==> picture [74 x 44] intentionally omitted <==

Silicon Integrated Systems Corp.

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

US$80,000,000 Zero Coupon Convertible Bonds due 2007

Issue Price: 100 per cent.

The US$80,000,000 Zero Coupon Convertible Bonds due 2007 (the “Bonds”, which includes the Optional Bonds (defined below), save where expressly stated otherwise) will be issued in registered form by Silicon Integrated Systems Corp. (the “Company”). Unless previously purchased and cancelled, converted or redeemed, the Bonds will be redeemed on 18 July 2007 at 119.944 per cent. of their principal amount. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation”.

ING Bank N.V. (the “Lead Manager”) is entitled at any time, in whole or in part on one or more occasions, on or after the Closing Date, to require the Company to issue up to a further US$20,000,000 aggregate principal amount of bonds which will have the same terms and conditions as, be fungible and form a single series with the Bonds initially issued (such additional bonds, the “Optional Bonds”), provided that no Optional Bonds shall be issued after 1 August 2002.

The Company will, at the option of the holder of any Bond (the “Bondholder”), redeem such Bond on 18 July 2004 at 107.545 per cent. of its principal amount. The Bonds may be redeemed, in whole or in part, at the option of the Company at any time after 18 January 2004 and prior to 18 July 2007, at their Early Redemption Amount (i) if the Closing Price of the common shares of par value NT$10 per share of the Company (the “Shares”) on the Taiwan Stock Exchange (“TSE”) translated into US dollars at the Prevailing Rate on each of the 20 consecutive Trading Days, the last of which occurs not more than ten days prior to the date upon which notice of such redemption is published, is at least 125 per cent. of the Conversion Price (as defined below) of the Bonds then in effect, translated into US dollars at the Fixed Exchange Rate (as defined below) on each such Trading Day or (ii) if at least 90 per cent. in principal amount of the Bonds has already been converted, redeemed or purchased and cancelled. The Bonds may also be redeemed in whole but not in part, at any time at the option of the Company at their Early Redemption Amount in the event of certain changes relating to Republic of China taxation. In addition, a Bondholder shall have the right to require the Company to purchase all (but not some only) of its Bonds in the event that the Company gives notice that the Shares cease to be listed or admitted to trading on the TSE at their Early Redemption Amount. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation”.

The Bonds may be converted at any time on or after 18 August 2002 and prior to 18 June 2007 into Shares except during a Closed Period. The price at which Shares will be issued upon conversion of the Bonds (the “Conversion Price”) will initially be NT$33.00 per Share subject to adjustment in the manner provided herein and with a fixed rate of exchange applicable on conversion of the Bonds of US$1.00 = NT$33.10 (the “Fixed Exchange Rate”). In addition, the Conversion Price will be adjusted (provided as described herein) on a date falling 45 days prior to each anniversary of the Closing Date in the event that the average Closing Price of the Shares converted into US dollars at the Prevailing Rate prior to each such date is less than the Conversion Price then in effect converted into US dollars at the Fixed Exchange Rate. In the event that the Market Price is lower than the Conversion Price on a Special Reset Date, a Bondholder shall be entitled (during the relevant Special Conversion Price Period) to convert its Bonds at the applicable Special Conversion Price, if the Company has given a notice in relation to such entitlement of the Bondholders on the 30th day prior to that Special Reset Date. See “Terms and Conditions of the Bonds — Conversion”. The Shares are listed on the TSE and application will be made to list the Shares issued on conversion of the Bonds on the TSE. On 10 July 2002, the Closing Price of the Shares on the TSE was NT$30.50 per Share.

Investing in the Bonds carries certain risks. See “Risk Factors”.

Application has been made to list the Bonds on the Socie´ te´ de la Bourse de Luxembourg S.A. (the “Luxembourg Stock Exchange”). Application has also been made to have the Restricted Bonds designated for trading in the Portal Market of the Nasdaq Stock Market, Inc. (the “PORTAL Market”) in the United States.

The Bonds and the Shares to be issued upon conversion of the Bonds have not been and will not be registered under the US Securities Act of 1933 (the “Securities Act”) and, subject to certain exceptions, may not be offered or sold within the United States or to, or for the account or benefit of, US persons (as defined in Regulation S under the Securities Act). The Bonds are being offered and sold outside the United States to non-US persons in reliance on Regulation S, and within the United States to qualified institutional buyers (“QIBs”) in reliance on Rule 144A under the Securities Act (“Rule 144A”). Prospective purchasers are hereby notified that sellers of the Bonds may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of these and certain further restrictions on offers, sales and transfers of the Bonds and the Shares to be issued upon conversion of the Bonds and distribution of this Offering Circular, see “Subscription and Sale” and “Transfer Restrictions of the Bonds”.

Bonds which are offered and sold in reliance on Regulation S (“Unrestricted Bonds”) will be represented by a permanent global certificate (the “Unrestricted Global Certificate”) in registered form, which will be registered in the name of a nominee of, and shall be deposited on or about the Closing Date with a common depositary for, Euroclear Bank S.A./N.V., as operator of the Euroclear System (“Euroclear”) and Clearstream Banking, socie´ te´ anonyme (“Clearstream, Luxembourg”). Bonds which are offered and sold in reliance on Rule 144A (“Restricted Bonds”) will be represented by a permanent global certificate (the “Restricted Global Certificate” and, together with the Unrestricted Global Certificate, the “Global Certificates”) in registered form, which will be deposited on or about the Closing Date with a custodian for, and registered in the name of, Cede & Co., as nominee for the Depository Trust Company (“DTC”). Beneficial interests in the Global Certificates will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear, Clearstream, Luxembourg, DTC and their participants. Except as described herein, individual certificates for Bonds will not be issued in exchange for beneficial interests in the Bonds represented by the Global Certificates. Interests in the Bonds represented by the Restricted Global Certificate will be subject to certain restrictions on transfer. See “Transfer Restrictions of the Bonds”.

Sole Bookrunner and Lead Manager

Co-Lead Managers

Bear, Stearns International Limited

Yuanta Core Pacific Securities Limited

The date of this Offering Circular is 11 July 2002

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

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

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

The Managers make no representations or warranties as to the accuracy or completeness of the information contained herein.

THE BONDS AND THE SHARES ISSUABLE UPON CONVERSION OF THE BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE US SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER US REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE OFFERING OF THE BONDS AND THE SHARES ISSUABLE UPON CONVERSION OF THE BONDS OR THE ACCURACY OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE IN THE UNITED STATES.

TO NEW HAMPSHIRE RESIDENTS: NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES 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 OF NEW HAMPSHIRE 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.

The Company has agreed that, for so long as any Bonds or any of the Shares issuable upon conversion of the Bonds representing such Shares are “restricted securities” within the meaning of Rule 144(a)(3) of the Securities Act, the Company will, during any period in which it is neither subject to Section 13 or 15(d) of the US Securities Exchange Act of 1934 (the “Exchange Act”), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner, or the Trustee for delivery to such holder, beneficial owner or prospective purchaser, in each case upon the request of such holder, beneficial owner, prospective purchaser or the Trustee the information required to be provided by Rule 144A(d)(4) under the Securities Act.

In connection with this issue, the Lead Manager may (to the extent permitted by applicable laws) over-allot or effect transactions with a view to supporting the market price of the Bonds at a level higher than that which might otherwise prevail for a limited period after the Closing Date. However, there may be no obligation on the Lead Manager to do this. Such stabilising, if commenced, may be discontinued at any time, and must be brought to an end after a limited period.

In this Offering Circular, references to the “ROC” are to the Republic of China or to the island of Taiwan and other areas under the effective control of the Republic of China and the terms “ROC”, “Republic of China” and “Taiwan” are used interchangeably.

The Company has prepared its audited consolidated balance sheet data as of 31 December 2000 and 2001 and audited consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended 31 December 1999, 2000 and 2001 and its unaudited non-consolidated financial statements as at and for the three-month periods ended 31 March 2001 and 2002 contained herein. These financial statements were prepared in conformity with generally accepted accounting principles in the ROC (“ROC GAAP”) which differ in certain material respects from generally accepted accounting principles in the United States (“US GAAP”). See “Summary of Principal Differences between ROC GAAP and US GAAP”. The Company is not required by the laws and regulations of the ROC to prepare consolidated financial statements, as all of the subsidiaries of the Company do not meet the criteria for consolidation under ROC GAAP.

Certain statements under “Summary”, “Risk factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and elsewhere in this Offering Circular constitute “forward-looking statements”. All statements other than statements of historical facts included in this Offering Circular, including, without limitation, those regarding the Company’s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to the Company’s products), are forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future and involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company or industry results to differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause the Company’s actual results or performance to differ materially from those in the forward-looking statements include, among others, political, social and economic conditions in the ROC. Additional factors that could cause actual results or performance to differ materially include, but are not limited to, those discussed in “Risk factors”. These forward-looking statements speak only as of the date of this Offering Circular.

ENFORCEABILITY OF FOREIGN JUDGEMENTS IN THE ROC

The Company is limited by shares and incorporated in the ROC under the Company Law of the ROC. Substantially all of the Company’s directors and executive officers, its supervisors and certain other parties named herein are residents of the ROC, and a substantial portion of the assets of the Company and such persons are located in the ROC. As a result, it may not be possible for investors to effect service of process upon the Company or such persons outside of the ROC, or to enforce against any of them judgements obtained in courts outside of the ROC. Any final judgement obtained against the Company or such person in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the Bonds will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that: (i) the court rendering the judgement has jurisdiction over the subject matter according to the laws of the ROC; (ii) the judgement is not contrary to the public order or good morals of the ROC; (iii) if the judgement was rendered by default by the court rendering the judgement, the Company or such persons were served within the jurisdiction of such court, or process was served on the Company or such persons with judicial assistance of the ROC; and (iv) judgements of the courts of the ROC are recognised and enforceable in the court rendering the judgement on a reciprocal basis. Remittance out of the ROC of any amount recovered from enforcing a foreign judgement in the ROC is also subject to the Foreign Exchange Control Statute and regulations as described in “Foreign Investment and Exchange Controls in the ROC” herein.

A party seeking to enforce a foreign judgement in the ROC would, except under limited circumstances, be required to obtain foreign exchange approval from the Central Bank of China (the “CBC”) for the remittance out of the ROC of any amounts recovered in respect of such judgement denominated in a currency other than NT dollars.

															Page
Summary � � � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 1
Risk Factors � � � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 15
Use of Proceeds � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 32
Exchange Rate Information � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 33
Capitalisation � � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 34
Selected Financial and Operating Data			�	�	�	�	�	�	�	�	�	�	�	�	� 35
Management’s Discussion and Analysis of Financial						Condition
and Results of Operations �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 40
Business � � � � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 57
Dividends and Dividend Policy �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 79
Market Price Information � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 80
Changes in Issued Share Capital	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 81
Description of the Shares � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	� 82
Terms and Conditions of the Bonds		�	�	�	�	�	�	�	�	�	�	�	�	�	� 87
The Global Certificates � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�119
Transfer Restrictions of the Bonds	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�124
The Securities Market of the ROC	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�126
Foreign Investment and Exchange Controls in the ROC							�	�	�	�	�	�	�	�	�130
Taxation � � � � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�135
Subscription and Sale � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�141
General Information � � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�144
Summary of Principal Differences between ROC GAAP							and	US	GAAP		�	�	�	�	�146
Financial Statements � � �	�	�	�	�	�	�	�	�	�	�	�	�	�	�	�152

In this Offering Circular, except where otherwise indicated, references to “US$” or “US dollars” are to the lawful currency of the United States, and references to “NT$” or “NT dollars” are to the lawful currency of the Republic of China. For your convenience, we have included in this Offering Circular translations of NT dollar amounts into US dollar amounts at an exchange rate of US$1.00 = NT$35.00, the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect on 29 March 2002, the last business day in that month. The translations in this Offering Circular should not be construed as a representation that those NT dollar or US dollar amounts have been, could have been or could in the future be, converted into US dollars or NT dollars, as the case may be, at any particular rate, the rate stated above or at all. In this Offering Circular, any discrepancies in any table between total and the sums of the amounts listed are due to rounding. The approximate middle market spot rate between the NT dollar and the US dollar on 10 July 2002 was US$1.00 = NT$33.10.

“SiS” is a registered trademark of Silicon Integrated Systems Corp. We have pending applications for trademark registration of the trademark “Xabre”. “Intel” and “Pentium” are trademarks of Intel Corporation. “FireWire” is a registered trademark of Apple Computer, Inc. “i.LINK” is a registered trademark of Sony Corporation. “DirectX” is a registered trademark of Microsoft Corporation.

SUMMARY

The following summary is qualified in its entirety by the more detailed information contained elsewhere in this Offering Circular.

The Company

We are a leading provider, based on revenue, of integrated and discrete core logic chipsets for the global personal computer, or PC, market. We also provide standalone graphics chips and system-on-a-chip solutions. Our major customers are motherboard makers, most of which, like us, have their headquarters in Taiwan.

Core logic chipsets are semiconductor devices located on the main circuitboards of PCs, or PC motherboards, that are integral for optimising the traffic flow and coordinating the communications between the microprocessor, memory and peripheral devices. Standalone graphics chips, or GPUs, are special purpose processors used to perform the complex computations required for high performance computer graphics.

We currently offer core logic products supporting the leading microprocessors from Intel Corporation, or Intel, and Advanced Micro Devices, Inc., or AMD, in each of the performance (priced above US$1,500), mainstream (priced from US$800 to US$1,500) and value (priced below US$800) segments of the PC market. The majority of our revenue has been generated in the value PC segment, and a portion has come from the mainstream PC segment, the largest segment of the PC market in dollar terms. Recently, we have broadened our product portfolio by developing more chipsets without an integrated GPU, referred to as discrete chipsets, which are generally higher performance products intended for mainstream and performance PCs.

We were the first to integrate a graphics processor into PC chipsets. These are referred to as integrated chipsets. More recently, we introduced the first chipset to support DDR 400 memory, one of the newest memory technologies for the Intel Pentium 4 microprocessor. We are currently selling integrated chipsets for the Pentium 4 in volume.

In 1998, we made the strategic decision to transform from a fabless design house, in which we outsourced the manufacture of our products to independent foundries, to an integrated device manufacturer, or IDM, with our own fab. Our fab is currently equipped to produce 28,000 8-inch wafers per month, which we expect will meet our needs until the end of 2003. As our business needs require, we expect to increase the capacity of our fab. We believe that owning our own fab increases our ability to control our manufacturing costs, gives us direct, dedicated access to advanced process technologies during market cycles in which foundry access is limited, allows us to bring more complex products to market faster, and makes it possible for us to more easily adjust the mix of products that we provide to our customers.

We have incurred operating losses in each of the last two years and may incur operating losses in the future. However, we have recorded operating income in two of the last three quarters, including the first quarter of 2002. Our operating results in the first quarter of 2002 reflect lower per unit manufacturing costs at our fab as a result of increased capacity and improved yields. The recent results also reflect increased average selling prices of our products although we, and the industry in general, are currently experiencing pricing pressures.

We currently have strategic technology relationships relating to our core logic product development, our intellectual property strategy, and our fab. We have licensed technology from Intel that allows us to offer core logic products for Intel’s Pentium microprocessors, and we plan to continue to license the technology standards that we will need to produce these leading-edge core logic products. In addition to dominating the market for microprocessors,

Intel also dominates the market for core logic chipset products compatible with Intel microprocessors and is, therefore, a major competitor to us in one of our most important markets. With respect to intellectual property, we have a broad patent cross-licensing agreement with IBM until the end of 2005. As part of our intellectual property strategy, we intend to continue seeking patent cross-licensing arrangements with leading technology industry participants.

We also have a broad strategic relationship with Toshiba Corporation, or Toshiba, relating to our fab. It includes agreements covering the transfer of advanced complementary metal-oxidesilicon, or CMOS, process technologies and future discussions about the transfer of more advanced process technologies, mutual second source manufacturing, and design and development of semiconductor products. Through strategic technology relationships we expect to share the risks of research and development efforts of new technologies, as well as share in design, technology know-how and process technologies.

We are subject to a proceeding before the U.S. International Trade commission and litigation in the United States District Court for the Northern District of California arising from intellectual property related claims by United Microelectronics Corporation and its affiliates. Although an administrative law judge in the International Trade Commission proceeding made a preliminary determination that the patents that we are claimed to have infringed are invalid and while we believe that we have presented meritorious defenses, due to the nature of the International Trade Commission proceeding and the District Court litigation with United Microelectronics Corporation and because the litigation is still in the pre-trial stage, we cannot estimate the effect of the proceedings, and the total expenses, or the possible loss, if any, that may ultimately be incurred in connection with the allegations.

Our Approach and Strategy

Focus on Providing a Broad Portfolio of Products Across All PC Segments and Target Graphics and Connectivity Markets. We are broadening our product portfolio by continuing to develop more discrete chipsets, more GPUs, and connectivity products for broadband and wireless communications. It is through the introduction of discrete chipsets that we intend to capture a larger market share of the mainstream and performance PC segments. In addition, we believe that our strategy of developing standalone GPUs will allow us to target large, attractive markets for these products and take advantage of our expertise and credibility in GPUs to produce and market more highly integrated core logic chipsets.
Maintain Low Cost, Leading-edge Manufacturing Through Our IDM Strategy. We believe that owning our own fab increases our ability to control our manufacturing costs, gives us direct, dedicated access to manufacturing capacity using advanced process technologies during market cycles when foundry access is limited, allows us to bring more complex products to market faster, and makes it possible for us to adjust more easily the mix of products that we are making available to our customers. We plan to introduce new process technologies, including copper-based process technology and the ability to use line widths smaller than 0.15 micron. We believe that our diverse product portfolio of both integrated and discrete core logic, as well as GPUs, connectivity and system-on-a-chip products, will enable us to increase our fab utilisation rates, further lowering our per unit costs.
Deliver Cost-effective, Technologically Advanced Products in a Rapid Time Frame. Continuously evolving microprocessor and memory technologies necessitate the rapid introduction of new core logic solutions. We intend to continue to expand our research and development activities and strategic technology relationships, maintain an aggressive product roadmap, and increase our process technology capabilities and capacity of our fab.

Maintain Intel and AMD Relationships. We believe that our product development efforts and our product acceptance have benefited significantly from our relationships with the two principal producers of x86 microprocessors, Intel and AMD. We plan to continue to allocate the resources necessary to maintain these relationships to assure access to the standards of Intel and AMD on which our future products will depend.
Leverage Strategic Technology Relationships. As part of our intellectual property strategy, we intend to continue to seek patent cross-licensing arrangements with leading technology industry participants. We currently have a broad strategic relationship with Toshiba relating to our fab. We believe that strategic technology relationships with selected global technology leaders will be an important factor in our success.
Enhance Customer Relationships and Market Penetration. We believe that the proximity of our design and manufacturing resources to our customers significantly improves our ability to provide timely and effective design assistance and support for our customers’ development of next-generation products. We intend to increase our sales and marketing efforts, not only in our primary markets to leverage our geographic proximity and close relations with motherboard makers in Taiwan and the People’s Republic of China, but also in the U.S. and Europe. Our efforts in the U.S. and Europe will focus on original equipment manufacturers, or OEMs, and end users, who are our indirect customers. We also intend to develop brand recognition for products from which we can most benefit from end-user brand awareness. For example, our new GPU products are branded under the name Xabre.

The Bonds

Company	Company	�	�	�	�	�	�	Silicon Integrated Systems Corp.
Bonds	�	�	�	�	�	�	�	US$80,000,000 Zero Coupon Convertible Bonds due
								2007; and references to “Bonds”, save where expressly
								stated otherwise, include the Optional Bonds.
Optional Bonds				�	�	�	�	The Lead Manager is entitled at any time, in whole or in
								part and on one or more occasions, on or after the
								Closing Date, to require the Company to issue up to a
								further US$20,000,000 aggregate principal amount of
								bonds which will have the same terms and conditions as,
								be fungible and form a single series with the Bonds
								initially issued, provided that no Optional Bonds shall be
								issued after 1 August 2002. References to “Optional
								Bonds” are to such additional bonds to be issued.
Issue Price		�	�	�	�	�	�	100 per cent.
Closing	Date		�	�	�	�	�	18 July 2002
Withholding		Tax		�	�	�	�	Interest (if any) and premium payable on the Bonds to
								non-residents is subject to a withholding tax in the ROC
								equal to 20 per cent. of the gross amount of interest (if
								any) and premium. The Company will pay such additional
								amounts as will result in the receipt by the Bondholders
								of the net amounts after such withholding or deduction
								being equal to the amounts which would otherwise have
								been receivable by them had no such withholding or
								deduction been required.
Status	�	�	�	�	�	�	�	The Bonds will be direct, unconditional, unsubordinated
								and unsecured obligations of the Company and will rank
								pari passu without any preference or priority among
								themselves and shall at all times rank at least equally
								with all other present and future direct, unconditional,
								unsubordinated and unsecured obligations of the
								Company, other than any obligation preferred by
								mandatory provisions of law.

Restriction on Disposal or Offering by the Company � The Company has agreed to certain restrictions on the disposal or offering by it or on its behalf of any interest in any shares or securities of the same class as the Bonds or Shares or in any securities representing interests in or convertible into, exchangeable for or which carry rights to subscribe or purchase Bonds or Shares or securities of the same class as the Bonds or Shares without the prior written consent of the Lead Manager (with certain exceptions) for a period of three months after the Closing Date. See “Subscription and Sale”. Conversion � � � � � � The Bonds are convertible at any time on or after 18 August 2002 and prior to the close of business (at the place at which the Bond is deposited for conversion) on 18 June 2007, except during any Closed Period, into Shares at a conversion price per Share (subject to adjustment as described herein) of NT$33.00 (the “Conversion Price”), determined on the basis of the Fixed Exchange Rate of US$1.00 = NT$33.10. If the Company shall establish a depositary facility for issuing American or global depositary receipts (or other scrips evidencing Shares), it shall use reasonable efforts, subject to applicable laws and regulations, (i) to procure that the depositary facility shall accept the deposit of Shares issuable upon conversion of the Bonds for the issuance of American or global depositary receipts (or other scrips evidencing Shares), and (ii) to establish arrangements for the deposit of the Shares issued upon the conversion of Bonds with the depositary bank for the issuance of American or global depositary receipts (or other scrips evidencing Shares) on behalf of a converting Bondholder; so that a converting Bondholder may elect to receive such American or global depositary receipts (or other scrips) evidencing the shares issuable to it upon conversion. See “Terms and Conditions of the Bonds — Conversion”. Conversion Price Reset � � The Conversion Price will be adjusted on the reset dates which shall be the date falling 45 days prior to 18 July 2003, 18 July 2004, 18 July 2005 and 18 July 2006 (each a “Reset Date”) in the event that the average Closing Price for the 20 consecutive Trading Days prior to the Reset Date converted into US dollars at the Prevailing Rate shall be less than the Conversion Price then in effect converted into US dollars, at the Fixed Exchange Rate provided that any adjustment to the Conversion Price pursuant to the Conversion Price Reset shall be limited so that the adjusted Conversion Price shall not be less than 80 per cent. of the initial Conversion Price prevailing on 18 July 2002 (but adjusted to reflect any anti-dilution adjustments required under the terms and conditions of the Bonds which may have occurred prior to the relevant Reset Date). See “Terms and Conditions of the Bonds — Conversion — Conversion Price reset”.

Special Conversion Price reset � � � � � � � If the Company (at its option) shall have given a notice relating to the Special Conversion Right to the Bondholders on the day which is the 30th day prior to a Special Reset Date, and the applicable Market Price is lower than the applicable Conversion Price on the Special Reset Date following such notice, a Bondholder shall be entitled (during the relevant Special Conversion Price Period) to convert its Bonds at the applicable Special Conversion Price. See “Terms and Conditions of the Bonds — Conversion — Special Conversion Price reset”. Negative Pledge � � � � The Company will not, and will not permit any of its Principal Subsidiaries to create security for the benefit of holders of any International Investment Securities or for any guarantee thereof without granting equivalent security in respect of the Bonds. See “Terms and Conditions of the Bonds — Negative pledge”. Final Redemption � � � � Unless previously redeemed, converted or purchased and cancelled, the Bonds will be redeemed at 119.944 per cent. of their principal amount in US dollars on 18 July 2007. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation — Redemption at maturity”. Redemption at the Option of the Company � � � � The Bonds may be redeemed (in whole or in part) at their Early Redemption Amount, in US dollars, at the option of the Company, at any time after 18 January 2004 and prior to 18 July 2007, upon not less than 30 nor more than 60 days’ notice to the Bondholders, (i) if the Closing Price of the Shares on the TSE (translated into US dollars at the Prevailing Rate), for a period of 20 consecutive Trading Days, the last of which occurs not more than ten days prior to the date upon which notice of such redemption is published, is at least 125 per cent. of the Conversion Price of the Bonds then in effect (translated into US dollars at the Fixed Exchange Rate) on each such Trading Day; or (ii) at least 90 per cent. in principal amount of the Bonds has already been converted, redeemed or purchased and cancelled. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation — Redemption at the option of the Company”. Early Redemption Amount � � Principal amount plus premium. Premium is equal to US$1,000 x 19.944% x Days Outstanding � 1,800 where “Days Outstanding” is the number of days from the Closing Date to (but excluding) the date of redemption calculated on the basis of a year of 360 days consisting of 12 months of 30 days each and in the case of incomplete month, the number of days elapsed.

Redemption at the Option of Bondholders � � � � � The Company will, at the option of a Bondholder, redeem all or some only of the Bonds of that holder on 18 July 2004 at 107.545 per cent. of their principal amount. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation — Redemption at the option of Bondholders”. Delisting Put Right � � � � A Bondholder shall have the right, at such Bondholder’s option, to require the Company to purchase all (but not some only) of such Bondholder’s Bonds at their Delisting Put Amount, in the event that the Company gives notice that the Shares cease to be listed or admitted to trading on the TSE. See “Terms and Conditions of the Bonds — Delisting Put Right”. Tax Redemption � � � � The Company may, at any time, redeem all (but not some only) of the Bonds at their Early Redemption Amount in the event of certain changes in ROC taxation which would require the Company to gross up for payments of principal or payments of premium or interest (if any) at a rate exceeding 20 per cent. See “Terms and Conditions of the Bonds — Redemption, purchase and cancellation — Redemption for taxation reasons”. Form and Denomination of the Bonds � � � � � The Bonds will be issued in registered form in the denomination of US$1,000 each. The Bonds will be offered and sold in principal amounts of US$1,000 or integral multiples thereof and will be transferable in principal amounts of US$1,000 or an integral multiple thereof. Bonds which are offered and sold in reliance on Regulation S will be represented by the Unrestricted Global Certificate which will be deposited on or before the Closing Date with a common depositary for, and registered in the name of a nominee of, Euroclear and Clearstream, Luxembourg. Bonds which are offered and resold in reliance on Rule 144A will be represented by the Restricted Global Certificate, which will be deposited on or before the Closing Date with a custodian for, and registered in the name of, Cede & Co., as nominee for DTC. Interests in the Restricted Global Certificate will be subject to certain restrictions on transfer. Beneficial interests in the Bonds represented by Global Certificates will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear, Clearstream, Luxembourg, DTC and their participants. Except as described herein, certificates for Bonds will not be issued in exchange for beneficial interests in the Global Certificates. Governing law � � � � � English law Trustee � � � � � � � The Bank of New York Listing � � � � � � � Application has been made to list the Bonds on the Luxembourg Stock Exchange. The Shares are listed on the TSE and application will be made for the Shares to be issued upon conversion of the Bonds to be listed on the TSE. Application has been made to have the Restricted Bonds designated for trading in the PORTAL Market.

Summary Financial and Operating Data

The following summary consolidated balance sheet data as of 31 December 2000 and 2001, and the summary consolidated statement of income data for the years ended 31 December 1999, 2000 and 2001 have been derived from our audited consolidated financial statements included elsewhere in this Offering Circular. The summary consolidated balance sheet data as of 31 December 1999, has been derived from our audited consolidated financial statements, which are not included in this Offering Circular.

As a result of our common shares being listed on the Taiwan Stock Exchange, we are required on an on-going basis to file with the Taiwan Stock Exchange unaudited unconsolidated financial statements for interim quarterly financial periods. Although, by their nature, unconsolidated financial statements are not comparable with consolidated financial statements, our unconsolidated financial statements do not differ materially from our consolidated financial statements. The following summary unconsolidated balance sheet data as of 31 March 2001 and 31 March 2002, and the summary unconsolidated statement of income data for the three months ended 31 March 2001 and 31 March 2002 have been derived from our unaudited unconsolidated financial statements included elsewhere in this Offering Circular. Results for the three months ended 31 March 2002 are not necessarily indicative of the results that may be expected for the year ending 31 December 2002.

The financial statements have been prepared and presented in accordance with ROC GAAP, which differs in certain respects from US GAAP. For a discussion of material differences between ROC GAAP and US GAAP as applied to our financial statements, see “Summary of Principal Differences between ROC GAAP and US GAAP”.

The summary financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes to those statements included elsewhere in this Offering Circular.

For your convenience, we have included in this summary financial data translations of NT dollar amounts into US dollar amounts at an exchange rate of US$1.00 = NT$35.00, the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect on 29 March 2002, the last business day in that month. These translations should not be construed as a representation that those NT dollar or US dollar amounts have been, could have been or could in the future be, converted into US dollars or NT dollars, as the case may be, at any particular rate, the rate stated above or at all.

							Year Ended 31 December	Year Ended 31 December	Year Ended 31 December
						1999	2000		2001	2001
						(NT$)	(NT$)		(NT$)	(US$)
							(In millions, except per share data)
Consolidated Statement of Income		Data:
Net revenue � � � � �	�	�	�	�	�	10,845	7,821		9,987	285
Cost of revenue � � � �	�	�	�	�	�	7,077	7,503		7,441	212
Gross profit � � � � �	�	�	�	�	�	3,768	318		2,546	73
Operating expenses:
Research and development	�	�	�	�	�	742	1,194		1,883	54
Marketing and sales � �	�	�	�	�	�	999	723		602	17
General and administrative	�	�	�	�	�	369	335		566	16
Total operating expenses �	�	�	�	�	�	2,110	2,252		3,051	87
Income (loss) from operations	�	�	�	�	�	1,658	(1,934)		(505)	(14)
Total non-operating income �	�	�	�	�	�	194	1,195		218	6
Total non-operating expenses	�	�	�	�	�	25	150		800	23
Income (loss) before income tax	�	�	�	�	�	1,827	(889)	(1,087)		(31)
Income tax benefit � � �	�	�	�	�	�	132	663		478	14
Income (loss) before minority interest			�	�	�	1,959	(226)		(609)	(17)
Minority interest in loss of subsidiaries			�	�	�	1	—		1	—
Net income (loss) � � �	�	�	�	�	�	1,960	(226)		(608)	(17)
Earnings (loss) per share �	�	�	�	�	�	2.30	(0.21)		(0.57)	(0.02)
Weighted average number of shares		outstanding
(retroactively adjusted for subsequent			stock
dividends and employee stock bonuses
distributed) � � � �	�	�	�	�	�	851	1,071		1,065	1,065
							As of 31 December
						1999	2000		2001	2001
						(NT$)	(NT$)		(NT$)	(US$)
							(In millions, except per share data)
Consolidated Balance Sheet Data:
Cash � � � � � �	�	�	�	�	�	12,530	2,928		2,963	85
Working capital � � � �	�	�	�	�	�	10,288	3,450		2,350	67
Long-term investments � �	�	�	�	�	�	796	584		1,664	48
Net property, plant and equipment		�	�	�	�	7,276	23,004	21,823		624
Total assets � � � � �	�	�	�	�	�	24,791	35,274	36,229		1,035
Total current liabilities � �	�	�	�	�	�	5,645	6,657		7,401	211
Bonds payable — net of current	portion		�	�	�	—	3,000		2,570	73
Long-term bank loans — net of current portion					�	—	7,000		7,377	211
Shareholders’ equity � � �	�	�	�	�	�	18,975	18,368	18,193		520

											Three	Months Ended 31	Months Ended 31	March
											2001		2002	2002
											(NT$)		(NT$)	(US$)
											(In millions, except per share data)
Unaudited Unconsolidated		Statement of Income Data:
Net revenue � � �	�	�	�	�	�	�	�	�	�	�	2,402	3,576		102
Cost of revenue � �	�	�	�	�	�	�	�	�	�	�	1,829	2,485		71
Unrealised intercompany	transaction — net					�	�	�	�	�	—		—	—
Gross profit � � �	�	�	�	�	�	�	�	�	�	�	573	1,091		31
Operating expenses:
Research and development�			�	�	�	�	�	�	�	�	459		449	13
Marketing and sales	�	�	�	�	�	�	�	�	�	�	159		316	9
General and administrative �			�	�	�	�	�	�	�	�	65		165	4
Total operating expenses	�	�	�	�	�	�	�	�	�	�	683		930	26
Income (loss) from operations�			�	�	�	�	�	�	�	�	(110)		161	5
Total non-operating income		�	�	�	�	�	�	�	�	�	49		28	1
Total non-operating expenses�			�	�	�	�	�	�	�	�	146		163	5
Income (loss) before income		tax	�	�	�	�	�	�	�	�	(207)		26	1
Income tax benefit �	�	�	�	�	�	�	�	�	�	�	—		—	—
Net income (loss)� �	�	�	�	�	�	�	�	�	�	�	(207)		26	1
Earnings (loss) per share
Basic � � � �	�	�	�	�	�	�	�	�	�	�	(0.20)		0.02	0.0007
Diluted � � � �	�	�	�	�	�	�	�	�	�	�	(0.20)		0.02	0.0007
Shares used in earnings (loss) per share calculation
Basic � � � �	�	�	�	�	�	�	�	�	�	�	1,060	1,071		1,071
Diluted � � � �	�	�	�	�	�	�	�	�	�	�	1,060	1,084		1,084
												As of 31 March
											2001		2002	2002
											(NT$)		(NT$)	(US$)
											(In millions, except per share data)
Unaudited Unconsolidated		Balance Sheet				Data:
Cash � � � � �	�	�	�	�	�	�	�	�	�	�	1,478		2,298	66
Working capital � �	�	�	�	�	�	�	�	�	�	�	3,325		2,068	59
Long-term investments	�	�	�	�	�	�	�	�	�	�	596		1,691	48
Net property, plant and equipment				�	�	�	�	�	�	�	22,635	21,114		603
Total assets � � �	�	�	�	�	�	�	�	�	�	�	34,631	36,228		1,035
Total current liabilities	�	�	�	�	�	�	�	�	�	�	5,636		8,105	232
Bonds payable — net of current			portion		�	�	�	�	�	�	3,000		2,140	61
Long-term bank loans —	net	of current portion					�	�	�	�	7,000		7,171	205
Shareholders’ equity �	�	�	�	�	�	�	�	�	�	�	18,160	18,219		521

RISK FACTORS

An investment in the Bonds involves a high degree of risk. You should carefully consider the risks described below and other information in this Offering Circular before making an investment decision. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, may also become important factors that affect us. If any of the following events actually occur, our business, financial condition and results of operations could be harmed. In that event, the trading price of the Bonds and our common shares could decline and you may lose all or part of your investment.

Risks Relating to Our History of Losses and Fluctuations in Our Revenue and Earnings

We have incurred operating losses in each of the past two years, and we may not be able to achieve and maintain profitability in the future

We have incurred operating losses in each of the last two years and we may incur operating losses in the future. We incurred net losses of NT$608 million (US$17 million) in 2001 and NT$226 million in 2000, as compared to net income of NT$1,960 million in 1999, as a result of increased costs and production constraints as we transitioned from designing our products for fabrication by third parties to manufacturing our products in our own facility, as well as the cyclical downturn in the personal computer industry. We cannot assure you that profitability will be restored and maintained in future periods.

Our operating results are subject to significant fluctuations, which could harm the market value of your investment

Our operating results have varied significantly from period to period and may continue to vary in the future. Downward fluctuations in our operating results may result in decreases in the market price of the Bonds and our common shares. Among the more important factors affecting our quarterly and annual operating results are the following:

market acceptance of our new products;
timeliness of our new product introductions in relation to market windows and our customers’ product design cycles;
high concentration of sales to a few customers;
cyclicality in the market for personal computers, or PCs, incorporating our products;
our ability to quickly adjust to unanticipated declines in demand and market prices for our products in light of our high percentage of fixed costs;
capacity utilisation and yields in our semiconductor manufacturing facility, particularly as we transition to new products or process technologies; and
timing of capital expenditures in anticipation of future orders.

We have at times, including in recent periods, been unable to predict our operating results, and it is possible that our future operating results may be below our projections or the expectations of research analysts and investors. If so, the market price of the Bonds and our common shares, and therefore the market value of your investment, may fall.

Since we are dependent on the market for personal computers, our revenues and earnings may fluctuate significantly

Our operating results depend, to a large degree, on conditions in the market for personal computers which tends to be highly cyclical. In 2001, we derived most of our revenue from the sale of products for use in PCs, principally in the value segment of the PC market, meaning those personal computers priced below US$800. We expect to continue to derive most of our revenue from the sale of products for use in personal computers. Any significant decrease in the demand for personal computers would likely decrease the demand for our products and may result in a decrease in our revenue and earnings. If the industry’s current downturn, which began in early 2001, does not improve or deteriorates further, there will likely be further downward pressure on the average selling prices for our products and we may ship fewer products. Many of our costs are fixed or difficult to reduce and we will not be able to reduce them quickly enough to offset declines in revenue. Conversely, if market conditions improve unexpectedly, we may not be able to increase production quickly enough to satisfy the demands of our customers, resulting in lost revenue opportunities and dissatisfied customers. In addition, the historical and continuing trend of declining average selling prices of personal computers places significant pressure on the prices of the components that go into personal computers, including our products, which could harm our revenue and margins. Furthermore, as new personal computers are introduced, selling prices of older models generally decline, leading to decreases in the prices that our customers are willing to pay for our products that are incorporated into these older models.

