PHIHONG - Capital/Financing Update 2013

OFFERING CIRCULAR

PHIHONG ENTERPRISE CO., LTD.

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

U.S.$50,000,000

1 per cent. Convertible Bonds due 2007

Issue Price: 100 per cent.

The U.S.$50,000,000 1 per cent. Convertible Bonds due 2007 (the ‘‘Bonds’’) will be issued in registered form by Phihong Enterprise Co., Ltd. (‘‘Phihong’’ or the‘‘Company’’) in reliance on Regulation S under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’).

The Bonds will be direct, unconditional, unsecured and unsubordinated obligations of Phihong and will rank at least pari passu in right of payment with all other unsecured and unsubordinated debt of Phihong. The Bonds bear interest rate at 1 per cent. per annum payable annually in arrears on 2nd July of each year (each an ‘‘Interest Payment Date’’), commencing 2nd July, 2003. Interest rate on the Bonds is computed on the basis of a 360-day year of twelve 30-day months. Holders of the Bonds may convert the Bonds into the common shares, par value NT$10 per share, of Phihong (the ‘‘Shares’’) at any time (subject to certain restrictions) on or after 1st August, 2002 and prior to the close of business (at the place the Bond is deposited for conversion) on 2nd June, 2007. Subject to availability, converting holders may elect to receive the Depositary Receipts representing the Shares (‘‘DR’’) at a conversion rate to be determined. Conversion of the Bonds into DRs is not currently available. The initial conversion price (the ‘‘Conversion Price’’) will be NT$50.0 per Share, which is equivalent to U.S.$1.4871 per Share, based on the Fixed Rate of Exchange (as defined herein) of NT$33.622 = U.S.$1.00, subject to adjustment in the manner provided herein. In addition, the Conversion Price will be adjusted from time to time in certain circumstances relating to the then prevailing closing price of the Shares relative to the Conversion Price. The Shares are listed on the Taiwan Stock Exchange (the ‘‘TSE’’). On 26th June, 2002, the closing price of the Shares on the TSE was NT$47.5 per Share.

Unless the Bonds have been previously redeemed, repurchased and cancelled or converted, Phihong will, at the option of the holder of any Bond (the ‘‘Bondholder’’), redeem all or part of the holder’s Bonds (i) on 2nd July, 2004 at 109.5 per cent. of the principal amount and (ii) on 2nd July, 2005 at the principal amount. Phihong has the option to call all or any portion of the Bonds on or at any time after 2nd July, 2004 and prior to 2nd July, 2007 at their principal amount plus accrued interest (if any) by giving a 40 to 60 day’s notice of redemption to the Bondholders, if the closing price of the Shares on the TSE in U.S. Dollars, calculated at the prevailing exchange rate, for a period of 30 consecutive Trading Days (as defined herein), the last of which occurring not more than ten days prior to the date of the notice of such redemption, is at least 130 per cent. of the Conversion Price in effect on each such trading day translated into U.S. Dollars at the Fixed Rate of Exchange. In addition, the Company may on or at any time after 2nd July 2004, redeem the outstanding Bonds in whole, or in part, at their principal amount in the event that 90 per cent. of the Bonds have been previously redeemed, called or converted. In addition, the Bonds may be redeemed in whole at the option of Phihong at the principal amount in the event that certain changes relating to Republic of China (‘‘ROC’’ or ‘‘Taiwan’’) taxation will result in additional costs to Phihong.

For a discussion of certain factors that should be considered in connection with an investment in the Bonds, see ‘‘Risk Factors’’ on page 9 herein.

Application has been made to list the Bonds on the Socie´te´ de la Bourse de Luxembourg S.A. (the ‘‘Luxembourg Stock Exchange’’).

The Bonds and Shares to be issued upon conversion of the Bonds have not been and will not be offered or sold within the United States or to, or for the account on behalf of, U.S. persons. The Bonds are not being offered in the ROC or in the United States.

Sole Bookrunner

Lead Manager

Senior Co-lead Manager

Citicorp International Limited

Managers

KGI Securities Co., Ltd.

Capital Far East Limited

(acting through Sinpac Securities (Hong Kong) Co., Ltd.)

The date of this Offering Circular is 26th June, 2002

Phihong, having made all reasonable inquiries, confirms that this Offering Circular contains all information with respect to Phihong, Phihong and its subsidiaries as a whole, the Bonds, and the Shares which is material in the context of the issue and offering of the Bonds (including all information required by applicable laws of the ROC), that the information contained herein (save as set out below) is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the Bonds, make this Offering Circular as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respects, that all reasonable inquiries have been made by the Company to verify the accuracy of such information, and that this Offering Circular does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary in order to make the statements herein, in the light of the circumstances under which they are made, not misleading. The Company accepts responsibility accordingly. Information provided herein with respect to the ROC, its political status and economy, has been derived from government and other public sources, and the Company accepts responsibility only for accurately extracting information from such sources.

The distribution of this Offering Circular and the offering and sale of the Bonds in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular comes are required by the Company and the Managers (as defined in ‘‘Underwriting’’) to inform themselves about and to observe any such restrictions. For a description of certain further restrictions on offers and sales of the Bonds and distribution of this Offering Circular, see ‘‘Underwriting’’. This Offering Circular does not constitute an offer of, or an invitation by or on behalf of the Company or the Managers to subscribe for or purchase, any of the Bonds in any jurisdiction in which such offer or invitation would be unlawful.

No person is authorized in connection with the issue, offering or sale of the Bonds to give any information or to make any representation not contained in this Offering Circular and any information or representation not contained herein must not be relied upon as having been authorized by the Company or the Managers. Neither the delivery of this Offering Circular nor any sale or allotment made in connection with the issue of the Bonds shall, under any circumstances, constitute a representation or create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date.

The Bonds will be represented by beneficial interests in a permanent global certificate (the ‘‘Global Certificate’’) in registered form, which will be registered in the name of a nominee of, and shall be deposited on or about 2nd July, 2002 with a common depositary for, Euroclear Bank S.A./N.V. as operator of the Euroclear System (‘‘Euroclear’’) and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream, Luxembourg’’).

Phihong has prepared the audited consolidated and non-consolidated financial statements as at and for the years ended 31st December, 2001, 2000 and 1999 and non-consolidated financial statements as at and for the three-month period ended 31st March, 2002 and 2001, contained herein in accordance with accounting principles generally accepted in the ROC.

NOTICE TO INVESTORS

Each purchaser of Bonds will be deemed to have represented and agreed as follows (terms that are defined in Regulation S under the Securities Act and used in the following section have the meanings assigned in Regulation S):

(1) it is purchasing the Bonds for its own account or for an account with respect to which it exercises sole investment discretion, and it and any such account is outside the United States and is not a U.S. person;
(2) it acknowledges that neither the Bonds nor the Shares issued upon conversion of the Bonds have been or will be registered under the Securities Act or with any securities regulatory authority of any jurisdiction and may not be offered or sold within the United States except as set forth below;
(3) it understands and agrees that if in the future it decides to resell, pledge or otherwise transfer any Bond or beneficial interest therein, or any Shares issued upon conversion of the Bonds, it may do so only (i) in an offshore transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S, (ii) pursuant to an exemption from registration under the Securities Act, if available, or (iii) pursuant to an effective registration statement under the Securities Act, and in each of cases (ii) and (iii), in accordance with applicable securities laws of the states of the United States;
(4) it agrees to, and each subsequent holder is required to, notify any purchaser from it of a Bond or beneficial interest therein of the resale restrictions referred to in section (3) above, if then applicable;
(5) it understands that, except in the circumstances referred to under the heading ‘‘The Form of the Bonds’’, the Bonds, and beneficial interests therein, will be represented by the Global Certificate;
(6) it understands that the Global Certificate will bear a legend to the following effect (unless otherwise agreed by the Company):

‘‘THIS SECURITY HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE ‘‘SECURITIES ACT’’) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY JURISDICTION AND, ACCORDINGLY, MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED TO A U.S. PERSON OR WITHIN THE UNITED STATES EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT.

THIS LEGEND MAY BE REMOVED AFTER THE EXPIRATION OF FORTY DAYS FROM THE ORIGINAL ISSUANCE OF THE 1 PER CENT. CONVERTIBLE BONDS DUE 2007 OF PHIHONG ENTERPRISE CO., LTD.’’; and

(7) it acknowledges that the Company and the Managers and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements; and if it is acquiring the Bonds as a fiduciary or agent for one or more accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such account.

For further information about the requirements under the Indenture to effect exchanges or transfers of interests in the Global Certificates and of Bonds in certificated form, see ‘‘The Form of the Bonds’’.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Offering Circular contains forward-looking statements that involve risks and uncertainties. Forward-looking terminology include ‘‘may,’’ ‘‘will,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘continue,’’ ‘‘believe,’’ ‘‘forecast,’’ ‘‘project’’ and other similar words. Statements that include such terminology are forward-looking statements. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks, uncertainties and assumptions discussed in the ‘‘Risk Factors’’ and elsewhere in this Offering Circular. The Company undertakes no obligation after the date of this Offering Circular to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future which may affect information contained herein.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

Phihong is a company limited by shares incorporated under the ROC Company Law. All of Phihong’s directors and executive officers, and its respective supervisors are residents of the ROC and a substantial portion of the assets of Phihong and such persons are located in the ROC. As a result, it may not be possible for investors to effect service of process upon Phihong or such persons outside the ROC, or to enforce against any of them judgments obtained in courts outside the ROC.

Any final judgment obtained against Phihong or such persons in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the Bonds will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that: (i) the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC; (ii) the judgment is not contrary to the public order or good morals of the ROC; (iii) if the judgment was rendered by default by the court rendering the judgment, Phihong or such persons were served within the jurisdiction of such court, or process was served on Phihong or such persons with judicial assistance of the ROC; and (iv) judgments of the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis. Remittance out of the ROC of any amount recovered from enforcing a foreign judgment in the ROC is also subject to the Foreign Exchange Control Statute and related regulations thereto as described in ‘‘Foreign Investment and Exchange Controls in the ROC’’ herein.

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		Page		Page
Summary . . . . . . . . . . . . . . . . . . .	. . . . . . . . . .	1	The Form of the Bonds . . . . . . . . . . . . . . . . .	77
Risk Factors . . . . . . . . . . . . . . . . .	. . . . . . . . . .	9	Description of the Shares . . . . . . . . . . . . . . . .	80
Use of Proceeds . . . . . . . . . . . . .	. . . . . . . . . .	17	Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	85
Market Price Information . . . . .	. . . . . . . . . .	18	Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . .	87
Dividends and Dividend Policy	. . . . . . . . . .	19	Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . .	89
Exchange Rates . . . . . . . . . . . . . .	. . . . . . . . . .	20	Independent Auditors . . . . . . . . . . . . . . . . . . .	89
Capitalization . . . . . . . . . . . . . . .	. . . . . . . . . .	21	General Information . . . . . . . . . . . . . . . . . . . .	90
Business . . . . . . . . . . . . . . . . . . . .	. . . . . . . . . .	22	Summary of Significant Differences
Selected Financial Information .	. . . . . . . . . .	39	between ROC GAAP and U.S. GAAP . . .	92
Management’s Discussion and Analysis of			Index to Financial Statements . . . . . . . . . . . .	F-1
Financial Condition and Results of			Appendix A — Taiwan, the Republic
Operation . . . . . . . . . . . . . . . . .	. . . . . . . . . .	42	of China . . . . . . . . . . . . . . . . . . . . . . . . . . . .	A-1
Management and Employees . . .	. . . . . . . . . .	51	Appendix B — Foreign Investment and
Principal Shareholders . . . . . . . .	. . . . . . . . . .	56	Exchange Controls in the ROC . . . . . . . . .	B-1
Changes in Issued Share Capital	. . . . . . . . .	56	Appendix C — The Securities Market
Terms and Conditions of the Bonds . . . . . . .		57	of the ROC . . . . . . . . . . . . . . . . . . . . . . . . . .	C-1

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

Except where the context otherwise requires, all references herein to ‘‘Phihong’’ or the ‘‘Company’’ are to Phihong Enterprise Co., Ltd. and the ‘‘Group’’ are to Phihong and its subsidiaries. All references herein to ‘‘Taiwan’’ or the ‘‘ROC’’ are to the island of Taiwan and other areas under the effective control of the Republic of China. All references herein to the ‘‘ROC Government’’ or the ‘‘ROC Company Law’’ are references to the government of the Republic of China and the Company Law of the Republic of China, respectively. All references herein to ‘‘ROC GAAP’’ are to the ‘‘Rules Governing Preparation of the Financial Statements of Securities Issuers’’ and accounting principles generally accepted in the ROC and ‘‘U.S. GAAP’’ are to accounting principles generally accepted in the United States, respectively. All references herein to the ‘‘PRC’’ are to the People’s Republic of China. All references herein to the ‘‘TSE’’ are references to the Taiwan Stock Exchange and all references herein to the ‘‘ROSE’’ are to the ROC Overthe-Counter Securities Exchange.

The Group does not exist as a legal entity. References herein to the Group and to financial or statistical information relating to the Group are for convenience of presentation only. Except as otherwise indicated, all financial information set forth herein with respect to various members of the Company has been presented in New Taiwan Dollars.

The Company publishes its financial statements in New Taiwan Dollars, the lawful currency of the ROC. All references herein to ‘‘New Taiwan Dollars,’’ ‘‘NT Dollars’’ and ‘‘NT$’’ are to New Taiwan Dollars, references to ‘‘United States Dollars,’’ ‘‘U.S. Dollars’’ and ‘‘U.S.$’’ are to United States Dollars, references to ‘‘Japanese Yen’’ and ‘‘JPY=’’ are to Japanese Yen, references to ‘‘Brazilian Reis’’ and ‘‘R$’’ are to Brazilian Reis, and references to ‘‘Renminbi’’ and ‘‘RMB’’ are to Renminbi. All translations from New Taiwan Dollars to United States Dollars were made on the basis of the average of buying and selling exchange rates in Taipei for cable transfers in NT Dollars per U.S. Dollar as certified by Taipei Forex Inc. of NT$34.999 = U.S.$1.00 as of 31st December, 2001 and of NT$35.000 = U.S.$1.00 as of 31st March, 2002. All amounts translated into United States Dollars as described above are provided solely for the convenience of the reader, and no representation is made that the NT Dollar or U.S. Dollar amounts referred to herein could have been or could be converted into U.S. Dollar or NT Dollar, as the case may be, at any particular rate, the above rates or at all. See ‘‘Exchange Rates’’. The closing rate between the NT Dollar and the U.S. Dollar on 26th June, 2002 was NT$33.622 = U.S.$1.00.

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SUMMARY

The following summary is qualified in its entirety by the more detailed information and financial statements contained elsewhere herein.

Phihong Overview

The Group designs, manufactures and sells switching and linear power supply units, including AC/DC power adapters and chargers, charger bases and open frame power supply modules on an Original Equipment Manufacture (‘‘OEM’’) or Original Design Manufacture (‘‘ODM’’) basis to some of the world’s leading makers of communications devices, computer peripherals and consumer electronics. The Group also manufactures accessories for mobile telephones and other handheld or mobile electronic devices. The Company believes that it is one of the major OEM/ODM manufacturers of power supply units for mobile telephones and consumer electronics in the world. The Group’s customers include some of the industry leaders, such as Accton, BenQ, Cisco, Epson, Motorola, OMRON, Panasonic, Sanyo and Sony.

The Group has been named as one of a few core global suppliers for power supply units and mobile telephone accessories for use in the Motorola brand products. The Group currently provides 33 different types of power supply units and mobile telephone accessories to Motorola. Sales to Motorola accounted for 67.6 per cent., 57.9 per cent. and 64.3 per cent. of the Group’s total sales in 2001, 2000 and 1999, respectively. All sales made by the Group to Motorola are on purchase order basis without long-term contracts or firm purchase commitments.

The Group owns three manufacturing facilities in the PRC and one in Brazil to produce its products. As a whole, the Company and its subsidiaries own a total of approximately 976,845 square feet of manufacturing space. The Group has recently closed its assemble lines in Taiwan. In order to take the advantage of lower labor costs and to capture the market opportunities, the Group increased its production outside of Taiwan, primarily in plants located in the PRC and Brazil. The Group has a global network of sales and service offices in the United States, Japan, the United Kingdom, Taiwan, the PRC, and Brazil to provide fast and convenient global distribution services to its customers.

In respect of quality assurance, the Group implements strict quality control programs and undertakes substantial on-the-job training for its employees. The corporate headquarters in Taiwan has received ISO9001 and ISO14001 accreditation. Each of Dongguan Phihong Plant and Dongguan Phitek Plant has received ISO9002 and ISO14001 accreditation, and the Santa Rita Plant has received ISO9002 accreditation. The Group implements quality control at both the product design and commercial production stages to ensure that its products meet customers’ satisfaction. The Group has received numerous vendor awards from its major customers, including Motorola and Sony. All power supply products manufactured by the Group are designed to meet relevant international safety standards, such as UL, CSA and TU[¨ ] V, and comply with strict FCC Class B and CISPR Class II (EN55022) emission levels.

The Group’s products have become more advanced and sophisticated over time, and many of its customers’ product development cycles have shortened in response to technological innovations and rapidly changing market demands. The Company believes that continuous investment and efforts to reinforce its research and development capabilities are key to maintaining its competitiveness in the markets for its existing products and enhancing its market share and customer base for its new products. The Group has design divisions, engineering teams and research and development laboratories in Taiwan, the PRC, the United States and Brazil. As a result of its research and development efforts, the Group has developed various new products such as electronic ballast and advanced acoustic devices.

The consolidated net sales of the Company have grown at a compound annual growth rate of 22.2 per cent. from NT$4,002.0 million in 1998 to NT$7,294.5 million (U.S.$208.0 million) in 2001. For the three months ended 31st March, 2002 the Company recorded non-consolidated net sales of NT$1,467.8 million (U.S.$41.9 million) and non-consolidated net income of NT$77.8 million (U.S.$2.2 million), compared to NT$1,393.9 million and NT$122.5 million, respectively, for the same period in 2001.

Competitive Strengths

The Company believes that the following strengths contribute to its competitive position in the relevant markets:

" Highly reliable products and safety standards compliance
" Close relationships with key industry leaders
" Providing one-stop shopping supply capacity to the customers
" Strong research and development programs and design capacity
" Strict quality control processes and standards
" Experienced professional management team

Strategy

The key elements of the Company’s strategy are:

" Maintain position as a leading manufacturer of power supply products in mobile communications devices sector
" Diversify customer base to reduce reliance on limited number of customers
" Focus on high-growth markets
" Establish strategic alliance with market leaders to improve technology and develop new customers
" Co-location of production facilities with industrial leaders in major markets
" Increase vertical and horizontal integration of manufacturing process

Corporate and Other Information

The Company was founded on 7th December, 1972 and its common shares were traded on the ROC Over-the-Counter Securities Exchange on 15th February, 2000 and have been listed on the Taiwan Stock Exchange since 17th September, 2001. The Company’s corporate headquarters and principal place of business are located at No. 16 Lane 530, Chung-Cheng North Road, San-Chung City, Taipei Hsien, Taiwan, R.O.C. and as from November 2002, the Company’s corporate headquarters and principal place of business is expected to be re-located to No. 568, Fu Shing San Road, Wen Hua Village, Gui Shan Shiang, Tao Yuan County. The Company’s telephone number and website are (886) 2-2980-5255 and www.phihong.com.tw, respectively.

	The Offering
Issuer . . . . . . . . . . . . . .	Phihong Enterprise Co., Ltd.
Bonds . . . . . . . . . . . . . .	U.S.$50,000,000 1 per cent. Convertible Bonds due 2007 convertible into
	fully-paid common shares of the Company with a par value of NT$10 each
	(‘‘Shares’’).
Issue Price . . . . . . . . . . .	100 per cent.
The Offering . . . . . . . . .	The Bonds will not be offered or sold in the ROC or in the United States.
	The Bonds will be offered only in offshore transactions in reliance on
	Regulation S under the U.S. Securities Act of 1933, as amended.
Closing Date . . . . . . . . .	2nd July, 2002
Maturity Date . . . . . . . . .	2nd July, 2007
Status . . . . . . . . . . . . . .	The Bonds will be direct, unconditional, unsecured and unsubordinated
	obligations of the Company and will rank at least pari passu without any
	preference or priority among themselves and shall at all times rank at least
	equally with all other present and future direct, unsecured and
	unsubordinated obligations of the Company.
Interest . . . . . . . . . . . . .	The Bonds bear interest at the rate of 1 per cent. per annum payable annually
	in arrears on 2nd July of each year, commencing 2nd July, 2003. Interest on
	the Bonds will be computed on the basis of a 360-day year of twelve 30-day
	months. See Condition 4 in ‘‘Terms and Conditions of the Bonds’’.
Withholding Tax . . . . . . .	Premium (if any) and interest payable on the Bonds to non-residents of the
	ROC is subject to a withholding tax in the ROC equal to 20 per cent. of the
	gross amount of such premium (if any) and interest. The Company will pay
	such additional amounts as will result in the receipt by the bondholders of
	the amounts which would have been receivablein the absence of such
	withholding or deduction.
Tax Redemption . . . . . . .	The Company may redeem all but not part of the Bonds at their principal
	amount in the event of changes in the ROC taxation laws and regulations
	and/or the application or interpretation thereof, which will result in
	additional costs to the Company. See Condition 8(D) in ‘‘Terms and
	Conditions of the Bonds’’.
Conversion . . . . . . . . . . .	Subject to prior redemption and subject as otherwise provided herein, the
	Bonds are convertible at any time on or after 1st August, 2002 and prior to
	the close of business (at the place at which the Bond is deposited for
	conversion) on 2nd June, 2007, except during any Closed Period (as defined
	herein), into Shares or depositary receipts (‘‘DRs’’) (if available). The initial
	conversion price (subject to adjustment in certain circumstances) (the
	‘‘Conversion Price’’) will be NT$50.0 per Share, which is equivalent to
	U.S.$1.4871 per Share, based on the Fixed Rate of Exchange of NT$33.622
	= U.S.$1.00. Fractions of Shares will not be issued on conversion and cash
	adjustments will not be made in respect thereof by the Company. See
	Condition 6 in ‘‘Terms and Conditions of the Bonds — Conversion’’.

Conversion of the Bonds into DRs is not currently available.

Conversion Price Reset . . The Conversion Price shall be adjusted downward on the Reset Date (as defined in Condition 6(D) in ‘‘Terms and Conditions of the Bonds — Conversion’’) which shall be the first, second and third anniversary of 2nd July, 2002 in the event that the average Closing Price (as defined in Condition 8 in ‘‘Terms and Conditions of the Bonds’’) of the Shares on the TSE for the 30 consecutive Trading Days immediately prior to the Reset Date converted into U.S. Dollars at the Prevailing Rate (as defined in Condition 6(D) in ‘‘Terms and Conditions of the Bonds — Conversion’’) is less than the Conversion Price then in effect converted into U.S. Dollars at the Fixed Exchange Rate established on the Pricing Date (as defined in Condition 6(A) in ‘‘Terms and Conditions of the Bonds — Conversion’’); provided that any adjustment to the Conversion Price pursuant to the Conversion Price Reset shall be limited so that the adjusted Conversion Price shall not be less than 80 per cent. of the Conversion Price then in effect. Alternative Conversion The Bondholders are entitled, within seven Trading Days after 2nd June, Price Reset . . . . . . . . . 2004 and 2nd June, 2005, to convert the Bonds into Shares at an Alternative Conversion Price as defined herein equal to 86.2 per cent. and 94.3 per cent., respectively, of the then market price. See Condition 6(E) in ‘‘Terms and Conditions of the Bonds’’. Final Redemption . . . . . . Unless previously redeemed, converted or repurchased and cancelled in the circumstances referred to in ‘‘Terms and Conditions of the Bonds’’ the Bonds will be redeemed at their principal amount in U.S. Dollars on 2nd July, 2007. See ‘‘Withholding Tax’’ above and Condition 8(A) in ‘‘Terms and Conditions of the Bonds — Redemption, Purchase and Cancellation’’. Redemption at the Option of The Company has the option to call all or any portion of the Bonds on or at the Company . . . . . . . . any time after 2nd July, 2004 and prior to the Maturity Date at their principal amount plus accrued interest by giving a 40 to 60 day’s notice of redemption to the Bondholders, if the closing price of the Shares on the Taiwan Stock Exchange in U.S. Dollars, calculated at the Prevailing Rate, for a period of 30 consecutive Trading Days, the last of which occurring not more than 10 days prior to the date of the notice of such redemption, is at least 130 per cent. of the Conversion Price in effect on each such Trading Day translated into U.S. Dollars at the Fixed Exchange Rate. In addition, The Company may redeem the outstanding Bonds in whole or in part, at their principal amount in the event that 90 per cent. of the Bonds have been previously redeemed, called or converted. See Condition 8(B) in ‘‘Terms and Conditions of the Bonds’’.

Redemption at the option of Until and unless previously redeemed, converted or purchased and Bondholders . . . . . . . . cancelled, the Company will at the Bondholder’s option redeem all or part of the Bondholder’s Bonds (a) on 2nd July, 2004 at 109.5 per cent. of the principal amount and (b) on 2nd July, 2005 at the principal amount. See Condition 8(C) in ‘‘Terms and Conditions of the Bonds — Redemption, Purchase and Cancellation — Redemption at the Option of Bondholders’’.

Form and Registration of	The Bonds will be issued in registered form in the denomination of
the Bonds . . . . . . . . . .	U.S.$10,000 each. The Bonds will be offered and sold in principal amounts
	of U.S.$10,000 or an integral multiple thereof. The Bonds will be
	represented by a Global Certificate deposited with The Bank of New
	York, as common depositary for, and registered in the name of a nominee
	for, Euroclear and Clearstream, Luxembourg. Beneficial interests in the
	Global Certificate will be shown on, and transfers thereof will be effected
	only through, records maintained by Euroclear and Clearstream,
	Luxembourg and their participants. Except as described herein, certificates
	for Bonds will not be issued in exchange for beneficial interests in the
	Global Certificate.
Governing Law . . . . . . . .	The laws of the State of New York, U.S.A.
Trustee . . . . . . . . . . . . .	The Bank of New York.
Listing. . . . . . . . . . . . . .	Application has been made to have the Bonds listed on the Luxembourg
	Stock Exchange. The Shares are listed on the Taiwan Stock Exchange and
	application will be made for the Shares issuable upon conversion of the
	Bonds to be listed on the Taiwan Stock Exchange.
Use of Proceeds . . . . . . .	The net proceeds from the offering of the Bonds, after deducting
	underwriting fees, including selling concessions and other expenses, are
	estimated to be approximately U.S.$49,000,000. The net proceeds will be
	used by the Company for the procurement of raw materials overseas.

Summary Financial Data

The summary consolidated income statement data for the years ended 31st December, 1999, 2000 and 2001, the summary consolidated balance sheet data as of 31st December, 1999, 2000 and 2001 prepared by Reality United Firm, and the summary non-consolidated income statement and balance sheet data for the three-month period ended 31st March, 2001 and 2002 prepared by Deloitte & Touche all expressed in millions of New Taiwan Dollars set forth below are derived, without adjustment, from the Audited Consolidated Financial Statements and the Unaudited Non-Consolidated Financial Statements, as the case may be, included elsewhere in this Offering Circular and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Results for the three-month period ended 31st March, 2002 are not necessarily indicative of the results that may be expected for the years ended 31st December, 2002. The summary consolidated income statement data for the years ended 31st December, 1997 and 1998 and the summary consolidated balance sheet data as of 31st December, 1997 and 1998 set forth below are derived from the audited consolidated financial statements of the Company not included herein. Such financial statements were audited by Realty United Firm, independent public accountants, whose audit report dated 18th March, 1999, is not included in this Offering Circular. Deloitte & Touche’s unaudit report dated 13th April, 2002 on the Unaudited Non-Consolidated Financial Statements as of and for the three-month period ended 31st March, 2001 and 2002 were qualified with respect to the effect on the Unaudited Non-Consolidated Financial Statements of adjustments, if any, had the financial statements of certain subsidiaries and investee companies been audited by independent accountants. The Audited Consolidated Financial Statements and Unaudited Non-Consolidated Financial Statements of the Company have been prepared and presented in accordance with ROC GAAP and reporting practices in the ROC which differ in certain material respects with U.S. GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see ‘‘Summary of Significant Differences Between ROC GAAP and U.S. GAAP’’. The Company has not qualified or identified the impact of the differences between ROC GAAP and U.S. GAAP, see ‘‘Risk Factors — Risks Relating to the ROC — Financial reporting and accounting standards in the ROC differ from other countries; bonus share issuance’’. The Company is not required to, and does not, prepare interim financial statements on a consolidated basis.

Convenience translations in the Audited Consolidated Financial Statements and the Audited NonConsolidated Financial Statements expressed in U.S. Dollars are provided solely for the convenience of the reader and such amounts do not form part of the audited financial statements.

As from 13th April, 2002, the independent auditors of the Company has been changed from Reality United Firm, a local accounting firm, to Deloitte & Touche, as the latter is an internationally recognized accounting firm, see ‘‘Risk Factors — Risks Relating to the Group’s Business — Changes in the Group’s Independent Auditors’’.

		Consolidated as of 31st December,	Consolidated as of 31st December,
1997	1998	1999	2000	2001	2001	2001	2002
NT$ $3,787,693 2,870,762	NT$ $4,001,566 2,567,943	NT$ $4,927,765 3,525,367				NT$ $1,393,863 1,159,922	NT$ $1,467,823 1,283,078
916,931 —	1,433,623 —	1,402,398 —	1,470,595 —				184,745 5,576
916,931 346,968	1,433,623 619,520	1,402,398 668,663	1,470,595 793,800	1,583,348 936,188	45,239 26,749	234,248 154,283	190,321 116,165
569,963 126,204 81,235	814,103 97,473 93,366	733,735 112,172 31,384	676,795 267,743 35,045	647,160 244,976 93,009	18,490 7,000 2,657	79,965 85,845 16,691	74,156 82,172 54,486
$ 470,855	$ 616,062	$ 645,314	$ 700,570	$ 625,272	$ 17,866	122,483	77,842
$ 3.12	$ 3.14	$ 3.29	$ 3.57	$ 3.19	$ 0.09	$ 0.62	$ 0.40

		Consolidated as of 31st December,	Consolidated as of 31st December,			Non-Consolidated as of 31st March,	Non-Consolidated as of 31st March,	Non-Consolidated as of 31st March,
1997	1998	1999	2000	2001	2001	2001	2002	2002
NT$ $2,196,155 — 192,665 10,133 10,130	NT$ $2,793,752 — 226,583 9,696 33,481	NT$ $4,040,336 13,828 323,067 20,043 37,056				NT$ $3,867,911 2,439,722 356,710 17,327 25,933	NT$ $2,654,449 3,425,784 795,960 13,368 53,566	U.S.$ $ 75,841 97,880 22,742 382 1,530
$2,409,083	$3,063,512	$4,434,330	$5,739,717	$6,840,185	$195,439	$6,707,603	$6,943,127	$198,375
1,194,679 3,721 93,859	1,088,168 1,650 265,028	1,743,289 — 413,681	2,084,789 — 587,286	2,456,939 — 647,054	70,200 — 18,488	2,921,965 — 589,793	2,490,936 — 649,140	71,170 — 18,546
1,292,259 1,116,824	1,354,846 1,708,666	2,156,970 2,277,360	2,672,075 3,067,642	3,103,993 3,736,192	88,688 106,751	3,511,758 3,195,845	3,140,076 3,803,051	89,716 108,659
$2,409,083	$3,063,512	$4,434,330	$5,739,717	$6,840,185	$195,439	$6,707,603	$6,943,127	$198,375

(1) Translated into United States Dollars using the exchange rate published by Taipei Forex Inc. at 31st December, 2001 of NT$34.999 = U.S.$1.00, and at 31st March, 2002 of NT$35.000 = U.S.$1.00.
(2) Earnings per Common Share are calculated by dividing net income by the weighted average number of shares outstanding during each year after adjusting retroactively for the effect of stock dividends and employees’ bonuses. No adjustment has been made with respect to the stock dividends and capitalization of employees’ bonuses approved by the shareholders on 10th June, 2002.
(3) Earnings per Common Share are calculated by dividing net income by the weighted average number of shares outstanding during each year after adjusting retroactively for the effect of stock dividends, including the stock dividends and capitalization of employees bonus approved by the shareholders on 10th June, 2002.

RISK FACTORS

Prior to making an investment decision, prospective investors should carefully consider the following risk factors, along with the other matters set out in this Offering Circular. The following risk factors could affect the Company’s actual results and could cause them to differ materially from estimates in any forward-looking statements given by or on behalf of the Company. ROC laws and regulations may differ from the laws and regulations in other countries.

Risks Relating to the Group’s Business

The Group’s business depends on a small number of customers

The markets for the Group’s products tend to be concentrated, with a large percentage of orders coming from a relatively small number of customers. For 1999, 2000 and 2001, the Group’s largest three customers accounted for 84.3 per cent., 78.4 per cent. and 78.4 per cent., respectively, of its consolidated net sales, respectively. Most of the Group’s key customers operate in the cyclical mobile communications businesses and have in the past, and may in the future, vary order levels significantly from period to period. In addition, as there are no long-term contract or purchase commitment made between the Group and its customers, there can be no assurance that such customers or any other customers will continue to place orders with the Group in the future at the same levels as in prior periods. The loss of one or more of the Group’s customers, or reduced orders by its key customers, could adversely affect the Group’s results of operations. See ‘‘— The Group does not usually enter into long-term supply contracts with its customers and therefore its customers may cancel their orders, change production quantities or delay production’’.

A substantial portion of the Group’s revenue derives from sales to Motorola. The Group currently provides 33 different types of power supply units and mobile telephone accessories to Motorola and is jointly designing several new products with Motorola. Sales to Motorola accounted for 61.5 per cent., 58.6 per cent. and 63.4 per cent. of the Group’s total sales in 1999, 2000 and 2001, respectively. All sales made by the Group to Motorola are on purchase order basis without long-term contract or firm purchase commitments. There is no assurance that Motorola will continuously place orders with or take deliveries from the Group.

The Group does not usually enter into long-term supply contracts with its customers and therefore its customers may cancel their orders, change production quantities or delay production

The Group does not generally enter into firm, long-term supply contracts with its customers and it continues to experience reduced lead-times in customer orders. Customers may cancel their orders, change production quantities or postpone production for a number of reasons. Cancellations, reductions or postponements by a significant customer or by a group of customers could seriously adversely affect the Group’s results of operations.

In addition, the Company makes significant decisions, including determining the levels of business that it will seek and accept, production schedules, components and raw material procurement commitments, personnel needs and other resource requirements, based on its estimates of customer requirements. The short-term nature of the Group’s customers’ commitments and the possibility of rapid changes in demand for their products reduce the Company’s ability to estimate accurately future customer requirements. On occasion, customers may require rapid increases in production, which can stress the Group’s resources and reduce margins. Although the Group has increased its manufacturing capacity and plans further increases, it may not have sufficient capacity at any given time to meet its customers’ demands. In addition, because many of the Group’s costs and operating expenses are relatively fixed, a reduction in customer demand could impact the Group’s gross margins and operating income.

The Group’s business is highly dependent on the communications devices, computer peripherals and consumer electronics businesses

Most of the Group’s sales are to customers in the communications devices, computer peripherals and consumer electronics industries. Therefore, the Group’s financial performance depends on its customers’ continued growth, viability and financial stability. These customers in turn depend on the growth and viability of the communications devices, computer peripherals and consumer electronics industries, which are highly cyclical. These industries are characterized by rapidly changing technologies and short product

life cycles. The factors affecting the communications devices, computer peripherals and consumer electronics industries in general, or any of the Group’s major customers or competitors in particular, could have a material adverse effect on the Group’s results of operations. The Group’s success depends to a significant extent on the success achieved by its customers in developing and marketing their products, some of which may be new and untested. If customers’ products become obsolete or fail to gain widespread commercial acceptance, the Group’s business could be materially adversely affected.

The Group’s historical sales growth and historical margins may not be sustainable

The Group recorded sales growth of 33.2 per cent., 46.4 per cent. and 1.1 per cent. for the years 1999, 2000 and 2001, respectively. This level of sales growth may not be sustained in future periods. As the Group continues to develop and expand its operations and production capacity, its operating costs and expenses will continue to increase, putting pressure on gross margins and operating margins. In addition, competition could result in price pressure, lower sales, reduced margins and lower market share, any of which could materially and adversely affect the Group’s results of operations. Therefore, period-to-period comparisons of operating results may not be meaningful and investors should not rely on the results of any period as an indication of future performance.

The communications devices, computer peripherals and consumer electronics accessories and components manufacturing industries are highly competitive

The communications devices, computer peripherals and consumer electronics manufacturing industry in which the Group operates is highly competitive and includes hundreds of companies with widely varying levels of engineering expertise and sophistication, some of which have achieved substantial market share. General competition in the communications devices, computer peripherals and consumer electronics accessories and components manufacturing industry is characterized by price erosion and rapid technological change. The Group competes with different companies, depending upon the type of product or geographic area. A number of the Group’s competitors are much larger and have greater manufacturing, financial, research and development and marketing resources than the Group. Some of these competitors also carry product lines that the Group does not carry and provide services that the Group does not provide. No assurance can be given that the Group will be able to continue to compete successfully in its relevant markets.

The Group’s operating results vary significantly

The Group experiences significant fluctuations in its results of operations. The factors which contribute to fluctuations include:

" the timing of customer orders;
" the volume of these orders relative to the Group’s capacity;
" market acceptance of customers’ new products;
" changes in demand for customers’ products and product obsolescence;
" the timing of the Group’s expenditure in anticipation of future orders;
" the Group’s effectiveness in managing manufacturing processes;
" changes in the cost and availability of labor and components;
" changes in the Group’s product mix;
" changes in economic conditions; and
" local factors and events that may affect the Group’s production volume, such as local holidays.

The markets for the Group’s customers’ products are subject to a certain degree of seasonality. These markets exhibit particular strength toward the end of each year in connection with holiday season sales. Accordingly, the Group’s third- and fourth-quarter revenues are usually higher, and its first- and secondquarter sales are usually lower, than average.

The Group may experience shortages of raw materials and components

The Group currently purchases certain of its key components and raw materials from a limited number of suppliers. These suppliers’ capacity may be insufficient should the Group’s requirements increase. In addition, the Group is, in certain circumstances, required to source certain key components from suppliers who have been approved by its customers and the Group may not be able to obtain alternative satisfactory sources of supply should such qualified suppliers be unable to supply it in the future. Accordingly, there can be no assurance that shortages of supply will not occur in the future and that, if such shortages occur, the Group will be able to obtain an adequate alternative supply of components and raw materials to meet production demand. If the Group is unable to obtain sufficient components and raw materials on a timely basis, the Group could experience manufacturing and shipping delays, which could adversely affect customer relationships and reduce sales. In addition, there can be no assurance that the Group would be able to pass on increased costs of components and raw materials to its customers. See ‘‘Business — Raw Materials and Components’’.

The Group is subject to operational risks and its insurance may not be adequate

The operation of manufacturing facilities involves many risks and hazards, including breakdown, failure or substandard performance of equipment, delay in delivery of equipment or improper installation or operation of equipment, difficulties in upgrading or expanding existing facilities to meet changing manufacturing line technologies, capacity constraints, labor disturbances, fire, natural disasters such as earthquakes or typhoons, environmental hazards and industrial accidents. The occurrence of material operational problems, including but not limited to the above events, could adversely affect the Group’s manufacturing plants. These problems could cause delivery delays and reduced output.

The Group maintains insurance typical in the electronics manufacturing industry in Taiwan and the PRC and in amounts that the Company believes to be adequate. Such insurance, however, may not provide adequate coverage in certain circumstances. In particular, in accordance with industry practice in the PRC, the Group does not currently carry any third party liability insurance to cover claims in respect of bodily injury or property or environmental damage resulting from accidents on the Group’s property or relating to Group operations. Nor does the Group carry business interruption insurance. No assurance can be given that uninsured losses and liabilities incurred by the Group will not have a material adverse effect on the Group’s results of operations.

The Group may not be able to develop new products or keep pace with technological change

The Group’s future success will depend in part on its ability to develop and market products and manufacturing processes which meet changing customer needs and to successfully anticipate or respond to technological changes in manufacturing processes in cost-effective and timely ways. Many of the Group’s products have short product life cycles due to frequent product introductions, rapidly changing technology and evolving industry standards. There can be no assurance that the Group will be successful in developing new products as a result of its research and development efforts or its cooperation with industry leaders or that it will keep pace with technological changes taking place in the market. Failure to do so or delay in reacting to the technological changes could have a material adverse effect on the Group’s business, or results of operations.

New power related technology that revolutionarily abandons or decreases the use of power supplies may have adverse impact on the Group’s business

A substantial portion of the Group’s business depends on the conventional power supply products, i.e., using AC/DC adapters or switching power supply units to charge rechargeable batteries on portable devices, such as mobile telephones and personal digital assistant (‘‘PDA’’). If conventional power supply technology changes significantly, such as invention of longer-lasting or disposable batteries, the market of the conventional power supply products and demand for the Group’s power supply units will be adversely affected.

The Group may be unable to manage its growth effectively

The Group has grown rapidly. The Group’s ability to manage growth effectively will require it to continue to implement and improve its operational, financial and management systems; continue to develop the management skills of its managers; and continue to train, motivate and manage its employees. If the Group were to fail to manage growth effectively the Group’s results of operations could be adversely affected.

The Group is dependent on its ability to attract and retain qualified employees

The Group’s success depends to a significant extent on the skills and efforts of key managerial and technical and other employees and upon its ability to continue to attract, retain and motivate qualified personnel. The Group competes with other electronics manufacturers as well as other manufacturing companies for technical and other employees, and the competition for such employees is intense. There can be no assurance that the Group will be able to continue to attract and retain the services of qualified employees essential for the Group’s growth. The loss of the services of certain of these employees or an inability to attract or retain qualified employees could have a material adverse effect on the Group.

The Group is exposed to the risks of currency exchange rate fluctuations

Historically, a majority of the operating costs and expenses of the Group have been denominated in U.S. Dollars, Hong Kong Dollars, RMB, Brazilian Reis and NT Dollars and the Group’s revenue has been denominated primarily in U.S. Dollars and NT Dollars. Accordingly, a portion of the Company’s consolidated costs of sales, operating expenses and revenues are exposed to fluctuations between the U.S. Dollar, Hong Kong Dollar, RMB, Brazilian Reis and NT Dollar. Although the Company attempts to mitigate the effects of exchange rate fluctuations primarily through the use of foreign currency borrowings and forward contracts, fluctuations in exchange rates may have an adverse impact on the Group’s future gross and operating margins and results of operations. See ‘‘Exchange Rates’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’. In addition, the Group has substantial investments in the PRC, and any devaluation in the value of RMB may have an adverse impact on the value of such investments in the PRC.

The Group may be subject to changes in tax benefits and increased taxes

The Group has structured its operations in a manner designed to maximize income in countries where tax incentives have been extended to encourage foreign investment, such as the PRC or where income tax rates are low. If the tax rates and policies applicable to the Group are rescinded or changed or if tax authorities were to challenge successfully the manner in which profits are recognized among the members of the Group, the Group’s taxes could increase and its results of operations and cash flow could be adversely affected. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operation — Income Tax’’.

The Group’s business may be harmed, and the price of the Bonds and Shares may be adversely affected, by changes in general economic and business conditions resulting from the recent terrorist attacks on the United States.

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

The Group’s operation may be adversely affected by natural disaster in the ROC and the PRC

The Company’s present corporate headquarters located in San-Chung City, Taipei County, Taiwan, and future corporate headquarters located in Tao Yuan County, are vulnerable to natural disasters. Disruption of operations of the Company, including work stoppages, power outages, fire, earthquakes or other natural disasters, would cause delays in processing shipments of certain products, which could lead

customers to obtain products from other sources. For example, the Company has in the past experienced major power outages on 29th July and 21st September, 1999, each of which resulted in a brief suspension of production. In September 1999, a major earthquake occurred, with its epicenter in central Taiwan. The earthquake caused interruptions to power supply and significant damage to buildings across Taiwan. As a result of the earthquake, the Company was obliged to suspend its manufacturing operation in Taiwan for one day. After the 1999 earthquake, there were a number of earthquakes in Taiwan in 2000, 2001 and 2002 including one which attacked northern Taiwan on 31st March, 2002. The area of Tianjin, PRC, where one of the Group’s plants is located is also a geologically earthquake active area and has a history of earthquakes. Similar incidents may occur in the future, which could have a material adverse effect on its results of operations.

Changes in the Group’s independent auditors

The Group’s independent auditors has been changed from Reality United Firm (who has been the Group’s independent auditors for 10 years) to Deloitte & Touche as from 13th April, 2002. The interpretation and/or application of ROC GAAP in preparing and/or auditing the financial statements of the Group may not necessarily be consistent with the interpretation and/or application adopted by Reality United Firm. As such, the financial statements for the three months ended 31st March, 2002 and future financial statements prepared and/or audited by Deloitte & Touche may not necessarily served as useful comparison to the Group’s past financial conditions reflected in the financial statements prepared and/or audited by Reality United Firm.

Risks Relating to the Offering

The Bondholders’ ability to exercise their conversion rights may be limited

The Bonds are convertible into Shares at the option of the converting Bondholders pursuant to the terms of the Bonds. Purchasers of the Bonds will not be able to exercise their conversion right during the Closed Periods, as defined in the terms and conditions of the Bonds. Under current ROC law, regulations and policy, PRC persons are not permitted to convert the Bonds or to register as shareholders of the Company.

The Company has not, at the date of this Offering Circular, established or authorized the establishment of any depositary receipt facility (‘‘DRs’’). Accordingly, conversion into DRs is not currently available. If in the future a depositary receipt facility is established or authorized by the Company, the Company will, to the extent permitted by applicable laws and regulations, make arrangements satisfactory to the Trustee for the Shares issued on conversion of Bonds to be accepted for deposit (at the option of the converting Bondholder) into such depositary receipt facility, subject always to the terms of such depositary facility, which terms may include certification or other requirements as conditions to the acceptance for deposit of the Shares issued on conversion of Bonds. There can be no assurance that the Company will in the future establish or authorize any DRs or that any arrangements for the deposit of Shares into such DRs would be available to all Bondholders.

Transfers of the Bonds and Shares are restricted.

Neither the Bonds nor the Shares have been, nor will they be, registered under the securities laws of the United States or elsewhere and neither the Bonds nor the Shares may be publicly offered, sold, pledged or otherwise transferred in any jurisdiction where such registration may be required. See ‘‘Underwriting.’’ The Bonds may not be publicly offered or sold, directly or indirectly, in the ROC.

An active trading market for the Bonds may not develop

The Bonds are a new issue of securities for which there is currently no trading market. The Company cannot predict whether an active trading market for the Bonds will develop or be sustained. If an active trading market were to develop, the Bonds could trade at prices that may be lower than the initial offering price. Whether or not the Bonds could trade at lower prices depends on many factors including:

" prevailing interest rates and the markets for similar securities;
" general economic conditions; and

" the Group’s financial condition, historic financial performance and future prospects.

If an active market for the Bonds fails to develop or be sustained, the trading price of such Bonds could be materially adversely affected. Application has been made to have the Bonds listed on the Luxembourg Stock Exchange. However, there can be no assurance that the Company will be able to obtain or be able to maintain such a listing or that, if listed, a trading market will develop on the Luxembourg Stock Exchange. The Company does not intend to apply for listing of the Bonds on any securities exchange other than the Luxembourg Stock Exchange. The Bonds may not be publicly offered, sold, pledged or otherwise transferred in any jurisdiction where registration may be required.

Shares eligible for future sale by the current shareholders may adversely affect the market price of the Shares

While the Company is not aware of any plans by any major shareholders to dispose of a significant amount of Shares, it cannot assure that one or more of the shareholders will not dispose of the Shares in the future. The Company also cannot predict the effect, if any, that future sales of the Shares, or the availability of the Shares for future sale, will have on the market price of the Shares prevailing from time to time. Sales of substantial amounts of common shares in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Shares.

Risks Relating to the ROC

Disruptions in the ROC’s political environment could seriously harm the Group’s business

The Company is incorporated in the ROC. Significant assets of the Company are located in, and substantial revenues are derived from, its operations in the ROC. Accordingly, the Company’s business and financial condition and the market price of the Shares may be affected by changes in local governmental policies and local political and social instability. The ROC has a unique international political status. The PRC asserts sovereignty over mainland China and the ROC and does not recognize the legitimacy of the ROC government. Although significant economic and cultural relations have been established in recent years between the ROC and the PRC, the government in the PRC has refused to renounce the possibility that it may at some point use force to gain control over the ROC. Relations between the ROC and the PRC and aspects of the ROC’s political environment could negatively affect the Group’s business and the market price of the Shares.

