OFFERING MEMORANDUM

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12,125,000 Global Depositary Shares Representing 48,500,000 Common Shares

Realtek Semiconductor Corp.

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

US$17.25 per GDS

We are selling 41,000,000 of our common shares and one of our shareholders, the National Financial Stabilization Fund, or the selling shareholder, is selling 7,500,000 of our common shares, each in the form of global depositary shares, or GDSs. Each GDS represents the right to receive four of our common shares.

Our common shares are listed on the Taiwan Stock Exchange. On January 24, 2002, the last reported sale price of our common shares on the Taiwan Stock Exchange was NT$172.00, equivalent to US$4.90 per share, based on an exchange rate of NT$35.080 to US$1.00. We have applied to list the GDSs offered in reliance on Regulation S on the Luxembourg Stock Exchange. We expect the GDSs offered in reliance on Rule 144A to be eligible for trading in the Private Offerings, Resales and Trading through Automated Linkages Market, also known as the PORTAL Market, and the GDSs offered in reliance on Regulation S to be eligible for trading on the International Order Book of the London Stock Exchange. Prior to this offering, there has been no market anywhere for the GDSs.

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

Neither the GDSs nor the underlying common shares have been or will be registered under the U.S. Securities Act of 1933, as amended, or any state securities laws and are being offered and sold only to ‘‘Qualified Institutional Buyers,’’ as defined under Rule 144A under the U.S. Securities Act, who are also qualified purchasers within the meaning of Section 2(a)(51) of the U.S. Investment Company Act of 1940, as amended, and outside the United States and the Republic of China to non-U.S. persons in accordance with Regulation S under the U.S. Securities Act. We will be relying on an exemption from the provisions of Section 7 of the U.S. Investment Company Act provided by Section 3(c)(7). For a description of restrictions on transfers of the GDSs, see ‘‘Notice to Investors’’ and ‘‘Plan of Distribution.’’

You can only withdraw the common shares represented by the GDSs after the expiry of a period of three months following the closing date of this offering.

Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting Commission . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds to Us (before expenses) . . . . . . . . . . . . . . . . . . . . . Proceeds to Selling Shareholder . . . . . . . . . . . . . . . . . . . . . .	Per GDS US$ 17.25 US$ 0.43125 US$16.81875 US$16.81875	Total
		US$209,156,250.00 US$ 5,228,906.25 US$172,392,187.50 US$ 31,535,156.25

Additionally, the initial purchasers will reimburse us for certain expenses, fees and commissions payable in connection with the offering.

The initial purchasers are offering the GDSs subject to various conditions. The initial purchasers expect to deliver the GDSs in book-entry form through The Depository Trust Company, Euroclear Bank S.A./N.V. as the operator of the Euroclear System, and Clearstream Banking, Socie´te´ Anonyme to purchasers on or about January 29, 2002, which will be the third business day following the date of pricing. See ‘‘Plan of Distribution.’’ The selling shareholder has granted the initial purchasers the right to purchase up to 1,798,500 GDSs, representing 7,194,000 shares, solely to cover over-allotments.

A copy of this document has been lodged with the Registrar of Companies in Singapore as an information memorandum for the purposes of Section 106D of the Companies Act, Chapter 50 of Singapore. The Registrar of Companies in Singapore takes no responsibility as to the contents of this document.

Sole Global Coordinator and Bookrunner Salomon Smith Barney

Salomon Smith Barney

ABN AMRO Rothschild

UBS Warburg

Barits Securities (Hong Kong) Limited

January 24, 2002

Barits Securities Corporation is the ROC financial adviser to our company.

You should rely only on the information contained in this offering memorandum. We have not, and the selling shareholder and the initial purchasers have not, authorized anyone to provide you with different information. We are not, and the selling shareholder and the initial purchasers are not, making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this offering memorandum is accurate as of any date other than the date on the front cover of this offering memorandum. Our business, financial condition, results of operations and prospects may have changed since that date.

TABLE OF CONTENTS
	Page
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11
Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	23
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	24
Market Price Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	25
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	27
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	28
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . .	30
Our Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	41
Our Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	62
Principal Shareholders and Selling Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	65
Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	66
Description of Our Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	67
Changes in Issued Share Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	72
Description of Global Depositary Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	73
Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	91
The Securities Markets of the ROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	97
Foreign Investment and Exchange Controls in the ROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	101
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	105
Notice to Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	108
Enforceability of Foreign Judgments in the ROC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	115
Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	115
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	116
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	117
Summary of Principal Differences Between ROC GAAP and U.S. GAAP . . . . . . . . . . . . . . . . . . . . . . .	118
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	A-1

Unless the context requires otherwise, references in this offering memorandum to ‘‘our company,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ are to Realtek Semiconductor Corp. References to ‘‘our common shares’’ or ‘‘our shares’’ are to our common shares, par value NT$10.00 per share, and references to ‘‘GDSs’’ or ‘‘global depositary shares’’ are to the global depositary shares, which we are offering pursuant to this offering memorandum, each representing four of our common shares.

In this offering memorandum, ‘‘ROC’’ or ‘‘Taiwan’’ refers to the island of Taiwan and other areas under the effective control of the Republic of China, and the ‘‘ROC Company Law’’ refers to the Company Law of the ROC. See ‘‘Glossary’’ for definitions of certain industry and technical terms we use in this offering memorandum.

All financial information, descriptions and other information in this offering memorandum regarding our activities, financial condition and results of operations are, unless otherwise indicated, presented on an unconsolidated basis.

We publish our financial statements in New Taiwan dollars, the lawful currency of the ROC. All references to ‘‘United States dollars,’’ ‘‘US dollars’’ and ‘‘US$’’ are to United States dollars, and references to ‘‘New Taiwan dollars,’’ ‘‘NT dollars’’ and ‘‘NT$’’ are to New Taiwan dollars. Unless otherwise specified, where financial information has been translated from NT dollars into US dollars, it has been translated, for convenience only, at the rate of NT$34.56 = US$1.00, the noon buying rate of the U.S. Federal Reserve Bank of New York on September 28, 2001, the last business day of the first nine months of 2001. The noon buying rate of the U.S. Federal Reserve Bank of New York on January 23, 2002 was NT$35.080 = US$1.00. See ‘‘Exchange Rates.’’

Any discrepancies in any table between totals and sums of the amounts are due to rounding.

The GDSs are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the U.S. Securities Act and the applicable securities laws of any state or other jurisdiction pursuant to a registration thereunder or exemption from registration. As a prospective purchaser, you should be aware that you may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in this offering memorandum entitled ‘‘Notice to Investors’’ and ‘‘Plan of Distribution.’’

We accept responsibility for the information contained in this document, which comprises listing particulars for the purpose of listing the GDSs on the Luxembourg Stock Exchange. To the best of our knowledge, information and belief (having taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.

The Luxembourg Stock Exchange takes no responsibility for the contents of this offering memorandum, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this offering memorandum.

The GDSs are offered in reliance upon an exemption from registration under the U.S. Securities Act for an offer and sale of securities that does not involve a public offering in the United States. This offering memorandum is personal to you and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the GDSs. The distribution of this offering memorandum by you to any other person, other than any person retained by you to advise you with respect to your purchase, is not authorized, and any disclosure by you of any of its contents, without our prior written consent, is prohibited. By accepting delivery of this offering memorandum, you agree to the foregoing and you agree not to make photocopies of this offering memorandum. In making a purchase of GDSs, you will be deemed to have made the acknowledgments, representations and agreements provided in the section of this offering memorandum entitled ‘‘Notice to Investors.’’

In making an investment decision regarding the GDSs, you must rely on your own examination of our company and the terms of the offering, including the merits and risks involved. The contents of this offering memorandum are not to be considered as legal, business, financial or tax advice. You should consult your own counsel, accountants and other advisors as to legal, tax, business, financial and related aspects of a purchase of the GDSs.

We have not registered, and do not intend to register, as an investment company under the U.S. Investment Company Act. We intend to rely upon an exemption from the registration requirements of the U.S. Investment Company Act that requires us to limit the persons resident in the United States who purchase securities in our company to qualified purchasers (as defined in Section 2(a)(51) of the U.S. Investment Company Act). Accordingly, each holder of and beneficial owner of an interest in the GDSs will be deemed to make certain representations, warranties, acknowledgments and agreements, and will be deemed to agree to certain additional restrictions on the transfer of the GDSs. See ‘‘Notice to Investors.’’

We and the selling shareholder reserve the right to withdraw this offering of GDSs prior to their issuance, and we, the selling shareholder and the initial purchasers reserve the right to reject any commitment to subscribe for the GDSs, in whole or in part. We, the selling shareholder and the initial purchasers also reserve the right to allot to you less than the full amount of GDSs sought by you. The initial purchasers and some related entities may acquire for their own account a portion of the GDSs.

The laws of some jurisdictions may restrict the distribution of this offering memorandum and the offer and sale of the GDSs. To purchase the GDSs, you must comply with all applicable laws and regulations in force in any jurisdiction in which you purchase, offer or resell the GDSs or possess this offering memorandum. You must also obtain any consent, approval or permission required for your purchase, offer or sale of the GDSs under the laws and regulations in force in any jurisdiction to which you are subject or in which you make such purchase, offer or resale. None of our company, the selling shareholder, the initial purchasers and our respective representatives are making any representation to you or any person regarding the legality of any investment in the GDSs by you or any person under applicable legal investment or similar laws or regulations. This offering memorandum does not constitute an offer to sell or a solicitation of an offer to buy any of the GDSs to you or any person in any jurisdiction where it is unlawful to make such an offer or solicitation.

Salomon Brothers International Limited, on behalf of the initial purchasers, may engage in transactions that stabilize, maintain or otherwise affect the price of the GDSs, including over-allotment, covering transactions and stabilizing transactions in the GDSs, during and after the offering of the GDSs. Such stabilization, if commenced, may be discontinued at any time. For a description of these activities, please refer to the section in this offering memorandum entitled ‘‘Plan of Distribution.’’

Some of the market data included in this offering memorandum are based on independent industry publications or other publicly available information. Although we believe that these independent sources are reliable, we have not independently verified the accuracy or completeness of this information.

Our unconsolidated financial statements as of and for the years ended December 31, 1998, 1999 and 2000 have been audited. Our unconsolidated financial statements as of and for the nine months ended September 30, 2000 and 2001 and financial information included in this offering memorandum based on these interim financial statements have been reviewed but not audited. All our financial statements have been prepared in accordance with the ‘‘Rules Governing the Preparation of Financial Statements of Securities Issuers,’’ other applicable ROC laws and regulations, and generally accepted accounting principles in the ROC, collectively referred to as ‘‘ROC GAAP’’ in this offering memorandum. ROC GAAP differs in many important respects from generally accepted accounting principles in certain other countries. The material differences between ROC GAAP and generally accepted accounting principles in the United States, or U.S. GAAP, as applicable to us are discussed under ‘‘Summary of Principal Differences Between ROC GAAP and U.S. GAAP.’’

iii

NOTICE TO NEW HAMPSHIRE RESIDENTS

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

SUMMARY

This summary highlights information contained elsewhere in this offering memorandum. It may not contain all the information you should consider before deciding to invest in the GDSs. You should read this entire offering memorandum carefully, including the ‘‘Risk Factors’’ section, and the financial statements and related notes included in this offering memorandum.

Our Company

We are one of the world’s leading fabless designers and suppliers of integrated circuits for network interface cards, or NIC ICs, and switches used in local area networks, or LANs. Our principal products, the 10Mbps Ethernet and 100Mbps Fast Ethernet NIC ICs, enjoy leading worldwide market shares. We also design and supply integrated circuits for PC peripherals and consumer electronics products. We believe our current product lines, comprised of data, voice and image ICs, position us effectively for the future, when the convergence of various forms of communication will require integrated single-chip solutions that seamlessly process data, voice and video traffic.

We currently operate in the following three business divisions:

Communications Networking Products Division —Our Communications Networking Products Division designs and develops ICs for wireline and wireless NICs and LAN switches. Principal products in this division include 10Mbps Ethernet NIC ICs, 100Mbps Fast Ethernet NIC ICs and Layer 2 switch ICs. In 2000, we had a global market share of 65.0% in our NIC ICs, based on IDC estimates.
PC Peripheral Products Division —Our PC Peripheral Products Division designs and develops ICs for audio codecs, sound chips, mouse controllers, clock generators and liquid crystal display, or LCD, controllers. An audio codec encodes and decodes analog sound into digital codes and vice versa, enabling computers to receive, transmit and playback sound. In the first three quarters of 2001, we had a global market share of approximately 23% in audio codecs, based on IDC estimates and market-based assumptions.
Consumer Electronics Products Division— Our Consumer Electronics Products Division designs and develops ICs for image-related products, such as scanners. Our most promising new products, scanner ICs, were introduced in 2001, and we estimate we had a global market share of approximately 11% for 2001. This division also designs and develops ICs for toys (voice and music record and playback functions) and caller-IDs. During January 2002, we intend to spin-off our consumer electronics IC products business, excluding image-related ICs to a 50%-owned subsidiary.

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Our 65% estimated worldwide market share in NIC ICs allows us to (i) widely deploy our solutions in the products of most leading PC and network hardware companies, (ii) gain volume and market share for our new product releases within a short period of time, (iii) collaborate with and participate in the early product design cycle of our customers, and (iv) gain leverage in negotiating supply terms given our position as an important customer with high demand for raw materials

Our History and Early Development

We were incorporated in 1987. In 1991, we launched our first data networking IC—our 10Mbps Ethernet NIC IC. We researched and developed more efficient chip circuitry and architecture, collaborating with the PC, motherboard and network designers in Taiwan. In 1997, we were among the first companies in the world to introduce single-chip solutions for Fast Ethernet NIC ICs (combining digital and analog signal capability on one chip). During January 2002, we intend to spin off all product lines, except image-related products, in our Consumer Electronics Products Division to M-Square Technologies Corp. in which we hold a 50% interest.

We were listed on the ROC Over-the-Counter Securities Exchange, or the ROSE, in September 1997 and moved our listing to the mainboard of the Taiwan Stock Exchange in October 1998. For the year 2000, we ranked ninth among the top 100 profitable enterprises of the technology industry in the ROC, according to Digital magazine. On January 24, 2002, the closing price of our common shares on the Taiwan Stock Exchange was NT$172.00, implying a market capitalization of NT$60.3 billion (US$1.7 billion based on the exchange rate as of that date).

Competitive Strengths

We believe we have progressed rapidly as a company by closely following our well defined and instructive business model. This model has allowed us to consistently achieve strong financial results. The three cornerstones of our business model, which reflect and apply our competitive strengths and advantages, are outlined below:

Advanced core technologies— We have developed and continue to build on our design capabilities from three primary sources: (i) our high-performance analog and mixed-signal circuit design capability, (ii) our superior knowledge of the IC manufacturing process, and (iii) cross-application of our system knowledge and our intellectual property. These technologies have allowed us to maximize yield and circuit performance while minimizing die size, power consumption and testing costs.
Capture of full ‘‘Taiwan Advantage’’— We benefit from the existence of a well-established, competitive electronics and semiconductor industry in Taiwan, in particular, from the presence of (i) leading PC and notebook vendors, who outsource their production to Taiwanese manufacturers (who collectively manufacture more than 50% of the world’s notebook computers), (ii) the world’s top PC motherboard manufacturers who together account for an estimated 80% of the global PC motherboard market, and (iii) well-established original equipment manufacturers and original design manufacturers in the networking equipment market. Close proximity to our customers facilitates efficient after-sales support, joint-developments and manufacturing improvement process. Also, we are supported on the supply side by the presence of (i) the world’s two largest wafer foundries, TSMC and UMC, and (ii) IC assembly and testing companies, such as SPIL and Greatek. Many of these companies are located in the Hsinchu Science-Based Industrial Park where our company is situated. Close proximity to the supply source facilitates us to mass-produce products at competitive prices.
Strong customer base and loyalty— We serve more than 250 customers. Our customers include (i) certain leading brand PC companies, (ii) motherboard manufacturers such as Asustek and Gigabyte, (iii) network hardware makers such as Accton and D-Link, and (iv) consumer electronics or PC peripheral companies such as Primax, Umax and Tiger Electronics. We also believe that other leading brand PC companies such as Compaq Computer, Hewlett-Packard and Sony are functionally our

customers because they designate and specify our products in their PC designs. We continually seek to strengthen our close relationships with them by offering high-performance, cost-effective IC solutions and jointly developing new products. Frequent collaborations with our customers not only result in design ‘‘wins,’’ but build long-term customer loyalty.

We believe the three underlying cornerstones of our business model listed above must be continually studied and applied for us to remain productive, profitable and competitive. As our business has grown, we believe we have also produced a number of other competitive strengths, including the following:

Cost-effective and customer-focused R&D capabilities —Our research and development efforts are focused on (i) cost-effective solutions for mass production of newly accepted products, the success of which is evidenced by our leading market share in our high-performance and competitively priced principal products, (ii) adoption of a system approach to our chip design, taking into account the product environment in which our ICs will operate, and (iii) delivery of value-added system solutions, such as software drivers, manufacturing utilities and printed circuit board designs, to our customers.
Proximity to the growing Asian PC and networking market— Unlike some of our competitors, who are based in North America, we are located in close proximity to the growing Asian PC and networking markets. PC penetration is still comparatively low in Asia, particularly in China and India. In 2001, when North America experienced slowing PC sales and sluggish demand for further networking equipment, Asian PC sales continued to grow. In China and India, many companies are only now building their LANs for their employees. We believe our presence in Asia and our collaborative effort to design products for the Asian marketplace will continue to fuel our growth in networking and PC peripheral IC solutions.
Experienced management team and highly qualified staff— Our executive officers have, on average, worked for our company for more than 10 years, and in the semiconductor industry for more than 12 years. Our employees are well-qualified, with 69.7% of them holding bachelor’s and 47.4% master’s or doctorate degrees. Our employees average 32 years in age with 5 years of relevant experience. Benefiting from a young, dynamic and highly qualified team of engineers and scientists, we offer competitive compensation packages, which include substantial bonuses, usually in the form of our shares and based on our financial performance.

Business Strategies

Our corporate goal is to maintain the leading market share for each of our principal products, and to capture the leading market share for new and developing products. We focus our efforts on implementing the following strategies in order to achieve this goal:

Market total-solutions to assist customers in achieving rapid time-to-market —We endeavor to provide products and services that go beyond the focus of mere chip design. By (i) co-operating with our customers in product development, (ii) designing products with consideration of their operating environment, and (iii) providing customers with layout reference design and manufacturing programs, we market comprehensive, integrated and flexible system solutions to help our customers achieve rapid time-to-market and, hence, enhance our customer relationships and competitiveness.
Focus on providing high-performance, cost-effective and integrated solutions— We focus on IC solutions that provide an optimal combination of performance, functionality, integration and price in order to maintain technological leadership and competitive edge. For example, we recently introduced a five port Layer 2 switch IC, which integrates all the functions of a switch—connectivity, processing and memory—into a single chip. We believe this single-chip switch IC may soon become a market leader.

Rapidly penetrate high-growth markets —We focus our capital resources, R&D efforts and employee commitments on rapidly penetrating product markets with high-volume, high-growth potential. We foresee our next growth phase to be driven by our recent foray into LAN switch chipsets and our future development of home networking and wireless networking IC solutions. We also selectively look for opportunities in the niche consumer and PC peripheral segments with high-volume growth potential.
Position us for future communications networks —We operate our business in three divisions, each of which focuses on a current form of communications—data in Communications Networking Products, voice in PC Peripheral Products and, increasingly, imaging in Consumer Electronics Products. We believe there is a growing trend towards convergence of various forms of communication. Our current product lines provide us with the necessary tools to competitively position ourselves in this evolving trend, which will require future integrated single-chip solutions to seamlessly handle voice, video and data traffic.
Invest in and maintain high-quality workforce —We will strive to continue attracting and retaining employees of the highest caliber with our supportive work environment and engaging corporate culture as well as competitive compensation.
Selectively pursue strategic acquisitions, partnerships and investments —We continue to selectively seek acquisition and investment opportunities in high-tech companies in Taiwan and overseas that would complement and expand our existing design capabilities, processes and core technologies.

Growth and Recent Results of Operations

Our results of operations have improved during the three years ended December 31, 2000. Our total net operating revenues increased during these three years at a compound annual growth rate, or CAGR, of 58.7% (from NT$2,129.7 million to NT$5,361.2 million (US$155.1 million)). Concurrently, our net income increased at a CAGR of 95.6% (from NT$441.7 million to NT$1,690.2 million (US$48.9 million)). While much of the communications networking, PC peripheral and consumer electronics industries slowed dramatically during the past 12 months, our net operating revenues continued to increase from NT$4,252.2 million for the nine-months ended September 30, 2000 to NT$4,987.7 million (US$144.3 million) for the nine months of 2001, or an increase of 17.3%. Our net income also increased from NT$1,279.0 million to NT$1,569.6 million (US$45.4 million) during the comparable nine-month periods, an increase of 22.7%.

In connection with new ROC regulations requiring the announcement under certain circumstances of an unaudited statement of income (see sections ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operation—Forecasts’’ and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Announcement of Preliminary Unaudited Results of Operations’’), on or about January 11, 2002, we announced the management accounts for the year ended December 31, 2001. The information presented here is derived from, but is not the complete, management accounts announced on or about January 11, 2002.

Unaudited Unconsolidated Statement of Operating Income For the year ended December 31, 2001

(Expressed in thousands of New Taiwan dollars)

Net operating revenues
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating costs
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross proft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized intercompany proft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized intercompany proft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2001
7,275,372
(3,679,636)
3,595,736
(4,583)
5,919
3,597,072
(250,022)
(189,217)
(707,868)
(1,147,107)
2,449,965

Please note that these management accounts are unaudited and were not reviewed under applicable ROC GAAP because accounts from our investee companies were not available as of this date. Accordingly, these management accounts will vary from our audited unconsolidated financial statements for the year ended 2001. There can be no assurance that such variance will not be material. For further discussion, see section ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Announcement of Preliminary Unaudited Results of Operations.’’

In addition, as required by the ROC SFC (see section ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forecasts’’), in light of the foregoing announcement, we announced that our latest revised financial forecasts, released in August 2001, are superseded by the management accounts announced on or about January 11, 2002. For further discussion, see section ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—Announcement of Preliminary Unaudited Results of Operations.’’

Although there can be no assurance as to our continued success, our management believes we have been sheltered from the full effects of the global high-technology downturn by our strong business model and competitive strengths discussed above. See also ‘‘Our Business—Competitive Strengths.’’

Our Location and Registered Office

Our executive and registered offices are located at No. 2, Industry East Road IX, Science-Based Industrial Park, Hsinchu, Taiwan, and our telephone number is (886) 3-578-0211. Our principal corporate Website is located at www.realtek.com.tw . The information contained in our Website is not part of this offering memorandum.

Summary Financial Information

The following summary financial information have been derived from our accounting records, our audited unconsolidated financial statements as of and for the years ended December 31, 1998, 1999, 2000 and our unaudited unconsolidated financial statements for the nine-month periods ended September 30, 2000 and 2001 included elsewhere in this offering memorandum. The audited financial statements have been audited by PricewaterhouseCoopers, independent accountants, while the unaudited financial statements have been reviewed by PricewaterhouseCoopers. Our unconsolidated financial statements are prepared and presented in accordance with reporting requirements of ROC GAAP, which differs in many important respects from U.S. GAAP, see ‘‘Summary of Principal Differences between ROC GAAP and U.S. GAAP.’’ The following summary financial data should be read in conjunction with our unconsolidated financial statements and the related notes included elsewhere in this offering memorandum, and the section ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’

(In millions, except earnings per share data) Unconsolidated Statement of Income Data Net operating revenues Communications networking ICs . . . . . . . . . . . . . . PC peripheral ICs . . . . . . . . . . . . . . . . . . . . . . . . . Consumer electronics ICs . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net operating revenues . . . . . . . . . . . . . . Operating costs (cost of sales) . . . . . . . . . . . . . . . . . . . . Gross proft, adjusted (1) . . . . . . . . . . . . . . . . . . . . . . . Operating expenses Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share (2) ($) . . . . . . . . . . . . . . . . . . . . . . . Earnings per share, adjusted ($) . . . . . . . . . . . . . . . . . . Unconsolidated Balance Sheet Data Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities (excluding current portion) . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year ended December 31, 1998 1999 2000 (audited) NT$ NT$ NT$ US$ 1,186.4 1,992.0 4,025.4 116.5 229.4 309.6 424.5 12.3 665.5 844.3 815.9 23.6 48.4 50.9 95.4 2.7 2,129.7 3,196.8 5,361.2 155.1 (1,249.8) (1,879.9) (2,976.6) (86.1) 879.9 1,316.9 2,378.7 68.8 (54.9) (59.6) (66.2) (1.9) (99.2) (119.2) (126.1) (3.6) (242.9) (352.9) (488.8) (14.1) (397.0) (531.7) (681.1) (19.7) 482.9 785.2 1,697.6 49.1 441.7 740.2 1,690.2 48.9 4.01 4.90 7.66 0.22 2.06(3) 3.37(3) 7.66(3) 0.22 As of December 31, 1998 1999 2000 (audited) 1,695.0 1,403.6 4,306.9 124.7 117.8 130.3 589.5 17.1 317.9 654.4 658.2 19.0 240.6 145.4 565.0 16.3 2,840.5 3,837.8 7,086.9 205.1 357.0 641.5 887.0 25.7 24.4 3.7 1,021.1 29.5 2,432.4 3,155.0 5,128.0 148.4	Nine months ended September 30, 2000 2001 (unaudited) NT$ NT$ US$ 3,218.6 3,718.0 107.6 309.1 692.9 20.0 642.7 539.0 15.6 81.8 37.8 1.1 4,252.2 4,987.7 144.3 (2,354.9) (2,576.2) (74.5) 1,897.3 2,411.0 69.8 (49.7) (160.8) (4.7) (98.1) (131.6) (3.8) (381.1) (504.2) (14.6) (528.9) (796.6) (23.1) 1,368.4 1,614.4 46.7 1,279.0 1,569.6 45.4 5.82 4.49 0.13 3.71(4) 4.49 0.13 As of September 30, 2000 2001 (unaudited) 4,001.5 6,189.3 179.1 411.4 1,836.1 53.1 1,022.8 1,226.5 35.5 420.1 868.2 25.1 6,683.8 9,347.5 270.5 948.2 1,618.9 46.8 1,005.1 1,032.5 29.9 4,683.6 6,623.1 191.6
	1998 1,695.0 117.8 317.9 240.6 2,840.5 357.0 24.4 2,432.4

(1) Gross profit after realized and unrealized inter-company gross profits.

(2) Based on the weighted average number of shares outstanding during each period.

(3) Based on the weighted average number of shares outstanding during each period after adjusting retroactively for the effect of stock dividends and capitalization of employees’ bonus and capital reserve. No adjustment has been made with respect to the stock dividends and capitalization of employees’ bonus approved by the shareholders on May 30, 2001.

(4) Based on the weighted average number of shares outstanding during each period after adjusting retroactively for the effect of stock dividends and capitalization of employees’ bonus and capital reserve, including the stock dividends and capitalization of employees’ bonus approved by the shareholders on May 30, 2001.

The Offering

Issuer . . . . . . . . . . . . . . . . . . . . . . . .	Realtek Semiconductor Corp.
Selling Shareholder . . . . . . . . . . . . .	National Financial Stabilization Fund
Offering . . . . . . . . . . . . . . . . . . . . . .	12,125,000 GDSs at an offering price of US$17.25 per GDS,
	representing 48,500,000 shares, comprised of the offering in the
	United States and the international offering outside the United States
	and the ROC. The offering to certain qualifed institutional buyers in
	the United States who are also qualifed purchasers within the
	meaning of the U.S. Investment Company Act is made in reliance on
	Rule 144A under the U.S. Securities Act. The international offering is
	made outside the United States and the ROC to non-U.S. persons in
	offshore transactions in reliance on Regulation S under the U.S.
	Securities Act. We are relying on an exemption from the provisions of
	Section 7 of the U.S. Investment Company Act provided by Section
	3(c)(7). GDSs offered in the U.S. offering and the international
	offering are referred to as the Rule 144A GDSs and the International
	GDSs, respectively, in this offering memorandum.
	Of the GDSs offered, we are offering 10,250,000 GDSs, representing
	41,000,000 shares, and the selling shareholder is offering 1,875,000
	GDSs, representing 7,500,000 shares.
Shares Outstanding Before GDS
Offering . . . . . . . . . . . . . . . . . . . . . .	350,332,252 common shares (as of December 31, 2001).
Shares Outstanding as adjusted for
this GDS Offering . . . . . . . . . . . . . .	391,332,252 common shares.
Lock-ups . . . . . . . . . . . . . . . . . . . . .	Our company and Cotek Pharmaceutical Industry (a principal
	shareholder) are restricted from issuing or disposing of any common
	shares or securities convertible or exchangeable for our common
	shares for a period of 180 days after the date of this offering
	memorandum without the prior written consent of the global
	coordinator, subject to certain exceptions. The selling shareholder is
	restricted from purchasing or disposing of any common shares or
	securities convertible or exchangeable for our common shares for a
	period of 90 days after the date of this offering memorandum without
	the prior written consent of the global coordinator, subject to certain
	exceptions. See ‘‘Plan of Distribution.’’
Over-allotment Option . . . . . . . . . . .	The selling shareholder has granted Salomon Brothers International
	Limited on behalf of the initial purchasers an option, exercisable in
	whole or in part, from the date of this offering memorandum to the
	date 30 days after the closing of this offering, to purchase up to
	1,798,500 GDSs, representing 7,194,000 shares, solely to cover over-
	allotments, if any. Unless we indicate otherwise, all information in this
	offering memorandum assumes the initial purchasers have not
	exercised the over-allotment option.

The GDSs . . . . . . . . . . . . . . . . . . . .	Each GDS represents four common shares. The GDSs will be issued
	pursuant to the deposit agreement. We and the selling shareholder will
	deposit the common shares to be represented by GDSs with the
	custodian, under the deposit agreement, of The Bank of New York, as
	the depositary, which in turn will deliver the GDSs.
	The Rule 144A GDSs will be evidenced by the Rule 144A Master
	GDR referred to below. The International GDSs will be evidenced by
	the International Master GDR referred to below. Except in the limited
	circumstances described in this offering memorandum, separate
	defnitive global depositary receipts, or GDRs, will not be issued in
	exchange for benefcial interests in the Rule 144A Master GDR or the
	International Master GDR.
Deposit and Withdrawal of Common
Shares . . . . . . . . . . . . . . . . . . . . . . .	Under the deposit agreement, you may deposit common shares with
	the custodian in Taipei and obtain GDSs, and may surrender GDSs to
	the depositary and receive common shares, subject in each case to the
	satisfaction of certain conditions.
	For a period of up to three months after the closing of the offering,
	you will not be entitled to sell or withdraw the shares represented by
	your GDSs. When both we and the selling shareholder have delivered
	to the custodian the physical share certifcates evidencing the shares,
	you may request the depositary to withdraw the shares represented by
	your GDSs and
	• transfer the shares to you; or

• sell the shares on your behalf on the Taiwan Stock Exchange. See ‘‘Description of Global Depositary Shares—Deposit, Transfer and Withdrawal’’ and ‘‘Foreign Investment and Exchange Controls in the ROC—Depositary Receipts.’’ Deposits of our shares generally may be made in our GDS facility, and GDSs may be issued against these deposits when:

we pay stock dividends on our shares;
we make free distributions of shares;
you exercise preemptive rights in the event of capital increases for cash; or
subject to certain conditions, any person purchases our shares on the Taiwan Stock Exchange for deposit in our GDS facility.
See ‘‘Description of Global Depositary Shares—Deposit, Transfer and Withdrawal.’’

On the closing date, we will deliver to the custodian certificates of payment in respect of the shares that we are offering. Under the ROC Securities and Exchange Law and applicable regulations, we are

	required to deliver the physical share certifcates representing these
	shares to the custodian in exchange for the certifcates of payment
	within 30 days after receiving approval from the Ministry of
	Economic Affairs of the ROC, or the ROC MOEA, of the amendment
	of our corporate registration with the ROC MOEA. We have agreed to
	issue and deliver the physical share certifcates in respect of the
	certifcates of payment initially deposited in connection with this
	offering on or prior to the date that is 60 days after the closing date.
	On the closing date, the selling shareholder will deliver its common
	shares in the offering to the custodian through the book entry system
	maintained by the Taiwan Securities Central Depositary Co., Ltd, or
	the central depositary, from the account of the selling shareholder held
	at the central depositary to the account of the custodian for the
	depositary held at the central depositary.
Absence of a Market for GDSs and
Listing . . . . . . . . . . . . . . . . . . . . . . .	The only trading market for common shares is the Taiwan Stock
	Exchange. See ‘‘Market Price Information.’’ Prior to the offering,
	there has been no trading market for the GDSs. We cannot assure you
	that any market for the GDSs will develop. We have applied to list the
	International GDSs on the Luxembourg Stock Exchange, to have the
	Rule 144A GDSs designated as eligible for trading on the PORTAL
	Market and to have the International GDSs designated as eligible for
	trading on the International Order Book of the London Stock
	Exchange.
	We expect the GDSs to be eligible for trading on the Luxembourg
	Stock Exchange in board lots of 100 GDSs.
Dividends . . . . . . . . . . . . . . . . . . . .	The common shares represented by GDSs will rank pari passu with
	other outstanding common shares in respect of dividends. Cash
	dividends will be paid to the depositary in NT dollars. The deposit
	agreement provides that, except in certain circumstances, cash
	dividends received by the depositary will be converted by the
	depositary into US dollars and distributed to the holders of the GDSs,
	less ROC withholding tax, other governmental charges and the
	depositary’s fees and expenses. See ‘‘Dividend Policy’’ and
	‘‘Description of Global Depositary Shares—Dividends, Other
	Distributions and Rights.’’
Voting Rights . . . . . . . . . . . . . . . . . .	Subject to the provisions of the deposit agreement, when we ask the
	depositary to ask for your instructions, you will be entitled to instruct
	the depositary how to vote the common shares underlying your GDSs.
	See ‘‘Description of Global Depositary Shares—Voting of Deposited
	Property.’’
ROC Taxes . . . . . . . . . . . . . . . . . . .	Dividends, whether in cash or shares, that we declare out of retained
	earnings and distribute to a non-ROC holder are subject to ROC
	withholding tax, which we will collect prior to distribution. The rate
	of this withholding tax is 20% on the amount of the distribution, in
	the case of cash dividends, or on the par value of the shares, in the

	case of stock dividends. Distributions of shares declared by us out of
	capital reserves are not subject to ROC tax. Under current ROC law,
	capital gains on the sale of GDSs and shares represented by GDSs are
	exempt from ROC income tax. See ‘‘Taxation—ROC Taxation.’’
Settlement . . . . . . . . . . . . . . . . . . . .	We expect the Depository Trust Company, or DTC, will accept the
	Rule 144A GDSs into its book-entry settlement system. So long as the
	Rule 144A GDSs are eligible for such system, all Rule 144A GDSs
	will be evidenced by a single master global depositary receipt, or Rule
	144A Master GDR, registered in the name of Cede & Co., as nominee
	of DTC. Your interests in the book-entry Rule 144A GDSs will be
	represented through fnancial institutions acting on your behalf as
	direct and indirect participants in DTC. DTC settlement practices are
	applicable to the Rule 144A GDSs held in DTC.
	We expect the International GDSs will be accepted for clearance
	through Euroclear Bank S.A./N.V., as operator of the Euroclear
	System, or Euroclear, and Clearstream Banking, socie´te´ anonyme, or
	Clearstream, in each case on a book-entry basis. So long as the
	International GDSs are eligible for such system, all International
	GDSs will be evidenced by a single master global depositary receipt,
	or International Master GDR, registered in the name of the common
	depositary for Euroclear and Clearstream. Your interests in the book-
	entry International GDSs will be represented by records maintained by
	Euroclear and Clearstream and their respective account holders. Initial
	settlement of the International GDSs will take place against delivery
	of the International GDSs to the common depositary.
	Transfers within DTC, Euroclear and Clearstream will be in
	accordance with the usual rules and operating procedures of the
	relevant system.
	All transfers are subject to restrictions described in greater detail in
	‘‘Notice to Investors.’’
Use of Proceeds . . . . . . . . . . . . . . . .	We expect to use the approximately US$172.4 million in net proceeds
	to us from the GDS offering in a manner consistent with our
	application to the Securities and Futures Commission of Taiwan,
	including the (i) purchase of testing and R&D equipment, (ii)
	purchase of R&D software and intellectual property, and (iii)
	expansion of our offshore R&D and customer service capabilities and
	for various other matters generally in connection therewith. See ‘‘Use
	of Proceeds.’’ We will not receive any of the net proceeds of the sale
	of shares, in the form of GDSs, by the selling shareholder.

RISK FACTORS

Investing in the GDSs involves risks, and you should carefully consider the risks described below before making an investment decision. In addition, you should also carefully consider all of the information contained in this offering memorandum, including our unconsolidated financial statements and related notes. You should note that we are governed in the ROC by a legal and regulatory environment that in some material respects may be different from that prevailing in other countries.

Risks Related to Our Financial Condition and Business

We may fail to develop new products.

Our future success will depend upon our ability to develop new IC solutions for existing and new markets, introduce such products in a timely and cost-effective manner and have such products selected for design into new products of leading equipment manufacturers, or design wins. The development of these new products is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products. Successful product development and introduction depends on a number of factors, including, among other things, accurate prediction of market requirements and evolving standards, accurate new product definition, timely completion and introduction of new product designs, availability of foundry capacity, achievement of high manufacturing yields and market acceptance of our and our customers’ products. Further, we cannot assure you that we will be able to introduce new products in a timely and costeffective manner or in sufficient quantities to meet customer demand or that such products will satisfy customer requirements or achieve market acceptance. If we or our customers fail to develop and introduce new products successfully and in a timely manner, our business, financial condition and results of operations would be materially and adversely affected.

We are highly dependent on sales of our current networking products.

Our communications networking products, particularly NIC ICs, accounted for a substantial portion of our net operating revenues (approximately 74.5% for the nine months ended September 30, 2001). While we strive to diversify our sales through the introduction of new products, we cannot assure you that we will not continue to be dependent on sales of our NIC ICs. Any reduction in the demand for our NIC ICs resulting from increased demand for competing NIC ICs or from any competing technology may adversely and materially affect our financial condition and results of operations.

We may be unable to keep abreast with rapid technological changes and market developments in the semiconductor industry.

The semiconductor industry is characterized by rapidly changing technology, frequent new product introductions, evolving industry standards, intense competition and increasingly short product life cycles. In particular, the markets for our networking communications ICs continue to undergo a period of rapid growth and consolidation. For example, while we hold the dominant market share in 10Mbps Ethernet NIC and 100Mbps Fast Ethernet NIC chip markets, the demand for these relatively mature products may wane following the introduction of the gigabit network. Our products are generally based on industry standards, which are continually evolving. The emergence of new industry standards could render our products or those of our customers unmarketable or obsolete and may require us to incur substantial unanticipated costs to comply with any such new standards. Moreover, our past sales and profitability have resulted, to a significant extent, from our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products. Our continued ability to adapt to such changes and anticipate future standards will be a significant factor in maintaining or improving our competitive position and our prospects for growth. We cannot assure you that we will be able to anticipate the evolving standards in the semiconductor industry or that we will be able to successfully develop and introduce new products. If we fail to anticipate technological change and introduce new products that achieve market acceptance, our business, financial condition and results of operations could be materially and adversely affected.

We depend on a relatively small number of customers for a substantial proportion of our sales.

We depend on a relatively small group of customers for a substantial portion of our net operating revenues. In the aggregate, our top five customers accounted for approximately 60.7% and 56.8% of our net operating revenues for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Our ability to maintain close relationships with these customers is essential to the ongoing growth and profitability of our business. These customers may vary their order levels significantly from period to period. We cannot assure you that we will be able to maintain our existing sales volumes to those customers or to maintain or add to our existing customer base. Any loss or cancellation of business from our major customers, significant changes in scheduled deliveries to any of these customers, or decreases in the prices of products sold to any of these customers may affect our business and results of operations materially and adversely.

Most of our customers’ purchase orders may be canceled or deferred easily.

Our customers’ purchasing decisions are based on many factors. For example, they may offer competing products designed by themselves or third parties. We generally do not have any sales contracts with our customers. Our customers typically purchase products on a purchase order basis and do not become obligated to purchase any quantity of products prior to the issuance of the purchase order, even if the customer has previously forecast a substantially higher volume of product. Further, a purchase order may be canceled or deferred by our customers on short notice without significant penalty. We cannot assure you that any of our customers will continue to place orders in the future at the same levels as in prior periods or at all.

Moreover, the sales cycle for testing and evaluating our products can range from three to six months or more and it can take an additional six months or more before a customer commences volume production of equipment that incorporates our products. The delays inherent in such lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans, which could result in the loss of our anticipated sales. Our business, financial condition and results of operations could be materially adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release products employing our products.

Demand for communications networking, consumer electronics, and PC peripherals may decrease.

Almost all our net operating revenues are derived from customers who use our products as component parts in the manufacture of communications networking, consumer electronics, PCs and PC peripherals and other communications products. A significant decrease in the demand for communications networking, consumer electronics, PCs and PC peripherals and other communications products may decrease the demand for our products and could seriously affect our results of operations. Furthermore, we are subject to many risks beyond our control that affect the success or failure of a particular customer, including, among others, the following:

competition faced by the customer in its particular industry;
market acceptance of the customer’s products;
engineering, marketing and management capabilities of the customer;
technical challenges unrelated to our technology faced by the customer in developing its products; and
resources of the customer.

Declining average selling prices of our customers’ products due to the downturn in 2001 in the communications technology, consumer electronics and PC industries, have placed significant pressure on the prices of our products that are used in these devices. If these average selling prices continue to decrease,

pricing pressure on our products may reduce our net operating revenues and therefore seriously harm our operating results.

We cannot assure you that any of our products, even if successfully developed and marketed, will generate revenue in excess of the costs of development and marketing or not be quickly rendered obsolete by changing consumer preferences or products embodying new technologies or features.

We depend on third party foundries for wafer fabrication—limiting our control over production, supply and delivery of our products.

We rely primarily on UMC and TSMC to fabricate our wafers. We provide our independent foundries with rolling forecasts of our production requirements, but the ability of each foundry to provide semiconductor devices to us is limited by the foundry’s available capacity. We do not have a long-term volume purchase agreement or a guaranteed level of production capacity with any of our foundry suppliers because we believe excess foundry capacity is currently available. We place our orders on a purchase order basis, and these foundries may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice. In particular, foundry customers that are larger and better financed than our company or that have long-term agreements with our independent foundries may cause such foundries to reallocate capacity in a manner adverse to us. In addition, if we choose to use a new foundry, several months are typically required to complete the qualification process before we can begin shipping products from the new foundry. If either UMC or TSMC experiences financial difficulties or suffers any damage or destruction to its respective facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner. Even our current outside foundries would need to have certain manufacturing processes qualified in the event of disruption at another foundry, which we may not be able to accomplish in a timely enough manner to prevent an interruption in supply of the affected products.

There are significant risks associated with our reliance on third party foundries, including the lack of ensured wafer supply; limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and the unavailability of or delays in obtaining access to key process technologies. In addition, IC manufacturing is a highly complex and technologically demanding process. Although we work closely with our independent foundries to minimize the likelihood of reduced manufacturing yields, we cannot assure you that we will not experience lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. We cannot assure you that any existing or new foundries would be able to manufacture wafers with acceptable manufacturing yields. Furthermore, we cannot assure you that our independent foundries will continue to deliver sufficient quantities of wafers on a timely basis, will not experience lower than expected manufacturing yields in the future, or will continue to have excess capacity, any of which events could materially and adversely affect our business, financial condition and results of operations.

We are subject to risks associated with product defects and incompatibilities.

Products as complex as those offered by us frequently contain errors, defects and bugs when first introduced or as new versions are released. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of such products, which could damage our reputation and adversely affect our ability to retain our existing customers and to attract new customers. Alleviating such problems may require significant expenditures of capital and resources by us. We cannot assure you that, despite testing by us, our suppliers or our customers, errors, defects or bugs will not be found in new products after commencement of commercial production, resulting in additional development costs, loss of, or delays in, market acceptance, diversion of technical and other resources from our other development efforts, claims by our customers or others against us, or the loss of credibility with our current and prospective customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. While product returns constituted less than 0.3% of our operating revenues since 1998, we cannot assure you that we can maintain this low level in future.

