US$61.3 million (NT$2,123 million). See ""Ì Equity Derivative Contract''.

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THE SEMICONDUCTOR INDUSTRY

Industry Background

The Semiconductor Integrated Circuits Industry

Semiconductor integrated circuits, or ICs, are critical components used in a wide and growing array of electronic systems. In recent years, semiconductor performance has improved markedly and the size and cost of ICs have decreased. As a result, ICs have expanded from their original primary application in computers to other applications, including consumer electronics, telecommunications systems, automation and control systems and security systems. As a result of increasing applications for semiconductor ICs as well as the increasing value of semiconductors used in electronic systems, the semiconductor market has grown at a faster rate than the electronic system industry.

The semiconductor industry has been cyclical, with periods of growth being followed by downturns due to global economic growth trends, inventory adjustments as well as periodic mismatches between semiconductor demand and manufacturing capacity. The semiconductor industry commenced a recovery in 1999, after a down cycle in the late 1990s, and recorded a 37% year on year growth in 2000. Since the beginning of 2001, however, as demand from the computing and communications sectors declined, the industry experienced excess capacity, overproduction, signiÑcant inventory buildup and consequent decreases in average selling prices. In 2002, while unit volume shipments grew in the Ñrst half, in part due to inventory replenishment, IC unit volume growth was weaker in the second half of the year. Beginning in mid-2003, the industry has seen what are believed to be initial signs of recovery, with increased IC demand and, for certain products, a slowdown and even a reversal of the decline in average selling prices.

Historically, semiconductor ICs were principally used in the computing industry. However, future growth of the semiconductor industry is expected to be driven by increasing semiconductor content in consumer electronic applications as well as in the communications industry. These applications could include wireless or handheld devices, DVD players, Öat panel digital televisions, digital cameras, MP3 digital audio players, video game consoles for internet games, electronic dictionaries and electronic books. These new applications typically require semiconductors of increasing power and decreasing size, which is expected to drive innovation and product volume growth. For example, next generation mobile phone handsets increasingly have features that support more data processing applications, multimedia applications and internet applications, and these applications are likely to drive the consumption of high performance logic and memory products, such as high-density Mask ROM and Flash products.

Semiconductor Products

Semiconductors may be classiÑed based on the type of technology used: analog, digital or mixed signal. 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 more standardized products that are diÅerentiated 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 classiÑed as either volatile memories, which lose their data content when power supplies are switched oÅ, or nonvolatile memories, which retain their data content without the need for constant power supply

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Nonvolatile memories are typically used to store program instructions that control the operation of microprocessors and electronic systems. There are four major 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. Measured by cost per Mb, Mask ROM is the least expensive and the most costeÅective nonvolatile memory currently produced. Mask ROM is widely applied in the video game and printer applications given its non-erasable nature and inexpensive unit cost. Long-term proliferation of new consumer electronic products, such as electronic books, electronic dictionaries and multimedia cards for third generation phone applications, is expected to 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.

EEPROM, or electronically erasable programmable ROM, devices, can be electronically altered while remaining in the system. This allows system manufacturers to reprogram eÇciently in the system to achieve several important advantages in terms of cost, speed, customization and data storage functions. However, EEPROM has remained considerably more expensive than EPROM for a given amount of storage capacity, commonly referred to as density. As a result, its 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. With Flash ICs, 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. As Flash products continue to improve in performance and decrease in cost, the applications for Flash products are expected to expand rapidly. Flash demand has increased signiÑcantly in recent years, driven by growing usage in cellular phones, VCD/DVD players, digital television recorders, digital still cameras 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''). 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-eÅective for some applications.

Many electronic system makers therefore prefer to incorporate application speciÑc integrated circuits, or ASICs, which are custom-designed semiconductors, into their products. These devices include a broad range of full-custom, semi-custom and application-speciÑc standard product logic devices, which have been developed speciÑcally for direct use into a wide variety of applications. Compared to memory products, logic devices are much more diÅerentiated and dependent upon intellectual property and advanced product design skills.

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 ICs. SOC products diÅer from ASIC devices in that ASICs generally adapt a particular chip function to a speciÑc product without integrating other chip functions onto the silicon.

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The growing shift in 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, which is expected to continue to drive the demands for SOC solutions.

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BUSINESS

General

We are an independent semiconductor designer, producer and supplier. Our product portfolio includes Mask ROM, Flash, EPROM, strategic manufacturing services, or SMS, and system logic center, or SLC, products. Based on sales revenues in 2002, we were ranked Ñrst in the global Mask ROM market with 52.6% of market share, fourth in the global EPROM market with 5.8% of market share and 10th in the global NOR Flash market with 2.2% of market share, according to a report published by Gartner Dataquest on May 9, 2003.

We view ourselves as an integrated provider and treat our principal clients as strategic partners. We work closely with them starting from early stages of product development to design silicon chip solutions that meet their speciÑc needs. These partners include Nintendo and Hewlett-Packard, with whom we have had relationships for over ten years. We diÅerentiate ourselves by our ability to oÅer a full range of in-house design, product and process engineering capabilities.

Following our recently completed reorganization of our business unit structure, we organize our operations into two main strategic business groups:

• ‚ our Microelectronics and Memory Solution Group, which encompasses Mask ROM, Flash, EPROM products and strategic manufacturing services; and

• ‚ our Integrated Solution Group, which focuses largely on SLC products for the audio, video, communications and microcontroller markets.

We generate our revenue from customers in the consumer electronics, computer and communications industries. For 2002, of our total net sales, excluding sales made by distributors, 68.6% was generated by our products for consumer electronics applications, 18.2% by our products for computer applications and 10.8% by our products for communications applications. For the six months ended June 30, 2003, of our total net sales, excluding sales made by distributors, 52.9% was generated by our products for consumer electronics applications, 22.3% by our products for computer applications and 19.2% by our products for communications applications.

We were founded in 1989 by engineers who returned to Taiwan from Silicon Valley in the United States. Our founders chose to form our company in Taiwan to take advantage of the availability of capital and Taiwan's manufacturing strengths. Today, many of the world's largest semiconductor companies are located in Taiwan. Many companies outside Taiwan outsource some or all of their semiconductor manufacturing needs to Taiwan's semiconductor manufacturing service providers. In addition, Taiwan is a center for the design and manufacture of electronic systems that have semiconductor devices as their primary components.

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

Our Strategy

We aim to be a global leader in the non-volatile memory market by oÅering our customers a total non-volatile memory solution for their electronic system requirements. We seek to distinguish ourselves from traditional integrated device manufacturers and wafer foundries by forging strategic partnerships with our key customers from an early stage of their product development to ensure our products meet their present and future requirements.

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Beginning in the second half of 2000, the semiconductor sector experienced a severe downturn, during which we and other market participants were unable to maintain proÑtability amidst slumping demand and increasingly declining average selling prices. In addition, just prior to the downturn, we had been investing in a number of research and development projects that resulted in an even greater resource strain when the downturn occurred.

Today, we believe we are beginning to see the initial signs of recovery in the sector, aÅording us the opportunity to leverage our core skills to expand on our leadership in Mask ROM products and to further grow our Flash business. We have recently streamlined our corporate structure into two distinct business units, and we have focused our operations and research and development initiatives on select technologies, which we expect will not only improve our technology migration and time to market but also allow us to maximize the beneÑts from our available resources.

The components of our strategic initiatives are as follows:

Focus our management eÅorts, research and development initiatives and technology development on select businesses in order to improve our Ñnancial performance and results of operations

In order to better focus our resources on key projects and customers, we have recently reorganized our business into two distinct business units, namely, the Microelectronic and Memory Solution Group, which focuses on our non-volatile memory and manufacturing business, and the Integrated Solution Group, which focuses on combining our non-volatile memory products with third-party or in-house SLC products to develop customized integrated device solutions for our customers.

As a result of this reorganization, we have also refocused our research and development eÅorts on key selected projects and discontinued other projects. For instance, we are no longer developing our in-house PAC-AND Flash technology, and are instead working with strategic partners on other Flash technologies that we believe are more likely to be successful and competitive in the future.

We have spun oÅ two subsidiaries, MagicPixel and MaxNova, as part of our eÅorts to focus our technology and product development. We believe such internally developed technologies and capabilities are better pursued independently so as not to divert our eÅorts and resources from non-volatile memory development. At the same time, our Integrated Solutions Group will continue to be able to leverage these capabilities in developing customized solutions for our customers, as we maintain close working partnerships with these subsidiaries.

We believe these eÅorts will help improve our Ñnancial performance and results of operations by allocating resources to those projects and initiatives that we believe will have the greatest impact on this objective.

Maintain our leadership in Mask ROM and multiple-time-programmable products

Although the Mask ROM market has been declining over time, it remains the preferred lowcost, high-volume solution for certain applications and hence continues to be an important segment of our business. We have been able to increase our market share in the Mask ROM segment over time while maintaining relatively strong margins in spite of declining average selling prices.

In the future, we expect Mask ROM and/or similar one-time or multiple-time-programmable products to continue to play an important role in our business. We will continue to focus on maintaining our competitiveness in this segment by improving our technology capabilities as well as introducing new applications for Mask ROM, including, in particular, digitally stored content for mobile and handheld devices.

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Invest in Flash technologies to develop cost-competitive solutions, particularly for the handheld device and wireless markets

We believe Flash will be the dominant non-volatile memory product in the future and are committed to expanding our capabilities and market share in Flash technologies. We believe that our ability to develop expertise in advanced Flash technologies is critical to our long-term competitiveness and success.

In the near term, we will focus on medium-density Flash products using advanced manufacturing processes and reduce micron line widths to develop cost-eÅective solutions. At the same time, in order to become a leader in the Flash industry, we plan to work with strategic technology partners to mitigate research and development risks. We will continue to develop NBit based technology, which we believe provides a simple and cost-eÅective solution, by migrating to lower geometries and higher densities. In addition, we are currently jointly developing 0.13 micron process technology with Renesas based on its DINOR Flash design. We believe that such strategic partnerships not only allow us to share the risk associated with research and development, but also improve the speed at which we can migrate to more advanced Flash technologies in a cost-competitive manner.

Leverage our competitive position in the non-volatile memory market to eÅectively crosssell and diversify our product mix and customer base

As the world's leading manufacturer of Mask ROMs, we are able to provide our customers with a cost-eÅective means to procure large volumes of capacity in a relatively short time frame. Our Mask ROM business has therefore been critical to our eÅorts in developing relationships with, and eventually cross-selling other products to, some of our key customers. For example, we have successfully sold Flash, SLC and SOC products to Nintendo, which originally began as a customer for our Mask ROM products only.

We plan to continue to leverage our Mask ROM business with our existing and potential customers, thereby expanding our ability to cross-sell and diversify product mix and customer base.

Capitalize on our strengths in non-volatile memory for embedded applications to provide integrated solutions

To complement our leading position in the non-volatile memory market, we are seeking to extend further resources and capabilities into SLC 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 capabilities, we believe our years of design and production expertise, our strong research and development team and our close relationship with system vendors will enable us to provide SOC solutions to our customers.

In particular, we are seeking to take advantage of the growth in the demand for platforms for other than personal computers, such as portable consumer electronics platforms and the demand for smaller and more advanced integrated circuits for communications and consumer applications. We believe the expansion into SLC and multimedia devices will enable us to reduce our exposure to the cycles of the memory market while building a broad range of product and process capabilities.

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Continue to upgrade our process technology and in-house manufacturing capabilities while expanding capacity prudently

Our manufacturing facilities enable us to provide a full range of services and timely delivery to our key clients. We will continue to maintain in-house manufacturing capacities and stress quality control and operational discipline to enhance production yield at our manufacturing facilities. Where necessary to enhance our competitive position, we intend to continue migrating our production to more advanced process technologies by making prudent investments in equipment and leveraging on our strategic partners' expertise.

However, in light of the capital-intensive nature of semiconductor manufacturing, we will continue to explore ways to align our product portfolio with our manufacturing capabilities and to increase our manufacturing capacity in a prudent manner. For instance, while we have already migrated Fab I to 0.32 micron process technology for certain chips from the 0.40 micron process technology primarily used in 1997, in order to maintain proÑtability at Fab I and minimize the amount of new investment required, we have initiated an ""Evergreen project''. This will allocate to Fab I manufacturing of products that do not require leading edge technologies, such as low-density Flash and ROM products and certain of our SLC and SMS products, including high voltage, microelectronic-mechanical system, or MEMS and embedded ROM products.

Similarly, although we completed the construction of the shell of our Fab III in July 2002, we have decided to defer investing in any twelve-inch equipment until market conditions improve. In order to alleviate capacity constraints in Fab II, which is an eight-inch facility, we have used approximately 7% of the space in Fab III to install eight-inch equipment to complement production at Fab II. As another example of our eÅorts in managing capacity constraints, we outsource some of our wafer production requirements to TSMC and Tower Semiconductor.

Our Reorganization

We recently reorganized our business unit structure. Our previous business unit structure was organized on the basis of the principal types of products and services we provided. Under our new business unit structure, we organize our operations into two strategic business units, namely, our Microelectronics and Memory Solution Group and our Integrated Solution Group. Our Microelectronics and Memory Solution Group is primarily responsible for the management and operation of our business relating to our non-volatile memory products, such as Mask ROM, Flash and EPROM products, and for SMS products. Our Integrated Solution Group is responsible for the management and operation of our business relating to SLC products.

Our Microelectronics and Memory Solution Group supports the technologies that enable us to provide semiconductor products and design services. It focuses primarily on the research and development of the advanced process technologies that we require for our business and on advancing our design capabilities, as well as the operation and capacity planning of our manufacturing facilities. It is also responsible for managing our process technologies and reinforcing our relationships with our strategic manufacturing partners through technology arrangements.

We believe that the integration of our former business units under our Microelectronics and Memory Solution Group will, among other improvements, enable us to more eÇciently utilize and plan our manufacturing capacity and allocate our resources.

Our Integrated Solution Group is responsible for providing value-added design services and system-level platform solutions to our customers based on the requirements of the end-market application. In addition, it is responsible for developing strategic partnerships with our key customers and leveraging on our platform partners to provide integrated solutions for our key

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customers. Our Integrated Solution Group is also our marketing channel for cross-selling our products and services to key customers.

We believe that our new business unit structure will increase our operational eÇciency and eÅectiveness in meeting the needs of our customers, as well as improve our overall competitiveness. Our reorganization is also expected to enable us to better allocate our resources by consolidating research and development teams and increasing our focus on projects that are strategic to our business.

As part of our reorganization, we spun oÅ two design teams into separate wholly-owned subsidiaries in 2003, namely Magic Pixel Inc. and MaxNova Inc. Magic Pixel Inc. was established to focus on our IC design of video and related products, while MaxNova Inc. was established to focus on IC design for our memory cards. We believe that these spin-oÅs will allow us to allocate our resources more eÅectively.

Our Products and Services

The following table sets forth our main products, their characteristics and applications, and the percentage of net sales revenue represented by these products and services in 2000, 2001, 2002 and the six months ended June 30, 2002 and 2003:

Product Characteristics Applications Microelectronics and Memory Solution Group: Mask ROM ÏÏÏ Not re-programmable Games, PDAs, word processors, printers, fax modems, VCDs, mobile phones, STBs FlashÏÏÏÏÏÏÏÏÏ Re-programmable within Mobile phones, PDAs, the application system digital cameras, STBs, Web TVs EPROMÏÏÏÏÏÏÏ Re-programmable Fax modems, VCDs, outside the application mobile phones, STBs system using industrial processors SMS ÏÏÏÏÏÏÏÏÏ Value-added services Internet applications, CDs, DVDs, microcontrollers with embedded Flash technology Integrated Solution Group: SLCÏÏÏÏÏÏÏÏÏÏ Highly integrated Digital still cameras, Öat system-on-a-chip panel displays, solutions featuring smart cards, PDAs, embedded Flash electronic dictionaries, technology digital audio products	% of net sales re	% of net sales re	venue	venue
	Year ended December 31, 2000 2001 2002 57.6% 56.6% 45.9% 19.2% 14.0% 26.4% 3.7% 4.5% 3.6% 9.3% 12.8% 2.5% 5.6% 9.2% 17.6%		Six months ended June 30,
	2000 57.6% 19.2% 3.7% 9.3% 5.6%	2001 56.6% 14.0% 4.5% 12.8% 9.2%	2002 45.1% 22.6% 4.4% 4.0% 19.4%	2003
				37.3% 35.5% 3.0% 10.8% 10.7%

Microelectronics and Memory Solution Group

Mask ROMs

We were the largest Mask ROM manufacturer in terms of revenues in 2002, with 52.6% of market share in the global Mask ROM market, according to a report published by Gartner Dataquest on May 9, 2003. Although the global Mask ROM market has been shrinking, we have increased our market share in recent years as certain key competitors have exited the market.

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We diÅerentiate ourselves by providing customized solutions, faster turnaround times and higher volume capacity. We continue to focus on the Mask ROM market because it provides higher margins than our other memory products as well as the opportunity for us to cross-sell other products to our customers.

Applications. Mask ROMs are used for applications in a wide range of electronic products, including the storage of software for video games and data storage for oÇce automation equipment, such as fonts for laser printers and dictionary data for word processors. Recently, signiÑcant new applications for Mask ROM products have been developed, including applications for pre-recorded MP3 music, mobile telecommunications, pachinko machines and multimedia devices.

We manufacture Mask ROMs using 0.45 micron and 0.15 micron patented process technology in densities ranging from 1Mb to 512Mb and in a variety of conÑgurations. We believe that our patented technology allows us to produce Mask ROM products that are smaller in size and with higher densities than the Mask ROM products from our competitors. We migrated our process technology to 0.18 micron in the second half of 2000 and successfully migrated our process technology to 0.15 micron for both Flash and Mask ROM in the fourth quarter of 2002.

Although the majority of the circuitry in a Mask ROM chip is based on a relatively standard design, we often incorporate customer design speciÑcations into application-speciÑc portions of the circuitry during the manufacturing process. For example, we have delivered Mask ROM products with densities ranging from 4 Mb to 32 Mb for use in memory cards of diÅerent form factors for use in a variety of consumer electronic devices.

We also manufacture a range of Mask ROM products that are compatible with Flash products. This provides our customers with the beneÑt of compatibility and the Öexibility of using our Flash devices during their design and development stages where software modiÑcations are required, while using our Mask ROM devices in the mass production of their products without the need for software modiÑcation.

The following table provides an overview of our principal Mask ROM products and the percentage of net sales revenue represented by these products in 2000, 2001, 2002 and the six months ended June 30, 2002 and 2003:

Density 512 Mb 256 Mb 128 Mb 64 Mb 32 Mb 16 Mb 8 Mb 4 Mb Other	Sample applications Games, entertainment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Games, memory cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Games, PDAsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Word processors, games, PDAs, STBs, data banks, printersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Games, DVDs, data communications ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Games, word processors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sound cards, data banks, BIOS, games, sound cards ÏÏÏÏÏÏ PHSs, data banks, gamesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pagers, data banks, STBs, BIOS, games, word processors, networking ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	% of our net Mask ROM sales	% of our net Mask ROM sales	% of our net Mask ROM sales	% of our net Mask ROM sales
		Year ended December 31, 2000 2001 2002 Ì Ì 0.1% 31.1% 14.7% 2.8% 7.9% 7.5% 12.9% 10.5% 27.3% 36.9% 16.1% 24.9% 25.4% 20.1% 17.8% 16.2% 7.1% 4.7% 2.5% 3.5% 2.1% 3.1% 3.7% 1.0% 0.1%		Six months ended June 30,
		2000 Ì 31.1% 7.9% 10.5% 16.1% 20.1% 7.1% 3.5% 3.7%	2001 Ì 14.7% 7.5% 27.3% 24.9% 17.8% 4.7% 2.1% 1.0%	2002 Ì 2.1% 11.0% 31.9% 27.9% 20.1% 2.4% 4.4% 0.2%	2003
					0.9% 6.2% 31.4% 35.9% 13.0% 7.2% 3.3% 1.4% 0.7%

Competition. The Mask ROM industry is highly competitive. Our major competitors include Oki, NEC and Hynix, among others. We believe that with our relative Öexibility in adjusting our product mix and allocating our 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 the future, we plan to increase

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our emphasis on high-density Mask ROM products for use in the games industry, as well as to explore the demand for applications in other industries to increase demand for our Mask ROM products.

We plan to maintain our leadership in the Mask ROM market by participating in the product design process of our existing and prospective customers at an early stage to ensure that our Mask ROM products meet the requirements in their high-end mobile consumer goods, such as mobile phones and MP3 players. We also plan to diversify our customer base to increase the variety of applications of our Mask ROM products in the markets for telecommunications products, toys and entertainment products, personal digital assistants and oÇce automation equipment.

Competing technologies to Mask ROM include CD-ROMs, DVD-ROMs, magnetic disks and on-demand software available through telephone-linked and Internet databases. In particular, one of our key customers, Nintendo, migrated its video game products from the Nintendo 64 platform to the Game Cube platform during the second half of 2001. The Game Cube utilizes a DVD-ROM-based storage system rather than the Mask ROM-based system used in Nintendo 64. See ""Ì Customers Ì Nintendo''. As a result, we reallocated a portion of our production resources to the manufacture of Mask ROMs for Nintendo's Game Boy series of handheld computing devices. Sales of Mask ROM for use in Game Boy Advance represented 33.6% of our Mask ROM revenue in 2002 and 43.5% for the six months ended June 30, 2003.

Flash

Flash is the fastest growing non-volatile memory product. We believe that Flash will be the dominant non-volatile memory product in the foreseeable future due to the wide variety of applications of Flash products. We currently focus on medium-density Flash products to take advantage of cost eÇciencies. We seek to increase the cost-eÅectiveness and our focus on higher density Flash products in the near future in order to increase our market share and to improve our gross margins.

Applications. Applications for Flash products range from a wide variety of portable electronic equipment devices to high volume mass storage of data. Flash is particularly suited for applications in handheld devices, as it has the combined beneÑts of portability, high-density and lower power consumption. Flash products are also used in various audio products, such as digital answering machines, mobile telephone systems, MP3 players, networking devices, digital cameras and personal computer motherboards. As Flash products are much smaller and more economical in power consumption than the hard disk drives commonly used for mass data storage, we believe that they will gradually replace disk drives in selected applications, particularly in handheld computers.

The two current major architectural standards for Flash products are the NOR and NAND standards. These standards are diÅerentiated largely by the manner in which the Flash products write and erase data. The NOR design architecture, commonly known as Code Flash, produces faster devices but does not support high-density products at a competitive price. NAND design architecture, commonly known as Data Flash, can support higher density Flash products at lower cost, but cannot be used for random access code storage purposes.

We previously developed our proprietary PAC-AND design architecture, which was a competing alternative standard to NOR and NAND, to seek to meet the requirements of both NOR and NAND. However, in order to focus our resources on the development of products based on NBit technology and the DINOR design, discussed below, which we believe hold more potential in the longer term, we recently decided not to further develop our PAC-AND design architecture beyond the present 0.15 micron process technology. However, we plan to develop further products utilizing our PAC AND design architecture based on the present 0.15 micron process technology.

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Beginning in the fourth quarter of 2000, we provided 32 Mb Flash products based on 0.25 micron process technology and Mitsubishi's DINOR Flash design, which has been transferred to Renesas, a new joint venture between Mitsubishi and Hitachi. We started providing 64 Mb and 128 Mb Flash products based on Renesas's DINOR Flash design and 0.15 micron process technology in the fourth quarter of 2002. DINOR oÅers the high-speed randomaccess capability of the NOR architecture, as well as the high-density and single power-supply characteristics of the NAND Flash architecture.

We have developed core technologies to achieve two bit per cell manufacturing capabilities, based on proprietary technology licensed from Saifun Semiconductors Ltd. (""Saifun'') known as Nitrided Read Only Memory, or N-ROM, which we also refer to as ""two bit per cell'' or ""NBit'' technology. See ""Ì Intellectual Property''. This technology enjoys signiÑcant advantages over conventional ""Öoating gate'' devices, requiring simpler masking steps and allowing smaller bit size and die size and production cost eÇciencies. We have currently achieved multiple-time programming standard for two bit per cell manufacturing and have also introduced 64Mb and 128Mb MTP devices using 0.25 micron process technology that support up to 100 program/erase cycles. We expect to achieve Flash standard in 2004.

If we are successful in developing Flash products using two bit per cell technology, together with Renesas's DINOR design architecture, we believe that we would be wellpositioned to compete eÅectively with other Flash manufacturers using other design architectures.

The following table provides an overview of our principal Flash products and the percentage of Flash memory net sales revenue represented by these products in 2000, 2001, 2002 and the six months ended June 30, 2002 and 2003:

Density 128 Mb 64 Mb 32 Mb 16 Mb 8 Mb 4 Mb 2 Mb 1 Mb Other	Sample applications Games ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Games, printers, STBs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PrintersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ STBs, communication boxes, printers, musical devices, games, web TVs, mobile phones ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DVD Players, STBs, ISDN boxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BIOS, CD R/W drives, cable modems ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BIOS, HDDs, CD R/W drives, communication boxesÏÏÏÏÏÏÏÏ BIOS, HDDs, games, DVD-ROM drivesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BIOS, HDDs, games ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	% of our net Flash memory sales	% of our net Flash memory sales	% of our net Flash memory sales	% of our net Flash memory sales
		Year ended December 31, 2000 2001 2002 Ì Ì Ì Ì Ì 5.6% 0.9% 7.7% 12.9% 36.0% 23.3% 32.7% 7.6% 9.9% 13.6% 30.4% 47.6% 30.2% 13.5% 6.6% 0.8% 9.9% 4.3% 4.2% 1.7% 0.6% Ì		Six months ended June 30,
		2000 Ì Ì 0.9% 36.0% 7.6% 30.4% 13.5% 9.9% 1.7%	2001 Ì Ì 7.7% 23.3% 9.9% 47.6% 6.6% 4.3% 0.6%	2002 Ì 0.2% 12.9% 28.6% 11.2% 43.1% 0.3% Ì 3.7%	2003
					0.6% 18.1% 15.6% 24.8% 14.1% 15.6% 2.1% 9.1% Ì

Competition. Flash has been one of the fastest growing segments of the memory products market. 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, Samsung, Toshiba, Advanced Micro Devices, Fujitsu and STMicroelectronics. Before 2001, we did not have a signiÑcant 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 2001, we increased our sales of Flash products. In 2002, we were the world's 10th largest supplier of NOR Flash memory, according to a report published by Gartner Dataquest on May 9, 2003, accounting for 2.2% of global market share (based on sales revenue) We plan to focus on higher density Flash products in the future in order to further increase our market share and to improve our gross margins. We may also in the future consider supplying Flash products to the cellular handset market in order to increase our market share.

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EPROM

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

We produce a range of EPROM products with densities ranging from 256Kb to 8Mb. The majority of our EPROM products have 2Mb density and are used in VCD players and cellular phones.

Competition. In 2002, we were the world's fourth largest supplier of EPROM products, according to a report published by Gartner Dataquest on May 9, 2003, accounting for 5.8% of global market share (based on sales revenue). While EPROMs remain viable mainly for applications requiring low-cost solutions, Flash products have begun to replace EPROM 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. Our revenues from EPROM have been declining for more than the past Ñve years. If current conditions continue, we do not expect EPROM products to represent a signiÑcant growth area for us in the future.

Strategic Manufacturing Services

We focus on providing value-added services, which center on providing application-speciÑc solutions to our strategic customers. We use our strategic manufacturing services to develop customer relationships with these strategic customers, which may lead to cross-selling our other products and services in the future. Our strategic manufacturing services also allow us to engage in joint development of new technology with our strategic customers and strengthen our strategic customer relationships. For example, we currently jointly developing 0.13 micron process technology with Renesas based on its DINOR Flash design.

Our strategic manufacturing services enable us to leverage our competitive manufacturing capability. With our extensive fab experience and advanced non-volatile 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 these services with a focus on the information appliances market.

Competition. We do not plan to compete with foundries with respect to these services, and provide strategic manufacturing services to selected strategic customers primarily to complement our other services.

Integrated Solution Group

The principal products of our integrated solution group are SLC and multimedia products. In 2001, we extended our expertise from the non-volatile memory market into the logic area by combining SLC products with embedded memory to oÅer comprehensive system solutions to our customers. Unlike with memory products, our emphasis on SLC and multimedia products is centered more on product design than on fabrication. We have focused on four key areas:

• ‚ audio;

• ‚ video;

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• ‚ communications; and

• ‚ microcontrollers.

As we grow our SLC and multimedia businesses, we intend to concentrate on producing SLC 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 SLC and multimedia products are currently used in the following end-market applications:

Audio

Sound Generator. Our MIDI solution for cellular handset customers, with a 32-voice polyphonic Sound Generator and high-quality wavetable sound synthesizer, provides enhanced ring-tone sound clarity. We have delivered samples to the major cellular phone makers, who are now conducting evaluation by cellular phone customers. We are ramping up our production in anticipation of volume shipments starting in the Ñrst quarter of 2004.

Digital Voice Recorder. Our digital voice recorder solution enables the integration of digital voice recording functions in various devices such as electronic dictionaries, language learning devices, electronic books and PDAs.

Home Equipment. Our home equipment products include integrated circuits for digital answering machines. The most important technology in these integrated circuits is digital signal processor technology, which is also necessary for applications in voice messaging, cordless telephones and cellular telephones.

Video

Digital Still Camera. We were the Ñrst company to provide to our customers, including Minolta Co., Ltd, a digital still camera controller that supports up to 16 million pixels for highend digital cameras.

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

CMOS Sensor Camera Module. We provide to our customers highly integrated CMOS image sensors and companion processor ICs for use in digital cameras and portable information appliances (such as PDAs and cell phones). We also oÅer compact modular solutions to our customers, including support in hardware design and algorithm development for speciÑc applications.

Our video-related SLC products also include DVD display controllers and game display controllers for pachinko machines.

Communications

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-eÅective solutions. Major OEM makers in Taiwan using the controllers include Accton Technology Corporations, D-Link Systems, Inc. and Lite-On Technology Corporation.

We also design clock generators, joystick controllers and wireless game controllers for Nintendo.

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Microcontrollers

In addition to microcontrollers for Öat panel displays, our microcontroller products also include microcontrollers for electronic dictionaries and PDAs, smart cards and small displays.

Customers

General

We emphasize customer relations as a key to our growth and proÑtability. As a key aspect of our customer development strategy, we strive to have major global computer and electronics companies accept our products for use in their devices, and seek to do this in part by participating in the product design process of our existing and prospective customers at an early stage to ensure that our products meet their present and future requirements. 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 also plan to continue to leverage our Mask ROM business with our existing and potential customers, thereby expanding our ability to cross-sell and diversify product mix and customer base.

Top Products and Applications

The following table sets forth, based upon a survey of our current customers, the major product areas and applications of our products purchased by our key customers, and the percentage of total sales revenue that these customers represented in 2000, 2001, 2002 and the six months ended June 30, 2002 and 2003:

Product Area Consumer Electronics ÏÏÏÏÏÏ Computer and Computer Peripheral ÏÏÏÏÏÏÏ Communications ÏÏÏ	Sample applications Game, STB, electronic dictionary, digital answering machine, musical instruments, digital TV, DVD, DSC, pachinko HDD, printer, LCD monitor, CD-ROM, CD-RW LAN, WAN, switch, DECT, ADSL, handsets	Customers Nintendo, Motorola, Inventec, GSL, Sony, Yamaha, Thomson, Sankyo, Minolta, Leapfrog, LG, Canon, Terayon Hewlett-Packard, Lexmark International, Dell, Brother, Cannon, Matsushita, Epson Oki, Benq Corporation, Hitachi, Toshiba, Philips, Sony, Philips, LG, Samsung NEC, Motorola, Accton, D-Link, AVM, Askey, Siemens, Ambit, Renesas	% of our net sales(1)	% of our net sales(1)	% of our net sales(1)	% of our net sales(1)
			Year ended December 31, 2000 2001 2002 63.9% 66.9% 68.6% 20.8% 26.2% 18.2% 15.3% 6.9% 10.8%		Six months ended June 30,
			2000 63.9% 20.8% 15.3%	2001 66.9% 26.2% 6.9%	2002 62.8% 21.5% 14.0%	2003
						52.9% 22.3% 19.2%

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

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Top Customers

The following table sets forth top customers (by sales) of our products by percentage of our net sales revenue in 2000, 2001, 2002 and the six months ended June 30, 2003 and the type of product purchased:

Customers Nintendo(1) ÏÏÏÏÏÏÏÏÏ Hewlett Packard ÏÏÏÏÏÏ Philips ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventec ÏÏÏÏÏÏÏÏÏÏÏÏÏ Renesas(2)ÏÏÏÏÏÏÏÏÏÏ Leapfrog ÏÏÏÏÏÏÏÏÏÏÏÏÏ ToshibaÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sankyo ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	% of net sales reve	% of net sales reve	nue Six months ended June 30 2002 2003 24.6% 15.2% 12.0% 11.7% 5.2% 1.8% 2.3% 2.2% 3.7% 8.5% 2.2% 0.3% 1.9% 2.5% Ì 3.8%	Productspurchased
	Year ended December 31 2000 2001 2002 32.8% 38.6% 34.2% 8.8% 6.3% 10.3% 1.0% 2.4% 2.9% 1.1% 1.4% 2.5% 8.0% 11.8% 2.3% 0.0% 0.3% 2.2% 0.7% 0.6% 1.6% 0.7% Ì 0.6%
	2000 32.8% 8.8% 1.0% 1.1% 8.0% 0.0% 0.7% 0.7%	2001 38.6% 6.3% 2.4% 1.4% 11.8% 0.3% 0.6% Ì	2002 24.6% 12.0% 5.2% 2.3% 3.7% 2.2% 1.9% Ì
				Mask ROM, Flash, SLC Mask ROM, Flash SLC Mask ROM SRAM, Flash Mask ROM, Flash Mask ROM, Flash Flash

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

• (2) The semiconductor operations of Mitsubishi Electric were transferred to Renesas on April 1, 2003.

Nintendo

The percentage of our total net sales revenue derived from Megachips, which on-sells our products to Nintendo, was 32.8% in 2000, 38.6% in 2001, 34.2% in 2002, 24.8% for the six months ended June 30, 2002 and 20.2% for the six months ended June 30, 2003. Nintendo is one of the world's largest users of Mask ROMs, which are used in Nintendo hand-held gaming devices, including Game Boy Advance. We have historically, since the beginning of our relationship, sold our products to Nintendo through Megachips, although we work directly with Nintendo with regard to technical matters. 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 as part of the design and production process. Our relationship is also predicated on our ability to supply quality products in a timely manner at competitive prices.

In 2001 and 2002, Nintendo launched its new Game Cube 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. Currently we provide product design, development and manufacturing services for multiple semiconductor devices to Nintendo for the production of the Game Cube, notwithstanding Nintendo's change of principal memory devices for this product. Our primary product oÅerings for the Game Cube relate mainly to accessory products and include clock generator integrated circuits used in the console, ethernet adaptors used in an accessory, radio frequency component integrated circuits used in a wireless controller, 4Mb and 16Mb code Flash used in conjunction with each game software, and 16Mb ASIC memory used in the console's operation system.

However, the Game Cube platform faces severe competition in the gaming console market, and Nintendo temporarily halted production of the Game Cube for a number of months in 2003 in order to clear excess inventory. As a result, sales of our products for Nintendo and in particular for the Game Cube as a percentage of our total net sales have been declining since 2002, although demand increased in late 2003 due to a signiÑcant reduction in prices for the Game Cube. We have been shifting additional production towards the output of Mask ROMs for Nintendo's Game Boy series of handheld gaming devices, including Game Boy Advance, which

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was released in the spring of 2001, and Game Boy Advance Super, which was released in 2003. We expect that demand for Mask ROMs for handheld gaming devices relative to demand for products for the Game Cube will continue to increase. See ""Risk Factors Ì Risks Relating to Our Company Ì Any delay or reduction in orders by Nintendo or the loss of Nintendo as a customer could result in the loss of a signiÑcant 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 payable over a thirty-six month period in monthly installments. Title to the leased equipment will be transferred to us at the end of the lease term.

Hewlett Packard

We are the main supplier of Mask ROMs to Hewlett-Packard, world's largest manufacturer of laser and inkjet printers, which requires Mask ROMs to store fonts in its laser and inkjet printers. We have had a relationship with Hewlett-Packard for over 10 years. We also supply Flash ROM to Hewlett-Packard, and we plan to market our SLC and ASIC products to Hewlett Packard in the future. The percentage of our total net sales revenue derived from Hewlett Packard was 8.8% in 2000, 6.3% in 2001, 10.3% in 2002, 12.0% for the six months ended June 30, 2002 and 11.7% for the six months ended June 30, 2003.

Renesas

We began our business relationship with Renesas, a joint venture between Mitsubishi and Hitachi, after its establishment in April 2003 following the transfer of certain agreements between Mitsubishi and us to Renesas. Prior to this, our relationship was with Mitsubishi. We supplied Mitsubishi with 4Mb SRAM based on 0.25 micron process technology in 1999, 32Mb Flash products based on 0.25 micron process technology in 2001, and 128Mb/64Mb Flash products based on 0.15 micron process technology from 2002. In October 2003, we signed a memorandum of understanding (the ""October MOU'') with Renesas to cooperate in a joint eÅort to develop advanced high density DINOR Flash technology and products based on 0.13 micron process technology. We expect that this joint development will require close cooperation involving various aspects of technology, design, production and marketing. The October MOU shall continue in force until June 30, 2004, or until we enter into deÑnitive agreements. The percentage of our total net sales revenue derived from Renesas was 8.0% in 2000, 11.8% in 2001, 2.3% in 2002, 3.7% for the six months ended June 30, 2002 and 8.5% for the six months ended June 30, 2003.

Sales and Marketing

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

Area Japan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hong Kong, Singapore and South Korea ÏÏÏÏÏÏ United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Europe and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended December 31, 2000 2001 2002 46.7% 50.1% 48.4% 21.8% 26.3% 17.5% 14.2% 12.4% 22.2% 9.6% 8.3% 9.8% 7.7% 2.9% 2.1% 100.0% 100.0% 100.0%	Year ended December 31, 2000 2001 2002 46.7% 50.1% 48.4% 21.8% 26.3% 17.5% 14.2% 12.4% 22.2% 9.6% 8.3% 9.8% 7.7% 2.9% 2.1% 100.0% 100.0% 100.0%	Six months ended June 30, 2002 2003 38.5% 38.2% 22.0% 31.3% 25.4% 22.9% 11.5% 5.1% 2.6% 2.5% 100.0% 100.0%
	2000 46.7% 21.8% 14.2% 9.6% 7.7% 100.0%	2001 50.1% 26.3% 12.4% 8.3% 2.9% 100.0%	2002 38.5% 22.0% 25.4% 11.5% 2.6% 100.0%

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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 oÇces in Taipei, San Jose in California, Chicago, Brussels, Tokyo, Osaka and Singapore. These oÇces conduct sales eÅorts and monitor the eÅectiveness of distributors and manufacturers' representatives.

We originate sales for our products within Taiwan either directly from our Taipei sales oÇce or through non-exclusive distributorships. Sales to Asia excluding Taiwan and Japan are also conducted through non-exclusive distributorships. Sales to Nintendo are made indirectly through Megachips. Megachips receives a 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 oÇces in Tokyo and Osaka. These distributors usually maintain small inventories and they distribute our products in Japan on a non-exclusive basis. Our customers in 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 wholly-owned subsidiaries, Macronix America and Macronix Europe N.V., which sell the products through 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. Our agreements with our representatives and domestic and international distributors are generally terminable by either party on short notice.

Property, Plant and Equipment

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

Fab I commenced commercial operations in 1992. Fab I occupies approximately 172,000 square feet on land that is leased from the Science Park Administration. 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 commercial operations in October 1997. Fab II occupies approximately 883,000 square feet on land that is leased from the Science Park Administration. 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 modernized production equipment, incorporates computer automated production systems and will be able to support 0.13 micron process technology without the need for major upgrades. Fab II is equipped with a total energy management system and an advanced waste treatment system. 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 approximately 170,000 square feet and a production support area of approximately 25,500 square feet. In order to alleviate capacity constraints in Fab II, which is an eight-inch facility, we have used approximately 7% of the space in Fab III to install eight-inch equipment to complement production at Fab II. However,

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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 2005 or later, although we expect that we will be able to ramp up production in approximately six months if required by market conditions. In addition, we may commence operations at Fab III sooner if a suitable cooperative opportunity presents itself with an existing or new business partner.

The Science Park Administration has granted us a parcel of land adjacent to our Fab II under a lease that is renewable annually for a maximum of 20 years. This land is to be used to build research and development laboratories.

Manufacturing and Quality Control

Manufacturing

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 diÅerent 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 ""back-end'' 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 77% of the testing and assembly of our SLC products, while testing most of our Mask ROM products internally.

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 2003 and expected fabrication capacity for 2004:

Fab I (six-inch wafers) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Fab II (eight-inch wafers)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	2000 36,000 40,000	2001 36,000 42,000	2002 35,000 40,000	2003 35,000 37,000	2004(1)
					35,000 37,500

(1) Planned capacity.

In order to maintain utilization rate at Fab I, which uses 0.32 micron and above process technology, and minimize the amount of new investment required, we plan to allocate to Fab I manufacturing of products that do not require leading edge technologies, such as low-density Flash and ROM products and certain of our SLC and SMS products, including high voltage, MEMS and embedded ROM products.

We began to manufacture Mask ROMs at Fab II at line widths 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 are in the process of converting some of our Mask ROM manufacturing capacity in Fab II to Flash manufacturing capacity in anticipation of demand, and also plan to increase our Flash manufacturing capacity in 2004.

We currently expect that Fab III will initially have a production capacity of approximately 15,000 eight-inch wafers and 25,000 twelve-inch wafers per month when fully loaded. Commencement and expansion of production at Fab III will depend on the then prevailing market conditions. See ""Management's Discussion and Analysis of Financial Condition and Results of Operations Ì Overview Ì Cost Reduction Initiatives''.

Our sales and capacity utilization tend to follow seasonal trends, particular with respect to Mask ROM, and typically peak around the end of the third quarter and the beginning of the fourth quarter of each year. In order to maximize our capacity utilization rate during the low season and to cope with demands during the high season, we typically use our excess capacity during the low season to build up an inventory of partially manufactured Mask ROMs and store

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them in Mask ROM banks. This would then allow us to complete the manufacture of Mask ROMs, incorporating our customers' software codes, in a shorter time during the high season.

Tower Semiconductor

In August 2000, we entered into a Ñve-year manufacturing and technology cooperation agreement with Tower Semiconductor whereby Tower Semiconductor will provide silicon wafer manufacturing processing services to us that can employ its microFLASH(r) technology. This technology is based on the proprietary N-ROM technology licensed from Saifun. 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. To date, due to adverse market conditions, we have placed orders for less wafers than we could have required Tower Semiconductor to manufacture for us, and have used Tower's manufacturing services to manufacture only our EPROM and SLC products.

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 in the event we decide to provide foundry services using NBit technology, we are obligated to purchase, certain minimum numbers of wafers based on percentages of the manufacturing capacity of a speciÑed production line in Tower Semiconductor's manufacturing facility, up to certain limits. Tower Semiconductor's Fab II fabrication facility is currently still in the start-up stage. 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. We continue to own at least the speciÑed minimum number of shares in Tower Semiconductor. See ""Related Party Transactions Ì Tower Semiconductor''.

Quality Control

All of our products undergo Ñnal testing before shipment. In most cases, externally packaged chips are returned to us for Ñnal testing before shipment. We occasionally subcontract Ñnal 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-oÅ 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 Ñlter 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 Ñnal test, which reviews the operation of each integrated circuit.

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We also oÅer ""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. We have experienced customer returns of less than 10 pieces per one million pieces shipped, which is in line with industry standards.

We operate a matrix system of quality assurance under which we maintain a single, company-wide quality engineering center. As of November 30, 2003, we employed 172 engineers, technicians and other employees whose duty is to develop and maintain a quality system and perform qualiÑcations for new products and new processes. At the same time, 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 certiÑcation in January 1994 from the Lloyd's Register Inspection Limited for our quality management system. In August 1997, we received the ISO 14001 certiÑcation for our environmental management system. In September 2001, we received the Quality System 9000 certiÑcation from the Lloyd's Register Quality Assurance for our quality system. In March 2002, we received the Occupation Health and Safety Assessment Series (""OHSAS'') 18001 certiÑcation for our occupational health and safety assessment. We are also in the process of obtaining the ISO 14969 quality management system certiÑcation. The certiÑcation process involves subjecting our production processes and the quality management systems at our factories to review and surveillance for various periods. The ISO certiÑcations also provide independent veriÑcation to our customers as to the quality control in our manufacturing processes.

Raw Materials

Our primary raw materials are silicon wafers, 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 metals, 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, have been relatively stable during the period of our operation. Raw material costs as a percentage of our net sales revenue was 3.6% in 2000, 6.6% in 2001, 4.9% in 2002 and 5.1% for the six months ended June 30, 2003. 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 eÅect on the price we would 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, insuÇcient. 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% between December 31, 2000 and December 31, 2001, but prices for both decreased on average by approximately 5.2% between December 31, 2001 and December 31, 2002. Between June 30, 2002 and June 30, 2003, prices for six-inch wafers and for eight-inch wafers decreased on average by approximately 11.0%.

We obtain our wafer supplies principally from three suppliers, namely Toshiba Ceramics Co., Ltd. and Sumitomo Corporation, Tokyo oÇce, both of which are overseas suppliers and Taisil Electronic Materials Corp., an ROC company. We settle all our wafer purchases in U.S. dollars.

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Chemicals

We obtain our supplies of industrial chemicals principally from a Taiwan joint venture entity formed by Merck Group of Germany and Kanto Kagaku (K.K.) of Japan. We obtain our supplies of bulk gases, such as nitrogen, oxygen and hydrogen, principally from our investee, United Industry Gas Co., Ltd., an aÇliate 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 state-owned water company. The ROC government also operates a puriÑed 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 that allow us to reclaim approximately 73% of the water used in our fabrication process. Although we have experienced several water shortages in the past, we are not currently experiencing any water shortages. 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, particularly in the northern Taiwan region. The ROC government has taken a series of measures to alleviate the impact of the water shortage, including restricting agricultural water usage. However, if the water shortage occurs again, the government may further restrict industrial water usage and our production may be materially adversely aÅected. See ""Risk Factors Ì Risks Relating to Our Company Ì We are vulnerable to natural disasters and other events beyond our control, which could severely disrupt the normal operation of our business and adversely aÅect our earnings''. To alleviate long-term water shortages, the government has constructed a major pipeline connecting the Science Park to a reservoir in Miao-li County. The government has also indicated that it intends to complete the construction of a dam in Hsinchu by 2005 to meet the water supply requirements of the Hsinchu Science Park.

Electricity

Electricity is our main source of energy and we receive all of our electricity supplies from the 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 from the national power grid approximately 226 million kilowatt hours of electricity in 2000, 260 million kilowatt hours of electricity in 2001, 316 million kilowatt hours of electricity in 2002 and 265.4 million kilowatt hours of electricity for the ten months ended October 31, 2003.

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 close to 100% of the power normally used to run Fab II. Fab II is one of the Ñrst semiconductor facilities in Taiwan to use a dynamic uninterrupted power supply system utilizing emergency power back-up generators that operate with no time delay.

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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 signiÑcant 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 Ñll any additional purchase orders for the product involved.

Research and Development

We believe that research and development is critical to our future success. We incurred expenses of NT$3,144 million in 2000, NT$3,825 million in 2001, NT$3,806 million (US$110.0 million) in 2002, NT$1,855 for the six months ended June 30, 2002 and NT$1,428 million (US$41.3 million) for the six months ended June 30, 2003 on research and development, or 9.4%, 17.6%, 23.1%, 26.7% and 20.0% of net sales revenue in those periods, respectively. On an ROC GAAP basis, royalty payments are included in research and development expense.

Our reorganization in 2003 enabled us to consolidate our research and development eÅorts and reduce the total number of projects by approximately two-thirds, to focus on those with strategic signiÑcance to us. As a result, we have, beginning in 2003, reduced our level of research and development expenditures.

As of November 30, 2003, we had 534 employees 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 Ñrms that follow the semiconductor industry and publish data on the size of the markets and their historical and projected growth rates. These Ñrms also generally publish a competition and market share proÑle 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 eÅorts, we have developed core design technologies in the following Ñve areas: memory, system logic, communications, audio and video. Our research eÅorts in the memory area presently include development of Flash memory based on Nbit technology, the development of 0.13 micron process technology for the manufacture of Mask ROM and the joint development of 0.13 micron process technology with Renesas based on its DINOR Flash design.

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 own patents for a number of

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processes relating to our Mask ROM, Flash, EPROM and SLC products in various countries, including the United States and Taiwan. As of November 30, 2003, we had a total of 449 U.S., 643 ROC, 4 Chinese, 13 Japanese and 21 European patents for products and technology developed through our own eÅorts or joint research and development eÅorts with other companies. Most of our patents expire between 2008 and 2022. As of November 30, 2003, we had over 2,070 patent applications pending in various jurisdictions, including the United States, Taiwan, China, Japan and Europe. We intend to continue to seek patent protection on signiÑcant new inventions.

We have registered 17 types of trademarks including ""MXIC'', ""Macronix'', ""MX'' and ""MTP EPROM''. As of November 30, 2003, we had a total of 90 trademark registrations granted and 20 applications pending in various jurisdictions including Australia, China, the European Union, India, Japan, Korea, Singapore, Taiwan and the United States.

As is the case with many companies in the semiconductor industry, we have from time to time experienced incidents of infringement of our intellectual property rights and illegal copies of our products, including some incorporating our trademarks. None of these, however, have had any material adverse eÅect 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 counsels to review and document our own patent monitoring and enforcement process. In spite of our eÅorts to decrease the risk of infringement, we are the subject of several patent infringement claims. See ""Ì Legal Proceedings''.

We have entered into patent license or cross-license agreements with companies such as IBM, AT&T Corporation (""AT&T'') and Agere Systems Inc. (""Agere'').

We have also entered into an agreement with Saifun that provides us with a non-exclusive, non-transferable, worldwide license to develop and manufacture products based on its N-ROM technology. The license is eÅective for the duration of the Saifun patents and thereafter shall continue on a year-to-year basis.

Payments under license or cross-license agreements amounted to NT$259 million in 2000, NT$176 million in 2001, NT$785 million (US$22.7 million) in 2002 and NT$164 million (US$4.7 million) for the six months ended June 30, 2003.

We license the manufacturing technology underlying a variety of our memory products, including Mask ROM devices, to third parties. We earned in royalties approximately NT$85 million in 2000, NT$77 million in 2001, NT$34 million (US$1.0 million) in 2002 and NT$5.5 million (US$0.2 million) for the six months ended June 30, 2003.

Employees

As of November 30, 2003, we employed 3,420 full time employees, of whom 444 were executive oÇcers and administrators, 1,496 were engineers and technicians and 1,480 were operators of machinery and equipment. Of all our operators, we employed 178 persons from overseas. Approximately 25.8% of our employees as of that date had undergraduate degrees, including approximately 1.2% who possessed doctoral degrees and approximately 23.5% who held master's degrees. As of November 30, 2003, the average age of our employees was 31.5 years.

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

Position Executive and Senior Managers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Supporting StaÅ and Administrators ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Engineers and Technicians ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operations Local ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Overseas ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Year ended December 31, 2000 2001 2002 211 245 299 486 537 204 1,425 1,424 1,830 1,434 1,332 1,279 202 182 180 3,758 3,720 3,792	Year ended December 31, 2000 2001 2002 211 245 299 486 537 204 1,425 1,424 1,830 1,434 1,332 1,279 202 182 180 3,758 3,720 3,792	Six months ended June 30,	Six months ended June 30,
	2000 211 486 1,425 1,434 202 3,758	2001 245 537 1,424 1,332 182 3,720	2002 270 167 1,812 1,249 174 3,672	2003
				281 165 1,516 1,202 132
				3,296

Our future success will depend, in part, on our ability to continue to attract and retain highly qualiÑed technical, marketing, engineering and management personnel. The competition in Taiwan for qualiÑed 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. In 2003, we also recruited a number of design engineers in Korea and our subsidiary in the United States recruited a number design engineers in the United States, to partially replace a number of engineers who had left. We have not experienced any strikes or signiÑcant work stoppages and believe that our relations with our employees are good.

We believe that our management policies and comprehensive beneÑts to employees have contributed to good employee relations and employee retention. Our employee beneÑts include subsidized meals and housing, health insurance, life insurance and education/training subsidies, as well as employee bonuses. 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 Ñve management representatives and 10 employee representatives to manage and administer the fund. We completed construction of modern athletic and recreational facilities for use by our employees in the fourth quarter of 2002.

We have also established an employee beneÑt 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 certiÑcate 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.

We spent an aggregate of NT$225 million in installing pollution prevention equipment, operation, waste treatment and pollutant composition in the year ended December 31, 2001, NT$1,299 million in the year ended December 31, 2002 and NT$371 million in the eleven months ended November 30, 2003. We 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 processed and disposed of by the Science Park environmental cleaning team. In addition, we have also established environmental

94

protection policies and have put in place environmental management teams trained by the ROC Environmental Protection Administration. Fab II was designed as an environmentally friendly facility and includes a modern waste water treatment and recycling system. We received ISO 14001 certiÑcation for our environment management system in August 1997.

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 Ñled an action against us and two other semiconductor manufacturers with the International Trade Commission (""ITC''), alleging a violation of Section 337 of the 1930 TariÅ Act for infringement of the U.S. Patent No. 4,451,903 (the ""903 patent'') owned or controlled by Atmel. On June 1, 2001, the ITC issued a Notice of Final Determination in our favor, and on July 26, 2001, the ITC denied Atmel's petition for reconsideration. Atmel did not appeal the Notice of Final Determination with the United States Court of Appeals for the Federal Circuit before the required deadline, and so it is bound by the ITC's Ñnding that we did not infringe the 903 patent or violate Section 337 of the TariÅ Act. In addition, on August 8, 1997, Atmel Ñled 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 that 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 the court issued an order on May 14, 2003 granting Macronix America's motion for summary judgment of invalidity of the 747 patent. Pursuant to this order, the court entered judgment in favor of Macronix America and against Atmel. With respect to the 096 patent, Macronix America Ñled a motion for summary judgment on 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. Macronix America Ñled a motion for summary judgment of non-infringement of the 096 patent on September 19, 2003. Atmel Ñled a motion for summary judgment of infringement of the 096 patent on the same date. The court has not issued its ruling as of the date of this OÅering Circular.

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 the litigation. If we are found to have infringed Atmel's patents, Atmel has requested injunctive relief to prohibit Macronix America 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 oÅ by Lucent Technologies Inc. in March 2001, Ñled 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 Ñled 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 Ñled 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.

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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 signiÑcant costs with respect to the defense of the claims that could have a material adverse eÅect on our results of operations or Ñnancial 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 speciÑc arrangements. The royalty accrual was NT$658 million in 2000, NT$490 million in 2001,NT$360 million (US$10.4 million) in 2002, NT$180 million in the six months ended June 30, 2002 and NT$105 million (US$3.0 million) in the six months ended June 30, 2003. The outstanding balance of this reserve was NT$402 million (US$11.6 million) as of December 31, 2002 and NT$585 million (US$16.9 million) as of June 30, 2003, respectively.

On July 9, 2003 we learned from Tower Semiconductor that a shareholders class action was Ñled on behalf of a class consisting of the ordinary shareholders of Tower Semiconductor at the close of business in the United States on April 1, 2002. This case was Ñled in the United States District Court for the Southern District of New York against Tower Semiconductor and its major corporate shareholders, including, us, and against directors of Tower Semiconductor, including Miin Wu, our president and CEO. The lawsuit alleges violation of section 14(a) and 20(a) of the Security Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder. The lawsuit alleges that Tower Semiconductor and its directors made false and misleading statements and omissions in a proxy solicitation to Tower Semiconductor's shareholders regarding a proposed amendment to a contract between Tower Semiconductor and its major shareholders, including us. The plaintiÅs are seeking unspeciÑed damages and attorneys' and experts' fee and expenses.

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 ""Ì Intellectual Property''.

Subsidiaries and Strategic Investments

Subsidiaries

The following table sets forth the identity of our at least 50% directly or indirectly owned subsidiaries and their jurisdictions of incorporation as of June 30, 2003.