The adverse economic conditions in Taiwan and Asia may affect the Company and the Bonds

Many economies in Asia, including the ROC and the PRC, have recently experienced significant downturns and related difficulties. As a result of the decline in the value of the region’s currencies, many Asian governments and companies have had difficulties in servicing foreign currency-denominated debt and many corporate borrowers have defaulted on their payment obligations. The currency fluctuations, as well as higher interest rates and other factors, have materially and adversely affected the economies of many countries and regions, including the ROC and the PRC. The NT Dollar significantly weakened against the U.S. Dollar in the first half of 2001 negatively impacting the results of operations of many companies. See ‘‘Exchange Rates’’. Economic developments in Asia could materially and adversely affect the Company’s business, results of operations and financial condition.

Foreign exchange approvals may be required

Under existing ROC law, foreign exchange approvals must be obtained from the Central Bank of China (the ‘‘CBC’’) on a payment-by-payment basis for the conversion into foreign currencies of the net proceeds realized from sale of the Shares issued on conversion of Bonds or any dividends relating to such Shares, or of any cash dividends or other cash distributions in respect of such Shares, as well as for inward remittances of subscription payments in connection with a rights issue. In addition, foreign persons may, subject to certain required documents, but without foreign exchange approval of the CBC, remit outside and into the ROC foreign currencies of up to U.S.$100,000 (or its equivalent) for each remittance. There can be no assurance that any such approval will be obtained in a timely manner or at all. See ‘‘Foreign Investment and Exchange Controls in the ROC — Overseas Corporate Bonds’’.

Financial reporting and accounting standards in the ROC differ from other countries; bonus share issuance.

The Group is subject to financial reporting requirements in the ROC that differ in significant respects from those applicable to companies in certain other countries including the United States. In addition, the Group’s financial statements are prepared in accordance with the ROC GAAP, which differ in certain material respects from U.S. GAAP. See ‘‘Summary of Significant Differences Between ROC GAAP and U.S. GAAP’’. Potential investors should consult their own professional advisers for an understanding of such differences and how they might affect the financial information contained herein.

In particular, the Company paid employee bonuses of 3 per cent. to 10 per cent. of the distributable after-tax profits, in the form of Shares or cash or combination of the two and expects that, subject to shareholders approval, it will pay all or some of employee bonuses for future periods in the form of Shares or cash or combination of the two. The Company granted an aggregate of 2,652,632 Shares, 3,660,000 Shares and 4,225,000 Shares in the years 1999, 2000 and 2001 to its employees, respectively. In such case, the number of Shares distributed is obtained by dividing the total nominal NT Dollar amount of the bonus by the par value of the Shares rather than their market value, which has generally been substantially higher than par value. Under ROC GAAP, the distribution of employee bonus shares is treated as an allocation from retained earnings when the distribution of employees bonuses is approved by the shareholders and the relevant regulatory authorities, and the Company is not required to, and does not, charge the value of the employee bonus shares to income. Under U.S. GAAP, however, the Company would be required to initially accrue the bonus as compensation costs when services are rendered. When bonuses are approved by shareholders in the subsequent year, an additional compensation cost would be recorded for the difference between the par value and the fair market value/intrinsic value of the shares granted to employees. Correspondingly, the Company’s net income and income per share calculated in accordance with U.S. GAAP would be reduced. This difference in treatment between ROC GAAP and U.S. GAAP would be material.

In addition, because the Shares issued under the employee share bonus scheme are issued at par value, which usually may be less than market value, such issuances may have a dilutive effect on existing shareholders. However, the Conversion Price of the Bonds is adjusted for such issuances.

Risks relating to the PRC

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

Currently a substantial part of the Group’s operations and assets are located in the PRC and the Group expects to make further investments in the PRC in the future and the Group is also selling and marketing its products in the PRC. Accordingly, financial condition, results of operations and future prospects of the Group are subject, to a significant degree, to the political and economic situation and legal developments in the PRC. There can be no assurance that the Group’s investment in the PRC and its production operations in the PRC will not be adversely affected if relations between the PRC and the ROC are further strained.

Prior to 1978, the PRC had adopted a central economic planning system. All production and economic activities in the country were governed by the economic goals set out in the five-year plans and annual plans adopted by central authorities. Since 1978, the PRC government has permitted foreign investment and implemented economic reforms, gradually changing from a planned economy towards a market-oriented economy. However, many of the reforms and economic policies adopted or to be adopted by the PRC government are unprecedented or experimental in nature and may have unforeseen results, which may have an adverse effect on enterprises with substantial business in the PRC, including the Group.

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

Since 1979, many laws and regulations dealing with general economic matters or particular economic activities have been promulgated in the PRC. However, enforcement of existing laws and regulations may be uncertain and sporadic and implementation and interpretation thereof may be inconsistent. The PRC judiciary is relatively inexperienced in enforcing the laws and regulations that currently exist, leading to a degree of uncertainty as to the outcome of any litigation. Further, it may be difficult to obtain swift and equitable enforcement or to obtain enforcement of a judgment by a court of another jurisdiction. The PRC’s legal system is based on written statutes and, therefore, decided legal cases do not have binding legal effect, although they are often followed by judges as guidance. The introduction of new PRC laws and regulations and the interpretation of existing laws and regulations may be subject to policy changes reflecting domestic political or social changes. As the PRC legal system develops, there can be no assurance that changes in such legislation or interpretation thereof will not have a material adverse effect on the business, financial condition, results of operations and future prospects of the Group.

USE OF PROCEEDS

The net proceeds from the offering of the Bonds, after deducting underwriting fees, including selling concessions, and other expenses, are estimated to be approximately U.S.$49,000,000. The net proceeds will be used by the Company for the procurement of raw materials overseas.

MARKET PRICE INFORMATION

The Shares have been traded on the ROSE on 15th February, 2000 and quoted and traded on the Taiwan Stock Exchange since 17th September, 2001. The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the Taiwan Stock Exchange for the Shares (adjusted for the effects of rights issues, employee bonus issues and stock dividends) and the high and low of the daily closing values of the Taiwan Stock Exchange Index.

2000 . . February (traded in ROSE) March April May June July August September October November December 2001 . . January February March April May June (listed on TSE) July August September October November December 2002 . . January February March April May June (through 17th June)	Closing Price per Share High Low (NT$) 214.0 118.5 238.0 154.0 217.0 154.0 166.0 125.0 154.0 79.0 86.0 66.0 92.5 70.0 94.5 57.5 57.0 32.4 47.8 36.0 42.1 28.8 52.5 32.1 67.5 54.0 68.0 52.0 67.0 53.5 62.0 39.7 49.5 38.0 43.0 34.6 45.9 37.1 31.8 24.6 35.0 28.1 58.0 34.1 65.5 50.0 68.0 51.5 60.0 46.6 68.0 50.5 72.0 59.0 57.5 49.1 56.0 50.0	Average Daily Trading Volume (in thousands of Shares) 987 3,166 2,148 905 1,597 1,029 2,959 2,722 1,962 2,899 1,182 4,542 6,457 4,958 3,724 2,372 2,394 2,158 3,046 1,313 4,173 8,180 6,955 8,304 3,714 7,676 5,580 3,842 3,052	TSE Index High Low 5,271.30 4,768.55 4,886.86 4,040.77 4,687.33 4,310.32 4,493.53 3,493.78 4,065.10 3,446.26 4,680.32 3,929.69 5,551.24 4,646.61 6,007.33 5,488.33 5,968.61 5,499.79 6,242.64 5,680.78 6,462.30 6,059.21 5,910.69 5,443.18 5,599.42 5,399.96	ROSE	Index
			High 5,271.30 4,886.86 4,687.33 4,493.53 4,065.10 4,680.32 5,551.24 6,007.33 5,968.61 6,242.64 6,462.30 5,910.69 5,599.42	High 282.48 296.89 326.42 275.58 286.17 249.15 250.48 233.25 168.22 139.47 123.12 139.53 149.52 152.46 149.51 138.83	High
					256.1 235.57 260.09 247.05 246.27 219.42 213.26 170.01 125.26 113.67 101.56 109.7 135.96 132.75 139.12 121.15

Source: Taiwan Stock Exchange Corporation Monthly Review

On 26th June, 2002, the reported closing price of the Shares was NT$47.5 per Share and the Taiwan Stock Exchange Index closed at 5,123.04.

DIVIDENDS AND DIVIDEND POLICY

The following table sets forth the cash dividends per share and stock dividends per share as a percentage of outstanding shares, paid during each of the years indicated in respect of Shares outstanding at the end of each such year, excepted as otherwise noted.

1997 . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . .	Cash Dividend per Share (NT$) 0 — — — 0.5	Stock Dividend per Share(1) (NT$) 1.8 7.2 6.1 4.0 2.5	Total Number of Shares Issued as Stock Dividend 4,122,000 26,859,242 39,344,500 42,800,000 38,365,000	Number of Outstanding Shares at Year End
				37,263,100 65,000,000 107,000,000 153,460,000 196,050,000

Note:

(1) The Company declares stock dividends in a New Taiwan Dollar amount per share, but it pays the dividends to its shareholders in the form of Shares. The amount of Shares distributed to each shareholder is calculated by multiplying the dividend declared by the number of Shares held by the given shareholder, divided by the par value of NT$10 per Share. Fractional Shares will be paid in cash.

The Company has historically paid dividends on the Shares with respect to the preceding year after approval by the shareholders at the annual general meeting of shareholders. The form, frequency and amount of future cash or stock dividends on the Shares will depend upon the Company’s earnings, cash flow, financial condition and other factors.

According to the Company’s articles of incorporation, out of the profits of the Company for each fiscal year, after having provided for income tax and the losses of the previous years, a legal reserve of 10 per cent. shall be set aside and thereafter a special reserve for reduction in shareholders’ equity for the fiscal year, may be further set aside. The balance of the profits may be wholly or partially retained to meet the operating needs of the Company as decided by the board of directors, and thereafter any remainder profits will be distributed as follows:

" 85 per cent. to 92 per cent. thereof as dividends;
" 5 per cent. thereof as remuneration to directors and supervisors; and
" 3 per cent. to 10 per cent. thereof as bonuses to employees.

The Company is at a growth stage of development. Taking into account the funds required and the long term financial planning of the Company and its shareholders, the dividends will be distributed in the form of Shares. The dividends may be distributed in cash only when the cash flow from the Company’s operating activities in the preceding fiscal year is positive, and when no major capital expenditure is planned within one year in the future. However, the articles of incorporation provide that dividends distributed in cash shall be no less than 10 per cent. of the total dividends.

EXCHANGE RATES

Fluctuations in the exchange rate between NT Dollars and U.S. Dollars will affect the U.S. Dollar equivalent of the NT Dollar price of the Shares on the Taiwan Stock Exchange and, as a result, may affect the market price of the Bonds.

The following table shows the exchange rates for New Taiwan Dollars expressed in New Taiwan Dollars per U.S.$1.00.

Year Ended 31st December, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 January . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . June (through 17th June) . . . . . . . . . . . . .	Average (of Month-End Rates) 27.461 28.948 33.412 32.233 31.336 33.896 34.968 35.066 35.018 34.913 34.459 34.126	High 27.980 33.500 35.300 33.450 33.200 35.300 35.167 35.112 35.103 35.003 34.645 34.169	Low 27.131 27.270 31.750 31.378 30.261 32.231 34.880 34.993 34.717 34.947 34.145 34.093	At Period-End
				27.491 32.638 32.216 31.395 32.992 34.999 34.980 32.112 35.000 34.717 34.145 34.101

Source: Taipei Forex Inc.

CAPITALIZATION

The following table sets forth the short-term debt, and the capitalization of the Company as of 31st December, 2001 and as adjusted to reflect the issuance of the Bonds.

As at 31st December, 2001	As at 31st December, 2001	As at 31st December, 2001
Actual As adjusted(1) NT$ U.S.$(2) NT$ U.S.$(2) (in thousand dollars) 522,215 14,921 156,507 4,472 — — — — — — 1,749,000 50,000 1,960,500 56,016 1,960,500 56,016 172,926 4,941 172,926 4,941 1,318,044 37,659 1,318,044 37,659 284,722 8,135 284,722 8,135 3,736,192 106,751 3,736,192 106,751 3,736,192 106,751 5,485,192 156,751	As adjusted(1)
NT$ 522,215 — — 1,960,500 172,926 1,318,044 284,722 3,736,192 3,736,192		U.S.$(2) 4,472
		—
		50,000
		56,016 4,941 37,659 8,135
		106,751
		156,751

(1) Short-term debt is adjusted to reflect the liquidation after 31st December, 2001 of NT$255 million principal amount of commercial paper and short-term borrowings of NT$110 million. Adjustment is also made for the Bonds issued hereby.
(2) NT Dollar amounts have been translated into U.S. Dollars (and the principal amount of the Bonds, being U.S.$50,000,000, has been translated into NT Dollars) using the exchange rate published by Taipei Forex Inc. at 31st December, 2001 of NT$34.999 = U.S.$1.00 solely for the convenience of the reader.
(3) The Group had no long-term borrowings at 31st December, 2001.

On 25th July, 2001, the Company pledged one of its office buildings and lands located in San-Chung City, Taipei, Taiwan valued NT$120.0 million to China Development Industrial Bank as collateral to an NT$100.0 million 13-month loan facility, which the Company has not drawn down.

There has been no material change to the capitalization of the Company since 31st December, 2001.

BUSINESS

This Offering Circular contains certain forward-looking statements. When used in this Offering Circular, the words ‘‘believes,’’ ‘‘intends,’’ ‘‘anticipates’’ and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the timing and acceptance of new product introductions, the actions of the Group’s competitors and business partners, and those discussed above under ‘‘Risk Factors,’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operation’’.

Overview

The Group designs, manufactures and sells switching and linear power supply units, including AC/DC power adapters and chargers, charger bases and open frame power supply modules on an Original Equipment Manufacture (‘‘OEM’’) or Original Design Manufacture (‘‘ODM’’) basis to some of the world’s leading makers of communications devices, computer peripherals and consumer electronics. The Group also manufactures accessories for mobile telephones and other handheld or mobile electronic devices. The Company believes that it is one of the major OEM/ODM manufacturers of power supply units for mobile telephones and consumer electronics in the world. The Group’s customers include some of the industry leaders, such as Accton Technology Corporation (‘‘Accton’’), BenQ Corporation (‘‘BenQ’’), Cisco Systems, Inc. (‘‘Cisco’’), Seiko Epson Corporation (‘‘Epson’’), Motorola Inc. (‘‘Motorola’’), OMRON Corporation (‘‘OMRON’’), Mitsutashi Electronic Corporation (‘‘Panasonic’’), Sanyo Electronic Co., Ltd. (‘‘Sanyo’’) and Sony Corporation (‘‘Sony’’).

Competitive Strengths

The Company believes that the following strengths contribute to its competitive position in the relevant markets:

Highly reliable products and safety standards compliance

Product safety is one of the major concerns in power supply industry. The Group manufactures power supply products which are highly reliable and complying with a wide range of the commonly accepted industrial safety standards and EMC adopted in different jurisdictions, including, IEC electronic standard license and UL safety standard license.

For example:

" IEC 60950 (Information Technology Equipment, I.T.E.);
" IEC 601-1 (Medical Equipment); and
" UL 1310 and CSA C22.2 No. 223 (Class 2 Equipment: power supply with extra low voltage and limited output power).
" UL 60950 (safety on Information Technology Equipment)

As the Group’s testing laboratories are certified by the Underwriters’ Laboratories Inc. (‘‘UL’’) to conduct in-house test, it may provide efficient and reliable test for the products manufactured in the Group’s manufacturing facilities.

Close relationships with key industry leaders

The Group has established close supplier-customer relationships with some of the world’s leading manufacturers of communications devices, computer peripherals and consumer electronics. Such leading names as Accton, BenQ, Cisco, Epson, Motorola, OMRON, Panasonic, Sanyo and Sony have placed the Group on their approved vendor lists in recognition of the consistently high product quality and quick response time of the Group. The Group has been named as one of a few core suppliers worldwide for Motorola. The Group is also named as a designated vendor by a number of major customers with whom the Group designated engineers to jointly design power supply units and other mobile telephone accessories. This allows the Group to benefit from, and contribute to, the customers’ strategic planning and standardsetting processes in the early stages of product development. This practice provides the Group with up-todate market information, which ensures that the Group’s new products are tailored to and responsive to its customers’ needs. The Company believes that this practice helps the Group to maintain the competition edge of the technology, to increase the Group’s technological advantage in relation to its competitors, and to cement its relationships with important customers.

Strong research and development programs and design capacity

The Group invests significant resources in research and development, through in-house research and development activities, joint development with major customers and provision of strong incentives to employees. The Group’s research and development activities are directed at developing new products and improving production efficiency and lowering costs.

As an ODM manufacturer, the Group is capable in new product design, which conforms to the customer’s requirements and safety standards. By leveraging the strong design capacity, the Group is able to produce standardized products being widely used in the communications devices, computer peripherals and consumer electronics industries.

Provide one-stop shopping supply capacity to the customers

In addition to the power supply units, the Group also provides a full range of mobile telecommunications accessory products which are either developed and manufactured by the Group or produced by the Group’s designated subcontractors. These accessory products include microphones, radio receivers, desktop chargers, car adapters and hand-free headsets. The Group’s customers can satisfy all their purchase requirements of mobile telecommunications accessories by dealing with the Group, which substantially reduce the hassle of controlling the quality and delivery time from multi-suppliers.

Strict quality control processes and standards

The Group has instituted a comprehensive quality assurance program to ensure the implementation of its firmwide quality policy. This policy rests on five basic principles, namely, satisfactory services; excellent design; superior quality; punctual delivery; and competitive price.

To implement the quality program comprehensively, the Company has established a Technology Enhancement Service Division. The Division provides quality services and support for the quality assurance departments of each of the manufacturing divisions. These quality assurance departments implement a series of rigorous quality checks at all stages of product development and production. The Technology Enhancement Service Division also provides electrical, mechanical, environmental, reliability and special testing services and functions to the research and development projects of the manufacturing divisions, as well as to the quality assurance departments.

The Company believes that through rigorous implementation of the quality assurance program, it has been able to achieve a reputation for its consistently high product quality, and that this reputation is an important competitive advantage for retaining its existing customers and attracting new customers among industry leaders in the computers, communications devices and consumer electronics industries.

Experienced professional management team

The senior management of the Group is led by a core team of professionals in the fields of management, finance and engineering, with an average experience of over 10 years of management experience in this industry. As a result, the Company is able to capture the market opportunities by directing its research and development and sales and marketing efforts to high growth areas. The Company believes it has the leadership it needs to continue to leverage its core strengths in the future.

Strategy

Maintain position as a leading manufacturer of power supplies in mobile communications devices sector

The Company believes that the Group’s position as a leading manufacturer of power supply units for the mobile telecommunications industry has provided it with significant competitive advantages. The Group has demonstrated its ability to manufacture sophisticated switching power supply units and other products in large volumes for customers who prefer sourcing their components from a small number of high quality manufacturers. The Company believes that the Group’s established reputation as a reliable supplier of quality products provides it with the opportunity to sell a broader range of products to its existing customers and to increase its sales of power supply units and other products in industries such as computer peripherals and data communications devices in which there are opportunities to increase its market share. The Group aims to focus its efforts on establishing long-term relationships with leading companies in high-growth markets.

Diversify the customer base to reduce reliance on limited number of customers

The markets for the Group’s products tend to be concentrated, with a large percentage of orders coming from a relatively small number of customers. For 2001, 2000 and 1999, the Group’s largest three customers accounted for 78.4 per cent., 78.4 per cent. and 84.3 per cent., respectively, of its consolidated net operating revenues, respectively. None of these customers purchase the products manufactured by the Group under a firm commitment or long-term contract basis. The Group endeavors to increase the customer base to include the major mobile telecommunications device manufacturers in Europe, Japan and the PRC to reduce reliance on limited number of customers.

Focus on high-growth markets

The Group will continuously focus its product development efforts on high-growth markets. These include markets for communications devices, PDAs and consumer electronics, which can be commonly characterized as going through rapidly increasing rate of turnover due to the evolution of new standards, the increasing functionality of each successive generation and the increasing rates of market penetration. Moreover, because of the emphasis on miniaturization in these products, the Group’s design and engineering superiority, supported by the Group’s experiences, is expected to enable the Group to increase sales and earnings.

Establish strategic alliance with market leaders to improve technology and develop new customers

The Group will keep exploring the opportunity to form solid strategic alliance with market leaders in different sectors to improve its services to the customers. The Company believes that strategic alliance arrangements may provide the Group with access to leading-edge engineering and technology capabilities. The alliance, if formed, is likely to enable the Group to expand its customer base, as well as to enhance the quality, technological sophistication, cost efficiency and time to market of its products.

Co-location of production facilities and logistic hubs with industrial leaders in major markets

The Group will continue to set up production facilities and logistic hubs in proximity to those of its key customers in major markets. Co-location of facilities and hubs ensures rapid response to changing customer orders, which is a key factor of selection of suppliers for some of the Group’s major customers. The Group maintains logistic hubs in Germany, the United Kingdom, the United States, and Brazil. The Group has recently started its new manufacturing facilities in Tianjin, PRC and the Company plans to establish new manufacturing bases in Jiangsu Province, PRC and Brazil.

Increasing vertical and horizontal integration of manufacturing process

The Group endeavors to establish a steady supply of critical materials and components for its core products through vertical integration with selected suppliers by way of acquisitions, equity participations, or strategic alliances. This gives the Group both control over quality, costs and supply chain management, as well as the flexibility necessary to customize components to match its customers’ specifications, and to roll out and ramp up production of new products.

The Group also aims to focus its efforts on working with its customers early in the design stage in order to design products which meet the customers’ specific requirements. This practice is particularly important in the power supply market which has historically required manufacturers to modify their products in accordance with the specific needs of each customer.

History and Organization of the Company

The Company was founded on 7th December, 1972, and its original product line focused on the manufacture of power adapters. In response to the growing demand of the communication devices and consumer electronics industries, in recent years the Company has invested significant resources to expand its product lines to include a full range of power supply products and mobile telephone accessories.

The Company’s common shares were traded on the ROC Over-the-Counter Securities Exchange on 15th February, 2000 and have been listed on the Taiwan Stock Exchange since 17th September, 2001.

The Company started manufacturing AC/DC power adapters and linear power supply units in 1973. In 1994, the Company obtained ISO9001 accreditation for its manufacturing facilities in Taiwan. The Company was certified by T-Mark, a Japanese industrial standard, in 1995. In 2000, as part of its efforts to focus on higher-growth products in the mobile telecommunications devices sector, the Group began to manufacture mobile telephone accessories. In early 2002, the Group established a new product line to make electronic ballast as a result of its research and development efforts.

In 1997, the Group was appointed by Motorola as its core supplier of power supply units and mobile telephone accessories. Currently, the Group is one of a few core suppliers of power supply units and mobile telephone accessories worldwide for Motorola.

The Company moved into its corporate headquarters and main manufacturing plant in San-Chung City, Taipei County, where it commenced manufacture of switching power supply units, in 1981. The Group commenced its operations in mainland China in 1996 by establishing Phihong International Corp. and Phihong (Dongguan) Electronics Co., Ltd. to produce power supply units in Dongguan, Guangdong Province, PRC. In 1999, the Company further established Phitek International Corp. and Dong Guan Phitek Electronics Ltd. to manufacture power supply units in mainland China exclusively for domestic sales in mainland China. In May 2002, the Group commenced operation of the Tianjin Plant in Tianjin City, PRC. The Tianjin Plant’s main product lines include switching power supply units for mobile telephones and mobile telephone accessories. The Group has also operated a production plant in Santa Rita, Brazil, since 2000. The corporate headquarters in Taiwan has received ISO9001 and ISO14001 accreditation. Each of Dongguan Phihong Plant and Dongguan Phitek Plant has received ISO9002 and ISO14001 accreditation, and the Santa Rita Plant has received ISO9002 accreditation.

The following diagram shows the structure of the Company and its principal subsidiaries, as of 31st March, 2002, together with details of the Company’s direct and indirect equity interests in such subsidiaries. See ‘‘— Principal Subsidiaries’’.

==> picture [444 x 134] intentionally omitted <==

----- Start of picture text -----

PHIHONG ENTERPRISE CO., LTD.
100% 100% 100% 100% 60% 100% 100%
PHIHONG PHIHONG PHIHONG PHITEK PHIHONG HONG-SHANG GUANG-LAI
JAPAN INTERNATIONAL USA INTERNATIONAL PWM INVESTMENT INVESTMENT
CORP. CORP. [(1)] CORP. [(1)] CORP. [(1)] BRAZIL CO., LTD. CO., LTD.
100% 100% 100% 100%
PHIHONG PHIHONG PHITEK DONG GUAN
(SHANGHAI) (DONGGUAN) (TIANJIN) PHITEK
ELECTRONICS ELECTRONICS ELECTRONICS ELECTRONICS
CO., LTD. CO., LTD. LTD. LTD.
----- End of picture text -----

(1) The financial statements of these companies have been consolidated with those of the Company in the Consolidated Financial Statements. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations — Basis of Presentation’’ and Note 2 to Consolidated Financial Statements for a discussion of principles of consolidation.
(2) There have been no material changes in the Company’s direct and indirect equity interests in each of its principal subsidiaries since 31st March, 2002.

The Company’s corporate headquarters and principal place of business are located at No. 16 Lane 530, Chung-Cheng North Road, San-Chung City, Taipei County, Taiwan, R.O.C. and as from November 2002, the Company’s corporate headquarters and principal place of business is expected to be re-located to No. 568, Fu Shing San Road, Wen Hua Village, Gui Shan Shiang, Tao Yuan County. The Company’s telephone number and website are (886) 2-2980-5255 and www.phihong.com.tw, respectively.

Products

The Group capitalizes on its strong research and development capability, industrial engineering expertise, vertically integrated manufacturing processes through cooperation with third party suppliers and its expertise in low cost, high quality mass production to offer quality products to its customers. The products manufactured by the Group are:

" switching and linear power supply units, including AC/DC adapters and chargers, charger bases and open frame power supply modules;
" mobile telephone accessories; and
" other products, including electronic ballast and data cables.

The Group supplies its products on an OEM/ODM basis to manufacturers of communications devices, computer peripherals, and consumer electronics.

The table below sets out the Company’s consolidated and non-consolidated total sales by product category and consolidated and non-consolidated net sales for the periods indicated. The information for the years ended 31st December, 1999, 2000 and 2001 is provided on a consolidated basis and the information for the three months ended 31st March, 2001 and 2002 is provided on a non-consolidated basis.

Year ended 31st December, (consolidated) 1999 2000 2001 NT$’000 NT$’000 NT$’000 4,111,727 5,677,857 5,651,023 739,165 983,816 752,059 4,682,752 6,059,427 6,017,855 460,172 833,028 76,873 90,880 58,356 4,927,765 7,212,725 7,294,466	Year ended 31st December, (consolidated) 1999 2000 2001 NT$’000 NT$’000 NT$’000 4,111,727 5,677,857 5,651,023 739,165 983,816 752,059 4,682,752 6,059,427 6,017,855 460,172 833,028 76,873 90,880 58,356 4,927,765 7,212,725 7,294,466	Three months ended 31st March,	Three months ended 31st March,
	(consolidated)	(non-consolidated)
1999 NT$’000 4,111,727 739,165 4,682,752 76,873 4,927,765	2000 NT$’000 5,677,857 983,816 6,059,427 460,172 90,880 7,212,725	2001 NT$’000 1,078,902 173,132 1,252,034 130,463 11,366 1,393,863	2002
			NT$’000 1,161,214 156,126
			1,317,340
			132,954 17,529
			1,467,823

(1) Include AC/DC power adapters and chargers and charger bases.

(2) Include vehicle power adapter.

(3) Include electronic ballast, electronic parts and components and data cables.

Power supply units

The Group is a worldwide leading manufacturer of switching and linear power supply products for the communications industry, as well as the consumer electronics, computer peripherals and other industries. Switching and linear power supply products accounted for 88.5 per cent. of the Company’s total consolidated sales revenue in 2001. The Group devotes substantial resources to both refining existing technology and developing new technologies in order to maintain its leading position in the market. The principal types of switching and linear power supply units currently produced by the Group are set out below.

AC/DC power adapters and chargers and charger bases. The Group has 29 years of experience in the manufacture of AC/DC power adapters and chargers. The power adapters and chargers produced by the Group are widely used in communication devices, information appliances, and other consumer electronics, utilizing hybrid circuits, system monitoring circuitries and sophisticated technologies developed by the Group to increase power density and reliability at reduced component cost. These products feature power factor correction (‘‘PFC’’) and power management functions for energy saving.

The Group manufactures both switching and linear power adapters and chargers. Switching power supply units convert AC into DC and are widely used in mobile telephone chargers, computer networks, computer peripherals, modems, fax machines, photocopying machines, interactive televisions, gaming platforms and satellite receivers in order to provide stable DC voltage and protection against voltage variation, unstable current, short-circuits and power line disturbance. These switching power supply units come with output levels ranging from 3.3V to 48V to support a machine’s operation and include a wide range of models. The switching power supply units produced by the Group provide up to 350 watts in power range. The Group also produces models with advanced features such as PFC, current sharing, hot swap, battery backup and green energy function. All of the switching power supply units produced by the Group are in compliance with international safety standards.

Linear power adapters and chargers convert AC to DC, but, unlike switching power supply units, only produce one set of current output for portable electronic appliances. Many models of the Group’s AC/DC adapters and chargers are designed to receive full-range input from 90VAC to 264VAC, a feature which

enables electronic devices to gain adequate power supplies worldwide without adjustment. The Group’s linear power adapters and chargers provide stabilization protection against voltage variations and short circuits and can produce stable voltage, current and power output to meet customer-specific applications.

The Group manufactures charger bases for recharging the batteries used in mobile phones, computer peripherals and other consumer electronics. Mobile phone charger bases range from C/10-rate trickle chargers to 2C-rate fast switching chargers, from constant-current/constant-voltage devices for single cells to micro-controller designs to satisfy the specific cell chemistry and complex charge profile of NiCd, NiMH, Li-ion and other smart battery packs. Most of the charger bases manufactured by the Group are able to check the battery electrical connection before starting, in order to protect the battery cells from over- or under-voltage, over- or under-temperature or excessive charge current. The charger bases can be powered from a conventional 90-264 VAC universal input or from a 12V vehicle power adapter.

For the years ended 31st December, 1999, 2000 and 2001, sales of power adapters and chargers and charger bases accounted for 80.6 per cent., 77.6 per cent. and 72.8 per cent., respectively, of the Company’s consolidated total sales. For the three months ended 31st March, 2002, sales of power adapters and chargers and chargers bases accounted for 79.1 per cent. of the Company’s non-consolidated total sales, compared to 77.4 per cent. in the comparable period of 2001.

Open frame power supply modules. Open frame power supply modules produced by the Group are switching power supply units to be installed in finished electronic goods or information appliances. The Group started producing open frame power supply modules in 1982.

For the years ended 31st December, 1999, 2000 and 2001, sales of open frame power supply modules accounted for 17.5 per cent., 15.4 per cent. and 15.7 per cent., respectively, of the Company’s consolidated total sales. For the three months ended 31st March, 2002, sales of open frame power supply modules accounted for 10.6 per cent. of the Company’s non-consolidated total sales, compared to 12.4 per cent. in the comparable period in 2001.

Mobile telephone accessories

In addition to the power related products, the Group started producing mobile telephone accessories in 2000. The mobile telephone accessories produced by the Group include vehicle power adapters, desktop mobile telephone chargers, hand-free headsets and receivers and microphones.

For the years ended 31st December, 2000 and 2001, sales of mobile telephone accessories accounted for 5.8 per cent. and 10.7 per cent., respectively, of the Company’s consolidated total sales. For the three months ended 31st March, 2002, sales of mobile telephone accessories accounted for 9.1 per cent. of the Company’s non-consolidated total sales, compared to 9.4 per cent. in the comparable period of 2001.

Others

Other products produced by the Group include data cables and electronic materials. For the years ended 31st December, 1999, 2000 and 2001, sales of other products accounted for 1.5 per cent., 1.2 per cent. and 0.8 per cent., respectively, of the Company’s consolidated total sales. For the three months ended 31st March, 2002, sales of other products accounted for 1.2 per cent. of the Company’s non-consolidated total sales, compared to 0.8 per cent. in the comparable period of 2001.

Sales and Marketing

The Group has a global sales network, consisting of a direct sales force and customer service representatives. To conduct its sales and marketing activities, the Group has sales offices located in Taipei, Taiwan, Singapore, Tokyo, Japan, San Jose, Chicago, the United States and Glasgow, Scotland. Sales offices are located in proximity to key customers. Each office is responsible for obtaining new customers, providing sales and customer support and maintaining existing customer relationships. The primary sales and marketing efforts for the Group are conducted by the Group’s product divisions, each of which is responsible for developing the sales and marketing strategies of new and existing products produced by the division. As of 31st March, 2002, the Company and its subsidiaries had 50 sales staff worldwide. The Group also uses independent sales representatives in the United States. Sales representatives operate on a commission basis.

The Group generally sells its products pursuant to specific customer purchase orders without any longterm contractual commitments. The customers may cancel the purchase orders with certain compensations, if agreed upon by the Group and customers. Generally, the sales and marketing process involves a customer first qualifying the Group as an approved vendor or supplier. This process typically involves exchanges of information through written surveys, presentations, site visits, formal audits, sample quotations and prototype promotions. The Group is an approved vendor for many of the major mobile telephone manufacturers, such as BenQ and Motorola. The Group also conducts a direct and active marketing strategy, including advertising in trade publications and attending trade shows and exhibitions.

The Group’s customers generally are invoiced either at the time of delivery of the products or upon receipt of the products, with varying credit terms, depending, in part, on where the customer is located and the product type. The Group’s pricing policy takes account of a number of factors, including customer relations, product specification, cost of production, mode of transportation and size of order.

The following table sets out a breakdown of the Group total sales by geographical region for the periods indicated:

	Year ended 31st December,	Year ended 31st December,	Year ended 31st December,
		(consolidated)
1999	2000 2001 % NT$ % NT$ (in millions, except percentages) 12.2% 818 12.5% 993 12.6% 1,518 23.1% 1,484 29.9% 2,650 40.4% 3,218 45.4% 1,576 24.0% 1,160 100% 6,561 100% 6,856		2001
NT$ 579 601 1,420 2,157 4,757				% 14.5% 21.7% 46.9% 16.9%
				100%

Customers

The Group emphasizes customer relations as a key to its growth and profitability. A key aspect of the Group’s customer development strategy is to locate the sales and marketing and in certain instances the production facilities near the customers in order to provide better and more efficient service. The Group also supplies the products to OEMs and sub-contractors, who in turn supply these products to global telecommunications and electronics companies.

The Group supplies power supply units, battery chargers and mobile telephone accessories to key consumers in the communications devices, computer peripherals and consumer electronics industries. Some of the Group’s key customers are Accton, BenQ, Cisco, Epson, Motorola, OMRON, Panasonic, Sanyo and Sony. For 1999, 2000 and 2001 the Group’s largest customer, Motorola accounted for 67.6 per cent., 57.9 per cent. and 64.3 per cent., respectively, of consolidated net sales. All sales made by the Group to Motorola are on purchase order basis without long-term contract or firm purchase commitments.

The Group’s close relationship with Motorola started from end of year 1996 and it has been named since 1997 as one of a few core global suppliers for power supply units and mobile telephone accessories for use in the Motorola brand products. The Group currently provides 33 different types of power supply units and mobile telephone accessories to Motorola in various of categories and is jointly designing several new products with Motorola, including power adapters and chargers and charger bases, hand-free headsets, and desk-top and vehicle power adapters.

Delivery

The Group generally distributes its OEM and ODM products directly to customers from its manufacturing facilities. The Group uses third party commercial freight delivery services or other delivery methods selected in consultation with its customers. The Group has not experienced difficulties in meeting its customers’ needs in this way. The Group usually takes four to six weeks from receipt of orders to

deliveries of products to customers. In certain cases, to better serve certain customers, the Group produces particular OEM or ODM products at factories which are located near the customers’ own production facilities. The Group considers its customers’ and potential customers’ requirements when selecting sites for its factories.

In recent years, certain customers have required the Group to establish ‘‘just-in-time’’ logistic hubs near the customers’ own production facilities. In such cases it has been the Group’s practice to lease space in commercial warehouse facilities rather than to establish its own warehouses. To date, the Group has not experienced any difficulty in meeting the requirements of its customers in this respect.

Raw Material and Components

Most of the raw materials and components utilized by the Group are supplied by third parties, which account for approximately 80 per cent. of the Company’s consolidated costs of goods sold. Principal components and raw materials include semiconductors, PC boards, cores, ICs, capacitors, wires, metal and plastic casing, and batteries. In general, the Group purchases these components and raw materials from multiple suppliers pursuant to purchase orders. The Company believes that the Group’s relations with its principal suppliers are stable.

The Group takes into consideration its projected production requirements, orders received, and procurement lead time to determine the level of supply of components and raw materials in stock. The Group also reviews the adequacy of its stock on a weekly basis to ensure that its production will not be interrupted by temporary shortages. In the event any of the single source suppliers fails to provide adequate supply continuously, the Company believes that its design engineers will at times be able to redesign the specific product, or work with other producers to assist them to produce the same components, so as to mitigate the reliance on the single source suppliers involved. In addition, the Company believes that to the extent that the Group continues to gain greater market share, its suppliers will desire to maintain a close business relationship with the Group in order to gain their own substantial market shares in component supply. For certain components, such as power semiconductors and cores, the Company believes that the Group is one of the largest customers to a certain suppliers and, therefore, that it has certain advantages in terms of bargaining power.

Market Environment and Competition

The principal markets in which the Group competes are those for power supply products and mobile telephone accessories products. Each of the markets is global, with industry leaders principally in the United States and Japan, but with production sites and ultimate customers located throughout the world. The Group sells a substantial portion of its products on an OEM or ODM basis, and therefore the Group competes for orders with other OEM and ODM manufacturers. Many of the Group’s products have relatively short product cycles due to rapidly changing technology and evolving industry standards. There has been a consistent downward trend in product prices, as advancement in technological know-how and sustained competition compels producers to lower prices in order to retain market shares.

The markets for the Group’s products are highly competitive and somewhat concentrated, with a large percentage of orders coming from a relatively small number of companies. The Group competes for orders with major international companies, some of which have greater financial, technical, marketing and other resources than the Group. The Group has found that product markets are also often segmented by industry. For example, in the market for adapters, competitors of the Group include Friwo, Astec, Mitsumi and SMK in the mobile telecommunications industry whereas the Group competes for sales of such products in the consumer electronics industry with companies such as Delta and Mitsumi.

The Group competes in different product lines to various degrees on the basis of price, product quality and reliability, product features, product system compatibility, customized design and sales and technical support. The Company believes that most of the Group’s customers prefer to sourcing products from a relatively small number of outside vendors, and therefore consistent high quality execution of orders received is necessary to foster customer loyalty, earn repeat orders and increase its market share. The Group’s ability to compete successfully is also subject to other factors both within and outside of its control, including successful and timely development of new products, design innovation, efficient manufacturing of products which meet required quality standards, pricing, as well as industry supply and demand trends and

general economic conditions. The business of the Group is particularly dependent on demand for mobile communication products, computer peripherals products, consumer electronics products and their respective accessories.

Production and Accreditation

The Group assembles components and electronic parts supplied by third party suppliers into finished goods, such as power supply units. The basic production processes for the Group’s products consist of surface mounting, automatic insertion, manual insertion, PC board inspection, wave soldering, final assembly, in-circuit tests, burn-in tests and inspection, function testing, final testing and packaging. The Group maintains a team of quality control staff and the Group as a whole has over 80 engineers, technicians and other employees whose duty is to monitor design and production processes in order to ensure quality of its products. These employees include line inspectors who work with members of the production staff to conduct examination and testing during the production process.

Each of the members within the Group has set up its quality engineering department to conduct quality review at the design stage. The Group’s quality engineers and manufacturing engineers are highly involved during the product design stage to evaluate the quality, reliability and manufacturing feasibility of the products. Before mass production, reliability tests are conducted to ensure satisfactory performance during the designed useful life spans of such products.

Most of the Group’s products are approved for self-test and certification by UL under TCP and CSA and are tested by the Group’s automatic testing system to help ensure their effectiveness and reliability. All the Group’s plants in the PRC and Brazil are ISO14001 certified.

The Group’s production plants in the PRC and production plants in Brazil are all ISO9001 certified. The ISO is an organization formed by delegates from member countries to establish international quality assurance standards for engineering and manufacturing processes. The ISO standards have been adopted by more than 60 countries. The certification process involves subjecting the production processes and the quality management systems at the relevant manufacturing facilities of the Group to review and surveillance for various periods. The ISO certifications also provide independent verification to customers as to the quality standards in the manufacturing processes of the Group.

Quality Assurance Policy

The Group has instituted a comprehensive quality assurance program to ensure the implementation of its firmwide quality policy. This policy consists of five basic principles, namely:

" satisfactory services — products must consistently achieve highest quality to meet customer demands,
" excellent design — product design must be efficient and sophisticated, which meets highest industrial standards,
" superior quality — utilization of sophisticated quality assurance program and continuously improve the quality of products,
" punctual delivery — lead-time of delivery to be shortened to meet the customers’ expectation, and
" competitive price — price of the Group’s product must be competitive by utilizing cost efficient programs.

In order to implement the quality assurance program comprehensively, the Group has established a Technological Enhancement Service Division to assist or oversee the following activities:

" customer complaint follow-up and improvement,
" engineering standards research and services,
" designing product testing procedures,
" electrical, mechanical, environmental and reliability testing,
" laboratory operation and management, equipment maintenance and calibration, and
" product safety applications and management.

Each of the members within the Group has also set up its quality assurance department to conduct quality review at the design stage. The Group’s quality engineers and manufacturing engineers are highly involved during the product design stage to evaluate the quality, reliability and manufacturing feasibility of the products. Before mass production, reliability tests are conducted to ensure satisfactory performance during the designed useful life spans of such products.

The Company believes that through rigorous implementation of the quality assurance program, it has been able to achieve a reputation for maintaining consistent high product quality, and that this reputation is an important competitive advantage for retaining existing customers and attracting new customers among industry leaders in the computers, communications devices and consumer electronics industries.

Facilities

The following map indicates the worldwide locations of the Group’s production facilities, research and development teams, sales and marketing forces and logistics hubs.

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R&D center: Taiwan, Dongguan/Shanghai PRC, US
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Sales Offices: Taiwan, Japan, Singapore,
Dongguan/Shanghai/Tianjin PRC, US, UK, North
Europe, Brazil
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Facilities: Phihong, Phitek, Tianjin, Brazil
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Hubs: Germany, UK, Tianjin, Singapore, US, Brazil

The Group operates four production facilities in three locations in the PRC and Brazil. The following table sets out the location and primary use of the production facilities of the Group as of 31st March, 2002:

Plant PRC Dongguan Phihong . . . . . . Dongguan Phitek . . . . . . . Tianjin Phitek . . . . . . . . . Brazil Santa Rita . . . . . . . . . . . .	Principal products Power supply units, mobile telephone accessories and data cables for export sale Power supply units, mobile telephone accessories and data cables for domestic sale within mainland China Power supply units and mobile telephone accessories for domestic sale within mainland China Power supply units	Owned or leased
		Owned Owned Owned Owned

The PRC

The Group has three production facilities in the PRC. The Dongguan Phihong and Dongguan Phitek Plants are located in Dongguan, Guangdong Province, PRC and the Tianjin Phitek Plant is located in Tianjin City, PRC. Currently, the Group’s production facilities in the PRC contribute over 90 per cent. of the Group’s total annual output by value. All plants in the PRC are owned by the Group.

Dongguan Phihong. The Group started operating the Dongguan Phihong Plant in 1996. Dongguan Phihong Plant produces switching and linear power supply units, including AC/DC power adapters and chargers, charger bases, open frame power supply modules, mobile telephone accessories and data cables for export sale. The Dongguan Phihong Plant employs more than 1,800 employees with total factory space of approximately 448,150 square feet. The Group also has research and development and engineering laboratories at the Dongguan Phihong Plant. The factory complex also has dormitory facilities to accommodate factory workers. Dongguan Phihong also serves as the Group’s business center in mainland China. Dongguan Phihong Plant has been granted ISO9002, ISO14001 and MITI accreditation.

Dongguan Phitek. The Group started operating the Dongguan Phitek Plant in 1999. Dongguan Phitek Plant produces switching and linear power supply units, including AC/DC power adapters and chargers, charger bases, open frame power supply modules, mobile telephone accessories and data cables for domestic sales in mainland China. Dong Guan Phitek Electronics Ltd., the operator of Dongguan Phitek, is permitted to conduct domestic sales in mainland China. Total building area of the factory is 156,000 square feet, where approximately 530 employees are employed. Dongguan Phitek Plant has been granted ISO9002, ISO14001 and MITI accreditation.

Tianjin Phitek. The Group started operating the Tianjin Phitek Plant in May 2002. Tianjin Phitek Plant produces switching and linear power supply units, including AC/DC power adapters and chargers, charger bases, open frame power supply modules, mobile telephone accessories and data cables for domestic sales in mainland China. Total building area of the factory is 156,000 square feet, where approximately 300 employees are employed.

Brazil

Santa Rita Plant. The Group started operating the Santa Rita Plant in 2000. The product line of Santa Rita Plant contains switching and linear power supply units, including AC/DC power adapters and chargers, and charger bases. Total building area of the factory is 69,450 square feet, where approximately 200 employees are employed.

The total building area of the Group’s facilities is 976,845 square feet. The Company believes that its existing production and office facilities are adequate to meet current requirements, and that suitable additional or substitute space will be available as needed to accommodate any further physical expansion of production, corporate operations and for any additional sales offices. The Group has not experienced any significant interruptions in production at any of its production facilities due to equipment failure or breakdown, raw material shortages, power interruptions, fire, labor disputes or other causes.

Headquarters

The Company maintains the corporate headquarters in Taiwan, ROC but does not have any production facility in Taiwan. The Company engages in sales and marketing, research and development and provides administrative services at its headquarters. The Company’s headquarters are located at No. 16, Lane 530, Chung Cheng North Road, San-Chung City, Taipei County, Taiwan, ROC, and as from November 2002, the Company’s corporate headquarters and principal place of business is expected to be re-located to No. 568, Fu Shing Shan Road, Wen Hua Village, Gui Shan Shang, Tao Yuan County. The Company projects that this new headquarters will have sufficient capacity for all of its current operation and operations in the foreseeable future.

Research and Development

The Company believes that research and development is critical to the future success of the Group and it is committed to devoting increasing efforts in research and development. Aggregate annual research and development expenditures by the Group increased from approximately NT$105.7 million in 1999 to approximately NT$135.7 million in 2001. For the three months ended 31st March, 2002, expenditures by the Group on research and development totaled NT$30 million on a non-consolidated basis. The Group intends to increase its research and development expenses as a percentage of consolidated net sales revenue from 2.0 per cent. to 5.0 per cent..

The Group has four engineering research and development offices in Taiwan, the PRC, the USA and Brazil. The Group has more than 100 engineers engaged in product design, automation and quality assurance.

Each of the manufacturing facilities within the Group conducts a five-step development procedure for each new product before it commences commercial production.

" based on the market survey and specific requirements of customers, the research and development group conducts product planning.
" based on the product plans, the relevant company’s engineers develop design and manufacturing concepts and an estimated schedule for the product development.
" the design engineers create prototypes, which involve design and simulation, component selection, sample building and testing, design review, reliability testing and manufacturability review.
" the production unit starts a pilot run of the new product, during which the products are subject to continuous review and testing.
" the workers in each relevant product line complete their pre-production preparation and the product is then ready for commercial production.

In conducting its research and development activities, the Group works closely with its customers. This close involvement of the research and development teams with customers at each stage of the design and development process positions the Group at the leading edge of technological innovation in the manufacture of power supply units and mobile telephone accessories.

The research and development improvements have helped the Group to manufacture its products in a cost-effective and reliable manner. The Group’s research and development achievements include electronic ballast, green power adapter, microcontroller based battery charger, FM radio module.

Intellectual Property

As of 31st March, 2002, the Company has pending patent applications for one patent to be registered in Taiwan, the PRC and the USA for products and technologies developed solely through its own efforts. Although the Company believes that it is not essential to own a large number of patents because the goods it produces are made in accordance with the specifications of its customers, it intends generally to continue to seek patent protection on any new inventions in design or process technology. The Company does not license intellectual property from other parties, other than licensing of software on commercial terms.

The Company has registered two trademarks in the ROC. In addition, the Company has registered one trademark in the PRC. The trademarks are designated for use on the Group’s products, including power supply units, battery charges, mobile telephone accessories, and other products.