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

Our customers generally place purchase orders not more than one month before shipment. In addition, due to the cyclical nature of the personal computer industry, our customers’ purchase orders have varied significantly from period to period. As a result, we do not typically operate with any significant backlog. The lack of significant backlog makes it difficult for us to forecast our revenue in future periods. Moreover, our expense levels are based in part on our expectations of future revenue and we may be unable to adjust costs in a timely manner to compensate for revenue shortfalls.

Risks Relating to Intellectual Property

We are subject to a proceeding before the U.S. International Trade Commission and litigation in the United States District Court for the Northern District of California arising from claims by United Microelectronics Corporation and affiliates, and the litigation and/or the proceeding could harm our business whether or not determined adversely

In January 2001, United Microelectronics Corporation, together with its affiliates UMC Group USA Inc. and United Foundry Service, Inc., collectively referred to as UMC, filed a complaint against us with the U.S. International Trade Commission, or ITC, to bar us from importing or selling products into the United States that UMC asserts infringe two U.S. patents nos. 6,117,345 and 5,559,352, referred to as the ‘345 and ‘352 patents, respectively. UMC also requested a permanent cease and desist order and any other penalties the ITC deems appropriate. The ITC commenced an investigation in February 2001 based on UMC’s complaint. Evidentiary hearings on the merits of UMC’s claims were held before an ITC administrative law judge in late 2001. We asserted defenses including non-infringement, patent invalidity and the “no domestic industry” defense. In addition, the administrative law judge was asked to determine whether alternative processes that we have developed infringe the patents. On 6 May 2002, the administrative law judge issued his initial determination in the form of a recommendation to the ITC. The administrative law judge found that both the ‘345 patent and the ‘352 patent were invalid. In addition, the administrative law judge found that even if the ‘345 patent and ‘352 patent were valid, the ‘352 patent was not infringed and that an alternative process technology that we have developed would not infringe the ‘345 patent. Both parties have petitioned the ITC for review of particular aspects of the initial determination made by the administrative law judge. The ITC has granted both requests for review and

provided that the parties may submit related briefs to the ITC in July 2002. The expected date for the final determination by the ITC in the investigation is 6 September 2002. If the ITC does not follow the administrative law judge’s initial determination and UMC were to prevail in the ITC proceeding, the ITC has the authority to issue an exclusion order restricting importation into the United States of products covered by that exclusion order. The ITC does not have the authority to award monetary damages. If the ITC were to issue an exclusion order, the exclusion order could be limited in scope to our core logic chipset products, or could be broader in scope, covering third party motherboards or personal computers incorporating our chipset products. In addition, if the ITC were to issue an exclusion order, the exclusion order could cover all of these products or could be limited in scope to products consisting of or containing core logic chipsets produced by us prior to implementation of the alternative process. We do not currently export any of our core logic chipset products directly to the United States, although third party motherboards and personal computers incorporating our chipsets are imported into the United States.

In addition, in December 2000, United Microelectronics Corporation, together with its affiliate UMC Group USA, Inc., referred to as plaintiffs, filed a civil complaint against us in the U.S. District Court for the Northern District of California seeking monetary damages, and injunctive and other equitable relief. The suit alleges that we have infringed plaintiffs’ intellectual property rights, including infringement of the ‘345 patent and an additional U.S. patent no. 5,580,701, referred to as the ‘701 patent, and misappropriated trade secrets, engaged in unfair competition in violation of federal and state law, breached non-disclosure agreements, intentionally interfered with plaintiffs’ contracts with certain of its former employees, and been unjustly enriched at plaintiffs’ expense. We answered the complaint, disputing plaintiffs’ claims and raising various defenses including non-infringement and invalidity of the ‘345 patent and the ‘701 patent. Discovery in the matter is ongoing, and the parties are awaiting the results of a claim construction hearing in April 2002 for the ‘701 patent. The ‘345 patent claim has been stayed pending resolution of the ITC proceeding described above. No trial date has been set in the litigation.

While we believe that we have presented meritorious defenses, due to the nature of the ITC proceeding and the litigation with UMC and because the litigation is still in the pre-trial stage, we cannot estimate the effect of the proceedings, and the total expenses, or the possible loss, if any, that may ultimately be incurred in connection with UMC’s allegations. Whether or not UMC succeeds in the ITC proceeding or in the litigation, we have incurred substantial costs in connection with defending ourselves and implementing alternative processes and designs. We cannot ensure that UMC will not succeed in the ITC proceeding in obtaining an exclusion order that would restrict the importation into the United States of our core logic chipset products, or third party motherboard or personal computer products incorporating our chipset products, that use technology found to be infringing. We cannot ensure that UMC will not succeed in the litigation in obtaining significant monetary damages or injunctive or other equitable relief. If UMC succeeds in the ITC proceeding or the litigation, we may be forced to seek to negotiate a license, which may not be available on commercially reasonable terms, if at all, incur further costs implementing alternative processes, or if our efforts to seek a license or implement alternative processes are unsuccessful, to outsource production to third party fabs. In addition, we cannot ensure that we would be successful at implementing alternative processes or outsourcing production to third party fabs in a timely fashion, if at all. Any one of these developments could place substantial financial and administrative burdens on us, hinder our business, and have a material adverse effect on our financial condition and operating results.

Claims that our products or processes infringe intellectual property rights of third parties could harm our competitive position and results of operations

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 until they are granted. Due to the complexity of the technology used and the multitude of patents, copyrights and other overlapping intellectual property rights, the semiconductor industry is characterised by frequent litigation regarding patent, trade secret and other intellectual property rights. It is common for patent owners to assert their patents against semiconductor manufacturers.

We have received from time to time communications from third parties alleging that their patents cover certain of our technologies and alleging infringement of intellectual property rights of others, and we may occasionally receive such communications in the future. Currently, we are reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, and the Syndia Corporation, claiming that our technologies infringe patents held by them. During 2001, we held meetings with National Semiconductor in which we discussed the reasons why we believe that our technology does not infringe patents asserted by them. We do not believe that we infringe any rights of third parties which have been brought to our attention. We cannot assure you that we do not infringe proprietary rights of third parties of which we are unaware.

Prosecuting and defending intellectual property lawsuits and related legal and administrative proceedings could result in substantial expense to us and significant diversion of effort of our personnel. In the event any third party were successful in a claim that our products or processes infringed its intellectual property, we may be required to:

seek licenses to the infringed technology, which may not be available to us on commercially reasonable terms, if at all;
discontinue using the infringing technologies, which could cause us to stop manufacturing some or all of our products;
pay substantial monetary damages; and/or
seek to develop non-infringing technologies, which may not be feasible and which might cause a market window to be missed.

Any one of these developments could place substantial financial and administrative burdens on us and hinder our business. If we fail to obtain necessary licenses or if litigation relating to patent infringement or other intellectual property matters occurs, it could prevent us from designing or manufacturing products or applying particular technologies, which could reduce our opportunities to generate revenue.

Any inability to obtain, preserve and defend our intellectual property rights could harm our competitive position

Our success and future growth depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our business and operating results.

Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of our patents or trademark registrations. In addition, we file patent registration applications solely in the United States, the ROC and, more recently, the People’s Republic of China. Competitors may manufacture and/or sell their products in other countries without infringing our patents. As a result of these factors, our patent and trademark applications and patents may not provide us with a significant competitive advantage.

We may be required to spend significant resources to secure and police our intellectual property rights. We may not be able to detect infringement in a timely fashion, if at all, and our competitive position may be harmed if we fail to do so. In addition, competitors may design around our technology or develop competing technologies. It may be difficult or impossible to protect our intellectual property in some foreign countries where intellectual property rights are unavailable or limited. Even if we prevail in any litigation to protect our intellectual property rights, the litigation may be expensive and cause a substantial drain on our cash and management resources.

Risks Relating to Intel’s Influence in the Microprocessor and Chipset Markets

If we are unable to obtain timely and cost-effective licenses to new microprocessor bus architectures developed by microprocessor companies such as Intel Corporation, we may be unable to create compatible core logic chipset products at competitive prices and bring them to market in a timely fashion, which would harm our business and operating results

We develop core logic chipsets that connect microprocessors, system memory and other system peripherals. To market compatible core logic chipsets, we must timely obtain a license or access from microprocessor providers such as Intel Corporation, or Intel, or Advanced Micro Devices, Inc., or AMD, relating to the bus architectures employed among the microprocessor, memory and core logic chipsets. For each new generation of microprocessor, if we do not receive a license or access in time to make available compatible core logic chipset products when they are available from our competitors, including Intel, our current and potential customers may design our competitors’ products into their systems instead of our own, which would seriously harm our business and operating results. In addition, if any royalty payments we make for these licenses require us to significantly raise the price of our products relative to those of our competitors, it would harm our business and operating results.

Significant competition from Intel, upon whom we depend for licenses to microprocessor bus architectures, may harm the average selling prices of our products or otherwise harm our business and results of operations

Intel has dominated the market for microprocessors used in personal computers for many years, and as a result has been able to influence microprocessor and personal computer system standards. Intel also dominates the market for core logic chipset products compatible with Intel processors and may leverage its leadership position in the microprocessor market, its financial strength and the high cost of the microprocessor relative to other components within the personal computer, to harm our competitive position relative to Intel. For example, Intel presently markets and/or bundles its core logic chipsets with its microprocessors, which gives it a significant advantage over its competitors and Intel has announced aggressive price reductions for its Pentium 4 core logic chipsets which has put pricing pressure on our products and the industry in general. In addition, Intel could integrate the functionality available from our products into its microprocessors. This could harm our ability to sell our core logic chipset products, or undercut the price of our products to our customers.

Due to the widespread adoption of Intel’s microprocessor architecture, Intel has the ability to set or influence key industry standards in ways that may harm our competitive position relative to Intel. Any significant modifications by Intel to the microprocessor or other aspects of the microprocessor architecture of the personal computer, or the timing of any modifications, could force us to incur increased costs or cause incompatibility with our technology and harm our competitiveness and results of operations.

Intel has significantly greater financial resources and brand recognition than we have among personal computer manufacturers and other personal computer industry participants, and we expect Intel to invest heavily in research and development and in marketing and selling campaigns to engender brand loyalty with personal computer manufacturers and users. Accordingly, certain original equipment manufacturers, or OEMs, may choose to buy core logic chipsets exclusively or primarily from Intel, making those OEMs unavailable to us as customers.

If Intel grants a license to the current version or any future versions of its Pentium 4 microprocessor bus architecture to our competitor VIA Technologies, Inc., competition for our products could increase and our profitability could suffer

Our sales and revenues for our Pentium 4-based chipset products have benefited from the fact that Intel has granted us a license to its Pentium 4 microprocessor bus architecture but has not granted any license to this technology to our closest competitor, VIA Technologies, Inc., or VIA. Potential customers for the Pentium 4-based chipset products of VIA, particularly first-tier motherboard makers, may be less willing to purchase these VIA products because of the threat

of litigation from Intel. In the event that Intel grants a license to its Pentium 4 microprocessor bus architecture to VIA, competition for our Pentium 4-based products could increase and create pressure to decrease our average selling prices for these products and decrease the number of units we are able to sell, which would harm our business and operating results.

Risks Relating to Our Strategy of Being An Integrated Device Manufacturer

If we are unable to maintain and improve our capacity, capacity utilisation and manufacturing yields and optimise our use of different process technologies, our business and operating results will suffer

Our ability to restore and maintain our profitability depends, in part, on our ability to maintain and improve our capacity, capacity utilisation and manufacturing yields, and optimise the relative number of wafers manufactured using different process technologies, referred to as our technology mix. Our capacity, or the maximum number of wafers we are able to process at a given time, and our capacity utilisation affect our operating results because a large percentage of our operating costs are fixed. Increases or decreases in our capacity or capacity utilisation rates can have a significant effect on our gross margins since the unit cost of our products generally decreases as fixed costs are allocated over a larger number of units. In 2000, we had low capacity and yields at our fab, which adversely affected our margins. In 2001, we experienced lower than anticipated capacity utilisation in our operations due to a combination of lower than expected growth in demand and manufacturing delay problems associated with the start-up nature of our new fab. As a result, we experienced reduced margins during that period. Our manufacturing yields directly affect costs, delivery schedules and volumes delivered, and accordingly our ability to attract and retain customers and attain profitability. Our technology mix affects how efficiently we utilise our equipment and process technologies, which can affect our margins. If we are unable to maintain and improve our capacity, capacity utilisation, and manufacturing yields or to optimise the technology mix of our wafer production, our margins and ability to achieve and maintain profitability may substantially decline.

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

Our manufacturing processes are highly complex, require advanced and costly equipment and are continuously being modified to improve manufacturing yields and product performance. Impurities or other difficulties in the manufacturing process or defects with respect to equipment or supporting facilities can lower manufacturing yields, interrupt production or result in loss of products in process. As system complexity has increased and process technology has become more advanced, manufacturing tolerances have been reduced and requirements for precision have become even more demanding. From time to time we may experience production difficulties that cause delivery delays and quality control problems. In particular, we may encounter the following problems:

difficulties in increasing production at existing and new facilities;
difficulties in upgrading or expanding existing facilities, including construction delays during expansions of our clean-rooms and other facilities;
difficulties in changing or upgrading our process technologies;
raw materials shortages and impurities;
difficulties in hiring and retaining qualified personnel; and
capacity constraints due to changes in product mix or the delayed delivery of equipment critical to our production.

After becoming an integrated device manufacturer in 2000, we experienced delayed deliveries of equipment, personnel shortages and difficulties in refining production processes at our fab. These problems resulted in capacity constraints and low and inconsistent yields, as well as quality control problems which adversely affected our relationships with our customers.

Any difficulties we encounter with our manufacturing process may have a greater adverse effect on us than would otherwise result because our 8-inch fab is currently our only manufacturing facility. If we encounter difficulties in the manufacturing process, these difficulties may increase our costs, cause quality control problems and delay product shipments to customers.

Capital requirements for new manufacturing capacity are high, and we may not be able to implement our planned growth or development if we are unable to meet our future capital requirements

The current capacity at our fab is 28,000 8-inch wafers per month. We expect this capacity to meet our needs until the end of 2003. As our business needs require, we expect to increase the capacity of our fab and to enhance our fab by introducing copper-based process technologies.

Our ability to obtain external financing in the future is subject to a variety of uncertainties, including:

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

Therefore, sufficient external financing may not be available to us on a timely basis, on acceptable terms or at all. As a result, we may be forced to curtail expansion plans, reduce research and development efforts, delay plans to increase the size of our sales force or delay the deployment of new technologies and products and become less competitive, which could result in a loss of customers and limit the growth of our business.

Failure to transition or difficulties in transitioning to new manufacturing process technologies could affect our ability to compete effectively

Our strategy is to employ the most advanced semiconductor process technology appropriate for our products. Use of these advanced processes may create a greater risk of initial yield problems. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. All of our current process technology is based on 0.15 micron and 0.18 micron technology. We continuously evaluate the benefits of migrating to smaller process technology geometries in order to improve performance and reduce costs. In the future, we will need to transition to increasingly smaller geometries in order to maintain our competitive position. Other companies in the industry have experienced difficulty in migrating to smaller geometries and to new manufacturing processes and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may experience similar difficulties.

Although we have an internal research and development team focused on developing new semiconductor manufacturing process technologies, we are dependent to a significant degree on our technology relationships to advance our portfolio of technologies. We currently have a strategic technology relationship with Toshiba Corporation for advanced process technologies, including complementary metal-oxide silicon technology, or CMOS, and a patent crosslicensing agreement with International Business Machines Corp, or IBM, for process-related patents. We can give no assurance that in the future we will be able to independently develop, or secure from third parties, the technology required for upgrading our process technologies, and our failure to successfully obtain such technology may seriously harm our competitive position.

Any environmental claims or failure to comply with any present or future environmental regulations may require us to spend additional funds and may harm our financial condition and operating results

As an integrated device manufacturer, we are subject to a variety of regulations relating to the usage, storage, discharge and disposal of chemicals and gases used in our manufacturing processes. The manufacture of our products generates gaseous chemical wastes, liquid wastes, waste water and other industrial wastes in various stages of the manufacturing process. We, together with other companies located in the Hsinchu Science-Based Industrial Park, receive assistance with the disposal of industrial wastes from the Science-Based Industrial Park Administration. The operations at our facilities are subject to regulation and periodic monitoring by the ROC Environmental Protection Administration, and the local environmental protection authorities, including the Science-Based Industrial Park Administration and the Environmental Protection Bureau of Hsinchu City. Environmental claims or the failure to comply with current or future regulations could result in the assessment of damages or imposition of fines against us, suspension of production or cessation of operations. New regulations could require us to acquire costly equipment or to incur other significant expenses. Any failure by us to control the use of, or adequately restrict the discharge of, hazardous substances could subject us to future liabilities.

Risks Relating to Hiring and Retaining Key Personnel

If we lose one or more of our key personnel without adequate replacements, our operations and business will suffer

Our future success depends on the continued service of our key executive officers. We are particularly dependent upon the continued service of our chief executive officer, S. Samuel Liu. We do not carry key person insurance on any of our personnel. If we lose the services of any of our key executive officers, it could be very difficult to find and integrate replacement personnel, which could seriously harm our operations and the growth of our business.

Our business could suffer if we are unable to retain and recruit qualified personnel

We depend on the continued availability of skilled technical and other personnel. Our business could suffer if we lose the services of these personnel and cannot adequately replace them. In addition, we will be required to increase substantially the number of these employees in connection with any expansion of our business, including the planned expansion of our worldwide sales force. We seek to recruit highly qualified personnel and there is intense competition for their services in the Taiwan semiconductor industry. In addition, we may need to increase employee compensation levels in order to attract and retain our existing employees and the additional personnel that we expect to require.

Risks Relating to Customer Concentration

Dependence on a limited number of customers may harm our revenue and profitability

The degree to which our sales are concentrated among a limited number of customers varies over time, and tends to increase during industry downturns, such as the one we are currently experiencing. We have derived and expect to continue to derive a large portion of our revenue from a small group of customers during any particular period. In particular, Elitegroup Computer Systems and Asustek Computer Inc., together with their affiliated companies, accounted for 52.1 per cent. and 13.4 per cent., respectively, of our net revenue in 2001. Our five largest customers and their affiliated companies, together accounted for 70.7 per cent., 76.9 per cent. and 82.5 per cent. of our net revenue in 1999, 2000 and 2001, respectively.

Dependence on a limited number of customers exposes us to increased risk that we will not achieve our revenue or profitability goals, as well as increased risk of delayed or missed accounts receivable collection. In particular, in the past our customers have used the leverage created by the volume of their purchases to request discounts and other price concessions from us, forcing us to choose between lower revenue or lower margins. We need to increase the number of our customers and decrease our dependence on our largest customers in order to reduce pricing pressure.

Most of our key customers manufacture motherboards for personal computers. A significant portion of these companies are relatively small, have limited operating histories and financial resources, and are highly exposed to the cyclicality of the personal computer industry. We expect that we will continue to be dependent upon a relatively limited number of large customers for a significant portion of our revenue, especially during industry downturns such as the one we experienced in the past year. Loss or cancellation of business, or pricing pressures, from our most significant customers therefore could significantly reduce our net revenue and profitability.

Risks Relating to the Competitiveness of Our Products

If we are unable to compete favourably with other core logic chipset and graphics processor providers, our revenue and margins will be harmed

The market for core logic chipset and graphics processor products is very competitive both in Taiwan and internationally. We face competition from a number of sources, including fabless semiconductor companies, such as VIA, NVIDIA Corporation, or NVIDIA, ATI Technologies, Inc., or ATI, and Acer Laboratories, Inc., or ALi, that focus exclusively on design and marketing, and other integrated device manufacturers, such as Intel. Some of our competitors, such as Intel, VIA and, with respect to graphics technology, NVIDIA and ATI, may have access to more advanced technologies and have greater financial and other resources, and may enjoy greater brand recognition, than we do. We believe that the principal competitive factors in the markets for our products are:

time to market;
product performance and features;
price;
reliability of supply;
product reliability; and
brand name.

Most of our customers obtain products from more than one source, and many of our competitors have shown a willingness to quickly and sharply reduce prices. Any renewed erosion in the prices for our products could cause our revenue and margins to decrease and harm our financial condition and operating results.

We need to develop new product designs and successfully manage the transition to these new designs and new technologies in order to maintain our competitive position

Our industry is characterised by short product life cycles and rapid increases in the complexity of products. Accordingly, developing new products and managing the transition to new products is crucial to our business. If we do not anticipate changes in technology and rapidly develop new and innovative products, we may not be able to provide sufficiently advanced products at competitive prices within the applicable market window or our customers’ product design cycles. As a result, we expect that we will need to constantly offer, on an ongoing basis,

increasingly advanced and cost-effective product designs with the features and functionality demanded by our customers before or when these features are offered by our competitors in order to respond to competitive industry conditions and increasing customer requirements. This will require that we:

anticipate the features and functionality that consumers will demand;
incorporate those features and functionality into products that meet the exacting requirements for features, quality and reliability of our customers;
introduce our products to the market in the volumes and within the narrow time period required by our customers;
achieve market acceptance of our and our customers’ products; and
manufacture our products in a cost-effective manner so that we may price our products competitively.

We have in the past experienced delays in the development of some new products. We cannot assure you that in the future we will be able to independently develop, or secure from third parties, the technology required for upgrading our product technologies, and our failure to successfully obtain such technology may seriously harm our competitive position. In addition, part of our strategy in developing new products is to utilise the advanced semiconductor process technology appropriate for our products. However, the use of advanced processes has in the past resulted in initial yield problems. Accordingly, we may not successfully develop or introduce new products in sufficient volumes within the appropriate time to meet market demand for our products. Our failure to develop, introduce or achieve market acceptance for new products on a timely basis would harm our business.

If we fail to efficiently manage the process of ramping up production of new products and phasing out production of older products with lower average selling prices, we may be unable to meet customer demand, and may experience lower margins or incur obsolete inventory expenses in connection with our older products

The introduction of new products and advances in technology may result in lower initial yields and other production delays that may harm our ability to deliver new products to our customers in the volumes they require. Our operating results will depend on our ability to estimate the demand for our new products and achieve volume production of these new products in time to meet demand. If we fail to meet demand for our new products, it may harm our competitive position and operating results.

In addition, the introduction of new products typically leads to declining average selling prices for products based on older technologies or processes. As a result, if we cannot reduce the costs associated with products based on older technologies or processes, the profitability of a given product, and our overall profitability, may decrease over time. Accordingly, our operating results will also depend on our ability to estimate the demand for our older products and reduce the costs associated with manufacturing our older products. If we fail to accurately forecast the demand for our older products and reduce the costs of manufacturing these older products, we may be unable to sell manufactured older products at a profit, or at all, which would result in expenses in connection with write-offs of obsolete inventory and harm our operating results.

Risks Relating to New Markets and New Products

If our core logic chipset products do not achieve greater penetration into the mainstream and performance segments of the personal computer market, our business and competitive position could suffer

Much of our future business strategy, growth and profitability depend on increasing demand for our products among the mainstream and performance segments of the personal computer

industry, particularly OEMs. While competition in the semiconductor industry is intense generally, it is particularly difficult for companies targeting the value personal computer segment to be profitable because of extreme price pressure and low margins. Mainstream and performance personal computer manufacturers generally look for the following qualities in their chipset and semiconductor component suppliers:

ability to bring products with advanced features to market on a timely basis;
leading design capabilities;
high-quality, reliable products;
competitive price and payment terms;
efficient order handling and fast delivery;
good customer service;
stable manufacturing yields and sufficient manufacturing capacity; and
broad range of products.

If we fail to achieve these qualities and increase demand for our products in the mainstream and performance personal computer segments, adoption of our products could be slow in these segments and our ability to expand our business and achieve and increase profitability could suffer as a result.

Our future revenue growth and profitability depend on improvements to our historical sales and marketing strategies

We depend on our sales and marketing abilities to translate progress from our research and development team into greater revenue and increased profitability. In the past, our sales and marketing resources and efforts have been more limited than some of our competitors. As we expand our product offerings, we need to effectively implement further sales and marketing initiatives, including entering into joint product promotions with customers, improving application engineering support to customers, targeting more international OEMs to secure design wins, promoting our products by advertising in trade journals, participating at industry trade fairs and organising technology seminars and sales conferences, and encouraging product testing by well-known industry publications. If we fail to increase our customer base through these initiatives, our revenue growth and ability to achieve and increase profitability will suffer.

Risks Relating to our Long-term Debt

The lenders under our long-term debt could deem that we are in default, which would significantly harm our liquidity and financial condition

the current ratio (current assets/current liabilities) shall not fall below 100 per cent.;

the shareholders’ equity ratio (net shareholders’ equity/total assets) shall not fall below 50 per cent., provided that the lenders have agreed, subject to execution of final amendments to the relevant loan agreements, that the 50 per cent. ratio will be changed to 43 per cent. if we complete an offering of up to US$150 million unsecured overseas convertible bonds in 2002; and
annual principal-interest margin multiples (net profit before tax + interest charge + depreciation + amortisation/interest charge) shall not fall below 2.5 before the end of 2001 and below 3.0 in 2002 and beyond.

As of 31 March 2002, we believe that we were in compliance with the financial and other covenants in these agreements. However, in addition to these covenants, the agreements for these debt obligations provide that the occurrence of other specific events would constitute an event of default under these debt obligations. By operation of cross default provisions, an event of default under any of these debt obligations could trigger an event of default under our other debt obligations and could result in the entire amount of principal and interest under these obligations being accelerated and becoming immediately due and payable. In particular, our NT$7,000 million syndicated bank loan and the bank guarantee in connection with our NT$3,000 million domestic bonds provide that material adverse litigation or arbitration against us that affects our repayment ability would give rise to an event of default and, our NT$1,650 million syndicated bank loan provides that any provisional injunction or attachment which involves a disputed amount of more than NT$1,000 million would give rise to an event of default. While it is possible that the lenders may determine that the existence of our litigation with UMC causes us to be in default, we believe the lenders under these debt obligations are aware of this litigation, and they have not accelerated any amounts under these obligations. In addition, our NT$7,000 million syndicated bank loan and the bank guarantee in connection with our NT$3,000 million domestic bonds provide that an event of default is triggered if we fail to duly pay to the guaranteeing banks, the leading bank, the managing bank or any other party under other contracts any payable amounts, or the debts incurred by us (whether as the principal debtor or the guarantor) to such creditors have become or are approved to be accelerated. An event of default under either of these obligations would also trigger an event of default under the NT$1,650 million syndicated bank loan. Due to the breadth of these cross-default provisions, our failure to meet relatively immaterial payment obligations under our commercial and other contracts could be deemed to trigger an event of default under each of these debt obligations, and there is a risk that the lenders under these obligations could assert that we are in default as a result of events occurring in our normal course of business.

Risks Relating to the Republic of China

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

We are incorporated in the ROC, and most of our assets are located in the ROC. In addition, most of our revenue is derived from our operations in the ROC. The ROC has a unique international political status. The People’s Republic of China, or PRC, asserts sovereignty over the ROC and does not recognise the legitimacy of the ROC government. Although significant economic and cultural relations have been established during recent years between the ROC and the PRC, the PRC government has indicated that it may use military force to gain control over Taiwan in certain circumstances, such as the declaration of independence by Taiwan. Relations between the ROC and the PRC have been particularly strained in recent years. In particular, the increasing influence of the Democratic Progressive Party, which has in the past formally advocated Taiwan’s independence from the PRC, including the inauguration of a member of that party as President of the ROC in May 2000 and the fact that party won a plural majority of the seats in the Legislative Yuan, the legislative branch of the ROC government, in elections on 1 December 2001, may increase political tensions and instability between the PRC and the ROC. An increase in tensions between the ROC and the PRC may affect the availability of the PRC as an export market for our products. In addition, past developments in relations between the ROC and the PRC have occasionally adversely affected the market value of Taiwanese companies and the value of the Taiwan Stock Exchange Weighted Stock

Index, or the TSE Index. Relations between the ROC and the PRC and other factors affecting the political or economic conditions of Taiwan could affect our business and the market price and the liquidity of the Bonds and our common shares.

Differences between ROC and U.S. accounting standards may affect the disclosure provided by our financial statements

Our financial statements are prepared under ROC generally accepted accounting principles, referred to as ROC GAAP, which differs in material respects from US GAAP. These differences include different methods of consolidation and methods for measuring the amounts shown in our financial statements, as well as additional disclosures required by US GAAP that are not required by ROC GAAP.

For details on the principal differences between ROC GAAP and US GAAP, see the section entitled “Summary of Principal Differences between ROC GAAP and US GAAP”.

We are vulnerable to natural disasters and other events beyond our control, including droughts and periodic power supply problems in Hsinchu, Taiwan which may seriously harm our business

All of our existing manufacturing operations are in Hsinchu, Taiwan. Disruption of operations at our manufacturing facilities in Hsinchu for any reason, including work stoppages, power outages, fire, earthquakes or other natural disasters, would cause delays in shipments of our products, which could lead our customers to obtain products from other sources.

As a result of the rapid growth of the Taiwan semiconductor industry, primarily based in Hsinchu, severe constraints have been placed on the water and electricity supply in that region. Any shortages of water or electricity could harm our operations. In particular, the semiconductor manufacturing process requires extensive amounts of fresh water and the Hsinchu area, where our fab is located, has experienced serious droughts in the past, most recently in the first half of 2002. If a drought occurs and the authorities are unable to source water from alternative sources in sufficient quantity, we may be required to temporarily shut down or substantially reduce the operations of the fab, which would seriously affect our operations.

In September 1999, a major earthquake occurred, with its epicentre in central Taiwan. The earthquake caused interruptions to power supplies and significant damage to buildings across Taiwan. More recently, there have been a number of smaller earthquakes in Taiwan. Although some of these recent earthquakes have impacted our operations in minor ways, for example, by requiring us to recalibrate some of the equipment in our fab, these impacts have not been material to us. If significant earthquakes occur in Taiwan in the future, they could cause enough disruption to our operations to harm our ability to produce our products and our operating results.

Taiwan is also susceptible to typhoons, which may cause damage and business interruption to our facilities. In 2001, Taiwan experienced severe damage from typhoons, including a typhoon on 16 September that caused over 100 deaths, severe flooding and extensive damage to property and businesses. Although we did not experience any damage or business interruption from the typhoons, there can be no assurance that we will not suffer damage or business interruption due to typhoons in the future, or that our operating results or financial condition will not be adversely affected as a result.

We are an ROC company, and because the rights of shareholders under ROC law differ from those of the laws of other jurisdictions, you may have difficulty protecting the shareholder rights you obtain upon conversion of Bonds

Our corporate affairs are governed by our articles of incorporation and by the laws governing corporations incorporated in the ROC. The rights of shareholders and the responsibilities of management and the members of the board of directors under ROC law are different from those applicable to a corporation incorporated in other jurisdictions, for example, the United

States. For example, controlling shareholders of ROC companies do not owe fiduciary duties to minority shareholders. Therefore, public shareholders of ROC companies may have more difficulty in protecting their interests in connection with actions taken by management or members of the board of directors than they would as public shareholders of a company in other jurisdictions, for example, a U.S. corporation.

You may have difficulty enforcing any judgement obtained outside the ROC against us or our directors and supervisors or executive officers

Our company is incorporated under the laws of the ROC. Substantially all of our directors, supervisors and executive officers reside in the ROC, as do some of the experts named in this Offering Circular. In addition, a substantial portion of our assets and the assets of those persons are located in the ROC. As a result, it may not be possible for investors to effect service of process outside the ROC (for example, within the United States) upon us or those persons, or it may be difficult to enforce against us or them judgements obtained in courts outside the ROC (for example, U.S. courts) including those based upon the civil liability provisions of the federal securities laws of the United States. See “Enforceability of Foreign Judgements in the ROC”.

Fluctuations in exchange rates could result in foreign exchange losses

Currently, the majority of our revenue is denominated in US dollars. Our costs of revenue, operating expenses and capital expenditures are incurred in several currencies, including NT dollars, Japanese yen, US dollars and Euros. We are particularly affected by fluctuations in the exchange rate between the U.S. and the NT dollar. Despite hedging and mitigating techniques implemented by us, any significant fluctuation in that exchange rate may have an adverse effect on our financial condition and results of operations. In addition, fluctuations in the exchange rate between the US dollar and the NT dollar will affect the US dollar value of our common shares and the market price of the Bonds and any cash dividends paid in NT dollars on common shares received upon conversion of the Bonds.

If economic conditions in the ROC deteriorate, our current business and future growth would be harmed

In recent years, the currencies of many East Asian countries, including the ROC, have experienced considerable volatility and depreciation. The Central Bank of China, which is the central bank of the ROC, has from time to time intervened in the foreign exchange market to minimise the fluctuation of the US dollar/NT dollar exchange rate and to prevent significant decline in the value of the New Taiwan dollar. New Taiwan dollars have depreciated against US dollars from US$1.00 = NT$27.52 on 2 January 1997 to US$1.00 = NT$35.00 on 29 March 2002, based on the noon buying rates published by the Federal Reserve Bank of New York. The approximate middle market spot rate between the NT dollar and the US dollar on 10 July 2002 was US$1.00 = NT$33.10.

In addition, the banking sector in the ROC has been seriously harmed by the general economic downturn in Asia and the ROC which has caused a depressed property market and an increase in the number of companies filing for corporate reorganisation protection. As a result, financial institutions are more cautious in providing credit for businesses in the ROC. We cannot assure you that we will continue to have access to credit on commercially reasonable terms or at all.

The imposition of foreign exchange restrictions may have an adverse effect on foreign investors’ ability to acquire Taiwan securities, including those of the Company, or repatriate the interest, dividends or proceeds of sale thereof

The government of the ROC may impose foreign exchange restrictions in certain emergency situations, including situations where there are sudden fluctuations in interest rates or exchange rates, where the government experiences extreme difficulty in stabilising the balance of payments or where there are substantial disturbances in the Taiwan financial and capital markets. These restrictions may require foreign investors to obtain the ROC

government’s approval before acquiring Taiwan securities or repatriating the interest or dividends from these securities or the proceeds from the sale of these securities. No assurances can be given that such restrictions will not adversely affect the secondary market price, among other things, of the Bonds.

Risks Relating to Ownership of the Bonds or the Shares

The market value of your investment may fluctuate due to the volatility of the ROC securities market

The ROC securities market is smaller and more volatile than the securities markets in the United States and in European countries. The Taiwan Stock Exchange has experienced substantial fluctuations in the prices and volumes of sales of listed securities and there are currently limits on the range of daily price movements on the Taiwan Stock Exchange. Over the past 12 years, the TSE Index peaked at 12,495.3 in February 1990, and subsequently fell to a low of 2,560.5 in October 1990. On 13 March 2000, the TSE Index experienced a 617 point drop, which represented the single largest point decrease in the history of the TSE Index. From 1 January 2000 to 31 December 2000, the TSE Index dropped 45.9 per cent. The Taiwan government has in the past purchased shares listed on the Taiwan Stock Exchange to stabilise that market. On 10 July 2002, the TSE Index closed at 5,262.01. The TSE has experienced problems in the past, such as market manipulation and insider trading. The recurrence of these or similar problems could harm the market price and liquidity of the securities of ROC companies, including the Bonds and our common shares, in both the domestic and the international markets.

You may incur dilution as a result of stock bonuses to our employees required by our articles of incorporation

Similar to other ROC technology companies, our articles of incorporation provide for annual bonuses to our employees in the form of common shares. Our articles of incorporation provide that the bonus paid for any year will be equal to 10 per cent. of any net income remaining for that year after paying taxes, making up losses and setting aside a legal reserve and special reserve, and that the bonus will be paid in the form of cash or Shares valued at their par value of NT$10 per share regardless of the market price of the Shares. Since these Shares are issued at par value, any issuance of shares pursuant to a distribution of bonus would have a dilutive effect on our Shares.

Our controlling shareholders may take actions that are not in our public shareholders’ best interest

As of 28 April 2002, Dr. Eugene C.Y. Duh, our chairman, and Mary S. Duh, his wife and one of our directors, Dr. S. Samuel Liu, our chief executive officer, and Hsin-Shen Liu, one of our directors, together own, directly or indirectly, an interest of approximately 21.8 per cent. of our outstanding common shares. Accordingly, these shareholders will continue to exercise a substantial influence over our business, including matters relating to:

our management and policies;
the timing and distribution of dividends; and
the election of our directors and supervisors.

These shareholders may take actions with which you may not agree or that are not in our or our public shareholders’ best interest.

The value of your investment may be reduced by possible future issues or sales of common shares by us or our shareholders

We have agreed that, except as described below, neither we nor any person acting on our behalf will issue, offer, sell, contract to sell or otherwise dispose of any interest in any Shares or securities of the same class as the Bonds or Shares (other than pursuant to (i) employee benefits plans, employee stock option plans or distributions of dividends or employee bonuses in the form of Shares, (ii) the conversion of Bonds or (iii) issuances and sales in connection with the sale of Bonds to the Managers) or any securities representing interests in or convertible into, exchangeable for or which carry rights to subscribe or purchase Bonds or Shares or securities of the same class as the Bonds or Shares or announce plans or otherwise make public an intention to do any of the foregoing (other than as aforesaid), in any such case without the prior written consent of the Lead Manager on behalf of the Managers between the date hereof and the date which is three months after the Closing Date (both dates inclusive). The Lead Manager on behalf of the Managers may, in its discretion, waive or terminate these restrictions.

As of 31 December 2001, 244,577,797 outstanding common shares or approximately 22.8 per cent. of our outstanding common shares were held by our current directors and executive officers. See “Business — Principal Shareholders” for a description of our significant shareholders. They may decide to sell those securities and we may decide to issue such securities in the future. We cannot predict the effect, if any, that future issues or sales of common shares, or the availability of our common shares for future sale, will have on the market price of the Bonds or our common shares. Sales of substantial amounts of our common shares in the public market, or the perception that future sales may occur, could depress the prevailing markprice of the Bonds or our common shares.

The markets for the Bonds and the Shares

Prior to the Offering, there has been no market for the Bonds. Application has been made to list the Bonds on the Luxembourg Stock Exchange and to have the Restricted Bonds designated for trading in the PORTAL Market.

There has been no trading market for the Shares outside the ROC and the only trading market for the Shares will be the Taiwan Stock Exchange.