Name of subsidiary Hui Ying Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Joytech Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix America, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix Europe N.V. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix (B.V.I.) Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏ New Trend Technology Inc. ÏÏÏÏÏÏÏÏÏÏÏÏ Wedgewood International Ltd. ÏÏÏÏÏÏÏÏÏÏ Macronix Pte Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kang Bao Investment Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rui Hong Investment Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic Pixel Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MaxNova Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix (Hong Kong) Co., Ltd. ÏÏÏÏÏÏÏ	Main business Investment Systems Solutions Sales and marketing Sales and marketing Investment IC design Investment Sales and marketing Investment Investment IC design IC design Sales and marketing	Jurisdiction of incorporation Taiwan, ROC Taiwan, ROC California, USA Belgium British Virgin Islands California, USA British Virgin Islands Singapore Taiwan, ROC Taiwan, ROC Taiwan, ROC Taiwan, ROC Hong Kong	Total Paid-in Capital of such Entity NT$500,000,000 NT$76,775,000 US$100,000 EUR 62,000 US$138,647,126 US$23,000,000 US$35,010,000 US$100,000 NT$500,000,000 NT$500,000,000 NT$50,000,000 NT$50,000,000 US$1,000,000	Direct or Indirect Equity Interest
				100% 92.5% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

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The book value of our shareholding in each of the following subsidiaries represents more than 10% of our net assets or net proÑts as of June 30, 2003.

Macronix (BVI) Co., Ltd. (""Macronix BVI'')

Macronix BVI is an investment holding company. As at June 30, 2003, we beneÑcially owned 100% of the issued share capital of Macronix BVI. As at June 30, 2003, Macronix BVI had a capital of US$162.2 million. As at December 31, 2002, Macronix BVI had net assets of US$36.3 million and accumulated deÑcits of US$75.1 million. For the year ended December 31, 2002, Macronix BVI recorded a net loss of US$35.2 million.

As at December 31, 2002, we held the shares of Macronix BVI at a value of NT$1,254.5 million. The shares of Macronix BVI held by us are fully paid-up. For the year ended December 31, 2002, we did not receive any dividend on the shares of Macronix BVI. For the year ended December 31, 2002 there are no inter-company loans between us and Macronix BVI.

Wedgewood International Ltd. (""Wedgewood'')

Wedgewood is an investment holding company. As at June 30, 2003, we beneÑcially owned 100% of the issued share capital of Wedgewood. As at 30 June, 2003, Wedgewood. had a capital of US$35 million. As at December 31, 2002, Wedgewood. had net assets of US$49.1 million and accumulated deÑcits of US$64.1 million. For the year ended December 31, 2002, Wedgewood recorded a net loss of US$31.3 million.

As at December 31, 2002, we held the shares of Wedgewood at a negative value of NT$1,705.5 million. The shares of Wedgewood held by us are fully paid-up. For the year ended December 31, 2002, we did not receive any dividend on the shares of Wedgewood. For the year ended December 31, 2002 there are no inter-company loans between us and Wedgewood.

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 oÅerings, expand our capacity, secure access to raw materials and services and keep up-to-date with technological changes in the semiconductor industry. As of June 30, 2003, these participations include:

• ‚ Tower Semiconductor, Ltd. (""Tower Semiconductor'') Ì A 14.9% indirect interest in Tower Semiconductor. Tower Semiconductor is an independent foundry manufacturer of semiconductor integrated circuits on silicon wafers. As at June 30, 2003, we beneÑcially owned 14.9% of the issued share capital of Tower Semiconductor. As at June 30, 2003, Tower Semiconductor had a capital of US$425.6 million. As at December 31, 2002, Tower Semiconductor had net assets of US$298.3 million and accumulated deÑcits of US$104.6 million. For the year ended December 31, 2002, Tower Semiconductor recorded a net loss of US$51.4 million. As at December 31, 2002, we held the shares of Tower Semiconductor at a value of NT$1,847.5 million. The shares of Tower Semiconductor held by us are fully paid-up. For the year ended December 31, 2002, we did not receive any dividend on the shares of Tower Semiconductor. For the year ended December 31, 2002 there are no inter-company loans between us and Tower Semiconductor.

• ‚ Prominent Communications, Inc. Ì A 35.2% direct equity interest in Prominent Communications. Prominent Communications designs and sells integrated chipsets and application-speciÑc integrated circuits for applications used in the wireless communications industry. We acquired our equity interest in Prominent Communications in late 1999 as

97

part of an arrangement to jointly develop integrated circuits for 900MHz cordless telephones.

• ‚ Biomorphic VLSI Inc. Ì A 34.1% indirect equity interest in Biomorphic VLSI Inc., or Biomorphic. Biomorphic develops and markets intelligent imaging sensors for digital cameras, automobiles and industrial applications. In the third quarter of 2003, as we had guaranteed a loan of US$3.4 million made to Biomorphic, we injected a further US$3.4 million in capital into Biomorphic to enable the loan to be repaid, and increased our shareholding to 49.8% as of September 30, 2003.

• ‚ Ardentec Corporation Ì A 11.8% direct equity interest in Ardentec Corporation, or 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 Ì A 5.9% indirect and a 1.3% direct equity interest in Chipbond, which specializes in wafer-level bumping in order to facilitate the latest semiconductor packaging technologies, such as ball grid array and Öip chip.

• ‚ RAiO Technology Inc. Ì A 28.0% indirect equity interest in RAiO Technology Inc., or RAiO, which provides intellectual property, software and ASIC design solutions for PC-peripheral products and consumer products.

Insurance

Our insurance coverage as of September 30, 2003 includes:

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

• ‚ business interruption insurance;

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

• ‚ directors' and oÇcers' liability insurance;

• ‚ Ñdelity 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

Directors, Supervisors and Senior Management

The following table sets forth the name of each director, supervisor and executive oÇcer, their respective position with us, the date of their respective initial appointment and age. We do not have any executive oÇcers other than the directors, supervisors and executive oÇcers listed below.

Name Ding-Hua Hu ÏÏÏÏÏÏÏ Miin Wu ÏÏÏÏÏÏÏÏÏÏÏ H. C. Chen(1) ÏÏÏÏÏ An Cheng(2) ÏÏÏÏÏÏ Ing-Jiunn Hai(2) ÏÏÏ Dang-Hsing YiuÏÏÏÏÏ C.Y. Lu(3) ÏÏÏÏÏÏÏÏ Y. S. Tan ÏÏÏÏÏÏÏÏÏÏ Raymond S. Mak ÏÏÏ C.L. Liu ÏÏÏÏÏÏÏÏÏÏÏÏ Simon M. Sze ÏÏÏÏÏÏ Roger Chu(2)ÏÏÏÏÏÏ Ping Tien Wu ÏÏÏÏÏÏ Cheng Yi Fang ÏÏÏÏÏ Paul Yeh ÏÏÏÏÏÏÏÏÏÏÏ	Position with Our Company Executive Director and Chairman Executive Director and President Executive Director Director Director Director and Chief Operating OÇcer Director and Chief Technology OÇcer Director Director and Vice President Director Director Supervisor Supervisor Supervisor Associate Vice President in charge of Finance Center	Date of Initial Appointment Age November 25, 1989 61 November 25, 1989 and September 1, 55 1989 July 18, 1992 65 April 19, 2001 39 April 19, 2001 54 June 5, 1995 and June 29, 1998 51 April 18, 2003 and October 1, 1999 53 June 29, 1998 and February 19, 1990 49 June 29, 1998 and September 1, 1995 53 June 27, 2003 69 June 27, 2003 67 July 18, 1992 56 November 27, 1993 62 April 19, 2001 62 July 1, 2001 47

• (1) Nominee of Hung Chih Investment Corporation.

• (2) Nominees of Delta Electronics Ltd.

• (3) 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 Venture Capital, a shareholder of our company. Dr. Hu has additionally served as the chairman of AVID Electronics Corporation as well as a director of ZYXEL Communication Corporation, Weltrend Semiconductors Inc., United Integrated Services Co., Ltd. and Fulbond Holdings Limited. 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 oÇcers 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 and 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.

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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 president of GE Capital in Taiwan for several years. He also served in key positions of several international Ñnancial 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.

Dang-Hsing Yiu has been a director since 1995 and our chief operating oÇcer since 1998. Mr. Yiu has been an executive oÇcer 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.

C.Y. Lu has been a director since 2003. He has been the chief technology oÇcer since 1999. Mr. Lu also is the Chairman and Chief Executive OÇcer of Ardentec Corporation. He has over 20 years experience in the semiconductor and technology related industries. Mr. Lu received a Ph.D in physics from Columbia University.

Y.S. Tan has been a director since 1998 and a vice president since 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 1995. He has also served as chairman of Macronix America, our United States subsidiary, since 1995. Before that, he was an executive oÇcer 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.

C.L. Liu has been a director since 2003. He has been the president and professor of computer science at National Tsing Hua University in Taiwan since 1998. He also has been the associate provost of the University of Illinois at Urbana-Champaign since 1995. Mr. Liu received a Ph.D. in electrical engineering from the Massachusetts Institute of Technology.

Simon M. Sze has been a director since 2003. He worked with Bell Laboratory from 1963 to 1989. Currently, he is UMC chair professor, professor of NCTU and president of National Nano Device Laboratory. Mr. Sze received a Ph.D. in electrical engineering from Stanford University.

Roger Chu has been a supervisor since 1992. He is also the Ñnancial 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 Ñnance center since July 2001. Prior to that, he was the senior director of our Ñnance 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.

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The business address for all of our directors and senior management is our principal executive oÇces at No. 16 Li Hsin Road, Science 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.

Board Practices

Our shareholders elect the members of our board of directors. Our board of directors is currently composed of 12 directors, three of whom are members of our executive director committee and two of whom are independent directors. 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. Although we currently do not have an audit committee or a remuneration committee, we are in the process of evaluating our current governance structures.

All of our directors were elected on April 19, 2001 for a three-year term, except that Mr. Liu and Mr. Sze were elected on June 27, 2003 for a three-year term. Our board of directors appoints our executive oÇcers. In accordance with the ROC Company Law, our supervisors cannot concurrently serve as our directors, executive oÇcers or other staÅ members. We currently have four supervisors, each of whom were 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, veriÑcation of statements by our board of directors at shareholders' meetings, calling of shareholders' meetings, representation of us in negotiations with our directors and giving notiÑcation, 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.

Certain of our directors and supervisors serve in their capacity as representatives of the corporate entities who hold the board or supervisor seats and do not serve in their individual capacity. Consequently, if any of these individuals withdraws, dies or otherwise becomes unable to serve, the corporate entity he or she represents has the ability to replace that person with a diÅerent representative of its choice.

We currently have two independent directors elected on June 27, 2003, namely, Mr. Liu and Mr. Sze. Directors and supervisors are deemed ""independent'' if (i) they serve in their individual capacity rather than in the capacity as representatives of the corporate entities who hold the board or supervisor seat, (ii) they have Ñve years of experience in business, legal or Ñnancial matters or in the company's business and (iii) they do not serve as independent directors or supervisors on the boards of directors of Ñve or more other companies. In addition, directors and supervisors will be deemed ""independent'' only if, for at least one year prior to their election, they:

• ‚ are not employed by the company or its aÇliates and are not directors or supervisors of the aÇliates of the company, provided that they may serve as independent directors or supervisors for both of the company and its subsidiaries;

• ‚ do not directly or indirectly hold over 1% of the outstanding shares of the company and are not ranked among the top ten individual shareholders of the company;

• ‚ are not married or related within the second degree to employees of the company or its aÇliates, directors and supervisors of the aÇliates of the company, holders (directly or

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indirectly) of over 1% of the outstanding shares of the company or shareholders who are ranked among the top ten individual shareholders of the company;

• ‚ are not directors, supervisors or employees of corporate shareholders that directly hold more than 5% of the shares of the company or are ranked among the top Ñve corporate shareholders of the company;

• ‚ are not directors, supervisors, managers or holders of more than 5% of the shares of a company or institution with which the company has a Ñnancial or business relationship; and

• ‚ are not a, or a spouse of an owner, partner, director, supervisor or manager of providers of Ñnancial, commercial or legal services to the company or its aÇliates.

The requirement for independent directors and supervisors currently only applies to companies who have applied to list their shares on the Taiwan Stock Exchange since 2002. Starting from September 1, 2003, such requirement will also apply to companies that apply to list their shares on the GreTai Securities Market. There is no assurance that such requirement will not apply to us in the future.

Compensation

The following table sets forth cash remuneration paid to our current directors, supervisors and executive oÇcers in 2003:

Name Ding-Hua Hu ÏÏÏÏÏÏÏÏÏ Miin Wu ÏÏÏÏÏÏÏÏÏÏÏÏÏ H.C. ChenÏÏÏÏÏÏÏÏÏÏÏÏ An ChengÏÏÏÏÏÏÏÏÏÏÏÏ Ing-Jiunn Hai ÏÏÏÏÏÏÏÏÏ Hong-Hui Chen ÏÏÏÏÏÏÏ Dang-Hsing YiuÏÏÏÏÏÏÏ C.Y. Lu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Y. S. Tan ÏÏÏÏÏÏÏÏÏÏÏÏ Raymond S. Mak ÏÏÏÏÏ C.L. Liu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Simon M. Sze ÏÏÏÏÏÏÏÏ Fuja Shone(1) ÏÏÏÏÏÏÏ Wen-Lung Lee ÏÏÏÏÏÏÏ Roger Chu ÏÏÏÏÏÏÏÏÏÏÏ Ping Tien Wu ÏÏÏÏÏÏÏÏ Cheng Yi Fang ÏÏÏÏÏÏÏ Paul Yeh ÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Position with our Company Executive Director and Chairman Executive Director and President Executive Director Director Director Director Director and Chief Operating OÇcer Director and Chief Technology OÇcer Director and Vice President Director and Vice President Director Director Director Supervisor Supervisor Supervisor Supervisor Associate Vice President in charge of Finance Center	Total compensation
		(NT$) 1,800,000 4,263,000 112,800 99,600 99,600 86,000 3,600,000 2,643,000 1,688,000 510,000 50,900 50,900 914,000 99,600 99,600 99,600 99,600 2,181,000
		18,497,200

(1) Resigned from oÇce eÅective April 18, 2003.

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Share Ownership

The following table sets forth the personal share ownership of our directors, supervisors and executive oÇcers and their immediate families as of December 31, 2003:

Title Executive Director and Chairman Executive Director and President Executive Director Director Director Director and Chief Operating Officer Director and Chief Technology OÇcer Director and Vice President Director and Vice President Director Director Supervisor Supervisor Supervisor Associate Vice President, Finance Center	Name Ding-Hua Hu Miin Wu H. C. Chen(1) An Cheng(2) Ing-Jiunn Hai(2) Dang-Hsing Yiu C.Y. Lu(3) Y. S. Tan Raymond S. Mak C.L. Liu Simon M. Sze Roger Chu(2) Ping Tien Wu Cheng Yi Fang Paul Yeh	Share Ownership Number of Shares Percentage 3,500,283 0.08% 30,932,711 0.70% 4,328,906 0.10% 0 0.00% 0 0.00% 19,172,119 0.44% 2,345,224 0.05% 4,273,159 0.10% 6,930,638 0.16% 0 0.00% 0 0.00% 50,877 0.00% 198,489 0.00% 1,086,739 0.02% 9,714,102 0.22%	Shares owned by Spouses and minor children	Shares owned by Spouses and minor children
		Number of Shares 3,500,283 30,932,711 4,328,906 0 0 19,172,119 2,345,224 4,273,159 6,930,638 0 0 50,877 198,489 1,086,739 9,714,102	Number of Shares 4,928,066 0 2,494,000 375,703 0 2,115,701 0 47,526 0 0 0 35,521 0 360,895 43,060	Percentage
				0.11% 0.00% 0.06% 0.01% 0.00% 0.05% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00%

• (1) Nominee of Hung Chih Investment Corporation.

(2) Nominees of Delta Electronics Ltd.

(3) Nominee of Hui Yin Investment Ltd.

Compensation of Directors, Supervisors and Executive OÇcers

According to our Articles, we may distribute 2.0% of distributable earnings to our directors and supervisors as compensation. In the event that a director or supervisor serves as a representative of a legal entity, such compensation is paid to the legal entity. We pay our executive oÇcers monthly salaries, including our Chairman, in addition to employee bonuses. The aggregate compensation paid in 2003 to our directors and supervisors for their services was NT$15.9 million and NT$0.4 million, respectively. The aggregate compensation paid in 2003 to our associate vice president of the Ñnance center for his services was NT$4.3 million. As of December 31, 2003, 72,819,145 shares were held by directors, supervisors and executive oÇcers. In addition, the president, vice-president, executive directors, and the associate vice president of the Ñnance center combined, held options to purchase up to 10,672,559 shares of the company. There have been no loans or advances made by us or any of our subsidiaries to, or guarantees given by us or any of our subsidiaries in relation to loans or advances received by, the directors, supervisors and executive oÇcers. We are not involved in any unusual transactions (such as purchases outside normal activities, acquisitions or disposals of assets) with any of our directors, supervisors or executive oÇcers.

All material transactions between the company and its directors, supervisors and executive oÇcers are described in ""Related party transactions.''

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Stock Plans

Stock Performance-Based Employee Bonus Plan

In April 1999, our board approved a program similar to a stock appreciation rights plan under which our employees who are eligible to participate would receive cash bonuses based on increases in the market price of our common shares. Our board has authorized our chairman to use his discretion to alter the terms of this plan, including the vesting period and the amount of the bonus allocated to our employees. We initially allocated 61,179,500 shares upon the establishment of the plan. Rights to receive cash bonuses under the plan were 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, another 25% on August 1, 2001 and the remaining 50% on August 1, 2002. In April 2002, our board of directors approved an amendment to the plan, changing the vesting date for the Ñnal 25% to August 1, 2002 from March 31, 2003. These rights to receive cash bonuses were forfeited for employees who discontinued their employment before the scheduled vesting dates.

Between the establishment of the plan and December 31, 2002, rights to receive cash bonuses with respect to a total of 6,197,600 shares have been forfeited, and rights to receive cash bonuses with respect to an additional 17,227,048 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 December 31, 2002, 72,208,948 shares were outstanding under the plan, rights to all of which were vested. We may from time to time increase the size of the plan in the future to allocate additional stock appreciation rights. In April 2003, all the 72,208,948 shares were forfeited.

Share Option Plans

We adopted three share option plans in November 29, 2001, April 24, 2002 and April 7, 2003, respectively. We also recently authorised a share option plan on March 11, 2004.

These share option plans provide that our oÇcers 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 or not less than 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 date the options are granted. Each vested option can be exercised within a period of six years from the relevant date the options are granted. There are no special senior management options. The options held by our directors, supervisors and executive oÇcers bear the same conditions as the ones received by our employees. In addition, only directors and executive oÇcers who are also hired as employees can be granted options pursuant to the share option plans. 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, 1,507,000 and 6,164,500 share options at exercise prices of NT$22.8, NT$22.3, NT$11.5 and NT$11.7 on January 16, 2002, May 6, 2002, October 1, 2002 and December 16, 2002, respectively. Under the April 2002 share option plan, we granted 150,000,000, 10,284,500 and 2,753,500 share options at an exercise of NT$11.5, NT$11.7 and NT$9.35 on October 1, 2002, December 16, 2002 and April 7, 2003, respectively. Under the April 2003 share option plan, we granted 126,000,000, 67,212,000 and 829,000 share options at exercise prices of NT$7.75, NT$7.75 and NT$9.00 on June 13, 2003, June 13, 2003 and November 4, 2003, respectively. Under the share option plan of March 11, 2004, we authorised the grant of a total of 200,000,000 share options at exercise prices to be determined by our Chairman and such exercise prices shall not be lower than the closing price of our shares on the issuance day.

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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 our former director Ms. Maria D.H. Lu of Chiao Tung Bank, a lender to us and a shareholder of our company, Mr. Miin Wu, who serves as a director of Tower Semiconductor, Mr. Yen Hie Chao, who previously served as a supervisor of United Industry Gas Co., Ltd. and our former director Mr. Jon Ten Chung, who serves as a director of Fuetrek. We believe that the transactions we conduct with these parties are on an arms-length commercial basis.

We subcontract a portion of our assembly and testing requirements to Powertech Co. Ltd., and Ardentech. Previously, we also subcontracted a portion of our assembly and testing requirements to Chantek, and we incurred manufacturing processing charges of NT$390 million in 2000 and NT$104 million in 2001 for services performed by Chantek. For services performed by Powertech, we incurred manufacturing processing charges of NT$96 million in 2000, NT$106 million in 2001, NT$173 million (US$5.0 million) in 2002 and NT$211 million (US$6.1 million) in 2003. For services performed by Ardentech, we incurred manufacturing processing charges of NT$64 million in 2000, NT$108 million in 2001, NT$241 million (US$7.0 million) in 2002 and NT$130 million (US$3.8 million) in 2003. We purchase industrial gases from United Industry Gas. We incurred NT$117 million in 2000, NT$119 million in 2001, NT$110 million (US$3.2 million) in 2002 and NT$100 million (US$2.9 million) in 2003, in charges for industrial gases provided by United Industry Gas.

In August 2000, we entered into a Ñve-year manufacturing and technology cooperation agreement with Tower Semiconductor, an Israeli company, whereby Tower Semiconductor will provide silicon wafer manufacturing processing services that can employ Tower Semiconductor's microFLASH technology. This technology is based on proprietary technology licensed from Saifun, an Israeli integrated circuit design company. We also have entered into a separate agreement with Saifun that provides us with rights to develop and manufacture certain products related to the microFLASH process technology. Under the agreement with Tower 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 and 2002, we have placed orders for less than the numbers of wafers that we could have required Tower Semiconductor to manufacture for us in those periods. Wafer purchases in 2001 totalled NT$157 million, in 2002 totalled NT$136 million (US$3.9 million) and in 2003 totalled NT$37 million (US$1.1 million).

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 appoint one member of Tower Semiconductor's board of directors and to a guaranteed portion of the wafer manufacturing capacity of Tower Semiconductor's new eight-inch fabrication facility, which is now in the start-up stage. Under the agreements, we agreed to purchase approximately 2.7 million Tower Semiconductor ordinary shares, of which 866,551 shares were purchased at the initial closing in January 2000, and the remainder were to be purchased in Ñve equal installments at subsequent closings upon achievement of certain milestones by Tower Semiconductor. The purchase price at each closing is to be based on the fair market value of the shares at the time, subject to a minimum of US$12.50 and a maximum of US$30 per share. Our payment obligations are US$20 million for the initial closing and US$11 million at each subsequent closing.

In September 2001, following the Ñrst two subsequent closings at which we acquired a further 733,380 shares, Tower Semiconductor underwent a Ñnancial restructuring under which, among other things, it issued additional shares. We purchased 1,255,848 shares at a price per share of US$12.75, and funded the purchase from our prepaid credit account, discussed below.

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Pursuant to the third and fourth subsequent closings in April and October 2002, we purchased a total of 2,416,326 shares at prices per share adjusted to take account of dilution. In October 2002 we purchased a further 660,000 shares pursuant to a rights oÅering for US$5.00 per share, and received warrants for the purchase of a further 297,000 shares.

In March 2003, we and other Tower Semiconductor investors reached an agreement with Tower Semiconductor to amend our obligations in relation to the Ñfth and Ñnal subsequent closing purchase obligation. Under the proposed amendment, we and the other investors will advance a total of US$24.6 million as a part of the Ñfth milestone payment, prior to Tower Semiconductor's satisfaction of the conditions. Of this amount, we are obliged to pay US$6.6 million, for the purchase of shares at US$2.983 per share. As of May 2003, we have already paid US$3.6 million of this amount for the purchase of 1,206,839 shares, and a further US$3 million is outstanding. We and the other investors have paid the balance of the Ñfth and Ñnal purchase obligation, which was US$4.4 million in our case.

Our payments to Tower Semiconductor, as December 10, 2003, total US$78.3 million, and of this the total share purchase consideration is US$64.2 million. Under the original share purchase agreement, the excess of our payment obligations over the total share purchase consideration is credited to a prepaid credit account. Amounts in the credit account may be applied to future purchases of wafers, purchases of Tower Semiconductor's shares (not including purchases under the original purchase commitments) or royalty payments.

At December 31, 2003, our credit account balance was US$14.1 million, and we owned approximately 15.8% of Tower Semiconductor's outstanding shares. Our average purchase price per share is US$7.88, which is somewhat higher than the fair market values due to the minimum per share price in the original agreement.

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MAJOR SHAREHOLDERS

The following table sets forth certain information, as of May 31, 2003, and as adjusted for the issuance of the GDSs being oÅered in this oÅering, with respect to our common shares owned of record by our top Ñve shareholders and all directors, supervisors and executive oÇcers as a group. To our knowledge, as of April 29, 2003, no shareholder beneÑcially owned 5% or more of our common shares.

5% or more of our common shares.
Name of Shareholder Delta Electronics, Ltd.(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ National Stabilization FundÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Civil Servant Retirement Pension Fund ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Treasury stock of Macronix International Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏ Labor Retirement Fund Supervisory Committee ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Director, supervisors and executive oÇcers as a group(2) ÏÏÏÏÏ	Prior to the	OÅering
	Number of common shares 81,335,400 65,777,140 45,176,440 40,000,000 36,069,447 86,818,012	Percentage of total outstanding common shares
		2.17% 1.76% 1.21% 1.07% 0.96% 2.32%

• (1) Delta Electronics nominated two of our current directors and one of our current supervisors. See ""Management.''

• (2) Includes no shares held by entities, oÇcers of which currently serve on our board of directors.

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THE SECURITIES MARKET OF TAIWAN

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently veriÑed by our company, the underwriters or any of our respective aÇliates or advisers in connection with this oÅering.

The Taiwan Stock Exchange

In 1961, the Securities and Futures Commission, working together with private interests, established the Taiwan Stock Exchange to provide a marketplace for securities trading. The Taiwan Stock Exchange is a corporation owned by government-controlled and private banks and enterprises. The Taiwan Stock Exchange is independent of entities transacting business through it, each of which pays a user's fee. Generally, all transactions in listed securities by brokers, traders and integrated securities Ñrms must be made through the Taiwan Stock Exchange.

The Taiwan Stock Exchange commenced operations in 1962. During the early 1980s, the Securities and Futures Commission actively encouraged new listings on the Taiwan Stock Exchange and the number of listed companies grew from 119 in 1983 to 669 as of December 31, 2003. As of December 31, 2003, the market capitalization of companies listed on the Taiwan Stock Exchange was NT$12,868 billion.

Historically, Taiwan companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the Securities and Futures Commission has encouraged companies to list other types of securities. In 1988, the Securities and Futures Commission permitted the issuance of the Taiwan's Ñrst convertible bonds. Since 1989, there have been oÅerings of domestic convertible bonds and convertible preferred shares. In addition, beneÑciary units evidencing beneÑciary interests in closed-end investment funds and Dragon Bonds issued by Asian Development Bank are also listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market of Taiwan. The Securities and Futures Commission also has regulations which permit foreign issuers to list their equity securities directly on the Taiwan Stock Exchange or through the use of depositary receipts. To date, Ñve foreign issuers have listed their equity securities on the Taiwan Stock Exchange through the use of depositary receipts in accordance with these regulations.

The Taiwan Stock Exchange requirements for listing are based on the following company attributes:

• ‚ shareholder diversiÑcation;

• ‚ length of time in business;

• ‚ amount of paid-in capital; and

• ‚ proÑtability.

However, special listing criteria apply to technology companies, key businesses engaging in national economic development and private enterprises participating in major national public construction project under the encouragement of the government.

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 on the initiative of the Securities and Futures Commission to encourage the trading of securities of companies who do not qualify for listing on the Taiwan Stock Exchange. As of December 31, 2003, 423 companies had listed equity securities on the GreTai Securities Market and the total market capitalization of those companies was approximately NT$1,201 billion. In addition, the

108

Emerging Stock Board of the GreTai Securities Market was established on January 1, 2002 at the initiative of the Securities and Futures Commission to encourage trading of securities of companies that are public companies but not qualiÑed 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. This weighted average method is also used for the Standard and Poor's Index in the United States and the Nikkei Stock Average in Japan. The Taiwan Stock Exchange Index is compiled by dividing the market value by the base day's total market value for the index shares. The Taiwan Stock Exchange Index is the oldest and most widely quoted market index in Taiwan.

The weighting of the shares in the Taiwan Stock Exchange Index is Ñxed as long as the number of shares outstanding remains constant. When the total number of shares outstanding changes, the weight of each stock is adjusted. Stock splits and stock dividends are adjusted automatically. Cash dividends are not included in the calculation.

The following table shows for the periods indicated information relating to the Taiwan Stock Exchange Index.

Period ended December 31, 1990ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1991ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1992ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1993ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1994ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1995ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1996ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1997ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1998ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1999ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Number of listed companies at theperiod end 199 221 256 285 313 347 375 404 437 462 474 584 638 669	Index high 12,495 6,305 5,392 6,071 7,184 7,051 6,983 10,117 9,277 8,609 10,202 5,551 6,462 6,142	Index low 2,560 3,316 3,328 3,136 5,195 4,503 4,690 6,820 6,251 5,475 8,350 4,647 3,850 4,140	Index at period end
				4,530 4,601 3,377 6,071 7,125 5,174 6,934 8,187 6,418 8,449 8,843 5,551 4,452 5,891

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. Fluctuations in the price of securities traded on the Taiwan Stock Exchange is restricted to 7% above and below the previous day's closing price in the case of equity securities, and 5% in the case of debt securities. The price limit for movements below the previous day's closing price has been modiÑed from time to time by the Ministry of Finance based on market conditions. The

109

Securities and Futures Commission has indicated that the limits on the share price movement may be further relaxed or abolished entirely.

Brokerage commission can be set at any rate not exceeding 0.1425% of the transaction price subject to reporting to the Taiwan Stock Exchange.

A securities transaction tax of 0.3% of the transaction price is payable by the seller of equity securities and a tax of 0.1% of the transaction price is payable by the seller of debt securities other than government bonds. These securities transaction taxes are withheld at the time of the transaction. In addition, according to the amended Statue of Upgrading Industries, which became eÅective on February 1, 2002, no securities transaction tax will be imposed on the transfer of Ñnancial debentures and corporate bonds 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.

Regulation and Supervision

The Securities and Futures Commission has extensive regulatory authority over public companies. Public companies are generally required to obtain approval from, or registration with, the Securities and Futures Commission for all securities oÅerings. The Securities and Futures Commission requires periodic reporting of Ñnancial and operating information by all public companies. In addition, the Securities and Futures Commission establishes standards for Ñnancial reporting and carries out licensing and supervision of participants in the Taiwan securities market.

The Securities and Futures Commission has responsibility for implementing the Securities and Exchange Law and for overall administration of governmental policies in the Taiwan securities market. It has extensive regulatory authority over the oÅering, issuing and trading of securities. In addition, the Securities and Exchange Law speciÑcally empowers the Securities and Futures Commission to promulgate necessary rules. The Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-term trading proÑts made through purchases and sales within six months by directors, managers, supervisors and stockholders who (together with their spouses, minor children and nominees) hold 10% or more of the shares of the issuer, together with the spouses, minor children and nominees of these parties. The Securities and Exchange Law prohibits trading by ""insiders'' based on non-public information that materially aÅects share price movement. ""Insiders'' include:

• ‚ directors, supervisors, managers and shareholders who (together with their spouses, minor children and nominees) hold 10% or more of the issuing company's shares (together with the spouses, minor children and nominees of these parties);

• ‚ any person who has learned material, non-public information due to an occupational or controlling relationship with the issuing company; and

• ‚ any person who has learned material, non-public information from any of the above.

Sanctions for market manipulation and insider trading include imprisonment. In addition, damages may be awarded to persons injured by the transaction.

The Securities and Exchange Law also imposes criminal liability on certiÑed public accountants and lawyers who make false certiÑcations in their examination and audit of an issuer's contracts, reports and other documents related to securities transactions. The Securities and Futures Commission regulations require that Ñnancial reports of listed companies be audited by accounting Ñrms consisting of at least three certiÑed public accountants and be signed by at least two certiÑed public accountants.

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In addition, the Securities and Exchange Law provides for civil liability for material misstatements or omissions made by issuers, and regulation of tender oÅers.

The Securities and Futures Commission does not have criminal or civil enforcement powers under the Securities and Exchange Law. Criminal actions may be pursued only by the government prosecutors. Civil actions may only be brought by plaintiÅs who assert that they have suÅered damages. The Securities and Futures Commission is empowered to curb abuses and violations of laws and regulations only through administrative measures including:

• ‚ issuance of warnings;

• ‚ temporary suspension of operation;

• ‚ imposition of administrative Ñnes; and

• ‚ revocation of licenses.

In addition to providing a market for securities trading, the Taiwan Stock Exchange reviews applications by Taiwan issuers to list securities on the Taiwan Stock Exchange. If issuers of listed securities violate laws and regulations or encounter signiÑcant diÇculties, the Taiwan Stock Exchange may, with the approval of the Securities and Futures Commission, delist securities of these issuers.

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FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN TAIWAN

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently veriÑed by our company, the underwriters or any of our respective aÇliates or advisers in connection with this oÅering.

General

Historically, foreign investments in the securities market of Taiwan were restricted. However, commencing in 1983, the Taiwan government has from time to time enacted legislation and adopted regulations to make foreign investment in the Taiwan securities market possible. Initially, only overseas investment trust funds of authorized securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since January 1, 1991, qualiÑed foreign institutional investors have been allowed to make investments in the Taiwan listed securities market. Since March 1, 1996, overseas Chinese, foreign institutional and foreign individual investors (other than qualiÑed foreign institutional investors), called ""general foreign investors'', have been permitted to make direct investments in the Taiwan listed securities market.

On September 30, 2003, the Executive Yuan approved the amendment to Regulations Governing Investment in Securities by Overseas Chinese and Foreign Nationals (the ""Regulations'') which took eÅect on October 2, 2003. According to the Regulations, the Securities and Futures Commission abolished the mechanism of the so-called ""qualiÑed foreign institutional investors'' and ""general foreign investors'' as stipulated in the Regulations before the amendment.

Under the Regulations, foreign investors are classiÑed as either ""oÅshore foreign institutional investors'', ""oÅshore overseas Chinese and foreign individuals'', ""onshore foreign institutional investors'' or ""onshore overseas Chinese and foreign individuals'' according to their respective geographical location and status. ""Foreign institutional investors'' refer to those incorporated and registered in accordance with foreign laws outside of Taiwan (i.e., oÅshore foreign institutional investors) or their branches set up and recognized within Taiwan (i.e., onshore foreign institutional investors). Unless otherwise speciÑed in the laws and regulations, all foreign investors are allowed to invest in Taiwan securities after they register with the Taiwan Stock Exchange. In addition, oÅshore foreign institutional investors are required to apply for a prior approval from the Central Bank of China (""CBC'') before they can register with the Taiwan Stock Exchange. OÅshore overseas Chinese and foreign individual investors are not required to apply for CBC approval, but a maximum investment ceiling will be separately determined by the Securities and Futures Commission after consultation with the CBC. On the other hand, foreign institutional investors are not subject to any ceiling for investment in the Taiwan securities market.

Foreign Ownership Limitations

Except for certain limits imposed by speciÑc laws and regulations, there are generally no limits on the foreign ownership of the issued share capital in a Taiwan Stock Exchange-listed company or a GreTai Securities Market-traded company.

Foreign Investment Approval

With the exception of investors under Regulations and investors in overseas corporate bonds and depositary receipts, under existing Taiwan laws and regulations relating to foreign investment, foreign investors who wish to make direct investments in the shares of Taiwan companies may submit a ""foreign investment approval'' application to the Investment Commission of the Ministry of Economic AÅairs of Taiwan or other governmental authority. Foreign investors who obtain this approval will be subject to the Law Governing Investments by

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Foreigners. The Investment Commission or other governmental authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval may repatriate annual net proÑts, interests and cash dividends attributable to an approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other governmental authority.

In addition to the general restrictions against direct investment by non-Taiwan persons in Taiwan companies, non-Taiwan persons are currently prohibited from investing in prohibited industries in Taiwan which are listed under a Negative List, as amended. The prohibition on direct foreign investment in the prohibited industries in the Negative List is absolute and provides no speciÑc exemption from its application. Under the Negative List, some industries are restricted so that non-Taiwan persons may directly invest only up to a speciÑed level and with the speciÑc approval of the relevant governmental authority. We are not in a restricted industry under the Negative List.

Depositary Receipts

In April 1992, the Securities and Futures Commission began allowing Taiwan companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the Ministry of Finance began allowing companies whose shares are traded on the GreTai Securities Market also to sponsor the issuance and sale of depositary receipts evidencing depositary shares, however, approvals 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 speciÑc Securities and Futures Commission approval, unless they are:

• ‚ stock dividends;

• ‚ free distributions of shares;

• ‚ due to the exercise by depositary receipt holders of their preemptive rights in the event of capital increases for cash; or

• ‚ if permitted under the deposit agreement and the relevant custodian agreement, due to the purchase by a person, directly or through the depositary, of shares on the Taiwan Stock Exchange or the GreTai Securities Market or the delivery to the depositary's custodian by any person of shares held by such person for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the aggregate number of:

• ‚ the number of issued depositary receipts previously approved by the Securities and Futures Commission; and

• ‚ the number of depositary shares created from stock dividends, free distributions of shares and exercise of pre-emptive rights in the event of capital increase. These issuances of depositary receipts may only be made to the extent that previously issued depositary receipts have been cancelled.

In the past, for depositary shares that represent new shares, three months after the issuance of a depositary receipt, a holder could request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder (other than a mainland Chinese person and an entity organized under the laws of mainland China). For depositary shares that represent previously existing shares, a holder may immediately after the issuance of depositary receipts request the depositary to cause the

113

underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder.

The Executive Yuan and the Securities and Futures Commission recently amended the relevant regulations such that the three-month withdrawal restriction has been removed. Accordingly, a holder (other than a mainland Chinese person and an entity organized under the laws of mainland China) may now withdraw shares immediately after the issuance of a depositary receipt representing new shares. In practice, withdrawals may take place typically four business days after the depositary receipt issuance.

A depositary receipt holder wishing to withdraw shares represented by depositary receipts in order to hold the shares is required to register with the Taiwan Stock Exchange for making investments in the Taiwan securities market (and if such holder is an oÅshore foreign institutional investor, to obtain a prior approval of the CBC), and then appoint a qualiÑed local agent to, among other things, open a securities account with a local securities brokerage Ñrm, remit funds and exercise shareholders' rights. If a depositary receipt holder is already a registered foreign investor, the common shares held in the special securities trading account that the depositary receipts holder has already opened for withdrawing the shares represented by the depositary receipts can be transferred into the general securities trading account upon Ñling an application with the appropriate government agency. In addition, the withdrawing holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make conÑrmations, settle trades and report all relevant information. The withdrawing holder is also required to appoint a tax guarantor for Ñling tax returns and making tax payments. Without meeting these requirements, the withdrawing holder would be unable to hold or subsequently sell the shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange or otherwise.

A depositary may, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, convert New Taiwan dollars from:

• ‚ the proceeds of the sale of shares represented by depositary receipts or received as stock dividends on the shares and deposited into the depositary receipt facility; or

• ‚ cash distributions received,

into other currencies, including U.S. dollars. In addition, a depositary may convert into NT dollars inward remittances of payments for purchases of underlying shares for deposit in the depositary facility against the creation of depositary shares. A depositary must obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion into foreign currencies from the proceeds from the sale of subscription rights for new shares if the proceeds are in excess of US$100,000 per remittance. It is expected that the Central Bank of China will grant this approval as a routine matter.

A depositary receipt holder may, after becoming a holder of shares, convert New Taiwan dollars into other currencies from proceeds from the sale of any underlying shares withdrawn from the depositary receipt facility. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in securities listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market.

Directed Share OÅerings

The Taiwan government has promulgated regulations to permit Taiwan companies listed on the Taiwan Stock Exchange or the GreTai Securities Market to issue shares directly (not through depositary receipt facilities) overseas.

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Overseas Corporate Bonds

Since 1989, the Securities and Futures Commission has approved a series of overseas corporate bond issues by Taiwan companies listed on the Taiwan Stock Exchange and traded on the GreTai Securities Market. Under current ROC laws, these overseas corporate bonds (if their terms so provide) may be converted by non-Taiwan persons, other than mainland Chinese persons, into shares of Taiwan companies or, with Securities and Futures Commission approval, may be converted into depositary receipts issued under the sponsorship of the same Taiwan companies or the shares of other companies, in the case of exchangeable bonds. Public issuing companies may issue corporate debt in oÅerings outside Taiwan. Proceeds from sales of the shares converted from overseas convertible bonds may be used for re-investment in securities listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market.

A non-Taiwanese converting bondholder, when exercising the conversion right to convert the bonds into shares of a Taiwan company, is required to appoint a qualiÑed local agent to:

• ‚ open a securities trading account with a local brokerage Ñrm;

• ‚ pay Taiwan taxes;

• ‚ 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 conÑrmations and settle trades and report all relevant information. A converting holder who plans to convert the bonds is also required to register with the Taiwan Stock Exchange for making investments in the Taiwan securities market (and if such holder is an oÅshore foreign institutional investor, to obtain a prior approval of the CBC). The converting holder is also required to appoint a tax guarantor for Ñling tax returns and making tax payments. Without meeting these requirements, the converting holder would be unable to hold or subsequently sell the shares converted from the bonds on the Taiwan Stock Exchange or otherwise. Without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, the issuing company may convert New Taiwan dollars into other currencies for redemption of the bonds or the repayment of the principal or interest on the bonds. In addition, a converting bondholder may through its local agent convert net proceeds realized from the 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 oÅering. However, a converting bondholder must obtain prior approval from the CBC on a payment-by-payment basis for conversion from NT dollars into other currencies in respect of the proceeds from the sale of subscription rights for newly issued shares if the proceeds are in excess of US$100,000 per remittance.

In addition, any funds received by the converting bondholder may be used for reinvestment in Taiwan securities listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market.

Exchange Controls

Taiwan's Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the Ministry of Finance and by the Central Bank of China to handle foreign exchange transactions. Current regulations favor traderelated foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign

115

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, a Taiwan company and a resident individual 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, each calendar year. Furthermore, any remittance of foreign currency into Taiwan by a Taiwan company or a resident individual in a year will be oÅset by the amount remitted out of Taiwan by such company or individual (as applicable) within its annual quota and will not use up its annual inward remittance quota to the extent of such oÅset. These limits apply to remittances involving a conversion between New Taiwan dollars and U.S. dollars or other foreign currencies. In addition, all private enterprises are required to register all medium and long-term foreign debt with the Central Bank of China.

In addition, a foreign person may, subject to certain requirements but without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if the required documentation is provided to the Taiwan authorities. This limit applies only to remittances involving a conversion between New Taiwan dollars and U.S. dollars or other foreign currencies.

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DESCRIPTION OF COMMON SHARES

Changes in our capital structure

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

Date of issue January 1998ÏÏÏÏÏÏ April 1998 ÏÏÏÏÏÏÏÏ July 1998 ÏÏÏÏÏÏÏÏÏ July 1999 ÏÏÏÏÏÏÏÏÏ March 2000 ÏÏÏÏÏÏÏ March 2000 ÏÏÏÏÏÏÏ March 2000 ÏÏÏÏÏÏÏ July 2000 ÏÏÏÏÏÏÏÏÏ August 2000 ÏÏÏÏÏÏ December 2000 ÏÏÏ June 2001 ÏÏÏÏÏÏÏÏ July 2002 ÏÏÏÏÏÏÏÏÏ April 2003 ÏÏÏÏÏÏÏÏ July 2003 ÏÏÏÏÏÏÏÏÏ November 2003 ÏÏÏ December 2003 ÏÏÏ	Type of issue Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance of stock dividend from retained earnings and recapitalization on capital reserve Issuance of stock dividend from recapitalization on capital reserve Issuance for cash Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance of stock dividend from retained earnings and recapitalization on capital reserve Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance of stock dividend from retained earnings and recapitalization on capital reserve Issuance of stock dividend from recapitalization on capital reserve Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance upon conversion of convertible bonds Issuance for cash	Number of Common Shares Issued 140,647,289 519,565 343,488,695 178,582,370 135,590,000 26,078,521 1,452,267 276,578,492 68,481,150 1,822,651 884,933,469 331,934,262 41,872,654 46,199,971 148,408,805 475,000,000	Total Number of issued common Shares after the issue
			1,441,815,433 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 3,733,149,529 3,779,349,500 3,927,758,305 4,402,758,305

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. Unless otherwise indicated in this OÅering Circular, holders of our GDSs generally have the same rights as holders of our common shares. See ""Risk Factors Ì Risks Relating to our Common Shares and our GDSs'' for a description of certain diÅerences.

General

Our authorized capital is NT$65.5 billion, divided into 6.55 billion shares, including up to 650 million shares reserved for the exercise of employee stock options. As of December 31,

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2003, 4,402,758,305 of our common shares had been fully paid-in and were outstanding. All of our common shares are in registered form.

As of December 31, 2003, 14,342,253 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 December 31, 2003, 1,434,225 ADSs, representing 14,342,253 common shares, were held of record by Cede & Co. and Ñve registered holders. We have no further information as to our common shares held, or beneÑcially owned, by U.S. persons.

The ROC Company Law, the ROC Statute for Establishment and Administration of Science 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 speciÑed in the articles of incorporation; and

• ‚ the approval of the ROC Securities and Futures Commission and the ROC Ministry of Economic AÅairs or the Hsinchu Science Park Administration, as applicable.

Increase in Capital; Delivery of CertiÑcates

We are required under ROC law to Ñle 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 certiÑcates to the relevant purchasers within 30 days after receiving approval from the Hsinchu Science 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 eÅective on November 14, 2001. Under the amended ROC Company Law, when a public company, such as our company, issues new shares, it could:

• ‚ issue multiple share certiÑcates and deliver them to shareholders;

• ‚ issue a single share certiÑcate representing the total number of new shares and deposit the certiÑcate with the Taiwan Securities Central Depositary Co., Ltd. (the ""Central Depositary''); or

• ‚ register the new shares with the Central Depositary in lieu of issuing share certiÑcates.

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

118

distributed by our board of directors, subject to the approval of our shareholders, as described in the following paragraph, in the following sequence:

• ‚ 83% as a dividend to shareholders;

• ‚ 15% for bonuses to employees; and

• ‚ 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 above 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 aÇliated 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 145 million common shares in the form of employee bonuses. In 2002 and 2003, we did not distribute any employee bonuses. 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 note 12 to our audited consolidated Ñnancial statements for the years ended December 31, 2000, 2001 and 2002 included in this OÅering Circular. Subject to compliance with the above requirements, we may pay dividends or make other distributions from our earnings and reserves as permitted by ROC Company Law.

At our annual ordinary meeting of shareholders, our board of directors submits for shareholder approval our consolidated Ñnancial 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 Ì ROC Taxation.''

Preemptive Rights and Issues of Additional Common Shares

According to the ROC Company Law, when a company issues new common shares for cash, 10% to 15% of the issue must be oÅered 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 oÅer new shares for cash, at least 10% of the issue must be oÅered 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 shareholders. Unless the percentage of shares to be oÅered to the public is

119

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 speciÑed persons at the direction of our board of directors. According to the amended ROC Securities and Exchange Law, which became eÅective on February 8, 2002, the preemptive rights provisions will not apply to oÅerings of new shares through a private placement approved at a shareholders' meeting.

Authorized but unissued shares of any class may be issued, subject to the abovementioned provisions of the ROC Company Law, the ROC Statute for Establishment and Administration of Science 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 Ñscal 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 oÇces 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, modiÑcation or termination of any contracts regarding leasing of all business, outsourcing of operations or joint operations;

• ‚ the dissolution, amalgamation or spin-oÅ of a company;

• ‚ the removing of directors or supervisors;

• ‚ the transfer of the whole or an important part of a company's business or properties;

• ‚ the taking over of the whole of the business or properties of any other company which would have a signiÑcant 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.

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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 Ñve 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-oÅ 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-oÅs, 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 or the method of resolution were legally defective. However, if a court is of the opinion that such violation is not material and does not aÅect 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 suÅered 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 oÇce in Taipei, Taiwan, and enter transfers of our common shares in the register upon presentation of, among other documents, the certiÑcates for the common shares transferred. Under the ROC Company Law, the transfer of common shares is eÅected by endorsement and delivery of the related share certiÑcates. 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 Ñle 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.

The ROC Company Law permits us to set a record date and close our shareholder register for a speciÑed 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

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before each extraordinary shareholders' meeting and a period of Ñve days before each record date for distribution of dividends, bonuses or other beneÑts.

Annual Financial Statements

Under the ROC Company Law, ten days before the ordinary meeting of shareholders, our annual Ñnancial statements must be available at our principal oÇce 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 oÅer for the following purposes:

• ‚ for share transfer to our employees;

• ‚ for the delivery of shares following the conversion or exercise of bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certiÑcates of warrants issued by us; and

• ‚ 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 the Ñrst two items 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 the third item 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 aÇliates (as deÑned 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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Our Articles of Incorporation

Our articles of incorporation have been previously Ñled with the Securities and Exchange Commission of the United States (the ""Commission'') and made available to investors with the Annual Report on Form 20-F for the Ñscal year ended December 31, 2002, Ñled with the Commission on June 30, 2003.

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DESCRIPTION OF THE DEPOSITARY

Citibank, N.A. (""Citibank'') is the Depositary pursuant to the Deposit Agreement. Citibank is a wholly-owned subsidiary of Citicorp, a Delaware corporation whose principal oÇce is located in New York, New York, which in turn is a wholly owned subsidiary of Citigroup Inc. Citibank is a commercial bank that, along with its subsidiaries and aÇliates, oÅers a wide range of banking and trust services to its customers throughout the United States and the world.

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

The consolidated balance sheets of Citibank as of December 31, 2002 and December 31, 2001 are set forth in Citicorp's 2002 Annual Report on Form 10-K, and as of September 30, 2003 are set forth in Citicorp's September 2003 Quarterly Report on Form 10-Q. Citicorp's 2002 Annual Report on Form 10-K and its September 2003 Quarterly Report on Form 10-Q are on Ñle with the SEC.

Citibank's Articles of Association and By-laws, each as currently in eÅect, together with Citicorp's 2002 Annual Report on Form 10-K and its September 2003 Quarterly Report on Form 10-Q, are available for inspection at the Depositary Receipt oÇce of Citibank, 111 Wall Street, New York, NY 10043 and at the oÇces of the listing agent in Luxembourg.

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DESCRIPTION OF GLOBAL DEPOSITARY SHARES

The following terms and conditions (subject to completion and amendment and excepting sentences in italics) will apply to the Global Depositary Shares, and will be endorsed on each Global Depositary Share certiÑcate. Terms not deÑned in this section have the meanings ascribed to them in the Deposit Agreement:

The Global Depositary Shares ( ""GDSs'' ) represented by this certiÑcate are each issued in respect of 40 common shares of par value NT$10 each (the ""Shares'' ) in Macronix International Co., Ltd. (the ""Company'' ) pursuant to and subject to an agreement dated April 5, 2004, and made between the Company and Citibank, N.A. in its capacity as depositary (the ""Depositary'' ) for the ""Facility'' (such agreement, as amended from time to time, being hereinafter referred to as the ""Deposit Agreement'' ). Pursuant to the provisions of the Deposit Agreement, the Depositary has appointed Citibank, N.A. Ì Taipei Branch as Custodian (the ""Custodian'' ) to receive and hold on its behalf any relevant documentation respecting certain Shares (the ""Deposited Shares'' ) and all rights, interests and other securities, property and cash deposited with the Custodian which are attributable to the Deposited Shares, including CertiÑcates of Payment representing entitlement to Shares (together with the Deposited Shares, the ""Deposited Property'' ). The Depositary shall hold Deposited Property for the beneÑt of the Holders (as deÑned below) as bare trustee in proportion to their holdings of GDSs. In these terms and conditions (the ""Conditions'' ), references to the ""Depositary'' are to Citibank, N.A. and/or any other depositary which may from time to time be appointed under the Deposit Agreement, references to the ""Custodian'' are to Citibank, N.A. Ì Taipei Branch or any other custodian from time to time appointed under the Deposit Agreement and references to the ""Main OÇce'' mean, in relation to the relevant Custodian, its head oÇce in the city of Taipei or such other location of the head oÇce of the Custodian in the Republic of China as may be designated by the Custodian with the approval of the Depositary (if outside the city of Taipei) or the head oÇce of any other custodian from time to time appointed under the Deposit Agreement. References in these Conditions to the ""Holder'' of any GDS shall mean the person or persons registered on the books of the Depositary maintained for such purpose (the ""Register'' ) as holder. These Conditions include summaries of, and are subject to, the detailed provisions of the Deposit Agreement, which includes the forms of the certiÑcates in respect of the GDSs. Copies of the Deposit Agreement are available for inspection at the speciÑed oÇce of the Depositary, each Agent (as deÑned in Condition 17) and the Luxembourg listing agent and at the Main OÇce of the Custodian. Terms used in these Conditions and not deÑned herein but which are deÑned in the Deposit Agreement have the meanings ascribed to them in the Deposit Agreement. Holders of GDSs are not party to the Deposit Agreement and thus, under English Law, have no contractual rights against, or obligations to, the Company or Depositary. However, the Deed Poll executed by the Company in favour of the Holders provides that, if the Company fails to perform the obligations imposed on it by certain speciÑed provisions of the Deposit Agreement, any Holder may enforce the relevant provisions of the Deposit Agreement as if it were a party to the Deposit Agreement and was the ""Depositary'' in respect of that number of Deposited Shares to which the GDSs of which he is the Holder relate. The Depositary is under no duty to enforce any of the provisions of the Deposit Agreement on behalf of any Holder of a GDS or any other person.

1. Withdrawal or Sale of Deposited Property and Further Issues of GDSs

On the closing date of this oÅering, we will deliver to the Custodian in Taiwan the CertiÑcate of Payment evidencing the right to receive the underlying Shares. No later than the second ROC business day following the closing date of this oÅering, we will apply to the Taiwan Stock Exchange (""TSE'') for listing of the Master Scripless CertiÑcate of Payment. Upon the listing of the Master Scripless CertiÑcate of Payment, which is expected to be on the fourth ROC business day following

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the closing date of this oÅering, the CertiÑcate of Payment we deliver to the Custodian on the closing date of this oÅering will be replaced by the Master Scripless CertiÑcate of Payment.

Under the ROC Securities and Exchange Law and applicable regulations, we are required to deliver the underlying Shares in physical certiÑcate form or scripless form to the Custodian within 30 days after receiving approval from the relevant governmental authority of our corporate amendment registration. We are required under the ROC Company Law to Ñle an amendment to our corporate registration within 15 days after receiving the proceeds from this oÅering. Prior to the issue of the underlying Shares in physical certiÑcate form or scripless form, we will apply for and obtain approval to list the underlying Shares on the TSE. We have agreed to issue and deliver the underlying Shares in physical certiÑcate form or scripless form in respect of the Master Scripless CertiÑcate of Payment in connection with this oÅering on or about 45 days after the closing date subject to obtaining approvals from the relevant governmental authority and the TSE. Until the underlying Shares have been so issued and delivered, the GDSs oÅered by us will represent the irrevocable right to receive Shares evidenced by the CertiÑcate of Payment (from the closing date of this oÅering to the date immediately prior the listing of the Master Scripless CertiÑcate of Payment) or the Master Scripless CertiÑcate Payment (on or after the date of listing of the Master Scripless CertiÑcate of Payment). When the Master Scripless CertiÑcate of Payment is listed on the TSE, such Holders will be entitled to the same rights as if the Depositary were holding the underlying Shares in physical certiÑcate form or scripless form except that such Holders will receive Individual Scripless CertiÑcates of Payment (rather than the underlying Shares in physical certiÑcate form or scripless form) in case of a withdrawal of the underlying Shares oÅered by us.

1.1 Any Holder may after the Initial Withdrawal Date (as deÑned below) request withdrawal, or sale by the Depositary on behalf of the Holder, of the Deposited Property attributable to any GDS upon production of such evidence of the entitlement of the Holder to the relative GDS as the Depositary may reasonably require, at the speciÑed oÇce of the Depositary or any Agent accompanied by:

(i) a duly executed order (in a form approved by the Depositary) requesting the Depositary to cause the Deposited Property to be withdrawn or sold to be delivered at the Main OÇce of the Custodian, or (at the request, risk and expense of the Holder, and only if permitted by applicable law from time to time) at the speciÑed oÇce located in New York, London or ROC of the Depositary or any Agent, or to the order in writing of, the person or persons designated in such order;

(ii) the payment of such fees, taxes, duties, charges and expenses as may be required under these Conditions or the Deposit Agreement;

(iii) the surrender (if appropriate) of GDS certiÑcates in deÑnitive registered form properly endorsed in blank or accompanied by proper instruments of transfer satisfactory to the Depositary to which the Deposited Property being withdrawn is attributable; and

(iv) the delivery to the Depositary of a duly executed and completed certiÑcate substantially in the form set out in (x) Schedule 3, Part B, to the Deposit Agreement, if Deposited Property is to be withdrawn or delivered during the Distribution Compliance Period (such term being deÑned as the 40 day period beginning on the latest of the commencement of the OÅering, the original issue date of the GDSs, and the issue date with respect to the additional GDSs, if any, issued to cover over-allotments) in respect of surrendered GDSs, or (y) Schedule 3, Part C, to the Deposit Agreement, if the Deposited Property is to be withdrawn or delivered after the Distribution Compliance Period.