Environmental Matters

All industrial wastes produced by each member of the Group are treated in compliance with local government regulations before discharge. The Company and its subsidiaries have not been subject to any, nor is it aware of any pending or threatened, material fines or action involving non-compliance with any environmental regulation of the ROC, the PRC or any other jurisdictions. All the Group’s plants in the PRC, except for the new plant in Tianjin, are ISO14001 accreditated.

Legal Proceedings

Neither the Company nor any member of the Group is involved in any litigation or other proceedings the outcome of which the Company believes might, individually or taken as a whole, materially affect the financial results or operations of the Company or any member of the Group.

Insurance

The Company maintains insurance policies with independent third parties in respect of buildings, goods in transit, equipment and certain inventories covering loss due to fire, explosion, earthquake, typhoon, and flood. While the Company believes its insurance policies to be adequate and in line with industry norms in Taiwan, significant damage to any of the Group’s production facilities, whether as a result of fire or other causes, could have a material adverse effect on the Group. Insurance coverage on property, plant and equipment amounted to approximately NT$414.0 million, NT$638.0 million and NT$1,178.0 million as of 31st December, 1999, 2000 and 2001, respectively. The Company or any member of the Group does not have any third-party liability insurance covering its product liability. The Company does not carry business interruption insurance or key-personnel insurance or any policy of a similar nature.

Principal Subsidiaries and Affiliates

Most of the business and assets of the Group in the ROC are held through the Company. The Company’s subsidiaries hold the Group’s operation facilities in the PRC. See ‘‘— History and organization of the Group’’ and ‘‘— Principal production facilities’’. The information set forth below reflects the Company’s direct and indirect equity interests in these subsidiaries and affiliates as of 31st March, 2002.

Company Phihong Japan Corp. . . . . . Phihong USA Corp. . . . . . Phihong International Corp. . . . . . . . . . . . . .	Main business Sales and marketing Sales and marketing, research and development Manufacture of switching and linear power supply units and mobile telephone accessories	Place of incorporation Japan California, USA British Virgin Islands	Total paid-in capital JPY=50,000,000 U.S.$1,200,000 U.S.$5,526,250	The Company’s direct and indirect equity interest(1)
				100% 100% 100%

Company Phitek International Corp. . Phihong PWM Brazil LTDA . . . . . . . . . . . . Phihong (Shanghai) Electronics Co., Ltd. . . . Phihong (Dongguan) Electronics Co., Ltd. . . . Dong Guan Phitek Electronics Ltd. . . . . . . Tian Jin Phitek Electronics Ltd. . . . . . . . . . . . . . . Hon-Shang Investment Co., Ltd. . . . . . . . . . . . . . . Guang-Lai Investment Co., Ltd. . . . . . . . . . . . . . .	Main business Manufacture of switching and linear power supply units and mobile telephone accessories Manufacture of switching and linear power supply units Research and development Manufacture of switching and linear power supply units, and mobile telephone accessories Manufacture of switching and linear power supply units, and mobile telephone accessories Manufacture of switching and linear power supply units, and mobile telephone accessories Investment holding Investment holding	Place of incorporation British Virgin Islands Brazil PRC PRC PRC PRC ROC ROC	Total paid-in capital U.S.$2,000,000 R$2,820,000 U.S.$2,000,000 HK$42,012,000 U.S.$2,000,000 U.S.$2,500,000 NT$300,000,000 NT$300,000,000	The Company’s direct and indirect equity interest(1)
				100% 60% 100% 100% 100% 100% 100% 100%

(1) There has been no material change in the Company’s direct and indirect equity interests in each of its principal subsidiaries since 31st March, 2002.

Phihong Japan Corp. was established in Japan in 2000. Its registered office is at Gotanda No. 2 Hanatari-Bldg., 9th Floor, 5-28-10, Higashi-Gotarda, Shinagami-ku Japan. Phihong Japan is a sales and marketing office which is responsible for promoting the Group’s products to new and existing Japanese customers, retaining new and existing customers and gathering market information.

As of and for the year ended 31st December, 2001, Phihong Japan had audited net assets, operating losses and net losses of JPY=(11.8 million), JPY=40,886.8 million and JPY=40,863.3 million, respectively. As of 31st December, 2001, Phihong Japan had paid-in capital of JPY=50.0 million.

Phihong USA Corp. was established in California, USA in 1997. Its registered office is at 48607 Warm Springs Blvd., Fremont, CA 94539, USA. Phihong USA is a sales and marketing office which is responsible for promoting the Group’s products to new and existing North American customers, retaining new and existing customers and gathering market information. In addition, Phihong USA has research and development capability with eight personnel working as engineers. Phihong USA has branch offices in Whitewall, Pennsylvania and Simi Valley, California, USA.

As of and for the year ended 31st December, 2001, Phihong USA had audited net assets, operating revenues and net profits of U.S.$1.6 million, U.S.$0.1 million and U.S.$97,770, respectively. As of 31st December, 2001, Phihong USA had paid-in capital and reserves of U.S.$1.2 million.

Phihong International Corp. was established in the British Virgin Islands in 1997. Its registered office is at IFS Chambers, Creque, Building Road Town, Tortola, British Virgin Islands. Phihong International owns Phihong (Dongguan) Electronics Co., Ltd. (‘‘Dongguan Phihong’’), Phihong (Shanghai) Electronics Co., Ltd. (‘‘Shanghai Phihong’’), and Tian Jin Phitek Electronics Ltd. (‘‘Tianjin Phitek’’). Dongguan Phihong owns one of the largest manufacturing facilities in the Group and has the most complete

product lines within the Group. The products produced by Dongguan Phihong are outsourced by Phihong International under the order of the Company. Shanghai Phihong engages in research and development of new power supplies and mobile communications devices products. Tianjin Phitek commenced commercial operation in May 2002 and intends to manufacture various switching and linear power supply units and mobile telephone accessories for domestic sales in mainland China.

As of and for the year ended 31st December, 2001, Phihong International had audited net assets, operating revenues and net profits of HK$601.8 million, HK$66.3 million and HK$66.0 million, respectively. As of 31st December, 2001, Phihong International had paid-in capital of HK$36.4 million.

Phitek International Corp. was established in the British Virgin Islands in 1999. Its registered office is at P.O. Box 3321, Road Town, Tortola British Virgin Islands. Phitek International owns Dong Guan Phitek Electronics Ltd. (‘‘Dongguan Phitek’’). Dongguan Phitek manufactures various switching and linear power supply units and mobile communications accessories for domestic sales in mainland China. The products produced by Dongguan Phitek are outsourced by Phitek International under the order of the Company.

As of and for the year ended 31st December, 2001, Phitek International had audited net assets, operating revenues and net profits of U.S.$60.2 million, U.S.$5.9 million and U.S.$8.1 million respectively. As of 31st December, 2001, Phitek International had paid-in capital of U.S.$2.0 million.

Phihong PWM Brazil LTDA was established in Brazil in 2000. Its registered office is at Rua tocantins, 190 CEP: 37540-000, Santa Rita Do Sapucai, Minas Gerais, Brazil. Phihong Brazil manufactures various of switching and linear power supply units. Phihong Brazil also maintains sales forces and research and development teams locally.

As of and for the year ended 31st December, 2001, Phihong Brazil had audited net assets, operating revenues and net profits of R$4.3 million, R$6.1 million and R$2.9 million, respectively. As of 31st December, 2001, Phihong Brazil had paid-in capital of R$2.8 million. Phihong (Shanghai) Electronics Co., Ltd. was established in the PRC in 2001. Its registered office is at Room 1211, Hongcao Building, No. 421, Hongcao Road, Shanghai 200233, China. Shanghai Phihong engages in research and development of new power supplies, electronic ballasts, and mobile communications devices.

As of and for the year ended 31st December, 2001, Shanghai Phihong had audited net assets, operating revenues and net profits of RMB6.3 million, RMB2.0 million and RMB2.0 million respectively. As of 31st December, 2001, Shanghai Phihong had paid-in capital of U.S.$1.0 million.

Phihong (Dongguan) Electronics Co., Ltd. was established in the PRC in 1996. Its registered office is at Kiji Road, Yinhu Industrial Zone, Qingxi Town, Dongguan, Guangdong Province, China. Dongguan Phihong owns one of the largest manufacturing facilities in the Group and has the most complete product lines within the Group. Dongguan Phihong engages in the manufacturing of switching and linear power supply units, mobile telephone accessories and other new products, such as electronic ballasts, mainly for export sales.

As of and for the year ended 31st December, 2001, Dongguan Phihong had audited net assets, operating revenues and net profits of HK$115.5 million, HK$(3.0 million) and HK$(0.5 million), respectively. As of 31st December, 2001, Dongguan Phihong had paid-in capital of HK$42.0 million.

Dong Guan Phitek Electronics Ltd. was established in the PRC in 1999. Its registered office is at Xiekeng Management Area, Qingxi Town, Dongguan, Guangdong China. Having obtained a domestic license, Dongguan Phitek is allowed to issue PRC value added tax receipt and can conduct domestic sales within mainland China. Therefore, Dongguan Phitek engages in the manufacturing of switching and linear power supply units, mobile telephone accessories mainly for domestic sales in mainland China.

As of and for the year ended 31st December, 2001, Dongguan Phitek had audited net assets, operating revenues and net profits of RMB25.5 million, RMB(4.2 million) and RMB(2.0 million), respectively. As of 31st December, 2001, Dongguan Phitek had paid-in capital of U.S.$2.0 million.

Tian Jin Phitek Electronics Ltd. was established in the PRC in 2001. Its registered office is at No. 11 Wei Shan Road, Tianjin Economic Technological Development Area (TEDA), Tianjin, China. Having obtained a domestic license, Tianjin Phitek is allowed to issue PRC value added tax receipt and can conduct domestic sales in mainland China. Tianjin Phitek commenced commercial operation in May 2002 and intends to manufacture switching and linear power supply units,and mobile telephone accessories mainly for domestic sales in mainland China.

Hon-Shang Investment Co., Ltd. was established in the ROC in 2001. Its registered office is at 6F-1, No.2, Chung-Shang North Road, Taipi, Taiwan ROC. It serves as an investment holding company but to date, no significant investment has been made by the Company through it.

Guang-Lai Investment Co., Ltd. was established in the ROC in 2001 . Its registered office is at 6F-1, No.2, Chung-Shang North Road, Taipi, Taiwan ROC. It serves as an investment holding company but to date, no significant investment has been made by the Company through it.

Related Party Transactions

The Company, its subsidiaries and certain of its affiliates, in the ordinary course of business or from time to time, enter into transactions with each other. The Company believes that all such transactions were based on general commercial practice. See Note 15 to the ‘‘Non-consolidated Financial Statements as at and for the three months ended 31st March, 2002 and 2001’’, and Note 9 to the ‘‘Consolidated Financial Statements as at and for the years ended 31st December, 2001, 2000 and 1999’’.

SELECTED FINANCIAL INFORMATION

The selected consolidated income statement information for the years ended 31st December, 1999, 2000 and 2001, the selected consolidated balance sheet information as of 31st December, 1999, 2000 and 2001 prepared by Reality United Firm, and the selected non-consolidated income statement and balance sheet information for the three-month period ended 31st March, 2001 and 2002 prepared by Deloitte & Touche all expressed in millions of New Taiwan Dollars set forth below are derived, without adjustment, from the Audited Consolidated Financial Statements and the Unaudited Non-Consolidated Financial Statements, as the case may be, included elsewhere in this Offering Circular and should be read in conjunction with, and are qualified in their entirety by reference to, such financial statements, including the notes thereto. Results for the three-month period ended 31st March, 2002 are not necessarily indicative of the results that may be expected for the years ended 31st December, 2002. The selected consolidated income statement information for the years ended 31st December, 1997 and 1998 and the selected consolidated balance sheet information as of 31st December, 1997 and 1998 set forth below are derived from the audited consolidated financial statements of the Company not included herein. Such financial statements were audited by Realty United Firm, independent public accountants, whose audit report dated 18th March, 1999, is not included in this Offering Circular. Deloitte & Touche’s unaudit report dated 13th April, 2002 on the Unaudited Non-Consolidated Financial Statements as of and for the three-month period ended 31st March, 2001 and 2002 were qualified with respect to the effect on the Unaudited Non-Consolidated Financial Statements of adjustments, if any, had the financial statements of certain subsidiaries and investee companies been audited by independent accountants. The Audited Consolidated Financial Statements and Unaudited Non-Consolidated Financial Statements of the Company have been prepared and presented in accordance with ROC GAAP and reporting practices in the ROC which differ in certain material respects with U.S. GAAP. For a discussion of certain differences between ROC GAAP and U.S. GAAP, see ‘‘Summary of Significant Differences Between ROC GAAP and U.S. GAAP’’. The Company has not qualified or identified the impact of the differences between ROC GAAP and U.S. GAAP, see ‘‘Risk Factors — Risks Relating to the ROC — Financial reporting and accounting standards in the ROC differ from other countries; bonus share issuance’’. The Company is not required to, and does not, prepare interim financial statements on a consolidated basis.

Convenience translations in the Audited Consolidated Financial Statements and the Unaudited NonConsolidated Financial Statements expressed in U.S. Dollars are provided solely for the convenience of the reader and such amounts do not form part of the audited financial statements.

		Consolidated as of 31st December,	Consolidated as of 31st December,
1997	1998	1999	2000	2001		2001	2002
NT$ $3,787,693 2,870,762	NT$ $4,001,566 2,567,943			NT$ $7,294,466 5,702,767	U.S.$ $208,419 162,941	NT$ $1,393,863 1,159,922	NT$ $1,467,823 1,283,078
916,931 —	1,433,623 —	1,402,398 —	1,470,595 —				184,745 5,576
916,931 346,968	1,433,623 619,520	1,402,398 668,663	1,470,595 793,800	1,583,348 936,188	45,239 26,749	234,248 154,283	190,321 116,165
569,963 126,204 81,235	814,103 97,473 93,366	733,735 112,172 31,384	676,795 267,743 35,045	647,160 244,976 93,009	18,490 7,000 2,657	79,965 85,845 16,691	74,156 82,172 54,486
$ 470,855	$ 616,062	$ 645,314	$ 700,570	$ 625,272	$ 17,866	$122,483	$ 77,842
$ 3.12	$ 3.14	$ 3.29	$ 3.57	$ 3.19	$ 0.09	$ 0.62	$ 0.40

		Consolidated as of 31st December,	Consolidated as of 31st December,			Non-Consolidated as of 31st March,	Non-Consolidated as of 31st March,	Non-Consolidated as of 31st March,
1997	1998	1999	2000	2001		2001	2002	2002
NT$ $2,196,155 — 192,665 10,133 10,130	NT$ $2,793,752 — 226,583 9,696 33,481	NT$ $4,040,336 13,828 323,067 20,043 37,056				NT$ $3,867,911 2,439,722 356,710 17,327 25,933	NT$ $2,654,449 3,425,784 795,960 13,368 53,566	U.S.$ $ 75,841 97,880 22,742 382 1,530
$2,409,083	$3,063,512	$4,434,330	$5,739,717	$6,840,185	$195,439	$6,707,603	$6,943,127	$198,375
1,194,679 3,721 93,859	1,088,168 1,650 265,028	1,743,289 — 413,681	2,084,789 — 587,286	2,456,939 — 647,054	70,200 — 18,488	2,921,965 — 589,793	2,490,936 — 649,140	71,170 — 18,546
1,292,259 1,116,824	1,354,846 1,708,666	2,156,970 2,277,360	2,672,075 3,067,642	3,103,993 3,736,192	88,688 106,751	3,511,758 3,195,845	3,140,076 3,803,051	89,716 108,659
$2,409,083	$3,063,512	$4,434,330	$5,739,717	$6,840,185	$195,439	$6,707,603	$6,943,127	$198,375

(1) Translated into United States Dollars using the exchange rate published by Taipei Forex Inc. at 31st December, 2001 of NT$34.999 = U.S.$1.00, and at 31st March, 2002 of NT$35.000 = U.S.$1.00.

(2) Earnings per Common Share are calculated by dividing net income by the weighted average number of shares outstanding during each year after adjusting retroactively for the effect of stock dividends and employees’ bonuses. No adjustment has been made with respect to the stock dividends and capitalization of employees’ bonuses approved by the shareholders on 10th June, 2002.
(3) Earnings per Common Share are calculated by dividing net income by the weighted average number of shares outstanding during each year after adjusting retroactively for the effect of stock dividends, including the stock dividends and capitalization of employees bonus approved by the shareholders on 10th June, 2002.

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

This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Non-Consolidated Financial Statements included elsewhere in this Offering Circular. The Company’s financial statements have been prepared in accordance with ROC GAAP, which differ in certain material respects from U.S. GAAP. See ‘‘Summary of Significant Differences between ROC GAAP and U.S. GAAP’’. The Company has not quantified the effect of the differences that would arise in the event its financial condition and results of operations were restated or reconciled to U.S. GAAP; however, some of these differences could be material. See ‘‘Risk Factors — Risks Relating to the ROC — Financial Reporting and Accounting Standards in the ROC Differ from Other Countries; Bonus Share Issuance’’. This Offering Circular contains both the Company’s consolidated financial statements and non-consolidated financial statements as of and for the years ended 31st December, 1999, 2000 and 2001, as well as nonconsolidated financial statements as of and for the three-month periods ended 31st March, 2001 and 2002. Accordingly, it is not possible to make direct comparisons between information contained in the Consolidated Financial Statements and the Non-Consolidated Financial Statements. The Company is not required to, and does not, prepare interim financial statements on a consolidated basis. Results for any interim period may not be indicative of the results for the entire fiscal year.

This discussion and analysis contains forward-looking statements. These statements are subject to certain risks and uncertainties, including those discussed below and in Risk Factors, which could cause actual results to differ materially from the expectations expressed in such forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements.

Overview

The consolidated net sales of the Company have grown at a compound annual growth rate of 22.2 per cent. from NT$4,002.0 million in 1998 to NT$7,294.5 million (U.S.$208.4 million) in 2001. For the three months ended 31st March, 2002 the Company recorded non-consolidated net sales of NT$1,467.8 million (U.S.$41.9 million) and non-consolidated net income of NT$77.8 million (U.S.$2.2 million), compared to NT$1,393.9 million and NT$122.5 million, respectively, for the same period in 2001.

Net Sales

The Company generates its sales primarily from its sales of switching and linear power supply units. In fiscal years 1999, 2000 and 2001, sales of switching and linear power supply units constituted 98.5 per cent., 93.1 per cent. and 88.5 per cent. of its net sales. Of the sales of the Company’s switching and linear power supply units, sales of AC/DC power adaptors and chargers and charger bases accounted for 80.6 per cent., 37.6 per cent. and 72.8 per cent. in 1999, 2000 and 2001, respectively, and sales of open frame power supply modules accounted for 19.0 per cent., 15.4 per cent. and 15.7 per cent. in 1999, 2000 and 2001, respectively. The Company also generates its sales from sales of mobile telephone accessories. In fiscal years 2000 and 2001, sales of these products constituted 6.4 per cent. and 11.4 per cent. of its net sales, respectively.

In the past few years, Motorola has been the Company’s largest customer. As explained in the Overview section above, sales to Motorola accounted for 67.6 per cent., 57.9 per cent. and 64.3 per cent. of the Group’s total sales in 2001, 2000 and 1999, respectively. All sales made by the Group to Motorola are on purchase order basis without long-term contracts or firm purchase commitments.

In pricing its products and services, the Company takes into account the complexity of the product, the prevailing market conditions, the order size, and the strength and history of the relationship with the customer. When possible, the Company seeks early involvement with customers in product design.

Net operating revenues from sales are generally recognized when the products are shipped to the customer or the receipt of products by customer at the respective logistic hubs of the Company.

Cost of Goods Sold

The Company’s cost of goods sold consists principally of:

" costs of raw materials and components;
" direct labor costs; and
" overhead, including depreciation and maintenance of production equipment, indirect labor costs, indirect material costs, outsourcing expenses and electricity and water utility costs.

Operating Expenses

The Company’s operating expenses consist of the following:

" Selling Expenses. Selling expenses consist primarily of selling commissions, salaries and related personnel expenses and other marketing expenses. The Company expects its selling and marketing expenses to increase significantly as it seeks to further expand its sales volume and customer base.
" Administrative Expenses. Administrative expenses consist primarily of salaries for its management, administrative, accounting, finance and human resources personnel, fees for professional services, and depreciation and amortization expenses for office equipment.
" Research and Development Expenses. Research and development expenses consist primarily of salaries, bonuses and related costs for product and technology development, and depreciation and maintenance on the equipment and various materials used in research and development processes. The Company expects its research and development expenses to grow significantly as the Company increases its research and development efforts to develop new products.

Results of Operations

The following table summarizes certain items from the Company’s results of operations for fiscal years 1999, 2000 and 2001, in each case as a percentage of net sales.

Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized Gross Profit . . . . . . . . . . . . . . . . . . . . . . . Realized Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . . Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Income (loss) . . . . . . . . . . . . . . . . . . . . . . . Other Income and Gain . . . . . . . . . . . . . . . . . . . . . . . Other Expenses and Loss . . . . . . . . . . . . . . . . . . . . . . Earnings Before Income Tax. . . . . . . . . . . . . . . . . . . . Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . Net Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1999 % 100.0 71.5 28.5 — 28.5 13.6 14.9 2.3 0.6 16.5 (3.4) 13.1	2000 % 100.0 79.6 20.4 — 20.4 11.0 9.4 3.7 0.5 12.6 (2.9) 9.7	2001 % 100.0 78.2 21.8 (0.1) 21.7 12.8 8.9 3.4 1.3 11.0 (2.4) 8.6	Three Months Ended 31st March, 2001 2002 (unconsolidated and unaudited) % % 100.0 100.0 83.2 87.4 16.8 12.6 — (0.4) 16.8 13.0 11.1 7.9 5.7 5.1 6.2 5.6 1.2 3.7 10.7 6.9 (1.9) (1.6) 8.8 5.3

Three Months Ended 31st March, 2002 Compared to Three Months Ended 31st March, 2001

Net Sales. Net sales increased by NT$74.0 million, or 5.3 per cent., from NT$1,393.9 million in the three months ended 31st March, 2001 to NT$1,467.8 million (U.S.$41.9 million) in the three months ended 31st March, 2002. This increase was primarily due to increase in new customers.

Cost of Goods Sold. Cost of goods sold increased by NT$123.2 million, or 10.6 per cent., from NT$1,159.9 million in the three months ended 31st March, 2001 to NT$1,283.1 million (U.S.$36.7 million) in the three months ended 31st March, 2002 primarily due to increase in net sales leading to increase in cost of raw materials.

Gross Profit. Gross profit, including realized gross profit from inter-affiliate transactions, decreased by NT$43.9 million, or 18.8 per cent., from NT$234.2 million in the three months ended 31st March, 2001 to NT$190.3 million (U.S.$5.4 million) in the three months ended 31st March, 2002. Gross margin, or gross profit as a percentage of net sales, decreased from 16.8 per cent. in the three months ended 31st March, 2001 to 13.0 per cent. in the three months ended 31st March, 2002. The decreases in gross profit and gross margin were primarily because the increase in cost of goods sold outpaced the increase in net sales.

Operating Expenses. Operating expenses decreased by NT$38.1 million, or 24.7 per cent., from NT$154.3 million in the three months ended 31st March, 2001 to NT$116.2 million (U.S.$3.3 million) in the three months ended 31st March, 2002. Operating expenses as a percentage of net sales decreased from 11.1 per cent. in the three months ended 31st March, 2001 to 7.9 per cent. in the three months ended 31st March, 2002. The decrease in operating expenses were principally due to:

" Selling Expenses. Selling expenses decreased by 15.9 per cent. from NT$75.9 million in the three months ended 31st March, 2001 to NT$63.8 million (U.S.$1.8 million) in the three months ended 31st March, 2002 primarily due to reduction in commission expenses, shipping expenses, expenses in inventory management at logistic hubs and relocation of certain personnel to

mainland China manufacturing facilities thus leading to reduction in remuneration to such personnel. Selling expenses as a percentage of net sales decreased to 4.4 per cent. in the three months ended 31st March, 2002 from 5.45 per cent. in the three months ended 31st March, 2001.

" Administrative Expenses. Administrative expenses decreased by 54.2 per cent. from NT$47.4 million in the three months ended 31st March, 2001 to NT$21.7 million (U.S.$0.6 million) in the three months ended 31st March, 2002 due to non-distribution of any special bonus to employees. Administrative expenses as a percentage of net sales decreased from 3.4 per cent. in the three months ended 31st March, 2001 to 1.5 per cent. in the three months ended 31st March, 2002.
" Research and Development Expenses. Research and development expenses decreased by 1.3 per cent. from NT$31.0 million in the three months ended 31st March, 2001 to NT$30.6 million (U.S.$0.9 million) in the three months ended 31st March, 2002 due to decrease in expenses for product safety certification. Research and development expenses as a percentage of net sales decreased from 2.2 per cent. in the three months ended 31st March, 2001 to 2.1 per cent. in the three months ended 31st March, 2002.

Operating Income and Operating Margin. Operating income decreased by NT$5.8 million, or 7.3 per cent., from NT$80.0 million in the three months ended 31st March, 2001 to NT$74.2 million (U.S.$2.1 million) in the three months ended 31st March, 2002. Operating margin also decreased, from 5.7 per cent. in the three months ended 31st March, 2001 to 5.1 per cent. in the three months ended 31st March, 2002. The decrease in operating income was primarily due to the decrease in gross profit mentioned above.

Non-operating Income. Non-operating income decreased by NT$3.6 million, or 4.3 per cent, from NT$85.8 million in the three months ended 31st March, 2001 to NT$82.2 million (U.S.$2.3 million) in the three months ended 31st March, 2002 mainly due to decreases in net investment income from NT$46.5 million in the three months ended 31st March, 2001 to NT$0 in the three months ended 31st March, 2002 and to a lesser extent due to a decrease in interest income by NT$6.9 million and a decrease in net foreign exchange gains by NT$2.8 million in the three months ended 31st March, 2002. The decrease in net investment income was primarily due to losses in the Company’s long-term investments. The decrease in interest income was primarily due to decreases in interest rate and a decrease in the Company’s cash and cash equivalents, and the decrease in foreign exchange gains was primarily due to the incurrence of net foreign exchange losses. These decreases were partially offset by increases in recovery from inventory devaluation from NT$5.0 million in the three months ended 31st March, 2001 to NT$15.0 million (U.S.$0.4 million) in the three months ended 31st March, 2002 due to change of design so that certain obsolete inventory were able to be used in new products, in mold development revenue from NT$4.1 million in the three months ended 31st March, 2001 to NT$15.0 million (U.S.$0.4 million) in the three months ended 31st March, 2002 and in other non-operating income mainly consisting of compensation from customers for cancelling orders of previous operating periods. The increase in recovery from inventory devaluation reflected an improvement in the market conditions for the Company’s products.

Non-operating Expense. Non-operating expense increased by NT$37.8 million, or 226.4 per cent., from NT$16.7 million in the three months ended 31st March, 2001 to NT$54.5 million (U.S.$1.6 million) in the three months ended 31st March, 2002, primarily due to the incurrence of net investment losses of NT$16.9 million (U.S.$0.5 million) resulted from reduction in gains from long term investments and net foreign exchange losses of NT$7.1 million (U.S.$0.2 million) resulted from depreciation in Euro against U.S. Dollars in the three months ended 31st March, 2002. Other non-operating expenses also increased from NT$14.9 million in the three months ended March 2001 to NT$29.1 million (U.S.$0.8 million) in the three months ended 31st March, 2002.

Income Taxes. The Company recorded income tax expenses of NT$24.0 million (U.S.$0.7 million) in the three months ended 31st March, 2002, compared to income tax expenses of NT$26.6 million in the three months ended 31st March, 2001. The Company’s effective tax rate in the three months ended 31st March, 2002 was approximately 24 per cent.

Net Earnings. Net earnings decreased by NT$44.7 million, or 36.4 per cent., from NT$122.5 million in the three months ended 31st March, 2001 to NT$77.8 million (U.S.$2.2 million) in the three months ended 31st March, 2002. Net earnings as a percentage of net sales decreased from 8.8 per cent. in the three months ended 31st March, 2001 to 5.3 per cent. in the three months ended 31st March, 2002.

Fiscal Year 2001 Compared to Fiscal Year 2000

Net Sales. Net sales increased by NT$81.8 million, or 1.1 per cent., from NT$7,212.7 million in fiscal year 2000 to NT$7,294.5 million (U.S.$208.4 million) in fiscal year 2001. This increase was primarily due to increase in purchase orders from existing customers and increase in new customers. Cost of Goods Sold. Cost of goods sold decreased slightly from NT$5,742.1 million in 2000 to NT$5,702.8 million (U.S.$162.9 million) in 2001 despite the increase in net sales during the same period primarily due to reduction in cost of raw materials, cost of outsourcing and increase in number of employees being made redundant.

Gross Profit. Gross profit increased by NT$112.8 million, or 7.7 per cent., from NT$1,470.6 million in fiscal year 2000 to NT$1,583.3 million (U.S.$45.2 million) in fiscal year 2001. Gross margin, or gross profit as a percentage of net sales, increased from 20.4 per cent. in 2000 to 21.7 per cent. in 2001. The increases in gross profit and gross margin were primarily due to the combination of increases in net sales and decreases in cost of goods sold.

Operating Expenses. Operating expenses increased by NT$142.4 million, or 17.9 per cent., from NT$793.8 million in fiscal year 2000 to NT$936.2 million (U.S.$26.7 million) in fiscal year 2001. Operating expenses as a percentage of net sales also increased from 11.0 per cent. in fiscal year 2000 to 12.8 per cent. in fiscal year 2001. The increases in operating expenses were principally due to:

" Selling Expenses. Selling expenses decreased by 20.0 per cent. from NT$451.0 million in fiscal year 2000 to NT$360.7 million (U.S.$10.3 million) in fiscal year 2001 primarily due to decrease in commission expenses from 2 per cent. to 1 per cent.. Selling expenses as a percentage of net sales decreased to 4.9 per cent. in fiscal year 2001 from 6.3 per cent. in fiscal year 2000.
" Administrative Expenses. Administrative expenses increased by 99.5 per cent. from NT$220.4 million in fiscal year 2000 to NT$439.8 million (U.S.$12.6 million) in fiscal year 2001 due to the distribution of one time special bonus to employees of managerial level. Administrative expenses as a percentage of net sales increased from 3.1 per cent. in fiscal year 2000 to 6.0 per cent. in fiscal year 2001.
" Research and Development Expenses. Research and development expenses increased by 10.9 per cent. from NT$122.4 million in fiscal year 2000 to NT$135.7 million (U.S.$3.8 million) in fiscal year 2001. Research and development expenses as a percentage of net sales increased from 1.7 per cent. in fiscal year 2000 to 1.9 per cent. in fiscal year 2001.

Operating Income and Operating Margin. Operating income decreased by NT$29.6 million, or 4.4 per cent., from NT$676.8 million in fiscal year 2000 to NT$647.2 million (U.S.$18.5 million) in fiscal year 2001. Operating margin also decreased, from 9.4 per cent. in fiscal year 2000 to 8.9 per cent. in fiscal year 2001. The decrease in operating income was primarily due to the increase in operating expenses mentioned above.

Non-operating Income. Non-operating income decreased by NT$22.7 million, or 8.5 per cent., from NT$267.7 million in fiscal year 2000 to NT$245.0 million (U.S.$7.0 million) in fiscal year 2001 mainly due to decreases in commission income from NT$13.6 million in fiscal year 2000 to NT$1.5 million (U.S.$0.04 million) in fiscal year 2001 and in investment income from NT$14.8 million (U.S.$0.4 million) in fiscal year 2001 compared to NT$34.6 million in fiscal year 2000. The decrease in commission income was primarily due to reduction in receipt of commission income from Densai Lambda K.K. The decrease in investment income was primarily due to reduction in net profit of Santa Rita Plant. These decreases were partially offset by increases in interest income from NT$45.6 million in fiscal year 2000 to NT$54.5 million (U.S.$1.6 million) in fiscal year 2001, in foreign exchange income from NT$13.6 million in fiscal year 2000 to NT$23.7 million (U.S.$0.7 million) in fiscal year 2001 and in gain on disposal of property and equipment from NT$1.0 million in fiscal year 2000 to NT$13.3 million (U.S.$0.4 million) in fiscal year 2001. The increase in interest income was mainly from increase in cash flow. The increase in foreign exchange income was primarily due to the appreciation of U.S. Dollars against NT Dollars and a substantial amount of payment currency from customers being U.S. Dollars. The increase in gain on disposal of property and equipment was principally due to relocation of manufacturing facilities to mainland China.

Non-operating Expense. Non-operating expense increased by NT$58.0 million, or 165.7 per cent., from NT$35.0 million in fiscal year 2000 to NT$93.0 million (U.S.$2.7 million) in fiscal year 2001, primarily due to losses of NT$40.0 million (U.S.$1.1 million) in inventory provision due to price declines and aging of the inventories and an increase from losses in disposal of property and equipment from NT$0.1 million in fiscal year 2000 to NT$2.6 million (U.S.$0.07 million) in fiscal year 2001. These increases were partially offset by a decrease in interest expenses from NT$13.1 million in fiscal year 2000 to NT$6.9 million (U.S.$0.2 million) in fiscal year 2001 mainly due to reduction on borrowings.

Income Taxes. The Company recorded income tax expenses of NT$173.9 million (U.S.$5.0 million) in fiscal year 2001, compared to income tax expenses of NT$208.9 million in fiscal year 2000. The Company’s effective tax rate in fiscal year 2001 was approximately 25 per cent..

Net Earnings. Net earnings decreased by NT$75.3 million, or 10.7 per cent., from NT$700.6 million in fiscal year 2000 to NT$625.3 million (U.S.$17.9 million) in fiscal year 2001. Net earnings as a percentage of net sales decreased from 9.7 per cent. in fiscal year 2000 to 8.6 per cent. in fiscal year 2001.

Fiscal Year 2000 Compared to Fiscal Year 1999

Net Sales. Net sales increased by NT$2,284.9 million, or 46.4 per cent., from NT$4,927.8 million in fiscal year 1999 to NT$7,212.7 million in fiscal year 2000. This increase was primarily due to increase orders from existing customers and increase in new customers.

Cost of Goods Sold. Cost of goods sold increased by NT$2,216.7 million, or 62.9 per cent. from NT$3,525.4 million in 1999 to NT$5,742.1 million in 2000 primarily due to increase in net sales leading to increase in cost of raw materials.

Gross Profit. Gross profit increased by NT$68.2 million, or 4.9 per cent., from NT$1,402.4 million in fiscal year 1999 to NT$1,470.6 million in fiscal year 2000. The increase in gross profit was primarily due to the increases in net sales outpaced the increases in cost of goods sold.

Gross margin, or gross profit as a percentage of net sales, decreased from 28.5 per cent. in 1999 to 20.4 per cent. in 2000. The decrease in gross margin was primarily due to increase in net sales, increase in cost of goods sold and reduction in sales price.

Operating Expenses. Operating expenses increased by NT$125.1 million, or 18.7 per cent., from NT$668.7 million in fiscal year 1999 to NT$793.8 million in fiscal year 2000. Operating expenses as a percentage of net sales decreased from 13.6 per cent. in fiscal year 1999 to 11.0 per cent. in fiscal year 2000. The increases in operating expenses were principally due to:

" Selling Expenses. Selling expenses increased by 30.7 per cent. from NT$345 million in fiscal year 1999 to NT$451 million in fiscal year 2000 primarily due to increase in commission expenses, shipping expenses and expenses with respect to increase in new losgistic hubs in Europe. Selling expenses as a percentage of net sales decreased to 6.3 per cent. in fiscal year 2000 from 7.0 per cent. in fiscal year 1999.
" Administrative Expenses. Administrative expenses increased by 1.1 per cent. from NT$218.0 million in fiscal year 1999 to NT$220.4 million in fiscal year 2000. Administrative expenses as a percentage of net sales decreased from 4.4 per cent. in fiscal year 1999 to 3.1 per cent. in fiscal year 2000.
" Research and Development Expenses. Research and development expenses increased by 15.8 per cent. from NT$105.7 million in fiscal year 1999 to NT$122.4 million in fiscal year 2000 due to increase in application fees for product safety certification. Research and development expenses as a percentage of net sales decreased from 2.1 per cent. in fiscal year 1999 to 1.7 per cent. in fiscal year 2000.

Operating Income and Operating Margin. Operating income decreased by NT$59.6 million, or 7.8 per cent., from NT$733.7 million in fiscal year 1999 to NT$676.8 million in fiscal year 2000. Operating margin also decreased, from 14.9 per cent. in fiscal year 1999 to 9.4 per cent. in fiscal year 2000. The decrease in operating income was primarily due to the increase in operating expenses mentioned above.

Non-operating Income. Non-operating income increased by NT$155.5 million, or 138.6 per cent., from NT$112.2 million in fiscal year 1999 to NT$267.7 million in fiscal year 2000 mainly due to increases in commission income from NT$10.4 million in fiscal year 1999 to NT$13.6 million in fiscal year 2000, in investment income from NT$0 in fiscal year 1999 to NT$34.6 million in fiscal year 2000, in foreign exchange income from NT$0 in fiscal year 1999 to NT$13.6 million in fiscal year 2000 and in gain on disposal of property and equipment from NT$0.2 million in fiscal year 1999 to NT$1.0 million in fiscal year 2000. The increase in miscellaneous Income was primarily due to the increase in return materials authorization from Motorola. The increase in commission income was primarily due to increase in commission income from Densai Lambda K.K.. The increase in investment income was primarily due to increase in investment income from Santa Rita Plant and increase in short-term investment in mutual funds. The increase in foreign exchange income was primarily due to appreciation of U.S. Dollars against NT Dollars and a substantial amount of payment currency from customers being in U.S. Dollars. These increases were partially offset by a decrease in interest income from NT$58.2 million in fiscal year 1999 to NT$45.6 million in fiscal year 2000, which was primarily due to reduction in cash flow and appropriation of cash deposit to invest in mutual funds.

Non-operating Expense. Non-operating expense increased by NT$3.6 million, or 11.5 per cent., from NT$31.4 million in fiscal year 1999 to NT$35.0 million in fiscal year 2000. This increase was partially offset by a decrease in foreign exchange loss from NT$9.0 million in fiscal year 1999 to NT$0 in fiscal year 2000 mainly due to appreciation in U.S. Dollar against NT Dollars.

Income Taxes. The Company recorded income tax expenses of NT$208.9 million in fiscal year 2000, compared to income tax expenses of NT$169.2 million in fiscal year 1999. The Company’s effective tax rate in fiscal year 2000 was approximately 25 per cent..

Net Earnings. Net earnings decreased by NT$55.3 million, or 8.6 per cent., from NT$645.3 million in fiscal year 1999 to NT$700.6 million in fiscal year 2000. Net earnings as a percentage of net sales decreased from 13.1 per cent. in fiscal year 1999 to 9.7 per cent. in fiscal year 2000.

Inventories and Receivables

Other than cash and cash equivalents, inventories and receivables are the principal components of the Company’s current assets and require a significant amount of working capital support, particularly as the Company’s sales continue to increase. Accordingly, control of inventories and receivables is a key aspect of the Company’s business operations.

Inventory turnover days changed from 58 days in fiscal year 1999 to 61 days in fiscal year 2000, but decrease to 69 days in fiscal year 2001 due to increase in inventory at the logistic hubs of the Company at the request of customers. As of 31st March, 2002, inventory turnover days were 73 days on an annualized basis due to better inventory control and reduction in inventory at the request of customers. Receivables turnover days changed from 86 days in fiscal year 1999 to 90 days in fiscal year 2000, and further improved to 75 days in fiscal year 2001. As of 31st March, 2002, receivables turnover days were 52 days on an annualized basis.

Liquidity and Capital Resources

The Company needs cash primarily for working capital, equipment purchases, and manufacturing facility expansion. The Company has historically financed its operations primarily from cash flow from operations, the proceeds of equity securities and short- and long-term borrowings. At 31st December, 2001, the Company had NT$2,413.5 million (U.S.$69.0 million) of cash and cash equivalents and NT$69.9 million (U.S.$2.0 million) of short-term investments. At 31st March, 2002, the Company had NT$566.1 million (U.S.$16.2 million) of cash and cash equivalents. At 31st December, 2001, the Company had an aggregate of NT$522.2 million (U.S.$14.9 million) borrowings outstanding under short-term and long-term loan facilities. At 31st March, 2002, the Company had an aggregate of NT$42.5 million (U.S.$1.2 million) borrowings outstanding under short-term and long-term loan facilities. On 25th July, 2001, the Company pledged one of its office buildings and lands located in San-Chung City, Taipei, Taiwan valued NT$120.0 million to China Development Industrial Bank as collateral to an NT$100.0 million 13-month loan facility, which the Company has not drawn down. The interest rates for borrowings under these loans ranged from 2.6 per cent. to 3.0 per cent. per annum.

Net cash (used for) provided by operating activities amounted to NT$(63.4) million, NT$949.3 million and NT$1,374.3 million (U.S.$39.3 million) in fiscal years 1999, 2000 and 2001 respectively. The net cash for first quarter of 2002 turns negative due to settlement of accounts payable with affiliates. The Company’s depreciation and amortization for fiscal years 1999, 2000 and 2001 were NT$45.8 million, NT$57.6 million and NT$83.8 million (U.S.$2.4 million), respectively. The increases in depreciation and amortization were primarily due to increased capital investments in manufacturing facilities and equipment. Notes and accounts receivable decreased NT$606.2 million (U.S.$17.3 million) in fiscal year 2001, despite an increase in net sales between 2000 and 2001 mainly due to faster collection of accounts receivable from customers.

Notes and accounts payable (including accounts payable to related parties) also remained relatively unchanged in fiscal year 2001. Net cash used for investing activities was NT$139.9 million, NT$521.9 million and NT$998.1 million (U.S.$28.5 million) in fiscal years 1999, 2000 and 2001, respectively. Net cash used for investing activities in fiscal year 2001 primarily reflected net cash used for investing in longterm investments of NT$418.9 million (U.S.$12.0 million) and capital expenditures for acquisition of property of NT$539.1 million (U.S.$15.4 million). The long-term investments and the capital expenditures were primarily funded with net cash provided by operating activities.

Net cash provided by (used for) financing activities was NT$103.5 million, NT$(235.2) million and NT$280.8 million (U.S.$8.0 million) in fiscal years 1999, 2000 and 2001, respectively. Net cash provided by financing activities in fiscal year 2001 mainly reflected an increase of NT$130.1 million (U.S.$3.7 million) of short-term loans and an increase of NT$254.5 million (U.S.$7.3 million) of short-term notes and bills payable.

The Company had capital expenditure cash outflows of NT$132.0 million, NT$483.2 million and NT$539.0 (U.S.$15.4 million) million in fiscal years 1999, 2000 and 2001, respectively. The Company’s capital expenditures in fiscal years 1999, 2000 and 2001 were primarily for purchases of new equipment and machinery at its manufacturing facility in the PRC and Brazil. In fiscal year 2002, the Company’s planned investments for the capital expenditures of it and its subsidiaries primarily relate to the purchase of new equipments for R&D and production facilities.

Inflation

The Company does not believe that inflation in Taiwan had a material impact on its results of operations. Inflation in Taiwan was approximately 0.18 per cent., 1.26 per cent. and negative 0.01 per cent. in 1999, 2000 and 2001, respectively.

Taxation

The corporate income tax rate in Taiwan that applies to the Company is 25 per cent.. The Company benefits from tax incentives, including tax credits for certain research and development and employee training expenses and credits for certain investments in automation equipment and technology. These tax incentives resulted in tax savings and an increase in deferred income tax assets of approximately NT$169.2 million, NT$208.9 million and NT$173.9 million (U.S.$5.0 million) in fiscal years 1999, 2000 and 2001, respectively.

The Company’s effective tax rates in fiscal years 1999, 2000 and 2001 were approximately 23 per cent. respectively.

Market Risk

Market risk is the risk of loss related to adverse changes in market prices, including interest rates and foreign exchange rates, of financial instruments. The Company is exposed to various types of market risks, including changes in interest rates and foreign currency exchange rates, in the normal course of business.

In the past, the Company uses derivative instruments such as options and forward contracts to hedge its foreign currency exposure to manage risks associated with foreign currency exposures through a controlled program of risk management in accordance with established policies approved by the board of directors and shareholders of the Company.

The Company’s primary market risk exposures relate to interest rate movements on borrowings and exchange rate movements on foreign currency denominated working capital, export sales as well as capital expenditures relating to equipment used in manufacturing processes and purchased primarily from Brazil, mainland China, Japan and the United States.

Interest Rate Risk

The Company’s major market risk exposure is changing interest rates. The Company’s exposure to market risk for changes in interest rates relates primarily to its long-term debt obligations. The Company primarily enters into debt obligations to support general corporate purposes including capital expenditures and working capital needs.

Foreign Currency Risk

The Company’s transactions are principally in New Taiwan Dollars, Renminbi, Japanese Yen, Hong Kong Dollars, Brazilian Reis and U.S. Dollars. The Company may in the future enter into short-term, forward exchange contracts and currency options to hedge the impact of foreign currency fluctuations on certain underlying assets, liabilities, and firm commitments for operating expenses and capital expenditures denominated in Brazilian Reis, Renminbi, Hong Kong Dollars, Japanese Yen and U.S. Dollars. The purpose of entering into these hedges is to minimize the impact of foreign currency fluctuations on the results of operations. Gains and losses on foreign currency contracts and foreign currency denominated liabilities are recorded in the period of the exchange rate changes.

MANAGEMENT AND EMPLOYEES

Directors

The Company’s board of directors is elected by the shareholders in a general meeting at which a quorum, consisting of a majority of all issued and outstanding Shares, is present. The Chairman is elected by the board from among the directors. The Company’s seven-member board of directors is responsible for the management of the Company’s business.

The term of office for the directors is three years from the date of appointment. Directors may serve any number of consecutive terms if re-elected and may be removed from office at any time for a valid reason, by a resolution adopted by the holders of at least a majority of the Shares represented at a shareholders’ meeting in which a quorum of at least two-thirds of all issued and outstanding Shares are represented. Alternatively, the ROC Company Law provides that in the case of a public company, such as the Company, a resolution may be adopted by the holders of at least two-thirds of the Shares represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding Shares are present. Normally, all board members are elected at the same time, except where the posts of one-third or more of the directors are vacant, at which time a special meeting of shareholders will be convened within 60 days to elect directors to fill the vacancies.

The following table sets forth the name of each of the Company’s current directors, his position in the Company, his business address, the number of Shares held, the percentage of Shares held, and other significant positions in the Company or in unrelated companies held by him or her.

Name Peter Lin . . . . . . . . . . . . . . Shin-Yi Lin . . . . . . . . . . . . Su-Nu Chien . . . . . . . . . . . Takeo Suzuki(1). . . . . . . . . . Chi-Jeng Chan(2) . . . . . . . . . Wen-Sang Ho(3) . . . . . . . . . Chiu-Yung Huang . . . . . . . .	Position Chairman Director Director Director Director Director Director	Number of Shares held as of 31st May, 2002 22,309,736 1,345,000 2,529,123 7,724,000 709,000 709,000 0	Percent of Shares held as of 31st May, 2002 11.38% 0.69% 1.29% 3.94% 0.36% 0.36% 0.00%	Other significant positions held
				1. Supervisor of Compostar Technology Co., Ltd. 2. Director of Hua Jung Components Co., Ltd. Chairman of Densei- Lambda K.K. Assistant Vice President of Concord II Venture Capital Co., Ltd. Assistant Vice President of Concord II Venture Capital Co., Ltd. Chairman of Ichia Technologies, Inc.

Notes:

(1) being nominated by Densei-Lambda K.K.

(2) being nominated by Concord II Venture Capital Co., Ltd.
(3) being nominated by Concord II Venture Capital Co., Ltd.

Supervisors

The Company currently has three supervisors, each serving a three-year term. Supervisors are typically elected at the time that directors are elected. The supervisors’ duties and powers include investigation of the Company’s business condition, inspection of the Company’s corporate records, verification and review of financial statements presented by the Company’s board of directors at shareholders’ meetings, convening of shareholders’ meetings, representing the Company in negotiations with the Company’s directors and notification, when appropriate, to the board of directors to cease acting in contravention of any applicable law or regulation or in contravention of the Company’s Articles of Incorporation. Each supervisor is elected by the Company’s shareholders and cannot concurrently serve as a director, management officer or other staff member. The ROC Company Law requires that a supervisor’s term of office be no more than three years.

The following table sets forth the name of each of the Company’s current supervisors, his or her position in the Company, his or her business address, the number of Shares held, the percentage of Shares and other significant positions held by him or her.

Name Yu-Jeng You . . . . . . . . . . . Jeng-Yin Chen . . . . . . . . . . Tai-Ming Chang . . . . . . . . .	Position Supervisor Supervisor Supervisor	Number of Shares held as of 31st May, 2002 1,484,015 631,891 0	Percent of Shares held as of 31st May, 2002 0.76% 0.32% 0.00%	Other significant positions held
				— — Chairman of the Board of Cradle Technologies, Inc.