There are limitations on the ability of Bondholders to exercise the Conversion Right

Investors in the Bonds will not be able to exercise their conversion right during certain Closed Periods. Under current ROC law, regulations and policy, PRC persons are not permitted to hold or convert the Bonds or to register as shareholders of our company. See “Terms and Conditions of the Bonds — Conversion”.

ROC capital gains tax may be imposed on transactions on the Shares

Under existing ROC law, gains on securities transactions are exempt from ROC income tax. This exemption applies to capital gains derived from the sale of Shares to be delivered upon conversion of the Bonds. There can be no assurance that a capital gains tax will not be imposed in the future or as to the manner in which any ROC capital gains tax in respect of Shares or Bonds would be imposed or calculated. See “Taxation — ROC Taxation of Non-residents”.

Holders of the Bonds will have no rights as holders of the Shares until the conversion of the Bonds

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

If a Bondholder converts Bonds such Bondholder will be required to appoint a tax guarantor and a local agent in the ROC

When a non-ROC Bondholder exercises its conversion rights to receive Shares and register as our shareholder, such holder will be required to appoint an agent (a “Tax Guarantor”) in the ROC. Such Tax Guarantor will be required to meet the qualifications set by the ROC Ministry of Finance (the “ROC MOF”) and will act as the guarantor of such holder’s tax payment obligations. Evidence of the appointment of a Tax Guarantor and the approval of such appointment is required as conditions to receiving such holder’s profits derived from the sale of Shares. There can be no assurance that such holders will be able to appoint and obtain approval for a Tax Guarantor in a timely manner.

In addition, under current ROC law, such converting Bondholder is required to appoint a local agent in the ROC to, among other things, open a securities trading account with a local securities brokerage firm and a bank account, remit funds and exercise a shareholder’s rights. Further, such converting Bondholder must appoint a local bank to act as custodian for confirmation and settlement of trades, safekeeping of securities and cash proceeds and reporting of information. Without satisfying these requirements, converting Bondholders would not be able to hold, sell or otherwise transfer Shares on the TSE.

A Bondholder or its designee requesting the conversion of its Bonds into Shares may be required to provide certain information to us, and failure to provide such information may prevent conversion or cause the conversion to be delayed

A Bondholder or its designee requesting the conversion of its Bonds into Shares may be required to provide certain information to us or the Conversion Agent, including the name and nationality of the person to be registered as the shareholder and the number of Shares such person is acquiring and has acquired in the past through conversion of Bonds held by it, and supporting documents, before such conversion will be effected. Under applicable ROC laws, we are required to report to the ROC Securities and Futures Commission (the “ROC SFC”) if the person to be registered as a shareholder: (i) is a “related party” of ours as defined in Statement of Financial Accounting Standard No. 6 of the ROC or (ii) will hold, immediately following such conversion, more than 10 per cent. of the total number of Shares deliverable upon the conversion of the aggregate principal amount of all Bonds at the time of issue. The conversion of the Bonds may be delayed if such information is not provided.

USE OF PROCEEDS

The net proceeds from the issue of the Bonds are estimated to amount to approximately US$77 million (and US$97 million if the option granted to the Lead Manager in respect of the Optional Bonds is exercised in full) and (i) approximately US$14 million of the net proceeds will be used in relation to the construction of our new research and development facility in Hsinchu, the ROC and the purchase of computer and other equipment for product design and (ii) the remainder of the net proceeds will be used for the semi-annual payments under our five-year domestic secured bonds and long-term secured syndicated bank loans.

If we wish to apply any of the net proceeds allocated to a specified purpose as described above other than for that purpose, and the aggregate amount of net proceeds which are to be so differently applied exceeds 20 per cent. of the aggregate net proceeds, we will need to obtain prior approval from the Central Bank of China. We will also need to notify the ROC SFC, make a public announcement of the use of proceeds for these other purposes and give notice of the approved change at the next shareholders’ meeting.

Our five-year domestic secured bonds have an aggregate face value of NT$3,000 million (US$86 million), bear interest at a fixed rate of 5.42 per cent. and are repayable semi-annually from July 2002 until July 2005. Our NT$7,000 million (US$200 million) long-term secured syndicated bank loan bears interest at a floating rate of 3.97 per cent. in 2001 and is repayable in semi-annual installments in varying amounts from June 2002 until June 2007.

EXCHANGE RATE INFORMATION

Fluctuations in the exchange rate between the NT dollar and the US dollar will affect the US dollar equivalent of the NT dollar price of the Shares on the TSE and, as a result, will likely affect the market price of the Bonds.

The following table sets forth the average of daily noon buying rates between the NT dollar and the US dollar for cable transfers in New York City certified for customs purposes by the Federal Reserve Bank of New York:

Year NT$ per US$ 1993 � � � � � � � � � � � � � � � � � � 26.416 1994 � � � � � � � � � � � � � � � � � � 26.465 1995 � � � � � � � � � � � � � � � � � � 26.495 1996 � � � � � � � � � � � � � � � � � � 27.468 1997 � � � � � � � � � � � � � � � � � � 28.775 1998 � � � � � � � � � � � � � � � � � � 33.547 1999 � � � � � � � � � � � � � � � � � � 32.322 2000 � � � � � � � � � � � � � � � � � � 31.260 2001 � � � � � � � � � � � � � � � � � � 33.824 2002 - January � � � � � � � � � � � � � � � 35.027 2002 - February � � � � � � � � � � � � � � � 35.073 2002 - March � � � � � � � � � � � � � � � � 35.020 2002 - April � � � � � � � � � � � � � � � � 34.917 2002 - May � � � � � � � � � � � � � � � � 34.454 2002 - June � � � � � � � � � � � � � � � � 33.889 2002 - July[(1)] � � � � � � � � � � � � � � � � 33.438

Source: Federal Reserve Statistical Release

Note:

(1) Up to and including 9 July 2002.

CAPITALISATION

The following table sets forth our unconsolidated short-term debt and capitalisation as of 31 March 2002, and as adjusted to give effect to the issuance of the Bonds.

This table should be read in conjunction with the Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

As of 31 March 2002	As of 31 March 2002	As of 31 March 2002	As of 31 March 2002
Unaudited actual		As adjusted (1)
(NT$) (US$) (in millions, except 5,144(2) 147		(NT$) (US$) per share data) 5,144 147 9,311 266 10 — 2,800 80 10,714 306 7,740 221 315 9 (582) (16) 32 1 18,219 521 30,340 867
9,311 (3) 10 — 10,714 7,740 315 (582) 32 18,219	266 — — 306 221 9 (16) 1 521	9,311 10 2,800 10,714 7,740 315 (582) 32 18,219	266
			— 80 306 221 9 (16 1
			521
27,540	787	30,340

Notes:

(1) The as adjusted basis gives effect to the issuance of the Bonds in the aggregate amount of US$80 million, assuming that the Optional Bonds are not issued and translated into NT dollars at a rate of NT$35.00 = US$1.00, the noon buying rate for cable transfer in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect on 29 March 2002, the last business day of that month.

(2) Of this amount, NT$2,339 million was secured and NT$2,805 million was unguaranteed and unsecured.
(3) All of this long-term debt, net of current portion, was secured.

Except as disclosed above, there has been no material change in the unconsolidated capitalisation of the Company since 31 March 2002.

SELECTED FINANCIAL AND OPERATING DATA

The selected consolidated balance sheet data as of 31 December 2000 and 2001, and the selected consolidated statement of income data for the years ended 31 December 1999, 2000 and 2001 have been derived from our audited consolidated financial statements included elsewhere in this Offering Circular. The selected consolidated balance sheet data as of 31 December 1997, 1998 and 1999, and the selected consolidated statement of income data for the years ended 31 December 1997 and 1998 have been derived from our audited consolidated financial statements, which are not included in this Offering Circular. These financial statements have been audited by T N Soong & Co, an associate member firm of Deloitte Touche Tohmatsu effective 22 April 2002. T N Soong was formerly a member firm of Andersen Worldwide, SC.

As a result of our common shares being listed on the Taiwan Stock Exchange, we are required on an on-going basis to file with the Taiwan Stock Exchange unaudited unconsolidated financial statements for interim quarterly financial periods. Although, by their nature, unconsolidated financial statements are not comparable with consolidated financial statements, our unconsolidated financial statements do not differ materially from our consolidated financial statements. The selected unconsolidated balance sheet data as of 31 March 2001 and 31 March 2002, and the selected unconsolidated statement of income data for the three months ended 31 March 2001 and 31 March 2002 have been derived from our unaudited unconsolidated financial statements included elsewhere in this Offering Circular. Results for the three months ended 31 March 2002 are not necessarily indicative of the results that may be expected for the year ending 31 December 2002.

The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the notes to those statements included elsewhere in this Offering Circular.

For your convenience, we have included in this selected financial information translations of NT dollar amounts into US dollar amounts at an exchange rate of US$1.00 = NT$35.00, the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect on 29 March 2002, the last business day in that month. These translations should not be construed as a representation that those NT dollar or US dollar amounts have been, could have been or could in the future be, converted into US dollars or NT dollars, as the case may be, at any particular rate, the rate stated above or at all.

	Year Ended 31 December	Year Ended 31 December	Year Ended 31 December	Year Ended 31 December	Year Ended 31 December
1997	1998	1999	2000		2001	2001
(NT$) 3,077 2,535 542 335 145 138 618 (76) 321 1 244 62 306 —	(NT$) (NT$) (NT$) (In millions, except per share 6,396 10,845 7,821 4,797 7,077 7,503 1,599 3,768 318 494 742 1,194 180 999 723 321 369 335 995 2,110 2,252 604 1,658 (1,934) 527 194 1,195 57 25 150 1,074 1,827 (889) 1 132 663 1,075 1,959 (226) — 1 —				(NT$) data) 9,987 7,441 2,546 1,883 602 566 3,051 (505) 218 800 (1,087) 478 (609) 1	(US$) 285 212 73 54 17 16 87 (14) 6 23 (31) 14 (17) —
306 0.38 810	1,075 1.33 810	1,960 2.30 851		(226) (0.21) 1,071	(608) (0.57) 1,065	(17) (0.02) 1,065

Consolidated Balance Sheet Data: Cash � � � � � � � � � � Working capital � � � � � � � � Long-term investments � � � � � � Net property, plant and equipment � � � Total assets� � � � � � � � � Total current liabilities � � � � � � Bonds payable — net of current portion � � Long-term bank loans — net of current portion � � � � � � � � � Shareholders’ equity� � � � � � �			As of 31 December
	1997 (NT$) 1,550 1,903 795 1,130 5,183 1,162 — — 3,945	1998 (NT$) 2,018 2,765 732 1,394 6,548 1,454 — — 5,020	1999 2000 (NT$) (NT$) (In millions) 12,530 2,928 10,288 3,450 796 584 7,276 23,004 24,791 35,274 5,645 6,657 — 3,000 — 7,000 18,975 18,368	2001 (NT$) 2,963 2,350 1,664 21,823 36,229 7,401 2,570 7,377 18,193	2001
					(US$) 85 67 48 624 1,035 211 73 211 520

Other Data: Cash flow: Depreciation � � � � � � � � � Capital expenditures � � � � � � � Cash provided by (used in) operating activities� Cash used in investing activities � � � � Cash provided by financing activities � � � Net cash flow � � � � � � � � � Gross profit margin � � � � � � � � Operating profit (loss) margin � � � � � Net profit (loss) margin � � � � � � �		Year Ended 31 December	Year Ended 31 December
	1999	2000	2001	2001
	(NT$) (NT$) (NT$) (US$) (In millions, except percentages) 241 1,221 3,670 105 2,792 17,822 3,944 113 1,589 (2,539) 1,692 48 (3,181) (18,861) (3,787) (108) 12,107 11,793 2,127 61 10,512 (9,602) 35 1 34.7% 4.1% 25.5% 25.5% 15.3% (24.7%) (5.1%) (5.1%) 18.1% (2.9%) (6.1%) (6.1%)

Unaudited Unconsolidated Statement of Income Data: Net revenue � � � � � � � � � � � � � Cost of revenue � � � � � � � � � � � � Unrealized intercompany transaction — net � � � � � Gross profit � � � � � � � � � � � � � Operating expenses: Research and development� � � � � � � � � Marketing and sales � � � � � � � � � � General and administrative � � � � � � � � � Total operating expenses � � � � � � � � � � Income (loss) from operations� � � � � � � � � Total non-operating income � � � � � � � � � Total non-operating expenses� � � � � � � � � Income (loss) before income tax � � � � � � � � Income tax benefit � � � � � � � � � � � Net income (loss)� � � � � � � � � � � � Earnings (loss) per share Basic � � � � � � � � � � � � � � Diluted � � � � � � � � � � � � � � Shares used in earnings (loss) per share calculation Basic � � � � � � � � � � � � � � Diluted � � � � � � � � � � � � � �		Three Months Ended 31 March	Three Months Ended 31 March
		2001 2002 2002 (NT$) (NT$) (US$) (In millions, except per share data) 2,402 3,576 102 1,829 2,485 71 — — — 573 1,091 31 459 449 13 159 316 9 65 165 4 683 930 26 (110) 161 5 49 28 1 146 163 5 (207) 26 1 — — — (207) 26 1 (0.20) 0.02 0.0007 (0.20) 0.02 0.0007 1,060 1,071 1,071 1,060 1,084 1,084	2002

Unaudited Unconsolidated Balance Sheet Data: Cash � � � � � � � � � � � � � � � Working capital � � � � � � � � � � � � Long-term investments � � � � � � � � � � Net property, plant and equipment � � � � � � � Total assets � � � � � � � � � � � � � Total current liabilities � � � � � � � � � � Bonds payable — net of current portion � � � � � � Long-term bank loans — net of current portion � � � � Shareholders’ equity � � � � � � � � � � �	As of 31 March	As of 31 March
	2001 2002 2002 (NT$) (NT$) (US$) (In millions, except per share data) 1,478 2,298 66 3,325 2,068 59 596 1,691 48 22,635 21,114 603 34,631 36,228 1,035 5,636 8,105 232 3,000 2,140 61 7,000 7,171 205 18,160 18,219 521	2002

Other Data: Cash flow: Depreciation � � � � � � � � � � � � Capital expenditures � � � � � � � � � � Cash provided by (used in) operating activities � � � � Cash used in investing activities � � � � � � � Cash provided by financing activities � � � � � � Net cash flow � � � � � � � � � � � � Gross profit margin � � � � � � � � � � � Operating profit (loss) margin� � � � � � � � � Net profit (loss) margin � � � � � � � � � �	Three Months Ended 31 March	Three Months Ended 31 March
	2001 2002 2002 (NT$) (NT$) (US$) (In millions, except percentages) 818 1,021 29 1,302 813 23 (644) 188 5 (724) (1,268) (36) 2 470 13 (1,366) (611) (17) 23.9% 30.5% 30.5% (4.5)% 4.5% 4.5% (8.6)% 0.7% 0.7%	2002

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

Unless stated otherwise, the discussion and analysis of our financial condition and results of operations in this section apply to our financial information as prepared in accordance with ROC GAAP. You should read the following discussion of our financial condition and results of operations together with the consolidated and unconsolidated financial statements and the notes to such statements included in this Offering Circular. ROC GAAP differs in certain respects from US GAAP. For a discussion of material differences as applied to our financial statements, see “Summary of Principal Differences between ROC GAAP and US GAAP”.

For the convenience of readers, NT dollar amounts used in this section for, and as of, the year ended 31 December 2001 and the three months ended 31 March 2002 have been translated into US dollar amounts using US$1.00 = NT$35.00, the noon buying rate for cable transfers in NT dollars as certified for customs purposes by the Federal Reserve Bank of New York in effect on 29 March 2002, the last business day in that month. The US dollar translation appears in parentheses next to the relevant NT dollar amount.

Overview

We are a leading provider, based on revenue, of integrated and discrete core logic products for the global PC market. We also provide standalone graphic chips and system-on-a-chip solutions.

Shift from fabless to IDM. In 1998 we decided to become an integrated device manufacturer, or IDM, and subsequently built our own semiconductor manufacturing facility, called a fab, in Hsinchu, Taiwan. We began incurring obligations to build our fab in October 1998. In March 2000, we completed pilot production of the first SiS630 chip at our fab. The following table indicates the increases in our fab’s manufacturing capacity and the dates when we completed these capacity increases:

Total Wafers Per Month Capacity 5,000 � � � � � � � � � � � � � � � � 10,000 � � � � � � � � � � � � � � � � 15,000 � � � � � � � � � � � � � � � � 20,000 � � � � � � � � � � � � � � � � 25,000 � � � � � � � � � � � � � � � � 28,000 � � � � � � � � � � � � � � � �	Date Capacity was First Available
	� June 2000 � October 2000 � December 2000 � April 2001 � August 2001 � September 2001

Total Wafers Per Month Capacity
5,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

10,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

15,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

20,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

25,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

28,000
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�
�

Date Capacity was First
Available

�
June 2000
�
October 2000
�
December 2000
�
April 2001
�
August 2001
�
September 2001

In connection with this transition from fabless to IDM, we outsourced the manufacturing of products representing approximately 100.0 per cent., 67.3 per cent. and 11.8 per cent. of our revenue, in 1999, 2000 and 2001, respectively.

As an IDM, we incur high up-front costs whenever we construct and equip a new fab or add fab capacity. For example, we incurred capital expenditures of NT$2,792 million, NT$17,822 million and NT$3,944 million (US$113 million) in 1999, 2000 and 2001, respectively, most of which consisted of fab construction and purchase of fab equipment. We depreciate these costs over the fab and equipment’s accounting lives, which are typically five years for equipment, 10 years for facilities and 50 to 55 years for a building’s shell. Our depreciation expense increased significantly in the past three years from NT$241 million in 1999 to NT$1,221 million in 2000 and to NT$3,670 million (US$105 million) in 2001, in line with our increased capital expenditures. If we raise debt to pay for these up-front costs, our interest costs increase, and if we issue equity to pay for these up-front costs, our per share earnings are initially diluted. Our interest costs increased from NT$2 million in 1999 to NT$129 million in 2000 to NT$679 million (US$19 million) in 2001 as a result of funding the construction and equipping of our fab largely with debt.

As an IDM, our operating results are also characterised by relatively high fixed costs. In 2001, 54.9 per cent. of our manufacturing costs consisted of depreciation, indirect material costs, amortisation of license fees and indirect labour costs. The other significant component of manufacturing costs were outsourcing costs for packaging and testing and direct materials and labour charges. The efficiency of our manufacturing is reflected in our manufacturing costs per unit, which are primarily determined by our fab capacity, capacity utilisation rates and production yields.

In the early stages of operating a fab, manufacturing costs per unit are relatively high because fab capacity is low. Manufacturing costs per unit are proportionately higher at low capacities primarily because of one-time, up-front fixed costs that are incurred in connection with building and operating a fab that are not incurred again as fab capacity is increased. These up-front fixed costs include, for example, building and facilities costs and the cost of certain types of equipment that are not fully utilised at low fab capacity. We had limited fab capacity in 2000 because we were in the early phases of building and expanding our fab. These capacity limitations were due in part to our own fab expansion schedule and in part to the delayed delivery of semiconductor manufacturing equipment by our suppliers, particularly in the first two quarters of 2000. During this period, we also had difficulty hiring a sufficient number of qualified persons to operate our fab. As a result of these manufacturing capacity limitations and our inability to secure adequate manufacturing capacity from third parties, we experienced delayed delivery of products to our customers during this period. As indicated above, we significantly increased our fab’s capacity over 2000 and 2001, thereby lowering our manufacturing costs per unit.

Utilisation rate is also a significant determinant of fab efficiency because higher utilisation rates also result in spreading manufacturing fixed costs over a larger number of units. Utilisation rate is the actual number of wafers we are processing at our fab in relation to the total number of wafers we have the capacity to process. Utilisation rates are affected by maximum capacity, the level of customer orders, production efficiency (yields) and product flow management. Other factors affecting our utilisation rates include the complexity and mix of the wafers produced, mechanical failure and disruption of operations due to expansion of operations, general mechanical failures, disruption of power supply and fire or natural disaster. The weighted average utilisation rate at our fab was 96.3 per cent. and 75.5 per cent. in 2000 and 2001, respectively. These utilisation rates are relatively high because we had low initial fab capacity and have increased that capacity over time.

Yields are also a primary determinant of fab efficiency and fluctuate depending on both the mix of products that we are manufacturing and the process technology being used. Yield generally refers to the percentage of usable chips per wafer compared to the total chips per wafer. Yields tend to be lower for more complex products, and therefore, yields tend to be lower for integrated chipsets compared to discrete chipsets. In addition, yields tend to be lower for newer products; as we gain experience in the manufacture of a specific product, yields tend to improve. Similarly, yields from using a new process geometry (for example, 0.15 micron process technology) or other new process technologies (for example, copper process technologies) tend to improve over time. In the early stages of operating a fab, yields are lower until the manufacturing process has been refined. We had relatively low yields in the early stages of our fab operations, particularly in the first two quarters of 2000. As a result of these yields and our low fab capacity during this period in particular, we experienced relatively high manufacturing costs per unit and delayed delivery of products to our customers. We have seen improving yield trends in 2000 and 2001.

Pricing and product life cycles. Our sales are normally priced pursuant to purchase orders negotiated with our customers which generally cover one month or less of deliveries. As a result of the short periods covered by purchase orders, we are frequently in ongoing discussions with our customers over product prices. Particularly in the case of some of our larger customers, the customers can ask for price reductions when placing large orders or when demand for our products is weak, often emphasising the importance of their order to us

and their past volume purchases to support their bargaining position. In addition, pressure to reduce prices is particularly high for products near the end of their life cycles and for sales made near the end of a calendar year. As a result of these factors, our need to grant price reductions varies and can cause our quarterly results to fluctuate significantly.

Price reductions frequently take the form of a discount after a sale has been invoiced. In the event that a price discount is negotiated, a credit memo is established to document the discount. In addition, in order to cover price discounts that may be granted and sales returns that may occur in a later accounting period, we record an allowance for discounts and returns at the time of recognition of the related revenue based on historical experience. During 2001, this allowance was generally between two and three per cent. of gross revenue. Our historical net revenue represents our gross revenues based on invoiced sales less discounts.

Our product life cycles vary, and for some products are as short as three to six months. At the beginning of a product’s life cycle, the average selling price of that product tends to be higher. This is particularly true for leading-edge products that we have brought to market quickly. A product’s average selling price tends to decrease as the product gets older. As a product nears the end of its life cycle, its average selling price can be sharply reduced. If we do not sell all of our inventory of a product before the end of its life cycle, we may need to write off that inventory. Inventories of a product that has not been sold for more than one year are written off completely. Similarly, because our other inventories are recorded at the lower of their cost or market value, if the average selling price of a product drops below its cost of revenue, we must write off the difference for that product’s inventory in the quarter in which such price drop occurs. If product life cycles are shorter, or market conditions are less favourable, than those projected by our management, inventory write downs may be required. We have incurred expenses in connection with obsolete inventory and reductions to carrying value of inventory in the past, including aggregate charges of NT$264 million (US$8 million) during 2001.

As a majority of our costs and expenses are fixed or semi-fixed, decreases in the average selling prices of our products have a substantial impact on our margins. In addition to the pricing factors mentioned above, prices are also dependent on the cyclicality of the personal computer market, as well as cyclicality in semiconductor manufacturing capacity. When demand for personal computers is lower, such as in 2001, price pressure on our products tends to be greater. In addition, when semiconductor manufacturing capacity is underutilised, foundries that manufacture products for our fabless competitors generally lower their prices. That results in the reduction of the cost basis of our competitors’ products and give our competitors more flexibility to reduce sales prices without sacrificing profit margins.

Critical Accounting Policies

We consider certain accounting policies related to revenue recognition, inventory valuations, valuations for deferred tax assets, allowance for doubtful accounts and useful lives of property, plant and equipment to be critical policies due to the estimation processes involved in each.

Revenue recognition. The four criteria that we use to recognise revenue are the existence of evidence of sales, actual shipment, fixed or determinable selling price and reasonable assurance of collectibility. We sell our products directly to customers and recognise revenue at the time of shipment or delivery, which is when title is transferred. We record in the same period that the related revenue is recorded estimated allowances for pricing discounts and sales returns that may be subsequently requested by customers. These estimates are based on historical experience and our management’s judgement. If the experience and judgement that we use to make these allowance estimates are not correct, revenue could be overstated. We also sell our products to distributors with substantial independent operations under sales arrangements whose terms do not allow for rights of return or price protection on unsold products held by them. In these instances, we recognise revenue when we ship the product directly to the distributors.

Inventory valuation. Inventories of a product that has not been sold for more than one year are written off completely. Our other inventories are stated at the lower of cost or market value. Market value represents net realisable value for finished goods and work-in-progress, and

replacement costs for raw materials and supplies. Net realisable value for finished goods and work-in-progress is primarily based on latest invoiced prices. If we do not sell all of our inventory of a product before the end of its life cycle, we may need to write off that inventory. Similarly, if the market value of a product drops below its book cost, we must write off the difference between the book cost and market value for inventory of that product. If product life cycles are shorter than expected or estimates of market value based on latest invoiced prices do not accurately indicate future market conditions, additional inventory write downs may be required.

Valuation allowance for deferred tax assets. When we have net operating loss carryforwards, investment tax credits or temporary differences in the amount of tax recorded for tax purposes and accounting purposes, we may be able to reduce the amount of tax that we would otherwise be required to pay in future periods. We recognise all existing future tax benefits arising from these tax attributes as deferred tax assets and then, based on our internal estimations of our future profits, establish a valuation allowance equal to the extent, if any, that it is more likely than not that deferred tax assets will not be realised. This valuation allowance, which was 57.5 per cent. and 56.3 per cent. of gross deferred tax assets at 31 December 2000 and 2001, respectively, reduces our deferred tax assets. We record a benefit or expense under the income tax benefit line of our income statement when there is a net change in our total deferred tax assets and liabilities in a period. For example, we recorded an income tax benefit in each of the first three quarters of 2000 and an income tax benefit of NT$478 million (US$14 million) in the fourth quarter of 2001. As the calculation of income tax benefit is dependent on our internal estimation of our future profitability, it is inherently subjective. To the extent that we determine that our use of deferred tax assets is uncertain based on our projections of future operations, we establish valuation allowances equal to as much as 100 per cent. of total deferred tax assets. In such cases, we may record no income tax benefit and may incur income tax expense (whether or not such expense is actually payable) on our income statement.

In addition, because the recording of deferred tax assets and income tax benefit is based on our assumptions of levels of profitability, if we subsequently determine that it is unlikely that we will achieve those profit levels, or otherwise believe that we will not incur sufficient tax liabilities to fully utilise the deferred tax assets, we will reduce our deferred tax assets in an amount equal to that determination and incur a charge to income in that amount at that time.

Allowance for doubtful accounts. We periodically record a provision for doubtful accounts based on our evaluation of the collectibility of our accounts receivable. The total amount of this provision is determined by us as follows. We first review the receivables of customers that we have determined are a higher credit risk based on their current overdue accounts with us, difficulties collecting from them in the past, or their overall financial condition. For each of these customers, we estimate the extent to which it will be able to meet its financial obligations to us, and we record an allowance that reduces our accounts receivable for that customer to the amount that we reasonably believe will be collected. For all other customers, we maintain an allowance for doubtful accounts equal to a percentage of their aggregate accounts receivable. Based on our prior experience, we currently maintain an allowance for the accounts receivable of these other customers of between 3 per cent. and 4 per cent. If the financial condition of our customers, or economic conditions generally, were to deteriorate, additional allowances may be required in the future, which would reduce our net income.

Useful lives of property, plant and equipment. Our fixed assets consist of property, plant and equipment. As of 31 December 2000 and 2001, fixed assets represented 65.2 per cent. and 60.2 per cent., respectively, of our total assets. We depreciate our fixed assets based on our estimates of their economic useful lives to us based on our judgement and historical experience. If we subsequently determine that the actual life of a fixed asset is shorter than what we had estimated, beginning from the time that we make this determination, we will depreciate the remaining undepreciated cost of that asset over its remaining economic useful life. This will result in increased depreciation expense and decreased net income during those periods. Similarly, if the actual life of a fixed asset is longer than what we had estimated, we will have a smaller depreciation expense and higher net income in subsequent periods. As a result, if our estimations of the useful lives of our fixed assets are not accurate, our net income in future periods could decrease or increase.

Results of Operations

Cost of Revenue

Our cost of revenue consists principally of:

raw materials costs;
direct labour costs;
overhead costs, including depreciation expense, amortised fixed licence costs for products ready for mass production, indirect labour costs, indirect materials costs and utility expense; and
charges for assembly and test services.

Due to the construction of our fab and the purchase of related equipment, depreciation expense included in cost of revenue increased significantly from NT$1,057 million in 2000 to NT$3,453 million (US$98 million) in 2001, which represented 14.1 per cent. and 46.4 per cent., respectively, of our cost of revenue in 2000 and 2001.

Operating Expenses

Our operating expenses consist of the following:

Research and development expenses. Research and development expenses consist primarily of salaries and related costs for the employees engaged in product design and process technology research and development, wafers and other engineering raw materials, mask production, amortisation of technology license fees and software, and depreciation and maintenance on the equipment used in our research and development efforts. We expect our research and development expenses to continue to grow in absolute terms as a result of our plans to broaden our portfolio of products and advance the technology of our process technologies and product designs. We expect that these efforts will require us to hire additional staff, purchase additional equipment, incur license fees for research and development purposes and use more raw materials in the development of products and the refinement of manufacturing processes. We typically amortise fixed amount license fees which are not directly tied to the actual production or sale of our products over the license term. We charge such amortised amounts to research and development expenses if our products to which the technology relates are not ready for mass production. Once our related products are ready for mass production, such amortised amounts of fixed license fees are charged to cost of revenue. If a license agreement fee has a variable component that is dependent on actual product sales, that variable fee is expensed as incurred, and is recorded as a marketing and sales expense. We are currently obligated to make royalty payments for research and development purposes of approximately NT$856 million, NT$507 million and NT$524 million in 2002, 2003 and 2004, respectively, for our agreements with Toshiba Corporation relating to advanced process technologies and our patent cross-license agreement with IBM.
Marketing and sales expenses. Marketing and sales expenses consist primarily of salaries and related personnel expenses, per unit license royalties, the cost of producing product samples and promotions and other marketing and sales expenses. License royalties recorded as sales expenses are typically incurred on a per unit basis when units are sold. These royalties heavily depend on product mix and unit volume, in many cases decreasing significantly when aggregate units sold thresholds have been met. For 2000 and 2001, license royalties represented approximately 73.6 per cent. and 61.5 per cent., respectively, of total marketing and sales expenses.

General and administrative expenses. General and administrative expenses consist primarily of salaries for our administrative, finance and human resource personnel, fees for professional services, including legal fees, and cost of computers and communications systems to support our operations. In periods of heavy litigation, particularly with respect to patent and trade secret disputes, legal fees for professional services can be a significant component of general and administrative expenses, as they were in 2001 and are expected to be in 2002.

Income (Loss) from Operations

We recorded losses from operations of NT$1,934 million in 2000 and NT$505 (US$14 million) in 2001. In the first quarter of 2002 we recorded income from operations of NT$161 million (US$5 million). These operating results reflect lower per unit manufacturing costs at our fab as a result of increased capacity and improved yields. They also reflect increasing average selling prices of our products during 2000, 2001 and the first three months of 2002.

We expect our net revenue to decrease from NT$3,576 million (US$102 million) in the first quarter of 2002 to NT$3,262 million (US$93 million) in the second quarter of 2002 principally due to decreased average selling prices of our products but also, to a lesser extent, reduced aggregate product volumes sold. Although our chipset sales volumes are expected to increase slightly in the second quarter of 2002 as compared to the first quarter, overall product volumes sold are expected to decrease. As a result of reduced average selling prices and volumes, we expect to report reduced gross and operating margins for the second quarter of 2002 and an operating loss in that quarter.

The decreased average selling prices of our products in the second quarter of 2002 are primarily due to pricing pressure created by Intel reducing the prices of its competing products, and not due to change in the mix of our products sold. As a result of Intel’s price reductions, we are operating in an environment of serious pricing pressure. We cannot predict or make assurances about if or when pricing pressures will ease, and expect to continue to experience pressure on our average selling prices and gross and operating margins as long as this environment persists.

Non-Operating Income and Expenses

Our non-operating income principally consists of:

interest income, which has been primarily derived from time deposits;
gain on disposal of investments, which has been primarily derived from our disposal of long-term investments; and
foreign exchange gain.

Our non-operating expenses principally consist of interest expenses and factoring expense. Also included in the fourth quarter of 2001 is indemnity expense relating to past claims of patent infringement on certain of our products.

Comparison of Results of Operations

The following table sets forth some of our results of operations data as a percentage of our net revenue for the periods indicated which is derived from our unconsolidated unaudited financial statements.

Net revenue � � � � � � � � � � � � � � Cost of revenue � � � � � � � � � � � � � Gross profit � � � � � � � � � � � � � � Operating expenses: Research and development � � � � � � � � � Marketing and sales � � � � � � � � � � � General and administrative � � � � � � � � � Total operating expenses � � � � � � � � � � � Income (loss) from operations � � � � � � � � � Total non-operating income � � � � � � � � � � Total non-operating expenses � � � � � � � � � Income (loss) before income taxes � � � � � � � � Income tax benefit � � � � � � � � � � � � Income (loss) before minority interest � � � � � � � Minority interest in loss of subsidiaries � � � � � � � Net income (loss) � � � � � � � � � � � �	Three Months Ended (unaudited)	Three Months Ended (unaudited)	Three Months Ended (unaudited)	31 March
		2001 (%) 100.0 76.1 23.9 19.1 6.6 2.7 28.4 (4.5) 2.0 6.1 (8.6) 0.0 N/A N/A		2002
				(%) 100.0 69.5 30.5 12.6 8.8 4.6 26.0 4.5 0.8 4.6 0.7 0.0 N/A N/A
		(8.6)		0.7

The first three months of 2001 compared with the first three months of 2002 (unconsolidated)

Net revenue. Our net revenue increased 48.9 per cent. from NT$2,402 million in the first three months of 2001 to NT$3,576 million (US$102 million) in the first three months of 2002. The increase was primarily due to an increase in the number of products sold and higher average selling price per product in the first three months of 2002 as compared to 2001. Products launched in the last two quarters of 2001, in particular the SiS650 and SiS645, contributed significantly to the total number of products sold in the first three months of 2002 and had higher average selling prices because they were still in the relatively early stages of their product life cycles and at the time they faced limited competition. We expect net revenue in the second quarter of 2002 to be lower as compared to the first quarter of 2002 as a result of decreased average selling prices.

Gross profit. Our gross margin increased from 23.9 per cent. in the first three months of 2001 to 30.5 per cent. in the first three months of 2002. The increase was primarily due to both higher average selling prices for our products and lower manufacturing costs per unit sold. In the first three months of 2002 as compared to the same period in 2001, we had lower manufacturing costs per unit as a result of continued increase of fab capacity in 2001 and a larger number of units produced, as well as improved yields.

Research and development expenses. Our research and development expenses decreased 2.2 per cent. from NT$459 million in the first three months of 2001 to NT$449 million (US$13 million) in the first three months of 2002. These expenses represented 19.1 per cent. and 12.6 per cent. of net revenue in the first three months of 2001 and 2002, respectively. We expect research and development expenses to be higher in both absolute terms and as a percentage of net revenue in the remaining quarters of 2002 due primarily to costs related to implementing copper-based process technologies and developing form factors for 0.13 micron process technologies.

Marketing and sales expenses . Our marketing and sales expenses increased 98.7 per cent. from NT$159 million in the first three months of 2001 to NT$316 million (US$9 million) in the first three months of 2002. These expenses represented 6.6 per cent. and 8.8 per cent. of net revenue in the first three months of 2001 and 2002, respectively. This increase in the first three months of 2002 as compared to 2001 was due to increased royalty expense associated with increased unit sales, in particular per unit license fees paid to Intel as a result of sales of our SiS650 and SiS645 products. In future quarters we expect our marketing and sales expenses to increase in both absolute terms and as a percentage of net revenue due to our product mix causing continued increases in license fees paid to Intel.

General and administrative expenses. General and administrative expenses consist primarily of salaries for our administrative, finance and human resource personnel, fees for professional services, including legal fees, and cost of computers and communications systems to support our operations. In periods of heavy litigation, particularly with respect to patent and trade secret disputes, legal fees for professional services can be a significant component of general and administrative expenses, as they were in 2001 and are expected to be in 2002.

Total non-operating income. Our total non-operating income decreased 42.9 per cent. from NT$49 million in the first three months of 2001 to NT$28 million (US$1 million) in the first three months of 2002. These changes were principally due to both higher interest income and a gain on disposal of short-term investments in the first three months of 2001, which were partially offset by dividend income in the first three months of 2002.

Total non-operating expenses. Our total non-operating expenses increased 11.6 per cent. from NT$146 million in the first three months of 2001 to NT$163 million (US$5 million) in the first three months of 2002. This increase was primarily due to the increase in interest expense on debt incurred for capital expenditures relating to our fab expansion.

Income tax benefit. We did not record an income tax benefit in the first three months of either 2001 or 2002.

The following table sets forth some of our results of operations data as a percentage of our net revenue for the periods indicated.

Year Ended 31 December	Year Ended 31 December	Year Ended 31 December
1999 (%) 100.0 65.3 34.7 6.8 9.2 3.4 19.4 15.3 1.8 0.2 16.9 1.2 18.1 0.0	2000 (%) 100.0 95.9 4.1 15.3 9.2 4.3 28.8 (24.7) 15.2 1.9 (11.4) 8.5 (2.9) 0.0	2001
		(%) 100.0 74.5 25.5 18.9 6.0 5.7 30.6 (5.1) 2.2 8.0 (10.9) 4.8 (6.1) 0.0
18.1	(2.9)	(6.1)

1999 compared with 2000 and 2000 compared with 2001

Net revenue. Our net revenue decreased 27.9 per cent. from NT$10,845 million in 1999 to NT$7,821 million in 2000, but increased by 27.7 per cent. to NT$9,987 million (US$285 million) in 2001. The decrease in 2000 compared to 1999 was principally due to our inability to fulfil all customer orders for our higher end products in 2000. In 1999, we outsourced 100 per cent. of our product manufacturing and were largely able to secure adequate manufacturing capacity. In 2000, we had low capacity and yields at our fab, and we were unable to obtain adequate manufacturing capacity from our existing foundry relationships for higher end products. The decrease in the number of products sold in 2000 compared to 1999 was offset partially by increased average selling prices of our products in 2000 compared to 1999.