The ""Initial Withdrawal Date'' means the date on which the Master Scripless CertiÑcate of Payment is listed on the Taiwan Stock Exchange.

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The Shares deposited under the Deposit Agreement may be withdrawn and held by Holders upon cancellation of the corresponding GDSs pursuant to the Deposit Agreement subject to the following conditions:

(a) the appointment by the Holder of an eligible agent in the ROC to open a securities trading account with an ROC brokerage Ñrm with ROC approval and a bank account to pay ROC taxes, remit funds, exercise shareholders' rights and perform such other functions as the Holder may designate upon such withdrawal;

(b) the appointment by the Holder of a tax guarantor in the ROC; and

(c) the appointment by the Holder of a custodian bank to hold the securities for safekeeping, making conÑrmations and settling trades.

In addition, the Holder will be required to register with the TSE for making investment in the ROC securities market (and if the Holder is an oÅshore foreign institutional investor, to obtain a prior approval of the CBC) prior to canceling GDSs and withdrawing Shares.

1.2 Where the Holder requests the withdrawal of Deposited Property in accordance with Condition 1.1, provided in any case, that the Deposited Property has been duly delivered to or to the order of the Depositary, the Depositary shall relinquish the Deposited Property in accordance with and subject to these Conditions and prevailing ROC laws. Where the Holder requests the sale of Deposited Property in accordance with Condition 1.1, the Depositary may procure such sale, and will only do so in accordance with the following terms:

(a) any such sale of Deposited Property will be conducted in accordance with the applicable laws of the ROC through a licensed securities broker in the ROC on the Taiwan Stock Exchange or in such other manner as may be permitted under the laws of the ROC;

(b) any such sale will be at the risk and expense of the Holder requesting such sale;

(c) no assurance is given by the Depositary as to (i) the fact that the sale will be eÅected, or (ii) the timing or pricing of any sale, whether generally or during periods of illiquidity or volatility with respect to the Shares; and

(d) upon receipt of any proceeds from such a sale, the Depositary will, subject to the terms of the Deposit Agreement, the Conditions and any applicable ROC laws and regulations, convert or cause the conversion of any such proceeds into US dollars and distribute any such proceeds to the Holder entitled thereto, after deduction or payment of all fees, taxes, duties, charges, costs and expenses applicable or incurred in connection with such sale and conversion as provided in the Deposit Agreement and the Conditions.

1.3 For the avoidance of doubt, a GDS Holder may withdraw Shares or Individual Scripless CertiÑcates of Payment pursuant to Condition 1.1 and hold such Shares or Individual Scripless CertiÑcates of Payment, which were formerly represented by GDSs, or request the Depositary to sell or cause to be sold on behalf of such Holder the Shares or Individual Scripless CertiÑcates of Payment represented by such Holder's GDSs on the Taiwan Stock Exchange (in each case, upon surrender of the GDSs to the Depositary and upon payment by the Holder of any fees, expenses, taxes or governmental charges and the completion and delivery by the Holder to the Depositary of a certiÑcate as provided in the Deposit Agreement), provided that the Custodian has received physical Individual Scripless CertiÑcates of Payment or share certiÑcates in respect of the Shares to be withdrawn or sold.

1.4 Upon production of such documentation and the making of such payment as aforesaid for withdrawal of the Deposited Property in accordance with Condition 1.1, the Depositary will direct the Custodian, by tested telex, facsimile or SWIFT message, within a reasonable time

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after receiving such direction from such Holder, to deliver at its Main OÇce to, or to the order in writing of, the person or persons designated in the accompanying order:

(i) a certiÑcate (if any) for, or other appropriate instrument of title (if any) to or evidence of a book-entry transfer in respect of the relevant Deposited Shares, registered in the name of the Depositary or its nominee and accompanied by such instruments of transfer in blank or to the person or persons speciÑed in the order for withdrawal and such other documents, if any, as are required by law for the transfer thereof; and

(ii) all other property forming part of the Deposited Property attributable to such GDS, accompanied, if required by law, by one or more duly executed endorsements or instruments of transfer in respect thereof; provided however that the Depositary may make delivery at its speciÑed oÇce in New York of any Deposited Property which is in the form of cash;

PROVIDED THAT the Depositary (at the request, risk and expense of any Holder so surrendering a GDS):

(a) will direct the Custodian to deliver the certiÑcates for, or other instruments of title to, or book-entry transfer in respect of, the relevant Deposited Shares and any document relative thereto and any other documents referred to in sub-paragraphs 1.4(i) and (ii) of this Condition (together with any other property forming part of the Deposited Property which may be held by the Custodian or its agent and is attributable to such Deposited Shares); and/or

(b) will deliver any other property forming part of the Deposited Property which may be held by the Depositary and is attributable to such GDS (accompanied, if required by law, by one or more duly executed endorsements or instruments of transfer in respect thereof);

in each case at the speciÑed oÇce in ROC of any Agent if so designated by the surrendering Holder in the order accompanying such GDS.

1.5 Delivery by the Depositary, any Agent and the Custodian of all certiÑcates, instruments, dividends or other property forming part of the Deposited Property as speciÑed in this Condition will be made subject to any laws or regulations applicable thereto.

1.6 After the initial deposit of Shares in connection with the initial oÅering of the GDSs, only the following may be deposited under the Deposit Agreement:

(i) Shares issued as a dividend or free distribution in respect of Deposited Shares pursuant to Condition 5;

(ii) Shares subscribed by Holders from the Company through the exercise of preemptive rights in connection with capital increase for cash distributed by the Company to such persons in respect of Deposited Shares pursuant to Condition 7;

(iii) to the extent permitted by applicable laws and regulations, securities issued by the Company to Holders in respect of Deposited Shares as a result of any change in the par value, sub-division, consolidation or other reclassiÑcation of Deposited Shares or otherwise pursuant to Condition 10; and

(iv) Shares and CertiÑcates of Payment deposited as permitted by and in accordance with ROC law and regulations in eÅect from time to time. In the case of a deposit of Shares and CertiÑcates of Payment requested under this paragraph (iv), the Depositary will refuse to accept Shares and CertiÑcates of Payment for deposit if the Depositary is notiÑed by the Company that such deposit is not permitted under any legal or regulatory restriction.

1.7 Subject to Condition 1.6, the Depositary may, in accordance with the terms of the Deposit Agreement and upon delivery of a duly executed order (in a form reasonably approved

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by the Depositary) and a duly executed certiÑcate substantially in the form of Schedule 3, Part A of the Deposit Agreement (which is described in the following paragraph) by or on behalf of any investor who is to become the beneÑcial owner of the GDSs, from time to time execute and deliver further GDSs having the same terms and conditions as the GDSs which are then outstanding in all respects (or the same in all respects except for the Ñrst dividend payment on the Shares corresponding to such further GDSs) and, subject to the terms of the Deposit Agreement, the Depositary shall accept for deposit any further Shares in connection therewith, so that such further GDSs shall form a single series with the already outstanding GDSs. References in these Conditions to the GDSs include (unless the context requires otherwise) any further GDSs issued pursuant to this Condition and forming a single series with the already outstanding GDSs.

The certiÑcate to be provided in the form of Schedule 3, Part A, of the Deposit Agreement certiÑes, among other things, that the person providing such certiÑcate is not a US person (as deÑned in Regulation S under the US Securities Act of 1933, as amended (the ""Securities Act'')), is located outside the United States, is not an aÇliate of the Company, acquired the Shares outside the United States, is not in the business of buying or selling securities, or if in such business did not acquire the Shares from the Company or any of its aÇliates in the initial distribution of Shares, and will, during the Distribution Compliance Period, transfer the GDSs only in an oÅshore transaction in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act.

1.8 After the initial deposit of Shares in connection with the initial oÅering of the GDSs, in the event that the Company or any of its aÇliates oÅers shares or securities convertible or exchangeable into shares that may be delivered in the form of GDSs and such GDSs initially represent Shares or the right to receive Shares as evidenced by CertiÑcates of Payment, such GDSs will correspond to a separate temporary Master GDS. Each Temporary GDS will be assigned a separate CUSIP or ISIN number (as appropriate) until such time as the Temporary GDS no longer corresponds to a CertiÑcate of Payment. The Company has undertaken in the Deposit Agreement to make Shares available in exchange for CertiÑcates of Payment and the Depositary is irrevocably authorised to surrender CertiÑcates of Payment then eligible for exchange with the Company for Shares. The Depositary may execute and deliver further GDSs which correspond to Shares which are received by the Depositary, the Custodian or its nominee in exchange for CertiÑcates of Payment.

1.9 Any further GDSs issued pursuant to Condition 1.7 or 1.8 which correspond to Shares which have diÅerent dividend rights (or other rights) from the Shares corresponding to the outstanding GDSs will correspond to a separate temporary Master GDS. Upon becoming fungible with outstanding GDSs, such further GDSs shall be evidenced by the Master GDS (by increasing the total number of GDSs evidenced by the Master GDS by the number of such further GDSs).

1.10 The Depositary may issue GDSs against rights to receive Shares from the Company (or any agent of the Company recording Share ownership). No such issue of GDSs will be deemed a ""Pre-Release'' as deÑned in Condition 1.11.

1.11 Notwithstanding the provisions of Condition 1.6 and Condition 1.7, the Depositary may, to the extent permitted by applicable laws and regulations, execute and deliver GDSs or issue interests in a Master GDS, as the case may be, prior to the receipt of Shares or a CertiÑcate of Payment (a ""Pre-Release'' ). The Depositary may, to the extent permitted by applicable laws and regulations, pursuant to Condition 1.1, deliver Shares or Individual Scripless CertiÑcates of Payment upon the receipt and cancellation of GDSs, which have been PreReleased, whether or not such cancellation is prior to the termination of such Pre-Release or the Depositary knows that such GDS has been Pre-Released. The Depositary may receive GDSs in lieu of Shares or a CertiÑcate of Payment in satisfaction of a Pre-Release. Each Pre-Release will be (a) preceded or accompanied by a written representation from the person to whom GDSs

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or Deposited Property are to be delivered (the ""Pre-Releasee'' ) that such person, or its customer, (i) owns or represents the owner of the corresponding Deposited Property or GDSs to be remitted (as the case may be), (ii) assigns all beneÑcial right, title and interest in such Deposited Property or GDSs (as the case may be) to the Depositary in its capacity as such and for the beneÑt of the Holders, (iii) will not take any action with respect to such GDSs or Deposited Property (as the case may be) that is inconsistent with the transfer of beneÑcial ownership (including without the consent of the Depositary, disposing of such Deposited Property or GDSs, as the case may be), other than in satisfaction of such Pre-Release, (b) at all times fully collateralised with cash or such other collateral as the Depository determines in good faith will provide substantially similar liquidity and security, (c) terminable by the Depositary on not more than Ñve (5) business days' notice, and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The number of GDSs which are outstanding at any time as a result of Pre-Release will not normally represent more than thirty per cent. of the total number of GDSs then outstanding; provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate and may, with the prior written consent of the Company, change such limits for the purpose of general application. The Depositary will also set dollar limits with respect to such transactions hereunder with any particular Pre-Releasee hereunder on a case by case basis as the Depositary deems appropriate. The collateral referred to in sub-paragraph (b) above shall be held by the Depositary as security for the performance of the Pre-Releasee's obligations in connection herewith, including the Pre-Releasee's obligation to deliver Shares and/or other securities or GDSs upon termination of a transaction anticipated hereunder (and shall not, for the avoidance of doubt, constitute Deposited Property hereunder).

The Depositary may retain for its own account any compensation received by it in connection with the foregoing including, without limitation, earnings on the collateral.

The person to whom any Pre-Release of GDSs or Shares or a CertiÑcate of Payment is to be made pursuant to this paragraph shall be required to deliver to the Depositary a duly executed and completed certiÑcate substantially in the form set out in Schedule 3 Part A of the Deposit Agreement.

1.12 The Company may have certain disclosure obligations and reporting obligations under ROC law if:

(i) the person to be registered as a shareholder is a ""related party'' of the Company under Statements of Financial Accounting Standard No. 6 of the ROC and such person beneÑcially owns Shares or CertiÑcates of Payment withdrawn from the Facility; or

(ii) the person to be registered as a shareholder owns Shares or CertiÑcates of Payment withdrawn from the Facility and the Shares or CertiÑcates of Payment withdrawn exceed 10 per cent of the Shares or CertiÑcates of Payment in the Facility.

As a result, if so instructed by the Company, the Depositary may ask the withdrawing Holders to disclose the name of such person and provide proof of the identity and genuineness of any signature and other documents to the Company. The information the Holder is required to provide may include the name and nationality of such person who is to be registered as a shareholder and the total number of Shares such person is withdrawing or has withdrawn in the past from the depositary receipt facility.

2. Suspension of Issue of GDSs and of Withdrawal of Deposited Property

The Depositary shall be entitled, at its reasonable discretion, at such times as it shall determine, to suspend the issue or transfer of GDSs (and the deposit of Shares or CertiÑcates of Payment) generally or in respect of particular Shares or CertiÑcates of Payment. In particular, to the extent that it is in its opinion practicable for it to do so, the Depositary will refuse to

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accept Shares or CertiÑcates of Payment for deposit, to execute and deliver GDSs or to register transfers of GDSs if it has been notiÑed by the Company in writing that the Deposited Shares, CertiÑcates of Payment or GDSs or any depositary receipts corresponding to Shares or CertiÑcates of Payment are listed on a U.S. Securities Exchange or quoted on a U.S. automated inter dealer quotation system. Further, the Depositary may suspend the withdrawal of Deposited Property during any period when the Register, or the register of shareholders of the Company is closed or, generally or in one or more localities, suspend the withdrawal of Deposited Property or deposit of Shares or CertiÑcates of Payment if deemed necessary or desirable or advisable by the Depositary in good faith at any time or from time to time, in order to comply with any applicable law or governmental or stock exchange regulations or any provision of the Deposit Agreement or for any other reason.

3. Transfer and Ownership

The GDSs are in registered form, each corresponding to 40 Shares. Title to the GDSs passes by registration in the Register and accordingly, transfer of title to a GDS is eÅective only upon such registration. The Depositary will refuse to accept for transfer any GDSs if it reasonably believes that such transfer would result in violation of any applicable laws. The Holder of any GDS will (except as otherwise required by law) be treated by the Depositary and the Company as its beneÑcial owner for all purposes (whether or not any payment or other distribution in respect of such GDS is overdue and regardless of any notice of ownership, trust or any interest in it or any writing on, or theft or loss of any certiÑcate issued in respect of it) and no person will be liable for so treating the Holder.

Prior to expiration of the Distribution Compliance Period, no owner of GDSs may transfer GDSs or Shares represented thereby except in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act.

4. Cash Distributions

Whenever the Depositary shall receive from the Company any cash dividend or other cash distribution on or in respect of the Deposited Shares (including any amounts received in the liquidation of the Company) or otherwise in connection with the Deposited Property, the Depositary shall, as soon as practicable, convert the same into United States dollars in accordance with Condition 8. The Depositary shall give notice to the Holders of its receipt of such payment in accordance with Condition 23, specifying the amount per Deposited Share payable in respect of such dividend or distribution and the earliest date, determined by the Depositary, for transmission of such payment to Holders and shall as soon as practicable distribute any such amounts to the Holders in proportion to the number of Deposited Shares corresponding to the GDSs so held by them respectively, subject to and in accordance with the provisions of Conditions 9 and 11; PROVIDED THAT:-

(a) in the event that the Depositary is aware that any Deposited Shares are not entitled, by reason of the date of issue or transfer or otherwise, to such full proportionate amount, the amount so distributed to the relative Holders shall be adjusted accordingly; and

(b) the Depositary will distribute only such amounts of cash dividends and other distributions as may be distributed without attributing to any GDS a fraction of the lowest integral unit of currency in which the distribution is made by the Depositary, and any balance remaining shall be retained by the Depositary beneÑcially as an additional fee under Condition 16.1(iv).

5. Distributions of Shares

Whenever the Depositary shall receive from the Company any distribution in respect of Deposited Shares which consists of a dividend or free distribution of Shares, the Depositary

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shall cause to be distributed to the Holders entitled thereto, in proportion to the number of Deposited Shares corresponding to the GDSs held by them respectively, additional GDSs corresponding to an aggregate number of Shares received pursuant to such distribution. Such additional GDSs shall be distributed by an increase in the number of GDSs corresponding to the Master GDS or by an issue of certiÑcates in deÑnitive registered form in respect of GDSs, according to the manner in which the Holders hold their GDSs; PROVIDED THAT, if and in so far as the Depositary deems any such distribution to all or any Holders not to be reasonably practicable (including, without limitation, due to the fractions which would otherwise result or to any requirement that the Company, the Custodian or the Depositary withhold an amount on account of taxes or other governmental charges) or to be unlawful, the Depositary shall (either by public or private sale and otherwise at its discretion, subject to all applicable laws and regulations) sell such Shares so received and distribute the net proceeds of such sale as a cash distribution pursuant to Condition 4 to the Holders entitled thereto.

6. Distributions other than in Cash or Shares

Whenever the Depositary shall receive from the Company any dividend or distribution in securities (other than Shares or rights to acquire Shares) or in other property (other than cash) on or in respect of the Deposited Property, the Depositary shall distribute or cause to be distributed such securities or other property to the Holders entitled thereto, in proportion to the number of Deposited Shares corresponding to the GDSs held by them respectively, in any manner that the Depositary may deem equitable and practicable for eÅecting such distribution; PROVIDED THAT, if and in so far as the Depositary deems any such distribution to all or any Holders not to be reasonably practicable (including, without limitation, due to the fractions which would otherwise result or to any requirement that the Company, the Custodian or the Depositary withhold an amount on account of taxes or other governmental charges) or to be unlawful, the Depositary shall deal with the securities or property so received, or any part thereof, in such way as the Depositary may determine to be equitable and practicable and as permitted under applicable laws and regulations including, without limitation, by way of sale (either by public or private sale and otherwise at its discretion, subject to all applicable laws and regulations) and shall (in the case of a sale) distribute the resulting net proceeds as a cash distribution pursuant to Condition 4 to the Holders entitled thereto.

7. Rights Issues

If and whenever the Company announces its intention to distribute rights to the holders of Shares to subscribe for or to acquire Shares, securities or other assets, the Depositary shall, subject to applicable law, as soon as practicable give notice to the Holders, in accordance with Condition 23, of such oÅer or invitation, specifying, if applicable, the earliest date established for acceptance thereof, the last date established for acceptance thereof and the manner by which and time during which Holders may request the Depositary to exercise such rights as provided below or, if such be the case, specifying details of how the Depositary proposes to distribute the rights or the proceeds of any sale thereof. The Depositary will deal with such rights in the manner described below:-

(i) if and to the extent that the Depositary shall, at its discretion, deem it to be lawful and reasonably practicable, the Depositary shall make arrangements whereby the Holders may, upon payment of the subscription price together with such fees, taxes, duties, charges, costs and expenses as may be required under the Deposit Agreement and completion of such undertakings, declarations, certiÑcations and other documents as the Depositary may reasonably require, request the Depositary to exercise such rights on their behalf with respect to the Deposited Shares and to distribute the Shares, securities or other assets so subscribed or acquired to the Holders entitled thereto by an increase in the numbers of GDSs corresponding to the Master GDS or an issue of certiÑcates in deÑnitive

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registered form in respect of GDSs, according to the manner in which the Holders hold their GDSs; or

(ii) if and to the extent that the Depositary shall at its discretion, deem it to be lawful and reasonably practicable, the Depositary will distribute such rights to the Holders entitled thereto in such manner as the Depositary may at its discretion determine; or

(iii) if and to the extent that the Depositary deems any such arrangement and distribution as is referred to in paragraphs (i) and (ii) above to all or any Holders not to be lawful and reasonably practicable (including, without limitation, due to the fractions which would otherwise result or to any requirement that the Company, the Custodian or the Depositary withhold an amount on account of taxes or other governmental charges) or to be unlawful, the Depositary will, PROVIDED THAT Holders have not taken up rights through the Depositary as provided in (i) above, sell such rights (either by public or private sale and otherwise at its discretion subject to all applicable laws and regulations) and distribute the net proceeds of such sale as a cash distribution pursuant to Condition 4 to the Holders entitled thereto. If the Depositary is unable to sell such rights, it will allow such rights to lapse.

The Company has agreed in the Deposit Agreement that it will, unless prohibited by applicable law or regulation, give its consent to, and if requested use all reasonable endeavours (subject to the next paragraph) to facilitate, any such distribution, sale or subscription by the Depositary or the Holders, as the case may be, pursuant to Conditions 1, 4, 5, 6, 7 or 10 (including the obtaining of legal opinions from counsel reasonably satisfactory to the Depositary concerning such matters as the Depositary may reasonably specify).

If the Company notiÑes the Depositary that registration is required in any jurisdiction under any applicable law of the rights, securities or other property to be distributed under Condition 1, 4, 5, 6, 7 or 10 or the securities to which such rights relate in order for the Company to oÅer such rights or distribute such securities or other property to the Holders or owners of GDSs and to sell the securities corresponding to such rights, the Depositary will not oÅer such rights or distribute such securities or other property to the Holders or sell such securities unless and until the Company procures the receipt by the Depositary of an opinion from counsel reasonably satisfactory to the Depositary and the Company that a registration statement is in eÅect or that the oÅering and sale of such rights or securities to such Holders or owners of GDSs are exempt from registration under the provisions of such law. Neither the Company nor the Depositary shall be liable to register such rights, securities or other property or the securities to which such rights relate and they shall not be liable for any losses, damages or expenses resulting from any failure to do so.

If at the time of the oÅering of any rights, at its discretion, the Depositary shall be satisÑed that it is not lawful or reasonably practicable (for reasons outside its control) to dispose of the rights in any manner provided in paragraphs (i), (ii) and (iii) above, the Depositary shall permit the rights to lapse. The Depositary will not be responsible for any failure to determine that it may be lawful or feasible to make such rights available to Holders or owners of GDSs in general or to any Holder or owner of a GDS or Holders or owners of GDSs in particular.

8. Conversion of Foreign Currency

Whenever the Depositary shall receive any currency other than United States dollars by way of dividend or other distribution or as the net proceeds from the sale of securities, other property or rights, and if at the time of the receipt thereof the currency so received can in the judgement of the Depositary be converted on a reasonably practicable basis into United States dollars and distributed to the Holders entitled thereto, the Depositary shall as soon as practicable itself convert or cause to be converted by another bank or other Ñnancial institution, by sale or in any other manner that it may reasonably determine, the currency so received into

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United States dollars. If such conversion or distribution can be eÅected only with the approval or licence of any government or agency thereof, the Depositary shall make reasonable eÅorts to apply, or procure that an application be made, for such approval or licence, if any, as it may deem desirable. If at any time the Depositary shall determine that in its judgement any currency other than United States dollars is not convertible on a reasonable basis into United States dollars and distributable to the Holders entitled thereto, or if any approval or licence of any government or agency thereof which is required for such conversion is denied or, in the opinion of the Depositary, is not obtainable on a reasonably practicable basis, or if any such approval or license is not obtained within a reasonable period as determined by the Depositary, the Depositary may distribute such other currency received by it (or an appropriate document evidencing the right to receive such other currency) to the Holders entitled thereto to the extent permitted under applicable law, or the Depositary may in its discretion hold such other currency for the beneÑt of the Holders entitled thereto. If any conversion of any such currency can be eÅected in whole or in part for distribution to some (but not all) Holders entitled thereto, the Depositary may at its discretion make such conversion and distribution in United States dollars to the extent possible to the Holders entitled thereto and may distribute the balance of such other currency received by the Depositary to, or hold such balance for the account of, the Holders entitled thereto, and notify the Holders accordingly.

9. Distribution of any Payments

9.1 Any distribution of cash under Condition 1, 4, 5, 6, 7 or 10 will be made by the Depositary to Holders on the record date established by the Depositary for that purpose (such date to be as close to the record date set by the Company as is reasonably practicable) and notice shall be given promptly to Holders in accordance with Condition 23, in each case subject to any laws or regulations applicable thereto and (subject to the provisions of Condition 8) distributions will be made in United States dollars by cheque drawn upon a bank in New York City or, in the case of the Master GDS, according to usual practice between the Depositary and Clearstream or Euroclear, as the case may be. The Depositary or the Agent, as the case may be, may deduct and retain from all moneys due in respect of such GDS in accordance with the Deposit Agreement all fees, taxes, duties, charges, costs and expenses which may become or have become payable under the Deposit Agreement or these Conditions or under applicable law or regulation in respect of such GDS or the relative Deposited Property.

9.2 Delivery of any securities or other property or rights other than cash shall be made as soon as practicable to the Holders on the record date established by the Depositary for that purpose (such date to be as close to the record date set by the Company as is reasonably practicable), subject to any laws or regulations applicable thereto and subject to all fees, taxes, duties, charges, costs and expenses which may become or have become payable under the Deposit Agreement or these conditions or under applicable law or regulation in respect of such GDS or the relative Deposited Property. If any distribution made by the Company with respect to the Deposited Property and received by the Depositary shall remain unclaimed at the end of three years from the Ñrst date upon which such distribution is made available to Holders in accordance with the Deposit Agreement, the Depositary shall (except for any distribution upon the liquidation of the Company when the Depositary shall retain the same) return the same to the Company to be dealt with in accordance with the provisions of applicable law or regulation.

10. Capital Reorganisation

Upon any change in the nominal or par value, sub-division, consolidation or other reclassiÑcation of Deposited Shares or any other part of the Deposited Property or upon any reduction of capital, or upon any reorganization, merger or consolidation of the Company or to which it is a party (except where the Company is the continuing corporation), to the extent permitted by applicable laws and regulations, the Depository shall as soon as practicable give

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notice of such event to the Holders and at its discretion may treat such event as a distribution and comply with the relevant provisions of Conditions 4, 5, 6 and 9 with respect thereto, or may execute and deliver additional GDSs in respect of Shares or may require the exchange of existing GDSs for new GDSs which reÖect the eÅect of such change.

11. Withholding Taxes and Applicable Laws

11.1 Payments to Holders of dividends or other distributions on or in respect of the Deposited Shares will be subject to deduction of ROC and other withholding taxes, if any, at the applicable rates.

11.2 If any governmental or administrative authorisation, consent, registration or permit or any report to any governmental or administrative authority is required under any applicable law in ROC in order for the Depositary to receive from the Company Shares or other securities to be deposited under these Conditions, or in order for Shares, other securities or other property to be distributed under Condition 1, 4, 5, 6 or 10 or to be subscribed under Condition 7 or to oÅer any rights or sell any securities represented by such rights relevant to any Deposited Shares, the Company has agreed to apply for such authorisation, consent, registration or permit or Ñle such report on behalf of the Holders within the time required under such laws. In this connection, the Company has undertaken in the Deposit Agreement to the extent reasonably practicable to take such action as may be required in obtaining or Ñling the same. The Depositary shall not be obliged to distribute GDSs representing such Shares, Shares, other securities or other property deposited under these Conditions or make any oÅer of any such rights or sell any securities corresponding to any such rights with respect to which such authorisation, consent, registration or permit or such report has not been obtained or Ñled, as the case may be, and shall have no duties to obtain any such authorisation, consent, registration or permit, or to Ñle any such report.

11.3 The Holders may be asked to indemnify the Depositary, the Company, the Custodian and any of their respective directors, employees, oÇcers and aÇliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of the inaccuracy of any information provided by such Holders in order to obtain any refund of taxes, reduced rate of withholding at source or other tax beneÑt obtained on behalf of such Holders. Neither the Depositary nor the Custodian nor the Company shall be liable for the failure by any Holder to obtain the beneÑts of tax credits on the basis of any non-U.S. tax paid against such Holder's income tax liability.

The Depositary is under no obligation to provide the Holders with any information about the tax status of the Company. The Depositary shall not incur any liability for any tax consequences that may be incurred by Holders on account of their ownership of the GDSs, including without limitation, tax consequences resulting from the Company (or any of its subsidiaries) being treated as a ""Foreign Personal Holding Company,'' or as a ""Passive Foreign Investment Company'' (in each case as deÑned in the U.S. Internal Revenue Code and the regulations issued thereunder) or otherwise.

12. Voting Rights

12.1 The Holders may exercise voting rights with respect to the Shares or CertiÑcates of Payment represented by their GDSs only pursuant to provisions of Condition 12 and the Deposit Agreement. The Holders hereby appoint the Depositary as their representative to exercise voting rights with respect to the Shares or CertiÑcates of Payment represented by the GDSs in the following manner.

12.2 The Company has agreed in the Deposit Agreement to provide to the Depositary no later than the business day (the ""CutoÅ Date'') that is at least 60 calendar days prior to an ordinary meeting of shareholders and 30 calendar days prior to an extraordinary meeting of

135

shareholders (such period covering the date of dispatch of such notice and the date of the meeting of shareholders) suÇcient copies, as the Depositary may reasonably request, of notices of meetings of the shareholders of the Company and the agenda therefore and any voting instruction forms, as well as English translations thereof (containing an indication of the number of directors or supervisors to be elected in the case of an election of directors of supervisors) by which each Holder may give instructions to the Depositary to vote (i) for or against each resolution speciÑed in the agenda for the meeting and (ii) on a cumulative basis, for the persons designated by such Holder as directors and supervisors (the ""Materials''). For the purposes of this Condition 12 only, in addition to the notice methods in Condition 23, the Company may send the Materials to the Depositary by email, provided that the relevant documents are sent in PDF format, are received by the Depositary in complete and legible form, and the Company notiÑes the Depositary by telephone of the information sent.

12.3 Upon receipt of the Materials, the Depositary shall, as soon as practicable thereafter, Ñx a record date for determining the Holders entitled to receive information as to such meeting (the ""Instruction Date'') and shall mail the Materials to such Holders. If the Company fails to supply the Materials to the Depositary by the CutoÅ Date, the Depositary shall be under no obligation to mail the Materials to Holders and subject to the provisions described below, will cause all Deposited Property represented by the GDSs to be present at the relevant meeting of shareholders insofar as permitted under applicable law for the purposes of satisfying quorum requirements but will not vote or notify any voting instructions relating to any such Deposited Property.

12.4 In order for voting instructions with respect to a GDS to be valid, the instructions must be completed and duly signed by the Holder of such GDS on the Instruction Date established by the Depositary and returned to the Depositary by such date. The Depositary shall exercise voting rights with respect to the GDS only in accordance with valid voting instructions. There can be no assurance that Holders generally or any Holder in particular will receive the Materials suÇciently prior to the Instruction Date to ensure that the Depositary shall exercise voting rights in accordance with the following Conditions.

12.5 Subject to Condition 12.7 below which shall apply to the election of director(s) and/or supervisor(s) of the Company (respectively, ""Directors'' and ""Supervisors''), if a Holder or Holders together holding at least 51.0 per cent of the GDSs outstanding at the relevant Instruction Date instructs or instruct the Depositary to vote in the same direction in respect of any particular resolution (other than the election of Director(s) and Supervisor(s)) the Depositary shall notify the instruction in respect of that resolution to the Designated Representative or such other person as the Designated Representative may designate (the ""Substitute'') as the voting representative of the Depositary and the Holders and appoint the Designated Representative or the Substitute to attend the meeting and vote all the Deposited Shares or CertiÑcates of Payment evidenced by GDSs in the manner so instructed by such Holders in relation to the relevant resolution or resolutions.

12.6 If, for any reason (other than failure by the Company to supply the notice of Shareholders' meeting to the Depositary within the requisite time period provided in Condition 12.2 above), the Depositary has not by the date speciÑed by the Depositary received instructions from Holders together holding at least 51.0 per cent of all the GDSs outstanding at the relevant record date to vote in the same manner in respect of any particular resolution (other than the election of Director(s) and/or Supervisor(s)) then, all Holders shall be deemed in respect of that particular resolution to have instructed the Depositary to authorise and appoint the Designated Representative or the Substitute to attend and vote at his sole discretion at such meeting all the Deposited Shares or CertiÑcates of Payment represented by outstanding GDSs in respect of that particular resolution which may not be in the interests of Holders, and/or cause the Deposited Shares or CertiÑcates of Payment to be voted as he deems appropriate provided, however, that no such authorisation shall be given with respect to

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any matter as to which the Designated Representative or the Substitute informs the Depositary that he does not wish to be so authorised, in which event the Depositary will not vote at the relevant meeting but will take such action as is necessary to cause all the Deposited Property to be counted for the purpose of satisfying applicable quorum requirements.

12.7 The Depositary will notify the instructions for the election of Directors and Supervisors received from Holders to the Designated Representative or the Substitute and appoint the Designated Representative or the Substitute as the representative of the Depositary and the Holders to attend such meeting and, subject to the provisions described in this Condition, vote the Deposited Property represented by GDSs as to which the Depositary has received instructions from Holders for the election of Directors and Supervisors in the manner so instructed, subject to any restrictions imposed by ROC law, rules or regulations. Holders who by the date speciÑed by the Depositary, following the mailing of the Materials, have not delivered instructions to the Depositary will be deemed to have instructed the Depositary to authorise the Designated Representative or the Substitute as the representative of the Depositary and the Holders to attend such meeting and vote, at such Designated Representative's or the Substitute's sole discretion, all the Deposited Property represented by GDSs as to which the Depositary has not received instructions from the Holders for the election of Directors and Supervisors, which may not be in the interest of the Holders; provided, however, that no such authorisation shall be given with respect to any election of Directors or Supervisors as to which the Designated Representative or the Substitute informs the Depositary that he does not wish to be so authorised, in which event the Depositary will attend such meeting and will vote that Deposited Property represented by the GDSs as to which it has received instructions from Holders for the election of Directors and Supervisors in the manner so instructed and will not vote at the relevant meeting any Deposited Property represented by GDSs, as to which the Depositary has not received instructions from the Holders for the election of Directors and Supervisors but will take such action as is necessary to cause all the Deposited Property to be counted for the purpose of satisfying applicable quorum requirements.

12.8 The Depositary shall not be required to take any action required by Clause 5 of the Deposit Agreement and this Condition 12 unless the Depositary has requested from the Company, and received, an opinion from the Company's legal counsel (such counsel being reasonably acceptable to the Depositary) at the expense of the Company to the eÅect that under ROC law (i) the voting arrangement is valid and binding on Holders under ROC law and the statutes of the Company and the Depositary is permitted to act in accordance with the provisions of Clause 5 of the Deposit Agreement and this Condition 12, (ii) the Depositary will not be deemed to be exercising voting discretion when causing the voting in accordance with Clause 5 of the Deposit Agreement and this Condition 12, and (iii) the Depositary will not be subject to any potential liability under ROC law for any losses arising from such voting on the ground that the voting is in accordance with Clause 5 of the Deposit Agreement and this Condition 12 is in violation of ROC law or under ROC law infringes the interests of Shareholders. In the event that the Depositary does not receive such an opinion, the Depositary will not grant the authorisation and appointment of the Designated Representative or the Substitute, and will have no obligation to take any further steps in relation to the exercise of voting rights arising in respect of any Deposited Shares or CertiÑcates of Payment, PROVIDED THAT the Depositary shall take such action as is necessary to cause all the Deposited Property to be counted for the purpose of satisfying applicable quorum requirements, to the extent that the Depositary has requested from the Company, and received, an opinion from the Company's legal counsel (such counsel being reasonably acceptable to the Depositary) at the expense of the Company to the eÅect that under ROC law the Depositary is not prohibited to take such action.

12.9 If the Depositary is advised in the opinion referred to in Condition 12.8 that it is not permissible under ROC law to vote or procure the voting of the Deposited Shares or CertiÑcates of Payment in accordance with Clause 5 of the Deposit Agreement or this Condition 12, or the

137

legal counsel is otherwise unable to provide the legal opinion referred to in Condition 12.8, or the Depositary determines that it is not reasonably practicable to do so, the Depositary shall have no obligation to take any further steps in relation to voting or procuring the voting of the Deposited Shares or CertiÑcates of Payment.

12.10 By continuing to hold GDSs, all Holders shall be deemed to have agreed to the provisions of Clause 5 of the Deposit Agreement and this Condition 12, as they may be amended from time to time in accordance with applicable ROC law.

12.11 The Depositary shall not, and the Depositary shall ensure that the Custodian and its nominees do not, under any circumstances, exercise any discretion as to voting. Neither the Depositary nor the Custodian or its nominees shall vote or attempt to exercise the right to vote that attaches to the Deposited Shares or CertiÑcates of Payment, other than in accordance with instructions given (or deemed given) by Holders in accordance with Clause 5 of the Deposit Agreement and this Condition 12.

12.12 ""Designated Representative'' means the person who is President of the Company as of the date of the Deposit Agreement, so long as such person remains an oÇcer or director of the Company or, in the event that such person is no longer an oÇcer or director of the Company, then the Chairman of the Board of Directors.

13. Documents to be Furnished, Recovery of Taxes, Duties and Other Charges

The Depositary shall not be liable for any taxes, duties, charges, costs or expenses which may become payable in respect of the Deposited Shares or other Deposited Property or the GDSs, whether under any present or future Ñscal or other laws or regulations, and such part thereof as is proportionate or referable to a GDS shall be payable by the Holder thereof to the Depositary at any time on request or may be deducted from any amount due or becoming due on such GDS in respect of any dividend or other distribution. In default thereof, the Depositary may for the account of the Holder discharge the same out of the proceeds of sale on any Stock Exchange on which the Shares may from time to time be listed, and subject to all applicable laws and regulations, of any appropriate number of Deposited Shares or other Deposited Property and subsequently pay any surplus to the Holder. Any such request shall be made by giving notice pursuant to Condition 23.

14. Liability

14.1 In acting hereunder the Depositary shall have only those duties, obligations and responsibilities expressly speciÑed in the Deposit Agreement and these Conditions and, other than holding the Deposited Property for the beneÑt of Holders as bare trustee, does not assume any relationship of trust for or with the Holders or owners of GDSs or any other person.

14.2 Neither the Depositary, the Custodian, the Company, any Agent, nor any of their agents, oÇcers, directors or employees shall incur any liability to any other of them or to any Holder or owner of a GDS or any other person with an interest in any GDSs if, by reason of any provision of any present or future law or regulation of ROC or any other country or of any relevant governmental or regulatory authority, or by reason of the interpretation or application of any such present or future law or regulation or any change therein, or by reason of any other circumstances beyond their control, or in the case of the Depositary, the Custodian, the Agent or any of their agents, oÇcers, directors or employees, by reason of any provision, present or future, of the constitutive documents of the Company or the provisions applicable to the Shares, any of them shall be prevented, delayed or forbidden from doing or performing any act or thing which the terms of the Deposit Agreement or these Conditions provide shall or may be done or performed; nor shall any of them incur any liability, in the absence of wilful default, negligence or bad faith, to any Holder or owner of GDSs or any other person with an interest in any GDSs by reason of any exercise of, or failure to exercise, any voting rights attached to the

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Deposited Shares or any of them or any other discretion or power provided for in the Deposit Agreement. Any such party may rely on, and shall be protected in acting upon, any written notice, request, direction or other document believed by it to be genuine and to have been duly signed or presented (including a translation which is made by a translator believed by it to be competent or which appears to be authentic).

14.3 Neither the Depositary nor any Agent shall be liable (except for its own wilful default, negligence or bad faith or that of its Agents, oÇcers or employees) to the Company or any Holder or owner of GDSs or any other person, by reason of having accepted as valid or not having rejected any certiÑcate for Shares, CertiÑcates of Payment or GDSs or any signature on any transfer or instruction purporting to be such and subsequently found to be forged or not authentic. For the avoidance of doubt, neither party should be responsible for its failure to perform any obligations under the Deposit Agreement or these Conditions EXCEPT where such failure is attributable to its wilful default, negligence or bad faith.

14.4 The Depositary and its agents may engage or be interested in any Ñnancial or other business transactions with the Company or any of its subsidiaries or aÇliates, or in relation to the Deposited Property (including without prejudice to the generality of the foregoing, the conversion of any part of the Deposited Property from one currency to another), may at any time hold or be interested in GDSs for its own account, and shall be entitled to charge and be paid all usual fees, commissions and other charges for business transacted and acts done by it as a bank, and not in the capacity of Depositary, in relation to matters arising under the Deposit Agreement (including, without prejudice to the generality of the foregoing, charges on the conversion of any part of the Deposited Property from one currency to another and on any sales of property) without accounting to Holders or any other person for any proÑt arising therefrom.

14.5 The Depositary shall endeavour to eÅect any such sale as is referred to or contemplated in Conditions 1, 5, 6, 7, 10, 13 or 21 or any such conversion as is referred to in Condition 8 in accordance with the Depositary's normal practices and procedures but shall have no liability (in the absence of its own wilful default, negligence or bad faith or that of its Agents, oÇcers, directors or employees) with respect to the terms of such sale or conversion or if such sale or conversion shall not be reasonably practicable.

14.6 The Depositary shall not be required or obliged to monitor, supervise or enforce the observance and performance by the Company of its obligations under or in connection with the Deposit Agreement or these Conditions.

14.7 The Depositary shall have no responsibility whatsoever to the Company, any Holders or any owner of GDSs or any other person as regards any deÑciency which might arise because the Depositary is subject to any tax in respect of the Deposited Property or any part thereof or any income therefrom or any proceeds thereof.

14.8 In connection with any proposed modiÑcation, waiver, authorisation or determination permitted by the terms of the Deposit Agreement, the Depositary shall not, except as otherwise expressly provided in Condition 22, be obliged to have regard to the consequence thereof for the Holders or the owners of GDSs or any other person.

14.9 Notwithstanding anything else contained in the Deposit Agreement or these Conditions, the Depositary may refrain from doing anything which could or might, in its opinion, be contrary to any law of any jurisdiction or any directive or regulation of any agency or state or which would or might otherwise render it liable to any person and the Depositary may do anything which is, in its opinion, necessary to comply with any such law, directive or regulation.

14.10 The Depositary may, in relation to the Deposit Agreement and these Conditions, act or take no action on the advice or opinion of, or any certiÑcate or information obtained from, any lawyer, valuer, accountant, banker, broker, securities company or other expert whether

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obtained by the Company, the Depositary or otherwise, and shall not be responsible or liable for any loss or liability occasioned by so acting or refraining from acting or relying on information from persons presenting Shares or CertiÑcates of Payment for deposit or GDSs for surrender or requesting transfers thereof.

14.11 Any such advice, opinion, certiÑcate or information (as discussed in Condition 14.10 above) may be sent or obtained by letter, telex, facsimile transmission, telegram or cable and the Depositary shall not be liable for acting on any advice, opinion, certiÑcate or information purported to be conveyed by any such letter, telex or facsimile transmission although (without the Depositary's knowledge) the same shall contain some error or shall not be authentic.

14.12 The Depositary may call for and shall be at liberty to accept as suÇcient evidence of any fact or matter or the expediency of any transaction or thing, a certiÑcate, letter or other communication, whether oral or written, signed or otherwise communicated on behalf of the Company by a Director of the Company or by a person duly authorised by a Director of the Company or such other certiÑcate from persons speciÑed in Condition 14.10 above which the Depositary considers appropriate and the Depositary shall not be bound in any such case to call for further evidence or be responsible for any loss or liability that may be occasioned by the Depositary acting on such certiÑcate.

14.13 The Depositary shall have no obligation under the Deposit Agreement except to perform its obligations as are speciÑcally set out therein without wilful default, negligence or bad faith.

14.14 The Depositary may delegate by power of attorney or otherwise to any person or persons or Öuctuating body of persons, whether being a joint depositary of the Deposit Agreement or not and not being a person to whom the Company may reasonably object, all or any of the powers, authorities and discretions vested in the Depositary by the Deposit Agreement and such delegation may be made upon such terms and subject to such conditions, including power to sub-delegate and subject to such regulations as the Depositary may in the interests of the Holders think Ñt, provided that no objection from the Company to any such delegation as aforesaid may be made to a person whose Ñnancial statements are consolidated with those of the Depositary's ultimate holding company. Any delegation by the Depositary shall be on the basis that the Depositary is acting on behalf of the Holders and the Company in making such delegation. The Company shall not in any circumstances and the Depositary shall not (provided that it shall have exercised reasonable care in the selection of such delegate) be bound to supervise the proceedings or be in any way responsible for any loss, liability, cost, claim, action, demand or expense incurred by reason of any misconduct or default on the part of any such delegate or sub-delegate. However, the Depositary shall, if practicable and if so requested by the Company, pursue (at the Company's expense and subject to receipt by the Depositary of such indemnity and security for costs as the Depositary may reasonably require) any legal action it may have against such delegate or sub-delegate arising out of any such loss caused by reason of any such misconduct or default. The Depositary shall, within a reasonable time of any such delegation or any renewal, extension or termination thereof, give notice thereof to the Company. Any delegation under this Condition which includes the power to sub-delegate shall provide that the delegate shall, within a speciÑed time of any sub-delegation or amendment, extension or termination thereof, give notice thereof to the Company and the Depositary.

14.15 The Depositary may, in the performance of its obligations hereunder, instead of acting personally, employ and pay an agent, whether a solicitor or other person, to transact or concur in transacting any business and do or concur in doing all acts required to be done by such party, including the receipt and payment of money.

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14.16 The Depositary shall be at liberty to hold or to deposit the Deposit Agreement and any deed or document relating thereto in any part of the world with any banking company or companies (including itself) whose business includes undertaking the safe custody of deeds or documents or with any lawyer or Ñrm of lawyers of good repute, and the Depositary shall not (in the case of deposit with itself, in the absence of its own negligence, wilful default, or bad faith or that of its Agents, directors, oÇcers or employees) be responsible for any losses, liability or expenses incurred in connection with any such deposit.

14.17 Notwithstanding anything to the contrary contained in the Deposit Agreement or these Conditions, the Depositary shall not be liable in respect of any loss or damage which arises out of or in connection with its performance or non-performance or the exercise or attempted exercise of, or the failure to exercise any of, its powers or discretions under the Deposit Agreement except to the extent that such loss or damage arises from the wilful default, negligence or bad faith of the Depositary or that of its Agents, oÇcers, directors or employees.

14.18 No provision of the Deposit Agreement or these Conditions shall require the Depositary to expend or risk its own funds or otherwise incur any Ñnancial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity and security against such risk of liability is not assured to it.

14.19 For the avoidance of doubt, the Depositary shall be under no obligation to check, monitor or enforce compliance with any ownership restrictions in respect of GDSs, CertiÑcates of Payment or Shares under any applicable ROC law as the same may be amended from time to time. Notwithstanding the generality of Condition 3, the Depositary shall refuse to register any transfer of GDSs or any deposit of Shares or CertiÑcates of Payment against issuance of GDSs if notiÑed by the Company, or the Depositary becomes aware of the fact, that such transfer or issuance would result in a violation of the limitations set forth above.

14.20 No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement.

14.21 Notwithstanding anything in the Conditions or the Deposit Agreement to the contrary, neither the Depositary, the Custodian nor any of their respective directors, employees, oÇcers of aÇliates shall incur any liability for any consequential or punitive damages for any breach of the terms of the Conditions or the Deposit Agreement.

15. Issue and Delivery of Replacement GDSs and Exchange of GDSs

Subject to the payment of the relevant fees, taxes, duties, charges, costs and expenses and such terms as to evidence and indemnity as the Depositary may require, replacement GDSs will be issued by the Depositary and will be delivered in exchange for or replacement of outstanding lost, stolen, mutilated, defaced or destroyed GDSs upon surrender thereof (except in the case of the destruction, loss or theft) at the speciÑed oÇce of the Depositary or (at the request, risk and expense of the Holder) at the speciÑed oÇce of any Agent.

16. Depositary's Fees, Costs and Expenses

16.1 The Depositary shall be entitled to charge the following remuneration and receive the following remuneration and reimbursement (such remuneration and reimbursement being payable on demand) from the Holders in respect of its services under the Deposit Agreement:

(i) for the issue of GDSs (other than upon the issue of GDSs pursuant to the OÅering) or the cancellation of GDSs upon the withdrawal of Deposited Property: U.S.$5.00 or less per 100 GDSs (or portion thereof) issued or cancelled;

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(ii) for issuing GDS certiÑcates in deÑnitive registered form in replacement for mutilated, defaced, lost, stolen or destroyed GDS certiÑcates: a sum per GDS certiÑcate which is determined by the Depositary to be a reasonable charge to reÖect the work, costs and expenses involved;

(iii) for issuing GDS certiÑcates in deÑnitive registered form (other than pursuant to (ii) above): the greater of US$1.50 per GDS certiÑcate (plus printing costs) or such other sum per GDS certiÑcate which is determined by the Depositary to be a reasonable charge to reÖect the work plus costs (including but not limited to printing costs) and expenses involved;

(iv) for receiving and paying any cash dividend or other cash distribution on or in respect of the Deposited Shares: a fee of U.S.$0.02 or less per GDS for each such dividend or distribution;

(v) in respect of any issue of rights or distribution of Shares or CertiÑcates of Payment (whether or not evidenced by GDSs) or other securities or other property (other than cash) upon exercise of any rights, any free distribution, stock dividend or other distribution: U.S.$5.00 or less per 100 outstanding GDSs (or portion thereof) for each such issue of rights, dividend or distribution; and

(vi) any other charge payable by the Depositary, any of the Depositary's agents, including the Custodian, or the agents of the Depositary's agents, in connection with the servicing of Deposited Shares or other Deposited Property (which charge shall be assessed against Holders as of the date or dates set by the Depositary and shall be payable at the sole discretion of the Depositary by billing such Holders for such charge or deducting such charge form one or more cash dividends or other cash distributions,

together with all expenses (including currency conversion expenses), transfer and registration fees, taxes, duties and charges payable by the Depositary, any Agent or the Custodian, or any of their agents, in connection with any of the above.

16.2 The Depositary is entitled to receive from the Company the fees, taxes, duties, charges costs and expenses as speciÑed in a separate agreement between the Company and the Depositary.

17. Agents

17.1 The Depositary shall be entitled to appoint one or more agents (the ""Agents'' ) for the purpose, inter alia, of making distributions to the Holders.

17.2 Notice of appointment or removal of any Agent or of any change in the speciÑed oÇce of the Depositary or any Agent will be duly given by the Depositary to the Holders.

18. Listing

The Company has undertaken in the Deposit Agreement to use its best endeavours to maintain, so long as any GDS is outstanding, a listing for the GDSs on the Luxembourg Stock Exchange.

For that purpose the Company will pay all fees and sign and deliver all undertakings required by the Luxembourg Stock Exchange in connection with such listings. In the event that the listing on the Luxembourg Stock Exchange is not maintained, the Company has undertaken in the Deposit Agreement to use its best endeavours with the reasonable assistance of the Depositary (provided at the Company's expense) to obtain and maintain a listing of the GDSs on any other internationally recognised stock exchange in Europe.

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19. The Custodian

The Depositary has agreed with the Custodian that the Custodian will receive and hold (or appoint agents approved by the Depositary to receive and hold) all Deposited Property for the account and to the order of the Depositary in accordance with the applicable terms of the Deposit Agreement which include a requirement to segregate the Deposited Property from the other property of, or held by, the Custodian PROVIDED THAT the Custodian shall not be obliged to segregate cash comprised in the Deposited Property from cash otherwise held by the Custodian. The Custodian shall be responsible solely to the Depositary PROVIDED THAT, if and so long as the Depositary and the Custodian are the same legal entity, references to them separately in these Conditions and the Deposit Agreement are for convenience only and that legal entity shall be responsible for discharging both functions directly to the Holders and the Company. The Custodian may resign or be removed by the Depositary by giving 90 days' prior notice, except that if a replacement Custodian is appointed which is a branch or aÇliate of the Depositary, the Custodian's resignation or discharge may take eÅect immediately on the appointment of such replacement Custodian. Upon the removal of or receiving notice of the resignation of the Custodian, the Depositary shall promptly appoint a successor Custodian (approved (i) by the Company, such approval not to be unreasonably withheld or delayed, and (ii) by the relevant authority in ROC, if any), which shall, upon acceptance of such appointment, and the expiry of any applicable notice period, become the Custodian. Whenever the Depositary in its discretion determines that it is in the best interests of the Holders to do so, it may, after prior consultation with the Company, terminate the appointment of the Custodian and, in the event of any such termination, the Depositary shall promptly appoint a successor Custodian (approved (i) by the Company, such approval not to be unreasonably withheld or delayed, and (ii) by the relevant authority in ROC, if any), which shall, upon acceptance of such appointment, become the Custodian under the Deposit Agreement on the eÅective date of such termination. The Depositary shall notify Holders of such change immediately upon such change taking eÅect in accordance with Condition 23. Notwithstanding the foregoing, the Depositary may temporarily deposit the Deposited Property in a manner or a place other than as therein speciÑed; PROVIDED THAT, in the case of such temporary deposit in another place, the Company shall have consented to such deposit, and such consent of the Company shall have been delivered to the Custodian. In case of transportation of the Deposited Property under this Condition, the Depositary shall obtain appropriate insurance at the expense of the Company if and to the extent that the obtaining of such insurance is reasonably practicable and the premiums payable are of a reasonable amount.

20. Resignation and Termination of Appointment of the Depositary

20.1 The Depositary may at any time be removed by the Company by 60 days prior written notice of such removal, which shall become eÅective upon the later to occur of (i) the 60th day after delivery of the notice to the Depositary and the Custodian, or (ii) the appointment of a successor depositary and its acceptance of such appointment as hereinafter provided. The Depositary may resign as Depositary by giving at least 120 days' prior notice in writing to the Company and the Custodian. Within 30 days after the giving of either such notice, notice thereof shall be duly given by the Depositary to the Holders and to the Luxembourg Stock Exchange.

The termination of the appointment or the resignation of the Depositary shall take eÅect on the date speciÑed in such notice; PROVIDED THAT no such termination of appointment or resignation shall take eÅect until the appointment by the Company of a successor depositary under the Deposit Agreement and the acceptance of such appointment to act in accordance with the terms thereof and of these Conditions, by the successor depositary. The Company has undertaken in the Deposit Agreement to use its best endeavours to procure the appointment of a successor depositary with eÅect from the date of termination speciÑed in such notice as soon

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as reasonably possible following notice of such termination or resignation. Upon any such appointment and acceptance, notice thereof shall be duly given by the Depositary to the Holders in accordance with Condition 23 and to the Luxembourg Stock Exchange.

20.2 Upon the termination of appointment or resignation of the Depositary and against payment of all fees and expenses due to the Depositary under the Deposit Agreement, the Depositary shall deliver to its successor as depositary suÇcient information and records to enable such successor eÇciently to perform its obligations under the Deposit Agreement and shall deliver and pay to such successor depositary all property and cash held by it under the Deposit Agreement. The Deposit Agreement provides that, upon the date when such termination of appointment or resignation takes eÅect, the Custodian shall be deemed to be the Custodian thereunder for such successor depositary, and the Depositary shall thereafter have no obligation under the Deposit Agreement or the Conditions (other than liabilities accrued prior to the date of termination of appointment or resignation or any liabilities stipulated in relevant laws or regulations).

21. Termination of Deposit Agreement

21.1 Either the Company or the Depositary but, in the case of the Depositary, only if the Company has failed to appoint a replacement Depositary within 90 days of the date on which the Depositary has given notice pursuant to Condition 20 that it wishes to resign, may terminate the Deposit Agreement by giving 90 days' prior notice to the other and to the Custodian. Within 30 days after the giving of such notice, notice of such termination shall be duly given by the Depositary to Holders of all GDSs then outstanding in accordance with Condition 23.

21.2 During the period beginning on the date of the giving of such notice by the Depositary to the Holders and ending on the date on which such termination takes eÅect, each Holder shall be entitled to obtain delivery of the Deposited Property relative to each GDS held by it, subject to the provisions of Condition 1.1 and upon compliance with Condition 1, upon payment of the charge speciÑed in Condition 16.1(i) and Clause 10.1.1(a) of the Deposit Agreement for such delivery and surrender, and together with all amounts which the Depositary is obliged to pay to the Custodian upon payment by the Holder of any sums payable by the Depositary and/or any other expenses incurred by the Depositary in connection with such delivery and surrender, and otherwise in accordance with the Deposit Agreement.

21.3 If any GDSs remain outstanding after the date of termination, the Depositary shall as soon as reasonably practicable sell the Deposited Property then held by it under the Deposit Agreement, shall not register transfers and shall not pass on dividends or distributions or take any other action except that (a) the Depositary shall be required to collect distributions on the Deposited Property and distribute Shares and other Deposited Property to the Holders upon the Holders' cancellation of the GDSs for so long as any Deposited Property is held by the Depositary, and (b) it will deliver the net proceeds of any such sale, together with any other cash then held by it under the Deposit Agreement, pro rata to Holders of GDSs which have not previously been so surrendered by reference to that proportion of the Deposited Property which is represented by the GDSs of which they are the Holders. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement and these Conditions, except its obligation to account to Holders for such net proceeds of sale and other cash comprising the Deposited Property without interest.