Executive Officers

The following table sets forth information relating to the Company’s executive officers.

Name Peter Lin . . . . . . . . . . . . . . . . . . . . Jonathan Chang . . . . . . . . . . . . . . . S.H. Gau . . . . . . . . . . . . . . . . . . . . F.Y. Lu . . . . . . . . . . . . . . . . . . . . . Robert Shieh . . . . . . . . . . . . . . . . . Wendy Dai . . . . . . . . . . . . . . . . . . Jack Kuo . . . . . . . . . . . . . . . . . . . . Vincent Lien . . . . . . . . . . . . . . . . . Thomas Hsu . . . . . . . . . . . . . . . . .	Position Chairman President Vice President Director Director Business Unit President Tele-Communication BU General Manager Special Assistant to President Chief Financial Officer and Vice President, Finance Division	Years with the Company
		30 10 4 months 3 18 22 3 3 4 months

Biographies of Directors, Supervisors and Executive Officers

Peter Lin, aged 54, joined the Company in 1972 and has served as a director and the Chairman of the Company since 1972. Before joining the Company, he served as the Manager in Taiwan Telecommunication Industry Co., Ltd. and sales engineer in Yi-Yo. Mr. Lin majors in electronics engineering from Nation ChiaYi Industrial Vocational School in the ROC.

Shin-Yi Lin, aged 59, joined the Company in 1999 and has served as a director of the Company since 1999. Prior to joining the Company, he worked in Kaochuang Harbor Bureau and Bureau of Water Resources. Mr. Lin graduated from the Accounting and Statistics of Commerce Department of Ta Tung Junior Technologieal Colleage in the ROC.

Su-Nu Chien, aged 54, joined the Company in 1981 and has served as a director of the Company since 1981. She graduated from National Chia-Yi Industrial Vocational School in the ROC.

Takeo Suzuki, aged 58, has been appointed by Densei-Lambda K.K. as the corporate representative in the Company and nominated as a Director of the Company since 20th May, 1999. Mr. Suzuki is the Chairman of Densei-Lambda K.K. who has the experience in the industry where the Company is conducting business for more than 20 years.

Chi-Jeng Chan, aged 35, has been appointed by Concord II Venture Capital Co., Ltd. as its corporate representative and nominated as a Director of the Company since 20th May, 1999. Mr. Chiang serves as an Assistant Vice President of Concord II Venture Capital. He holds an Master of Business Administration degree from University of Rochester in New York, U.S.A.

Wen-Sang Ho, aged 34, has been appointed by Concord II Venture Capital Co., Ltd. as its corporate representative and nominated as a Director of the Company since 20th May, 1999. Mr. Ho is an Assistant Vice President of Concord II Venture Capital. He holds an Master of Business Administration degree from National Cheug-Chi University in Taiwan, ROC.

Chiu-Yung Huang, aged 46, has been elected as an independent director of the Company since 10th June, 2002. Mr. Huang currently serves as the Chairman of Ichia Technologies Inc., a company listed on the TSE. Mr. Huang holds a Bechelor’s degree in Mechanical Engineering from Long-Hwa Institute of Technology in Taiwan, ROC.

Yu-Jeng, You, aged 36, joined the Company in 1999. Before joining the Company, she served as a Section Chief in the Lucky Bank Taiwan Inc. Ms. Yo graduated from Taichung Institute of Commerce.

Jeng-Yin Chen, aged 33, joined the Company in 1999. Before taking the position as Supervisor, Ms. Chen worked in the IT Department of Carrefour. Ms. Chen holds a Bachelors degree of Pace University in the United States.

Tai-Ming Chang, aged 48, has been elected as an independent supervisor of the Company since 10th June, 2002. Mr. Chang is currently the Chairman of Cradle Technologies, Inc., a Company listed on the TSE. Mr. Chang holds a Bechelor’s degree in Information Technology from Chung Yuan Christian University in Taiwan, ROC.

Jonathan Chang, aged 57, has served as the President of the Company since 1992. Before joining the Company, he served as the vice president of Clarion (Taiwan) Manufacturing Co., Ltd. and the Sales Manager of Yi-Yo Electronic Appliance Company. Mr. Chang holds an EMBA degree from National Taiwan University of Science and Technology in the ROC.

S.H. Gau, aged 48, has served as Director and the Vice President of the Company since January 2002. Before taking the position as Vice President, Mr. Gau served as the President in Portans Electrical Corp. Ltd., and the President in Uppermost Electrical Corp. Ltd. Mr. Gau holds a Doctor degree from Oregan University in the United States.

F.Y. Lu, aged 41, has served as the Director of Supplier Planning Group since April 1999. Before taking the position as Director, Mr. Lu served as the Manager in Ambit Microsystem Corporation and the Manager in Shan-wen Computer Company. Mr. Lu graduated from St.John’s & St.Mary’s Institute of Technology in Taiwan.

Robert Shieh, aged 45, has served as Director of the Company since September 1984. Before joining the Company, Mr. Shieh had served as technician in Hsiang Cheng Electric Corp., and technician in Lutron Electric Enterprise Co., Ltd. Mr. Shieh graduated from National Chin-Yi Institute of Technology in Taiwan.

Wendy Dai, aged 47, has served as a director and the Business Unit President of the United States and Europe Group of the Company since March 1980. Ms. Dai was formerly President of the Company’s US branch. She graduated from Chihlee Institute of Commerce in Taiwan.

Jack Kuo, aged 44, has served as Tele-Communication BU General Manager of the Company since 1999. Before joining the Company, he was the Marketing Vice President of Clevo Co and a Senior Researcher in Dynatech Technology Corporation. Mr. Kuo holds a Master degree in mechanical from National Cheng Kung University in Taiwan.

Vincent Lien, aged 45, is the Special Assistant to the President of the Company. Prior to joining the Company, Mr. Lien was the Manager of Financial Department of Clevo Co. and Shen-wen Computer Company. He holds a Bachelors degree in business management from Tatung Institute of Technology in Taiwan.

Thomas Hsu, aged 48, is the Chief Financial Officer and Vice President, Finance Division of the Company. Before joining the Company, Mr. Hsu had served as Financial Controller of Winbond Electronics Corp., and the Vice President of The Chase Manhattan Bank, National Association. He holds an MBA degree from the University of Michigan at Ann Arbor in the United States.

Compensation of Directors, Supervisors and Executive Officers

In 2001, the Company paid its directors and supervisors and executive officers approximately NT$57.1 million in aggregate compensation, including salary and share bonus. The number of Shares distributed as employee bonus was calculated by dividing the total nominal amount of the bonus by NT$10, the par value of the Company’s Shares, rather than their market value. The market value of the Company’s Shares is currently substantially higher than par value.

Employees

Overview

The Company had the following number of employees as of the period indicated:

As of 31st December, 1999 2000 2001 50 45 50 56 73 87 29 38 36 221 237 52 356 393 225	As of 31st December, 1999 2000 2001 50 45 50 56 73 87 29 38 36 221 237 52 356 393 225	As of 31st March,
1999 50 56 29 221 356	2000 45 73 38 237 393	2002
		54 93 29 23
		199

As of 31st December, 2001, all of the Company’s employees worked on a full-time basis. The average age of the Company’s employees is 34 years old.

As of 31st December, 2001, approximately 76 per cent. of the Company’s employees held a college degree or higher educational qualification. The Company places considerable importance on the recruitment, training and retention of a team of qualified and experienced engineers to oversee and manage the Company’s manufacturing operations.

Neither the Company nor any of its subsidiaries has experienced any significant labor disputes in the past three years.

Employee remuneration

The salaries of the Company’s employees in the ROC are adjusted based on industry standards, inflation and individual performance. The Company pays a year-end bonus to the employees equivalent to an average of three months’ salary. In addition, the articles of incorporation of the Company provide that the Company’s employees are entitled to employee bonuses out of the retained earnings. See ‘‘Description of The Shares’’. In addition, ROC law requires that the Company’s employees be given pre-emptive rights to subscribe for 10 per cent. to 15 per cent. of any rights issues or share offerings of the Company. Currently, the Company does not have any share option schemes.

Employee retirement plan

The Company has established an employee retirement plan (‘‘Retirement Plan’’). The Retirement Plan provides for lump-sum payments to retiring employees in Taiwan based on the length of service, age and certain other factors. The Company deposits funds equal to two per cent. of employees’ total salaries with the Central Trust of China in accordance with the requirements of the Labor Standards Law of the ROC. Actual payment of retirement benefits are financed by the pension fund and any insufficiency will be paid by the Company.

All Taiwan Stock Exchange listed companies are required to calculate their pension obligations based on actuarial valuation. Pursuant to ROC Financial Accounting Standard Statement No. 18, the Company recognizes net periodic pension cost which includes service cost, interest cost, expected return on plan assets, amortization of unrecognized transition obligation, pension gains/losses and prior service cost based on an actuarial valuation.

Employee Insurance

The Company carries mandatory national health insurance and labor insurance for its employees as well as travel insurance which covers the employee’s emergency medical needs and accidents.

PRINCIPAL SHAREHOLDERS

In so far as is known to the Company, as of 31st March, 2002, there is no person other than a director who, directly or indirectly, beneficially owns 10 per cent. or more of the Company’s capital.

CHANGES IN ISSUED SHARE CAPITAL

The following table shows the increases in the Company’s issued share capital since incorporation:

Date of Issue December 1972 . . . July 1977 . . . . . . . July 1981 . . . . . . . October 1983 . . . . . September 1985 . . . December 1987 . . . December 1989 . . . December 1990 . . . October 1991 . . . . . October 1997 . . . . . January 1998 . . . . . July 1998 . . . . . . . June 1999 . . . . . . . May 2000 . . . . . . . May 2001 . . . . . . .	Type of Issue Incorporation Rights issue Rights issue Rights issue Rights issue Rights issue Rights issue and capitalization of stock dividends Rights issue and capitalization of stock dividends and legal reserves Capitalization of stock dividends Rights issue and capitalization of stock dividends and employees’ bonus Rights issue Capitalization of stock dividends and employees’ bonus Capitalization of stock dividends and employees’ bonus Capitalization of stock dividends and employees’ bonus Capitalization of stock dividends and employees’ bonus	Par Value of Shares 100 100 100 100 100 100 10 10 10 10 10 10 10 10 10	Number of Issued Shares 2,000 28,000 170,000 100,000 100,000 200,000 8,000,000 6,900,000 2,090,000 9,173,141 5,100,000 27,736,859 42,000,000 46,460,000 42,590,000	Number of Shares Outstanding After Issue
				2,000 30,000 200,000 300,000 400,000 600,000 14,000,000 20,900,000 22,990,000 32,163,141 37,263,141 65,000,000 107,000,000 153,460,000 196,050,000

TERMS AND CONDITIONS OF THE BONDS

The following terms and conditions (subject to amendment and except for the sentences in italics) will be endorsed on the Certificates issued in respect of the Bonds. The Global Certificate contains provisions which apply to the Bonds when they are in the form of interests that are represented by the Global Certificate, some of which modify the effect of the terms and conditions set out below. See ‘‘The Form of the Bonds’’.

The issue of U.S.$50,000,000 1 per cent. Convertible Bonds Due 2007 (the ‘‘Bonds’’) of Phihong Enterprise Co., Ltd. (the ‘‘Company’’) was authorized by a resolution of the Board of Directors of the Company adopted on 1st April, 2002. The Bonds are constituted by an indenture (the ‘‘Indenture’’) to be dated as of 2nd July, 2002 and to be made between the Company and The Bank of New York (the ‘‘Trustee’’), which term includes any successor trustee under the Indenture for the holders of the Bonds (the ‘‘Bondholders’’). The Company will enter into a paying and conversion agency agreement (the ‘‘Agency Agreement’’) to be dated as of 2nd July, 2002 with the Trustee, The Bank of New York as the registrar and the principal paying, transfer and conversion agent, and The Bank of New York (Luxembourg) S.A., as paying, transfer and conversion agent, appointed thereunder (the ‘‘Paying Agent’’, the ‘‘Conversion Agent’’ and the ‘‘Transfer Agent’’ and such expression shall include the Principal Agent) in relation to the Bonds. The registrar, the principal paying, transfer and conversion agent and replacement agent for the time being are referred to below as the ‘‘Registrar’’, the ‘‘Principal Agent,’’ and the ‘‘Replacement Agent’’, respectively, and are referred to together with ‘‘Paying Agent, Transfer Agent and Conversion Agent’’ as the ‘‘Agents’’. The statements in these Terms and Conditions (‘‘Conditions’’) include summaries of, and are subject to, the detailed provisions of the Indenture. Copies of the Indenture and the Agency Agreement are available for inspection by the Bondholders during normal business hours at the principal office of the Trustee, being at the date hereof located at 101 Barclay Street, 21st Floor West, New York , N.Y. 10286, U.S.A. and at the specified offices of each of the Agents. The Bondholders are entitled to the benefit of the Indenture and are bound by, and are deemed to have notice of, all the provisions of the Indenture and the Agency Agreement.

1. Status

The Bonds constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Company and rank at least pari passu among themselves and (subject as aforesaid and other than any obligations preferred by mandatory provisions of law) with all other present and future direct, unconditional, unsubordinated and unsecured obligations of the Company.

2. Form, Denomination and Title

(A) Form and Denomination

The Bonds will be issued at par in registered form, in the denomination of U.S.$10,000 and integral multiples thereof and will be offered, sold and be transferable in principal amounts of U.S.$10,000 or an integral multiple thereof. The Bonds are not issuable in bearer form. The Bonds will initially be represented by a global certificate (the ‘‘Global Certificate’’) deposited with The Bank of New York, as common depositary for, and registered in the name of a nominee for, Euroclear Bank S.A./N.V., as operator of the Euroclear System (‘‘Euroclear’’) and Clearstream Banking, socie´te´ anonyme (‘‘Clearstream, Luxembourg’’).

Owners of interests in the Bonds will not be entitled to receive definitive physical certificates (the ‘‘Definitive Certificate’’) in respect of their Bonds except in the limited circumstances described in the Global Certificate. In the event that certificates do become issuable, a bond certificate (each a ‘‘Certificate’’) will be issued to each Bondholder in respect of its registered holding of Bonds. Each Bond and each Certificate will be serially numbered with an identifying number which will be recorded on the relevant Certificate and in the register of Bondholders which the Company will procure to be kept by the Registrar.

(B) Title

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

3. Negative Pledge

So long as any of the Bonds remain outstanding (as defined in the Indenture), the Company shall not, and shall ensure that none of its Principal Subsidiaries (as defined below), if any, will, create or permit to be outstanding any mortgage, charge, pledge, lien or other form of encumbrance (each an ‘‘Encumbrance’’) upon the whole or any part of its, or, as the case may be, any such Principal Subsidiary’s, undertaking, property, assets or revenues, present or future, to secure for the benefit of the holders of any International Investment Securities (as defined below) (i) payment of any sum due in respect of any such International Investment Securities, (ii) any payment under any guarantee of any such International Investment Securities or (iii) any payment under any indemnity or other like obligation relating to any such International Investment Securities without in any such case at the same time according to the Bonds, provide for the benefit of the Bondholders either the same security as is granted to or is outstanding in respect of such International Investment Securities, guarantee, indemnity or other like obligation or such other security as shall be approved by an Extraordinary Resolution (as defined in the Indenture) of the Bondholders.

As used herein, the term ‘‘International Investment Securities’’ means bonds, debentures, notes or investment securities of the Company or any other person evidencing indebtedness with a maturity of not less than 1 year from the date thereof which (a) either (i) are by their terms payable, or confer a right to receive payment, in any currency other than New Taiwan Dollars or (ii) are denominated or payable in New Taiwan Dollars and more than 50 per cent. of the aggregate principal amount thereof is initially offered or distributed outside Taiwan, the Republic of China (the ‘‘ROC’’) by or with the authorization of the issuer thereof and (b) are for the time being, or are capable of being, quoted, listed, ordinarily dealt in or traded on any stock exchange, quotation system or over-the-counter or other similar securities market outside the ROC.

‘‘Principal Subsidiary’’ means any Subsidiary (i) whose total revenue, as shown by the latest audited accounts (consolidated in the case of a company which itself has subsidiaries) of such Subsidiary, are at least 20 per cent. of the total revenue of the Company and its consolidated Subsidiaries (including existing Subsidiaries and Subsidiaries which may be acquired or formed by the Company from time to time during the terms of the Bonds) as shown by the latest audited consolidated accounts of the Company or (ii) whose gross assets, as shown by the latest audited accounts (consolidated in the case of a company which itself has subsidiaries) of such Subsidiary are at least 20 per cent. of the gross assets of the Company and its consolidated Subsidiaries (including existing Subsidiaries and Subsidiaries which may be acquired or formed by the Company from time to time during the terms of the Bonds) as shown by the latest audited consolidated accounts of the Company.

‘‘Subsidiary’’ means any corporation or other business entity more than 50 per cent. of the outstanding voting stock of which is for the time being owned directly or indirectly by the Company.

4. Interest

(A) Interest

The Bonds bear interest from 2nd July, 2002 at the rate of 1 per cent. per annum (but without prejudice to Condition 7(C)). Interest will be paid annually in arrears on 2nd July of each year (each an ‘‘Interest Payment Date’’), commencing on 2nd July, 2003 subject to the provisions hereunder. Interest will be paid to the Bondholders of record on 17th June immediately preceding each Interest Payment Date.

(B) Calculation

Whenever it is necessary to compute an amount of interest in respect of any Bond for a period of other than a full year, such interest will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of days elapsed.

(C) Cessation of Interest or Payment of Accrued Interest

(i) Each Bond will cease to bear interest from the due date for redemption thereof unless, following surrender in accordance with Condition 8, payment of principal or premium (if any) is improperly withheld or refused or unless default is otherwise made in respect of any such payment. In any such event, interest will continue to accrue (after as well as before any judgment) up to but excluding the date on which payment in full of the principal or premium (if any) thereof is made.
(ii) Upon conversion of a Bond on exercise of the Conversion Right in accordance with Condition 6, that Bond will be deemed to have ceased to bear interest from the immediately preceding Interest Payment Date (unless Condition 6(B)(viii) applies).
(iii) If the date for redemption of any Bond is not an Interest Payment Date or if payment of principal or premium (if any) is improperly withheld or refused in respect of any Bond or if default is otherwise made in respect of any such payment or if the Bonds have become due and payable pursuant to Condition 10, interest accrued and unpaid in respect of any such Bond from and including 2nd July, 2002 or, as the case may be, the Interest Payment Date being or last preceding such due date for redemption or, if later, the date up to which interest in respect of such Bond accrued and was paid, will be paid following surrender of the relevant Certificate in accordance with Condition 8.

5. Transfers of Bonds; Issue of Certificates

(A) Transfers

Subject to Condition 5(D) below, a Bond may be transferred upon the surrender at the specified office of any Transfer Agent (including the Transfer Agent in Luxembourg) of the individual Definitive Certificate in respect of the Bond to be transferred, together with the form of transfer endorsed thereon (if such Definitive Certificate has been issued) or, in the case of a Bond represented by the Global Certificate, delivery at such office of a form of transfer obtainable from any Transfer Agent (the ‘‘Form of Transfer’’), duly completed and executed and any other evidence that such Transfer Agent may require. In the case of a transfer of only part of a holding of Bonds in respect of which a Certificate is issued, a new Certificate shall be issued to the transferee in respect of the part transferred and a further new Certificate in respect of the balance of the holding not transferred shall be issued to the transferor. The Form of Transfer is available at the specified office of the respective Transfer Agents (including the Transfer Agent in Luxembourg).

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

(B) Delivery of New Certificates

Each new Certificate to be issued upon a transfer of Bonds shall be available for delivery upon receipt by the Transfer Agent (including the Transfer Agent in Luxembourg) at its specified office of the relevant Certificate and the duly completed and executed Form of Transfer. Delivery of the new Certificates shall be made at the specified office of such Transfer Agent to whom the relevant Certificate and the duly completed and executed Form of Transfer have been surrendered or delivered or, at the option of the holder making such delivery or surrender as aforesaid and as specified in the relevant Form of Transfer or otherwise in writing, be mailed by uninsured post at the risk of the holder entitled to the new Certificate to such address as may be so specified, unless such holder requests otherwise and pays in advance to the relevant Transfer Agent the costs of such other method of delivery and/or such insurance as it may specify.

Except in the limited circumstances described in the Global Certificate, owners of interests in the Bonds represented by the Global Certificate will not be entitled to receive Definitive Certificates (if issued) in respect of their individual holdings of the Bonds.

(C) Formalities Free of Charge

Transfers of the Bonds will be effected without charge by or on behalf of the Company or any Transfer Agent, but only upon payment (or the giving of such indemnity as such Transfer Agent may require in respect) of any tax or other governmental charges which may be imposed in relation thereto.

(D) Restricted Transfer Periods

No Bondholder may require the transfer of a Bond to be registered (i) during the period of 15 days ending on the due date for any payment of principal, premium (if any) and interest on the Bond; (ii) after such Bond has been called for redemption pursuant to Condition 8(B) or 8(D); (iii) after the Conversion Notice (as defined in Condition 6(B)) and the individual Definitive Certificate in respect of such Bond (if issued) have been deposited for conversion pursuant to Condition 6; or (iv) following exercise of the Bondholder’s put option pursuant to Condition 8(C).

(E) Regulations

All transfers of Bonds and entries on the register of Bondholders will be made subject to the detailed regulations concerning transfer of Bonds set forth in the Agency Agreement. The regulations may be changed by the Company, with the prior written approval of the Trustee and the Registrar. A copy of the current regulations will be mailed (at the Company’s expense) by the Registrar to any Bondholder who asks for one and will also be available at the office of the paying, transfer and conversion agent in Luxembourg and elsewhere.

6. Conversion

On exercise of the Conversion Right (as defined below), the converting Bondholders pursuant to the election made by such Bondholder may: (a) elect to receive Shares in Taiwan, or (b) in the event the Company establishes a depositary receipt facility following the closing and subject to compliance with the terms and conditions of the deposit agreement established with respect to such depositary receipt facility, elect to receive depositary receipts representing the interests in the Shares and the Bondholder may direct the Company to procure that Shares transferred and delivered upon conversion of the Bonds are deposited with the custodian for the DR Depositary (as defined below) for the issuance and delivery of the DRs (as defined below) by the DR Depositary.

In the event that the Company establishes a depositary receipt facility, it will have to procure additional Shares for deposit with the custodian for the DR Depositary. Such Shares could be procured by open market purchases or by issuing new Shares, subject to compliance with applicable ROC law and the Company’s articles of incorporation.

In the event the Company does establish a depositary receipt facility, the procedure for Bondholders to convert the Bonds into DRs will be substantially similar to the conversion procedure for Bondholders to convert the Bonds into Shares. In each case, the Bondholder will deposit the individual Definitive Certificate in respect of a Bond (if issued) and the Conversion Notice (as defined herein) with the Conversion Agent. However, in the case of conversion into DRs, the Bondholder will direct that all or some only of the Shares issuable upon conversion be deposited with the relevant DR Depositary for issuance of DRs.

The Company shall, within five Trading Days from the Conversion Date, issue and deliver the Shares converted from the Bonds to the converting Bondholder or its designee, subject to the requirements relating to the conversion in the Indenture being satisfied.

The Indenture provides, in summary, that the term ‘‘Shares’’ means, when used to refer to the class or classes of the Company’s capital stock into which the Bonds are convertible and when used in certain other instances, only the Company’s common shares, NT$10 par value per share, but that when used elsewhere, including in Condition 6(C), such term also includes shares of any other class or classes of the share capital

of the Company authorized after the date of the Indenture which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or winding-up of the Company.

(A) Conversion Right

(i) Conversion Period: Each Bondholder has the right during the Conversion Period (as hereinafter defined) to convert any Bond into Shares (defined below), credited as fully paid, and may, if a depositary receipt facility has been established and depositary receipts representing the Shares (‘‘DRs’’) have been issued, and subject to compliance with the terms and conditions of the relevant deposit agreement, direct in the Conversion Notice that all or some only of the Shares issuable upon conversion be deposited with a custodian for the relevant DR depositary (the ‘‘DR Depositary’’) for issuance of DRs, on and subject to the terms set forth herein (the ‘‘Conversion Right’’). Subject to and upon compliance with the provisions of this Condition, the Conversion Right attaching to any Bond may be exercised, at the option of the holder thereof and as and to the extent provided herein, at any time on or after 1st August, 2002 and prior to the close of business on 2nd June, 2007 (at the place where the Conversion Notice (as defined in Condition 6(B)) and the individual Definitive Certificate in respect of such Bond (if issued) are deposited for conversion) or, if such date shall not be a business day, on the immediately preceding business day at such place (but in no event thereafter), or, if such Bond shall have been called for redemption prior to that date, then up to the close of business (at the place aforesaid) on the date 7 days prior to the date fixed for redemption thereof (or if such day shall not be a business day at such place on the immediately preceding business day at such place) (the ‘‘Conversion Period’’); provided, however, that the Conversion Right during any Closed Period shall be suspended and the Conversion Period shall not include any such Closed Period. ‘‘Closed Period’’ shall mean any period during which under the laws of the ROC the Company shall close its shareholders register, which period includes 60 days prior to the date of the annual general meeting of Shareholders (‘‘AGM’’), 30 days prior to a special shareholders’ meeting and 90 days prior to the record date for determination of shareholders entitled to receive stock or cash dividends (with the commencement date which is the first day of the aforesaid 60-day period prior to the date of AGM). Such 90-day period shall be extended to the extent necessary for the Company to obtain the ROC Securities and Futures Commission’s or the relevant competent authorities’ approval for its distribution of stock and/or cash dividends. The Company shall procure that the Bondholders are given not less than 10 nor more than 60 days’ prior notice of any Closed Period in accordance with the provisions of the Indenture.

A ‘‘Taiwan business day’’ means a day (other than a Saturday or Sunday) on which commercial banks in Taipei are open for business. Under current ROC law, regulation and policy, PRC persons are not permitted to convert the Bonds or to register as a shareholder of the Company. Under current ROC law, a PRC person means an individual holding a passport issued by the PRC, a resident of any area of China under the effective control or jurisdiction of the PRC (but not including a special administrative region of the PRC such as Hong Kong or Macau, if so excluded by applicable laws of the ROC), any agency or instrumentality of the PRC and any corporation, partnership and other entity organized under the laws of any such area or controlled or beneficially owned by any such person, resident, agency or instrumentality.

Under current ROC law, a non-ROC converting Bondholder when exercising his Conversion Right to convert the Bonds into Shares is required (unless the Company establishes a depositary receipt facility and the Bondholder elects to receive DRs with respect to the Bonds to be converted, in which case, the Shares will be delivered to and deposited with a custodian appointed by the relevant DR Depositary) to appoint a local agent in the ROC with such qualifications as are set by the ROC Securities and Futures Commission (‘‘ROC SFC’’), to open a securities trading account with a local brokerage firm and a New Taiwan Dollar (‘‘NT$’’) bank account, act as custodian for the securities, pay ROC withholding taxes, make confirmation and settlement, remit funds, exercise shareholders’ rights, handle conversion application and perform such other matters as may be designated by such converting Bondholder (or its designee), on behalf of and as agent for such converting Bondholder (or its designee). Under existing ROC laws and regulations, without obtaining an approval from the TSE and opening such accounts, an investor in the Bonds would not be able to receive, hold, sell or otherwise transfer the Shares into which the Bonds may have been converted on the TSE or otherwise. See ‘‘Foreign Investment and Exchange Controls in the ROC’’ and ‘‘Description of the Shares’’.

(ii) Number of Shares and/or DRs Issuable on Conversion: The number of Shares to be issued upon conversion of any Bond will be determined by dividing the principal amount of the Bonds (translated into NT Dollars at the fixed exchange rate of NT$33.622 = U.S.$1.00 quoted from the Taipei Forex Inc. on the pricing date of the Bonds (the ‘‘Fixed Exchange Rate’’)) by the Conversion Price (as hereinafter defined and as may be adjusted in the event of conversion into DRs) in effect on the Conversion Date as defined in Condition 6(B). The number of DRs to be issued upon conversion of any Bond (if applicable) will be determined by dividing the principal amount of the Bonds by the Conversion Price (as hereinafter defined) in effect on the Conversion Date, and dividing, as the case may be, such quotient by the number of Shares represented by each DR on the Conversion Date.

If a Certificate or Certificates in respect of more than one Bond shall be deposited for conversion at any one time by the same Bondholder, the number of Shares (and/or DRs, if applicable) to be issued upon conversion thereof will be calculated on the basis of the aggregate principal amount of the Bonds in respect of which the Certificate(s) were so deposited. Fractions of Shares (and/or DRs, if applicable) will not be issued on conversion, and cash adjustments will not be made in respect thereof by the Company. Notwithstanding the foregoing, in the event of a consolidation or reclassification of Shares (and DRs, if applicable) by operation of law or otherwise occurring after 2nd July, 2002, the Company will upon conversion of the Bonds pay in U.S. Dollars a sum equal to such portion of the principal amount of the Bond or Bonds converted as corresponds to any fraction of a Share (and/or DR, if applicable) not issued as aforesaid if such sum exceeds U.S.$10. For the purpose of calculating the amount of such payment, the Company shall use the Fixed Exchange Rate referred to above in this Condition 6(A)(ii).

(iii) Initial Conversion Price: The price at which Shares will be issued upon conversion (the ‘‘Conversion Price’’) will be NT$50.0 per Share (determined on the date the Bonds are priced (the ‘‘Pricing Date’’), and subject to adjustment in the manner provided in Conditions 6(C) and 6(D). The price at which DRs will be issued upon conversion, in the event that the Company establishes a depositary receipt facility, will be determined by multiplying, or dividing, as the case may be, the Conversion Price by the number of Shares represented by each DR on the Conversion Date and will be subject to adjustment in the manner provided in Conditions 6(C) and 6(D).

(iv) Revival on Default: Notwithstanding the provisions of Condition 6(A)(i), if there shall be default in making payment in full in respect of any Bond which shall have been called for redemption prior to 2nd June, 2007 on the date fixed for redemption thereof, the Conversion Right attaching to such Bond will continue to be exercisable up to and including the close of business (at the place where the relevant individual Definitive Certificate (if issued) in respect of such Bond and the Conversion Notice (as defined in Condition 6(B)) are deposited for conversion) on the date upon which the full amount of the monies payable in respect of such Bond has been duly received by the Trustee or the Principal Agent and notice of such receipt has been duly given to the Bondholders.

(B) Conversion Procedure

(i) Exercise Procedure: To exercise the Conversion Right attaching to any Bond, the holder thereof must complete, execute and deposit at its own expense between 9: 00 a.m. and 3: 00 p.m. (local time at the specified office referred to below) on any business day (as defined below) during the Conversion Period at the specified office of a Conversion Agent outside of the ROC at which the individual Definitive Certificate in respect of a Bond (if issued) is presented for conversion, a notice of conversion (a ‘‘Conversion Notice’’) in duplicate, duly completed and signed, in the then current form obtainable from the specified office of any Conversion Agent, together with the relevant individual Definitive Certificate (if issued) and any certificates and other documents as may be required under the law of the ROC or the jurisdiction in which such Conversion Agent is located and any amount to be paid by the Bondholder. A Conversion Notice deposited outside the hours specified above or on a day which is not a business day at the place of the specified office of the relevant Conversion Agent shall for all purposes be deemed to have been deposited with that Conversion Agent between 9: 00 a.m. and 3: 00 p.m. on the next business day.

Bondholders who deposit a Conversion Notice during a Closed Period will not be permitted to convert their Bonds until the Trading Day following the last day of the Closed Period which (if all other conditions to convert have been fulfilled) will be the Conversion Date (as defined below) for such Bonds. Such Bondholders or the DR Depositary, as applicable, will not be registered as holders of Shares until the Conversion Date.

If a depositary receipt facility has been established and DRs have been issued, the Conversion Notice shall contain an option for the Bondholder to elect to receive Shares and/or DRs upon such conversion. The Conversion Notice shall contain, inter alia, an appointment of a local agent by such converting Bondholder. A Conversion Notice once deposited may not be withdrawn without the consent in writing of the Company. The Company shall immediately notify in writing the Conversion Agents, Principal Agent and Trustee of its written consent together with the relevant Conversion Notice. The price at which such Bonds will be converted will be the Conversion Price (as adjusted in Condition 6(A)(iii) in the event of conversion into DRs) in effect on the Conversion Date.

In this Condition 6(B)(i), ‘‘business day’’ means a day (other than a Saturday or Sunday) on which commercial banks are open for business in London and in the place where the Conversion Agent with whom the individual Definitive Certificate (if issued) and the Conversion Notice are deposited is open for business.

(ii) Taxes and Expenses; Deposit Date and Conversion Date: As conditions precedent to conversion, together with the Conversion Notice, the Bondholder must pay to the relevant Conversion Agent all stamp, issue, registration, excise and similar taxes or duties or transfer costs (if any) arising on conversion in the country in which the Bond is deposited for conversion, or payable in any jurisdiction consequent upon the issue or delivery of Shares (and/or DRs, if applicable) or any other property or cash upon conversion to or to the order of a person other than the converting Bondholder. Except as aforesaid, the Company will pay the expenses arising in the ROC on the issue of Shares (and/or DRs, if applicable) on conversion of Bonds and all charges of the Conversion Agents (and the relevant DR Depositary, if applicable) in connection therewith as provided in the Indenture and Agency Agreement. The date on which any Certificate and the Conversion Notice (in duplicate) relating thereto, together with any certificates and other documents as may be required under applicable law or a relevant deposit agreement (if applicable), are deposited with a Conversion Agent and the payments, if any, required to be paid by the Bondholder are made is hereinafter referred to as the ‘‘Deposit Date’’. The ‘‘Conversion Date’’ applicable to a Bond shall mean the next day following the Deposit Date, which day both is a Trading Day as defined in Condition 8(B) and occurs during the Conversion Period. Bondholders who deposit a Conversion Notice during a Closed Period will not be permitted to convert their Bonds until the Trading Day following the last day of that Closed Period.

(iii) Holder of Record: In the event Shares are to be received by the Bondholder upon conversion, with effect from the opening of business in the ROC on the Conversion Date, the Company will deem the converting Bondholder (or its designee) as indicated in the Conversion Notice to have become the holder of record of the number of Shares to be issued upon such conversion to such holder (disregarding any retroactive adjustment of the Conversion Price (as adjusted in Condition 6(A)(iii) in the event of conversion into DRs) referred to below prior to the time such retroactive adjustment shall have become effective) and at such time, subject to Condition 6(B)(v), the rights of such converting Bondholder as a Bondholder with respect to such Bonds converted shall cease (except rights arising under Condition 6(B)(iv) and 6(B)(vi).

In the event a converting Bondholder has the option under these Conditions to elect, and elects, to receive DRs, with effect from the opening of business in the ROC on the Conversion Date, the Company will deem the relevant DR Depositary or its nominee to have become the holder of record of the number of Shares represented by such DRs to be issued upon such conversion (disregarding any retroactive adjustment of the Conversion Price (as adjusted in Condition 6(A)(iii) in the event of conversion into DRs) referred to below prior to the time such retroactive adjustment shall have become effective) and upon delivery by the relevant DR Depositary to the Bondholder of the number of DRs into which the Bonds are convertible, subject to Condition 6(B)(v), the rights of such converting Bondholder as a Bondholder with respect to such Bonds converted shall cease (except rights arising under Condition 6(B)(iv) and 6(B)(vi).

(iv) Availability of Shares: The Company shall, for the benefit of Bondholders, ensure that sufficient Shares are available as soon as possible (but no later than five Trading Days from the Conversion Date).

(v) Delivery of Shares and/or DRs: On the Conversion Date, the Company will register the converting Bondholder (or its designee) or the relevant DR Depositary (or its nominee), as applicable, in the Company’s register of shareholders as the owner of the number of Shares to be issued pursuant to Condition 6(B)(iii) upon conversion of such Bonds and, subject to any applicable limitations then imposed by ROC laws and regulations, according to the request made in the relevant Conversion Notice, procure that, as soon as practicable, and in any event within five Trading Days from the Conversion Date, there be delivered to the local agent appointed by the converting Bondholder (if Shares are to be received by the converting Bondholder), and/or to the relevant custodian, as agent for the relevant DR Depositary (if the converting Bondholder has the option under these Conditions to elect, and elects, to receive DRs), a certificate or certificates for the relevant Shares, registered in the name specified for that purpose in the relevant Conversion Notice, together with any other property or cash (including, without limitation, cash payable pursuant to Condition 6(A)(ii)) required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the delivery thereof.

In the event a converting Bondholder has the option under these Conditions to elect, and elects, to receive DRs on exercise of its Conversion Right, the Company agrees to deliver to and deposit with the relevant custodian, as agent for the relevant DR Depositary, a sufficient number of Shares to represent the DRs such Bondholder is entitled to receive upon conversion. Such Shares will be registered in the name of the relevant DR Depositary or its nominee and deposited in accordance with the terms of the relevant deposit agreement.

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

(vii) Interest Entitlement: If any notice requiring the redemption of any Bonds is given pursuant to Condition 8(B) or (C) during the period starting on the 15th day prior to the record date in respect of any dividend payable in respect of the Shares and ending on that record date, where (in either case) such notice specifies a date for redemption falling on or prior to the date which is 14 days after the Interest Payment Date (the ‘‘Relevant Interest Payment Date’’) next following such record date, interest shall (subject as hereinafter provided) accrue on the Bonds, the Certificates for which shall have been delivered for conversion and in respect of which the Conversion Date falls on or after such record date from the preceding Interest Payment Date (or, if the relevant Conversion Date falls before the first Interest Payment Date, from 2nd July, 2002) to the relevant Conversion Date (unless the Conversion Date falls after the Relevant Interest Payment Date). Any such interest shall be paid by the Company not later than 14 days after the relevant Conversion Date by U.S. Dollar check drawn on, or by transfer to a U.S. Dollar account maintained by the payee with, a bank in The City of New York in accordance with instructions given by the relevant Bondholder.

Save as provided in this sub-paragraph (viii), no payment or adjustment will be made on conversion for any interest accrued on converted Bonds since the Interest Payment Date last preceding the relevant Conversion Date, or, if the Bonds are converted before the first Interest Payment Date, since 2nd July, 2002.

(viii) Conversion Agents: The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of any Conversion Agent and to appoint further or other Conversion Agents; provided that the Company will at all times maintain a Conversion Agent having specified offices in London, the United Kingdom, and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require, in Luxembourg. Notice of any such termination or appointment and of any changes in the specified offices of the Conversion Agents will be given promptly by the Company to the Bondholders in accordance with Condition 15 and to the Luxembourg Stock Exchange.

(C) Adjustments to Conversion Price

The Conversion Price (as adjusted in Condition 6(A)(iii) in the event of conversion into DRs) will be subject to adjustment in the manner set forth in the Indenture upon the occurrence of certain events set out in the Indenture, including:

(i) the making of a free distribution or bonus issue of Shares;
(ii) subdivisions, consolidations or reclassifications of Shares;
(iii) the declaration of a dividend in Shares;

Under the terms of the Indenture, no account is to be taken of, or credit given for, the par value of Shares issued in any stock dividend in calculating an appropriate conversion price adjustment, so that the full dilutive effect of stock dividends is provided for.

(iv) the grant, issue or offer to the holders of Shares of rights or warrants to subscribe for or purchase Shares at less than the then Current Market Price (as defined in the Indenture) or to subscribe for or purchase any securities convertible into or exchangeable for Shares at less than the then Current Market Price;
(v) the distribution to the holders of Shares of evidences of indebtedness of the Company or of shares of capital stock of the Company (other than Shares) or of assets (other than regular periodic dividends in cash) or of rights or warrants to subscribe for or purchase shares or securities (other than those mentioned in (iv) above);
(vi) the issue of securities (other than the Bonds, Shares issued on conversion of Bonds and those mentioned in (iv) above) convertible into or exchangeable for Shares at less than the then Current Market Price or of rights or warrants (other than those mentioned in (iv) above) to subscribe for or purchase Shares at less than the then Current Market Price or to subscribe for or purchase securities convertible into or exchangeable for Shares at less than the then Current Market Price;

Under the terms of the Indenture, no adjustment will be made to the conversion price as a result of the issue of Shares to the shareholders of any company which merges into the Company, in proportions equal to such shareholders’ shareholdings in such company immediately prior to the merger.

(vii) the issue of Shares (other than (a) Shares issued on conversion of convertible bonds, including the Bonds, (b) Shares to shareholders of any company which merges with the Company upon such merger and in proportion to their shareholdings in such company, or (c) in any of the circumstances described above but including Shares issued under any employee bonus or profit-sharing arrangements) at less than the then Current Market Price; and

(viii) any other event or circumstance which would have in the determination of the Company or the Trustee an analogous effect to any of the events in (i) to (vii) above including, but not limited to, issues of receipts or certificates entitling holders to receive securities,

in accordance with the formulas stipulated in the Indenture. No adjustment will be made where such adjustment would be less than 1 per cent. of the Conversion Price then in effect; provided, however, that any adjustment that otherwise would be required to be made will be carried forward and taken into account in determining any subsequent adjustment. Any adjustment will be notified promptly by the Company to the Bondholders in accordance with Condition 15.

The Trustee will not be obliged to monitor whether any event has occurred which might fall within the events giving rise to adjustment to the Conversion Price as set out in the Indenture or (i) to (viii) above and, until it has actual knowledge by way of express notice in writing from the Company to the contrary, shall assume no such event has occurred.

(D) Conversion Price Reset

The Conversion Price shall be adjusted (the ‘‘Adjusted Conversion Price’’) on each Reset Date, which shall be the first (the ‘‘First Reset Date’’), second (the ‘‘Second Reset Date’’) and third (the ‘‘Third Reset Date’’) anniversaries (each a ‘‘Reset Date’’) of 2nd July, 2002, in the event that the average Closing Price of the Shares on the TSE converted into U.S. Dollars at the then Prevailing Rate (as defined below) for 30 consecutive Trading Days immediately prior to (and excluding) the relevant Reset Date (the ‘‘Average Closing Price’’) is less than the Conversion Prices then in effect on the relevant Reset Date converted into U.S. Dollars at the Fixed Exchange Rate in accordance with the following formula set forth in the Indenture:

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

(i) any adjustment to the Conversion Price pursuant to this Condition 6(D) shall be limited so that the Conversion Price adjusted in accordance with this Condition 6(D) shall not be less than 80 per cent. of the initial Conversion Price (as adjusted to reflect any adjustments required under Condition 6(C) above, which may have occurred prior to the relevant Reset Date);
(ii) the provisions of Condition 6(C) shall apply mutatis mutandis to this Condition 6(D) to ensure that appropriate adjustments shall be made to any Closing Price to reflect any adjustments made to the Conversion Price in accordance with Condition 6(C) during the period of calculation of the Average Closing Price;
(iii) the Conversion Price shall not be reduced below the par value of the Shares (currently NT$10 per share) unless, under applicable law then in effect, the Bonds could be converted at such reduced Conversion Price into legally issued and non-assessable Shares; and
(iv) for the avoidance of doubt (x) any adjustments to the Conversion Price made pursuant to this Condition 6(D) shall only be downward adjustments and (y) an adjustment may be made in respect of the Second or Third Reset Date notwithstanding that an adjustment may have been made in respect of a preceding Reset Date.

The ‘‘Prevailing Rate’’ for the translation of the Closing Prices shall be the arithmetic average of the closing rate of U.S. Dollars to NT Dollars quoted by Taipei Forex Inc. at the close of business on each day of the 30 consecutive Trading Days preceding the relevant reference date. For the purpose of the formula in this Condition, the Prevailing Rate shall be expressed as the number of NT Dollars per U.S.$1.00.

Any such adjustment shall become effective as of the relevant Reset Date and shall be notified to the Bondholders within 5 days of the relevant Reset Date in accordance with Condition 15.

(E) Alternative Conversion Price Reset

To stimulate Bondholder’s interest to exercise their conversion right, Condition 6(E) provides an alternative. This is set in accordance with the regulations for underwriters’ assistance for public companies in the issuance of securities, which was amended by the Chinese Securities Association and was then filed for recordation with the ROC SFC. The Alternative Reset Date, the alternative Conversion Price (the ‘‘Alternative Conversion Price’’) and the period of exercise (i.e. seven Trading Days) are set based on that regulations.

The Bondholders are entitled, within a seven Trading-Day period after 2nd June, 2004, (the first day of such seven Trading-Day period will be determined by the Company), to convert the Bonds into Shares based on the reset Alternative Conversion Price, which would be 86.2 per cent. of the then market price.

The Bondholders are entitled, further, within a seven Trading-Day period after 2nd June, 2005, (the first day of such seven Trading-Day period will be determined by the Company), to convert the Bonds into Shares based on the reset Alternative Conversion Price, which would be 94.3 per cent. of the then market price.

The above-mentioned ‘‘Alternative Reset Date’’ shall be each of the 45th day before the second and third anniversary, being 18th May, 2004 and 18th May, 2005. The above-mentioned ‘‘market price’’ is the lowest among the average closing prices of the Shares on the TSE translated into U.S. Dollars at the Prevailing Rate for 10, 15 and 20 Trading Days immediately preceding the applicable Alternative Reset Date.

The Company undertakes to notify the Bondholders the Market Price and the beginning and end of each relevant seven Trading-Day period as soon as practicable in accordance with Condition 15.

The Alternative Conversion Prices will only be applicable within the relevant seven Trading Days period described in this Condition 6(E). The standard Conversion Price will be applicable to any conversion without such period in which the Alternative Conversion Prices are applicable.

The above procedure for Alternative Conversion will follow the Self-control Rules for Underwriters to Sponsoring the Issuing Company for Offering and Issuance of Securities.

(F) Mergers; Disposals

The Company will not merge, amalgamate or consolidate with or into any other corporation or entity (the Company not being the continuing entity) or sell or transfer all, or substantially all, of the assets of the Company, whether as a single transaction or a number of transactions, related or not, to any corporation, entity or person or to one or more members of any group under the common control of any corporation, entity or person unless the Company shall have notified the Bondholders of such event in accordance with Condition 15 and the Company and such corporation, entity or person shall have executed a indenture supplemental to the Indenture in form and substance satisfactory to the Trustee providing that such corporation, entity or person shall assume the obligations of the Company under the Bonds, the Indenture and the Agency Agreement and providing that each Bond then outstanding shall be convertible into the class and amount of shares and other securities, cash and other property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of Shares (and/or DRs, if applicable) into which such Bond would have been convertible immediately prior to such consolidation, amalgamation, merger, sale or transfer (assuming for such purpose that the Bonds were convertible at the time of such consolidation, amalgamation, merger, sale or transfer) at the Conversion Price (as adjusted in Condition 6(A)(iii) in the event of conversion into DRs) as adjusted from time to time pursuant to the Indenture. Such supplemental indenture will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions to this Condition. The above provisions of this Condition 6(E) will apply in the same way to any subsequent or further consolidations, amalgamations, mergers, sales or transfers.

(G) Conversion Undertakings

(i) Depositary receipts: Subject to the ROC SFC’s separate approval, if required, the Company may, at its option, but is not required to, make arrangements satisfactory to the Trustee for the Bonds to be converted into DRs or other scrip evidencing Shares. Any such arrangements shall be in addition to the provisions of these Conditions relating to conversion into Shares.

The Company has not at the date of this Offering Circular established or authorized the establishment of any depositary receipt facility. Accordingly, conversion into DRs is not currently available. If in the future a depositary receipt facility is established or authorized by the Company, the Company will, to the extent permitted by applicable laws and regulations, make arrangements satisfactory to the Trustee for Shares issued on conversion of Bonds to be accepted for deposit (at the option of the converting Bondholder) into such depositary receipt facility, subject always to the terms of such depositary facility, which terms may include certification or other requirements as conditions to the acceptance for deposit of Shares issued on conversion of Bonds. There can be no assurance that the Company will in future establish or authorize any depositary receipt facility or that any arrangements for the deposit of Shares into such depositary receipt facility would be available to all Bondholders.

The Company shall give notice to the Conversion Agents, Principal Agent and Bondholders in accordance with Condition 15 and to the Luxembourg Stock Exchange within 14 days of the establishment of the depositary receipt facility.

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

7. Payments

(A) Principal, Premium (if any) and Interest

Payment of principal, premium (if any) and interest will be made by transfer to the registered account of the Bondholder or by U.S. Dollar check drawn on a bank in The City of New York, U.S.A., mailed to the registered address of the Bondholder if it does not have a registered account. Payments of principal and premium (if any) will only be made after surrender of the relevant individual Definitive Certificate (if issued) at the specified office of any Agent.