The increase in net revenue in 2001 compared to 2000 was primarily the result of substantially increased average selling prices in 2001, principally as a result of new product launches. The number of products sold in 2001 decreased as compared to 2000.

Gross profit. Our gross margin decreased from 34.7 per cent. in 1999 to 4.1 per cent. in 2000, but increased to 25.5 per cent. in 2001. The lower gross margin in 2000 compared to both 1999 and 2001 was principally due to our fab being in its initial phase of operations in 2000, resulting in high fixed costs being allocated over a relatively small number of units. In 1999, we had no fab related costs allocated to cost of revenue because we outsourced all of our manufacturing and, in 2001, although we owned a fab, we had been able to lower manufacturing costs per unit by increasing capacity and units produced as well as improving yields.

Research and development expenses. Our research and development expenses increased 60.9 per cent. from NT$742 million in 1999 to NT$1,194 million in 2000, and increased 57.7 per cent. to NT$1,883 million (US$54 million) in 2001. These expenses represented 6.8 per cent., 15.3 per cent. and 18.9 per cent. of net revenue in 1999, 2000 and 2001, respectively. The year-over-year increases reflected increases in process technology related research and development expenses related to our fab. These expenses included salaries, wafer and other engineering raw materials, mask production, amortisation of license fees to IBM, and depreciation. Wafer and other engineering raw materials costs were at high levels because we followed a strategy of using large quantities to test our manufacturing processes in order to expedite development and refinement of those processes.

Marketing and sales expenses. Our marketing and sales expenses decreased 27.6 per cent. from NT$999 million in 1999 to NT$723 million in 2000, and decreased 16.7 per cent. to NT$602 million (US$17 million) in 2001. These expenses represented 9.2 per cent., 9.2 per cent. and 6.0 per cent. of net revenue in 1999, 2000 and 2001, respectively. This in 2000 primarily resulted from decreased royalty expense associated with decreased unit sales, and the decrease in 2001 was due to decreased royalty expenses paid to Intel and National Semiconductor due to changes in our product mix and lower per unit royalty rates from meeting applicable aggregate unit sales volume thresholds.

General and administrative expenses. Our general and administrative expenses decreased 9.2 per cent. from NT$369 million in 1999 to NT$335 million in 2000, but increased 69.0 per cent. to NT$566 million (US$16 million) in 2001. These expenses represented 3.4 per cent., 4.3 per cent. and 5.7 per cent. of net revenue in 1999, 2000 and 2001, respectively. In 2000, the absolute decrease in NT dollars was primarily due to additional cash compensation that was paid in 1999, but not in 2000, to general and administrative employees. In 2000, the increase as a percentage of net revenue was due to our lower net revenue. In 2001, the increase resulted from increased legal fees relating to our patent and trade secrets litigation with UMC.

Total non-operating income. Our total non-operating income increased 516.0 per cent. from NT$194 million in 1999 to NT$1,195 million in 2000, but decreased 81.8 per cent. to NT$218 million (US$6 million) in 2001. These changes were principally due to the one-time gain in 2000 on our disposal of a portion of our investment in Vanguard International Semiconductor Corp., referred to as Vanguard, in a gain of approximately NT$893 million.

Total non-operating expenses. Our total non-operating expenses increased 500.0 per cent. from NT$25 million in 1999 to NT$150 million in 2000 and increased 433.3 per cent. to NT$800 million (US$23 million) in 2001. These increases were principally due to the interest related to the additional debt incurred for capital expenditures for our fab expansion. NT$44 million (US$1 million) of factoring expenses, and NT$56 million (US$2 million) of indemnity expense relating to past claims of patent infringement with respect to certain of our products, in 2001 also contributed to the increase in that year; we had no factoring expense or indemnity expense in 1999 or 2000.

Income tax benefit. Our income tax benefit increased 402.3 per cent. from NT$132 million in 1999 to NT$663 million in 2000, but decreased 27.9 per cent. to NT$478 million (US$14 million) in 2001. The increase in 2000 was primarily due to a net increase in our total deferred tax assets in 2000 as compared to 1999. This net increase was primarily the result of investment tax credits, and partially the result of net operating loss carryforwards, generated in 2000. The decrease in 2001 as compared to 2000 was primarily the result of an increase in deferred tax liabilities relating to temporary differences in depreciation timing in 2001.

Quarterly Results of Operations

The following table sets forth unconsolidated statement of income data under ROC GAAP for each of the nine quarters in the period ended 31 March 2002, and the percentage of our net revenue represented by each item of the respective quarter. This information has been derived from our unaudited unconsolidated financial statements that, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this information. The following data is presented under ROC GAAP on an unconsolidated basis, which differs from our consolidated financial data presented elsewhere in this Offering Circular. You should read this information in conjunction with our audited consolidated financial statements and related notes appearing elsewhere in this Offering Circular. We have experienced and expect to continue to experience fluctuations in operating results from quarter to quarter. You should not draw any conclusions about our future results from the results of operations for any quarter, as quarterly results are not indicative of the results for a full year or any other period. For a discussion of material differences between ROC GAAP and US GAAP as applied to our financial statements, see “Summary of Principal Differences between ROC GAAP and US GAAP”.

			Three Months Ended	Three Months Ended
31 Mar. 2000 (NT$) 1,369 1,458 (89) 231 87 30 348 (437) 522 95 91 — 1 709 6 — — 17 23 249 336	30 June 2000 (NT$) 1,831 2,180 (349) 279 230 93 602 (951) 373 39 — — 39 451 6 — — 4 10 (510) 219	30 Sept. 2000 (NT$) 2,329 1,801 528 311 255 61 627 (99) 4 22 10 — 13 49 48 — — 8 56 (106) 101	31 Dec. 2000 31 Mar. 2001 30 June 2001 (NT$) (NT$) (NT$) (Unaudited) (In millions) 2,303 2,402 2,520 2,075 1,829 1,911 228 573 609 387 459 442 210 159 135 74 65 115 671 683 692 (443) (110) (83) 7 16 15 23 17 12 — 13 67 — — — 5 3 10 35 49 104 68 140 186 — — — — — — 396 6 23 107 146 192 (515) (207) (171) — — —	30 Sept. 2001 (NT$) 2,352 1,633 719 455 130 123 708 11 13 5 — — 2 20 178 — — 22 201 (170) —	31 Dec. 2001 (NT$) 2,705 2,061 644 542 195 193 930 (286) — 11 22 13 5 51 174 56 44 — 296 (531) 471	31 Mar. 2002 (NT$) 3,576 2,485 1,091 449 316 165 930 161 — 5 9 13 1 28 161 — 2 — 163 26 —	31 Mar. 2002
							(US$) 102 71 31 13 9 4 26 5 — — — 1 — 1 5 — — — 5 1 —
585	(291)	(5)	(515) (207) (171)	(170)	(60)	26	1

			Three	Months Ended	Months Ended
31 Mar. 2000 100.0 106.5 (6.5) 16.9 6.4 2.2 25.5 (32.0) 38.2 6.9 6.6 0.0 0.1	30 June 2000 100.0 119.1 (19.1) 15.2 12.5 5.1 32.8 (51.9) 20.3 2.1 0.0 0.0 2.2	30 Sept. 2000 100.0 77.3 22.7 13.3 11.0 2.6 26.9 (4.2) 0.2 1.0 0.4 0.0 0.5	31 Dec. 2000 31 Mar. 2001 30 June 2001 (Unaudited) (%) 100.0 100.0 100.0 90.1 76.1 75.8 9.9 23.9 24.2 16.8 19.1 17.5 9.1 6.6 5.4 3.2 2.7 4.6 29.1 28.4 27.5 (19.2) (4.5) (3.3) 0.3 0.7 0.6 1.0 0.7 0.5 0.0 0.5 2.6 0.0 0.0 0.0 0.2 0.1 0.4			30 Sept. 2001 100.0 69.4 30.6 19.3 5.5 5.3 30.1 0.5 0.6 0.2 0.0 0.0 0.1	31 Dec. 2001 100.0 76.2 23.8 20.1 7.2 7.1 34.4 (10.6) 0.0 0.4 0.8 0.5 0.2	31 Mar. 2002
								100.0 69.5 30.5 12.6 8.8 4.6 26.0 4.5 0.0 0.1 0.3 0.4 0.0
51.8	24.6	2.1	1.5	2.0	4.1	0.9	1.9	0.8 4.5 0.0 0.1 0.0 4.6 0.7 0.0 0.7
0.4 0.0 0.0 1.2 1.6 18.2 24.5	0.4 0.0 0.0 0.2 0.6 (27.9) 12.0	2.1 0.0 0.0 0.3 2.4 (4.5) 4.3	3.0 0.0 0.0 1.7 4.7 (22.4) 0.0	5.8 0.0 0.0 0.3 6.1 (8.6) 0.0	7.4 0.0 0.0 0.2 7.6 (6.8) 0.0	7.6 0.0 0.0 1.0 8.6 (7.2) 0.0	6.4 2.1 1.6 0.8 10.9 (19.6) 17.4	4.5 0.0 0.1 0.0
								4.6
								0.7 0.0
42.7	(15.9)	(0.2)	(22.4)	(8.6)	(6.8)	(7.2)	(2.2)

Net revenue. Net revenue increases for the quarters in 2000 were primarily driven by the launch of our SiS630 product in the third quarter of 1999. Seasonality contributed to the increase in the third quarter of 2000. Sales of the SiS630 continued to be a major factor in the first two quarters of 2001 but declined significantly in the third quarter. The launch of the SiS650 and SiS645 in the third quarter of 2001 contributed to net revenue increases in the fourth quarter of 2001. In the fourth quarter of 2001, our net revenue was constrained by reduced sales to large customers arising from our resistance to their pricing demands.

Gross profit. Gross margin in the first two quarters of 2000 was negative as high fixed fab costs were allocated over a relatively small number of units produced from our fab. Gross margin increased in the third quarter of 2000 as we began to produce more wafers from our fab, but then declined in the fourth quarter as we increased provisions for inventory losses due to low yields encountered during these early fab operations. Gross margin decreased in the fourth quarter of 2001 despite increases in our fab capacity, utilisation rates and yields. This was because we could not supply sufficient quantities of our products during the faster than anticipated transition in customer demand from products supporting the Intel Pentium III microprocessor to products supporting the Pentium 4 microprocessor, and although we had higher sales volumes of Pentium III core logic chipsets, it was offset by reduced average selling prices due to an anticipated quick transition of the market from Pentium III chipsets to Pentium 4 chipsets. This resulted in significant price reductions for our Pentium III-related

products and decreased gross margins in that quarter. Gross profits increased in the first quarter of 2002 in connection with significant sales of our SiS650 and SiS645 products.

Research and development expenses. Research and development expenses as a percentage of net revenue were relatively high during the fourth quarter of 2001 principally due to lower than expected net revenue in that quarter. Based on targeted research and development efforts under the expectation of higher net revenues, we made some commitments that we were not able to reverse. In addition, process technology license fees are amortised on a fixed schedule and are therefore unaffected by lower net revenue. We also had higher research and development expense in that quarter as a result of higher mask costs associated with the introduction of new products.

Marketing and sales expenses. Marketing and sales expenses as a percentage of net revenue were relatively high during the second and third quarters of 2000, and declined for the next three quarters, primarily as a result of decreasing per unit license fees paid to Intel over the life cycle of our SiS630 product. These expenses increased in the fourth quarter of 2001 and first quarter of 2002 as per unit license fees paid to Intel increased as a result of increased sales of our SiS650 and SiS645 products.

General and administrative expenses. General and administrative expenses as a percentage of net revenue were relatively high during the fourth quarter of 2001 as a result of increased legal fees relating to our patent and trade secrets litigation with UMC.

Non-operating income. Non-operating income as a percentage of net revenue was high in the first and second quarters of 2000 primarily as a result of an unusual, one-time gain on our disposal of a portion of our investment in Vanguard, which resulted in a gain of approximately NT$893 million. Interest income and foreign exchange gain also contributed to non-operating income in the first quarter of 2000.

Non-operating expenses. Non-operating expenses in absolute terms have increased over most of the quarters shown principally due to the increase in interest expense because of additional debt incurred for capital expenditures relating to our fab expansion. Factoring expense, and indemnity expense relating to past claims of patent infringement for certain of our products, contributed to an increase in absolute terms of non-operating expenses in the fourth quarter of 2001. We did not incur factoring expense in any other quarter of 2000 or 2001. It is likely that we will incur additional factoring expense in the future. We did not incur indemnity expense in any other quarter of 2000 or 2001. Future sales of the products that were alleged to infringe and that were related to the indemnity expense taken in the fourth quarter of 2001 will have royalties recorded in marketing and sales in the future in quarters that sales of these products occur.

Income tax benefit. Income tax benefit as a percentage of net revenue was relatively high in the first and second quarters of 2000 and the fourth quarter of 2001 primarily as the result of a net increase in our total deferred tax assets in each of those quarters as compared to each prior quarter. The net increases were primarily the result of net operating loss carryforwards and investment tax credits generated in each quarter.

Liquidity and Capital Resources

The operation of our business as an integrated device manufacturer is highly capital intensive. The construction and development of our fab over the past three years has required significant investment. The current capacity at our fab is 28,000 8-inch wafers per month which we expect to meet our needs until the end of 2003. As our business needs require, we expect to increase the capacity of our fab.

In addition, the semiconductor industry has historically experienced rapid changes in process technology. To maintain competitiveness at the same capacity, we must make significant continuing investment in plant and equipment and process technology research and development. In addition to our need for liquidity to support our capacity expansion and manufacturing process improvements, as we increase capacity, we will require significant working capital for raw materials for production.

We have budgeted approximately NT$2,956 million of capital expenditures in 2002 (compared to approximately NT$3,944 million (US$113 million) in 2001), including approximately NT$761 million relating to our new research and development facility in Hsinchu, NT$1,000 million to introduce copper-based process technologies at our fab, NT$300 million for equipment relating to product design and NT$895 million for process technology related license fees.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. We cannot assure you that we will be able to raise additional capital, should that become necessary, on terms acceptable to us or at all.

Unused credit lines for short-term bank loans as of 31 March 2002 were approximately NT$2,186 million (US$62 million).

Our NT$7,000 million syndicated bank loan, our NT$1,650 million syndicated bank loan and the bank guarantee in connection with our NT$3,000 million domestic bonds have financial and other covenants that could trigger an event of default if we fail to comply with them. Each of the agreements for these debt obligations contains the following three financial covenants, and these covenants are tested against our audited unconsolidated financial statements as of 30 June of each year and the date of our annual consolidated financial statements: (i) the current ratio (current assets/current liabilities) shall not fall below 100 per cent.; (ii) the shareholders’ equity ratio (net shareholders’ equity/total assets) shall not fall below 50 per cent., provided that the lenders have agreed, subject to execution of final amendments to the relevant loan agreements, that the 50 per cent. ratio will be changed to 43 per cent. if we complete an offering of up to US$150 million unsecured overseas convertible bonds in 2002; and (iii) annual principal-interest margin multiples (net profit before tax + interest charge + depreciation + amortisation/interest charge) shall not fall below 2.5 before the end of 2001 and below 3.0 in 2002 and beyond. As of 30 June 2002, we believe that we were in compliance with the financial and other covenants in these agreements.

However, in addition to these covenants, the agreements for these debt obligations provide that the occurrence of other specific events would constitute an event of default under these debt obligations. By operation of cross default provisions, an event of default under any of these debt obligations could trigger an event of default under our other debt obligations and could result in the entire amount of principal and interest under these obligations being accelerated and becoming immediately due and payable. In particular, our NT$7,000 million syndicated bank loan and the bank guarantee in connection with our NT$3,000 million domestic bonds provide that material adverse litigation or arbitration against us that affects our repayment ability would give rise to an event of default and, our NT$1,650 million syndicated bank loan provides that any provisional injunction or attachment which involves a disputed amount of more than NT$1,000 million would give rise to an event of default. While it is possible that the lenders may determine that the existence of our litigation with UMC causes us to be in default, we believe the lenders under these debt obligations are aware of this litigation, and they have not accelerated any amounts under these obligations. In addition, our NT$7,000 million syndicated bank loan and the bank guarantee in connection with our NT$3,000 million domestic bonds provide that an event of default is triggered if we fail to duly pay to the guaranteeing banks, the leading bank, the managing bank or any other party under other contracts any payable amounts, or the debts incurred by us (whether as the principal debtor or the guarantor) to such creditors have become or are approved to be accelerated. An event of default under either of these obligations would also trigger an event of default under the NT$1,650 million syndicated bank loan. Due to the breadth of these cross-default

provisions, our failure to meet relatively immaterial payment obligations under our commercial and other contracts could be deemed to trigger an event of default under each of these debt obligations, and there is a risk that the lenders under these obligations could assert that we are in default as a result of events occurring in our normal course of business.

We have financed our substantial capital expenditure requirements from cash flows from operations as well as from bank borrowing and the issuance of five year secured bonds denominated in New Taiwan dollars. In June 2000, we borrowed NT$7,000 million under a long-term secured syndicated bank loan which bears interest at a floating rate and which is repayable in semi-annual instalments in varying amounts from June 2002 until June 2007. In July 2000, we issued five-year domestic secured bonds with an aggregate face value of NT$3,000 million which bear interest at a fixed rate of 5.42 per cent. and which are repayable semi-annually from July 2002 until July 2005. In August 2001, we borrowed NT$1,650 million under a long-term secured syndicated bank loan which bears interest at a floating rate and which is repayable in semi-annual instalments from March 2003 until September 2006. The terms of our NT$7,000 million and NT$1,650 million bank loans require us to use all proceeds for the purchase of plant and machinery for our 8-inch fab. At 31 March 2002, we had short-term bank loans and letters of credit outstanding of NT$2,704 million (US$77 million), secured bonds outstanding with aggregate face value of NT$3,000 million (US$86 million) and long-term bank loans outstanding of NT$8,650 million (US$247 million).

The following table summarises our obligations and commitments as of 31 March 2002 to make future payments under contracts, such as bank debt agreements, other debt agreements, license agreements and lease agreements.

Contractual Obligations Short-term bank debt and letters of credit � � Long-term bank debt � � � � � � � Bonds payable � � � � � � � � Capital leases � � � � � � � � � Operating leases � � � � � � � � License fees and royalties � � � � � � Total � � � � � � � � � � �		Payments Due by Period	Payments Due by Period	Payments Due by Period	Payments Due by Period	Payments Due by Period	Payments Due by Period
t and letters of credit � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � alties � � � � � �	Total (NT$) 2,704 8,650 3,000 111 136 2,485	Less than 1 year (NT$) 2,704 1,479 860 101 8 560		1-3 years (NT$) (In millions) — 5,056 2,140 10 31 1,575		4-5 years (NT$) — 2,115 — — 21 350		After 5 years
								(NT$) — — — — 76 —
	17,086		5,712		8,812		2,486	76

In the fourth quarter of 2001, we entered into agreements to sell accounts receivable to factors. We factored receivables of Elitegroup Computer Systems and its affiliates, which together are our largest customer, whose receivables generally have longer payment terms. Under the factoring agreements, which have a fixed term of 120 to 180 days, we are assessed a periodic finance charge, which is reflected in non-operating expense as factoring expense, based on the balance of the factored receivable that has not been collected by the factor. At the end of the fixed term, no further finance charges are assessed, even if the factor has not collected the receivables. The factoring agent has the right to collect the receivables and bears the collection risk. Depending on the factoring transaction, the factoring agent remits between 80 per cent. and 100 per cent. of the factored receivable to us at the time of entering into the factoring agreement. The remaining 20 per cent., if applicable, is due to us at the end of the term of the factored receivable. In 2001, we factored accounts receivable totalling NT$2,486 million (US$71 million) and recorded a factoring expense of NT$44 million (US$1 million). In the first three months of 2002, we factored accounts receivable totalling NT$114 million (US$3 million) and recorded a factoring expense of NT$1.8 million (US$51,000). The maximum amount of the finance charge over the fixed term is expensed at the time we enter into the factoring agreement. It is likely that we will incur additional factoring expense in the first half of 2002.

At 31 March 2002, we had NT$2,298 million (US$66 million) of cash.

Once a fab is in operation at acceptable capacity and yields, it can provide significant cash flows. We had cash flows from operations of NT$(2,539) million and NT$1,692 million (US$48 million) in 2000 and 2001, respectively, and cash flows from operations of NT$188 million (US$5 million) in the first quarter of 2002. Although we had a net loss in 2001 of NT$608 million (US$17 million), we had a positive cash flow from operations of NT$1,692 million (US$48 million) in that period as a result of non-cash depreciation and amortisation expense of NT$4,087 million (US$117 million). The amount of cash that we generated in 2001 was reduced by increases in inventories of NT$1,971 million (US$56 million), reflecting our building inventories of new products and larger than expected growth in inventories of Pentium 4-related products. The amount of cash that we generated in 2001 was increased by a net reduction in notes receivable of NT$850 million (US$24 million) as a result of factoring transactions. The amount of cash that we generated in the first quarter of 2002 was reduced by increases in accounts receivable of NT$1,413 million (US$40 million).

Net cash used in our investment activities in 2000 and 2001 was NT$18,861 million and NT$3,787 million (US$108 million), respectively, and net cash used in our investment activities in the first quarter of 2002 was NT$1,268 million (US$36 million). Reflected in those net amounts in 2000, 2001 and the first three months of 2002 is a total use of cash in investment activities of NT$17,822 million, NT$3,944 million (US$113 million), and NT$813 million (US$23 million) respectively, primarily used to purchase equipment.

Net cash provided by our financing activities in 2001 was NT$2,127 million (US$61 million) from our issuances of short-term debt, medium-term notes and corporate bonds. Net cash provided by our financing activities in the first three months of 2002 was NT$470 million (US$13 million) primarily from our issuances of short-term debt.

Inflation

We do not believe that inflation in Taiwan has had a material impact on our results of operations. Inflation in Taiwan was approximately 0.2 per cent., 1.3 per cent. and (0.01) per cent. in 1999, 2000 and 2001, respectively.

Qualitative and Quantitative Disclosures about Market Risk

Market risk is the risk of loss related to adverse changes in market prices of financial instruments. Our exposure to financial market risks derives primarily from changes in interest rates and foreign exchange rates. To mitigate our foreign exchange rate risks, we utilise derivative financial instruments, the application of which, pursuant to our internal guidelines, is for hedging purposes and not speculative purposes.

At 31 December 2001, we had US dollar-, NT dollar-, Japanese yen-, and Euro-denominated savings accounts of US$43 million, NT$870 million (US$25 million), Yen 1,022 million (US$8 million) and Euro 5 million (US$4 million), respectively. We also had certificates of deposit of NT$121 million (US$3 million). We had US dollar-denominated receivables of US$57 million at 31 December 2001. We also had NT dollar denominated accounts receivable of NT$435 million (US$12 million) at 31 December 2001.

At 31 December 2001, we had payables of NT$1,558 million (US$45 million), US$52 million, Yen 1,327 million (US$10 million), and smaller amounts in other currencies. At 31 December 2001, we had short-term loans in foreign currencies in the following amounts: US$1 million, Yen 98 million (US$1 million), Euro 8 million (US$7 million) and NLG 4 million (US$2 million).

Interest rate risk

Our exposure to interest rate risks relates primarily to our long-term debts, which are normally assumed to finance our capital expenditures.

The table below presents annual principal amounts due and related weighted average implied forward rates by year of maturity for our long-term debt obligations as of 31 December 2001.

Long-term Debt: Secured Bonds Fixed rate (NT$ million) � � � � Average interest rate (%) � � � � Secured long-term loans Variable rate (NT$ million) � � � � Average interest rate (%) � � � � Secured long-term loans Variable rate (NT$ million) � � � � Average interest rate (%) � � � �	2002 430 5.42 1,273 4.40 — —	2003 860 5.42 1,273 4.40 413 4.49	2004 860 5.42 1,273 4.40 413 4.49	2005 850 5.42 1,273 4.40 413 4.49	2006 2007 and Thereafter — — — — 1,273 635 4.40 4.40 411 — 4.49 —	2006 2007 and Thereafter — — — — 1,273 635 4.40 4.40 411 — 4.49 —
						— — 635 4.40 — —

Foreign currency risk

Currently, the majority of our revenues are denominated in US dollars. Our cost of revenue, operating expenses and capital expenditures are incurred in several currencies, including NT dollars, Japanese yen, US dollars and Euros. We are particularly affected by fluctuations in the exchange rate between the US dollar and the NT dollar. We enter into short-term, forward exchange contracts to hedge foreign-currency denominated customer receivables and our payables. The purpose of entering into these hedges is to minimise the impact of foreign currency fluctuations on our results of operations, and not for speculative purposes. These hedging transactions help to reduce, but do not eliminate, the impact of foreign currency exchange rate movements. At the inception dates of each contract, the premium or discount of the contract is recorded. The premium or discount is calculated as the difference between the contracted forward exchange rate minus the spot exchange rate, times the nominal amount of the contract. The premium or discount are amortised using the straight-line method over the term of the contract and recorded as income or expense on balance sheet dates. Deferred gains or losses from forward exchange contracts are included in the measurement of the hedged transaction when the hedged transaction occurs. The contracts have maturity dates that do not exceed one year.

As of 31 December 2001, we had outstanding forward exchange contracts to sell US dollars at a contract amount of US$40 million and to buy Euros at a contract amount of Euro 9 million, which are described in more detail in Note 21 to the consolidated financial statements included elsewhere in this Offering Circular.

BUSINESS

General

We are a leading provider, based on revenue, of integrated and discrete core logic chipsets for the global PC market. We were founded in Taiwan in 1987 and have developed a broad range of internal capabilities for the design and manufacture of core logic and graphics products. Our customers, which are primarily motherboard makers, are almost all based in Taiwan. We engage in engineering discussions with our customers early in their product design cycles to help them design product roadmaps and differentiate their products from their competitors’ products.

In 1998 we made the strategic decision to build our own semiconductor manufacturing facility, called a fab, in Hsinchu, Taiwan. We completed pilot production of the first SiS630 chip at our fab in March 2000, and we now manufacture substantially all of our products in this facility. We believe that our manufacturing capability provides us with a competitive advantage over core logic producers that do not have their own fabs, or are fabless, and we are committed to enhancing the capacity and technological capabilities of our fab as our business needs require.

As of 31 December 2001, we had 1,638 employees, 1,011 of which were engineers. Our headquarters and fab are in Hsinchu, Taiwan, and we have marketing offices in Taipei, other parts of Asia and the U.S.

Industry Background

The Personal Computer Market

The personal computer, or PC, industry is large, with approximately 124 million PCs sold worldwide in 2001. The primary growth drivers for the PC market have been rapid advancements in semiconductor technologies and increases in the functionality of integrated circuits designed into PCs. These advances have continuously improved the performance, breadth of functions and reliability of PCs, while lowering the overall cost of a PC system. For example, many PCs sold today contain semiconductor components that allow users to efficiently access Internet content, play complex video games incorporating advanced 3D graphics, and capture and edit digital video and audio files. The personal computer market is divided into computers based on Intel and AMD microprocessors using the x86 architecture and the much smaller market for Apple personal computers. Throughout this Offering Circular, when we refer to the personal computer market we are referring to the market for x86 architecture computers. PC manufacturers generally offer a range of systems to both retail and business consumers, who have diverse and evolving cost and performance requirements. The PC market is typically segmented into three categories, performance PCs (priced above US$1,500), mainstream PCs (priced from US$800 to US$1,500), and value PCs (priced below US$800), representing approximately 29.3 per cent., 57.8 per cent. and 12.9 per cent. in units, respectively, of the overall global PC market in 2001 according to estimates by Gartner Dataquest.

PC Components

For many years PCs have incorporated various data input and output technologies for such basic purposes as connecting printers, modems, internal and external storage devices, mice, keyboards, and game controllers. Today’s PCs are being called upon to provide more advanced functions, such as accessing Internet content via broadband connections, creating and viewing complex 3D graphical presentations, playing complex graphical games, communicating using wireless technology, and capturing and editing digital video and audio files. These and other functions are performed by the primary microprocessor, also referred to as the central processing unit, or CPU, and other semiconductor components. These

semiconductor components include core logic, main memory and other ancillary integrated circuits, or ICs. The selection of CPU, main memory, core logic and ancillary ICs for the motherboard are critical determinants of the performance, breadth of functions and cost of a PC.

In an operating PC, the CPU is constantly reading data from and writing data to the main memory, also referred to as random access memory, or RAM. At the same time, ICs controlling storage devices, graphics processing, input/output functions and other functions also need to exchange data and instructions with the CPU and RAM. The CPU, the RAM, and all of these various ancillary devices are not directly connected to one another; rather, they are indirectly connected by data channels, known as busses, and communicate with each other through data traffic that flows over the busses. The core logic chipset’s purpose is to coordinate the communications of these various devices over the busses. As a result, core logic is a key design element of the motherboard.

Core Logic Chipsets

The core logic chipset, which manages the flow of data traffic on a PC motherboard, typically consists of two ICs, usually referred to as the North Bridge and the South Bridge. As illustrated below in a generic PC architecture schematic where an integrated core logic chipset is used, the North Bridge acts as the interface among the CPU, the RAM and the graphics processor. The North Bridge also connects to the South Bridge, which supports the connection of various peripherals, including input devices such as the keyboard and mouse, storage devices such as the disk drive and hard drive, connectivity devices such as the printer, modem (standard or broadband), and network interface card (which may provide wireless connectivity), and digital media devices such as a digital music player or digital video recorder.

Integrated Core Logic Chipset

==> picture [458 x 215] intentionally omitted <==

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

North Bridge
Microprocessor Main Memory
(including integrated
(CPU) Front graphics processor) Memory (RAM)
side bus bus
South Bridge
connections to USB port, FireWire port,
parallel port, serial port, keyboard,
mouse, hard drive, floppy disk etc.
----- End of picture text -----

Core logic products can be classified into two types: discrete and integrated. Discrete chipsets have the primary purpose of performing the communications and coordination functions described above, but do not have integrated graphics processing capabilities. Therefore, in the case of discrete chipsets, the graphics processor would not be on the core logic chipset as it is in the schematic above. The other type, integrated chipsets, perform the same functions as discrete chipsets and also have graphics accelerator functionality integrated into them.

One of the key trends affecting core logic products has been an increase in the number of features that are integrated directly into the core logic chipset itself. Motherboards designed for performance PCs are frequently based on discrete chipsets, which are engineered to enable the latest CPU and memory technologies and to provide very efficient connections to standalone ICs that incorporate leading-edge technology for performing crucial ancillary

functions such as graphics processing or connectivity. For motherboard makers, the use of discrete chipsets usually results in higher PC performance and more flexibility in the choice of standalone ICs, but typically also results in higher overall motherboard cost due to the use of more, and more costly, standalone ICs. Responding to consumer demand, the new features and standards initially provided by performance PCs are frequently designed into mainstream PCs and eventually value PCs in subsequent product generations. In these segments, cost pressures tend to weigh in favour of an integrated chipset solution in which the chipset replaces the more costly standalone ICs. As a result, a chipset maker seeking to offer products across all segments of the PC market must constantly develop discrete chipsets that support leading-edge features and standards and, soon thereafter, integrated chipset products that incorporate the newer functionality.

Chipsets are critical components in the overall architecture of a PC because of the integral role they play in determining the performance and breadth of functions offered by a PC. As a result of the increasing integration of diverse functionality into both discrete and integrated chipsets, such as the integration of audio functionality, a larger portion of a PC’s functionality is provided by the chipset, as opposed to other ICs. Chipsets also enable individual performance improvements in CPUs, main memory and other PC components to translate into improved overall PC system performance because they coordinate communications among those components at increasingly higher speeds. Chipsets are a key PC architectural component because they are the managers of data traffic on the busses which is increasing in volume and diversity.

Core Logic Market

The core logic market is large and growing. In 2001, according to IDC, the core logic market for desktop and mobile PCs was approximately US$3,800 million, and it is expected to grow to approximately US$5,100 million by 2006. Core logic products for x86 architecture PCs are dependent on proprietary system bus standards set by the two primary designers and manufacturers of microprocessors, Intel and AMD. According to IDC, in 2001, Intel’s sales represented approximately 78.9 per cent. of the microprocessor market based on units sold and AMD’s represented approximately 20.6 per cent. Core logic makers need licenses to the proprietary microprocessor bus standards of Intel and AMD in order to make compatible products. In addition to manufacturing microprocessors, Intel also manufactures core logic products and competes in the core logic market. Historically, Intel’s unit sales represented approximately 66.6 per cent., 59.4 per cent. and 55.0 per cent. of the core logic market in 1999, 2000 and 2001, respectively, according to IDC.

The principal direct customers for core logic products are motherboard makers, primarily located in Taiwan. Motherboard makers assemble PC motherboards and then sell them to PC original equipment manufacturers, referred to as OEMs, to systems integrators, or into the retail motherboard market. In the case of some OEMs, the OEM and motherboard maker jointly decide which components to use on motherboards and for other OEMs, the OEM is the final decision maker. Motherboard makers decide which components will be used in motherboards sold to systems integrators and into the retail market. Some core logic products are also sold directly to OEMs. Recently, some motherboard makers have begun designing entire PC systems in addition to their more traditional role of designing only motherboards. As motherboard makers become more system design oriented, we believe that they will have more control over the selection of motherboard components, including core logic.

In order to compete successfully in the core logic market, core logic producers must continually introduce products that support existing and new microprocessors, various types of RAM, evolving graphics standards and new connectivity protocols. Core logic producers strive to bring each generation of new products to market quickly in order to have those products designed into motherboards. Generally, motherboard makers have a one to three month design window for incorporating new chipset products. Core logic producers are better able to achieve these design wins if they work closely with their customers to define product roadmaps, customise products, test assembled products and provide core logic features that will ultimately allow a customer to differentiate its products from those of its competitors.

Leading-edge Manufacturing

Access to high-quality manufacturing is critical to the success of a core logic producer. Core logic producers need reliable access to facilities and equipment that are capable of producing continuously more complex core logic products. In particular, integration of functions into the core logic often is achieved by shrinking the chipset, which means using the most advanced manufacturing technologies, also referred to as process technologies, to fit more circuitry on a chip. In addition, core logic producers require manufacturing capability that will allow them to introduce new products quickly and that will allow them the flexibility to change quickly the mix of products being produced in order to adapt to changing market demand.

Some core logic producers operate their own fabs, such as Intel, AMD and us. Fabless producers, like VIA Technologies, Inc., or VIA, Acer Laboratories, Inc., or ALi, design products and outsource manufacturing to leading semiconductor foundries such as Taiwan Semiconductor Manufacturing Company Limited and United Microelectronics Corporation in Taiwan or Chartered Semiconductor Manufacturing Ltd. in Singapore. Companies operating their own fabs may enjoy lower manufacturing costs, better time-to-market, greater ability to scale production in times of high demand, greater ability to change their product mix quickly and greater ability to improve product performance by working closely with dedicated manufacturing personnel. However, companies operating their own fabs are subject to periodic low utilisation rates, high upfront capital costs, high fixed costs, and the need to maintain their own leading-edge process technologies. Fabless producers are not subject to the same utilisation issues and do not require the same capital investment or need to maintain their own advanced process technologies. However, particularly in times of high demand, fabless core logic producers may be burdened with higher costs arising from increased foundry prices, longer time-to-market, less product mix flexibility and the inability to obtain the volume or time-to-market commitments from foundries required by the core logic producer’s customers.

Our Approach and Strategy

We are a leading independent provider of integrated and discrete core logic chipsets for the global PC market. We also provide standalone graphic chips and system-on-a-chip solutions. The key elements of our current approach and strategy include:

Focus on Providing a Broad Portfolio of Products Across All PC Segments and Target Graphics and Connectivity Markets

We currently offer core logic products supporting the leading CPUs from Intel and AMD, allowing us to sell our chipsets into each of the performance, mainstream and value segments of the PC industry. The majority of our revenue has been generated in the value PC segment, and a portion has come from the mainstream PC segment, the largest segment of the PC market in dollar terms. Recently, we have broadened our product portfolio by developing more discrete chipsets, which are generally higher performance products intended for mainstream and performance PCs. It is through the introduction of discrete chipsets that we intend to increase our market share in the mainstream and performance PC segments. For example, we recently released a new product for the performance market: the SiS648 which is compatible with DDR 400 memory (meaning, double data rate direct random access memory having a data transfer rate of 400 MHz). In 2001, sales of integrated chipsets and discrete chipsets represented approximately 67 per cent. and 20 per cent. of our net revenue, respectively. In the first three months of 2002, sales of integrated and discrete chipsets represented approximately 62 per cent. and 29 per cent. of our net revenue, respectively.

In addition to our activities in the core logic market, we also design and market standalone graphics processing units, or GPUs, and are developing connectivity solutions and additional system-on-a-chip solutions. GPUs are processors specially designed to perform the complex computations required for high performance computer graphics. Our GPU sales in 2001 represented approximately 13 per cent. of our net revenue. Expertise that we gain in our GPU products is also important in our integrated chipset business because integrated chipsets incorporate graphics processors. We recently adopted the brand name “Xabre” for our new GPU products, including the Xabre 600, Xabre 400, Xabre 200 and Xabre 80. We believe that

branding our new GPU products will enhance our marketing efforts. Our connectivity solutions are standalone ICs that provide communications functionality. We are designing and intend to bring to market connectivity products for broadband communications and wireless communications. System-on-a-chip products, also referred to as SoCs, are heavily integrated solutions useful for applications such as Internet appliances, set-top boxes and communication devices. SoCs are a market that we will also be targeting in the future.

We believe that our strategy of developing standalone GPU and connectivity products will provide us with a number of key benefits. Most directly, it will allow us to target large, attractive markets for these standalone products. It will also allow us to build credibility in the marketplace for our expertise in these areas. In the future, as new graphics and connectivity functions are integrated into our core logic products, we expect to take advantage of our expertise and market credibility in these areas to produce better, more highly integrated core logic chipsets and to market them more successfully.