22. Amendment of Deposit Agreement and Conditions

All and any of the provisions of the Deposit Agreement and these Conditions (other than this Condition 22) may at any time and from time to time be amended by agreement between the Company and the Depositary in any respect which they may deem necessary or desirable.

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Notice of any amendment of these Conditions (except to correct a manifest error) shall be duly given to the Holders by the Depositary, and any amendment (except as aforesaid) which shall increase or impose fees payable by Holders or which shall otherwise, in the opinion of the Depositary, be materially prejudicial to the interests of the Holders (as a class) shall not become eÅective so as to impose any obligation on the Holders until the expiration of three months after such notice shall have been given. During such period of three months, each Holder shall be entitled to obtain, subject to and upon compliance with Condition 1, delivery of the Deposited Property relative to each GDS held by it upon surrender thereof, upon payment of the charge speciÑed in Condition 16.1(i) for such delivery and surrender and otherwise in accordance with the Deposit Agreement and these Conditions. Each Holder at the time when such amendment so becomes eÅective shall be deemed, by continuing to hold a GDS, to approve such amendment and to be bound by the terms thereof in so far as they aÅect the rights of the Holders. In no event shall any amendment impair the right of any Holder to receive, subject to and upon compliance with Condition 1, the Deposited Property attributable to the relevant GDS.

For the purposes of this Condition 22, an amendment shall not be regarded as being materially prejudicial to the interests of Holders if its principal eÅect is to permit the creation of GDSs in respect of additional Shares to be held by the Depositary which are or will become fully consolidated as a single series with the other Deposited Shares PROVIDED THAT temporary GDSs will represent such Shares until they are so consolidated.

23. Notices

23.1 Any and all notices to be given to any Holder shall be duly given if personally delivered, or sent by mail (if domestic, Ñrst class, if overseas, Ñrst class airmail) or air courier, or by telex or facsimile transmission conÑrmed by letter sent by mail or air courier, addressed to such Holder at the address of such Holder as it appears on the transfer books for GDSs of the Depositary, or, if such Holder shall have Ñled with the Depositary a written request that notices intended for such Holder be mailed to some other address, at the address speciÑed in such request.

23.2 Delivery of a notice sent by mail or air courier shall be eÅective three days (in the case of domestic mail or air courier) or seven days (in the case of overseas mail) after despatch, and any notice sent by telex transmission, as provided in this Condition, shall be eÅective when the sender receives the answer back from the addressee at the end of the telex and any notice sent by facsimile transmission, as provided in this Condition, shall be eÅective when the intended recipient has conÑrmed by telephone to the transmitter thereof that the recipient has received such facsimile in complete and legible form. The Depositary or the Company may, however, act upon any telex or facsimile transmission received by it from the other or from any Holder, notwithstanding that such telex or facsimile transmission shall not subsequently be conÑrmed as aforesaid.

23.3 So long as GDSs are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, all notices to be given to Holders generally will also be published in a leading daily newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort ).

24. Reports and Information on the Company

24.1 The Company has undertaken in the Deposit Agreement (so long as any GDS is outstanding) to furnish the Depositary with six copies in the English language (and to make

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available to the Depositary, the Custodian and each Agent as many further copies as they may reasonably require to satisfy requests from Holders) of:-

(i) in respect of the Ñnancial year ending on 31 December 2003 and in respect of each Ñnancial year thereafter, the non-consolidated (and, if published for holders of Shares, consolidated) balance sheets as at the end of such Ñnancial year and the non-consolidated (and, if published for holders of Shares, consolidated) statements of income for such Ñnancial year in respect of the Company, prepared in conformity with generally accepted accounting principles in ROC and reported upon by independent public accountants selected by the Company, as soon as practicable (and in any event within 180 days) after the end of such year;

(ii) if the Company publishes semi-annual Ñnancial statements for holders of Shares, such semi-annual Ñnancial statements of the Company, as soon as practicable, after the same are published and in any event no later than three months after the end of the period to which they relate; and

(iii) if the Company publishes quarterly Ñnancial statements for holders of Shares, such quarterly Ñnancial statements, as soon as practicable, after the same are published, and in any event no later than one month after the end of the period to which they relate.

24.2 The Depositary shall upon receipt thereof give due notice to the Holders that such copies are available upon request at its speciÑed oÇce and the speciÑed oÇce of any Agent.

25. Copies of Company Notices

The Company has undertaken in the Deposit Agreement to transmit to the Custodian and the Depositary on or before the day when the Company Ñrst gives notice, by mail, publication or otherwise, to holders of any Shares or other Deposited Property, whether in relation to the taking of any action in respect thereof or in respect of any dividend or other distribution thereon or of any meeting or adjourned meeting of such holders or otherwise, such number of copies of such notice and any other material (which contains information having a material bearing on the interests of the Holders) furnished to such holders by the Company (or such number of English translations of the originals if the originals were prepared in a language other than English) in connection therewith as the Depositary may reasonably request. If such notice is not furnished to the Depositary in English, either by the Company or the Custodian, the Depositary shall, at the Company's expense, arrange for an English translation thereof (which may be in such summarised form as the Depositary may deem adequate to provide suÇcient information) to be prepared. Except as provided below, the Depositary shall, as soon as practicable after receiving notice of such transmission or (where appropriate) upon completion of translation thereof, give due notice to the Holders which notice may be given together with a notice pursuant to Condition 9.1, and shall make the same available to Holders in such manner as it may determine.

26. Moneys held by the Depositary

The Depositary shall be entitled to deal with moneys paid to it by the Company for the purposes of the Deposit Agreement in the same manner as other moneys paid to it as a banker by its customers and shall not be liable to account to the Company or any Holder or any other person for any interest thereon, except as otherwise agreed and shall not be obliged to segregate such moneys from other moneys belonging to the Depositary.

27. Severability

If any one or more of the provisions contained in the Deposit Agreement or in these Conditions shall be or become invalid, illegal or unenforceable in any respect, the validity,

146

legality and enforceability of the remaining provisions contained therein or herein shall in no way be aÅected, prejudiced or otherwise disturbed thereby.

28. Governing Law

28.1 The Deposit Agreement and the GDSs are governed by, and shall be construed in accordance with, English law except that the certiÑcations set forth in Schedule 3 to the Deposit Agreement and any provisions relating thereto shall be governed by and construed in accordance with the laws of the State of New York and any United States Federal Court sitting in the Borough of Manhattan, New York City. The rights and obligations attaching to the Deposited Shares and CertiÑcates of Payment will be governed by ROC law. The Company has submitted in respect of the Deposit Agreement and the Deed Poll to the jurisdiction of the English courts and the courts of the State of New York and any United States Federal Court sitting in the Borough of Manhattan, New York City and has appointed an agent for service of process in London and the Borough of Manhattan, New York City. The Company has also agreed in the Deposit Agreement, and the Deed Poll to allow, respectively, the Depositary and the Holders to elect that Disputes are resolved by arbitration.

28.2 The Company has irrevocably appointed Law Debenture Corporate Services Limited of 5th Floor, 100 Wood Street, London EC2V 7EX, United Kingdom as its agent in England to receive service of process in any Proceedings in England based on the Deed Poll and appointed Macronix America, Inc. (Address: 491 Fairview Way Milpitas, CA 95035-0302, U.S.A.) as its agent in New York to receive service of process in any Proceedings in New York. If for any reason the Company does not have such an agent in England or New York as the case may be, it will promptly appoint a substitute process agent and notify the Holders and the Depositary of such appointment. Nothing herein shall aÅect the right to serve process in any other manner permitted by law.

28.3 The courts of England are to have jurisdiction to settle any disputes (each a ""Dispute'' ) which may arise out of or in connection with the GDSs and accordingly any legal action or proceedings arising out of or in connection with the GDSs ( ""Proceedings'' ) may be brought in such courts. Without prejudice to the foregoing, the Depositary further irrevocably agrees that any Proceedings may be brought in any New York State or United States Federal Court sitting in the Borough of Manhattan, New York City. The Depositary irrevocably submits to the non-exclusive jurisdiction of such courts and waives any objection to Proceedings in such courts whether on the ground of venue or on the ground that the Proceedings have been brought in an inconvenient forum.

28.4 These submissions are made for the beneÑt of each of the Holders and shall not limit the right of any of them to take Proceedings in any other court of competent jurisdiction nor shall the taking of Proceedings in one or more jurisdictions preclude the taking of Proceedings in any other jurisdictions (whether concurrently or not).

28.5 In the event that the Depositary is made a party to, or is otherwise required to participate in, any litigation, arbitration, or Proceeding (whether judicial or administrative) which arises from or is related to or is based upon any act or failure to act by the Company, or which contains allegations to such eÅect, upon notice from the Depositary, the Company has agreed to fully cooperate with the Depositary in connection with such litigation, arbitration or Proceeding.

28.6 The Depositary irrevocably appoints Citibank, N.A., London Branch, Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, United Kingdom as its agent in England to receive service of process in any Proceedings in England based on any of the GDSs. If for any reason the Depositary does not have such an agent in England, it will promptly appoint a substitute process agent and notify the Holders of such appointment. Nothing herein shall aÅect the right to serve process in any other manner permitted by law.

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COMMON SHARES ELIGIBLE FOR FUTURE SALE

General

Before the completion of this oÅering, 1,434,225 ADSs, representing 14,342,253 common shares, were outstanding and freely tradeable. Up to 13,125,000 GDSs, representing 525,000,000 common shares, are being sold in this oÅering. As of December 31, 2003, we had outstanding US$169 million aggregate principal amount of 0.5% convertible bonds due 2007, US$90 million aggregate principal amount of zero coupon convertible bonds due 2008 and NT$767 million aggregate principal amount of zero coupon convertible bonds due 2007, convertible into 209,665,161, 260,854,295 and 88,149,425 of our common shares, respectively.

Lock-up

We have agreed with the Managers (as deÑned in ""Subscription and Sale'') not to, during the period beginning from the date of this OÅering Circular and continuing to and including the date 120 days after the date of this OÅering Circular, directly or indirectly, oÅer, sell, contract to sell, pledge or otherwise dispose of, or Ñle with the Commission a registration statement under the Securities Act relating to, any common shares, ADSs or GDSs, or securities convertible into or exchangeable or exercisable for any common shares, ADSs or GDSs, or any other capital stock, and not to publicly disclose our intention to make any such oÅer, sale, pledge, disposal or Ñling, without the prior written consent of Deutsche Bank AG London, except (i) grants of employee stock options pursuant to the terms of a plan in eÅect on the date of this OÅering Circular, (ii) issuance of employee bonus shares in accordance with our Articles of Incorporation, (iii) common shares issued in respect of stock dividends having a record date after the closing date of this oÅering, (iv) issuance of the Deposited Shares and (v) common shares issued upon conversion of bonds previously issued by the Company.

While we are not aware of any plans by any major shareholders to dispose of signiÑcant numbers of our common shares, one or more existing shareholders may dispose of our common shares or ADSs. No prediction can be made as to the eÅect, if any, of future sales of our common shares, ADSs or GDSs, or the availability of common shares, ADSs or GDSs for future sale, on the market price of our common shares, ADSs or GDSs prevailing from time to time. Sales of substantial numbers of our common shares, ADSs or GDSs in the public market, or the perception that these sales may occur, could adversely aÅect the prevailing market price of our common shares, ADSs or GDSs.

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TAXATION

ROC Taxation

General

The following summary addresses the principal ROC tax consequences of the ownership and disposition of common shares or GDSs to a nonresident individual or non-resident entity that holds such common shares or GDSs (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 common shares or GDSs and a ""non-resident entity'' (a ""Non-ROC Entity'') is a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the ROC for proÑt-making purposes and does not have a Ñxed place of business or other permanent establishment in the ROC.

GDS HOLDERS AND COMMON SHARE HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS CONCERNING THE TAX CONSEQUENCES OF OWNING THE GDSs OR COMMON SHARES IN TAIWAN AND ANY OTHER RELEVANT TAXING JURISDICTION TO WHICH THEY ARE SUBJECT.

GDSs

Dividends. Dividends, whether in cash or stock declared by us out of retained earnings and distributed to a Non-ROC Holder in respect of our shares represented by GDSs are subject to ROC withholding tax, currently at a rate of 20% on the amount of the distribution, in the case of cash dividends, or on the par value of the distributed shares, in the case of stock dividends. The Depositary may dispose of a portion of the dividends to pay such tax. Distributions of stock dividends out of capital reserves are not subject to ROC withholding tax.

Sale. Transfers of GDSs are not subject to ROC securities transaction tax. Gains on sale of GDSs are not subject to ROC income tax.

Common Shares

Dividends. Dividends (whether in cash or stock) declared by us out of retained earnings and distributed to a Non-ROC Holder in respect of common shares are subject to ROC withholding tax, currently at the rate of 20%, on the amount of the distribution (in the case of cash dividends) or on the par value of the common shares (in the case of stock dividends). Distributions of stock dividends declared by us out of capital reserves are not subject to ROC withholding tax.

Sale. Security transaction tax will be withheld at the rate of 0.3% of the transaction price upon a sale of common shares.

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 which 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.

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Inheritance Tax and Gift Tax

ROC inheritance tax is payable on any property situated within the ROC of a deceased NonROC 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 Ñrst NT$600,000 to 50% of amounts over NT$100,000,000. Gift tax is payable at rates ranging from 4% of the Ñrst 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 GDSs 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, United Kingdom and Vietnam which limit the rate of withholding tax on dividends or interest paid with respect to shares or bonds in ROC companies to residents of these countries. It is unclear whether a Non-ROC Holder will be considered to own common shares for the purposes of such income tax treaties. Accordingly, holders of common shares who are otherwise entitled to the beneÑts of the relevant income tax treaty should consult their own tax advisors concerning their eligibility for beneÑts under the treaty with respect to the common shares.

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 eÅect for resident shareholders of Taiwanese corporations. In accordance with the Amendment, a 10% retained earnings tax will be imposed on a company for its after-tax earnings generated after January 1, 1998 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, the retained earnings tax can be credited against the 20% withholding tax imposed on the Non-ROC Holders up to 10% of the declared dividends.

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SUBSCRIPTION AND SALE

Deutsche Bank AG London, Credit Suisse First Boston (Hong Kong) Limited and Chinatrust Securities Co., Ltd (together, the ""Managers'') have, subject to the terms and conditions stated in the subscription agreement dated March 31, 2004 (the ""Subscription Agreement''), severally agreed to subscribe, and we have agreed to sell to each Manager, the number of GDSs listed opposite the Manager's name below.

Manager Deutsche Bank AG LondonÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Credit Suisse First Boston (Hong Kong) Limited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chinatrust Securities Co., LtdÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Number of GDSs
	8,990,625 3,937,550 196,875 13,125,000

We have agreed with the Managers that neither we nor any person acting on our behalf will, directly or indirectly, issue, oÅer, sell, contract to sell, pledge or otherwise dispose of, or Ñle a registration statement under the Securities Act relating to, any Shares or securities of the same class as the GDSs or the Shares (other than (i) pursuant to employee beneÑts plans or distributions of dividends or employee bonuses in the form of Shares, (ii) the issue of the Deposited Shares or (iii) upon conversion of bonds previously issued by the Company) or any securities convertible into, exchangeable for or which carry rights to subscribe or purchase GDSs or Shares or securities of the same class as the GDSs, Shares or other instruments representing interests in the GDSs, Shares or other securities of the same class as the GDSs or Shares (other than the GDSs and other than as aforesaid), or any other capital stock, in any such case without the prior written consent of the Global Coordinator on behalf of the Managers between the date hereof and the date which is 120 days after the Closing Date (both dates inclusive). Provided, however, the Company may announce plans or otherwise make public an intention to issue or otherwise to take action to prepare to issue securities (including but not limited to applications Ñled with the ROC SFC);

The GDSs will be subscribed at the issue price of US$13.20 per GDS less a selling concession of US$0.198 per GDS. In addition, we have agreed to pay to the Managers a management commission of US$0.066 per GDS and an underwriting commission of US$0.066 per GDS. We have agreed to indemnify the Managers against certain liabilities incurred in connection with the issue of the GDSs. The subscription agreement may be terminated in certain circumstances prior to payment to us.

Selling Restrictions

United States

The GDSs have not been and will not be registered under the Securities Act, and may not be oÅered or sold within the United States or to, or for the account or beneÑt of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. The GDSs are being oÅered and sold outside of the United States to non-U.S. persons in reliance on Regulation S. Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not oÅer or sell the GDSs (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the oÅering and the Closing Date, within the United States or to, or for the account or beneÑt of, U.S. persons, and it will have sent to each broker/dealer to which it sells GDSs, during the distribution compliance period, a conÑrmation or other notice setting forth the restrictions on oÅers and sales of the GDSs within the United States or to, or for the account or beneÑt of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S.

151

In addition, until 40 days after the commencement of the oÅering of the GDSs, an oÅer or sale of the GDSs within the United States by a dealer that is not participating in the oÅering may violate the registration requirement of the Securities Act.

United Kingdom

Each Manager has severally represented and agreed that:

• ‚ it has not oÅered or sold and, prior to the date six months after the date of issue of the GDSs, will not oÅer or sell any GDSs to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their business or otherwise in circumstances which have not resulted and will not result in an oÅer to the public in the United Kingdom within the meaning of the Public OÅer 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 GDSs in circumstances in which Section 21(1) of the FSMA does not apply to us; and

• ‚ it has compiled and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the GDSs in, from or otherwise involving the United Kingdom.

Japan

Each Manager has severally represented and agreed that the GDSs have not been and will not be registered under the Securities and Exchange Law of Japan and that the GDSs which it subscribes will be subscribed by it as principal. Each Manager also has severally represented and agreed that, in connection with the initial oÅering of the GDSs, it will not directly and indirectly oÅer or sell and GDSs in Japan, or to, or for the beneÑt of any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan), except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and other applicable laws and regulations of Japan.

ROC

Each Manager has severally represented and agreed that it has not oÅered or sold and will not oÅer or sell any GDSs in the ROC.

Hong Kong

Each Manager has severally represented and agreed that (1) it has not oÅered or sold and will not oÅer or sell in Hong Kong, by means of any document, any GDSs other than to persons whose ordinary business is to buy or sell shares or debentures, whether as a principal or agent, or in circumstances which do not constitute an oÅer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong; and (2) it has not issued and will not issue any invitation, advertisement or document relating to the GDSs in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the GDSs which are intended to be disposed of to persons outside Hong Kong or only to ""professional investors'' within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.

152

Singapore

Each Manager has severally represented and agreed that the OÅering Circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Manager has severally represented, warranted and agreed that it has not circulated or distributed nor will it circulate or distribute the OÅering Circular and any other document or material in connection with the oÅer or sale, or invitation for subscription or purchase, of any GDSs nor has it oÅered or sold and will not oÅer to sell such GDSs or cause such GDSs to 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 speciÑed in Section 274 of the Securities and Futures Act 2001 of Singapore (the ""SFA''), (ii) to a sophisticated investor (as deÑned in Section 275 of the SFA), and in accordance with the conditions, speciÑed in Section 275 of the SFA or (iii) otherwise pursuant to and in accordance with the conditions of, any other applicable provisions of the SFA.

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GENERAL INFORMATION

1. The Master GDS has been accepted for clearance through the Clearstream, International and Euroclear systems with a Common Code of XS0190054709. The International Securities IdentiÑcation Number for the Master GDS is 019005470.

2. In connection with the application to list the GDSs on the Luxembourg Stock Exchange, a legal notice relating to the issue of the GDSs, the Deposit Agreement and copies of our constitutional documents and the constitutional documents of the Depositary will be deposited with the Register of Commerce and Companies in Luxembourg (Registre de Commerce et des Soci πet πes a Luxembourg) where such documents may be examined and copies obtained.fi

3. We have obtained all necessary consents, approvals and authorisations in the ROC in connection with the issue of the GDSs. The issue of the GDSs was authorised by resolution of our shareholders' meeting on June 27, 2003 and our Board of Directors passed on November 17, 2003 and December 19, 2003.

4. Except as disclosed in this document there has been no signiÑcant change in our Ñnancial or trading position since September 30, 2003 and no material adverse change in our Ñnancial position or prospects since September 30, 2003.

5. Except as disclosed in this document, we are not involved in any litigation or arbitration proceedings which may have, or have had during the 12 months preceding the date of this document, a signiÑcant eÅect on our Ñnancial position nor are we aware that any such proceedings are pending or threatened.

6. Copies of our latest annual consolidated accounts and our latest interim consolidated accounts may be obtained, and copies of the Deposit Agreement and copies of our constitutional documents and the constitutional documents of the Depositary will be available for inspection, at the oÇces of our Luxembourg listing agent during normal business hours. The consolidated Ñnancial statements in this document have been audited in accordance with ROC GAAP. The unconsolidated Ñnancial statements in this document have been reviewed in accordance with ROC Statement of Generally Accepted Auditing Standards No. 36, ""The Review Standards of Financial Statements.'' Interim September 2003 consolidated accounts were not available for the purposes of this oÅering. Unconsolidated annual accounts for the years ending 2000, 2001 and 2002 and interim accounts for June 2002 and 2003 were not included in this document because there are minimal diÅerences between the consolidated and unconsolidated accounts. The September 2003 unconsolidated accounts included in this document have been translated and included in this document for the purposes of this oÅering only and will not be available for future periods.

7. The GDSs will bear a legend to the following eÅect:

""THIS GLOBAL DEPOSITARY SHARE AND THE ORDINARY SHARES OF MACRONIX INTERNATIONAL CO., LTD. REPRESENTED HEREBY (THE ""SHARES'') HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE ""SECURITIES ACT''), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND, PRIOR TO THE EXPIRATION OF A DISTRIBUTION COMPLIANCE PERIOD (DEFINED AS THE PERIOD ENDING 40 DAYS AFTER THE LATEST OF THE COMMENCEMENT OF THE GDS OFFERING AND THE ORIGINAL ISSUE DATE OF THE GDSs) MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES.

154

UPON THE EXPIRATION OF THE DISTRIBUTION COMPLIANCE PERIOD REFERRED TO ABOVE, THIS GLOBAL DEPOSITARY SHARE AND THE SHARES REPRESENTED HEREBY SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS ON TRANSFER PROVIDED IN THIS LEGEND, PROVIDED THAT AT THE TIME OF SUCH EXPIRATION THE OFFER OR SALE OF THE GLOBAL DEPOSITARY SHARES REPRESENTED HEREBY AND THE SHARES REPRESENTED THEREBY BY THE HOLDER HEREOF IN THE UNITED STATES WOULD NOT BE RESTRICTED UNDER THE SECURITIES LAWS OF THE UNITED STATES OR ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES.''

1. The EU Transparency Obligations Directive is currently being Ñnalised and may be implemented in Luxembourg in a manner that is unduly burdensome for our company. In such circumstances, we may decide to seek an alternative listing for the GDSs on a stock exchange outside the European Union.

2. As long as the GDSs are listed in the Luxembourg Stock Exchange, all notices to holders of GDSs will be published in a newspaper with general circulation in Luxembourg, which is expected to be the Luxemburger Wort.

3. For so long as any of the GDSs are outstanding and listed on the Luxembourg Stock Exchange, The Bank of New York (Luxembourg) S.A., or a successor intermediary notiÑed to the holders of the GDSs, will serve as the intermediary between the Luxembourg Stock Exchange and persons in connection with the issue and listing of the GDSs.

155

SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ROC GAAP AND US GAAP

Our Ñnancial statements are prepared and presented in accordance with ROC GAAP, which diÅers in certain material respects from US GAAP. Certain material diÅerences between ROC GAAP applicable to us and US GAAP are summarized below. The summary should not be taken as inclusive of all ROC GAAP and US GAAP diÅerences. In making an investment decision, you must rely upon your own examination of our company, the terms of the oÅering and our Ñnancial information. You should consult your own professional advisors for an understanding of the diÅerences between ROC GAAP and US GAAP, and how these diÅerences might aÅect the Ñnancial information contained herein. Additionally, no attempt has been made to identify all disclosure, presentation or classiÑcation diÅerences that would aÅect the manner in which events and transactions are presented in the Ñnancial statements or notes thereto. Further, no attempt has been made to identify future diÅerences between ROC GAAP and US GAAP as a result of prescribed changes in accounting standards. Regulatory bodies that promulgate ROC GAAP and US GAAP have signiÑcant projects ongoing that could aÅect future comparisons such as this one. Finally, no attempt has been made to identify all future diÅerences between ROC GAAP and US GAAP that may aÅect the Company's Ñnancial information as a result of transactions or events that may occur in the future.

Convertible Debt Securities with BeneÑcial Conversion Feature

Under ROC GAAP, there are no speciÑc regulations with respect to the accounting for beneÑcial conversion features embedded in convertible securities.

Under US GAAP, in accordance with EITF 00-27 ""Application of EITF98-5 Accounting for Convertible Securities with BeneÑcial Conversion Features'' (EITF 00-27), convertible securities with beneÑcial conversion features or contingently adjustable conversion ratios are recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The amount to be allocated should be calculated at the commitment date as the diÅerence between the conversion price and the fair value of the common stock into which the security is convertible, multiplied by the number of shares into which the security is convertible. The resulting discount on the convertible security is accreted, as interest expense, from the date the beneÑcial conversion feature is Ñxed to the stated redemption date.

ReclassiÑcation of Capital Account to Accumulated DeÑcit

Under ROC GAAP, a company may reclassify its additional paid-in capital account to oÅset its accumulated deÑcit.

Under US GAAP, in accordance with SAB Topic 5S ""Quasi-Reorganization'', a deÑcit reclassiÑcation of any nature is considered to be a quasi-reorganization. As such, a company may not reclassify or eliminate a deÑcit in retained earnings unless all requisite conditions for a quasi-reorganization are satisÑed. The Company's reclassiÑcation of additional paid-in capital account to oÅset its accumulated deÑcit does not qualify as a quasi reorganization in accordance with US GAAP.

Impairment of long-lived assets

ROC GAAP has no speciÑc standards that address impairment of long-lived assets held and used by an entity. Normally such assets are carried at cost less accumulated depreciation.

Under US GAAP, SFAS No. 144, ""Accounting for the Impairment or Disposal of Long-Lived Assets'' (SFAS 144) requires that long-lived assets, and certain identiÑable intangibles with Ñnite lives, held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A three-

156

step approach is used to evaluate a long-lived asset (group) to be held and used for impairment: (1) Consider whether indicators of impairment are present. (2) If indicators of impairment are present, determine whether the sum of the estimated undiscounted future cash Öows attributable to the long-lived asset (group) in question is less than its carrying amount and (3) If less, recognize an impairment loss based on the excess of the carrying amount of the long-lived asset (group) over its fair value. Once an impairment is recognized, the reduced carrying amount of the asset is accounted for as its new cost. For a depreciable asset, the new cost is depreciated over the asset's remaining useful life. Restoration of previously recognized impairment losses is prohibited.

Debt Securities

ROC GAAP provides no guidance for the accounting of the derivatives embedded in debt securities regardless whether the securities are assets or liabilities.

Under US GAAP, if debt securities (assets or liabilities) contain terms that are not considered to be clearly and closely related to the underlying security, the instrument is considered to contain an embedded derivative that must be bifurcated and must be accounted for separately according to FAS 133. The host instrument is accounted for consistent with the accounting for similar instruments according to US GAAP. The bifurcated derivation instrument is accounted for in accordance with FAS 133.

Employee Bonuses

Under ROC GAAP, employee bonuses and 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 Company's articles of incorporation provide that remuneration to directors and supervisors may not be settled through the issuance of common shares.

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 Ñnancial statements, the compensation expense is initially accrued in accordance with the method of payment provided by the Company's articles of incorporation in the period to which it relates. The diÅerence 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.

Employee Retirement BeneÑts

As permitted under ROC GAAP, prior to 1996, the pension expense recorded by the Company in connection with its deÑned beneÑt 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 Ñrst adopted this policy at the beginning of 1993 since it was not feasible to apply the actuarial basis at an earlier date.

157

Prepaid Wafer Credits

ROC GAAP requires companies to evaluate the impairment of its prepaid assets that can be used for future production purchases from one of its costs method investees; however ROC GAAP provides limited guidance for such analysis.

The more prescriptive nature of US GAAP can result in impairment charges being recorded in diÅerent periods and/or in more signiÑcant amounts than those recorded under ROC GAAP. Under US GAAP, impairment analysis requires the consideration of factors such as the Ñnancial stability of the investee, the product needs of the Company and the length of time before which the prepayment account can be used.

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 valuation allowances.

Marketable securities and non-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 losses 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. Nonmarketable securities are carried at cost. An other-than-temporary decline in value of marketable and non-marketable equity securities is not required to be recognized under ROC GAAP due to the less prescriptive nature of ROC GAAP's principles. The Company's policy is to account for all unrealized losses on long-term investments 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 classiÑed as trading securities, available-forsale securities or held-to-maturity securities. The Company did not have any investments classiÑed 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. Non-marketable securities are carried at cost. Under US GAAP if an other-than-temporary decline in value of a marketable or non-marketable security exists, the unrealized loss should be charged to the statement of operations.

Derivative Financial Instruments

Under ROC GAAP, the Company is required to disclose certain information in the Ñnancial statements regarding derivative Ñnancial instruments but there are no speciÑc accounting requirements for derivative Ñnancial instruments (except for foreign currency forward exchange contracts for which the accounting is documented in note 2 to the Ñnancial statements). In addition, ROC GAAP has no speciÑc regulations with respect to the accounting for derivative Ñnancial instruments indexed to the Company's own stock.

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

158

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 Ñnancial 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.

(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 Ñnancial 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 Ñnancial reporting purposes and accordingly have been carried in the Ñnancial 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.

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 oÅset against the change in fair value of assets, liabilities, or Ñrm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineÅective portion of a derivatives' change in fair value will be immediately recognized in earnings. The company adopted FASB 133 on January 1, 2001. The Company has issued certain convertible debt instruments that contain embedded derivatives because the currency in which the instrument is denominated is diÅerent from the currency in which the underlying stock is denominated. The Company has bifurcated such conversion options in accordance with FAS 133 and accounted for the bifurcated derivative instrument in accordance with FAS 133 and the host instrument in accordance with the applicable standards.

Under US GAAP, the Company does not have any derivative contracts that qualify for hedge accounting.

Stock Appreciation Rights

ROC GAAP has no speciÑc 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 Ñnancial 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 diÅerence between the strike price in the derivative contract and the employees' exercise price.

159

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 and FASB Interpretation 28 Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans (FIN 28). Under FIN 28, 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.

Employee Stock Options

ROC GAAP has no speciÑc accounting practice regarding stock options or the disclosure of stock options.

Under US GAAP, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, if the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for the Company. If the exercise price is lower than the market price at the grant date, under APB 25, the diÅerence is recognized as deferred compensation expense and amortized over the vesting period. APB25 also requires the evaluation of the original terms of a stock option and any changes subsequent to the grant date. Depending on the terms or changes to terms, compensation expense equal to the intrinsic value of the options may be recognized.

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. However, eÅective from January 1, 2002, purchases or sales of the Company's own shares are treated as treasury stock transactions and accounted for in a manner similar to US GAAP discussed below.

US GAAP requires that if the Company acquires shares of its own capital stock for purposes other than retirement, the cost of the acquired stock should be shown separately as a deduction from the total of capital stock, additional paid-in capital, and retained earnings, or accorded the accounting treatment appropriate for retired stock. ""Gains'' on sales of the repurchased stock not previously accounted for as constructively retired should be credited to additional paid-in capital; losses should be charged to additional paid-in capital to the extent that previous net ""gains'' from sales or retirements of the same class of stock are included therein, otherwise the losses are charged to retained earnings.

Gross ProÑt 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 proÑt. The government subsidies for research and development and the reversal of bad debt expense are included in the determination of operating income.

160

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 diÅerence between the investment cost for the portion of the investee acquired and the acquired net assets is charged to equity.

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 diÅerence between the investment cost for the portion of investee acquired and the acquired net assets is recorded as part of the investment. The diÅerence is assigned to individual assets and liabilities acquired on the basis of the assets' and liabilities' fair values. Any remaining diÅerence between the cost of the investment and net assets acquired is allocated to goodwill. Goodwill for equity method investments is not separable from the investment.

Tax on Undistributed Earnings

Under ROC GAAP, 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 shareholders resolve that its earnings shall be retained.

Under US GAAP, the Company should measure its income tax expense, including the tax eÅects of temporary diÅerences, using the tax rate that includes the tax on undistributed earnings.

Income Tax

Under ROC GAAP, a valuation allowance determined is less stringent as compared to U.S. GAAP.

Under U.S. GAAP, if a company has experienced cumulative losses in recent years, it is not generally able to consider subjective projections of future operating proÑts for the purpose of determining the valuation allowance for deferred income tax assets. A valuation allowance is provided on deferred tax assets to the extent that it is not ""more likely than not'' that such deferred tax assets will be realized.

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.

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 aÅect the current period's earnings per share only.

We have not quantiÑed the eÅects of the aforementioned diÅerences between ROC GAAP and U.S. GAAP. Accordingly, there can be no assurance on the eÅects on balance sheet, net income and shareholders' equity reported in accordance with ROC GAAP if determined in accordance with U.S. GAAP.

161

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements of Macronix International Co., Ltd. and its
Subsidiaries
Independent Auditors' Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-2
Consolidated Balance Sheets as of December 31, 2000, 2001 and 2002 and June 30,
2002 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 2002 and for the six-month periods ended June 30, 2002 and 2003 ÏÏ	F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 2002 and for the six-month periods ended June 30, 2002 and 2003 ÏÏ	F-6
Consolidated Statements of Shareholders' Equity for each of the three years in the
period ended December 31, 2002 and for the six-month periods ended June 30,
2002 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-8
Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-10

F-1

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, 2001 and 2002 and June 30, 2002 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash Öows for each of the three years in the period ended December 31, 2002 and for the six-month periods ended June 30, 2002 and 2003. These Ñnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these Ñnancial 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 Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the consolidated Ñnancial position of Macronix International Co., Ltd. at December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, and the consolidated results of its operations and its cash Öows for each of the three years in the period ended December 31, 2002 and for the six-month periods ended June 30, 2002 and 2003, 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, 2003 Except for Note 12, as to which the date is January 9, 2004

F-2

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003 (Amounts in thousands except share and per share data)

ASSETS Notes Current assets Cash and cash equivalents ÏÏÏÏ 3,12 Restricted investments-current 12 Short-term investmentsÏÏÏÏÏÏÏ 4 Notes and accounts receivable (net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 Receivables from related partiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 Other Ñnancial assetsÏÏÏÏÏÏÏÏÏ 6 Inventories (net) ÏÏÏÏÏÏÏÏÏÏÏÏ 7 Deferred income taxes (net) 16 Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current assets ÏÏÏÏÏÏÏÏ Property, plant and equipment 12,17,18 Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BuildingsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Production equipment ÏÏÏÏÏÏÏÏ Research and development equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OÇce furniture and equipment Leased equipmentÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress and prepaid equipment ÏÏÏÏÏÏÏÏÏ Total property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes (net) 16 Intangible assets (net) ÏÏÏÏÏÏÏ Long-term equity investments 8 Restricted investments-non- currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 12 Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 12,560,954 7,394,361 213,648 34,000 3,351,572 96,838 1,243,907 1,185,324 34,248 2,299,149 2,619,259 75,680 20,076 90,934 2,627 Ì Ì Ì 7,298,502 5,140,820 148,536 761,889 495,112 14,306 608,621 647,807 18,717 530,797 375,425 10,847 25,357,895 21,300,614 615,447 1,359,287 1,354,931 39,149 13,362,736 18,315,334 529,192 41,038,791 42,937,505 1,240,610 1,216,401 1,518,588 43,877 904,795 940,814 27,183 966,347 1,750,658 50,582 7,103,107 7,534,791 217,706 65,951,464 74,352,621 2,148,299 (26,389,547) (34,323,303) (991,717) 39,561,917 40,029,318 1,156,582 1,193,526 1,451,245 41,931 854,535 1,051,228 30,374 1,502,672 1,827,089 52,791 1,721,801 260,625 7,530 2,116,436 2,199,942 63,564 72,308,782 68,120,061 1,968,219	As of December 31, 2001 2002 NT$ NT$ US$ 12,560,954 7,394,361 213,648 34,000 3,351,572 96,838 1,243,907 1,185,324 34,248 2,299,149 2,619,259 75,680 20,076 90,934 2,627 Ì Ì Ì 7,298,502 5,140,820 148,536 761,889 495,112 14,306 608,621 647,807 18,717 530,797 375,425 10,847 25,357,895 21,300,614 615,447 1,359,287 1,354,931 39,149 13,362,736 18,315,334 529,192 41,038,791 42,937,505 1,240,610 1,216,401 1,518,588 43,877 904,795 940,814 27,183 966,347 1,750,658 50,582 7,103,107 7,534,791 217,706 65,951,464 74,352,621 2,148,299 (26,389,547) (34,323,303) (991,717) 39,561,917 40,029,318 1,156,582 1,193,526 1,451,245 41,931 854,535 1,051,228 30,374 1,502,672 1,827,089 52,791 1,721,801 260,625 7,530 2,116,436 2,199,942 63,564 72,308,782 68,120,061 1,968,219	As of June 30, 2003 2002 2003 NT$ NT$ US$ 11,646,711 6,142,823 177,487 2,431,557 678,391 19,601 1,208,338 1,148,370 33,180 2,510,430 2,725,019 78,735 53,993 64,893 1,875 Ì 173,025 4,999 4,932,097 4,379,168 126,529 1,023,410 583,701 16,865 405,084 384,161 11,100 616,520 295,205 8,530 24,828,140 16,574,756 478,901 1,328,359 1,351,773 39,057 13,904,545 23,278,541 672,596 41,796,597 44,541,076 1,286,942 1,305,498 1,537,656 44,428 926,388 1,023,975 29,586 1,775,604 1,750,658 50,583 9,563,110 1,683,104 48,631 70,600,101 75,166,783 2,171,823 (30,343,808) (38,786,093) (1,120,662) 40,256,293 36,380,690 1,051,161 933,368 1,309,155 37,825 908,090 1,054,212 30,460 1,762,232 2,178,872 62,955 251,475 259,537 7,499 2,097,251 2,204,380 63,692 71,036,849 59,961,602 1,732,493	As of June 30, 2003 2002 2003 NT$ NT$ US$ 11,646,711 6,142,823 177,487 2,431,557 678,391 19,601 1,208,338 1,148,370 33,180 2,510,430 2,725,019 78,735 53,993 64,893 1,875 Ì 173,025 4,999 4,932,097 4,379,168 126,529 1,023,410 583,701 16,865 405,084 384,161 11,100 616,520 295,205 8,530 24,828,140 16,574,756 478,901 1,328,359 1,351,773 39,057 13,904,545 23,278,541 672,596 41,796,597 44,541,076 1,286,942 1,305,498 1,537,656 44,428 926,388 1,023,975 29,586 1,775,604 1,750,658 50,583 9,563,110 1,683,104 48,631 70,600,101 75,166,783 2,171,823 (30,343,808) (38,786,093) (1,120,662) 40,256,293 36,380,690 1,051,161 933,368 1,309,155 37,825 908,090 1,054,212 30,460 1,762,232 2,178,872 62,955 251,475 259,537 7,499 2,097,251 2,204,380 63,692 71,036,849 59,961,602 1,732,493
	2000 NT$ 15,561,894 216,000 310,945 5,334,341 Ì Ì 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 0 1,711,205 72,450,531	2001 NT$ 12,560,954 34,000 1,243,907 2,299,149 20,076 Ì 7,298,502 761,889 608,621 530,797 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 72,308,782		2002 NT$ 11,646,711 2,431,557 1,208,338 2,510,430 53,993 Ì 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
			NT$ 7,394,361 3,351,572 1,185,324 2,619,259 90,934 Ì 5,140,820 495,112 647,807 375,425 21,300,614 1,354,931 18,315,334 42,937,505 1,518,588 940,814 1,750,658 7,534,791 74,352,621 (34,323,303) 40,029,318 1,451,245 1,051,228 1,827,089 260,625 2,199,942 68,120,061		NT$ 6,142,823 678,391 1,148,370 2,725,019 64,893 173,025 4,379,168 583,701 384,161 295,205 16,574,756 1,351,773 23,278,541 44,541,076 1,537,656 1,023,975 1,750,658 1,683,104 75,166,783 (38,786,093) 36,380,690 1,309,155 1,054,212 2,178,872 259,537 2,204,380 59,961,602

See accompanying notes to consolidated Ñnancial statements.

F-3

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED BALANCE SHEETS Ì (Continued) December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003 (Amounts in thousands except share and per share data)

LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of capital lease obligations Current portion of long-term debtsÏÏÏÏÏÏÏÏÏ Notes and accounts payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payables to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payables to equipment suppliersÏÏÏÏÏÏÏÏÏÏÏ Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilities Capital lease obligations, less current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debts, less current portion ÏÏÏÏÏÏ Accrued pension costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and contingenciesÏÏÏÏÏÏÏÏÏÏ Shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common shares NT$10 par value, authorized 3,500,000,000, 4,500,000,000, 5,350,000,000, 5,350,000,000 and 6,550,000,000 shares as of December 31, 2000, 2001 and 2002 and June 30, 30, 2002 and 2003, and issued 2,474,409,144, 3,359,342,613, 3,691,276,875, 3,359,342,613, 3,779,349,500 shares as of December 31, 2000, and 2001 and 2002 and June 30, 2002 and 2003, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Stock dividends to be distributed ÏÏÏÏÏÏÏÏÏÏ Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Legal reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earnings (accumulated deÑcits) ÏÏ Unrealized losses on long-term investments Cumulative translation adjustments ÏÏÏÏÏÏÏÏ Treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and shareholders' equityÏÏÏ	Notes 9 10 11 12 17 16 11 12 13 18 14 15		As of December 31, 2001 2002 NT$ NT$ US$ 733,950 2,159,151 62,385 Ì Ì Ì 322,073 625,989 18,087 2,877,581 8,721,428 251,992 1,095,469 1,385,826 40,041 133,177 156,809 4,531 1,010,363 1,551,915 44,840 2,958,637 3,016,253 87,150 403,963 304,444 8,796 96,905 434,991 12,568 9,632,118 18,356,806 530,390 1,615,738 980,525 28,331 17,892,680 18,358,201 530,431 24,533 105,194 3,039 88 104,253 3,012 Ì 788 23 29,165,157 37,905,767 1,095,226 33,593,426 36,912,769 1,066,535 5,949,964 2,630,621 76,008 Ì Ì Ì 16,360 356 10 1,707,053 1,708,689 49,370 1,425 378,657 10,941 2,249,996 (9,469,175) (273,597) (647,618) (979,081) (28,289) 273,019 219,894 6,353 Ì (1,188,436) (34,338) 43,143,625 30,214,294 872,993 72,308,782 68,120,061 1,968,219	As of December 31, 2001 2002 NT$ NT$ US$ 733,950 2,159,151 62,385 Ì Ì Ì 322,073 625,989 18,087 2,877,581 8,721,428 251,992 1,095,469 1,385,826 40,041 133,177 156,809 4,531 1,010,363 1,551,915 44,840 2,958,637 3,016,253 87,150 403,963 304,444 8,796 96,905 434,991 12,568 9,632,118 18,356,806 530,390 1,615,738 980,525 28,331 17,892,680 18,358,201 530,431 24,533 105,194 3,039 88 104,253 3,012 Ì 788 23 29,165,157 37,905,767 1,095,226 33,593,426 36,912,769 1,066,535 5,949,964 2,630,621 76,008 Ì Ì Ì 16,360 356 10 1,707,053 1,708,689 49,370 1,425 378,657 10,941 2,249,996 (9,469,175) (273,597) (647,618) (979,081) (28,289) 273,019 219,894 6,353 Ì (1,188,436) (34,338) 43,143,625 30,214,294 872,993 72,308,782 68,120,061 1,968,219	As of June 30, 2003 2002 2003 NT$ NT$ US$ 2,094,848 2,419,052 69,895 1,680,691 297,527 8,596 607,442 634,218 18,325 5,396,407 4,763,335 137,629 1,453,528 1,400,516 40,466 115,512 113,562 3,281 1,072,779 734,692 21,228 2,922,558 3,247,163 93,821 363,173 267,824 7,738 225,038 39,089 1,129 15,931,976 13,916,978 402,108 1,250,666 656,594 18,971 19,056,023 19,945,903 576,305 66,994 148,205 4,282 69,028 118,214 3,416 Ì 10,813 312 36,374,687 34,796,707 1,005,394 33,593,426 37,793,495 1,091,982 2,624,586 7,248 209 3,319,343 Ì 6,035 1,263 37 1,708,689 Ì Ì 378,657 Ì Ì (5,296,868) (10,960,301) (316,680) (654,863) (703,884) (20,338) 171,593 215,510 6,227 (1,188,436) (1,188,436) (34,338) 34,662,162 25,164,895 727,099 71,036,849 59,961,602 1,732,493	As of June 30, 2003 2002 2003 NT$ NT$ US$ 2,094,848 2,419,052 69,895 1,680,691 297,527 8,596 607,442 634,218 18,325 5,396,407 4,763,335 137,629 1,453,528 1,400,516 40,466 115,512 113,562 3,281 1,072,779 734,692 21,228 2,922,558 3,247,163 93,821 363,173 267,824 7,738 225,038 39,089 1,129 15,931,976 13,916,978 402,108 1,250,666 656,594 18,971 19,056,023 19,945,903 576,305 66,994 148,205 4,282 69,028 118,214 3,416 Ì 10,813 312 36,374,687 34,796,707 1,005,394 33,593,426 37,793,495 1,091,982 2,624,586 7,248 209 3,319,343 Ì 6,035 1,263 37 1,708,689 Ì Ì 378,657 Ì Ì (5,296,868) (10,960,301) (316,680) (654,863) (703,884) (20,338) 171,593 215,510 6,227 (1,188,436) (1,188,436) (34,338) 34,662,162 25,164,895 727,099 71,036,849 59,961,602 1,732,493
		2000 NT$ 1,586,502 Ì 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 Ì 27,877,204 24,744,091 8,424,373 Ì 16,360 647,015 Ì 10,743,013 (107,300) 105,875 Ì 44,573,427 72,450,631	2001 NT$ 733,950 Ì 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 Ì 29,165,157 33,593,426 5,949,964 Ì 16,360 1,707,053 1,425 2,249,996 (647,618) 273,019 Ì 43,143,625 72,308,782		2002 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 Ì 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
				NT$ 2,159,151 Ì 625,989 8,721,428 1,385,826 156,809 1,551,915 3,016,253 304,444 434,991 18,356,806 980,525 18,358,201 105,194 104,253 788 37,905,767 36,912,769 2,630,621 Ì 356 1,708,689 378,657 (9,469,175) (979,081) 219,894 (1,188,436) 30,214,294 68,120,061		NT$ 2,419,052 297,527 634,218 4,763,335 1,400,516 113,562 734,692 3,247,163 267,824 39,089 13,916,978 656,594 19,945,903 148,205 118,214 10,813 34,796,707 37,793,495 7,248 Ì 1,263 Ì Ì (10,960,301) (703,884) 215,510 (1,188,436) 25,164,895 59,961,602

See accompanying notes to consolidated Ñnancial statements.

F-4

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2000, 2001 and 2002 and the six-month periods ended June 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Notes Sales revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Sales returns ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sales discountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross proÑt (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Unrealized proÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gross proÑt (loss) ÏÏÏÏÏÏÏÏÏÏÏ Operating expenses Selling expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and development expenses ÏÏ Total operating expenses ÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating income Research and development subsidies ÏÏ Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposal of long-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gain on short-term investments ÏÏÏ Reversal of inventory loss provision ÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating expenses Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory loss provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss from equity investmentÏÏÏÏÏÏÏ Net investment loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) before taxes and minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16 Income (loss) before minority interest Minority interest lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Earnings Per Common Share: Net income (loss) per common share Ì basicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income (loss) per common share Ì dilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro-forma data: assuming that the Company's shares owned by subsidiaries were not treated as treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2 Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss per common share Ì basic ÏÏ	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 33,810,791 22,036,281 16,647,525 481,003 (273,154) (208,920) (42,650) (1,232) (44,529) (80,131) (112,411) (3,248) 33,493,108 21,747,230 16,492,464 476,523 (15,493,667) (11,674,103) (17,104,860) (494,217) 17,999,441 10,073,127 (612,396) (17,694) Ì Ì (2,895) (84) 17,999,441 10,073,127 (615,291) (17,778) (940,347) (611,406) (567,660) (16,401) (1,772,441) (2,120,718) (1,838,025) (53,107) (3,143,896) (3,825,049) (3,805,742) (109,961) (5,856,684) (6,557,173) (6,211,427) (179,469) 12,142,757 3,515,954 (6,826,718) (197,247) 30,914 1,389 2,286 66 541,387 495,611 216,937 6,268 293,480 453,965 Ì Ì 15,543 21,284 252 7 Ì Ì 27,791 803 Ì 75,582 Ì Ì Ì Ì Ì Ì 63,695 308,108 218,622 6,317 945,019 1,355,939 465,888 13,461 (1,265,902) (1,173,312) (1,237,902) (35,767) Ì Ì (321,266) (9,283) (80,775) (2,586,505) (2,929,284) (84,637) (5,935) (7,262) Ì Ì (601,187) (395,088) (141,077) (4,076) (15,941) (384,438) (273,865) (7,913) (107,115) (248,273) (72,897) (2,106) (2,076,855) (4,794,878) (4,976,291) (143,782) 11,010,921 77,015 (11,337,121) (327,568) (398,097) (943,495) (19,898) (574) 10,612,824 (866,480) (11,357,019) (328,142) Ì Ì 356 10 10,612,824 (866,480) (11,356,663) (328,132) NT$2.93 (NT$0.23) (NT$3.10) (US$0.09) NT$2.91 (NT$0.23) (NT$3.10) (US$0.09) (11,426,697) (330,156) (NT$3.12) (US$0.09)	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 33,810,791 22,036,281 16,647,525 481,003 (273,154) (208,920) (42,650) (1,232) (44,529) (80,131) (112,411) (3,248) 33,493,108 21,747,230 16,492,464 476,523 (15,493,667) (11,674,103) (17,104,860) (494,217) 17,999,441 10,073,127 (612,396) (17,694) Ì Ì (2,895) (84) 17,999,441 10,073,127 (615,291) (17,778) (940,347) (611,406) (567,660) (16,401) (1,772,441) (2,120,718) (1,838,025) (53,107) (3,143,896) (3,825,049) (3,805,742) (109,961) (5,856,684) (6,557,173) (6,211,427) (179,469) 12,142,757 3,515,954 (6,826,718) (197,247) 30,914 1,389 2,286 66 541,387 495,611 216,937 6,268 293,480 453,965 Ì Ì 15,543 21,284 252 7 Ì Ì 27,791 803 Ì 75,582 Ì Ì Ì Ì Ì Ì 63,695 308,108 218,622 6,317 945,019 1,355,939 465,888 13,461 (1,265,902) (1,173,312) (1,237,902) (35,767) Ì Ì (321,266) (9,283) (80,775) (2,586,505) (2,929,284) (84,637) (5,935) (7,262) Ì Ì (601,187) (395,088) (141,077) (4,076) (15,941) (384,438) (273,865) (7,913) (107,115) (248,273) (72,897) (2,106) (2,076,855) (4,794,878) (4,976,291) (143,782) 11,010,921 77,015 (11,337,121) (327,568) (398,097) (943,495) (19,898) (574) 10,612,824 (866,480) (11,357,019) (328,142) Ì Ì 356 10 10,612,824 (866,480) (11,356,663) (328,132) NT$2.93 (NT$0.23) (NT$3.10) (US$0.09) NT$2.91 (NT$0.23) (NT$3.10) (US$0.09) (11,426,697) (330,156) (NT$3.12) (US$0.09)	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 33,810,791 22,036,281 16,647,525 481,003 (273,154) (208,920) (42,650) (1,232) (44,529) (80,131) (112,411) (3,248) 33,493,108 21,747,230 16,492,464 476,523 (15,493,667) (11,674,103) (17,104,860) (494,217) 17,999,441 10,073,127 (612,396) (17,694) Ì Ì (2,895) (84) 17,999,441 10,073,127 (615,291) (17,778) (940,347) (611,406) (567,660) (16,401) (1,772,441) (2,120,718) (1,838,025) (53,107) (3,143,896) (3,825,049) (3,805,742) (109,961) (5,856,684) (6,557,173) (6,211,427) (179,469) 12,142,757 3,515,954 (6,826,718) (197,247) 30,914 1,389 2,286 66 541,387 495,611 216,937 6,268 293,480 453,965 Ì Ì 15,543 21,284 252 7 Ì Ì 27,791 803 Ì 75,582 Ì Ì Ì Ì Ì Ì 63,695 308,108 218,622 6,317 945,019 1,355,939 465,888 13,461 (1,265,902) (1,173,312) (1,237,902) (35,767) Ì Ì (321,266) (9,283) (80,775) (2,586,505) (2,929,284) (84,637) (5,935) (7,262) Ì Ì (601,187) (395,088) (141,077) (4,076) (15,941) (384,438) (273,865) (7,913) (107,115) (248,273) (72,897) (2,106) (2,076,855) (4,794,878) (4,976,291) (143,782) 11,010,921 77,015 (11,337,121) (327,568) (398,097) (943,495) (19,898) (574) 10,612,824 (866,480) (11,357,019) (328,142) Ì Ì 356 10 10,612,824 (866,480) (11,356,663) (328,132) NT$2.93 (NT$0.23) (NT$3.10) (US$0.09) NT$2.91 (NT$0.23) (NT$3.10) (US$0.09) (11,426,697) (330,156) (NT$3.12) (US$0.09)	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ 7,032,296 7,219,516 208,596 (19,524) (42,710) (1,234) (63,916) (22,325) (645) 6,948,856 7,154,481 206,717 (7,278,701) (9,834,195) (284,142) (329,845) (2,679,714) (77,425) (5,928) Ì Ì (335,773) (2,679,714) (77,425) (260,445) (273,372) (7,899) (852,182) (838,927) (24,239) (1,855,443) (1,428,342) (41,270) (2,968,070) (2,540,641) (73,408) (3,303,843) (5,220,355) (150,833) Ì 3,125 90 122,672 49,320 1,425 48,244 66,284 1,915 3,083 Ì Ì Ì 2,275 66 Ì Ì Ì Ì 297,894 8,607 127,118 32,451 938 301,117 451,349 13,041 (581,143) (552,987) (15,978) Ì Ì Ì (3,376,071) Ì Ì Ì (366) (11) (106,947) (46,375) (1,340) (78,199) (764,497) (22,088) (27,638) (54,890) (1,586) (4,169,998) (1,419,115) (41,003) (7,172,724) (6,188,121) (178,795) (11,632) (23,304) (673) (7,184,356) (6,211,425) (179,468) Ì 2,332 67 (7,184,356) (6,209,093) (179,401) (NT$1.95) (NT$1.69) (US$0.05) (NT$1.95) (NT$1.69) (US$0.05) (7,206,751) (6,230,975) (180,034) (NT$1.96) (NT$1.69) (US$0.05)	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ 7,032,296 7,219,516 208,596 (19,524) (42,710) (1,234) (63,916) (22,325) (645) 6,948,856 7,154,481 206,717 (7,278,701) (9,834,195) (284,142) (329,845) (2,679,714) (77,425) (5,928) Ì Ì (335,773) (2,679,714) (77,425) (260,445) (273,372) (7,899) (852,182) (838,927) (24,239) (1,855,443) (1,428,342) (41,270) (2,968,070) (2,540,641) (73,408) (3,303,843) (5,220,355) (150,833) Ì 3,125 90 122,672 49,320 1,425 48,244 66,284 1,915 3,083 Ì Ì Ì 2,275 66 Ì Ì Ì Ì 297,894 8,607 127,118 32,451 938 301,117 451,349 13,041 (581,143) (552,987) (15,978) Ì Ì Ì (3,376,071) Ì Ì Ì (366) (11) (106,947) (46,375) (1,340) (78,199) (764,497) (22,088) (27,638) (54,890) (1,586) (4,169,998) (1,419,115) (41,003) (7,172,724) (6,188,121) (178,795) (11,632) (23,304) (673) (7,184,356) (6,211,425) (179,468) Ì 2,332 67 (7,184,356) (6,209,093) (179,401) (NT$1.95) (NT$1.69) (US$0.05) (NT$1.95) (NT$1.69) (US$0.05) (7,206,751) (6,230,975) (180,034) (NT$1.96) (NT$1.69) (US$0.05)
	2000 NT$ 33,810,791 (273,154) (44,529) 33,493,108 (15,493,667) 17,999,441 Ì 17,999,441 (940,347) (1,772,441) (3,143,896) (5,856,684) 12,142,757 30,914 541,387 293,480 15,543 Ì Ì Ì 63,695 945,019 (1,265,902) Ì (80,775) (5,935) (601,187) (15,941) (107,115) (2,076,855) 11,010,921 (398,097) 10,612,824 Ì 10,612,824 NT$2.93 NT$2.91	2001 NT$ 22,036,281 (208,920) (80,131) 21,747,230 (11,674,103) 10,073,127 Ì 10,073,127 (611,406) (2,120,718) (3,825,049) (6,557,173) 3,515,954 1,389 495,611 453,965 21,284 Ì 75,582 Ì 308,108 1,355,939 (1,173,312) Ì (2,586,505) (7,262) (395,088) (384,438) (248,273) (4,794,878) 77,015 (943,495) (866,480) Ì (866,480) (NT$0.23) (NT$0.23)		2002 NT$ 7,032,296 (19,524) (63,916) 6,948,856 (7,278,701) (329,845) (5,928) (335,773) (260,445) (852,182) (1,855,443) (2,968,070) (3,303,843) Ì 122,672 48,244 3,083 Ì Ì Ì 127,118 301,117 (581,143) Ì (3,376,071) Ì (106,947) (78,199) (27,638) (4,169,998) (7,172,724) (11,632) (7,184,356) Ì (7,184,356) (NT$1.95) (NT$1.95) (7,206,751) (NT$1.96)
			NT$ 16,647,525 (42,650) (112,411) 16,492,464 (17,104,860) (612,396) (2,895) (615,291) (567,660) (1,838,025) (3,805,742) (6,211,427) (6,826,718) 2,286 216,937 Ì 252 27,791 Ì Ì 218,622 465,888 (1,237,902) (321,266) (2,929,284) Ì (141,077) (273,865) (72,897) (4,976,291) (11,337,121) (19,898) (11,357,019) 356 (11,356,663) (NT$3.10) (NT$3.10) (11,426,697) (NT$3.12)		NT$ 7,219,516 (42,710) (22,325) 7,154,481 (9,834,195) (2,679,714) Ì (2,679,714) (273,372) (838,927) (1,428,342) (2,540,641) (5,220,355) 3,125 49,320 66,284 Ì 2,275 Ì 297,894 32,451 451,349 (552,987) Ì Ì (366) (46,375) (764,497) (54,890) (1,419,115) (6,188,121) (23,304) (6,211,425) 2,332 (6,209,093) (NT$1.69) (NT$1.69) (6,230,975) (NT$1.69)

See accompanying notes to consolidated Ñnancial statements.