We may be unable to accurately predict our product demand.

The lead time required to fabricate wafers is often longer than the lead time our customers provide to us for delivery of their product requirements. We must build inventory well in advance of product shipments. Because our markets are volatile and subject to rapid technology and price changes, there is a risk that we will forecast incorrectly and produce insufficient inventories of particular products, resulting in lost sales. Furthermore, if anticipated sales and shipments in any quarter do not occur when expected, expense and inventory levels could be disproportionately high, requiring significant working capital and inventory writedowns or write-offs. In addition, third party foundries may not be able to fabricate enough wafers as fast as we need them, and rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and other expenses. Any of these could adversely affect our business and operating results.

We are highly dependent on key senior personnel.

Our success depends greatly on our ability to continue to attract, retain and motivate qualified personnel, including key senior executives and research and development, engineering, sales and marketing manufacturing, support and other personnel. We do not carry key person insurance on any of our personnel. We expect competition for these personnel in Taiwan, as well as internationally, to intensify in the future as we and our competitors hire additional personnel to support business expansion. The loss of key personnel without adequate replacement, or the inability to attract new qualified personnel, could have a material adverse effect on us.

We may be unable to manage our growth.

We have experienced a period of rapid growth and expansion that has placed, and continues to place, significant strain on our resources. To accommodate this growth, we will be required to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the improvement of our accounting and other internal management systems, all of which may require substantial management effort. We cannot assure you that such efforts can be accomplished successfully. In addition, this growth, as well as our product development and selling, general and administrative activities, has necessitated an increase in the number of our employees, resulting in increased responsibilities for our management. If we sustain our growth in the future, we will need to continue to implement and improve our operational, financial and management information systems and to hire, train, motivate and manage our expanding employee base. We cannot assure you that our systems, procedures and controls will be adequate to support our operations. Any failure to improve our operational, financial and management information systems, or to hire, train, motivate or manage our employees could have a material adverse effect on our business, financial condition and results of operations.

Our business, operating results and financial condition may be adversely affected by fluctuations in exchange rates.

Our purchases of wafers and equipment are primarily denominated in US dollars. While we also sell our products in US dollars, our customers may in some circumstances pay for the products in New Taiwan dollars at the spot exchange rate. A significant movement in the US dollar/NT dollar exchange rate could therefore have material impact on our earnings. We recognized a foreign exchange loss of NT$0.9 million for 1998, a foreign exchange loss of NT$14.7 million for 1999, foreign exchange gain of NT$23.8 million (US$0.7 million) for 2000, a foreign exchange gain of NT$2.1 million for the first nine months of 2000 and foreign exchange gain of NT$42.2 million (US$1.2 million) for the first nine months of 2001. We enter from time to time into forward foreign currency contracts or other financial derivatives to hedge our foreign currency exposure, but we cannot assure you that we will be fully protected against exchange rate fluctuations.

We may not put our cash reserves and balances to optimal use, and our strategic investments subject us to numerous risks.

We have generated substantial net cash to date, a significant amount of which we had invested in strategic and other long-term investments. Our management has broad discretion as to the utilization of our cash flow. We cannot assure you that it will be utilized in a manner that you would consider optimal, or that it can or will be invested to yield a significant return.

As part of our business strategy, we expect to review acquisition prospects that would complement our existing product offerings, augment our market coverage or enhance our technological capabilities. See ‘‘Our Business—Business Strategies.’’ Although we have no current agreements or negotiations underway with respect to any material acquisitions, we may make acquisitions of businesses, products or technologies in the future. However, we cannot assure you that we will be able to locate suitable acquisition opportunities. Our future acquisitions could result in potentially dilutive issuances of equity securities, large one-time write-offs, the incurrence of debt and contingent liabilities or amortization expenses related to goodwill and other intangible assets, difficulties in the assimilation of operations, personnel, technologies, products and the information systems of the acquired companies, diversion of management’s attention from other business concerns, risks of entering geographic and business markets in which we have no or limited prior experience and potential loss of key employees of acquired organizations, any of which could materially and adversely affect our results of operations.

We hold a substantial amount of investment securities.

We historically own a substantial amount of investment securities within the meaning of Section 3(a)(2) of the Investment Company Act. These primarily consist of (i) our investments in subsidiaries and other companies in related fields of business, which we account for in our financial statements under ‘‘long-term investments,’’ (ii) our investments in mutual funds, primarily bond funds, which we account for in our financial statements under ‘‘marketable securities,’’ and (iii) time deposits and short-term bonds, which may be considered investment securities given all the facts and circumstances, and which we account for in our financial statements as sub-items under ‘‘cash and cash equivalents.’’

Our long-term investments are stated at the lower of cost or market value for listed companies and at cost for unlisted companies, if we own less than 20% of the voting rights of these companies or have no significant influence over their operational decisions. We account for long-term investments in which we own at least 20% of the voting rights using the equity method. The excess of the acquisition cost over the investee company’s net asset value is capitalized and amortized over five years. Marketable securities are recorded at cost when acquired and are stated at the lower of aggregate cost or market value as at the relevant balance sheet date. See Note 2 to the financial statements for the nine months ended September 30, 2001 included in this offering memorandum.

As of September 30, 2001, (i) our long-term investments amounted to NT$2,380.3 million (US$68.9 million) with a market value of NT$2,865.4 million (US$82.9 million), (ii) our marketable securities amounted to NT$1,918.5 million (US$55.5 million) with a market value of NT$1,937.3 million (US$56.1 million), and (iii) our time deposits and short-term bonds amounted to NT$1,431.3 million (US$41.4 million). See Notes 4 and 11 to the financial statements for the nine months ended September 30, 2001 included in this offering memorandum.

We have not registered, and do not intend to register, as an investment company under the U.S. Investment Company Act. We will be relying upon an exemption from the registration requirements provided by Section 3(c)(7) of the U.S. Investment Company Act, which requires us to limit the persons resident in the United States who purchase securities in our company to qualified purchasers within the meaning of Section 2(a)(51).

We are subject to a recent Bureau of Export Administration proceeding.

violation of the Export Administration Regulations, or the EARs, without the required written letter of assurance. On July 12, 1995, an Administrative Law Judge issued a Default Order in the matter ordering (i) the revocation and surrender of all licenses issued by the Office of Export Services in which we appear or participate and (ii) that we be denied, for a period of five years, all U.S. export privileges. On August 3, 1995, the Under Secretary for Export Administration affirmed the Default Order. As a practical matter, denial of U.S. export privileges meant we could not purchase U.S.-origin products and technology, and we were added to a ‘‘Denied Persons List’’. The Denied Persons List is regularly published in the U.S. Federal Register and is accessed by U.S. exporters seeking to comply with the EARs. On August 3, 2000, the Default Order lapsed and we were removed from the Denied Persons List.

On December 10, 2001, the BXA wrote to inform us that it has commenced an administrative proceeding against us for allegedly violating the Default Order. The BXA is seeking administrative sanctions for (i) a civil penalty of up to US$11,000 per violation (for four alleged violations), (ii) a denial of our export privileges, and/or (iii) exclusion from practice before the BXA. We intend to attempt to settle the BXA proceeding. Nevertheless, if the proceeding were resolved adversely to our interests, we cannot assure you that our operations would not be adversely affected by our inability to purchase U.S.-origin products or software. See ‘‘Legal Proceedings’’ .

Risks Related to Intellectual Property

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

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

discontinue using process technologies that could cause us to stop manufacturing particular products;
pay substantial monetary damages;
seek to develop non-infringing technologies, which may not be feasible; and/or
seek to acquire licenses to the infringed technology, which may not be available on reasonable commercial terms, or at all.

We could be seriously harmed by any of these developments. Litigation, which could result in substantial costs to us and divert our resources, may also be necessary to enforce our patents or other intellectual property rights or to defend against claimed infringement of the rights of others. If we fail to obtain necessary licenses or the occurrence of patent infringement or other intellectual property litigation, our business could be seriously harmed.

We may fail to adequately protect our proprietary rights.

We believe that our success will depend in part upon our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. These legal protections provide only limited protection and may be time consuming and expensive to obtain and enforce for one or more of the following reasons:

our failure to adequately protect our proprietary rights could result in competitors offering similar products and impair our ability to compete;

despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary;
our competitors may independently develop similar, but not infringing, technology, duplicate our products, or design around our patents or our other intellectual property; and
other parties may breach confidentiality agreements or other protective contracts with us, and we may not be able to enforce our rights in the event of these breaches.

Our pending patent applications may not be approved. Even if our pending patent applications are approved, the resulting patents may not provide us with any competitive advantage or may be challenged by third parties. If challenged, our patents might not be upheld or their claims could be narrowed. Any litigation surrounding our rights could force us to divert important financial and other resources away from our business operations.

Risks Relating to Our Industry

We are vulnerable to cyclical downturns in the semiconductor industry.

The semiconductor industry is highly cyclical. Economic downturns historically have caused reduced product demand, rapid declines in product prices, low capacity utilization and production over-capacity. For example, during 1997 and 1998, intense competition in the semiconductor industry worldwide, coupled with a general economic downturn in the Asia Pacific region, caused the prices of and demand for many of our products to decline significantly. Also, since the beginning of 2001, the semiconductor industry has been adversely impacted by the sudden and rapid decline in worldwide demand for electronic products such as PCs, PC peripherals, consumer electronics and other communications devices. As such, electronics systems and applications companies started to scale back their orders for semiconductor devices to avoid further inventory accumulations. As a result, the average selling prices for some of our products have declined. These declines reduced our gross margins and seriously harmed our operating results. We cannot predict when the semiconductor industry will recover. Even after the industry recovers, our product prices, sales volumes and margins may again significantly decline in future cyclical downturns, and our business, financial condition and results of operations may seriously suffer accordingly.

The IC industry, and particularly the IC design segment, is intensely competitive and is characterized by price erosion, declining gross margins and product obsolescence. We may fail to compete adequately in this industry.

The IC industry, and particularly the IC design segment, is intensely competitive. Competition typically occurs at the design stage, where the customer evaluates alternative design solutions that require IC products. We face a constant and increasing risk of losing customers to our competitors. The competitive environment also creates downward pressure on prices and requires higher spending to address the competition, both of which tend to keep gross margin lower.

In each particular market in which we participate, we face competition from different groups of companies. Some of our competitors have substantially greater financial and other resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. In our communications networking IC business, our competitors for NIC ICs include Intel Corporation and 3Com Corporation, and our competitors for switch ICs include Broadcom Corporation, Kendin Communications, Inc. and Marvell Technology Group Ltd. In our PC peripheral IC business, our competitors include Analog Devices, Inc., SigmaTel, Inc., Cypress Semiconductor Corporation and Integrated Circuit Systems, Inc., or ICS. In our consumer electronics IC business, our competitors include National Semiconductor Corporation, Grandtech Semiconductor Corporation and Genesys Logic Inc. Emerging companies are also increasing their participation in the market, as well as customers who develop their own ICs.

Several companies, both large and small, have introduced products that compete with ours or have announced their intention to incorporate our product functions into the PC core logic chipset. We also anticipate potential competition from suppliers of products based on new technologies. As such, the industries in which we compete are intensely competitive and are characterized by rapid technological change, product obsolescence and continuous price erosion. For example, PC motherboard makers are increasingly integrating the functions of the NIC into the motherboard itself, obliterating the need for NICs. We are able to benefit from this trend because the integration of the NIC functions into the motherboard, or the so-called LAN on motherboard, requires the same chips that are used to produce an NIC. Some computer chipset manufacturers are trying to integrate the functions of the NIC into the PC chipset directly, or the so-called LAN on chipset, which means that that NIC ICs that we produce could become obsolete. While we believe that significant technological challenges remain in the successful implementation of LAN on chipset in the near to medium term, we cannot assure you that we will not be adversely and materially affected by any technological breakthrough in implementing LAN on chipset.

We may be unable to produce sufficient quantities of products at a competitive cost and with the speed and other performance characteristics desired by customers. If competitors succeed in supplanting our products, our market share may not be sustainable and net operating revenues, gross margin, and earnings would be adversely affected. We must continually develop new products with higher performance and manage our costs in order to compete. We cannot assure you that we will be able to do this successfully, and if we fail to reduce costs or introduce new products in response to competitive pressures, our business will be adversely affected.

Risks Relating to the World

We face uncertain global economic conditions.

The September 11, 2001 terrorist attacks on the United States, and the ensuing retaliatory measures—such as military action in Afghanistan—taken by the United States and its allies may have unpredictable adverse effects on global economic conditions, the financial markets and our business and results of operations. The terrorist attacks on the World Trade Center in New York and the Pentagon near Washington, D.C., and the retaliatory actions taken or threatened to be taken by the United States have caused uncertainty and volatility in the U.S. and international economies and financial markets, and coincided with an overall weakening of economic conditions. In addition, we cannot assure you there will not be further terrorist attacks against the United States or U.S. businesses operating abroad, or an escalation of the retaliatory actions. We cannot predict what effect these events may have on global economic conditions, the financial markets, or on our business and results of operations.

Risks Related to the Republic of China

We face substantial political risks associated with doing business in Taiwan, particularly due to the tense relationship between Taiwan and China.

Our principal executive offices and substantially all our assets are located in Taiwan and most of our net operating revenues are derived from our operations in Taiwan. Accordingly, our business and results of operations and the market price of our shares and the GDSs may be affected by changes in Taiwan governmental policies, taxation, inflation or interest rates and by social instability and diplomatic and social developments in or affecting Taiwan which are outside of our control. Further, you should also note that we are governed in the ROC by a legal and regulatory environment that in some material respects may be different from that prevailing in other countries. Taiwan, as part of the Republic of China, has a unique international political status. The People’s Republic of China, or the PRC, asserts sovereignty over mainland China and Taiwan and does not recognize the legitimacy of the Taiwan government. Although significant economic and cultural relations have been established during recent years between Taiwan and the PRC, the government in the PRC has indicated that it may use military force to gain control over Taiwan if the Taiwan government declares independence or indefinitely delays progress towards unification as well as if any foreign power interferes in Taiwan’s affairs. The PRC has threatened to take hostile actions toward Taiwan if the Taiwan

government does not officially endorse the PRC’s ‘‘One China’’ policy. Relations between Taiwan and the PRC and other factors affecting the political or economic condition of Taiwan could substantially affect our business and the market price and the liquidity of our shares and GDSs.

In late August 2001, based on a recommendation by an economic council, Mr. Chen Shui-bian, the current President of the ROC, announced his government’s intention to relax regulations governing Taiwan investments in the PRC. An ‘‘aggressive opening, effective management’’ approach to reviewing the limits of investments in the PRC will replace the current policy of ‘‘go slow, be patient.’’ Detailed measures to implement the new policy, however, will be need to be adopted by the Legislative Yuan, the national legislature of the ROC. While the new policy and the future implementing measures will likely result in lesser tension between the Taiwan and PRC governments, the relaxation of Taiwan investment limits in the PRC may also result in a large flow of capital resources from Taiwan to mainland China. Such outward flow of capital may adversely affect the economic conditions of Taiwan, which in turn may negatively impact the results of our operations and financial condition.

The trading price of our GDSs may be seriously harmed by trading activity on the Taiwan Stock Exchange and the trading price of our common shares.

The trading price of our GDSs may be affected by the trading price of our common shares on the Taiwan Stock Exchange. The Taiwan Stock Exchange is smaller and more volatile than the securities markets in the United States. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of securities. In the past decade, the Taiwan Stock Exchange Index peaked at 12,495.34 in February 1990 and subsequently fell to a low of 2,560.47 in October 1990. From the beginning of 2000 through January 24, 2002, the Taiwan Stock Exchange Index reached a high of 10,202.20 on February 17, 2000, and a low of 3,446.26 on October 3, 2001. Over the same period, the daily closing value of our common shares ranged from a high of NT$297.0 per share to a low of NT$80.50 per share. The Taiwan Stock Exchange is particularly volatile during times of political instability, including when relations between Taiwan and the PRC are strained. Several investment funds affiliated with the Taiwan government have also from time to time purchased securities from the Taiwan Stock Exchange has experienced market manipulation, insider trading and settlement defaults. The recurrence of these or similar problems or circumstances could influence the market price and liquidity of our securities.

Our business depends on the continued support of the Taiwan government.

The Taiwan government has been very supportive of technology companies such as our company. For instance, Taiwan’s labor laws and regulations do not require employees of semiconductor companies, including our company, to be unionized, and permit these employees to work shifts of 12 hours each day on a two days on, two days off basis. We cannot assure you, however, that these labor laws and regulations will not change in the future. If the Taiwan government requires our employees to be unionized or decreases the number of hours our employees may work in a given day, our labor costs may increase significantly which could result in lower margins.

In addition, like many Taiwan technology companies, we have benefited from substantial tax incentives provided by the Taiwan government. In 2000, such incentives resulted in a saving of NT$226.9 million (US$6.6 million). If these incentives are curtailed or eliminated, our net income after tax may decrease substantially.

Taiwan is susceptible to natural disasters that could severely disrupt the normal operation of our business.

Substantially all of our properties are located in Taiwan, and we rely on independent foundries and assembly facilities located in Taiwan for the manufacturing of substantially all of our products. Taiwan is susceptible to natural disasters, such as earthquakes and typhoons. On September 21, 1999, the central part of Taiwan experienced a severe earthquake that caused significant property damage and loss of life. This earthquake caused minor damage to the facilities of our suppliers and adversely affected our operations and the operations of many other companies in Taiwan. Other parts of Taiwan have also experienced earthquakes and typhoons that damaged and disrupted the businesses of many other companies in Taiwan. We currently

maintain an insurance policy to cover damages caused by typhoons and flooding, but not damages caused by earthquakes. We do not maintain business disruption insurance. We cannot assure you that our insurance coverage will continue to be available to us on reasonable terms or that it will be sufficient to cover all damages or business disruption losses we may suffer in connection with a catastrophic event.

You may have difficulty enforcing any judgment obtained in the United States against us or our directors, supervisors or executive officers.

We are incorporated under ROC law. Substantially all of our directors, supervisors and executive officers reside in Taiwan. In addition, substantially all of our assets and a substantial portion of the assets of those persons are located in Taiwan. As a result, it may not be possible for investors to effect service of process upon us or those persons within the United States, or it may be difficult to enforce against us or them judgments obtained in the U.S. courts, including those based upon the civil liability provisions of the federal securities laws of the United States. See ‘‘Enforceability of Foreign Judgments in the ROC.’’

Risks Relating to Our GDSs and Our Trading Market

Our GDSs have limited voting rights.

Under ROC law, only the registered holder of shares may exercise the voting rights associated with such shares. Consequently, the voting rights with respect to shares represented by GDSs will be exercisable only by the depositary as the registered owner of such shares. The depositary will only vote such shares in accordance with the provisions of the deposit agreement. The depositary may solicit from the GDS holders in accordance with the deposit agreement instructions as to the manner such holders wish the depositary to vote the shares. According to the ROC Company Law, a registered holder of shares must vote all shares for which it is the registered holder in the same manner, except in the case of election of directors and supervisors which is done by means of cumulative voting.

The deposit agreement specifies that if the voting instructions given by a GDS holder or holders together holding at least 51% of the GDSs outstanding at the relevant record date instruct the depositary to vote in the same manner in respect of one or more resolutions to be proposed at a meeting of shareholders (including the election of directors or supervisors), the depositary will notify the instructions to the chairman of our board of directors or such other person as he may designate as his representative and appoint our chairman or his representative to attend the meeting and vote all the shares represented by the GDSs to be voted in the manner so instructed by such holders. In connection with the election of directors and supervisors, we will provide in the notice to shareholders an indication of the number of directors or supervisors to be elected and a list of the candidates proposed by us. Additional or different candidates may be nominated at the meeting of the shareholders than those proposed in the list provided by us. If the depositary does not receive any such instructions as provided above by the date fixed by the depositary as the last date to accept such instructions, then the holders will be deemed to have instructed the depositary to authorize and appoint our chairman or his representative to attend such meeting and vote, at his sole discretion, all the shares represented by the GDSs (including the election of directors and supervisors), which may not be in the interest of the holders of GDSs. See ‘‘Description of Global Depositary Shares—Voting of Deposited Property.’’

Based on the number of our outstanding shares as of December 31, 2001, as adjusted for this GDS offering, the GDSs will represent approximately 12.4% of our total outstanding shares. Our articles of incorporation provide that a holder of shares has one vote for each share, except that a holder of more than 3% of the total outstanding shares is not permitted to vote 1% of the number of shares held by such holder in excess of 3%. Although under the amendment to the ROC Company Law that took effect on November 14, 2001, we are no longer required to so limit the voting rights of our shareholders, we have not yet amended our articles of incorporation to reflect the change of law. This provision is applicable to the depositary or its nominee. Accordingly, to the extent that the shares represented by the outstanding GDSs constitute more than 3% of the total outstanding shares, the votes to be cast by the depositary at meetings of our shareholders will be discounted accordingly. In the case of elections of directors or supervisors, such discount will apply on a pro rata basis amongst the votes for all candidates cast by the depositary.

You are subject to foreign exchange controls for conversion of your proceeds into foreign currencies.

Under current ROC law, the depositary, without obtaining further approvals from the Central Bank of China, or the CBC, or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including US dollars, in respect of the proceeds of the sale of shares represented by GDSs or received as stock dividends in respect of such shares that have been deposited into the GDS facility and any cash dividends or distributions received in respect of such shares. In addition, the depositary may also convert into NT dollars inward remittances of payments for purchases of shares for deposit in the GDS facility against the creation of additional GDSs. In addition, a GDS holder, after being the holder of shares, may, without obtaining further approvals from the CBC or any other government authority or agency of the ROC, convert NT dollars into other currencies in respect of proceeds from the sale of any shares withdrawn from the GDS facility and delivered to the holder and convert into NT dollars of subscription payments in respect of rights offerings. However, a holder must obtain foreign exchange approval from the CBC on a payment by payment basis for conversion from NT dollars into foreign currencies in respect of the proceeds from the sale of subscription rights of new shares. Although it is expected that the CBC will grant such approval as a routine matter, there can be no assurance that in the future any such approval will be obtained in a timely manner or at all. See ‘‘Foreign Investment and Exchange Controls in the ROC.’’

Further sales of our common shares or conversion of our convertible debt may adversely affect the price of our GDSs and our common shares.

The market price of our GDSs or our shares could decline as a result of sales of a large number of our shares after this offering or the perception that such sales could occur. We and Cotek Pharmaceutical Industry (a principal shareholder) have agreed, subject to certain exceptions, not to issue or dispose of our shares or GDSs or securities convertible or exchangeable for our shares or GDSs for a period of 180 days after the date of this offering memorandum without the prior written consent of Salomon Brothers International Limited. The selling shareholder has agreed, subject to certain exceptions, not to purchase or dispose of our shares or GDSs or securities convertible or exchangeable for our shares or GDSs for a period of 90 days after the date of this offering memorandum without the prior written consent of Salomon Brothers International Limited. See ‘‘Plan of Distribution.’’ Except for these restrictions, there is no restriction on our ability to issue, sell or otherwise dispose of, and our shareholders’ ability to sell or otherwise dispose of, our shares and GDSs. We cannot assure you that we will not issue, sell or otherwise dispose of, or that any of our principal shareholders will not sell or otherwise dispose of, our shares or GDSs.

Liquidity of our GDSs and our common shares may be limited.

Prior to this offering, there has been no market for the shares outside of the ROC and there has been no market for the GDSs. Following this offering, the only trading market for the shares will be the Taiwan Stock Exchange. We have applied to list the International GDSs on the Luxembourg Stock Exchange and to have the International GDSs accepted for trading on the International Order Book of the London Stock Exchange. The Rule 144A GDSs have been made eligible for trading in the PORTAL Market. The shares to be issued in connection with this offering will be listed and admitted to trading on the Taiwan Stock Exchange.

When both we and the selling shareholder have delivered to the custodian physical share certificates in respect of the deposited shares that are offered in this offering in the form of GDSs, a holder may withdraw and hold the shares represented by their GDSs or request the depositary to sell or cause to be sold on behalf of such holder the shares represented by such GDSs on the Taiwan Stock Exchange. In connection with any such withdrawal or sale, GDSs will be surrendered to the depositary. Unless additional GDSs are issued, the effect of such transactions will be to reduce the number of outstanding GDSs and, if a significant number of such transactions are effected, to reduce the liquidity of the GDSs. Under current ROC law, additional GDSs may be issued in connection with dividends on or free distributions of shares or the exercise by holders of their preemptive rights in connection with rights offerings. In addition, to the extent that previously issued GDSs have been cancelled and the shares represented thereby have been sold on the Taiwan Stock Exchange,

additional GDSs may be issued without specific ROC regulatory approval, provided that the aggregate amount of outstanding GDSs after such issuance does not exceed the total number of issued GDSs originally approved by the ROC Securities and Futures Commission, or ROC SFC, plus any GDSs issued pursuant to the preceding sentence (subject to any adjustments in the number of shares represented by each GDS). See ‘‘Foreign Investment and Exchange Controls in the ROC.’’

The GDSs and our shares represented thereby have not been registered under the securities laws in the United States or elsewhere and may not be publicly offered, sold, pledged or otherwise transferred in any jurisdiction where such registration may be required. See ‘‘Notice to Investors’’ and ‘‘Plan of Distribution.’’

You are subject to government-imposed requirements of appointing a tax guarantor and local agent in the ROC.

When you withdraw and hold the shares represented by GDSs, you are required under current ROC law and regulations to appoint an agent, or a tax guarantor, in the ROC for filing tax returns and making tax payments. A tax guarantor must meet certain qualifications set by the Ministry of Finance of the ROC, or ROC MOF, and, upon appointment, becomes a guarantor of your ROC tax obligations. Evidence of the appointment of a tax guarantor and the approval of the appointment by the ROC tax authorities is required as conditions to your repatriation of the profits derived from the sale of withdrawn shares. We cannot assure you that you will be able to appoint and obtain approval for a tax guarantor in a timely manner, or at all.

In addition, under current ROC law, you are required to appoint a local agent in the ROC to, among other things, open a securities trading account with a local securities brokerage firm, remit funds and exercise shareholders’ rights. In addition, you must appoint a local bank to act as custodian for handling confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting and declaration of information. Under existing ROC laws and regulations, without such an account, you will not be able to hold or to sell or otherwise transfer on the Taiwan Stock Exchange or otherwise, the shares you withdraw from our GDS facility.

Employee stock bonuses that we distribute from time to time may dilute your holdings.

ROC companies generally pay their employees bonuses in the form of cash or stock and our articles of association provides that, after certain deductions and provisions, our employees should receive as bonuses in aggregate of between 10% to 15% of our distributed retained earnings. See ‘‘Description of Our Shares— Dividends and Distributions.’’ We generally determine the number of shares issuable by reference to the par value of the shares, even though the market value of the shares as of the date of declaration or distribution of the stock bonuses could be significantly higher. Distributions of shares to our employees may effectively dilute your holdings and associated rights in our shares and the GDSs.

If we were considered to be a passive foreign investment company, you could be subject to additional taxes.

Based on the projected composition of our income and valuation of our assets, including goodwill, we do not expect to be a passive foreign investment company for 2002 and do not expect to become one in the future, although there can be no assurance in this regard. The determination of whether we are a passive foreign investment company is made annually. Accordingly, it is possible that we may be a passive foreign investment company in the current or any future taxable year due to changes in our asset or income composition or if our projections are not accurate. Because we have valued our goodwill based on the anticipated market value of our shares immediately following this offering, a decrease in the price of our shares may also result in our becoming a passive foreign investment company. If you own our shares or GDSs at any time during a taxable year in which we are a passive foreign investment company, you will be subject to a complex set of rules under the Internal Revenue Code and, generally, would be subject to additional tax and an interest charge upon certain distributions by us or upon a sale or other disposition of our shares or GDSs at a gain. Please see ‘‘Taxation—United States Taxation’’ for a more detailed discussion of the consequences if we are deemed a passive foreign investment company. We urge you to consult your own tax advisors regarding the application of the passive foreign investment company rules to your particular circumstances.

EXCHANGE RATES

Fluctuations in the exchange rate between the New Taiwan dollar and the US dollar will affect the US dollar equivalent of the New Taiwan dollar price of our common shares on the Taiwan Stock Exchange and, as a result, will likely affect the market price of our GDSs. Fluctuations in the exchange rate between New Taiwan dollars and US dollars will also affect the US dollar conversion by the depositary of cash dividends paid in New Taiwan dollars on, and the New Taiwan dollar proceeds received by the depositary from any sale of, our common shares represented by our GDSs.

The following table sets forth, for the periods indicated, information concerning the number of New Taiwan dollars for which one US dollar could be exchanged based on the noon buying rate for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York.

Period Year ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 January (through January 23) . . . . . . . . . . . . . . . . . . . . . . . . .	New Taiwan Dollars per US Dollar Noon Buying Rate Average rate High Low Period-end NT$ NT$ NT$ NT$ 27.468 27.950 27.150 27.520 28.775 33.250 27.340 32.800 33.547 35.000 32.050 32.270 32.322 33.400 31.390 31.390 31.260 33.250 30.350 33.170 32.673 33.645 32.230 32.350 32.330 32.400 32.270 32.400 32.622 32.920 32.380 32.850 32.940 33.000 32.850 32.940 33.203 34.050 32.890 33.950 34.328 34.520 34.080 34.480 34.821 35.050 34.450 34.800 34.639 34.770 34.560 34.580 34.575 34.700 34.452 34.560 34.583 34.620 34.530 34.550 34.498 34.550 34.440 34.470 34.682 35.130 34.460 35.080 35.028 35.080 34.940 35.080	New Taiwan Dollars per US Dollar Noon Buying Rate Average rate High Low Period-end NT$ NT$ NT$ NT$ 27.468 27.950 27.150 27.520 28.775 33.250 27.340 32.800 33.547 35.000 32.050 32.270 32.322 33.400 31.390 31.390 31.260 33.250 30.350 33.170 32.673 33.645 32.230 32.350 32.330 32.400 32.270 32.400 32.622 32.920 32.380 32.850 32.940 33.000 32.850 32.940 33.203 34.050 32.890 33.950 34.328 34.520 34.080 34.480 34.821 35.050 34.450 34.800 34.639 34.770 34.560 34.580 34.575 34.700 34.452 34.560 34.583 34.620 34.530 34.550 34.498 34.550 34.440 34.470 34.682 35.130 34.460 35.080 35.028 35.080 34.940 35.080	New Taiwan Dollars per US Dollar Noon Buying Rate Average rate High Low Period-end NT$ NT$ NT$ NT$ 27.468 27.950 27.150 27.520 28.775 33.250 27.340 32.800 33.547 35.000 32.050 32.270 32.322 33.400 31.390 31.390 31.260 33.250 30.350 33.170 32.673 33.645 32.230 32.350 32.330 32.400 32.270 32.400 32.622 32.920 32.380 32.850 32.940 33.000 32.850 32.940 33.203 34.050 32.890 33.950 34.328 34.520 34.080 34.480 34.821 35.050 34.450 34.800 34.639 34.770 34.560 34.580 34.575 34.700 34.452 34.560 34.583 34.620 34.530 34.550 34.498 34.550 34.440 34.470 34.682 35.130 34.460 35.080 35.028 35.080 34.940 35.080	New Taiwan Dollars per US Dollar Noon Buying Rate Average rate High Low Period-end NT$ NT$ NT$ NT$ 27.468 27.950 27.150 27.520 28.775 33.250 27.340 32.800 33.547 35.000 32.050 32.270 32.322 33.400 31.390 31.390 31.260 33.250 30.350 33.170 32.673 33.645 32.230 32.350 32.330 32.400 32.270 32.400 32.622 32.920 32.380 32.850 32.940 33.000 32.850 32.940 33.203 34.050 32.890 33.950 34.328 34.520 34.080 34.480 34.821 35.050 34.450 34.800 34.639 34.770 34.560 34.580 34.575 34.700 34.452 34.560 34.583 34.620 34.530 34.550 34.498 34.550 34.440 34.470 34.682 35.130 34.460 35.080 35.028 35.080 34.940 35.080
		High NT$ 27.950 33.250 35.000 33.400 33.250 33.645 32.400 32.920 33.000 34.050 34.520 35.050 34.770 34.700 34.620 34.550 35.130 35.080	Low NT$ 27.150 27.340 32.050 31.390 30.350 32.230 32.270 32.380 32.850 32.890 34.080 34.450 34.560 34.452 34.530 34.440 34.460 34.940	Period-end
				NT$ 27.520 32.800 32.270 31.390 33.170 32.350 32.400 32.850 32.940 33.950 34.480 34.800 34.580 34.560 34.550 34.470 35.080 35.080

Source: Federal Reserve Statistical Release, Board of Governors of the Federal Reserve System

For information relating to foreign exchange approvals required in the ROC for the conversion by the depositary of dividends on common shares or proceeds from the sale of common shares from New Taiwan dollars into US dollars and the payment of these dividends or proceeds to GDS holders, see ‘‘Foreign Investment and Exchange Controls in the ROC.’’

We publish our financial statements in NT dollars. This offering memorandum contains translation of NT dollar amounts into US dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from NT dollars to US dollars and from US dollars to NT dollars in this offering memorandum were made at a rate of NT$34.56 to US$1.00, the noon buying rate of the U.S. Federal Reserve Bank of New York on September 28, 2001, the last business day of the first nine months of 2001. No representation is made that the NT dollar or US dollar amount referred to in this offering memorandum could have been or could be converted into US dollars or NT dollars, as the case may be, at any particular rate or at all. On January 23, 2002, the noon buying rate of the U.S. Federal Reserve Bank of New York was NT$35.080 to $1.00.

USE OF PROCEEDS

We estimate that our net proceeds from this offering, after deducting underwriting discounts and selling concessions, but not expenses payable, will be approximately US$172.4 million. We intend to use the net proceeds of this offering in a manner consistent with our application to the Securities and Futures Commission of Taiwan, including (i) the purchase of testing and R&D equipment, (ii) the purchase of R&D software and intellectual property and (iii) the expansion of our offshore R&D and customer service capabilities and for various other matters generally in connection therewith.

Pending use of the net proceeds for these purposes, we intend to invest our net proceeds in short-term interest bearing obligations. Use of the net proceeds ultimately is subject to application by us and approval by our board of directors. The semiconductor industry is a rapidly evolving industry and our capital requirements historically have changed materially within any financial period.

We will not receive any of the net proceeds from the sale of shares, in the form of GDSs, by the selling shareholder.

MARKET PRICE INFORMATION

Our shares were listed on the ROSE, on September 11, 1997. Since October 26, 1998, we have listed our shares on the Taiwan Stock Exchange under the stock ticker ‘‘2379’’ while delisting our shares from the ROSE. The following table 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 our shares and the high and low of the daily closing values of the Taiwan Stock Exchange Index.

1998 Fourth Quarter (beginning from October 26) . . . . . . . . . 1999 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 January (through January 24) . . . . . . . . . . . . . . . . . . . .	Closing price per share(1) High Low NT$ NT$ 95.00 75.00 84.00 61.50 159.00 69.00 133.00 104.00 141.50 95.00 225.00 138.00 295.00 213.00 297.00 139.00 150.00 84.50 136.50 95.50 164.00 129.00 185.00 141.00 196.00 171.00 183.00 154.00 177.00 148.00 157.00 98.50 121.00 106.00 113.00 80.50 107.00 87.50 127.00 106.50 171.00 128.50 180.00 157.00	Adjusted closing price per share(2) High Low NT$ NT$ 34.80 27.47 30.77 22.53 61.19 25.27 63.33 49.52 67.38 45.24 107.14 65.71 140.48 101.43 158.00 92.67 100.00 56.33 91.00 63.67 109.33 86.00 123.33 94.00 130.67 114.00 122.00 102.67 118.00 98.67 117.50 97.67 121.00 106.00 113.00 80.50 107.00 87.50 127.00 106.50 171.00 128.50 180.00 157.00	Adjusted average daily trading volume(2) (in thousands of shares) 2,491.82 1,867.72 12,369.66 13,975.03 13,634.07 19,141.22 11,877.69 12,727.73 12,628.61 22,766.11 26,718.82 22,217.36 13,782.22 8,112.89 5,580.32 6,435.35 6,107.14 6,955.61 8,662.46 11,106.50 18,139.21 13,327.26	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High NT$ 95.00 84.00 159.00 133.00 141.50 225.00 295.00 297.00 150.00 136.50 164.00 185.00 196.00 183.00 177.00 157.00 121.00 113.00 107.00 127.00 171.00 180.00	High NT$ 34.80 30.77 61.19 63.33 67.38 107.14 140.48 158.00 100.00 91.00 109.33 123.33 130.67 122.00 118.00 117.50 121.00 113.00 107.00 127.00 171.00 180.00		High 7,435.84 7,043.23 8,608.91 8,593.35 8,448.84 10,202.20 10,186.17 8,585.52 6,353.67 5,936.20 6,104.24 5,896.32 5,608.50 5,405.54 5,271.30 4,886.86 4,687.33 4,493.53 4,065.10 4,608.32 5,551.24 5,871.28	Low
					6,418.43 5,474.79 7,018.68 6,823.52 7,362.69 8,536.05 8,120.89 6,185.14 4,614.63 4,894.79 5,674.69 5,499.54 5,353.50 4,958.61 4,768.55 4,040.77 4,310.32 3,493.78 3,446.26 3,929.69 4,646.61 5,488.33

(1) As reported.

(2) As adjusted retroactively for issuances of new shares, including stock dividends, capitalization of employee stock bonuses and capital reserve. See ‘‘Changes in Issued Capital.’’

Source: Taiwan Stock Exchange, Bloomberg.

On January 24, 2002, the closing sale price per share of our shares on the Taiwan Stock Exchange was NT$172.00.

The performance of the Taiwan Stock Exchange has in recent years been characterized by extreme price volatility. There are currently limits on the range of daily price movements on the Taiwan Stock Exchange. See ‘‘The Securities Markets of the ROC—Price Limits, Commissions, Transaction Tax and Other Matters.’’

DIVIDEND POLICY

The following table sets forth the aggregate number of outstanding shares entitled to dividends, as well as the cash dividend paid and stock dividends distributed on each share, during each of the years indicated. Figures represent dividends in respect of the prior fiscal year paid in the then current fiscal year.

Year 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Aggregate number of shares outstanding on record date 50,021,660 77,032,518 112,984,166 151,012,982 222,929,690	Stock dividend per share NT$ 3.25 4.10 3.00 4.00 5.00	Cash dividend per share
			NT$ — — — 1.00 0.50

It has been our practice to capitalize a portion of our earnings each year in the form of a stock dividend. We historically have paid an annual dividend on our shares with respect to the preceding year after approval by our shareholders at the annual general meeting of shareholders. The form, frequency and amount of future dividends on the shares will depend upon our earnings, financial condition and other factors. Accordingly, we cannot assure you that we will continue to pay dividends on our shares or that future dividends will be comparable to historical dividends.

Under our articles of incorporation, we are required under certain circumstances to allocate a certain portion of our annual net income, if any, and retained earnings from prior years to employee bonuses. See ‘‘Description of Our Shares—Dividends and Distributions.’’ Since 1991, we have paid a portion of these bonuses in the form of our shares. The amount of shares issued as a bonus is obtained by dividing the cash value of the bonus by the par value of the shares. Therefore, the actual value of a stock bonus is in excess of the value of the bonus had it been paid in cash. In addition, the distribution of employee bonus shares may, subject to the number of shares to be distributed, dilute the shareholdings of our shareholders. In 1998, 1999, 2000 and 2001, we issued 4,368,309 shares, 4,133,567 shares, 8,287,298 shares and 14,840,516 shares, respectively, as employee bonus shares.

Except in limited circumstances, under the ROC Company Law, we are not permitted to distribute dividends or make other distributions to shareholders in respect of any year in which we neither generated net income nor had accumulated unappropriated earnings. The ROC Company Law also requires that 10% of annual net income (less prior years’ losses and outstanding tax) be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. For a description of our dividend policy, see ‘‘Description of Our Shares—Dividends and Distributions.’’

Holders of our GDSs will be entitled to receive dividends, subject to the terms of the deposit agreement, to the same extent as our shareholders. Cash dividends will be paid to the depositary in NT dollars and, after deduction of any applicable ROC taxes and will generally be converted by the depositary into US dollars and paid to holders of our GDSs. Stock dividends will be distributed to the depositary and, after deduction of any applicable ROC taxes will generally be distributed by the depositary, in the form of additional GDSs, to holders of GDSs.

CAPITALIZATION

The following tables set forth our unconsolidated total capitalization as of September 30, 2001 on an actual basis and on an as adjusted basis. The adjusted basis gives effect to our issuance of 10,250,000 GDSs. We had no short-term borrowings as of September 30, 2001. There has been no material change in our common stock and no material increase in our long-term borrowings since September 30, 2001. You should read the table in conjunction with our audited and unaudited unconsolidated financial statements, including the notes to those statements, included elsewhere in this offering memorandum.

Long-term borrowings Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity Capital stock Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . Capital reserve Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on disposal of fxed assets . . . . . . . . . . . . . . Retained earnings Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unappropriated earnings . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . . . . Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	As of September 30, 2001 (unaudited) Actual As adjusted for this offering (in millions) NT$ US$ NT$ US$ 1,032.5(1) 29.9(1) 1,032.5 29.9 3,492.8(2) 101.1(2) 3,902.8 113.0 655.3 19.0 6,355.9 183.9 1.4 — (3) 1.4 — (3) 398.6 11.5 398.6 11.5 2,032.2 58.8 2,032.2 58.8 42.8 1.2 42.8 1.2 6,623.1 191.6 12,733.7 368.4 7,655.6 221.5 13,766.2 398.3
	Actual
	NT$ 1,032.5(1) 3,492.8(2) 655.3 1.4 398.6 2,032.2 42.8 6,623.1 7,655.6

Long-term borrowings
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity
Capital stock
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital reserve
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on disposal of fxed assets . . . . . . . . . . . . . .
Retained earnings
Legal reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unappropriated earnings . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment . . . . . . . . . . . . . . . .
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of September 30, 2001 (unaudited)
Actual
As adjusted for
this offering
(in millions)
NT$
US$
NT$
US$
1,032.5(1)
29.9(1)
1,032.5
29.9
3,492.8(2)
101.1(2)
3,902.8
113.0
655.3
19.0
6,355.9
183.9
1.4
— (3)
1.4
— (3)
398.6
11.5
398.6
11.5
2,032.2
58.8
2,032.2
58.8
42.8
1.2
42.8
1.2
6,623.1
191.6
12,733.7
368.4
7,655.6
221.5
13,766.2
398.3

Actual

NT$
1,032.5(1)
3,492.8(2)
655.3
1.4
398.6
2,032.2
42.8
6,623.1
7,655.6

(1) As of December 31, 2001, our issued and outstanding common stock and certificates exchangeable for shares increased by NT$10.5 million and NT$0.1 million, respectively.

(2) As of December 31, 2001, our long-term borrowings decreased by NT$189.8 million. (3) Less than US$0.1 million.

SELECTED FINANCIAL INFORMATION

The following selected financial information have been derived from our accounting records, our audited unconsolidated financial statements as of and for the years ended December 31, 1998, 1999, 2000 and our unaudited unconsolidated financial statements for the nine-month periods ended September 30, 2000 and 2001 included elsewhere in this offering memorandum. The audited financial statements have been audited by PricewaterhouseCoopers, independent accountants, while the unaudited financial statements have been reviewed by PricewaterhouseCoopers. Our unconsolidated financial statements are prepared and presented in accordance with reporting requirements of ROC GAAP, which differs in many important respects from U.S. GAAP, see ‘‘Summary of Principal Differences between ROC GAAP and U.S. GAAP.’’ You should read the following selected financial data in conjunction with our unconsolidated financial statements and the related notes included elsewhere in this offering memorandum, and the section ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations.’’