Maintain Low Cost, Leading-edge Manufacturing Through Our IDM Strategy

In 1998, we made the strategic decision to switch from being a fabless design house to becoming an integrated device manufacturer, or IDM, by building our own fab. In March 2000, we completed pilot production of the first SiS630 chip from our fab. We believe that we have developed advanced process technologies necessary to deliver innovative products quickly. Our fab is currently equipped to produce 28,000 8-inch wafers per month, which we expect to meet our needs until the end of 2003. As our business needs require, we expect to increase the capacity of our fab. We believe that owning our own fab increases our ability to control our manufacturing costs, gives us direct, dedicated access to advanced process technologies during market cycles where foundry access is limited, allows us to bring more complex products to market faster and gives us the ability to adjust more easily the mix of products that we are making available to our customers.

We intend to continue to work to improve our manufacturing yields and thereby lower our production costs. We plan to introduce new process technologies, including the ability to use line widths smaller than 0.15 micron and the use of copper-based process technologies. We believe that our diverse product portfolio of both integrated and discrete core logic products, as well as GPUs, connectivity products and SoCs, will enable us to increase utilisation rates, further lowering our per unit costs.

Deliver Cost-effective, Technologically Advanced Products in a Rapid Time Frame

We believe that our advanced, in-house design capabilities and our fab enable us to provide to our customers cost-effective, technologically advanced products in a timely manner. We were the first to integrate a graphics controller into a PC chipset. We also introduced the first chipset to support DDR 333 memory. More recently, we released a chipset to support DDR 400 memory, one of the newest memory technologies for the Pentium 4 platform. We develop most of our product design and process technologies in-house and have approximately 570 engineers devoted to the development of new products and process technologies.

Our focus on quickly developing and marketing innovative and cost-effective products is essential because continuously evolving microprocessor and memory technologies necessitate the rapid introduction of corresponding core logic solutions. Product time-tomarket, price and performance are critical to having our products designed into our customers’ motherboards. In order to continue to meet these requirements, we intend to expand our research and development expertise and strategic technology relationships, maintain an aggressive product roadmap, and continue to increase our process technology capabilities and capacity at our fab.

Maintain Intel and AMD Relationships

We believe that our product development efforts and our product acceptance have benefited significantly from our relationships with the two principal producers of microprocessors, Intel and AMD. For example, we believe that we are one of the few core logic chipset producers to have a license to Intel’s front-side bus architecture for its Pentium 4 microprocessor. We plan to continue to focus our efforts on maintaining these relationships to assure access to the standards of Intel and AMD on which our future products will depend.

Leverage Strategic Technology Relationships

We currently have strategic technology relationships relating to our core logic product development, our intellectual property strategy and our fab. With respect to our core logic products, we have licensed microprocessor technology from Intel, and we plan to continue to license the technology standards that we will need to produce leading-edge core logic products. With respect to intellectual property, we have a broad patent cross-licensing agreement with IBM until the end of 2005. As part of our intellectual property strategy, we intend to continue to seek patent cross-licensing arrangements with leading technology industry participants.

We currently have a broad-based strategic relationship with Toshiba relating to our fab. It includes agreements covering the transfer of advanced complementary metal-oxide silicon, also referred to as CMOS, process technologies and copper technologies and future discussions about the transfer of more advanced process technologies, mutual second source manufacturing and design and development of semiconductor products. We believe that strategic technology relationships with selected global technology leaders will be an important factor in our success. Through these relationships, we expect to share some of the risks of research and development efforts of new technologies. We also expect to share design and technology know-how. For more information on these relationships and licenses see “— Strategic Relationships” and “— Intellectual Property”.

Enhance Customer Relationships and Market Penetration

The majority of our customers are leading motherboard manufacturers who, like us, have their principal operations in Taiwan. We believe that close working relationships with our customers are important to our success because they help us to anticipate and meet customer requirements as they develop next-generation products. We believe that the proximity of our design and manufacturing resources to our customers significantly improves our ability to provide timely and effective design assistance and support for our products. We expect to continue to focus on providing a high level of customer support and service to enhance existing customer relationships and to attract new customers.

Our main sales office is in Taipei, with branch offices in other parts of Asia and in the U.S. We focus our sales and marketing efforts primarily on motherboard makers, who are our principal direct customers. We also direct sales and marketing efforts towards OEMs because they unilaterally, or jointly with their motherboard suppliers, make decisions about what motherboard components to use. In addition, we direct sales and marketing efforts towards end-users of PCs because some motherboards are sold directly into the retail motherboard market. We intend to increase our sales and marketing efforts, initially in our primary markets to leverage our geographic proximity and close relations with motherboard makers in Taiwan and the PRC. We also intend to focus on increasing sales by expanding our marketing efforts in the United States and Europe. This marketing strategy is directed towards OEMs and end-users, our indirect customers, and includes participation in trade shows, press activities, benchmarking performance of our advanced products with recognised independent testing sources, website management, joint promotions with motherboard makers and advertising. We also plan to develop further product brands in areas where we can most benefit from end-user brand awareness. For example, our new GPU products are branded under the name “Xabre”.

Products

During the years ended 1999, 2000 and 2001, revenue from sales of our core logic products accounted for 86.4 per cent., 84.6 per cent. and 86.6 per cent., respectively, of our net revenue. The majority of this core logic revenue related to products for the value PC segment, and a portion related to the mainstream PC segment. In 2001, approximately 75 per cent. of the core logic chipsets that we sold were integrated chipsets. During the years ended 1999, 2000 and 2001, revenue from sales of our GPU products accounted for 11.3 per cent., 10.6 per cent. and 12.7 per cent., respectively, of our net revenue.

Internally developed software is an important component of our products, particularly for GPUs and the graphics accelerator portion of our integrated chipsets. The types of software that we develop for our products include device drivers, basic input/output system software, or BIOS, and utility software. Having our software operations in Taiwan, close to our motherboard customers, facilitates our ability to work closely with those customers to shorten their product time-to-market and to enhance our customer service.

Core Logic Chipsets

The following table sets forth our principal core logic chipset products, introduction dates and key features:

Product North Bridge Discrete Solutions Intel Pentium 4 SiS648 � � � � � SiS645DX � � � � � SiS645 � � � � � AMD K7 SiS745 � � � � � SiS735 � � � � � SiS733 � � � � � Integrated Solutions Intel Pentium 4 SiS651 � � � � � SiS650 � � � � � AMD K7 SiS740 � � � � � SiS730S � � � � � Intel Pentium III SiS630S � � � � � SiS630E � � � � � SiS630 � � � � � South Bridge 961 � � � � � � � 962 � � � � � � �	Quarter Introduced Q2 02 Q1 02 Q3 01 Q4 01 Q1 01 Q1 01 Q1 02 Q3 01 Q3 01 Q3 00 Q4 00 Q2 00 Q3 99 Q3 01 Q2 02	Key Features DDR 400; AGP 8x(1) DDR 333; AGP 4x DDR 333; AGP 4x DDR 333; IEEE 1394(2) SDR/DDR; Single chip(3) SDR; K7 Single chip DDR 333; 256 bit graphics, AGP 4x SDR/DDR; 256 bit graphics, AGP 4x SDR/DDR; 256 graphics SDR; 128 bit graphics SDR; 128 bit graphics; Single chip SDR; 128 bit graphics; Single chip SDR; 128 bit graphics; Single chip ATA100(4), USB1.1(5) ATA133, USB2.0(1)

Notes:

(1) This product has recently been released and chip samples are currently being tested by our customers.

(2) IEEE 1394, frequently referred to as FireWire� and i.LINK�, is a standard for connecting various peripherals to the PC. It is a higher speed connection than standard USB and is commonly used with peripherals that must exchange large amounts of data with the PC, for example, digital video recorders.

(3) Single chip refers to the North Bridge and South Bridge functionality being combined in a single chip.

(4) ATA100 is a standard for connecting storage devices such as hard drives to the PC. ATA100 allows for a higher speed connection than the predecessor standards, ATA33 and ATA66.

(5) USB, short for universal serial bus, is a common standard for connecting various peripherals to the PC.

GPUs

Our second most important product line in revenue terms has consisted of GPUs. The following table sets forth our GPU products, introduction dates and their key features:

Product Xabre 600 � � � � � � Xabre 400 � � � � � � Xabre 200 � � � � � � Xabre 80 � � � � � � SiS315 � � � � � � SiS305 � � � � � � SiS300 � � � � � � SiS301 � � � � � � SiS6326 � � � � � � SiS6326 DVD � � � � � SiS6326 AGP � � � � �	Quarter Introduced Q1 02 Q1 02 Q1 02 Q1 02 Q3 01 Q2 00 Q3 99 Q3 99 Q4 96 Q2 97 Q2 97	Key Features AGP 8x, DirectX 8.1(1), core speed(2) 275 MHz(3) AGP 8x, DirectX 8.1, core speed 250 MHz(3) AGP 8x, DirectX 8.1, core speed 200 MHz(3) AGP 4x, DirectX 8.1, core speed 200 MHz(3) 256 bit GPU 128 bit VGA(4) 128 bit VGA TMDS(5) & TV-out 64 bit VGA with AGP interface 64 bit VGA with AGP/DVD TV-out 64 bit VGA with AGP interface

Notes:

(1) DirectX� is Microsoft software that allows software applications to include graphics functions without requiring that the software be tailored to the particular graphics hardware included in a PC. References to DirectX 7 or DirectX 8 indicate that the graphics processor supports the hardware features required by that version of DirectX.
(2) The core speed is the speed at which a processor operates internally. Frequently the same processor design will result in manufactured processors that are able to run at different core speeds.
(3) This product has recently been released and chip samples are currently being tested by our customers.
(4) VGA is a common graphics standard for PCs.
(5) TMDS, short for transition minimised differential signaling, refers to a technology interface used to send graphics data to the monitor. This interface specification allows for two TMDS links, enabling large pixel format digital display devices.

Customers

Our major customers are motherboard makers, most of whom have their headquarters or principal operations in Taiwan. Our five largest customers, together with their affiliated companies, accounted for 70.7 per cent., 76.9 per cent., and 82.5 per cent. of our net revenue in 1999, 2000 and 2001, respectively. We do not have long-term contracts with any of these customers. Other than Elitegroup Computer Systems, together with its affiliated companies, which we refer to as ECS, and Asustek Computer Inc., together with its affiliated companies, which we refer to as Asustek, no customer accounted for more than 10 per cent. of our net revenue in 1999, 2000 or 2001. ECS and Asustek accounted for 52.1 per cent. and 13.4 per cent., respectively, of our 2001 net revenue.

The following table sets forth the names and percentage of net revenue, in descending order of percentage of net revenue, of our five largest customers, together with their affiliated companies, for each of 1999, 2000 and 2001.

1999 ECS(1) � � � � Asustek � � � � Gigabyte Technology Co., Ltd. � � � First International Computer, Inc.� � Acer Computer Ltd. �	% of Net Revenue 2000 (%) 45.1 ECS(1) � � � � 7.6 Acer Computer Ltd. � 6.5 Universal Scientific Industrial Co., Ltd. 5.9 Fullerton Technology Co., Ltd.(2) � � 5.6 Asustek � � � �	% of Net Revenue 2001 (%) 48.2 ECS(1) � � � � 9.1 Asustek � � � � 7.3 Fullerton Technology Co., Ltd.(2) � � 6.3 Mitac Technology Corporation � � 6.0 Acer Computer Ltd. �	% of Net Revenue
			(%) 52.1 13.4 7.6 4.9 4.5

Notes:

(1) For purposes of presenting customer information in this section we have grouped sales to Prewell International Limited and Talent Trade Asia Limited together with sales to ECS although ECS and these two entities may not be affiliated for other purposes. Based on our business transactions with these companies, including the pledge to us by the Chairman of the Board of ECS of 10,000,000 personally owned shares of ECS to secure accounts receivable owed to us by Prewell and Talent, we believe that this aggregation is appropriate. We have not experienced collection problems with respect to receivables from ECS or these two entities. Shares of ECS are publicly traded in Taiwan on the Taiwan Stock Exchange. As of 28 May 2002, the 10,000,000 pledged ECS shares were valued in the aggregate at NT$1,710 million (US$49 million) based on the closing price per share on that date of NT$171 on the Taiwan Stock Exchange. In 2001, Prewell, at 42 per cent., and ECS, at 10 per cent., represented our first and third largest customers as a percentage of net revenue, respectively. Prewell is based in Hong Kong. We believe that a substantial majority of the products that we sell to Prewell are used by ECS, a Taiwan-based motherboard maker.
(2) Fullerton is a distributor of our products.

The following table sets forth net revenue from foreign market sales.

Geographic Area		Year Ended 31 December	Year Ended 31 December
	1999 (NT$)	2000 (NT$)	2001 (NT$)	2001
				(US$)
East Asia (Hong Kong and China) � � � � Northeast Asia (Japan and Korea) � � � � Europe and America � � � � � � � Southeast Asia � � � � � � � � �	5,257 70 56 16	(In millions) 4,451 5,011 20 28 30 13 15 7		143 1 — —

Competition

The market for core logic chipset products is very competitive both in Taiwan and internationally. We face competition from a number of sources, including fabless semiconductor companies, such as VIA, NVIDIA, ATI and ALi, that focus exclusively on design and marketing and other integrated device manufacturers, such as Intel. Some of our competitors, such as Intel, VIA and, with respect to graphics technology, NVIDIA and ATI, may have access to more advanced technologies and have greater financial and other resources, and enjoy greater brand recognition, than we do. We believe that the principal competitive factors in the markets for our products are:

time to market;
product performance and features;
price;

reliability of supply;
product reliability; and
brand name.

Most of our customers obtain products from more than one source, and many of our competitors have shown a willingness to quickly and sharply reduce prices. Any renewed erosion in the prices for our products could cause our profits to decrease and harm our financial condition and operating results.

Manufacturing and Quality Control

Manufacturing

In 1998, we decided to transition ourselves from a fabless design company into an integrated device manufacturer. We believe that the maintenance of our own fab, incorporating advanced process technologies, permits us to enjoy lower manufacturing costs, better time-to-market, greater ability to scale production in times of high demand, greater ability to change our product mix quickly and greater ability to improve product performance by working closely with our dedicated fab personnel. As sales volumes of products increase, we believe that our manufacturing yields should improve through standardisation and refinement of our internal processes, and our fab utilisation should increase, resulting in lower per unit production costs.

In March 2000, we completed pilot production of the first SiS630 chip at our fab. Since that time, we have been refining our semiconductor manufacturing processes as is typical in our industry. Our lower net revenue and net loss in 2000 reflect in part the low fab capacity, low manufacturing yields and production delays which occurred in our first year of fab operations. However, we have gradually increased our yields over the past year as a result of refining our internal manufacturing processes, and our increasing fab capacity and improved utilisation have resulted in higher net revenue and decreasing product costs. Our decision to extend our product line to include more discrete chipsets has also resulted in better overall yields because of the simpler construction of these products.

Our fab, located in the Hsinchu Science-Based Industrial Park, currently has a manufacturing capacity of 28,000 8-inch wafers per month. All of our current process technology is based on 0.15 micron and 0.18 micron technology. Approximately half of our processes are 0.18 micron technology, used principally for production of discrete chipsets and older integrated chipsets, and the other half is 0.15 micron technology primarily used for GPUs and newer integrated chipsets. We expect to introduce copper-based process technologies in the manufacture of our products.

Our fab received ISO9002 certification in November 2001. ISO9002 sets the criteria for developing a fundamental quality management system. This system focuses on continuous improvement and defect prevention within our company. The certification process involves subjecting our production processes and the quality management systems at our fab 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.

Equipment

We purchase equipment from a small number of qualified equipment vendors to assure consistency. In implementing our capacity expansion and technology advancement plans, we expect to make significant purchases of equipment. Some of the equipment is available from a limited number of vendors and is manufactured in relatively limited quantities, and some equipment has only recently been developed. To date, we have been able to procure required equipment on a timely basis.

Raw Materials

Our manufacturing processes use many raw materials, primarily silicon wafers, chemicals, gases and various types of precious sputtering targets. Raw materials costs constituted 18.5 per cent. of our net revenue in 2001 and 10.3 per cent. of our net revenue in the first three months of 2002. The three largest components of raw materials costs — chemicals, wafers and gas — accounted for 31 per cent., 21 per cent. and 14 per cent., respectively, of our raw materials costs in 2001 and 30 per cent., 20 per cent. and 13 per cent., respectively, of our raw materials costs in the first three months of 2002. These raw materials are generally available from several suppliers. We procure materials from a small number of qualified vendors who we believe produce high-quality materials. We generally do not have any long-term supply contracts with our vendors. Although we have not experienced a shortage of raw materials that has had a material effect on our operations, and supplies of raw materials we use currently are adequate, shortages could occur in various critical materials due to interruption of supply or increased industry demand.

We use substantial amounts of electricity supplied by Taiwan Power Company in our manufacturing process. Businesses in the Hsinchu Science-Based Industrial Park, such as us, enjoy preferential electricity supply. Nonetheless, we do occasionally experience electricity shortages that, to date, have not had a material impact on our operations.

The semiconductor manufacturing process uses extensive amounts of fresh water. Due to the growth of the semiconductor manufacturers in the Hsinchu Science-Based Industrial Park, there has been concern as to the future availability of sufficient fresh water. In 1997, the ROC government finished construction of a pipeline to provide the Hsinchu Science-Based Industrial Park with an additional source of fresh water, which is currently sufficient for our fab. The ROC government has announced a plan to build a fresh water reservoir near the Hsinchu Science-Based Industrial Park that is expected to satisfy the Hsinchu Science-Based Industrial Park’s long-term water requirements. The reservoir is expected to be completed in 2005. In addition, the Hsinchu area, where our fab is located, has experienced serious droughts, most recently in the first half of 2002. If a drought occurs and the authorities are unable to obtain water from alternative sources in sufficient quantity, we may be required to temporarily shut down or substantially reduce the operations of the fab, which would seriously affect our operations.

Assembly and Testing

At the end of our manufacturing processes, our products are tested for functionality and assembled. Depending on the product line, we either sub-contract this back-end work to testing and assembly subcontractors in Taiwan, or perform the work ourselves. We generally use two test and assembly subcontractors and have not had, and do not expect, capacity limitations in this area. All of our products undergo final testing before shipment.

One of the two test and assembly contractors that we primarily use is Orient Semiconductor Electronics, or OSE. The chairman of OSE, Mary S. Duh, is the wife of Eugene C.Y. Duh, the Chairman of our Board of Directors. We incurred obligations to OSE for test and assembly services in the amount of NT$1,196 million, NT$837 million and NT$1,277 million (US$36 million) in 1999, 2000 and 2001, respectively. We believe that the contract and price terms with OSE for these services are comparable to those that could have been obtained from unrelated parties.

Sales and Marketing

We focus our sales and marketing efforts principally on motherboard makers, who are our primary direct customers. We also direct sales and marketing efforts towards OEMs because they unilaterally, or jointly with their motherboard suppliers, make decisions about what motherboard components to use. In addition, we direct efforts towards end-users of PCs because some motherboards are sold into the retail motherboard market. Our initiatives for OEMs and end-users of PCs include participation in trade shows, press activities,

benchmarking performance of our advanced products with recognised independent testing sources, website management, joint promotions with motherboard makers and advertising. We also plan to further develop product brands in areas where we can most benefit from end-user brand awareness. For example, our new GPU products are branded under the name Xabre.

We categorise sales geographically based on the region in which our direct customers are headquartered. Historically, a majority of our revenue has been derived from customers based in Taiwan, in part because the world’s leading motherboard manufacturers are located in Taiwan.

Our main sales office is located in Taipei. We have a total of 63 employees performing sales and marketing functions, including nine in the United States. We also distribute our products in Taiwan through one independent distributor.

We do not have long-term contracts with our customers. A majority of our customers purchase products from us by placing purchase orders. Customer orders generally are not placed far in advance and, as a result, we do not typically operate with a significant backlog.

We focus on providing a high level of customer service to attract new customers and maintain ongoing customer loyalty. During microprocessor platform transitions, motherboard makers and OEMs particularly value suppliers that provide high quality field support, short product time-to-market, and good price-to-performance product characteristics. We have 40 employees who provide customer service and support. We emphasise responsiveness to customer needs, quality, flexibility and delivery speed and accuracy.

Strategic Relationships

We currently have strategic technology relationships relating to our core logic product development and our intellectual property strategy and a broad-based relationship with Toshiba relating primarily to our fab. With respect to our core logic products, we have licensed microprocessor technology from Intel, and we plan to continue to license the technology that we will need to produce leading-edge core logic products. With respect to intellectual property, we have a broad patent cross-licensing agreement with IBM until the end of 2005. As part of our intellectual property strategy, we intend to continue to seek patent cross-licensing arrangements with leading technology industry participants.

Our broad-based strategic relationship with Toshiba relates primarily to our fab. That relationship includes an agreement for advanced process technologies under which Toshiba is providing licenses and transferring know-how to us in exchange for upfront licensing fees and royalties related to our sales. The manufacturing process technology transfer relates to advanced CMOS technology, which we plan to use in the manufacture of our semiconductor products and copper technology. Our relationship with Toshiba also includes agreements to discuss the transfer of more advanced process technologies, mutual second source manufacturing, and design or development of semiconductor products.

We believe that strategic technology relationships with selected global technology leaders will be an important factor in our success. Through these relationships, we expect to share some of the risks of research and development efforts in the development of new technologies. We also expect to share design, technology know-how and process technologies. For more information on these relationships and licenses see “— Intellectual Property”.

Research and Development

The chipset industry is characterised by rapid changes in technology and short product life cycles, making time-to-market critical for successful commercialisation of chipsets. We therefore believe that effective research and development is critical to our future success. In 1999, 2000 and 2001, our research and development expenditures totalled approximately NT$742 million, NT$1,194 million and NT$1,883 million (US$54 million), respectively. These expenditures represented approximately 6.8 per cent., 15.3 per cent., and 18.9 per cent. of net revenue in 1999, 2000 and 2001, respectively.

In the first three months of 2002, our research and development expenditures totalled approximately NT$449 million (US$13 million) which represented approximately 12.6 per cent. of net revenue in that period.

Our research and development efforts are focused on product design and process engineering. As of 31 December 2001, we employed 570 people in research and development, of whom approximately 90 per cent. were focused on product design, and approximately 10 per cent. on process engineering. Approximately 450 of our research and development engineers hold masters degrees, and another 15 hold Ph.D. degrees. For product design, we work closely with customers and OEMs in defining our product roadmap.

Properties

Our corporate headquarters and our fab are located in Hsinchu Science-Based Industrial Park in Hsinchu, Taiwan. Our headquarters and fab occupy a total of approximately 220,000 square feet of land. We lease the land for a total cost of NT$10 million (US$0.3 million) per year, subject to adjustment under the leases, from the Science-Based Industrial Park Administration under four leases which expire between 2014 and 2019. We own all the buildings and substantially all the equipment at this location.

We are in the process of constructing a new research and development facility in Hsinchu which is expected to be completed in July 2002. The new research and development facility is being constructed outside the Hsinchu Science-Based Industrial Park and is located on three connected parcels of land totalling approximately 120,000 square feet. We are the registered owner of the two parcels of land on which we have begun construction. They total approximately 80,000 square feet. Due to land transfer restrictions, the third parcel is registered under the name of Hsin-Ron Duh, daughter of Eugene C.Y. Duh, the Chairman of our Board of Directors. Pursuant to a written agreement between us and Ms. Duh, Ms. Duh has granted us unrestricted usage rights and has agreed to transfer the registered title to us when the land transfer restrictions no longer restrict such transfer. We are responsible for all taxes and expenses incurred for our usage of the land. There will be no economic gain to Ms. Duh on any of these transactions.

The Tainan Science-Based Industrial Park Administration has granted us the right to lease land in Tainan Science-Based Industrial Park in southern Taiwan. The land is currently available for our use as the site for a new 12-inch wafer fab which we may construct in the future. We have not reached an agreement with the Tainan Science-Based Industrial Park Administration on a fee for leased land. We expect that the fee would be the then applicable standard fee per square metre charged to all lessees in the Tainan Science-Based Industrial Park. The Tainan Science-Based Industrial Park Administration is required to publicly announce the standard rate when the rate is established, but we believe that the rate has not yet been published.

Intellectual Property

Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights covering elements of our products and production processes. The general areas of coverage of our intellectual property rights include:

(i) proprietary technologies relating to our products, including rights relating to chipsets, graphics processors, central processing units and broadband and wireless connectivity standards and technology;
(ii) semiconductor manufacturing process technologies, including 0.15 micron technology and 0.18 micron technology;
(iii) trademark protection for our brands, including “SiS”, which is our most important brand; and
(iv) copyright protection for our proprietary logic design technology.

When filing new patent applications, we generally file them concurrently in the United States, Taiwan and the PRC. As of 5 February 2002, we had over 526 patents pending worldwide, and we had 34 patents issued in the United States. Our issued patents have expiration dates ranging from 2005 to 2020. We have pending applications for trademark registration of the trademark “Xabre”.

We use internally developed process technologies and may use process technologies licensed from third parties in the future. We entered into a technology license agreement with Toshiba for advanced process technologies under which Toshiba is providing licenses and transferring know-how to us in exchange for upfront licensing fees and royalties, and royalties based on our sales. The manufacturing process technology transfer relates to advanced CMOS technology which we plan to use in the manufacture of our products and copper technology.

We have entered into license agreements with Intel pursuant to which Intel has granted a patent license to us to make, use and sell chipsets capable of connecting to and operating with Intel’s Pentium II, Pentium III and Pentium 4 microprocessors. We have agreed to make royalty payments in exchange for the licenses and we have granted to Intel a non-exclusive, non-transferable cross-license to all of our patents.

We have entered into a non-exclusive, worldwide patent cross-licensing agreement until the end of 2005 with IBM covering each party’s existing patents relating to certain process technologies and a party’s right to use, license, sell, manufacture and have assembled its related products, subject to restrictions. Under the agreement, we are making a fixed sum payment to IBM, payable in annual instalments until the end of 2005.

Our ability to compete also depends on our ability to operate without infringing the proprietary rights of others. The semiconductor industry is generally characterised by frequent litigation regarding patent and other intellectual property rights. As is the case with many companies in the semiconductor industry, we have from time to time received communications from third parties asserting that we have infringed their patents or other intellectual property rights. We expect that we will receive similar communications in the future. Irrespective of the validity or the successful assertion of such claims, we could incur significant costs and devote significant management resources to the defense of these claims, which could seriously harm our company. Except as noted in the “Litigation” section below, there is no material litigation involving assertion of any such claim currently pending against us.

Environmental Matters

The semiconductor production process generates gaseous, liquid, water and other industrial wastes in various stages of the manufacturing process. Our operations are subject to regulation and periodic monitoring by Taiwan’s Environmental Protection Administration and local environmental protection authorities. In 2001, we spent approximately NT$17 million (US$0.5 million) relating to environmental protection matters. We have installed various types of anti-pollution equipment in our fabrication facilities to reduce, treat and, where feasible, recycle the wastes generated in our manufacturing processes. We believe that we have adopted anti-pollution measures for the effective maintenance of environmental protection standards consistent with the practice of the semiconductor industry in Taiwan. We also believe that we are in compliance in all material respects with applicable environmental laws and regulations. We are not involved in any pending material environmental disputes.

Litigation

selling products into the United States that UMC asserts infringe two U.S. patents nos. 6,117,345 and 5,559,352, referred to as the ‘345 and ‘352 patents, respectively. UMC also requested a permanent cease and desist order and any other penalties the ITC deems appropriate. The ITC commenced an investigation in February 2001 based on UMC’s complaint. Evidentiary hearings on the merits of UMC’s claims were held before an ITC administrative law judge in late 2001. We asserted defenses including non-infringement, patent invalidity and the “no domestic industry” defense. In addition, the administrative law judge was asked to determine whether alternative processes that we have developed infringe the patents. On 6 May 2002, the administrative law judge issued his initial determination in the form of a recommendation to the ITC. The administrative law judge found that both the ‘345 patent and the ‘352 patent were invalid. In addition, the administrative law judge found that even if the ‘345 patent and ‘352 patent were valid, the ‘352 patent was not infringed and that an alternative process technology that we have developed would not infringe the ‘345 patent. Both parties have petitioned the ITC for review of particular aspects of the initial determination made by the administrative law judge. The ITC has granted both requests for review and provided that the parties may submit related briefs to the ITC in July 2002. The expected date for the final determination by the ITC in the investigation is 6 September 2002. If the ITC does not follow the administrative law judge’s initial determination and UMC were to prevail in the ITC proceeding, the ITC has the authority to issue an exclusion order restricting importation into the United States of products covered by that exclusion order. The ITC does not have the authority to award monetary damages. If the ITC were to issue an exclusion order, the exclusion order could be limited in scope to our core logic chipset products, or could be broader in scope, covering third party motherboards or personal computers incorporating our chipset products. In addition, if the ITC were to issue an exclusion order, the exclusion order could cover all of these products or could be limited in scope to products consisting of or containing core logic chipsets produced by us prior to implementation of the alternative process. We do not currently export any of our core logic chipset products directly to the United States, although third party motherboards and personal computers incorporating our chipsets are imported into the United States.

In addition, in December 2000, United Microelectronics Corporation, together with its affiliate UMC Group USA, Inc., referred to as plaintiffs, filed a civil complaint against us in the U.S. District Court for the Northern District of California seeking monetary damages, and injunctive and other equitable relief. The suit alleges that we have infringed plaintiffs’ intellectual property rights, including infringement of the ‘345 patent and an additional U.S. patent no. 5,580,701, referred to as the ‘701 patent, and misappropriated of trade secrets, engaged in unfair competition in violation of federal and state law, breached non-disclosure agreements, intentionally interfered with plaintiffs’ contracts with certain of its former employees, and been unjustly enriched at plaintiffs’ expense. We answered the complaint, disputing plaintiffs’ claims and raising various defenses including non-infringement and invalidity of the ‘345 patent and the ‘701 patent. Discovery in the matter is ongoing, and the parties are awaiting the results of a claim construction hearing in April 2002 for the ‘701 patent. The ‘345 patent claim has been stayed pending resolution of the ITC proceeding described above. No trial date has been set in the litigation.

succeed in the litigation in obtaining significant monetary damages or injunctive or other equitable relief. If UMC succeeds in the ITC proceeding or the litigation, we may be forced to seek to negotiate a license, which may not be available on commercially reasonable terms or at all, incur further costs implementing alternative processes, or if our efforts to seek a license or implement alternative processes are unsuccessful, to outsource production to third party fabs. We cannot ensure that we would be successful in obtaining a license on commercially reasonable terms or at all, or at implementing alternative processes or outsourcing production to third party fabs in a timely fashion, if at all. Any one of these developments could place substantial financial and administrative burdens on us, hinder our business and have a material adverse effect on our financial condition and operating results.

Currently, we are reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, and the Syndia Corporation, claiming that our technologies infringe patents held by them. During 2001, we held meetings with National Semiconductor in which we discussed our technology and the patents asserted by them and the reasons why we believe that our technology does not infringe patents asserted by them.

Employees

As of 31 December 2001, we had 1,638 employees, which included 1,011 engineers, 409 technicians and 218 clerical and administrative staff. In our operations, we employed 19 persons who do not reside in Taiwan. Approximately 19 per cent. of our employees as of 31 December 2001 had undergraduate degrees, another 40 per cent. held master’s degrees and another 1 per cent. held doctoral degrees.

Our employees are not covered by any collective bargaining agreements. We have not experienced any strikes or significant work stoppages and believe that our relations with our employees are good.

Subsidiaries

The following table sets forth summary information for our subsidiaries as of 31 March 2002.

Subsidiary Silicon Integrated Systems Corporation Silicon Integrated Systems Limited InveStar CPU Venture Capital Fund, Inc. LDC	Main Activities 1. Market information collection 2. Product agency 3. After-sale service 1. Market information collection 2. Product agency 3. After-sale service High technology venture capital	Jurisdiction of Incorporation California Hong Kong Cayman Islands	Percentage of our ownership interest (%) 100 99.9 62.5	Percentage of our voting interest
				(%) 100 99.9 62.5

Management

Directors, Supervisors and Executive Officers

The following table sets forth information with respect to our directors, supervisors and executive officers as of 8 July 2002.

Name Directors Eugene C.Y. Duh � � � � Mary S. Duh � � � � � � Hsin-Shen Liu � � � � � S. Samuel Liu � � � � � Tsai-Feng Ho � � � � � Archie Hwang � � � � � Supervisors Sherry Shih � � � � � � An-Feng Wang � � � � � Executive Officers Michael T.H. Chen � � � � Pearline Ho � � � � � � S.H. Chen � � � � � � Bo Yung Chen � � � � � Y.H. Yang � � � � � �	Age 63 61 55 53 49 49 47 58 42 39 43 38 41	Position Chairman Director Director Director, President and Chief Executive Officer Director(1) Director Supervisor(2) Supervisor Senior Vice President, Integrated Product Division and Connectivity Product Division Vice President, Corporate Services Vice President, Quality Assurance Chief Financial Officer Director of Die Production

Notes:

(1) Representative of Lanching Investment Ltd.

(2) Representative of Consolidated Marketing Corporation

Dr. Eugene C.Y. Duh has served as our chairman since our founding in 1987. He has also served as a director of Orient Semiconductor Electronics, Limited, or OSE, since 1998. He was a founding president of United Microelectronics Corporation and also a founder and former chairman of OSE. Mr. Duh’s wife is the chairman of OSE, and we subcontract a portion of our test and assembly work to OSE. Dr. Duh received a B.S. degree in electrical engineering from National Taiwan University and a Ph.D. degree in electrical engineering from Stanford University. He is the husband of Mary S. Duh, one of our directors.

Mary S. Duh has served as a director since 1992. Mrs. Duh has also served as chairman of OSE since 1992. Mrs. Duh received a B.A. degree in accounting from National Chung Hsing University. She is the wife of Eugene C.Y. Duh, the chairman of our board of directors.

Hsin-Shen Liu has served as a director since 1992. Mr. Liu has also served as a director of Yeou Yih Steel Corporation Limited since 1997. He graduated from Chung Shan senior high school.

Dr. S. Samuel Liu has served as a director since 1992 and as our president and chief executive officer since 1990. Prior to joining us, he was a director of Intel’s Mid-range Microprocessor Product Line. Dr. Liu received a B.S. degree in electrical engineering from National Taiwan University and a Ph.D. degree in materials science and engineering from Stanford University.

Tsai-Feng Ho is the representative of Lanching Investment Ltd. and has served as a director since 1998. She has also served as the chairman of Lanching Investment Ltd. since 1997. She graduated from Cheng Shiu Institute of Technology.

Archie Hwang has served as a director since 1998. Mr. Hwang has also served as the chairman of Hermes-Epitek Corp., service company for a full range of both semiconductor and optoelectronics processing equipment, since 1977, Episil Technologies Inc., a foundry house, since 1985, Hermes System Inc., a wholly-owned subsidiary of Hermes-Epitek Corp., since 1995, Hermes Microvision Inc., a company that makes equipment for yield control and enhancements for semiconductor manufacturing companies, since 1998, and Advanced Ion Beam Technology Inc., a company in the semiconductor equipment business, since 1999. He received a B.A. degree in electrophysics from National Chiao Tung University.

Sherry Shih is the representative of Consolidated Marketing Corporation, an electronic components and product marketer, and has served as one of our supervisors since 1992. Miss Shih has also served as the accounting manager of Consolidated Marketing Corporation since 1996. She received a B.A. degree in accounting from Tamkang University. Miss Shih has also served as a director of Consolidated Marketing Corporation since 1999. She has also served as a director of E-com since 1999.

An-Feng Wang has served as one of our supervisors since 1995. Mr. Wang graduated from Municipal Kaohsiung Vocational Technical High School.

Michael T.H. Chen , senior vice president, joined us in 1993 and is in charge of the Integrated Product Division and the Connectivity Product Division. He received an M.S. degree in electrical engineering from National Taiwan University.

Pearline Ho , vice president, joined us in 1995 and is in charge of Corporate Service. Prior to joining us, she was an Asia-Pacific Regional human resources manager at Logitech. She received a B.A. degree in Chinese literature and linguistics from National Tsin-Hua University.

S.H. Chen , vice president, joined us in 1989 and is in charge of Quality Assurance. Prior to joining us, he had 4.5 years working experience at ERSO/ITRI. He received an M.S. degree in electrical engineer from National Chiao-Tung University.

Bo Yung Chen , Chief Financial Officer, joined us in April 2002. Prior to joining us, he was a Vice President for the global information technology industry in the Corporate Banking Group, Citibank, Taipei, from 1997 to 2002 and was an Assistant Vice President and team leader there from 1996 to 1997. He received a MBA degree from the University of Pittsburgh.

Y.H. Yang , director of Die Production, joined us in 1999. Prior to joining us, he worked for Worldwide Semiconductor Manufacturing Corp. as Deputy Plant Manager. He had 13 years working experience in semiconductor manufacturing. He received a Ph.D. degree in electronic engineering from National Chiao-Tung University.

The business address for all of our directors, supervisors and senior management other than those stated immediately below is our principal executive offices at No. 16, Creation Rd. 1, Science-Based Industrial Park, Hsinchu, Taiwan. The business address for Mary S. Duh is Orient Semiconductor Electronics, Ltd., 9 Central 3 Rd, St. N.E.P.Z., Kao Hsiung, Taiwan. The business address for Tsai-Feng Ho is No. 228, Chien-Shin Rd., San-Ming Chiu, Kao Hsiung, Taiwan. The business address for Archie Hwang is No. 18, Creation Rd. 1, Science-Based Industrial Park, Hsinchu, Taiwan. The business address for Sherry Shih is 11 Fl., No. 56, Sec. 4, Nanjing E. Rd, Taipei, Taiwan.

Board of Directors and Supervisors

The ROC Company Law and our articles of incorporation provide that the board of directors is to be elected by our shareholders for three-year terms in a general shareholders’ meeting at which a quorum, consisting of a majority of all issued and outstanding shares, is present. The chairman of our board is elected by the board of directors. Our six-member board of directors is responsible for the management of our business.