(B) Registered Accounts

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

(C) Fiscal Laws

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

(D) Payment Initiation

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

(E) Payment Delay

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

(F) Business Days

In this Condition 7, ‘‘business day’’ means a day on which commercial banks are open for business in The City of New York, U.S.A. and London, United Kingdom and, in the case of the surrender of a Certificate, in London, United Kingdom, and in the place where the Certificate is surrendered.

(G) Partial Payments

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

Distribution of payments with respect to the Global Certificates held through Euroclear or Clearstream, Luxembourg will be made to the holders holding through participants of Euroclear or Clearstream, Luxembourg, as the case may be, to the account of The Bank of New York, as common depositary for Euroclear and Clearstream, Luxembourg and will be credited by Euroclear or Clearstream, Luxembourg, as the case may be, to the cash accounts of the participants of Euroclear or Clearstream, Luxembourg, in accordance with the relevant system’s rules and procedures, to the extent received by the common depositary.

8. Redemption, Purchase and Cancellation

(A) Redemption at Maturity

Unless previously redeemed, converted or purchased and cancelled as herein provided, the Company will redeem the Bonds at their principal amount in U.S. Dollars on 2nd July, 2007. The Bonds may be redeemed in whole or in part prior to that date only as provided in paragraphs (B) and (C) below (but without prejudice to Condition 10).

(B) Redemption at the Option of the Company

(i) On or at any time 24 months after 2nd July, 2002, the Company may, having given not less than 40 nor more than 60 days’ notice to the Bondholders in accordance with Conditions 8(H) and 15 (which notice will be irrevocable), redeem all or part of the Bonds at their principal amount plus accrued interest (if any) if the Closing Price of the Shares translated into U.S. Dollars at the then Prevailing Rate, of the Shares for each of the 30 consecutive Trading Days, the last of which occurs not more than ten days prior to the date upon which notice of such redemption is published, is at least 130 per cent. of the Conversion Price then in effect, translated into U.S. Dollars at the Fixed Exchange Rate of NT$33.622 = U.S.$1.00, on each such Trading Day. If there shall occur an event giving rise to a change in the Conversion Price during any such 30 Trading Day period, appropriate adjustments for the relevant days shall be made for the purpose of calculating the Closing Price for such days. If the Closing Price cannot be determined for one or more consecutive Trading Days, such day or days will be disregarded in the relevant calculation and will be deemed not to have existed when ascertaining such 30 Trading Day period.

(ii) On or at any time after 2nd July, 2004, the Company may, having given not less than 30 nor more than 60 days’ notice to the Bondholders in accordance with Conditions 8(H) and 15 (which notice will be irrevocable), redeem all or part of the Bonds at their principal amount if 90 per cent. of the Bonds have been previously redeemed, repurchased, or converted and cancelled.

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

The term ‘‘Trading Day’’ means a day on which the TSE or the stock market on which the Shares are then traded in is open for business but does not include a day when (a) no such last transaction price or closing bid and offered prices are reported and (b) (if the Shares are not listed or admitted to trading on such exchange) no such closing bid and offered prices are furnished as aforesaid. The term ‘‘Closing Price’’ for any Trading Day means the last reported transaction price of the Shares on the TSE for such day or, if no transaction takes place on such day, the last available reported transaction price of the Shares on the TSE in effect on the Trading Day immediately preceding such day or, if the Shares are not listed or admitted to trading on such exchange, the average of the closing bid and offered prices of Shares for such day as furnished by a leading independent securities firm licensed to trade on the TSE selected from time to time by the Company for the purpose.

(C) Redemption at the Option of Bondholders

Unless previously redeemed, converted or purchased and cancelled as herein provided, the Company will, at the option of the holder of any Bond, redeem all or part of the Bonds held by that Bondholder on 2nd July, 2004 (‘‘First Put Date’’) at 109.5 per cent. of the principal amount and on 2nd July, 2005 (‘‘Second Put Date’’) (each of the First Put Date and Second Put Date is referred to as a ‘‘Put Date’’) at the principal amount.

To exercise such option the holder must deposit the individual Definitive Certificate in respect of such Bond (if issued) with any Agent and a duly completed redemption notice in the form obtainable from any of the Agents, not more than 60 nor less than 30 days prior to each relevant Put Date. No Bond so deposited may be withdrawn (except as provided in the Agency Agreement) without the prior written consent of the Company and such written consent must be notified by the Company to the Principal Agent no later than seven days prior to each relevant Put Date. Not less than 30 nor more than 45 days’ notice of the commencement of the period for the deposit of individual Definitive Certificates for redemption (if issued) and the redemption notice pursuant to this paragraph (C) shall be given to the Bondholders by the Company. The exercise of the Bondholders’ option under this Condition 8(C) shall override any exercise at the Company’s right under Conditions 8(B).

(D) Redemption for Taxation Reasons

At any time, the Company may, having given not less than 30 nor more than 60 days’ notice to the Bondholders in accordance with Conditions 8(H) and 15 (which notice shall be irrevocable) redeem all but not some only of the Bonds at their principal amount, if (i) the Company determines immediately prior to the giving of such notice that it has or will become obliged to pay additional amounts as provided or referred to in Condition 9 as a result of any change in, or amendment to, the laws or regulations of the ROC or any political subdivision or any authority thereof or therein having power to tax, or any change in the general application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after 1st January, 2002 and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company would be obliged to pay such additional amounts were a payment in respect of the Bonds then due. Prior to the giving of any notice of redemption pursuant to this paragraph, the Company shall deliver to the Trustee a certificate signed by two directors of the Company stating that the obligation referred to in (i) above cannot be avoided by the Company taking reasonable measures available to it and the Trustee shall be entitled to accept such certificate as sufficient evidence of the satisfaction of the condition precedents set out in (ii) above, in which event it shall be conclusive and binding on the Bondholders. Bonds in respect of which a notice of redemption has been given under Condition 8(B) and 8(C) shall not be affected by any notice given subsequently under this Condition 8(D).

(E) Purchase

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

(F) Selection of Bonds

In the case of redemption of some only of the Bonds pursuant to Condition 8(B)(i), where individual Definitive Certificates have been issued, the Bonds to be redeemed will be selected individually by lot by the Principal Agent, in such place as the Trustee shall approve and in such manner as the Trustee shall deem to be appropriate and fair not more than 60 days and not less than 25 days prior to the date fixed for redemption.

(G) Cancellation

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

(H) Redemption Notices

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

9. Taxation

(A) Subject to (B) and (C) below, all payments of principal, premium (if any) and interest by the Company will be made free and clear of and without any deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the government of the ROC or any authority thereof or therein having power to tax, unless deduction or withholding of such taxes, duties, assessments or governmental charges is compelled by law.
(B) Where such withholding or deduction is in respect of ROC withholding tax on premium or interest payments at the rate of up to and including 20 per cent., the Company will increase the amount of premium (if any) or interest paid by it to the extent required so that the net amount of premium (if any) or interest received by Bondholders (without prejudice to Condition 7) would be equal to the amounts which would have been receivable in the absence of any such withholding or deduction.
(C) In the event that any such withholding or deduction in respect of principal or any additional withholding or deduction in excess of 20 per cent. in respect of interest or premium (if any) is required, the Company will pay such additional amounts by way of principal, premium (if any) and interest, as will result in the receipt by the Bondholders of the amounts which would have been receivable in the absence of any such withholding or deduction, except that no such additional amounts shall be payable in respect of any Bond:
(i) to, or on behalf of, a holder who is subject to such taxes, duties, assessments or governmental charges in respect of such Bond by reason of his being connected with the ROC otherwise than merely by holding such Bond or by the receipt of principal in respect of the Bond; or
(ii) if the individual Definitive Certificate in respect of such Bond (if issued) is surrendered more than 30 days after the relevant date except to the extent that the holder would have been entitled to such additional amount on surrendering the relevant Certificate for payment on the last day of such 30 day period. For this purpose, the ‘‘relevant date’’ in relation to any Bond means (a) the due date for payment in respect thereof or (b) (if the full amount of the monies payable on such due date has not been received by the Trustee or the Principal Agent on or prior to such due date) the date on which notice is duly given to the Bondholders that such monies have been so received.

(D) References in these Conditions to principal, premium or interest shall be deemed also to refer to any increased or additional amounts which may be payable in respect thereof under this Condition or any undertaking given in addition to or substitution for it under the Indenture.

10. Events of Default

The Trustee at its discretion may, and if so requested in writing by the holders of not less than 25 per cent. in principal amount of the Bonds then outstanding or if so directed by an Extraordinary Resolution shall (but subject to being indemnified or secured by the holders to its satisfaction), give notice in writing to the Company that the Bonds are immediately due and payable, if any of the following events (an ‘‘Event of Default’’) shall have occurred and be continuing:

(i) there is failure to pay the principal of or any premium on any of the Bonds within 15 business days after the same shall become due and payable in accordance with these Conditions; or

(ii) the Company defaults in performance or observance of or compliance with any of its other obligations (other than the covenant to pay the principal, premium (if any) or interest in respect of the Bonds set out in the Bonds) or the Indenture which default is incapable of remedy or, if in the opinion of the Trustee such default is capable of remedy, such default is not in the opinion of the Trustee remedied within 30 days (or such longer time as the Trustee may consider appropriate in relation to the jurisdiction concerned) after written notice of such default shall have been given to the Company by the Trustee; or

(iii) any other present or future indebtedness of the Company, or any of its Principal Subsidiaries, for or in respect of monies borrowed or raised becomes (or becomes capable of being declared) due and payable prior to its stated maturity by reason of an event of default (howsoever described), or any such indebtedness is not paid when due or, as the case may be, within any applicable grace period originally provided for, or the Company or any of its Principal Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee or indemnity or arrangement or obligation having a like or similar effect (howsoever described) for any monies borrowed or raised by any person, provided that the aggregate amount of the relevant indebtedness and guarantees in respect of which one or more events mentioned above in this paragraph (iii) have occurred and is continuing equals or exceeds U.S.$5,000,000 or its equivalent in any other currency (determined as provided below), and provided further that where two or more of the Company and/or its Principal Subsidiaries are liable for the payment of the same relevant indebtedness or guarantee (whether liable jointly and severally, by way of guarantee, surety or otherwise), any such amount shall be counted once only; or

(iv) an execution by a court having jurisdiction is levied or enforced or sued out, or other legal enforcement process is levied or sued out upon, commenced or issued upon, against or in respect of the whole or any substantial part of the undertaking, property, assets or revenues of the Company and in any such case is not discharged or stayed within 60 days of having been so levied, sued out, commenced or issued; or an execution by a court having jurisdiction is levied or enforced or sued out or other legal enforcement process is levied or sued out upon, commenced or issued upon, against or in respect of the whole or any substantial part of the undertaking, property, assets or revenues of any of the Principal Subsidiaries and in any such case is not discharged or stayed within 60 days of having been so levied, sued out, commenced or issued; or

(v) any person entitled to the benefit thereof shall institute appropriate legal proceedings to enforce any Encumbrance upon the whole or any substantial part of the assets or revenues of the Company; or any person entitled to the benefit thereof shall institute appropriate legal proceedings to enforce any Encumbrance upon the whole or any substantial part of the assets or revenues of any Principal Subsidiary of the Company; or

(vi) the Company becomes bankrupt or insolvent, or consents to or suffers the appointment of an administrator, liquidator (except for the purpose of and followed by a voluntary solvent reorganization, merger, consolidation, amalgamation or other similar arrangement the terms of which have previously been approved by the Trustee or an Extraordinary Resolution of the Bondholders) or receiver (or other similar official) in bankruptcy or insolvency of the Company or in respect of the whole or any substantial part of the undertakings, property, assets or revenues of the Company or the Company stops, suspends or threatens to stop or suspend payment of all or a material part of (or of a particular type of) its debts; or any of the Company’s Principal Subsidiaries becomes bankrupt or insolvent, or consents to or suffers the appointment

of an administrator, liquidator (except for the purpose of and followed by a voluntary solvent reorganization, merger, consolidation, amalgamation or other similar arrangement the terms of which have previously been approved by the Trustee or an Extraordinary Resolution of the Bondholders) or receiver (or other similar official) in bankruptcy or insolvency of any of the Company’s Principal Subsidiaries or in respect of the whole or any substantial part of the undertakings, property, assets or revenues of any of the Company’s Principal Subsidiaries or any of the Company’s Principal Subsidiaries stops, suspends or threatens to stop or suspend payment of all or a material part of (or of particular type of) its debts; or

(vii) an order issued by a court with competent jurisdiction is made or an effective resolution passed by the Company for the winding-up or dissolution of the Company (except for the purpose of and followed by a solvent reconstruction, merger, consolidation, amalgamation or other similar arrangement the terms of which are approved by the Trustee or an Extraordinary Resolution of the Bondholders); or an order issued by a court with competent jurisdiction is made or an effective resolution passed by any of the Company’s Principal Subsidiaries for the winding-up or dissolution of any of the Company’s Principal Subsidiaries (except for the purpose of and followed by a solvent reconstruction, merger, consolidation, amalgamation or other similar arrangement the terms of which are approved by the Trustee or an Extraordinary Resolution of the Bondholders); or

(viii) the Company shall merge, amalgamate or consolidate with any other corporation or entity (with the Company not being the continuing entity) or shall sell or dispose of substantially all its business or assets whether as a single transaction or a number of transactions, related or not, to any person, unless the Company shall have notified the Bondholders of such event in accordance with Condition 15 (with a copy of such notice sent to the Luxembourg Stock Exchange) and the Company and such corporation, entity or person shall have executed an indenture supplemental to the Indenture in form and substance satisfactory to the Trustee providing that such corporation, entity or person shall assume the obligations of the Company under the Bonds, the Indenture and the Agency Agreement and providing that each Bond then outstanding shall be convertible into the class and amount of Shares and other securities, cash and other property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of Shares into which such Bond would have been convertible immediately prior to such consolidation, amalgamation, merger, sale or transfer (assuming for such purpose that the Bonds were convertible at the time of such consolidation, amalgamation, merger, sale or transfer) at the Conversion Price as adjusted from time to time pursuant to the Indenture; provided that such agreement by such other person shall not be required if such assumption shall be effective by operation of law; or

(ix) any governmental authority or agency condemns, seizes, compulsorily purchases or expropriates all or a substantial part of the assets or shares of the Company; or any governmental authority or agency condemns, seizes, compulsorily purchases or expropriates all or a substantial part of the assets or shares of any of the Company’s Principal Subsidiaries; or

(x) proceedings shall have been initiated against the Company or any of its Principal Subsidiaries under any applicable bankruptcy, insolvency or reorganization law and such proceedings shall not have been discharged or stayed within a period of 60 days (or such longer period as the Trustee may consider appropriate in relation to the jurisdiction concerned); or

(xi) any event occurs which under the laws of the ROC has an analogous effect to any of the events referred to in the foregoing paragraphs.

For the purposes of Condition 10 (iii) above, any indebtedness which is in a currency other than U.S. Dollars shall be translated into NT Dollars at the spot rate for the sale of U.S. Dollars against the purchase of the relevant currency quoted by any leading bank in the relevant market selected by the Trustee on any day when the Trustee requests such a quotation for such purposes. If no direct spot rate is available, a rate shall be calculated by reference to the cross-rates through U.S. Dollars and relevant currencies.

Upon any such notice being given to the Company, the Bonds will immediately become due and payable at 100 per cent. of their principal amount, and overdue interest on the amounts due, from the date on which such amounts first become due, shall be payable, to the extent permitted by law, at the rate of 6 per cent. per annum.

The term ‘‘business day’’ for the purpose of this Condition 10 means a day on which commercial banks and foreign exchange markets are open for business in Taipei, Taiwan, ROC.

11. Prescription

Claims in respect of (a) principal and premium (if any) and (b) interest will become unenforceable after 10 years (in the case of (a)) and 5 years (in the case of (b)), respectively, from the relevant date for payment in respect thereof.

12. Enforcement

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

13. Meetings of Bondholders, Modification and Waiver

(A) Meetings

The Indenture contains provisions for convening meetings of Bondholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of the Bonds or the provisions of the Indenture. The quorum at any such meeting for passing an Extraordinary Resolution will be two or more persons holding or representing over 50 per cent. in principal amount of the Bonds for the time being outstanding or, at any such meeting which has been adjourned, two or more persons being or representing Bondholders whatever the principal amount of the Bonds so held or represented unless the business of such meeting includes consideration of proposals, inter alia, (i) to modify the maturity date of the Bonds, (ii) to reduce or cancel the amount of principal, premium or interest payable in respect of the Bonds, (iii) to change the currency of payment of the Bonds, (iv) to modify or cancel the right to convert the Bonds into Shares (except in accordance with Condition 6(B) and 13(B)) or to modify the circumstances in which the Bonds may be redeemed or converted at the option of the Company or to shorten the Conversion Period, (v) to modify the provisions relating to the resetting of the Conversion Price, (vi) to modify the provisions concerning the quorum required at any meeting of the Bondholders or the majority required to pass an Extraordinary Resolution or sign a resolution in writing, in which case the necessary quorum for passing an Extraordinary Resolution will be two or more persons holding or representing over twothirds, or at any adjourned such meeting over one-third, in principal amount of the Bonds for the time being outstanding. An Extraordinary Resolution passed at any meeting of Bondholders will be binding on all Bondholders, whether or not they are present at the meeting, and will be conclusive and binding upon all future Bondholders.

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

(B) Modification of Conversion Right

Notwithstanding Condition 13(A)(iv) above, the Trustee may agree, without the consent of the Bondholders, to any modification to or variation of the Conversion Rights (including modification of and additions to the declarations and statements to be made by Bondholders in a Conversion Notice) which is in its opinion necessary or desirable to effect or facilitate conversion as contemplated in these Conditions and which is not materially prejudicial to the interests of the Bondholders. The Trustee’s agreement may be subject to any condition which the Trustee requires; including but not limited to,

obtaining, at the sole expense of the Company, an opinion of a merchant or investment bank or legal or other expert. Any such modification shall be binding on all the Bondholders. The Company shall prepare a supplement to this Offering Circular and notify the Bondholders of such modification in accordance with Condition 15 and to the Luxembourg Stock Exchange as soon as practicable.

(C) Other Modifications and Waivers

The Trustee may (but shall not be in any way be obligated to) agree, without the consent of the Bondholders, to (i) any modification (except as mentioned above) of, or the waiver or authorization of any breach or proposed breach of, the Bonds or the Indenture which is not, in the opinion of the Trustee, materially prejudicial to the interests of the Bondholders or (ii) any modification of the Bonds or the Indenture which, in the Trustee’s opinion, is of a formal, minor or technical nature or to correct a manifest error or to comply with mandatory provisions of law. In connection with such modification, waiver or authorization, the Trustee may require (at the sole expense of the Company) a certificate from the Company certifying, and a legal opinion advising the Trustee, that the modification, waiver or authorization is of a formal, minor or technical nature or to correct a manifest error or to comply with the mandatory provisions of law. Any such modification, waiver or authorization will be binding on the Bondholders and, unless the Trustee agrees otherwise, any such modification will be notified by the Company to the Bondholders in accordance with Condition 15 and to the Luxembourg Stock Exchange as soon as practicable thereafter.

(D) Exercise of Trustee’s Functions

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

14. Replacement of Certificates

If any Certificate is mutilated, defaced, destroyed, stolen or lost, it may be replaced at the specified office of the Registrar or the Replacement Agent located in Luxembourg upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require (which terms will require, inter alia, that if such Certificate is subsequently deposited for conversion into Shares there shall be paid to the Company on demand NT$33.622 for each U.S.$1.00 of the principal amount of such Bond determined based on the Fixed Exchange Rate). Mutilated or defaced Certificates must be surrendered before replacements will be issued.

15. Notices

In addition to the provisions set forth in the Global Certificate, if applicable, all notices to Bondholders shall be validly given if in writing in English and mailed to them at their respective addresses in the register of Bondholders maintained by the Registrar, and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort).

Any such notice shall be deemed to have been given on the later of the date of such publication and the seventh day after being so mailed.

16. Indemnification

The Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking proceedings to enforce payment unless indemnified to its satisfaction.

17. Agents

The names of the initial Agents and Registrar and their specified offices are set out at the end of this Offering Circular. The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment further or other Agents, provided that the Company will at all times maintain Agents having specified offices in London City, The City of New York and a Western European financial center, which so long as the Bonds are listed on the Luxembourg Stock Exchange and rules of that exchange so require shall be Luxembourg, a Registrar and a Principal Agent. Notice of any such termination or appointment, of any changes in the specified offices of the Agents or of any change in the identity or specified office of the Registrar or the Principal Agent will be given promptly by the Company to the Bondholders, the Trustee and the Luxembourg Stock Exchange.

18. Governing Law and Jurisdiction

(A) Governing Law

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

(B) Jurisdiction

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

(C) Agent for Service of Process

The Company has irrevocably appointed CT Corporation System of 111 Eighth Avenue, New York, NY10011, U.S.A. as its authorized agent for service of process in New York in any Proceedings.

THE FORM OF THE BONDS

The Bonds will be issued at par in registered form, in the denomination of U.S.$10,000 and integral multiples thereof. The Bonds are not issuable in bearer form.

The Bonds will be represented by a global certificate (the ‘‘Global Certificate’’) which will be deposited with the Trustee as common depositary for, and registered in the name of a nominee for, Euroclear and Clearstream, Luxembourg. Upon the issuance of the Global Certificate, Euroclear and Clearstream, Luxembourg will credit, on their internal systems, the respective principal amounts of the individual beneficial interests in the Bonds represented by the Global Certificate to the accounts of persons who have accounts with Euroclear and Clearstream, Luxembourg (‘‘participants’’). These accounts will initially be designated by or on behalf of the Managers. Ownership of beneficial interests in the Global Certificate will be limited to participants and persons who hold interests through participants. Beneficial interests in the Global Certificates will be shown on, and transfers thereof will be effective only through, records maintained by Euroclear and Clearstream, Luxembourg and their participants.

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

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

Owners of interests in the Bonds will not be entitled to receive definitive physical certificates in respect of their interests in the Bonds except in the limited circumstances described below under ‘‘— Registration of Title’’.

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

Any such Bond in physical certificated form issued prior to the 41st day following the original issuance of the Bonds shall bear the legend set out under ‘‘Notice to Investors’’.

The Global Certificate

The Global Certificate contains provisions which apply to the Bonds that are represented by the Global Certificate, some of which modify the effect of the terms and conditions of the Bonds (the ‘‘Conditions’’) set out in this Offering Circular. Terms defined in the Conditions have the same meaning in the paragraphs below. The following is a summary of those provisions:

Meetings

The registered holder (as defined in the Conditions) of the Global Certificate will be treated as being two persons for the purposes of any quorum requirements of a meeting of Bondholders and, at any such meeting, as having one vote in respect of each U.S.$10,000 in principal amount of Bonds for which the Global Certificate is issued. The Trustee may allow a person with an interest in Bonds in respect of which the Global Certificate has been issued to attend and speak at a meeting of Bondholders on appropriate proof of his identity and interest.

Cancellation

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

Trustee’s Powers

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

Conversion

Subject to the requirements of Euroclear and Clearstream, Luxembourg, the Conversion Right attaching to a Bond in respect of which the Global Certificate is issued may be exercised by the presentation to or to the order of the Principal Agent of one or more Conversion Notices duly completed by or on behalf of a holder of a book-entry interest in the Bond. Deposit of the Global Certificate with the Principal Agent together with the relevant Conversion Notice shall not be required. The exercise of the Conversion Right shall be notified by the Principal Agent to the Registrar and the holder of the Global Certificate.

Payment

Payments of principal, premium (if any) and interest in respect of Bonds represented by the Global Certificate will be made without presentation or if no further payment is to be made in respect of the Bonds, against presentation and surrender of the Global Certificate to or to the order of the Principal Agent or such other Paying Agent as shall have been notified to the Bondholders for such purpose.

Notices

So long as the Bonds are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear and Clearstream, Luxembourg or the Alternative Clearing System (as defined below), notices to Bondholders may be given by delivery of the relevant notice to Euroclear and Clearstream, Luxembourg, for communication by it to entitled accountholders in substitution for notification as required by the Conditions except that so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, notices shall also be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort).

Redemption at the Option of the Company

No drawing of Bonds will be required under Condition 8(F) in the event that the Company exercises its call option pursuant to Condition 8(B) in respect of less than the aggregate principal amount of Bonds in respect of which the Global Certificate is issued. Notices will be made by the Company in accordance with the previous paragraph and the Luxembourg Stock Exchange will be informed should the Company exercise the call option.

Redemption at the Option of Bondholders

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

Registration of Title

Certificates in definitive form for individual holdings of Bonds will not be issued in exchange for interests in Bonds in respect of which the Global Certificate is issued, except in case that (a) either Euroclear or Clearstream, Luxembourg (or any alternative clearing system on behalf of which the Bonds evidenced by the Global Certificate may be held) (the ‘‘Alternative Clearing System’’) is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, or (b) the Bonds become immediately due and payable in accordance with the provisions of Condition 10 or if in connection with judicial proceedings brought by the Trustee, the Trustee has been advised that it is necessary or appropriate for Definitive Certificates to be executed and delivered.

Transfers

Transfers of interests in the Bonds with respect to which the Global Certificate is issued shall be effected through the records of the relevant clearing system and its participants in accordance with the Conditions, the Agency Agreement and the rules and procedures of the relevant clearing system.

Enforcement

For the purposes of enforcement of the provisions of the Indenture against the Trustee, the persons named in a certificate of the holder of the Bonds in respect of which the Global Certificate is issued shall be recognized as the beneficiaries of the trusts set out in the Indenture, to the extent of the principal amount of their interest in the Bonds set out in the certificate of the holder, as if they were themselves the holders of Bonds in such principal amounts.

DESCRIPTION OF THE SHARES

The following is a summary of information relating to the share capital of the Company, including the material provisions of the Company’s articles of incorporation, the ROC Securities and Exchange Law (the ‘‘Securities and Exchange Law’’) and regulations promulgated thereunder and the ROC Company Law, all as currently in effect.

General

As of 31st March, 2002, the authorized share capital of the Company was NT$2,800,000,000, divided into 280,000,000 Shares with a par value of NT$10 per Share, of which 50,000,000 Shares have been reserved for conversion of convertible bonds. As of 31st March, 2002, the paid-in capital was NT$1,960,500,000, all of which are issued, outstanding and fully paid in registered form.

Under the ROC Company Law, any change in the Company’s authorized share capital, including decreases in authorized share capital, requires an amendment to the Company’s articles of incorporation, which in turn requires approval at the shareholders’ meeting. Authorized but unissued Shares may be issued subject to the ROC Company Law and the articles of incorporation, upon terms that the board of directors may determine.

There are no material provisions in the articles of incorporation regarding changes in the Company’s authorized share capital and in the rights of the Shares.

The Company has one class of Shares. Pursuant to the ROC Company Law, a company may not issue preferred stock unless authorized by the articles of incorporation. There is no such authorization in the articles of incorporation of the Company.

Other than the Bonds offered hereby, the Company has not issued any warrants, options, convertible debt securities, exchangeable securities or debt securities with warrants attached.

Dividends and Distribution

Under the ROC Company Law, except under certain limited circumstances, a ROC company is not permitted to distribute dividends or make any other distributions to shareholders in any year in which the Company has no earnings.

The ROC Company Law also requires that out of the company’s annual earnings, less prior years’ losses, if any, and outstanding tax, 10 per cent. of which shall be set aside as legal reserve. Allocation to legal reserve need not be made when the accumulated legal reserve equals the paid-in capital. Apart from the aforesaid legal reserve, a company may, by the provisions of its articles of incorporation or with the unanimous agreement of all shareholders, appropriate another sum as a special reserve. Pursuant to the articles of incorporation of the Company, the Company has set aside the required legal reserve and appropriate a special reserve for reduction in shareholders’ equity. In addition, the articles of incorporation provide that the balance of the earnings may be wholly or partially retained to meet the operating needs of the Company as decided by the board of directors, and thereafter any remainder profits of the Company will be distributed as follows: (1) 85 per cent. to 92 per cent. for dividends, (2) 5 per cent. for remuneration of all directors and supervisors, and (3) 3 per cent. to 10 per cent. for employee bonuses. The articles of incorporation further provides that the dividends may be distributed in cash only when the cash flow from the Company’s operating activities in the preceding fiscal year is positive, and when no major capital expenditure is planned within one year in the future. However, the articles of incorporation provide that dividends distributed in cash shall be no less than 10 per cent. of the total dividends.

At each annual ordinary shareholders’ meeting, the board of directors of the Company submits to the shareholders for their approval any proposal for the distribution of a dividend or the making of any other distribution to shareholders from the Company’s earnings (subject to compliance with the requirements mentioned above) for the preceding fiscal year. All holders of the Shares outstanding and fully paid as of the relevant record date are entitled to share equally in any dividend or other distribution so approved.

In addition, if the Company does not have losses, the Company is permitted to make distributions to its shareholders of additional Shares by capitalizing reserves (including the legal reserve and capital surplus of premium from issuing stock and earnings from gifts received). However, amounts payable by capitalizing the legal reserve are limited to 50 per cent. of the total accumulated legal reserve and this capitalization can only be effected when the accumulated legal reserve exceeds 50 per cent. of the paid-in capital of the Company.

New Shares and Preemptive Rights

New Shares may only be issued with the prior approval of the board of directors. If the issuance of any new Shares will result in any change in the authorized share capital, the Company is required under ROC law to amend the articles of incorporation and obtain approval of the shareholders. The Company must also obtain the approval of, or submit a registration with, the ROC SFC.

Under the ROC Company Law, when the Company issues new Shares for cash, existing shareholders who are listed on the shareholders’ register as of the record date have preemptive rights to subscribe for the new issue in proportion to their existing shareholdings, while the Company’s employees, whether or not they are existing shareholders, have a similar right to subscribe for 10 per cent. to 15 per cent. of the new issue. The specific terms and arrangements for such Share issuances will be determined at the time of the Share issuances. Any new Shares that remain unsubscribed at the expiration of the subscription period may be offered to the public or privately placed by the Company. The foregoing provisions regarding preemptive rights of existing shareholders and employees do not apply to Shares issued upon the conversion of the Bonds.

In addition, in accordance with the ROC Securities and Exchange Law, when the Company intends to offer new Shares for cash, it must conduct a public offering of at least 10 per cent. of the Shares to be sold, except under certain circumstances or when exempted by the ROC SFC. This percentage can be increased by a resolution passed at shareholders’ meeting, which would diminish the number of new Shares subject to the preemptive rights of existing shareholders.

Meetings of Shareholders

The ordinary meeting of shareholders of the Company is usually held in San-Chung City, Taipei Hsien, ROC, as determined by the board of directors, within six months of the end of each calendar year. Extraordinary meetings of shareholders may be convened by resolution of the board of directors whenever they consider it necessary, and they must do so if requested in writing by shareholders holding not less than 3 per cent. of the paid-in capital who have held these Shares for more than one year. Extraordinary meetings of shareholders may also be convened by a supervisor of the Company in the case where the board of directors did not or could not convene the shareholders’ meeting, or when the supervisor, for the benefit of the Company, deems necessary. Notice in writing of ordinary and extraordinary shareholders’ meetings stating the place, time and purpose thereof must be dispatched to each shareholder of the Company at least 30 days and 15 days, respectively, prior to the date set for the meeting. Also, according to the regulations of the ROC SFC, the Company is required to publish notices of shareholders’ meetings in a national daily newspaper (which is expected to be the Economic Daily News).

Voting Rights

Under the ROC Company Law, a shareholder has one vote for each common share except for treasury shares. As previously required by law, the Company’s articles of incorporation provide that the vote cast by a shareholder holding more than 3 per cent. of the total issued and outstanding Shares will be discounted by 0.1 per cent. of that portion of the shareholding in excess of the 3 per cent. level. However, the current ROC Company Law has now eliminated this voting discount requirement.

Except as otherwise provided by law, a resolution can be adopted by the holders of at least a majority of the Shares represented at a shareholders’ meeting at which the holders of a majority of all issued and outstanding Shares are present. In accordance with the ROC Company Law, the election of directors and supervisors at a shareholders’ meeting is by means of cumulative voting unless the articles of incorporation of a company provide otherwise. In all matters, except for the election of directors and supervisors, a shareholder must cast all of his votes when voting on any of these matters. The articles of incorporation do not provide other election methods. Ballots for the election of directors are casted separately from those for

the election of supervisors. Candidates for the offices of directors and supervisors may be nominated at the shareholders’ meeting at which ballots for the election are cast. Any shareholder who has a personal interest in a matter to be discussed at the shareholders’ meeting, the outcome of which may impair the company’s interests, shall not vote or exercise voting rights on behalf of another shareholder on such matter. Under the ROC Company Law, the approval by the holders of at least a majority of the Shares represented at a shareholders’ meeting in which a quorum of at least two-thirds of all issued and outstanding Shares are presented is required for major corporation actions, including:

" amendment to the articles of incorporation;
" transfer of the whole or a substantial part of the Company’s business or assets;
" execute, amend or terminate any contract that leases the Company’s whole business, mandates the Company’s operation to other persons, or operates the business frequently for the joint interest of the Company and other persons;
" taking over of the whole of the business or assets of any other company which would have a significant impact on the Company’s operations;
" distribution of any stock dividend;
" the dissolution or amalgamation of a company;
" the merger or division; and
" the removing of directors or supervisors.

In addition, the distribution of any stock dividend by the Company shall be further subject to the approval by or registration with the ROC SFC.

Alternatively, the ROC Company Law provides that in the case of a public company, such as the Company, a resolution may be adopted by the holders of at least two-thirds of the Shares represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding Shares are present. However, if a controlling company holds not less than 90 per cent. 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.

In addition, according to the Corporate Merger and Acquisition Act, as effective on 8th February, 2002, if a company intends to transfer all or substantially all of its business or assets to its subsidiary, subject to the qualifications set forth in the said act, such transaction only needs to be approved by majority board resolution rather than super majority vote by the shareholders in the shareholders’ meeting as required by the ROC Company Law.

A shareholder may be represented at an ordinary or extraordinary meeting by proxy if a valid proxy form is delivered to the Company five days before the commencement of the ordinary or extraordinary shareholders’ meeting. Except for trust enterprises or stock affair agents approved by the ROC SFC, a person who holds a proxy for one or more shareholders who together hold more than 3 per cent. of the total issued Shares, the votes of those shareholders in excess of 3 per cent. of the outstanding Shares shall not be counted.

Under the ROC Company Law, the Company may set a record date and shall close the register of shareholders for a specified period immediately prior to and including the record date in order to determine the shareholders and pledgees that are entitled to rights pertaining to the Shares. The specified period required for the respective record date is as follows:

" ordinary shareholders’ meeting — sixty days;
" extraordinary shareholders’ meeting — thirty days; and
" relevant record date for distribution of dividends, bonuses or other interests — five days.

Annual Financial Statements

Under the ROC Company Law, for a period of at least 10 days before the ordinary shareholders’ meeting, the Company’s annual audited financial statements must be available at the principal office of the Company in San-Chung, for inspection by the shareholders. According to the regulations of the ROC SFC, the Company is required to publish its annual, semi-annual and quarterly non-consolidated financial statements in a national daily newspaper (which is expected to be the Economic Daily News), which are also available in the office of the paying, transfer and conversion agent in London.

Transfers of Common Shares

Under the ROC Company Law, a public company, such as the Company, may issue individual share certificates, one master or no certificate at all to evidence common shares. Under the ROC Company Law, when individual share certificates are issued and delivered to the shareholders, the transfer of the Shares (in registered form) is effected by endorsement and delivery of share certificates. If the Company decides to issue one master certificate to represent the total outstanding and issued shares, the transfer of the Shares will be carried out on the book-entry system. In order to assert shareholders’ rights against the Company, the transferee must have his name and address registered on the Company’s register of shareholders. Shareholders are required to register their respective specimen seal or chop with the Company. The settlement of trading of the Shares is normally carried out on the book-entry system maintained by Taiwan Securities Central Depository Co., Ltd.

Acquisition by the Company of its own Common Shares

Under previous ROC Company Law, a ROC company could not acquire its own shares except for minor exceptions. Any share acquired by a ROC company under such exceptions must be sold by the company at the current market price within six months after its acquisition. Under the current ROC Company Law, a company may purchase up to 5 per cent. of its issued common shares to transfer to employees in accordance with a resolution of its board of directors, passed by a majority vote, at a meeting with at least two-thirds of the directors present.

In addition, under the ROC Securities and Exchange Law as amended and effective on 8th February, 2002, the Company may, pursuant to a board resolution adopted by a majority consent at a meeting attended by more than two-thirds of the directors and pursuant to the procedures prescribed by the ROC SFC, purchase its Shares on the Taiwan Stock Exchange or ROC Over-the-Counter Securities Exchange or by a tender offer for the following purposes:

" for transfer of Shares to its employees;
" to meet the exercise of conversion rights for Shares by holders of bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by the Company; and
" for maintaining its credit and its shareholders’ equity; provided that the Shares so purchased shall be cancelled thereafter.

The total Shares so purchased by the Company shall not exceed 10 per cent. of its total issued and outstanding Shares. In addition, the total amount for purchase of the Shares shall not exceed the aggregate amount of the retained earnings, the premium from stock issues and the realized portion of the capital reserve.

The Shares purchased by the Company pursuant to the first two purposes above shall be transferred to the intended transferees within three years after the purchase, otherwise the Shares shall be cancelled. To cancel the Shares pursuant to the third purpose above, the Company shall complete amendment registration for such cancellation within six months after the purchase.

The Shares purchased by the Company shall not be pledged or hypothecated. In addition, the Company may not exercise any shareholders’ rights attaching to such Shares. The Company’s affiliates, directors, supervisors, managers and their respective spouses and minor children and/or nominees are prohibited from selling the Shares of the Company held by them during the period in which the Company purchases its own Shares.

In addition to the share purchase restriction, the ROC Company Law further provides that subsidiaries of the Company may not acquire the Company’s Shares or the shares of the Company’s majority-owned subsidiaries if the majority of the outstanding voting shares or paid-in capital of such subsidiary is directly or indirectly held by the Company.

Liquidation Rights

In the event of the liquidation of the 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 number of Shares that each director, supervisor, manager or significant shareholder (i.e. a shareholder who, together with his or her spouse, minor children or nominees, holds more than 10 per cent. of the Shares) of the Company can sell or transfer on the Taiwan Stock Exchange daily is limited by the ROC Securities and Exchange Law. Further, they may sell or transfer the Shares on the Taiwan Stock Exchange only after reporting to the ROC SFC at least three days before the transfer, provided that such reporting is not required if the number of Shares transferred does not exceed 10,000.

Limitation on Shareholdings in the Company and Reporting Obligations

The ROC Securities and Exchange Law requires each director, supervisor, manager or significant shareholder to report any change in that person’s shareholding to the Company before each fifth day of each month and the Company shall report the same to the ROC SFC before the fifteenth day of each month. Such persons are also required to report to the Company immediately the pledge of their Shares and the Company shall report the same to the ROC SFC within five days from the pledge date. A person or a person who along with other persons acquires more than 10 per cent. of the issued and outstanding Shares of the Company shall report to the ROC SFC, within ten days from the acquisition date, the acquisition purpose, funding sources and other information required by the ROC SFC.

TAXATION

The Bonds may be deemed by taxing authorities in various jurisdictions to be issued with original issue discount. Prospective investors should consult their own advisers concerning the tax consequences of an investment in Bonds or Shares.

ROC Taxation of Non-residents

The following is a summary under present law of the principal ROC tax consequences of the ownership and disposition of Bonds and Shares to a Non-Resident Individual or Non-Resident Entity that holds Bonds or Shares (each a ‘‘Non-ROC Holder’’). As used in the preceding sentence, a ‘‘Non-Resident Individual’’ is a foreign national individual who owns Bonds or Shares and is not physically present in the ROC for 183 days or more during any calendar year and a ‘‘Non-Resident Entity’’ is a corporation or a noncorporate body that owns Bonds or Shares and is organized under the laws of a jurisdiction other than the ROC and has no fixed place of business or other permanent establishment in the ROC.

Withholding Tax on Payments of Premium and Interest

Premium (if any) and interest payable on the Bonds to Non-ROC Holders is subject to a withholding tax in the ROC currently equal to 20 per cent. of the gross amount of such premium (if any) and interest at the time of payment.

Dividends on the Shares

Dividends (whether in cash or Shares) declared by the Company out of retained earnings and paid out to holders of Shares are normally subject to ROC income tax collected by way of withholding at the time of distribution. The current rate of withholding for Non-ROC Holders adopted by the tax authorities is 20 per cent. of the amount of the distribution (in the case of cash dividends) or the par value of the Shares (in the case of stock dividends). Distributions of stock dividends declared by the Company out of capital reserves are currently not subject to ROC withholding tax. In accordance with the ROC Income Tax Law, a 10 per cent. retained earnings tax will be imposed on a company for its after-tax earnings generated after 1st January, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares dividends out of those retained earnings, a maximum amount of up to 10 per cent. of the declared dividends will be credited against the 20 per cent. withholding tax imposed on the Non-ROC Holder.

Capital Gains

Under current ROC law, a gain realized upon the sale or other disposition of securities is exempt from ROC income tax. This exemption will apply to a sale or other disposition of Bonds or Shares.

ROC law currently provides no specific provisions regarding the ROC income tax consequences of a conversion of Bonds into Shares. Without further clarification from the ROC tax authorities, it is impossible to conclude definitively that gain on the conversion of Bonds into Shares will not be deemed as taxable gain, additional interest income (subject to the 20 per cent. withholding tax) or otherwise subject to other ROC taxes. Transfers of Bonds by Non-ROC Holders are regarded as transactions outside the ROC and thus any gains derived therefrom are not subject to ROC income tax.

Securities Transaction Tax

The ROC Government imposes a securities transaction tax that will apply to sales of Bonds and Shares. The transaction tax, which is payable by the seller, is generally levied on sales of Shares at the rate of 0.3 per cent. of the transaction price and on sales of Bonds at the rate of 0.1 per cent. of the transaction price. However, according to a letter issued by the ROC MOF dated 17th January, 2001, sales of the Bonds outside of the ROC are exempted from such securities transaction tax. According to the amended Statute for Upgrading Industries effective as of 1st February, 2002, no securities transaction tax will be imposed on the sale of the Bonds. Such tax credit is valid from 1st February, 2002 to 31st December, 2009.

Securities transaction tax and/or gift tax may be imposed in relation to the converting Bondholder’s designation of another person to be the holder of Shares upon conversion of the Bonds.

There is no ROC securities transaction, stamp, issue or registration tax imposed on the issuance of Shares upon conversion of the Bonds.

Estate Tax and Gift Tax

ROC estate tax is payable on any property within the ROC of a deceased Non-Resident Individual, and ROC gift tax is payable on any property within the ROC donated by a Non-Resident Individual. Estate tax is currently imposed at rates ranging from 2 per cent. of the first NT$600,000 to 50 per cent. of amounts in excess of NT$100 million. Gift tax is imposed at rates ranging from 4 per cent. of the first NT$600,000 donation to 50 per cent. of donation in excess of NT$45 million. Under ROC estate and gift tax laws, the Bonds and Shares will be deemed to be located in the ROC without regard to the location of the owner.

Tax Treaty

At present, the ROC has income tax treaties with Indonesia, Singapore, New Zealand, Australia, South Africa, Gambia, Swaziland, Malaysia, Macedonia, Vietnam and The Netherlands. It is unclear whether a Non-ROC Holder will be considered to own Bonds or Shares for the purposes of such treaties. Accordingly, a holder of Bonds or Shares who is otherwise entitled to the benefit of a treaty should consult its own tax advisers concerning eligibility for benefit under the treaty with respect to Bonds or Shares. The ROC government has announced a plan to suspend or terminate the tax treaty with South Africa in reaction to South Africa’s decision to discontinue its diplomatic recognition of the ROC.

Tax Reform

In order to increase Taiwan’s competitiveness, an amendment to the ROC Income Tax Law (‘‘Amendment’’) was enacted on 1st January, 1998, to integrate the corporate income tax and the shareholder dividend tax with the aim of eliminating the double taxation effect for resident shareholders of ROC companies. The Amendment will have the following effect upon Non-ROC Holders of the Shares. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operation — Income Tax’’.

A 10 per cent. retained earnings tax will be imposed on the Company for its after-tax earnings generated after 1st January, 1998 which are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the Company declares dividends out of those retained earnings, a maximum amount of up to 10 per cent. of the declared dividends will be credited against the 20 per cent. withholding tax imposed on the Non-ROC Holders of its Shares.

Preemptive Rights

Distributions of preemptive rights for the Shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of preemptive rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3 per cent. of the gross amount received. Proceeds derived from sales of statutory subscription rights that are not evidenced by securities are subject to capital gains tax at the rate of (i) 25 per cent. of the gains realized for Non-ROC Entity Holders, and (ii) 35 per cent. of the gains realized for Non-ROC Individual Holders. Subject to compliance with ROC law, the Company has the sole discretion to determine whether preemptive rights are evidenced by securities or not.

UNDERWRITING

Chinatrust Commercial Bank, Offshore Banking Branch (the ‘‘Lead Manager’’), Citicorp International Limited, Sinpac Securities (Hong Kong) Co., Ltd. and Capital Far East Limited (together with the Lead Manager, the ‘‘Managers’’) have, pursuant to a Subscription Agreement dated as of 26th June, 2002 (the ‘‘Subscription Agreement’’), severally and not jointly agreed with the Company to subscribe and purchase the Bonds at the issue price of 100 per cent. of their principal amount less the combined management and underwriting commission and selling fee of 2.0 per cent. on the aggregate principal amount of the Bonds.

The respective obligations of the Managers to subscribe for the Bonds are subject to termination if certain conditions are not met prior to the time of delivery of the Global Certificate which is expected to be 5: 00 p.m., Hong Kong time, on 2nd July, 2002. In such event, the listing of the Bonds on the Luxembourg Stock Exchange would not become effective.

The Company has agreed in the Subscription Agreement to indemnify the Managers against certain liabilities, including the liabilities under the Securities Act, in connection with the offering of the Bonds.

The Bondholders who purchase the Bonds from the Managers may be required to pay stamp taxes and other charges in accordance with the laws and practice of the country of purchase in addition to the issue price of the Bonds.

Selling Restrictions

No action has been or will be taken in any jurisdiction that would permit a public offering of the Bonds or the Shares issuable upon conversion of the Bonds, or the possession, circulation or distribution of this Offering Circular or any other material relating to the Company, the Bonds or the Shares issuable upon conversion of the Bonds, in any jurisdiction where action for the purpose is required. Accordingly, neither the Bonds nor any Shares issuable upon conversion of the Bonds may be offered or sold, directly or indirectly, and neither this Offering Circular nor any other offering material or advertisements in connection with the Bonds or the Shares issuable upon conversion of the Bonds may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction.

United States

Each Manager has acknowledged and agreed that the Bonds and the Shares to be issued upon conversion of the Bonds have not been and will not be registered under the Securities Act, and may not (i) as part of their distribution at any time or (ii) prior to the 40th day after the closing of the offering of the Bonds be offered or sold within the United States or to, or for the account or benefit of, U.S. persons. The Bonds are being offered and sold outside the United States to non-U.S. persons in reliance on Regulation S.

In addition, until 40 days after the closing of the offering of the Bonds, an offer or sale of the Bonds or the Shares to be issued upon conversion of the Bonds within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act.

United Kingdom

Each Manager has represented and agreed that:

(1) it has not offered or sold and prior to the date six months after the issue of the Bonds and will not offer or sell any Bonds to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offer of Securities Regulations 1995;
(2) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom; and

(3) it has only issued or passed onto any person in the United Kingdom any document received by it in connection with the issue of the Bonds, if that person is of a kind described in Articles 19, 47 or 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (as amended) or is a person to whom such document may otherwise lawfully be issued or passed on.

The ROC

Each Manager has acknowledged and agreed that the Bonds may not be offered, sold or delivered, directly or indirectly, in the ROC, as part of the distribution of the Bonds.

Hong Kong

Each Manager has acknowledged and agreed that (1) it has not offered or sold and will not offer or sell in Hong Kong, by means of any document, any Bonds other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong; and (2) it has not issued and will not issue any invitation or advertisement relating to the Bonds in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to Bonds which are intended to be disposed of to persons outside Hong Kong or only to persons whose business involves the acquisition, disposal or holding, of securities, whether as principal or agent.

Japan

The Bonds and Shares have not been and will not be registered under the Securities and Exchange Law of Japan. Accordingly, each Manager has represented and agreed that it has not, directly or indirectly, offered or sold and will not, directly or indirectly, offer or sell any Bonds or Shares in Japan or to, or for the benefit of, any resident of Japan, except that the Managers may offer and sell such Bonds or Shares pursuant to an exemption from the registration requirements of, and otherwise in compliance with the Securities and Exchange Law of Japan and other applicable laws and regulations of Japan. As used in this paragraph, ‘‘resident of Japan’’ means any person who resides in Japan, including any corporation or other entity organized under the laws of Japan.