Unconsolidated Statement of Income Data Net operating revenues Communications networking ICs . . . . . . . . . . . . . . . . . . . . . PC peripheral ICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer electronics ICs . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net operating revenues . . . . . . . . . . . . . . . . . . . . Operating costs (cost of sales) Communications networking ICs . . . . . . . . . . . . . . . . . . . . . PC peripheral ICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer electronics ICs . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proft Communications networking ICs . . . . . . . . . . . . . . . . . . . . . PC peripheral ICs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer electronics ICs . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gross proft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proft, adjusted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating expenses Selling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Research and development . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net non-operating income (expenses) Interest income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expenses), net . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (beneft) . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per Share Data (in dollars): Earnings per share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share after retroactive adjustment . . . . . . . . . . .	Year ended December 31, 1998 1999 2000 (audited) NT$ NT$ NT$ US$ (in millions, except earnings 1,186.4 1,992.0 4,025.4 116.5 229.4 309.6 424.5 12.3 665.5 844.3 815.9 23.6 48.4 50.9 95.4 2.7 2,129.7 3,196.8 5,361.2 155.1 (704.2) (1,184.2) (2,164.5) (62.6) (142.6) (146.5) (184.0) (5.3) (385.5) (510.7) (555.0) (16.1) (17.5) (38.5) (73.1) (2.1) (1,249.8) (1,879.9) (2,976.6) (86.1) 482.2 807.8 1,860.9 53.8 86.8 163.1 240.5 7.0 280.0 333.6 260.9 7.6 30.9 12.4 22.3 0.6 879.9 1,316.9 2,384.6 69.0	Nine months ended September 30, 2000 2001 (unaudited) NT$ NT$ US$ per share data) 3,218.6 3,718.0 107.6 309.1 692.9 20.0 642.7 539.0 15.6 81.8 37.8 1.1 4,252.2 4,987.7 144.3 (1,727.6) (1,839.0) (53.2) (128.7) (383.2) (11.1) (443.2) (318.8) (9.2) (55.4) (35.2) (1.0) (2,354.9) (2,576.2) (74.5) 1,491.0 1,879.0 54.4 180.4 309.7 9.0 199.5 220.2 6.3 26.4 2.6 0.1 1,897.3 2,411.5 69.8 1,897.3 2,411.0 69.8 (49.7) (160.8) (4.7) (98.1) (131.6) (3.8) (381.1) (504.2) (14.6) (528.9) (796.6) (23.1) 1,368.4 1,614.4 46.7 (24.3) (15.6) (0.5) 90.1 133.5 3.9 65.8 117.9 3.4 1,434.2 1,732.3 50.1 155.2 162.7 4.7 1,279.0 1,569.6 45.4 5.82 4.49 0.13 3.71(4) 4.49 0.13
	1998 NT$ 1,186.4 229.4 665.5 48.4 2,129.7 (704.2) (142.6) (385.5) (17.5) (1,249.8) 482.2 86.8 280.0 30.9 879.9
	879.9 1,316.9 2,378.7 68.8 (54.9) (59.6) (66.2) (1.9) (99.2) (119.2) (126.1) (3.6) (242.9) (352.9) (488.8) (14.1) (397.0) (531.7) (681.1) (19.7) 482.9 785.2 1,697.6 49.1 22.4 15.8 (33.2) (1.0) (54.2) (65.3) 185.4 5.4 (31.8) (49.5) 152.2 4.4 451.1 735.7 1,849.8 53.5 9.4 (4.5) 159.6 4.6 441.7 740.2 1,690.2 48.9 4.01 4.90 7.66 0.22 2.06(3) 3.37(3) 7.66(3) 0.22

Unconsolidated Balance Sheet Data: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term liabilities (excluding current portion) . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	As of December 31, As of September 30, 1998 1999 2000 2000 2001 (audited) (unaudited) NT$ NT$ NT$ US$ NT$ NT$ US$ (in millions) 1,695.0 1,403.6 4,306.9 124.7 4,001.5 6,189.3 179.1 117.8 130.3 589.5 17.1 411.4 1,836.1 53.1 866.5 383.4 2,322.0 67.2 2,013.7 1,918.5 55.5 317.9 654.4 658.2 19.0 1,022.8 1,226.5 35.5 240.6 145.4 565.0 16.3 420.1 868.2 25.1 741.7 1,914.1 2,339.5 67.7 2,247.8 2,380.3 68.9 314.3 363.9 347.1 10.0 375.1 621.2 18.0 89.5 156.2 93.4 2.7 59.3 156.6 4.5 2,840.5 3,837.8 7,086.9 205.1 6,683.8 9,347.5 270.5 357.0 641.5 887.0 25.7 948.2 1,618.9 46.8 24.4 3.7 1,021.1 29.5 1,005.1 1,032.5 29.9 26.7 37.6 50.8 1.5 46.8 73.0 2.1 408.1 682.8 1,958.9 56.7 2,000.1 2,724.4 78.8 2,432.4 3,155.0 5,128.0 148.4 4,683.6 6,623.1 191.6	As of September 30,	As of September 30,
	1998 NT$ 1,695.0 117.8 866.5 317.9 240.6 741.7 314.3 89.5 2,840.5 357.0 24.4 26.7 408.1 2,432.4		2001

(1) Gross profit after realized and unrealized intercompany gross profits.
(2) Based on the weighted average number of shares outstanding during each period.
(3) Based on the weighted average number of shares outstanding during each period after adjusting retroactively for the effect of stock dividends and capitalization of employees’ bonus and capital reserve. No adjustment has been made with respect to the stock dividends and capitalization of employees’ bonus approved by the shareholders on May 30, 2001.
(4) Based on the weighted average number of shares outstanding during each period after adjusting retroactively for the effect of stock dividends and capitalization of employees’ bonus and capital reserve, including the stock dividends and capitalization of employees’ bonus approved by the shareholders on May 30, 2001.

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

You should read the following discussion in conjunction with our audited and unaudited unconsolidated financial statements and the related notes included elsewhere in this offering memorandum. We prepare our financial statements in accordance with ROC GAAP, which differs in many material respects from U.S. GAAP. See ‘‘Summary of Principal Differences Between ROC GAAP and U.S. GAAP.’’

Overview

Consolidation Principles

Under ROC GAAP, we are required on an annual basis to consolidate the financial results of any subsidiary whose total assets or net operating revenues are at least 10% of our unconsolidated total assets or net operating revenues, respectively. In addition, we are required to consolidate the financial statements of each subsidiary whose total assets or net operating revenues exceed 3% of our unconsolidated total assets or net operating revenues, if the total assets or net operating revenues of all our unconsolidated subsidiaries exceed 30% of our unconsolidated total assets or net operating revenues. In the past three financial years, none of our subsidiaries met the criteria for consolidation and accordingly, we have not prepared any consolidated financial statements. Consistent with ROC GAAP, we recognized in our statements of income our proportionate share in the net income or losses generated by our unconsolidated subsidiaries and our other investments as investment income and investment loss. The results of operations of our company, other than net income, would have been substantially different if our financial statements had been prepared under a consolidated basis.

Spin-Off of Certain Consumer Electronics IC Lines

During January 2002, we intend to spin off our consumer electronics IC products business, excluding image ICs, to M-Square Technologies Corp., which we incorporated in June 2001. The spin-off involves our transfer of employees, equipment, machinery and other assets relating to our consumer electronics IC lines to M-Square. We intend to retain some inventory. In addition, we intend to license related intellectual property rights to M-Square for royalty payments. As of the date of this offering memorandum, we hold a 50% interest in M-Square, with the remaining 50% being held by M-Square’s key management and engineers and our company’s senior employees, each of whom subscribed for his or her interest in cash in November 2001. M- Square performs its own management and administrative functions. M-Square is temporarily sub-leasing office and production space from us.

The spin-off will allow us to focus our core technologies on product applications that will form the building blocks for developing products for a future network environment where we expect voice, image and data communications to converge. See ‘‘Our Business—Products—Consumer Electronics ICs.’’ Net operating revenues of the products to be spun off accounted for 31.2%, 26.4%, 15.2%, 15.3% and 7.8% of our net operating revenues for 1998, 1999, 2000 and the first nine months of 2000 and 2001, respectively. After the spin-off, the results generated from the production of these products will be reflected as our investment gain or loss in our financial statements, and will not be consolidated with the results of our company unless we are required to apply the consolidation principle as more fully described in ‘‘—Consolidation Principles’’ above.

Net Operating Revenues

Our net operating revenues represent our sales revenues after the deduction of sales allowances and sales returns. We recognize sales revenues at the time of shipment of our products to our customers, including our subsidiaries. Sales allowances represent discounts offered to our customers who settle their accounts early. These allowances have represented 0.3% to 0.8% of our operating revenues since 1998. Sales returns represent products actually returned by our customers. These sales returns have represented not more than 0.3% of our operating revenues since 1998. Almost all our products are standard IC products, ASSPs, for mature systems and equipment, which generally require shorter sales cycles than application specific ICs, or ASICs.

We generally price our products after taking in account several factors, including cost of production, lifecycle stage of the product, competition, technological level of the product, and level of service provided to the customers. We typically can charge the highest price for our products during the early stage in the life cycle of our products. Prices fall during the life cycle because of competition, emergence of substitutes and technological obsolescence. We strive to maintain our average selling price over the product life cycle by providing a total solution to our customers, which includes after-sales support, driver software support, system design guidance, training for customers’ employees and helping customers obtain certification for their products. We believe that our total solution approach helps us price our products at a premium over other Taiwan fabless companies.

Operating Costs (Cost of Sales)

Our operating costs (cost of sales) are principally comprised of manufacturing costs, which are (i) raw materials costs, (ii) direct labor costs and (iii) manufacturing expenses. Raw materials costs account for more than half of our operating costs (cost of sales). Our raw materials are comprised of processed wafers, the cost of which principally depends on raw wafer cost, the complexity of manufacturing processes and the yields of the wafers processed. The foundry industry is highly cyclical, resulting in fluctuations in the price of processed wafers depending on the available foundry capacity and the demand for foundry services. We maintain excellent relationships with our foundry suppliers and have never faced any significant constraints in obtaining wafers during 1999 and 2000, when the foundry capacity was relatively tight. The foundry capacity has eased considerably since the fourth quarter of 2000, enabling us to negotiate more favorable wafer prices with our foundry suppliers. The unit price per wafer we pay to the foundries is also affected by the line-width used to manufacture finished wafers. Lower line-widths allow more ICs to be manufactured per wafer leading to lower manufacturing cost per IC. Direct labor costs principally represent the remuneration of our employees involved in wafer probing and final testing. Manufacturing expenses principally represent the payments we make to IC assembly houses for their packaging services, as well as expenses relating to wafer probing and final testing, which we conduct in-house.

Gross Margin, adjusted

Our gross margin, adjusted, has increased from 41.3% for 1998 to 48.3% for the nine months ended September 30, 2001. The main factors affecting our gross margin include our product mix, our cost reduction efforts and the stage of our products’ life cycles. For example, newly introduced products generally have higher average selling prices and gross margins, both of which typically decline over product life cycles due to competitive pressures and volume discounts.

Research and Development

Research and development is the primary component of our operating expenses, as research and development of ICs is our core activity. R&D expenses as a proportion of net operating revenues ranged from 9.1% to 11.4% between 1998 and 2000 and in the first nine months of 2000 and 2001. R&D expenses consist primarily of salaries and related costs of employees engaged in research, design and development activities. As of September 30, 2001, we had 256 employees engaged in research and development. We recognize mask

expenses as part of our R&D expenses. In addition, any cost of developing and testing a new product before its commercial production is recognized as our R&D expenses. While we do not have a policy to allocate a certain amount of our revenues for our R&D activities, we expect that the absolute level of R&D expenses will increase in the future, as we commit resources to develop new products.

Employee Bonus

Under ROC law, we may distribute a certain percentage of our annual net income, if any, and retained earnings from prior years to our employees as bonuses in either cash or stock. In addition, we have from time to time paid performance and other bonuses to our employees and we expense these performance and other bonuses when they are incurred. The following table sets forth the information regarding cash and stock bonuses we distributed out of our net income and/or retained earnings to our employees in the periods indicated below.

	Year ended December 31,
1998 — NT$43.7 NT$43.7	1999 2000 (in millions) — — NT$41.3 NT$82.9 NT$41.3 NT$82.9	2001
		NT$15.9 NT$148.4
		NT$164.3

Cash and stock bonuses are not expensed in the income statement but are deducted from our retained earnings in the year of distribution. See ‘‘Dividend Policy’’ for a detailed discussion on the distribution of net income and retained earnings.

Results of Operations

The following table sets forth certain financial data as a percentage of our unconsolidated net operating revenues for the periods indicated:

Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . Operating costs (cost of sales) . . . . . . . . . . . . . . . . . . Gross proft, adjusted (1) . . . . . . . . . . . . . . . . . . . . . . Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating income . . . . . . . . . . . . . . . . . . . . . . . . Non-operating expenses . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . Income tax (expenses) benefts . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year ended December	31, 2000 100.0% (55.6) 44.4 (12.7) 31.7 3.9 (1.1) 34.5 (3.0) 31.5%	Nine months ended September 30, 2000 2001 (unaudited) 100.0% 100.0% (55.4) (51.7) 44.6 48.3 (12.4) (16.0) 32.2 32.3 2.5 4.3 (0.9) (1.9) 33.8 34.7 (3.7) (3.3) 30.1% 31.4%
	1998 1999 (audited) 100.0% 100.0% (58.7) (58.8) 41.3 41.2 (18.6) (16.6) 22.7 24.6 2.8 2.5 (4.3) (4.1) 21.2 23.0 (0.4) 0.1 20.8% 23.1%

(1) Gross profit after realized and unrealized inter-company gross profits.

Nine Months Ended September 30, 2001 Compared With Nine Months Ended September 30, 2000

Net Operating Revenues. Our net operating revenues increased by 17.3% to NT$4,987.7 million (US$144.3 million) for the first nine months of 2001 from NT$4,252.2 million for the first nine months of

The increase in our net operating revenues between these two periods was primarily due to the increased sales of our 100Mbps NIC, switch, scanner and audio codec ICs, slightly offset by the decreased sales in our 10Mbps NIC, caller-ID, toy and sound ICs.

The net operating revenues of our communications networking ICs increased by 15.5% from NT$3,218.6 million in the first nine months of 2000 to NT$3,718.0 million (US$107.6 million) in the first nine months of 2001, principally as a result of the increased sales of 100Mbps NIC and switch ICs, partially offset by the decreased sales of 10Mbps NIC ICs. While the average selling prices of 100Mbps NIC and switch ICs decreased between these two periods as these products became more mature, their operating revenues increased as a result of increased sales volume.

The net operating revenues of our PC peripheral ICs increased by 124.2% to NT$692.9 million (US$20.0 million) in the first nine months of 2001 from NT$309.1 million in the first nine months of 2000, principally as a result of increased sales of our audio codec and mouse ICs. The increase was slightly offset by a decreased sale in sound ICs. The average selling prices of our PC peripheral ICs, except for sound and clock ICs, decreased between these two periods.

The net operating revenues of our consumer electronics ICs decreased by 16.1% to NT$539.0 million (US$15.6 million) in the first nine months of 2001 from NT$642.7 million in the first nine months of 2000, principally as a result of decreased sales of all consumer electronics ICs except for scanner ICs, which were introduced in the second half of 2000. The scanner ICs have rapidly become a major contributor to the net operating revenues of our consumer electronics ICs since their introduction in late 2000. The sales of scanner ICs accounted for 27.9% of the net operating revenues of our consumer electronics products in the first nine months of 2001.

Operating Costs (Cost of Sales). Our operating costs (cost of sales) increased by 9.4% to NT$2,576.2 million (US$74.5 million) for the first nine months of 2001 from NT$2,354.9 million for the first nine months of 2000. The increase was primarily attributable to increased sales volume of all our products, except for 10Mbps NIC, caller-ID and sound ICs. However, the operating costs (cost of sales) attributable to 100Mbps NIC ICs decreased despite an increase in sales volume. The decrease in the cost of producing 100Mbps NICs was due to lower raw wafer costs and cost savings resulting from the improvement of manufacturing processes and better yields.

Gross Profit, adjusted. Our gross profit, adjusted, increased by 27.1% to NT$2,411.0 million (US$69.8 million) for the first nine months of 2001 from NT$1,897.3 million for the first nine months of 2000. Gross margin, adjusted, increased to 48.3% for the first nine months of 2001 from 44.6% for the first nine months of 2000, primarily because of the production of higher margin 10Mbps/100Mbps NIC and audio codec ICs. The increase in the gross margin of the 10Mbps NIC ICs between these two periods was due to an increase in the average selling price of these products and a decrease in their operating costs (cost of sales).

Selling Expenses. Our selling expenses for the first nine months of 2001 increased by 223.5% to NT$160.8 million (US$4.7 million) (3.2% of our net operating revenues) from NT$49.7 million (1.2% of net operating revenues) for the first nine months of 2000. The increase principally resulted from increased commissions to our distributors to attract new customers and encourage the provision of quality services. In addition, we also made technical service payments to two subsidiaries, Realtek Semiconductor (HK) Limited and beginning in 2001, M-Square Technologies Corp., for their provision of after-sale services to some of our offshore consumer electronics IC customers. These payments increased to NT$27.4 million (US$0.8 million) in the first nine months of 2001, compared with NT$9.5 million in the first nine months of 2000.

Administrative Expenses. Our administrative expenses for the first nine months of 2001 increased by 34.1% to NT$131.6 million (US$3.8 million) (2.6% of net operating revenues) from NT$98.1 million (2.3% of net operating revenues) for the first nine months of 2000, principally as a result of increased salaries and bonuses of our general and administrative staff in line with our increased sales, and increased staff in our president’s office who were responsible for legal affairs and for implementing our international marketing and investment strategies.

Research and Development Expenses. Our research and development expenses for the first nine months of 2001 increased by 32.3% to NT$504.2 million (US$14.6 million) (10.1% of net operating revenues) from NT$381.1 million (9.0% of net operating revenues) for the first nine months of 2000, primarily due to increased compensation for our R&D personnel resulting from increased salaries and bonuses and net increase in R&D staff strength. Also contributing to the increase were research and test and mask expenses incurred in connection with the research and development of new products.

Operating Income. As a result of the foregoing, our operating income increased by 18.0% to NT$1,614.4 million (US$46.7 million) for the first nine months of 2001 from NT$1,368.4 million for the first nine months of 2000. Our operating margin increased from 32.2% in the first nine months of 2000 to 32.4% in the first nine months of 2001.

Net Non-Operating Income (Expenses). We recognized a net non-operating gain, equaling non-operating income minus non-operating expenses, of NT$117.9 million (US$3.4 million) for the first nine months of 2001, compared with a net non-operating gain of NT$65.8 million for the first nine months of 2000, primarily due to increased gain on disposal of interests in certain bond funds in the amount of NT$121.9 million and foreign exchange gains of NT$40.1 million from the devaluation of the NT dollar against the US dollar. These increases were partially offset by our net investment loss of NT$15.0 million (US$0.4 million) in our investee companies accounted for under the equity method in the first nine months of 2001, compared to an investment income of NT$75.8 million in the first nine months of 2000.

Net Income. As a result of the foregoing and after the deduction of income tax expenses of NT$155.2 million in the first nine months of 2000 and NT$162.7 million (US$4.7 million) in the first nine months of 2001, our net income increased by 22.7% to NT$1,569.6 million (US$45.4 million) for the first nine months of 2001 from NT$1,279.0 million for the first nine months of 2000. Our net margin increased from 30.1% in the of 2000 to 31.5% in nine months of 2001.

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

Net Operating Revenues. Our net operating revenues increased by 67.7% to NT$5,361.2 million (US$155.1 million) for 2000 from NT$3,196.8 million for 1999. The increase in net operating revenues between these two periods was primarily due to increased sales of all our products except for caller-ID ICs.

The net operating revenues of our communications networking ICs increased by 102.1% from NT$1,992.0 million in 1999 to NT$4,025.4 million (US$116.5 million) in 2000, principally as a result of the increased sales of our 100Mbps NIC, 10Mbps NIC and switch ICs. The sales volume of all these products increased between the two periods, particularly our 100Mbps NIC and switch ICs. The increase reflected the industry trend of migration to the Fast Ethernet, the higher demand for switch ICs in line with the proliferation of communications networking, and increasing popularity of these products. The average selling prices of our 100Mbps NIC and switch ICs decreased between the two periods as these products became more mature. While 10Mbps NIC ICs also became more mature, the average selling price of our 10Mbps NIC ICs increased between the two periods reflecting fewer market participants in the 10Mbps NIC IC market.

The net operating revenues of our PC peripheral ICs increased by 37.1% to NT$424.5 million (US$12.3 million) in 2000 from NT$309.6 million in 1999, as a result of increased sales of all our PC peripheral ICs. The average selling prices of all these products increased between these two periods, except for our audio codec ICs. While the sales volume of our audio codec and clock ICs increased, the sales volume of our sound ICs decreased between these two periods.

The net operating revenues of our consumer electronics ICs decreased by 3.4% to NT$815.9 million (US$23.6 million) in 2000 from NT$844.3 million 1999, principally as a result of decreased sales of our callerID ICs, offset by increased sales of our toy ICs, and sales of our scanner ICs, which we introduced in the second half of 2000.

Operating Costs (Cost of Sales). Our operating costs (cost of sales) increased by 58.3% to NT$2,976.6 million (US$86.1 million) for 2000 from NT$1,879.9 million for 1999. The primary factor contributing to the increase was the sales volume increase between these two periods of all our products, except for our sound ICs.

Gross Profit, adjusted. Our gross profit, adjusted increased by 80.6% to NT$2,378.7 million (US$68.8 million) for 2000 from NT$1,316.9 million for 1999. Gross margin, adjusted increased to 44.4% for 2000 from 41.2% for 1999, primarily as a result of increased sales of higher-margin 10Mbps and 100Mbps NIC ICs, offset by increased sales of our audio codec ICs at a lower margin. The increase in the gross margin for our 10Mbps and 100Mbps NIC ICs between these two periods was due to lower raw wafer costs and cost savings resulting from the improvement of manufacturing processes and better yields.

Selling Expenses. Our selling expenses increased by 11.1% to NT$66.2 million (US$1.9 million) (1.2% of net operating revenues) for 2000 from NT$59.6 million (1.9% of net operating revenues) for 1999, principally reflecting increased commissions to our distributors in line with our increased sales revenues. Selling expenses also increased because of an increase in park management fees paid to the authority of the Hsinchu Science-Based Industrial Park, which are calculated based on our net operating revenues.

Administrative Expenses. Our administrative expenses increased by 5.7% to NT$126.1 million (US$3.6 million) (2.4% of net operating revenues) for 2000 from NT$119.2 million (3.7% of net operating revenues) for 1999, principally as a result of increased salaries and bonuses of our general and administrative staff following salary adjustments in line with our increased profit.

Research and Development Expenses. Our research and development expenses increased by 38.5% to NT$488.8 million (US$14.1 million) (9.1% of net operating revenues) for 2000 from NT$352.9 million (11.0% of net operating revenues) for 1999, primarily due to increased salaries and bonuses of our R&D staff in line with increased profit, and a net increase in R&D personnel. In addition, mask expenses also increased as we developed more products in 2000, compared to 1999.

Operating Income. As a result of the foregoing, our operating income increased by 116.2% to NT$1,697.6 million (US$49.1 million) for 2000 from NT$785.2 million for 1999. Our operating margin increased from 24.6% in 1999 to 31.7% in 2000.

Net Non-Operating Income (Expenses). In 2000, we recognized non-operating gain, that is, net nonoperating income minus net non-operating expenses, of NT$152.2 million (US$4.4 million); in contrast, we recorded a net non-operating loss of NT$49.5 million for 1999. The difference of NT$201.7 million can be largely explained by the (1) extraordinary investment gains generated in 2000 by our subsidiary, Leading Enterprises Limited, or Leading Enterprises, from its disposal of its interests in Prosys Technology Inc., or Prosys, to Actel Corporation, or Actel, and the sale of a portion of the Actel shares that Leading Enterprises acquired in connection with its disposal of Prosys, and (2) extraordinary investment loss of NT$77.3 million incurred in 1999 due to the operating losses of several companies, including Prosys, that we invested in through Leading Enterprises. The increase in the non-operating gain in 2000 was partially offset by (1) NT$25.7 million less in gain on disposal of our investments in certain bond funds in 2000 in comparison with 1999, and (2) an increase in 2000 in comparison with 1999 of NT$47.6 million in interest expense due to our issuance of NT$1,400 million zero coupon convertible bonds in May 2000.

Net Income. As a result of the foregoing, and after the deduction of income tax expenses of NT$159.6 million (US$4.6 million) in 2000 and after the addition of income tax benefit of NT$4.5 million in 1999, our net income increased by 128.4% to NT$1,690.2 million (US$48.9 million) in 2000 from NT$740.2 million in 1999. We recognized the income tax benefit in 1999 because our tax obligations were offset by our tax exemption and savings available in that year and future years. See ‘‘Taxation.’’ Our net margin increased from 23.1% in 1999 to 31.5% in 2000.

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

Net Operating Revenues. Our net operating revenues increased by 50.1% to NT$3,196.8 million for 1999 from NT$2,129.7 million for 1998. The increase in our net operating revenues between these two periods was primarily due to the increased sales of all our products.

The net operating revenues of our communications networking ICs increased by 67.9% from NT$1,186.4 million in 1998 to NT$1,992.0 million in 1999, principally as a result of the increased sales of 10Mbps NIC, 100Mbps NIC and switch ICs. The sales volume of all these products, especially our 100Mbps NIC and switch ICs, increased between the two periods, reflecting the industry trend of migration to the Fast Ethernet, and our introduction of new switch ICs in 1999, respectively. The average selling prices of these products, however, decreased between the two periods.

The net operating revenues of our PC peripheral ICs increased by 35.0% to NT$309.6 million in the 1999 from NT$229.4 million in 1998, principally as a result of increased sales of our sound ICs, and sales of our audio codec and clock ICs, both of which we introduced in 1999.

The net operating revenues of our consumer electronics ICs increased by 26.9% to NT$844.3 million in 1999 from NT$665.5 million in 1998, principally as a result of increased sales of our caller-ID and toy ICs.

Operating Costs (Cost of Sales). Our operating costs (cost of sales) increased by 50.4% to NT$1,879.9 million for 1999 from NT$1,249.8 million for 1998. The primary factor contributing to the increase was the increase in the sales volume between these two periods for all our products, except that operating costs (cost of sales) for our 10Mbps NIC ICs and sound ICs decreased despite increased sales because of our cost-reduction measures.

Gross Profit, adjusted. Our gross profit, adjusted increased by 49.7% to NT$1,316.9 million for 1999 from NT$879.9 million for 1998. However, our gross margin, adjusted remained stable at 41.3% and 41.2% for 1998 and 1999, respectively. The main reason is that the margins for our 100Mbps NIC and switch ICs remained fairly unchanged because both the average selling prices and the operating costs (cost of sales) decreased at a similar rate. While the margins for our 10Mbps NIC, caller-ID and sound ICs increased between the two periods, they were substantially offset by the decrease in margins for our toy ICs.

Selling Expenses. Our selling expenses increased by 8.5% to NT$59.6 million (1.9% of net operating revenues) for 1999 from NT$54.9 million (2.6% of net operating revenues) for 1998, principally reflecting increased salaries and bonuses, and increased commissions to our distributors in line with our increased sales.

Administrative Expenses. Our administrative expenses increased by 20.2% to NT$119.2 million (3.7% of net operating revenues) for 1999 from NT$99.2 million (4.7% of net operating revenues) for 1998, principally as a result of increased bonuses for our general and administrative staff.

Research and Development Expenses. Our research and development expenses increased by 45.3% to NT$352.9 million (11.0% of net operating revenues) for 1999 from NT$242.9 million (11.4% of net operating revenues) for 1998, primarily due to increased compensation for our R&D staff and a net increase in R&D personnel. In addition, mask expenses also increased as we developed more products in 1999, compared to 1998.

Operating Income. As a result of the foregoing, our operating income increased by 62.6% to NT$785.2 million for 1999 from NT$482.9 million for 1998. Our operating margin increased from 22.7% in 1998 to 24.6% in 1999.

Net Non-Operating Income (Expenses). Our non-operating loss, that is, net non-operating income minus net non-operating expenses, increased by 55.3% to NT$49.5 million for 1999 from NT$31.8 million for 1998, primarily as a result of (i) an increase in our investment loss due to the decline in value of our investment in

United Wein Technology Co., Ltd. in the amount of NT$31.0 million, (ii) an increase of NT$7.0 million in our share of the net losses incurred by the other companies we invested in that were accounted for under the equity method, (iii) an increase in our net foreign exchange loss by NT$13.8 million, and (iv) a decrease in our interest income by NT$6.7 million. The increase in investment loss and net foreign exchange loss and the decrease in interest income were partially offset by an increase of NT$31.2 million in gain on disposal of our investment in certain bonds and the decrease in our provision for loss on inventory obsolescence by NT$14.2 million.

Net Income. As a result of the foregoing and after the addition of income tax benefit of NT$4.5 million in 1999 and the deduction of income tax expense of NT$9.4 million in 1998, our net income increased by 67.6% to NT$740.2 million for 1999 from NT$441.7 million for 1998. Our net margin increased from 20.7% in 1998 to 23.2% in 1999.

Working Capital Management

Effective working capital management is an important part of our operations. Accounts receivable and inventories are principal components of our current assets and will continue to require significant amounts of working capital, particularly if our net operating revenues continue to increase. Accounts payable is the largest component of our current liabilities and serves as an important source of our working capital.

The following table summarizes the positions of our notes and accounts receivable and inventory as at and for the dates and periods indicated.

As of and for the year ended December 31, As of and for the nine months ended September 30, 1998 1999 2000 2000 2001 (audited) (unaudited) Amount Average Days Amount Average Days Amount Average Days Amount Average Days Amount Average Days (amounts in millions of NT$) 417.4 70 708.2 64 737.7 49 1,092.6 58 1,280.6 55 318.0 88 253.4 55 615.3 53 528.8 45 949.6 83	As of and for the nine months ended September 30,	As of and for the nine months ended September 30,
1998 Amount Average Days 417.4 70 318.0 88	2001
Amount 417.4 318.0		Average Days
		55 83

(1) The average days for notes and accounts receivable for the years ended December 31, 1998, 1999 and 2000 is equal to 365 days divided by the result of (i) net operating revenues divided by (ii) the average of the opening and closing balances of notes and accounts receivable. The average days for accounts receivable for the nine months ended September 30, 2000 and 2001 is equal to 273 days divided by the result of (i) net operating revenues divided by (ii) the average of the opening and closing balances of notes and accounts receivables.
(2) The average days for inventory for the years ended December 31, 1998, 1999 and 2000 is equal to 365 days divided by the result of (i) operating costs (cost of sales) divided by (ii) the average of the opening and closing balances of inventory. The average days for inventory for the nine months ended September 30, 2000 and 2001 is equal to 273 days divided by the result of (i) operating costs (cost of sales) divided by (ii) the average of the opening and closing balances of inventory.

Notes and Accounts Receivable. We currently trade with our principal customers generally on a guaranteed payment basis, allowing credit terms of between 30 and 60 days, with most payments made within 60 days. We also generally require new customers to prepay their orders. The average collection days for our notes and accounts receivable decreased from 70 days in 1998 to 64 days in 1999 and 49 days in 2000, reflecting the increased demand for our products and our ability to require shorter credit terms. The average collection days for our notes and accounts receivables in the first nine months of 2001 decreased to 55 days from 58 days in the first nine months of 2000. Our receivables increased for these periods as a result of the increase in net operating revenues. We generally have not experienced material problems in collecting from our customers and historically have enjoyed a relatively low level of bad debt expenses. Our bad debt provision

expenses for 1998, 1999, 2000 and the first nine months of 2000 and 2001 were NT$3.0 million, NT$0.5 million, NT$0.1 million (US$2 thousand), NT$3.6 million and NT$5.4 million (US$0.2 million), respectively.

Inventory. Our average inventory turnover days decreased from 88 days in 1998 to 55 days in 1999 and to 53 days in 2000, primarily due to higher sales growth relative to inventory growth for our products. Our average inventory turnover days in the first nine months of 2001, however, increased to 83 days, compared with 45 days for the first nine months of 2000 because of slowdown in the global electronics industry during 2001.

Liquidity and Capital Resources

For the years 1998, 1999, 2000 and the first nine months of 2001, our principal cash requirements included inventory, equipment purchases, factory expansion, working capital, and research and development. We had funded our operations and growth primarily from cash flow from operations. In May 2000, we issued NT$1,400 million Zero Coupon Convertible Bonds Due 2005. Substantially all of the proceeds of the convertible bond offering were used to expand our capacity, purchase testing equipment and computer-aided design tools, and engage in research and development of new products.

Our net cash provided by operating activities totaled approximately NT$520.5 million, NT$874.2 million, NT$1,529.4 million (US$44.3 million) and NT$1,313.2 million (US$38.0 million) for 1998, 1999, 2000 and the first nine months of 2001, respectively. We had combined cash and cash equivalents of approximately NT$117.8 million, NT$130.3 million, NT$589.5 million (US$17.1 million) and NT$1,836.1 million (US$53.1 million) at the end of 1998, 1999, 2000 and the first nine months of 2001, respectively. As of September 30, 2001, we did not have any short-term borrowings or long-term bank borrowings.

Our cash used in capital expenditures—consisting of acquisitions of fixed assets and software, including related royalty payments—for 1998, 1999 and 2000 totaled NT$118.3 million, NT$114.8 million and NT$110.1 million (US$3.2 million), respectively. Our cash used in acquiring fixed assets for 1998, 1999 and 2000 totaled NT$105.0 million, NT$99.3 million and NT$70.1 million (US$2.0 million), respectively. Our cash used in making long term investments for 1998, 1999 and 2000 totaled NT$607.5 million, NT$1,259.0 million and NT$300.0 million (US$8.7 million), respectively. We had budgeted capital expenditures of approximately NT$557.9 million for 2001, of which NT$440.0 million (US$12.7 million) was spent during the first nine months of 2001. All our capital expenditures in 2001 were incurred primarily to expand our design and production capacity.

We believe that existing cash and cash equivalent balances, together with proceeds of this offering, will be sufficient to fund our anticipated capital expenditure and working capital requirements for 2002.

Foreign Exchange

We maintain our accounting records and prepare our financial statements in New Taiwan dollars. Our purchases of wafers and equipment are primarily denominated in US dollars. While we also sell our products in US dollars, our customers may in some circumstances pay for the products in New Taiwan dollars at the spot exchange rate. Our foreign currency transactions are recorded on the date they occur at the effective exchange rate for such date. At the end of each month, we restate the balances of foreign-currency denominated monetary assets and liabilities at the month-end spot rate and credit or charge to current income the resulting foreign exchange gain or loss. We enter from time to time into forward foreign currency contracts or other financial derivatives to hedge our foreign currency exposure.

The US dollar amounts disclosed in the financial statements for the year ended December 31, 2000 and nine months ended September 30, 2001 are presented solely for the convenience of the reader and were translated using the exchange rate of US$1=NT$34.56, the noon buying rate of the U.S. Federal Reserve Bank of New York on September 28, 2001, the last business day of the first nine months of 2001.

Forecasts

We are required by the ROC SFC to report our financial forecasts for the three years following the listing of our shares on the Taiwan Stock Exchange and under certain other circumstances, including issuance of new shares for cash. If at any time we come to believe our results are likely to vary by more than 20% from our current financial forecasts, we are required to announce that the current forecasts are no longer valid within two days thereof and publish revised financial forecasts within 10 days thereof. Further, if our actual results of operations do vary by more than 20% from our latest financial forecasts for such period, we are required to report the reason for such variance and/or provide an explanation as to why we did not update our financial forecast sufficiently to avoid the variance. Pursuant to these requirements, we revised our annual financial forecast upwards in August 2001 and announced on or around January 11, 2002 our preliminary unconsolidated unaudited results of operations and that such forecasts made in August 2001 were superseded by the management accounts for the year ended December 31, 2001. See ‘‘Announcement of Preliminary Unaudited Results of Operations’’ below.

You should not place undue reliance on these forecasts as they are based on many assumptions regarding our industries, global business activities and general market, political and economic conditions, and many other factors that are beyond our control. In addition, we caution you that the forecasts and the revised forecasts we published in 2001 are not necessarily indicative of our actual results for the year ending December 31, 2001. We do not expect to update you on any possible difference presented in our forecasts we have published or will publish in the future, from the information included in this offering memorandum, including forward looking statements.

Announcement of Preliminary Unconsolidated Unaudited Results of Operations

On or about January 11, 2002, we announced our preliminary unconsolidated unaudited results of operation for the year ended December 31, 2001. Please note that these management accounts would be unaudited and therefore may vary from our audited unconsolidated financial statements for the year ended 2001, which we expect to publish in April 2002. In particular, we prepared these management accounts based on our estimate of our net investment income (loss) and our income tax (expense) benefit, which would affect our net income. We can only determine definitively our net investment income (loss) when audited results relating to our investments become available, generally after January 31, 2002. Similarly, we can only determine definitively our income tax (expense) benefit after our audited financial statements are finalized. Accordingly, our net income, as presented in these management accounts, is likely to vary from that presented in our audited financial statements, and we cannot assure you that the variance would not be significant. Our net investment income (loss) constituted (8.7%), (6.3%), 7.3%, 5.3% and (1.1%) of our income before income tax for the years ended December 31, 1998, 1999 and 2000, and for the nine months ended September 30, 2000 and 2001, respectively. Our income tax (expense) benefit constituted (2.1%), 0.6%, (8.6%), (10.8%) and (9.4%) of our income before income tax for the years ended December 31, 1998, 1999 and 2000, and for the nine months ended September 30, 2000 and 2001, respectively.

Investment Securities

We have been making a number of investments in Taiwan and overseas based high-tech companies and we may continue to make additional investments on a selected basis. These investments assist us, among other things, in developing good relations with our suppliers and acquiring relevant technology. We do not intend, however, to make substantial investments outside our core semiconductor business. As a result of these investments, our long-term investments increased from NT$741.7 million as of December 31, 1998, to NT$1,914.1 million as of December 31, 1999, to NT$2,339.5 million (US$67.7 million) as of December 31, 2000, and to NT$2,380.3 million (US$68.9 million) as of September 30, 2001. Our net income has also been affected by the operating results of these investments and we expect this trend to continue in the future. In 2000, we recognized investment income of NT$134.5 million (US$3.9 million), which constituted 8.0% of our net income for that year. In contrast, we recognized investment losses of NT$39.3 million and NT$77.3 million in 1998 and 1999, respectively.

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

Taxation

The corporate income tax rate in Taiwan applicable to us is 25%. Prior to January 20, 2000, we enjoyed a preferential rate of 20% because of our location at the Hsinchu Science-Based Industrial Park. However, this preferential rate was abolished by the administrative regulations of the Hsinchu Science-Based Industrial Park.

Based on our status as a company engaged in the research, development and design of communications networking ICs, PC peripheral ICs and consumer electronics ICs in Taiwan, we have been granted exemptions from income taxes in Taiwan with respect to income attributable to capital increases for the purpose of purchasing equipment related to the business for a period of four years following each such capital increase. This tax exemption resulted in tax savings of approximately NT$66.9 million, NT$29.9 million and NT$33.3 million (US$1.0 million) in 1998, 1999 and 2000, respectively.

We also benefit from other tax incentives generally available to technology companies, including tax credits ranging from 5% to 25% of the amount of certain research and development and employee training expenses and credits for investment in automation equipment and technology. These tax incentives resulted in tax savings of approximately NT$25.8 million, NT$109.9 million and NT$193.6 million (US$5.6 million) in 1998, 1999 and 2000, respectively.

After taking into account the tax exemptions and tax incentives discussed above, our effective income tax rate, income tax (benefit) expense as a percentage of our pre-tax income, was 2.1%, (0.6%) and 8.6% in 1998, 1999 and 2000, respectively.

In 1997, the Taiwan Income Tax Law was amended to integrate corporate income tax and shareholder dividend tax to eliminate the double taxation effect for resident shareholders of Taiwan companies. Under the amendment, all retained earnings generated from January 1, 1998 and not distributed to shareholders as dividends in the following year will be assessed a 10% retained earnings tax. See ‘‘ROC Taxation—Tax Reform.’’ As a result, if we do not distribute all of our annual retained earnings generated after January 1, 1998 as either cash or stock dividends in the following year, the earnings will be subject to the 10% retained earnings tax. We recorded NT$25.1 million and NT$5.3 million (US$0.2 million) as this 10% tax on undistributed earnings as income tax expense in 1999 and 2000, respectively. If these retained earnings are distributed thereafter, the income tax previously paid by us on these earnings may be credited against the amount of withholding tax payable by our shareholders in connection with such distribution.

OUR BUSINESS

Introduction

We currently operate in the following three business divisions:

Communications Networking Products Division —Our Communications Networking Products Division designs and develops ICs for wireline and wireless NICs and LAN switches. Principal products in this division include 10Mbps Ethernet NIC ICs, 100Mbps Fast Ethernet NIC ICs and Layer 2 switch ICs. In 2000, we had a global market share of 65.0% in our NIC ICs, based on IDC estimates.
PC Peripheral Products Division —Our PC Peripheral Products Division designs and develops ICs for audio codecs, sound chips, mouse controllers, clock generators and liquid crystal display, or LCD, controllers. An audio codec encodes and decodes analog sound into digital codes and vice versa, enabling computers to receive, transmit and playback sound. In the first three quarters of 2001, we had a global market share of approximately 23% in audio codecs, based on IDC estimates and market-based assumptions.
Consumer Electronics Products Division —Our Consumer Electronics Products Division designs and develops ICs for image-related products, such as scanners. Our most promising new products, scanner ICs, were introduced in 2001, and we estimate we had a global market share of approximately 11% for 2001. This division also designs and develops ICs for toys (voice and music record and playback functions) and caller-IDs. During January 2002, we intend to spin-off our consumer electronics IC products business, excluding image-related ICs to a 50%-owned subsidiary.

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Our History and Early Development

Our Market Environment

Fabless Semiconductor Industry

Prior to the 1990s, almost all semiconductor companies manufactured their own chips—they were vertically integrated from product conception to design, prototyping, manufacturing and distribution. Independent foundries did not exist and semiconductor companies were apprehensive of giving their designs to other semiconductor companies to manufacture for fear of intellectual property rights violations. During the past decade the semiconductor industry has become increasingly specialized, with the emergence of independent foundries (e.g., TSMC, UMC and Chartered Semiconductor Manufacturing Ltd.), assembly and test houses (e.g., ASE Test Limited, STATS, Inc. and SPIL), and design companies, which focus purely on designing ICs, outsourcing the manufacturing to third parties. Design companies that do not own a fab—hence the term ‘‘fabless’’—have blossomed in the past decade supported by the availability of capable foundry, assembly and test capacities. The fabless model has resulted in increased specialization and a more efficient allocation of resources within the semiconductor industry as design companies focus solely on design, product development and marketing, while foundries and assembly and testing companies strive to improve process technologies and manufacturing processes. This ‘‘vertical disintegration’’ has resulted in the rapid development of the semiconductor industry with both fabless IC design and foundry manufacturing processes consistently outperforming the industry’s expectations.

Although the semiconductor industry is cyclical in nature, and is currently experiencing a downturn, the fabless semiconductor industry has experienced steady growth over the past several years, partly because of the structural change towards vertical disintegration. The United States leads the world in terms of the number of fabless companies with about 50% of the world’s fabless companies located in the United States. Taiwan is second with about 25% of the world’s fabless companies.

The Taiwan Advantage in the Fabless Semiconductor Industry

Taiwan is the world’s second largest player in the fabless semiconductor industry and is growing at the fastest rate. Several factors contribute to Taiwan’s success in the fabless industry. Early government assistance, which included tax incentives and subsidies, facilitated the emergence of a strong electronics manufacturing industry in Taiwan. Taiwan’s low-cost manufacturing and product design capabilities have prompted many international PC, consumer electronics, and communications companies to outsource a substantial portion of their manufacturing needs to Taiwan. Many companies in Taiwan are further strengthening their cost advantage by migrating part of their manufacturing capacity, especially in final product assembly, to the PRC.

Proximity to such a large and successful electronics manufacturing industry has helped Taiwan’s semiconductor companies, which include fabless companies, to acquire a large portion of these Taiwan manufacturers’ orders for semiconductors products. On the supply side, Taiwan is home to the world’s two largest foundries, namely, TSMC and UMC, numerous companies in photomask manufacturing, assembly and testing, and a large pool of highly skilled and experienced engineers. The existence of the entire semiconductor supply chain in Taiwan has been a principal driving force behind the growth in Taiwan fabless companies.

Our Industries

We design, develop and market IC solutions for the communications networking, PC peripheral and consumer electronics markets.