F-5

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 2001 and 2002 and the six-month periods ended June 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Cash Öows from operating activities: Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposal of long-term investments Net loss (net gain) on short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Allowance (reversal of allowance) for bad debtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory provision (reversal) ÏÏÏÏÏÏÏÏÏÏÏÏ Net loss from equity investmentÏÏÏÏÏÏÏÏÏÏÏ Write oÅ on long term investmentsÏÏÏÏÏÏÏÏ Loss from charge on long-term investee ÏÏÏ Net gain (loss) on disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net changes in operating assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes and accounts receivable ÏÏÏÏÏÏÏÏÏÏ InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes and accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏ Payables to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued pension cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activities ÏÏÏÏ Cash Öows from investing activities: Decrease (increase) in restricted investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposal of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments for purchase of marketable securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions to other Ñnancial assetsÏÏÏÏÏÏÏÏÏ Additions to long-term equity investments Proceeds from disposals of long-term equity investments (non-marketable securities) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments for purchase of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposals of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions to intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposals of intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Additions) deductions to other liabilities Ì refundable deposits ÏÏÏÏÏÏÏÏÏ Net cash used in investing activities ÏÏÏÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 10,612,824 (866,480) (11,356,663) (328,132) 5,656,781 7,443,341 8,107,296 234,247 391,419 562,415 634,805 18,341 (126,113) 849,259 9,058 262 Ì Ì (27,791) (803) (77,059) (6,446) 4,631 134 91,048 9,431 14,918 431 80,775 2,586,505 2,929,284 84,637 601,187 395,088 141,077 4,076 Ì 384,438 Ì Ì 93,000 Ì Ì Ì (9,608) (14,022) (252) (7) Ì Ì Ì Ì (2,196,738) 3,005,685 (405,886) (11,727) (1,712,693) (4,597,771) (767,482) (22,175) (64,995) 130,454 156,736 4,528 (94,385) (163,946) (44,670) (1,291) 377,003 (555,561) 290,357 8,389 21,135 (172,956) 23,632 683 1,814,958 335,752 57,616 1,665 432,252 (294,655) (99,519) (2,875) 229,798 (196,083) 338,086 9,768 492 (404) Ì Ì 1,772 3,265 80,661 2,331 16,122,853 8,837,309 85,894 2,482 774,375 182,000 (1,856,396) (53,638) 3,305,855 9,164,765 7,661,859 221,377 (3,417,022) (10,091,281) (7,691,078) (222,221) Ì Ì Ì Ì (754,784) (1,492,004) (762,940) (22,044) 12,500 3,038 Ì Ì (11,948,143) (9,432,281) (8,433,728) (243,679) 177,446 92,658 6,023 174 (125,105) (405,231) (83,506) (2,413) (549,269) (635,249) (436,686) (12,617) Ì Ì Ì Ì (159,187) (1,721,801) 60 2 (12,683,334) (14,335,386) (11,596,392) (335,059)	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 10,612,824 (866,480) (11,356,663) (328,132) 5,656,781 7,443,341 8,107,296 234,247 391,419 562,415 634,805 18,341 (126,113) 849,259 9,058 262 Ì Ì (27,791) (803) (77,059) (6,446) 4,631 134 91,048 9,431 14,918 431 80,775 2,586,505 2,929,284 84,637 601,187 395,088 141,077 4,076 Ì 384,438 Ì Ì 93,000 Ì Ì Ì (9,608) (14,022) (252) (7) Ì Ì Ì Ì (2,196,738) 3,005,685 (405,886) (11,727) (1,712,693) (4,597,771) (767,482) (22,175) (64,995) 130,454 156,736 4,528 (94,385) (163,946) (44,670) (1,291) 377,003 (555,561) 290,357 8,389 21,135 (172,956) 23,632 683 1,814,958 335,752 57,616 1,665 432,252 (294,655) (99,519) (2,875) 229,798 (196,083) 338,086 9,768 492 (404) Ì Ì 1,772 3,265 80,661 2,331 16,122,853 8,837,309 85,894 2,482 774,375 182,000 (1,856,396) (53,638) 3,305,855 9,164,765 7,661,859 221,377 (3,417,022) (10,091,281) (7,691,078) (222,221) Ì Ì Ì Ì (754,784) (1,492,004) (762,940) (22,044) 12,500 3,038 Ì Ì (11,948,143) (9,432,281) (8,433,728) (243,679) 177,446 92,658 6,023 174 (125,105) (405,231) (83,506) (2,413) (549,269) (635,249) (436,686) (12,617) Ì Ì Ì Ì (159,187) (1,721,801) 60 2 (12,683,334) (14,335,386) (11,596,392) (335,059)	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 10,612,824 (866,480) (11,356,663) (328,132) 5,656,781 7,443,341 8,107,296 234,247 391,419 562,415 634,805 18,341 (126,113) 849,259 9,058 262 Ì Ì (27,791) (803) (77,059) (6,446) 4,631 134 91,048 9,431 14,918 431 80,775 2,586,505 2,929,284 84,637 601,187 395,088 141,077 4,076 Ì 384,438 Ì Ì 93,000 Ì Ì Ì (9,608) (14,022) (252) (7) Ì Ì Ì Ì (2,196,738) 3,005,685 (405,886) (11,727) (1,712,693) (4,597,771) (767,482) (22,175) (64,995) 130,454 156,736 4,528 (94,385) (163,946) (44,670) (1,291) 377,003 (555,561) 290,357 8,389 21,135 (172,956) 23,632 683 1,814,958 335,752 57,616 1,665 432,252 (294,655) (99,519) (2,875) 229,798 (196,083) 338,086 9,768 492 (404) Ì Ì 1,772 3,265 80,661 2,331 16,122,853 8,837,309 85,894 2,482 774,375 182,000 (1,856,396) (53,638) 3,305,855 9,164,765 7,661,859 221,377 (3,417,022) (10,091,281) (7,691,078) (222,221) Ì Ì Ì Ì (754,784) (1,492,004) (762,940) (22,044) 12,500 3,038 Ì Ì (11,948,143) (9,432,281) (8,433,728) (243,679) 177,446 92,658 6,023 174 (125,105) (405,231) (83,506) (2,413) (549,269) (635,249) (436,686) (12,617) Ì Ì Ì Ì (159,187) (1,721,801) 60 2 (12,683,334) (14,335,386) (11,596,392) (335,059)	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ (7,184,356) (6,209,093) (179,402) 3,986,850 4,486,560 129,632 307,630 309,143 8,932 (1,363) 53,501 1,546 Ì (2,275) (66) 1,167 7,975 230 6,528 52,842 1,527 3,376,071 (297,894) (8,607) 106,947 46,375 1,340 Ì Ì Ì Ì Ì Ì (3,083) 366 11 Ì Ì Ì (262,923) (133,369) (3,853) (1,012,493) 1,059,468 30,612 (43,811) 80,220 2,318 157,865 264,790 7,651 358,059 14,690 424 (17,665) (43,247) (1,250) (36,079) 230,910 6,672 (40,790) (36,620) (1,058) 128,133 (395,902) (11,439) 170 (20) (1) 42,461 43,011 1,243 (130,682) (468,569) (13,538) (927,231) 2,674,269 77,268 4,544,433 4,130,454 119,343 (4,682,399) (4,101,742) (118,513) Ì (173,025) (4,999) (391,312) (123,671) (3,573) 59,193 9,197 266 (4,801,673) (1,815,033) (52,443) 6,023 3,741 108 280,842 (4,438) (128) (213,178) (168,031) (4,855) Ì 430 12 (261,657) (5) Ì (6,386,959) 432,146 12,486	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ (7,184,356) (6,209,093) (179,402) 3,986,850 4,486,560 129,632 307,630 309,143 8,932 (1,363) 53,501 1,546 Ì (2,275) (66) 1,167 7,975 230 6,528 52,842 1,527 3,376,071 (297,894) (8,607) 106,947 46,375 1,340 Ì Ì Ì Ì Ì Ì (3,083) 366 11 Ì Ì Ì (262,923) (133,369) (3,853) (1,012,493) 1,059,468 30,612 (43,811) 80,220 2,318 157,865 264,790 7,651 358,059 14,690 424 (17,665) (43,247) (1,250) (36,079) 230,910 6,672 (40,790) (36,620) (1,058) 128,133 (395,902) (11,439) 170 (20) (1) 42,461 43,011 1,243 (130,682) (468,569) (13,538) (927,231) 2,674,269 77,268 4,544,433 4,130,454 119,343 (4,682,399) (4,101,742) (118,513) Ì (173,025) (4,999) (391,312) (123,671) (3,573) 59,193 9,197 266 (4,801,673) (1,815,033) (52,443) 6,023 3,741 108 280,842 (4,438) (128) (213,178) (168,031) (4,855) Ì 430 12 (261,657) (5) Ì (6,386,959) 432,146 12,486
	2000 NT$ 10,612,824 5,656,781 391,419 (126,113) Ì (77,059) 91,048 80,775 601,187 Ì 93,000 (9,608) Ì (2,196,738) (1,712,693) (64,995) (94,385) 377,003 21,135 1,814,958 432,252 229,798 492 1,772 16,122,853 774,375 3,305,855 (3,417,022) Ì (754,784) 12,500 (11,948,143) 177,446 (125,105) (549,269) Ì (159,187) (12,683,334)	2001 NT$ (866,480) 7,443,341 562,415 849,259 Ì (6,446) 9,431 2,586,505 395,088 384,438 Ì (14,022) Ì 3,005,685 (4,597,771) 130,454 (163,946) (555,561) (172,956) 335,752 (294,655) (196,083) (404) 3,265 8,837,309 182,000 9,164,765 (10,091,281) Ì (1,492,004) 3,038 (9,432,281) 92,658 (405,231) (635,249) Ì (1,721,801) (14,335,386)		2002 NT$ (7,184,356) 3,986,850 307,630 (1,363) Ì 1,167 6,528 3,376,071 106,947 Ì Ì (3,083) Ì (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) 4,544,433 (4,682,399) Ì (391,312) 59,193 (4,801,673) 6,023 280,842 (213,178) Ì (261,657) (6,386,959)
			NT$ (11,356,663) 8,107,296 634,805 9,058 (27,791) 4,631 14,918 2,929,284 141,077 Ì Ì (252) Ì (405,886) (767,482) 156,736 (44,670) 290,357 23,632 57,616 (99,519) 338,086 Ì 80,661 85,894 (1,856,396) 7,661,859 (7,691,078) Ì (762,940) Ì (8,433,728) 6,023 (83,506) (436,686) Ì 60 (11,596,392)		NT$ (6,209,093) 4,486,560 309,143 53,501 (2,275) 7,975 52,842 (297,894) 46,375 Ì Ì 366 Ì (133,369) 1,059,468 80,220 264,790 14,690 (43,247) 230,910 (36,620) (395,902) (20) 43,011 (468,569) 2,674,269 4,130,454 (4,101,742) (173,025) (123,671) 9,197 (1,815,033) 3,741 (4,438) (168,031) 430 (5) 432,146

See accompanying notes to consolidated Ñnancial statements.

F-6

MACRONIX INTERNATIONAL CO., LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS Ì (Continued) For the years ended December 31, 2000, 2001 and 2002 and the six-month periods ended June 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Cash Öows from Ñnancing activities: Proceeds from short-term debtsÏÏÏÏÏÏÏÏÏÏÏ Repayments of short-term debts ÏÏÏÏÏÏÏÏÏÏ Proceeds from short-term notesÏÏÏÏÏÏÏÏÏÏÏ Repayments of short-term notes ÏÏÏÏÏÏÏÏÏÏ Proceeds from long-term debts and capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of long-term debts and capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subscriptions receivedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Distribution of directors' and supervisors' remunerationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock repurchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by Ñnancing activities ÏÏÏ EÅect of exchange rate changes on cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at the beginning of the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at the end of the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Supplemental disclosures of cash Öow information: Interest paid during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax paid during the period ÏÏÏÏÏÏÏÏÏ Non-cash activities: Current portion of long-term debts and capital lease obligations transferred to current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments for purchases of property, plant and equipment: Payable to equipment suppliers (beginning balance)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add: Purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Payable to equipment suppliers (ending balance) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments for purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Convertible bonds converted to common stock and additional paid-in capital ÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 7,209,095 5,025,485 12,559,352 362,882 (6,832,979) (5,878,037) (11,134,151) (321,703) Ì 2,600,000 4,630,000 133,776 (248,409) (2,600,000) (4,630,000) (133,776) 6,170,000 7,424,432 12,288,062 355,044 (1,944,964) (4,048,757) (6,309,991) (182,317) 3,613,555 Ì Ì Ì Ì (190,148) Ì Ì Ì Ì (1,046,071) (30,225) Ì Ì 788 23 7,966,298 2,332,975 6,357,989 183,704 1,189 164,162 (14,084) (407) 11,407,006 (3,000,940) (5,166,593) (149,280) 4,154,888 15,561,894 12,560,954 362,928 15,561,894 12,560,954 7,394,361 213,648 1,225,134 1,157,978 1,176,317 33,988 55,795 568,013 152,985 4,420 3,263,543 3,199,654 9,347,417 270,079 1,510,163 1,364,891 1,010,363 29,193 11,802,871 9,077,753 8,975,280 259,326 (1,364,891) (1,010,363) (1,551,915) (44,840) 11,948,143 9,432,281 8,433,728 243,679 4,022,584 Ì Ì Ì	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 7,209,095 5,025,485 12,559,352 362,882 (6,832,979) (5,878,037) (11,134,151) (321,703) Ì 2,600,000 4,630,000 133,776 (248,409) (2,600,000) (4,630,000) (133,776) 6,170,000 7,424,432 12,288,062 355,044 (1,944,964) (4,048,757) (6,309,991) (182,317) 3,613,555 Ì Ì Ì Ì (190,148) Ì Ì Ì Ì (1,046,071) (30,225) Ì Ì 788 23 7,966,298 2,332,975 6,357,989 183,704 1,189 164,162 (14,084) (407) 11,407,006 (3,000,940) (5,166,593) (149,280) 4,154,888 15,561,894 12,560,954 362,928 15,561,894 12,560,954 7,394,361 213,648 1,225,134 1,157,978 1,176,317 33,988 55,795 568,013 152,985 4,420 3,263,543 3,199,654 9,347,417 270,079 1,510,163 1,364,891 1,010,363 29,193 11,802,871 9,077,753 8,975,280 259,326 (1,364,891) (1,010,363) (1,551,915) (44,840) 11,948,143 9,432,281 8,433,728 243,679 4,022,584 Ì Ì Ì	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 7,209,095 5,025,485 12,559,352 362,882 (6,832,979) (5,878,037) (11,134,151) (321,703) Ì 2,600,000 4,630,000 133,776 (248,409) (2,600,000) (4,630,000) (133,776) 6,170,000 7,424,432 12,288,062 355,044 (1,944,964) (4,048,757) (6,309,991) (182,317) 3,613,555 Ì Ì Ì Ì (190,148) Ì Ì Ì Ì (1,046,071) (30,225) Ì Ì 788 23 7,966,298 2,332,975 6,357,989 183,704 1,189 164,162 (14,084) (407) 11,407,006 (3,000,940) (5,166,593) (149,280) 4,154,888 15,561,894 12,560,954 362,928 15,561,894 12,560,954 7,394,361 213,648 1,225,134 1,157,978 1,176,317 33,988 55,795 568,013 152,985 4,420 3,263,543 3,199,654 9,347,417 270,079 1,510,163 1,364,891 1,010,363 29,193 11,802,871 9,077,753 8,975,280 259,326 (1,364,891) (1,010,363) (1,551,915) (44,840) 11,948,143 9,432,281 8,433,728 243,679 4,022,584 Ì Ì Ì	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ 1,771,670 1,773,644 51,247 (359,528) (1,507,639) (43,561) 1,680,691 297,527 8,597 Ì Ì Ì 5,651,927 3,552,559 102,645 (2,049,461) (5,342,880) (154,374) Ì Ì Ì Ì Ì Ì (1,046,071) Ì Ì Ì 10,025 290 5,649,228 (1,216,764) (35,156) (45,830) 1,649 48 (914,243) (1,251,538) (36,160) 12,560,954 7,394,361 213,648 11,646,711 6,142,823 177,488 541,166 544,783 15,741 54,611 3,507 101 6,003,849 5,397,553 155,954 1,010,363 1,551,915 44,840 4,864,089 997,810 28,831 (1,072,779) (734,692) (21,228) 4,801,673 1,815,033 52,443 Ì 887,974 31,215	For the six-month period ended June 30, 2002 2003 NT$ NT$ US$ 1,771,670 1,773,644 51,247 (359,528) (1,507,639) (43,561) 1,680,691 297,527 8,597 Ì Ì Ì 5,651,927 3,552,559 102,645 (2,049,461) (5,342,880) (154,374) Ì Ì Ì Ì Ì Ì (1,046,071) Ì Ì Ì 10,025 290 5,649,228 (1,216,764) (35,156) (45,830) 1,649 48 (914,243) (1,251,538) (36,160) 12,560,954 7,394,361 213,648 11,646,711 6,142,823 177,488 541,166 544,783 15,741 54,611 3,507 101 6,003,849 5,397,553 155,954 1,010,363 1,551,915 44,840 4,864,089 997,810 28,831 (1,072,779) (734,692) (21,228) 4,801,673 1,815,033 52,443 Ì 887,974 31,215
	2000 NT$ 7,209,095 (6,832,979) Ì (248,409) 6,170,000 (1,944,964) 3,613,555 Ì Ì Ì 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$ 5,025,485 (5,878,037) 2,600,000 (2,600,000) 7,424,432 (4,048,757) Ì (190,148) Ì Ì 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 Ì		2002 NT$ 1,771,670 (359,528) 1,680,691 Ì 5,651,927 (2,049,461) Ì Ì (1,046,071) Ì 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 Ì
			NT$ 12,559,352 (11,134,151) 4,630,000 (4,630,000) 12,288,062 (6,309,991) Ì Ì (1,046,071) 788 6,357,989 (14,084) (5,166,593) 12,560,954 7,394,361 1,176,317 152,985 9,347,417 1,010,363 8,975,280 (1,551,915) 8,433,728 Ì		NT$ 1,773,644 (1,507,639) 297,527 Ì 3,552,559 (5,342,880) Ì Ì Ì 10,025 (1,216,764) 1,649 (1,251,538) 7,394,361 6,142,823 544,783 3,507 5,397,553 1,551,915 997,810 (734,692) 1,815,033 887,974

See accompanying notes to consolidated Ñnancial statements.

F-7

							Total	NT$	26,383,644			Ì	Ì		3,613,555	4,022,584		Ì	(84,011)	10,612,824		(33,397)	58,228	44,573,427			Ì	Ì	Ì	(190,148)		(540,318)	(866,480)	167,144	43,143,625			Ì	Ì	Ì		Ì	356	(331,463)	(11,356,663)	(53,125)	(1,046,071)	(142,365)	30,214,294	872,993
						Treasury	stock	NT$	Ì			Ì	Ì		Ì	Ì		Ì	Ì	Ì		Ì	Ì	Ì			Ì	Ì	Ì	Ì		Ì	Ì	Ì	Ì			Ì	Ì	Ì		Ì	Ì	Ì	Ì	Ì	(1,046,071)	(142,365)	(1,188,436)	(34,338)
						Translation	adjustments	NT$	47,647			Ì	Ì		Ì	Ì		Ì	Ì	Ì		Ì	58,228	105,875			Ì	Ì	Ì	Ì		Ì	Ì	167,144	273,019			Ì	Ì	Ì		Ì	Ì	Ì	Ì	(53,125)	Ì	Ì	219,894	6,353
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY	For the years ended December 31, 2000, 2001 and 2002	and the six-month periods ended June 30, 2002 and 2003	(Amounts in thousands except share and per share data)	Stock	Additional dividends Retained earnings Unrealized losses	Common paid-in Subscriptions to be Capital Legal Special (accumulated on long-term	shares capital received distributed reserve reserve reserve deÑcit) investments	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	Balance as of January 1, 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 19,644,060 4,801,195 448,812 Ì 5,778 556,745 Ì 902,696 (23,289)	Appropriation and distribution of 1999	retained earnings:	Legal reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 90,270 Ì (90,270) Ì	Stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,765,785 (2,127,527) Ì Ì Ì Ì Ì (638,258) Ì	Issuance of additional common shares for	cashÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,355,900 2,706,467 (448,812) Ì Ì Ì Ì Ì Ì	Conversion of convertible bonds ÏÏÏÏÏÏÏÏÏÏÏ 978,346 3,044,238 Ì Ì Ì Ì Ì Ì Ì	Gain on disposal of property, plant and	equipment transferred to capital reserve ÏÏ Ì Ì Ì Ì 12,435 Ì Ì (12,435) Ì	Unrealized losses on long-term investments Ì Ì Ì Ì Ì Ì Ì Ì (84,011)	Net income, 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì 10,612,824 Ì	Cost of investment in excess of purchased	assets of an equity investeeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (1,853) Ì Ì (31,544) Ì	Cumulative translation adjustment ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Balance as of December 31, 2000 ÏÏÏÏÏÏÏÏÏ 24,744,091 8,424,373 Ì Ì 16,360 647,015 Ì 10,743,013 (107,300)	Appropriation and distribution of 2000	retained earnings:	Special reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 1,425 (1,425) Ì	Legal reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì 1,060,038 Ì (1,060,038) Ì	Stock dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,849,335 (2,474,409) Ì Ì Ì Ì Ì (6,374,926) Ì	Remuneration of directors and supervisors Ì Ì Ì Ì Ì Ì Ì (190,148) Ì	Unrealized losses on long-term	investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì (540,318)	Net loss, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì (866,480) Ì	Cumulative translation adjustment ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Balance as of December 31, 2001 ÏÏÏÏÏÏÏÏÏ 33,593,426 5,949,964 Ì Ì 16,360 1,707,053 1,425 2,249,996 (647,618)	Appropriation and distribution of 2001	retained earnings:	Special reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì 377,232 (377,232) Ì	Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì (16,360) 1,636 Ì 14,724 Ì	Legal reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Additional paid-in capital transferred to	common stock (3,319,342,620 shares) 3,319,343 (3,319,343) Ì Ì Ì Ì Ì Ì Ì	Recognition of an investee's capital reserve Ì Ì Ì Ì 356 Ì Ì Ì Ì	Unrealized losses on long-term investments Ì Ì Ì Ì Ì Ì Ì Ì (331,463)	Net loss, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì (11,356,663) Ì	Cumulative translation adjustment ÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Common stock repurchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Treasury stock owned by subsidiaries ÏÏÏÏÏÏ Ì Ì Ì Ì Ì Ì Ì Ì Ì	Balance as of December 31, 2002 ÏÏÏÏÏÏÏÏÏ 36,912,769 2,630,621 Ì Ì 356 1,708,689 378,657 (9,469,175) (979,081)	Balance as of December 31, 2002 (US$) ÏÏ 1,066,535 76,008 Ì Ì 10 49,370 10,941 (273,597) (28,289)

F-8

		Treasury	stock Total	NT$ NT$	Ì 43,143,625	Ì Ì	Ì Ì	Ì Ì			Ì Ì		Ì (7,245)		Ì (7,184,356)	Ì (101,426)	(1,046,071) (1,046,071)	(142,365) (142,365)	(1,188,436) 34,662,162		(1,188,436) 30,214,294		Ì Ì		Ì Ì		Ì Ì	Ì 887,974	Ì 907		Ì 275,197		Ì (6,209,093)	Ì (4,384)	(1,188,436) 25,164,895		(34,338) 727,099
		Translation	adjustments	NT$	273,019	Ì	Ì	Ì			Ì		Ì		Ì	(101,426)	Ì	Ì	171,593		219,894		Ì		Ì		Ì	Ì	Ì		Ì		Ì	(4,384)	215,510		6,227
	Unrealized losses	on long-term	investments	NT$	(647,618)	Ì	Ì	Ì			Ì		(7,245)		Ì	Ì	Ì	Ì	(654,863)		(979,081)		Ì		Ì		Ì	Ì	Ì		275,197		Ì	Ì	(703,884)		(20,338)
	Retained earnings	(accumulated	deÑcit)	NT$	2,249,996	(377,232)	14,724	Ì			Ì		Ì		(7,184,356)	Ì	Ì	Ì	(5,296,868)		(9,469,175)		2,630,621		1,708,689		378,657	Ì	Ì		Ì		(6,209,093)	Ì	(10,960,301)		(316,680)
		Special	reserve	NT$	1,425	377,232	Ì	Ì			Ì		Ì		Ì	Ì	Ì	Ì	378,657		378,657		Ì		Ì		(378,657)	Ì	Ì		Ì		Ì	Ì	Ì		Ì
		Legal	reserve	NT$	1,707,053	Ì	1,636	Ì			Ì		Ì		Ì	Ì	Ì	Ì	1,708,689		1,708,689		Ì		(1,708,689)		Ì	Ì	Ì		Ì		Ì	Ì	Ì		Ì
		Capital	reserve	NT$	16,360	Ì	(16,360)	Ì			Ì		Ì		Ì	Ì	Ì	Ì	Ì		356		Ì		Ì		Ì	Ì	907		Ì		Ì	Ì	1,263		37
Stock	dividends	to be	distributed	NT$	Ì	Ì	Ì	Ì			3,319,343		Ì		Ì	Ì	Ì	Ì	3,319,343		Ì		Ì		Ì		Ì	Ì	Ì		Ì		Ì	Ì	Ì		Ì
		Subscriptions	received	NT$		Ì	Ì	Ì			Ì		Ì		Ì	Ì	Ì	Ì	Ì				Ì		Ì		Ì	Ì	Ì		Ì		Ì	Ì	Ì		Ì
	Additional	paid-in	capital	NT$	5,949,964	Ì	Ì	Ì			(3,319,343)		Ì		Ì	Ì	Ì	Ì	2,630,621		2,630,621		(2,630,621)		Ì		Ì	7,248	Ì		Ì		Ì	Ì	7,248		209
		Common	shares	NT$	Balance as of January 1, 2002ÏÏÏÏÏÏÏÏÏÏÏÏ 33,593,426	Special reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Capital reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Legal reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Additional paid-in capital transferred to	common stock (3,319,342,620	shares) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Unrealized losses on long-term	investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Net loss for the six months ended June 30,	2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Cumulative translation adjustment ÏÏÏÏÏÏÏÏÏ Ì	Common stock repurchased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Treasury stock owned by subsidiaries ÏÏÏÏÏ Ì	Balance as of June 30, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,593,426		Balance as of January 1, 2003ÏÏÏÏÏÏÏÏÏÏÏÏ 36,912,769	Capital reserve used to cover accumulated	deÑcits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Legal reserve used to cover accumulated	deÑcits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Special reserve used to cover accumulated	deÑcits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Conversion of convertible debentures ÏÏÏÏÏ 880,726	Recognition of an investee's capital reserve Ì	Unrealized losses on long-term	investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Net loss for the six months ended June 30,	2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	Cumulative translation adjustments ÏÏÏÏÏÏÏÏ Ì	Balance as of June 30, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏ 37,793,495		Balance as of June 30, 2003 (US$) ÏÏÏÏÏÏ 1,091,982

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 Ñnancial 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., MaxNova Inc., Magic Pixel Inc. and Macronix (Hong Kong) Co., Ltd. In addition, 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. and Hui Ying Investment, Ltd.'s 92.5% owned subsidiary, Joyteck Technology Co., are also included in the consolidated Ñnancial statements of Macronix International Co., Ltd. Macronix International Co., Ltd. and their direct and indirect subsidiaries are hereinafter collectively referred to as the ""Company'' or ""Macronix.'' All signiÑcant inter-company balances and transactions have been eliminated in connection with the preparation of the consolidated Ñnancial statements of the Company.

2. Summary of SigniÑcant Accounting Policies

Generally Accepted Accounting Principles

The consolidated Ñnancial statements have been prepared in accordance with accounting principles generally accepted in the Republic of China (""ROC GAAP'').

Use of Estimates

The preparation of the consolidated Ñnancial statements in conformity with ROC GAAP requires management to make estimates and assumptions that aÅect the amounts reported in the Ñnancial statements and accompanying notes. Actual results could diÅer 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 insigniÑcant risk of changes in interest rates. Commercial paper, negotiable certiÑcates of deposit, and bank acceptances with original maturities of three months or less are considered to be cash equivalents.

Foreign Currency Translation

The Company maintains its accounting records in New Taiwan dollars (""NT dollars'' or ""NT$''), the national currency of the ROC. Transactions denominated in foreign currencies are recorded in NT dollars using the exchange rates in eÅect at the date of the transactions. Assets

F-10

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

and liabilities denominated in foreign currencies are translated into NT dollars using the exchange rates in eÅect at the balance sheet date. Foreign exchange gains or losses are included in the statements of operations.

The assets and liabilities of the foreign subsidiaries are translated into NT dollars, with the local currency of each foreign subsidiary as its functional currency, at exchange rates in eÅect at the balance sheet date. Revenue and expense accounts are translated using a weighted average exchange rate for the relevant 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 speciÑed foreign currencies at speciÑed exchange rates for another currency on a speciÑed date. The Company's forward contracts are designated as hedges; discounts or premiums, being the diÅerence between the spot exchange rate and the forward exchange rate at the inception of the contract, are accreted or amortized to the statement of operations over the contract lives using the straight-line method. Realized gains and losses from settlement or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the statement of operations 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 Ñnancial 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 diÅerent 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 recorded in the statement of operations upon exercise in the periods in which such options are exercised.

• 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 Öoating interest rates. The diÅerence 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 such gains or losses occur.

The gain or loss resulting from the diÅerence between the related Öoating rate interest and Ñxed rate interest at the balance sheet date is recorded in the statement of operations for the period ending on such balance sheet date. The realized gains and losses upon settlement are recorded in the statement of operations.

F-11

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

d. Structured deposits

A structured deposit represents a deposit with an embedded currency option placed with a Ñnancial institution to earn higher interest income. At maturity the Ñnancial 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 amount of the pre-determined interest is accrued. The realized and unrealized gains and losses arising from the currency portion of the contracts are recorded in the statement of operations for the relevant period at the balance sheet date and at maturity, as the case may be.

e. Other derivative Ñnancial instruments

The Company has entered into other derivative Ñnancial instruments for hedging purposes. Other derivative Ñnancial instruments are accounted for as described in note 21.

Information Expressed in US Dollars

The Ñnancial 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 and has been made at the rate of NT$34.61 to US$1(on the basis of the noon buying rate in New York for cable transfers as certiÑed for customs purposes by the Federal Reserve Bank of New York on June 30, 2003). 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.

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.

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 Ñnished goods, and commodities purchased. The lower of cost or market method is applied to each major category of inventory.

Long-Term Investments

Long-term investments in which the Company holds an interest of 20% or more and has the ability to exercise signiÑcant inÖuence are accounted for under the equity method of accounting. The diÅerence between the cost of the investment and the fair value of the identiÑable assets at the date of acquisition is amortized over Ñve 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.

The unrealized proÑts and losses from intercompany transactions between the investor company and investee company during the period are eliminated. If the transaction is downstream (a sale to the investee company) and the investor company has controlling power over the investee company, unrealized proÑts and losses are eliminated; if the investor company

F-12

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

has no controlling power, the unrealized proÑts and losses are eliminated based on the investor's percentage ownership interest in the investee. If the transaction is upstream (a sale to the investor), unrealized proÑts and losses are eliminated based on the investor's percentage ownership interest in the investee regardless of whether the investor company has controlling power or not.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is provided based on the Company's credit policy, the collectibility and aging analysis of notes and accounts receivable and other receivables.

Other Financial Assets

Other Ñnancial assets are credit-linked notes, which are recorded at cost using the speciÑc identiÑcation method. Interest income is calculated based on the contracted interest rate.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following useful lives:

tion is calculated on a straight-line basis over the following useful lives:
Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 to 20 years
Production equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	2 to 5 years
Research and development equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	3 to 5 years
OÇce furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	1 to 15 years
Leased equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	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. Interest incurred with respect to the additions of property, plant and equipment is capitalized until those assets are ready for use.

Lease agreements

Provided a lease agreement meets the capitalization criteria, the present value of the minimum lease payments net of executory costs is capitalized as an asset along with a corresponding liability. Leased equipment is depreciated using the straight-line method over the estimated useful life. A lease that does not qualify as a capital lease is classiÑed as an operating lease and the lease payments are recorded as rental expense.

Intangible Assets

Intangible assets are originally recorded at cost and are amortized over their estimated useful lives using the straight-line method. Royalties and issuing costs of convertible bonds are amortized over the related contracts' lives and life of the bonds, respectively. Computer software is amortized over one to three years, while other intangible assets are amortized over one to Ñve years. Accumulated amortization of intangibles amounted to NT$1,091,419, NT$1,653,834, NT$2,288,639, NT$1,961,464 and NT$2,597,782 (US$75,059) as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, respectively.

F-13

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Employee Retirement BeneÑts

The Company has a deÑned beneÑt 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 in May 1996 to 5% of the wages and salaries paid. EÅective 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 beneÑt entitlements, is administered by the Employees' Retirement Fund Committee and is registered in this committee's name. Accordingly, the pension fund is not included in the Ñnancial 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 beneÑt 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 a straight-line basis over the employees' average remaining service period of about twenty-Ñve years.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to diÅerences between the Ñnancial 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 the Company's earnings shall be retained.

Income tax credits resulting from the acquisition of equipment, research and development expenditures, employee training and investment in equity stock are recognized using the Öowthrough method.

Convertible Bonds

The interest-premium of puttable convertible bonds, which is the diÅerence between the speciÑed put price and the par value, is amortized using the interest method and is recognized as a liability over the period from the issuance date of the bonds to the expiry date of the put option. If the bondholder does not exercise the put option, the interest-premium, which has been recognized as a liability, is amortized over the period from the expiry date to the maturity date using the interest method. However, if at the expiry date the market value of the common stock under conversion exceeds the put price, the interest-premium should be credited to additional paid-in capital.

The cost of issuing convertible bonds is recorded as a deferred asset and is amortized over the period from the issuance date of the convertible bonds and the expiry date of the put option.

F-14

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

When bondholders exercise their conversion rights, the book value of convertible bonds is credited to common stock at an amount equal to the par value of the common stock and the excess is credited to capital reserve; no gain or loss is recognized on bond conversion.

Revenue Recognition

Revenue is recognized when it becomes realized or realizable. Revenue from the sale of products is recognized when ownership of the product 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 calculated based on the par value of the common shares issued.

Research and Development Subsidies

Government subsidies for research and development are recorded as non-operating income in the period the qualifying research and development activities are undertaken.

Minority Interests

Minority interest in the statements of operations includes interest in the earnings or losses of less than wholly owned subsidiaries and the pre-acquisition earnings of companies acquired during the year that the Company was not entitled to recognize.

Net Income Per Common Share

In accordance with ROC. Statement of Financial Accounting Standard No.24, ""Earnings per Share'', the Company presents basic earnings per share if a simple capital structure exists; or both basic earnings per share and diluted earnings per share if a complex capital structure exists. Basic earnings per share is equal to the net income (loss) attributable to common stock divided by the weighted-average number of common shares. When calculating diluted earnings per share, the numerator includes or adds back potential common stock dividends, interest and other conversion revenues (expenses). The denominator includes all potentially dilutive common shares.

F-15

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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

Outstanding common shares, beginning balance, net of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuance of common shares for cash on January 22, 2000 ÏÏÏ Bonds converted to common shares in 2000ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average eÅect of 2000 stock dividend ÏÏÏÏÏÏÏÏ Stock dividends and transfer of capital reserve to capital on May 28, 2001 (30%) ÏÏÏÏÏÏ Employee bonus transfer to capital on May 28, 2001 ÏÏÏÏ Weighted average eÅect of 2001 stock dividend ÏÏÏÏÏÏÏÏ Weighted-average number of repurchased stockÏÏÏÏÏÏÏÏÏÏÏ Stock dividends on July 13, 2002ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted average eÅect of 2002 stock dividend ÏÏÏÏÏÏÏÏ Bonds converted to common shares for the six months ended June 30, 2003 ÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Weighted eÅect of treasury stock owned by subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average number of sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 1,964,406,063 2,474,409,144 3,359,342,613 128,160,411 Ì Ì 59,638,870 Ì Ì 275,142,476 Ì Ì Ì 742,322,744 Ì 139,898,381 142,610,725 Ì 728,204,346 Ì Ì Ì Ì (26,205,248) Ì Ì 333,313,737 329,545,055 335,934,261 Ì Ì Ì Ì 3,624,995,602 3,695,276,874 3,666,451,102 Ì Ì (6,023,152) 3,624,995,602 3,695,276,874 3,660,427,950	For theyear ended December 31, 2000 2001 2002 1,964,406,063 2,474,409,144 3,359,342,613 128,160,411 Ì Ì 59,638,870 Ì Ì 275,142,476 Ì Ì Ì 742,322,744 Ì 139,898,381 142,610,725 Ì 728,204,346 Ì Ì Ì Ì (26,205,248) Ì Ì 333,313,737 329,545,055 335,934,261 Ì Ì Ì Ì 3,624,995,602 3,695,276,874 3,666,451,102 Ì Ì (6,023,152) 3,624,995,602 3,695,276,874 3,660,427,950	For the six-month period ended June 30, 2002 2003 3,359,342,613 3,651,276,875 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (12,181,856) Ì Ì Ì 334,716,076 Ì Ì 28,738,727 3,681,876,833 3,680,015,602 (6,023,152) (6,023,152) 3,675,853,681 3,673,992,450
	2000 1,964,406,063 128,160,411 59,638,870 275,142,476 Ì 139,898,381 728,204,346 Ì Ì 329,545,055 Ì 3,624,995,602 Ì 3,624,995,602	2001 2,474,409,144 Ì Ì Ì 742,322,744 142,610,725 Ì Ì Ì 335,934,261 Ì 3,695,276,874 Ì 3,695,276,874	2002 3,359,342,613 Ì Ì Ì Ì Ì Ì (12,181,856) Ì 334,716,076 Ì 3,681,876,833 (6,023,152) 3,675,853,681

F-16

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Basic and diluted earnings per share (the ""EPS'') are calculated as follows:

Basic EPS: Income (loss) available to common share holders ÏÏÏÏ Weighted average common shares outstanding ÏÏÏÏÏÏÏÏ Basic EPSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted EPS: Income (loss) available to common share holders ÏÏÏÏ Income impact of assumed conversion of convertible bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income (loss) available to common shares plus assumed conversionsÏÏÏÏÏÏ Weighted average common shares outstanding ÏÏÏÏÏÏÏÏ Weighted average assumed conversion of convertible bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjusted weighted average sharesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Diluted EPS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 10,612,824 (866,480) (11,356,663) 3,624,995,602 3,695,276,874 3,660,427,950 2.93 (0.23) (3.10) 10,612,824 (866,480) (11,356,663) 487,451 Ì Ì 11,100,275 (866,480) (11,356,663) 3,624,995,602 3,695,276,874 3,660,427,950 195,006,994 Ì Ì 3,820,002,596 3,695,276,874 3,660,427,950 2.91 (0.23) (3.10)	For theyear ended December 31, 2000 2001 2002 10,612,824 (866,480) (11,356,663) 3,624,995,602 3,695,276,874 3,660,427,950 2.93 (0.23) (3.10) 10,612,824 (866,480) (11,356,663) 487,451 Ì Ì 11,100,275 (866,480) (11,356,663) 3,624,995,602 3,695,276,874 3,660,427,950 195,006,994 Ì Ì 3,820,002,596 3,695,276,874 3,660,427,950 2.91 (0.23) (3.10)	For the six-month period ended June 30, 2002 2003 (7,184,356) (6,209,093) 3,675,853,681 3,673,992,450 (1.95) (1.69) (7,184,356) (6,209,093) Ì Ì (7,184,356) (6,209,093) 3,675,853,681 3,673,992,450 Ì Ì 3,675,853,681 3,673,992,450 (1.95) (1.69)
	2000 10,612,824 3,624,995,602 2.93 10,612,824 487,451 11,100,275 3,624,995,602 195,006,994 3,820,002,596 2.91	2001 (866,480) 3,695,276,874 (0.23) (866,480) Ì (866,480) 3,695,276,874 Ì 3,695,276,874 (0.23)	2002 (7,184,356) 3,675,853,681 (1.95) (7,184,356) Ì (7,184,356) 3,675,853,681 Ì 3,675,853,681 (1.95)

The diluted earnings per share calculation excludes the statement of operations impact of NT$433,525, NT$413,809, NT$310,417 and NT$158,585 related to the assumed conversion of convertible bonds into 210,301,619 weighted average shares, 374,454,410 weighted average shares, 439,231,166 weighted average shares and 729,590,146 weighted average shares for years 2001 and 2002, the six-month periods ended June 30, 2002 and 2003, respectively. The impact of the assumed conversion has been excluded due to the anti-dilutive eÅect.

Pro-forma data:

Assuming that the Company's shares owned by its subsidiaries were not treated as treasury stock for the year 2002 and the six-month periods ended June 30, 2002 and 2003, the net loss and loss per share would be as follows:

Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealised short-term investment loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss (pro-forma) ÏÏÏÏÏÏÏÏÏÏÏ	For the year ended December 31, 2002 NT$ US$ (11,356,663) (328,132) (70,034) (2,024) (11,426,697) (330,156)	For the six-monthperiod ended June 30, 2002 2003 NT$ NT$ US$ (7,184,356) (6,209,093) (179,401) (22,395) (21,882) (633) (7,206,751) (6,230,975) (180,034)	For the six-monthperiod ended June 30, 2002 2003 NT$ NT$ US$ (7,184,356) (6,209,093) (179,401) (22,395) (21,882) (633) (7,206,751) (6,230,975) (180,034)
	2002	2002 NT$ (7,184,356) (22,395) (7,206,751)
	NT$ (11,356,663) (70,034) (11,426,697)		NT$ (6,209,093) (21,882) (6,230,975)

F-17

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Basic EPS(pro-forma) Year 2002: Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ For the six months ended June 30, 2002 Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ For the six months ended June 30, 2003 Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Amount(numerator) Before tax After tax $(11,426,697) $(11,426,697) $ (7,206,751) $ (7,206,751) $ (6,230,975) $ (6,230,975)	Shares (denominator) 3,666,451,102 3,681,876,833 3,680,015,602	Net lossper share	Net lossper share
	Before tax $(11,426,697) $ (7,206,751) $ (6,230,975)		Before tax $(3.12) $(1.96) $(1.69)	After tax
				$(3.12) $(1.96) $(1.69)

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 Ñnancial statements. Any surplus or deÑcit on treasury stock transactions are credited or charged to capital reserves. In addition, eÅective from January 1, 2002, the Company's shares owned by its subsidiaries are treated as treasury stock. Retroactive adjustments were not required.

Reason and EÅect of a Change in Accounting Policies

EÅective 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 by NT$70,034, NT$22,395 and NT$21,882 for the year ended December 31, 2002, and for the six-month periods ended June 30, 2002 and 2003, respectively, and reduced loss per share by NT$0.02, NT$0.01 and NT$0.003 for the years ended December 31, 2002, and for the six-month periods ended June 30, 2002 and 2003, respectively. Long-term equity investments and shareholders' equity both decreased by NT$ 142,365, NT$142,365 and NT$ 142,365 as of December 31, 2002 and June 30, 2002 and 2003.

3. Cash and Cash Equivalents

Petty cash ÏÏÏÏÏÏÏÏÏ Checking and savings accounts Time depositsÏÏÏÏÏÏ Cash equivalents ÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 463 3,363 97 1,731,151 5,812,797 167,951 8,247,274 1,025,330 29,625 2,582,066 552,871 15,974 12,560,954 7,394,361 213,647	As of June 30,	As of June 30,	As of June 30,
	2000 NT$ 6,398 5,569,445 9,986,051 Ì 15,561,894	2001 NT$ 463 1,731,151 8,247,274 2,582,066 12,560,954	2002 NT$ 53,340 1,759,878 8,767,173 1,066,320 11,646,711	2003
				NT$ 12,360 2,168,211 3,302,750 659,502 6,142,823	US$ 357 62,647 95,428 19,055
					177,487

F-18

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

4. Short-Term Investments

Marketable securitiesÏÏÏÏ Mutual funds ÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline ÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31,	As of December 31,	US$ Ì 34,745 (497) 34,248	As of June 30,	As of June 30,	US$ Ì 33,732 (552) 33,180
	2000 NT$ 134,392 190,195 (13,642) 310,945	2001 NT$ 159,061 1,135,272 (50,426) 1,243,907	2002		2002 NT$ Ì 1,276,463 (68,125) 1,208,338	2003
			NT$ Ì 1,202,539 (17,215) 1,185,324			NT$ Ì 1,167,481 (19,111) 1,148,370

5. Notes and Accounts Receivable (Net)

Notes receivable ÏÏÏÏÏÏ Accounts receivableÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for doubtful accountsÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31,	As of December 31,	US$ 2,772 78,799 81,571 (5,891) 75,680	As of June 30,	As of June 30,	US$ 3,947 81,076 85,023 (6,288) 78,735
	2000 NT$ 216,096 5,402,648 5,618,744 (284,403) 5,334,341	2001 NT$ 68,798 2,426,367 2,495,165 (196,016) 2,299,149	2002		2002 NT$ 188,387 2,497,574 2,685,961 (175,531) 2,510,430	2003
			NT$ 95,947 2,727,195 2,823,142 (203,883) 2,619,259			NT$ 136,627 2,806,027 2,942,654 (217,635) 2,725,019

6. Other Financial Assets

6. Other Financial Assets
Credit-linked notes, maturing within a year	As of December 31, 2000 2001 2002 NT$ NT$ NT$ US$ Ì Ì Ì Ì		As of June 30,
	2000 NT$ Ì	2001 NT$ Ì	2002 NT$ Ì	2003
				NT$ 173,025	US$ 4,999

Credit-linked notes were not pledged. As of June 30, 2003, interest receivable of creditlinked notes amounted to NT$1,682, which was recorded under other current assets.

7. Inventories (Net)

Merchandise ÏÏÏÏÏÏÏÏÏÏÏ Finished goods ÏÏÏÏÏÏÏÏ Work in process ÏÏÏÏÏÏÏ Raw materialsÏÏÏÏÏÏÏÏÏÏ Supplies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline and obsolescence ÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 16,343 82,102 2,372 1,710,658 2,422,366 69,990 8,287,946 8,038,534 232,261 361,175 229,586 6,634 165,468 119,484 3,452 578 483 14 10,542,168 10,892,555 314,723 (3,243,666) (5,751,735) (166,187) 7,298,502 5,140,820 148,536	As of December 31, 2001 2002 NT$ NT$ US$ 16,343 82,102 2,372 1,710,658 2,422,366 69,990 8,287,946 8,038,534 232,261 361,175 229,586 6,634 165,468 119,484 3,452 578 483 14 10,542,168 10,892,555 314,723 (3,243,666) (5,751,735) (166,187) 7,298,502 5,140,820 148,536	As of June 30, 2002 2003 NT$ NT$ US$ 27,007 195,584 5,651 2,035,581 2,464,968 71,221 8,952,816 6,855,390 198,076 368,030 106,732 3,084 125,837 112,288 3,244 5,343 419 12 11,514,614 9,735,381 281,288 (6,582,517) (5,356,213) (154,759) 4,932,097 4,379,168 126,529	As of June 30, 2002 2003 NT$ NT$ US$ 27,007 195,584 5,651 2,035,581 2,464,968 71,221 8,952,816 6,855,390 198,076 368,030 106,732 3,084 125,837 112,288 3,244 5,343 419 12 11,514,614 9,735,381 281,288 (6,582,517) (5,356,213) (154,759) 4,932,097 4,379,168 126,529
	2000 NT$ 8,725 2,120,073 3,440,313 459,910 199,295 110,382 6,338,698 (1,054,883) 5,283,815	2001 NT$ 16,343 1,710,658 8,287,946 361,175 165,468 578 10,542,168 (3,243,666) 7,298,502		2002 NT$ 27,007 2,035,581 8,952,816 368,030 125,837 5,343 11,514,614 (6,582,517) 4,932,097
			NT$ 82,102 2,422,366 8,038,534 229,586 119,484 483 10,892,555 (5,751,735) 5,140,820		NT$ 195,584 2,464,968 6,855,390 106,732 112,288 419 9,735,381 (5,356,213) 4,379,168

F-19

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The insurance coverage for inventories amounted to NT$6,128,719, NT$9,752,705, NT$6,700,681 (US$193,605), NT$10,848,106 and NT$6,805,000 (US$196,619) as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, respectively.

8. Long-Term Equity Investments

8. Long-Term Equity Investments
Accounted for under cost method: Chantek Electronic Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chien Cheng Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Caesar Technology, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Biomorphic VLSI Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio Electronic Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2000 Percent Shares NT$ Owned 15,211,746 206,301 8.89% 4,626,502 58,500 4.50% 11,345,833 23,419 14.64% 8,000,000 80,000 15.38% 23,987,500 237,500 11.85% 6,395,000 83,135 3.20% 632 81 Ì* 9,187,500 129,559 7.66% 818,945 (107,300) 711,195 74,129,603 405,542 29.65% 6,100,000 98,006 33.17% 4,660,252 85,613 35.83% 3,140,000 30,212 26.17% 619,373 1,330,568
	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$ 206,301 58,500 23,419 80,000 237,500 83,135 81 129,559 818,945 (107,300) 711,195 405,542 98,006 85,613 30,212 619,373 1,330,568

• Less than 0.01%

** Publicly traded.

F-20

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounted for under cost method: Chantek Electronic Co., Ltd. ** ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chien Cheng Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pico Netics Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Global Strategic Investment FundÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FueTrek Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tower Semiconductor Ltd.** ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Caesar Technology, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Biomorphic VLSI Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio Electronic Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2001 Percent Shares NT$ Owned 15,211,746 Ì 8.89% 5,274,212 58,500 3.41% 4,538,333 Ì 14.64% 8,000,000 80,000 15.38% 23,987,500 237,500 11.78% 7,034,500 83,135 3.17% 714 81 Ì* 11,988,450 189,936 8.57% 1,000,000 31,455 4.00% 2,000,000 69,900 2.52% 480 43,342 17.65% 2,855,779 1,281,408 11.28% 2,075,257 (647,618) 1,427,639 74,129,603 Ì 29.65% 6,100,000 42,022 32.54% 4,660,252 14,126 35.60% 3,140,000 18,885 26.17% 75,033 1,502,672	As of December 31, 2001 Percent Shares NT$ Owned 15,211,746 Ì 8.89% 5,274,212 58,500 3.41% 4,538,333 Ì 14.64% 8,000,000 80,000 15.38% 23,987,500 237,500 11.78% 7,034,500 83,135 3.17% 714 81 Ì* 11,988,450 189,936 8.57% 1,000,000 31,455 4.00% 2,000,000 69,900 2.52% 480 43,342 17.65% 2,855,779 1,281,408 11.28% 2,075,257 (647,618) 1,427,639 74,129,603 Ì 29.65% 6,100,000 42,022 32.54% 4,660,252 14,126 35.60% 3,140,000 18,885 26.17% 75,033 1,502,672
	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$ Ì 58,500 Ì 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 Ì 42,022 14,126 18,885 75,033 1,502,672

• Less than 0.01%

• ** Publicly traded.

F-21

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounted for under cost method: Chantek Electronic Co., Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chien Cheng Venture Capital Co., Ltd.ÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp. ÏÏÏÏÏÏÏÏÏÏÏÏ Pico Netics Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Global Strategic Investment Fund ÏÏÏÏÏÏÏÏÏÏ FueTrek Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tower Semiconductor Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value declineÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Caesar Technology, Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏ Biomorphic VLSI Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio Electronic Co. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid Investment Honbond Venture Capital Co., Ltd. ÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2002	As of December 31, 2002	As of December 31, 2002	Percent owned 4.35% 3.38% 14.64% 15.38% 11.78% 2.99% Ì* 7.17% 4.16% 2.52% 17.65% 13.66% 29.65% 35.23% 35.08% 28.04% 15.00%
	Shares 15,211,746 5,274,212 4,538,333 8,000,000 23,987,500 7,386,225 806 10,028,450 1,000,000 2,000,000 480 5,932,105 74,129,603 7,300,000 4,660,252 3,140,000	NT$ Ì 58,500 Ì 80,000 237,500 83,135 81 158,302 31,275 69,500 43,094 1,847,480 2,608,867 (979,081) 1,629,786 Ì 65,864 Ì 11,439 77,303 120,000 1,827,089	US$ Ì 1,690 Ì 2,312 6,862 2,402 2 4,574 904 2,008 1,245 53,380 75,379 (28,289) 47,090 Ì 1,903 Ì 331 2,234 3,467 52,791

• Less than 0.01%

• ** Publicly traded.

F-22

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounted for under cost method: Chantek Electronic Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chien Cheng Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FueTrek Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tower Semiconductor Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pico Netics Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Global Strategic Investment FundÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Caesar Technology, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Biomorphic VLSI Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio Electronic Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid Investment: Honbond Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic Pixel Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of June 30, 2002	As of June 30, 2002	Percent Owned 8.89% 3.41% 14.64% 15.38% 11.78% 3.17% Ì* 7.17% 17.65% 13.00% 3.73% 2.52% Ì 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 Ì 6,100,000 4,660,252 3,140,000	NT$ Ì 58,500 Ì 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 Ì 21,636 Ì 15,811 37,447 120,000 50,000 170,000 1,762,232

• Less than 0.01%

• ** Publicly traded

F-23

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounted for under cost method: Chantek Electronic Co., Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chien Cheng Venture Capital Co., Ltd.ÏÏÏÏÏÏ Honbond Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp. ÏÏÏÏÏÏÏÏÏÏÏÏ Pico Netics Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Global Strategic Investment Fund ÏÏÏÏÏÏÏÏÏÏ FueTrek Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tower Semiconductor Ltd.**ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value declineÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏ Biomorphic VLSI Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio Electronic Co. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of June 30, 2003	As of June 30, 2003	Percent owned 4.35% 3.38% 14.64% 15.38% 15.00% 11.78% 2.75% Ì* 7.17% 4.11% 2.52% 17.65% 14.89% 35.23% 34.06% 28.04%
	Shares 15,211,746 5,274,212 4,538,333 8,000,000 12,000,000 23,987,500 6,771,225 806 10,028,450 1,000,000 2,000,000 480 7,138,944 7,300,000 4,660,252 3,140,000	NT$ Ì 58,500 Ì 80,000 120,000 237,500 76,213 81 158,136 31,144 69,210 42,914 1,964,349 2,838,047 (703,884) 2,134,163 39,280 Ì 5,429 44,709 2,178,872	US$ Ì 1,690 Ì 2,312 3,467 6,862 2,202 2 4,569 900 2,000 1,240 56,757 82,001 (20,338) 61,663 1,135 Ì 157 1,292 62,955

• Less than 0.01%

** Publicly traded.

The Company's investments in Chantek Electronic Co., Ltd., Taiwan Mask Corp., Chipbond Technology Corp., Tower Semiconductor Ltd. and Powertech Co., Ltd. are classiÑed as marketable equity securities and accounted for at the lower of cost or market.