Singapore

Each Manager has acknowledged and agreed that this Offering Circular has not been and will not be registered as a prospectus with the Registrar of Companies in Singapore. Accordingly, each Manager has represented and agreed that it has not offered or sold and will not offer or sell any Bonds nor has it circulated or distributed nor will it circulate or distribute this Offering Circular or any other offering document or material relating to the Bonds, directly or indirectly, (i) to persons in Singapore other than under circumstances in which such offer or sale does not constitute an offer or sale of the Bonds to the public in Singapore or (ii) to the public or any member of the public in Singapore other than pursuant to, and in accordance with the conditions of, an exemption invoked under Division 5A of Part IV of the Companies Act, Chapter 50 of Singapore and to persons to whom the Bonds may be offered or sold under such exemption.

LEGAL MATTERS

Certain legal matters with respect to the Bonds will be passed upon for the Company by Lee and Li, Attorneys at Law, and for the Managers by Baker & McKenzie, Hong Kong. Baker & McKenzie, Hong Kong will rely upon Lee and Li, Attorneys at Law with respect to certain matters of ROC law. Lee and Li, Attorneys at Law will rely upon Baker & McKenzie, Hong Kong with respect to certain matters of United States federal and New York laws.

INDEPENDENT AUDITORS

The financial statements of the Company as of and for the years ended 31st December, 2001, 2000 and 1999 included in this Offering Circular have been audited by Reality United Firm, independent auditors, as stated in their report appearing herein.

The financial statements of the Company for the three months ended 31st March, 2002 and 2001 included in this Offering Circular have been prepared by Deloitte & Touche, independent auditors, as stated in their report appearing herein.

GENERAL INFORMATION

Registered Office and Principal Place of Business

The Company is registered with the Ministry of Economic Affairs of the ROC under a uniform registration number of 30435973. The Company’s registered office and the principal place of business is located at No.16, Lane 530, Chung-Cheng N. Rd., San-Chung City, Taipei Hsien, Taiwan, ROC.

Company Confirmation

The Company, having made all reasonable inquiries, confirms that this Offering Circular contains all information with respect to the Company, the Company and its subsidiaries as a whole, the Bonds, and the Shares which is material in the context of the issue and offering of the Bonds (including all information required by applicable laws of the ROC), that the information contained herein (save as set out below) is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the Bonds, make this Offering Circular as a whole or any of such information or the expression of any such opinions or intentions misleading in any material respects, that all reasonable inquiries have been made by the Company to verify the accuracy of such information, and that this Offering Circular does not contain an untrue statement of a material fact or omit to state a material fact required to be stated herein or necessary in order to make the statements herein, in the light of the circumstances under which they are made, not misleading. The Company accepts responsibility accordingly. Information provided herein with respect to the ROC, its political status and economy, has been derived from government and other public sources, and the Company accepts responsibility only for accurately extracting information from such sources.

Authorizations

The offering of the Bonds was authorized and approved by the Company’s board of directors on 1st April, 2002 and by the ROC SFC on 18th June, 2002.

Listing and Trading

Application has been made to list the Bonds on the Luxembourg Stock Exchange. The legal notice relating to the issue of the Bonds and the Company’s articles of incorporation will be registered prior to the listing with the Chief Registrar of the District Court in Luxembourg (Greffier en Chef du Tribunal d’Arrondissement de et a` Luxembourg), where such documents will be available for inspection and where copies thereof can be obtained upon request. According to Chapter VI, Article 3, point A/II/2 of the Rules and Regulations of the Luxembourg Stock Exchange the Bonds shall be freely tradable and therefore no transaction made on the Luxembourg Stock Exchange shall be cancelled. As long as the Bonds are listed on the Luxembourg Stock Exchange, the Company will maintain a paying agent, a conversion agent and a transfer agent in Luxembourg.

Documents Available

Copies (and certified English translations where the documents are not in English) of the following documents may be inspected and freely obtainable at the specified office of the Paying Agent in Luxembourg for as long as the Bonds are listed on the Luxembourg Stock Exchange:

" the Company’s articles of incorporation;
" a copy of the annual reports of the independent accountants, containing the audited consolidated financial statements of the Company as at and for the years ended 31st December, 2001, 2000 and 1999;
" a copy of the annual reports of the independent accountants, containing the audited nonconsolidated financial statements of the Company as at and for the years ended 31st December, 2001, 2000 and 1999;

" a copy of the quarterly reports of independent accountants, containing the unaudited nonconsolidated financial statements of the Company as at and for the three months ended 31st March, 2002 and 2001;
" the Subscription Agreement relating to the Bonds; and
" the Indenture constituting the Bonds (which includes the form of the Global Certificate) and the Agency Agreement.

In addition, copies of this Offering Circular and the most recent consolidated and non-consolidated annual financial statements of the Company and the Company’s unaudited quarterly and audited semiannual financial statements (in each case in English), will be available at the specified office of the Paying Agent in Luxembourg free of charge for as long as the Bonds are listed on the Luxembourg Stock Exchange. All notices, including all financial notices concerning the Company and notices of the Company’s general meetings, to holders of the Bonds will be published in a daily newspaper of general circulation (which is expected to be the Luxemburger Wort).

Change in Independent Auditors

The independent auditors of the Company has been changed from Reality United Firm, a local accounting firm to Deloitte & Touche, an international accounting firm as from 13th April, 2002, in pace with the Company’s intention to achieve presence in global market.

Material Change

Except as disclosed herein, there has been no material change in the financial position of the Company since 31st December, 2001, the date of the latest financial statements contained herein.

Governing Law

The Subscription Agreement, the Agency Agreement and the Indenture in connection with the offering are governed by the Laws of the State of New York.

Clearance

The Bonds have been accepted for clearance by Euroclear and Clearstream, Luxembourg. Relevant clearance and settlement information for the Bonds is set forth below:

Common Code . . . . . 014977210 ISIN . . . . . . . . . . . . XS0149772104

Litigation

Neither the Company, nor any member of the Company, is involved in any legal or arbitration proceedings which may have, or have had in the past twelve months, a significant adverse effect on the Company or the financial position of the Group, nor is the Company aware that any such proceedings pending or threatened. See ‘‘Business — Legal Proceedings’’.

Depositary Receipt Facility

The Company has not at the date of this Offering Circular established or authorized the establishment of any depositary receipt facility. Accordingly, conversion into DRs is not currently available.

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

The Company’s financial statements were prepared using accounting principles, procedures and reporting practices generally accepted in the Republic of China and are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions (including the U.S. and U.K.) other than those in the Republic of China. The generally accepted accounting principles in the ROC, or ‘‘ROC GAAP’’, differ in many material respects from generally accepted accounting principles in the U.S. or ‘‘U.S. GAAP’’. Significant differences between ROC GAAP and U.S. GAAP applicable to the Company are summarized below. The summary should not be construed to be all-inclusive or exhaustive. In addition, no attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which transactions and events are presented in the Company’s financial statements or notes thereto. Further, no attempt has been made to identify future differences between ROC GAAP and U.S. GAAP as a result of prescribed changes in accounting standards.

Subject Bonuses to Employees, Directors and Supervisors . . . . . . . . Shareholder Bonuses . . . . Capital Surplus . . . . . . .	ROC GAAP Under ROC GAAP, employee bonuses and remuneration of directors and supervisors paid in accordance with the Company’s articles of incorporation as a part of the distribution of earnings are recorded as an appropriation from retained earnings in the period the distribution of earnings is approved at the Company’s shareholders’ meeting. If employee bonuses are paid through the issuance of Shares, the amount transferred from retained earnings is based on the par value of the shares issued. The remuneration of directors and supervisors must be paid in cash and may not be paid through the issuance of Shares. Shareholder bonuses (stock dividends) of the Company are recorded as a reduction to its retained earnings for the par value of the share issued, and a like amount recorded to the capital stock account. The following items are treated by the Company as capital surplus under ROC GAAP: (a) any premium on issuance of capital stock; (b) any after-tax gain on disposal of fixed assets; (c) any donated surplus; (d) any revaluation increment of fixed assets; and (e) the value of assets of a company acquired in a merger in excess of assumed liabilities and the consideration paid for shares of such company in connection with the acquisition. The above (b) accounting treatments were in effect until 28th December, 2001. Thereafter, with the enactment of a new business accounting law, the accounting for such transactions has become similar to U.S. GAAP.	U.S. GAAP
		U.S. GAAP requires that all such bonuses and remuneration be recorded as compensation expense at a defined measurement date. In addition, if the employee bonuses are paid in the form of shares, the fair value of the shares issued is used to determine the amount of the expense. Stock dividends are recorded as a reduction to retained earnings based on the fair value of the share issued, and a like amount recorded to the capital stock and capital surplus accounts. Under U.S. GAAP, items (a) and (c) of the preceding column are reported as additional paid- in capital. Under U.S. GAAP, item (b) remains a component of retained earnings. Items (d) and (e) of the preceding column are not permitted. In addition, costs relating to the listing of a company’s equity share are offset against the proceeds as opposed to being expensed in the income statement.

Subject Depreciation of Property, Plant and Equipment . Investments in Debt and Equity Securities . . . . Retained Earnings Tax . . Consolidation Policy . . . . Total Comprehensive Income . . . . . . . . . . .	ROC GAAP In practice, depreciation is generally provided using the guideline service lives as prescribed by the ROC Tax Authorities plus one additional year as salvage value. ROC SFC regulations applicable to public companies require that when property, plant and equipment has been fully depreciated over the prescribed service life and the underlying asset continues to be used, the remaining book value (i.e., the salvage value portion) is depreciated over the asset’s remaining economic life. Investments in debt and marketable equity securities are stated at the lower of amortized cost or market value. Long-term investments in non-listed equity securities that represent less than 20 per cent. of the investee’s common stock ownership are stated at cost, subject to a permanent impairment test. Stock dividends received are recorded as an increase in voting stock and not as investment income. Companies in the ROC are subject to a ten per cent. tax on the profits retained and earned after 31st December, 1997. If the retained profits are distributed to the shareholders in the following year, the tax can be avoided. Under ROC GAAP, income tax expense is recorded in the statement of income in the following year if the earnings are not distributed to the shareholders. Subsidiaries whose total sales and total assets are less than ten per cent. of the parent company are not required to be consolidated. No display of total comprehensive income is required.	U.S. GAAP
		Depreciation is provided over the asset’s estimated useful life. Once an asset has been fully depreciated, there is no additional depreciation if the asset continues to be used in the business. Investments in debt and marketable equity securities are classified in one of three categories: trading, held-to-maturity, or available-for-sale. Debt and marketable equity securities classified as trading securities are reported at fair value with unrealized gains and losses included in earnings; debt securities classified as held-to-maturity securities are reported at amortized cost; and, debt and marketable equity securities classified as available-for-sale securities are reported at fair value with unrealized gains and losses reported in accumulated comprehensive income. The accounting for long-term investments in non- listed equity securities is similar under U.S. GAAP as under ROC GAAP. Stock dividends received are recorded as investment income based on the fair value of the stock. Under U.S. GAAP, income tax expense related to the ten per cent. retained profit tax is recorded in the statement of income in the year that the profits were earned based on management’s estimate of the amount of profits to be retained. All subsidiaries controlled by the parent are required to be consolidated unless control is temporary. Total comprehensive income is required to be displayed for all years in which an income statement is presented. Comprehensive income comprises net income and other comprehensive income such as unrealized gains and losses on securities and foreign currency translation adjustments.

Subject Acquisition of Businesses Presentation of Non- consolidated Financial Statements . . . . . . . . Compensated Absences . . Accounting for Derivative Financial . . . . . . . . . .	ROC GAAP Under ROC GAAP, if a company acquires an enterprise by issuing shares of its stock in exchange for 100 per cent. of the outstanding shares of the enterprise’s stock, the fair value of the net assets acquired may be used to determine the fair value of the acquired enterprise. Under this method of accounting, the shares of stock issued by the acquirer are recorded at the fair value of the net assets acquired. No goodwill is recognized by the acquirer under this method. If a company acquires an enterprise using cash as the purchase consideration. The difference between the purchase consideration and the fair value of the net assets acquired is accounted for as a consolidation debit asset and amortized to income over five years. Also, ROC GAAP has no specific accounting practice related to the recognition of liabilities in connection with an acquisition of a business. Under ROC Securities and Futures Commission requirements, non-consolidated financial statements of the Company are presented as the primary financial statements and consolidated financial statements as supplemental financial statements. The Company’s investment in its subsidiaries is accounted for under the equity method of accounting in the non-consolidated financial statements. The net income from the Company’s subsidiaries is included in investment income as a one-line item in the non-operating section of the non-consolidated statement of income. The Company’s investment in its subsidiaries is included in long-term equity investments as a one-line item in the non- consolidated balance sheet. ROC GAAP has no specific accounting practice regarding compensated absences. There are no definitive accounting standards, other than certain disclosure requirements, under ROC GAAP which address accounting for derivative financial instruments such as foreign currency options, futures, interest rate or foreign currency swaps.	U.S. GAAP
		Under U.S. GAAP, business combinations subsequent to 1st July, 2001 are accounted for based on the ‘‘purchase’’ method. The difference between purchase consideration and historical net assets acquired is allocated based on the fair values of the net assets and other identifiable intangible assets acquired, with any residual accounted for as goodwill. In such allocation of purchase consideration, purchased research and development costs would be expensed upon consummation of the acquisition. In an acquisition resulting in the exchange of shares of stock, the purchase consideration is measured based on the fair value of exchanged stock of either the acquirer or acquiree, whichever stock has a more readily determinable market value. The income of the acquirer includes the operations of the acquiree subsequent to the acquisition. Under U.S. GAAP, parent-company-only non- consolidated financial statements are not allowed to be presented as the primary financial statements. Compensated absences must be accrued based on the liability for employees’ rights to receive compensation for future absences when certain conditions are met. Under SFAS No. 133 ‘‘Accounting for Derivative Instruments and Hedging Activities’’, as amended, accounting for derivative financial instruments is in large part determined by the purpose for which the instrument was entered into.

INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Earnings for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Changes in Stockholders’ Equity for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Balance Sheets as of 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Earnings for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Changes in Stockholders’ Equity for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Cash Flows for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Non-Consolidated Financial Statements for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Balance Sheets as of 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Income for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Changes in Stockholders’ Equity for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Consolidated Statements of Cash Flows for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Non-Consolidated Financial Statements for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .	Page
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Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Earnings for the years ended
31st December, 2001, 2000 and 1999
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Balance Sheets
as of 31st December, 2001, 2000 and 1999
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Earnings for the years ended
31st December, 2001, 2000 and 1999
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Changes in Stockholders’ Equity
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Cash Flows
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Non-Consolidated Financial Statements
for the years ended 31st December, 2001, 2000 and 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Balance Sheets
as of 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Income for the three months periods ended
31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Changes in Stockholders’ Equity
for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Consolidated Statements of Cash Flows
for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Non-Consolidated Financial Statements
for the three months periods ended 31st March, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

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These English financial statements expressed in thousands of New Taiwan dollars were translated from the financial statements prepared originally in Chinese language.

F-1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

PHIHONG ENTERPRISE CO., LTD.:

We have audited the consolidated balance sheets of PHIHONG ENTERPRISE CO., LTD. and its subsidiaries as of 31st December, 2001, 2000 and 1999, and the related consolidated statements of earnings, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of PHIHONG USA CORP., investees accounted for under the equity method. These statements were audited by other auditors whose reports thereon have been furnished to us. Our opinion, insofar as it relates to the investments in PHIHONG USA CORP., which amounted to NT$271,883,000, NT$396,753,000, and NT$319,241,000 at 31st December, 1990, 2000 and 2001 respectively, and related investment income of NT$3,323,000 NT$5,351,000 and NT$563,956,000 for the years ended 31st December, 2001, 2000 and 1999, respectively is based solely on the reports of the other auditors.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PHIHONG ENTERPRISE CO., LTD. as of 31st December, 2001, 2000 and 1999, and the results of its consolidated operations and its consolidated cash flows for the years then ended in conformity with "Regulations Governing the Preparation of Financial Statements of Public Companies" and accounting principles generally accepted in the Republic of China.

The translation of the 2001 New Taiwan dollar amounts into U.S. Dollar amounts has been made in conformity with the basis stated in Note 2, and such U.S. Dollars amounts are presented solely for the convenience of readers outside the Republic of China.

Reality United Firm, CPAs

4th April, 2002

The above auditors’ report and the following financial statements are English translations of the Chinese auditors’ report and financial statements prepared for and used in the Republic of China. The accompanying financial statements were prepared using accounting principles, procedures and reporting practices generally accepted in the Republic of China and are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than those in the Republic of China. The standards, procedures and practices utilized to audit such financial statements are those generally accepted and applied in the Republic of China.

F-2

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PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States Dollars, otherwise stated)

ASSETS Current Assets: Cash and Cash Equivalents (Note 2 and 3) . . . . . . Cash in Bank – Assigned . Short-term Investment . . . Notes and Accounts Receivable (Note 4). . . Accounts Receivable — Related Parties (Note 9). . . . . . . . . . . Other Receivables . . . . . . Other Receivable — Related Parties (Note 9) Inventories (Note 2 and 5) Prepaid expenses and Other Current Assets . . . . . . Total Current Assets . . Long-term Investment (Note 6). . . . . . . . . . . . . Property, Plant and equipment (Note 2 and 7) Land . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . Transportation Equipment. Furniture and Fixtures . . . Miscellaneous Property and Equipment . . . . . . . . . Prepayments for Land and Equipment . . . . . . . . . Less: Accumulated Depreciation . . . . . Net Property, Plant and Equipment . . . . . . . Intangible Assets: Deferred Pension Costs . . Other assets: Unamortized Expenses . . . Refundable Deposits (Note 8). . . . . . . . . . . Total Other Assets. . . . Total Assets . . . . . . . . . . . .		2001	% 35.28 — 1.02 17.23 0.24 0.80 0.15 17.73 1.10 73.55 7.59 1.73 1.17 0.38 0.20 7.40 9.65 (2.53) 18.00 0.19 0.41 0.26 0.67 100.00	2000	% 28.47 0.05 0.58 31.17 0.23 1.51 0.16 21.64 0.59 84.40 1.85 1.87 0.43 0.33 0.40 5.75 6.23 (2.20) 12.81 0.30 0.34 0.30 0.64 100.00	1999	% 29.89 1.09 — 35.35 0.00 1.01 0.08 22.83 0.86 91.11 0.31 2.05 0.56 0.26 0.38 4.20 1.84 (2.00) 7.29 0.45 0.47 0.37 0.84 100.00
	USD $ 68,958 — 1,998 33,672 464 1,571 297 34,648 2,148 143,756 14,825 3,374 2,283 737 382 14,480 18,861 (4,944) 35,173 382 799 504 1,303 $195,439	NTD $2,413,461 — 69,934 1,178,472 16,251 54,992 10,402 1,212,650 75,184 5,031,346 518,852 118,095 79,890 25,798 13,359 506,803 660,115 (173,029) 1,231,031 13,368 27,951 17,637 45,588 $6,840,185		NTD $1,634,185 2,832 32,994 1,788,765 13,368 86,802 9,156 1,242,134 33,808 4,844,044 106,166 107,637 24,754 19,052 23,014 329,635 357,598 (126,114) 735,576 17,327 19,334 17,270 36,604 $5,739,717		NTD $1,325,206 48,389 — 1,567,644 18 44,772 3,660 1,012,408 38,239 4,040,336 13,828 91,089 24,754 11,357 16,721 186,242 81,659 (88,755) 323,067 20,043 20,878 16,178 37,056 $4,434,330

(See accompanying notes to financial statements.)

F-4

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS — (Continued) 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States Dollars, otherwise stated)

LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Short-term Borrowings. . . Short-term Notes and Bills Payable . . . . . . . . . . . Accounts Payable — Related Parties (Note 9) Notes and Accounts Payable (Note 8). . . . . Other Payables . . . . . . . . Accrued Expenses . . . . . . Other Payables — Related Parties (Note 9). . . . . . Other Current Liabilities. . . . . . . . . . Total Current Liabilities. . . . . . . . Other Liabilities . . . . . . . . . Total Liabilities . . . . . . . Stockholders’ Equity: (Note 10) Contributed Capital . . . . . Additional Paid-in Capital Retained Earnings . . . . . . Cumulative Translation Adjustment. . . . . . . . . Net Loss Not Recognized as Pension Cost. . . . . . Total Stockholders’ Equity . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . .		2001	% 3.91 3.72 0.02 23.21 1.64 3.17 — 0.25 35.92 9.46 45.38 28.66 2.53 19.27 4.16 — 54.62 100.00	2000	% 2.40 — 0.03 27.33 1.74 4.62 0.01 0.19 36.32 10.23 46.55 26.74 3.01 21.29 2.41 — 53.45 100.00	1999	% 7.58 — 0.01 26.01 0.06 5.09 — 0.56 39.31 9.33 48.64 24.13 3.84 22.81 0.58 (0.00) 51.36 100.00
	USD $ 7,651 7,270 37 45,350 3,204 6,197 — 491 70,200 18,488 88,688 56,016 4,941 37,659 8,135 — 106,751 $195,439	NTD $ 267,760 254,455 1,286 1,587,210 112,139 216,891 — 17,198 2,456,939 647,054 3,103,993 1,960,500 172,926 1,318,044 284,722 — 3,736,192 $6,840,185		NTD $ 137,694 — 1,665 1,568,473 100,344 265,191 446 10,976 2,084,789 587,286 2,672,075 1,534,600 172,926 1,221,945 138,171 — 3,067,642 $5,739,717		NTD $ 336,258 — 499 1,153,473 2,805 225,663 — 24,591 1,743,289 413,681 2,156,970 1,070,000 169,902 1,011,687 25,839 (68) 2,277,360 $4,434,330

(See accompanying notes to financial statements.)

F-5

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, except earnings per share)

Net Sales . . . . . . . . . . . . . . Cost of Goods Sold . . . . . . . Gross Profit . . . . . . . . . . . . Unrealized Gross Profit . . . . Realized Gross Profit. . . . . . Operating Expenses . . . . . . . Operating Income (loss) . . . . Other Income and Gain . . . . Commission Income . . Investment Income . . . Interest Income . . . . . . Gain on Disposal of Property and Equipment . . . . . . . Foreign Exchange Income . . . . . . . . . Miscellaneous Income . Other Expenses and Loss . . . Loss on Disposal of Property and Equipment Interest Expenses . . . . . . Foreign Exchange Loss . . Loss for Market Price Decline and Obsolete and Slow-moving Inventories . . . . . . . . . Miscellaneous Expenses and Loss . . . . . . . . . . Earnings Before Income Tax. Income Tax Expense (Note 2 and 11) . . . . . . . Net Earnings. . . . . . . . . . . . Earnings Per Share . . . . . . .		2001	% 100.00 78.18 21.82 (0.11) 21.71 12.83 8.88 3.36 1.28 10.96 (2.39) 8.57	2000	% 100.00 79.61 20.39 — 20.39 11.01 9.38 3.71 0.48 12.61 (2.90) 9.71	1999	% 100.00 71.54 28.46 — 28.46 13.57 14.89 2.28 0.64 16.53 (3.43) 13.10
	USD $208,419 162,941 45,478 (239) 45,239 26,749 18,490 6,999 44 422 1,557 379 676 3,921 2,657 74 198 — 1,143 1,242 22,832 (4,967) $ 17,865 $ 0.09	NTD $7,294,466 5,702,767 1,591,699 (8,351) 1,583,348 936,188 647,160 244,976 1,548 14,757 54,492 13,280 23,651 137,248 93,009 2,591 6,936 — 40,000 43,482 799,127 (173,855) $ 625,272 $ 3.19		NTD $7,212,725 5,742,130 1,470,595 — 1,470,595 793,800 676,795 267,743 13,570 34,586 45,640 956 13,644 159,347 35,045 103 13,119 — — 21,823 909,493 (208,923) $ 700,570 $ 3.57		NTD $4,927,765 3,525,367 1,402,398 — 1,402,398 668,663 733,735 112,172 10,413 — 58,221 150 — 43,388 31,384 343 13,946 8,962 — 8,133 814,523 (169,209) $ 645,314 $ 4.20

(See accompanying notes to financial statements.)

F-6

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED 31ST DECEMBER, 2001, 2000 AND 1999 (Expressed in thousands of New Taiwan dollars, otherwise stated)

Balance, 1st January, 1999 . . . . . Stock dividends issued . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . Net earnings for 1999 . . . . . . . . Capital surplus from gain on disposal of assets . . . . . . . . . Net loss not recognized as pension cost . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments for long-term equity investments. . . . . . . . . Balance, 31st December, 1999 . . Stock dividends issued . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . Net earnings for 2000 . . . . . . . . Capital surplus from gain on disposal of assets . . . . . . . . . Capital surplus from long-term investment . . . . . . . . . . . . . . Reverse net loss not recognized as pension cost . . . . . . . . . . . . . Cumulative translation adjustments for long-term equity investments. . . . . . . . . Balance, 31st December, 2000 . . Stock dividends issued . . . . . . . . Cash dividends issued . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . Net earnings for 2001 . . . . . . . . Cumulative translation adjustments for long-term equity investments. . . . . . . . . Balance, 31st December, 2001 . .	Contributed Capital $650,000 420,000 1,070,000 464,600 1,534,600 425,900 $1,960,500	Additional Paid-in Capital $169,240 662 169,902 1,259 1,765 172,926 $172,926	Retained Earnings $ 809,140 (420,000) (22,105) 645,314 (662) 1,011,687 (464,600) (24,453) 700,570 (1,259) 1,221,945 (425,900) (76,730) (26,543) 625,272 $1,318,044	Cumulative Translation Adjustment $ 80,286 (54,447) 25,839 112,332 138,171 146,551 $284,722	Net Loss not Recognized as Pension Cost $— (68) (68) 68 — $—	Total $1,708,666 — (22,105) 645,314 — (68) (54,447) 2,277,360 — (24,453) 700,570 — 1,765 68 112,332 3,067,642 — (76,730) (26,543) 625,272 146,551 $3,736,192

(See accompanying notes to financial statements.)

F-7

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

Cash Flows from Operating Activities: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . Loss for market price decline of marketable securities . . . . Investment income-equity method . . . . . . . . . . . . . . . . . . Provision for pension . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (Gain) on disposal of property and equipment . . . . . . Loss (Gain) on sale of short-term investments. . . . . . . . . . Loss on obsolete of property and equipment . . . . . . . . . . . Unrealized profit from intercompany transactions . . . . . . . Deferred income tax (benefit) expense . . . . . . . . . . . . . . . (Increase) decrease in notes and accounts receivable . . . . . (Increase) decrease in inventories . . . . . . . . . . . . . . . . . . (Increase) decrease in other receivables . . . . . . . . . . . . . . (Increase) decrease in other current assets. . . . . . . . . . . . . Increase (decrease) in notes and accounts payable . . . . . . . Increase (decrease) in accrued expenses . . . . . . . . . . . . . . Increase (decrease) in other payables . . . . . . . . . . . . . . . . Increase (decrease) in other current liabilities . . . . . . . . . . Increase (decrease) in other liabilities . . . . . . . . . . . . . . . Net cash inflow (outflow) from operating activities . . . . Cash Flows from Investing Activities Increase in long-term investments . . . . . . . . . . . . . . . . . . . . Increase in short-term investments . . . . . . . . . . . . . . . . . . . . Proceeds from sale of short-term investments . . . . . . . . . . . . Acquisition of properties . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of properties . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in refundable deposits. . . . . . . . . . . . . . . (Increase) decrease in cash in bank-assigned . . . . . . . . . . . . . Increase in unamortized expenses . . . . . . . . . . . . . . . . . . . . Net cash inflow(outflow) from investing activities . . . . . . .	2001 USD NTD $ 17,865 $ 625,272 2,394 83,782 — — (82) (2,861) 362 12,682 (305) (10,689) — — 26 926 239 8,351 1,150 40,242 17,319 606,164 842 29,484 909 31,810 (544) (19,030) 525 18,358 (1,380) (48,300) 337 11,795 178 6,222 (568) (19,894) 39,268 1,374,314 (11,969) (418,905) (1,055) (36,940) — — (15,403) (539,082) 527 18,453 (10) (367) 81 2,832 (689) (24,105) $(28,518) $(998,114)	2000 NTD $ 700,570 57,568 — (31,893) 9,516 282 (2,693) 409 — 132,183 (239,967) (229,726) (38,368) 6,372 416,166 39,528 97,539 (960) 32,749 949,275 (63,207) (492,994) 462,693 (483,245) 25,426 (1,092) 45,557 (15,067) $(521,929)	1999 NTD $ 645,314 45,758 3,291 — (5,052) 193 — 128 — 150,762 (897,081) (498,058) (23,255) (14,693) 538,376 (4,551) (1,352) (3,495) 363 (63,352) (13,828) — 18,633 (132,016) 2,143 (882) 3,000 (16,967) $(139,917)
	USD $ 17,865 2,394 — (82) 362 (305) — 26 239 1,150 17,319 842 909 (544) 525 (1,380) 337 178 (568) 39,268 (11,969) (1,055) — (15,403) 527 (10) 81 (689) $(28,518)

(See accompanying notes to financial statements.)

F-8

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued) FOR THE YEARS ENDED 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

Cash Flows from Financing Activities: Increase (decrease) in short-term borrowings. . . . . . . . . . . . . Increase (decrease) in short-term notes and bills payable . . . . Increase (decrease) in lease payment payable . . . . . . . . . . . . Increase (decrease) in accounts payable-related parties . . . . . . Cash Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation to employees directors and supervisors . . . . . . Cash inflow (outflow) from financing activities. . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . Cash and cash equivalent, beginning of year . . . . . . . . . . . . . . . Cash and cash equivalent, end of year . . . . . . . . . . . . . . . . . . . Supplementary Cash Flow Information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing and Financing Activities Not Affecting Cash Lease payment payable-current portion. . . . . . . . . . . . . . . . . Stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquiring cost of machinery investment . . . . . . . . . . . . . . . .	2001 USD NTD $ 3,716 $ 130,066 7,270 254,455 — — (13) (446) (2,192) (76,730) (758) (26,543) 8,023 280,802 3,493 122,274 22,266 779,276 46,692 1,634,185 $68,958 $2,413,461 $ 209 $ 7,329 $ 2,850 $ 99,732 $ — $ — $12,169 $ 425,900 $ — $ —	2000 NTD $ (198,564) — (1,110) 446 — (35,998) (235,226) 116,859 308,979 1,325,206 $1,634,185 $ 13,152 $ 25,294 $ — $ 464,600 $ —	1999 NTD $ 116,639 — (2,611) — — (10,560) 103,468 (54,447) (154,248) 1,479,454 $1,325,206 $ 12,1127 $ 34,156 $ 1,110 $ 420,000 $ 2,482
	USD $ 3,716 7,270 — (13) (2,192) (758) 8,023 3,493 22,266 46,692 $68,958 $ 209 $ 2,850 $ — $12,169 $ —

(See accompanying notes to financial statements.)

F-9

PHIHONG ENTERPRISE CO., LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31ST DECEMBER, 2001, 2000 AND 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

1. ORGANIZATION

PHIHONG ENTERPRISE CO., LTD., the Company was established on December, 1972 and engaged mainly in the trade of hi-tech products. Since 1973 the Company has primarily engaged in manufacturing of power supply. In 1981, the Company relocated in Sanchung City, Taipei, Taiwan. The Company’s authorized common stock 280,000,000 shares, issued and outstanding common stock amounted to 196,050,000 shares as of 31st December,1999.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) Basis of consolidated financial statement presentation

The accompanying consolidated financial statements have been prepared in accordance with R.O.C. generally accepted accounting principles.

Under ROC GAAP, a company is required to consolidate financial results of any subsidiary (any corporation or other business entity more than 50 per cent. of the outstanding voting stock of which is owned directly or indirectly by the company) whose total assets or net sales exceed 10 per cent. of the company’s non-consolidated total assets or net sales, as the case may be. In addition, the ROC Securities and Futures Commission requires the Company to consolidate the financial statements of each subsidiary whose total assets or net sales exceed three per cent. of the company’s nonconsolidated total assets or net sales, if the total assets or net sales or all non-consolidated subsidiaries of the company exceed 30 per cent. of the company’s non-consolidated total assets or net sales, as the case may be.

The companies included in these consolidated financial statements include Phihong USA Corp., Phihong International Corp. and Phitek International Co., Ltd.

Phihong International Corp was established on May 1996 in the Territory of British Virgin Islands. Phihong International Corp. entrusted its subsidiaries — Phihong (Dongguan) Electronics Co., Ltd., Phihong (Shanghai) Electronics Co., Ltd. and Tianjin Phitek Electronics Ltd. which were established in Mainland China.

Phitek International Co., Ltd. was established on August 1999 in the Territory of British Virgin Islands. Phitek International Co., Ltd. entrusted its subsidiary — Dongguan Phitek Electronics Co., Ltd.

(2) Foreign currency transactions

Foreign currency transactions are translated into New Taiwan dollars at the rates prevailing on the transaction dates. Gains or losses on foreign exchange are recognized in current operations for the differences in foreign exchange rates subsequently applied when the foreign currency receivables and payables are settled. Foreign currency receivables and payables are translated into New Taiwan dollars at the approximate market rate of exchange prevailing on the balance sheet date and the resulting unrealized gains or losses are recognized in current operations.

Foreign subsidiaries use the local currency as the functional currency for financial reporting purposes. Accordingly, local currency financial statements are translated into New Taiwan dollars at currency rates of exchange with gains for losses resulting from translation included in the determination of comprehensive income. Cumulative translation adjustments are reflected in a separate component of stockholders’ equity.

F-10

(3) Cash equivalents

Cash equivalents represent all highly liquid debt instruments, such as commercial paper and bankers’ acceptance purchased with a maturity of three months or less, and other highly liquid investments with insignificant interest rate risk.

(4) Short-term investment

Stocks of listed companies, bankers’ acceptance and commercial papers purchased are recorded as short-term investments.

Short-term investments are stated at the lower of cost (weighted average cost for stocks, and individual cost for bankers’ acceptance and commercial papers) or market value. Stock dividends received are not recognized as investment income but accounted for as an increase in the number of capital shares invested.

(5) Allowance for bad debts

The amount of allowance for bad debts is determined on the basis of the ages of notes and accounts receivable, the credit worthiness, the quality of customer and the collectibility of each account.

(6) Inventories

Inventories are stated at the lower of the cost or market value. Cost is determined by weight average cost. Market value of raw material and work in process are determined by using the replacement cost; market value of finished goods and merchandise are determined by using the net realizable value.

(7) Property, plant and equipment

Property, plant and equipment are stated at cost.

Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets.

Upon disposal of these fixed assets, the related cost, revaluation increment and accumulated depreciation are to be eliminated from the accounts. The gains resulting from the disposal of these fixed assets should be first posted as income of the year, then, transferred, after deducting related income tax, to capital surplus, in accordance with the related regulations.

(8) Long-term investment

The Company adopts the provisions of Statements of Financial Accounting Standards (SFAS) NO. 5 — ‘‘Long-term Equity Investments’’ Investments in debt securities are accounted for under the cost method.

The statements requires the use of the equity method when accounting for investments in which the investor has the ownership of 20 per cent. or more of the outstanding stock of the investee. In addition, for the investor having more than 50 per cent. ownership of the outstanding stock of the investee, preparation of consolidated financial report is required.

(9) Unamortized expenses and amortization

Unamortized expenses represent leasehold improvements and computer software, are amortized over 3-10 years on the straight-line method.

F-11

(10) Income Tax

The Company adopts the provisions of Statements of SFAS NO. 22 — ‘‘Accounting for Income Taxes.’’ Under SFAS NO. 22, deferred income tax is determined based on differences between the financial statements and tax basis of assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to be reversed. The income tax effects due to taxable temporary differences are recognized as deferred income tax assets. The realization of the deferred tax assets is evaluated and a valuation allowance is recognized accordingly.

Classification of the deferred income tax assets or liabilities as current or non-current depends on the related assets or liabilities. If not so related, they are classified on the basis of the expected reversal date.

3. CASH AND CASH EQUIVALENTS

Cash on hand . . . . . . . . . . . . . . . . . . . . . Cash in banks . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $ 73 $ 2,550 68,885 2,410,911 $68,958 $2,413,461	31st December, 2000 NTD $ 2,402 1,631,783 $1,634,185	31st December, 1999
	USD $ 73 68,885 $68,958		NTD $ 2,728 1,322,478
			$1,325,206

4. NOTES AND ACCOUNTS RECEIVABLE

Notes receivable . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . Accounts receivables-related parties. . . . . . Allowance for bad debts. . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $ 174 $ 6,101 33,918 1,187,108 497 17,385 (453) (15,871) $34,136 $1,194,723	31st December, 2000 NTD $ 11,543 1,792,603 13,501 (15,514) $1,802,133	31st December, 1999
	USD $ 174 33,918 497 (453) $34,136		NTD $ 15,583 1,567,575 18 (15,514)
			$1,567,662

5. INVENTORIES

Finished goods . . . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . . . Raw materials. . . . . . . . . . . . . . . . . . . . . Materials in transit . . . . . . . . . . . . . . . . . Allowance for market price decline . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $17,499 $ 612,442 10,491 367,169 7,747 271,131 93 3,270 (1,182) (41,362) $34,648 $1,212,650	31st December, 2000 NTD $ 646,132 284,734 323,698 3,804 (16,234) $1,242,134	31st December, 1999
	USD $17,499 10,491 7,747 93 (1,182) $34,648		NTD $ 426,756 258,904 340,847 17,813 (31,912)
			$1,012,408

As of 31st December, 2001, 2000 and 1999, inventories were insured against casualty loss of NT$609,292,000, NT$317,760,000 and NT$295,483 respectively.

F-12

6. LONG-TERM INVESTMENT

31st December, 2001	31st December, 2001	31st December, 2001
Percentage of Holding Investment Income Book Value USD USD 100% $(310) $ (77) 60% 790 1,564 3.33% — 1,429 48% (70) 469 100% 6 5,720 100% 6 5,720 $ 422 $14,825 31st December, 2001		Book Value
		USD $ (77) 1,564 1,429 469 5,720 5,720
		$14,825
Percentage of Holding Investment Income Book Value NTD NTD 100% $(10,865) $ (2,712) 60% 27,632 54,752 3.33% — 50,000 48% (2,400) 16,422 100% 195 200,195 100% 195 200,195 $14,757 $518,852 31st December, 2000		Book Value
		NTD $ (2,712) 54,752 50,000 16,422 200,195 200,195
		$518,852
Percentage of Holding Investment Income Book Value NTD NTD 90% $ (5,604) $ 7,583 60% 37,497 43,635 100% — 4,948 3.33% — 50,000 $31,893 $106,166 31st December, 1999		Book Value
		NTD $ 7,583 43,635 4,948 50,000
		$106,166
Percentage of Holding 90%	Investment Income NTD $—	Book Value
		NTD 13,828

31st December, 2001	31st December, 2001	31st December, 2001
Cost USD $ 3,374 2,283 737 382 14,480 18,861 $40,117	Accumulated Depreciation USD $ 148 485 182 158 3,971 — $4,944	Net Book Value
		USD $ 3,226 1,797 555 224 10,510 18,861
		$35,173

F-13

31st December, 2001	31st December, 2001	31st December, 2001
Cost Accumulated Depreciation Net Book Value NTD NTD NTD $ 118,095 $ 5,175 $ 112,920 79,890 16,982 62,908 25,798 6,371 19,427 13,359 5,534 7,825 506,803 138,967 367,836 660,115 — 660,115 $1,404,060 $173,029 $1,231,031 31st December, 2000		Net Book Value
		NTD $ 112,920 62,908 19,427 7,825 367,836 660,115
		$1,231,031
Cost Accumulated Depreciation Net Book Value NTD NTD NTD $107,637 $ 3,454 $104,183 24,754 15,556 9,198 19,052 5,582 13,470 23,014 11,249 11,765 329,635 90,273 239,362 357,598 — 357,598 $861,690 $126,114 $735,576 31st December, 1999		Net Book Value
		NTD $104,183 9,198 13,470 11,765 239,362 357,598
		$735,576
Cost NTD $ 91,089 24,754 11,357 16,721 186,242 81,659 $411,822	Accumulated Depreciation NTD $ 2,019 14,118 4,725 7,171 60,722 — $88,755	Net Book Value
		NTD $ 89,070 10,636 6,632 9,550 125,520 81,659
		$323,067

As of 31st December, 2001, 2000 and 1999, property, plant and equipment were insured against casualty loss of NT$569,104,000, NT$320,137,000 and NT$118,634,000.

8. NOTES AND ACCOUNTS PAYABLE

Notes payable . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . Accounts payable — related parties . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $18,030 $ 631,016 27,320 956,194 37 1,286 $45,387 $1,588,496	31st December, 2000 NTD $ 667,429 901,044 1,665 $1,570,138	31st December, 1999
	USD $18,030 27,320 37 $45,387		NTD $ 677,041 476,432 499
			$1,153,972

F-14

9. TRANSACTIONS WITH RELATED PARTIES

(1) Name of/and relationship with related parties

Names of related party Densei-Lambda K.K. . . . . . . . . . . . . . . . . . . . . . . . . Guang-lai Investment Co., Ltd. . . . . . . . . . . . . . . . . . Hon-sheng Investment Co., Ltd. . . . . . . . . . . . . . . . . Phihong (Shanghai) Electronics Co., Ltd. . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . Phihong PWM Brazil Ltda . . . . . . . . . . . . . . . . . . . .	Relationship
	One of directors of the Company Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method

Names of related party
Densei-Lambda K.K. . . . . . . . . . . . . . . . . . . . . . . . .
Guang-lai Investment Co., Ltd. . . . . . . . . . . . . . . . . .
Hon-sheng Investment Co., Ltd. . . . . . . . . . . . . . . . .
Phihong (Shanghai) Electronics Co., Ltd. . . . . . . . . . .
Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . .
Phihong PWM Brazil Ltda . . . . . . . . . . . . . . . . . . . .

Relationship

One of directors of the Company
Investee company accounted for under equity method
Investee company accounted for under equity method
Investee company accounted for under equity method
Investee company accounted for under equity method
Investee company accounted for under equity method

(2) Significant related party transactions

(a) Sales

(b)	Names of related party Densei-Lambda K.K. . . . . . . Phihong Japan Corp. . . . . . . Phihong PWM Brazil Ltda . . Purchase	2001 USD NTD % $ 13 $ 439 0.01 7 246 0.00 $3,675 $128,629 1.76	2000 NTD % $ 327 0.00 10 0.00 $160,899 2.23	1999
				NTD % $562 0.01 — — $ — —

Names of related party 2001 USD NTD % Densei-Lambda K.K. . . . . . . $125 $ 4,358 0.09 Phihong Japan Corp. . . . . . . $433 $15,163 0.33 Others Names of related party 31st December, 2001 USD NTD % Accounts Receivable Densei-Lambda K.K . . . . $ — $ — — Phihong PWM Brazil Ltda 497 17,385 1.44 Accounts Payable Phihong Japan Corp. . . . . — — — Densei-Lambda K.K... . . . $ 37 $ 1,286 0.13 2001 USD Other Receivables Guang-lai Investment Co., Ltd. . . . . . . . . $ 1 Hon-sheng Investment Co., Ltd. . . . . . . . 1 Phihong Japan Corp. . . . . . . . . . . . . . . . 109 Phihong (Shanghai) Electronics Co., Ltd. . — Densei-Lambda K.K. . . . . . . . . . . . . . . . — Phihong PWM Brazil Ltda . . . . . . . . . . . 187 Other Payables Phihong Japan Corp. . . . . . . . . . . . . . . . . . $ —	2000 1999 NTD % NTD % $ 9,533 0.21 $681 0.02 $27,741 0.60 $ — — 31st December, 2000 31st December, 1999 NTD % NTD % $ — — $ 18 0.00 13,501 0.75 — — 604 0.07 — — $ 1,061 0.12 $499 0.02 2000 1999 NTD NTD NTD $ 21 $ — $— 21 — — 3,808 — — — 1,646 — — 3,551 — 6,552 3,959 — $ — $ 446 $—	1999	1999
		NTD % $681 0.02 $ — — 31st December, 1999
	NTD $ — 13,501 604 $ 1,061 NTD $ 21 21 3,808 — — 6,552 $ —
USD $ 1 1 109 — — 187 $ —			NTD $— — — — — — $—

F-15

(d) Transaction of property

Names of related party Phihong PWM Brazil Ltda . . . . . . . . . . . .		2001	2001	Cost NTD $233	2000 Selling price Cost NTD NTD $2,467 $2,136	1999	1999
	Selling Price USD $25	Cost USD $7	Selling price NTD $892		Selling price NTD $2,467	Selling price NTD $—	Cost
							NTD $—

10. STOCKHOLDERS’ EQUITY

(1) Common stock

The Company’s authorized common stock is NT$2,800,000,000 or 280,000,000 shares with a par of NT$10 per share as of 31st December, 2001, the issued and outstanding common stock amounted to NT$1,960,500,000 or 196,050,000 shares.

(2) Distribution of retained earnings

As stipulated in the Company’s articles, the annual net income (after income tax) must be used to offset accumulated deficit first, succeedingly appropriate 10 per cent. of the annual net income as legal reserve, and then to pay regular dividends; the remainder, if any, appropriating bonus to employees at the range between 3 per cent. and 10 per cent. and remunerations to directors and supervisors at 5 per cent.. The rest will be distributed by Board of Directors and presented to board of shareholders to ask for approval.

11. INCOME TAX

(1) The Company’s maximum statutory income tax rate is 25 per cent..

The components of income tax benefit are summarized as follows:

Currently payable . . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . .	2001 USD $3,817 1,150 $4,967	2001 NTD $133,614 40,241 $173,855	2000 NTD $ 76,740 132,183 $208,923	1999
				NTD $ 18,446 150,763
				$169,209

(2) The differences between income tax benefit and income tax payable calculated by applying the statutory rate to taxable income are summarized as follows:

Income tax payable . . . . . . . . . . . . . . . . . . . . Expenses disallowed for tax purpose . . . . . . . . Investment credit. . . . . . . . . . . . . . . . . . . . . . Allowance for deferred income tax assets . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . .	2001 USD $5,757 6 (647) — (149) $4,967	2001 NTD $201,538 205 (22,660) — (5,228) $173,855	2000 NTD $229,589 (173) (20,964) — 471 $208,923	1999
				NTD $204,491 1,323 (17,583) (15,000) (4,022)
				$169,209

F-16

(3) Balances of imputation tax credit account as of 31st December, 2001, 2000 and 1999 are as follows:

Imputation tax credit account . . .	31st December, 2001 USD NTD $2,195 $76,818	31st December, 2000 NTD $29,718	31st December, 1999
			NTD $28,739

12. COMMITMENTS

(1) As of 31st December, 2001, the Consolidated Company provided bills and notes for the fulfillment of short-term borrowings amounting to NT$330,000,000.
(2) In March 1999, the Consolidated Company entered into real estate agreements with Formosa Plastic Company and Nan Ya Plastic Company for acquisition of land, with a contract price amounting to NT$466,712,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to NT$373,370,000.
(3) As of 31st December, 2001, the Consolidated Company’s unused letters of credit for the purpose of importing raw materials are USD 42,000 and JPY 23,296,000.
(4) In October 2001, the Company entered into real estate agreements with Yue-Jie Company for acquisition of land and plant, with a contract price amounting to NT$190,000,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to NT$66,500,000.
(5) During Year 2001, 2000 and 1999, the Consolidated Company entered into construction agreements with third parties amounting to NT$13,095,000 and RMB23,794,000. As of 31st December, 2001, the related outstanding obligations amounted to NT$2,656,000 and RMB14,601,000.
(6) In January 2000, Phihong (Dongguan) Electronics Co., Ltd. entered into an agreement with Qing-Xi Company for acquisition of plant, with a contract price amounting to RMB23,500,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to RMB21,150,000.
(7) Phihong (Shanghai) Electronics Co., Ltd. entered into real estate agreements for acquisition of office buildings, with contract prices amounting to US$1,384,000. As of 31st December, 2001, the related outstanding obligations amounted to US$914,000.
(8) Tianjin Phitek Electronics Ltd., entered into an agreement in November, 2001 for acquisition of office building, with a contract price amounting to RMB17,000,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to RMB3,400,000.

13. SUBSEQUENCE

(1) The title of real estate acquired from Formosa Plastic Company and Nan Ya Plastic Company has been transferred to the Consolidated Company at 26th February, 2002.
(2) The title of real estate acquired from Yue-Jie Company has been transferred to the Consolidated Company at 14th January, 2002.