Communications—Local Area Networks (LANs)

LANs are privately owned networks located within a single building or campus with a geographical reach of a few kilometers. LANs are widely used to connect PCs and workstations in offices or homes to share resources—such as printers, data storage facilities and the Internet—and exchange information. LANs often use transmission technology consisting of a single cable to which all machines are attached. Computers and other resources are usually connected to LANs using a network interface card, or NIC. The flow of data within a LAN is controlled using LAN switches.

Computers may use several existing protocols to transmit data over a LAN, including IEEE 802.3, commonly known as Ethernet. Ethernet, which uses a linear topology to connect computers in a network, is the most widely used LAN protocol. According to IDC, Ethernet accounted for 94.1% of network connecting device shipments in 2000. Traditionally, Ethernet runs at speeds of 10 to 100Mbps. Currently 100Mbps Fast Ethernet is the most widely used configuration, accounting for 84.6% of network connecting device shipments in 2000. IDC’s actual and forecast data of the market size of the LAN semiconductor market is set out below:

Worldwide LAN Semiconductor Revenue (1999-2004)	1999A	2000F	2001F	2002F	2003F	2004F
NIC			(US$	millions)
Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	90	49	27	15	8	5
Fast Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	472	524	498	374	278	211
Gigabit Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	11	42	69	121	157	183
Token Ring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	102	80	60	41	28	25
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	676	695	654	551	472	430
Switch
Ethernet Fixed Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	54	26	12	8	5	4
Ethernet Modular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	33	18	6	5	4	3
Fast Ethernet Fixed Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	586	877	919	917	754	707
Fast Ethernet Modular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,136	1,231	1,458	1,526	1,477	1,278
Gigabit Ethernet Fixed Port . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	26	62	146	155	216	305
Gigabit Ethernet Modular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	230	653	1,286	1,958	2,188	2,673
10-Gigabit Ethernet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	0	12	70	199	310	502
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,066	2,879	3,897	4,769	4,955	5,473
Router(1)
SOHO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	86	128	135	148	147	157
Low-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	212	197	180	165	161	148
Midrange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	70	79	78	74	70	64
High-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	201	290	356	482	511	550
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	568	693	749	869	889	919

Source: IDC, November 2000

(1) IDC Data as of February 2001

Communications—LAN Market Trends

Higher Speed Ethernet. 10Mbps Ethernet accounted for 20.1% of network device shipments in 1999. However, in 2000, its share dropped to 8.9%, with 10/100Mbps Fast Ethernet accounting for 84.6% of the shipments. We expect the trend towards faster transmission speed to continue and that the LAN speed will gradually increase to 1,000Mbps, or 1 Gbps, over the next few years. However, to achieve 1 Gbps transmission speed, network equipment and semiconductor vendors must develop systems and chips to support data transmission at higher speeds.

Chip Integration. Chip designs can be integrated horizontally or vertically. Horizontal integration involves integrating multiple chips of the same kind on a single chip. For instance, four physical layers, or PHYs, can be horizontally integrated to form a single chip called QuadPHY. Vertical integration involves integrating multiple chips performing different functions on a single chip. For instance, the transceiver, PHY and media access controller, or MAC, can be integrated into a single chip to create a 3-in-1 NIC chip. Integration offers several benefits to the customer, including lower board space, faster time to market, improved performance and reliability, and lower cost.

Communications—Wireless LAN

According to IDC, the market share of wireless LAN, the second most popular network connection device, is expected to grow from 3.9% in 2000 to 15.5% in 2005. The demand for wireless LAN is primarily driven by the increasing need for mobile network connectivity in both home and enterprise markets, particularly in the use of portable PCs and handheld devices. We believe that because wireless LAN can be established without network layout, the wireless will penetrate the desktop PC market when the price falls to an acceptable level.

Wireless technologies based upon the IEEE 802.11 and Bluetooth standards allow consumers to have mobile flexibility around their homes and offices. Bluetooth provides a low-cost wire replacement technology enabling wireless connectivity among consumers’ cell phones, personal digital assistants, or PDAs, PCs, and MP3 players. IEEE 802.11b is the wireless equivalent of 11 Mbps Ethernet, and has already penetrated the corporate community as the wireless technology of choice.

PC Peripheral

Audio codecs and clock chips are some of the basic components that are part of a computer motherboard. IDC estimates that, despite the current downturn, demand for PCs will continue to grow at a CAGR of about 10.2% from 2001 to 2005. The increasing demand for PC and PC peripheral products is expected to be largely driven by demands in developing regions such as the People’s Republic of China and India. In 2001, the PC shipment to Asia (excluding Japan) is expected to grow by 10.5% over 2000, in spite of a decline of 1.6% in the global PC shipment during the same period. The growth in both PCs and notebooks will drive the demand for PC peripheral ICs including audio codecs and clock chips.

Consumer Electronics—Imaging

The Internet has changed the way businesses and consumers exchange information. As the Internet has become an integral part of our daily activities, so has the demand for printed documents to be available online on the Internet, driving the need for color-capable high-speed scanners. In 2000, the worldwide shipment of scanners reached 20.4 million, a 15.4% growth over 1999. IDC expects 2001 worldwide shipments to grow by 9.1% over 2000 and reach 22.3 million units. IDC expects this growth to continue until 2005 at a CAGR of 9.7% between 2000 and 2005.

Over the past several years, the LCD technology has matured, resulting in better features of LCD screens, such as higher resolution, wider viewing angle and increased brightness. Prices for LCD monitors have

declined significantly over the past six months, which we believe should encourage more consumers to replace CRT monitors with lighter and energy-efficient LCD monitors. IDC estimates that the demand for large-sized TFT-LCD panels will grow at a CAGR of 35% from 1999 to 2002, driven primarily by the growth in the notebook market and the increased substitution of CRT monitors with LCD monitors. The television market is expected to further contribute to the demand for LCD monitors. We sell our LCD controller ICs through our PC peripheral product division and recognize their contribution to our results of operations accordingly.

We believe that as demand for these image products grows over the next several years, the demand for semiconductors that are required in these products will grow correspondingly. We believe that our mix-mode and graphics core technologies will enable us to capitalize on this trend, as we introduce products to cater to the needs for these markets.

Competitive Strengths

Advanced core technologies —We have developed and continue to build on our design capabilities from three primary sources: (i) our high-performance analog and mixed-signal circuit design capability, (ii) our superior knowledge of the IC manufacturing process, and (iii) cross-application of our system knowledge and our intellectual property. These technologies have allowed us to maximize yield and circuit performance while minimizing die size, power consumption and testing costs.
Capture of full ‘‘Taiwan Advantage’’ —We benefit from the existence of a well-established, competitive electronics and semiconductor industry in Taiwan, in particular, from the presence of (i) leading PC and notebook vendors, who outsource their production to Taiwanese manufacturers (who collectively manufacture more than 50% of the world’s notebook computers), (ii) the world’s top PC motherboard manufacturers who together account for an estimated 80% of the global PC motherboard market, and (iii) well-established original equipment manufacturers and original design manufacturers in the networking equipment market. Close proximity to our customers facilitates efficient after-sales support, joint-developments and manufacturing improvement process. Also, we are supported on the supply side by the presence of (i) the world’s two largest wafer foundries, TSMC and UMC, and (ii) IC assembly and testing companies, such as SPIL and Greatek. Many of these companies are located in the Hsinchu Science-Based Industrial Park where our company is situated. Close proximity to the supply source facilitates us to mass-produce products at competitive prices.
Strong customer base and loyalty —We serve more than 250 customers. Our customers include (i) certain leading brand PC companies, (ii) motherboard manufacturers such as Asustek and Gigabyte, (iii) network hardware makers such as Accton and D-Link, and (iv) consumer electronics or PC peripheral companies such as Primax, Umax and Tiger Electronics. We also believe that other leading brand PC companies such as Compaq Computer, Hewlett-Packard and Sony are functionally our customers because they designate and specify our products in their PC designs. We continually seek to strengthen our close relationships with them by offering high-performance, cost-effective IC solutions and jointly developing new products. Frequent collaborations with our customers not only result in design ‘‘wins,’’ but build long-term customer loyalty.

We believe the three underlying cornerstones of our business model listed above must be continually studied and applied for us to remain productive, profitable and competitive. As our business has grown, we believe we also have produced a number of other competitive strengths, including the following:

Cost-effective and customer-focused R&D capabilities —Our research and development efforts are focused on (i) cost-effective solutions for mass production of newly accepted products, the success of

which is evidenced by our leading market share in our high-performance and competitively priced principal products, (ii) adoption of a system approach to our chip design, taking into account the product environment in which our ICs will operate, and (iii) delivery of value-added system solutions, such as software drivers, manufacturing utilities and printed circuit board design, to our customers.

Proximity to the growing Asian PC and networking market —Unlike some of our competitors, who are based in North America, we are located in close proximity to the growing Asian PC and networking markets. PC penetration is still comparatively low in Asia, particularly in China and India. In 2001, when North America experienced slowing PC sales and sluggish demand for further networking equipment, Asian PC sales continued to grow. In China and India, many companies are only now building their LANs for their employees. We believe our presence in Asia and our collaborative effort to design products for the Asian marketplace will continue to fuel our growth in networking and PC peripheral IC solutions.
Experienced management team and highly qualified staff —Our executive officers have, on average, worked for our company for more than 10 years, and in the semiconductor industry for more than 12 years. Our employees are well qualified, with 69.7% of them holding bachelor’s and 47.4% master’s or doctorate degrees. Our employees average 32 years in age with 5 years of relevant experience. Benefiting from a young, dynamic and highly qualified team of engineers and scientists, we offer competitive compensation packages, which include substantial bonuses, usually in the form of our shares and based on our financial performance.

Business Strategies

Market total-solutions to assist customers in achieving rapid time-to-market —We endeavor to provide products and services that go beyond the focus of mere chip design. By (i) co-operating with our customers in product development, (ii) designing products with consideration of their operating environment, and (iii) providing customers with layout reference design and manufacturing programs, we market comprehensive, integrated and flexible system solutions to help our customers achieve rapid time-to-market and, hence, enhance our customer relationships and competitiveness. In addition, we assist our customers in obtaining certification of their products for use with leading operating systems, such as Microsoft, and provide a wide range of driver software to our customers to facilitate their sales activities.
Focus on providing high-performance, cost-effective and integrated solutions —We focus on IC solutions that provide an optimal combination of performance, functionality, integration and price in order to maintain technological leadership and competitive edge. For example, we recently introduced a five port Layer 2 switch IC, which integrates all the functions of a switch—connectivity, processing and memory—into a single chip. We believe this single-chip switch IC may soon become a market leader.
Rapidly penetrate high-growth markets —We focus our capital resources, R&D efforts and employee commitments on rapidly penetrating product markets with high-volume, high-growth potential. We foresee our next growth phase to be driven by our recent foray into LAN switch chipsets and our future development of home networking and wireless networking IC solutions. We also look selectively for opportunities in the niche consumer and PC peripheral segments with high-volume growth potential.
Position us for future communications networks —We operate our business in three divisions, each of which focuses on a current form of communications—data in Communications Networking Products, voice in PC Peripheral Products and, increasingly, imaging in Consumer Electronics Products. We

believe there is a growing trend towards convergence of various forms of communication. Our current product lines provide us with the necessary tools to competitively position ourselves in this evolving trend, which will require future integrated single-chip solutions to seamlessly handle voice, video and

Invest in and maintain high-quality workforce —Our success depends on the services of our employees, in particular our R&D personnel. We intend to continue investing in our R&D team and activities in step with the growth of our business. From 1998 through the first nine months of 2001, our R&D expenses accounted for at least 9.0% of our net operating revenues. We believe our reputation as a leading design house has consistently attracted top graduates from Taiwan universities to join our company. We will strive to continue attracting and retaining employees of the highest caliber with our supportive work environment and engaging corporate culture as well as competitive compensation, which includes cash and stock bonuses. We encourage our employees to perform at their optimal potential and give them many opportunities to develop personally and professionally into highly self-motivated, independent agents who are empowered to become the most productive, resourceful employees. Our philosophy strives to create a profitable relationship between employees and managers at all levels, guaranteeing high morale and efficient production.
Selectively pursue strategic acquisitions, partnerships and investments —We continue to selectively seek acquisition and investment opportunities in high-tech companies in Taiwan and overseas that would complement and expand our existing design capabilities, processes and core technologies. For example, we will be seeking to acquire companies with system-on-chip capability using CMOS wireless transmission technology or with the ability to develop multifunctional ICs using WLAN modeling.

Products

We provide highly integrated IC solutions for applications in three broad categories: communications networking, PC peripherals and consumer electronics. The following table sets out our net operating revenues by product for the three years ended December 31, 1998, 1999, 2000, and for the nine months ended September 30, 2000 and 2001.

(in millions, except percentages) Communications Networking 100Mbps NIC . . . . . . . . . . . . . . . . . . . . . . . 10Mbps NIC . . . . . . . . . . . . . . . . . . . . . . . . Switches . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PC Peripherals AC 97 Audio Codecs . . . . . . . . . . . . . . . . . . Sound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mouse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Electronics Toy(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caller-ID(1) . . . . . . . . . . . . . . . . . . . . . . . . Image . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Fiscal Year ended December 31, 1998 1999 2000 (unaudited) NT$ % NT$ % NT$ % 457.4 21.5 1,212.8 37.9 2,852.4 53.2 720.0 33.8 768.0 24.0 918.3 17.1 0.3 — 2.1 0.1 169.9 3.2 8.7 0.4 9.1 0.3 84.8 1.6 — — 16.4 0.5 95.0 1.8 201.9 9.5 259.5 8.1 260.4 4.9 — — — — 16.6 0.3 — — 13.9 0.4 31.2 0.6 27.5 1.3 19.8 0.6 21.3 0.4 464.7 21.8 584.2 18.3 595.2 11.1 200.8 9.4 260.1 8.1 220.2 4.1 — — — — 0.5 — 48.4 2.3 50.9 1.7 95.4 1.7 2,129.7 100.0 3,196.8 100.0 5,361.2 100.0	Fiscal Year ended December 31, 1998 1999 2000 (unaudited) NT$ % NT$ % NT$ % 457.4 21.5 1,212.8 37.9 2,852.4 53.2 720.0 33.8 768.0 24.0 918.3 17.1 0.3 — 2.1 0.1 169.9 3.2 8.7 0.4 9.1 0.3 84.8 1.6 — — 16.4 0.5 95.0 1.8 201.9 9.5 259.5 8.1 260.4 4.9 — — — — 16.6 0.3 — — 13.9 0.4 31.2 0.6 27.5 1.3 19.8 0.6 21.3 0.4 464.7 21.8 584.2 18.3 595.2 11.1 200.8 9.4 260.1 8.1 220.2 4.1 — — — — 0.5 — 48.4 2.3 50.9 1.7 95.4 1.7 2,129.7 100.0 3,196.8 100.0 5,361.2 100.0	Nine months ended September 30,	Nine months ended September 30,
	1998 NT$ % 457.4 21.5 720.0 33.8 0.3 — 8.7 0.4 — — 201.9 9.5 — — — — 27.5 1.3 464.7 21.8 200.8 9.4 — — 48.4 2.3 2,129.7 100.0	1999 (unaudited) NT$ % 1,212.8 37.9 768.0 24.0 2.1 0.1 9.1 0.3 16.4 0.5 259.5 8.1 — — 13.9 0.4 19.8 0.6 584.2 18.3 260.1 8.1 — — 50.9 1.7 3,196.8 100.0	2000 2001 (unaudited) NT$ % NT$ % 2,358.2 55.5 2,520.1 50.5 711.7 16.7 593.9 11.9 106.1 2.5 285.1 5.7 42.6 1.0 318.9 6.4 51.9 1.2 473.4 9.5 214.5 5.0 75.0 1.5 2.9 0.1 63.9 1.3 19.2 0.5 77.1 1.5 20.6 0.5 3.5 0.1 464.1 10.9 294.0 5.9 178.6 4.2 94.4 1.9 — — 150.6 3.0 81.8 1.9 37.8 0.8 4,252.2 100.0 4,987.7 100.0	2001

(1) These product lines are intended to be spun off to M-Square Technologies Corp. in January 2002. See ‘‘—Consumer Electronics ICs.’’

(2) Include design fee income and other miscellaneous items.

Communications Networking ICs

Computer networks provide the infrastructure for information access, data- and resource-sharing. One of the most popular configurations for computer networks is the local area network, or LAN. Each LAN usually consists of PCs, workstations and a server in a restricted area, often connected to one or more data communications devices, such as printers, data storage facilities and the Internet. The most important equipment components in the LAN include the NIC, hub, switch and router. We provide integrated, low-power IC solutions for the manufacture of some of these components.

NICs. An NIC is a peripheral card attached to a computer that enables it to interface with a network.
There are three basic building blocks for an NIC. They are: • the physical layer, or PHY, which connects the NIC to the cable and receives and transmits signals to the network;
the PHY transceiver, which connects with the physical layer, extracts and deserializes the bits from the analog signals; and
the media access controller, or MAC, which interprets the bits as Ethernet packets and can provide multiple access and sense whether the network is busy and then randomly transmit the packets with data collision detection.

Our principal NIC ICs include the following:

Product	Features	Date introduced
RTL8101L . . . . . . . . . . . . . . . . . .	PCI/mini-PCI single chip Fast Ethernet	December 2001
	controller with AC-link interface
RTL8139D(L) . . . . . . . . . . . . . . . .	PCI/mini-PCI single-chip Fast Ethernet	December 2001
	controller with PCI bridge interface
RTL8139C(L)/RTL8100B(L) . . . . .	PCI/cardbus/mini-PCI single-chip Fast	January 2000/July 2001
	Ethernet controller
RTL8139C(L)+ . . . . . . . . . . . . . . .	Advanced PCI/cardbus/mini-PCI single-chip	July 2001
	Fast Ethernet controller with MII interface
RTL8150L(M) . . . . . . . . . . . . . . .	USB 1.1 single-chip Fast Ethernet controller	May 2001
	with MII interface
RTL8201L . . . . . . . . . . . . . . . . . .	MII/SNI single-port PHYsceiver	December 2000
RTL8029AS . . . . . . . . . . . . . . . . .	PCI single-chip Ethernet controller	December 1996
RTL8019AS . . . . . . . . . . . . . . . . .	ISA single-chip Ethernet controller	February 1996

Traditionally, Ethernet runs at speeds of 10Mbps to 100Mbps, with 100Mbps Fast Ethernet being the most widely used configuration. We first introduced our 10Mbps Ethernet NIC chipsets in 1991 and our 100Mbps Fast Ethernet NIC chipsets in 1997. Currently, our Ethernet and Fast Ethernet ICs follow the ‘‘system on chip’’ design, integrating the transceiver, PHY and MAC into a single three-in-one chip, offering significant price/performance benefits to our customers. We believe we are able to achieve such integration in our products because of our superior mixed-signal design capabilities. We now enjoy the leading global market share of Ethernet and Fast Ethernet NIC ICs, accounting for approximately 65.0% of the global market in 2000. We sold approximately 16.0 million and 34.0 million Ethernet and Fast Ethernet ICs, respectively, in 2000. In the first nine months of 2001, we sold 9.5 million and 33.8 million Ethernet and Fast Ethernet ICs, respectively.

Switches. A switch is a network device that switches traffic between two or more network segments, providing discrete LAN segments to one or more PC users on each switched port. A switching solution

typically requires some form of memory, multiple MAC and PHYsceivers. We have a variety of switch ICs, including RTL8305S (a five port Layer 2 switch IC that integrates five MACs, five PHYs, a 1 Mbit SRAM and a 1K-entry lookup table into one single chip). We believe that RTL8305S provides a highly adaptable and costeffective solution. We believe we were the first company in Taiwan to introduce a single-chip switch solution in May 2001 and to develop the first working Quad PHYs (RTL8204) in June 2000 and Octal PHYs (RTL8208) in October 2001. Leveraging on our expertise in mixed-mode design, we believe we will continue to provide system-on-chip, or SOC, integrated solutions that are complete, competitive and reliable.

Our principal switch ICs include the following:

		Date
Product	Features	introduced
RTL8208 . .	8-port 10/100Mbps TX/FX Fast Ethernet transceiver	October 2001
RTL8316 . .	16-port 10/100Mbps Fast Ethernet switch controller with embedded DRAM	October 2001
RTL8305S . .	5-port 10/100Mbps Fast Ethernet single-chip switch solution	May 2001
RTL8204 . .	4-port 10/100Mbps TX/FX Fast Ethernet transceiver	June 2000
RTL8308 . .	8-port 10/100Mbps Fast Ethernet switch controller with embedded DRAM	January 2000

New Products. Set out below is certain information concerning communications networking ICs that we are currently developing and expect to introduce in the next six months.

Product name	Features	Target launch date
RTL8305SB . . . . .	5-port 10/100Mbps TX/FX Ethernet single-chip switch controller	1st Quarter 2002
RTL8318 . . . . . . .	16-port 10/100Mbps plus 2-port Gigabit switch controller	2nd Quarter 2002
RTL8326 . . . . . . .	24-port 10/100Mbps plus 2-port Gigabit switch controller	2nd Quarter 2002

Top Customers. Directly or through our distributors, we sell our communications networking ICs to design or manufacturing contractors as component parts for incorporation into their products. These contractors manufacture their products for sale under their own brand names, or for sale to leading United States network system companies on an OEM or ODM basis. The top five customers of our communications networking ICs accounted for 83.9%, 73.7% and 56.2% of our net operating revenues for communications networking ICs in 1999, 2000 and the nine-month period ended September 30, 2001, respectively. The top five customers of our communications networking ICs in the first nine months of 2001 included Accton, Global Memory Inc., Andev Technology Co., CAMEO Communications, Inc. and Artlink Technology Co., Ltd. Global Memory, Andev Technology and Artlink Technology are our distributors, who distribute products to networking communications companies such as Elitegroup, Netronix Inc., Andi Technology Company and Resources of Productive Technology, Inc.

PC Peripheral ICs

We also provide IC solutions for use in PC peripherals.

AC97 Audio Codecs. An audio codec is chip-based software solution that encodes and decodes analog sound into digital codes and vice-versa. The audio codec enables PC and notebook computers to receive, transmit and playback sound. We first introduced audio codecs in 1999. We offer a wide variety of dual-channel audio codecs, ranging from basic models to those with advanced features, such as acceptable signal-to-noise ratios at volumes exceeding 95 decibels. In the first three quarters of 2001, we had a global market share of approximately 23% in audio codecs, based on the IDC estimate of PC shipments in that period and our assumption that each PC shipped contained at least one audio codec. In November 2001, we began production of a two-channel AC97 audio codec.

Mouse Controllers and Sound Chips. A mouse controller is an application specific IC used in a computer mouse. Sound chips are ICs used in connection with the sound systems of computers. We reduced production of sound chips in the second half of 2001, as integration of sound chips into core logic chipsets eroded the market for stand-alone sound ICs.

Clock Generators. A clock generator is an internal timing device that emits the timing signals or pulses critical to the function of a processor or communications device. Our clock generator ICs support several series of chipsets of Intel and VIA Technologies, Inc., or VIA, including Intel’s 815/EP, Intel 845, Intel 850, VIA KT133/KLE, VIA Pro266/KT266 chipsets. We first introduced clock ICs in 1999. We plan to introduce clock generators that support other chipsets of Intel, VIA and also Silicon Integrated Systems Corporation.

Other Products. We also provide LCD controller solutions that support up to 18-inch scalar super extended graphics adapter. LCD controllers are ICs that typically include micro-processing and other functions and that are used to control LCD products. We plan to introduce in the near future LCD controller solutions that integrate more features. We are also currently developing asymmetric digital subscriber line, or ADSL, modem chipsets that would offer the total broadband solution.

New Products. Set out below is certain information concerning PC peripheral ICs that we are currently developing and expect to introduce in the next six months.

Product name Features ALC650 . . . . . . . . . . . . . . . . . . . . . . . . . . Advanced six-channel AC97 audio codec RTD3001 . . . . . . . . . . . . . . . . . . . . . . . . . Flat Panel Display Controller ALC202 . . . . . . . . . . . . . . . . . . . . . . . . . . Advanced two-channel AC97 audio codec	Target launch date 1st Quarter 2002 1st Quarter 2002 1st Quarter 2002

Top Customers. Directly or through distributors, we sell our PC peripheral IC solutions to manufacturers of PC peripherals, such as PCs and LCD monitors. The top five customers of our PC peripheral ICs accounted for 56.1%, 59.3% and 64.8% of our net operating revenues for PC peripheral ICs in 1999, 2000 and the first nine months of 2001, respectively. The top five customers of our PC peripheral ICs in the nine month period ended September 30, 2001 included Artlink Technology, Vector Electronic Co., Ltd., Fullerton Technology Co., Ltd., ABIT Computer Corp. and Nuvision Technology Inc. Artlink Technology, Vector Electronics and Fullerton Technology are our distributors, who distribute our PC peripheral ICs to PC peripheral companies and manufacturer such as Elitegroup, Gigabyte and Micro-star.

Consumer Electronics ICs

Our principal consumer electronics products are scanner ICs, which we began mass-producing in January 2001. Our first scanner chip operated at an analog front end, or AFE, speed of 2MHz, offered 16-bit resolution and interfaced with the universal serial bus port, or USB1.1. We have introduced a scanner IC that integrates SRAM memory in October 2001. We are also developing scanner chips with higher speed AFE, and direct memory access, or DMA, interfaces for USB2.0 and P1394 applications. We are also currently developing IC solutions for multi-functional peripherals, which are machines that incorporate multiple functions such as those of a scanner, a printer, a photocopier and even a facsimile machine. Set forth below is certain information concerning consumer electronics ICs that we are currently developing and expect to introduce in the next six months.

Product			Features	Target launch date
RTS8852	. .	PC-based MFP. Includes 16bits@2MHz ADC, USB1.1, Control-logic,		1st Quarter 2002
		SRAM
RTS8821	. .	High Speed Scanner. Includes	16bits@6MHz ADC, USB1.1, Control-logic,	2nd Quarter 2002
		DMA for USB2.0 and P1394
RTS8872	. .	USB 2.0 Device Controller. Includes 1 USB 2.0 PHY, SIE, MCU, RAM		2nd Quarter 2002
		and ROM

Our Consumer Electronics Products Division produces toy ICs—ICs used in toy applications such as speech voice changers; record and playback; easy speech for toys; LCD controllers for toys, LCD games and interactive toys; one-key voice melody and dual-channel voice melody for toys, gift items, clocks and toy

pianos; and radio car controllers. Caller ID ICs have also been an important product in the Consumer Electronics Products Division. Caller ID ICs are used to provide the signal processing necessary to identify the phone number and name of the incoming call.

Top Customers. We sell our consumer electronics ICs to manufacturers of consumer electronics products and imaging products, such as scanners and electronic toys. The top five customers of our consumer electronics ICs accounted for 74.1%, 68.5% and 76.0% of our net operating revenues for consumer electronics products in 1999, 2000 and the nine month period ending September 30, 2001, respectively. The top five customers of our consumer electronics ICs in the period ending September 30, 2001 included Sunwave Development Ltd., Nuvision Technologies, Inc., Genmosa Technology Inc., General Instrument Corp. (Taiwan) and Single Chip Microelectronics Co., Ltd. Nuvision Technologies and Sunwave Development are our distributors, who distribute our scanner ICs to imaging companies such as Umax and Primax, and toy ICs to Tiger Electronics and Mattel, Inc.

Core Technologies

We possess a comprehensive range of core technologies encompassing the complete design space from systems to silicon. We have developed our capabilities and continue to build on them from three primary sources: (i) our high-performance analog and mixed-signal circuit design capability, (ii) our intimate familiarity with the IC manufacturing or fabrication process, and (iii) cross-application of our system knowledge and our silicon intellectual property in the communications, consumer and PC peripheral areas.

We have developed significant analog and mixed-signal circuit expertise with a wide range of complex analog building blocks such as high-speed phase locked loop, data recovery circuits and high-frequency and high-resolution analog-to-digital and digital-to-analog converters. We believe some of our analog functional blocks utilize some of the lowest die area devices in the industry, which makes them suitable for integration with high-volume mixed-signal products. To date, we have successfully deployed our expertise in Fast Ethernet NICs and Octal PHYs and other higher data rate products, both existing and under development.

Using our familiarity with the IC manufacturing or fabrication process, we have developed our proprietary standard cells, and memory, processor and analog building blocks. Our building blocks may operate on a standalone basis as a complete basic system or various devices may be interconnected to form a more complex

system. This component level expertise enables us to anticipate and evaluate effectively the various systems issues and tradeoffs that our customers will face when designing their products. This helps us to partition our solutions properly and to attain appropriate levels of integration. Use of systems level and gate level design languages enables us to achieve higher efficiency and superior price/performance characteristics for our solutions. We have strengthened our system-on-chip design capability that enables us to integrate processor, memory and analog building blocks.

Cross application of our system knowledge and silicon intellectual property in the communications, consumer and PC peripheral areas positions us in good stead in the area of converged networks. We have attained skills in the areas of Fast Ethernet channel, or FEC, quadrature amplitude modulation, or QAM, and quadrature phase shift keying, or QPSK, modulation and demodulation, variable rate transmitters and receivers, digital clocks, carrier recovery techniques and adaptive equalization algorithms. We have designed and deployed fully integrated digital signal processing based transceiver chips for Fast Ethernet LAN applications. We are now extending this digital signal processing transceiver expertise and applying it to the development of a Gigabit copper twisted pair transceiver. We have developed networking protocols that we have applied for the development of MAC for Fast Ethernet NIC and switch applications. Our capability to deploy hardware-based DSP architecture, rather than firmware-based digital signal processing, or DSP, architecture has enabled us to provide less complex, lower cost and higher performance solutions. Our audio and image-related technologies also enable us not only to gradually expand our market share in audio codecs and scanner ICs, but also to rapidly penetrate into product applications in a converged video, voice and data communications environment of the future. In addition, our expertise and experience in driver and application software programming across various software operating system platforms enable us to provide complete software support for existing and future IC applications, thus increasing the added value and competitive edge of our customers’ products.

Design

ICs are highly design-intensive. IC designers must address issues such as architectural compatibility, power conservation, heat dissipation and size constraints.

In order to refine, develop and deliver new and enhanced products in a fast and efficient manner, we use an automated design environment based on advanced workstations, dedicated product simulators, system simulation with hardware and software modeling and use of a high-level design description language. We consider our computer-aided engineering and computer-aided design capabilities to be important for our future success in all areas of new product development. We develop detailed test procedures and specifications for each product and require our independent foundries to use these procedures.

We believe our design process adds value to our customers at all stages of their design and manufacturing cycle. Our system designers work with our clients in early design stages to closely study the end-system and identify the level of integration that can be achieved in the IC. Integration involves combining the functions of various components of the system in the IC itself, thereby eliminating the need for those components in the end-system. Integration provides many fundamental benefits to our customers, including improving performance of the system, increasing product reliability, saving board space, shortening time-to-market, and reducing system cost.

During the early stages of the design process, our system engineers also work with the customer to decide if a particular functionality needs to be designed using hardware or software. Increased software content reduces the IC cost as fewer transistors are required to achieve the desired functionality. Our involvement with the customers in the system design process helps us understand important design issues early and arrive at more efficient product specifications, product features and PCB layouts.

After identifying the features and determining the specifications of an IC, we begin the design work employing our analog, digital and embedded memory design capabilities, layout engineering expertise and existing cell libraries. Our design expertise enables us to design ICs with mixed-mode capabilities and

embedded memory capabilities features that provide additional performance and cost benefits to our customers. Our layout engineers seek to design the product using the most efficient layout requiring fewer transistors and lower chip area. We use cell libraries provided by foundries and other third parties and also continue to develop cell libraries in-house. Cell libraries help us shorten the IC design process and enhance its reliability.

We continue to work with our customers after the IC design stage by providing driver software, application utilities, and diagnostic software required for successful integration of the IC with the customer’s system. We also help our customers in obtaining certification for the use of their products with leading operating systems, such as Microsoft and Novell, Inc.

Before we can adopt a design for mass production, we must make a prototype of the chip and subject it to stringent testing. We work closely with our independent foundry suppliers in this process. The foundries produce the prototype and help us identify and solve any production issues. For example, if the prototype gives a low yield rate, the foundry staff will assist our design team to analyze the cause. Our close proximity to the foundries allows us to address any production issues quickly and effectively. Mass production typically begins three months after the first prototype of a product is made.

Manufacturing

After an IC design is completed, the manufacturing process that follows consists of masking, wafer manufacturing, probe testing, assembly and final testing. Our core business is IC design, marketing and sales and we outsource our masking, wafer manufacturing and assembly requirements to outside suppliers. We do not own and maintain any wafer manufacturing fabrication or assembly facilities.

Mask-Making

After the design and layout of the circuit is finalized and produced, it is duplicated on a photographic negative, known as a mask, by an electron beam generator. We outsource our mask-making needs to specialist companies such as Taiwan Mask Corp. and TSMC.

Wafer Manufacturing

The mask is then used in the wafer fabrication process. We procure wafers primarily from UMC and TSMC in Taiwan. UMC and TSMC are the world’s leading semiconductor foundries, which manufacture semiconductor designs using a comprehensive range of leading-edge wafer fabrication processes. We specify the use of established process technologies for the manufacturing of our products. Our expertise is in the differentiated architecture and functionality of our products, and we focus on providing solutions that offer an optimal combination of performance, functionality, integration and prices. Most of our products are currently fabricated in 0.35 and 0.25 micron line widths.

Precise terms with respect to volume and timing of wafer production and pricing of wafers produced by foundries are determined by periodic negotiations with our independent wafer foundry suppliers. Typically, orders are made based on the number of wafers. The foundries are responsible for replacing wafers that fall below the 10% variance from the pre-agreed yield rate. We work very closely with our independent foundry suppliers in ensuring the optimal yield rate in the wafer manufacturing process, which is an important aspect of our cost-containment efforts. We analyze with our independent foundry suppliers whether any low yield rate resulted from manufacturing glitches or design faults, and take any necessary remedial action. Our independent foundry suppliers have been very responsive and supportive in this aspect. The yield rate for a new product typically takes three months to stabilize.

We typically give our independent foundries monthly rolling forecasts of our requirements. When we anticipate increased demands for our products, we may also require our foundries to increase quantity of committed supplies.

We continuously evaluate opportunities to enhance our foundry relationships or obtain additional capacity from our main suppliers as well as other suppliers of leading-edge process technologies. In addition, we engage in cost reduction programs designed to enhance the profitability for our products.

To date, we have not experienced any serious disruption in our wafer supply.

Wafer Probing

After a wafer is fabricated, it is visually inspected. Subsequently, individual semiconductors on a wafer, or a die, are electrically tested or ‘‘probed.’’ Dies that fail this test are marked to be discarded. We conduct all wafer probing in-house.

Wafer probing requires two main pieces of equipment—the tester and the probe station. The probe station is used to stabilize the wafer for testing purposes. We currently have 13 testers and 20 probe stations. We expect to use a portion of the proceeds from this offering to expand our probing facilities. With our in-house wafer-probing capabilities, we have the flexibility to adjust our output during the high and low seasons and are able to better manage our cost structure and product delivery times.

Assembly

After the wafers are probed, we deliver the wafers to assembly vendors for assembly. The wafers are first sawed into individual dies. Dies that are marked defective are discarded. The dies are then processed to protect them and to facilitate electrical connections and heat dissipation. We outsource our assembly requirements primarily to SPIL and Greatek in Taiwan.

To date, we have not experienced any substantial disruption to or delay in our assembly requirements.

Final Testing

Packaged semiconductors must be tested to ensure that the device meets performance specifications. We perform our own final testing in-house, and believe this to be necessary to ensure quality control of our products.

Quality Assurance

We believe that we build quality into our products starting with the design and development process. Our designs are subjected to extensive circuit simulation under extreme conditions of temperature, voltage and processing before being committed to manufacture. We pre-qualify each independent foundry and assembly facility and conduct regular in-depth quality audits. We closely monitor foundry production to ensure consistent overall quality, reliability and yield levels.

In 1995, we received the International Organization for Standardization, or ISO, 9001 certification. The certification process involves subjecting our production processes and the quality management systems at our factories to review and surveillance for various periods. The ISO certification also provides independent verification to our customers as to the quality control in our manufacturing processes.

Customers

General

We emphasize customer relations as a key to our growth and profitability. A key aspect of our customer development strategy is to have major global computer and electronics companies accept our products for use in their devices.

In addition to trying to increase orders from existing customers, we continuously seek opportunities to work with new top-tier customers for our new products. As we attempt to develop long-term relationships with our customers, we strategically identify potential new customers by evaluating the customer’s potential for growth as well as its existing and new product lines. We target new customers whom we believe have product lines that fit our growth strategy and to whom we believe we can add value through our competitive strengths.

Our sales to any single customer fluctuate significantly from period to period based on order rates and design cycles. Any individual customer may or may not continue purchasing products in any subsequent product release or generation. Sales to our customers are typically made pursuant to separate, detailed purchase orders for each new purchase. We typically place orders to purchase our products from our foundries on a monthly rolling basis, while our customers generally place purchase orders approximately one month prior to delivery.

We currently trade with our principal customers generally on a guaranteed payment basis. Our payment terms to our customers typically require payment within 30 to 60 days after shipments of products, which is the industry standard. We also generally require new customers to prepay their orders.

Top Customers

The following table sets forth the top five customers of our products, based on their respective purchases as a percentage of our net operating revenues for the periods indicated below.

Customers Artlink Technology Co., Ltd. . . . . . . . . . . . . . . . Accton Technology Corp. . . . . . . . . . . . . . . . . . . Global Memory Inc. . . . . . . . . . . . . . . . . . . . . . CAMEO Communications, Inc. . . . . . . . . . . . . . Nuvision Technology Co., Ltd. . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Year ended December 31, 1998 1999 2000 — — 4.2% 9.1% 16.2% 20.3 — 5.5 5.7 — — — 2.6 9.1% 21.7% 32.8%	Nine months ended September 30, 2000 2001 3.5% 11.1% 23.1 12.0 5.0 9.7 — 7.3 2.5 6.7 34.1% 46.8%	Products purchased(1)
			CN, PC CN CN, PC CN CN, CS, PC

(1) CN denotes communications networking ICs, PC denotes PC peripheral ICs and CS denotes consumer electronics ICs.

We serve more than 250 customers. Our customers include (i) certain leading brand PC companies, (ii) motherboard manufacturers such as Asustek and Gigabyte, (iii) network hardware makers such as Accton and D-Link, and (iv) consumer electronics or PC peripheral companies such as Primax, Umax and Tiger Electronics. We also believe that other leading brand PC companies such as Compaq Computer, Hewlett Packard and Sony are functionally our customers because they designate and specify our products in their PC designs. Their designs ultimately obligate their contract manufacturers to purchase our products. Moreover, a significant amount of our engineering and design efforts are spent collaborating with these companies to ensure our products are the highest-performing and most cost-effective ICs for each of their applications.

Sales and Marketing

We market our products through our sales and marketing staff, independent sales representatives throughout the world, as well as through exhibitions (such as Comdex Fall, CUES and Cubit) and trade shows (such as ISP Con and Internet World) to distributors, strategic partners and potential licensees of our technologies and products. Through a subsidiary, we also operate a technical support center in Hong Kong.

To complement our direct sales force, we also sell our products through independent sales representatives and distributors. The sales representatives sell our products on a commission basis and do not maintain

inventory, whereas the distributors maintain inventory and therefore may enjoy cost savings depending on the size of their orders.

Research and Development

We believe that the continued introduction of new products in our target markets is essential to our growth, and we seek to continue to enhance and expand our product line through in-house research and development efforts and selective acquisitions.

Each of our three product divisions has its own system designers that continually engage in research and development related to their assigned products. We also have a dedicated research and development engineering division that is tasked with advancing our core technologies, design flows and design methodologies. We believe this helps us shorten the time-to-market and improve the robustness of our products. To minimize duplication of R&D efforts by the product divisions, we centralize in the R&D division activities relating to technologies that are common to all our product lines, such as layout and analog designs. Our R&D division would then share their results with the product divisions. Our R&D efforts are also augmented by an R&D center that our subsidiary owns in San Jose, California in the United States.

Our typical R&D cycle begins when we assign an engineer to study and learn about a particular market segment or technology. If we conclude that the development of a new product is feasible, we will assemble a team of engineers with respective expertise in system design and analog, digital and memory technologies to begin designing the new product. In line with our design methodologies described in ‘‘—Design,’’ we will identify the functions and specifications we would like to incorporate in the new product. It generally takes about six months to construct a prototype using field-programmable gate array, or FPGA, that can be tested against the specifications. It would usually take another six months before commercial production of the product begins.

Our R&D focus is to develop products that have high-volume growth potential that we can benefit by capturing a leading market share in the product.

Competition

Competition in the IC industry is intense. We compete in different market segments to various degrees on the basis of the following:

price;
performance, level of integration and adherence to industry standards;
production, distribution and marketing capabilities;
product quality and reliability;
ability to rapidly introduce new products to market;
reputation; and
intellectual property.

Competition is also affected by the life cycle of the product. For instance, companies that are more focused on early-stage product introductions may reduce production or exit a product when volumes ramp up and a large number of players enter the market, as cost becomes a key determinant of competitiveness. On the other hand, during the same stage of the product life cycle, Taiwan companies typically enter the market by introducing low-cost products to gain market share. We compete with both Taiwan and global, primarily U.S., companies. We believe that we enjoy significant cost advantages over our U.S. competitors. At the same time,

we believe that we are a technological leader in Taiwan in the communications networking IC segment and possess the most advanced design capabilities. As a result, we have been able to gain market share from our U.S. competitors, and at same time, compete effectively against other Taiwan companies.

In our communications networking IC business, our competitors for switch ICs include Broadcom, Kendin and Marvell and our competitors for NIC ICs include Intel and 3Com. In our PC peripheral IC business, our competitors include Analog Devices, SigmaTel, Cypress and ICS. In our consumer electronics IC business, our competitors include National Semiconductor, Grandtech Semiconductor and Genesys Logic. Our strategy for expansion in these markets includes continued introduction of new products that address high volume, low-cost applications as well as high-performance applications. In addition, we anticipate continued price reductions proportionate to our ability to lower the manufacturing cost for established products. See ‘‘—Business Strategies.’’

Intellectual Property

We rely primarily on a combination of patents, trademarks, copyrights, trade secrets, employee and thirdparty nondisclosure agreements and licensing arrangements to protect our intellectual property. As of September 30, 2001, we held a total of 14 U.S. patents and 24 Taiwan patents in force for products and technology developed through our own efforts. These patents have expiration dates from February 2002 to April 2019. Our issued patents and pending patent applications primarily relate to technology in connection with the development of our chipsets. Our policy is to seek patents that have broad application in the semiconductor industry and that we believe will provide a competitive advantage.

We currently have more than 48 patents either pending or under review in various jurisdictions, including the U.S., Taiwan and the PRC. We intend to continue to seek patent protection on significant new inventions.

We have registered two trademarks in Taiwan, including a trademark that incorporates our English name ‘‘Realtek.’’ The trademarks are designated for us on our products. The trademark ‘‘Realtek’’ has been approved in the U.S. for use on our published books, manuals and data sheets regarding our IC products. The trademark ‘‘Realtek’’ has also been registered in the PRC.

To decrease the risk of infringing protected technologies, we have procedures to evaluate related patents as part of our product development process. In addition, we have retained various patent counsel to review and document our own patent process. Where appropriate, we will enter into licensing arrangements with existing patent holders and will pay royalties and license fees to these holders. These payments amounted to NT$4.1 million in 1998, NT$0 in 1999 and NT$5.3 million (US$0.2 million) in 2000. Notwithstanding our efforts to decrease the risk of infringement, we are the subject of one patent infringement claim. See ‘‘—Legal Proceedings.’’

Employees

As of September 30, 2001, we had 403 full-time employees serving in the following capacities:

Function Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Production and Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Number
	256 111 36 403

Function
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Production and Testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number

256
111
36
403

Approximately 69.7% of our employees as of that date hold bachelor’s and 47.4% master’s or doctorate degrees. As of September 30, 2001, the average age of our employees was 32 years.

The competition for qualified engineers and managers with experience in the semiconductor industry is particularly intense. Our future success will depend, in part, on our ability to continue to attract and retain highly qualified technical, marketing, engineering and management personnel. See ‘‘Risk Factors—Risks Relating to Our Financial Condition and Business.’’ Our overall turnover rate has been approximately 6.0%. Our employees are not covered by any collective bargaining agreements. We believe our wages are competitive with other Taiwan companies in our industry. We have not experienced any strikes or significant work stoppages and believe that our relations with our employees are good.