The Company recognized long-term equity investment losses for Biomorphic VLSI, Inc. by US$1,609, US$2,203 (NT$74,537), US$3,400 (NT$117,494), US$2,455 (NT$84,883) and US$404 (NT$14,035) for the years ended December 31, 2000, 2001 and 2002 and for the six months ended June 30, 2002 and 2003, respectively. As of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, the Company's investments in Biomorphic VLSI, Inc. amounted to NT$85,613, NT$14,126, (NT$104,105), (NT$68,770) and (NT$ 117,657), respectively. The Company recorded the credit equity investment under other liabilities.

No long-term equity investments were pledged as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003.

F-24

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

9. Short-Term Debts

9. Short-Term Debts
Letter of credit loans within 180 days at variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏ Working capital loans due within 180 days at variable interest rates ÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 924,680 Ì 696,176 20,115 661,822 733,950 1,462,975 42,270 1,586,502 733,950 2,159,151 62,385			As	of June 30,
	2000 NT$ 924,680 661,822 1,586,502	2001 NT$ Ì 733,950 733,950		2002 NT$ Ì 2,094,848 2,094,848	2003
			NT$ 696,176 1,462,975 2,159,151		NT$ 34,674 2,384,378 2,419,052	US$ 1,002 68,893
						69,895

The weighted average interest rate of the short-term debts was 6.39%, 2.66%, 2.32%, 1.95% and 2.144% as of December 31, 2000, 2001 and 2002 and June 30, 2000 and 2003, respectively.

The short-term debt includes a foreign currency facility with a balance outstanding of US$0, US$21,000, US$42,100 (NT$1,462,975), US$41,600 and US$42,452 (NT$1,469,051) as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, respectively.

The Company's unused short-term lines of credit (including unused letters of credit) amounted to NT$10,709,670, NT$18,202,678, NT$15,124,176 (US$436,989), NT$18,134,084 and NT$8,339,356 (US$240,952) as of December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003, respectively.

10. Short-Term Notes

10. Short-Term Notes
Commercial papers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: discounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2000 2001 2002 NT$ NT$ NT$ US$ Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì		As of June 30,		US$ 8,668 (72) 8,596
	2000 NT$ Ì Ì Ì	2001 NT$ Ì Ì Ì	2002 NT$ 1,690,000 (9,309) 1,680,691	2003
				NT$ 300,000 (2,473) 297,527

The weighted average interest rate of the short-term notes was 2.390% and 1.987% as of June 30, 2002 and 2003.

The Company's unused lines of credit for short-term notes amounted to NT$27,300,000 and NT$3,300,000 (US$95,348) as of June 30, 2002 and 2003.

11. 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, repayable in 24 quarterly installments from May 31,1999. The ownership of the equipment will be transferred to the Company upon the expiration of the agreement. Cost of the equipment amounted to NT$24,946. However, Caesar Technology, Inc. was formally placed in liquidation in January 2002. As of April 30, 2002, the Company's capital lease obligation to Caesar Technology, Inc. amounted to NT$13,958. On August 14, 2002, the Company entered into a settlement with Caesar Technology, Inc. which required the Company to pay NT$3,215 to acquire the ownership of the equipment, and Caesar Technology to waive its right to claim the remaining capital lease obligation.

F-25

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

In 2001, the Company entered into a 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. During the lease period, the Company is not allowed to modify or sublease the equipment. Upon the expiry of the agreement, the ownership of the equipment must be unconditionally transferred to the Company.

Future lease obligations resulting from the above leases as of June 30, 2003 are as follows:

follows:
Year				NT$		US$
July 1, 2003 to June 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		$	669,085			$19,332
Less: unrealized interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			(34,867)			(1,007)
Current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			634,218			18,325
July 1, 2004 to June 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			669,036			19,330
July 1, 2005 to June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ				Ì		Ì
July 1, 2006 to June 30, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ				Ì		Ì
July 1, 2007 to June 30, 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ				Ì		Ì
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			669,036			19,330
Less: unrealized interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			(12,442)			(359)
Lease obligations Ì long-term ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			656,594			18,971
Total lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		$1,290,812				37,296
Accumulated depreciation of assets	under capital leases amounted to		NT$6,930,
NT$60,874, NT$306,402 (US$8,853),	NT$173,680 and NT$452,290 (US$13,068) as of
December 31, 2000, 2001 and 2002 and June 30, 2002 and 2003.
12. Long-Term Debt
	Interest		Balance
December 31,		December 31,
2000	2001 2002 2000	2001			2002
	% % NT$	NT$		NT$		US$
Secured
Medium term loans from one bank, repayable
in 8 semi-annual installments from May
2001 to November 2004 with variable
interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	4.00 Ó 3.00 Ó
6.96	8.62 6.70 400,000	300,000		200,000		5,779
Loan from one bank, repayable in 21
quarterly installments from May 1998 to
May 2003 with variable interest rates ÏÏÏÏÏ 6.63	6.35 5.64 190,000	114,000		38,000		1,098
Debentures, 5-year secured debentures
repayable in full at maturity in October
2006 with interest paid annually at a Ñxed
interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì	3.30 3.30 Ì 3,000,000			3,000,000		86,680
Medium term loans from 7 banks, repayable
in 10 semi-annual installments from
December 1998 to June 2003 with
variable interest rates, fully repaid before
maturity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.275 Ó	0.775 Ó
1.3092	0.8092 Ì 1,365,507	844,349			Ì	Ì

F-26

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Medium term loans from one bank, repayable in 96 monthly installments from May 1999 to April 2007 with variable interest rates ÏÏ Medium term loan from 14 banks, repayable in 19 quarterly installments from July 1999 to December 2005 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from 20 banks, repayable in 10 semi-annual installments from March 2005 to December 2009 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 156 monthly installments from May 2003 to April 2016 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5 year secured convertible debentures due May 5, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 17 quarterly installments from April 2002 to April 2006 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 8 semi-annual installments from June 2003 to October 2006 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from 7 banks, repayable in 21 quarterly installments from March 1996 to March 2001 with variable interest rates Debentures, repayable in 5 semi-annual installments from January 1999 to January 2001 with a Ñxed interest ratesÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 6 semi-annual installments from April 2000 to October 2002 with a Ñxed interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in July 2000 with a Ñxed rateÏÏÏÏÏÏÏÏÏÏÏÏÏ Unsecured ECB III Debentures, 5-year unsecured convertible debentures due February 1, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ECB IV Debentures, 5-year unsecured convertible debentures puttable in August 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5-year unsecured convertible debentures puttable in December 2005ÏÏÏÏ Add: Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest December 31, 2000 2001 2002 % % 7.69 6.525 5.695 6.005 Ó 3.025 2.525 Ó 7.88 Ó 7.6 5.635 Ì Ì 2.854 7.64 6.655 5.695 Ì Ì Ì Ì 6.475 5.365 Ì 5.150 5.025 6.755 Ó 8.88 Ì Ì 7.00 Ì Ì 6.85 Ì Ì 7.35 Ì Ì 1.00 1.00 1.00 Ì 0.50 Ì Ì	Interest December 31, 2000 2001 2002 % % 7.69 6.525 5.695 6.005 Ó 3.025 2.525 Ó 7.88 Ó 7.6 5.635 Ì Ì 2.854 7.64 6.655 5.695 Ì Ì Ì Ì 6.475 5.365 Ì 5.150 5.025 6.755 Ó 8.88 Ì Ì 7.00 Ì Ì 6.85 Ì Ì 7.35 Ì Ì 1.00 1.00 1.00 Ì 0.50 Ì Ì		Balance December 31, 2001 2002 NT$ NT$ US$ 233,600 189,800 5,484 4,938,036 3,181,570 91,926 Ì 3,000,000 86,680 889,000 889,000 25,686 2,796,000 2,780,000 80,324 400,000 329,410 9,518 400,000 400,000 11,557 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 5,554,324 2,505,370 72,389 Ì 5,880,534 169,909 Ì 3,200,000 92,459 19,469,309 25,593,684 739,489 1,300,952 1,485,945 42,934 (2,877,581) (8,721,428) (251,992) 17,892,680 18,358,201 530,431	Balance December 31, 2001 2002 NT$ NT$ US$ 233,600 189,800 5,484 4,938,036 3,181,570 91,926 Ì 3,000,000 86,680 889,000 889,000 25,686 2,796,000 2,780,000 80,324 400,000 329,410 9,518 400,000 400,000 11,557 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 5,554,324 2,505,370 72,389 Ì 5,880,534 169,909 Ì 3,200,000 92,459 19,469,309 25,593,684 739,489 1,300,952 1,485,945 42,934 (2,877,581) (8,721,428) (251,992) 17,892,680 18,358,201 530,431
	2000 7.69 6.005 Ó 7.88 Ì 7.64 Ì Ì Ì 6.755 Ó 8.88 7.00 6.85 7.35 1.00	2001 % 6.525 3.025 Ó 7.6 Ì 6.655 Ì 6.475 5.150 Ì Ì Ì Ì 1.00 Ì Ì	2000 NT$ 277,400 6,427,979 Ì 229,900 2,646,400 Ì Ì 47,600 100,000 1,332,000 300,000 5,257,140 Ì Ì 18,573,926 739,303 (3,259,688) 16,053,541	2001 NT$ 233,600 4,938,036 Ì 889,000 2,796,000 400,000 400,000 Ì Ì Ì Ì 5,554,324 Ì Ì 19,469,309 1,300,952 (2,877,581) 17,892,680
					NT$ 189,800 3,181,570 3,000,000 889,000 2,780,000 329,410 400,000 Ì Ì Ì Ì 2,505,370 5,880,534 3,200,000 25,593,684 1,485,945 (8,721,428) 18,358,201

F-27

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Secured Medium term loans from one bank, repayable in 8 semi-annual installments from May 2001 to November 2004 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loan from one bank, repayable in 21 quarterly installments from May 1998 to May 2003 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5-year secured debentures repayable in full at maturity in October 2006 with interest paid annually at a Ñxed interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loans from one bank, repayable in 96 monthly installments from May 1999 to April 2007 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from 14 banks, repayable in 19 quarterly installments from July 1999 to December 2005 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from 20 banks, repayable in 10 semi-annual installments from March 2005 to December 2009 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 156 monthly installments from May 2003 to April 2016 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5 year secured convertible debentures due May 5, 2003ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 17 quarterly installments from April 2002 to April 2006 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 8 semi-annual installment from June 2003 to October 2005 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unsecured ECB III Debentures, 5- year unsecured convertible debentures due February 1, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ECB IV Debentures, 5- year unsecured convertible debentures puttable in August 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5-year unsecured convertible debentures puttable in December 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ECB V Debentures, 5- year unsecured convertible debentures puttable in February 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add: Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest June 30, 2002 2003 % % 3.525 Ó 2.65 Ó 6.8 6.50 5.82 Ì 3.30 3.30 5.92 4.49 2.5875 Ó 1.9625 Ó 5.82 5.49 Ì 2.69556 5.92 4.49 Ì Ì 5.545 5.215 5.125 5.025 1.00 1.00 0.5 0.50 Ì Ì Ì Ì		Balance June 30, 2003 NT$ US$ 150,000 4,334 Ì Ì 3,000,000 86,680 167,900 4,851 2,306,061 66,630 5,910,000 170,760 877,602 25,357 Ì Ì 282,350 8,158 350,000 10,113 Ì Ì 5,855,996 169,200 2,314,700 66,879 3,114,450 89,987 24,329,059 702,949 380,179 10,985 (4,763,335) (137,629) 19,945,903 576,305
	2002 % 3.525 Ó 6.8 5.82 3.30 5.92 2.5875 Ó 5.82 Ì 5.92 Ì 5.545 5.125 1.00 0.5 Ì Ì	2002 NT$ 250,000 76,000 3,000,000 211,700 3,946,057 Ì 889,000 2,682,400 376,470 400,000 5,328,655 5,674,081 Ì Ì 22,834,363 1,618,067 (5,396,407) 19,056,023
			NT$ 150,000 Ì 3,000,000 167,900 2,306,061 5,910,000 877,602 Ì 282,350 350,000 Ì 5,855,996 2,314,700 3,114,450 24,329,059 380,179 (4,763,335) 19,945,903

On October 29, 2001, the Company issued NT$3,000,000 of Ñve-year secured debentures, due in October 2006 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 due May 2003 were convertible at the option of the holder into the Company's common stock at an initial conversion price of NT$53.728 per share. However, the conversion price was subject to adjustments in the event that certain changes occur to the Company's capital structure. The convertible debentures were 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 requirements would have applied if, at any time in the 24 months immediately prior to the

F-28

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

maturity date of the bonds, the aggregate outstanding amount of principal and accrued interest was 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. As of April 22, 2003, an aggregate principal amount of US$70,000 of the debentures were converted. In addition, with the resolution of the board of directors, the Company repurchased the residual outstanding bonds, in the aggregate principal amount of US$80,000, from the market. The related debt extinguishment loss of NT$22,765 from the above repurchase was included in other expense account.

The 1% 5-year unsecured convertible debentures due February 2005 are convertible at the option of the holder into the Company's common stock at an initial conversion price of NT$69 per share. However, the conversion price is subject to adjustments in the event that certain changes occur to the Company's capital structure. The convertible debentures are redeemable at par at maturity or at the option of bondholders at 121.422% of par on February 1, 2003. In 2000, an aggregate principal amount of US$41,078 of the bonds was converted. No bond was converted in any periods thereafter. In 2002 and the Ñrst half of 2003, the Company repurchased US$86,825 and US$61,277, respectively, of the bonds from the market that resulted in a debt extinguishment loss of NT$45,144 and NT$12,275, respectively. In addition, upon the request of bondholders, the Company has redeemed an aggregate principal amount of US$10,820 of the debentures as of June 30, 2003 that resulted in a gain of NT$2,442. Debt extinguishment gain and loss are recorded under other expense account.

The 0.5% 5-year unsecured convertible debentures due February 2007 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. However, the conversion price is subject to adjustments in the events that certain changes occur to the Company's capital structure. At June 30, 2003, the split adjusted conversion price was NT$28.4727 per share. The holders of these convertible debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The date at which debentures may be redeemed is August 9, 2004. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$6,315,399 (US$182,473).

The non-interest bearing 5-year unsecured convertible debentures due December 2007 are convertible at the option of the holder into the Company's common stock at the conversion price. The initial conversion price was NT$11 from the issue date to June 26, 2003 and then was reset to NT$8.8 after June 26, 2003. However, the conversion price is subject to adjustments in the event that certain changes occur to the Company's capital structure. As of June 30, 2003, an aggregate principal amount of NT$885,300 of these debentures have been converted. The holders of these convertible debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The periods at which debentures may be redeemed are from November 13, 2005 to December 12, 2005 and from November 13, 2006 to December 13, 2006. The earliest date at which the bonds may be redeemed is November 13, 2005. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$2,547,790 (US$73,614).

The non-interest bearing 5-year unsecured convertible debentures due February 2008 are convertible at the option of the holder into the Company's common stock at the initial conversion price of NT$12.06. However, the conversion price is subject to an adjustment (in the manner set forth in the Indenture) upon the occurrence of certain events set out in the Indenture, including, among other things, the declaration of dividend in common shares,

F-29

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

subdivisions, consolidations, and the issue of common shares in cash. The holders of these convertible debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The dates at which debentures may be redeemed are February 10, 2004, February 10, 2005, February 10, 2006 and February 10, 2007. The earliest date at which the bonds may be redeemed is February 10, 2004. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$3,114,450 (US$89,987). In addition, as of January 9, 2004 (the last day that the bondholders can make the request of early redemption), bondholders have requested the Company to redeem the debentures in an aggregate principal amount of US$78,100(NT$2,702,651). This amount together with the interest payable of US$610 (NT$21,115) have been reclassiÑed to current portion of debenture account in the balance sheet as of June 30, 2003.

The above long-term debt, excluding the convertible debentures, as of June 30, 2003 is repayable in US$51,340 (NT$1,776,621) and in NT$8,267,292.

Maturity of existing long-term debt for the 5 years succeeding June 30, 2003 are as follows:

Years July 1, 2003 Ó June 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2004 Ó June 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2005 Ó June 30, 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2006 Ó June 30, 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2007 Ó June 30, 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ After June 30, 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$ 4,763,335 8,188,930 3,861,028 4,336,886 1,250,385 2,308,674 24,709,238	US$
		137,629 236,606 111,558 125,307 36,128 66,705
		713,933

Certain of the debt agreements require the Company to issue new share capital for cash if the debt to equity ratio is greater than 1.2. In addition, one debt agreement requires the Company to maintain a current ratio of no less than 100 percent.

The Company's assets pledged as collateral for security for foreign labor, customs clearance deposits, compensated deposits, secured loans and capital leases as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 are as follows:

Accounts Restricted investments Ì currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted investments Ì non-current ÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		December 31, 2001 2002 NT$ NT$ US$ 34,000 3,351,572 96,838 1,721,801 260,625 7,530 16,197,916 14,986,581 433,013 17,953,717 18,598,778 537,381	December 31, 2001 2002 NT$ NT$ US$ 34,000 3,351,572 96,838 1,721,801 260,625 7,530 16,197,916 14,986,581 433,013 17,953,717 18,598,778 537,381		June 30,	June 30,
	2000 NT$ 216,000 Ì 18,273,554 18,489,554	2001 NT$ 34,000 1,721,801 16,197,916 17,953,717		2002 NT$ 2,431,557 251,475 13,735,792 16,418,824	2003
			NT$ 3,351,572 260,625 14,986,581 18,598,778		NT$ 678,391 259,537 14,238,195 15,176,123	US$ 19,601 7,499 411,390
						438,490

F-30

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

13. 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 Ñrst 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, eÅective 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.

In August 1999, the Company revised its pension plan to allow for early retirement under certain conditions. This required the Company to record prior service costs in the amount of NT$32,557 which the Company amortizes 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 rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Salary increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected investment return ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the year ended December 31, 2000 2001 2002 6.0% 5.0% 4.0% 5.5% 4.5% 3.5% 6.0% 5.0% 4.0%	For the year ended December 31, 2000 2001 2002 6.0% 5.0% 4.0% 5.5% 4.5% 3.5% 6.0% 5.0% 4.0%	For the six months ended June 30, 2002 2003 4.5% 3.5% 4.0% 3.0% 4.5% 3.5%
	2000 6.0% 5.5% 6.0%	2001 5.0% 4.5% 5.0%	2002 4.5% 4.0% 4.5%

F-31

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The funded status of the Company's pension plan as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 is as follows:

Pension obligation Vested beneÑt obligation ÏÏÏ Non-vested beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅect of future pay increases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Projected beneÑt obligation Plan assets at fair valueÏÏÏÏÏÏÏ Projected beneÑt obligation in excess of plan assetsÏÏÏÏÏÏÏ Unrecognized net transition obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized prior service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrecognized net loss (gain) OverstateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued pension cost ÏÏÏÏÏÏÏÏ		December 31, 2001 2002 NT$ NT$ US$ Ì Ì Ì (291,447) (397,536) (11,486) (291,447) (397,536) (11,486) (389,883) (367,091) (10,606) (681,330) (764,627) (22,092) 535,118 589,501 17,033 (146,212) (175,126) (5,059) 58,751 55,659 1,608 29,410 28,108 812 33,518 (13,835) (400) Ì Ì Ì (24,533) (105,194) (3,039)	December 31, 2001 2002 NT$ NT$ US$ Ì Ì Ì (291,447) (397,536) (11,486) (291,447) (397,536) (11,486) (389,883) (367,091) (10,606) (681,330) (764,627) (22,092) 535,118 589,501 17,033 (146,212) (175,126) (5,059) 58,751 55,659 1,608 29,410 28,108 812 33,518 (13,835) (400) Ì Ì Ì (24,533) (105,194) (3,039)		June 30, 2003 NT$ US$ Ì Ì (477,784) (13,805) (477,784) (13,805) (364,861) (10,542) (842,645) (24,347) 613,023 17,712 (229,622) (6,635) 54,113 1,564 27,457 793 (153) (4) Ì Ì (148,205) (4,282)
	2000 NT$ Ì (147,815) (147,815) (274,676) (422,491) 420,695 (1,796) 61,843 30,712 (112,027) Ì (21,268)	2001 NT$ Ì (291,447) (291,447) (389,883) (681,330) 535,118 (146,212) 58,751 29,410 33,518 Ì (24,533)		2002 NT$ Ì (340,949) (340,949) (382,998) (723,947) 563,801 (160,146) 57,205 28,759 11,525 (4,337) (66,994)
			NT$ Ì (397,536) (397,536) (367,091) (764,627) 589,501 (175,126) 55,659 28,108 (13,835) Ì (105,194)		NT$ Ì (477,784) (477,784) (364,861) (842,645) 613,023 (229,622) 54,113 27,457 (153) Ì (148,205)

The components of the December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 net pension costs are as follows:

Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization of prior service costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net pension costÏÏÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	US$ 3,303 883 (722) 127 3,591	For the six-month ended June 30, 2002 2003 NT$ NT$ US$ 57,679 58,798 1,699 16,987 13,482 390 (14,644) (12,242) (354) 2,197 2,197 63 62,219 62,235 1,798	For the six-month ended June 30, 2002 2003 NT$ NT$ US$ 57,679 58,798 1,699 16,987 13,482 390 (14,644) (12,242) (354) 2,197 2,197 63 62,219 62,235 1,798
	2000 NT$ 79,843 24,146 (23,387) 3,226 83,828	2001 NT$ 100,021 25,349 (28,193) 1,487 98,664	2002		2002 NT$ 57,679 16,987 (14,644) 2,197 62,219	2003
			NT$ 114,324 30,577 (25,010) 4,394 124,285			NT$ 58,798 13,482 (12,242) 2,197 62,235

F-32

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Additional pension disclosures:

BeneÑt obligation at January 1 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏ Paid to retirees ÏÏÏÏÏÏÏÏÏÏÏ Increase in unrecognized transition costÏÏÏÏÏÏÏÏÏÏ Increase in unrecognized prior service costÏÏÏÏÏÏÏ Increase in unrecognized actuarial (gain) loss ÏÏÏÏ BeneÑt obligation at the end of the period ÏÏÏÏÏÏÏ Change in plan assets Fair value of plan assets at the beginning of the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ContributionsÏÏÏÏÏÏÏÏÏÏÏÏÏ Paid to retirees ÏÏÏÏÏÏÏÏÏÏÏ Other adjustments ÏÏÏÏÏÏÏÏ Fair value of plan assets at the end of the period ÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 422,491 681,330 19,686 100,021 114,324 3,303 25,349 30,577 883 (223) (1,532) (44) Ì Ì Ì Ì Ì Ì 133,692 (60,072) (1,736) 681,330 764,627 22,092 420,695 535,118 15,461 19,247 12,639 365 95,399 43,624 1,260 (223) (1,532) (44) Ì (348) (10) 535,118 589,501 17,032	As of December 31, 2001 2002 NT$ NT$ US$ 422,491 681,330 19,686 100,021 114,324 3,303 25,349 30,577 883 (223) (1,532) (44) Ì Ì Ì Ì Ì Ì 133,692 (60,072) (1,736) 681,330 764,627 22,092 420,695 535,118 15,461 19,247 12,639 365 95,399 43,624 1,260 (223) (1,532) (44) Ì (348) (10) 535,118 589,501 17,032	As of June 30,	As of June 30,	As of June 30,
	2000 NT$ 371,470 79,843 24,146 (866) Ì Ì (52,102) 422,491 321,369 18,136 82,056 (866) Ì 420,695	2001 NT$ 422,491 100,021 25,349 (223) Ì Ì 133,692 681,330 420,695 19,247 95,399 (223) Ì 535,118		2002 NT$ 681,330 57,679 16,987 (1,532) Ì Ì (30,517) 723,947 535,118 24,095 6,467 (1,531) (348) 563,801	2003
			NT$ 681,330 114,324 30,577 (1,532) Ì Ì (60,072) 764,627 535,118 12,639 43,624 (1,532) (348) 589,501		NT$ 764,627 58,798 13,482 Ì Ì Ì 5,738 842,645 589,501 4,298 19,224 Ì Ì 613,023	US$ 22,092 1,699 390 Ì Ì Ì 166
						24,347
						17,032 124 556 Ì Ì
						17,712

14. 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 oÅered to the company's employees. According to the Securities and Exchange Law of the ROC, at least 10% of the issue must also be oÅered to the public.

During the year ended December 31, 2000, convertible debentures totaling NT$4,022,584 were converted to the Company's common shares in the aggregate principal amount of which resulted in the issuance of 97,834,589 additional common shares and the recording of additional paid-in capital of NT$3,044,238.

On May 3, 2000, the Company's shareholders approved a resolution in the annual general meeting to increase the authorized share capital to NT$35,000,000. On the same date, the shareholders also approved a resolution to declare a 13% stock dividend which resulted in the issuance of 276,578,492 common shares. The board of directors approved a resolution that Ñxed the ex-right date at June 13, 2000.

F-33

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

On April 19, 2001, the Company's shareholders approved a resolution 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 approved a resolution that Ñxed the ex-right date at May 28, 2001. The Company's shareholders also approved a resolution to issue 142,610,725 common shares in settlement of the 2000 employee bonus.

On May 30, 2002, the Company's shareholders approved a resolution at the annual meeting to increase the authorized share capital to NT$53,500,000, divided into 5,350,000,000 shares (including 450,000,000 shares reserved for future exercises of stock options). In addition, the shareholders also approved a resolution to declare a 10% stock dividend, which resulted in the issuance of 331,934,262 common shares.

During the six months ended June 30, 2003, unsecured domestic convertible debentures in the aggregate principal amount of NT$880,726 were converted to the Company's common shares which resulted in the issuance of 88,072,625 additional common shares.

On June 27, 2003, the Company's shareholders approved a resolution at the annual meeting to increase the authorized share capital to NT$65,500,000, divided into 6,550,000,000 shares (including 650,000,000 and 1,120,650,500 shares reserved for future exercise of stock options and conversion of convertible bonds, respectively). As of June 30, 2003, the authorized capital increase has not been registered.

As of June 30, 2003, the Company's authorized and issued common shares amounted to NT$65,500,000 and NT$37,793,495, divided into 6,550,000,000 (including 650,000,000 and 1,120,650,500 shares reserved for future exercise of stock options and conversion of convertible bonds, respectively) and 3,779,349,500 shares at NT$10 par value, respectively.

The Company has three stock option plans (""2001 plan'', ""2002 plan'' and ""2003 plan'') that provide for the granting of options to qualiÑed employees for the purchase of the Company's common shares at the market price of the grant date. Stock options expire in six years from their grant date 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, 170,000,000 shares and 200,000,000 shares under 2001 plan, 2002 plan and 2003 plan, respectively.

Legal Reserve

According to the ROC Company Law, 10% of the Company's net income, after deducting previous years' losses, if any, must be set aside 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 paid-in capital, 50% of such reserve may be distributed to the Company's shareholders through the issuance of additional common shares in the form of a stock dividend.

On June 27, 2003, the Company's shareholders resolved in the annual meeting to use the legal reserve of NT$1,708,689 to oÅset accumulated deÑcits in retained earnings.

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 Ñscal year end in which the debit balance arose.

F-34

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

On June 27, 2003, the Company's shareholders resolved in the annual meeting to use the special reserve of NT$378,657 to oÅset accumulated deÑcits in retained earning.

Capital reserve

According to the ROC Company Law, the capital reserve can only be used for oÅsetting accumulated deÑcits or distribution of stock dividends. The Company cannot use the capital reserve to oÅset accumulated deÑcits unless the legal reserve is insuÇcient for oÅsetting such deÑcits.

On May 31, 2002, the Company's shareholders approved a resolution at the annual meeting to transfer a gain of NT$16,360 earned on disposal of property, plant and equipment to retained earnings.

On June 27, 2003, the Company's shareholders approved a resolution at the annual meeting to use the capital reserve of NT$2,630,621 to oÅset deÑcits in retained earnings.

Income distributions

Prior to May 2000, the Company's articles of incorporation provided that the net income, after deducting the previous years' losses and the appropriation of the legal reserve (""Distributable Earnings''), may be appropriated or distributed in the following sequence:

• a. Dividend to shareholders at 10% of the Company's paid-in capital;

• b. Employee bonuses at 15% of Distributable Earnings;

• c. Remuneration for directors and supervisors' services at 2% of Distributable

• Earnings;

• d. Shareholders' bonuses.

The Company's articles of incorporation, revised on May 3, 2000, provide that 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 or in the form of common shares or a combination thereof, as determined by the shareholders at the annual general meeting. 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.

F-35

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

15. Treasury Stock

On April 24, 2002, the Company's board of directors authorized the repurchase of up to 335,934,621 shares (NT$9,546,141) from the open market for the purpose of transferring shares to employees. The Company repurchased 40 million shares for NT$1,046,071 in 2002.

According to the Stock Exchange Regulations of Taiwan, total shares repurchased cannot exceed 10% of the Company's issued stock. Total repurchased amounts also cannot exceed the sum of retained earnings and the realized capital reserve. The Securities and Forwards Commission approved in April 2002 the Company's plan to repurchase stock. The maximum amount approved for repurchase was NT$9,546,141.

In accordance with the Stock Exchange Regulations of Taiwan, treasury stock cannot be pledged, voted or be eligible to receive dividends.

EÅective from January 1, 2002, the Company's shares owned by its subsidiaries were treated as treasury stock. The shares owned by the Company's subsidiary for the year 2002 and the six-month periods ended June 30, 2002 and 2003 were as follows:

Subsidiary Hui Ying Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subsidiary Hui Ying Investment, Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subsidiary Hui Ying Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2003 Shares Amount 6,023,152 142,365	January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2003 Shares Amount 6,023,152 142,365	January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2003 Shares Amount 6,023,152 142,365	January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2002 Shares Amount 5,475,593 142,365 January 1, 2003 Shares Amount 6,023,152 142,365	Additions	Additions	Additions		Disposals	Disposals	Disposals	Disposals			December 31, 2002	December 31, 2002	December 31, 2002
									Shares Amount Ì Ì Disposals		Amount		Selling price		Shares Amount 6,023,152 142,365 June 30, 2002		Market Value
					Shares Amount (note) 547,559 Ì Additions Shares Amount Ì Ì Additions Shares Amount Ì Ì		Amount
																	72,332
								Shares Ì Shares Ì									Market Value
									Shares		Amount Ì		Selling price
		Shares		Amount		Shares Ì	Amount
		6,023,152		142,365			Ì		Ì				Ì

Note: Hui Ying Investment, Ltd. received a 2002 stock dividend of 547,559 shares from the Company.

As of December 31, 2000, 2001 and 2002 and June 30, 2003, the Company's treasury stock was as follows:

Shares owned by Subsidiary ÏÏÏÏÏÏ Shares repurchased ÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31,	As of December 31,	US$ 4,113 30,225 34,338	As of June 30,	As of June 30,
	2000 NT$ Ì Ì Ì	2001 NT$ Ì Ì Ì	2002		2002 NT$ 142,365 1,046,071 1,188,436	2003
			NT$ 142,365 1,046,071 1,188,436			NT$ 142,365 1,046,071 1,188,436	US$ 4,113 30,225
							34,338

F-36

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

16. Income Taxes

The Company is located in the HSIP. In order for business operations to be eligible to be located 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 through 2000 to other business entities located in Taiwan, is imposed on proÑts generated business operations located in HSIP. Beginning 2001, the preferential income tax rate of 20% is no longer available to business operations located in HSIP.

The Company is entitled to a four-year income tax exemption period on income generated from the cost of 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 the expansion operations located in the HSIP during a Ñve year period beginning in the year taxable income is Ñrst generated from the expanded operations. The Company has elected to start the four-year tax exemption period to run from January 1, 2001 to December 31, 2004.

As of June 30, 2003 unused tax credits available to reduce future taxable income amounted to NT$4,210,631(US$121,659). The available tax credit in each year is limited to 50% of the corporate tax payable in that year, except in the last of such Ñve year period when there is no such limit. As of June 30, 2003, the Company had available the following amounts of tax credits:

Expiration Years 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$ 1,160,243 134,441 1,192,770 1,359,359 363,819 4,210,632	US$
		33,523 3,885 34,463 39,276 10,512
		121,659

Under the rules of R.O.C. Income Tax Law, operating losses can be carried forward for Ñve years. As of June 30, 2003, the Company had unutilized loss carryforwards of NT$9,240,792 (US$266,998), which expire in 2008.

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

Components of income tax expense (beneÑt):

Current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DeferredÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 524,210 94,236 10,840 312 (126,113) 849,259 9,058 262 398,097 943,495 19,898 574	As of December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 524,210 94,236 10,840 312 (126,113) 849,259 9,058 262 398,097 943,495 19,898 574	As of June 30,	As of June 30,	US$ (873) 1,546 673
	2000 NT$ 524,210 (126,113) 398,097	2001 NT$ 94,236 849,259 943,495	2002 NT$ 12,995 (1,363) 11,632	2003
				NT$ (30,197) 53,501 23,304

F-37

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The reconciliation of book income tax expense (beneÑt) computed at the Company's preferential 20% tax rate through 2000 and at 25% tax rate beginning in 2000 to income tax expense (beneÑt) recorded is summarized below:

Expected income tax expense (beneÑt) Undistributed earnings tax ÏÏÏÏÏÏÏ Additional tax assessment ÏÏÏÏÏÏÏ EÅect of tax exempt earningsÏÏÏÏÏÏÏÏÏÏÏ Tax credits earned ÏÏÏ Change in valuation allowance ÏÏÏÏÏÏÏÏÏ Net gain (loss) on long-term equity investment ÏÏÏÏÏÏÏÏ Correction to PY return ÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅect of rate change Impact of industrial park reduced tax rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax expenseÏÏ	For theyear ended	For theyear ended	December 31,	US$ (81,892) 9,199 Ì Ì (40,597) 95,887 (381) Ì 18,886 Ì (528) 574	For the six-month period ended	For the six-month period ended	June 30, US$ (44,699) Ì Ì Ì (4,173) 20,409 9,183 17,793 2,904 Ì (744) 673
	2000 NT$ 2,202,184 Ì 93,246 Ì (1,548,034) (630,739) 120,237 Ì 104,973 Ì 56,230 398,097	2001 NT$ 19,254 465,488 58,879 (256,260) (920,993) 1,255,102 (20,466) Ì Ì 317,936 24,555 943,495	2002		2002 NT$ (1,802,204) 318,378 874 Ì (956,113) 1,871,332 186,126 Ì 380,693 Ì 12,546 11,632	2003
			NT$ (2,834,280) 318,378 Ì Ì (1,405,069) 3,318,646 (13,194) Ì 653,667 Ì (18,250) 19,898			NT$ (1,547,030) Ì Ì Ì (144,433) 706,358 317,814 615,829 100,491 Ì (25,725) 23,304

Components of deferred income tax assets and liabilities:

Deferred tax liabilities Tax depreciation in excess of book depreciation ÏÏÏÏÏÏÏÏÏÏ Unrealized foreign exchange gains ÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred tax liabilities Deferred tax assets Tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory provisionÏÏÏÏÏÏ Bad debt allowance ÏÏÏÏÏ Accrued royalty expense Unrealized foreign exchange loss ÏÏÏÏÏÏÏÏ Loss carryforwards ÏÏÏÏÏ Unrealized equity investment lossÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 536,015 253,074 7,312 Ì 45,900 1,326 Ì 47 2 536,015 299,021 8,640 2,979,508 4,066,198 117,486 501,304 444,135 12,833 25,917 13,710 396 132,543 52,127 1,506 114,461 11,853 342 Ì 2,244,203 64,843 Ì Ì Ì	As of December 31, 2001 2002 NT$ NT$ US$ 536,015 253,074 7,312 Ì 45,900 1,326 Ì 47 2 536,015 299,021 8,640 2,979,508 4,066,198 117,486 501,304 444,135 12,833 25,917 13,710 396 132,543 52,127 1,506 114,461 11,853 342 Ì 2,244,203 64,843 Ì Ì Ì	As of June 30,	As of June 30,	As of June 30,
	2000 NT$ 369,659 Ì Ì 369,659 3,029,232 132,459 24,565 67,251 103,160 Ì Ì	2001 NT$ 536,015 Ì Ì 536,015 2,979,508 501,304 25,917 132,543 114,461 Ì Ì		2002 NT$ 353,648 13,785 2,916 370,349 3,617,243 527,862 15,092 71,840 Ì 1,280,038 134,875	2003
			NT$ 253,074 45,900 47 299,021 4,066,198 444,135 13,710 52,127 11,853 2,244,203 Ì		NT$ 646,327 2,359 46 648,732 4,210,632 413,539 15,940 45,373 17,035 2,310,198 930,562	US$ 18,675 68 1
						18,744
						121,659 11,949 461 1,311 492 66,749 26,887

F-38

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Amortization of capacity variance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred tax assets ÏÏ Valuation allowance ÏÏÏÏÏÏÏ Net deferred tax assetsÏÏÏÏ Total net deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net deferred tax assets- current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net deferred tax assets- non-currentÏÏÏÏÏÏÏÏÏÏÏÏÏ Total net deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ Ì Ì Ì 235,088 229,189 6,622 3,988,821 7,061,415 204,028 (1,497,391) (4,816,037) (139,151) 2,491,430 2,245,378 64,877 1,955,415 1,946,357 56,237 761,889 495,112 14,306 1,193,526 1,451,245 41,931 1,955,415 1,946,357 56,237	As of December 31, 2001 2002 NT$ NT$ US$ Ì Ì Ì 235,088 229,189 6,622 3,988,821 7,061,415 204,028 (1,497,391) (4,816,037) (139,151) 2,491,430 2,245,378 64,877 1,955,415 1,946,357 56,237 761,889 495,112 14,306 1,193,526 1,451,245 41,931 1,955,415 1,946,357 56,237	As of June 30, 2002 2003 NT$ NT$ US$ Ì 102,532 2,962 28,232 18,172 525 5,675,182 8,063,983 232,995 (3,348,055) (5,522,395) (159,561) 2,327,127 2,541,588 73,434 1,956,778 1,892,856 54,690 1,023,410 583,701 16,865 933,368 1,309,155 37,825 1,956,778 1,892,856 54,690	As of June 30, 2002 2003 NT$ NT$ US$ Ì 102,532 2,962 28,232 18,172 525 5,675,182 8,063,983 232,995 (3,348,055) (5,522,395) (159,561) 2,327,127 2,541,588 73,434 1,956,778 1,892,856 54,690 1,023,410 583,701 16,865 933,368 1,309,155 37,825 1,956,778 1,892,856 54,690
	2000 NT$ Ì 59,955 3,416,622 (242,289) 3,174,333 2,804,674 1,210,602 1,594,072 2,804,674	2001 NT$ Ì 235,088 3,988,821 (1,497,391) 2,491,430 1,955,415 761,889 1,193,526 1,955,415		2002 NT$ Ì 28,232 5,675,182 (3,348,055) 2,327,127 1,956,778 1,023,410 933,368 1,956,778
			NT$ Ì 229,189 7,061,415 (4,816,037) 2,245,378 1,946,357 495,112 1,451,245 1,946,357		NT$ 102,532 18,172 8,063,983 (5,522,395) 2,541,588 1,892,856 583,701 1,309,155 1,892,856

17. Related Party Transactions

a. Related Parties and Relationships

Related parties

Caesar Technology, Inc. (""Caesar'') Biomorphic VLSI. Inc.(""Biomorphic'') Prominent Communications, Inc. (""PCI'') Chantek Electronic Co., Ltd. (""Chantek'')

United Industry Gases Co., Ltd. (""UIG'') Powertech Technology, Inc.(""Powertech'')

Ardentec Corporation (""Ardentec'')

Tower Semiconductor, Ltd. (""Tower'')

Chiao Tung Bank(""Chiao Tung'')

FueTrek Co., Ltd. (""FueTrek'')

Raio Technology Co., Ltd. (""Raio'')

Macronix Education Foundation

Relationships

The Company's equity investee. (note) The Company's equity investee.

The Company's equity investee.

• The Company was represented on Chantek's board of directors before October 29, 2001.

The Company is UIG's supervisor.

• The Company is represented on Powertech's board of directors.

• The Company is represented on Ardentec's board of directors.

The Company is represented on Tower's board of directors.

Chiao Tung Bank was represented on the Company's board of directors before November 26, 2002.

• The Company is represented on FueTrek's board of directors.

• The Company is represented on Raio's board of directors.

The president is the same.

Note: Caesar Technology Inc. applied for formal compulsory liquidation in January 2002 and completed the liquidation process on May 10, 2003.

F-39

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

b. Major transactions with related parties

Sales to related parties were as follows:

Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PCI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 63,198 88,721 158,194 4,571 Ì Ì 155,923 4,505 Ì 9,749 15,298 442 63,198 98,470 329,415 9,518	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 63,198 88,721 158,194 4,571 Ì Ì 155,923 4,505 Ì 9,749 15,298 442 63,198 98,470 329,415 9,518	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 63,198 88,721 158,194 4,571 Ì Ì 155,923 4,505 Ì 9,749 15,298 442 63,198 98,470 329,415 9,518	For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,
	2000 NT$ 63,198 Ì Ì 63,198	2001 NT$ 88,721 Ì 9,749 98,470	2002	2002 NT$ 89,326 50,989 Ì 140,315	2003
			NT$ 158,194 155,923 15,298 329,415		NT$ 68,142 Ì 36,291 104,433	US$
						1,969 Ì 1,048
						3,017

Sales prices to PCI, Biomorphic and Raio are not comparable with those of regular customers because the Company is the sole provider for them.

The general collection terms with related parties are 45-60 days, similar to those with regular customers.

(a) Manufacturing processing charges to related parties for the years ended December 31, 2000, 2001, 2002 and for the six-month periods ended June 30, 2002 and 2003, are summarized as follows:

Caesar ÏÏÏÏÏÏ Chantek ÏÏÏÏÏ Powertech ÏÏ ArdentecÏÏÏÏ TotalÏÏÏÏÏÏÏÏ		December	31, 2002 NT$ US$ Ì Ì Ì Ì 172,778 4,992 240,686 6,954 413,464 11,946		June 30,	June 30,
	2000 NT$ 593,965 390,190 96,197 63,538 1,143,890	2001 NT$ 240,003 103,873 106,263 108,329 558,468			2002 NT$ Ì Ì 44,999 57,513 102,512	2003
			NT$ Ì Ì 172,778 240,686 413,464			NT$ Ì Ì 103,511 50,938 154,449	US$ Ì Ì 2,991 1,472
							4,463

Such charges form a part of cost of goods sold.

(b) The Company purchased industrial gases from UIG totaling NT$116,944, NT$119,137, NT$109,940 (US$3,177), NT$57,418 and NT$46,273 (US$1,337) for the years ended December 31, 2000, 2001, 2002, and for the six-month periods ended June 30, 2002 and 2003, respectively. Such purchases are included in cost of goods sold.

(c) For the years ended December 31, 2001, 2002, and the six-month periods ended June 30, 2002 and 2003, the Company purchased wafers from Tower totaling NT$157,263, NT$136,047 (US$3,931), NT$53,153 and NT$33,343 (US$963). Such purchases are included in 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 in 18.g, the Company made the third and the fourth milestone payments to Tower on April 23, 2002 and October 1, 2002, respectively, which, in aggregate, increased the Company's investment in Tower by US$13,201 (NT$458,069) and the prepaid credit account by US$8,800 (NT$305,379), respectively. As of June 30, 2003, NT$489,242 (US$14,138) remained in the prepaid credit account.

F-40

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(d) Merchandise purchased from related parties are as follows:

PCI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏÏ Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 97 232 404,717 11,694 Ì 3,300 46,716 1,350 Ì 2,653 13,863 400 97 6,185 465,296 13,444	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 97 232 404,717 11,694 Ì 3,300 46,716 1,350 Ì 2,653 13,863 400 97 6,185 465,296 13,444	For theyear ended December 31, 2000 2001 2002 NT$ NT$ NT$ US$ 97 232 404,717 11,694 Ì 3,300 46,716 1,350 Ì 2,653 13,863 400 97 6,185 465,296 13,444		For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,
	2000 NT$ 97 Ì Ì 97	2001 NT$ 232 3,300 2,653 6,185			2002 NT$ 112,990 Ì Ì 112,990	2003
			NT$ 404,717 46,716 13,863 465,296			NT$ 63,798 53,008 3,231 120,037	US$ 1,843 1,532 93
							3,468

(e) The Company entered into an IP License Agreement with FueTrek. Total amount of license fees to be paid under this agreement was NT$10,050 (US$290). This amount has been paid as of June 30, 2003. The Company recorded such amount as a deferred asset and amortized it over the contract's life.

(f) The Company donated NT$18,985 (US$549) to Macronix Education Foundation in the six months ended June 30, 2003.

(g) Refer to note 11 with regard to information about the Company's capital lease agreement with Caesar.

(h) Accounts receivable from related parties as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 were as follows:

PCI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ UIGÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for doubtful accounts ÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 NT$ NT$ US$ 3 33,237 960 10,198 27,498 794 Ì 21,200 613 Ì 15,999 462 9,875 Ì Ì 20,076 97,934 2,829 Ì (7,000) (202) 20,076 90,934 2,627	As of December 31, 2001 2002 NT$ NT$ US$ 3 33,237 960 10,198 27,498 794 Ì 21,200 613 Ì 15,999 462 9,875 Ì Ì 20,076 97,934 2,829 Ì (7,000) (202) 20,076 90,934 2,627		As of June 30, 2002 2003 NT$ NT$ US$ 23,948 Ì 44,817 36,689 1,060 Ì 18,384 531 179 54,191 1,566 3,137 1,629 47 72,081 110,893 3,204 (18,088) (46,000) (1,329) 53,993 (64,893) 1,875	As of June 30, 2002 2003 NT$ NT$ US$ 23,948 Ì 44,817 36,689 1,060 Ì 18,384 531 179 54,191 1,566 3,137 1,629 47 72,081 110,893 3,204 (18,088) (46,000) (1,329) 53,993 (64,893) 1,875
	2000 NT$ Ì Ì Ì Ì Ì Ì Ì Ì	2001 NT$ 3 10,198 Ì Ì 9,875 20,076 Ì 20,076			2002 NT$ 23,948 44,817 Ì 179 3,137 72,081 (18,088) 53,993
			NT$ 33,237 27,498 21,200 15,999 Ì 97,934 (7,000) 90,934			NT$ Ì 36,689 18,384 54,191 1,629 110,893 (46,000) (64,893)

F-41

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(i) Payables to related parties as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 were as follows:

PCIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Caesar ÏÏÏÏÏÏÏÏÏÏÏ Chantek ÏÏÏÏÏÏÏÏÏÏ UIG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PowertechÏÏÏÏÏÏÏÏ Tower ÏÏÏÏÏÏÏÏÏÏÏ Ardentec ÏÏÏÏÏÏÏÏÏ Biomorphic ÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31,	As of December 31,	US$ 927 Ì Ì 246 1,742 494 903 Ì 219 4,531	As	of June 30,
	2000 NT$ Ì 140,060 76,131 9,803 51,196 Ì 28,623 Ì 320 306,133	2001 NT$ Ì 28,538 20,321 10,290 34,723 11,183 24,290 Ì 3,832 133,177	2002		2002 NT$ 19,686 Ì Ì 10,204 31,838 11,166 42,225 Ì 393 115,512	2003
			NT$ 32,091 Ì Ì 8,517 60,292 17,070 31,255 Ì 7,584 156,809			NT$ Ì Ì Ì 18,838 41,474 8,186 25,785 17,293 1,986 113,562	US$ Ì Ì Ì 544 1,198 237 745 500 57
							3,281

(j) Loans

Chiao TungÏÏÏÏÏÏ Chiao TungÏÏÏÏÏÏ Chiao TungÏÏÏÏÏÏ Chiao TungÏÏÏÏÏÏ Chiao TungÏÏÏÏÏÏÏÏ	Year	ending December 31, 2000	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% Ó 7.89% ending December 31, 2001			Interest Expense
	Amount $7,705,406
					$517,418
	Maximum Balance Amount Month 6,275,370 March Year	Ending Balance Interest Rate 5,052,036 1.5% Ó 7.79% ending December 31, 2002			Interest Expense
	Amount 6,275,370
					337,381
	Maximum Balance Ending Amount Month Balance Interest Rate 6,440,948 November 6,424,108 2.09% Ó 5.92% Period ending June 30, 2002				Interest Expense
	Amount 6,440,948
					170,071
	Maximum balance Amount Month $4,244,982 January ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Ending balance $4,200,302 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest Interest rate expense 2.4625% Ó 5.92% $ 76,568 Period ending June 30, 2003 ÏÏÏÏÏ Not a related party		Interest expense
	Amount $4,244,982 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
					$ 76,568
				Not a related party

Chiao TungÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(k) The Company acted as guarantor for a loan to Biomorphic in the maximum aggregate principal amount of US$3,400. As of December 31, 2001, 2002, June 30, 2002 and 2003, the amount outstanding under such loan was US$3,400, US$2,750, US$3,400 and US$3,400, respectively.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

18. Commitments and Contingencies

The Company's commitments and contingencies, not included in the Ñnancial statements, as of June 30, 2003 were as follows:

a. Letters of credit issued for future deliveries of inventories and equipment amounted to NT$454,586 (US$13,135).

b. The Company's signiÑcant construction and machinery contracts totaled approximately NT$14,773,803 (US$426,865). The Company paid NT$10,088,312 (US$291,485) pursuant to these contracts as of June 30, 2003.

c. Operating Leases:

The land on which the Company's buildings are located is leased from the HSIP. The related leases expire in the year from 2010 to 2020 and are renewable at the Company's option.

Future minimum payments under these non-cancelable operating leases as of June 30, 2003 were as follows:

2003 were as follows:
July 1, 2003 Ó June 30, 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2004 Ó June 30, 2005ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2005 Ó June 30, 2006ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2006 Ó June 30, 2007ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ July 1, 2007 Ó June 30, 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ThereafterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total minimum lease payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Operating Leases
	NT$ 65,321 64,384 64,384 64,384 64,384 388,362 711,219	US$ 1,888 1,860 1,860 1,860 1,860 11,222
		20,550

Rental expenses under the operating leases amounted to NT$65,524, NT$71,746, NT$72,796 (US$2,103), NT$49,181, NT$33,129 (US$957), for the years ended December 31, 2000, 2001, 2002 and for the six-month periods ended June 30, 2002, 2003, respectively.

d. The license fees from products license agreements entered into by the Company with IBM and AGERE totally amounted to US$46,000. As of June 30, 2003, the Company had paid US$31,000 pursuant to the agreements.

e. The Company entered into a technology agreement with a company. As of June 30, 2003, Ñxed license fee had been fully paid, while running royalties will be charged based on the percentages of the net sales from the licensed products pursuant to the agreement.

f. On February 18, 1997, Atmel Corporation (""Atmel'') Ñled a legal action against MXA, one of the Company's subsidiaries, with the International Trade Commission (""ITC'') for an alleged violation of Atmel's patent No. 903. On June 1, 2001, the ITC issued a Notice of Final Determination, ruling that MXA did not infringe the 903 patent. Atmel Ñled a petition to the ITC to reverse its non-infringement Ñnding. 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 Ñnal determination and therefore is bound by the ITC's Ñnding that MXA did not infringe the 903 patent.

In August 1997, Atmel Ñled a complaint against MXA for infringement of Atmel's patents No. 096 and 747. MXA applied for summary judgment for both patents. On January 14, 2002,

F-43

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

the Court issued an order denying Atmel's motion to correct inventorship of the 747 patent. Based on that order, MXA has sought a ruling of invalidity of the 747 patent due to incorrect inventorship, and is awaiting the Court's decision. On May 14, 2003, the Court granted the Company's motion for summary judgment of invalidity of the 747 patent due to nonjoinder of co-inventor. SpeciÑcally, the Court's Order found that all claims of the 747 patent are invalid for nonjoinder of a co-inventor. The Court has also granted the Company's motion for summary judgment against three of the four asserted claims of the 096 patent, leaving only one claim to be litigated on the 096 patent. In light of the results to date, the Company believes that there will be no signiÑcant impact on its operations or Ñnancial position 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 signiÑcant costs with respect to the defense of the claims, which could have a material adverse eÅect on the Company's Ñnancial 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 speciÑc arrangements.

g. The Company entered into an agreement with Tower Semiconductor Ltd. (""Tower''), an Israeli public company whose shares are quoted on the NASDAQ National Market, to purchase silicon wafers to be manufactured by Tower (""Wafer'') in an amount of 25% of then available quarterly manufacturing capacity of a speciÑed production line, after it passes qualiÑcation testing, but not more than 4,750 Wafer outs per month (the ""Minimum Loading Obligation'') commencing on the date manufacturing on a speciÑed production line commences and ending 12 months following the expected production date, the Minimum Loading Obligation shall, from the third quarter of the expected production date, be reduced by 950 wafer outs per month each quarter. The minimum Loading Obligations may be limited to 15% of Tower's capacity before Tower proves to the Company that the one time programmable or multiple time programmable pass the production qualiÑcation. If the Company maintains speciÑed levels of investment in Tower's shares, the Company will receive favorable pricing terms on the Ñrst 3,800 wafers purchased each month until the contract expires in 2011.

In conjunction with the foundry agreement, the Company entered into share purchase agreements in December 2000 with Tower whereby the Company agreed to invest US$75 million in Tower. Following an initial payment of US$20 million for 866,551 shares made in January 2001, upon completion by Tower of certain milestones speciÑed in the agreement, payments to Tower are made in Ñve equal installments of US$11 million each. Upon satisfaction of each milestone, the Company is required to purchase 733,380 shares of Tower. Payment for the Ñrst milestone was made in March 2001 and payment for the second milestone was made in April 2001. The Company acquired a total of 366,690 shares with the Ñrst two payments. The payments are held on deposit with Tower and may be used to purchase Tower shares or wafers or make royalty payments.

In September 2001, in connection with Tower's Ñnancial restructuring, the Company (together with the other wafer producers) exchanged US$16,012 of its prepaid credit account to purchase 1,255,848 Tower shares at US$12.75 per share.

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

F-44

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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 and the forth milestone payment on April 23 and October 1, 2002, respectively. For these payments, the Company acquired 1,071,497 and 1,344,829 of Tower's shares, respectively, at US$6.16 and US$4.908 per share, respectively. In addition, the Company participated in Tower's shares oÅering on October 21, 2002 and acquired 660,000 shares at US$5 per share.

As of June 30, 2003, the Company's prepaid credit account amounted to NT$489,242 (US$14,138). Pursuant to the terms applicable to the credits issued in connection with the various milestone payments, this account may be applied against wafer purchases by 7.5% to 15% of each wafer purchase amount. In addition, this account may in certain circumstances be applied towards the purchase of additional unregistered ordinary shares or credited against other amounts payable by the Company to Tower, including certain payments to be made by the Company and Tower Company under the SCM Waiver Agreement dated December 12, 2000 between the Company and Tower.

In February 2003, the board of Tower agreed to further amend the shares purchase agreement. The terms of the amendment require the payment of US$11,000 for the Ñfth and also the Ñnal milestone and this payment will be made in two installments. The Ñrst installment of approximately US$6,600 will be due Ñve business days after the amendment is approved by Tower, the Company and certain shareholders of Tower; the second installment of approximately US$4,400 will be due Ñve business days after Tower has raised additional funds equal to approximately US$22,000, referred to as the Minimum Financing. Immediately following the advancement of the Ñrst installment, the Company will be issued fully-paid and non-assessable ordinary shares of Tower equivalent to the Ñrst installment divided by the average trading price for the ordinary shares of Tower during the 30 consecutive trading days preceding the date that the amendment is approved by Tower's board of directors. Immediately following the advancement of the second installment, the Company will be issued fully-paid and nonassessable ordinary shares of Tower equivalent to the second installment divided by the price per ordinary share of Tower paid in connection with the Minimum Financing (the ""Minimum Financing Price''); provided, however, that if the Minimum Financing Price cannot reasonably be calculated from the documents evidencing the Minimum Financing, then the Minimum Financing Price shall be the average trading price for the ordinary shares of Tower during the 30 consecutive trading days preceding the date the second installment is paid. In addition, under the terms of the amendment, the Company is granted an option to convert all or a portion of its unused prepaid credit account associated with the fourth milestone payment in the aggregate amount of NT$304,524 into Tower's unregistered shares based on the average closing price of Tower's common shares during the 30 consecutive days preceding December 31, 2005. On May 16, 2003, the Company paid US$3,600 for the Ñrst installment, obtaining 1,206,839 shares of Tower's at the price of US$2.983 per share. There was US$3,000 of the Ñrst installment remained unpaid as of June 30, 2003.