We currently have two supervisors. Supervisors are typically elected by the shareholders at the time that directors are elected. Supervisors may be elected as representatives of a corporation or government. The supervisors’ duties and powers include, but are not limited to, investigation of our condition, inspection of our corporate records, verification of some statements by our board of directors prior to the ordinary shareholders’ meeting which is held yearly, calling of shareholders’ meetings, representing us in negotiations with our directors and notification, when appropriate, to the directors or the board of directors to cease acting in contravention of any applicable law or regulation or in contravention of our articles of incorporation or resolution adopted at our shareholders’ meeting. In accordance with the laws of the ROC relating to corporations, a supervisor cannot concurrently serve as a director, managerial officer or other staff member. The ROC Company Law requires that a company shall have at least one supervisor at all times.

The term of office for our directors and supervisors is three years from the date of election. The expiration of the current term in office for each of our directors and supervisors is May 2004. Our directors and supervisors may serve any number of consecutive terms and may be removed from office at any time by a resolution adopted at a general shareholders’ meeting.

In accordance with ROC law, each of our directors and supervisors is elected either in his or her capacity as an individual or as an individual representative of a corporation or government shareholder. Of our current directors and supervisors, Tsai-Feng Ho was selected in the capacity as representative of Lanching Investment Ltd., and Sherry Shih was elected in the capacity as a representative of Consolidated Marketing Corporation.

Compensation of Directors, Supervisors and Executive Officers

In 2001, we paid to our directors, supervisors and executive officers total compensation of NT$27 million (US$0.8 million), including salary, bonus, remunerations and other. We record this compensation in NT dollars. Remunerations to directors are always paid in cash. Bonuses to employees may be granted in cash or stock or both.

Our Chairman, Eugene C.Y. Duh, was paid a transportation fee of NT$0.6 million (US$17,140) in 2001. Our Director, President and Chief Executive Officer, S. Samuel Liu, was paid total remunerations of NT$9.4 million (US$0.3 million) in 2001. Directors and supervisors were each paid a transportation fee of NT$0.1 million (US$3,429) in 2001.

Stock Option Plan

On 28 December 2001, we obtained the approval of the ROC Securities and Futures Commission for the issuance of employee stock options. On 13 December 2001, we enacted our first stock option plan. Under this plan, we are able to issue up to 30,000,000 employee stock options. Each option entitles the holder to purchase one share of our common stock at the price equal to the closing market price on the date of the option issuance. The option is exercisable to the extent vested for seven years and is vested for 50 per cent., 75 per cent. and 100 per cent. in the second, third and fourth anniversary dates, respectively. The options are not transferable. On 22 February 2002, we issued 29,950,000 options pursuant to the plan at an exercise price of NT$45.80 per common share.

Employee Bonuses

Employee salaries are reviewed annually. Salaries are adjusted based on industry standards, inflation and individual performance. As an incentive, additional bonuses in cash may be paid to employees at the discretion of management based on the performance of individuals. In addition, the ROC Company Law requires that employees be given pre-emptive rights to subscribe to between 10 per cent. and 15 per cent. of any of our rights issues or share offerings, except issuances in connection with exercises of employee stock options, warrant exercises, conversion of bonds, mergers and spin-offs or by way of a private placement.

Our employees participate in our profit distribution pursuant to our articles of incorporation. Our articles of incorporation provide that, after we pay our income taxes, deduct losses incurred in prior years and deduct the legal reserve and special reserves, 10 per cent. of the remaining portion of our net income for any year shall be allocated to employees’ bonuses. We pay employee bonuses in the form of cash or Shares valued at NT$10 per share regardless of the market price of the shares. The value of the shares received by employees is significantly more than the cash amount employees would receive if the employee share bonus was paid in cash.

On 18 May 2001, we sold 10.7 million shares of treasury stock to our employees at a price of NT$39.50 per share and transferred the shares to our employees on 20 July 2001. For each employee, the sale was contingent on that employee continuing to be employed with us through 31 December 2001. Our average cost basis in the shares was NT$36.50 per share. Under ROC GAAP, we did not recognise income or expense in connection with the sale, and our capital surplus was increased by an amount equal to the difference between the aggregate sales price and our aggregate cost.

Related Party Transactions

The following discussion describes transactions and agreements since 1 January 1999 until the date of this Offering Circular between our consolidated group and our directors, supervisors, executive officers, corporate auditors and shareholders that own more than 10 per cent. of our outstanding shares and, in each case, the companies with whom they are affiliated. The discussion also describes transactions between our consolidated group and companies in which we own a 10 per cent. or greater equity interest. We believe that each of the transactions described below is, or at the time it was entered into was, on terms no less favourable than those we could have obtained with independent third parties.

Orient Semiconductor Electronics

Mary S. Duh, the chairman of Orient Semiconductor Electronics, also referred to as OSE, is the wife of Eugene C.Y. Duh, the chairman of our board of directors. We sold approximately 460 IC chips to OSE for NT$0.2 million in 1999. We outsource a portion of our packaging and test requirements to OSE and had subcontract expenditures in the amount of NT$1,196 million, NT$837 million and NT$1,277 million (US$36 million) in 1999, 2000 and 2001, respectively. We believe that the price and payment terms for subcontract expenditures to OSE are comparable to those that could have been obtained from unrelated parties. Additionally, we leased certain equipment from OSE in 1999 and paid rental expenses in the amount of NT$5 million under the lease. We believe that the price and payment terms for the equipment leases from OSE were at least as favourable as those that could have been obtained from unrelated parties.

On 21 September 2001, we purchased 90 million non-voting shares of preferred stock of OSE for NT$1,035 million (US$30 million) at NT$11.50 per share in an offering of 150 million shares in total. The OSE preferred shares pay cumulative dividends in cash at the rate of 5.60 per cent. per year. As of 31 December 2001, dividend income in the amount of NT$13 million had been recorded under non-operating income. The OSE preferred shares have a mandatory conversion feature. This feature provides that, on the third anniversary of the purchase date, shares of this OSE preferred stock will be converted into common stock on a one-for-one basis. The OSE preferred shares have no quoted market price.

Consolidated Marketing Corporation

Consolidated Marketing Corporation, referred to as CMC, is one of our supervisors, through its representative, Sherry Shih. CMC is an electronic components and product marketer. We sold products to CMC in the amount of NT$1 million and NT$1 million in 1999 and 2000, respectively.

Land Purchase Agreement

We purchased a parcel of land in Hsinchu for the new facilities for research and development activities. This parcel of land is zoned as farmland and, as required by regulation in Taiwan, must be owned by a natural person. To comply with this regulation, the parcel was registered under the name of Hsin-Ron Duh. Hsin-Ron Duh is the daughter of Eugene C. Y. Duh, the Chairman of our Board of Directors. We paid the purchase price of the third parcel on behalf of Ms. Duh, registered it in her name and obtained a mortgage on the property. Pursuant to an agreement between us and Ms. Duh, Ms. Duh has granted us unrestricted usage rights and has agreed to transfer the registered title to us when the land is no longer zoned as farmland. We are responsible for all taxes and expenses incurred for our usage of the land. There will be no economic gain to Ms. Duh on any of these transactions. See “Business — Properties”.

Principal Shareholders

The following table sets forth information known to us regarding the beneficial ownership of our shares as of 28 April 2002:

each person known by us to beneficially own 5 per cent. or more of our outstanding shares as of 28 April 2002;
each of our current directors, supervisors and executive officers that beneficially owns 1 per cent. or more of our outstanding shares as of 28 April 2002; and
all of our current directors, supervisors and executive officers as a group as of 28 April 2002.

All information with respect to share ownership has been furnished to us by our shareholders. Such beneficial ownership includes ownership by such persons’ spouse and minor children. The percentage share ownership for each shareholder prior to the offering is based on 1,071,416,437 common shares outstanding as of 28 April 2002.

Name of Beneficial Owner Eugene C.Y. Duh(1) � � � � � � � � � � � � Mary S. Duh(2) � � � � � � � � � � � � � Hsin-Shen Liu � � � � � � � � � � � � � S. Samuel Liu � � � � � � � � � � � � � Directors, supervisors and executive officers as a group (13 persons) � � � � � � � � � �	Share Ownership	Share Ownership
	Number 120,805,779 63,134,250 18,766,766 29,504,517 244,577,797	Percentage
		(%) 11.3 5.9 1.8 2.8 22.8

Each of our principal shareholders has the same voting rights as the other holders of our common shares.

Notes:

(1) Not including the shareholding of Mary S. Duh.
(2) Not including the shareholding of Eugene C.Y. Duh.

DIVIDENDS AND DIVIDEND POLICY

To date we have not paid any cash dividends on our common shares. Any dividends paid to our shareholders out of net income, after (i) income taxes, (ii) deduction for losses in prior years, (iii) deductions for legal and special reserves and (iv) employee bonuses, or out of our reserves will be proposed by our board of directors and will then be subject to final approval by our shareholders. Our articles of incorporation require that not more than 20 per cent. of the distributable dividends described above be distributed in the form of cash. The form of dividends distribution is determined by our shareholders. Our board of directors does not intend to propose to our shareholders in the foreseeable future that we pay cash dividends. We have paid annual stock dividends on our common shares since 1995.

The following table sets forth the aggregate number of outstanding common shares entitled to stock dividends, as well as the stock dividends paid during each of the years indicated. The stock dividends per common share represent the dividends paid in the fiscal year for common shares outstanding on the record date applicable to the payment of these dividends.

Year 1997 � � � � � � � � � � 1998 � � � � � � � � � � 1999 � � � � � � � � � � 2000 � � � � � � � � � � 2001 � � � � � � � � � �	Stock Dividends per Common Share(1) Total Common Shares Issued as Stock Dividends (NT$) 2.10 54,285,000 1.60 50,453,600 2.40 87,905,310 5.58 342,527,572 0.99 97,401,494	Outstanding Common Shares on Record Date(2) 258,500,000(3) 315,335,000(4) 366,272,125(5) 613,848,695(6) 974,014,943(7)	Percentage of Outstanding Common Shares Represented by Stock Dividends
			(%) 21.0 16.0 24.0 55.8 9.9

Notes:

(1) Holders of common shares receive as a stock dividend the number of common shares equal to the NT dollar value per common share of the dividend declared multiplied by the number of common shares owned and divided by the par value of NT$10 per share. Fractional shares will not be issued or paid in cash.
(2) Aggregate number of common shares outstanding on the record date applicable to the dividend payment. Includes common shares issued in the previous year as bonuses to our employees and issued in rights offerings.
(3) Includes 3,680,000 common shares issued for employee bonuses in December 1996 with respect to profits in 1995.
(4) Includes 2,550,000 common shares issued for employee bonuses in May 1997 with respect to profits in 1996.
(5) Includes 483,525 common shares issued for employee bonuses in July 1998 with respect to profits in 1997. (6) Includes 9,671,260 common shares issued for employee bonuses in August 1999, with respect to profits in 1998, and 150,000,000 common shares issued in a rights offering in September 1999.
(7) Includes 17,638,676 common shares issued for employee bonuses in August 2000 with respect to profits in 1999.

For a discussion of restrictions on, and procedures for, distributions or dividends under ROC law, see “Description of the Shares — Dividends and Distributions”.

MARKET PRICE INFORMATION

The Shares have been listed on the TSE since August 1997. The table below sets forth, for the periods indicated, the high and low closing prices and the average daily volume of trading activity on the TSE for the Shares (adjusted for the effects of rights issue, employee bonus and stock dividends) and the high and low of the daily closing values of the TSE Index.

As of 31 March 2002, there were an aggregate of 1,071,416,437 Shares outstanding. The following table sets forth, for the periods indicated, the high and low closing prices on the Taiwan Stock Exchange for the Shares.

July 2002(4) � � � � June 2002 � � � � May 2002 � � � � April 2002 � � � � March 2002 � � � � February 2002 � � � January 2002 � � � December 2001 � � � November 2001 � � � Year Ended 31 December 2001 � � � � � Fourth Quarter � � � Third Quarter � � � Second Quarter � � � First Quarter � � � � Year Ended 31 December 2000 � � � � � Fourth Quarter � � � Third Quarter � � � Second Quarter � � � First Quarter � � � � Year Ended 31 December 1999 � � � � � Year Ended 31 December 1998 � � � � � Year Ended 31 December 1997(1)� � � � �	Closing Price Per Share(2)	Closing Price Per Share(2)	Adjusted Closing Price Per Share(3)	Adjusted Closing Price Per Share(3)	Average Daily Trading Volume	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High	Low	High	Low	(inthousands	High	Low
	(NT$) 32.20 39.00 45.40 53.50 56.00 54.00 57.50 60.00 47.20 66.00 60.00 39.70 65.00 66.00 160.00 68.50 140.00 160.00 141.50 164.00 82.50 79.50	(NT$) 28.00 27.90 39.20 48.80 49.60 45.80 48.20 43.50 36.20 20.70 23.10 20.70 42.00 38.10 34.60 34.60 73.50 122.00 100.00 54.50 34.40 29.20	(NT$) 32.20 39.00 45.40 53.50 56.00 54.00 57.50 60.00 47.20 60.00 60.00 36.09 59.09 60.00 102.73 62.27 102.73 93.96 82.57 76.50 30.58 29.46	(NT$) 28.00 27.90 39.20 48.80 49.60 45.80 48.20 43.50 36.50 20.70 23.10 20.70 38.18 34.64 31.45 31.45 66.81 71.19 58.35 23.43 12.75 10.82	of shares) 19,184 10,147 12,291 18,188 34,230 30,250 48,430 58,524 71,396 41,650 66,841 31,366 16,586 51,633 23,364 25,597 20,704 24,423 22,669 16,903 17,520 2,754	5,388.52 5,599.42 5,910.69 6,462.30 6,242.64 5,968.61 6,007.33 5,551.24 4,608.32 6,104.24 5,551.24 4,886.86 5,608.50 6,104.24 10,202.20 6,353.67 8,585.52 10,186.17 10,202.20 8,608.91 9,277.09 10,116.84	4,969.32 5,071.76 5,433.18 6,059.21 5,680.78 5,499.79 5,488.33 4,646.61 3,929.69 3,446.26 3,446.26 3,493.78 4,768.55 4,894.79 4,614.63 4,614.63 6,185.14 8,120.89 8,536.05 5,474.79 6,251.38 7,089.56

Sources: Bloomberg, Taiwan Stock Exchange

Notes:

(1) Since 1 August 1997.

(2) As reported.

(3) As adjusted for 54,285,000 shares and 2,550,000 shares, respectively, issued as stock dividends and for employee bonuses in May 1997, 50,453,600 shares and 483,525 shares, respectively, issued as stock dividends and for employee bonuses in July 1998, 87,905,310 shares and 9,671,260 shares, respectively, issued as stock dividends and for employee bonuses in August 1999, 342,527,572 shares and 17,638,676 shares, respectively, issued as stock dividends and for employee bonuses in August 2000, and 97,401,494 shares issued as stock dividends in August 2001.

(4) Up to and including 10 July 2002.

On 10 July 2002, the last reported sale price of our common shares on the Taiwan Stock Exchange was NT$30.50.

CHANGES IN ISSUED SHARE CAPITAL

The following table shows the changes in the issued common share capital of the Company since August 1987:

Month of issue August 1987 � � � August 1989 � � � January 1992� � � December 1994 � � August 1995 � � � December 1996 � � May 1997 � � � July 1998� � � � August 1999 � � � September 1999 � � August 2000 � � � August 2001 � � �	Number of Shares issued 6,500,000 7,500,000 6,000,000 65,000,000 65,000,000 36,000,000 68,820,000 3,680,000 54,285,000 2,550,000 50,453,600 483,525 87,905,310 9,671,260 150,000,000 342,527,572 17,638,676 97,401,494	Type of issue Formation of the Company by cash investment(1) Rights issue Stock dividend(2) Rights issue Rights issue Stock dividend(2) Stock dividend(2) Employee bonus Stock dividend(2) Employee bonus Stock dividend(3) Employee bonus Stock dividend(2) Employee bonus Rights issue Stock dividend(4) Employee bonus Stock dividend(5)	Number of Shares outstanding after issue
			6,500,000 14,000,000 20,000,000 85,000,000 150,000,000 186,000,000 254,820,000 258,500,000 312,785,000 315,335,000 365,788,600 366,272,125 454,177,435 463,848,695 613,848,695 956,376,267 974,014,943 1,071,416,437

Notes:

(1) Includes 1,300,000 Shares issued in consideration for technologies transferred.
(2) Stock dividend paid out of unappropriated retained earnings.
(3) 25,226,800 Shares paid out of unappropriated retained earnings and 25,226,800 Shares paid out of capital reserve.
(4) 158,986,812 Shares paid out of unappropriated retained earnings and 183,540,760 Shares paid out of capital reserve.
(5) Paid out of capital reserve.

DESCRIPTION OF THE SHARES

The following description is a summary of information concerning our share capital and the material provisions of our articles of incorporation, the ROC Securities and Exchange Law and the ROC Company Law in effect as of the date of this Offering Circular.

General

Our authorised share capital is NT$18,000 million, divided into 1,800 million shares, including up to 350 million shares reserved for the conversion of convertible bonds and 100 million shares reserved for the exercise of employee stock options. As of 31 March 2002, 1,071,416,437 of our common shares had been fully paid-in and were outstanding. All of our common shares are in registered form.

The ROC Company Law, the ROC Statute for Establishment and Administration of ScienceBased Industrial Park and the ROC Securities and Exchange Law provide that any change in the issued share capital of a public company, such as ours, requires various approvals. These include:

the approval of the board of directors;
an amendment to the articles of incorporation (which requires shareholder approval) if the original paid-in share capital plus the number of the shares issuable upon the conversion of convertible securities or exercise of warrants or employee options, and the number of any new shares to be issued exceeds the number of shares authorised in the articles of incorporation; and
the approval of the Securities and Futures Commission and the Ministry of Economic Affairs or the Science-Based Industrial Park Administration, as applicable.

Dividends and Distributions

Except in limited circumstances, under the ROC Company Law we are not permitted to pay dividends or make other distributions to shareholders for any year in which we did not have current or retained earnings, excluding reserves. The ROC Company Law also requires that 10 per cent. of our annual net income, less prior years’ losses, if any, and any outstanding income taxes be set aside as a legal reserve until the accumulated legal reserve equals our paid-in capital. In addition, we may be required to set aside a special reserve specified in our articles of incorporation and applicable laws and regulations. Our articles of incorporation further provide that, after we pay our income taxes, deduct losses incurred in prior years and deduct the legal reserve, 10 per cent. of the remaining portion of our net income for any year shall be allocated to employees’ bonuses, payable in the form of cash or common shares valued at the par value, NT$10 per share, regardless of the market price of the shares. Any distribution to the shareholders out of the remaining portion may be proposed by the board of directors, subject to the approval of our shareholders.

Our articles of incorporation provide that we may pay distributions to shareholders in stock or cash or a combination of stock and cash. However, the preferred form for distributions is stock and not more than 20 per cent. of our distributions may be in the form of cash. All or part of the funds available for distribution to shareholders as dividends may be reserved at the relevant annual shareholders’ meeting as retained earnings for distribution in subsequent years.

In addition to permitting dividends to be paid out of earnings if we do not have losses, as described above, the ROC Company Law permits us to make distributions of additional common shares to our shareholders by capitalising reserves, including the legal reserve and capital surplus consisting of premium from issuing stock and earnings from gifts received. However, the capitalised portion payable out of our legal reserve is limited to 50 per cent. of the total accumulated legal reserve, and only to the extent the accumulated legal reserve exceeds 50 per cent. of our paid-in-capital.

At our annual general meeting of shareholders, our board of directors submits for shareholder approval our financial statements for the preceding year and the board’s proposal for distributions and employee bonuses from our net income, subject to compliance with the requirements described above, for the preceding year. All our common shares outstanding and fully paid as of the relevant record date are entitled to share equally in any approved dividend or other distribution.

For information as to Taiwanese taxes on dividends and distributions, see “Taxation — ROC Taxation of Non-residents”.

Preemptive Rights and Issues of Additional Common Shares

Under the ROC Company Law, when a ROC company issues new shares for cash, a company’s employees, whether or not they are shareholders of the company, have rights to subscribe for a percentage between 10 per cent. to 15 per cent., determined by the board of directors, of the new issue. Existing shareholders who are listed on the shareholders’ register as of the record date have preemptive rights to subscribe for the remainder of the new issue in proportion to their existing shareholdings. In addition, the ROC Securities and Exchange Law and the relevant securities regulations require that a public company listed on the Taiwan Stock Exchange or whose shares are traded on the Over-the-Counter Securities Exchange that intends to offer new shares for cash must offer at least 10 per cent. of the issue to the public, except under limited circumstances or when exempted by the Securities and Futures Commission. This percentage can be increased by a resolution passed at a shareholders’ meeting, which would reduce the number of new shares subject to the preemptive rights of existing shareholders. The common shares not subscribed for by the employees and shareholders at the expiration of the period for the exercise of their rights should be sold to the public or specified persons at the direction of our board of directors. According to the amended Securities and Exchange Law which became effective on 8 February 2002, the preemptive rights provisions will not apply to offerings of new shares through a private placement approved at a shareholders’ meeting.

Authorised but unissued shares of any class may be issued, subject to the above-mentioned provisions of the ROC Company Law, the ROC Statute for Establishment and Administration of Science-Based Industrial Park and ROC Securities and Exchange Law, upon the terms as determined by our board of directors.

Meetings of Shareholders

General meetings of our shareholders may be ordinary or extraordinary. Ordinary meetings of our shareholders generally are held in Hsinchu, Taiwan, within six months after the end of our fiscal year. Extraordinary meetings of our shareholders may be convened by resolution of our board of directors whenever it deems necessary, or under the circumstances described below under “Other Rights of Shareholders”, by shareholders or our supervisors. Notice in writing of general meetings, stating the place, time and purpose of the meeting, must be sent to each shareholder at least 30 days, in the case of ordinary meetings, and 15 days, in the case of extraordinary meetings, before the date set for the meeting.

Voting Rights

Under the ROC Company Law, a shareholder has one vote for each common share. Except as otherwise provided by law, a resolution may be adopted by the holders of a simple majority of the common shares represented at the shareholders’ meeting. At least a majority of the holders of the total issued and outstanding common shares must be present at the meeting for the resolution to be binding. The election of our directors and supervisors at a shareholders’ meeting is by means of cumulative voting. Ballots for the election of directors are cast separately from those for the election of supervisors. Candidates for the offices of directors and supervisors may be nominated at the shareholders’ meeting at which ballots for the election are cast.

The ROC Company Law also provides that shareholder approval is required for major corporate actions, including:

any amendment to the articles of incorporation, which is required, among other things, for any increase in authorised share capital;
entering into, modification or termination of any contracts providing for the leasing of the whole business or outsourcing of operations or joint operations;
the dissolution, amalgamation or spin-off of a company;
removing directors or supervisors;
transfer of the whole or an important part of a company’s business or properties;
the taking over of the whole of the business or properties of any other company which would have a significant impact on the acquiring company’s operations; or
the distribution of any stock dividend.

To obtain this approval, a shareholders’ meeting must be convened. The holders of at least two-thirds of all of the issued and outstanding common shares must be present at this meeting. Then, the holders of at least a majority of the common shares represented at the meeting must vote in favour of the action. However, in the case of a publicly-held company such as ours, the resolution may be adopted by the holders of at least two-thirds of the common shares represented at a meeting of shareholders at which holders of at least a majority of the issued and outstanding common shares are present. If a controlling company holds not less than 90 per cent. of its subsidiary’s outstanding shares, the controlling company’s merger with the subsidiary can be approved by board resolution adopted by majority consent at a meeting with two-thirds of directors present. A shareholder may be represented at a shareholders’ meeting by proxy. A valid proxy must be delivered to us at least five days before the commencement of the meeting.

Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders of our company are entitled to appraisal rights in the event of amalgamation, spin-off and various other major corporate actions within 20 days of the resolution enacting the event. A dissenting shareholder may request that we redeem all of the shares owned by the shareholder at a fair price to be determined by mutual agreement. If an agreement cannot be reached, the valuation will be determined by a court order. A dissenting shareholder may exercise its appraisal right by serving written notice on us before the related shareholders’ meeting and by raising and registering its objection at the shareholders’ meeting.

In addition to appraisal rights, within 30 days after the date of the shareholders’ meeting, any shareholder has the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedures were legally defective. However, if the court is of the opinion that such violation is not material and does not affect the result of the resolution, the court may reject or dismiss the shareholder’s lawsuit. One or more shareholders who together have held more than 3 per cent. of our issued and outstanding shares for over a year may require a supervisor to bring a derivative action against a director for the director’s liability to our company as a result of the director’s unlawful actions or failure to act. In addition, one or more shareholders who together have held more than 3 per cent. of our issued and outstanding shares for over a year may require our board of directors to convene an extraordinary shareholders’ meeting by sending a written request to the board of directors.

Register of Shareholders and Record Dates

Our share registrar, Chinatrust Commercial Bank, maintains the register of our shareholders at its office in Taipei, Taiwan, and enters transfers of our common shares in the register upon

presentation of, among other documents, the certificates for the common shares transferred. Under the ROC Company Law, the transfer of common shares is effected by endorsement and delivery of the related share certificates. In order, however, to assert shareholders’ rights against us, the transferee must have his name and address registered on the shareholder register. Shareholders are required to file their respective specimen seals with us. The settlement of trading in our common shares is normally carried out on the book-entry system maintained by the Taiwan Securities Central Depositary Co., Ltd.

The ROC Company Law permits us to set a record date and to close our shareholder register for a specified period in order for us to determine the shareholders or pledgees that are entitled to certain rights pertaining to our common shares by giving advance public notice. Under the ROC Company Law, a public company’s shareholder register, such as ours, is closed for a period of 60 days, 30 days and 5 days before each ordinary shareholders’ meeting, each extraordinary shareholders’ meeting and each record date for determining entitlement to dividends, bonuses or other rights, respectively.

Annual Financial Statements

Under the ROC Company Law, ten days before the ordinary meeting of shareholders, our annual financial statements must be available at our principal office in Hsinchu for shareholder inspection.

Acquisition of Common Shares by Our Company

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

However, under the ROC Securities and Exchange Law, we may, in accordance with Securities and Futures Commission procedures and a resolution adopted by a majority of our board of directors at a meeting attended by more than two-thirds of the directors, purchase our shares on the Taiwan Stock Exchange or by a tender offer for the following purposes:

(1) for transfer to our employees;
(2) for the delivery of shares following the conversion or exercise of bonds with warrants, preferred shares with warrants, convertible bonds, or convertible preferred shares or certificates of warrants issued by us; and
(3) for maintaining our credit and our shareholders’ equity, except that the shares so purchased shall be cancelled thereafter.

The total shares purchased by us may not exceed 10 per cent. of our total issued and outstanding shares. In addition, the total cost of the purchased shares may not exceed the aggregate amount of our retained earnings, any premium from share issuances and the realised portion of our capital reserve. The shares purchased by us for the first two purposes set forth above will be transferred to the intended transferees within three years after the purchase; otherwise the shares will be cancelled. For the shares purchased for the third purpose set forth above required to be cancelled, we are required to complete an amendment registration for the cancellation within six months after the purchase. The shares purchased by us may not be pledged or hypothecated. In addition, we may not exercise any shareholders’ rights for these shares. Our affiliates, as defined in Article 369-1 of the ROC Company Law, directors, supervisors, managers and their respective spouses and minor children and/or nominees are prohibited from selling our shares during the period we purchase our own shares.

Liquidation Rights

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

Transfer Restrictions

The ROC Securities and Exchange Law requires each director, supervisor, manager or shareholder who, together with that shareholder’s spouse, minor children or nominees, holds more than 10 per cent. of our shares, to report the amount of that person’s shareholding to us and also limits the number of shares that can be sold or transferred on the Taiwan Stock Exchange by that person per day. In addition, these persons may sell or transfer shares of our common stock on the Taiwan Stock Exchange only after reporting that sale or transfer to the SFC at least three days prior to the sale or transfer, except that such advance reporting requirement does not apply if the number of shares transferred does not exceed 10,000.

TERMS AND CONDITIONS OF THE BONDS

The following terms and conditions (subject to amendment and except for the sentences in italics) (the “Conditions ”) will be endorsed on the Certificates issued in respect of the Bonds :

The issue of US$80,000,000 Zero Coupon Convertible Bonds due 2007 (the “Bonds”, which shall include any additional Bonds issued pursuant to the option to increase the principal amount of the Bonds described in the Trust Deed (as defined below)) of Silicon Integrated Systems Corp. (the “Company”) was authorised by a resolution of the Board of Directors of the Company adopted on 14 December 2001. The Bonds are constituted by a trust deed (the “Trust Deed”) dated 18 July 2002, and made between the Company and The Bank of New York (the “Trustee”, which term shall include all persons for the time being trustee or trustees under the Trust Deed) for the holders of the Bonds. The Company has entered into a paying and conversion agency agreement (the “Agency Agreement”) dated 18 July 2002 with the Trustee, The Bank of New York as registrar, The Bank of New York as principal paying, conversion and transfer agent and the other paying, conversion, replacement and transfer agents appointed thereunder (together the “Agents” in relation to the Bonds). The registrar, principal paying and conversion agent, paying agents, conversion agents, transfer agents and replacement agent for the time being under the Agency Agreement are referred to below as the “Registrar”, the “Principal Agent”, the “Paying Agents” (which expression shall include the Principal Agent), the “Conversion Agents” (which expression shall include the Principal Agent), the “Transfer Agents” (which expression shall include the Registrar) and the “Replacement Agent”, respectively. The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the Trust Deed. Unless otherwise defined, terms used in these Conditions have the meaning specified in the Trust Deed. Copies of the Trust Deed and the Agency Agreement are available for inspection during normal business hours at the specified office of the Trustee being at the date hereof at 48th Floor, One Canada Square, London E14 5AL, United Kingdom and at the specified offices of each of the Agents. The holders of the Bonds are entitled to the benefit of and are bound by the provisions of the Trust Deed and are deemed to have notice of all the provisions of the Trust Deed and the Agency Agreement.

1 STATUS

The Bonds constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Company and rank pari passu without any preference or priority among themselves and (subject as aforesaid) shall at all times rank at least equally with all other present and future direct, unconditional, unsubordinated and unsecured obligations of the Company (other than any obligation preferred by mandatory provisions of law).

2 FORM, DENOMINATION AND TITLE

(a) Form and denomination

The Bonds are issued in registered form without interest coupons in the denomination of US$1,000 each. A bond certificate (each a “Certificate”) will be issued to each holder of the Bonds in respect of its registered holding of the Bonds. Each Bond and each Certificate will be serially numbered with an identifying number which will be recorded on the relevant Certificate and in the register of holders of the Bonds (the “Register”) which the Company will procure to be kept by the Registrar.

Certificates with respect to Restricted Bonds will bear the Securities Act Legend (as defined in the Trust Deed), unless the Company determines otherwise in accordance with applicable law. Certificates with respect to Unrestricted Bonds will not bear the Securities Act Legend.

The Restricted Bonds will be represented by the Restricted Global Certificate deposited with a custodian for, and registered in the name of a nominee of, DTC in New York City. The Unrestricted Bonds will be represented by the Unrestricted Global Certificate and deposited with a common depositary for, and registered in the name of a nominee of, Euroclear and Clearstream, Luxembourg.

Except in the limited circumstances described in a Global Certificate, owners of interests in the Bonds represented by that Global Certificate will not be entitled to receive individual Certificates in respect of their individual holdings of the Bonds. The Bonds are not issuable in bearer form.

(b) Title

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

3 NEGATIVE PLEDGE

So long as any of the Bonds remains outstanding (as defined in the Trust Deed), the Company shall not, and shall not permit any of its Principal Subsidiaries to, create or permit to be outstanding any mortgage, charge, pledge, lien or other form of encumbrance or security interest (an “Encumbrance”) upon the whole or any part of its undertaking, property, assets or revenues, present or future, to secure for the benefit of the holders of any International Investment Securities (I) payment of any sum due in respect of any such International Investment Securities; (II) any payment under any guarantee of any such International Investment Securities; or (III) any payment under any indemnity or other like obligation relating to any such International Investment Securities without, in any such case, at the same time according to the Bonds either the same security as is granted to or is outstanding in respect of such International Investment Securities, guarantee, indemnity or other like obligation or such other security as shall be approved by an Extraordinary Resolution (as defined in the Trust Deed) of the Bondholders.

For this purpose, the term “International Investment Securities” means bonds, debentures, notes, or other similar investment securities of the Company or any other person evidencing indebtedness with a maturity of not less than one year which (A) either (1) are by their terms payable, or confer a right to receive payment, in any currency other than the currency of the country of incorporation of the issuer or (2) are denominated or payable in the currency of the country of incorporation of the issuer and more than 50 per cent. of the aggregate principal amount thereof is initially distributed outside the country of incorporation of the issuer by or with the authorisation of the issuer thereof, and (B) are for the time being, or are capable of being, quoted, listed, ordinarily dealt in or traded on any stock exchange, quotation system or over-the-counter or other similar securities market outside the country of incorporation of the issuer.

“Principal Subsidiary” means any corporation or other business entity more than 50 per cent. of the outstanding voting stock of which is for the time being owned directly or indirectly by the Company and either (A) the net sales or net operating revenues of which, as shown by the accounts (consolidated in the case of any entity which itself has subsidiaries) of such entity upon which the latest audited consolidated accounts of the Company have been based, are at least 10 per cent. of the net sales of the Company and its consolidated subsidiaries, if any, as shown by such audited consolidated accounts or (B) the gross assets of which, as shown by the aforementioned accounts, are at least 10 per cent. of the gross assets of the Company and its consolidated subsidiaries, if any, as shown by such audited consolidated accounts.

4 TRANSFERS OF BONDS; ISSUE OF CERTIFICATES

(a) Transfers

The Bonds are transferrable in principal amounts of US$1,000 or integral multiples thereof. A Bond may be transferred by depositing the Certificate issued in respect of that Bond, with the form of transfer on the back duly completed and signed, at the specified office of the Registrar or any Transfer Agent.

Transfers of interests in the Bonds in respect of which a Global Certificate is issued will be effected in accordance with the rules of the relevant clearing systems.

Upon the transfer, exchange or replacement of a Restricted Bond, a Transfer Agent or Replacement Agent will only deliver Certificates with respect to Restricted Bonds that bear the Securities Act Legend, unless there is delivered to such Transfer Agent or Replacement Agent such satisfactory evidence, which may include an opinion of legal counsel, as may be reasonably required by the Company, that neither the Securities Act Legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.

Until and including the 40th day after the later of the commencement of the offering and the latest closing date of the Bonds (the “Distribution Compliance Period”), an interest in Bonds represented by the Unrestricted Global Certificate may be transferred to a person who takes delivery in the form of an interest in Bonds represented by the Restricted Global Certificate only if a written certificate of the transferee (in the form provided in the Agency Agreement) is delivered to the effect that it is purchasing such interest for its own account or for accounts as to which it exercises sole investment discretion and that it is and, if applicable, each such account holder is, a QIB within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any State of the United States or any other jurisdiction. After the expiration of the Distribution Compliance Period, such prohibitions will no longer apply.

Interests in Bonds represented by the Restricted Global Certificate may be transferred to a person who takes delivery in the form of an interest in Bonds represented by the Unrestricted Global Certificate, whether before, during or after the expiration of the Distribution Compliance Period, only if a written certificate from the transferor (in the form provided in the Agency Agreement) is delivered to the effect that such transfer is being made in an offshore transaction in accordance with Rule 903 or 904 of Regulation S and that, if such transfer occurs prior to the expiration of the Distribution Compliance Period, such interest in such Bonds represented by the Unrestricted Global Certificate will be held immediately thereafter through Euroclear and Clearstream, Luxembourg. For the avoidance of doubt, such certification requirement will continue to apply to such transfers after the expiration of the Distribution Compliance Period.

An interest in the Bonds represented by the Restricted Global Certificate may be exchanged for an interest in the Bonds represented by the Unrestricted Global Certificate or vice versa subject to compliance with the same certification procedures described in the paragraphs above.

Transfers of Bonds and interests therein and Shares to be issued upon conversion of such Bonds, are also subject to the restrictions described under “Subscription and Sale” and “Transfer Restrictions of the Bonds”.

(b) Delivery of new certificates

Each new Certificate to be issued upon transfer of the Bonds will, within three business days of receipt by the relevant Transfer Agent of the form of transfer, be mailed by uninsured mail at the risk of the holder entitled to the Bonds to the address specified in the form of transfer. For the purposes of this Condition 4, “business day” shall mean a day (other than a Saturday or Sunday) on which banks are open for business in the city in which the specified office of the Transfer Agent with whom a Certificate is deposited in connection with a transfer is located.

Except in the limited circumstances described in the Global Certificates, owners of interests in the Bonds represented by the Restricted Global Certificate and the Unrestricted Global Certificate will not be entitled to receive individual Certificates in respect of their individual holdings of Bonds. Issues of Certificates upon transfer of Bonds are subject to compliance by the transferor and transferee with the transfer restrictions and the certification procedures described above and in the Agency Agreement, and, in the case of Restricted Bonds, also compliance with the Securities Act Legend.

Where some but not all the Bonds in respect of which a Certificate is issued are to be transferred, converted or redeemed, a new Certificate in respect of the Bonds not so transferred, converted or redeemed will, within three business days of deposit or surrender of the original Certificate with or to the relevant Agent, be mailed by uninsured mail at the risk of the holder of the Bonds not so transferred, converted or redeemed to the address of such holder appearing on the register of holders of the Bonds.

(c) Formalities free of charge

Registration of transfer of the Bonds will be effected without charge by or on behalf of the Company or any of the Agents, subject to payment (or the giving of such indemnity as the Company or any of the Agents may require) in respect of any tax or other governmental charges which may be imposed in relation to it.

(d) No transfer periods

No holder of the Bonds may require the transfer of a Bond to be registered (I) during the period of 15 days ending on the due date for any payment of principal on the Bond, (II) after the Certificate in respect of such Bond has been deposited for conversion pursuant to Condition 5, or (III) after the Certificate in respect of such Bond has been deposited for the purpose of exercising the put option of the Bondholders pursuant to Condition 7(d) or the Delisting Put Right pursuant to Condition 7(e);

(e) Regulations

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

5 CONVERSION

The Company shall, within five Trading Days (as defined below) from the Conversion Date, issue and deliver the Shares converted from the Bonds to the converting Bondholder or its designee.