We believe that our management policies and comprehensive benefits to employees have contributed to good employee relations and employee retention. Our employee benefits include subsidized meals, health insurance, life insurance and education or training subsidies, as well as employee bonuses, which often involve distributions in the form of our common shares. In compliance with ROC law, we provide health benefits to our employees under the National Universal Health Plan and the Labor Insurance Plan. We also have a defined benefit retirement plan covering all regular employees. Benefits under this plan are based on length of service and average monthly pay for the six months before retirement. We currently contribute on a monthly basis 2% of the aggregate wages of our employees to a retirement fund, which is maintained with the Central Trust of China as required by ROC law. As of September 30, 2001, the retirement plan had plan assets of approximately NT$33.2 million (US$1.0 million).

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

Facilities

We lease from the Science Park Administration 4,856 square meters for our headquarters in Taiwan, under leases expiring in November 2015. The lease contracts are renewable upon expiration.

Insurance

We maintain insurance policies on our buildings, equipment and inventories covering property damage and damage due to, among other events, fires, typhoons and floods. We maintain these insurance policies on our facilities and on inland transit of inventories. Our property insurance covers replacement costs for our assets. We do not have insurance for business interruptions.

Environmental Matters

The business of IC design does not cause any significant pollution. We have not incurred any loss due to environmental problems in the past three years and believe that we are in compliance with all relevant ROC environmental protection laws.

Legal Proceedings

In November 2000, ICS filed an action against us in the U.S. District Court for the Northern District of California. ICS alleges that some of our clock generator ICs infringed on a certain ICS patent. ICS is seeking an injunction as well as the recovery of monetary damages, including treble damages for wilful infringement. In February 2001, we filed an answer and affirmative defenses to ICS’s complaint, denying the allegations in ICS’s complaint, and asserted a counterclaim requesting declaratory relief that we are not infringing the IC patent and that the patent is invalid and unenforceable. As advised by our patent counsel representing us in the proceedings, we believe that we have strong defenses to ICS’s claims on invalidity, non-infringement and inequitable conduct grounds. Both parties are currently conducting discovery in this case. The court has appointed a mediator to facilitate an informal resolution of the dispute.

Although we believe ICS’s claims are unwarranted and we intend to continue to contest vigorously ICS’ allegations, we cannot predict the outcome of this litigation. If mediation is unsuccessful, and if we are subsequently found to have infringed the ICS patent, we could be liable for monetary damages—which could be trebled if the infringement were found to have been willful—and be required to withdraw various products from the market. An adverse decision could have a material adverse effect on our financial condition and results of operations.

On March 31, 1995, the Bureau of Export Administration of the U.S. Department of Commerce, or the BXA, initiated an administrative proceeding against us for allegedly purchasing U.S.-origin graphic chips in violation of the Export Administration Regulations, or the EARs, without the required written letter of assurance. On July 12, 1995, an Administrative Law Judge issued a Default Order in the matter ordering (i) the revocation and surrender of all licenses issued by the Office of Export Services in which we appear or participate and (ii) that we be denied, for a period of five years, all U.S. export privileges. On August 3, 1995, the Under Secretary for Export Administration affirmed the Default Order. As a practical matter, denial of U.S. export privileges meant we could not purchase U.S.-origin products and technology, and we were added to a ‘‘Denied Persons List’’. The Denied Persons List is regularly published in the U.S. Federal Register , and is accessed by U.S. exporters seeking to comply with the EARs. On August 3, 2000, the Default Order lapsed and we were removed from the Denied Persons List.

On December 10, 2001, the BXA wrote to inform us that it has commenced an administrative proceeding against us for allegedly violating the Default Order. The BXA is seeking administrative sanctions for (i) a civil penalty of up to US$11,000 per violation (for four alleged violations), (ii) a denial of our export privileges, and/or (iii) exclusion from practice before the BXA. We intend to attempt to settle the BXA proceeding amicably. We believe we acted in good faith to implement a compliance program designed to preclude purchases of U.S.-origin products and technology during the pendency of the Default Order. We also believe any potential violations that may have occurred were inadvertent and not knowingly countenanced by senior management. Nevertheless, if the proceeding were resolved adversely to our interests, we cannot assure you that our operations would not be adversely affected by our inability to purchase U.S.-origin products or software.

Except as described above, we are not aware of any pending or threatened, and are not involved in any, material litigation or other proceedings the outcome of which we believe might, individually or taken as a whole, adversely affect our operations or financial condition.

Our Subsidiaries and Affiliated Companies

We, directly or through investment vehicles, have made a number of investments in high-tech companies in Taiwan and overseas that would complement and expand our existing design capabilities, processes and core technologies. These investments constitute about 25.5% of total assets as of September 30, 2001. We do not intend to make any substantial investment outside our core businesses in the near future.

Set out below is certain information about these subsidiaries and affiliated companies as of September 30, 2001.

Company Main business Avance Logic Inc. . . . . . . . . . . . . . . . . R&D and market research Leading Enterprises Limited . . . . . . . . . Holding and investment company Amber Universal Inc. . . . . . . . . . . . . . Holding and investment company Realtek Semiconductor (HK) Limited . . Technical support and consulting Realsun Investments Co. Ltd. . . . . . . . Investment company Hung-Wei Venture Capital Co., Ltd. . . . Investment company Realking Investments Limited . . . . . . . . Investment company M-Square Technologies Corp. . . . . . . . ICs manufacturing, design, research, development, selling and marketing Actions Technology Inc. (Cayman) . . . . Holding and investment company Actions Technology Co., Ltd. (BVI) . . . Holding and investment company Actions Technology (H.K.) Co., Ltd. . . Information Service Group Well Information Technology Co., Ltd. . . . . . . . . . . . . . . . . . . . . . Software and electronic component production and sales Ascend Semiconductor Co., Ltd. . . . . . ICs manufacturing, design, research, development, selling and marketing Technology Partner Venture Capital Corporation . . . . . . . . . . . . . . . . . . . Venture capital Global Tech Management Consulting Corporation . . . . . . . . . . . . . . . . . . . Management consulting	Jurisdiction of incorporation Registered Address Total paid-in capital USA 2380-Q Qume Dr., San Jose, CA 95131, USA US$4,575,000 BVI Tropic Isle Building, P.O. Box 438, Road Town, Tortola, BVI US$3,930,000 BVI The Lake Building, 1 Floor, Wickhams Cay 1, P.O. Box 3152, Road Town, Tortola, BVI US$9,211,035 Hong Kong Room 3, 14th Floor, Charm Centre 700, Castle Peak Road, Lai Chi Kok, Kowloon, Hong Kong HK$1,500,000 ROC 4F-5, No. 882, Kuan-Fu Road Sec. 2, Hsinchu, Taiwan, ROC NT$180,000,000 ROC 4F-5, No. 882, Kuan-Fu Road Sec. 2, Hsinchu, Taiwan, ROC NT$700,000,000 ROC 4F-5, No. 882, Kuan-Fu Road Sec. 2, Hsinchu, Taiwan, ROC NT$300,000,000 ROC 5F-3, No. 29, Pei-Da Road, Hsinchu, Taiwan, ROC NT$50,000,000 Cayman Islands Huntlaw Building, P.O. Box 2804, George Town, Grand Cayman, Cayman Islands US$8,000,000 BVI Tropic Isle Building, P.O. Box 438, Road Town, Tortola, BVI US$3,500,000 Hong Kong Unit F, 6th Floor, West Gate Tower, 7 Wing Hong Street, Lai Chi Kok, Kowloon, Hong Kong HK$2 ROC 6F-3, No. 9, Wu Chuan 1 Rd., Hsin Chuang City, Taipei Hsien, Taiwan, ROC NT$240,000,000 ROC 2F, No. 29, Pei-Da Road, Hsinchu, Taiwan, ROC NT$400,000,000 ROC 6F, No. 56, Wu-Kung 6 Rd., Wu-Ku Industrial Park, Taipei Hsien, Taiwan, ROC NT$905,000,000 ROC 6F, No. 56, Wu-Kung 6 Rd., Wu-Ku Industrial Park, Taipei Hsien, Taiwan, ROC NT$13,000,000	Effective equity interest (%) 100.00% 100.00% 100.00% 100.00% 99.99% 99.99% 99.99% 99.86% 62.15% 62.15% 62.15% 59.07% 18.00% 15.47% 10.00%

Additional Information on Hung-Wei Venture Capital Co., Ltd.

Hung-Wei Venture Capital Co., Ltd., our 99.99% subsidiary, is an ROC company incorporated in December 1999 with its registered address at 4F-5, No. 882, Kuan-Fu Road Sec. 2, Hsinchu, Taiwan, ROC. Hung-Wei is principally a venture capital company. As of and for the year ended December 31, 2000, HungWei had a total paid-in capital of NT$700 million (US$20.3 million), accumulated losses of NT$2.8 million (US$0.1 million) and a net loss of NT$2.8 million (US$0.1 million). As of December 31, 2000, our book value of Hung-Wei was NT$697.1 million (US$20.2 million). All the shares in Hung-Wei are fully paid up. HungWei did not pay any dividend for the year ended December 31, 2000. There are no intercompany loans between Hung-Wei and our company.

OUR MANAGEMENT

Directors and Supervisors

Our articles of incorporation provide that our board of directors is to be elected by and from among our shareholders in the annual general meeting at which a quorum, consisting of a majority of all the shares in issue having voting rights, is present. Although under the amendments to the ROC Company Law that took effect on November 14, 2001, it is no longer required that our directors be elected from among our shareholders, we have not amended our articles of incorporation to reflect this change of law. Our chairman is a director elected by our board of directors. The seven-member board of directors is responsible for the management of the business of our company.

Our articles of incorporation provide for three supervisors. In accordance with the ROC Company Law, our supervisors are elected by and from among our shareholders and cannot concurrently serve as a director or officer of, or in a staff position with, our company. The duties and powers of each supervisor include, among other things, investigating the condition of our company, inspecting corporate records, verifying statements prepared by the board of directors prior to the annual general shareholders’ meeting, calling shareholders meetings, representing our company in negotiations with our directors and notifying, when appropriate, the board of directors to cease acting in contravention of applicable law or regulation or in contravention of our articles of incorporation or beyond our scope of business.

The term of office for our directors and supervisors is three years from the date of election or until the next election, whichever is later; but if the MOEA sets a deadline requiring us to elect the new directors and supervisors after the expiry of the three year term and we fail to so elect by the deadline, the term of office of the original directors and supervisors will terminate immediately after the deadline. They may serve any number of consecutive terms and may be removed from office at any time for cause by a special resolution adopted by the majority of the shareholders at a meeting at which shareholders representing at least two-thirds of all issued and outstanding shares of our common stock are present. Alternatively, in the case of a public company, such as our company, such a resolution may be approved by the holders of at least two thirds of our shares represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding shares are present. The business address of each of our directors, our supervisors and our executive officers is the registered address of our company.

The following table sets forth certain information relating to directors and supervisors as of July 13, 2001.

Name Position Yeh, Po-Len . . . . . . . . . . . . . Chairman Huang, Chih-Chien . . . . . . . . Director Chiu, Sun-Chien . . . . . . . . . . Director Yeh, Nan-Horng . . . . . . . . . . Director Chen, Jinn-Shing . . . . . . . . . . Director Ni, Shu-Ching . . . . . . . . . . . . Director Hou, Shung-Tsang . . . . . . . . . Director Fan, Mu-Kung . . . . . . . . . . . . Supervisor Pan, Chang-Mei . . . . . . . . . . Supervisor Chen, Shang-Wen . . . . . . . . . Supervisor	Number of shares held as of July 13, 2001 2,796,572 3,959,146 1,083,189 4,242,019 3,817,719 3,955,123 252 146,842 1,653,863 4,600	Percentage of total shares outstanding as of July 13, 2001 Other principal directorships and supervisorships outside our company 1.25% None 1.78% None 0.49% None 1.90% President of Global Tech Management Consulting Co., Ltd. 1.71% None 1.77% None X(1) None X(1) None 0.74% None X(1) None

(1) Less than 0.1%.

Under our articles of incorporation, our board of directors may appoint managers of our company.

The following table sets forth certain information relating to our executive officers:

Name Position Chiu, Sun-Chien . . . . . . . . . . President Yeh, Nan-Horng . . . . . . . . . . Vice President Chen, Jinn-Shing . . . . . . . . . . Vice President Huang, Chih-Min . . . . . . . . . . Vice President of Manufacturing Division Lee, Chih-Min . . . . . . . . . . . . Vice President of Communications Networking Product Division Chen, Hsuan-Wen . . . . . . . . . Vice President of R&D Engineering Division Lin, Han-Chen . . . . . . . . . . . . Director of PC Peripheral Product Division Chen, Cheng-Chung . . . . . . . Director of Consumer Electronics Product Division Lu, Ya-Li . . . . . . . . . . . . . . . Director of Finance Division	Years with us
	10 14 14 12 6 9 11 9 8

Name
Position
Chiu, Sun-Chien . . . . . . . . . .
President
Yeh, Nan-Horng . . . . . . . . . .
Vice President
Chen, Jinn-Shing . . . . . . . . . .
Vice President
Huang, Chih-Min . . . . . . . . . .
Vice President of Manufacturing Division
Lee, Chih-Min . . . . . . . . . . . .
Vice President of Communications Networking Product Division
Chen, Hsuan-Wen . . . . . . . . .
Vice President of R&D Engineering Division
Lin, Han-Chen . . . . . . . . . . . .
Director of PC Peripheral Product Division
Chen, Cheng-Chung . . . . . . .
Director of Consumer Electronics Product Division
Lu, Ya-Li . . . . . . . . . . . . . . .
Director of Finance Division

Years with us

10
14
14
12
6
9
11
9
8

Set forth below are short biographies of each of our executive officers.

Mr. Sun-Chien Chiu joined our company in 1991 and currently serves as President. Prior to joining our company, he served as a senior engineer at UMC. Mr. Chiu received his master’s degree in electrical engineering at National Taiwan University.

Mr. Nan-Horng Yeh has been our Vice President since our inception in 1987 and currently serves as a Vice President. He is also the President of Global Tech Management Consulting Co., Ltd. Mr. Yeh received his MBA degree from Washington University in St. Louis, Missouri.

Mr. Jinn-Shing Chen joined our company since our inception in 1987 and currently serves as a Vice President. Prior to joining our company, he served as a manager at UMC. Mr. Chen received his bachelor’s degree in electrical engineering at National Taiwan University. Mr. Chih-Min Huang joined our company in 1989 and currently serves as Vice President of Manufacturing Division. Prior to joining our company, he was a product manager at E-CMOS Technology Corporation. Mr. Hung received his bachelor’s degree in physics at Chung Yuan Christian University, Taiwan.

Mr. Chih-Min Lee joined our company in 1995 and currently serves as Vice President of Communications Networking Product Division. Prior to joining our company, he served as a manager at Cameo Communications, Inc. Mr. Lee received his master’s degree in electrical engineering at National Taiwan University.

Mr. Hsuan-Wen Chen joined our company in 1992 and currently serves as Vice President of R&D Engineering Division. Prior to joining our company, he served as a senior engineer at UMC. Mr. Chen received his master’s degree in electrical engineering at National Taiwan University.

Mr. Han-Chen Lin joined our company in 1990 and currently serves as Director of PC Peripheral Product Division. Prior to joining our company, he served as an engineer at UMC. Mr. Lin received his bachelor’s degree in electrical engineering at Chung Yuan Christian University, Taiwan.

Mr. Cheng-Chung Chen joined our company in 1992 and currently serves as Director of Consumer Electronics Product Division. Prior to joining our company, he served as an engineer at UMC. Mr. Chen received his bachelor’s degree in electrical engineering at National Chiao Tung University, Taiwan.

Ms. Ya-Li Lu joined our company in 1993 and currently serves as our Director of Finance Division. She received her MBA degree from Drexel University, Pennsylvania and a bachelor’s degree from National Taiwan University. Prior to joining our company, she worked for Taiwan Securities Co., Ltd.

Share Ownership, Related Party Transactions and Compensation

As of July 13, 2001, the members of the board of directors and the supervisors and the executive officers of our company, together with members of their immediate families, owned of record 37,728,826 of our shares, or approximately 16.8% of our total shares outstanding, and owned no options with respect to the shares. See ‘‘Principal Shareholders.’’

During 1998, 1999 and 2000, none of our directors, supervisors or any executive officers entered into any transaction with our company or any of our subsidiaries that were unusual in their nature or conditions or significant to our business or subsidiaries.

The aggregate remuneration, including bonuses paid in cash and stock valued at par, paid by our company to our directors, supervisors and executive officers in their capacities as such from January 1, 2000 through December 31, 2000 was approximately NT$54.1 million (US$1.6 million). There are no outstanding loans granted by our company or any of our subsidiaries to any of our directors, supervisors or executive officers and there are no outstanding guarantees provided by us or any of our subsidiaries for the benefit of any of our directors, supervisors or executive officers.

PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER

The names of our ten largest shareholders of record and their share ownership as of July 13, 2001 are as follows:

Name Cotek Pharmaceutical Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . National Financial Stabilization Fund of the Government of the ROC . . JF Asset Management International Limited . . . . . . . . . . . . . . . . . . . . . Yeh Nan-Horng . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chiang, Ting-Chi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Huang, Chih-Chien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ni, Shu-Ching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chen, Jinn-Shing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hanlin Investment Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cathay Life Insurance Co. Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Number of shares held 14,994,684 9,796,000(2) 8,067,400 4,242,019 4,029,059 3,959,146 3,955,123 3,817,719 3,153,140 3,028,000	Percentage of total shares outstanding(1)
		6.73% 4.39%(2) 3.62% 1.90% 1.81% 1.78% 1.77% 1.71% 1.41% 1.36%

(1) As of July 13, 2001, the total number of our outstanding shares was 222,929,690.
(2) In August 2001, a stock dividend of 0.5 shares per share was issued. As of the date of the offering, the National Financial Stabilization Fund owned 14,694,000 shares. Following the offering, it will own approximately 1.84% of our outstanding shares (and no shares if their overallotment option is exercised in full).

As of July 13, 2001 was the last date on which we closed our stock registry for the purposes of share transfers, the share ownership of our shareholders indicated in the table above does not reflect any share transfers effected after July 13, 2001. In addition, the information above does not reflect the stock dividend distribution discussed in ‘‘Dividend Policy,’’ which took place after July 13, 2001. As of December 31, 2001, the number of common shares outstanding was 350,332,252.

The selling shareholder, the National Financial Stabilization Fund, is a fund formed by the government of the ROC in February 2000 in response to the recent volatility of the securities market in Taiwan. See ‘‘The Securities Market of the ROC—National Financial Stabilization Fund.’’ As of the date of this offering memorandum, the selling shareholder owns 14,694,000 shares, including 7,500,000 shares offered, in the form of GDSs, under this offering memorandum and 7,194,000 shares that are subject to the over-allotment option.

RELATED PARTY TRANSACTIONS

We and our subsidiaries have entered and may in the future enter into transactions with each other or one another in the ordinary course of business. However, these transactions were not significant for 1998, 1999, 2000 and the first nine months of 2001. We have not made any purchase from our subsidiaries and we have made sales to only one subsidiary, Actions Technology Co., Ltd. (BVI), in 2000 and in the first nine months of 2001, in the aggregate amount of NT$99.0 million (US$2.9 million) and NT$64.7 million (US$1.9 million), respectively, or 1.8% and 1.3% of our net operating revenues, respectively. See note 5 to the financial statements included elsewhere in this offering memorandum for a description of our other related party transactions in the same periods.

DESCRIPTION OF OUR SHARES

Prior to our annual shareholder meeting held on May 30, 2001, our authorized share capital was NT$3,900,000,000 divided into 390,000,000 shares, of which 20,000,000 shares were reserved for conversion of convertible bonds. At such shareholder meeting, our shareholders approved the increase of our authorized share capital to NT$5,000,000,000 divided into 500,000,000 shares, of which 30,000,000 shares were reserved for conversion of convertible bonds and 20,000,000 shares were reserved for the exercise of employee stock options. As of December 31, 2001, 350,332,252 shares were issued and outstanding. As of the date of this offering memorandum, we have not implemented any employee stock option plan or issued any employee stock option. We do not have any other equity in the form of preferred shares or otherwise outstanding as of the date of this offering memorandum, except that in May 2000, we issued NT$1,400,000,000 Zero Coupon Convertible Bonds due 2005, of which NT$842.7 million (US$24.4 million) remained outstanding as at December 31, 2001.

All shares presently issued are fully paid and in registered form.

New Shares and Preemptive Rights

New shares may only be issued with the prior approval of our board of directors. If our issuance of any new shares will result in any change in our authorized share capital, we are required under ROC law to amend our articles of incorporation and obtain approval of our shareholders in a shareholder’s meeting. We must also obtain the approval of, or submit a registration with, the ROC SFC and the ROC MOEA or, if applicable, the ROC Science Industrial Park Administration. According to the ROC Company Law, when a company issues capital stock for cash, 10% to 15% of the issue must be offered to its employees. All our employees have waived their pre-emption right in respect of shares to be issued for this offering. In addition, if a listed company intends to offer new shares for cash, at least 10% of the issue must also be offered to the public. This percentage can be increased by a resolution passed at a shareholders’ meeting, which will reduce the number of new shares in which existing shareholders may have preemptive rights. Unless the percentage of the shares offered to the public is increased by a resolution, existing shareholders of our company have a preemptive right to acquire the remaining 75% to 80% of the issue in proportion to their existing shareholdings.

Shareholders

We only recognize persons registered in our registrar as our shareholders. We may set a record date and close our register of shareholders for specified periods to determine which shareholders are entitled to various rights pertaining to our shares.

Transfer of Shares

Under the ROC Company Law, shares are generally transferred by endorsement and delivery of the related share certificates. However, in the case of a public company such as our company, shares can be traded and settled through the book-entry system of a securities depositary institution. In such situation, the issue of physical share certificates is not required and the transfer of shares can be effected through the book-entry system. In addition, transferees must have their names and addresses registered on our register in order to assert shareholder’s rights against us. Our shareholders are required to file their respective specimen seals with our share registrar, Transfer Agency Department, Chinatrust Commercial Bank, Ltd. The settlement of trading of our shares on the Taiwan Stock Exchange will be carried out on the book-entry system maintained by Taiwan Securities Central Depository Co., Ltd.

Shareholders’ Meetings

We are required to hold one annual ordinary shareholders’ meeting every calendar year, and we generally hold our annual ordinary shareholders’ meeting within six months after the end of each calendar year. Our

directors may convene an extraordinary meeting whenever they see fit, and they must do so if requested in writing by shareholders holding not less than 3% of our paid-in share capital who have held these shares for more than a year. In addition, any of our supervisors may convene a shareholders meeting when necessary. At least 15 days advance written notice must be given of every extraordinary shareholders’ meeting and at least 30 days advance written notice must be given of every annual ordinary shareholders’ meeting. Unless otherwise required by law or by our articles of incorporation, voting for an ordinary resolution requires an affirmative vote of a simple majority of those present. A distribution of cash dividends would be an example of an ordinary resolution. The ROC Company Law also provides that in order to approve certain major corporate actions, including any amendment of our articles of incorporation, dissolution or amalgamation, the transfer of the whole of the business or assets to any other company which would have a significant impact in our operations, or the distribution of any stock dividend, a special resolution may be adopted by the majority of the holders represented at a meeting of shareholders at which at least two-thirds, or three-fourths in the event of a dissolution or amalgamation, of all issued and outstanding shares of our common stock are present.

Alternatively, in the event of a public company, such as us, such a resolution may be approved by the holders of at least two thirds (or three-quarters in case of a resolution involving the dissolution or amalgamation) of our shares represented at a meeting of shareholders at which holders of at least a majority of issued and outstanding shares are present.

Voting Rights

Each share is generally entitled to one vote. Our articles of incorporation, however, provide that a shareholder of more than 3% of our total issued and outstanding shares will have their votes discounted by 1% of the portion in excess of the 3% level. Although under the amendment to the ROC Company Law that has become effective on November 14, 2001, we are no longer required to limit the voting rights of shareholders of more than 3% of our total outstanding shares, our articles of incorporation have not been amended to reflect the change of law. Except as otherwise provided by law or our articles of incorporation, a resolution can be adopted by the holders of a simple majority of the total issued and outstanding shares represented at a shareholders’ meeting. Except as otherwise provided by law, the quorum for a shareholder’s meeting to discuss the ordinary resolutions is a majority of the total issued and outstanding shares. There is cumulative voting for the election of directors and supervisors. In all other matters, a shareholder must cast all his votes in the same manner when voting on any of these matters.

Our shareholders may be represented at an ordinary or extraordinary shareholders’ meeting by proxy if a valid proxy form is delivered to us five days before the commencement of the ordinary or extraordinary shareholders’ meeting. Voting right attaching to our shares exercised by our shareholders’ proxy shall be subject to ROC proxy regulation. Except for trust enterprises and share transfer agents approved by ROC SFC, if one person is appointed as proxy by two or more shareholders who together hold more than 3% of our total issued shares, the votes of those shareholders in excess of 3% of our total issued shares will not be counted.

Any shareholder who has a personal interest in a matter to be discussed at our shareholders’ meeting, the outcome of which may impair our interests, shall not, or on behalf of another shareholder, vote or exercise voting rights on such matter.

Dividends and Distributions

We may distribute dividends in any year in which we have net income after tax. Before distributing a dividend to shareholders, we must recover any past losses, pay all outstanding taxes and set aside as a legal reserve 10% of our net income until our legal reserve equals our paid-in capital.

At the shareholders’ annual ordinary meeting, our board of directors submits to the shareholders for their approval proposals for the distribution of a dividend or the making of any other distribution to shareholders from our net income or reserves for the preceding fiscal year. Dividends are paid to shareholders proportionately. Dividends may be distributed either in cash or in shares or a combination of cash and shares, as determined by the shareholders at such meeting.

Our dividend policy, as set forth in our articles of incorporation, provides that we must use our current year’s net income, if any, to pay all income taxes and to offset any past operating losses. We must then allocate the remaining amount as follows:

10% as legal reserve;
a special reserve from retained earnings equal to the net reduction of the stockholders’ equity as of the end of the previous year resulting from adjustments such as cumulative translation adjustments and unrealized loss on long-term investments;
not more than 10% of the paid-in capital as stockholders’ dividends (interests on capital);
thereafter, at least 30% of the total of the remaining net income from the current year and the unappropriated earnings from prior years must be distributed in the following order:
(i) at least 82% as special bonuses to stockholders;
(ii) not more than 3% as remuneration to directors and supervisors; and
(iii) between 10% and 15% as special bonuses to employees.

In addition, our articles of incorporation provide that when distributing dividends in any year, we will first issue stock dividends and, depending on our capital expenditure and funding needs, distribute cash dividends in an amount not exceeding 50% of the total dividends distributable in that year.

For information on the dividends paid by us in recent years, see ‘‘Dividend Policy.’’ For information as to ROC taxes on dividends and distributions, see ‘‘Taxation—ROC Taxation.’’

Acquisition of Common Shares by Our Company

With minor exceptions, we may not acquire our common shares under the ROC Company Law and any common shares we acquire must be sold at the current market price within six months after our acquisition of the shares.

In addition, under an amendment to the Securities and Exchange Law, which took effect on July 19, 2000, we may, by a board resolution adopted by majority consent at a meeting with two-thirds of our directors present, purchase our shares on the Taiwan Stock Exchange or by a tender offer, in accordance with the procedures prescribed by the ROC SFC, for the following purposes:

to transfer shares to our employees;
to convert bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by us into shares; and
if necessary, to maintain our credit and our shareholders’ equity; provided that the shares so purchased shall be cancelled thereafter.

We are not allowed to purchase more than 10% of our total issued and outstanding shares. In addition, we may not spend more than the aggregate amount of the retained earnings, the premium from issuing stock and the realized portion of the capital reserve to purchase our shares.

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

Liquidation Rights

In the event of our liquidation, the assets remaining after payment of all our debts, liquidation expenses, taxes and distributions to holders of preferred shares, if any, will be distributed pro rata to our shareholders in accordance with the ROC Company Law and our Articles of Incorporation.

Rights to Bring Shareholders’ Suits

Under the ROC Company Law, a shareholder may bring suit against us, including the following events:

Within one month from the date on which it is adopted, a shareholder may file a lawsuit to annul a shareholder’s resolution if the procedure for convening a shareholders’ meeting or the method of resolution violates any law or regulation or our articles of incorporation.
If the substance of a resolution adopted at a shareholders’ meeting contradicts any applicable law or regulation or our articles of incorporation, a shareholder may bring a suit to determine the validity of such resolution.

Under the ROC Company Law and Securities and Exchange Law, shareholders may bring suit against our directors and supervisors, including the following circumstances:

Shareholders who have continuously held 5% or more of the total number of issued shares for a period of one year or longer may request in writing that a supervisor institute an action against a director on our behalf. In case the supervisor fails to institute an action within 30 days after receiving such request, the shareholders may institute an action on our behalf. In the event shareholders institute an action, a court may, upon application of the defendant, order such shareholders to furnish appropriate security.
If any director, supervisor, manager or shareholder holding more than 10% of our shares and their respective spouses and minor children and/or nominees sell shares within six months after acquisition of such shares, or repurchases the shares within six months after the sale, we may claim for recovery of any profits realized from the sale and purchase. If our board of directors or our supervisors fail to claim for recovery, any shareholder may request our board of directors or our supervisors to exercise the right of claim within 30 days. After such 30 day period, such requesting shareholder shall have the right to claim such recovery on our behalf. Our directors and supervisors shall be jointly and severally liable for damages suffered by us as a result of their failure to exercise the right of claim.

Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in the event of a merger and various other major corporate actions. Dissenting shareholders may, within 20 days of the shareholders’ resolution approving such action, request us to redeem all their shares at a fair price to be determined by mutual agreement. If no agreement can be reached, the valuation will be determined by a court. Subject to applicable law, dissenting shareholders may, among other things, exercise their appraisal rights by notifying us before the related shareholders’ meeting and by raising and registering their dissent at the shareholders’ meeting.

One or more shareholders who have held more than 5% of the issued and outstanding shares for over a year may require a supervisor to bring a derivative action against a director for the director’s liability to us resulting from the director’s unlawful actions or failure to act. In addition, one or more shareholders who have held more than 3% of the issued and outstanding shares for more than one year may require our board of directors to call an extraordinary shareholders’ meeting by sending a written request to our board of directors.

Financial Statements

For a period of at least ten days before our annual shareholders’ meeting, we must make available our annual financial statements at our principal offices in Hsinchu, Taiwan and our share registrar in Taipei for our shareholders’ inspection.

Transfer Restrictions

Our directors, supervisors, managers and shareholders holding more than 10% of our shares are required to report any changes in their shareholding to us on a monthly basis. In addition, the number of shares that they can sell or transfer on the Taiwan Stock Exchange on a daily basis is limited by ROC law. Further, they may sell or transfer our 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.

CHANGES IN ISSUED SHARE CAPITAL

The following table sets forth the changes in our issued share capital as of the dates indicated.

October 1987 . . . . . . . . . . . October 1989 . . . . . . . . . . . December 1990 . . . . . . . . . November 1991 . . . . . . . . . October 1992 . . . . . . . . . . . October 1993 . . . . . . . . . . . May 1994 . . . . . . . . . . . . . August 1995 . . . . . . . . . . . June 1996 . . . . . . . . . . . . . July 1997 . . . . . . . . . . . . . May 1998 . . . . . . . . . . . . . July 1998 . . . . . . . . . . . . . July 1999 . . . . . . . . . . . . . August 2000 . . . . . . . . . . . October 2000 . . . . . . . . . . . January 2001 . . . . . . . . . . . March 2001 . . . . . . . . . . . . August 2001 . . . . . . . . . . . September 2001 . . . . . . . . . December 2001 . . . . . . . . .	Number of Shares Issued 500,000 3,500,000 8,000,000 3,726,316 4,263,684 5,350,264 4,659,736 11,871,950 8,149,710 18,315,858 8,695,000 35,951,648 38,028,816 68,692,491 3,007,716 4,936 211,565 126,349,556 5,524 1,047,482	Type of Issue Issuance of shares for cash Issuance of shares for cash Issuance of shares for cash Capitalization of retained earnings Capitalization of retained earnings Capitalization of retained earnings Capitalization of retained earnings Capitalization of retained earnings Capitalization of retained earnings Capitalization of retained earnings and capital reserve Issuance of shares for cash Capitalization of retained earnings Capitalization of retained earnings and capital reserve Capitalization of retained earnings Capitalization of convertible bonds transfers Capitalization of convertible bonds transfers Capitalization of convertible bonds transfers Capitalization of retained earnings and convertible bonds transfers Capitalization of convertible bonds transfers Capitalization of convertible bonds transfers	Number of Shares Outstanding after Issue
			500,000 4,000,000 12,000,000 15,726,316 19,990,000 25,340,264 30,000,000 41,871,950 50,021,660 68,337,518 77,032,518 112,984,166 151,012,982 219,705,473 222,713,189 222,718,125 222,929,690 349,279,246 349,284,770 350,332,252

DESCRIPTION OF GLOBAL DEPOSITARY SHARES

The following is a description of certain rights that registered holders and beneficial owners of the GDSs have under ROC Law and under the deposit agreement, to be dated as of January 29, 2002, among us, The Bank of New York, as depositary, and all registered holders and beneficial owners from time to time of the GDSs issued under the deposit agreement. The description, however, is only a summary. Your rights and obligations with respect to the GDSs will be governed solely by the deposit agreement, including the terms of the GDRs, and applicable ROC law. Registered holders and beneficial owners of GDSs will be deemed to have notice of and be bound by all applicable provisions of the deposit agreement.

Introduction

GDRs evidencing GDSs will be issued under the deposit agreement. Each GDS will represent four common shares deposited with the depositary’s custodian in the ROC. We and the depositary will only recognize registered holders as owners of the GDSs. The custodian will initially be The International Commercial Bank of China, Head Office—Trust Department, currently located at 3rd Floor, 2 Chung King South Road, Section 1, Taipei, ROC. The deposit agreement sets forth the rights of registered holders and beneficial owners and the rights and duties of the depositary in respect of securities deposited under the deposit agreement, and any and all other securities, cash, and other property from time to time received in respect of such deposited securities, collectively referred to as deposited property. The custodian will maintain separate accounts in the depositary’s name for the Rule 144A GDSs and the International GDSs, respectively. Copies of the deposit agreement will be on file at the depositary’s corporate trust office, 101 Barclay Street, New York, New York 10286, USA, currently temporarily located at One Wall Street, New York, New York 10286, USA. The depositary’s principal executive office is located at One Wall Street, New York, New York 10286, USA.

The Rule 144A GDSs will be held in DTC’s book-entry settlement system. The Rule 144A Master GDR, evidencing Rule 144A GDSs, will be issued to DTC and registered in the name of Cede & Co., as nominee of DTC. Therefore, Cede & Co. initially will be the holder of record of all of the GDSs. So long as the Rule 144A GDSs are held in DTC’s book-entry settlement system or unless otherwise required by law, ownership of beneficial interests in a Rule 144A GDS will be shown on, and the transfer of such ownership will be effected only through, records maintained by (1) DTC or its nominee or (2) institutions that have accounts with DTC.

The International GDSs will be held through Euroclear and Clearstream. The Master International GDR, evidencing the International GDSs, will be issued to a common depositary for Euroclear and Clearstream and registered in the name of a nominee of that common depositary. Therefore, that common depositary will initially be the record holder of all the International GDSs. So long as International GDSs are held through Euroclear and Clearstream or unless otherwise required by law, ownership of International GDSs will be shown on, and transfer of that ownership will be effected only through, records maintained by (1) Euroclear and Clearstream or (2) institutions that have accounts with Euroclear or Clearstream.

Owners of beneficial interests in GDSs will not be entitled to receive definitive certificated GDRs evidencing the GDSs. Only if it is impracticable without undue effort or expense to have the GDSs available in book-entry form will we instruct the depositary to deliver physical GDRs in definitive form to all beneficial owners of the GDSs, with such modifications to the form of GDR and the deposit agreement as we and the depositary may agree.

Initial settlement of the GDSs sold to non-U.S. persons outside the ROC and the United States in reliance on Regulation S will take place through Euroclear and Clearstream in accordance with the settlement procedures applicable to equity securities in the Euromarket. Trades on the Luxembourg Stock Exchange must be capable of being settled through Clearstream or Euroclear. Clearstream and Euroclear will only accept clearance of the International GDSs. Therefore, holders or beneficial owners of Rule 144A GDSs wishing to effect trades on the Luxembourg Stock Exchange must exchange their Rule 144A GDSs for International GDSs.

Transfers within DTC, Euroclear and Clearstream will be in accordance with the usual rules and operating procedures of the relevant system. Cross-market transfers between investors who own or who will own GDSs through DTC, on the one hand, and investors who own or who will own GDSs through Euroclear or Clearstream, on the other hand, must be effected by surrendering GDSs issued under one facility to the depositary and requesting issuance of GDSs issued under the other facility. These transactions require compliance with the requirements for withdrawal and deposit described below, including payment of the fees of the depositary and delivery of signed certifications and agreements.

Deposit, Transfer and Withdrawal

General

Unless we and the depositary agree otherwise and applicable law permits, additional shares may be deposited only as allowed under the deposit agreement. The depositary will accept additional deposits only if it receives written certification referred to in ‘‘—Rule 144A GDSs’’ and ‘‘—International GDSs.’’ The depositary may refuse to accept securities for deposit if ROC law prohibits the deposit. Under current ROC law, shares may not be deposited in the GDS facilities, and no GDSs may be issued against such deposits, without specific approval of the ROC SFC. However, additional GDSs may be issued without such approval in connection with:

stock dividends on or free distributions of shares;
the exercise by registered holders and beneficial owners of their preemptive rights applicable to shares evidenced by GDSs in the event of capital increases for cash; or
if permitted under the deposit agreement, the purchase directly by any person of shares on the Taiwan Stock Exchange for deposit in the GDS facilities; but only to the extent of the number of withdrawn and cancelled GDSs, the underlying shares of which have been sold on the Taiwan Stock Exchange. See ‘‘Foreign Investment and Exchange Controls in the ROC.’’

Our initial deposit of shares in connection with this offering will be made by delivery to the custodian a certificate of payment evidencing the irrevocable right to receive the physical share certificates representing the shares underlying the GDSs, which shares will be registered in the name of the depositary or its nominee. The selling shareholder will make its initial deposit by delivering to the custodian shares registered in the name of the depositary or its nominee through the book entry system maintained by the Taiwan Securities Central Depositary Co., Ltd., or the central depositary, from the account of the selling shareholder held at the central depositary to the account of the custodian for the depositary held at the central depositary. We and the depositary have agreed, subject to the terms and conditions of the deposit agreement, that upon delivery to the custodian of the initial deposit, the depositary will, upon payment of the fees, charges and taxes provided in the deposit agreement, execute and deliver at its corporate trust office a GDR or GDRs to the person or persons named in the custodian’s notice delivered to the depositary or requested by the persons depositing such shares, registered in the name or names requested by those persons, and evidencing any authorized number of GDSs requested by such person or persons to which such persons are entitled. The depositary and the custodian will refuse to accept shares for deposit whenever notified that we have restricted transfer of such shares to comply with delivery or transfer requirements or ownership restrictions referred to in the deposit agreement or under applicable law.

Under current ROC law and the deposit agreement, registered holders may withdraw shares represented by the GDSs upon surrender of their GDSs at the depositary’s corporate trust office and upon payment of any fees, expenses, taxes, governmental and similar charges as provided in the deposit agreement, subject to the terms of the deposit agreement and the transfer restrictions applicable to the shares, if any. In addition, registered holders or beneficial owners may request that the shares represented by their GDSs be sold on their behalf. See ‘‘Foreign Investment and Exchange Controls in the ROC.’’

Any registered holder requesting a sale of shares described above may be required under applicable law and by the depositary to deliver to the depositary a written order requesting the depositary to sell the shares, except that the depositary may, in its discretion, discontinue providing this service for holders of the GDSs. The depositary will use reasonable efforts, in its sole discretion, to sell or cause to be sold the shares in accordance

with applicable ROC law through a securities company in the ROC on the Taiwan Stock Exchange or in such other manner permitted under applicable ROC law. The sale will be at the risk and expense of the registered holder or beneficial owner requesting the sale. We cannot assure you that the depositary will be able to sell any shares in a timely manner or at a specified price, particularly during periods of illiquidity or volatility with respect to our shares. See ‘‘Risk Factors—Risks Relating to Our GDSs and Our Trading Market’’ and ‘‘The Securities Markets of the ROC.’’ Upon receipt of any proceeds from any such sale, the depositary will, subject to any restrictions imposed by ROC law and regulations, and as provided in the deposit agreement, convert the proceeds into United States dollars and distribute the proceeds to the selling registered holders after deducting the fees of the depositary and any fees, expenses, taxes, governmental or similar charges incurred in connection with the sale. Any sale may be subject to ROC taxation on capital gains, if any, and will be subject to a securities transaction tax. The ROC currently does not impose tax on capital gains arising from ROC securities transactions, but we cannot assure you that a capital gains tax on ROC securities transactions will not be imposed in the future or as to the manner in which any ROC capital gains tax in respect of a sale of shares would be imposed or calculated. See ‘‘Taxation—ROC Taxation.’’

The depositary will only honor requests for withdrawal of whole numbers of shares or other deposited property. If you surrender GDSs representing other than a whole number of shares or deposited property, the depositary will deliver ownership of the appropriate whole number of shares represented by the surrendered GDS in accordance with the terms of the deposit agreement. If any GDSs are surrendered but not cancelled, the depositary will execute and deliver a GDR or GDRs evidencing the balance of GDSs not so cancelled to the person or persons surrendering the GDSs. Trading restrictions on the Taiwan Stock Exchange may result in the price per share or any lot of shares other than in an integral multiple of 1,000 shares being lower than the price of shares in lots of integral multiples of 1,000 shares.

Upon surrender at the depositary’s corporate trust office of GDSs for the purpose of withdrawal of the deposited property represented by the GDS, and upon payment of the fees of the depositary for the surrender of GDSs, governmental charges and taxes provided in the deposit agreement, and subject to the terms and conditions of the deposit agreement, the registered holder of the GDS will be entitled to delivery, to him or to his order, of the amount of deposited property at the time represented by the GDSs. Any registered holder or other person requesting withdrawal of deposited property against delivery of GDSs must deliver to the depositary a written order containing delivery instructions to such effect. The forwarding of share certificates, other securities, property, cash and other documents of title for such delivery will be at the registered holder’s risk and expense.

Under current ROC law, notwithstanding anything to the contrary in the deposit agreement, a registered holder wishing to withdraw deposited property from the GDS facilities must appoint an eligible agent in the ROC, with such qualifications specified by the ROC SFC, on its behalf and as its agent to:

open a securities trading account with a local brokerage firm (after receiving an approval from the Taiwan Stock Exchange) and a bank account;
remit funds;
exercise stockholders’ rights;
and perform such other functions as may be designated by the withdrawing registered holder.

In addition, the withdrawing registered holder must also appoint a custodian bank to hold the securities in safekeeping, make confirmations and settle trades and report all relevant information. Without making such appointment and the opening of the accounts, the withdrawing registered holder would be unable to subsequently sell the deposited property withdrawn from the GDS facilities on the Taiwan Stock Exchange or otherwise. In addition, the withdrawing registered holder must also appoint a tax guarantor for filing tax returns and making tax payments.

We may have various ROC government disclosure obligations and reporting obligations upon the withdrawal of the deposited property from the GDS facilities if:

any person who applies to withdraw the deposited property is a ‘‘related party’’ of our company under Statement of Financial Accounting Standard No. 6 of the ROC; or
any person who has applied to withdraw cumulatively 10% or more of the deposited shares from the GDS facilities.

Because of these obligations, the depositary may ask the withdrawing registered holder to disclose the name of the beneficial owner of the GDSs delivered for cancellation and provide proof of identity and genuineness of any signature and other documents. The information that the withdrawing registered holder must provide may include the name and nationality of the beneficial owner and the number of shares the beneficial owner is withdrawing or has withdrawn in the past.

The depositary will refuse to register the transfer of any GDR if it is notified by us that the proposed transfer would not comply with the restrictions set out in the applicable legend on the GDR. If we notify the depositary that a specified beneficial owner of GDSs is required to transfer its GDSs to a person designated by us on the ground that the beneficial owner of a GDR was in breach, at the time made or deemed made, of any representation contained in the applicable legend, the depositary will so notify the registered holder of that GDR and request that the registered holder notify that beneficial owner. We consider as void any transfer of a beneficial interest in GDSs in violation of the applicable transfer restrictions.