As of June 30, 2003, the Company owned approximately 14.89 % of Tower's shares and had NT$489,242 or about US$14,138 remaining on deposit with Tower that may be used toward purchases of wafers or unregistered shares of Tower.

F-45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

MACRONIX INTERNATIONAL CO., LTD.

19. Other Disclosures

• a Property, plant and equipment

Total capitalized interest amounted to NT$310,082, NT$153,373, NT$363,670 (US$10,508), NT$194,648, NT$60,610 (US$1,751) for the years ended December 31, 2000, 2001, 2002 and for the six-month periods ended June 30, 2002, 2003, respectively.

The insurance coverage for property, plant and equipment amounted to NT$38,575,907, NT$59,526,195, NT$60,128,403 (US$1,737,313), NT$59,859,054 and NT$62,287,671 (US$1,799,702) as of December 31, 2000, 2001, 2002, and as of June 30, 2002 and 2003, respectively.

b Royalty Revenue

Royalty revenue earned amounted to NT$84,973, NT$76,759, NT$34,462 (US$996), NT$36,948, NT$5,549 (US$160) for the years ended December 31, 2000, 2001, 2002, and for the six-month periods ended June 30, 2002 and 2003, respectively.

c SigniÑcant Subsequent Events

(Unaudited) On August 13, 2003, the Company's Boards of Directors passed a resolution for the oÅering of 500,000,000 common shares with NT$10 at par and the oÅering price at NT$8 per share. The number of shares and the oÅering price were subsequently approved to change to 475,000,000 shares and NT$8.11 per share. The oÅering was approved by the SFC on October 22, 2003. As of November 12, 2003, all shares in this oÅering had been subscribed and paid up, resulting in the Company realizing gross proceeds of NT$3,852,250.

(Unaudited) In the third quarter 2003, NT$1,306,000 of unsecured domestic convertible debentures were converted into the Company's common shares, which resulted in the issuance of 148,408,805 additional common shares.

(Unaudited) In November 2003, the Company agreed to amend the shares purchase agreement with Tower (as discussed in note 18g), subject to the approval of Tower's shareholders, to, among other things, (a) advance the entire amount of the remaining Ñfth milestone payment of US$7,400, (b) defer the use of the Company's wafer credits in Tower, and (c) extend the lock-up period for the Company's Tower shares. SpeciÑcally,

(a) The Company agreed to waive all terms of Tower's milestones and advance to Tower in one aggregate lump sum the remaining portion of the Ñrst installment (US$3,000) and the entire second installment (US$4,400). With respect to the remaining portion of the Ñrst installment, the Company will be issued non-assessable ordinary shares equivalent to the aggregate of its remaining portion of the Ñrst installment divided by US$2.983. With respect to the second installment, the Company will be issued nonassessable ordinary shares equal to the second installment divided by the price per share in a certain public oÅering, provided, however, that such public oÅering is not consummated within 180 days from the date of the amendment, the Company will be issued nonassessable ordinary shares equal to the second installment divided by the average trading price for Tower's shares during the 15 consecutive trading days preceding the payment of the second installment.

(b) The Company agreed not to use wafer credits until January 1, 2007, except with respect to purchase orders issued before the date of the amendment utilizing wafer credits. However, the amendment provides an option for the Company to convert credits it would

F-46

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

have otherwise been able to utilize per quarter into non-assessable ordinary shares of Tower. Unconverted credits will accrue interest at a rate per annum equal to three-month LIBOR plus 2.5% through December 31, 2007. Interest payments will be made quarterly and the aggregate principal amount of the unconverted credits will be repaid in one lump sum on December 31, 2007.

(c) The Company agreed not to sell the Tower shares until January 29, 2006, except the Company may sell 30% of the Tower shares held by it as of January 29, 2004.

d Information on Investments in Mainland China

The Company does not have any material investments in Mainland China.

e Other

Certain accounts in the Ñnancial statements of the Company as of December 31, 2000, 2001 and 2002 and June 30, 2002 have been reclassiÑed to conform with the presentation of the current period.

20. Segment Information

a) 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 signiÑcant 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 consists of revenue less direct and allocable operating expenses. Segment identiÑable assets are those which are directly used in or identiÑed to segment operations.

F-47

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The geographic distributions of the Company's identiÑable assets, operating income and revenues are summarized in the following tables.

2000 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customers ÏÏÏÏÏÏÏ 28,086,268 3,244,508 2,162,332 Sales between geographic areas ÏÏÏÏÏ 4,151,714 61,526 Ì Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,237,982 3,306,034 2,162,332 Operating income (loss), including other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,602,123 117,140 (275,948) Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,205,052 1,493,371 2,407,247 Capital expendituresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 11,785,823 4,807 12,241 Depreciation and amortizationÏÏÏÏÏÏÏÏ 6,045,466 2,734 Ì 2001 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customersÏÏÏÏÏÏÏÏÏ 19,315,375 1,625,430 806,425 Sales between geographic areas ÏÏÏÏÏÏÏ 2,045,346 73,754 Ì Net SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 21,360,721 1,699,184 806,425 Operating income (loss), including other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 567,227 (156,008) 19,402 Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 71,978,632 4,076,899 212,175 Capital expendituresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,294,353 777,500 5,900 Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏ 7,996,672 5,237 3,847	Elimination NT$ Ì (4,213,240) (4,213,240) 292,121 (2,655,039) Ì Ì Elimination NT$ Ì (2,119,100) (2,119,100) 324,095 (3,958,924) Ì Ì	Consolidated NT$ 33,493,108 Ì 33,493,108 11,735,436 541,387 (1,265,902) 11,010,921 (398,097) 10,612,824 72,450,631 11,802,871 6,048,200 Consolidated NT$ 21,747,230 Ì 21,747,230 754,716 495,611 (1,173,312) 77,015 (943,495) (866,480) 72,308,782 9,077,753 8,005,756

F-48

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

2002 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customers ÏÏÏ 14,686,242 1,378,719 427,503 Sales between geographic areas 1,388,914 106,973 109,318 Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,075,156 1,485,692 536,821 Operating income (loss), including other expensesÏÏÏÏÏÏÏ (10,467,666) (1,110,247) (1,212) Interest revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,320,896 309,266 4,531,545 Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,576,597 Ì 3,871 Depreciation and amortization ÏÏÏÏ 8,731,930 4,774 5,397 Six months ended June 30, 2002 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customersÏÏÏÏÏÏÏÏÏ 6,183,135 709,109 56,612 Sales between geographic areas ÏÏÏÏÏÏÏ 554,876 43,406 180,886 Net SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,738,011 752,515 237,498 Operating income (loss), including other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,779,340) (678,323) 1,315 Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,881,728 4,535,047 106,503 Capital expendituresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,859,173 208 4,708 Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏ 4,288,149 3,025 3,306	2002 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customers ÏÏÏ 14,686,242 1,378,719 427,503 Sales between geographic areas 1,388,914 106,973 109,318 Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 16,075,156 1,485,692 536,821 Operating income (loss), including other expensesÏÏÏÏÏÏÏ (10,467,666) (1,110,247) (1,212) Interest revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxesÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 66,320,896 309,266 4,531,545 Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏ 8,576,597 Ì 3,871 Depreciation and amortization ÏÏÏÏ 8,731,930 4,774 5,397 Six months ended June 30, 2002 Domestic USA Others NT$ NT$ NT$ Sales to unaÇliated customersÏÏÏÏÏÏÏÏÏ 6,183,135 709,109 56,612 Sales between geographic areas ÏÏÏÏÏÏÏ 554,876 43,406 180,886 Net SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,738,011 752,515 237,498 Operating income (loss), including other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,779,340) (678,323) 1,315 Interest revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 69,881,728 4,535,047 106,503 Capital expendituresÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,859,173 208 4,708 Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏ 4,288,149 3,025 3,306	Elimination Consolidated NT$ NT$ Ì 16,492,464 (1,605,205) Ì (1,605,205) 16,492,464 1,262,969 (10,316,156) 216,937 (1,237,902) (11,337,121) (19,898) 356 (11,356,663) (3,041,646) 68,120,061 Ì 8,580,468 Ì 8,742,101 Elimination Consolidated NT$ NT$ Ì 6,948,856 (779,168) Ì (779,168) 6,948,856 742,095 (6,714,253) 122,672 (581,143) (7,172,724) (11,632) (7,184,356) (3,486,429) 71,036,849 Ì 4,864,089 Ì 4,294,480
	NT$ 56,612 180,886
	237,498
	1,315
	106,503
	4,708
	3,306

F-49

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Six months ended June 30, 2003 Sales to unaÇliated customersÏÏÏÏÏÏ Sales between geographic areas ÏÏÏÏ Net SalesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating income (loss), including other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Tax expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minority interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ IdentiÑable assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Depreciation and amortization ÏÏÏÏÏÏ	Domestic NT$ 6,520,039 537,814 7,057,853 (5,798,639) 58,010,093 996,769 4,791,210	USA NT$ 375,621 62,402 438,023 (1,051,232) 280,987 246 1,820	Others NT$ 258,821 63,332 322,153 (6,007) 3,292,989 795 2,877	Elimination NT$ Ì (663,548) (663,548) 1,171,424 (3,113,619) Ì (204)	Consolidated NT$ 7,154,481 Ì 7,154,481 (5,684,454) 49,320 (552,987) (6,188,121) (23,304) 2,332 (6,209,093) 58,430,450 997,810 4,795,703

Major customers

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

Customers Nintendo ÏÏÏ HPÏÏÏÏÏÏÏÏÏ MitsubishiÏÏ Total ÏÏÏÏÏÏ		For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,		For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,
	2000		2001		2002		US$		2002	2003
	NT$	%	NT$	%	NT$	%		NT$	%	NT$	%	US$
	11,000,761 2,957,795 2,687,224	32.84 8.83 8.03	8,389,547 1,364,785 2,556,151	38.58 6.28 11.75	5,646,469 1,691,841 379,982	34.24 10.26 2.30	163,146 48,883 10,979	1,706,499 836,636 259,192	24.56 12.04 3.73	1,088,130 834,892 605,456	15.21 11.67 8.46	31,440 24,123 17,493
	16,645,780	49.70	12,310,483	56.61	7,718,292	46.80	223,008	2,802,327	40.33	2,528,478	35.34	73,056

Exports

The Company's export sales accounted for 78%, 74%, 82%, 78% and 69% of total net sales for the years ended December 31, 2000, 2001, 2002, and for the six-month periods ended June 30, 2002 and 2003, respectively.

Export sales from the ROC are as follows:

JapanÏÏÏÏÏÏÏÏÏÏ Singapore and Hong KongÏÏÏ United States ÏÏ EuropeÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏ	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	US$ 230,662 105,639 46,716 9,975 392,992	For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,
	2000 NT$ 15,633,134 4,752,607 3,234,672 2,566,235 26,186,648	2001 NT$ 10,892,506 2,702,321 1,808,299 633,198 16,036,324	2002		2002 NT$ 2,672,151 1,766,929 800,750 180,886 5,420,716	2003
			NT$ 7,983,215 3,656,167 1,616,837 345,226 13,601,445			NT$ 2,729,306 1,640,988 368,180 180,220 4,918,694	US$ 78,859 47,414 10,638 5,207
							142,118

F-50

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Products

The Company's principal products and services consist of memory products, SOC products and services, and multimedia products. The following table sets forth the amounts of total net sales revenue from external customers represented by these products for the periods ended on December 31, 2000, 2001, 2002 and June 30, 2002 and 2003:

ROMÏÏÏÏÏÏÏÏÏÏÏ Flash ÏÏÏÏÏÏÏÏÏÏ SMSÏÏÏÏÏÏÏÏÏÏÏ SLC ÏÏÏÏÏÏÏÏÏÏÏ EPROM ÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏ Total net sales revenueÏÏÏÏÏÏ	For theyear ended December 31,	For theyear ended December 31,	For theyear ended December 31,	US$ 218,867 125,850 11,865 83,630 17,107 19,204 476,523	For the six months ended June 30,	For the six months ended June 30,	For the six months ended June 30,
	2000 NT$ 19,292,030 6,430,677 3,114,859 1,875,614 1,239,245 1,540,683 33,493,108	2001 NT$ 12,308,932 3,044,612 2,783,645 2,000,745 978,625 630,671 21,747,230	2002		2002 NT$ 3,131,849 1,573,221 275,175 1,344,604 307,834 316,173 6,948,856	2003
			NT$ 7,574,989 4,355,660 410,662 2,894,427 592,079 664,647 16,492,464			NT$ 2,666,475 2,542,703 769,822 764,814 212,488 198,179 7,154,481	US$ 77,044 73,467 22,243 22,098 6,139 5,726 206,717

21. Financial Instruments

SigniÑcant 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, 2003, approximately 43.49% of the Company's long-term debt was in US dollars and approximately 45.90% of the Company's accounts receivable were in Japanese Yen. To protect against reductions in value and volatility of future cash Öows caused by changes in foreign exchange rates, the Company utilizes Ñnancial 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 hedging purposes. To mitigate the credit risk associated with Ñnancial instruments, all the counter-parties of the contracts entered into by the Company are reputable global Ñnancial institutions. The outstanding Ñnancial instrument positions, identiÑed for hedging or trading purposes, as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 are as follows:

a. Foreign currency forward contracts

The table below summarizes by major currency the notional amounts of forward exchange contracts in NT dollars. Foreign currency amounts are translated at rates current at the reporting date. The ""buy'' amounts represent the NT dollar equivalent of commitments to purchase foreign currencies, and the ""sell'' amounts represent the NT dollar equivalent of commitments to sell foreign currencies. Most of the Company's foreign exchange forward contracts matured in 2002, and were entered into for the purposes of hedging the foreign exchange exposures arising from the Company's assets and liabilities.

US dollarÏÏÏÏÏÏÏ Japanese Yen ÏÏ	As of December 31,	As of December 31,	2002 Buy Sell Ì Ì Ì Ì	As of June 30,	As of June 30,
	2000 Buy Sell Ì Ì Ì 73,407	2001 Buy Sell 314,550 Ì Ì 333,660		2002 368,830 Ì Ì 290,172	2003
	Buy Ì Ì	Buy 314,550 Ì		368,830 Ì	Buy Sell Ì Ì Ì Ì

F-51

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

As of December 31, 2000 and 2001 and June 30, 2002, the net receivable (payable) resulting from the above exchange contracts amounted to NT$(13,407), NT$699 and NT$(10,704).

Net exchange gains (losses) related to foreign currency forward contracts for the years ended December 31, 2000, 2001, 2002 and for the six-month periods ended June 30, 2002 and 2003 were NT$(6,267), NT$47,821, NT$(30,612)(US$(884)), NT$(1,651) and NT$- (US$-), respectively.

b. Option 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 eÅect that, if the rate of one currency to the other currency in exchange exceeds a given rate, the contracts are automatically terminated. These have the impact of reducing the upfront cost of the options.

• c. Cross currency and interest rate swaps

To hedge against certain of the Company's long-term debt denominated in US dollars which bear interest at Öoating three-month SIBOR, the Company entered into cross currency and interest rate swaps which eÅectively converted the debts into Japanese Yen and the Öoating interest rate into a Ñxed 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 they expose the Company to foreign exchange risk. The Company placed deposits with certain Ñnancial institutions which entitled the Company to earn interest rates in excess of the market rates for a ""basic'' deposit. However, the Ñnancial 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 hedging purposes.

F-52

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

• e. The estimated fair values of the Company's Ñnancial instruments were as follows:

On balance sheet:

On balance sheet:
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term equity investments ÏÏÏÏÏÏÏÏÏÏÏÏ Short-term debts and notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debts (including current portion) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cross currency interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Equity contract ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Derivative related to the 8 optionsÏÏÏÏÏÏÏÏ Foreign exchange forwardsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Structured depositÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Option ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		As of December 31, 2001 2002 Carrying Carrying amount Fair value amount Fair value NT$ NT$ NT$ US$ NT$ US$ 12,560,954 12,560,954 7,394,361 213,648 6,142,823 177,487 1,243,907 1,107,494 1,185,324 34,248 1,164,023 33,633 1,502,672 1,511,837 1,827,089 52,791 2,252,953 65,095 (733,950) (733,950) (2,159,151) (62,385) (2,15 9,151) (62,385) (20,770,261) (18,402,577) (27,079,629) (782,423) (27,360,152) (790,527) 62,830 64,882 20,425 590 20,895 604 (1,042,067) (1,239,250) (1,385,110) (40,021) (1,887,620) (54,540) 453,798 (12,841) (359,181) (10,378) (504,333) (14,572) 699 1,119 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì
	2000 Carrying amount Fair value NT$ US$ 15,561,894 15,561,894 310,945 310,935 1,330,568 1,223,268 (1,586,502) (1,586,502) (19,313,229) (18,144,311) 43,260 52,260 Ì Ì Ì Ì 13,407 (15,408) 496,200 496,194 Ì 2,261	2001 Carrying amount Fair value NT$ NT$ 12,560,954 12,560,954 1,243,907 1,107,494 1,502,672 1,511,837 (733,950) (733,950) (20,770,261) (18,402,577) 62,830 64,882 (1,042,067) (1,239,250) 453,798 (12,841) 699 1,119 Ì Ì Ì Ì
	Carrying amount NT$ 15,561,894 310,945 1,330,568 (1,586,502) (19,313,229) 43,260 Ì Ì 13,407 496,200 Ì	Carrying amount NT$ 12,560,954 1,243,907 1,502,672 (733,950) (20,770,261) 62,830 (1,042,067) 453,798 699 Ì Ì	Carrying amount NT$ US$ 7,394,361 213,648 1,185,324 34,248 1,827,089 52,791 (2,159,151) (62,385) (27,079,629) (782,423) 20,425 590 (1,385,110) (40,021) (359,181) (10,378) Ì Ì Ì Ì Ì Ì

Cash and cash equivalentsÏÏÏÏ Short-term investments ÏÏÏÏÏÏ Other Ñnancial assetsÏÏÏÏÏÏÏÏÏ Long-term equity investments Short-term debts and notes ÏÏ Long-term debts (including current portion) ÏÏÏÏÏÏÏÏÏÏÏ Cross currency interest rateÏÏÏ Equity contractÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Derivative related to the 8 optionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange forwards ÏÏÏ Options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		June 30, 2003 Carrying amount Fair value NT$ US$ NT$ US$ 6,142,823 177,487 6,142,823 177,487 1,148,370 33,180 1,164,023 33,633 173,025 4,999 173,025 4,999 2,178,872 62,955 2,252,953 65,095 (2,716,579) (78,491) (2,716,579) (78,491) (24,709,238) (713,933) (23,522,440) (679,643) 10,750 311 10,915 315 (2,016,544) (60,865) (2,129,834) (61,538) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì
	2002 Carrying amount Fair value NT$ NT$ 11,646,711 11,646,711 1,208,338 1,208,263 Ì Ì 1,762,232 1,847,305 3,775,539 3,775,539 24,452,430 24,991,903 30,256 30,980 (1,171,752) (1,503,921) (120,587) (505,047) (10,704) (9,181) Ì (133,998)
	Carrying amount NT$ 11,646,711 1,208,338 Ì 1,762,232 3,775,539 24,452,430 30,256 (1,171,752) (120,587) (10,704) Ì	Carrying amount NT$ US$ 6,142,823 177,487 1,148,370 33,180 173,025 4,999 2,178,872 62,955 (2,716,579) (78,491) (24,709,238) (713,933) 10,750 311 (2,016,544) (60,865) Ì Ì Ì Ì Ì Ì

f. Derivative contracts relating to convertible debentures

On May 5, 1998, the Company issued convertible debentures in an aggregate principal amount of US$150,000, which were privately placed with a Ñnancial institution. A whollyowned subsidiary (the ""Subsidiary'') of the Company subsequently entered into a call option contract with the Ñnancial institution, the underlying reference being the convertible debentures. The terms of the contract provided that the notional amount of US$150,000 is divided into Ñfteen 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 Ñfteen. 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

F-53

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

swaps were combined into one contract. The Subsidiary exercised two options and Ñve options on January 22, 2000 and June 26, 2000, respectively. In April 2003, the Company settled the remaining eight options by paying US$13,147 (NT$455,018). The related settlement gain was US$1,207 (NT$41,774).

In June 2000, the Company entered into a contract with a Ñnancial institution for the settlement of Ñve 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, expires in May 2003. However, in April 2003, the Company extended the contract to May 2004. As of June 30, 2003, the remaining underlying reference was 53,253,964 of the Company's common shares. If the share price is lower than the predetermined contract price, then the Company would pay the diÅerence between the two amounts to the Ñnancial institution. The contract rate at which the contract is settled is based on US dollars, and the Company's share price is converted into US dollars using current NT dollars to US dollars exchange rates in order to determine the settlement amount. The predetermined contract price and the share price converted into US dollars using current exchange rate were US$1.37 and US$0.21 per share, respectively. The carrying amount of this contract as of June 30, 2003 was a loss of US$60,874 (NT$2,106,849), while the fair value was a loss of US$61,336 (NT$2,122,829). The Company maintained a deposit of US$44,246 (NT$1,531,375) in that Ñnancial institution. Such deposit is maintained exclusively for the future settlement of the contract.

In entering into Ñnancial instruments, the Company is subject to credit, price, liquidity and cash Öow 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 Öows from Ñnancial assets on hand as at the balance sheet date. The Company minimizes exposure to credit risk by only dealing with reputable banks.

The notional amounts of the Ñnancial instruments as of December 31, 2000, 2001, 2002 and June 30, 2002 and 2003 were as follows (amounts in thousands):

Financial instruments Currency forward-hedging ÏÏ Buying options-hedging ÏÏÏÏÏ Selling options-hedging ÏÏÏÏÏ Cross currency interest rate swaps-hedgingÏÏÏÏÏÏÏÏÏÏÏ Structured deposit-trading ÏÏ Call options relating to convertible debenturesÏÏÏÏ		December 31,	2002 Ì Ì Ì US$ 4,000 Ì US$80,000	June 30,	June 30,
	2000 YEN 254,003 Ì YEN 105,800 NT$ 175,000 US$ 12,000 US$ 15,000 US$ 80,000	2001 YEN 1,251,538 YEN 4,574,400 YEN 2,874,600 US$ 8,000 Ì US$ 80,000		2002 YEN 1,032,640 US$ 11,000 YEN 4,313,150 US$ 9,000 YEN 9,379,050 US$ 15,000 US$ 6,000 Ì Ì	2003
					Ì Ì Ì US$2,000 Ì Ì

F-54

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

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 Ñnancial instrument will Öuctuate due to changes in foreign exchange rates; interest rate risk is the risk that the value of a Ñnancial instrument will Öuctuate due to changes in market interest rates; market risk is the risk that the value of Ñnancial instrument will Öuctuate 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 oÅset 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 Ñnancial institutions, which entitled the Company to earn interest rates in excess of the market rates for a ""basic'' deposit, however, the Ñnancial 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 Ñnancial institutions, they will settle the principal in a diÅerent currency than the original currency, which will result in a loss to the Company.

The Company also entered into a currency (JPY v.s. USD) swap contract for the US$80,000 convertible debentures, which exposes the Company to currency risks for both Japanese yen and U.S. dollars. The Company considers that the currency risk related to the contract is minimal as gains or losses from the contract will be oÅset by gains or losses from the underlying assets and liabilities denominated in Japanese yen or U.S. dollars. The contract was settled in April 2003.

Liquidity and cash Öow risks

Liquidity risk is the risk that the Company will encounter diÇculty in raising funds to meet commitments associated with Ñnancial instruments. Liquidity risk may result from an inability to sell a Ñnancial asset quickly at close to its fair value. Cash Öow risk is the risk that future cash Öows associated with a monetary Ñnancial instrument will Öuctuate by a signiÑcant amount.

The Company anticipates that the liquidity risk is minimal because the Ñnancial instruments entered into for hedging purposes are liquid and are entered into, pursuant to binding contracts, 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 exposure to losses resulting from adverse Öuctuations in assets and liabilities denominated in foreign currency. Therefore, no signiÑcant additional cash requirement is anticipated. For structured deposit contracts, there are no additional cash Öows 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 diÅerent foreign currency. In addition, the Company might be exposed to additional cash Öow risk for written option contracts if the contracts are out of the money at maturity.

The fair values of the Ñnancial 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.

F-55

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Short-term investments:

The fair value of the Company's short-term investments is based on the market prices at the reporting date.

Other Ñnancial assets:

The fair value of the Company's other Ñnancial assets approximates its carrying amount.

Long-term equity investments:

The fair value of the Company's long-term equity investments is based on the average market prices in the last month of the year if the market prices are available or on the Ñnancial data or any other information if market prices are not available.

Long and short-term debts:

The carrying amounts of the Company's short-term borrowings approximate their fair values. The fair value of the Company's long-term borrowings bearing variable interests, which includes current portion of long-term debt, is estimated using the book value of the debt at the reporting date. The fair value of long-term borrowings bearing Ñxed interest rates, bonds payable and convertible bonds payable is based on the market prices at the reporting date if the market prices are available or estimated using the discounted cash Öow method based on the Company's borrowing rates for similar types of borrowings.

OÅ balance sheet Ñnancial 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 Ñnancial 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 Ñnancial statements.

F-56

INDEX TO UNCONSOLIDATED FINANCIAL STATEMENTS

Unconsolidated Financial Statements of Macronix International Co., Ltd
Independent Auditors' Review Report ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-58
Unconsolidated Balance Sheets as of September 30, 2002 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-59
Unconsolidated Statements of Operations the nine-month periods ended
September 30, 2002 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-61
Unconsolidated Statements of Cash Flows for the nine-month periods ended
September 30, 2002 and 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-62
Notes to Unconsolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	F-64

F-57

INDEPENDENT AUDITORS' REVIEW REPORT

The Board of Directors, Supervisors, and Shareholders of Macronix International Co., Ltd.

We have reviewed the accompanying balance sheets of Macronix International Co., Ltd. as of September 30, 2002 and 2003, and the related statements of operations and cash Öows for the nine months ended September 30, 2002 and 2003. These Ñnancial statements are the responsibility of the Company's management. Our responsibility is to express a review opinion on these Ñnancial statements based on our review.

We conducted our review in accordance with R.O.C. Statement of Generally Accepted Auditing Standards No. 36, ""The Review Standards of Financial Statements.'' A review consists principally of inquiries, comparison and analytical procedures. A review is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the Ñnancial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modiÑcations that should be made to the accompanying Ñnancial statements in order for them to be in conformity with generally accepted accounting principles in the Republic of China.

DIWAN, ERNST & YOUNG CERTIFIED PUBLIC ACCOUNTANTS

Taipei, Taiwan, R.O.C October 17, 2003 Except for Note 11, as to which the date is January 9, 2004

F-58

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED BALANCE SHEETS September 30, 2002 and 2003

(Amounts in thousands except share and per share data)

ASSETS Current assets Cash and cash equivalentsÏÏÏÏÏÏÏÏÏÏÏÏ Notes receivable (net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts receivable (net) ÏÏÏÏÏÏÏÏÏÏÏ Receivables from related parties (net) Other receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ñnancial assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories (net) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes-current (net) ÏÏ Restricted investments-currentÏÏÏÏÏÏÏÏ Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipmentÏÏÏÏÏÏÏÏ Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Production equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and development equipment OÇce furniture and equipment ÏÏÏÏÏÏÏÏ Leased equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Construction in progress and prepaid equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total property, plant and equipmentÏÏÏ Less: Accumulated depreciationÏÏÏÏÏÏÏ Net property, plant and equipment ÏÏ Deferred income taxes (net) ÏÏÏÏÏÏÏÏÏ Intangible assets (net)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term equity investments ÏÏÏÏÏÏÏÏ Restricted investments-non-currentÏÏÏ Other assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Notes 2,4(1) 2,4(2) 2,4(3) 2, 4(4) 2,4(5),10 2,4(6) 2, 4(20) 6 2,4(8),6 2,4(20) 2 2,4(7) 6	As	of September 30, 2003 NT$ US$ $ 5,622,531 $ 162,454 222,129 6,418 2,704,024 78,128 497,342 14,370 236,292 6,827 168,775 4,876 4,188,945 121,033 343,903 9,937 466,079 13,467 499,623 14,436 14,949,643 431,946 598,076 17,281 23,405,816 676,273 45,075,206 1,302,375 1,551,075 44,816 905,514 26,163 1,750,658 50,583 1,290,515 37,287 74,576,860 2,154,778 (40,938,391) (1,182,849) 33,638,469 971,929 1,420,566 41,045 992,141 28,666 3,320,093 95,929 253,162 7,315 133,245 3,850 54,707,319 1,580,680
		2002 NT$ $ 9,124,858 164,105 2,556,669 378,883 471,329 Ì 5,259,806 485,421 713,987 2,200,919 21,355,977 598,076 17,078,143 42,556,661 1,324,654 856,482 1,750,658 7,872,789 72,037,463 (32,239,757) 39,797,706 1,203,158 1,068,125 3,206,193 262,050 215,489 67,108,698
			NT$ $ 5,622,531 222,129 2,704,024 497,342 236,292 168,775 4,188,945 343,903 466,079 499,623 14,949,643 598,076 23,405,816 45,075,206 1,551,075 905,514 1,750,658 1,290,515 74,576,860 (40,938,391) 33,638,469 1,420,566 992,141 3,320,093 253,162 133,245 54,707,319

See accompanying notes to unaudited and unconsolidated Ñnancial statements.

F-59

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED BALANCE SHEETS Ì (Continued) September 30, 2002 and 2003

(Amounts in thousands except share and per share data)

LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities Short-term debtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion of long-term debts ÏÏÏÏÏ Notes and accounts payable ÏÏÏÏÏÏÏÏÏÏÏ Payables to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏ Payables to equipment suppliers ÏÏÏÏÏÏÏ Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term liabilities Capital lease obligations, less current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debts, less current portion ÏÏ Accrued pension cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and contingencies Shareholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common shares NT$10 par value, authorized 5,350,000,000 and 6,550,000,000 shares as of September 30, 2002 and 2003 and issued 3,691,276,876 and 3,927,758,305 shares as of September 30, 2002 and 2003, respectively. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Legal reserve ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Special reserveÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated deÑcits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unrealized losses on long-term investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cumulative translation adjustments ÏÏÏÏÏ Treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total shareholders' equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total liabilities and shareholders' equity	Notes 4(9) 4(10) 4(12),6 4(11),6 5 2,4 4(12),6 4(11),6 4(13) 4(14) 4(15) 4(16) 4(17) 4(18)	As	of September 30	US$ $ 31,718 8,640 18,029 307,347 56,042 5,493 15,796 43,060 6,218 1,793 494,136 13,939 341,098 4,841 4 854,018 1,134,862 Ì 37 Ì Ì (355,731) (22,872) 4,704 (34,338) 726,662 1,580,680
		2002 NT$ $ 556,300 Ì 623,837 7,032,655 1,635,010 277,231 1,396,618 1,666,114 358,075 105,556 13,651,396 1,145,262 19,863,462 90,642 174 34,750,936 36,912,769 2,630,621 Ì 1,708,689 378,657 (7,445,569) (867,795) 228,826 (1,188,436) 32,357,762 67,108,698	2003
			NT$ $ 1,097,746 299,014 623,990 10,637,293 1,939,621 190,123 546,692 1,490,305 215,216 62,058 17,102,058 482,430 11,805,389 167,530 143 29,557,550 39,277,583 Ì 1,263 Ì Ì (12,311,856) (791,600) 162,815 (1,188,436) 25,149,769 54,707,319

See accompanying notes to unaudited and unconsolidated Ñnancial statements.

F-60

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF OPERATIONS For the nine-month periods ended September 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Sales revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Sales returnsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Sales discounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net sales revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cost of goods soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gross lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Unrealized proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Realized gross loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Administrative expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Research and development expenses ÏÏÏÏÏÏÏ Total operating expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating income Research and development subsidiesÏÏÏÏÏÏÏÏ Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign exchange gain ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposal of property, plant and equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gain on short-term investments ÏÏÏÏÏÏÏÏÏ Reversal of inventory loss provisionÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-operating expenses Interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory loss provision ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss from equity investment ÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss before taxes and minority interestÏÏÏÏÏ Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss before tax per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pro-forma data: assuming that the Company's shares owned by subsidiaries were not treated as treasury stock Net lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Notes 2,4(22),5 2 2 2,5 2 2 2 2,4(20) 2,4(19) 2,4(19)	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ 11,514,737 12,015,293 347,162 (23,176) (64,249) (1,856) (89,455) (26,428) (763) 11,402,106 11,924,616 344,543 (11,926,411) (15,474,541) (447,112) (524,305) (3,549,925) (102,569) 60,823 Ì Ì (463,482) (3,549,925) (102,569) (481,943) (489,746) (14,150) (906,833) (819,522) (23,679) (2,815,242) (2,093,941) (60,501) (4,204,018) (3,403,209) (98,330) (4,667,500) (6,953,134) (200,899) 171 3,125 90 162,687 53,367 1,542 21,110 265,073 7,659 3,070 479 14 4,466 9,136 264 Ì 873,735 25,245 176,638 245,217 7,085 368,142 1,450,132 41,899 (861,137) (720,671) (20,823) (3,132,660) Ì Ì (999,129) (1,141,889) (32,993) (40,773) (37,774) (1,091) (5,033,699) (1,900,334) (54,907) (9,333,057) (7,403,336) (213,907) Ì Ì Ì (9,333,057) (7,403,336) (213,907) (NT$2.55) (NT$1.98) (US$0.06) (NT$2.55) (NT$1.98) (US$0.06) (9,407,722) (7,426,049) (214,564) (NT$2.56) (NT$1.98) (US$0.06)	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ 11,514,737 12,015,293 347,162 (23,176) (64,249) (1,856) (89,455) (26,428) (763) 11,402,106 11,924,616 344,543 (11,926,411) (15,474,541) (447,112) (524,305) (3,549,925) (102,569) 60,823 Ì Ì (463,482) (3,549,925) (102,569) (481,943) (489,746) (14,150) (906,833) (819,522) (23,679) (2,815,242) (2,093,941) (60,501) (4,204,018) (3,403,209) (98,330) (4,667,500) (6,953,134) (200,899) 171 3,125 90 162,687 53,367 1,542 21,110 265,073 7,659 3,070 479 14 4,466 9,136 264 Ì 873,735 25,245 176,638 245,217 7,085 368,142 1,450,132 41,899 (861,137) (720,671) (20,823) (3,132,660) Ì Ì (999,129) (1,141,889) (32,993) (40,773) (37,774) (1,091) (5,033,699) (1,900,334) (54,907) (9,333,057) (7,403,336) (213,907) Ì Ì Ì (9,333,057) (7,403,336) (213,907) (NT$2.55) (NT$1.98) (US$0.06) (NT$2.55) (NT$1.98) (US$0.06) (9,407,722) (7,426,049) (214,564) (NT$2.56) (NT$1.98) (US$0.06)
		2002 NT$ 11,514,737 (23,176) (89,455) 11,402,106 (11,926,411) (524,305) 60,823 (463,482) (481,943) (906,833) (2,815,242) (4,204,018) (4,667,500) 171 162,687 21,110 3,070 4,466 Ì 176,638 368,142 (861,137) (3,132,660) (999,129) (40,773) (5,033,699) (9,333,057) Ì (9,333,057) (NT$2.55) (NT$2.55) (9,407,722) (NT$2.56)	2003
			NT$ 12,015,293 (64,249) (26,428) 11,924,616 (15,474,541) (3,549,925) Ì (3,549,925) (489,746) (819,522) (2,093,941) (3,403,209) (6,953,134) 3,125 53,367 265,073 479 9,136 873,735 245,217 1,450,132 (720,671) Ì (1,141,889) (37,774) (1,900,334) (7,403,336) Ì (7,403,336) (NT$1.98) (NT$1.98) (7,426,049) (NT$1.98)

See accompanying notes to unaudited and unconsolidated Ñnancial statements.

F-61

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF CASH FLOWS For the nine-month periods ended September 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Cash Öows from operating activities: Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on disposal of long-term investments ÏÏÏÏÏÏÏÏ Net gain on short-term investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bad debt expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventory provision (reversal) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net loss from equity investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net gain on disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net changes in operating assets and liabilities Notes and accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes and accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payables to related parties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income taxes payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued pension cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by operating activitiesÏÏÏÏÏÏÏÏ Cash Öows from investing activities: (Increase) decrease in restricted investmentsÏÏÏÏÏ Proceeds from disposal of marketable securitiesÏÏÏ Additions to other Ñnancial assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions to long-term equity investments ÏÏÏÏÏÏÏÏ Proceeds from disposals of long-term investments Payments for purchase of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposals of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Additions to intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from disposals of intangible assets ÏÏÏÏÏÏ (Additions) deductions to other liabilities Ì refundable depositsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏ	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ (9,333,057) (7,403,336) (213,907) 6,028,303 6,734,273 194,576 473,868 433,814 12,534 Ì 30,501 881 Ì (2,275) (66) (4,466) (6,861) (198) 11,456 55,001 1,589 3,132,660 (873,735) (25,245) 1,009,677 1,141,889 32,993 (3,070) (479) (14) (654,495) (810,729) (23,425) (1,200,445) 1,773,709 51,248 65,518 91,107 2,632 114,804 249,698 7,215 547,404 567,949 16,410 96,570 (42,528) (1,229) (161,604) (242,683) (7,012) Ì (85,567) (2,472) (102,660) 5,054 146 67,938 52,110 1,506 88,401 1,666,912 48,162 (707,168) 2,542,663 73,466 4,466 6,861 198 Ì (168,775) (4,876) (658,822) (931,723) (26,921) Ì 9,197 266 (6,949,176) (2,407,923) (69,573) 6,023 6,093 176 8,016 156,296 4,516 (416,602) (144,603) (4,178) Ì 430 12 (13,147) (81,866) (2,365) (8,726,410) (1,013,350) (29,279)	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ (9,333,057) (7,403,336) (213,907) 6,028,303 6,734,273 194,576 473,868 433,814 12,534 Ì 30,501 881 Ì (2,275) (66) (4,466) (6,861) (198) 11,456 55,001 1,589 3,132,660 (873,735) (25,245) 1,009,677 1,141,889 32,993 (3,070) (479) (14) (654,495) (810,729) (23,425) (1,200,445) 1,773,709 51,248 65,518 91,107 2,632 114,804 249,698 7,215 547,404 567,949 16,410 96,570 (42,528) (1,229) (161,604) (242,683) (7,012) Ì (85,567) (2,472) (102,660) 5,054 146 67,938 52,110 1,506 88,401 1,666,912 48,162 (707,168) 2,542,663 73,466 4,466 6,861 198 Ì (168,775) (4,876) (658,822) (931,723) (26,921) Ì 9,197 266 (6,949,176) (2,407,923) (69,573) 6,023 6,093 176 8,016 156,296 4,516 (416,602) (144,603) (4,178) Ì 430 12 (13,147) (81,866) (2,365) (8,726,410) (1,013,350) (29,279)
	2002 NT$ (9,333,057) 6,028,303 473,868 Ì Ì (4,466) 11,456 3,132,660 1,009,677 (3,070) (654,495) (1,200,445) 65,518 114,804 547,404 96,570 (161,604) Ì (102,660) 67,938 88,401 (707,168) 4,466 Ì (658,822) Ì (6,949,176) 6,023 8,016 (416,602) Ì (13,147) (8,726,410)	2003
		NT$ (7,403,336) 6,734,273 433,814 30,501 (2,275) (6,861) 55,001 (873,735) 1,141,889 (479) (810,729) 1,773,709 91,107 249,698 567,949 (42,528) (242,683) (85,567) 5,054 52,110 1,666,912 2,542,663 6,861 (168,775) (931,723) 9,197 (2,407,923) 6,093 156,296 (144,603) 430 (81,866) (1,013,350)

See accompanying notes to unaudited and unconsolidated Ñnancial statements.

F-62

MACRONIX INTERNATIONAL CO., LTD.

UNCONSOLIDATED STATEMENTS OF CASH FLOWS Ì (Continued) For the nine-month period ended September 30, 2002 and 2003 (Amounts in thousands except share and per share data)

Cash Öows from Ñnancing activities: Proceeds from short-term debtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of short-term debts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from short-term notesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from long-term debts and capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of long-term debts and capital lease obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Increase) decrease in refundable deposits-inÏÏÏÏÏ Common stock repurchasedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net cash provided by (used in) Ñnancing activities Net decrease in cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at the beginning of the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and cash equivalents at the end of the period ÏÏ Supplemental disclosures of cash Öow information: Interest paid during the periodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income tax paid during the period ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Non-cash activities: Current portion of long-term debts and capital lease obligations transferred to current liabilities Payments for purchases of property, plant and equipment: Payable to equipment suppliers (beginning balance)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add: Purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Payable to equipment suppliers (ending balance)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Payments for purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Convertible bonds converted to common stock and additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ 7,823,154 2,735,950 79,051 (7,266,854) (2,334,380) (67,448) 4,630,000 299,014 8,640 (4,630,000) Ì Ì 8,740,689 3,401,209 98,272 (2,783,296) (6,311,922) (182,373) 86 (6) Ì (1,046,071) Ì Ì 5,467,708 (2,210,135) (63,858) (3,170,301) (1,556,573) (44,975) 12,295,159 7,179,104 207,429 9,124,858 5,622,531 162,454 802,410 698,101 20,170 36,955 33,493 968 7,656,492 11,261,283 325,377 1,010,363 1,551,915 44,840 7,335,431 1,402,700 40,529 (1,396,618) (546,692) (15,796) 6,949,176 2,407,923 69,573 Ì 2,207,501 63,782	For the Nine-Month Period Ended September 30, 2002 2003 NT$ NT$ US$ 7,823,154 2,735,950 79,051 (7,266,854) (2,334,380) (67,448) 4,630,000 299,014 8,640 (4,630,000) Ì Ì 8,740,689 3,401,209 98,272 (2,783,296) (6,311,922) (182,373) 86 (6) Ì (1,046,071) Ì Ì 5,467,708 (2,210,135) (63,858) (3,170,301) (1,556,573) (44,975) 12,295,159 7,179,104 207,429 9,124,858 5,622,531 162,454 802,410 698,101 20,170 36,955 33,493 968 7,656,492 11,261,283 325,377 1,010,363 1,551,915 44,840 7,335,431 1,402,700 40,529 (1,396,618) (546,692) (15,796) 6,949,176 2,407,923 69,573 Ì 2,207,501 63,782
	2002 NT$ 7,823,154 (7,266,854) 4,630,000 (4,630,000) 8,740,689 (2,783,296) 86 (1,046,071) 5,467,708 (3,170,301) 12,295,159 9,124,858 802,410 36,955 7,656,492 1,010,363 7,335,431 (1,396,618) 6,949,176 Ì	2003
		NT$ 2,735,950 (2,334,380) 299,014 Ì 3,401,209 (6,311,922) (6) Ì (2,210,135) (1,556,573) 7,179,104 5,622,531 698,101 33,493 11,261,283 1,551,915 1,402,700 (546,692) 2,407,923 2,207,501

See accompanying notes to unaudited and unconsolidated Ñnancial statements.

F-63

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 and 2002

(Amounts in thousands except shares, per share data and percentages)

1. Organization and Business

The Company

Macronix International Co., Ltd. (the ""Company'') was incorporated in the Hsinchu Science Based Industrial Park (""HSIP''), Taiwan, under the laws of the Republic of China (the ""R.O.C.'') on December 9, 1989. The Company operates principally as a designer, manufacturer and supplier of integrated circuits and memory chips. As of September 30, 2003 and 2002, the numbers of the Company's employees were 3,398 and 3,771, respectively.

2. Summary of SigniÑcant Accounting Policies

The accompanying unaudited unconsolidated Ñnancial statements are prepared in accordance with R.O.C.'s ""Guidelines Governing the Preparation of Financial Reports by Securities Issuer'' and generally accepted accounting principles. SigniÑcant accounting policies are summarized as follows:

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 insigniÑcant risk of changes in interest rates. Commercial paper, negotiable certiÑcates of deposit, and bank acceptances with original maturities of three months or less are considered to be cash equivalents.

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.

Foreign Currency Translation

The Company maintains its accounting records in New Taiwan dollars (""NT Dollars'' or ""NT$''), the national currency of the Republic of China. Transactions denominated in foreign currencies are recorded in NT Dollars using the exchange rates in eÅect at the dates of the transactions. Assets and liabilities denominated in foreign currencies are translated into NT Dollars using the exchange rates in eÅect at the balance sheet date. Foreign exchange gains or losses are included in other income or losses.

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 exchange rates in eÅect at the balance sheet date. Revenue and expense accounts are translated using a weighted average exchange rate for the relevant period. Translation gains and losses are included as a component of shareholders' equity.

Information Expressed in US dollars

The unaudited unconsolidated Ñnancial statements are stated in NT dollars, the national currency of the ROC. Translation of NT dollars amounts into US dollars amounts is included solely for the convenience of the readers and has been made at the rate of NT$34.61 to US$1 (on the basis of the noon buying rate in New York for cable transfer as certiÑed for customs

F-64

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

purposes by the Federal Reserve Bank of New York on June 30, 2003. 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.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is provided based on the Company's credit policy, the collectibility and aging analysis of notes and accounts receivable and other receivables.

Other Financial Assets

Other Ñnancial assets are credit-linked notes, which are recorded at cost using the speciÑc identiÑcation method. Interest income is calculated based on the contracted interest rate.

Inventories

Inventories are carried at the lower of cost or market value using the weighted average cost method. Replacement cost is used to determine the market value of raw materials and supplies. Net realizable value is used to determine the market value of work in process and Ñnished goods, and commodities purchased. The lower of cost or market method is applied to each major category of inventory.

Long-Term Investments

(1) Long-term investments in which the Company holds an interest of 20% or more and has the ability to exercise signiÑcant inÖuence are accounted for under the equity method of accounting. The diÅerence between the cost of the investment and the fair value of the identiÑable assets at the date of acquisition is amortized over Ñve years. Other long-term investments are carried at the lower of cost or market value, with unrealized losses recorded as a separate component of shareholders' equity. There is no recognition of unrealized gains.

(2) The unrealized proÑts and losses from intercompany transactions between the investor company and investee company during the period are eliminated. If the transaction is downstream (a sale to the investee company) and the investor company has controlling power over the investee company, unrealized proÑts and losses are eliminated; if the investor company has no controlling power, the unrealized proÑts and losses are eliminated based on the investor's percentage ownership interest in the investee. If the transaction is upstream (a sale to the investor), unrealized proÑts and losses are fully eliminated regardless of whether the investor company has controlling power or not.

(3) In accordance with R.O.C. Ñnancial reporting regulations, the quarterly Ñnancial statements are not prepared on a consolidated basis.

F-65

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following useful lives:

is calculated on a straight-line basis over the following useful lives:
Buildings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 to 20 Years
Production equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 Years
Leased equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 Years
Leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 Years
Research and development equipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 Years
OÇce furniture and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	5 to 6 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. Interest incurred with respect to the additions of property, plant and equipment is capitalized until those assets are ready for use.

Lease Agreements

Provided a lease agreement meets the capitalization criteria, the present value of the minimum lease payments, net of executory costs, is capitalized as an asset along with a corresponding liability. Leased equipment is depreciated using the straight-line method over the estimated useful life. The lease obligation is amortized over the lease term using the eÅective interest method. A lease that does not qualify as a capital lease is classiÑed as an operating lease and the lease payments are recorded as rental expense.

Intangible Assets

Intangible assets are originally recorded at cost and amortized over their estimated useful lives using the straight-line method. Royalties and issuing costs of debentures are amortized over the related contracts' lives and life of the debentures, respectively. Computer software is amortized over three years, while other intangible assets are amortized over one to Ñve years.

Revenue Recognition

Revenue is recognized when it becomes realized or realizable. Revenue from the sale of products is recognized when ownership of the product 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.

Capital Expenditures vs. Expenses

If the expenditure increases the future service potential of the plant assets and the purchase price exceeds a certain monetary threshold, the expenditure is capitalized, while the others are expensed as incurred.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences attributable to diÅerences between the Ñnancial statement carrying amounts of

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

assets and liabilities and their tax bases, including investment and research and development tax credits. A valuation allowance is provided based on the expected realizability 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 R.O.C. The 10% tax on undistributed earnings is recorded as an expense at the time the shareholders resolve that the Company's earnings shall be retained.

Income tax credits resulting from the acquisition of equipment, research and development expenditures, employee training and investment in equity stock shall be recognized using Öowthrough method.

Convertible Bonds

The interest-premium of puttable convertible bonds, which is the diÅerence between the speciÑed put price and the par value, is amortized using the interest method and is recognized as a liability over the period from the issuance date of the bonds to the expiry date of the put option. If the bondholder does not exercise the put option, the interest-premium, which has been recognized as a liability, is amortized over the period from the expiry date to the maturity date using the interest method. However, if at the expiry date the market value of the common stock under conversion exceeds the put price, the interest-premium should be credited to additional paid-in capital.

The cost of issuing convertible bonds is recorded as deferred assets and is amortized over the period from the issuance date of the convertible bonds and the expiry date of the put option.

When bondholders exercise their conversion rights, the book value of convertible bonds is credited to common stock at an amount equal to the par value of the common stock and the excess is credited to capital reserve; no gain or loss is recognized on bond conversion.

Employee Retirement BeneÑts

The Company has a deÑned beneÑt 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 R.O.C., the Company makes monthly contributions equal to 2% of the wages and salaries, which were 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 in May 1996 to 5% of the wages and salaries paid. EÅective 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 beneÑt entitlements, is administered by the Employees' Retirement Fund Committee and is registered in this committee's name. Accordingly, the pension fund is not included in the Ñnancial statements of the Company.

The Company adopted, on a prospective basis, R.O.C. Statement of Financial Accounting Standards No. 18, ""Accounting for Pensions'' in 1996. The Statement requires that the pension plan assets and the beneÑt obligations 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 obligations 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 using a straight-line method over the employees' average remaining service period of about twenty-Ñve years.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Financial Instruments

(1) Foreign exchange forward contracts

A forward foreign exchange contract obligates the Company to exchange predetermined amounts of speciÑed foreign currencies at speciÑed exchange rates for another currency on a speciÑed date. The Company's forward contracts are designated as hedges; discounts or premiums, being the diÅerence between the spot exchange rate and the forward exchange rate at the inception of the contract, are accreted or amortized to the statement of operations over the contract lives using the straight-line method. Realized gains and losses from settlement or unrealized gains and losses resulting from changes in the spot exchange rate at the balance sheet date are recorded in the statement of operations 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.

(2) Option contracts

At maturity the Company or the Ñnancial 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 diÅerent 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 recorded in the statement of operations upon exercise in the period in which such options are exercised.

(3) Other derivative Ñnancial instruments

The Company has entered into other derivative Ñnancial instruments for hedging purposes. The related gains and losses on hedging instruments are recorded in the statement of operations upon the exercise of the contracts or in the same period as the hedged transaction. The changes in the fair value of trading instruments are recorded in the period of change.

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 distributed of the Company's earnings. If such distributions is made in the form of common shares, the amount transferred from retained earnings is calculated based on the par value of the common shares issued.

Net Income Per Common Share

In accordance with ROC Statement of Financial Accounting Standards No. 24, ""Earnings per Share,'' the Company presents basic earnings per share if a simple capital structure exists; or both basic earnings per share and diluted earning per share if a complex capital structure exists. Basic earnings per share is equal to the net income (loss) attributable to common shares divided by the weighted-average number of common shares. When calculating diluted earnings per share, the numerator includes or add backs potential common stock dividends, interest and other conversion revenues (expenses). The denominator includes all potential dilutive common shares.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Treasury Stock

In accordance with the R.O.C. 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 Ñnancial statements. Any surplus or deÑcit on treasury stock transactions are credited or charged to capital reserves. In addition, the Company's shares owned by its subsidiaries are treated as treasury stock.

3. Reason and EÅect of Changes in Accounting Policy

None.

4. SigniÑcant Accounts

(1) Cash and Cash Equivalents

(1) Cash and Cash Equivalents
Petty cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Checking and savings accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Time deposits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash equivalents-short-term notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,
	2002 NT$ 380 1,497,826 7,626,652 Ì 9,124,858	2003
		NT$ 330 1,800,127 3,742,131 79,943 5,622,531	US$
			9 52,012 108,123 2,310
			162,454

(2) Notes Receivable

(2) Notes Receivable
Notes receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,
	2002 NT$ 164,105 Ì 164,105	2003
		NT$ 222,129 Ì 222,129	US$
			6,418 Ì
			6,418

(3) Accounts Receivable

Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for sales returns and discounts ÏÏÏÏÏÏÏÏÏÏ Allowance for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of	September 30,	US$ 84,940 (88) (6,724) 78,128
	2002 NT$ 2,786,156 (45,036) (184,451) 2,556,669	2003
		NT$ 2,939,795 (3,047) (232,724) 2,704,024

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(4) Receivables from Related Parties

(4) Receivables from Related Parties
Accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of	September 30, 2003 NT$ US$ 510,342 14,746 (13,000) (376) 497,342 14,370
	2002 NT$ 392,759 (13,876) 378,883
		NT$ 510,342 (13,000) 497,342

(5) Other Ñnancial assets

(5) Other Ñnancial assets
Credit-linked notes, maturing within a yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,
	2002 NT$ Ì	2003
		NT$ 168,775	US$
			4,876

Credit-linked notes were not pledged. As of September 30, 2003, interest receivable of credited-linked notes amounted to NT$1,674 (US$48).

(6) Inventories

(6) Inventories
Merchandise ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raw materialsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Supplies ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Finished goodsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unallocated freight-inÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value decline and obsolescence ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,		US$ 6,955 4,420 2,938 176,804 65,558 12 256,687 (135,654) 121,033
	2002 NT$ $ 62,648 285,405 111,716 8,771,099 2,253,563 504 11,484,935 (6,225,129) 5,259,806	2003
		NT$ 240,707 152,980 101,663 6,119,184 2,268,961 424 8,883,919 (4,694,974) 4,188,945

a. Inventories were not pledged.

b. The insurance coverage for inventories amounted to NT$6,500,000 and NT$5,005,000 (US$144,611) as of September 30, 2002 and 2003, respectively.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(7) Long-Term Equity Investments

(7) Long-Term Equity Investments
Accounted for under cost method: Chien Cheng Venture Capital Co., Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chantek Electronic Co., Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp.** ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Macronix (BVI) Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kang Bao Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Run Hong Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hui Ying Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix Amarica Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Caesar Technology, Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Treasury stock owned by the subsidiaries ÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepaid investment: Honbond Venture Capital Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic Pixel Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value declineÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30, 2002 Percent Shares NT$ Owned 8,000,000 80,000 15.38% 4,538,333 Ì 14.64% 23,987,500 237,500 11.78% 13,010,760 Ì 3.72% 5,274,212 58,500 3.38% 7,386,225 83,135 2.87% 1,790,000 37,590 1.28% 806 81 Ì* 496,806 124,346,246 1,952,006 100.00% Ì 496,055 100.00% Ì 488,489 100.00% Ì 412,715 100.00% 100,000 128,664 1000.00% 7,300,000 71,618 35.23% Ì Ì Ì (142,365) 3,407,182 120,000 50,000 170,000 (867,795) 3,206,193
	Shares 8,000,000 4,538,333 23,987,500 13,010,760 5,274,212 7,386,225 1,790,000 806 124,346,246 Ì Ì Ì 100,000 7,300,000 Ì	NT$ 80,000 Ì 237,500 Ì 58,500 83,135 37,590 81 496,806 1,952,006 496,055 488,489 412,715 128,664 71,618 Ì (142,365) 3,407,182 120,000 50,000 170,000 (867,795) 3,206,193

• Less than 0.01%

** Publicly traded.

F-71

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Accounted for under cost method: Chien Cheng Venture Capital Co., Ltd.ÏÏÏÏ Honbond Venture Capital Co., Ltd. ÏÏÏÏÏÏÏ Quality Test System Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chantek Electronic Co., Ltd.ÏÏÏÏÏÏÏÏÏÏÏ United Industrial Gases Co., Ltd. ÏÏÏÏÏÏÏÏÏ Powertech Co. Ltd.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chipbond Technology Corp. ÏÏÏÏÏÏÏÏÏÏ Taiwan Mask Corp. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounted for under equity method: Macronix (BVI) Co., Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Kang Bao Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Run Hong Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Hui Ying Investment, Ltd. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix Amarica Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MaxNova Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic Pixel Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Macronix (Hong Kong) Co., Ltd. ÏÏÏÏÏÏÏÏ Prominent Communications, Inc. ÏÏÏÏÏÏÏÏÏ Joyteck Technology Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Caesar Technology, Inc.ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Treasury stock owned by the subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for market value declineÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As	of September 30, 2003	of September 30, 2003	Percent owned 15.38% 15.00% 14.64% 10.49% 3.72% 3.31% 2.72% 1.28% Ì* 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 35.23% 18.18% Ì
	Shares 8,000,000 12,000,000 4,538,333 23,987,500 13,010,760 5,274,212 7,109,786 1,790,000 806 162,928,876 Ì Ì Ì 100,000 5,000,000 5,000,000 Ì 7,300,000 2,000,000 Ì	NT$ 80,000 120,000 Ì 237,500 Ì 58,500 76,213 37,590 81 609,884 2,046,656 512,048 389,542 387,457 138,373 44,990 43,691 38,613 24,279 18,525 Ì (142,365) 3,501,809 (791,600) 3,320,093	US$ 2,312 3,467 Ì 6,862 Ì 1,690 2,202 1,086 3 17,622 59,135 14,795 11,255 11,195 3,998 1,300 1,262 1,115 702 535 Ì (4,113) 101,179 (22,872) 95,929

• Less than 0.01%

• ** Publicly traded.