F-17

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

PHIHONG ENTERPRISE CO., LTD.:

We have audited the balance sheets of PHIHONG ENTERPRISE CO., LTD. as of 31st December, 2001, 2000 and 1999, and the related statements of earnings, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of PHIHONG USA CORP., PHIHONG PWM BRAZIL LTDA, and EPI TECHNOLOGY (HONG KONG) CO., LIMITED, investees accounted for under the equity method. These statements were audited by other auditors whose reports thereon have been furnished to us. Our opinion, insofar as it relates to the investments in PHIHONG USA CORP., PHIHONG PWM BRAZIL LTDA, and EPI TECHNOLOGY (HONG KONG) CO., LIMITED, which amounted to NT$125,730,000 at 31st December, 2001, and related investment income of NTD28,555,000 for the year ended 31st December, 2001, is based solely on the reports of the other auditors.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PHIHONG ENTERPRISE CO., LTD. as of 31st December, 2001, 2000 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with ‘‘Regulations Governing the Preparation of Financial Statements of Public Companies’’ and accounting principles generally accepted in the Republic of China.

We have also audited the consolidated financial statements of PHIHONG ENTERPRISE CO., LTD. and subsidiaries for the years ended 31st December, 2001, 2000 and 1999 (not accompanied herein) on which we have issued our report thereon expressing an unqualified opinion.

Reality United Firm, CPAs

4th April, 2002

F-18

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PHIHONG ENTERPRISE CO., LTD.

BALANCE SHEETS

31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

ASSETS Current Assets: Cash and Cash Equivalents (Note 2 and 3) . . . . . . . . . . Cash in Bank — Assigned . . . . Notes and Accounts Receivable (Note 4). . . . . . . . . . . . . . . Accounts Receivable — Related Parties (Note 9). . . . . . . . . . Other Receivables . . . . . . . . . . Other Receivable — Related Parties (Note 9). . . . . . . . . . Inventories (Note 2 and 5) . . . . Prepaid expenses and Other Current Assets . . . . . . . . . . Total Current Assets . . . . . . Long-term Investments (Note 6) . . Property, Plant and equipment (Note 2 and 7) Land . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . Transportation Equipment. . . . . Furniture and Fixtures . . . . . . . Miscellaneous Property and Equipment . . . . . . . . . . . . . Prepayments for Land and Equipment . . . . . . . . . . . . . Less: Accumulated Depreciation . . . . . . . . . Net Property, Plant and Equipment . . . . . . . . . . . Intangible Assets: Deferred Pension Costs . . . . . . Other assets: Unamortized Expenses . . . . . . . Refundable Deposits (Note 8) . . Total Other Assets. . . . . . . . Total Assets . . . . . . . . . . . . . . . .		2001	% 23.73 — 11.96 1.07 0.53 2.84 13.03 0.62 53.78 38.83 0.47 0.28 0.09 0.08 1.18 5.48 (0.75) 6.83 0.16 0.27 0.13 0.40 100.00	2000 NTD % 1,381,592 19.62 2,833 0.04 1,208,187 17.15 425,908 6.05 80,134 1.14 20,356 0.29 1,093,244 15.53 30,707 0.43 4,242,961 60.25 2,387,500 33.91 39,758 0.56 24,754 0.35 9,030 0.13 6,695 0.09 110,343 1.57 234,261 3.33 (60,592) (0.86) 364,249 5.17 17,327 0.25 11,435 0.16 18,243 0.26 29,678 0.42 $7,041,715 100.00	1999 NTD % $ 824,363 15.27 48,389 0.90 1,448,058 26.83 168,336 3.12 44,772 0.83 20,828 0.39 908,601 16.83 32,461 0.60 3,495,808 64.77 1,671,124 30.96 39,758 0.74 24,754 0.46 4,561 0.09 6,032 0.11 87,356 1.62 71,064 1.31 (51,167) (0.95) 182,358 3.38 20,043 0.37 19,460 0.36 8,515 0.16 27,975 0.52 $5,397,308 100.00
	USD $ 57,624 — 29,036 2,592 1,290 6,899 31,645 1,510 130,596 94,285 1,136 670 212 191 2,876 13,308 (1,831) 16,562 382 658 316 974 $242,799	NTD $2,016,783 — 1,016,226 90,712 45,137 241,469 1,107,546 52,865 4,570,738 3,299,872 39,758 23,460 7,414 6,695 100,655 465,755 (64,070) 579,667 13,368 23,035 11,054 34,089 $8,497,734		NTD 1,381,592 2,833 1,208,187 425,908 80,134 20,356 1,093,244 30,707 4,242,961 2,387,500 39,758 24,754 9,030 6,695 110,343 234,261 (60,592) 364,249 17,327 11,435 18,243 29,678 $7,041,715	NTD $ 824,363 48,389 1,448,058 168,336 44,772 20,828 908,601 32,461 3,495,808 1,671,124 39,758 24,754 4,561 6,032 87,356 71,064 (51,167) 182,358 20,043 19,460 8,515 27,975 $5,397,308

(See accompanying notes to financial statements.)

F-20

PHIHONG ENTERPRISE CO., LTD.

BALANCE SHEETS — (Continued) 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Short-term Borrowings. . . . . . . Short-term Notes and Bills Payable . . . . . . . . . . . . . . . Accounts Payable — Related Parties (Note 9). . . . . . . . . . Notes and Accounts Payable (Note 8). . . . . . . . . . . . . . . Other Payables . . . . . . . . . . . . Accrued Expenses . . . . . . . . . . Other Payable — Related Parties (Note 9). . . . . . . . . . . . . . . Other Current Liabilities . . . . . Total Current Liabilities. . . . Other Liabilities . . . . . . . . . . . . . Total Liabilities . . . . . . . . . . . Stockholders’ Equity: (Note 10) Contributed Capital . . . . . . . . . Additional Paid-in Capital . . . . Retained Earnings . . . . . . . . . Cumulative Translation Adjustment. . . . . . . . . . . . . Net Loss Not Recognized as Pension Cost. . . . . . . . . . . . Total Stockholders’ Equity . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . .		2001	% 2.41 2.99 22.73 17.51 1.10 1.57 — 0.08 48.39 7.64 56.03 23.07 2.04 15.51 3.35 — 43.97 100.00	2000 NTD % $ 137,694 1.96 — — 1,714,355 24.35 1,328,794 18.87 62,313 0.88 150,918 2.14 446 0.01 5,456 0.08 3,399,976 48.29 574,097 8.15 3,974,073 56.44 1,534,600 21.79 172,926 2.46 1,221,945 17.35 138,171 1.96 — — 3,067,642 43.56 $7,041,715 100.00	1999 NTD % $ 336,258 6.23 — — 1,053,754 19.52 1,112,742 20.62 2,805 0.05 151,547 2.81 25,775 0.48 2,652 0.05 2,685,533 49.76 434,415 8.04 3,119,948 57.80 1,070,000 19.83 169,902 3.15 1,011,687 18.74 25,839 0.48 (68) (0.00) 2,277,360 42.20 $5,397,308 100.00
	USD $ 5,851 7,270 55,185 42,496 2,677 3,819 — 187 117,485 18,563 136,048 56,016 4,941 37,659 8,135 — 106,751 $242,799	NTD $ 204,785 254,455 1,931,370 1,487,320 93,690 133,658 — 6,562 4,111,840 649,702 4,761,542 1,960,500 172,926 1,318,044 284,722 — 3,736,192 $8,497,734		NTD $ 137,694 — 1,714,355 1,328,794 62,313 150,918 446 5,456 3,399,976 574,097 3,974,073 1,534,600 172,926 1,221,945 138,171 — 3,067,642 $7,041,715	NTD $ 336,258 — 1,053,754 1,112,742 2,805 151,547 25,775 2,652 2,685,533 434,415 3,119,948 1,070,000 169,902 1,011,687 25,839 (68) 2,277,360 $5,397,308

(See accompanying notes to financial statements.)

F-21

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF EARNINGS

For the Years ended 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, Except Earnings Per Share)

Net Sales . . . . . . . . . . . . . . . . . . Cost of Goods Sold . . . . . . . . . . . Gross Profit . . . . . . . . . . . . . . . . Unrealized Gross Profit . . . . . . . . Realized Gross Profit. . . . . . . . . . Operating Expenses . . . . . . . . . . . Operating Income (loss) . . . . . . . . Other Income and Gain . . . . . . . . Commission Income . . . . . . . . Investment Income . . . . . . . . . Interest Income . . . . . . . . . . . . Gain on Disposal of Property and Equipment . . . . . . . . . . . . . Foreign Exchange Income . . . . Miscellaneous Income . . . . . . . Other Expenses and Loss . . . . . . . Loss on Disposal of Property and Equipment . . . . . . . . . . . . . Interest Expenses . . . . . . . . . . Loss for Market Price Decline and Obsolete and Slow- moving Inventories . . . . . . . Miscellaneous Expenses and Loss . . . . . . . . . . . . . . . . . Earnings Before Income Tax. . . . . Income Tax Expense (Note 2 and 11) . . . . . . . . . . . . . . . . . Net Earnings. . . . . . . . . . . . . . . . Earnings Per Share . . . . . . . . . . .		2001	% 100.00 85.01 14.99 (0.02) 14.97 9.06 5.91 7.01 1.30 11.62 (2.50) 9.12	2000 NTD % $6,560,912 100.00 5,951,659 90.71 609,253 9.29 442 0.00 609,695 9.29 438,530 6.68 171,165 2.61 768,324 11.71 13,570 546,714 29,163 1,678 15,810 161,389 32,964 0.50 253 10,977 — 21,734 906,525 13.82 (205,955) (3.14) $ 700,570 10.68 $ 3.57	1999 NTD % $4,833,033 100.00 4,266,032 88.27 567,001 11.73 3,200 0.07 570,201 11.80 401,789 8.32 168,412 3.48 673,603 13.94 10,413 565,641 47,103 883 — 49,563 28,652 0.59 343 13,675 6,764 7,870 813,363 16.83 (168,049) (3.48) $ 645,314 13.35 $ 4.20
	USD $195,881 166,525 29,356 (36) 29,320 17,753 11,567 13,744 44 7,952 1,413 39 633 3,663 2,546 37 198 1,143 1,168 22,765 (4,900) $ 17,865 $ 0.09	NTD $6,855,647 5,828,196 1,027,451 (1,274) 1,026,177 621,330 404,847 481,046 1,548 278,308 49,457 1,378 22,164 128,191 89,121 1,298 6,935 40,000 40,888 796,772 (171,500) $ 625,272 $ 3.19		NTD $6,560,912 5,951,659 609,253 442 609,695 438,530 171,165 768,324 13,570 546,714 29,163 1,678 15,810 161,389 32,964 253 10,977 — 21,734 906,525 (205,955) $ 700,570 $ 3.57	NTD $4,833,033 4,266,032 567,001 3,200 570,201 401,789 168,412 673,603 10,413 565,641 47,103 883 — 49,563 28,652 343 13,675 6,764 7,870 813,363 (168,049) $ 645,314 $ 4.20

(See accompanying notes to financial statements.)

F-22

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years ended 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars, otherwise stated)

Balance, 1st January, 1999 . . . . . . Stock dividends issued . . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . . Net earnings for 1999 . . . . . . . . . Capital surplus from gain on disposal of assets . . . . . . . . . . Net loss not recognized as pension cost . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments for long-term equity investments Balance, 31st December, 1999 . . . Stock dividends issued . . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . . Net earnings for 2000 . . . . . . . . . Capital surplus from gain on disposal of assets . . . . . . . . . . Capital surplus from long-term investments . . . . . . . . . . . . . . Reverse net loss not recognized as pension cost . . . . . . . . . . . . . . Cumulative translation adjustments for long-term equity investments Balance, 31st December, 2000 . . . Stock dividends issued . . . . . . . . . Cash dividends issued . . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . . . . Net earnings for 2001 . . . . . . . . . Cumulative translation adjustments for long-term equity investments Balance, 31st December, 2001 . . .	Contributed Capital $650,000 420,000 1,070,000 464,600 1,534,600 425,900 $1,960,500	Additional Paid-in Capital $169,240 662 169,902 1,259 1,765 172,926 $172,926	Retained Earnings $ 809,140 (420,000) (22,105) 645,314 (662) 1,011,687 (464,600) (24,453) 700,570 (1,259) 1,221,945 (425,900) (76,730) (26,543) 625,272 $1,318,044	Cumulative Translation Adjustment $ 80,286 (54,447) 25,839 112,332 138,171 146,551 $284,722	Net Loss not Recognized as Pension Cost $— (68) (68) 68 — $—	Total $1,708,666 — (22,105) 645,314 — (68) (54,447) 2,277,360 — (24,453) 700,570 — 1,765 68 112,332 3,067,642 — (76,730) (26,543) 625,272 146,551 $3,736,192

(See accompanying notes to financial statements.)

F-23

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF CASH FLOWS

For the Years ended 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

Cash Flows from Operating Activities: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income — equity method . . . . . . . . . . . . . . Provision for pension . . . . . . . . . . . . . . . . . . . . . . . . Loss (Gain) on disposal of property and equipment . . . . Loss (Gain) on sale of short-term investments. . . . . . . . Loss on obsolete of property and equipment . . . . . . . . . Unrealized profit from intercompany transactions . . . . . Deferred income tax (benefit) expense . . . . . . . . . . . . . (Increase) decrease in notes and accounts receivable . . . (Increase) decrease in inventories . . . . . . . . . . . . . . . . (Increase) decrease in other receivables . . . . . . . . . . . . (Increase) decrease in other current assets. . . . . . . . . . . Increase (decrease) in notes and accounts payable . . . . . Increase (decrease) in accrued expenses . . . . . . . . . . . . Increase (decrease) in other payables . . . . . . . . . . . . . . Increase (decrease) in other current liabilities . . . . . . . . Net cash inflow (outflow) from operating activities . . Cash Flows from Investing Activities Increase in long-term investments . . . . . . . . . . . . . . . . . . Increase in short-term investments . . . . . . . . . . . . . . . . . . Proceeds from sale of short-term investments . . . . . . . . . . Acquisition of properties . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of properties . . . . . . . . . . . . . . . . . . . (Increase) decrease in other receivable — related parties . . (Increase) decrease in refundable deposits. . . . . . . . . . . . . (Increase) decrease in cash in bank-assigned . . . . . . . . . . . Increase in unamortized expenses . . . . . . . . . . . . . . . . . . Net cash inflow(outflow) from investing activities . . . . .	2001 USD NTD $ 17,865 $ 625,272 470 16,456 443 15,488 (7,611) (266,411) 362 12,683 (2) (81) — — 26 926 36 1,274 1,150 40,242 15,062 527,157 (409) (14,302) 1,000 34,997 5 188 10,730 375,541 (493) (17,260) 897 31,377 32 1,106 39,563 1,384,653 (13,469) (471,411) — — — — (7,746) (271,095) 1,189 41,620 (7,118) (249,112) 4 156 81 2,833 (579) (20,280) $(27,638) $(967,289)	2000 NTD $ 700,570 15,634 15,438 (544,021) 9,516 (450) (2,693) 409 (1,416) 132,183 (17,701) (184,643) (34,890) 3,695 876,653 (629) 59,508 3,914 1,031,077 (58,258) (460,000) 462,693 (223,029) 24,813 — (1,946) 45,556 (14,221) $(224,392)	1999 NTD $ 645,314 12,921 13,543 (565,641) (5,052) (540) 3,291 128 (3,200) 150,762 (943,273) (463,681) (42,928) (10,617) 751,965 (529) 718 (4,242) (461,061) (92,015) — 18,633 (96,855) 2,143 409 3,000 (17,057) $(181,742)
	USD $ 17,865 470 443 (7,611) 362 (2) — 26 36 1,150 15,062 (409) 1,000 5 10,730 (493) 897 32 39,563 (13,469) — — (7,746) 1,189 (7,118) 4 81 (579) $(27,638)

F-24

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF CASH FLOWS — (Continued) For the Years ended 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

Cash Flows from Financing Activities: Increase (decrease) in short-term borrowings. . . . . . . . . . . Increase (decrease) in short-term notes and bills payable . . Increase (decrease) in lease payment payable . . . . . . . . . . Increase (decrease) in accounts payable — related parties. . Cash Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation to directors and supervisors . . . . . . . . . . . . Cash inflow (outflow) from financing activities. . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . Cash and cash equivalents, beginning of year . . . . . . . . . . . . Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . Supplementary Cash Flow Information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing and Financing Activities Not Affecting Cash Lease payment payable — current portion . . . . . . . . . . . . Stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquiring cost of machinery investment . . . . . . . . . . . . . .	2001 USD NTD $ 1,917 $ 67,091 7,270 254,455 — — (13) (446) (2,192) (76,730) (758) (26,543) 6,224 217,827 18,149 635,191 39,475 1,381,592 $57,624 $2,016,783 $ 209 $ 7,329 $ 2,787 $ 97,545 $ — $ — $12,169 $ 425,900 $ 80 $ 2,799	2000 NTD $ (198,564) — (1,110) (25,329) — (24,453) (249,456) 557,229 824,363 $1,381,592 $ 13,152 $ 22,326 $ — $ 464,600 $ —	1999 NTD $ 136,839 — (2,611) 25,775 — (22,105) 137,898 (504,905) 1,329,268 $ 824,363 $ 12,127 $ 32,996 $ 1,110 $ 420,000 $ 2,482
	USD $ 1,917 7,270 — (13) (2,192) (758) 6,224 18,149 39,475 $57,624 $ 209 $ 2,787 $ — $12,169 $ 80

(See accompanying notes to financial statements.)

F-25

PHIHONG ENTERPRISE CO., LTD.

NOTES TO FINANCIAL STATEMENTS 31st December, 2001, 2000 and 1999

(Expressed in thousands of New Taiwan dollars and United States dollars, otherwise stated)

1. ORGANIZATION

PHIHONG ENTERPRISE CO., LTD., the Company was established on 12th December, 1972 and engaged mainly in the trade of hi-tech products. Since 1973 the Company has primarily engaged in manufacturing of power supply. In 1981, the Company relocated in Sanchung City, Taipei, Taiwan. The Company’s authorized common stock 280,000,000 shares, issued and outstanding common stock amounted to 196,050,000 shares as of 31st December, 2000.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) Basis of financial statement presentation

The accompanying financial statements have been prepared in accordance with R.O.C. generally accepted accounting principles.

(2) Foreign currency transactions

(3) Cash equivalents

(4) Short-term investment

Stocks of listed companies, bankers’ acceptance and commercial papers purchased are recorded as short-term investments.

(5) Allowance for bad debts

The amount of allowance for bad debts is determined on the basis of the ages of notes and accounts receivable, the credit worthiness, the quality of customer and the collectibility of each account.

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(6) Inventories

(7) Property, plant and equipment

Property, plant and equipment are stated at cost.

Depreciation on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets.

(8) Long-term investment

The Company adopts the provisions of Statements of Financial Accounting Standards (SFAS) No. 5 — ‘‘Long-term Equity Investments’’ Investments in debt securities are accounted for under the cost method.

(9) Unamortized expenses and amortization

Unamortized expenses represent leasehold improvements and computer software, are amortized over 3–10 years on the straight-line method.

(10) Income Tax

The Company adopts the provisions of Statements of SFAS No. 22 — ‘‘Accounting for Income Taxes.’’ Under SFAS No. 22, deferred income tax is determined based on differences between the financial statements and tax basis of assets and liabilities, using enacted tax rates in effect during the years in which the differences are expected to be reversed. The income tax effects due to taxable temporary differences are recognized as deferred income tax assets. The realization of the deferred tax assets is evaluated and a valuation allowance is recognized accordingly.

3. CASH AND CASH EQUIVALENTS

Cash on hand . . . . . . . . . . . . . . . . . . . Cash in banks . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $ 36 $ 11,265 57,588 2,015,518 $57,624 $2,016,783	31st December, 2000 NTD $ 1,119 1,380,473 $1,381,592	31st December, 1999
	USD $ 36 57,588 $57,624		NTD $ 1,716 822,647
			$824,363

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4. NOTES AND ACCOUNTS RECEIVABLE

Notes receivable . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . Accounts receivables-related parties. . . . Allowance for bad debts. . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $ 174 $ 6,100 29,272 1,024,506 2,625 91,846 (443) (15,514) $31,628 1,106,938	31st December, 2000 NTD $ 11,543 1,207,436 430,630 (15,514) 1,634,095	31st December, 1999 NTD $ 15,583 1,446,093 170,232 (15,514) 1,616,394
	USD $ 174 29,272 2,625 (443) $31,628

5. INVENTORIES

Finished goods . . . . . . . . . . . . . . . . . . Work in process . . . . . . . . . . . . . . . . . Raw materials. . . . . . . . . . . . . . . . . . . Materials in transit . . . . . . . . . . . . . . . Allowance for market price decline . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $14,647 $ 512,644 10,340 361,863 7,747 271,131 93 3,270 (1,182) (41,362) $31,645 $1,107,546	31st December, 2000 NTD $ 498,745 283,231 323,698 3,804 (16,234) $1,093,244	31st December, 1999 NTD $322,988 258,865 340,847 17,813 (31,912) $908,601
	USD $14,647 10,340 7,747 93 (1,182) $31,645

As of 31st December, 2001, 2000 and 1999, inventories were insured against casualty loss of NT$250,000,000 and NT$250,000,000.

6. LONG-TERM INVESTMENT

PHIHONG INTERNATIONAL CORP.. . . . . . . . . . . . . . . . . PHIHONG USA CORP. . . . . . . . . . . . . . . . . . . . . . . . . . . . PHITEK INTERNATIONAL CO., LTD.. . . . . . . . . . . . . . . . PHIHONG JAPAN CORP. . . . . . . . . . . . . . . . . . . . . . . . . . PHIHONG PWM BRAZIL LTDA . . . . . . . . . . . . . . . . . . . . WK Technology Fund VIII Limited . . . . . . . . . . . . . . . . . . . E.P.I. Technology (Hong Kong) Co., Limited . . . . . . . . . . . . GUANG-LAI INVESTMENT CO., LTD. . . . . . . . . . . . . . . . HON-SHENG INVESTMENT CO., LTD.. . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PHIHONG INTERNATIONAL CORP.. . . . . . . . . . . . . . . . . PHIHONG USA CORP. . . . . . . . . . . . . . . . . . . . . . . . . . . . PHITEK INTERNATIONAL CO., LTD.. . . . . . . . . . . . . . . . PHIHONG JAPAN CORP. . . . . . . . . . . . . . . . . . . . . . . . . . PHIHONG PWM BRAZIL LTDA . . . . . . . . . . . . . . . . . . . . WK Technology Fund VIII Limited . . . . . . . . . . . . . . . . . . . E.P.I. Technology (Hong Kong) Co., Limited . . . . . . . . . . . . GUANG-LAI INVESTMENT CO., LTD. . . . . . . . . . . . . . . . HON-SHENG INVESTMENT CO., LTD.. . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001	31st December, 2001	Book Value USD $76,917 1,559 984 (77) 1,564 1,429 469 5,720 5,720 $94,285 Book Value NTD $2,692,009 54,556 34,455 (2,712) 54,752 50,000 16,422 200,195 200,195 $3,299,872
	Percentage of Holding Investment Income USD 100% $8,377 100% 95 100% (941) 100% (311) 60% 790 3.33% — 48% (70) 100% 6 100% 6 $7,952 31st December, 2001
	Percentage of Holding 100% 100% 100% 100% 60% 3.33% 48% 100% 100%	Investment Income NTD $293,170 3,323 (32,942) (10,865) 27,632 — (2,400) 195 195 $278,308

F-28

31st December, 2000	31st December, 2000
Percentage of Holding 100% 100% 100% 90% 60% 3.33%	Investment Income NTD $498,163 5,351 8,614 (5,604) 37,497 — $544,021	Book Value
		NTD $2,171,891 48,221 66,170 7,583 43,635 50,000
		$2,387,500

31st December, 1999	31st December, 1999
Percentage of Holding 100% 100% 100% 90%	Investment Income NTD $563,956 1,735 (50) — $565,641	Book Value
		NTD $1,554,418 40,650 62,228 13,828
		$1,671,124

PROPERTY, PLANT AND EQUIPMENT

31st December, 2001	31st December, 2001
Cost Accumulated Depreciation USD USD $ 1,136 $ — 670 460 212 31 191 133 2,876 1,207 13,308 — $18,393 $1,831 31st December, 2001		Net Book Value
		USD $ 1,136 210 181 58 1,669 13,308
		$16,562

Cost NTD $ $39,758 23,460 7,414 6,695 100,655 465,755 $643,737	Accumulated Depreciation NTD $ — 16,087 1,078 4,645 42,260 — $64,070	Net Book Value
		NTD $ 39,758 7,373 6,336 2,050 58,395 465,755
		$579,667

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31st December, 2000	31st December, 2000
Cost Accumulated Depreciation NTD NTD $ 39,758 $ — 24,754 15,556 9,030 2,577 6,695 3,841 110,343 38,618 234,261 — $424,841 $60,592 31st December, 1999		Net Book Value
		NTD $ 39,758 9,198 6,453 2,854 71,725 234,261
		$364,249

Cost NTD $ 39,758 24,754 4,561 6,032 87,356 71,064 $233,525	Accumulated Depreciation NTD $ — 14,118 3,071 3,002 30,976 — $51,167	Net Book Value
		NTD $ 39,758 10,636 1,490 3,030 56,380 71,064
		$182,358

As of 31st December, 2001, 2000 and 1999, property, plant and equipment were insured against casualty loss of NT$69,625,000, NT$62,765,000 and NT$62,765,000.

8. NOTES AND ACCOUNTS PAYABLE

Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable-related parties . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	31st December, 2001 USD NTD $18,030 $ 631,017 24,466 856,303 55,185 1,931,370 $97,681 $3,418,690	31st December, 2000 NTD $ 667,429 661,365 1,714,355 $3,043,149	31st December, 1999
	USD $18,030 24,466 55,185 $97,681		NTD $ 677,041 435,701 1,053,754
			$2,166,496

9. TRANSACTIONS WITH RELATED PARTIES

(1) Name of/and relationship with related parties

Names of related party

Relationship

Densei-Lambda K.K. . . . . . . . . . . . . . . . . . . . . . . . . . Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . Phihong International Corp. . . . . . . . . . . . . . . . . . . . . Phitek International Co., Ltd. . . . . . . . . . . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . Phihong PWM Brazil Ltda . . . . . . . . . . . . . . . . . . . . . Guang-lai Investment Co., Ltd. . . . . . . . . . . . . . . . . . . Hon-sheng Investment Co., Ltd. . . . . . . . . . . . . . . . . .

One of directors of the Company

Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method Investee company accounted for under equity method

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(2) Significant related party transactions

(a) Sales

Names of related party USD Phihong USA Corp.. . . . . . . $15,768 Densei-Lambda K.K. . . . . . . 13 Phihong Japan Corp. . . . . . . 7 Phitek International Co., Ltd. 3,537 Phihong PWM Brazil Ltda . . $3,675 (b) Purchase Names of related party USD Phihong USA Corp.. . . . . . . $3,557 Densei-Lambda K.K. . . . . . . 125 Phihong Japan Corp. . . . . . . $ 433 (c) Supply of processing services Names of related party USD Phihong International Corp. . $18,280 Phitek International Co., Ltd. $ 1,791 (d) Others 31st Names of related party USD Accounts Receivable Phihong USA Corp.. . . . . $ 1,995 Phitek International Co., Ltd. . . . . . . . . . . 132 Phihong PWM Brazil Ltda 497 Accounts Payable Phihong International Corp. 55,148 Phihong Japan Corp. . . . . — Densei-Lambda K.K. . . . . $ 37 Other Receivables Phihong USA Corp.. . . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . Phitek International Co., Ltd. . . . . . Phihong PWM Brazil Ltda . . . . . . . Densei-Lambda K.K. . . . . . . . . . . . Guang-lai Investment Co., Ltd. . . . . Hon-sheng Investment Co., Ltd. . . . Other Payables Phihong USA Corp.. . . . . . . . . . . . Phihong International Corp. . . . . . . Phihong Japan Corp. . . . . . . . . . . .		2001 NTD % $551,855 8.05% 439 0.01% 246 0.00% 123,805 1.80% $128,629 1.88% 2001 NTD % $124,485 2.69% 4,358 0.09% $ 15,163 0.33% 2001 NTD % $639,794 57.55% $ 62,688 5.64% December, 2001 NTD % $ 69,839 6.26% 4,622 0.41% 17,385 1.56% 1,930,084 69.24% — — $ 1,286 0.05% 31st December, 2001
	USD $15,768 13 7 3,537 $3,675

F-31

(e) Transaction of property

Phihong International Corp. . Phihong USA Corp.. . . . . . . Phitek International Co., Ltd. Phihong PWM Brazil Ltda . .	31st December, 2001 Selling price Selling price Cost USD NTD NTD $1,114 $38,991 $29,875 15 524 489 180 6,302 3,310 $ 25 $ 892 $ 233	31st December, 2001 Selling price Selling price Cost USD NTD NTD $1,114 $38,991 $29,875 15 524 489 180 6,302 3,310 $ 25 $ 892 $ 233	31st December, 2000 Selling price Cost NTD NTD $22,397 $21,644 93 86 1,680 1,020 $ 2,467 $ 2,136	31st December, 1999	31st December, 1999
	Selling price USD $1,114 15 180 $ 25	Selling price NTD $38,991 524 6,302 $ 892	Selling price NTD $22,397 93 1,680 $ 2,467	Selling price NTD $427 511 — $ —	Cost
					NTD $385 518 — $ —

10. STOCKHOLDERS’ EQUITY

(1) Common stock

(2) Distribution of retained earnings

11. INCOME TAX

(1) The Company’s maximum statutory income tax rate is 25 per cent..

The components of income tax benefit are summarized as follows:

Currently payable . . . . . . . . . . . . . . . . . . . . Deferred income tax expense (benefit) . . . . . . Income tax expense (benefit) . . . . . . . . . . . .	31st December, 2001 USD NTD $3,750 $131,259 1,150 40,241 $4,900 $171,500	31st December, 2000 NTD $ 73,772 132,183 $205,955	31st December, 1999
	USD $3,750 1,150 $4,900		NTD $ 17,286 150,763
			$168,049

(2) The differences between income tax benefit and income tax payable calculated by applying the statutory rate to taxable income are summarized as follows:

Income tax payable . . . . . . . . . . . . . . . . . . . Expenses disallowed for tax purpose . . . . . . . Investment credit. . . . . . . . . . . . . . . . . . . . . Allowance for deferred income tax assets . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . .	2001 USD NTD $5,691 $199,183 6 205 (648) (22,660) — — (149) (5,228) $4,900 $171,500	2000 NTD $226,621 (173) (20,964) — 471 $205,955	1999
	USD $5,691 6 (648) — (149) $4,900		NTD $203,331 1,323 (17,583) (15,000) (4,022)
			$168,049

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(3) Balances of imputation tax credit account as of 31st December, 2001, 2000 and 1999 are as follows:

Imputation tax credit account . . . . . . . . . . . .	31st December, 2001 USD NTD $2,195 $76,818	31st December, 2000 NTD $29,718	31st December, 1999
			NTD $203,331

12. COMMITMENTS

(1) As of 31st December, 2001, the Company provided bills and notes for the fulfillment of shortterm borrowing amounting to NT$330,000,000.
(2) As of 31st December, 2001, the Company guaranteed loans made by its related parties amounting to NT$182,000,000.
(3) In March 1999, the Company entered into real estate agreements with Formosa Plastic Company and Nan Ya Plastic Company for acquisition of land, with a contract price amounting to NT$466,712,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to NT$373,370,000.
(4) In October 2001, the Company entered into an agreement with Yue-Jie Company for acquisition of land and plant, with a contract price amounting to NT$190,000,000. As of 31st December, 2001, prepayments relating to the agreement above amounted to NT$66,500,000.
(5) As of 31st December, 2001, the Company’s unused letters of credit for the purpose of importing raw materials are US$42,000 and JPY 23,296,000.

13. SUBSEQUENCE

(1) The title of real estate acquired from Formosa Plastic Company and Nan Ya Plastic Company has been transferred to the Company at 26th February, 2002.
(2) The title of real estate acquired from Yue-Jie Company has been transferred to the Company at 14th January, 2002.

F-33

INDEPENDENT ACCOUNTANTS’ REPORT

To the Board of Directors and Stockholders of

PHIHONG ENTERPRISE CO., LTD.:

We have reviewed the balance sheet of Phihong Enterprise Co., Ltd. (the ‘‘Company’’) as of 31st March, 2002 and the related statements of income, changes in stockholders’ equity and cash flows for the three-month period then ended (all expressed in New Taiwan dollars). These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report based on our review. The financial statements of the Company for the three-month period ended 31st March, 2001 were reviewed by other auditors whose report, dated 18th April, 2001, expressed an opinion that was qualified as to the part of long-term equity investments that were based on unreviewed financial statements.

We conducted our review in accordance with ‘‘Review of Financial Statements,’’ No. 36 of generally accepted auditing standards of the Republic of China. A review consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express an opinion on these financial statements.

As mentioned in Note 8, part of long-term equity investments accounted for under equity method for the three-month period ended 31st March, 2002 is based on unreviewed financial statements. As of 31st March, 2002, the aggregate balance of the Company’s investments in its investees whose financial statements have not been reviewed by independent auditors amounted to $131,530 thousand New Taiwan dollars. For the three-month period ended 31st March, 2002, the Company’s investment income from such investments amounted to $5,338 thousand New Taiwan dollars.

Based on our review, except for the effects of such modifications, if any, as might have been determined to be necessary had the long-term equity investments and investment income of investees mentioned above been recognized based on reviewed financial statements, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the Republic of China.

As described in Note 2, the financial statements of the Company as of and for the three-month period ended 31st March, 2002 expressed in U.S. Dollars were translated from the New Taiwan Dollars using the exchange rate of NT$35.00 to U.S.$1.00 at 31st March, 2002, solely for the convenience of readers.

Deloitte & Touche

13th April, 2002

The accompanying financial statements, which have been translated into English for the convenience of readers outside the Republic of China, are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China. Accordingly, the accompanying balance sheet of Phihong Enterprise Co., Ltd. and the related statements of income, changes in stockholders’ equity and cash flows as of and for the three-month period ended 31st March, 2002 are not designed for those who are not informed about accounting principles, procedures and practices in the Republic of China. The standards, procedures and practices utilized in the Republic of China to review such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China.

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PHIHONG ENTERPRISE CO., LTD.

BALANCE SHEETS

31ST MARCH, 2002 AND 2001

(In Thousands of New Taiwan Dollars and United States Dollars)

ASSETS CURRENT ASSETS: Cash and cash equivalents (Notes 2 and 3). . . . . . . . . . . . . . . . . . . . . . . . Notes receivable (Notes 2 and 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable (Notes 2 and 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable — affiliates (Notes 2, 5 and 15) . . . . . . . . . . . . . . . . . Other receivables (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables — affiliates (Note 15). . . . . . . . . . . . . . . . . . . . . . . . . . Inventories (Notes 2 and 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LONG-TERM EQUITY INVESTMENTS (Notes 2 and 8) . . . . . . . . . . . . . . . PROPERTY, PLANT AND EQUIPMENT (Notes 2 and 9): Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revalued appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments on purchase of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTANGIBLE ASSETS Deferred pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER ASSETS (Notes 2 and 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	UNAUDITED	2001 NTD $1,282,334 7,207 969,597 351,123 49,181 30,516 1,146,076 31,877 3,867,911 2,439,722 147,636 32,305 179,941 (57,996) 234,765 356,710 17,327 25,933 $6,707,603
	2002 NTD USD $ 566,115 $ 16,174 5,730 163 668,099 19,089 98,686 2,820 89,128 2,547 278,747 7,964 903,357 25,810 44,587 1,274 2,654,449 75,841 3,425,784 97,880 831,626 23,761 32,305 923 863,931 24,684 (68,329) (1,952) 358 10 795,960 22,742 13,368 382 53,566 1,530 $6,943,127 $198,375
	NTD $ 566,115 5,730 668,099 98,686 89,128 278,747 903,357 44,587 2,654,449 3,425,784 831,626 32,305 863,931 (68,329) 358 795,960 13,368 53,566 $6,943,127

F-36

PHIHONG ENTERPRISE CO., LTD.

BALANCE SHEETS — (Continued) 31ST MARCH, 2002 AND 2001

(In Thousands of New Taiwan Dollars and United States Dollars)

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Short-term borrowings (Note 11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable — affiliates (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable (Notes 2 and 14). . . . . . . . . . . . . . . . . . . . . . . . . . . . Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RESERVE FOR LAND VALUE INCREMENT TAX . . . . . . . . . . . . . . . . . . . OTHER LIABILITIES: Accrued pension cost (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred credits (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STOCKHOLDERS’ EQUITY: Capital stock (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustments (Note 2). . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	UNAUDITED
	2002 NTD USD $ 42,475 $ 1,214 333,370 9,525 719,321 20,552 1,211,181 34,605 100,263 2,865 83,161 2,376 1,165 33 2,490,936 71,170 22,317 637 44,050 1,259 561,268 16,036 21,505 614 626,823 17,909 3,140,076 89,716 1,960,500 56,014 172,926 4,941 1,395,886 39,883 273,739 7,821 3,803,051 108,659 $6,943,127 $198,375	2001
	NTD $ 42,475 333,370 719,321 1,211,181 100,263 83,161 1,165 2,490,936 22,317 44,050 561,268 21,505 626,823 3,140,076 1,960,500 172,926 1,395,886 273,739 3,803,051 $6,943,127	NTD $ 69,908 535,387 494,875 1,675,471 — 137,776 8,548
		2,921,965
		22,317
		35,820 509,085 22,571
		567,476
		3,511,758
		1,534,600 173,135 1,344,219 143,891
		3,195,845
		$6,707,603

See notes to financial statements.

F-37

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF INCOME

THREE-MONTH PERIODS ENDED 31ST MARCH, 2002 AND 2001 (In Thousands of New Taiwan Dollars and United States Dollars, Except for Earnings Per Share Expressed in Dollar)

GROSS SALES AND REVENUES EARNED . . . . . . . . . . . . . . . . . . . . . . . . LESS SALES RETURNS AND ALLOWANCES . . . . . . . . . . . . . . . . . . . . . . NET SALES AND REVENUES EARNED . . . . . . . . . . . . . . . . . . . . . . . . . . COST OF GOODS SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . REALIZED GROSS PROFIT FROM INTER-AFFILIATE TRANSACTIONS . . GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME FROM OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-OPERATING INCOME: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income, net (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposal of property, plant and equipment. . . . . . . . . . . . . . . . . . . Foreign exchange gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mold development revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-OPERATING EXPENSES: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment loss, net (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of property, plant and equipment. . . . . . . . . . . . . . . . . . . Foreign exchange loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX (Note 2 and 14) . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EARNINGS PER SHARE (Notes 2 and 12) . . . . . . . . . . . . . . . . . . . . . . . . .	UNAUDITED	2001 NTD $1,405,668 (11,805) 1,393,863 1,159,922 233,941 307 234,248 154,283 79,965 12,440 46,502 279 2,818 4,072 19,734 85,845 1,443 — 314 — 14,934 16,691 149,119 (26,636) $ 122,483 $ 0.62
	2002 NTD USD $1,476,413 $42,183 (8,590) (245) 1,467,823 41,938 1,283,078 36,660 184,745 5,278 5,576 160 190,321 5,438 116,165 3,319 74,156 2,119 5,527 158 — — 287 8 — — 14,984 428 61,374 1,754 82,172 2,348 1,319 38 16,947 484 56 2 7,073 202 29,091 831 54,486 1,557 101,842 2,910 (24,000) (686) $ 77,842 $ 2,224 $ 0.40 $ 0.01
	NTD $1,476,413 (8,590) 1,467,823 1,283,078 184,745 5,576 190,321 116,165 74,156 5,527 — 287 — 14,984 61,374 82,172 1,319 16,947 56 7,073 29,091 54,486 101,842 (24,000) $ 77,842 $ 0.40

See notes to financial statements.

F-38

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY THREE-MONTH PERIODS ENDED 31ST MARCH, 2002 AND 2001 (In Thousands of New Taiwan Dollars and United States Dollars)

Capital Stock		Capital Surplus	Capital Surplus		Retaine	d Earnings	Cumulative Translation Adjustments	Total
	Additional Paid-in Capital	Revaluation Increment on Property, Plant and Equipment	Gain on Disposal of Property, Plant and Equipment	Effect of Transactions Relating to Long-term Equity Investments
					Legal Reserve	Unappropriated Earnings
$1,534,600	$150,000	$9,987	$11,383	$1,765	$186,097	$1,035,639 122,483	$138,171 5,720	$3,067,642 5,720 122,483
$1,534,600	$150,000	$9,987	$11,383	$1,765	$186,097	$1,158,122	$143,891	$3,195,845
$1,960,500	$150,000	$9,987	$11,174	$1,765	$256,028	$1,062,016 77,842
$1,960,500	$150,000	$9,987	$11,174	$1,765	$256,028	$1,139,858	$273,739	$3,803,051
$ 56,014	$ 4,286	$ 286	$ 319	$ 50	$ 7,315	$ 30,344 2,224
$ 56,014	$ 4,286	$ 286	$ 319	$ 50	$ 7,315	$ 32,568	$ 7,821	$108,659

See notes to financial statements.

F-39

PHIHONG ENTERPRISE CO., LTD.

STATEMENTS OF CASH FLOWS

THREE-MONTH PERIODS ENDED 31ST MARCH, 2002 AND 2001

(In Thousands of New Taiwan Dollars and United States Dollars)

OPERATING ACTIVITIES: Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recovery from inventory devaluation. . . . . . . . . . . . . . . . . . . . . . . . . . Investment loss (income) recognized under equity method . . . . . . . . . . . Realized gross profit from inter-affiliate transactions . . . . . . . . . . . . . . . Net (gain) loss on disposal of property, plant and equipment. . . . . . . . . . Changes in assets and liabilities provided (used) cash: Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable — affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables — affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax asset — current . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable — affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for retirement plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . . . INVESTING ACTIVITIES: Increase in long-term equity investments . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposal of long-term equity investments . . . . . . . . . . . . . . . Acquisition of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . Proceeds from disposal of property, plant and equipment . . . . . . . . . . . . . . (Increase) decrease in refundable deposits. . . . . . . . . . . . . . . . . . . . . . . . . Increase in deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) provided by investing activities. . . . . . . . . . . . . . . . . . . . . FINANCING ACTIVITIES: Decrease in short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in short-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (excluding interest capitalized) . . . . . . . . . . . . . . . . . . . . . . . . Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Translation adjustments on foreign long-term equity investments . . . . . . . . .	UNAUDITED	2001 NTD $ 122,483 7,999 (4,966) (46,502) (307) 327 4,250 220,326 81,592 (47,866) 30,953 (10,160) (390) 2,053 — (132,042) (166,490) (38,884) — (75,901) 3,092 9,867 3,181 (159,868) (37,385) — — (6,405) 13,228 367 (1,277) 5,913 (67,786) — (67,786) (99,258) 1,381,592 $1,282,334 $ 2,385 $ 47,043 $ 5,720
	2002 NTD USD $ 77,842 $ 2,224 9,217 263 (15,000) (429) 16,947 484 (5,576) (160) (230) (7) 284 8 342,113 9,775 (7,974) (228) 219,189 6,263 (43,991) (1,257) (37,278) (1,065) (494) (14) 8,772 251 (20,623) (589) (297,647) (8,504) (136,982) (3,914) (720,189) (20,577) 100,263 2,865 (144,187) (4,120) (5,397) (154) (538) (15) 2,687 77 (736,634) (21,047) (658,792) (18,823) (200,000) (5,714) 50,000 1,429 (221,402) (6,326) 373 11 (1,066) (31) (3,016) (86) (375,111) (10,717) (162,310) (4,638) (254,455) (7,270) (416,765) (11,908) (1,450,668) (41,448) 2,016,783 57,622 $ 566,115 $16,174 $ 2,122 $ 61 $ 661 $ 19 $ (10,983) $ (314)
	NTD $ 77,842 9,217 (15,000) 16,947 (5,576) (230) 284 342,113 (7,974) 219,189 (43,991) (37,278) (494) 8,772 (20,623) (297,647) (136,982) (720,189) 100,263 (144,187) (5,397) (538) 2,687 (736,634) (658,792) (200,000) 50,000 (221,402) 373 (1,066) (3,016) (375,111) (162,310) (254,455) (416,765) (1,450,668) 2,016,783 $ 566,115 $ 2,122 $ 661 $ (10,983)

See notes to financial statements.

F-40

PHIHONG ENTERPRISE CO., LTD.

NOTES TO FINANCIAL STATEMENTS

THREE-MONTH PERIODS ENDED 31ST MARCH, 2002 AND 2001

(Amounts are Expressed in Thousands of New Taiwan Dollars and United States Dollars, Except for Per Share Data and Other Specified Items)

1. ORGANIZATION AND OPERATIONS

Phihong Enterprise Co., Ltd. (the ‘‘Company’’) was incorporated on 7th December, 1972, and is primarily engaged in the manufacturing and sale of various power supplies. As of 31st March, 2002, the Company’s outstanding capital stock amounted to $1,960,500 (US$56,014). In February 2000, the Company received authorization to have its stock listed on the Over-the-Counter Exchange. In September 2001, the Company’s stock was authorized to trade in Taiwan Stock Exchange.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash includes cash on hand and unrestricted bank deposits. Cash equivalents refer to time certificates of deposit and commercial paper, which can be readily converted into cash without significant penalty or the value will not be significantly affected by variation of interest.

Allowance for Doubtful Accounts

Allowance for doubtful accounts is provided based upon the management’s evaluation of the collectibility and, past loss experience of notes and accounts receivable and intercompany receivables, and other pertinent factors.

Inventories

Inventories are stated at the lower of cost or market, with cost being determined based on the weighted-average method. Market values for raw materials are determined by replacement cost, while work-in-process and finished goods are determined by their net realizable values.

Long-Term Equity Investments

Investments in companies where the Company’s ownership interest is 20 per cent. or more, or where the Company can exercise significant influence, are accounted for under the equity method. If the Company’s share of an investee company’s losses equals to or exceeds the carrying amount of an investment accounted for under the equity method and the Company guarantees obligations of an investee company, or is otherwise committed to provide further financial support for an investee company, or an investee company’s losses are temporary and there exists sufficient evidence showing imminent return to profitable operations, then the Company continue to recognize investment losses in proportion to the stock ownership percentage. Such credit balance on the book value of a long-term equity investments is included in deferred credit under other liabilities on the balance sheet.

Property, Plant and Equipment

Property, plant and equipment are stated at cost plus revalued appreciation less accumulated depreciation. Expenditures that would increase the value or extend the useful lives of property, plant and equipment are capitalized. Interest costs are capitalized starting with the first expenditure related to construction of asset, and capitalization continues until such asset is substantially completed and ready for its intended use. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets, with an additional year for salvage.

An additional service life and a new residual value will be determined for any depreciable asset which is still in use after the end of its initially prescribed useful life. Depreciation is computed on the straight-line method.

F-41

Deferred Charges

Deferred charges are amortized on a straight-line basis over three years.

Retirement Plan

The Company has a retirement plan covering all eligible employees. The benefits are based primarily upon an employee’s years of service and average compensation for the six-month period before retirement. Contributions to the plan are assessed at 2 per cent. of monthly employee salaries and wages.

The Company adopted the provisions of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 18, ‘‘Accounting for Pension,’’, which requires that pension expense shall be computed at actuarial basis.

Deferred Credit

Deferred credit represents those unrealized profit resulting from transactions between the Company and its affiliated companies accounted for under equity method.

Foreign Currency Transactions

Foreign currency transactions are recorded in New Taiwan dollars at the exchange rates prevailing on the respective transaction date. Gains or losses, caused by different foreign exchange rates applied when foreign currency receivables and payables are settled, are credited or charged to income. Assets and liabilities denominated in foreign currencies are translated at the exchange rates of balance sheet date, and resulting gains or losses are credited or charged to current income.

Cumulative Translation Adjustments

Long-term equity investments denominated in foreign currencies are restated at the balancesheet-date exchange rates. The related translation adjustments are reported as a separate component of stockholders’ equity.

Income Tax

The Company adopted the provisions of SFAS No. 22, ‘‘Accounting for Income Tax,’’ which require an asset and liability approach to account for income tax. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized, if needed.

Under the Amended Income Tax Law of ROC, undistributed earnings of the Company from 1998 onward are subject to 10 per cent. additional income tax which will be shown as income tax expense in the following year when the decision to retain the earnings is made by the shareholders in their meeting.

Derivative Financial Instruments

Forward exchange contracts that are designated and effective as a hedge of net foreign assets or liabilities positions are recorded on the respective transaction date. The discounts or premiums (the differences between the contract rates and the spot rates on the date of purchase multiplied by principal amount of foreign currencies) involved in all forward contracts are separately accounted for and amortized to income over the duration of the contracts.

Receivables or payables from forward exchange contracts are shown on the accompanying balance sheets in the net balance.

F-42

The premiums which shall be received or paid while foreign exchange options contracts were entered into, are deferred and recognized as revenue or expense as such contracts expired.