The depositary will be entitled to rely upon any determination made or instruction received from us as described in the preceding paragraph without making any independent investigation and will not be liable to any person for any action taken or omitted pursuant to any such determination or instruction.

Rule 144A GDSs

Any deposit of shares for Rule 144A GDSs after the initial deposit of securities for the issuance of the Rule 144 GDSs must be accompanied by a written certification by or on behalf of the person who will be the beneficial owner of the additional Rule 144A GDSs to be issued, to the effect that it:

(a) acknowledges that (1) the Rule 144A GDSs, and the shares represented thereby, have not been and are not expected to be registered under the Securities Act and (2) our company is not, and does not intend to be, registered under the U.S. Investment Company Act and that we are relying upon an exemption from the registration requirements of the U.S. Investment Company Act provided by Section 3(c)(7) of that Act;

(b) certifies that it (1) is a qualified institutional buyer, or a QIB, within the meaning of Rule 144A under the U.S. Securities Act and also a qualified purchaser, or a QP, within the meaning of Section 2(a)(51) of the U.S. Investment Company Act, (2) is not a broker-dealer that owns and invests on a discretionary basis less than US$25 million in securities of unaffiliated issuers or a plan referred to in Paragraph (a)(1)(d) or (a)(l)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(l)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (3) is aware that the sale of the Rule 144A GDSs may be made in reliance on Rule 144A, (4) is acquiring the Rule 144A GDSs for its own account or for the account of a QIB who is also QP that can make the representations in this paragraph, (5) was not formed for the purpose of investing in our company and (6) will hold the Rule 144A GDSs in at least the minimum number of 10,000 GDSs, and, at the time of issuance of the additional Rule 144A GDSs, it (or one or more QIBs/QPs for whose account it is acting) will be the beneficial owner of such GDSs; and

(c) agrees that it will not offer, sell, pledge or otherwise transfer the Rule 144A GDSs or the shares represented thereby except (A)(l) in a transaction that meets the requirements of Rule 144A, to a person that it reasonably believes is a QIB and that is also a QP and who is able to make the following

representations: (a) it is a QIB who is also a QP, (b) it is not a broker-dealer that owns and invests on a discretionary basis less than US$25 million in securities of unaffiliated issuers and is not a plan referred to in Paragraph (a)(1)(d) or (a)(1)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(l)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (c) is aware that the sale of the Rule 144A GDSs may be made in reliance on Rule 144A, (d) is acquiring the Rule 144A GDSs for its own account or for the account of a QIB who is also QP that is able to make the representations set forth in this clause (1), (e) was not formed for the purpose of investing in our company, (f) will hold and transfer the Rule 144A GDSs in at least the minimum number of 10,000 GDSs and (g) it, and each account for which it is purchasing, will provide notice of the transfer restrictions set forth in this clause (A) to any subsequent transferee, (2) in an offshore transaction to a non-U.S. person in a transaction that meets the requirements of Rule 903 or 904 of Regulation S; or (3) to a QP pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 thereunder (if available) and, in each of cases (1) through (3), in accordance with all applicable securities laws of the states of the United States and in a minimum number of 10,000 GDSs and that (B) it will, and each subsequent holder is required to notify any subsequent purchaser of such GDSs from it of the resale restrictions referred to in (A) above.

The depositary will refuse to accept shares for deposit whenever we have notified the depositary that we have restricted transfer of the shares or whenever the depositary reasonably believes that the deposit would violate applicable law, or whenever the depositary or the custodian considers a refusal necessary or desirable. The depositary will also refuse to accept certain shares for deposit if notified in writing that shares are listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system, unless the deposit is accompanied by evidence satisfactory to the depositary that any shares presented for deposit are eligible for resale pursuant to Rule 144A.

A registered holder may not surrender its Rule 144A GDSs and withdraw the shares they represent from the Rule 144A GDS facility unless and until the depositary has received a duly executed and completed written certificate and agreement by or on behalf of the person who after the withdrawal will be the beneficial owner of the deposited property withdrawn, to the effect that it:

(a) acknowledges that (1) the Rule 144A GDSs and the shares represented thereby have not been and will not be registered under the Securities Act and (2) our company is not, and does not intend to be, registered under the U.S. Investment Company Act and our company is relying on an exemption from the registration requirements of the U.S. Investment Company Act provided by Section 3(c)(7) of that Act;

(b) certifies that either:

(A) it is (1) a QIB and also a QP, (2) not a broker-dealer that owns and invests on a discretionary basis less than US$25 million in securities of unaffiliated issuers or a plan referred to in Paragraph (a)(l)(d) or (a)(l)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(l)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (3) aware that the sale of the Rule 144A GDSs may be made in reliance on Rule 144A, (4) acquiring the Rule 144A GDSs for its own account or for the account or for the account of a QIB who is also QP that is able to make the representations set forth in this paragraph (A), (5) not formed for the purpose of investing in our company, (6) holding the Rule 144A GDSs in at least the minimum number of 10,000 and either:

(i) it has sold or otherwise transferred, or agreed to sell or otherwise transfer and at or prior to the time of withdrawal will have sold or otherwise transferred, the Rule 144A GDSs or the shares to a person other than a U.S. person in accordance with Regulation S under the Securities Act and it is, or prior to such sale it was, the beneficial owner of the Rule 144A GDSs; or

(ii) it has sold or otherwise transferred, or agreed to sell or otherwise transfer and at or prior to the time of withdrawal will have sold or otherwise transferred, the Rule 144A GDSs or the shares to another person that is (1) a QIB and also a QP, (2) not a broker-dealer that owns

and invests on a discretionary basis less than US$25 million in securities of unaffiliated issuers or a plan referred to in Paragraph (a)(l)(d) or (a)(l)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(l)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (3) aware that the sale of the Rule 144A GDSs may be made in reliance on Rule 144A, (4) acquiring the Rule 144A GDSs for its own account or for the account of a QIB who is also QP that is able to make the representation set forth in this paragraph, (5) not formed for the purpose of investing in the Company and (6) holding shares in at least the minimum number of 40,000 shares and it is, or prior to such sale it was, the beneficial owner of the Rule 144A GDSs; or

(iii) it will be the beneficial owner of the shares upon withdrawal and, accordingly, agrees (or, if it acting for the account of one or more QIBs, each such QIB has confirmed to it that it agrees) that (x) it will not offer, sell, pledge or otherwise transfer the shares except (A)(l) in a transaction meeting the requirements of Rule 144A to a person it reasonably believes is a QIB and who is also a QP and who is able to make the following representations: (a) it is a QIB who is also a QP, (b) it is not a broker-dealer that owns and invests on a discretionary basis less than US$25 million in securities of unaffiliated issuers and is not a plan referred to in Paragraph (a)(l)(d) or (a)(l)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(l)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (c) it is aware that the sale of the shares may be made in reliance on Rule 144A, (d) it is acquiring the shares for its own account or for the account of a QIB who is also QP that is able to make these representations, (e) it was not formed for the purpose of investing in our company (f) it will hold and transfer the shares in at least the minimum number of 40,000 shares and (g) it, and each account for which it is purchasing, will provide notice of the transfer restriction set forth in this clause (A) to any subsequent transferee; (2) in an offshore transaction to a non-U.S. person in a transaction that meets the requirements of Rule 903 or 904 of Regulation S; or (3) to a QP pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 thereunder (if available) and, in each of cases (1) through (3), in accordance with all applicable securities laws of the states of the United States and that (B) it will, and each subsequent holder is required to notify and subsequent purchaser of such shares from it of the resale restrictions referred to in (A) above and (y) it will not deposit or cause to be deposited such shares into any depositary receipt facility established or maintained by a depositary bank (including any facility maintained by the depositary), other than a Rule 144A/3(c)(7) restricted depositary receipt facility; or

(B) it is not a U.S. person (as defined in Regulation S under the Securities Act) located outside the United States (within the meaning of Regulation S under the Securities Act); acquired, or agreed to acquire and at or prior to the time of withdrawal will have acquired, the Rule 144A GDSs or the shares outside the United States (within the meaning of Regulation S under the Securities Act), and is, or upon acquisition thereof will be, the beneficial owner of the Rule 144A GDSs or the shares.

International GDSs

Any deposit of shares for International GDSs after the initial deposit of securities for the issuance of International GDSs must be accompanied by a written certification and agreement by or on behalf of the person who will be owner of the additional International GDSs to be issued to the effect that it:

(a) acknowledges that (i) the International GDSs and the shares represented thereby have not been and will not be registered under the Securities Act and (ii) our company is not, and does not intend to be, registered under the U.S. Investment Company Act and our company is relying on an exemption from the registration requirements of the U.S. Investment Company Act provided by Section 3(c)(7) of that Act;

(b) certifies that the shares are not restricted securities within the meaning of Rule 144(a)(3) under the U.S. Securities Act and it is, or at the time the shares are deposited and at the time the International GDSs are issued will be, the beneficial owner of such shares and of such International GDSs and (i) is not

a U.S. person (as defined in Regulation S under the Securities Act) and is located outside the United States (within the meaning of Regulation S) and acquired, or has agreed to acquire and will have acquired, the shares to be deposited outside the United States (within the meaning of Regulation S) , (ii) is not an affiliate of our company or a person acting on behalf of such an affiliate, and (iii) is not in the business of buying and selling securities or, if it is in such business, did not acquire the securities to be deposited from our company or any affiliate thereof; and

(c) agrees that during the distribution compliance period, it will not offer, sell, pledge or otherwise transfer such International GDSs or the shares represented thereby except (1) in a transaction meeting the requirements of Rule 144A tender the Securities Act to a person that is (a) a QIB who is also a QP or a purchaser that the seller and any person acting on the seller’s behalf reasonably believe is a QIB who is also a QP, in each case purchasing for its own account or for the account of one or more QIBs and who are also QPs and that is able to make other representations required by the legend appearing on the Rule 144A GDRs and (b) aware that the offer, sale, pledge or other transfer is being made in reliance on Rule 144A and that our company is relying on an exemption from the registration requirements of the Investment Company Act that requires our company to limit the persons resident in the United States who purchase securities in our company to QPs or (2) to a person other than a U.S. person (as defined in Regulation S under the Securities Act) in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S under the Securities Act, in each case in accordance with any applicable securities laws of the States of the United States and other jurisdictions and further provided that, in connection with any transfer under (1) above, the transferor shall, prior to the settlement of such sale, withdraw the shares from the international depositary facility and cause instructions to be given to the custodian to deposit such shares in the Rule 144A facility and to the depositary for the issuance of Rule 144A GDSs to or for the account of such QIB, all in accordance with the provisions of the deposit agreement; and agrees to notify any purchaser of the International GDSs from it of the resale restrictions referred to above.

The depositary will refuse to accept shares for deposit whenever we have notified the depositary that we have restricted transfer of the shares or whenever the depositary reasonably believes that the deposit would violate applicable law, or whenever the depositary or the custodian considers a refusal necessary or desirable. During the distribution compliance period, the depositary will also refuse to accept certain shares for deposit if notified in writing that the shares are listed on a U.S. securities exchange or quoted on a U.S. automated inter dealer quotation system, unless accompanied by evidence satisfactory to the depositary that any shares presented for deposit are eligible for resale pursuant to Rule 144A.

During the distribution compliance period, a registered holder may not surrender its International GDSs for the withdrawal of shares from the International GDS facility unless and until the depositary has received a written certificate and agreement by or on behalf of the person surrendering such International GDSs who after withdrawal will be the of the shares withdrawn to the effect that it:

(a) acknowledges that (i) the International GDSs and the shares represented thereby have not been and will not be registered under the U.S. Securities Act and (ii) our company is not, and does not intend to be, registered under the U.S. Investment Company Act, and our company will be relying on an exemption from the registration requirements of the U.S. Investment Company Act provided by Section 3(c)(7) of that Act;

(b) certifies that either:

(A) it is a person other than a U.S. person (as defined in Regulation S under the Securities Act) located outside the United States (within the meaning of Regulation S under the Securities Act), and either:

(i) it has sold or otherwise transferred, or agreed to sell and at or prior to otherwise transfer and at or prior to the time of withdrawal will have sold or otherwise transferred, the International

GDSs or the shares in accordance with Regulation S under the Securities Act and it is, or prior to such sale or other transfer it was, the beneficial owner of the International GDSs;

(ii) it has sold or otherwise transferred, or agreed to sell or otherwise transfer and at or prior to the time of withdrawal will have sold or otherwise transferred, the International GDSs or the shares in a transaction meeting the requirements of Rule 144A under the Securities Act to a person that is (a) a QIB who is also a QP or a purchaser that the seller and any person acting on the seller’s behalf reasonably believe is a QIB who is also a QP, in each case purchasing for its own account or for the account of one or more QIBs and who are also QPs and that is able to make the other representations required by the legend appearing on the Rule 144A GDRs and (b) aware that the offer, sale, pledge or other transfer is being made in reliance on Rule 144A and that our company is relying on an exemption from the registration requirements of the Investment Company Act that requires our company to limit the persons resident in the United States who purchase securities in our company to QPs and, accordingly, it is separately causing instructions to be given to the custodian to deposit such shares in the Rule 144A facility and to the depositary for the issuance of a certificate evidencing Rule 144A GDSs upon deposit of the proper certification on behalf of the purchaser and otherwise in accordance with the terms and conditions of the deposit agreement, and it is, or prior to such sale or other transfer it was, the beneficial owner of the International GDSs; or

(iii) it will be the beneficial owner of the shares upon withdrawal and, accordingly it agrees that, prior to the expiration of the distribution compliance period it will not offer, sell, pledge or otherwise transfer the shares except (A) in a transaction meeting the requirements of Rule 144A under the Securities Act to a person that is (a) a QIB who is also a QP or a purchaser that the seller and any person acting on the seller’s behalf reasonably believe is a QIB who is also a QP, in each case purchasing for its own account or for the account of one or more QIBs and who are also QPs and that is able to make other representations required by the legend appearing on the Rule 144A GDRs and (b) aware that the offer, sale, pledge or other transfer is being made in reliance on Rule 144A and that our company is relying on an exemption from the registration requirements of the Investment Company Act that requires our company to limit the persons resident in the United States who purchase securities in our company to QPs or (B) to a person other than a U.S. person (as defined in Regulation S under the Securities Act) in accordance with Regulation S under the Securities Act; or

(B) it is (a) a QIB who is also a QP and that is able to make other representations required by the legend appearing on the Rule 144A GDRs and (b) aware that the offer, sale, pledge or other transfer is being made in reliance on Rule 144A and that our company is relying on an exemption from the registration requirements of the Investment Company Act that requires our company to limit the persons resident in the United States who purchase securities in our company to QPs and, accordingly, it is separately taking all action necessary to cause the shares being withdrawn to be deposited in the Rule 144A facility and for the issuance of a certificate evidencing Rule 144A GDSs or the adjustment of the Master Rule 144A GDR.

On and after the Effective Time, registered holders or beneficial owners may surrender International GDSs and withdraw deposited property at any time subject only to:

temporary delays caused by closing transfer books of the depositary or the register of our shareholders in connection with voting at a shareholders’ meeting or the payment of dividends or a rights offering;
the payment of fees, expenses, taxes, governmental and similar charges; and
compliance with any laws or governmental regulations relating to the GDSs or to the withdrawal of deposited property.

Dividends, Other Distributions and Rights

Subject to any restrictions imposed by ROC law and regulations and the terms of the deposit agreement, the depositary must convert or cause to be converted as soon as reasonably practicable into US dollars, to the extent that in its judgment it can do so on a reasonable basis and can transfer the resulting US dollars to the United States, all cash dividends and other cash distributions denominated in a currency other than US dollars, including NT dollars, that it receives in respect of the deposited property, and to distribute the resulting US dollar amount (net of reasonable and customary expenses incurred by the depositary in converting non-US currency) to the registered holders in proportion to the number of GDSs representing such deposited property held by them, reduced by any amount on account of taxes to be withheld by us or the depositary and after deduction or upon payment of the fees and expenses of the depositary and the custodian.

If at any time the depositary determines that in its judgment any non-US currency received by the depositary is not convertible on a reasonable basis into US dollars distributable to registered holders, or if any government approval or license is required for such conversion is denied or in the opinion of the depositary, after consultation with us, is not obtainable, or if any such approval or license is not obtained within a reasonable period as determined by the depositary, the depositary may distribute the non-US currency (or an appropriate document evidencing the right to receive such non-US currency) received by the depositary to, or in its discretion may hold such non-US currency (without liability for interest) for the respective accounts of, the registered holders. If any non-US currency may not be converted, in whole or in part, for distribution to some registered holders, the depositary may in its discretion make such conversion and distribution in US dollars to the extent permissible to the registered holders for whom such conversion and distribution is practicable and may, subject to any applicable laws or regulations distribute the balance of the non-US currency received by the depositary to, or hold such balance (without liability for interest) for the respective accounts of, the registered holders for whom such conversion and distribution is not practicable.

Whenever the depositary or its nominee receives any free distribution of shares in respect of any deposited property, the depositary may, and will if we so request, deliver proportionately to the registered holders additional GDSs that represent the number of shares received as such free distribution, after deduction or upon payment of the fees and expenses of the depositary and the custodian.

If for any reason, however, including any requirement that we or the depositary withhold, or make an advance payment of, an amount on account of taxes or other governmental charges or that such shares must be registered under the Securities Act in order to be distributed to registered holders or due to the fractional entitlements that would otherwise result, the depositary deems such distribution not to be practical or feasible, the depositary may (i) adopt such other method as it may deem equitable and practicable for the purpose of effecting such distribution, including the public or private sale of any or all of the shares thus received, and the net proceeds of any such sale (after payment of and reimbursement of advances to pay any taxes or governmental charges) will be distributed by the depositary to the registered holders as in the case of a distribution received in cash or (ii) refrain from effecting such distribution altogether. If additional GDSs are not so delivered (except pursuant to the preceding sentence), each will thereafter also represent its proportionate interest in the additional shares distributed upon the deposited property represented thereby. In lieu of delivery of additional GDSs for fractional GDSs in any such case, the depositary will sell the number of shares represented by the aggregate of such fractions and distribute the net proceeds, in US dollars, in the manner described in the deposit agreement.

Each registered holder and beneficial owner of GDSs so distributed will be deemed to have acknowledged that the shares have not been registered under the Securities Act and to have agreed to comply with the restrictions on transfer set forth under ‘‘Notice to Investors.’’

If we offer or cause to be offered to the holders of any deposited property any rights to subscribe for additional shares or any rights of any other nature, the depositary, after consultation with us, will have discretion as to the procedure to be followed in making such rights available to any registered holders or in

disposing of such rights for the benefit of any registered holders and making the net proceeds available in US dollars to such registered holders or, if by the terms of such rights offering, or for any other reason, the depositary may not either make such rights available to any registered holders or dispose of such rights and make the net proceeds available to such registered holders, then the depositary must allow the rights to lapse. However, if at the time of the offering of any rights the depositary determines in its discretion, after consultation with us, that it is lawful and feasible to make such rights available to all registered holders or to certain registered holders but not to other registered holders, the depositary may, after consultation with us, distribute to any registered holder to whom it determines the distribution to be lawful and feasible, in proportion to number of GDSs held by such registered holder, warrants or other instruments in such form as it deems appropriate. If the depositary determines in its discretion that it is not lawful and feasible to make such rights available to all or certain registered holders, it may, and at our request must, to the extent practicable, sell the rights, warrants or other instruments in proportion to the number of GDSs held by the registered holders to whom it has determined it may not lawfully or feasibly make such rights available, and allocate the net proceeds of such sales for the account of such registered holders otherwise entitled to such rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such registered holders because of exchange restrictions or the date of delivery of any GDS. If the depositary determines that it is not lawful or feasible to make any such rights available to the registered holders, or to sell such rights as described above, the depositary will allow such rights to lapse.

In circumstances in which rights would not otherwise be distributed, if a registered holder requests the distribution of warrants or other instruments in order to exercise the rights allocable to the GDSs of such registered holder, the depositary will make such rights available to such registered holder upon written notice from us to the depositary that (a) we had elected in our sole discretion to permit such rights to be exercised and (b) such registered holder has executed such documents as we and the depositary have determined are reasonably required under applicable law. Upon (a) instruction pursuant to such warrants or other instruments to the depositary from such registered holder to exercise such rights, (b) payment by such registered holder to the depositary for the account of such registered holder of an amount equal to the purchase price of the shares to be received in exercise of the rights, and (c) payment of the fees of the depositary as set forth in such warrants or other instruments, the depositary will, on behalf of such registered holder, exercise the rights and purchase the shares, and we must deliver the shares so purchased to the depositary on behalf of such registered holder. As agent for such registered holder, the depositary will deposit the shares so purchased, and will execute and deliver GDSs representing such shares pursuant to the deposit agreement.

If registration, under the Securities Act or any other applicable law, of the rights or the securities to which any rights relate may be required in order for us to offer such rights to registered holders or beneficial owners or to sell the securities to which such rights relate or to take other action with respect to such rights or securities, the depositary will not so offer, sell or act unless and until a registration statement (under the Securities Act or any other applicable laws) is in effect or unless such offering, sale or action is exempt from registration under the provisions of such law as determined by United States counsel for us in an opinion, in form and substance and from counsel satisfactory to the depositary, delivered to the depositary at our sole cost and expense. Neither we nor the depositary will be obligated to register such rights or such securities under the Securities Act or any other applicable law or take any other actions necessary to permit such offering or sale and they shall not be liable for any losses, damages or expenses resulting from any failure to do so.

Whenever the depositary or its nominee receives any distribution upon any deposited property in property other than cash, shares or rights relating to any deposited property, the depositary will distribute the property so received to the registered holders, after deduction or upon payment of the fees and expenses of the depositary and the custodian and any applicable fees, taxes or other charges, in proportion to the number of GDSs held by them, in any manner that the depositary may reasonably deem equitable and practicable. However, if in the opinion of the depositary it distributes such property or the distribution cannot be made proportionately among the registered holders, or if for any other reason (including any requirement that we, the custodian or the depositary withhold, or make an advance payment of, an amount on account of taxes or other governmental

charges or such property consists of securities that must be registered under the Securities Act in order to be distributed to registered holders) the depositary deems such distribution not to be practicable or feasible, the depositary may adopt such method as it may reasonably deem equitable and practicable to distribute such property, including the public or private sale of any or all of the property thus received and the distribution of the net proceeds of such sale to the registered holders in such manner as in the case of a distribution in cash.

If the depositary determines that any distribution of property (including shares, rights to subscribe for shares and other securities) or gains on the transfer of GDSs or shares are subject to any tax or governmental charges which the depositary is obligated to withhold or pay, the depositary may dispose of any or all of such property in such amounts and in such manner (including public or private sale) as the depositary deems necessary and practicable to pay such taxes or governmental charges, and the depositary shall distribute the net proceeds of any such sale or the balance of any such property after deduction of such taxes or governmental charges to the registered holders in proportion to the number of GDSs held by them.

Upon any change in par value, split-up, consolidation or any other reclassification of deposited property, or upon any recapitalization, reorganization, merger or consolidation of our company or sale of assets affecting us or to which we are a party, any securities that shall be received by the depositary or its nominee in exchange for, in conversion of, or in respect of deposited property shall be treated as deposited property, and the GDSs will, subject to the terms of the deposit agreement and applicable laws (including any registration requirements of the Securities Act), thereafter represent the right to receive the deposited property so received in exchange or conversion, unless new or additional GDSs are delivered pursuant to the following sentence. In any such case, the depositary may, and must at our request, subject to the terms of the deposit agreement and if permitted by applicable law, execute and deliver additional GDSs or make appropriate adjustments in its records (as in the case of a dividend of shares), or call for the surrender of outstanding GDSs to be exchanged for new GDSs specifically describing such new deposited property.

Record Dates

If any of the following events occurs, the depositary must fix a record date (a) for determining the registered holders who will be entitled to receive or exercise such property or right, (b) for determining the registered holders who will be entitled to give instructions for the exercise of voting rights at any such meeting, and (c) for the effectiveness of any change in the number of shares represented by GDSs, which shall be the same date or as near as practicable to the corresponding record date fixed by us as the depositary determines practicable:

any cash dividend or other cash distribution becomes payable or any distribution other than cash must be made, or rights must be issued, with respect to the deposited property;
the depositary causes a change in the number of shares represented by each GDS;
the depositary receives notice of any meeting that is to include holders of deposited property or at which holders of deposited property are entitled to vote; and
the depositary finds it necessary or convenient in respect of any matter.

The registered holders on a record date will be entitled to receive such property or exercise such rights or be entitled to give such instructions and, in the case of fixing the date on or after which each GDS will represent a changed number of shares, each GDS will represent a changed number of shares with effect from such date.

Voting of Deposited Property

Registered holders may exercise voting rights with respect to the shares represented by the GDSs only in accordance with the provisions of the deposit agreement. Each registered holder and beneficial owner, by acceptance of GDSs or acquisition of any beneficial interest therein, will have authorized and directed the

depositary to vote, without liability, the deposited property as set forth below. According to the ROC Company Law, shareholders’ voting rights attaching to shareholdings in an ROC company must, as to all matters subject to a vote of shareholders (other than elections of directors and supervisors), be exercised as to all shares held by such shareholders in the same manner. Accordingly, the voting rights attaching to the deposited property must be exercised as to all matters subject to a vote of shareholders by the depositary or the depositary’s nominee, as representative of the registered holders, collectively in the same manner, except in the case of an election of directors and supervisors. The election of directors and supervisors is by means of cumulative voting.

In the deposit agreement, the registered holders will appoint the depositary as their representative to exercise the voting rights with respect to the shares or other deposited property represented by the GDSs.

We will provide to the depositary sufficient copies in English, as the depositary may reasonably request, of notices of meetings of the shareholders of our company and the meeting agenda, voting instruction forms by which each registered holder may give instructions to the depositary to vote for or against each and, a list of candidates, if any, for elections of directors and supervisors, any resolution specified in the agenda for the meeting, which the depositary must, upon written request by us, mail or cause to be mailed to registered holders as soon as practicable after receipt. However, if we fail to supply the notices of meetings of shareholders of our company containing the requisite information together with the English translation to the depositary on a business day that is at least 30 calendar days prior to the ordinary meeting of shareholders or at least 15 calendar days prior to the extraordinary meeting of shareholders (each such period covering the date of dispatch of such notice and the date of the meeting of shareholders), the depositary is under no obligation to mail notices to registered holders and will endeavor to cause all deposited property represented by the GDSs to be present at the relevant meeting of shareholders insofar as practicable and permitted under applicable law but will not vote any such deposited property.

In order for voting instructions to be valid, the voting instruction form must be completed and duly signed and by the registered holder and returned to the depositary by the date specified by the depositary. If a registered holder or registered holders together holding at least 51% of the GDSs outstanding at the relevant record date instruct the depositary to vote in the same manner in respect of one or more resolutions to be proposed at the meeting (including those relating to the election of directors or supervisors), the depositary must, subject to the second succeeding paragraph, notify the instruction to our chairman (or such other person as our chairman may designate) and appoint our chairman or that other person designated by him as the representative of the depositary and the registered holders to attend such meeting and vote all the deposited property represented by GDSs in accordance with the voting instruction of such registered holders in relation to such resolution.

If, for any reason, the depositary has not and by the date specified by it received instructions from a registered holder or registered holders together holding at least 51% of all the GDSs outstanding at the relevant record date to vote in the same manner in respect of any resolution (including one relating to the election of directors or supervisors), then, subject to the following paragraph, such registered holders will be deemed to have instructed the depositary to authorize our chairman (or such other person as the chairman may designate) and appoint our chairman or that other person designated by him as the representative of the depositary and the registered holders to attend such meeting and vote, at his sole discretion, all the deposited property represented by GDSs, which may not be in the interests of the registered holders or beneficial owners; provided, however, that no such authorization shall be given with respect to any matter as to which our chairman informs the depositary that he does not wish to be so authorized, in which event the depositary shall not vote at the relevant meeting; and provided further, however, that the depositary shall comply, to the extent practicable, with our written instructions to take such action as is necessary for the deposited property to, and the deposited property shall in such event, be counted for the purpose of satisfying applicable quorum requirement.

In connection with the election of our directors or supervisors, we will provide in our notice to shareholders an indication of the number of directors or supervisors to be elected and a list of the candidates

proposed by us. Additional or different candidates may be nominated at the meeting of the shareholders other than those proposed in the list provided by us. In connection with the election of directors and supervisors, candidates standing for election as representatives of a shareholder may be replaced by the shareholder prior to the shareholders’ meeting, and the voting instructions cast by the beneficial owners for such candidates shall be counted as votes for their replacements.

The depositary’s notification of a voting instruction or grant of an authorization to vote in the manner and circumstances described in the preceding paragraphs are subject to the receipt (at our sole cost and expense) by it prior to each shareholders’ meeting of an opinion of our outside ROC counsel addressed to, and in form and substance satisfactory to, the depositary, to the effect that under ROC law (i) the deposit agreement is valid, binding and enforceable against us and the registered holders, and that the voting arrangement set forth therein is valid, binding and enforceable upon registered holders and beneficial owners of GDSs, and (ii) the depositary will not be deemed to be authorized to exercise any discretion when voting in accordance with the deposit agreement and will not be subject to any potential liability under ROC law for losses arising from such voting on the ground that such voting is in violation of ROC law. If the depositary does not receive such an opinion, we and the depositary may take such actions, including the amendment of the provisions under the deposit agreement relating to the voting of deposited property as both of us deem appropriate to endeavor to provide for the exercise of voting rights attached to the deposited property at future shareholders’ meetings of our company in a manner consistent with applicable ROC law.

Our articles of incorporation provide that a holder of shares has one vote for each share, except that a holder of more than 3% of the total outstanding shares is not permitted to vote 1% of the number of shares held by such holder in excess of 3%. Although under the amendment to the ROC Company Law that took effect on November 14, 2001, we are no longer required to so limit the voting rights of our shareholders, we have not yet amended our articles of incorporation to reflect the change of law. This provision is applicable to the depositary, as representative of the registered holders of record of the shares represented by the GDSs. Accordingly, if the shares represented by the outstanding GDSs constitute more than 3% of the total outstanding shares, then the votes to be cast by the depositary at the meetings of the shareholders of our company, whether pursuant to the voting instruction, shall be discounted accordingly. The depositary is not obligated to calculate any discount to the aggregate votes of all outstanding shares.

By accepting and continuing to hold GDSs, all registered holders will be deemed to have agreed to the voting provisions of the deposit agreement as such provisions may be amended from time to time to comply with applicable ROC law.

The depositary will not, and will ensure that the custodian and its nominees do not, exercise any discretion as to voting nor vote or attempt to exercise the right to vote that attaches to the deposited property, other than in accordance with such written instructions from registered holders subject to the requirements herein.

Beneficial owners are entitled to exercise their voting rights only through the procedures of the respective registered holders of the GDSs in which they have a beneficial interest.

Reports and Other Communications; Available Information

If, at any time, we are neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b), we will furnish, upon request, to any registered holder, beneficial owner or holder of shares withdrawn from deposit upon surrender of Rule 144A GDSs and, during the distribution compliance period, of International GDSs, and any prospective purchaser designated by such a registered holder, beneficial owner or holder of such shares, copies of the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act to permit compliance with Rule 144A under the Securities Act in connection with resales of GDSs and shares.

In addition, so long as we are relying on the exemption from registration provided by Section 3(c)(7) of the Investment Company Act, we will furnish to the depositary for delivery to owners of Rule 144A GDSs an

annual notice that states that each owner of Rule 144A GDSs (a) must be able to make the representations set forth in paragraph 1 under ‘‘Notice to Investors—Rule 144A GDSs’’, (b) is subject to the transfer restrictions described in paragraph 2 and (c) is subject to our right to require the transfer of the Rule 144A GDSs described in paragraph 1.

We will, at our own expense, provide the depositary with sufficient copies of all notices and any other reports and communications we generally provide to our shareholders or holders of other deposited property, and we may, at our own expense, provide to the depositary sufficient copies of any other communication we may reasonably request be distributed to registered holders. The depositary shall arrange at our expense for prompt mailing of copies thereof to all registered holders and, at the reasonable request and at our expense, shall also make such notices, reports and communications available to all registered holders in the same manner as we make them generally available to our shareholders, or on such other basis as we may advise the depositary is required by any law or regulation or any requirement of any stock exchange to which we may be subject, subject to any limitations imposed by United States or other law. We will also provide the depositary with sufficient copies of English language versions of our annual reports and English language translations of notices and communications relating to matters to be voted on by our shareholders, and may provide English language summaries of other notices, reports and communications.

The depositary will make available for inspection during business hours by registered holders at its corporate trust office, copies of the deposit agreement and any notices, reports or communications, including any proxy soliciting materials, received from us that are both (a) received by the depositary or its nominee, as the holder of the deposited property, and (b) made generally available to the holders of such deposited property by us.

Amendment and Termination of the Deposit Agreement

The form of any GDS and any provisions of the deposit agreement (including the provisions of the GDRs) may at any time and from time to time be amended by agreement between us and the depositary in any respect which both of us may deem necessary or desirable. Any amendment that imposes or increases any fees or charges (other than the fees of the depositary, if any, for the issuance, execution or delivery of GDSs, taxes and other governmental charges, custody, transfer and registration fees, and other fees and expenses in respect of the transfer or sales of shares, delivery expenses and charges incurred by the depositary in the conversion of foreign currency and in connection with foreign exchange control regulations), amends the amendment provisions under the deposit agreement, or which otherwise prejudices any substantial existing right of registered holders or beneficial owners (as a class), will not, however, become effective as to outstanding GDSs until the expiration of 30 days after notice of such amendment shall have been given to the registered holders.

Despite the foregoing, notice of any amendment that affects the registered holders of only one GDS facility may be given only to those registered holders that are so affected. Every registered holder and beneficial owner at the time any amendment becomes effective shall be deemed by continuing to hold such GDS or to own any beneficial interest therein to consent and agree to such amendment and to be bound by the deposit agreement as amended hereby. No amendment will impair the right of any registered holder to surrender its GDSs and receive the deposited property they represent, except in order to comply with applicable laws or regulations. Despite the foregoing, if any governmental body adopts new laws, rules or regulations that would require amendment of the deposit agreement to comply with the new laws, rules or regulations, we and the depositary may amend the deposit agreement and the form of the GDRs at any time in accordance with such changed rules. Amendment to the deposit agreement in such circumstances may become effective before a notice of such amendment is given to registered holders or within any other period of time as required for compliance.

The depositary must at any time at our direction by 60 days’ written notice terminate the deposit agreement by (1) mailing notice of such termination to the registered holders of all GDSs then outstanding at least 30 days prior to the date fixed in such notice for such termination or (2) by mailing notice of such

termination to us at any time after the GDS facilities contain no deposited property. The depositary may likewise terminate the deposit agreement by mailing notice of such termination to the registered holders of all GDSs then outstanding at least 60 days prior to the date fixed in such notice for such termination if the depositary has delivered to us a written notice of its election to resign and a qualified successor depositary has not been appointed and accepted its appointment as provided under the deposit agreement within 60 days after such delivery. If any GDSs remain outstanding after the date of termination, the depositary thereafter must discontinue the registration of transfers of GDSs, must suspend the distribution of dividends to the registered holders, must not accept deposits of shares (and shall instruct the custodian to act accordingly) and must not give any further notices or perform any further acts under the deposit agreement, except that the depositary will continue to collect dividends and other distributions pertaining to deposited property, will sell property and rights and convert deposited property into cash as provided in the deposit agreement and will continue to deliver deposited property, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property (in all such cases, without liability for interest and after deduction of expenses), in exchange for GDSs surrendered to the depositary. At any time after the expiration of six months from the date of termination, the depositary may sell the deposited property then held hereunder and may thereafter hold the net proceeds of any such sale, together with any other cash then held by it under the deposit agreement, without liability for interest, for the pro rata benefit of the registered holders in each GDS facility of GDSs that have not theretofore been surrendered. After making such sale, the depositary will be discharged from all obligations under the deposit agreement.

The depositary may at any time terminate one GDS facility under the deposit agreement while continuing to serve as depositary for the remaining facility. In such event, the depositary shall follow the same notice and other procedures in relation to the registered holders, GDSs and deposited property of the terminated facility as set forth in the preceding paragraph.

Charges of Depositary

Registered holders and beneficial owners, as appropriate, agree to pay through deduction or otherwise

(a) the fees of the depositary (i) upon the issuance and delivery of GDSs against deposit of shares or other depositary receipts, except in connection with the Initial Deposit, of US$5.00 or less per 100 GDSs (or portion thereof) payable by the party receiving GDSs, (ii) upon the delivery of deposited securities or other deposited property against surrender of GDSs, of US$5.00 or less per 100 GDSs (or portion thereof) payable by the party surrendering GDSs, (iii) upon the distribution of dividends, sale of rights or other corporate action involving distributions in respect of deposited property, of US$2.00 or less per 100 GDSs (or portion thereof) payable by the party to whom distribution of dividends, or for whom the sale of rights, is made, (iv) upon the exercise of rights of US$5.00 or less per 100 GDSs (or portion thereof), payable by the party to whom, or for whom, the exercise of rights is made or to whom the dividend is paid, (v) for issuing GDRs in definitive registered form in replacement of mutilated, defaced, lost, stolen or destroyed GDRs a sum per GDR which is determined by the depositary to be a reasonable charge to reflect the work, costs (including but not limited to printing costs) and expense involved, and (vi) for issuing GDRs in definitive registered form (other than pursuant to (v) above), a sum per GDR, which is determined by the depositary to be a reasonable charge to reflect the work, costs and expenses involved; and (vii) unless a fee has been charged in a calendar year in connection with distributions and sale referred to above in (iii), a fee for that calendar year of $0.02 or less per GDS (or a portion thereof) for depositary services, together with all expenses, transfer and registration fees, taxes duties and charges payable by the depositary, any agent or the custodian in connection with any of the above; and

(b) all (i) taxes and other governmental charges (including, but not limited to, any transfer, capital gains and stamp tax), (ii) registration, transfer, custody or other fees as may from time to time be in effect for the registration of transfers of shares generally on the share register of us or its appointed agent for the registration of transfers and accordingly applicable to transfers of shares to or from the name of the depositary’s nominee, as representative of the registered holders, on the making of deposits or withdrawals

as described in the deposit agreement, (iii) cable, telex, facsimile transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of persons depositing shares or registered holders or beneficial owners, (iv) reasonable and customary expenses and charges as are incurred by the depositary in the conversion of foreign currency or in connection with other distributions to registered holders as described in the deposit agreement and (v) any other charge payable by the depositary, any of the depositary’s agents, including the custodian, or the agents of the depositary’s agents in connection with the servicing of Shares or other deposited property (which charge shall be assessed against beneficial owners of record as of the date or dates set by the depositary in accordance with the deposit agreement and shall be collected at the sole discretion of the depositary by billing such beneficial owners for such charge or by deducting such charge from one or more cash dividends or other cash distributions).

Liability of Registered Holders and Beneficial Owners for Taxes and Other Charges

The depositary will not be liable for nor be obligated to pay any taxes, duties, charges, costs or expenses which may become payable in respect of the deposited property or the GDSs, whether under any present or future fiscal or other laws or regulations, and such part thereof as is proportionate or referable to a GDR will be payable by the registered holder and beneficial owner thereof to the depositary at any time on request or may be deducted from any amount due or becoming due on such GDR in respect of any dividend or other distribution, any proceeds from sale of any deposited property or otherwise in respect of such GDS.

The depositary may refuse, and we shall be under no obligation, to register any transfer of all or part of any GDS or any deposit or withdrawal of deposited property represented by GDSs until payment of all taxes, governmental and other charges listed in the deposit agreement is made, and may withhold any dividends or other distributions, or may sell for the account of the registered holder hereof any part or all of the deposited property represented by GDSs, and may apply such dividends or other distributions or the proceeds of any such sale in payment of such tax or governmental or other charge, the registered holder and the beneficial owner remaining liable for any deficiency.

Exchange Controls

The depositary, without obtaining further approvals from the CBC or any other governmental authority or agency of the ROC, may convert NT dollars to other currencies, including United States dollars, in respect of the proceeds of the sale of shares represented by GDSs or the sale of shares issued as stock dividends deposited into the GDS facilities in respect of such shares and any cash dividends or cash distributions received in respect of such shares. In addition, the depositary, also without any such approvals, may convert inward remittances of payments for purchase of shares for deposit in the Facilities against the creation of additional GDSs into NT dollars. In addition, a registered holder, after being the holder of shares, may, without obtaining further approvals from the CBC or any other government authority or agency of the ROC, convert NT dollars into other currencies for proceeds from the sale of any shares withdrawn from the GDS facility and delivered to the registered holder and for conversion into NT dollars of subscription payments in respect of rights offerings. However, the registered holder must obtain foreign exchange approval from the CBC on a payment-by-payment basis for conversion from NT dollars into foreign currencies in respect of the proceeds from the sale of subscription rights of new shares. It is expected that the CBC will grant such foreign exchange approval as a routine matter. See ‘‘Foreign Investment and Exchanges Controls in ROC.’’

General

Neither we nor the depositary will be liable to any registered holder or beneficial owner if prevented or delayed by law, governmental authority, any provision of our articles of incorporation or any circumstance beyond our control or the depositary’s control, in performing the deposit agreement. The duties, obligations and responsibilities of the depositary under the deposit agreement are expressly limited to performing its duties

specified in the deposit agreement without negligence or bad faith. The depositary does not assume any relationship of agency or trust for or with the registered holder or other persons interested in GDSs or any other person.

Until termination of the deposit agreement in accordance with its terms, the depositary must maintain in the Borough of Manhattan, The City of New York, facilities for the execution and delivery, registration of transfers and surrender of GDSs in accordance with the provisions of the deposit agreement. The depositary may close the transfer books, at any time or from time to time, when deemed expedient by it in connection with the performance of its duties under the deposit agreement or when requested by us.

As a condition precedent to the execution and delivery, registration of transfer, split-up, combination or surrender of any GDS or the delivery of any distribution in respect thereof or the withdrawal of any deposited property, the depositary or the custodian may require from the registered holder, the presenter of a GDS, the depositor of shares or the presenter of written instructions: (i) payment of any applicable fees, taxes and other charges listed in the deposit agreement; (ii) proof satisfactory to it as to the identity and genuineness of any signature, including but not limited to, a signature guarantee in accordance with industry practice; (iii) delivery of such certifications and documents referred to in the deposit agreement or as we may from time to time specify in writing to the depositary to assure compliance with the Securities Act (it being understood that the depositary shall have no responsibility for such compliance other than to obtain such certifications as we may reasonably specify); and (iv) compliance with such other restrictions, if any, as the depositary and we may establish consistent with the provisions of the deposit agreement.

The delivery of GDSs against, or adjustments in the records of the depositary to reflect, deposits of shares generally or of particular shares may be suspended or withheld, or the registration of transfer of GDSs in particular instances may be refused, or the registration of transfer generally may be suspended, or the surrender of outstanding GDRs on the receipt of written instructions for the purpose of withdrawal of deposited property may be suspended, during any period when the transfer books of the depositary or our company (or the appointed agent of our company for the transfer and registration of shares) are closed or if any such action is deemed in good faith to be necessary or advisable by us or the depositary at any time or from time to time.

The depositary may appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of GDSs at designated transfer offices on behalf of the depositary.

If any GDSs are listed on one or more stock exchanges or automated quotation systems in the United States, the depositary or its agent shall act as registrar or, with the written approval of our company, may appoint a registrar or one or more co-registrars for registration of such GDSs in accordance with any requirements of such exchange or exchanges or system or systems. Such registrar or co-registrars may be removed and a substitute or substitutes appointed by the depositary after consultation with us or upon the reasonable request of our company.

Governing Law and Jurisdiction

The deposit agreement will be governed by the laws of the State of New York. Under the deposit agreement, we will irrevocably submit to the jurisdiction of any New York state or federal court sitting in the borough of Manhattan in The City of New York in respect of any suit, action or proceeding arising out of or relating to the deposit agreement or the GDSs and will irrevocably accept for ourselves and in respect of our property, generally and unconditionally, the jurisdiction of these courts.