(a) Conversion Right

(i) Conversion Period: Each Bondholder has the right to convert any Bond into Shares on and subject to the terms set forth herein (the “Conversion Right”). Subject to and upon compliance with the provisions of this Condition 5, the Conversion Right attaching to any Bond may be exercised, at the option of the holder thereof and as to the extent provided herein, at any time on or after 18 August 2002 and prior to the close of business (at the place where such Bond is deposited for conversion) on 18 June 2007 or if such date shall not be a business day at such place, on the immediately preceding business day at such place (but in no event thereafter), or, if such Bond shall have been called for redemption prior to 18 June 2007, then up to the close of business (at the place aforesaid) on the date seven days prior to the date fixed for redemption thereof or if such date shall not be a business day at such place, on the immediately preceding business day at such place (the “Conversion Period”); provided however, that the Conversion Right during any Closed Period shall be suspended and the Conversion Period shall not include any such Closed Period. The Company shall procure that holders of the Bonds are given timely (and if practicable timely prior) notice in accordance with Condition 14, of any Closed Period.

“Closed Period” means any period during which under the laws of the Republic of China (the “ROC”) the Company shall close its shareholders’ register, which period includes (I) 60 days prior to the date of the annual general meeting of shareholders,

(II) 30 days prior to a special shareholders’ meeting, and (III) from three Trading Days prior to the day on which the Company notifies the Taiwan Stock Exchange (the “TSE”) of the record date for determination of stockholders entitled to receipt of dividends, subscriptions of shares due to capital increase or other benefits and bonuses to such record date or (IV) such other periods determined by ROC law applicable from time to time.

“Trading Day” means a day (other than a Saturday or Sunday) on which the TSE is open for business.

“Shares” means (I) shares of the class of share capital of the Company which, at the date of the Trust Deed, is designated as common stock of NT$10 each in the capital of the Company, together with shares of any class or classes resulting from any division, consolidation or re-classification thereof, which as between themselves have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or winding-up of the Company, and (II) fully-paid and non-assessable shares of any class or classes of the share capital of the Company authorised after the date of the Trust Deed which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or winding-up of the Company; provided that “Shares” to be issued on a conversion of the Bonds shall mean only “Shares” as defined in (I) above.

Under current ROC law, regulation and policy, PRC persons are not permitted to hold or convert the Bonds or to register as a shareholder of the Company. Under current ROC law, “PRC person” means an individual holding a passport issued by the PRC, a resident of any area of China under the effective control or jurisdiction of the PRC (but not including a special administrative region of the PRC such as Hong Kong or Macau, if so excluded by applicable laws of the ROC), any agency or instrumentality of the PRC and any corporation, partnership or other entity organised under the laws of any such area or controlled or beneficially owned by any such person, resident, agency or instrumentality.

Under current ROC law, a non-ROC holder of Bonds when exercising his Conversion Right to convert Bonds into Shares is required to appoint a local agent, also referred to as a Tax Guarantor, in ROC, for filing tax returns and making tax payment on its behalf. In addition, a non-ROC converting Bondholder is required to appoint a local agent in the ROC with such qualifications as are set by the ROC SFC, to open a securities trading account with a local brokerage firm and a New Taiwan dollar bank account, pay ROC withholding taxes, remit funds, exercise shareholders’ rights and perform such other matters as may be designated by such converting Bondholder on behalf of and as agent for such person. In addition, such non-ROC converting Bondholder must also appoint a custodian bank to hold the securities for safekeeping, to make confirmation and settlement trades, and report all relevant information. Under existing ROC laws and regulations, without first obtaining an approval from the TSE and opening such accounts, such converting Bondholder would not be able to hold or to sell or otherwise transfer the Shares into which the Bonds may have been converted, on the TSE or otherwise. See “Risk Factors — Risks relating to Ownership of the Bonds or the Shares”, “Foreign investment and exchange controls in the ROC” and “Description of the Shares”.

(ii) Number of Shares issuable on conversion: The number of Shares to be issued upon conversion of any Bond will be determined by dividing the principal amount of the Bond (translated into New Taiwan dollars at the fixed rate of US$1.00 = NT$33.10 (the “Fixed Exchange Rate”)) by the Conversion Price (as defined in paragraph (iii) of this Condition 5(a)) in effect on the Conversion Date. If more than one Bond shall be deposited for conversion at any one time by the same Bondholder, the number of Shares to be issued upon conversion thereof will be calculated on the basis of the aggregate principal amount of the Bonds so deposited. Fractions of Shares will not be issued on conversion, and cash or other adjustments will not be made in respect

thereof by the Company. Notwithstanding the foregoing, in the event of a consolidation or reclassification of Shares by operation of law or otherwise occurring after 11 July 2002, the Company will upon conversion of the Bonds pay in US dollars a sum equal to such portion of the principal amount of the Bonds deposited for conversion as corresponds to any fraction of a Share not issued as aforesaid if such sum exceeds US$10. For the purpose of calculating the amount of such payment, the Company shall use the Fixed Exchange Rate.

(iii) Initial Conversion Price: The price at which Shares will be issued upon conversion (the “Conversion Price”) will initially be NT$33.00 per Share, but will be subject to adjustment in the manner provided in Conditions 5(c), 5(d) and 5(e).
(iv) Revival on default: Notwithstanding the provisions of paragraph (i) of this Condition 5(a), if the Company shall default in making payment in full in respect of any Bond which shall have been called for redemption prior to 18 June 2007 or the date fixed for redemption thereof, the Conversion Right attaching to such Bond will continue to be exercisable up to and including the close of business (at the place where the Bond is deposited for conversion) on the date upon which the full amount of the monies payable in respect of such Bond has been duly received by the Trustee or the Principal Agent and notice of such receipt has been duly given to the Bondholders.

(b) Conversion Procedure

(i) Exercise Procedure: To exercise the Conversion Right attaching to any Bond, the holder thereof must complete, execute and deposit at his own expense between 9:00 am and 3:00 pm on any business day during the Conversion Period at the specified office of a Conversion Agent outside the ROC at which the Bond is presented for conversion a notice of conversion (a “Conversion Notice”) in duplicate, duly completed and signed, in the then current form obtainable from the specified office of any Conversion Agent, together with the Certificate relating to the relevant Bonds and any certificates and other documents as may be required under the law of the ROC or the jurisdiction in which such Conversion Agent shall be located. A Conversion Notice delivered outside the hours specified above or on a day which is not a business day shall be deemed to have been deposited with the Conversion Agent on the next business day. The Conversion Notice shall contain, inter alia , an appointment of a local agent in the ROC. A Conversion Notice once deposited may not be withdrawn without the consent in writing of the Company. The price at which such Bond will be converted will be the Conversion Price in effect on the Conversion Date.

A Bondholder exercising the Conversion Right in relation to a Bond shall be required to represent and agree in the Conversion Notice that at the time of signing and delivery of such Conversion Notice either (I) it or the person who has the beneficial interest in that Bond is not in the United States or a U.S. Person (within the meaning of Regulation S under the U.S. Securities Act of 1933 (the “Securities Act”)) and it, or (as the case may be) such person, purchased such Bond, or the beneficial interest therein, in a transaction made in accordance with Rule 903 or Rule 904 of Regulation S under the Securities Act (“Regulation S”) and that it, or (as the case may be) such person understands that the Shares to be issued upon conversion of the Bond have not been and will not be registered under the Securities Act and agrees that (A) it, or (as the case may be) such person will not offer, sell, pledge or otherwise transfer such Shares prior to the expiration of the Distribution Compliance Period (as defined in the Trust Deed) except (1) in accordance with Rule 144A under the Securities Act (“Rule 144A”) to a person that it and any person acting on its behalf reasonably believe is a qualified institutional buyer within the meaning of Rule 144A (“QIB”) purchasing for its own account or for the account of a QIB, (2) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (3) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), in each ease in accordance with any applicable securities laws of any State of the United States, and (B) any transfer of such Shares prior to

the expiration of the Distribution Compliance Period will only be made to a person who agrees to be bound by these same restrictions or (II) it or the person who has the beneficial interest in that Bond is a QIB and understands that the Shares to be issued or transferred upon exchange of such Bond have not been and will not be registered under the Securities Act and agrees that (A) if it, or (as the case may be) such person, should sell, pledge or otherwise transfer such Shares it, or such person, will do so only in compliance with the Securities Act and other applicable laws and only (1) in accordance with Rule 144A to a person that the holder reasonably believes is a QIB purchasing for its own account or for the account of a QIB, (2) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (3) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), and (B) it shall not deposit any of such Shares in any unrestricted depositary receipt facility for the Shares which may be created in the United States; provided that the representations and undertakings in this paragraph need not be given with respect to any conversion of Bonds represented by the Unrestricted Global Certificate where such conversion is to occur after the expiration of the Distribution Compliance Period. No Shares will be delivered to a holder of a Bond or a beneficial interest therein unless such holder satisfies the foregoing conditions. If such holder is unable or otherwise fails to satisfy the foregoing conditions, such holder may transfer its Bonds or beneficial interest therein subject to compliance with the transfer restriction set forth in the Agency Agreement.

The Agency Agreement provides that the Company may have certain disclosure obligations and reporting obligations under ROC law and regulations if:

(i) the person to be registered as a shareholder is a “related party” of the Company under Statements of Financial Accounting Standard No. 6 of the ROC and such person beneficially owns the Shares issued upon the conversion of Bonds; or
(ii) the person to be registered as a shareholder owns the Shares issued upon the conversion of Bonds and such Shares exceed 10 per cent. of the total number of Shares expected to be issued upon conversion of all the Bonds at the initial Conversion Price.

As a result of such disclosure obligations, the Conversion Agents may, at the request of the Company, require the converting Bondholders to disclose the name of the person to be registered as the shareholder and to provide proof of identity and genuineness of any signature and other documents as a condition precedent to the conversion of the Bonds. The conversion of Bonds may be delayed until the relevant Conversion Agent receives the requested information and satisfactory evidence of the compliance with all laws and regulations by the Bondholders. The information the Bondholder is required to provide may include the name and nationality of the person to be registered as shareholder and the total number of Shares which such person has or will receive in connection with the Bonds such person is converting or has converted in the past.

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

For the purposes of this Condition 5, “business day” means a day (other than a Saturday or Sunday) on which commercial banks are open for business in New York City, London and the city in which the specified office of the Conversion Agent with whom a Conversion Notice is deposited in connection with the conversion is located.

(ii) Taxes and Expenses; Deposit Date and Conversion Date: Together with the Conversion Notice, the holder of the Bond must pay to the relevant Conversion Agent all stamp, issue, registration, excise and similar taxes and duties (if any) or transfer

costs arising on conversion in the country in which the Bond is deposited for conversion, or payable in any jurisdiction consequent upon the issue or delivery of Shares or any other property or cash upon conversion to or to the order of a person other than the converting Bondholder. Except as aforesaid, the Company will pay the expenses arising in the ROC on the issue of Shares on conversion of the Bond and all charges of the Conversion Agents in connection therewith as provided in the Agency Agreement. The date on which any Bond and the Conversion Notice (in duplicate) relating thereto are deposited (subject as provided in paragraph (i)) with a Conversion Agent and the payments, if any, required to be paid by the holder of the Bond are made is hereinafter referred to as the “Deposit Date”. The “Conversion Date” applicable to a Bond shall mean the next business day following the Deposit Date, which business day is both a Trading Day and occurs during the Conversion Period.

(iii) Holder of record: With effect from the opening of business in the ROC on the Conversion Date, the Company will deem the converting Bondholder as indicated in the Conversion Notice to have become the holder of record of the number of Shares to be issued upon such conversion (disregarding any retroactive adjustment of the Conversion Price referred to below prior to the time such retroactive adjustment shall have become effective) and at such time, subject to paragraph (v) of this Condition 5(b), the rights of such converting Bondholder as a holder of the Bonds with respect to the Bonds deposited for conversion shall cease (except for the rights arising under paragraphs (iv) and (vi) of this Condition 5(b)).
(iv) Availability of Shares: The Company shall, for the benefit of the Bondholders, ensure that sufficient Shares, which are listed on the TSE, are available as soon as possible and in any event within five Trading Days (or such number of Trading Days as stipulated by the relevant laws and regulations applicable from time to time) from the applicable Conversion Date.
(v) Delivery of Shares: On the Conversion Date the Company will register the converting Bondholder in the Company’s register of shareholders as the owner of the number of Shares to be issued pursuant to paragraph (iii) of this Condition 5(b) upon conversion of such Bonds and, subject to any applicable limitations then imposed by ROC laws and regulations, according to the request made in the relevant Conversion Notice, procure that, as soon as practicable, and in any event within five Trading Days (or such number of Trading Days as stipulated by the relevant laws and regulations applicable from time to time) from the Conversion Date, there be delivered to the local agent appointed by the converting Bondholder, a certificate or certificates for the relevant Shares, registered in the name of the converting Bondholder together with any other property or cash (including, without limitation, cash payable pursuant to paragraph (ii) of Condition 5(a)) required to be delivered upon conversion and such assignments and other documents (if any) as may be required by law to effect the delivery thereof.
(vi) Retroactive adjustment of Conversion Price: If the Conversion Date in relation to any Bond shall be on or after a date with effect from which an adjustment to the Conversion Price takes retroactive effect pursuant to any of the provisions referred to in Condition 5(c) and the Trust Deed and the relevant Conversion Date falls on a date when the relevant adjustment has not been reflected in the Conversion Price, the Company will, within 20 days after the date of such adjustment of the Conversion Price, issue and deliver such number of Shares as is equal to the excess of the number of Shares that would have been required to be issued on conversion of such Bond if the relevant retroactive adjustment had been made as at the said Conversion Date over the number of Shares previously issued pursuant to such conversion, and in such event and in respect of such number of Shares references in paragraphs (iii) and (v) of this Condition 5(b) to the Conversion Date shall be deemed to refer to the date upon which such retroactive adjustment becomes effective (disregarding the fact that it becomes effective retroactively). Fractions of Shares will not be issued and no cash or other adjustment will be made in respect thereof.

(vii) Dividends and other entitlements: To the extent permitted under the laws of the ROC, Shares received by the converting Bondholders will be entitled to the annual dividend distributions or other benefits accruing to such Shares and approved by the immediately preceding annual general meeting of shareholders if the Conversion Date in respect of the conversion of such Bonds is on a day which is at least three Trading Days prior to the Company’s notification to the TSE in respect of a record date (and the relevant closure of the shareholders’ register) for determining the identity of shareholders who are entitled to such distributions in that year. The Company shall give the Bondholders not less than 14 days’ prior notice of its intention to make such notification to the TSE, which notice shall indicate the proposed date of such notification to the TSE.
(viii) Conversion Agents: The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of any Conversion Agent and to appoint further or other Conversion Agents, provided that the Company will at all times maintain Conversion Agents having specified offices in London and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of the exchange so require, in Luxembourg also. Notice of any such termination or appointment and of any changes in the specified offices of the Conversion Agents will be given promptly by the Company to the holders of the Bonds in accordance with Condition 14.

(c) Adjustments to Conversion Price

The Conversion Price will be subject to adjustment in the manner and upon the occurrence of certain events set forth below:

(i) Free distribution, bonus issue, division, consolidation and reclassification of Shares: If the Company shall (I) make a free distribution of Shares which is treated as a capitalisation issue for accounting purposes (including but not limited to a capitalisation of capital reserves), (II) make a bonus issue of its Shares which is treated as a capitalisation issue for accounting purposes (including but not limited to a capitalisation of capital reserves), (III) divide its outstanding Shares, (IV) consolidate its outstanding Shares into a smaller number of Shares, or (V) re-classify any of its Shares into other securities of the Company, then the Conversion Price shall be appropriately adjusted so that the holder of any Bonds the Conversion Date in respect of which occurs after the coming into effect of the adjustment described in this paragraph (i), shall be entitled to receive the number of Shares and/or other securities of the Company which he would have held or have been entitled to receive after the happening of any of the events described above had such Bonds been converted immediately prior to the happening of such event (or, if the Company has fixed a prior record date for the determination of shareholders entitled to receive any such free distribution or bonus issue, Shares or other securities issued upon any such division, consolidation or re-classification, immediately prior to such record date), but without prejudice to the effect of any other adjustment to the Conversion Price made with effect from the date of the happening of such event (or such record date) or any time thereafter. An adjustment made pursuant to this paragraph (i) shall become effective immediately on the relevant event referred to above becoming effective or, if a record date is fixed therefor, immediately after such record date, provided that in the case of a free distribution of Shares, a bonus issue of Shares or capitalisation of reserves which must, under applicable law of the ROC, be submitted for approval to a general meeting of shareholders of the Company before being legally paid or made, and which is so approved after the record date fixed for the determination of shareholders entitled to receive such distribution, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.

(ii) Declaration of dividend in Shares: If the Company shall declare a dividend in Shares then the Conversion Price shall be appropriately adjusted so that the holder of any Bonds the Conversion Date in respect of which occurs after the coming into effect of the adjustment described in this paragraph (ii), shall be entitled to receive the number of Shares and/or other securities of the Company which he would have held or have been entitled to receive after the date when such dividend is declared had such Bonds been converted immediately prior to the happening of such event (or, if the Company has fixed a prior record date for the determination of shareholders entitled to receive such dividend, immediately prior to such record date), but without prejudice to the effect of any other adjustment to the Conversion Price made with effect from the date of the happening of such event (or such record date) or any time thereafter. No account is to be taken of, or credit given for, the par value of Shares issued in a stock dividend in calculating the appropriate conversion price adjustment, so that the full dilutive effect is provided for. An adjustment made pursuant to this paragraph (ii) shall become effective immediately on the relevant event referred to above becoming effective or, if a record date is fixed therefor, immediately after such record date provided that in the case of a dividend in Shares or capitalisation of reserves which must, under applicable law of the ROC, be submitted for approval to a general meeting of shareholders of the Company before being legally paid or made, and which is so approved after the record date fixed for the determination of shareholders entitled to receive such dividend and/or distribution, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.
(iii) Concurrent adjustment events: If the Company shall declare a dividend in, or make a free distribution or bonus issue of, Shares which dividend, issue or distribution is to be paid or made to shareholders as of a record date which is also:
(A) the record date for the issue of any rights or warrants which requires an adjustment of the Conversion Price pursuant to paragraphs (iv), (v) or (vi) of this Condition 5(c);
(B) the day immediately before the date of issue of any securities convertible into or exchangeable for Shares which requires an adjustment of the Conversion Price pursuant to paragraph (viii) of this Condition 5(c);
(C) the day immediately before the date of issue of any Shares which requires an adjustment of the Conversion Price pursuant to paragraph (ix) of this Condition 5(c); or
(D) the day immediately before the date of issue of any rights, options or warrants which requires an adjustment of the Conversion Price pursuant to paragraph (x) of this Condition 5(c);

then (except where such dividend, bonus issue or free distribution gives rise to a retroactive adjustment of the Conversion Price under paragraph (i) or (ii) of this Condition 5(c)) no adjustment of the Conversion Price in respect of such dividend, bonus issue or free distribution shall be made under paragraph (i) or (ii) of this Condition 5(c), but in lieu thereof an adjustment shall be made under paragraphs (iv), (v), (vi), (viii), (ix) or (x) of this Condition 5(c) (as the case may require) by including in the denominator of the fraction described therein the aggregate number of Shares to be issued pursuant to such dividend, bonus issue or free distribution.

No account is to be taken of, or credit given for, the par value of Shares issued in a stock dividend in calculating the appropriate conversion price adjustment, so that the full dilutive effect is provided for.

(iv) Rights issues to shareholders: If the Company shall grant, issue or offer to the holders of Shares rights entitling them to subscribe for or purchase Shares (I) at a consideration per Share receivable by the Company (determined as provided in

paragraph (xiv) of this Condition 5(c)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price per Share at such record date; or (II) at a consideration per Share receivable by the Company which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration, then the Conversion Price in effect (in a case within (I) above) on the record date for the determination of shareholders entitled to receive such rights or (in a case within (II) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

==> picture [138 x 23] intentionally omitted <==

where:

NCP = the Conversion Price after such adjustment

OCP = the Conversion Price before such adjustment.

N = the number of Shares outstanding (having regard to paragraph (xv) of this Condition 5(c)) at the close of business in the ROC (in a case within (I) above) on such record date or (in a case within (II) above) on the date the Company fixes the said consideration.

n = the number of Shares initially to be issued upon exercise of such rights at the said consideration being (aa) the number of Shares which underwriters have agreed to underwrite as referred to below or, if greater, (bb) the number of Shares for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).

v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) would purchase at such Current Market Price per Share specified in (I) or, as the case may be, (II) above.

Subject as provided below, such adjustment shall become effective immediately after the latest date for the submission of applications for such Shares by shareholders entitled to the same pursuant to such rights or (if later) immediately after the Company fixes the said consideration but in all cases retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of rights entitling them to subscribe for or purchase Shares, any Shares which are not subscribed for or purchased by the persons entitled thereto are underwritten by other persons prior to the latest date for the submission of applications for such Shares, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but in all cases retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of rights entitling them to subscribe for or purchase Shares, any such Shares which are not subscribed for or purchased by the underwriters who have agreed to underwrite as referred to above or by the shareholders entitled thereto (or persons to whom shareholders have transferred such rights) who have submitted applications for such Shares as referred to above are offered to and/or subscribed by others, no further adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(v) Warrants issued to shareholders : If the Company shall grant, issue or offer to the holders of Shares warrants entitling them to subscribe for or purchase Shares (I) at a consideration per Share receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) which is fixed on or prior to the record date for the determination of shareholders entitled to receive such warrants and is less than the Current Market Price per Share at such record date; or (II) at a consideration per Share receivable by the Company which is fixed after the record date mentioned above and is less than the Current Market Price per Share on the date the Company fixes the said consideration, then the Conversion Price in effect (in a case within (I) above) on the record date for the determination of shareholders entitled to receive such warrants or (in a case within (II) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

==> picture [138 x 23] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

n = the number of Shares to be issued upon exercise of such warrants at the said consideration which, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (aa) the number of warrants which underwriters have agreed to underwrite as referred to below or, if greater, (bb) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).

Subject as provided below, such adjustment shall become effective (A) where no applications for such warrants are required from shareholders entitled to the same, upon their issue and (B) where applications by shareholders entitled to the same are required as aforesaid, immediately after the latest date for the submission of such applications or (if later) immediately after the Company fixes the said consideration but in all cases retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of warrants entitling them to subscribe for or purchase Shares in the circumstances described in (I) and (II) above, any warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of warrants entitling them to subscribe for or purchase Shares, any warrants which are not subscribed for or purchased by the underwriters who have agreed to underwrite as

referred to above or by the shareholders entitled thereto (or persons to whom shareholders have transferred the right to purchase such warrants) who have submitted applications for such warrants as referred to above are offered to and/or subscribed by others, no further adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(vi) Issues of rights or warrants for equity related securities to shareholders : If the Company shall grant, issue or offer to the holders of Shares rights or warrants entitling them to subscribe for or purchase any securities convertible into or exchangeable for Shares (I) at a consideration per Share receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price per Share at such record date; or (II) at a consideration per Share receivable by the Company (determined as aforesaid) which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration, then the Conversion Price in effect (in a case within (I) above) on the record date for the determination of shareholders entitled to receive such rights or warrants or (in a case within (II) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

==> picture [138 x 24] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

n = the number of Shares initially to be issued upon exercise of such rights or warrants and conversion or exchange of such convertible or exchangeable securities at the said consideration being, in the case of rights, (aa) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities which the underwriters have agreed to underwrite as referred to below or, as the case may be, (bb) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa) and which, in the case of warrants, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (aa) the number of warrants which underwriters have agreed to underwrite as referred to below or, if greater, (bb) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).

by shareholders entitled to the same pursuant to such rights, immediately after the latest date for the submission of such applications or (if later) immediately after the Company fixes the said consideration; but in all cases retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of rights or warrants entitling them to subscribe for or purchase securities convertible into or exchangeable for Shares in the circumstances described in (I) and (II) above, any convertible or exchangeable securities or warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such convertible or exchangeable securities or warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

If, in connection with a grant, issue or offer to the holders of Shares of rights or warrants entitling them to subscribe for or purchase securities convertible into or exchangeable for Shares, any convertible or exchangeable securities or warrants which are not subscribed for or purchased by the underwriters who have agreed to underwrite as referred to above or by the shareholders entitled thereto (or persons to whom shareholders have transferred such rights or the right to purchase such warrants) who have submitted applications for such convertible or exchangeable securities or warrants as referred to above are offered to and/or subscribed by others, no further adjustment shall be made to the Conversion Price by reason of such offer and/or subscription.

(vii) Other distributions to shareholders: If the Company shall distribute to the holders of Shares evidences of its indebtedness, or shares of capital stock of the Company (other than Shares), assets (excluding regular periodic dividends in cash) or rights or warrants to subscribe for or purchase shares or securities (excluding those rights and warrants referred to in paragraphs (iv), (v) and (vi) of this Condition 5(c)), then the Conversion Price in effect on the record date for the determination of shareholders entitled to receive such distribution shall be adjusted in accordance with the following formula:

==> picture [163 x 24] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

CMP = the Current Market Price per Share on the record date for the determination of shareholders entitled to receive such distribution.

fmv = the fair market value (as determined by the Company and notified to the Trustee or, if pursuant to applicable law of the ROC such determination is to be made by application to a court of competent jurisdiction, as determined by such court or by an appraiser appointed by such court) of the portion of the evidences of indebtedness, equity share capital, shares of capital stock, assets, rights or warrants so distributed applicable to one Share less any consideration payable for the same by the relevant Shareholder.

In making a determination of the fair market value of any such evidences of indebtedness, shares of capital stock, assets, rights or warrants, the Company shall consult a leading independent securities company or commercial bank in Taipei selected by the Company and approved by the Trustee and shall take fully into account the advice received from such company or bank.

100

Such adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive such distribution. Provided that (A) in the case of such a distribution which must, under applicable law of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the Board of Directors of the Company before such distribution may legally be made and is so approved after the record date fixed for the determination of shareholders entitled to receive such distribution, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date and (B) if the fair market value of the evidences of indebtedness, shares of capital stock, assets, rights or warrants so distributed cannot be determined until after the record date fixed for the determination of shareholders entitled to receive such distribution, such adjustment shall, immediately upon such fair market value being determined, become effective retroactively to immediately after such record date.

Under the terms of Condition 5(c), no account is to be taken of, or credit given for the par value of Shares issued in any employee dividend or profit-sharing arrangements in calculating the appropriate conversion price adjustment, so that the full dilutive effect is provided for.

(viii) Issue of convertible or exchangeable securities other than to shareholders or on exercise of warrants : If the Company shall issue any securities convertible into or exchangeable for Shares (other than the Bonds, or in any of the circumstances described in paragraphs (vi) and (x) of this Condition 5(c)) and the consideration per Share receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such securities is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of issue of such convertible or exchangeable securities shall be adjusted in accordance with the following formula:

==> picture [138 x 23] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

N = the number of Shares outstanding (having regard to paragraph (xv) of this Condition 5(c)) at the close of business in the ROC on the day immediately prior to the date of such issue.

n = the number of Shares to be issued upon conversion or exchange of such convertible or exchangeable securities at the initial conversion or exchange price or rate.

Such adjustment shall become effective as of the calendar day in the ROC corresponding to the calendar day at the place of issue on which such convertible or exchangeable securities are issued.

(ix) Other issues of Shares : If the Company shall issue any Shares (other than Shares issued upon conversion or exchange of any convertible or exchangeable securities (including the Bonds) issued by the Company or upon exercise of any rights or

101

warrants granted, offered or issued by the Company or in any of the circumstances described in paragraphs (i) and (ii) of this Condition 5(c) or issued to shareholders of any company which merges with the Company in proportion to their shareholdings in such company immediately prior to such merger, upon such merger but including Shares issued under any employee dividend or profit-sharing arrangements) for a consideration per Share receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such Shares is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the issue of such additional Shares shall be adjusted in accordance with the following formula:

==> picture [138 x 23] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

N = the number of Shares outstanding (having regard to paragraph (xv) of this Condition 5(c)) at the close of business in the ROC on the day immediately prior to the date of issue of such additional Shares.

n = the number of additional Shares issued as aforesaid.

Such adjustment shall become effective as of the calendar day in the ROC of the issue of such additional Shares.

(x) Issue of equity related Securities : If the Company shall grant, issue or offer options, warrants or rights (excluding those rights and warrants referred to in paragraphs (iv), (v), (vi) and (vii) of this Condition 5(c)) to subscribe for or purchase Shares or securities convertible into or exchangeable for Shares and the consideration per Share receivable by the Company (determined as provided in paragraph (xiv) of this Condition 5(c)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the offer, grant or issue of such rights, options or warrants is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of the offer, grant or issue of such rights, options or warrants shall be adjusted in accordance with the following formula:

==> picture [138 x 24] intentionally omitted <==

where:

NCP and OCP have the meanings ascribed thereto in paragraph (iv) of this Condition 5(c).

N = the number of Shares outstanding (having regard to paragraph (xv) of this Condition 5(c)) at the close of business in the ROC on the day immediately prior to the date of such issue.

102

n = the number of Shares to be issued on exercise of such rights or warrants and (if applicable) conversion or exchange of such convertible or exchangeable securities at the said consideration.

Such adjustment shall become effective as of the calendar day in the ROC corresponding to the calendar day at the place of issue on which such rights or warrants are issued.

Any adjustment will be notified promptly by the Company to the holders of the Bonds in accordance with Condition 14.

(xi) Analogous events and modifications : If (I) the rights of conversion or exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for, or which carry rights to subscribe for or purchase Shares are modified (other than pursuant to and as provided in the terms and conditions of such options, rights, warrants or securities) or (II) the Company determines or written notice has been given to the Trustee that any other event or circumstance has occurred which has or would have an effect on the position of the holders of the Bonds as a class compared with the position of the holders of all the securities (and options and rights relating thereto) of the Company, taken as a class which is analogous to any of the events referred to in paragraphs (i) to (x) of this Condition 5(c), then, in any such case, the Company shall notify the Trustee thereof or if the Trustee has been notified under (II), the Trustee shall notify the Company thereof and the Company shall consult with a leading independent securities company or commercial bank in Taipei selected by the Company and approved by the Trustee as to what adjustment, if any, should be made to the Conversion Price to preserve the value of the Conversion Right of holders of the Bonds and will make any such adjustment.
(xii) Simultaneous issues of different classes of Shares : In the event of simultaneous issues of two or more classes of share capital comprising Shares or rights or warrants in respect of, or securities convertible into or exchangeable for, two or more classes of share capital comprising Shares, then, for the purposes of this Clause, the formula:

==> picture [138 x 23] intentionally omitted <==

shall be restated as:

==> picture [195 x 24] intentionally omitted <==

where v1 and n1 shall have the same meanings as “v” and “n” but by reference to one class of Shares, v2 and n2 shall have the same meanings as “v” and “n” but by reference to a second class of Shares, v3 and n3 shall have the same meanings as “v” and “n” but by reference to a third class of Shares and so on.

(xiii) Current Market Price per Share: For the purposes of this Condition 5(c), the “Current Market Price” per Share on any date means the average of the daily closing prices (as defined below) of the relevant Shares for any 30 consecutive Trading Days (as defined below) commencing 45 Trading Days before the date of any relevant adjustment. If the Company has more than one class of share capital comprising

103

Shares, then the relevant Current Market Price for Shares shall be the price for that class of Shares the issue of which (or of rights or warrants in respect of, or securities convertible into or exchangeable for, that class of Shares) gives rise to the adjustment in question.

If during the said 45 Trading Days or any period thereafter up to but excluding the date as of which the adjustment of the Conversion Price in question shall be effected, any event (other than the event which requires the adjustment in question) shall occur which gives rise to a separate adjustment to the Conversion Price hereunder the provisions of this Trust Deed, then the Current Market Price as determined above shall be adjusted in such manner and to such extent as a leading independent securities company or commercial bank in Taipei selected by the Company and approved by the Trustee shall in its absolute discretion deem appropriate and fair to compensate for the effect thereof.

(xiv) Consideration Receivable by the Company: For the purposes of any calculation of the consideration receivable by the Company pursuant to paragraphs (iv), (v), (vi), (viii), (ix) and (x) of this Condition 5(c), the following provisions shall be applicable:
(A) in the case of the issue of Shares for cash, the consideration shall be the amount of such cash, provided that in no such case shall any deduction be made for any commissions or any expenses paid or incurred by the Company for any underwriting of the issue or otherwise in connection therewith;
(B) in the case of the issue of Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Company (and in making such determination the Company shall consult a leading independent securities company or commercial bank in Taipei selected by the Company and approved by the Trustee and shall take fully into account the advice received from such company or bank) or, if pursuant to applicable law of the ROC such determination is to be made by application to a court of competent jurisdiction, as determined by such court or an appraiser appointed by such court, irrespective of the accounting treatment thereof;
(C) in the case of the issue (whether initially or upon the exercise of rights or warrants) of securities convertible into or exchangeable for Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for such securities and (if applicable) rights or warrants plus the additional consideration (if any) to be received by the Company upon (and assuming) the conversion or exchange of such securities at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in (A) and (B) above) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) such conversion or exchange at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price;
(D) in the case of the issue of rights or warrants to subscribe for or purchase Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for any such rights or warrants plus the additional consideration to be received by the Company upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in (A) and (B) above) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price;

104

(E) if any of the consideration referred to in any of the paragraphs in this Condition 5(c) preceding this paragraph (xiv) is receivable in a currency other than NT dollars, such consideration shall (in any case where there is a fixed rate of exchange between the NT dollar and the relevant currency for the purposes of the issue of the Shares, the conversion or exchange of such securities or the exercise of such rights or warrants) be translated into NT dollars for the purposes of this paragraph (xiv) at such fixed rate of exchange and shall (in all other cases) be translated into NT dollars at the mean of the exchange rate quotations (being quotations for the cross rate through US dollars if no direct rate is quoted) by a leading bank in the ROC for buying and selling spot units of the relevant currency by telegraphic transfer against NT dollars on the date as of which the said consideration is required to be calculated as aforesaid; and
(F) in the case of the issue of Shares (including, without limitation, to employees under any employee bonus or profit sharing arrangements) credited as fully paid out of retained earnings or capitalisation of reserves at their par value, the aggregate consideration receivable by the Company shall be deemed to be zero (and accordingly the number of Shares which such aggregate consideration receivable by the Company could purchase at the relevant Current Market Price per Share shall also be deemed to be zero).
(xv) Cumulative Adjustments: If, at the time of computing an adjustment (the “later adjustment”) of the Conversion Price pursuant to any of paragraphs (ii), (iv), (v), (vi), (viii), (ix) and (x) of this Condition 5(c), the Conversion Price already incorporates an adjustment made (or taken or to be taken into account pursuant to the proviso to paragraph (xvi) of this Condition 5(c)) to reflect an issue of Shares or of securities convertible into or exchangeable for Shares or of rights or warrants to subscribe for or purchase Shares or securities, to the extent that the number of such Shares or securities taken into account for the purposes of calculating such adjustment exceeds the number of such Shares in issue at the time relevant for ascertaining the number of outstanding Shares for the purposes of computing the later adjustment, such excess Shares shall be deemed to be outstanding for the purposes of making such computation.
(xvi) Minor Adjustments: No adjustment of the Conversion Price shall be required where such adjustment would be less than one per cent. of the Conversion Price in effect prior to such adjustment; provided that any adjustment which by reason of this paragraph (xvi) is not required to be made shall be carried forward and taken into account (as if such adjustment had been made at the time when it would have been made but for the provisions of this paragraph (xvi)) in any subsequent adjustment. All calculations under this Condition 5(c) shall be made to the nearest NT$0.01 with NT$0.005 being rounded up to the next NT$0.01.
(xvii) Minimum Conversion Price: Notwithstanding the provisions of this Condition 5(c), the Company covenants that Conversion Price shall not be reduced below the par value of the Shares (NT$10 at the date hereof) as a result of any adjustment made hereunder unless under applicable law then in effect Bonds may be converted at such reduced Conversion Price into legally issued, fully-paid and non-assessable Shares.
(xviii) Reference to “fixed”: Any reference in this Condition 5(c) to the date on which a consideration is “fixed” shall, where the consideration is originally expressed by reference to a formula which cannot be expressed as an actual cash amount until a later date, be construed as a reference to the first day on which such actual cash amount can be ascertained.
(xix) Trustee not obliged to monitor: The Trustee shall not be under any duty to monitor whether any event or circumstances has happened or exists within this Condition 5(c) and will not be responsible to holders of the Bonds for any loss arising from any failure by it to do so.

105

(xx) Notice of adjustment: The Trust Deed provides that the Company shall give notice to the Bondholders accordance with Condition 14 and, so long as the Bonds are listed on the Socie´ te´ de la Bourse de Luxembourg S.A. (the “Luxembourg Stock Exchange”), to the Luxembourg Stock Exchange also, promptly after an adjustment to the Conversion Price pursuant to this Condition 5(c) takes effect, stating the Conversion Price in effect before and after such adjustment and the effective date of the adjustment.

(d) Conversion Price reset

If the average of the Closing Prices of the Shares on the TSE (the “Average Closing Price”) for the period of 20 consecutive Trading Days immediately prior to (and excluding) each of the dates which is the 45th day prior to 18 July 2003, 18 July 2004, 18 July 2005 and 18 July 2006 (each a “Reset Date”), converted into US dollars at the Prevailing Rate is less than the Conversion Price in effect on the Reset Date converted into US dollars at the Fixed Exchange Rate, the Conversion Price shall be adjusted in accordance with the following formula:

==> picture [406 x 25] intentionally omitted <==

Such adjusted Conversion Price shall be rounded upwards, if necessary, to the nearest NT$0.01.