Non-Derivative Financial Instruments

The recognition, valuation, and measurement of non-derivative financial assets and liabilities are made in accordance with the above accounting policies and accounting principles generally accepted in the Republic of China.

Convenience Translation into U.S. Dollars

The Company maintains its accounting records and prepares its financial statements in New Taiwan dollars. The United States dollar amounts disclosed in the 2002 financial statements are presented solely for the convenience of readers and were translated from New Taiwan dollars using the closing exchange rate of NT$35.00 to U.S.$1.00 at 31st March, 2002 obtained from Taipei Forex Inc. Such translation amounts should not be construed as representations that the New Taiwan dollar amounts represent, or have been or could be converted into United States dollars at that or any other rate.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents at 31st March, 2002 and 2001 consist of the following:

Cash on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checking accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign-currency savings deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . . Time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $ 1,009 $ 29 1,519 43 27,863 796 144,874 4,139 390,850 11,167 $566,115 $16,174	2001
	NTD $ 1,009 1,519 27,863 144,874 390,850 $566,115	NTD $ 1,041 9,613 110,026 194,194 967,460
		$1,282,334

The time certificates of deposit pledged for short-term borrowings at 31st March, 2001 amounted to $1,832 (US$52), are included in other current assets.

4. NOTES RECEIVABLE

Notes receivable at 31st March, 2002 and 2001 consist of the following:

Notes receivable — non-affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $5,730 $163 — — $5,730 $163	2001
	NTD $5,730 — $5,730	NTD $7,923 (86)
		$7,207

5. ACCOUNTS RECEIVABLE

Accounts receivable at 31st March, 2002 and 2001 consist of the following:

Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for doubtful accounts. . . . . . . . . . . . . . . . . . . . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable — affiliates (Note 15). . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $683,527 $19,529 (15,428) (440) 668,099 19,089 98,686 2,820 $766,785 $21,909	2001
	NTD $683,527 (15,428) 668,099 98,686 $766,785	NTD $ 985,025 (15,428)
		969,597 351,123
		$1,320,720

F-43

6. OTHER RECEIVABLES

Other receivables at 31st March, 2002 and 2001 consist of the following:

Receivable from business tax overpaid . . . . . . . . . . . . . . . . . . . . . . . . Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $ 4,421 $ 126 692 20 83,639 2,390 376 11 $89,128 $2,547	2001
	NTD $ 4,421 692 83,639 376 $89,128	NTD $22,498 5,396 13,367 7,920
		$49,181

7. INVENTORIES

Inventories at 31st March, 2002 and 2001 consist of the following:

Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $238,001 $ 6,800 412,978 11,799 278,740 7,964 929,719 26,563 (26,362) (753) $903,357 $25,810	2001
	NTD $238,001 412,978 278,740 929,719 (26,362) $903,357	NTD $ 394,485 341,534 421,325
		1,157,344 (11,268)
		$1,146,076

As of 31st March, 2002 and 2001, insurance coverage for inventories both amounted to $250,000 (US$7,143).

8. LONG-TERM EQUITY INVESTMENTS

Long-term equity investments at 31st March, 2002 and 2001 consist of the following:

	2002 Carrying Value Ownership Percentage NTD USD $2,662,881 $76,083 100.00 55,534 1,587 100.00 30,742 879 100.00 1 — 100.00 300,316 8,580 100.00 300,315 8,580 100.00 56,915 1,626 60.00 19,080 545 48.00 — — — $3,425,784 $97,880	2001	2001
Original Cost NTD USD $143,312 $4,095 33,587 960 63,286 1,808 14,659 419 300,000 8,571 300,000 8,571 8,258 236 18,822 538 — — $881,924 $25,198		Carrying Value NTD $2,204,953 50,626 53,139 4,793 — — 76,211 — 50,000 $2,439,722	Ownership Percentage
NTD $143,312 33,587 63,286 14,659 300,000 300,000 8,258 18,822 — $881,924	NTD $2,662,881 55,534 30,742 1 300,316 300,315 56,915 19,080 —		100.00 100.00 100.00 100.00 — — 60.00 — 3.33
	$3,425,784

F-44

Long-term equity investment income (loss) for the three-month periods ended 31st March, 2002 and 2001 is summarized as follows:

Phihong International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phitek International Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guang-Lai Investment Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hon-Sheng Investment Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong PWM Brasil LTDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E.P.I. Technology (H.K.) Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $(18,681) $(533) 965 28 (3,845) (110) (742) (21) 121 3 120 3 4,329 124 786 22 $(16,947) $(484)	2001 NTD $42,554 2,638 (13,992) (2,163) — — 17,465 — $46,502
	NTD $(18,681) 965 (3,845) (742) 121 120 4,329 786 $(16,947)

For the three-month period ended 31st March, 2002, the investees for which the Company recognized its investment income (loss) under equity method based on unreviewed financial statements include Phihong USA Corp., Phihong Japan Corp., Phihong PWM Brasil LTDA. and E.P.I. Technology (H.K.) Co., Ltd. For the three-month period ended 31st March, 2001, the investees for which the Company recognized its investment income (loss) under equity method based on unreviewed financial statements include Phihong USA Corp., Phitek International Co., Ltd., Phihong Japan Corp. and Phihong PWM Brasil LTDA.

Phihong International Corp. (‘‘PHI’’) was incorporated in British Virgin Islands in 1996. The Company made additional investments in Phihong (Dongguan), Phihong (Shanghai) and Dahong (Tiengin) to manufacture various power supplies through PHI in mainland China.

Phitek International Co., Ltd. (‘‘PHK’’) was incorporated in British Virgin Islands in 1999. The Company made additional investments in Dahong (Dongguan) to manufacture various power supplies through PHK in mainland China.

Phihong USA Corp. was incorporated in USA in 1998, and is engaged as an agent in sale of the Company’s products and provision of related customer services.

Guang-Lai Investment Co., Ltd. and Hon-Sheng Investment Co., Ltd. were incorporated in October 2001. Both of them are primarily engaged in investing activities.

Phihong Japan Corp. was incorporated in Japan in 2000 and is engaged as an agent in sale of the Company’s products and provision of related customer service. As the net value of Phihong Japan turned to negative as at 31st March, 2002, the Company not just recognized long-term equity investments loss of $742 (US$21), but recorded deferred credit of $3,842 (US$110) for the three-month period ended 31st March, 2002, which reflected the excess of loss over the initial investment cost.

Phihong PWM Brasil LTDA. was incorporated in Brasil and is engaged in sale of the Company’s products.

E.P.I. Technology (H.K.) Co., Ltd. was incorporated in Hong Kong in 2001. The Company made additional investments in Chuohong (Shen Chung), to manufacture various power supplies through E.P.I. in mainland China.

F-45

9. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at 31st March, 2002 and 2001 consist of the following:

		2002	2002	2002	2002			2001
Cost		Reassessed Value Increment		Accumulated Depreciation		Carrying Value		Carrying Value
NTD $589,350 124,665 76,515 7,414 30,978 2,704 358	USD $16,839 3,562 2,186 212 885 77 10	NTD $32,305 — — — — — —	USD $923 — — — — — —	NTD $ — 16,985 32,090 1,389 15,323 2,542 —	USD $ — 485 917 39 438 73 —	NTD $621,655 107,680 44,425 6,025 15,655 162 358	USD $17,762 3,077 1,269 173 447 4 10	NTD $ 39,758 8,848 51,462 5,383 16,186 308 234,765
$831,984	$23,771	$32,305	$923	$68,329	$1,952	$795,960	$22,742	$356,710

The Company recorded the appreciation in value of land in 1993 to reflect the value appraised and published by the government. Reserve for land value increment tax, payable upon sale of land, is presented under long-term liabilities.

In March 1999, the Company bought a parcel of land from Formosa Plastics Corp. and Nan Ya Plastics Corp. at $466,712 (US$13,335). The Company has fully paid the amount and the title of land has been transferred to the Company on 26th February, 2002.

In October 2001, the Company bought a parcel of land with a factory from Yue-Jie Co., Ltd. at $190,000 (US$5,429). The Company has fully paid the amount and the title of land and factory has been transferred to the Company on 14th January, 2002.

At 31st March, 2002 and 2001, certain property, plant and equipment were pledged to secure shortterm borrowings. The collateralized real properties are as follows:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $39,758 $1,136 7,036 201 $46,794 $1,337	2001
	NTD $39,758 7,036 $46,794	NTD $39,758 8,848
		$48,606

At 31st March, 2002 and 2001, insurance coverage for property, plant and equipment, excluded land and prepayment on purchase of equipment, amounted to $208,859 (US$5,968) and $69,625 (US$1,989), respectively.

10. OTHER ASSETS

Other assets at 31st March, 2002 and 2001 consist of the following:

Refundable deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Temporary tax payment (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $11,371 $325 21,572 616 20,039 572 584 17 $53,566 $1,530	2001
	NTD $11,371 21,572 20,039 584 $53,566	NTD $10,094 15,839 — —
		$25,933

F-46

11. SHORT-TERM BORROWINGS

Short-term borrowings at 31st March, 2002 and 2001 consist of the following:

Procurement loans . . . . . . . . . . . . . . . . . . . .	2002 Annual Interest Rate Balance NTD USD 2.56%–2.99% $42,475 $1,214	2002 Annual Interest Rate Balance NTD USD 2.56%–2.99% $42,475 $1,214	2001
	Annual Interest Rate 2.56%–2.99%		Annual Interest Rate 1.163%–8.161%	Balance
		NTD $42,475		NTD $69,908

As of 31st March, 2001, certain time deposits were pledged for procurement loans, please see Note 16.

12. CAPITAL STOCK

The Company’s outstanding capital stock at 31st March, 2001 amounted to $1,534,600 (US$43,846). In 2001, the Company issued additional $425,900 (US$12,168) common shares through stock dividends of $383,650 (US$10,961) and bonuses to employees to common stock of $42,250 (US$1,207). Consequently, at 31st March, 2002, the Company’s outstanding capital stock was increased to $1,960,500 (US$56,014), divided into 196,050,000 common shares with a par value of $10 (US$0.29) each.

On 8th April, 2002, the Board of Directors approved to issue additional $394,900 (US$11,283) common shares through stock dividends of $352,890 (US$10,083) and bonuses to employees to common stock pending confirmation by the shareholders in their meeting.

Earnings per share are based upon the weighted average number of shares of stock outstanding during each year. For the three-month ended 31st March, 2001, the weighted average number of shares used in the calculation of earnings per share has been restated for the retroactive effect of the stock dividends issued in 2001.

13. RETAINED EARNINGS

According to the Company Law of ROC and the Company’s Articles of Incorporation, 10 per cent. of the Company’s annual earnings, after paying tax and offsetting deficit, if any, should first be appropriated as legal reserve until such reserve equals to the amount of the Company’s capital, and then appropriated necessary special reserve as regulated by laws or domestic authorities.

Any remaining balance, unless to be retained partially by the Company or resolved otherwise by the stockholders, shall then be appropriated as follows:

a. 3 per cent. to 10 per cent. as bonuses to employees,
b. 5 per cent. bonuses to directors and supervisors, and
c. 85 per cent. to 92 per cent. as dividends to stockholders, while stock dividends are in prior consideration. If the year of earnings distribution generated a operating cash inflow and no major capital investment in the following year, of such dividends, not less than 10 per cent. of distributed earnings, can be paid by cash.

14. INCOME TAX

The provision for income tax for the three-month period ended 31st March, 2002 is as follows:

Income tax expense — current period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NTD $30,000 (6,000) $24,000	USD $857 (171)
		$686

F-47

The components of deferred tax asset (liability) as of 31st March, 2002 are as follows:

Deferred tax asset (liability): Unrealized inventory devaluation losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . Unrealized bad debt losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized profit from inter-affiliate transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized exchange losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term equity investments income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset — noncurrent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NTD $ 6,500 1,400 1,800 7,600 3,000 21,000 (570,268) (528,968) 32,300 $(561,268)	USD $ 186 40 51 217 86 600 (16,293)
		(15,113) 923
		$(16,036)

Current income tax expense for the three-month period ended 31st March, 2002 and income tax payable as of 31st March, 2002 is reconciliated as follows:

Income tax expense at statutory rate of 25% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term equity investment loss accounted for by equity method . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (reversal of) deferred income tax asset (liability): Unrealized gain on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . Unrealized devaluation loss on inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized bad debt expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized profit from inter-affiliate transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current period’s withholding income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add prior year’s income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable as at 31st March, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NTD $ 25,460 4,237 303 30,000 (4,467) (3,840) (3,665) 3,000 (6,000) 737 15,765 (661) 85,159 $100,263	USD $ 727 121 9
		857 (127) (109) (105) 85 (171) 21
		451 (19) 2,433
		$2,865

Temporary tax payment of $20,039 (US$572) as at 31st March, 2002 was balance of prior year’s withholding income tax.

The income tax returns for the years through 1997 have been examined and approved by the tax authority.

The informations of Imputation Credit (‘‘IC’’) on the undistributed earnings as of 31st March, 2002 is as follows:

		NTD	USD
Balance of Imputation Credit Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$	76,818	$ 2,195
Undistributed earnings for the years of 1997 and before . . . . . . . . . . . . . . . . . . . . . . . . . .	$	133,572	$ 3,817
Undistributed earnings for the years of 1998 and after . . . . . . . . . . . . . . . . . . . . . . . . . . .	$1,006,286		$28,751
Expected IC ratio on distributed earnings for the year of 2002 . . . . . . . . . . . . . . . . . . . . .		17.47%
Actual IC ratio of earnings distribution for the year of 2001 . . . . . . . . . . . . . . . . . . . . . . .		8.42%

The expected IC ratio for the year of 2002 has considered the estimated income tax payable of 2001.

F-48

15. RELATED PARTY TRANSACTIONS

Names and relationships of the related parties are as follows:

Name
Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . .
Phihong International Corp. . . . . . . . . . . . . . . . . . . . . .
Phitek International Co., Ltd. . . . . . . . . . . . . . . . . . . . .
Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . .
Phihong PWM Brasil LTDA. . . . . . . . . . . . . . . . . . . . .
Densei-Lambda K.K. . . . . . . . . . . . . . . . . . . . . . . . . . .

Relationship

The Company holds a 100% ownership interest
The Company holds a 100% ownership interest
The Company holds a 100% ownership interest
The Company holds a 100% ownership interest
The Company holds a 60% ownership interest
One of the directors of the Company

The Company’s major transactions with the related parties are summarized as follows:

Sales

Sales to related parties for the three-month periods ended 31st March, 2002 and 2001 are summarized as follows:

2002	2001	2001
Amount NTD USD $94,077 $2,688 12,321 352 — — 3 — $106,401 $3,040	Amount NTD $203,894 8,368 62,453 143 $274,858	Percentage to Net Sales
NTD $94,077 12,321 — 3 $106,401		14.63 0.60 4.48 —
		19.71

The price that the Company sold its finished goods to affiliates is determined by each other in considering the product type, cost and market price, etc.

Cost of Sales — Purchases

Purchases from related parties for the three-month periods ended 31st March, 2002 and 2001 are summarized below:

2002	2001	2001
Amount NTD USD $8,548 $244 28 1 $8,576 $245	Amount NTD $59,590 5,302 $64,892	Percentage to Net processing
NTD $8,548 28 $8,576		5.94 0.53
		6.47

The purchase price for both related parties and unrelated parties are similar.

F-49

Processing Fee

Processing fee incurred for the three-month periods ended 31st March, 2002 and 2001 are as follows:

2002	2001	2001
Amount NTD USD $73,734 $2,107 15,629 446 $89,363 $2,553	Amount NTD $106,721 1,558 $108,279	Percentage to Total Processing Fee
NTD $73,734 15,629 $89,363		64.70 0.94
		65.64

The processing fee is determined by the Company and its affiliates’ mutual agreement.

Accounts Receivable

Accounts receivable from affiliates as at 31st March, 2002 and 2001 are summarized as follows:

Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong PWM Brasil LTDA. . . . . . . . . . . . . . . . . . . . . . . . . . Phitek International Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $88,669 $2,533 9,847 281 — — 170 5 $98,686 $2,819	2001
	NTD $88,669 9,847 — 170 $98,686	NTD $136,627 20,190 194,174 132
		$351,123

Accounts Payable

Accounts payable due to related parties as at 31st March, 2002 and 2001 are summarized as follows:

Phihong International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $1,205,464 $34,442 5,717 163 $1,211,181 $34,605	2001
	NTD $1,205,464 5,717 $1,211,181	NTD $1,674,615 856
		$1,675,471

Other Receivables

Other receivables from affiliates as at 31st March, 2002 and 2001 are as follows:

Phitek International Co., Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong PWM Brasil LTDA. . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $262,108 $7,489 15,908 454 731 21 $278,747 $7,964	2001
	NTD $262,108 15,908 731 $278,747	NTD $27,421 — 3,095
		$30,516

F-50

Other Payables

Other payables to affiliates as at 31st March, 2002 and 2001 are as follows:

Phihong International Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $11,754 $336 2,155 62 $13,909 $398	2001
	NTD $11,754 2,155 $13,909	NTD $ — 268
		$268

Property Transactions

Sales of property, plant and equipment to related parties for the three-month periods ended 31st March, 2002 and 2001 are as follows:

Related Party Phihong International Corp. . . . . . Phitek International Co., Ltd. . . . . Total . . . . . . . . . . . . . . . . . . . . . . Related Party			2002
	Items Book Value NTD USD Machinery and equipment $152 $ 4 Office equipment 161 5 Office equipment 58 2 . . . . . . . . . . . . . . . . . . $371 $11 Items . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .		Book Value NTD USD $152 $ 4 161 5 58 2 $371 $11	Selling		Price USD $ 4 5 2 $11		Gain (Loss)
			NTD $152 161 58 $371	NTD $154 161 58 $373 2001				NTD $(2) — — $(2)	USD $— — —
									$—

			Items		Book Value $ 66 4,126 4,626 $8,818		Selling Price $ 66 7,684 5,370 $13,120		Gain (Loss)
Phihong USA Corp.. . . . . . . . . . . . Phihong International Corp. . . . . . . Phitek International Co., Ltd. . . . . . Total . . . . . . . . . . . . . . . . . . . . . .		Machinery and equipment Machinery and equipment Machinery and equipment . . . . . . . . . . . . . . . . . . .							$ — (3,558) (744
									$(4,302)

Commission Income

Densei-Lambda K.K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $302 $9	2001
		NTD $449

Commission Expenses

Other payables to affiliates as at 31st March, 2002 and 2000 are as follows:

Phihong USA Corp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phihong Japan Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $15,240 $435 1,950 56 $17,190 $491	2001
	NTD $15,240 1,950 $17,190	NTD $17,958 588
		$18,546

Credit Guarantees

See Note 17.

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16. PLEDGED PROPERTIES

At 31st March, 2002 and 2001, the following assets are pledged to secure loans from banks:

Pledged time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2002 NTD USD $ — $ — 39,758 1,136 7,036 201 $46,794 $1,337	2001
	NTD $ — 39,758 7,036 $46,794	NTD $ 1,832 39,958 8,848
		$50,438

17. COMMITMENTS AND CONTINGENCIES

Loan Guarantees

The Company has guaranteed the payments of loans of Phihong USA Corp. $140,000 (US$4,000) as at 31st March, 2002.

Letters of Credit

Outstanding letters of credit as at 31st March, 2002 are as follows: (unit: dollar)

U.S. Dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,721.75

18. OTHERS

Fair Value of Financial Instruments

The fair value of non-derivative financial instruments at 31st March, 2002 is summarized as follows:

Items Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . Notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable — affiliates . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables — affiliates. . . . . . . . . . . . . . . . . . . . . . . . Long-term equity investments . . . . . . . . . . . . . . . . . . . . . . . . Other financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities: Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable — affiliates. . . . . . . . . . . . . . . . . . . . . . . . Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current financial liabilities . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .	Carrying Value NTD USD $566,115 $16,174 5,730 163 668,099 19,089 98,686 2,820 89,128 2,547 278,747 7,964 3,425,784 97,880 11,371 325 42,475 1,214 333,370 9,525 719,321 20,552 1,211,181 34,605 83,161 2,376 1,165 33 100,263 2,865 44,050 1,259	Fair Value
		NTD USD $566,115 $16,174 5,730 163 668,099 19,089 98,686 2,820 89,128 2,547 278,747 7,964 3,425,784 97,880 11,371 325 42,475 1,214 333,370 9,525 719,321 20,552 1,211,181 34,605 83,161 2,376 1,165 33 100,263 2,865 44,050 1,259

Approaches and assumptions employed in assessing the fair value of financial instruments are summarized as follows:

Financial instruments classified as current assets and liabilities, cash and cash equivalents, notes receivable, accounts receivable, accounts receivable — affiliates, short-term borrowings, short-term bills, notes payable, accounts payable, accounts payable — affiliates, and other financial instruments etc., whose expiry dates are short-term recognize carrying value as fair value.

Long-term equity investments, provided market prices are available, are valued at market prices. Otherwise, available financial or other useful information is employed to compute fair value.

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Refundable deposits and advance deposits from customers, is stated at discounted value.

19. RECLASSIFICATIONS

Certain accounts in the 2001 financial statements have been reclassified to conform to the 2002 method of presentation.

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APPENDIX A — TAIWAN, THE REPUBLIC OF CHINA

The information set forth in this section has been extracted from various government and other publicly available publications, which have not been prepared or independently verified by the Company, the Managers, the Trustee, the Depositary or any of their respective affiliates or advisors in connection with the Offering.

General

Taiwan is an island of 36,000 square kilometers located across the Taiwan Strait from the PRC. About one quarter of the island is arable and the remainder is mainly mountainous. Taiwan has a population of approximately 23 million and is one of the most densely populated areas of the world.

Political Status and International Relations

The ROC has a unique international political status. Although the Chinese nation has existed for several thousand years, since 1949, Taiwan and the Chinese mainland have been separately governed. The ROC, which was founded in 1912, governs Taiwan while the Peoples’ Republic of China (the ‘‘PRC’’), which was founded in 1949, has governed the Chinese mainland for the past 52 years. The ROC asserted that the ROC and the PRC are equal political entities which should enter into ‘‘state to state’’ relations while the PRC claims that it is the sole government in China and that Taiwan is part of China. Although relations between the ROC and the PRC have improved in a number of significant respects, the PRC has consistently refused to renounce the possibility that it may at some time use force to gain control over Taiwan.

Although the ROC is no longer a member of the United Nations, it maintains active trade and financial relations with most major economic powers and maintains trade missions in locations around the world. On 1st January, 2002, the ROC became the 144th member of the World Trade Organization and the ROC government is currently seeking re-admission to the United Nations.

The ROC Government is organized into five branches or ‘‘Yuans’’, namely: the Executive Yuan, the Legislative Yuan, the Judicial Yuan, the Examination Yuan and the Control Yuan. The Executive Yuan formulates and implements national economic policy.

The ROC Government is headed by the President, who also serves as the commander-in-chief of the armed forces and is partially entrusted with the exercise of emergency powers. In the past, the National Assembly has elected the President and Vice President to six-year terms. However, beginning in 1996 the President and Vice President have been directly elected by the people for four-year terms. The President appoints the Premier and the Deputy Premier and Cabinet ministers on the recommendation of the Premier. The Premier heads the Executive Yuan (the Cabinet). The Legislative Yuan is the ROC’s sitting legislative body, and is responsible for the enactment of all national laws. The Judicial Yuan administers the judicial system and vests judicial review powers in the Council of Grand Justices. The Control Yuan audits government accounts and has the power to investigate and impeach government officials. The Examination Yuan is empowered to examine and select government officials and establish pay scales and other terms of employment for the civil service.

Since 1986, the ROC Government has been implementing political liberalization. The ROC Government has made progress in democratizing the political process, resulting in the development of opposition political parties, the beginning of open elections, and tolerance for open public debates. As a result of these changes, one of the opposition parties, Democratic Progressive Party (‘‘DPP’’), has obtained a greater representation in the government. On 18th March, 2000, Mr. Chen Shui-bien, the DDP candidate was elected President of the ROC.

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Economy

The table below sets forth selected economic data relating to the ROC for the periods indicated.

Real gross national product (percentage change). . . . . . . . . . . . Consumer price index (age change) . . Industrial production index(1) . . . . . . . Exports . . . . . . . . . . . . . . . . . . . . . . Imports . . . . . . . . . . . . . . . . . . . . . . Trade balance . . . . . . . . . . . . . . . . . Current balance . . . . . . . . . . . . . . . . Foreign exchange reserves . . . . . . . . . Government surplus (deficit) (NT$ billions) . . . . . . . . . . . . . . .		Year Ended 31st December, (except where indicated)

Notes:

(1) Industrial production index represents an index of the total annual value of ROC industrial production based on a scale with the year 1991 equaling 100.

(2) Public data not available as of the date of this Offering Circular.

Sources: Taiwan Statistical Data Book, Council for Economic Planning and Development, ROC; Quarterly National Economic Trends, Taiwan Area, Directorate General of Budget, Accounting and Statistics, Executive Yuan, ROC; Financial Statistics Monthly, Taiwan District, ROC; Economic Research Department, the Central Bank of China; and Monthly Statistics of the Republic of China, Directorate-General of Budget, Accounting and Statistics, Executive Yuan, ROC.

From 1981 to 1987, Taiwan’s economy built up a significant current account surplus, peaking at U.S.$18 billion in 1987. With exchange controls in place, the capital account stayed roughly in balance over the period, allowing Taiwan to accumulate official foreign exchange reserves in excess of U.S.$76 billion by the end of that period. During the 1990’s, the foreign exchange reserve increased to approximately U.S.$90.5 billion by the end of 1998, making it one of the largest in the world. The increase in capital was one reason for the rapid share price inflation in the 1980’s and early 1990’s. The CBC acted to reduce the inflationary impact of this rapid acceleration in monetary growth through two measures. First, beginning in 1987, the CBC liberated outflow and restricted inflow of foreign currency and the NT Dollar was allowed to appreciate 50 per cent. against the U.S. Dollar by the end of 1989. Second, the CBC has since gradually relaxed monetary control as the demand for funds has risen due to increasing overseas investment, strong government spending on infrastructure and other capital projects and the revival of domestic private investment.

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APPENDIX B — FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

The information presented in this appendix has been extracted from publicly available documents which have not been prepared or independently verified by the Company, the Managers or any of their respective affiliates or advisors in connection with the Offering. Please note that citizens of the People’s Republic of China and entities organized in the People’s Republic of China are subject to special ROC laws, rules and regulations, which are not discussed in this section.

Foreign Investment

Historically, foreign investment in the ROC securities market has been restricted. From 1983 onwards, however, the ROC Government has from time to time enacted legislation and adopted regulations to permit foreign investment in the ROC securities market.

Overseas Corporate Bonds

Since 1989, the ROC SFC has approved a series of overseas corporate bond (‘‘OCBs’’) issues by ROC companies listed on the TSE in offerings outside the ROC. Since December 1994, the ROC SFC has also permitted ROC companies whose shares are traded on the ROSE to issue and offer OCBs.

Under the current ROC laws and policies, OCBs can be converted by bondholders (other than PRC persons) into shares of the issuing companies or may be converted into depositary receipts issued under the sponsorship of the same ROC company or the shares of other ROC companies, in the case of exchangeable bonds. Public issuing companies may issue corporate debt in offerings outside the ROC. Proceeds from sales of the shares converted from OCBs may be used for re-investment in securities listed on the TSE or traded on the ROSE. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed below.

Bondholders who are non-ROC persons exercising conversion rights will be required to appoint a tax guarantor in the ROC for filing tax returns and making tax payments. Such tax guarantor will be required to meet the qualifications set by the MOF and to act as the guarantor of the converting bondholders’ tax payment obligations.

Under existing ROC laws, subject to certain limited exceptions, repatriation of profits by non-ROC bondholders is subject to the submission of evidence of the appointment of a tax guarantor to, and approval thereof by, the ROC tax authorities or submission of tax clearance certificate so long as the capital gains from securities transaction are exempted from ROC income tax.

Under current ROC law, a non-ROC converting bondholder when exercising the conversion right to convert the bonds into shares of an ROC company is required to appoint a local agent (with such qualifications set by the ROC SFC) to open a securities trading account with a local brokerage firm and a bank account to handle the conversion application, remit funds, exercise shareholders’ rights, hold the securities and cash proceeds in safekeeping, make confirmations and settle trades, report all relevant information and perform such other actions as may be designated by such converting bondholder, on behalf of and as agent for such converting bondholder.

Unless otherwise limited by the Central Bank of China (‘‘CBC’’), an ROC company may, without obtaining further approvals from the CBC or any other government authority of the ROC, convert NT Dollars to other currencies, including U.S. Dollars, in respect of the proceeds of the redemption of the Bonds or payment of interest on, or the repayment of principal upon maturity of, the Bonds.

In addition, a non-ROC converting bondholder may, through its local agent and without obtaining prior approval from the CBC, convert NT Dollars into foreign currencies of net proceeds realized from the sale of the converted shares or any stock dividends relating to such shares, or any cash dividend or other cash distribution in respect of such shares, as well as for inward remittances of subscription payments in connection with a rights offering and tax payment.

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Direct Share Offerings

The ROC Government has permitted ROC companies listed on the TSE or the ROSE to issue shares directly (not through depositary receipt facilities) overseas.

Qualified Foreign Institutional Investors

The Executive Yuan has approved guidelines for direct investment in ROC securities listed on the TSE or ROSE or other ROC securities by certain qualified foreign institutional investors (‘‘QFII’’) approved by ROC SFC and, if applicable, CBC, including:

(i) banks which hold securities assets of at least U.S.$200 million and have experience in safekeeping or management of securities and assets and in international financial or trust business;
(ii) insurance companies which hold securities assets of at least U.S.$200 million;
(iii) fund management institutions which manage assets of at least U.S.$200 million;
(iv) general securities firms which have a net worth of at least U.S.$100 million and experience in international securities investments;
(v) offshore fund management companies of which are more than 50 per cent. of their capital is owned by a ROC securities investment trust enterprise provided that the funds to be invested cannot be derived from sources in the ROC or PRC or be owned by such offshore fund management companies;
(vi) offshore securities firms of which more than 50 per cent. of their capital is owned by a ROC securities firm, or other offshore securities firms which are wholly-owned by such offshore securities firms;
(vii) offshore securities firms of which are wholly-owned by a ROC securities firms, or other offshore securities firms of which are more than 51 per cent. of their capital is owned by such offshore securities firms;
(viii) foreign government-owned investment institutions provided that all the funds to be invested shall be owned by the foreign government;
(ix) pension funds;
(x) mutual funds, unit trusts or investment trusts which have assets of at least U.S.$200 million;
(xi) trust companies which hold securities assets in trust of at least U.S.$200 million and have experience in safekeeping or management of securities or assets and in international financial or trust businesses; and
(xii) any other professional institutional investors which hold securities or assets of at least U.S.$200 million.

Each QFII who wishes to invest directly in the ROC securities market is required to apply for an investment permit from the ROC SFC, provided that any application for investment exceeding U.S.$50 million will require approvals from both the CBC and the ROC SFC. QFIIs who receive the permit(s) may currently invest up to U.S.$3 billion, with certain limited exceptions, and are required to remit the full amount into ROC within two years of receiving the investment permit. Except some restrictions imposed by specific law and regulation, from 1st January, 2001, the individual and aggregate foreign ownership of the issued share capital in a TSE listed company or a ROSE quoted company is not restricted. ROC Custodians for QFIIs are required to submit to the CBC and the ROC SFC a report of trading activities and status of assets under custody and other matters every month. Capital remitted to the ROC under these guidelines may be remitted out of the ROC at any time after the date such capital is remitted to the ROC. Capital remitted out of the ROC may be returned to the ROC within the approved years of the outward remittance

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without ROC SFC approval as long as its aggregate inward remittance after netting off its aggregate outward remittance does not exceed the investment amount approved by the ROC SFC and CBC (if applicable). Capital gains and income on investments may be remitted out of the ROC at any time.

General Foreign Investors

Except for QFIIs, General Foreign Investors (‘‘GFIs’’) may currently invest in ROC securities up to U.S.$5 million (in the case of individual investors) and U.S.$50 million (in the case of institutional investors) after obtaining approval issued by the TSE.

Foreign Investment Approval

With the exception of QFIIs, GFIs and investors in OCBs and DRs, under existing ROC laws and regulations relating to foreign investment, investors (both institutional and individual) who are not ROC persons and wish to make direct investment in the shares of ROC companies are required to submit a Foreign Investment Approval (‘‘FIA’’) application to the Investment Commission of the MOEA or other government authority. The Investment Commission or such other government authority reviews each FIA application and approves or disapproves each application after consultation with other government agencies (such as the CBC and the ROC SFC). Under current law, any non-ROC person possessing an FIA may remit capital for the approved investment and is entitled to repatriate annual net profits, interest and cash dividends attributable to such investment. Investment capital and capital gains attributable to such investment may be repatriated after approvals of the Investment Commission or other government authorities have been obtained.

Prohibited and Restricted Industries

In addition to the general restriction against direct investment by non-ROC persons in shares of ROC companies, non-ROC persons are currently prohibited from investing in certain industries in the ROC pursuant to the Negative List as amended by the Executive Yuan from time to time. The prohibition on foreign investment in the prohibited industries specified in the Negative List is absolute and provides no specific exemption from its application. Pursuant to the Negative List, certain other industries are restricted so that non-ROC persons may invest in such industries only up to a specified level and with the specific approval of the relevant competent authority which is responsible for enforcing the relevant legislation which the Negative List is intended to implement. The businesses the Company being engaged are not a prohibited or restricted industry under the Negative List.

Exchange Controls

The ROC’s Foreign Exchange Control Statute and regulations thereunder provide that all foreign exchange transactions must be executed by banks designated to handle such business by the ROC Ministry of Finance and by the CBC. Current regulations favor trade-related foreign exchange transactions.

Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters, and all foreign currency needed for the import of merchandise and services may be purchased freely from the designated banks for conducting foreign exchanges.

ROC companies, foreign companies recognized by the ROC, resident individuals and foreigners with an alien resident certificate may also, without foreign exchange approval, remit into and out of the ROC foreign currencies of up to U.S.$50 million (or its equivalent) and U.S.$5 million (or its equivalent), respectively, in each calendar year. The above limits apply to remittances involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies. Furthermore, any remittance of foreign currency into the ROC by an ROC company or resident individual in a year will be offset by the amount remitted out of the ROC by the company or individual (as applicable) within its annual quota and will not used up its annual inward remittance quota to the extent of such offset. The above limits apply to remittance involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies. A requirement is also imposed on all enterprises to register medium-and-long-term foreign debt with the CBC.

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In addition, foreign persons, other than the persons mentioned in the preceding paragraph, may, subject to certain requirements, but without foreign exchange approval of the CBC, remit outside and into the ROC foreign currencies of up to U.S.$100,000 (or its equivalent) for each remittance. The above limit applies only to remittances involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies.

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APPENDIX C — THE SECURITIES MARKET OF THE ROC

The information presented in this appendix has been extracted from publicly available document which have not been prepared or independently verified by the Company, the Managers or any of their respective affiliates or advisors in connection with the Offering.

In 1960, the ROC Government established the Securities and Exchange Commission to supervise and control all aspects of the securities market. The Securities and Exchange Commission of the ROC was restructured in early 1997 and renamed as the Securities and Futures Commission (‘‘SFC’’). In the 1970’s and the early 1980’s, the ROC Government implemented a number of steps designed to upgrade the quality and importance of the ROC securities market, such as encouraging listing on the TSE and establishing an over-the-counter market. In the mid-1980’s, the ROC Government began to revise its laws and regulations in a manner designed to facilitate the gradual internationalization of the ROC securities market.

The Taiwan Stock Exchange

In 1961, the ROC SFC established the Taiwan Stock Exchange (‘‘TSE’’) to provide a marketplace for securities trading. The TSE is a corporation owned by government-controlled entities and private banks and enterprises. The TSE is independent of entities transacting business through it, each of which pays a user’s fee. Generally, all transactions in listed securities by brokers, traders and integrated securities firms must be made through the TSE.

The TSE commenced operations in 1962. During the early 1980s, the ROC SFC actively encouraged new listings on the TSE and the number of listed companies grew from 119 in 1983 to 593 by the end of May 2002. As of the end of May 2002, the market capitalization of companies listed on the TSE was NT$10,807 billion.

Historically, Taiwan companies have listed only shares and bonds on the TSE. However, the ROC SFC has encouraged companies to list other types of securities. In 1988, the ROC SFC permitted the issuance of the Taiwan’s first convertible bonds. Since 1989, there have been offerings of domestic convertible bonds and convertible preferred shares. In addition, beneficiary units evidencing beneficiary interests in closed-end investment funds and bonds issued by Asian Development Bank and other foreign banks are also listed on the TSE or traded on the ROSE. The ROC SFC also has regulations which permit foreign issuers to list their equity securities directly on the TSE or through the use of depositary receipts. To date, two foreign issuers have listed their equity securities on the TSE through the use of depositary receipts in accordance with these regulations.

The TSE requirements for listing are based on the following company attributes:

" the number and distribution of stockholders;
" length of time in business;
" amount of capital; and
" profitability.

However, special listing criteria apply to technology companies and key businesses engaging in national economic development or in key public construction BOT projects.

The Over-the-Counter Market (the ‘‘OTC’’) and the ROC Over-the-Counter Securities Exchange

To complement the TSE, the ROSE was established in September 1982 on the initiative of the ROC SFC to encourage the trading of securities of companies who do not qualify for listing on the TSE. As of 26th June, 2002, 397 companies have listed equity securities on the ROSE and the total market capitalization of those companies was NT$704 billion.

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In addition, the Emerging Market on the OTC was established on 2nd January, 2002 on the initiative of the ROC SFC to encourage trading of securities of companies that are public companies but do not qualify for listing on the TSE or ROSE. The price of the emerging stock is decided by negotiation between securities firms and investors. As of 27th June, 2002, 101 companies have registered equity securities on the Emerging Market on the OTC.

The following table sets forth, for the periods indicated, certain information relating to the ROSE Index:

Period ended 1995 . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . 2002 (through 17th June) . . . .	No. of listed companies at period end 41 79 114 176 264 300 333 398	Market value NT$ million 2,796 453,509 2,310,659 1,198,158 1,994,031 4,479,660 14,121,960 1,570,343	Index high 101.96 234.83 343.99 281.41 207.18 329.47 136.23 163.00	Index low 94.02 99.92 210.22 163.89 138.99 99.86 106.74 135.26	Index at period end
					101.96 233.09 245.05 165.80 207.18 104.93 136.23 135.88

Sources: OTC Monthly Review; OTC Data Base; Taiwan Economic Journal.

Taiwan Stock Exchange Index

The TSE Index is calculated on the basis of a wide selection of listed shares weighted according to the number of shares outstanding. This weighted average method is also used for the Standard and Poor’s Index in the United States and the Nikkei Stock Average in Japan. The TSE Index is compiled by dividing the market value by the base day’s total market value for the index shares. The TSE Index is the oldest and most widely quoted market index in Taiwan.

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

The following table shows for the periods indicated information relating to the TSE Index.

Period ended 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 (through 31st May) . . . . . . . . . . . . . . . . . .	Number of listed companies at theperiod end 347 375 404 437 462 474 584 593	Index high 7,051.49 6,982.81 10,116.84 9,277.09 8,608.91 10,202.20 5,551.24 6,462.30	Index low 4,503.37 4,690.22 6,820.35 6,251.38 5,475.00 8,349.91 4,646.61 5443.18	Index at period end
				5,173.73 6,933.94 8,187.27 6,418.43 8,448.84 8,842.63 5,551.24 5,675.65

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.

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Price Limits, Commissions, Transaction Tax and Other Matters

The TSE has placed limits on block trading and on the range of daily price movements. Transactions that involve 500 trading lots or more must be registered and executed pursuant to certain TSE guidelines. Fluctuations in the price of stock traded on the TSE are currently subject to a restriction of seven per cent. above and below the previous day’s closing price (or reference price set by the TSE if the previous day’s closing price is not available because of lack of trading activity) in the case of equity securities, and 5 per cent. in the case of debt securities. Brokerage commissions are proposed by the TSE and approved by the ROC SFC. The current approved maximum brokerage commission is 0.1425 per cent. of the transaction price for equity securities; however, a lower rate may be charged to clients by securities firms at their sole discretion, provided that they must report such rate to the TSE. A securities transaction tax, currently levied at the rate of 0.3 per cent. of the transaction price, is payable by the seller of equity securities and a tax at the rate of 0.1 per cent. of the transaction price is payable by the seller of debt securities other than government bonds. Such securities transaction taxes are withheld at the time of the transaction. According to the amended Statute for Upgrading Industries effective as of 1st February, 2002, no securities transaction tax will be imposed on the sale of the Bonds from 1st February, 2002 to 31st December, 2009. Sales of shares of companies listed on the TSE are currently sold in lots of 1,000 around shares. Odd lot trading, or the purchase or sale of less than 1,000 shares, can be conducted in after-hours trading. Investors who desire to sell odd lots of shares of a listed company occasionally experience delays in effecting such sales.

Regulation and Supervision

The ROC SFC has been under the jurisdiction of the Ministry of Finance since 1981. The ROC SFC has extensive regulatory authority over companies listed on the TSE, companies whose shares are traded on the ROSE and unlisted publicly issuing companies. Such companies are generally required to obtain approval from, or registration with, the ROC SFC for all securities offerings. The ROC SFC has promulgated regulations requiring, unless otherwise exempted, periodic reporting of financial and operating information by all public companies. In addition, the ROC SFC is responsible for the establishment of standards for financial reporting and carries out licensing and supervision with respect to the other participants in the ROC securities markets. The ROC SFC has responsibility for implementation of the ROC Securities and Exchange Law and for overall administration of governmental policies in the ROC securities markets. It has extensive regulatory authority over the offering, issuing and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the ROC SFC to promulgate rules under certain circumstances.

The ROC Securities and Exchange Law prohibits market manipulation. For example, it requires a company to recover certain short-term trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors and shareholders, together with their spouses, minor children and nominees, holding 10 per cent. or more shares of the company. The ROC Securities and Exchange Law prohibits trading by ‘‘insiders’’ based on non-public information that materially affects share price movement. Pursuant to the ROC Securities and Exchange Law, the term ‘‘insiders’’ includes directors, supervisors, managers and shareholders having more than 10 per cent. or more shareholding, together with their spouses, minor children and nominees, or any person who has learned such information due to an occupational or controlling relationship with the issuing company and any person who has learned such information from any of the foregoing. Sanctions can include imprisonment. In addition, damages may be awarded to persons injured by the transaction.

The ROC Securities and Exchange Law also imposes criminal liability on certified public accountants and lawyers who make false certifications in their examination and audit of an issuer’s contracts, reports and other evidentiary documents that are related to securities transactions. The ROC SFC regulations require that financial reports of listed companies be audited by accounting firms consisting of at least three certified public accountants and be signed by at least two certified public accountants.

The ROC Securities and Exchange Law also provide for, among other things, regulations relating to public offerings of securities; measures to strengthen the capital structure of issuers; civil liability for material misstatements or omissions made by issuers; more stringent regulation of the securities activities of officers, supervisors, directors and major shareholders of issuers; regulations regarding tender offers; and a significant expansion of the prohibitions against insider trading, including the imposition of treble civil damages and criminal sanctions.

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The ROC SFC does not have criminal or civil enforcement powers under the ROC Securities and Exchange Law. Criminal actions may be pursued only by prosecutors. Under the ROC law, civil actions may only be brought by plaintiffs who assert that they have suffered damages. The ROC SFC is directly empowered to curb abuses and violations of applicable laws and regulations only through administrative measures.

In addition to providing a market for securities trading, the TSE has primary responsibility for reviewing applications by issuers to list securities on the TSE and the ROSE has primary responsibility for reviewing applications by issuers to list securities on the ROSE. The ROC SFC reviews all securities offerings by listed companies. If issuers of listed securities violate relevant laws and regulations or encounter significant difficulties, the TSE and the ROSE may, with the approval of the ROC SFC, delist securities of such issuers.

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REGISTERED OFFICE OF THE COMPANY

Phihong Enterprise Co., Ltd. No.16, Lane 530 Chung-Cheng N. Road San-Chung, Taipei County, Taiwan, ROC

TRUSTEE AND REGISTRAR

The Bank of New York 101 Barclay Street 21st Floor West New York, NY 10286 U.S.A.

PRINCIPAL PAYING, TRANSFER AND CONVERSION AGENT

The Bank of New York One Canada Square 48th Floor, London E14 5AL England

AUDITORS TO THE COMPANY

Reality United Firm, CPAs F1.6, No.2 Fu-Shing N. Rd., Taipei, Taiwan

Deloitte & Touche Fl. 7, No. 102 Kuang-Fu S. Rd., Taipei, Taiwan

ROC LEGAL ADVISOR

TO THE COMPANY

Lee & Li Attorneys at Law 7th Floor, 201 Tun-Hwa N. Road Taipei, Taiwan ROC

LEGAL ADVISOR TO THE MANAGERS

Baker & McKenzie 14/F, Hutchison House 10 Harcourt Road Hong Kong

LUXEMBOURG LISTING, PAYING, TRANSFER, REPLACEMENT AND CONVERSION AGENT

The Bank of New York (Luxembourg) S.A. Aerogolf Centre 1A, Hoehenhof L-1736 Senningerberg Grand Duchy of Luxembourg

Printed by ROMAN 8357-1

AI assistant

PHIHONG — Capital/Financing Update 2013

52096_rns_2013-10-28_f1a13a18-d1e5-45b1-abb8-ef443ff41979.pdf

PHIHONG ENTERPRISE CO., LTD.

U.S.$50,000,000

1 per cent. Convertible Bonds due 2007

Issue Price: 100 per cent.

Senior Co-lead Manager

Citicorp International Limited

Managers

KGI Securities Co., Ltd.

Capital Far East Limited

NOTICE TO INVESTORS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

TABLE OF CONTENTS

CERTAIN DEFINED TERMS, CONVENTIONS AND CURRENCY OF PRESENTATION

SUMMARY

Phihong Overview

Competitive Strengths

Strategy

Corporate and Other Information

Summary Financial Data

RISK FACTORS

Risks Relating to the Group’s Business

The Group’s business depends on a small number of customers

The Group does not usually enter into long-term supply contracts with its customers and therefore its customers may cancel their orders, change production quantities or delay production

The Group’s business is highly dependent on the communications devices, computer peripherals and consumer electronics businesses

The Group’s historical sales growth and historical margins may not be sustainable

The communications devices, computer peripherals and consumer electronics accessories and components manufacturing industries are highly competitive

The Group’s operating results vary significantly

The Group may experience shortages of raw materials and components

The Group is subject to operational risks and its insurance may not be adequate

The Group may not be able to develop new products or keep pace with technological change

New power related technology that revolutionarily abandons or decreases the use of power supplies may have adverse impact on the Group’s business

The Group may be unable to manage its growth effectively

The Group is dependent on its ability to attract and retain qualified employees

The Group is exposed to the risks of currency exchange rate fluctuations

The Group may be subject to changes in tax benefits and increased taxes

The Group’s business may be harmed, and the price of the Bonds and Shares may be adversely affected, by changes in general economic and business conditions resulting from the recent terrorist attacks on the United States.

The Group’s operation may be adversely affected by natural disaster in the ROC and the PRC

Changes in the Group’s independent auditors

Risks Relating to the Offering

The Bondholders’ ability to exercise their conversion rights may be limited

Transfers of the Bonds and Shares are restricted.

An active trading market for the Bonds may not develop

Shares eligible for future sale by the current shareholders may adversely affect the market price of the Shares

Risks Relating to the ROC

Disruptions in the ROC’s political environment could seriously harm the Group’s business

The adverse economic conditions in Taiwan and Asia may affect the Company and the Bonds

Foreign exchange approvals may be required

Financial reporting and accounting standards in the ROC differ from other countries; bonus share issuance.

Risks relating to the PRC

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

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

MARKET PRICE INFORMATION

DIVIDENDS AND DIVIDEND POLICY

EXCHANGE RATES

CAPITALIZATION

BUSINESS

Overview

Competitive Strengths

Highly reliable products and safety standards compliance

Close relationships with key industry leaders

Strong research and development programs and design capacity

Provide one-stop shopping supply capacity to the customers

Strict quality control processes and standards

Experienced professional management team

Strategy

Maintain position as a leading manufacturer of power supplies in mobile communications devices sector

Diversify the customer base to reduce reliance on limited number of customers

Focus on high-growth markets

Establish strategic alliance with market leaders to improve technology and develop new customers

Co-location of production facilities and logistic hubs with industrial leaders in major markets

Increasing vertical and horizontal integration of manufacturing process

History and Organization of the Company

Products

Power supply units

Mobile telephone accessories

Others

PHIHONG Capital/Financing Update 2013