Information Relating to the Depositary

The Bank of New York is a state-chartered New York banking corporation and a wholly-owned subsidiary of The Bank of New York Company, Inc., a New York corporation. The principal executive office of The Bank of New York is located at One Wall Street, New York, New York 10286, and the Corporate Trust Office,

located at 101 Barclay Street, New York, New York 10286, is temporarily located at One Wall Street, New York, New York 10286.

The Bank of New York Company, Inc. is subject to the reporting requirements of the U.S. Securities Exchange Act of 1934. The Bank of New York Company, Inc.’s audited consolidated financial statements at and for the year ended December 31, 2000 are contained in its Annual Report on Form 10-K for the year ended December 31, 2000 filed with the U.S. Securities and Exchange Commission, and its unaudited consolidated financial statements at and for the three months and nine months ended September 30, 2001 are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed with the U.S. Securities and Exchange Commission.

A copy of The Bank of New York’s articles of association, as amended, together with copies of the Forms 10-K and 10-Q referred to above, will be available for inspection at its principal executive offices in New York and at its principal office in London, and at the office of the listing agent in Luxembourg.

TAXATION

ROC Taxation

The following is a summary of the principal ROC tax consequences of the ownership and disposition of GDSs and shares to a Non-Resident Individual or Non-Resident Entity that holds GDSs or shares (each a ‘‘Non-ROC Holder’’). A ‘‘Non-Resident Individual’’ refers to a foreign national individual who owns GDSs or shares and is not physically present in the ROC for 183 days or more during any calendar year and a ‘‘NonResident Entity’’ is a corporation or a non-corporate body that owns GDSs 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. You should consult your own tax advisors concerning the tax consequences of owning GDSs or shares in the ROC and any other relevant taxing jurisdiction to which you are subject.

Dividends

Dividends (whether in cash or shares) declared by us out of retained earnings and paid out to a Non-ROC Holder in respect of shares represented by GDSs are normally subject to ROC income tax collected by way of withholding, for which we are responsible, at the time of distribution. The current rate of withholding for NonROC Holders is 20% of the amount of the distribution (in the case of cash dividends) or of the par value of the common stock (in the case of stock dividends).

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

Capital Gains

Gains from the sale of property in the ROC are generally subject to ROC income tax. However, under current ROC law, capital gains on securities transactions (including sale of common stock) are exempt from income tax. On January 4, 1996, the ROC Legislative Yuan passed a bill for the amendment to the ROC Income Tax Law that would have eliminated the exemption from the ROC income tax for gains realized on the sale of ROC securities and imposed a capital gains tax. On January 12, 1996, this amendment was repealed by the ROC Legislative Yuan. The re-introduction of a capital gains tax would require the ROC Legislative Yuan to engage in a full legislative process for the enactment of tax legislation.

Sales of GDSs by Non-ROC Holders are regarded as transactions relating to property located outside the ROC and thus any resultant gains are currently not subject to ROC income tax.

Preemptive Rights

Our distribution of statutory preemptive rights for the shares in compliance with the ROC Company Law is currently not subject to ROC tax. Proceeds derived from sales of statutory preemptive rights evidenced by securities are currently exempted from income tax but are subject to securities transaction tax, currently at the rate of 0.3% of the gross amount received. Proceeds derived from sales of statutory subscription rights that are not evidenced by securities are subject to capital gains tax at the rate of (1) 25% of the gross amount received for Non-Resident Entities and (2) 35% of the gross amount received for Non-Resident Individuals. Subject to compliance with ROC law, we at our sole discretion may determine whether statutory subscription rights are evidenced by securities.

Securities Transaction Tax

Securities transaction tax, currently at the rate of 0.3% of the gross amount received, will be withheld upon a sale of shares by the securities broker. Transfers of GDSs by Non-ROC Holders are not subject to ROC securities transaction tax.

Estate Taxation and Gift Tax

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

Tax Treaties

At present, the ROC has double taxation treaties with Indonesia, Singapore, Australia, South Africa, Malaysia, Gambia, Swaziland, Macedonia, Vietnam, New Zealand and the Netherlands, which limit the rate of withholding tax on dividends paid with respect to shares in ROC companies. It is unclear whether a Non-ROC Holder will be considered to own shares for the purposes of such treaties. Accordingly, if you are otherwise entitled to the benefits of a treaty, you should consult your own tax advisors concerning eligibility for benefits under the treaty with respect to GDSs. The ROC government has announced a plan to suspend or terminate the tax treaty with South Africa in reaction to South Africa’s decision to discontinue its recognition of the ROC.

Tax Reform

In order to increase Taiwan’s competitive ability, an amendment to the ROC Income Tax Law was enacted on January 1, 1998, to integrate the corporate income tax and the shareholder dividend tax with the aim of eliminating the double taxation effect for resident shareholders of Taiwanese corporations. In accordance with the amendment, a 10% retained earnings tax will be imposed on a company for its after-tax earnings generated after January 1, 1998 that are not distributed in the following year. The retained earnings tax so paid will further reduce the retained earnings available for future distribution. When the company declares dividends out of those retained earnings, a maximum amount of up to 10% of the declared dividends will be credited against the 20% withholding tax imposed on the Non-ROC Holders.

United States Taxation

The following is a summary of the material U.S. federal income tax consequences for beneficial owners of our shares or GDSs that purchase such shares or GDSs in connection with this offering, that hold the shares or GDSs as capital assets, and that are U.S. persons that do not have a permanent establishment in the ROC, are not citizens or residents of the ROC and are not physically present in the ROC for 183 days or more within a calendar year. You are a U.S. holder if you are the beneficial owner of shares or GDSs and are, for U.S. federal income tax purposes:

a citizen or resident of the United States;
a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof;
an estate the income of which is subject to U.S. federal income taxation regardless of its source;
a trust if it is subject to the primary supervision of a court within the United States and one or more U.S. persons has the authority to control all substantial decisions of the trust; or
a trust that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

This summary is based on current law, which is subject to change, perhaps retroactively. It is for general purposes only and you should not consider it to be tax advice. In addition, it is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. This summary does not represent a detailed description of all the federal income tax consequences to you in light of your particular circumstances. In

addition, it does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

a dealer in securities or currencies;
a trader in securities and you elect to use a mark-to-market method of accounting for your securities holdings;
a financial institution or an insurance company;
a tax-exempt organization;
a regulated investment company;
a real estate investment trust;
a person liable for alternative minimum tax;
a person holding shares as part of a hedging, integrated or conversion transaction, constructive sale or straddle;
a person owning, actually or constructively, 10% or more of our voting stock; or
a U.S. holder whose ‘‘functional currency’’ is not the United States dollar.

We cannot assure you that a later change in law will not alter significantly the tax considerations that we describe in this summary.

If a partnership holds our shares or GDSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our shares or GDSs, you should consult your tax advisor.

You should consult your own tax advisor concerning the particular U.S. federal income tax consequences to you of the ownership and disposition of the shares or GDSs, as well as the consequences to you arising under the laws of any other taxing jurisdiction.

In general, for U.S. federal income tax purposes, a U.S. person who is the beneficial owner of a GDS will be treated as the owner of the shares underlying its GDS. However, the U.S. Treasury has expressed concerns that parties to whom depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of GDSs. Accordingly, the analysis of the creditability of ROC taxes described in this offering memorandum could be affected by future actions that may be taken by the U.S. Treasury. Deposits or withdrawals of shares by U.S. holders for GDSs will not be subject to U.S. federal income tax.

Taxation of Dividends

Except as discussed below with respect to the passive foreign investment company rules, the amount of distributions you receive on your shares or GDSs (other than certain pro rata distributions of shares to all shareholders) including net amounts withheld in respect of ROC withholding taxes, will generally be treated as dividend income to you if the distributions are made from our current and accumulated earnings and profits as calculated according to U.S. federal income tax principles. Such income will be includible in your gross income as ordinary income on the day you actually or constructively receive it, which in the case of a GDS will be the date received by the depositary. The amount of any distribution of property other than cash will be the fair market value of such property on the date it is distributed. You will not be entitled to claim a dividends received deduction with respect to distributions you receive from us.

The amount of any dividend paid in NT dollars will equal the U.S. dollar value of the NT dollars you receive, calculated by reference to the exchange rate in effect on the date you actually or constructively receive the dividend, which in the case of a GDS will be the date received by the depositary, regardless of whether the NT dollars are actually converted into U.S. dollars. Any gain or loss you realize if you subsequently sell or otherwise dispose of the NT dollars will be ordinary income or loss from sources within the United States for foreign tax credit limitation purposes.

Subject to certain limitations under the Internal Revenue Code, you may be entitled to a credit or deduction against your federal income taxes for the amount of any ROC taxes that are withheld from dividend distributions made to you. The decision to claim either a credit or a deduction must be made annually, and will apply to all foreign taxes paid by you to any foreign country or United States possession with respect to the applicable tax year. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends we pay with respect to shares or GDSs will generally be considered ‘‘passive income,’’ or, for certain holders, ‘‘financial services income.’’ You may be subject to special rules if your foreign source income during the taxable year consists entirely of ‘‘qualified passive income’’ and if you have US$300 or less, or US$600 or less if you file a joint return, of creditable foreign taxes that you have paid or accrued during the taxable year. Furthermore, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on shares or GDSs if you (1) have held shares or GDSs for less than a specified minimum period during which you are not protected from risk of loss, (2) are obligated to make payments related to the dividends or (3) hold the shares or GDSs in arrangements in which your expected economic profit, after non-U.S. taxes, is insubstantial compared to the foreign tax credits generated. The rules governing the foreign tax credit are complex. We therefore urge you to consult your tax advisor regarding the availability of the foreign tax credit under your particular circumstances.

To the extent that the amount of any distribution you receive exceeds our current and accumulated earnings and profits for a taxable year, the distribution will first be treated as a tax-free return of capital, causing a reduction in your adjusted basis in the shares or GDSs and thereby increasing the amount of gain, or decreasing the amount of loss, you will recognize on a subsequent disposition of the shares or GDSs. The balance in excess of adjusted basis, if any, will be taxable to you as capital gain recognized on a sale or exchange.

It is possible that pro rata distributions of shares to all shareholders may be made in a manner that is not subject to U.S. federal income tax. In the event that such distributions are tax-free, the basis of any new shares so received will be determined by allocating the U.S. holder’s basis in the old shares between the old shares and the new shares, based on their relative fair market values on the date of distribution. For U.S. tax purposes, any such tax-free share distribution and any distributions in excess of current and accumulated earnings and profits and distributions of shares generally would not result in foreign source income to you. Consequently, you may not be able to use the foreign tax credit associated with any ROC withholding tax imposed on such distributions unless you can use the credit against U.S. tax due on other foreign source income in the appropriate category for foreign tax credit purposes.

Taxation of Capital Gains

Except as discussed below with respect to the passive foreign investment company rules, when you sell or otherwise dispose of your shares or GDSs you will recognize capital gain or loss in an amount equal to the difference between the U.S. dollar value of the amount realized for the shares or GDSs and your basis in the shares or GDSs, determined in U.S. dollars. For foreign tax credit limitation purposes, such gain or loss will generally be treated as U.S. source. If you are an individual, and the shares or GDSs being sold or otherwise disposed of are capital assets that you have held for more than one year, your gain recognized will be taxed at a maximum rate of 20%. Your ability to deduct capital losses is subject to limitations.

Any ROC securities transaction tax, or any ROC gross income tax imposed on the proceeds derived from sales of statutory preemptive rights which are not evidenced by securities, that you pay generally will not be a creditable foreign tax for U.S. federal income tax purposes, but you may be able to deduct such taxes, subject to certain limitations under the Internal Revenue Code. You are urged to consult your tax advisors regarding the U.S. federal income tax consequences of these taxes.

Passive Foreign Investment Company

although there can be no assurance in this regard. In general, a company is considered a passive foreign investment company for any taxable year if either:

at least 75% of its gross income is passive income, which is income derived from certain dividends, interest, royalties, rents, annuities or property transactions; or
at least 50% of the value of its assets is attributable to assets that produce or are held for the production of passive income.

The 50% of value test is based on the average of the value of our assets for each quarter during the taxable year. If we own at least 25% by value of another company’s stock, we will be treated, for purposes of the passive foreign investment company rules, as owning our proportionate share of the assets and receiving our proportionate share of the income of that company.

In determining that we do not expect to be a passive foreign investment company, we are relying on our projected capital expenditure plans and projected revenue for the current year and for future years. In addition, our determination is based on a current valuation of our assets, including goodwill. In calculating goodwill, we have valued our total assets based on our total market value, which is based on the market value of our shares and is subject to change. In addition, we have made a number of assumptions regarding the amount of this value allocable to goodwill. We believe our valuation approach is reasonable. However, it is possible that the Internal Revenue Service will challenge the valuation or allocation of our goodwill, which may result in us being classified as a passive foreign investment company.

In addition, the determination of whether we are a passive foreign investment company is made annually. Accordingly, it is possible that we may become a passive foreign investment company in the current or any future taxable year due to changes in our asset or income composition. Because we have valued our goodwill based on the market value of our shares, a decrease in the price of our shares may also result in our becoming a passive foreign investment company.

If we are a passive foreign investment company for any taxable year during which you hold our shares or GDSs, you will be subject to special tax rules with respect to any ‘‘excess distribution’’ that you receive and any gain you realize from a sale or other disposition, including a pledge, of our shares or GDSs. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for our shares or GDSs will be treated as excess distributions. Under these special tax rules:

the excess distribution or gain will be allocated ratably over your holding period for our shares or GDSs;
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a passive foreign investment company, will be treated as ordinary income; and
the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

If you hold our shares or GDSs in any year in which we are a passive foreign investment company, you are required to file Internal Revenue Service Form 8621. In certain circumstances, a U.S. holder, in lieu of being subject to the passive foreign investment company rules discussed above, may make an election to include gain on the stock of a passive foreign investment company as ordinary income under a mark-to-market method provided that such stock is regularly traded on a qualified exchange. Under this method, any difference between the stock’s fair market value and its adjusted basis at the end of the year is accounted for by either an inclusion in income or a deduction from income. The GDSs are listed on the Luxembourg Stock Exchange and the shares are listed on the Taiwan Stock Exchange, each of which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable U.S. Treasury

regulations for purposes of the mark-to-market election, and no assurance can be given that the GDSs or the shares will be ‘‘regularly traded’’ for purposes of the mark-to-market election.

If you make an effective mark-to-market election, you will include in income each year as ordinary income the excess of the fair market value of your passive foreign investment company shares or GDSs at the end of the year over your adjusted tax basis in the shares. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the shares or GDSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-tomarket election.

Your adjusted tax basis in passive foreign investment company shares or GDSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the shares or GDSs cease to be passive foreign investment company stock that is regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You should consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.

Alternatively, a U.S. holder of shares or GDSs in a passive foreign investment company can sometimes avoid the rules described above by electing to treat the company as a ‘‘qualified electing fund’’ under section 1295 of the Internal Revenue Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election.

You should consult your own tax advisors concerning the U.S. federal income tax consequences of holding our shares or GDSs if we are considered a passive foreign investment company in any taxable year.

Information Reporting and Backup Withholding

In general, unless you are an exempt recipient such as a corporation, information reporting will apply to dividends in respect of the shares or GDSs and to the proceeds from the sale of your shares or GDSs paid within the United States, and in some cases, outside of the United States. Additionally, if you fail to provide your taxpayer identification number, or fail either to report in full dividend and interest income or to make the necessary certifications, you will be subject to backup withholding. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability, provided you furnish the required information to the Internal Revenue Service.

Estate and Gift Tax

The ROC imposes an estate tax on a decedent who owns shares, and possibly GDSs, even if the decedent was not a citizen or resident of the ROC. See ‘‘—ROC Taxation.’’ The amount of any inheritance tax paid to the ROC may be eligible for credit against the amount of U.S. federal estate tax imposed on your estate. You should consult your personal tax advisors to determine whether and to what extent you may be entitled to such credit.

Under present law, a comparable U.S. tax credit for foreign gift taxes (such as those imposed by the ROC) is not available.

THE SECURITIES MARKETS OF THE ROC

We have extracted from publicly available documents the information presented in this section.

The Taiwan Stock Exchange

In 1961, the ROC SFC established the Taiwan Stock Exchange to provide a marketplace for securities trading. The Taiwan Stock Exchange is a corporation owned by government-controlled entities and private banks and enterprises. The Taiwan Stock Exchange is independent of entities transacting business through it, each of which pays a user’s fee. Subject to limited exceptions, all transactions in listed securities by brokers, traders and securities firms must be made through the Taiwan Stock Exchange.

The Taiwan Stock Exchange commenced operations in 1962. During the early 1980’s, the ROC SFC actively encouraged new listings on the Taiwan Stock Exchange, and the number of listed companies grew from 119 in 1983 to 584 as of December 31, 2001. As of September 30, 2001, the market capitalization of companies listed on the Taiwan Stock Exchange was NT$6,503 billion.

Historically, Taiwan companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the ROC SFC has encouraged companies to list other types of securities. In 1988, the ROC SFC permitted the issuance of Taiwan’s first exchangeable bonds that are exchangeable at the option of the bondholders for shares in other companies owned by the issuer. 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 Taiwan Stock Exchange.

Currently only two non-Taiwan companies are listed on the Taiwan Stock Exchange through the use of depositary receipts. The ROC SFC’s regulations, however, permit foreign issuers to list their equity securities directly on the Taiwan Stock Exchange or through the use of depositary receipts. The Taiwan Stock Exchange requirements for listing are based on:

the number and distribution of stockholders of a company;
length of time the company has been in existence;
amount of capital;
profitability; and
capital structure.

However, special listing criteria apply to technology companies and key businesses engaging in national economic development.

We, as a public company in Taiwan, are obligated to make the following reports to the ROC SFC and the Taiwan Stock Exchange, including without limitation:

regular reports regarding monthly sales revenues; quarterly, semi-annual and annual financial information; public financial forecasts; annual reports; minutes of shareholders’ meetings; regular reports regarding solicitations of proxies; the execution of internal audits; and statements of internal controls; and
special reports regarding events which have had a significant impact on shareholders’ rights or the price of our securities; resolutions of our board of directors related to a merger; prospectuses for approved issuances of securities; material changes that have been made regarding cash injections and corporate bond issuances; financial forecasts; approvals of changes of accounting principles; details of the issuance of overseas depositary receipts; revisions to procedures for acquiring or selling assets; and revisions to operating procedures for making third-party loans.

The ROSE

To complement the Taiwan Stock Exchange, an over-the-counter, or OTC, market was established in September 1982 on the initiative of the ROC SFC to encourage trading of securities of companies that do not qualify for listing on the Taiwan Stock Exchange. The OTC market was limited to unlisted equity securities, bank and corporate bonds and debentures and government bonds. As trading volume on the OTC market was minimal, the ROSE was established in 1994 to take over the previous OTC market. Since the ROSE instituted a reformed trading system in 1995, the trading volume on the ROSE has grown more rapidly. The ROSE has used the Taiwan Stock Exchange’s method of trading as a model, and aims to reform the ROSE trading to the point where few differences exist between the two markets systems. As of September 30, 2001, 323 companies had equity securities listed on the ROSE. As of September 30, 2001, the total market capitalization of companies with equity securities listed on the ROSE was NT$829 billion.

Taiwan Stock Exchange Index

The Taiwan Stock Exchange Index is calculated on the basis of a wide selection of listed shares weighted according to the number of shares outstanding. This weighted average method is also used for the Standard and Poor’s Index in the United States and the Nikkei Stock Average in Japan. The Taiwan Stock Exchange Index is compiled by dividing the market value by the base day’s total market value for the index shares. The Taiwan Stock Exchange Index is the oldest and most widely quoted market index in Taiwan.

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

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

Period ended, December 31, 1990 . . . . . . . . . . . . . . . . . . . . 1991 . . . . . . . . . . . . . . . . . . . . 1992 . . . . . . . . . . . . . . . . . . . . 1993 . . . . . . . . . . . . . . . . . . . . 1994 . . . . . . . . . . . . . . . . . . . . 1995 . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . .	Number of Listed Companies at the Period End 199 221 256 285 313 347 382 404 437 462 531 584	Trading Values (in NT$ billions) NT$19,031.3 9,682.7 5,917.1 9,056.7 18,812.1 10,151.5 12,907.6 37,241.2 29,619.0 29,291.5 30,526.6 18,354.9	Index High 12,495.34 6,305.22 5,391.63 6,070.56 7,183.75 7,051.49 6,982.81 10,116.84 9,277.09 8,608.91 10,202.20 6,104.24	Index Low 2,560.47 3,316.26 3,327.67 3,135.56 5,194.63 4,503.37 4,690.22 6,820.35 6,251.38 5,474.79 4,614.63 3,446.26	Index at Period End
					4,530.16 4,600.67 3,377.06 6,070.56 7,124.66 5,173.73 6,933.94 8,187.27 6,418.43 8,448.84 4,739.09 5,551.24

Sources: Status of Securities Listed on Taiwan Stock Exchange

As indicated above, the performance of the Taiwan Stock Exchange has in recent years been characterized by extreme price volatility.

Price Limits, Commissions, Transaction Tax and Other Matters

The Taiwan Stock Exchange has placed limits on block trading and on the range of daily price movements. Transactions that involve 500 trading lots, that is 500,000 shares, or more must be registered and

executed under Taiwan Stock Exchange block trade guidelines. Fluctuations in the price of securities traded on the Taiwan Stock Exchange is restricted to 7% above and below the previous day’s closing price in the case of equity securities, and 5% in the case of debt securities. However, these restrictions have been modified from time to time by the ROC MOF based on market conditions.

Effective from July 1, 2000, brokerage commission can be in any rates not exceeding 0.1425% of the transaction price.

A securities transaction tax of 0.3% of the transaction price is payable by the seller of equity securities and a tax of 0.1% of the transaction price is payable by the seller of debt securities other than government bonds. These securities transaction taxes are withheld at the time of the transaction.

Sales of shares of listed companies on the Taiwan Stock Exchange are generally sold in round lots of 1,000 shares. Investors who desire to sell less than 1,000 shares of a listed company occasionally experience delays in making these sales.

National Financial Stabilization Fund

In response to recent declines and volatility in the securities markets in Taiwan, the government recently formed the National Financial Stabilization Fund, which may, upon the approval of its Fund Management Committee, purchase shares of ROC companies under certain circumstances where the capital markets or other financial markets in Taiwan are disrupted so as to put the national stability of ROC in jeopardy. The National Financial Stabilization Fund has purchased shares of Taiwan companies in March, October and November of 2000. The details of the transactions of the National Financial Stabilization Fund are published on the website and government gazette of the Executive Yuan of the ROC.

Regulation and Supervision

The ROC SFC has extensive regulatory authority over public companies. Under current ROC law, any company, after approval by a resolution of its board of directors, may register with ROC SFC as a public company. A public company must offer a certain percentage of its shares to the public. Public companies are generally required to obtain approval from, or registration with, the ROC SFC for all securities offerings. The ROC SFC requires periodic reporting of financial and operating information by all public companies. In addition, the ROC SFC establishes standards for financial reporting and carries out licensing and supervision of securities firms and other participants in the Taiwan securities market.

The ROC SFC has responsibility for implementing the Securities and Exchange Law and for overall administration of governmental policies in the Taiwan securities market. It has extensive regulatory authority over the offering, issuing and trading of securities. In addition, the Securities and Exchange Law specifically empowers the ROC SFC to promulgate necessary rules.

The Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-term trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors, as well as spouses, minor children and nominees of these parties, and stockholders together with their spouses, minor children and nominees holding 10% or more stocks of the issuer. The Securities and Exchange Law prohibits trading by ‘‘insiders’’ based on non-public information that materially affects share price movement. ‘‘Insiders’’ includes:

directors, supervisors, managers, as well as spouses, minor children and nominees of these parties, and stockholders together with their spouses, minor children and nominees holding 10% or more of the issuing company;
any person who has learned material, non-public information due to an occupational or controlling relationship with our issuing company, and
any person who has learned material, non-public information from any of the above.

Sanctions include imprisonment. In addition, damages may be awarded to persons injured by the transaction.

The Securities and Exchange Law also imposes criminal liability on certified public accountants and lawyers who intentionally make false certifications in their examination and audit of an issuer’s contracts, reports and other documents 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.

In addition, the Securities and Exchange Law provides for, among other things:

regulations relating to public offering, issuance and trading of securities;
more stringent regulation of the securities activities of officers, supervisors, directors and major stockholders of issuers;
regulations regarding securities firms and securities exchanges;
civil liability for material misstatements or omissions made by issuers; and
regulations regarding tender offers.

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

In addition to providing a market for securities trading, the Taiwan Stock Exchange reviews applications by Taiwan issuers to list securities on the Taiwan Stock Exchange. If issuers of listed securities violate laws and regulations or encounter significant difficulties, the Taiwan Stock Exchange may, with the approval of the ROC SFC, delist securities of these issuers.

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FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

We have extracted from publicly available documents the information presented in this section. Please note that citizens of the PRC and entities organized in the PRC are subject to special ROC laws, rules and regulations, which are not discussed in this section.

General

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

Qualified Foreign Institutional Investors

The Executive Yuan, the cabinet of the ROC government, has approved guidelines for direct investment in listed securities on the Taiwan Stock Exchange or traded on the ROSE by qualified foreign institutional investors. Qualified foreign institutional investors include:

banks that hold securities assets of at least US$200 million, and have experience in securities or assets custody or management and international financial or trust business;
insurance companies that hold securities assets of at least US$200 million;
fund management institutions that have existed for one year or more and manage securities assets of at least US$200 million;
offshore fund management companies of which more than 50% of their capital is owned by a Taiwan securities investment trust enterprise; provided that the funds to be invested cannot be derived from sources in Taiwan or mainland China or be owned by these offshore fund management companies;
general securities firms that have a net worth of at least US$100 million and have experience in international securities investment;
offshore subsidiary securities firms that are more than 50% owned by a Taiwan securities firm, or such securities firms that are wholly owned by these offshore subsidiary security firms;
offshore subsidiary securities firms that are wholly owned by a Taiwan securities firm, or such securities firms that are more than 51% owned by these offshore subsidiary security firms;
foreign government-owned investment institutions; provided, however, that the source of fund must come from such foreign government;
pension funds;
mutual funds, unit trusts or investment trusts that have assets of at least US$200 million;
trust companies that hold securities assets of at least US$200 million in trust, and have experience in securities/assets custody/management and international financial or trust business; and

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any other institutional investors that have been existed for one year or more and hold securities assets of at least US$200 million.

Each qualified foreign institutional investor wishing to invest directly in the Taiwan securities market is required to apply for an investment permit from the ROC SFC. If the investment amount exceeds US$50 million, an approval from the CBC is also required. The application to the ROC SFC requires among others:

the appointment of a local agent and custodian;
proof of qualification;
a copy of the custodian contract; and
other documents required by the ROC SFC.

Generally, qualified foreign institutional investors who receive a permit may invest up to US$3 billion and are required to remit the full amount into Taiwan within two years of receiving the investment permit. Capital remitted into Taiwan by the qualified foreign institutional investors may be repatriated at any time. Capital gains and income on investments may also be repatriated at any time.

General Foreign Investors

In addition to qualified foreign institutional investors, general foreign investors meeting qualifications set by the ROC SFC may generally invest in Taiwan Stock Exchange-listed securities or securities traded on the ROSE up to a limit of US$50 million if they are institutional investors and US$5 million if they are individual investors after obtaining approval issued by Taiwan Stock Exchange.

Foreign Investment Approval

Other than:

qualified foreign institutional investors;
general foreign investors; and
investors in overseas convertible bonds and depositary receipts,

foreign investors who wish to make direct investments in the shares of Taiwan companies may submit a ‘‘foreign investment approval’’ application to the Investment Commission of the ROC MOEA or other government authority for enjoyment of benefits granted under the Regulations Governing Investments by Foreigners. The Investment Commission or other government authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval may repatriate annual net profits and interests and cash dividends attributable to an approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other government authority.

In addition to the general restrictions against direct investment by non-Taiwan persons in Taiwan companies, non-Taiwan persons are currently prohibited from investing in prohibited industries in Taiwan under the Negative List for Investment by Overseas Chinese and Foreign Nationals promulgated by the Executive Yuan from time to time. The prohibition on direct foreign investment in the prohibited industries in the negative list is absolute. Under the negative list, some other industries are restricted so that non-Taiwan persons may directly invest only up to a specified level and with the specific approval of the relevant authority responsible for enforcing the legislation that the negative list is intended to implement.

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Depositary Receipts

In April 1992, the ROC SFC began allowing Taiwan companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing shares of their capital stock. In December 1994, the ROC MOF began allowing companies whose shares are traded on the ROSE also to sponsor the issuance and sale of depositary receipts evidencing depositary shares representing shares of their capital stock. Approvals for these issuances are still required.

Commencing three months (if the deposited shares are new shares) or immediately (if the deposited shares are existing shares) after the issuance of a depositary receipt, a holder of the depositary receipt may request the depositary to cause the underlying shares to be sold in Taiwan and to distribute the proceeds of the sale to or to withdraw the shares and deliver the shares to the depositary receipt holder. A citizen of the PRC is not permitted to withdraw and hold our shares.

A depositary receipt holder wishing to withdraw shares represented by depositary receipts is required to appoint a qualified local agent to, among other things, open a securities trading account with a local securities brokerage firm, open a bank account, remit funds and exercise shareholders’ rights. In addition, the withdrawing holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make confirmations, settle trades and report all relevant information. Without making this appointment and the opening of accounts, the withdrawing holder would be unable to subsequently hold or transfer the shares withdrawn from a depositary receipt facility on the Taiwan Stock Exchange or otherwise. The withdrawing holder is also generally required to appoint a tax guarantor as guarantor for the withdrawing depositary receipt holder’s ROC tax payment obligations.

No deposits of shares may be made in a depositary receipt facility and no depositary receipts may be issued against deposits without specific ROC SFC approval, unless they are:

stock dividends or free distributions of shares;
due to the exercise by the depositary receipt holder of preemptive rights in the event of capital increases for cash; or
due to the direct purchase by depositary receipt holders of shares or purchase through the depositary on the Taiwan Stock Exchange or the ROSE for deposit in the depositary receipt facility, but subject to the following two conditions:
(1) issuances may only be made to the extent that previously issued depositary receipts withdrawn by non-ROC holders have been canceled and the underlying shares have been sold on the Taiwan Stock Exchange or the ROSE; and
(2) the applicable deposit agreement and custody agreement must specifically provide for such issuances.

A depositary receipt holder or the depositary, without obtaining further approvals from the CBC or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including U.S. dollars, in respect of:

the proceeds of the sale of common shares represented by depositary receipts or received as share dividends with respect to the common shares and deposited into the depositary receipt facility; and
any cash dividends or distributions received from the common shares.

In addition, the depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional depositary receipts. If a depositary receipt holder withdraws his or her common shares underlying the GDSs and becomes a holder of the issuer’s common shares, the holder may convert into NT dollars subscription payment for rights offerings. The depositary may be required to obtained foreign exchange payment approval from the CBC on a payment-by-

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payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights of new common shares. Although it is expected that the CBC will grant approval as a routine matter, required approvals may not be obtained in a timely manner, or at all.

Overseas Corporate Bonds

Since 1989, the ROC SFC has approved a series of overseas bond offerings by ROC companies listed on the Taiwan Stock Exchange. The relevant regulations also permit the companies whose shares are listed on the ROSE to issue and offer overseas corporate bonds. Under current ROC law, these overseas corporate bonds are convertible into shares in ROC companies. The regulations also permit public companies to issue corporate debt in offerings outside the ROC. Proceeds from sale of shares converted from overseas convertible bonds may be used for reinvestment in shares listed on the Taiwan Stock Exchange or the ROSE, subject to the limitations and restrictions applicable to qualified foreign institutional investors or general foreign investors described above.

Under current ROC law, a non-ROC converting bondholder, when exercising his conversion right to convert bonds into shares, must appoint a local agent with such qualifications specified by the ROC SFC to open a securities trading account with a local brokerage firm, and to act as custodian for the securities, pay ROC taxes, make confirmations and settlement, remit funds, exercise shareholders’ rights and perform such other matters as may be designated by the converting bondholder on behalf of and as its agent.

A ROC company may, without obtaining further approvals from the CBC or any other government authority of the ROC, convert NT dollars to other non-ROC currencies, including US dollars, for making payments in respect of redemption of bonds or repayment of principal of and interest on bonds. A non-ROC converting bondholder may, through its local agent and without obtaining prior approval from the CBC, convert into foreign currencies net proceeds realized from the sale of converted entitlement certificates, 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 inward remittance of subscription payments in respect of rights offerings.

Overseas Share Offerings

In June 1997, the ROC government promulgated regulations permitting ROC companies whose shares are listed on the Taiwan Stock Exchange or traded on the ROSE to offer shares directly to non-ROC persons overseas, without utilizing depositary receipt facilities.

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated to handle foreign exchange transactions by the ROC MOF 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. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may remit to and from Taiwan foreign currencies of up to US$50 million (or its equivalent) and US$5 million, (or its equivalent) respectively in each calendar year. These limits apply to remittances involving a conversion between NT dollars and US dollars or other foreign currencies. A requirement is also imposed on all private enterprises to register all medium and long-term foreign debt with the CBC.

In addition, a foreign person without an alien resident card or an unrecognized foreign entity may remit to and from Taiwan foreign currencies of up to US$100,000 per remittance if required documentation is provided to Taiwan authorities. This limit applies only to remittances involving a conversion between NT dollars and US dollars or other foreign currencies.

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PLAN OF DISTRIBUTION

Salomon Brothers International Limited is acting as the sole global coordinator and bookrunner of this offering, and the representative of the initial purchasers named below. Subject to the terms and conditions stated in the respective purchase agreements dated the date of this offering memorandum, to be concurrently entered into between our company and the initial purchasers, and between the selling shareholder and the initial purchasers, each initial purchaser named below has agreed to purchase, and we and the selling shareholder have respectively agreed to sell to that initial purchaser, the number of GDSs set forth opposite the initial purchaser’s name.

e.
Initial Purchasers Salomon Brothers International Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UBS AG, acting through its business group UBS Warburg . . . . . . . . . . . . . . . . . . ABN AMRO Rothschild . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Barits Securities (Hong Kong) Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Number of GDSs
		8,184,375 2,425,000 606,250 909,375 12,125,000

The purchase agreements provide that the obligations of the initial purchasers to purchase the GDSs included in this offering are subject to approval of legal matters by counsel and to other conditions. The initial purchasers are obligated to purchase all the GDSs (other than those covered by the over-allotment option described below) if they purchase any of the GDSs.

The selling shareholder has granted Salomon Brothers International Limited on behalf of the initial purchasers an option, exercisable in whole or in part, from the date of this offering memorandum to the date 30 days after the closing of this offering, to purchase up to 1,798,000 GDSs, representing 7,194,000 shares, at the offering price less the underwriting discount. The initial purchasers may exercise the option solely for the purpose of covering over-allotments, if any, in connection with this offering. To the extent the option is exercised, each initial purchaser must purchase a number of additional GDSs approximately proportionate to that initial purchaser’s initial purchase commitment.

The initial purchasers have agreed to purchase the GDSs at the offering price set forth on the cover page of this offering memorandum, and we have agreed to pay the initial purchasers a combined underwriting commission of US$0.43125 per GDS. Additionally, the initial purchasers will reimburse us for certain expenses fees and commissions payable in connection with the offering. We have been advised that the initial purchasers propose to resell the GDSs at the offering price set forth on the cover page of this offering memorandum within the United States to qualified institutional buyers (as defined in Rule 144A) who are also qualified purchasers (as defined in Section 2(a)(51) of the U.S. Investment Company Act) in reliance on Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S. We will be relying on an exemption from the provisions of Section 7 of the U.S. Investment Company Act provided by Section 3(c)(7). See ‘‘Notice to Investors.’’ The price at which the GDSs are offered may be changed at any time without notice.

The GDSs have not been, and will not be, registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except in transactions exempt from, or not subject to, the registration requirements of the Securities Act. See ‘‘Notice to Investors.’’

Accordingly, in connection with sales outside the United States, each initial purchaser has agreed that, except as permitted by the purchase agreements and set forth in the ‘‘Notice to Investors,’’ it will not offer or sell the GDSs within the United States or to, or for the account or benefit of, U.S. persons (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, and it will have sent to each dealer to which it sells GDSs during the 40-day restricted period a confirmation or other notice setting forth the restrictions on offers and sales of the GDSs within the United States or to, or for the account or benefit of, U.S. persons.

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In addition, until 40 days after the commencement of this offering, an offer or sale of GDSs within the United States by a dealer that is not participating in this offering may violate the registration requirements of the Securities Act if that offer or sale is made otherwise than in accordance with Rule 144A.

Our company and Cotek Pharmaceutical Industry (a principal shareholder) have agreed that, for a period of 180 days from the date of this offering memorandum, we and they will not, without the prior written consent of Salomon Brothers International Limited, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. We may, however, issue employee bonus shares and stock dividends consistent with past practices, implement stock splits, and issue common stock in connection with the conversion of securities or exercise of warrants outstanding as of the date of this offering memorandum. The selling shareholder has agreed that, for a period of 90 days from the date of this offering memorandum, it will not, without the prior written consent of Salomon Brothers International Limited, dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. Salomon Brothers International Limited in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. In addition, the selling shareholder has agreed that it will not buy securities in our company for a period of 90 days from the closing date of this offering.

Each initial purchaser has represented and agreed that (1) it has not offered or sold, and prior to the date six months after the date of issue of the GDSs, will not offer or sell, any GDSs to persons in the United Kingdom by means of any document other than to persons whose ordinary business is to buy, hold, manage or dispose of investments, whether as principal or agent, for the purposes of their businesses or otherwise in circumstances that have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (2) it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 and the Public Offers of Securities Regulations 1995 with respect to anything done by it in relation to the GDSs in, from or otherwise involving the United Kingdom; and (3) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) received by it in connection with the issue or sale of the GDSs in circumstances in which section 21(1) of the Financial Services and Markets Act 2000 does not apply to our company.

Each of the initial purchasers has represented and agreed that (1) it has not offered or sold and will not offer or sell the GDSs in Hong Kong SAR by means of this offering memorandum or any document, other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap 32 of the Laws of Hong Kong SAR) and (2) it has not issued and or held for the purpose of issue in Hong Kong SAR this offering memorandum, any other offering material or any advertisement, invitation or document relating to the GDSs in Hong Kong SAR other than with respect to the GDSs intended to be disposed of to persons outside Hong Kong SAR or only to persons whose business involves the acquisition, disposal, or holding of securities, whether as principal or as agent.

Each of the initial purchasers has acknowledged and agreed that this offering memorandum and any other document relating to the GDSs have not been and will not be registered as a prospectus with the Registrar of Companies and Businesses in Singapore and the GDSs will only be offered and sold in Singapore pursuant to an exemption invoked under Section 106C or Section 106D of the Companies Act, Chapter 50, of Singapore, or the Singapore Companies Act. Accordingly, each of the initial purchasers has represented and agreed that the GDSs may not be offered or sold, nor may this offering memorandum or any other offering document or material relating to the GDSs be circulated or distributed, directly or indirectly, to the public or any member of the public in Singapore other than (1) to an institutional investor or other body or person specified in Section 106C of the Singapore Companies Act, (2) to a sophisticated investor in accordance with the conditions specified in Section 106D of the Singapore Companies Act, or (3) otherwise pursuant to, and in accordance with, the conditions of any other applicable provision of the Singapore Companies Act.

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Each of the initial purchasers severally represents and agrees that it has not offered or sold and will not offer or sell any GDSs, directly or indirectly in the ROC.

Each of the initial purchasers has represented and agreed that the GDSs have not been registered under the Securities and Exchange Law of Japan, and it has not offered or sold and will not offer or sell, directly or indirectly, the GDSs in Japan or to or for the account of any resident of Japan, except (1) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan and (ii) in compliance with any other applicable requirements of Japanese law.

The GDSs will constitute new classes of securities with no established trading market. We have applied to list the International GDSs on the Luxembourg Stock Exchange. We expect the Rule 144A GDSs to be eligible for trading in the PORTAL Market—the National Association of Securities Dealer’s screen-based automated market for trading of securities eligible for resale under Rule 144A—and the International GDSs to be eligible for trading on the International Order Book of the London Stock Exchange. However, we cannot assure you that the prices at which the GDSs will sell in the market after this offering will not be lower than the initial offering price or that an active trading market for the GDSs will develop and continue after this offering. The initial purchasers have advised us that they currently intend to make a market in the GDSs. However, they are not obligated to do so and any market-making activities with respect to the GDSs may be discontinued at any time without notice. In addition, such market-making activity will be subject to the limits imposed by the Securities Act and the Exchange Act. Accordingly, we cannot assure you as to the liquidity of, or trading market for, the GDSs.

In connection with the offering, Salomon Brothers International Limited, on behalf of the initial purchasers, may purchase and sell GDSs in the open market. These transactions may include over-allotment, covering transactions and stabilizing transactions. Over-allotment involves sales of GDSs in excess of the number of GDSs to be purchased by the initial purchasers in this offering, which creates a short position for the initial purchasers. Covering transactions involve purchases of the GDSs in the open market or through the exercise of the initial purchasers’ over-allotment option after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of bids or purchases of GDSs made for the purpose of preventing or retarding a decline in the market price of the GDSs while the offering is in progress. Any of these activities may have the effect of preventing or retarding a decline in the market price of the GDSs. They may also cause the price of the GDSs to be higher than the price that would otherwise exist in the open market in the absence of these transactions. The initial purchasers may conduct these transactions in the over-thecounter market or otherwise. If the initial purchasers commence any of these transactions, they may discontinue them at any time.

We and the selling shareholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make because of any of those liabilities.

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NOTICE TO INVESTORS

Because of the following restrictions, you are advised to consult legal counsel before making any offer, resale, pledge or other transfer of the International GDSs, the Rule 144A GDSs or the shares represented by GDSs.

The following discussion relates to GDSs evidenced by GDRs and representing shares and certificates of payment. References to shares in this section include both shares and certificates in the case of the GDSs representing certificates of payment.

The GDSs and their underlying shares have not been registered under the Securities Act and may not be offered or sold except to (a) qualified institutional buyers (as defined in Rule 144A), or QIBs, who are also qualified purchasers (as defined in Section 2(a)(51) of the Investment Company Act), or QPs, in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A and (b) non-U.S. persons in offshore transactions in reliance on Regulation S. Furthermore, we have not registered, and do not intend to register, as an investment company under the Investment Company Act. We intend to rely upon an exemption from the registration requirements of the Investment Company Act that requires us to limit the persons resident in the United States who purchase securities in our company to QPs.

Rule 144A GDSs

Each holder of and beneficial owner of an interest in Rule 144A GDSs will be deemed to have made in favor of our company, the depositary and the initial purchasers the following representations, warranties, acknowledgments and agreements:

The purchaser represents and warrants that (A) it is a QIB who is also a QP, (B) it is not a brokerdealer that owns and invests on a discretionary basis less than US$25 milllion in securities of unaffiliated issuers and is not a plan referred to in Paragraph (a)(1)(d) or (a)(1)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(1)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (C) it is aware that the sale of the Rule 144A GDSs to it is being made in reliance on Rule 144A or another exemption from the registration requirements of the Securities Act, (D) it is acquiring the Rule 144A GDSs for its own account or for the account of a QIB who is also QP that is able to make the representations set forth in this paragraph, (E) it was not formed for the purpose of investing in our company, (F) the purchaser and each account for which it is purchasing will hold and transfer the Rule 144A GDSs in at least the minimum number of 10,000 GDSs, and (G) it will provide notice of the transfer restrictions set forth in the next paragraph to any subsequent transferees of the the Rule 144A GDSs. It understands that if it was in breach of any of the representations set forth in this paragraph, its acquisition of the related GDSs or interest in the GDSs will be void ab initio and at any time, if we determine or are notified that it is so in breach, we may require that the related GDSs or interest in the related GDSs be transferred to a person designated by us.
It understands that the GDSs are being offered in a transaction not involving a public offering in the United States within the meaning of the Securities Act and that the GDSs have not been and will not be registered under the Securities Act, and may not be reoffered, resold, pledged or otherwise transferred except (A) (i) to a person who it reasonably believes is a QIB who is also a QP in accordance with Rule 144A and who is able to make the representations set forth in paragraph 1 above, (ii) in an offshore transaction to a nonU.S. person complying with Regulation S; or (iii) to a QP pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available) and, in each of cases (i) through (iii), in accordance with all applicable securities laws of the states of the United States and in a minimum number of 10,000 GDSs, and that (B) it will, and each subsequent holder is required to, notify any subsequent purchaser of such GDSs from it of the resale restrictions referred to in (A) above.