The Company's investments in Chantek Electronic Co., Ltd., Taiwan Mask Corp., Chipbond Technology Corp., Tower Semiconductor Ltd. and Powertech Co., Ltd. are classiÑed as marketable equity securities and accounted for at the lower of cost or market.

a. Hui Ying Investment Ltd. held 6,023,152 shares of the Company which amounted to NT$142,365 (US$4,113) as of September 30, 2002 and 2003. These shares were accounted for as treasury stock.

b. The long-term equity investments were not pledged.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(8) Property, Plant and Equipment

a. The total interest expense (including capitalized interest) for the nine months ended September 30, 2002 and 2003 amounted to NT$1,146,050 and NT$793,696 (US$22,933), respectively. Interest was capitalized on the following property, plant and equipment accounts:

equipment accounts:
Item Buildings and facilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Production equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ EÅective interest ratesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the nine-month periods September 30,		ended
	2002 NT$ 284,913 Ì 284,913 5.58%	2003
		NT$ 1,759 71,266 73,025 4.15%	US$ 51 2,059
			2,110

b. The insurance coverage for property, plant and equipment amounted to NT$59,680,105 and NT$60,321,010 (US$1,742,878) as of September 30, 2002 and 2003, respectively.

c. Please refer to note 6 ""Assets Pledged As Collateral'' for a summary of those assets included in property, plant and equipment that have been used as security for loans.

(9) Short-term Debts

) Short-term Debts
Working capital loansÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Letter of credit loans (Due within 180 days)ÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,
	2002 NT$ 280,000 276,300 556,300	2003
		NT$ 950,000 147,746 1,097,746	US$ 27,449 4,269
			31,718

a. The Company's unused short-term lines of credit amounted to NT$11,154,650 and NT$6,170,001 (US$178,272) as of September 30, 2002 and 2003, respectively.

b. The interest rates of short-term debts ranged from 2.4% to 2.8% and from 1.7% to 2.1% as of September 30, 2002 and 2003, respectively.

c. There were no assets pledged as collateral for short-term debts.

(10) Short-term Notes

0) Short-term Notes
Commercial papers ÏÏÏÏ Less: Discounts ÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest Rate 1.92%-2.12%	Period 05.15.2003-12.12.2003	As of September 30, 2003 NT$ US$ 300,000 8,668 (986) (28) 299,014 8,640
			NT$ 300,000 (986) 299,014

a. There were no short-term notes as of September 30, 2002.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

b. The Company's unused short-term lines of credits for short-term notes amounted to NT$4,600,000 and NT$1,800,000 (US$52,008) as of September 30, 2002 and 2003, respectively.

c. There were no assets pledged as collateral for short-term notes.

(11) Long-term Debts

Secured Loan from one bank, repayable in 21 quarterly installments from May 1998 to May 2003 with variable interest rates ÏÏÏ Medium term loans from one bank, repayable in 96 monthly installments from May 1999 to April 2007 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loans from 14 banks, repayable in 19 quarterly installments from July 1999 to January 2004 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5-year secured debentures repayable in full at maturity in October 2006 with interest paid annually at a Ñxed interest rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 156 monthly installments from May 2003 to April 2016 with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 8 semi-annual installments with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 8 semi-annual installments with variable interest rates ÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 17 quarterly installments from April 2002 with variable interest ratesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Debentures, 5 year secured convertible debentures due May 5, 2003ÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from one bank, repayable in 8 semi-annual installments from June 2003 with variable interest ratesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Medium term loan from 20 banks, repayable in 10 semi-annual installments from March 2005 with variable interest ratesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unsecured ECB III Debentures, 5-year unsecured convertible debentures due February 1, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ECB IV Debentures, 5-year unsecured convertible debentures puttable in August 2004ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest September 30, 2002 2003 % % 5.74 Ì 5.82 4.35 2.525- 5.74 1.775-3.94 3.30 3.30 5.82 4.35 3. 25 2.525 6.80 6.50 5.465 5.155 Ì Ì 5.15 5.025 3.14 2.55 1.00 1.00 0.50 0.50	Balance	Balance
		September 30,
	2002 % 5.74 5.82 2.525- 5.74 3.30 5.82 3. 25 6.80 5.465 Ì 5.15 3.14 1.00 0.50	2002 NT$ 57,000 200,750 3,354,462 3,000,000 889,000 187,500 62,500 352,940 2,795,200 400,000 3,000,000 4,943,032 5,912,687	2003
			NT$ US$ Ì Ì 156,950 4,535 1,570,410 45,374 3,000,000 86,680 860,506 24,863 112,500 3,250 37,500 1,083 258,820 7,478 - Ì 350,000 10,113 5,910,000 170,760 - Ì 5,712,156 165,044

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Debentures, 5-year unsecured convertible debentures puttable in December 2005 ECB V Debentures, 5-year unsecured convertible debentures puttable in February 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add: Interest payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: current portionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Interest September 30, 2002 2003 % % Ì Ì Ì Ì	Balance September 30, 2002 2003 NT$ NT$ US$ Ì 1,008,700 29,145 Ì 3,037,950 87,777 25,155,071 22,015,492 636,102 1,741,046 427,190 12,343 (7,032,655) (10,637,293) (307,347) 19,863,462 11,805,389 341,098	Balance September 30, 2002 2003 NT$ NT$ US$ Ì 1,008,700 29,145 Ì 3,037,950 87,777 25,155,071 22,015,492 636,102 1,741,046 427,190 12,343 (7,032,655) (10,637,293) (307,347) 19,863,462 11,805,389 341,098
	2002 % Ì Ì	2002 NT$ Ì Ì 25,155,071 1,741,046 (7,032,655) 19,863,462
			NT$ 1,008,700 3,037,950 22,015,492 427,190 (10,637,293) 11,805,389

On October 29, 2001, the Company issued NT$3,000,000 of Ñve-year secured debentures, due in October 2006 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 due May 2003 were convertible at the option of the holder into the Company's common stock at an initial conversion price of NT$53.728 per share. However, the conversion price was subject to adjustments in the event that certain changes occur to the Company's capital structure. The convertible debentures were 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 requirements would have applied 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 was 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. As of April 22, 2003, an aggregate principal amount of US$70,000 of the debentures were converted. In addition, with the resolution of the board of directors, the Company repurchased the residual outstanding bonds, in the aggregate principal amount of US$80,000, from the market. The related debt extinguishment loss of NT$22,765 from the above repurchase was included in other expense account.

The 1% 5-year unsecured convertible debentures due February 2005 are convertible at the option of the holder into the Company's common stock at an initial conversion price of NT$69 per share. However, the conversion price is subject to adjustments in the event that certain changes occur to the Company's capital structure. The convertible debentures are redeemable at par at maturity or at the option of bondholders at 121.422% of par on February 1, 2003. In 2000, an aggregate principal amount of US$41,078 of the bonds was converted. No bond was converted in any periods thereafter. In 2002 and the Ñrst nine months of September 2003, the Company repurchased US$86,825 and US$61,277, respectively, of the bonds from the market that resulted in a debt extinguishment loss of NT$45,144 and NT$12,275, respectively. In addition, upon the request of bondholders, the Company has redeemed an aggregate principal amount of US$10,820 of the debentures as of September 30, 2003 that resulted in a gain of NT$2,442. Debt extinguishment gain and loss are recorded under other expense account.

The 0.5% 5-year unsecured convertible debentures due February 2007 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. However, the conversion price is subject to adjustments in the events that certain changes occur to the Company's capital structure. At September 30, 2003, the split adjusted conversion price was NT$28.4727 per share. The holders of these convertible

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The date at which debentures may be redeemed is August 9, 2004. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$6,160,275 (US$177,991).

The non-interest bearing 5-year unsecured convertible debentures due December 2007 are convertible at the option of the holder into the Company's common stock at the conversion price. The initial conversion price was NT$11 from the issue date to June 26, 2003 and then was reset to NT$8.8 after June 26, 2003. However, the conversion price is subject to adjustments in the event that certain changes occur to the Company's capital structure. As of September 30, 2003, an aggregate principal amount of NT$2,191,300 of these debentures have been converted. The holders of these convertible debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The periods at which debentures may be redeemed are from November 13, 2005 to December 12, 2005 and from November 13, 2006 to December 13, 2006. The earliest date at which the bonds may be redeemed is November 13, 2005. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$1,110,276 (US$32,080).

The non-interest bearing 5-year unsecured convertible debentures due February 2008 are convertible at the option of the holder into the Company's common stock at the initial conversion price of NT$12.06. However, the conversion price is subject to an adjustment (in the manner set forth in the Indenture) upon the occurrence of certain events set out in the Indenture, including, among other things, the declaration of dividend in common shares, subdivisions, consolidations, and the issue of common shares in cash. The holders of these convertible debentures have the ability to mandatorily redeem the debentures at predetermined amounts. The amount for which the debentures may be redeemed varies depending on the date in which the holder elects to require redemption. The dates at which debentures may be redeemed are February 10, 2004, February 10, 2005, February 10, 2006 and February 10, 2007. The earliest date at which the bonds may be redeemed is February 10, 2004. If all of the bonds are redeemed on this date, the Company would be required to pay approximately NT$3,037,950 (US$87,777).

The Company's unused long-term lines of credit amounted to NT$9,000,000 and NT$6,090,000 (US$175,961) as of September 30, 2002 and 2003, respectively.

Please refer to note 6 for ""Assets Pledged As Collateral'' for long-term debts.

(12) 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, repayable in 24 quarterly installments from May 31, 1999. The ownership of the equipment will be transferred to the Company upon the expiration of the agreement. Cost of the equipment amounted to NT$24,946. However, Caesar Technology, Inc. was formally placed in liquidation in January 2002. As of April 30, 2002, the Company's capital lease obligation to Caesar Technology, Inc. amounted to NT$13,958. On August 14, 2002, the Company entered into a settlement with Caesar Technology, Inc. which required the Company to pay NT$3,215 to acquire the ownership of the equipment, and Caesar Technology to waive its right to claim the remaining capital lease obligation.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

In 2001, the Company entered into a 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. During the lease period, the Company is not allowed to modify or sublease the equipment. Upon the expiry of the agreement, the ownership of the equipment must be unconditionally transferred to the Company.

Future lease obligations resulting from the above leases as of September 30, 2003 are as follows:

Year October 1, 2003ÓSeptember 30, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: unrealized interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ October 1, 2004ÓSeptember 30, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: unrealized interest expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Lease obligations Ì long-term ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total capital lease obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$ 652,603 (28,613) 623,990 489,452 (7,022) 482,430 1,106,420	US$ 18,856 (827) 18,029 14,142 (203) 13,939 31,968

Please refer to note 6 for ""Assets Pledged As Collateral"" for those leased assets pledged as security.

(13) Capital Stock

As of January 1, 2002, the Company's authorized and issued common shares amounted to NT$45,000,000 and NT$33,593,426, divided into 4,500,000,000 and 3,359,342,613 shares at NT$10 par value, respectively.

The Company has three stock option plans (""2001 plan'', ""2002 plan'' and ""2003 plan'') that provide for the granting of options to qualiÑed employees for the purchase of the Company's common shares at the market price of the grant date. Stock options expire in six years from their grant date 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, 170,000,000 shares and 200,000,000 shares under 2001 plan, 2002 plan and 2003 plan, respectively.

On May 30, 2002, the Company's shareholders approved a resolution at the annual meeting to increase the capital stock to NT$53,500,000, divided into 5,350,000,000 shares (including 450,000,000 and 400,000,000 shares reserved for future exercises of stock options and conversion of convertible bonds, respectively). In addition, the shareholders also approved a resolution to declare a 10% stock dividend, which resulted in the issuance of 331,934,262 common shares.

During the nine months ended September 30, 2003, unsecured domestic convertible debentures totaling NT$2,191,300 were converted into the Company's common shares which resulted in the issuance of 236,481,430 additional common shares of which 148,408,805 shares remained unregistered.

On June 27, 2003, the Company's shareholders approved a resolution at the annual meeting to increase the authorized share capital to NT$65,500,000, divided into 6,550,000,000 shares (including 650,000,000 and 1,120,650,500 shares reserved for future

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

exercise of stock options and conversion of convertible bonds, respectively). The capital increase has not been registered.

As of September 30, 2003, the Company's authorized and issued common shares amounted to NT$65,500,000 and NT$39,277,583, divided into 6,550,000,000 (including 650,000,000 and 1,120,650,500 shares reserved for future exercise of stock options and conversion of convertible bonds, respectively) and 3,927,758,305 shares at NT$10 par value, respectively.

(14) Capital Reserve

According to the ROC Company Law, the capital reserve can only be used for oÅsetting accumulated deÑcits or distribution of stock dividends. The Company cannot use the capital reserve to oÅset accumulated deÑcits unless the legal reserve is insuÇcient for oÅsetting such deÑcits.

On May 31, 2002, the Company's shareholders approved a resolution at the annual meeting to transfer a gain of NT$16,360 earned on disposal of property, plant and equipment to retained earnings.

On June 27, 2003, the Company's shareholders approved a resolution at the annual meeting to use the capital reserve of NT$2,630,621 to oÅset deÑcits in retained earnings.

(15) Legal Reserve

According to the ROC Company Law, 10% of the Company's net income, after deducting previous years' losses, if any, must be set aside 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 paid-in capital, 50% of such reserve may be distributed to the Company's shareholders through the issuance of additional common shares in the form of a stock dividend.

On June 27, 2003, the Company's shareholders resolved in the annual meeting to use the legal reserve of NT$1,708,689 to oÅset accumulated deÑcits in retained earnings.

(16) 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 Ñscal year end in which the debit balance arose.

On June 27, 2003, the Company's shareholders resolved in the annual meeting to use the special reserve of NT$378,657 to oÅset accumulated deÑcits in retained earning.

(17) Income Distributions

a. 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

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(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. 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. Furthermore, 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.

b. Information relating to the distributions of the remuneration for directors and supervisors and employees' bonuses is as follows:

(a) There was no distribution in 2002 because of the Company's accumulated deÑcits.

(b) Except for the transfer of gain on disposal of property, plant and equipment to retained earnings, which was resolved in the annual meeting on May 30, 2002, there was no distribution of retained earnings in 2001.

(c) Information relating to employees' bonuses and remuneration for directors and supervisors' services, which were approved by the board of directors' and the shareholders' annual meetings, is accessible on the website of Taiwan Stock Exchange Corporation.

c. The Company's shares for the conversion of CB I were issued under par value. The discount, NT$157,313, was charged against retained earnings.

(18) Treasury Stock

a. Based on the audited Ñnancial statements of the Company for the six months ended June 30, 2003, the maximum shares allowed to repurchase were 373,935,000 shares. The Company repurchased 40,000,000 shares for NT$1,046,071 as of September 30, 2003.

b. According to the Stock Exchange Regulations of Taiwan, total shares repurchased cannot exceed 10% of the Company's issued stock. Total repurchased amounts also cannot exceed the sum of retained earnings and the realized capital reserve. The Securities and Forwards Commission approved in April 2002 the Company's plan to repurchase stock. The maximum amount approved for repurchase was NT$9,546,141.

c. In accordance with the Stock Exchange Regulations of Taiwan, treasury stock cannot be pledged, voted or be eligible to receive dividends.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

d. EÅective from January 1, 2002, the Company's shares owned by its subsidiaries were treated as treasury stock. The shares owned by the Company's subsidiary for the year 2002 and the six-month period ended June 30, 2003 were as follows:

Beginning balance Additions Subsidiary Shares Amount Shares Amount For the nine months ended September 30, 2003 Hui Ying Investment, Ltd. 6,023,152 $142,365 Ì $Ì For the nine months ended September 30, 2002 Hui Ying Investment, Ltd. 5,475,593 $142,365 Ì $Ì	Disposals	Disposals	Selling price Ì Ì	Ending balance	Ending balance
	Shares Ì Ì	Amount $Ì $Ì		Shares 6,023,152 6,023,152 (note)	Amount $142,365 $142,365	Market Value
						$49,619
						$67,700

(note) Hui Ying Investment, Ltd. received a 2002 stock dividend of 547,559 shares from the Company.

(19) Basic Earnings Per Share

The capital structure of the Company is considered to be complex as it has convertible bonds and stock options outstanding. Nevertheless, the Company only presented basic earnings per share for the nine-month periods ended September 30, 2003 and 2002 as the convertible bonds and stock options had an anti-dilutive eÅect. The calculation of the weighted-average number of shares is as follows:

Outstanding common shares, beginning balance, net of treasury stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital reserve transferred to common stock (3,337,786,143 shares*10%) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average number of treasury stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Bonds converted into common shares for the nine months ended September 30, 2003 (236,481,430 shares) ÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Weighted eÅect of treasury stock owned by subsidiaries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Weighted-average numbers of shares outstanding ÏÏÏÏÏÏÏÏÏ

For the nine-month period ended September 30, 2003 2002 3,651,276,875 3,359,342,613 Ì 333,778,614 Ì (21,556,470) 92,154,897 Ì 3,743,431,772 3,671,564,757 (6,023,152) (6,023,152) 3,737,408,620 3,665,541,605

2003 3,651,276,875 Ì Ì 92,154,897 3,743,431,772 (6,023,152) 3,737,408,620

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

For the nine months ended September 30, 2003:

For the nine months ended September 30, 2003:
Amount(numerator) Before tax After tax Basic EPS Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏ $(7,403,336) $(7,403,336) For the nine months ended September 30, 2002: Basic EPS Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏ $(9,333,057) $(9,333,057)	Shares (denominator) 3,737,408,620 3,665,541,605	Earning (loss) per share Before tax After tax $(1.98) $(1.98) $(2.55) $(2.55)
		Before tax $(1.98) $(2.55)

Assuming that the Company's shares owned by its subsidiaries were not treated as treasury stock:

For the nine months ended September 30, 2003:

Basic EPS Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏ	Amount(numerator) Before tax After tax $(7,426,049) $(7,426,049)	Shares (denominator) 3,743,431,772	Net income (loss) per Share Before tax After tax $(1.98) $(1.98)
	Before tax $(7,426,049)		Before tax $(1.98)

For the nine months ended September 30, 2002:

Basic EPS Net loss ÏÏÏÏÏÏÏÏÏÏÏÏÏ	Amount(numerator) Before tax After tax $(9,407,722) $(9,407,722)	Shares (denominator) 3,671,564,757	Net income (loss) per Share Before tax After tax $(2.56) $(2.56)
	Before tax $(9,407,722)		Before tax $(2.56)

(20) Income Taxes

a. The Company is entitled to a four-year income tax exemption period on income generated from the cost of 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 the expansion operations located in the HSIP during a Ñve year period beginning in the year taxable income is Ñrst generated from the expanded operations. The Company has elected to start the four-year tax exemption period to run from January 1, 2001 to December 31, 2004.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

b. As of September 30, 2003 unused tax credits available to reduce future taxable income amounted to NT$4,229,382 (US$122,201). The available tax credit in each year is limited to 50% of the corporate tax payable in that year, except in the last of such Ñve year period when there is no such limit. As of September 30, 2003, the Company had available the following amounts of tax credits:

Expiration Year 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	NT$ 1,160,243 134,441 1,192,770 1,359,358 382,570 4,229,382	US$
		33,523 3,884 34,463 39,277 11,054
		122,201

c. Under the rules of R.O.C. Income Tax Law, operating losses can be carried forward for Ñve years. As of September 30, 2003, the Company had unutilized loss carryforwards of NT$12,127,110 (US$350,393), which expire in 2008.

d. The Company's income tax returns through 1998 have been assessed by the tax authority. However, the Company was not satisÑed with the results of 1998,1997,1996 and 1995 assessments and Ñled for administrative remedy:

(a) For the 1995 tax return, the authority reduced the additional tax to NT$ 91,772 after determining the tax recheck. The Company has paid the half of the tax and Ñled a petition with the Ministry of Finance.

(b) The authority issued the determination of recheck of 1996 return, reducing the additional tax to NT$114,585. The Company remained unsatisÑed and, after paying half of the tax, Ñled a petition with the Ministry of Finance. In May 2003, the petition was denied. The Company Ñled an administrative lawsuit on July 11, 2003. The case is still under process.

(c) The Company applied for recheck after the authority assessed the additional tax of 1997 to be NT$93,246.

(d) For the 1998 return, the authority's assessment reduced the Company's loss carryforwards by NT$55,822. The Company has recorded this diÅerence in the Ñnancial statements and Ñled for recheck.

e. Deferred tax assets and liabilities as of September 30, 2002 and 2003 were as follows:

(a) Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (b)Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (c) Valuation allowance for deferred tax assets ÏÏÏÏÏ	As of September 30,	As of September 30,
	2002 NT$ 519,210 6,974,064 4,537,709	2003
		NT$ 529,435 8,338,820 5,922,740	US$ 15,297
			240,937
			171,128

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(d)Temporary diÅerences that generated deferred tax assets or liabilities:

			As of September	As of September	As of September	30,
	2002						2003
	Amount	Tax eÅect			Amount			Tax eÅect
	NT$	NT$		NT$		US$		NT$		NT$
Depreciation
expense ÏÏÏÏÏÏÏÏÏ	(5,294,863)	(410,352)	(2,328,868)			(67,289)		(501,871)		(14,501)
Unrealized
inventory
provision ÏÏÏÏÏÏ	6,247,988	484,219	4,714,786			136,226		365,396		10,557
Unrealized
investment
lossesÏÏÏÏÏÏÏÏÏ	2,005,490	155,425	2,153,735			62,229		535,991		15,487
Unrealized royalty
expense ÏÏÏÏÏÏÏ	651,503	50,491		630,457		18,216		48,860		1,412
Unrealized
allowance for
bad debts ÏÏÏÏÏ	167,799	13,005		236,374		6,830		18,319		529
Unrealized foreign
exchange gains	(1,404,611)	(108,858)	(355,662)			(10,276)		(27,564)		(796)
Unrealized foreign
exchange
lossesÏÏÏÏÏÏÏÏÏ	819,747	63,531			Ì		Ì	Ì		Ì
Amortization of
capacity
variance ÏÏÏÏÏÏÏ	Ì	Ì	1,227,910			35,478		95,163		2,750
OthersÏÏÏÏÏÏÏÏÏÏÏ	102,461	7,941		63,774		1,843		13,931		403
Loss
carryforwardsÏÏ	8,722,399 2,180,600		12,127,110			350,393		3,031,778		87,598
Investment tax
credits ÏÏÏÏÏÏÏÏ	4,018,852							4,229,382		122,201
						As of September 30,
					2002			2003
					NT$			NT$		US$
(e) Deferred tax assets Ì current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ				2,335,840			1,824,424			52,714
Valuation allowance for deferred		tax
assets Ì current	ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ			(1,512,995)			(1,294,684)		(37,408)
Net deferred tax assets Ì current ÏÏÏÏÏÏÏÏÏÏÏ					822,845		529,740			15,306
Deferred tax liabilities Ì current		ÏÏÏÏÏÏÏÏÏÏÏÏÏ		(108,858)			(63,661)			(1,839)
Net deferred tax assets and liabilities Ì
currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ					713,987		466,079			13,467

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

	As of	As of	September 30,	September 30,
	2002			2003
	NT$			NT$	US$
Deferred tax assets Ì non-currentÏÏÏÏÏÏ $ 4,638,224		$		6,514,396	188,223
Valuation allowance for deferred tax
assets Ì non-current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,024,714)			(4,628,056)		(133,720)
Net deferred tax assets Ì non-current ÏÏ 1,613,510				1,886,340	54,503
Deferred tax liabilities Ì non-current ÏÏÏÏ	(410,352)			(465,774)	(13,458)
Net deferred tax assets and liabilities Ì
non-currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,203,158		$		1,420,566	41,045
	For the nine-month period				ended
			September 30,
	2002			2003
	NT$			NT$	US$
(f) Income taxes payable from continuing
operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		Ì		Ì	Ì
Tax expense (beneÑt) from recognition of
depreciation expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	(125,663)			248,797	7,189
Tax expense from recognition of unrealized
inventory provisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	17,085			78,739	2,275
Tax expense from recognition of unrealized
royalty expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	82,052			3,267	94
Tax (beneÑt) expense from recognition of
unrealized allowance for bad debts ÏÏÏÏÏÏÏÏÏÏ	12,912			(4,609)	(133)
Tax beneÑt from recognition of unrealized
investment lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	(576)			(365,695)	(10,566)
Tax (beneÑt) expense from recognition of
unrealized foreign exchange gains ÏÏÏÏÏÏÏÏÏÏÏ	108,857			(18,336)	(530)
Tax expense from recognition of unrealized
exchange losses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	50,930			11,854	342
Tax beneÑt from amortization of capacity
variance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		Ì		(95,163)	(2,750)
Tax beneÑt from investment credits ÏÏÏÏÏÏÏÏÏÏÏ	(1,039,344)			(163,184)	(4,715)
Tax expense from allowance valuationÏÏÏÏÏÏÏÏÏ	3,060,986			1,134,606	32,783
Tax beneÑt from losses carryforwardsÏÏÏÏÏÏÏÏÏ	(2,180,600)			(787,626)	(22,757)
Over accrual of prior year's tax expense ÏÏÏÏÏÏÏ		Ì		(30,501)	(881)
Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	13,361			(12,149)	(351)
Income tax expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ		Ì		Ì	Ì

(g)Information relating to the imputation of shareholders' income taxes

Available shareholders' tax credits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected (actual) ratio of shareholders' tax credits ÏÏÏÏÏ	As of September 30,	As of September 30,	As of September 30,
	2002 NT$ 110,549 Ì	2003
		NT$ 94,854 Ì	US$ 2,741
			Ì

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(h) Information related to undistributed retained earnings

After 1998 (inclusive) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As	of September 30,	US$ (355,731)
	2002 NT$ $(7,445,569)	2003
		NT$ $(12,311,856)

(21) Pension Fund

The balances of Employees' Retirement Fund amounted to NT$566,935 and NT$617,841 (US$17,852) as of September 30, 2002 and 2003, respectively. Pension expense recognized for the nine months ended September 30, 2002 and 2003 amounted to NT$93,103 and NT$80,012 (US$2,312), respectively.

(22) Sales revenue

(22) Sales revenue
Revenue from sales of manufactured products ÏÏÏÏÏÏÏÏ Service revenue ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Sales returns and sales discount ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net sales revenueÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the nine months ended September 30, 2002 2003 NT$ NT$ US$ 11,064,141 11,934,955 344,841 49,897 5,552 160 400,699 74,786 2,161 11,514,737 12,015,293 347,162 (112,631) (90,677) (2,619) 11,402,106 11,924,616 344,543
	2002 NT$ 11,064,141 49,897 400,699 11,514,737 (112,631) 11,402,106	2003
		NT$ 11,934,955 5,552 74,786 12,015,293 (90,677) 11,924,616

(23) Personnel, Deprecation and Amortization Expenses

Personnel Expense Salary expense ÏÏÏÏÏ Insurance expense ÏÏ Pension expense ÏÏÏ Meal expense ÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ DepreciationÏÏÏÏÏÏÏÏÏÏ Amortization ÏÏÏÏÏÏÏÏÏ		For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,
		2002	Total $1,746,702 122,029 93,103 76,017 $2,037,851 $6,028,303 $ 364,692		2003
	Recorded under cost of goods sold $ 940,849 70,739 47,935 47,140 $1,106,663 $5,661,163 $ 32,533	Recorded under operating expense $805,853 51,290 45,168 28,877 $931,188 $367,140 $332,159		Recorded under Cost of goods sold $ 952,064 74,281 41,874 46,697 $1,114,916 $6,346,579 $ 20,120	Recorded under operating expense $798,209 54,297 38,138 28,069 918,713 387,694 $334,814	Total $1,750,273 128,578 80,012 74,766 $2,033,629 $6,734,273 $ 354,934	US$
							$ 50,571 3,715 2,312 2,160
							$ 58,758
							$194,576
							$ 10,255

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

5. Related Party Transactions

(1) Related Parties and their Relationships Associate with the Company

Related parties Relationship Macronix America Inc. (""MXA'')ÏÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee Macronix (BVI) Co., Ltd. (""BVI'')ÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee Caesar Technology, Inc. (""Caesar'')ÏÏÏÏÏÏÏÏÏ The Company's equity investee (note) Magic Pixel Inc. (""Magic'')ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee MaxNova Inc. (""Maxnova'')ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee Macronix (Hong Kong) Co., Ltd. (""MX (HK)'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee Prominent Communications, Inc. (""Prominent'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Company's equity investee Wedgewood International Ltd. (""Wedgewood'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A subsidiary's equity investee New Trend Technology Inc. (""NTTI'') ÏÏÏÏÏÏÏ A subsidiary's equity investee Macronix Europe, NV. (""MXE'')ÏÏÏÏÏÏÏÏÏÏÏÏÏ A subsidiary's equity investee Biomorphic VLSI, Inc. (""Biomorphic'') ÏÏÏÏÏÏÏ A subsidiary's equity investee Macronix Pte Ltd. (""MPL'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A subsidiary's equity investee Tower Semiconductor Ltd. (""Tower'') ÏÏÏÏÏÏ A subsidiary is represented on Tower's board of directors. FueTrek Co., Ltd. (""FueTrek'') ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ A subsidiary is represented on FueTrek's board of directors. Raio Technology Co., Ltd. (""Raio'') ÏÏÏÏÏÏÏÏÏ A subsidiary's equity investee United Industry Gas Co., Ltd. (""UIG'') ÏÏÏÏÏÏÏ The Company is UIG's supervisor. Powertech Technology Inc.(""Powertech'') ÏÏÏ The Company is represented on Powertech's board of directors. Ardentec Corporation (""Ardentec'')ÏÏÏÏÏÏÏÏÏ The Company is represented on Ardentec's board of directors. Chiao Tung BankÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Chiao Tung Bank was represented on the Company's board of directors before November 26, 2002. Macronix Education Foundation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The president is the same.

(note) Caesar Technology Inc. applied for formal compulsory liquidation in January 2002 and completed the liquidation process on May 10, 2003.

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

• (2) Major Transactions with Related Parties

• a. Sales to related parties were as follows:

Relatedparties MXA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MX(HK)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MXEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MagicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ FueTrekÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ProminentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,
	2002 NT$ 860,806 Ì 269,561 116,739 Ì 10,757 Ì 104,530 Ì 1,362,393	2003
		NT$ 504,838 276,002 265,851 126,754 68,887 45,949 5,591 Ì 5 1,293,877	US$ 14,586 7,975 7,681 3,662 1,990 1,328 162 Ì Ì
			37,384

Sales prices to MXA, MXE and MX (HK) are approximately 88%, 88% and 94% of those to end-users, respectively. Sales prices to Biomorphic, Prominent and Raio are not comparable with those to regular customers because the Company is the sole provider for them.

The Company is still negotiating the service agreement with Magic. Service fees will be charged to Magic once the agreement is complete. Currently, sales prices to Magic include no margin.

The general collection terms with related parties are 30-60 days, similar to regular customers.

b. Expenses paid to related parties were as follows:

Relatedparties MXA ÏÏÏÏÏÏÏÏÏÏ BVI ÏÏÏÏÏÏÏÏÏÏÏÏ MPL ÏÏÏÏÏÏÏÏÏÏÏ NTTIÏÏÏÏÏÏÏÏÏÏÏ MXIC Education Foundation ÏÏÏ TotalÏÏÏÏÏÏÏÏÏÏÏ	Account Selling expenses Selling expenses Selling expenses Research and development expenses Administrative expenses	For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,
		2002 NT$ 103,343 66,815 9,002 73,825 Ì 252,985	2003
			NT$ 109,712 84,442 10,298 65,611 21,050 291,113	US$ 3,170 2,440 297 1,896 608
				8,411

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

c. Disposal of assets for the nine months ended September 30, 2003 were as follow:

Relatedparties MagicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MaxNova Inc. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ArdentecÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Item Fixed assets Software Fixed assets Fixed assets	Book value NT$ US$ 3,200 92 416 12 884 26 Ì Ì 4,500 130	Gain(loss)
			NT$ US$ 114 3 14 Ì Ì Ì 48 2 176 5

There were no transactions about disposal of assets with related parties for the nine months ended September 30, 2002.

d. Manufacturing processing charges from related parties for the nine months ended September 30, 2002 and 2003 were as follows:

September 30, 2002 and 2003 were as follows:
Relatedparties Ardentec ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PowertechÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the nine months ended September 30,
	2002 NT$ $178,570 96,019 $274,589	2003
		NT$ $100,106 150,656 $250,762	US$ 2,892 4,353
			7,245

Such charges form a part of cost of goods sold.

e. The Company purchased industrial gas from UIG totaling NT$85,518 and NT$74,667 (US$2,157) for the nine months ended September 30, 2002 and 2003, respectively. Such purchases are included in cost of goods sold.

f. The Company purchased wafers from Tower totaling NT$96,556 and NT$35,988 (US$1,040) for the nine months ended September 30, 2002 and 2003. Such purchases are included in cost of goods sold.

g. Merchandise purchased from related parties were as follows:

Relatedparties Prominent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	For the nine months ended September 30,	For the nine months ended September 30,	For the nine months ended September 30,
	2002 NT$ 275,548 18,249 Ì 293,797	2003
		NT$ 63,798 53,008 3,257 120,063	US$ 1,843 1,532 94
			3,469

Such purchases form a part of cost of goods sold.

h. The Company entered into an IP License Agreement with FueTrek in 2002. The Company paid in total amount of license fees to be paid under this agreement of NT$10,050 (JPY34,300). The Company recorded such amount as a deferred assets and amortized it over the contract's life.

F-88

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(3) Receivables and payables resulting from the above transactions as of September 30, 2002 and 2003 were as follows:

a. Accounts Receivable

Relatedparties MX(HK) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Raio ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MXA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MXEÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BiomorphicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Magic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NTTI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ UIG (note) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BVIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ProminentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Others ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less: Allowance for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of	September 30, 2003 NT$ US$ 233,812 6,756 64,269 1,857 59,254 1,712 52,897 1,528 45,615 1,318 34,003 982 6,494 188 5,063 146 2,522 73 2 Ì 6,411 186 510,342 14,746 (13,000) (376) 497,342 14,370
	2002 NT$ Ì 24,769 222,299 59,840 11,292 Ì 6,722 Ì 2,368 50,984 14,485 392,759 (13,876) 378,883
		NT$ 233,812 64,269 59,254 52,897 45,615 34,003 6,494 5,063 2,522 2 6,411 510,342 (13,000) 497,342

(Note) The Company charged UIG of electricity and water fee for the use of the Company's equipment.

b. Accounts Payable

Relatedparties MXA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PowertechÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ardentec ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ UIG ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ NTTI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BVI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prominent ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ TowerÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ OthersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,	As of September 30,
	2002 NT$ $ 50,752 52,249 55,080 9,249 24,685 14,297 40,838 21,994 8,087 $277,231	2003
		NT$ $ 68,658 45,391 33,264 17,833 9,958 10,100 Ì Ì 4,919 $190,123	US$ 1,984 1,311 961 515 288 292 Ì Ì 142
			5,493

(4) In 2002, the board of directors authorized the Company to act as guarantor for up to USD154,000 for loans and derivative Ñnancial instrument transactions of its subsidiaries and equity investees. Based on the authorization, the Company guaranteed Biomorphic's loan for up to USD 4,000 and MX(HK)'s letters of credit in a maximum amount of NT$100,000

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MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

(US$2,889). The Biomorphic guarantee, however, expired on July 14, 2003. As of September 30, 2002 and 2003, the guaranteed amounts were as follows:

Relatedparties WedgewoodÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BVI ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Biomorphic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ MX(HK) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,	As of September 30,
	2002 USD 85,000 19,000 3,400 USD 107,400 $ Ì	2003
		USD 95,000 31,600 Ì
		USD 126,600
		$ 100,000

(5) Please refer to note 4(11) with regards to information about the Company's longterm loan agreement with Chao Tung Bank.

(6) Please refer to note 4(12) with regards to information about the Company's capital lease agreement with Caesar.

6. Assets Pledged As Collateral

The Company's assets pledged as collateral for security for foreign labor, customs clearance deposits, compensated deposits, secured loans and capital leases as of September 30, 2002 and 2003 were as follows:

Accounts Restricted investments-current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restricted investments-non-currentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	As of September 30,	As of September 30,
	2002 NT$ $ 2,200,919 262,050 15,938,685 $18,401,654	2003
		NT$ $ 499,623 253,162 13,994,007 $14,746,792	US$ 14,436 7,315 404,334
			426,085

7. Commitments And Contingencies

The Company's commitments and contingencies, not included in the Ñnancial statements, as of September 30, 2003 were as follows:

a. Letters of credit issued for future deliveries of equipment totaled approximately NT$359,557 (US$10,389).

b. The Company's signiÑcant construction and machinery contracts totaled approximately NT$14,699,846 (US$424,728). As of September 30, 2003, the Company paid NT$10,227,320 (US$295,502) pursuant to these contracts.

c. Operating Leases:

The Company entered into several operating lease contracts for land with the administrative oÇce of the Hsinchu Science-Based Industrial Park. The lease terms are from 1990 to 2020. Future lease payments under the lease are NT$66,257 (US$ 1,914) for 2003, NT386,774 (US$11,175) in total from 2004 to 2008, NT$307,770 (US$8,893) in total from 2009 to 2020.

F-90

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

d. According to the loan agreements entered into by the Company with several banks including Chiao Tung Bank, the Company is required to issue new shares for cash if the debt to equity ratio is greater than 1.2, or if ratio of current assets to current liabilities does not exceed 1.00.

e. The license fees from the products licensed agreements entered into by the Company with A and B companies in the United States amounted to USD 46,000. As of September 30, 2003, the Company has paid USD 31,000 pursuant to the agreements.

f. The Company entered into a technology agreement with one company. As of September 30, 2003, Ñxed license fee has been fully paid, while running royalties will be charged based on the percentages of the net sales from the licensed products pursuant to the agreement.

g. In August 1997, Atmel Ñled a complaint against MXA for infringement of Atmel's patents No. 096 and 747. MXA applied for summary judgment for both patents. On January 14, 2002, the Court issued an order denying Atmel's motion to correct inventorship of the 747 patent. Based on that order, MXA has sought a ruling of invalidity of the 747 patent due to incorrect inventorship, and is awaiting the Court's decision. On May 14, 2003, the Court granted the Company's motion for summary judgment of invalidity of the 747 patent due to nonjoinder of co-inventor. SpeciÑcally, the Court's Order found that all claims of the 747 patent are invalid for nonjoinder of a co-inventor. The Court has also granted the Company's motion for summary judgment against three of the four asserted claims of the 096 patent, leaving only one claim to be litigated on the 096 patent. Both parties applied for summary judgment for infringement of the 096 patent on the written counterstatement. MXA and its attorney will adduce substantial contestation in order to win the lawsuit.

8. SigniÑcant Disaster Losses

No signiÑcant disasters occurred during the period.

9. SigniÑcant Subsequent Events

(Unreviewed) On August 13, 2003, the Company's Boards of Directors passed a resolution for the oÅering of 500,000,000 common shares with NT$10 at par and the oÅering price at NT$8 per share. The number of shares and the oÅering price were subsequently approved to change to 475,000,000 shares and NT$8.11 per share. The oÅering was approved by the SFC on October 22, 2003. As of November 12, 2003, all shares in this oÅering had been subscribed and paid up, resulting in the Company realizing gross proceeds of NT$3,852,250.

F-91

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

10. Financial Instruments

a. Contract Amount or Notional Amount and Credit Risk:

Financial instrument Written options-hedging ÏÏÏÏÏÏÏÏ Purchased options-hedging ÏÏÏÏÏÏ Cross currency interest rate swaps-hedging ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	2002.9.30	Credit risk Ì Ì Ì	2003.9.30
	Contract amount or Notional amount Í3,737,100 USD5,000 Í1,626,450 USD4,000		Contract amount or Notional amount Ì Ì Ì	Credit risk
				Ì Ì Ì

Credit risk amount represents forward exchange contracts with a positive fair value factoring in the oÅsetting eÅect of the master netting arrangement as of balance sheet date. If the credit risk amount is positive and the transaction party breaches the contract, the Company will incur a loss. The possibility of incurring a loss is remote since the Company's counter parties are reputable.

b. Market Value Risk

Market value risk is insigniÑcant due to the fact that the purpose of the forward exchange contract, option contracts and cross currency swaps are hedging and the gain or loss from Öuctuations of interest or exchange rates will be oÅset by the gain or loss from the underlying assets or liabilities denominated in foreign currencies. In addition, market value risk in the dual currency deposits contracts is considered low because the range of foreign exchange rates is Ñxed.

c. Liquidity Risk

No signiÑcant cash Öow risks are expected as the exchange rate on the forward contracts is Ñxed, and the Company expects to have suÇcient Japanese Yen assets to meet the cash requirements.

d. Types of derivative Ñnancial instruments, purpose of holding the derivative Ñnancial instruments and the strategy for achieving the hedging purpose:

The Company's derivative Ñnancial instruments are entered into mainly for hedging purposes. The purpose of holding forward exchange contracts, option contracts and cross currency swaps is to hedge exchange rate Öuctuation risks resulting from assets, liabilities or commitments denominated in foreign currency. The Company's hedging strategy is to mitigate into market price risk. Derivative Ñnancial instruments selected for hedging purposes are reviewed and anti-co-related with the Öuctuation of the fair value of derivatives hedged. Derivatives are evaluated periodically. In addition, the primary purpose of holding dual currency deposit option contracts is to earn higher interest revenue within a Ñxed range of foreign exchange rates.

e. Presentation of derivative Ñnancial instruments

Forward exchange contracts receivable and payable are reported under current assets or liabilities on a net basis if any right of oÅset exists.

Foreign exchange gains earned for the nine months ended September 30, 2003 amounted to NT$568 which was reported under other income. Gains and losses related to option contracts are dealt with in the statement of operations upon exercise.

F-92

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

f. Fair value of Ñnancial instruments

Cash and cash equivalents and restricted investmentsÏÏÏÏÏÏÏÏÏÏ Notes and accounts receivable (including receivables from related parties) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Ñnancial assets ÏÏÏÏÏÏÏÏÏÏÏÏ Other receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term equity investments ÏÏÏÏ Short-term debts and notes ÏÏÏÏÏÏ Payables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debts (including current portion) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capital lease obligation ÏÏÏÏÏÏÏÏÏÏÏ Cross currency interest rate ÏÏÏÏÏÏ Purchased options-hedging ÏÏÏÏÏÏÏ Written options-hedging ÏÏÏÏÏÏÏÏÏ		As of September 30,	As of September 30,
	2002 Carrying amount Fair value NT$ NT$ 11,587,827 11,587,827 3,099,657 3,099,657 Ì Ì 471,329 471,329 3,206,193 3,227,905 556,300 556,300 5,333,048 5,333,048 26,936,117 25,862,773 1,769,099 1,694,014 23,381 25,013 Ì (995) Ì (21,928)	2003
	Carrying amount NT$ 11,587,827 3,099,657 Ì 471,329 3,206,193 556,300 5,333,048 26,936,117 1,769,099 23,381 Ì Ì	Carrying amount NT$ US$ 6,375,316 184,204 3,423,495 98,916 168,775 4,876 236,292 6,827 3,320,093 95,929 1,396,760 40,358 4,381,957 126,610 22,442,682 648,445 1,106,420 31,968 Ì Ì Ì Ì Ì Ì	Fair value
			NT$ US$ 6,375,316 184,204 3,423,495 98,916 168,775 4,876 236,292 6,827 3,563,572 102,964 1,396,760 40,358 4,381,957 126,610 22,508,413 650,344 1,079,010 31,176 Ì Ì Ì Ì Ì Ì

The methods and assumptions used to estimate the fair value of derivative Ñnancial instruments are as follows:

(1) The fair value of the Company's short-term Ñnancial instruments is based on the book value of those instruments at the reporting date due to the short maturity of those instruments. This method was applied to cash and cash equivalents, restricted investments, receivables, payables and short-term debts and short-term notes.

(2) The fair value of the Company's marketable securities is based on the market prices at the reporting date if the market prices are available. The fair value of the Company's marketable securities is based on Ñnancial data or any other information if market prices are not available.

(3) The fair value of the Company's long-term borrowings bearing variable interest rates, which includes the current portion of long-term debts, is estimated using the book value of the debt at the reporting date.

(4) The fair value of bonds payable and convertible bonds payable is based on the market prices at the reporting date if market prices are available or estimated using the discounted cash Öow method based on the Company's borrowing rates for similar types of borrowings.

(5) The fair value of derivative Ñnancial instruments (normally includes unrealized gains or losses from outstanding forward exchange contracts) is assumed to be based on the amount that the Company is entitled to receive or obligated to pay if the Company terminated the contracts at the balance sheet date.

F-93

MACRONIX INTERNATIONAL CO., LTD.

NOTES TO UNCONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

g. Stock Options

Grant Date 2002.1.16 2002.5.6 2002.10.1 2002.12.16 2003.4.7 2003.6.13	Total Units Issued 71,768,500 560,000 151,507,000 16,449,000 2,753,000 193,212,000	Shares to Be Exercised (note) 35,884,250 17,942,125 17,942,125 280,000 140,000 140,000 75,753,500 37,876,750 37,876,750 8,224,500 4,112,250 4,112,250 1,376,500 688,250 688,250 96,606,000 48,303,000 48,303,000	Beginning Date of Exercise 2004.1.16 2005.1.16 2006.1.16 2004.5.6 2005.5.6 2006.5.6 2004.10.1 2005.10.1 2006.10.1 2004.12.16 2005.12.16 2006.12.16 2005.4.7 2006.4.7 2007.4.7 2005.6.13 2006.6.13 2007.6.13	Exercise Deadline 2008.1.15 2008.5.5 2008.9.30 2008.12.15 2009.4.6 2009.6.12	Exercise Price 22.8 22.3 11.5 11.7 9.35 7.75	Performance of Contract Issuance of new shares Issuance of new shares Issuance of new shares Issuance of new shares Issuance of new shares Issuance of new shares	Market
							High Low 13.15 3.88 13.15 3.88 13.15 3.88 13.15 3.88 13.15 3.88 13.15 3.88

(Note) Unless canceled due to illegal acts, options may be exercised by up to 50%, 75% and 100% in the third year, fourth year and Ñfth year (and thereafter) of option lives.

F-94

GLOSSARY OF TECHNICAL TERMS

AND circuit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A circuit which has two or more input signal gates and
	which delivers an output only if and when every input
	signal gate is energized simultaneously.
ASIC ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Application SpeciÑc Integrated Circuit. A custom designed
	integrated circuit that performs speciÑc functions which
	would otherwise require a number of commodity inte-
	grated circuits to perform. The use of an ASIC in place of
	a conventional integrated circuit reduces product size and
	cost and also improves reliability.
ASSPÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Application SpeciÑc Standard Product. A standard inte-
	grated circuit designed for a speciÑc product or applica-
	tion, such as a VCR or microwave.
ATAÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	AT attachment, or Advanced Technology Attachment.
	The speciÑcation for an Integrated Device Electronics
	interface which is a type of hardware interface widely
	used to connect various peripheral devices to a personal
	computer.
BIOSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Basic Input Output System. This software controls the
	basic power-up functioning of a computer system.
CD-ROM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Compact Disc used for data storage on a read-only basis.
CD-R/WÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	CD-recordable and rewritable. Originally called CD-erasa-
	ble'', CD-RW can be erased and new information can be
	re-recorded onto the same physical location on the disc
	by a CD-RW recorder.
DAM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Digital Answering Machine.
Die ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A piece of a semiconductor wafer containing the circuitry
	of a single chip.
DINOR ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Divided bit-line NOR Mitsubishi-patented Flash architecture
	used in its Flash memory product line. DINOR oÅers the
	high-speed random-access capability of the NOR architec-
	ture, without NOR's over-erase problems or the need to
	set all bits to zero before erase. It also oÅers 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 architec-
	ture, the opposite of the NOR architecture.
DRAM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	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.

A-1

DSP ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Digital Signal Processor. A type of integrated circuit that
	processes and manipulates digital information after it has
	been converted from an analog source. DSPs are parallel
	processors used for high complexity, high-speed real-time
	computations in a wide variety of applications, including
	digital cell telephone systems and data compression
	systems.
Embedded Flash controller ÏÏÏÏÏÏÏÏ	A device which incorporates Flash memory on which
	other devices rely for access to a computer system. A
	disk controller, for example, controls access to one or
	more disk drives, managing physical and logical access to
	the drive or drives.
ERROM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Erasable Programmable ROM. Nonvolatile memory which
	can be reprogrammed by removing the device from the
	system, erasing the data through exposure to ultraviolet
	light and reprogramming and reinstalling the device in the
	system.
EEPROM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Electrically Erasable Programmable ROM. Similar to
	EPROM, except that it can be erased electronically before
	being reprogrammed.
Ethernet ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A type of LAN.
Flash Memory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A type of non-volatile memory, similar to an EEPROM in
	tint it is erasable and reprogrammable. The diÅerence is
	that it can be erased and reprogrammed in the electronic
	system into which the Flash memory chip has been
	incorporated.
GPS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Global Positioning Satellite System. A network of satellites
	that provides precise location determination to receivers.
GSMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Global System for Mobile Communications. Aa standard
	for digital mobile telephone networks.
GUIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Graphics User Interface. An interface which allows opera-
	tion of a computer by manipulating graphical icons and
	windows (usually by pointing and clicking a mouse)
	rather than using text commands.
HDD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A combination of two or more transistors on a base
	material, usually silicon. All semiconductor chips, including
	memory chips and logic chips, are just very complicated
	integrated circuits with thousands of transistors.
LAN ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Local Area Network. A short distance network designed
	to connect computers within a localized environment to

A-2

enable the sharing of databases and other communications.

LCD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 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 Ñeld is applied, the molecules align with the light passing through it. A polarized Ñlter laminated over the electrodes can selectively ""turn on'' a cell or a pixel, containing the liquid crystal material, turning it dark.

Logic Product ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A product that contains digital integrated circuits that
	process, rather than store, information.
Mask ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A piece of glass on which an integrated circuit's circuitry
	design is laid out. Integrated circuits may require up to 20
	diÅerent 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Mega Bit. One million (or 1.048.576) bits as a unit of
	data size or memory capacity.
Memory ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A group of integrated circuits that a computer uses to
	store data and programs, such as ROM, RAM, DRAM and
	SRAM.
MHz ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Megahertz. One million cycles per second. Typically mea-
	sures the clock speed of microprocessors.
MicronÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	1/25,000 of an inch. Circuitry on an integrated circuit
	typically follows lines that are less than one micron wide.
Motherboard ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	The main piece of circuitry inside a personal computer.
MP3 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Motion Picture Experts Group-I, Audio Layer 3. A digital
	data compression and storage technology for music.
NAND circuit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Not AND. A logic circuit whose 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Memory products which retain their data content without
	the need for constant power supply.
NOR circuitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Not OR. A logic circuit in which an output signal appears
	only when a signal is absent from all of its input gates.
OR circuit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Paired Array Contact.
PCMCIA cards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Personal computer cards, standardized by Personal Com-
	puter Memory Card International of San Jose, California or

A-3

	credit card sized, removable modules for portable
	computers.
PDA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Personal Digital Assistant. A hand-held multifunctional
	minicomputer used for, among other things, word
	processing, name card retention and appointment
	calendars.
PHS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Personal Hand Set. A lower capability but less expensive
	mobile telephone communications system currently
	achieving substantial consumer acceptance in Japan.
PROM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Programmable Read-Only Memory. Similar to ROM in that
	once programmed it can be ""read only'' and not changed.
	Programmable ROM means that customers can program
	the integrated circuits themselves, rather than it being
	programmed when it is manufactured. The programming is
	possible because of a series of fuses in the circuitry that
	can be selectively blown to create a unique type of data.
RAM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Random Access Memory. A type of volatile memory,
	forming the main memory of a computer where applica-
	tions and Ñles are run.
ROMÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	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 Ñrst
	turned on.
Semiconductor ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	A material with electrical conducting properties in between
	those of metals and insulators. (Metals always conduct
	and insulators never conduct, but semiconductors some-
	times conduct.) Essentially, semiconductors transmit elec-
	tricity only under certain circumstances, such as when
	given a positive or electric charge. Therefore, a semicon-
	ductor's ability to conduct can be turned on or oÅ by
	manipulating those charges and this allows the semicon-
	ductor 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Standard Mechanical Interface Box System. A system
	which links process microenvironments so that a wafer is
	never exposed to room air. With a SMIF Box System,
	traditional environmental conditions are replaced with a
	microenvironment that can be pressurized with air or
	nitrogen to keep out room air.
SRAM ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Static Random Access Memory. A type of volatile mem-
	ory 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.

A-4

STB ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Set top box. A device to diÅerentiate signals from television and multimedia service providers. SXGA ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Super Extended Graphics Array. An enhanced set of Video Graphics Array standards that is capable of displaying an image ranging from 768 x 1024 pixels to 1024 x 1280 pixels. TransistorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ An individual circuit that can amplify or switch electric current. This is the building block of all integrated circuits and semiconductors. VCD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Video Compact Disk. Volatile memoryÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Memory products which lose their data content when the power supply is switched oÅ. Wafer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thin, round, Öat piece of silicon that is the base of most integrated circuits.

A-5

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REGISTERED OFFICE OF THE ISSUER

Macronix International Co., Ltd.

No. 16, Li-Hsin Road Science Park Hsinchu Taiwan, ROC

DEPOSITARY CUSTODIAN Citibank, N.A. Citibank, N.A. Ì Taipei Branch 111 Wall Street B1, No. 16 Nanking East Road, New York, New York 10043 Section 4 USA Taipei Taiwan, ROC

LEGAL ADVISERS TO THE ISSUER

as to ROC law

Baker & McKenzie

Taipei Branch 15th Floor 168 Tun Hwa N. Road Taipei Taiwan, ROC

LEGAL ADVISERS TO THE MANAGERS

as to ROC law as to English law Lee and Li Linklaters 7th Floor 10th Floor 201 Tun Hwa N. Road Alexandra House Taipei Chater Road Taiwan, ROC Hong Kong

LISTING AGENT

AUDITOR

The Bank of New York (Luxembourg) S.A. Aerogolf Center 1A, Hoehenhof L-1736 Senningerberg Luxembourg

Diwan, Ernst & Young

Taipei Branch 9th Floor 333 Keelung Road, Section 1 Taipei Taiwan, ROC

TABLE OF CONTENTS Summary ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Recent DevelopmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk FactorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Forward-Looking Statements ÏÏÏÏÏÏÏÏÏ Use Of Proceeds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Market Price Information ÏÏÏÏÏÏÏÏÏÏÏÏÏ Exchange Rates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Capitalization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selected Financial Information ÏÏÏÏÏÏÏÏ Management's Discussion And Analysis Of Financial Condition And Results Of Operations ÏÏÏÏÏÏÏÏÏ The Semiconductor IndustryÏÏÏÏÏÏÏÏÏÏ Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Related Party Transactions ÏÏÏÏÏÏÏÏÏÏÏ Major Shareholders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ The Securities Market Of Taiwan ÏÏÏÏÏ Foreign Investment And Exchange Controls In Taiwan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Description Of Common SharesÏÏÏÏÏÏÏ Description of the DepositaryÏÏÏÏÏÏÏÏÏ Description Of Global Depositary Shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common Shares Eligible For Future Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Taxation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Subscription and Sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ General Information ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Summary of Certain SigniÑcant DiÅerences between ROC GAAP and U.S. GAAPÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Index To Consolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Index to Unconsolidated Financial StatementsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Appendix A Ì Glossary of Technical Terms ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ	Page 1 8 13 33 35 36 38 39 40 41 43 71 74 99 105 107 108 112 117 124 125 148 149 151 154 156 F-1 F-57 A-1	Macronix International Co., Ltd. (Incorporated in Taiwan, the Republic of China) 13,125,000 Global Depositary Shares Representing 525,000,000 Common Shares Global Coordinator and Sole Bookrunner Deutsche Bank Joint Lead Manager Credit Suisse First Boston Co-Manager Chinatrust Securities OÅering Circular 31 March 2004