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It acknowledges that we and the depositary reserve the right prior to any sale or other transfer pursuant to clause 2(A)(ii) or (iii) above involving a registration of transfer to require the delivery of such certifications, legal opinions and other information as we and the depositary may reasonably require to confirm that the proposed sale or other transfer complies with the foregoing restrictions. It understands that the Rule 144A GDRs will, for so long as we are relying on Section 3(c)(7) of the Investment Company Act and unless we and the depositary agree otherwise in accordance with applicable law, bear a legend substantially to the following effect:

This security, the Rule 144A Global Depositary Shares (‘‘GDSs’’) evidenced hereby, and the shares (‘‘Shares’’) of Realtek Semiconductor Corp. (the ‘‘Company’’) represented thereby, have not been and are not expected to be registered under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’), and such securities may not be offered, sold, pledged or otherwise transferred in the absence of such registration or an applicable exemption therefrom. Each purchaser of the GDSs evidenced hereby is hereby notified that the seller of such GDSs may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A thereunder. The Company is not registered, and does not intend to register, as an investment company under the United States Investment Company Act of 1940, as amended (the ‘‘Investment Company Act’’). The Company is relying upon an exemption from the registration requirements of the Investment Company Act provided by Section 3(c)(7) thereof.

The holder hereof, by purchasing the GDSs evidenced hereby, agrees for the benefit of the Company and the Depositary that such GDSs and the Shares represented thereby may be offered, sold, pledged or otherwise transferred only (A)(1) in a transaction that meets the requirements of Rule 144A, to a person who it reasonably believes is a ‘‘qualified institutional buyer’’ (‘‘QIB’’) within the meaning of Rule 144A and who is also a ‘‘qualified purchaser’’ (‘‘QP’’) within the meaning of Section 2(a)(51) of the Investment Company Act for purposes of Section 3(c)(7) thereof and who is able to make the following representations: (a) it is a QIB who is also a QP, (b) it is not a broker-dealer that owns and invests on a discretionary basis less than US$25 milllion in securities of unaffiliated issuers and is not a plan referred to in Paragraph (a)(1)(d) or (a)(1)(e) of Rule 144A or a trust fund referred to in Paragraph (a)(1)(f) of Rule 144A that holds the assets of such a plan, if investment decisions with respect to the plan are made by the beneficiaries of the plan, (c) it is aware that the sale of the Rule 144A GDSs is being made in reliance on Rule 144A or another exemption from the registration requirements of the Securities Act, (d) it is acquiring the Rule 144A GDSs for its own account or for the account of a QIB who is also QP that is able to make the representations set forth in this clause (1), (e) it was not formed for the purpose of investing in the Company, (f) will hold and transfer the Rule 144A GDSs in at least the minimum number of 10,000 GDSs and (g) it, and each account for which it is purchasing, will provide notice of the transfer restrictions set forth in this clause (A) to any subsequent transferee; (2) in an offshore transaction to a non-U.S. person in a transaction that meets the requirements of Rule 903 or 904 of Regulation S; or (3) to a QP pursuant to an exemption from the registration requirements of the Securities Act provided by Rule 144 thereunder (if available) and, in each of cases (1) through (3), in accordance with all applicable securities laws of the states of the United States and in a number of 10,000 GDSs and that (B) the holder will, and each subsequent holder is required to notify any subsequent purchaser of such GDSs from it of the resale restrictions referred to in (A) above.

The Company may treat any transfer in violation of the foregoing as of no force and effect, as void ab initio, and as not operating to transfer any rights to the transferee, notwithstanding any instructions to the contrary to the Company, the depositary or any intermediary. If at any time, the Company determines or is notified that the holder of this security or a beneficial interest herein was in breach, at the time given, of any of the representations set forth in the above legend, the Company may require that this security or such interest herein be transferred to a person designated by the Company.

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The holder acknowledges that the Company and the depositary reserve the right prior to any sale or other transfer pursuant to clause (A)(2) or (3) above involving a registration of transfer to require the delivery of such certifications, legal opinions and other information as the Company and the depositary may reasonably require to confirm that the proposed sale or other transfer complies with the foregoing restrictions.

It will not, at any time, offer to buy or offer to sell the GDSs by any directed selling efforts or by any form of general solicitation or advertising, including, but not limited to, any advertisement, article, notice of other communication published in any newspaper, magazine or similar medium or broadcast over television or radio or seminar or meeting whose attendees have been invited by general solicitation or advertising.
If it is a U.S. person, it acknowledges that it has purchased the GDSs in the ordinary course of its investment business, for a bona fide business purpose.
It acknowledges that our company, the initial purchasers, the depositary and others will rely upon its deemed representations, warranties, acknowledgments and agreements set forth in ‘‘—Rule 144A GDSs’’, and it agrees to notify us, the depositary and the initial purchasers promptly in writing if any of these representations, warranties, acknowledgments and agreements ceases to be accurate and complete.
The Rule 144A GDSs will initially be evidenced by the Rule 144A Master GDR, and before any beneficial interest in the Rule 144A GDSs evidenced by the Rule 144A Master GDR may be sold or otherwise transferred to a person who takes delivery in the form of a beneficial interest in the International GDSs evidenced by the International Master GDR, both the transferor and the transferee will be required to provide written certifications, in the applicable forms provided in the deposit agreement.

International GDSs

Each owner of an interest in International GDSs will be deemed to have made in favor of our company, the depositary and the initial purchasers the following acknowledgments, representations, warranties and agreements (terms used below that are defined in Rule 144A or Regulation S are used as so defined):

The International GDRs, the International GDSs evidenced thereby and the shares represented thereby have not been and are not expected to be registered under the Securities Act or with any securities regulatory authority of any state of the United States and are subject to significant restrictions on transfer.
Such owner is not an affiliate of our company or the selling shareholder or acting on behalf of any such affiliate. During the distribution compliance period, such owner purchasing is purchasing the International GDSs in an offshore transaction meeting the requirements of Regulation S.
Such owner will not offer, sell, pledge or otherwise transfer any interest in the International GDRs, International GDSs evidenced thereby or shares represented thereby except as permitted by the legend set forth in paragraph (4) below.
The International GDRs (including the International Master GDR) will bear legends to the following effect, unless we and the depositary determine otherwise in compliance with applicable law, and that it will observe the restrictions contained therein:

This security, the International Global Depositary Shares (‘‘GDSs’’) evidenced hereby, and the shares (‘‘Shares’’) of Realtek Semiconductor Corp. (the ‘‘Company’’) represented thereby, have not been and are not expected to be registered under the United States Securities Act of 1933, as amended (the ‘‘Securities Act’’). The Company is not registered, and does not intend to register, as an investment company under the United States Investment Company Act of 1940, as amended (the ‘‘Investment Company Act’’). The Company is relying upon an exemption from the registration

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requirements of the Investment Company Act provided by Section 3(c)(7) thereof. Prior to the expiration of a period of 40 days after the later of the commencement of the offering by the Company, any selling shareholder or their respective affiliates of Shares or GDSs or securities convertible, exercisable or exchangeable into Shares or GDSs, pursuant to which offering this security is delivered, and the related closing (the ‘‘Distribution Compliance Period’’), such securities may not be offered, sold, pledged or otherwise transferred except (1) in a transaction meeting the requirements of Rule 144A under the Securities Act to a person that is (a) a qualified institutional buyer (as defined in Rule 144A under the Securities Act) who is also a qualified purchaser (as defined in Section 2(a)(51) of the Investment Company Act), or a purchaser that the seller and any person acting on the seller’s behalf reasonably believe is a qualified institutional buyer who is also a qualified purchaser in each case purchasing for its own account or for the account of one or more qualified institutional buyers and who are also qualified purchasers that are able to make the representations set forth in the legend appearing on the Rule 144A Global Depositary Receipts and (b) aware that the offer, sale, pledge or other transfer is being made in reliance on Rule 144A and that the Company is relying on an exemption from the registration requirements of the Investment Company Act that requires the Company to limit the persons resident in the United States who purchase securities in the Company to qualified purchasers or (2) to a non-U.S. person in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S under the Securities Act, in each case in accordance with any applicable securities laws of the States of the United States and other jurisdictions and further provided that, in connection with any transfer under (1) above, the transferor shall, prior to the settlement of such sale, withdraw the shares from the International Facility and cause instructions to be given to the Custodian to deposit such Shares in the Rule 144A Facility and to the Depositary for the issuance of Rule 144A GDSs to or for the account of such qualified institutional buyer who is also a qualified purchaser, all in accordance with the provisions of the deposit agreement. Each holder and beneficial owner, by its acceptance of this security or an interest in the GDSs evidenced hereby, represents that it understands and agrees to the foregoing and following restrictions, and each holder will, and each subsequent holder is required to, notify any purchaser of this security from it of the resale restrictions referred to above.

Upon the expiration of the Distribution Compliance Period, the GDSs evidenced hereby and the Shares represented thereby shall no longer be subject to the restrictions provided in this legend, provided that at such time and thereafter the offer or sale of the International GDSs evidenced hereby and the Shares represented thereby by the holder hereof in the United States would not be restricted under any applicable securities laws of the United States or of the States or Territories of the United States.

The International GDSs offered will initially be represented by the International Master GDR and, prior to the expiration of the distribution compliance period, before any beneficial interest in the International GDSs evidenced by the International Master GDR may be sold or otherwise transferred to a person who takes delivery in the form of a beneficial interest in the Rule 144A GDSs evidenced by the Rule 144A Master GDR, both the transferor and the transferee will be required to provide written certifications in the applicable forms provided in the deposit agreement.
We will not recognize any resale or other transfer, or attempted resale or other transfer, of International GDRs, International GDSs evidenced thereby or shares represented thereby made other than in compliance with the above-stated restrictions.
Each purchaser of International GDSs in the United Kingdom (other than those whose ordinary business is to buy and sell shares and debentures, whether as principal or agent) will also be deemed to have confirmed that it is acquiring the International GDSs for its own account as a long-term investment.
Such owner acknowledges that we, the selling shareholder, the initial purchasers, the depositary and their respective affiliates and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements.

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Other Provisions Regarding Transfer of the GDSs

Interests in Rule 144A GDSs evidenced by the Rule 144A Master GDR may be transferred to a person whose interest in such Rule 144A GDSs is subsequently represented by the International Master GDR, only upon receipt by the depositary of written certifications from the transferor and the transferee to the effect that the transfer is being made in accordance with Regulation S. Interests in International GDSs represented by the International Master GDR may be transferred to a person whose interest in such International GDSs is subsequently evidenced by the Rule 144A Master GDR only upon receipt by the depositary of written certifications from the transferor (prior to the expiry of the distribution compliance period) and the transferee (at any time) to the effect that such transfer is being made in accordance with Rule 144A. Any interest in GDSs represented by one of the Master GDRs that is transferred to a person whose interest in such GDSs is subsequently evidenced by an interest in the other Master GDR will, upon transfer, cease to be an interest in the GDSs evidenced by such first Master GDR and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to interests in GDSs represented by such other Master GDR for so long as it remains such an interest.

We have applied to list the International GDSs on the Luxembourg Stock Exchange. The Luxembourg Stock Exchange is a ‘‘designated offshore securities market’’ (within the meaning of Regulation S) and, accordingly, you may resell GDSs in, on or through the facilities of such exchange in reliance upon, and subject to compliance with, the safe harbor provided by Rule 904 of Regulation S.

Settlement and Clearance

Ownership of Rule 144A GDSs evidenced by the Rule 144A Master GDR will be limited to DTC participants or persons who hold interests through DTC participants. Ownership of such interests will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of DTC participants) and the records of DTC participants (with respect to interests of persons other than DTC participants). So long as DTC, or its nominee, is the registered holder of the Rule 144A Master GDR, DTC or its nominee, as the case may be, will be considered the sole owner of the Rule 144A GDSs evidenced by the Rule 144A Master GDR for all purposes under the deposit agreement and the Rule 144A GDSs. Transfers between DTC participants will be effected through DTC. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer Rule 144A GDSs evidenced by the Master Rule 144A GDR to such persons may be limited. Because DTC can only act on behalf of DTC participants, who in turn act on behalf of indirect participants, the ability of a person owning Rule 144A GDSs evidenced by the Master Rule 144A GDR to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take action in respect of such interest, may be affected by the lack of physical individual denitive securities in respect of such interest.

Beneficial interests in the International GDSs held through Euroclear and Clearstream will be represented by the International Master GDR registered in the name of a common depositary for Euroclear and Clearstream. The aggregate holdings of beneficial interests in the International GDSs in Euroclear and Clearstream will be reflected in the book-entry accounts of each such institution. Ownership of International GDSs evidenced by the International Master GDR will be limited to Euroclear or Clearstream accountholders or persons who hold interests through such accountholders. Ownership of such interests will be shown on, and the transfer of that ownership will be effected only through, records maintained by the common depositary (with respect to the aggregate holdings of Euroclear and Clearstream), the records of Euroclear and Clearstream (with respect to the holdings of their respective accountholders) and the records of such Euroclear and Clearstream accountholders (with respect to the interests of persons holding International GDSs through such accountholders).

Transfers of International GDSs held through Euroclear or Clearstream will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream.

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Euroclear and Clearstream each holds securities for participating organizations and facilitates the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in the accounts of such participants. Euroclear and Clearstream provide to their respective participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Euroclear and Clearstream participants are financial institutions throughout the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to Euroclear and Clearstream is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear or Clearstream participant, either directly or indirectly.

DTC, Euroclear and Clearstream will not monitor compliance with any transfer or ownership restrictions.

Section 3(c)(7) Procedures

Reliance on Investment Company Act Section 3(c)(7)

In reliance on Section 3(c)(7) of the Investment Company Act, we have not registered with the U.S. Securities and Exchange Commission as an investment company pursuant to the Investment Company Act. To rely on Section 3(c)(7), we must have a ‘‘reasonable belief’’ that all purchasers of the Rule 144A GDSs (including the initial purchasers and subsequent transferees) are ‘‘qualified purchasers’’ (as defined in Section 2(a)(51) of the Investment Company Act). We will establish such a reasonable belief by means of the representations, warranties and agreements made, or deemed made, by the purchasers of Rule 144A GDSs under ‘‘Notice to Investors,’’ the agreements of the initial purchaser relating to the distribution of the GDSs pursuant to Rule 144A and Regulation S referred to under ‘‘Plan of Distribution’’ and our covenants and undertakings referred to below.

Reminder Notices

Whenever we send an annual report or other periodic report to the holders of the GDSs, we will also send a ‘‘Section 3(c)(7) Reminder Notice’’. Each Section 3(c)(7) Reminder Notice will state that (1) each holder of a Rule 144A GDSs or an interest in Rule 144A GDSs must be able to make the representations and warranties, or the 3(c)(7) Representations, described under ‘‘—Rule 144A GDSs’’ above, (2) the Rule 144A GDSs or interest in the Rule 144A GDSs are transferable only to holders that are able to make the 3(c)(7) Representations and satisfy the other transfer restrictions applicable to the Rule 144A GDSs; and (3) if any holder of a Rule 144A GDS or an interest in a Rule 144A GDS is determined not to be a qualified institutional buyer who is also a qualified purchaser, then we may treat the transfer to such person as null and void, and we will have the right, exercisable in our sole discretion, to require such purchaser to sell all of its GDSs (and all interests therein) to a transferee designated by us. We will send each annual report (and each Section 3(c)(7) Reminder Notice) to DTC with a request that participants pass them along to the beneficial owners of the Rule 144A GDSs. We will send at least one Section 3(c)(7) Reminder Notice per year.

DTC Actions

We will direct DTC to take the following steps in connection with the Rule 144A GDSs:

(1) We will direct DTC to include the ‘‘3c7’’ marker in the DTC 20-character security descriptor and the 48-character additional descriptor for the Rule 144A GDSs in order to indicate that sales are limited to qualified institutional buyers who are also qualified purchasers.

(2) We will direct DTC to cause each physical DTC deliver order ticket delivered by DTC to purchasers to contain the 20-character security descriptor and will direct DTC to cause each DTC deliver order ticket delivered by DTC to purchasers in electronic form to contain the ‘‘3c7’’ indicator and the related user manual for participants.

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(3) On or prior to the closing date for this offering, we will instruct DTC to send an ‘‘Important Notice’’ to all DTC participants in connection with this offering. The ‘‘Important Notice’’ and will notify DTC participants that the Rule 144A GDSs are Section 3(c)(7) securities issued by a non-U.S. person.

(4) We will from time to time request the depositary to obtain a list of all DTC participants holding an interest in the Rule 144A GDSs.

Bloomberg Screens, Etc.

We will from time to time request all third-party vendors to include on screens maintained by such vendors appropriate legends regarding Rule 144A, Regulation S and Section 3(c)(7) restrictions on the GDSs. Without limiting the foregoing, we will request that Bloomberg, L.P. include the following on each Bloomberg screen containing information about the GDSs:

(1) The bottom of the ‘‘Security Display’’ page describing the Rule 144A GDSs should state: ‘‘Iss’d Under 144A/3c7’’.

(2) The bottom of the ‘‘Security Display’’ page describing the International GDSs should state: ‘‘Iss’d Under Reg S/3c7’’.

(3) The ‘‘Security Display’’ page should have a flashing red indicator stating ‘‘See Other Available Information’’.

(4) Such indicator for the Rule 144A GDSs should link to an ‘‘Additional Security Information’’ page, which should state that the Rule 144A GDSs ‘‘are being offered in reliance on the exemption from registration under Rule 144A of the Securities Act of 1933 to persons that are both (1) qualified institutional buyers (as defined in Rule 144A under the Securities Act) and (2) qualified purchasers (as defined under Section 3(c)(7) of the Investment Company Act of 1940, as amended)’’.

(5) Such indicator for the International GDSs should link to an ‘‘Additional Security Information’’ page, which should state that the International GDSs ‘‘are being offered in reliance on the exemption from registration under Regulation S under the Securities Act of 1933 in offshore transactions to non-U.S. persons’’.

(6) The ‘‘Disclaimer’’ page for the GDSs should state that the GDSs ‘‘will not be and have not been registered under the Securities Act of 1933, as amended and the Issuer has not been registered under the Investment Company Act of 1940, as amended, and these securities may not be offered of sold in the United States absent registration or an applicable exemption from registration requirements and any such offer or sale of these securities must be in accordance with Section 3(c)(7) of the Investment Company Act of 1940, as amended’’.

CUSIP

We will cause each ‘‘CUSIP’’ or ‘‘CINS’’ number obtained for a GDS to have an attached ‘‘fixed field’’ that contains ‘‘3c7’’ and ‘‘144A’’ or ‘‘Reg S’’ indicators, as applicable.

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ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

We are a company limited by shares and incorporated under the ROC Company Law. Substantially all of our directors, supervisors and executive officers and certain of the experts named in this offering memorandum are residents of the ROC, and a significant portion of the assets of our company and these persons are located in the ROC. The selling shareholder is wholly located in the ROC. As a result, it may not be possible for you to effect service of process upon our company, the selling shareholder or these persons outside of the ROC, or to enforce against any of them judgments obtained in courts outside of the ROC. Our ROC counsel has advised us that any final judgment obtained against us in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the GDSs 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 with the following:

the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;
the judgment is not contrary to the public order or good morals of the ROC;
the judgment is a final judgment for which the period for appeal has expired or from which no appeal can be taken;
if the judgment was rendered by default, we were personally served within the jurisdiction of the court rendering the judgment or process was served on us with judicial assistance of the ROC; and
judgments of the courts of the ROC are recognized and enforceable in the jurisdiction of the court rendering the judgment on a reciprocal basis. Judgments obtained in certain United States courts have been confirmed to be recognized and enforceable in the courts of the ROC on a reciprocal basis.

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

FORWARD-LOOKING STATEMENTS

This offering memorandum contains forward-looking statements, as defined in the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements, including without limitation, statements relating to our capital expenditures, financings, production capacity and expansion plans, reflect our current views with respect to future events and financial performance. These views are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results or those anticipated. For example, changes in the market outlook, customer demands, availability of materials, equipment, manpower and timely regulatory approvals, as well as the availability of financings and the terms thereof, could affect our capital expenditures, financings, production capacity, expansion and construction plans. See ‘‘Risk Factors.’’ Although we believe the expectations reflected in the forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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AVAILABLE INFORMATION

To permit compliance with Rule 144A under the Securities Act in connection with resales of the GDSs, we agree that, upon request of a holder of a GDS, to furnish the holder and any prospective purchaser designated by the holder the information required to be delivered under Rule 144A(d)(4). This requirement only applies so long as we are not subject to the periodic reporting requirements of Section 13 or Section 15(d) of the U.S. Securities Exchange Act and are not exempt from such reporting requirements pursuant to Rule 12g3-2(b) of the U.S. Securities Exchange Act. Any such request should be directed to Realtek Semiconductor Corp., Attention: Finance Division, No. 2, Industry East Road IX, Science-Based Industrial Park, Hsinchu, Taiwan (telephone: 886-3-5780211; fax: 886-3-5787314).

Copies of such information are available from the principal office of The Bank of New York (Luxembourg), S.A. during normal business hours on any weekday for so long as the GDSs are listed on the Luxembourg Stock Exchange and the rules of the stock exchange so require.

LEGAL MATTERS

Certain legal matters with respect to the GDSs will be passed upon for us by Jones, Day, Reavis & Pogue, as to ROC law, and for the initial purchasers by Simpson Thacher & Bartlett as to U.S. and New York law.

ACCOUNTANTS

Our audited unconsolidated financial statements as of and for the years ended December 31, 1998, 1999 and 2000 have been audited by PricewaterhouseCoopers, independent accountants, as indicated in their report on those financial statements, and are included in this offering memorandum. PricewaterhouseCoopers’ audit report with respect to the unconsolidated financial statements as of and for the years ended December 31, 1998, 1999 and 2000 states that the financial statements of certain investee companies accounted for under the equity method were audited by other auditors and that their report, to the extent it relates to these investee companies included in the unconsolidated financial statements, is based solely on the reports of these other auditors. Our unaudited unconsolidated financial statements as of and for the nine months ended September 30, 2000 and 2001 have been the subject of a limited review by PricewaterhouseCoopers. PricewaterhouseCoopers’ review report with respect to the unconsolidated financial statements as of and for the nine months ended September 30, 2000 and 2001 contains qualifications with respect to the effect on the unconsolidated financial statements of such adjustments, if any, as might have been determined to be necessary had the financial statements of the investee companies, accounted for under the equity method, been reviewed by independent auditors.

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GENERAL INFORMATION

We are registered with the ROC Ministry of Economic Affairs. Our registration number is 22671299. According to Article 2 of our articles of incorporation, our scope of business is to engage in the design, development, manufacture, and sale of ICs and their application software.

Our offering of the GDSs and the issue of the underlying shares were authorized and approved by our board of directors on August 16, 2001 and by our shareholders on May 30, 2001. The selling shareholder’s offering of the GDSs was authorized by its Fund Management Committee.

We have applied to list the International GDSs on the Luxembourg Stock Exchange. The legal notice relating to the issue of the GDSs and our articles of incorporation, the articles of association of the depositary and the deposit agreement will be registered prior to the listing with the Registrar of the District Court in Luxembourg (Greffier en Chef du Tribunal d’Arrondissement de et a Luxembourg), where such documents are available for inspection and where copies thereof can be obtained upon request.

Except as disclosed in this offering memorandum, neither we nor any of our subsidiaries is involved in any litigation or arbitration proceedings that may have, or have had during the 12 months preceding the date of this offering memorandum, a significant adverse effect on our financial position or any of our subsidiaries, nor are we or any of our subsidiaries aware that any such proceedings are pending or threatened. There has been no material adverse change in our financial position or results of operations since the date of the latest audited unconsolidated financial statements as of and for the nine months ended September 30, 2001, except as disclosed in this offering memorandum.

All consents, approvals, authorizations or other orders required under the prevailing laws of the ROC have been given or obtained for the offer, issue and sale of the GDSs. A copy of this offering memorandum will be filed with the ROC SFC subsequent to the closing of the offering.

Copies of our articles of incorporation and the articles of association of the depositary and copies of the deposit agreement and the offering memorandum (or, pending execution thereof, drafts thereof subject to modification) will, for so long as the GDSs are listed on the Luxembourg Stock Exchange, be available for inspection during usual business hours on any weekday (except public holidays) at the offices of The Bank of New York (Luxembourg), S.A., the listing agent in Luxembourg. As long as any of the GDSs remains outstanding, copies of our annual reports and semi-annual reports in English containing our audited unconsolidated financial statements, and our most recent unconsolidated unaudited quarterly interim report in English will be delivered to and be obtainable from the offices of the listing agent. We do not prepare any consolidated financial statements. See ‘‘Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Consolidation Principles’’.

Trades on the Luxembourg Stock Exchange must be capable of being settled through Euroclear and Clearstream. Euroclear and Clearstream have only accepted for clearance those GDSs represented by the International Master GDR. Investors holding an interest in the Rule 144A Master GDR wishing to effect trades on the Luxembourg Stock Exchange will have to exchange the relevant holding from Rule 144A Master GDR for International Master GDR.

As long as the GDSs are listed on the Luxembourg Stock Exchange, The Bank of New York (Luxembourg) S.A. will act as the intermediary between the Luxembourg Stock Exchange and persons connected with the issuance and listing of the GDSs.

We expect the Rule 144A GDSs will be made eligible for trading in the PORTAL Market with ISIN No. US7560631035, CUSIP No. 756063103 and PORTAL Trading Symbol RLTKGDS. We expect the International GDSs will be accepted for clearance through Euroclear and Clearstream with Common Code No. 014049312 and ISIN No. US7560632025.

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

Our financial statements are prepared and presented in accordance with ROC GAAP which differ in certain respects from U.S. GAAP. The following is a summary of the principal differences between ROC GAAP and ROC SFC requirements, as applicable to our company, and U.S. GAAP. The summary below should not be considered as being exhaustive. Additionally, it may exclude certain differences that may affect the disclosure, presentation or classification of transactions or events in our financial statements. Further, this summary does not take into account numerous projects currently being undertaken by standard setting bodies in the United States and ROC that could affect future comparisons such as this one. Finally, we have not attempted to identify all future differences between ROC GAAP and U.S. GAAP that may affect the financial statements as a result of transactions or events that may occur in the future.

Subject ROC GAAP

Retained earnings/Earnings per share/Employee stock bonus

It is a statutory requirement that bonuses paid to employees and remuneration paid to directors and supervisors out of retained earnings are not regarded as expenses, but instead are reported as a distribution from retained earnings and recorded in the year the shareholders approved the distribution of earnings. Under certain circumstances, employee bonuses may be paid in the form of newly issued stocks, in which case the stock issuance is recorded at par value.

The stock bonus to employees is given retroactive effect in the computation of earnings per share.

Under ROC GAAP, for publicly owned corporation, only simple earnings per share (EPS) is required to be presented on the face of the income statement if it has simple capital structure, e.g. only common stock and the potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercise could in the aggregate dilute earnings per common share by less than 3%. Primary and fully diluted earnings per share is calculated, if the aggregate diluted result is at least equal to 3% of simple earnings per share, by taking into consideration additional common shares that would have been outstanding if the dilutive share equivalents of convertible securities had been issued.

U.S. GAAP

Under U.S. GAAP, employee bonuses and remuneration issued to directors and supervisors, irrespective of whether the bonuses, are paid in the form of cash or stock are charged to income as compensation expense in the year the services are rendered. For bonuses paid in stock, the shares are valued using the fair value or the intrinsic value method and the difference with the amount initially recorded is recorded in the period the shareholders approved the distribution of earnings.

Under U.S. GAAP, stock bonus to employees is given only prospective effect in the computation of earnings per share.

U.S. GAAP eliminated the 3% materiality consideration in the distinction between simple and complex capital structure. Accordingly, all entities with outstanding convertible securities, options, warrants, or other rights that upon conversion could dilute earnings per common share should present both basic and diluted EPS in equal prominence on the face of the income statement. If basic and diluted EPS are identical, they may be presented in one appropriately captioned line item.

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Subject ROC GAAP U.S. GAAP
Stock dividends Under ROC GAAP, the issuance of Under U.S. GAAP, when the ratio of stock dividends (sometimes distribution is less than 25% of characterized as stockholders’ shares of the same class outstanding, bonuses) is recorded based on the stock dividends are generally par value of the shares, multiplied recorded based on the fair value by the number of shares issued. method, with the par value recorded in the capital stock accounts and the excess of fair value over the par value being recorded as additional paid-in capital. Distribution in excess of 25% is generally considered as stock split.
Employee share purchase In connection with a number of new Under U.S. GAAP, such issues shares issued to shareholders, the would be recorded as capital Company also issue shares to contribution for the cash amount employees at the same issue price, received from the employees. In which usually represented a discount addition, compensation expense to the quoted market price. Under would be recorded, for the ROC GAAP, such issues are difference between the shares issue recorded as capital contribution for price and the fair market value or the cash amount received from the the intrinsic value, during the period employees. when such issues were made.
Capital reserve In conformity with ROC GAAP, the Under U.S. GAAP, these items are following items are treated as capital treated as follows: reserve: (a) any premium on capital stock; (a) as additional paid-in capital and (shareholders equity); and
(b) after-tax gain on disposal of (b) remains in retained earnings assets (transferred from retained after recognition in earnings. earnings to capital reserve after recognition in earnings).
Consolidation Under ROC GAAP, a company is Under U.S. GAAP, the parent required to include in its annual company’s consolidated financial consolidated financial statements statements generally include the only those subsidiaries, which are financial statements of majority-owned directly or indirectly over 50% subsidiaries, unless (i) control is owned. For directly-owned considered temporary or (ii) control subsidiaries (i) with total assets and does not rest with the majority owner. operating revenues which are less Further, U.S. GAAP requires that the than 10% of the Company’s accounting principles and practices unconsolidated total assets and used by an enterprise in the operating revenues, or (ii) which are preparation of its interim statements in a negative equity position, the should be based on those used in its Company has the option of whether latest annual financial statements or not to consolidate such unless a change of accounting practice subsidiaries. For purposes of or policy has been adopted in the applying the above test, the amounts current year. Thus, if the enterprise’s are determined based on the latest annual financial statements were respective subsidiary’s prepared on a consolidated basis,
Under U.S. GAAP, the parent company’s consolidated financial statements generally include the financial statements of majority-owned subsidiaries, unless (i) control is considered temporary or (ii) control does not rest with the majority owner. Further, U.S. GAAP requires that the accounting principles and practices used by an enterprise in the preparation of its interim statements should be based on those used in its latest annual financial statements unless a change of accounting practice or policy has been adopted in the current year. Thus, if the enterprise’s latest annual financial statements were prepared on a consolidated basis, accordingly the interim financial

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Subject ROC GAAP Irrespective of the above test, if the combined revenues and total assets of all such unconsolidated subsidiaries exceeds 30% of the Companys unconsolidated total assets and operating revenues, then each individual subsidiary with total assets or operating revenues greater than 3% of the Company’s respective unconsolidated amounts shall be consolidated. However, a company is not required to prepare interim financial statements on consolidated basis. Instead, the company is only required to recognize investment income/loss in majority-owned subsidiaries under the equity method.

Goodwill being the excess of the investment cost over the net asset value of the consolidated subsidiary is capitalized as an intangible asset and amortized to the income statement over five to twenty years.

Equity investments of at For investments accounted under the least 20% equity method, ROC GAAP provides that, any resulting profit intercompany transactions between an investor company and an unconsolidated investee company, be eliminated in the investor company’s financial statements. In general, net intercompany profit on such transactions is deferred and offset against the long term investment account, with the deferred net intercompany profit amortized to income over future periods based on the nature of the transaction which give rise to the deferred intercompany profit.

U.S. GAAP

statements shall also be prepared on consolidated basis, except as discussed above.

Under U.S. GAAP, goodwill is not amortized. Starting with fiscal years beginning after December 15, 2001, goodwill is to be tested for impairment at the level of reporting unit. Impairment losses for goodwill that arise due to the initial application of this new standard (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principles. Goodwill acquired after June 30, 2001 will be subject to the non-amortization provision of this standard. Prior to the issuance of this standard, goodwill is amortized over its estimated useful life but not exceeding 40 years.

Under U.S. GAAP, the gross amount of the related accounts of the intercompany profit arising from intercompany transactions between an investor company and an unconsolidated investee affiliate are generally eliminated in the investor companys financial statements by charging cost of sales and crediting the investment account. This elimination is either complete or partial to the extent of the investor company’s interest in the investee company.

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Subject

Equity investments of less than 20% or debt investments/short-term investment

ROC GAAP

Long-term investments of less than 20% of a company’s shares are accounted for at the lower of cost or market value for listed investee companies and at cost for unlisted investee companies and if the company has no ability to exercise significant influence in the management of the investee company. Valuation allowance under this lower of cost or market value method is shown under stockholders’ equity. When it becomes evidently clear that there has been a permanent impairment in investment value and the chance of recovery is minimal, loss is recognized in the current year.

Under ROC GAAP, investments in foreign investee companies, denominated in foreign currencies, accounted for at cost method are converted to New Taiwan dollars using the exchange rate prevailing at balance sheet date and the resulting exchange gain or loss is recorded in stockholders’ equity under the cumulative translation adjustment account.

U.S. GAAP

Equity investments of less than 20% that have readily determinable fair value and debt investments are classified in three categories and accounted as follows:

a) Debt and equity securities classified as trading securities are marked to market at the end of the accounting period with unrealized gains or losses taken to current earnings.
b) Debt securities classified as held to maturity are reported at amortized cost, with any premium or discount amortized over the period of the investment.
c) Debt and equity securities classified as available for sale are marked to market at the end of the accounting period with unrealized gains or losses taken to a separate component of shareholders’ equity, unless there is a permanent decline in the value of such investment in which case it is recorded against income.

Effective for financial statements for the year ended December 31, 1999, significant influence criteria have been expanded to include investment with the highest voting rights.

Short-term investments are stated at the lower of cost or market value.

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Subject ROC GAAP
Accounting for changes in Under ROC GAAP, when an ownership interest in investee investee company issues additional companies shares and the investor’s ownership interest changes as a result, any resulting difference between the investor’s investment balance and its proportionate share of the investee company’s net equity is adjusted to its investment account with an offsetting entry to the investor’s capital reserve or retained earnings. Upon subsequent disposition of the investment, amounts previously recorded to capital reserve or retained earnings relating to the respective investment will be reversed and recorded as part of the gain or loss on disposal.
Impairment of long-lived assets No specific standards address or long-lived assets to be impairment of long-lived assets; disposed normally such assets would be carried at cost less accumulated depreciation.
Assets purchased for use in the business but not subsequently used for that purpose are generally recorded as idle assets and reclassified from fixed assets to other assets, in which case there is a requirement to assess the net realizable value such that idle assets are not recorded at an amount in excess of net realizable value.
Prepayment of fixed assets
Under ROC GAAP, prepayment of fixed assets is presented as part of assets.

U.S. GAAP

Under U.S. GAAP, when an investee company issues additional shares at an amount over/under the carrying value of the shared held by the investor and the investor’s ownership interest decreases as a result of not fully subscribing to the issue, the resulting difference between the investor’s investment balance and its proportionate share of investee company’s net equity is adjusted to its investment account with an offsetting entry either to (i) gain or loss to record the deemed disposition of shares or (ii) to paidin-capital. If an adjustment has been made to paid-in-capital to recognize investee capital transactions, U.S. GAAP would not permit the adjustment of such amounts on the subsequent disposition of all or a part of the adjustment.

U.S. GAAP requires that long-lived assets held for use by an entity be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the carrying value and the fair value based on discounted cash

Under U.S. GAAP, prepayment of fixed assets should be presented as other assets.

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Subject ROC GAAP U.S. GAAP Depreciation of fixed assets Depreciation is generally provided Depreciation is provided over the using the guideline service lives as asset’s estimated economic useful prescribed by the ROC Tax life. Salvage value, if any, is based Authorities plus one additional year on the estimated net realizable value as salvage value. of the asset at the end of its estimated economic useful life. Convertible debt securities When convertible bonds are issued, Under U.S. GAAP, beneficial ROC GAAP does not recognize or conversion features of convertible account for any beneficial or securities with beneficial conversion conversion feature embedded in the features or contingently adjustable securities. conversion ratios should be recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. That amount should be calculated at the commitment date as the difference between the conversion price and the fair value of the common stock, multiplied by the number of shares into which the security is convertible (intrinsic value). Comprehensive income Under ROC GAAP, there are no U.S. GAAP establishes standards for standards for accounting and reporting and display of reporting of comprehensive income. comprehensive income and its components in a financial statements that is displayed with the same prominence as other financial statements. Comprehensive income is composed of two subsetsX‘‘net income’’ and ‘‘other comprehensive income.’’ Comprehensive income includes charges or credits to equity that are not the result of transactions with owners (e.g., cumulative translation adjustments under SFAS 52, minimum pension liabilities under SFAS 87 and unrealized gains and losses on available-for-sale securities under SFAS 115, and the effective portion of the change in the fair value of cash flow and net investment hedges under FAS 133).

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Subject ROC GAAP Accounting for derivative There are no specific accounting instruments standards under ROC GAAP which address measurement for derivative instruments such as options, swap arrangements, and interest, rate swap contracts, except for foreign currency forward contracts. Such contracts are classified as either hedge or speculative contracts. Forward contracts in the form of hedges are recorded and translated using the exchange rates prevailing on the contract date. The discount or premium on the forward exchange contract is amortized over the contract period. The balance at period-end is translated into New Taiwan dollars at the exchange rates prevailing at the balance sheet date, and any translation is recognized in the current year’s net income.

U.S. GAAP

Under U.S. GAAP, accounting for derivative instruments requires that all entities recognize derivative instruments as assets and liabilities in the statement of financial position and subsequently measure them at fair value. If certain conditions are met, entities may elect to designate a derivative instrument as one of the following:

Fair value hedge—a hedge of the exposures to changes (that are attributable to a particular risk) in the fair value of (1) a recognized asset or liability or (2) an unrecognized firm commitment;

Cash-flow hedge—a hedge of the exposure to variability (that is attributable to a particular risk) in the cash flows of a forecasted transaction; and

Foreign-currency hedge—a hedge of the foreign-currency exposure of (1) an unrecognized firm commitment, (2) an available-for-sale security, (3) a forecasted transaction, or (4) a net investment in a foreign operation.

Compensated absences ROC GAAP has no specific Compensated absences must be accounting practice regarding accrued based on the liability for compensated absences. employees’ rights to receive compensation for future absences when certain conditions are met. Cost of sales Under ROC GAAP, provisions for Under U.S. GAAP, provisions for normal inventory scrap and normal inventory scrap and obsolescence are recorded as nonobsolescence are generally charged operating expenses. to cost of sales.

Deferred charges Under the ROC Company Law, Under U.S. GAAP, expenses of expenses of obtaining new capital issuing common or preferred stock by issuing common or preferred should be charged directly to the stock can be capitalized as deferred capital in excess of par or capital in charges and then amortized over excess of stated value. Retained three years under the straight-line earnings may be charged when legal method. regulations prohibit charging stock issue costs to capital accounts.

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Subject Concentration of risk Segment information Statement of cash fows Pension plan disclosure	ROC GAAP ROC GAAP has no specifc disclosure requirements concerning concentration of risk. ROC GAAP requires disclosure of segment information in the footnotes information to the fnancial statements according to industry and geographic information, which need not necessarily be the same as the management’s internal report to company decision-makers. Under ROC GAAP, cash fows are generally reported at their net amount for the period. In addition, certain disclosures of non-cash investing and fnancing activities are not generally made, and certifcates of time deposits with original maturities of greater than three months are classifed as cash. Under ROC GAAP, disclosure of changes in plan assets and beneft obligations is not required.	U.S. GAAP
		Disclose concentration of risk on one or more parties, as appropriate, including such parties as major customers, suppliers, franchisers, distributors, general agents, borrowers or lenders is required. Under U.S. GAAP, public business enterprise is required to present segment information based on operating segments. Several operating segments may, provided aggregation criteria are met, be aggregated to reportable segments for which the required information is disclosed. Disclosure is based on the management’s approach for reporting segments information to the company’s chief operating decision-makers that are used internally for evaluating segment performance and deciding how to allocate resources to segments. Under U.S. GAAP, cash fows are generally reported at their gross amounts, rather than netting infows against outfows for related items (such as netting payments on long- term debt against proceeds from issuance of new long-term debt instruments.) In addition, separate disclosure is required of all investing and fnancing activities that do not result in cash fows. Certifcates of time deposits with original maturities of over three months are classifed as trading securities. Under U.S. GAAP, changes in plan assets and beneft obligations are required to be disclosed.

125

Subject Revenue recognition 10% additional income tax on undistributed earnings New accounting pronouncements	ROC GAAP Under ROC GAAP, revenue is recognized when realized or realizable. Under the current tax regulations, current year’s earnings, on tax basis, not distributed in the following year are subject to 10% additional income tax. This 10% additional income tax is recognized as a tax expense in the following year when the amount is determined. In addition, the effect of the 10% tax on temporary differences is not recognized. Under ROC GAAP, disclosure of recently issued accounting standards but not yet effective as of balance sheet date is not required.	U.S. GAAP
		Under U.S. GAAP, revenue recognition is usually prescriptive and revenue is generally recognized when it is realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fxed or determinable, and (iv) collectibility is reasonably assured. Under U.S. GAAP, this 10% additional income tax is recognized in the period during which the related income is generated and the impact of the 10% tax is measured for both current and deferred tax. U.S. GAAP requires disclosure of the impact that recently issued accounting standards will have on the fnancial statements of the company when adopted in the future.

126

INDEX TO FINANCIAL STATEMENTS

A. Financial Statements as of and for the years ended December 31, 1998, 1999 and 2000

	Page
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-2
Unconsolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-3
Unconsolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-5
Unconsolidated Statements of Changes in Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-6
Unconsolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-9
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-11

B. Unaudited Financial Statements as of and for the nine-month periods ended September 30, 2000 and 2001

	Page
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-54
Unconsolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-55
Unconsolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-57
Unconsolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-58
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-60

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Realtek Semiconductor Corporation

We have audited the accompanying unconsolidated balance sheets of Realtek Semiconductor Corporation as of December 31, 1998, 1999 and 2000, and the related unconsolidated statements of income, of changes in stockholders’ equity and of cash flows for the years then ended, expressed in thousands of New Taiwan dollars. 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. As described in Note 4(6) to the financial statements, the 1998, 1999 and 2000 financial statements of certain investee companies accounted for under the equity method were audited by other auditors, whose reports thereon were furnished to us. The long-term investments in these investee companies were NT$14,873 thousand, NT$711,223 thousand, NT$797,253 thousand as of December 31, 1998, 1999 and 2000, respectively, and the related investment losses were NT$5,961 thousand, NT$3,348 thousand and NT$13,184 thousand for the years then ended, respectively. Our opinion, insofar as it relates to the amounts included in the financial statements and information disclosed in Note 13 relative to these long-term investments, is based solely on the reports of the other auditors.

We conducted our audits in accordance with the ‘‘Rules Governing Examinations of Financial Statements by Certified Public Accountants’’ and generally accepted auditing standards in the Republic of China. Those rules and standards require that we plan and perform the audits 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 and the reports of the other auditors provide a reasonable basis for our opinion.

In our opinion, based upon our audits and the reports of other auditors, the accompanying unconsolidated financial statements present fairly, in all material respects, the financial position of Realtek Semiconductor Corporation as of December 31, 1998, 1999 and 2000, and the results of its operations and its cash flows for the years then ended, in conformity with the ‘‘Rules Governing the Preparation of Financial Statements of Securities Issuers’’ and generally accepted accounting principles in the Republic of China.

The financial statements of Realtek Semiconductor Corporation as of and for the year ended December 31, 2000 expressed in US dollars are presented solely for the convenience of the reader and were translated from the New Taiwan dollar financial statements using the exchange rate of US$1.00: NT$34.56. This basis of translation is not in accordance with generally accepted accounting principles in the Republic of China.

PricewaterhouseCoopers

Hsinchu, Taiwan Republic of China March 5, 2001

The accompanying unconsolidated financial statements are not intended to present the financial position and results of operations and cash flows of the Company in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of China. The standards, procedures and practices in the Republic of China governing the audit of such financial statements may differ from those generally accepted in countries and jurisdictions other than the Republic of China.

F-2