Provided that:

(i) any adjustment to the Conversion Price pursuant to this Condition 5(d) shall be limited so that the Conversion Price adjusted in accordance with this Condition 5(d) shall not be less than 80 per cent. of the initial Conversion Price prevailing on 18 July 2002 (but adjusted to reflect any adjustments required under Condition 5(c) which may have occurred prior to the relevant Reset Date);
(ii) the provisions of Condition 5(c) shall apply mutatis mutandis to this Condition 5(d) to ensure that appropriate adjustments shall be made to any Closing Price to reflect any adjustments made to the Conversion Price in accordance with Condition 5(c);
(iii) the Conversion Price shall not be reduced below the par value of the Shares (NT$10 per share as at the date hereof) unless, under applicable law then in effect, the Bonds could be converted at such reduced Conversion Price into legally issued, fully-paid and non-assessable Shares; and
(iv) for the avoidance of doubt any adjustments to the Conversion Price made pursuant to this Condition 5(d) shall only be downward adjustments.

“Prevailing Rate” for the translation of the Closing Prices shall be the closing rate for the purchase of US dollars with NT dollars quoted by Taipei Forex Inc. at the close of business on each Trading Day on which the Closing Price of that day is to be translated and shall be expressed as the number of NT dollars per US$1.00.

“Closing Price” for any Trading Day means the last reported transaction price or, if no transaction takes place on such day, the average of the closing bid and offered prices of Shares for such day as furnished by a leading independent securities firm licensed to trade on the TSE selected from time to time by the Company for the purpose.

Any such adjustment shall become effective as of the relevant Reset Date and shall be notified to the Bondholders in accordance with Condition 14 and so long as the Bonds are listed on the Luxembourg Stock Exchange, to the Luxembourg Stock Exchange also, within five days of the relevant Reset Date.

106

(e) Special Conversion Price reset

The 30th day prior to the Put Date (as defined in Condition 7(d)) and the 30th day prior to the Maturity Date (as defined in Condition 7(a)) shall each be a “Special Reset Date”. In the event that the Market Price is lower than the Conversion Price (converted into US dollars at the Fixed Exchange Rate) on a Special Reset Date, if the Company has given a Special Reset Notice in respect of that Special Reset Date in accordance with the provisions of this Condition 5(e), a Bondholder shall be entitled to exercise the Conversion Right in respect of all or some only of its Bonds, provided that the Deposit Date in respect of such exercise is within a period of seven business days starting (and including) the fifth business day after that Special Reset Date (such period being the “Special Conversion Price Period” in relation to that Special Reset Date), at a conversion price (each a “Special Conversion Price”), which is equal to 85 per cent. and 78 per cent. of the applicable Market Price (converted into NT dollars at the Fixed Exchange Rate), respectively for the first and the second Special Reset Date provided that if the Special Conversion Price so determined in respect of a Special Reset Date is less than the par value of the Shares then the par value of the Shares on that date (unless under the applicable law then in effect the Bonds could be converted at a Special Conversion Price into legally issued, fully-paid and non-assessable Shares) shall be the Special Conversion Price applicable to the relevant Special Conversion Period (the Conversion Right exercisable pursuant to and in accordance with this Condition 5(e) is hereinafter referred to as the “Special Conversion Right”).

The Company may at its option, on the day which is the 30th day prior to a Special Reset Date, give an irrevocable notice to the Bondholders (in accordance with Condition 14) to the effect that the Special Conversion Right shall be available during the Special Conversion Price Period relating to the Special Reset Date immediately following such notice if on such Special Reset Date the relevant Market Price shall be lower than the Conversion Price on that Special Reset Date (the “Special Reset Notice”). The Special Conversion Right shall be available during the relevant Special Conversion Price Period if the Special Reset Notice has been given and the applicable Market Price is lower than the Conversion Price on the relevant Special Reset Date, regardless of whether or not the further notice to be given by the Company on the Special Reset Date as provided below is given.

If the Company has given a Special Reset Notice in relation to a Special Reset Date, then on that Special Reset Date the Company shall give further notice to the Bondholders in accordance with Condition 14 (such notice shall be given, so long as the Bonds are listed on the Luxembourg Stock Exchange, to the Luxembourg Stock Exchange also) and such notice shall, inter alia , state:

EITHER

that the Special Conversion Right is not available as the applicable Market Price is equal to or greater than the applicable Conversion Price.

OR

(i) that the Special Conversion Right is available, the date of the Special Reset Date and the start and end dates of the Special Conversion Price Period;
(ii) the applicable Market Price; and
(iii) the applicable Special Conversion Price.

The Special Conversion Price shall only apply to an exercise of a Special Conversion Right, and shall not apply in respect of any other conversion. Where the Special Conversion Right is, pursuant to the foregoing provisions, available to the Bondholders during the Special Conversion Period relating to the second Special Reset Date, such Conversion Right shall be exercisable notwithstanding that such Special Conversion Period shall fall after the end of the Conversion Period; and the Conversion Right will otherwise be unavailable during such Special Conversion Period.

107

“Market Price” means the lowest among the average Closing Prices of the Shares on the TSE (translated into US Dollars at the Prevailing Rate on each Trading Date) for 10, 15 and 20 consecutive Trading Days immediately preceding (and including) the applicable Special Reset Date.

(f) Mergers and disposals

The Company will not merge, amalgamate or consolidate with or into any other corporation or entity (the Company not being the continuing entity) or sell or transfer all, or substantially all, of the assets of the Company, whether as a single transaction or a number of transactions, related or not, to any corporation, entity or person or to one or more members of any group under the common control of any corporation, entity or person unless the Company shall have notified the holders of the Bonds of such event in accordance with Condition 14 and the Company and such corporation, entity or person shall have executed a trust deed supplemental to the Trust Deed in form and substance satisfactory to the Trustee providing that such corporation, entity or person shall assume the obligations of the Company under the Bonds, the Trust Deed and the Agency Agreement and providing that each Bond then outstanding shall be convertible into the class and amount of shares and other securities, cash and other property receivable upon such consolidation, amalgamation, merger, sale or transfer by a holder of the number of Shares into which such Bonds would have been convertible immediately prior to such consolidation, amalgamation, merger, sale or transfer (assuming for such purpose that the Bonds were convertible at the time of such consolidation, amalgamation, merger, sale or transfer) at the Conversion Price as adjusted from time to time pursuant to the Trust Deed. Such supplemental trust deed will provide for adjustments which will be as nearly equivalent as may be practicable to the adjustments provided for in the foregoing provisions to this Condition 5(f). The above provisions of this Condition 5(f) will apply in the same way to any subsequent consolidations, amalgamations, mergers, sales or transfers.

(g) Conversion undertakings

(i) Depositary receipts: The Company covenants and agrees that if it shall establish a depositary facility for issuing American or global depositary receipts (or other scrips evidencing Shares), it shall use reasonable efforts (I) to procure that the depositary facility shall accept the deposit of Shares issuable upon conversion of the Bonds with the depositary bank for the issuance of American or global depositary receipts (or other scrips) evidencing the Shares so deposited, and (II) to establish arrangements for the deposit of the Shares issued upon the conversion of Bonds with the depositary bank for the issuance of American or global depositary receipts (or other scrips evidencing Shares) on behalf of a converting Bondholder; so that a converting Bondholder may elect to receive such American or global depositary receipts (or other scrips) evidencing the Shares issuable to it upon conversion provided that, if and to the extent that any approval from the ROC SFC is required in connection with (I) or (II), the Company shall only be required hereunder to use reasonable efforts to apply for such approval. Any such arrangements shall be in addition to the provisions of these Conditions relating to conversion into Shares.

The Company’s obligations above are subject always to applicable laws and regulations, provided that it shall use reasonable efforts to obtain any necessary legal, regulatory or other approvals, if required (except for the approval of the ROC SFC), in relation to the establishment of a depositary facility as described above and the establishment of arrangements to deposit Shares issuable upon conversion of Bonds into such depositary facility and do such other acts incidental thereto to facilitate the establishment of the same. Moreover, the terms of the depositary facility may, in order to comply with applicable laws and regulations, impose certification or other requirements as conditions of accepting deposit of Shares issued upon conversion, or refuse to accept deposit of Shares by or on behalf of certain Bondholders. A converting Bondholder who elects to receive depositary receipts or other scrips evidencing Shares will be required to pay any duties, tax, costs or expenses arising out of or in connection with the deposit of Shares with the depositary bank. There is no assurance that the depositary bank will agree to

108

establish a depositary facility which accepts the Shares issued upon the conversion of Bonds for deposit with the depositary bank for the issuance of American or global depositary receipts (or other scrips evidencing Shares) or that the necessary legal, regulatory or other approvals will be obtained by the Company.

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

6 PAYMENTS

(a) Principal and other sums

Payment of principal, premium or interest (if any) due will be made by transfer to the registered account of a Bondholder or by US dollar cheque drawn on a bank in New York City mailed to the registered address of the Bondholder if it does not have a registered account. Payments of principal, premium or interest (if any) due will only be made after surrender of the relevant Certificate at the specified office of any Paying Agent.

References in these Conditions and the Agency Agreement to principal in respect of a Bond shall, where the context so permits, be deemed to include a reference to any premium and interest payable thereon.

(b) Registered accounts

The registered account of a Bondholder means the US dollar account maintained by or on behalf of it with a bank in New York City details of which appear on the Register at the close of business on the second business day (as defined in Condition 6(f)) before the due date for payment, and the registered address of a Bondholder means its address appearing on the Register at that time.

(c) Fiscal laws

All payments are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8. No commissions or expenses shall be charged to the holders of the Bonds in respect of such payments.

(d) Payment initiation

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

(e) Default interest and payment delay

If the Company fails to pay any sum in respect of the Bonds when the same becomes due and payable under these Conditions, interest shall accrue on the overdue sum at the rate of 7.00 per cent. per annum from the due date. Such default interest shall accrue on the basis of a year of 360 days consisting of 12 months of 30 days each.

Holders of the Bonds will not be entitled to any interest or other payment for any delay after the due date in receiving the amount due if the due date is not a business day, if the holder of the Bonds is late in surrendering its Certificate (if required to do so) or if a cheque mailed in accordance with this Condition 6 arrives after the due date for payment.

109

(f) Business days

In this Condition 6, “business day” means a day on which commercial banks are open for business in New York City and London and, in the case of the surrender of a Certificate, in the place where the Certificate is surrendered.

(g) Partial payments

If the amount of principal is not paid in full, the Registrar will annotate the register of holders of the Bonds with a record of the amount of principal in fact paid.

7 REDEMPTION, PURCHASE AND CANCELLATION

(a) Redemption at maturity

Unless previously redeemed or converted or purchased and cancelled as herein provided, the Company will redeem the Bonds at 119.944 per cent. of their principal amount in US dollars on 18 July 2007 (the “Maturity Date”). The Bonds may be redeemed in whole or in part prior to the Maturity Date only as provided in Conditions 7(b), 7(c), 7(d) and 7(e) below (but without prejudice to Condition 9).

(b) Redemption at the option of the Company

The Bonds may be redeemed, in whole or in part, at their Early Redemption Amount, in US dollars, at the option of the Company, at any time after 18 January 2004 and prior to 18 July 2007, upon not less than 30 nor more than 60 days’ notice to the holders of the Bonds (which notice shall be irrevocable and published in accordance with Condition 14), (i) if the Closing Price of the Shares on the TSE (translated into US dollars at the Prevailing Rate), for a period of 20 consecutive Trading Days, the last of which occurs not more than ten days prior to the date upon which notice of such redemption is published, is at least 125 per cent. of the Conversion Price of the Bonds then in effect (translated into US dollars at the Fixed Exchange Rate) on each such Trading Day; or (ii) if at least 90 per cent. in principal amount of the Bonds has already been converted, redeemed or purchased and cancelled. If there shall occur an event giving rise to a change in the Conversion Price during any such 20 consecutive Trading Day period, appropriate adjustments for the relevant days shall be made for the purpose of calculating the Closing Price for such days. If the Closing Price cannot be determined for one or more consecutive Trading Days, such day or days will be disregarded in the relevant calculation and will be deemed not to have existed when ascertaining such 20 consecutive Trading Day period.

The “Early Redemption Amount” of a Bond is determined in accordance with the following formula, rounded up to the nearest cent:

Early Redemption Amount = US$1,000 + US$1,000 x Premium Percentage x

Days Outstanding Relevant Period

where

“Premium Percentage” means 19.944 per cent.

“Relevant Period” means 1,800 days.

“Days Outstanding” means the numbers of days from, and including, 18 July 2002 to, but excluding the date for redemption and/or purchase, calculated on the basis of a year of 360 days consisting of 12 months of 30 days each, and in the case of an incomplete month, the number of days elapsed.

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

110

(c) Redemption for taxation reasons

At any time (but not if notice of redemption under Condition 7(b) has already been given to Bondholders), the Company may, having given not less than 30 nor more than 60 days’ notice to the Bondholders (which notice shall be irrevocable and given to Bondholders in accordance with Condition 14) redeem all but not some only of the Bonds at their Early Redemption Amount if (i) the Company satisfies the Trustee immediately prior to the giving of such notice that it has or will become obliged to pay additional amounts as provided or referred to in Condition 8(c) as a result of any change in, or amendment to, the laws or regulations of the ROC or any political subdivision or any authority thereof or therein having power to tax, or any change in the general application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after 18 July 2002 and (ii) such obligation cannot be avoided by the Company taking reasonable measures available to it, provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Company would be obliged to pay such additional amounts were a payment in respect of the Bonds then due. Prior to the publication of any notice of redemption pursuant to this Condition 7(c), the Company shall deliver to the Trustee a certificate signed by an authorised officer of the Company stating that the obligation referred to in (i) above cannot be avoided by the Company taking reasonable measures available to it and the Trustee shall be entitled to accept such certificate as sufficient evidence of the satisfaction of the condition precedent set out in (ii) above in which event it shall be conclusive and binding on the Bondholders. The Bonds in respect of which a notice of redemption has been given under Condition 7(b), 7(d) or 7(e) shall not be affected by any notice given subsequently under this Condition 7(c).

(d) Redemption at the option of Bondholders

The Company will, at the option of the holder of any Bond, redeem all or some of that holder’s Bonds on 18 July 2004 (the “Put Date”), at 107.545 per cent. of their principal amount. To exercise such option the holder must deposit the Certificate issued in respect of such Bonds with any Agent together with a duly completed redemption notice in the form obtainable from any of the Agents, not more than 60 nor less than 35 days prior to such date. No Bonds so deposited may be withdrawn (except as provided in the Agency Agreement) without the prior written consent of the Company. Not less than 30 nor more than 60 days’ notice of the commencement of the period for the deposit of Certificates for redemption pursuant to this Condition 7(d) shall be given to the Bondholders by the Company in accordance with Condition 14.

(e) Delisting Put Option

(i) Without prejudice to Condition 5(f), in the event that the Shares cease to be listed or admitted to trading on the TSE (a “Delisting”), each Bondholder shall have the right (the “Delisting Put Right”), at such Bondholder’s option, to require the Company to purchase all (but not some only) of such Bondholder’s Bonds on the 20th business day after the Delisting Put Notice Date (the “Delisting Put Date”) at a price equal to the Early Redemption Amount calculated on the basis that the date for redemption is the Delisting Put Date (the “Delisting Put Amount”). References in these Conditions to “principal” shall be deemed to include the portion of the Delisting Put Amount payable in relation to a Bond which is equal to the principal amount of that Bond, and references in these Conditions to “premium” shall be deemed to include the portion of the Delisting Put Amount payable in relation to a Bond which is in excess of the principal amount of that Bond.
(ii) Promptly after becoming aware of a Delisting, the Company will notify the Bondholders in accordance with Condition 14 regarding such Delisting Put Right, which notice (the date such notice is given shall be referred to herein as the “Delisting Put Notice Date”) shall state:
(A) the Delisting Put Date;

111

(B) the date of such Delisting and, briefly, the events causing such Delisting;
(C) the date by which the Purchase Notice must be given;
(D) the amount of the Delisting Put Amount and the method by which such amount will be paid;
(E) the names and addresses of all Paying Agents; and
(F) that a Purchase Notice, once validly given, may not be withdrawn.

To exercise its Delisting Put Right to require the Company to purchase its Bonds, the Bondholder must deliver a written irrevocable notice of the exercise of such right (a “Purchase Notice”) in the form obtainable from any of the Agents, to any Paying Agent on any business day prior to the close of business at the location of such Paying Agent on such day and which day is not less than 10 business days prior to the Delisting Put Date.

Payment of the Delisting Put Amount upon exercise of the Delisting Put Right for any Certificate for which a Purchase Notice has been delivered is conditioned upon delivery of such Certificate (together with any necessary endorsements) to any Paying Agent on any business day together with the delivery of such Purchase Notice and will be made promptly following the later of the Delisting Put Date and the time of delivery of such Certificate. If the Paying Agent holds on the Delisting Put Date money sufficient to pay the Delisting Put Amount of Bonds for which Purchase Notices have been delivered in accordance with the provisions hereof, then, whether or not such Bond is delivered to the Paying Agent, on and after such Delisting Put Date, (i) such Bond will cease to be outstanding, (ii) such Bond will be deemed paid and (iii) all other rights of the Bondholder shall terminate (other than the right to receive the Delisting Put Amount).

For the purposes of this Condition 7(e), “business day” shall mean a day on which commercial banks are open for business in London and New York City.

(f) Purchase

The Company may at any time and from time to time purchase the Bonds in the open market or otherwise. The Bonds so purchased shall be surrendered to the Principal Agent for cancellation and may not be held and reissued or resold.

(g) Selection of the Bonds

In the case of a redemption of some only of the Bonds pursuant to Condition 7(b), the Bonds to be redeemed will be selected individually by lot by the Principal Agent, in such place as the Trustee shall approve and in such manner as the Trustee shall deem to be appropriate and fair not more than 60 days and not less than 15 days prior to the date fixed for redemption.

(h) Cancellation

All Bonds which have been redeemed or converted, or purchased by the Company, shall forthwith be cancelled. Certificates in respect of all Bonds cancelled will be forwarded to or to the order of the Principal Agent and such Bonds may not be reissued or resold.

(i) Redemption notices; Precedence of notices

All notices to holders of the Bonds given by or on behalf of the Company pursuant to this Condition 7 will specify the date fixed for redemption, the redemption price, the Conversion Price as at the date of the relevant notice, the Closing Price of the Shares and the aggregate principal amount of the Bonds outstanding as at the latest practicable date prior to the publication of the notice and, in the case of a partial redemption, a list of the Bonds called for redemption (when applicable).

112

No notice of redemption given pursuant to Condition 7(b) or 7(c) shall be effective if it specifies a due date for redemption falling during the period commencing 60 days and ending 30 days (both inclusive) prior to any Put Date or Delisting Put Date (and if given shall not be effective). Any notice of redemption given under Condition 7(b) or 7(c) before any Put Date or Delisting Put Date and specifying a due date for redemption after the 30th day prior to any Put Date or Delisting Put Date shall be without prejudice to the rights of the Bondholders under Conditions 7(d) and 7(e) and shall not apply in respect of any Bonds in respect of which the option under Conditions 7(d) or 7(e) shall be or has been exercised. No notice of redemption given pursuant to Condition 7(b) shall be effective if it specifies a date for redemption which falls during a Closed Period or within 30 days following the last day of a Closed Period.

8 TAXATION

(a) All payments in respect of the Bonds shall be made free and clear of and without any deduction or withholding for or on account of any present or future taxes, duties, assessments or governmental charges of whatever nature imposed, levied, collected, withheld or assessed by or on behalf of the government of the ROC or any authority thereof or therein having power to tax, unless deduction or withholding of such taxes, duties, assessments or governmental charges is compelled by law.
(b) Where such withholding or deduction is in respect of ROC withholding tax on payments of premium at the rate of up to and including 20 per cent., the Company will increase the amount of premium paid by it to the extent required so that the net amount of premium received by the Bondholders (without prejudice to Condition 6) amounts to the relevant amount payable under Condition 7.
(c) In the event that any such withholding or deductions in respect of principal or any additional withholding or deduction in excess of 20 per cent. in respect of premium is required, the Company will pay such additional amounts as will result in the receipt by the Bondholders of the amounts which would have been receivable in the absence of any such withholding or deduction, except that no such additional amounts shall be payable in respect of any Bonds:
(i) to, or on behalf of, a holder who is subject to such taxes, duties, assessments or governmental charges in respect of such Bonds by reason of his being connected with the ROC otherwise than merely by holding such Bonds or by the receipt of principal or premium, in respect of the Bonds; or
(ii) if the Certificate in respect of such Bonds is surrendered more than 30 days after the relevant date except to the extent that the holder would have been entitled to such additional amount on surrendering the relevant Certificate for payment on the last day of such 30-day period.

For this purpose the “relevant date” in relation to any Bonds means (I) the due date for payment in respect thereof, or (II) (if the full amount of the monies payable on such due date has not been received in New York City by the Trustee or the Principal Agent on or prior to such due date) the date on which notice is duly given to the Bondholders that such monies have been so received.

(d) References in these Conditions to principal and premium shall be deemed also to refer to any increased or additional amounts which may be payable in respect thereof under this Condition 8.

9 EVENTS OF DEFAULT

The Trustee at its discretion may, and if so requested in writing by the holders of not less than 25 per cent. in principal amount of the Bonds then outstanding or if so directed by an

113

Extraordinary Resolution shall (but subject to being indemnified and/or secured by the Bondholders to its satisfaction), give notice to the Company that the Bonds are immediately due and payable, if any of the following events (an “Event of Default”) shall have occurred and be continuing:

(a) the Company fails to pay the principal of or any premium on any of the Bonds within seven days after the same shall become due and payable in accordance with the Conditions; or
(b) the Company defaults in performance or observance of or compliance with any one or more of its other obligations set out in the Bonds or the Trust Deed which default is incapable of remedy or, if in the opinion of the Trustee such default is capable of remedy, such default is not in the opinion of the Trustee remedied within 30 days (or such longer time as the Trustee may consider appropriate in relation to the jurisdiction concerned) after written notice of such default shall have been given to the Company by the Trustee; or
(c) any other present or future indebtedness of the Company or any of its Principal Subsidiaries (as defined in Condition 3) for or in respect of monies borrowed or raised becomes due and payable prior to its stated maturity by reason of any potential default, event of default or the like (howsoever described), or any such indebtedness is not paid when due or, as the case may be, within any applicable grace period originally provided for, or the Company or any of its Principal Subsidiaries fails to pay when due any amount payable by it under any present or future guarantee or indemnity or arrangement or obligation having a like or similar effect (howsoever described) for any monies borrowed or raised by any person provided that the aggregate amount of the relevant indebtedness and guarantees in respect of which one or more events mentioned above in this Condition 9(c) have occurred equals or exceeds US$10,000,000 or its equivalent in any other currency (determined as provided below); or
(d) an encumbrancer takes possession or a receiver, manager or other similar officer is appointed, or a distress, execution or seizure before judgement is levied, enforced or sued out upon, against or in respect of the whole or any substantial part of the undertaking, property, assets or revenues of the Company and the same is not stayed, discharged, released or satisfied (as the case may be) within 60 days (or such longer period as the Trustee may consider appropriate in relation to the jurisdiction concerned) of such taking of possession, appointment, levying, enforcement or suing out (as the case may be); or
(e) the Company or any of its Principal Subsidiaries becomes bankrupt or insolvent or is unable to pay its debts as they mature or applies for or consents to or suffers the appointment of an administrator, liquidator (except for the purpose of and followed by a voluntary solvent reorganisation, merger, consolidation, amalgamation or other similar arrangement the terms of which have previously been approved by an Extraordinary Resolution of the holders of the Bonds) or receiver (or other similar official) of the Company or any of its Principal Subsidiaries or in respect of the whole or any substantial part of the undertakings, property, assets or revenues of the Company or any of its Principal Subsidiaries, or the Company or any of its Principal Subsidiaries stops, suspends or threaten to stop or suspend payment of all or a material part of (or of a particular type of) its debts, proposes or makes a general assignment or an arrangement or composition with or for the benefit of the relevant creditors in respect of any of such debts or a moratorium or standstill is agreed or declared in respect of or affecting all or any part of (or of a particular type of) the debts of the Company or any of its Principal Subsidiaries; or
(f) an order is made or an effective resolution passed for the winding-up or dissolution of the Company or the Company ceases or threatens to cease to carry on all or a material part of its business or operations or the Company becomes capable of being

114

dissolved under ROC law (except for the purpose of and followed by a solvent reconstruction, merger, consolidation, amalgamation or other similar arrangement the terms of which are approved by an Extraordinary Resolution of the holders of the Bonds); or

(g) the Company shall merge, amalgamate or consolidate with any other corporation or entity (with the Company not being the continuing entity) or shall sell or dispose of substantially all its business or assets whether as a single transaction or a number of transactions, related or not, to any person without obtaining the prior approval by Extraordinary Resolution of the Bondholders and of such person to assume the obligations of the Company under the Bonds and the Trust Deed; provided that such agreement by such other person shall not be required if such assumption shall be effective by operation of law; or
(h) a moratorium is agreed or declared in respect of any indebtedness of the Company or any governmental authority or agency condemns, seizes, compulsorily purchases or expropriates all or a substantial part of the assets or shares of the Company; or
(i) proceedings shall have been initiated against the Company under any applicable bankruptcy, insolvency or reorganisation law and such proceedings shall not have been discharged or stayed within a period of 60 days (or such longer period as the Trustee may consider appropriate in relation to the jurisdiction concerned); or
(j) any action, condition or thing (including the obtaining or effecting of any necessary consent, approval, authorisation, exemption, filing, licence, order, recording or registration) at any time required to be taken, fulfilled or done in order to (I) enable the Company lawfully to enter into, exercise its rights and perform and comply with its obligations under the Bonds and the Trust Deed, (II) ensure that those obligations are legally binding and enforceable and (III) make the Bonds and the Trust Deed admissible in evidence in the courts of the ROC is not taken, fulfilled or done, and such case is incapable of remedy or, if in the opinion of the Trustee is capable of remedy, is not in the opinion of the Trustee remedied within such period (being not less than 30 days) as the Trustee may consider reasonable; or
(k) any event occurs which under the laws of the ROC, has an analogous effect to any of the events referred to in the foregoing paragraphs.

Upon any such notice being given to the Company, the Bonds will immediately become due and payable at their Early Redemption Amount (as defined in Condition 7(b)).

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

10 PRESCRIPTION

Claims in respect of principal and premium and default interest (if any) will become unenforceable after 10 years (in the case of principal and premium) and five years (in the case of default interest) from the relevant date for payment in respect thereof.

Under ROC law, claims in respect of principal and premium (if deemed to be interest) and default interest will become unenforceable after 15 years (in the case of principal) and five years (in the case of premium (if deemed to be interest) and default interest) from the relevant date for payment in respect thereof.

115

11 ENFORCEMENT

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

12 MEETINGS OF BONDHOLDERS, MODIFICATION AND WAIVER

(a) Meetings

The Trust Deed contains provisions for convening meetings of holders of the Bonds to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of the Bonds or the provisions of the Trust Deed. The quorum at any such meeting for passing an Extraordinary Resolution will be two or more persons holding or representing over 50 per cent. in principal amount of the Bonds for the time being outstanding or, at any adjourned such meeting, two or more persons being or representing holders of the Bonds whatever the principal amount of the Bonds so held or represented unless the business of such meeting includes consideration of proposals, inter alia , (i) to modify the maturity date of the Bonds or the date for redemption at the option of holders of the Bonds, (ii) to reduce or cancel the amount of principal, premium and/or rate of default interest (if any) payable in respect of the Bonds, (iii) to change the currency of payment of the Bonds, (iv) (subject to Condition 12(b)) to modify or cancel the Conversion Right (except in accordance with Conditions 5(b) and 12(b)) or (v) to modify the provisions concerning the quorum required at any meeting of the Bondholders or the majority required to pass an Extraordinary Resolution, in which case the necessary quorum for passing an Extraordinary Resolution will be two or more persons holding or representing over two thirds, or at any adjourned such meeting over one third, in principal amount of the Bonds for the time being outstanding. An Extraordinary Resolution passed at any meeting of Bondholders will be binding on all Bondholders, whether or not they are present at the meeting.

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

If any meetings are convened in accordance with this Condition 12(a), the Company shall inform the Luxembourg Stock Exchange as soon as possible.

(b) Modification of Conversion Right

Notwithstanding paragraphs (iv) and (v) of Condition 12(a) above, the Trustee may agree, without the consent of the Bondholders, any modification to or variation of the Conversion Rights (including Special Conversion Rights) (including modification of and additions to the declarations and statements to be made by Bondholders in a Conversion Notice) which is in its opinion necessary or desirable to effect or facilitate conversion as contemplated in these Conditions and which is not, in the Trustee’s opinion, materially prejudicial to the interests of the Bondholders. The Trustee’s agreement may be subject to any condition which the Trustee requires. Any such modification will be binding on the Bondholders and, unless the Trustee agrees otherwise, any such modification will be notified by the Company to the Bondholders as soon as practicable thereafter.

116

If there is any modification in accordance with this Condition 12(b), the Company shall inform the Luxembourg Stock Exchange as soon as possible.

(c) Other modifications and waivers

The Trustee may agree, without the consent of the Bondholders, to (i) any modification (except as mentioned above) of, or the waiver or authorisation of any breach or proposed breach of, the Bonds or the Trust Deed which is not, in the opinion of the Trustee, materially prejudicial to the interests of the holders of the Bonds or (ii) any modification of the Bonds or the Trust Deed which, in the Trustee’s opinion, is of a formal, minor or technical nature or to correct a manifest error or to comply with mandatory provisions of law. Any such modification, waiver or authorisation will be binding on the Bondholders and, unless the Trustee agrees otherwise, any such modification will be notified by the Company to the Bondholders as soon as practicable thereafter. The Trustee’s agreement may be subject to any condition which the Trustee requires.

If there is any modification or waiver in accordance with this Condition 12(c), the Company shall notify the Luxembourg Stock Exchange as soon as possible.

(d) Exercise of Trustee’s functions

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

13 REPLACEMENT OF CERTIFICATES

If any Certificate is mutilated, defaced, destroyed, stolen or lost, it may be replaced at the specified office of the Registrar or at the office of the Registrar or the Replacement Agent upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require (which terms will require, inter alia , that if such Certificate is subsequently deposited for conversion into Shares there shall be paid to the Company on demand NT$33.10 for each US$1.00 of the principal amount of such Bonds). Mutilated or defaced Certificates must be surrendered before replacements will be issued.

14 NOTICES

All notices to Bondholders shall be validly given if published in a leading newspaper having general circulation in London (which is expected to be the Financial Times ( London Edition )) and mailed to them at their respective addresses in the Register maintained by the Registrar and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort ).

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

15 FURTHER ISSUE

The Company will at the request of ING Bank N.V. create and issue further bonds in accordance with the terms of the option granted by the Company to ING Bank N.V. under the subscription agreement dated 11 July 2002 relating to the Bonds, such additional bonds to have the same terms and conditions as the Bonds in all respects and will be fungible and form

117

a single series with the Bonds provided that the aggregate principal amounts of the Bonds and such additional bonds shall not exceed US$20,000,000 and that no such additional bonds shall be issued after 1 August 2002. Such further bonds may, with the consent of the Trustee, be constituted by a deed supplemental to the Trust Deed.

16 INDEMNIFICATION

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

17 AGENTS

The names of the initial Agents and Registrar and their specified offices are set out in the Agency Agreement. The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of further or other Agents, provided that the Company will at all times maintain a Paying, Transfer and Conversion Agent having specified offices in London and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, a Paying, Transfer, Replacement and Conversion Agent in Luxembourg. Notice of any such termination or appointment, of any changes in the specified offices of the Agents or of any change in the identity or specified office of any Agent will be given promptly by the Company to the Bondholders and the Trustee and, so long as the Bonds are listed on the Luxembourg Stock Exchange and the rules of that exchange so require, will be published in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort ).

18 GOVERNING LAW AND JURISDICTION; THIRD PARTY RIGHTS

(a) Governing law

The Trust Deed, the Agency Agreement and the Bonds are governed by and shall be construed in accordance with English law.

(b) Jurisdiction

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

(c) Agent for service of process

The Company has irrevocably appointed (I) Hackwood Secretaries Limited at its registered office for the time being (currently at One Silk Street, London EC2Y 8HQ, England) as its agent in England to receive service of process in any Proceedings in England based on any of the Bonds, and (II) Silicon Integrated Systems Corporation at 240 North Wolfe Road, Sunnyvale, California 94086, United States of America as its agent in New York to receive service of process in any Proceedings in New York based on any of the Bonds.

(d) Third party rights

No person shall have any right to enforce any term or condition of the Bonds under the Contracts (Rights of Third Parties) Act 1999.

118

THE GLOBAL CERTIFICATES

Each Global Certificate contains provisions which apply to the Bonds in respect of which the Global Certificate is issued, some of which modify the effect of the terms and conditions of the Bonds set out in this Offering Circular. Terms defined in the Conditions have the same meaning in the paragraphs below. The following is a summary of those provisions:

Global Certificates

Upon the issue of the Restricted Global Certificate, DTC or its custodian will credit, in its internal system, the respective principal amount of the individual interests represented by such Restricted Global Certificate to the accounts of persons who have accounts with DTC. Such accounts initially will be designated by or on behalf of the Managers. Ownership of beneficial interests in the Restricted Global Certificate will be limited to persons who have accounts with DTC (“DTC Participants”) or persons who hold interests through DTC Participants. Ownership of beneficial interests in the Restricted Global Certificate will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of DTC Participants) and the records of DTC Participants (with respect to interests of persons other than DTC Participants).

So long as DTC or its nominee is the registered owner or holder of the Restricted Global Certificate, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Restricted Bonds represented by such Restricted Global Certificate for all purposes under the Trust Deed and the Bonds. Unless DTC notifies the Company that it is unwilling or unable to continue as depositary for the Restricted Global Certificate, or ceases to be a “clearing agency” registered under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), owners of interests in the Restricted Global Certificate will not be entitled to have any Restricted Bonds registered in their names, will not receive or be entitled to receive physical delivery of certificates in individual form and will not be considered the owners or holders of the Restricted Global Certificate (or any Restricted Bonds represented thereby) under the Trust Deed or the Bonds. In addition, no beneficial owner of an interest in such Restricted Global Certificate will be able to transfer that interest except in accordance with DTC’s applicable procedures (in addition to those under the Trust Deed referred to herein).

The Unrestricted Global Certificate will be deposited with, and registered in the nominee name of, a common depositary for Euroclear and Clearstream, Luxembourg (the “Common Depositary”) and Euroclear and Clearstream, Luxembourg will credit their respective accountholders with the respective principal amounts of the individual interests represented by such Unrestricted Global Certificate. Such accounts will designated initially by or on behalf of the Managers. Ownership of beneficial interests in the Unrestricted Global Certificate will be limited to persons who have accounts with Euroclear or Clearstream, Luxembourg or persons who hold interests through such accountholders. Ownership of beneficial interests in the Unrestricted Global Certificate will be shown on, and the transfer of that ownership will be effected only through, the records maintained by Euroclear and Clearstream, Luxembourg (with respect to interests of their respective accountholders) and the records of such accountholders (with respect to interests of persons other than such accountholders).

Payments of the principal of the Global Certificates will be made to DTC and the Common Depositary or their respective nominees as the registered owners thereof. None of the Company, the Trustee, the Registrar, the Agents and any custodian or other agent will have any responsibility or liability for the accuracy of any of the records relating to, or payments made on account of, ownership interests in the Global Certificates or for any notice permitted or required to be given to holders of Bonds or any consent given or actions taken by such registered holders of Bonds. The Company expects that upon receipt of any payment of principal in respect of a Global Certificate representing any Bonds held by it or its nominee, DTC or the Common Depositary, as the case may be, will immediately credit DTC Participants’ accounts, in the case of DTC, or Euroclear and Clearstream, Luxembourg, in the case of the Common Depositary, with payments in amounts proportionate to their respective interests in the principal amount of such Global Certificates as shown on their respective records.

119

Transfers between DTC Participants will be effected in DTC’s Same-Day Funds Settlement System. Transfers between accountholders in Euroclear and Clearstream, Luxembourg will be effected in accordance with their respective rules and operating procedures.

The laws of certain jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Accordingly, the ability of beneficial owners to own, transfer or pledge beneficial interests in the Global Certificates may be limited by such laws.

Conversion of Restricted Bonds will be effected through DTC Participants in accordance with DTC’s procedures. Conversion of Unrestricted Bonds will be effected through participants in Euroclear and Clearstream, Luxembourg in the ordinary way in accordance with their respective rules and operating procedures.

Subject to compliance with the transfer restrictions applicable to the Bonds described under “Transfer Restrictions of the Bonds”, when beneficial interests in Global Certificates are to be transferred from the account of a DTC Participant holding a beneficial interest in the Restricted Global Certificate to the account of a Euroclear or Clearstream, Luxembourg accountholder wishing to hold a beneficial interest in the Unrestricted Global Certificate, the DTC Participant will deliver instructions for delivery to the relevant Euroclear or Clearstream, Luxembourg accountholder to DTC by 12:00 p.m. (noon), New York City time, on the settlement date. On the settlement date, the Registrar will (i) decrease the amount of Restricted Bonds registered in the name of DTC or its nominee and evidenced by the Restricted Global Certificate and (ii) increase the amount of Unrestricted Bonds registered in the name of the Common Depositary or its nominee and evidenced by the Unrestricted Global Certificate. Book-entry interests will be delivered to Euroclear or Clearstream, Luxembourg, as the case may be, for credit to the relevant accountholder on the first business day following the settlement date. Prior to such transfer, the DTC Participant will provide the certifications required under the Agency Agreement.

Subject to compliance with the transfer restrictions applicable to the Bonds described under “Transfer Restrictions of the Bonds”, when beneficial interests in Global Certificates are to be transferred from the account of a Euroclear or Clearstream, Luxembourg accountholder holding a beneficial interest in the Unrestricted Global Certificate to the account of a DTC Participant wishing to hold a beneficial interest in the Restricted Global Certificate, the Euroclear or Clearstream, Luxembourg participant must send delivery instructions to Euroclear by 10:00 a.m. Brussels time for custody exchange instructions received by telex and by 3:00 p.m. Brussels time for custody exchange instructions received through SWIFT or Euclid and to Clearstream, Luxembourg by 7:45 p.m. Luxembourg time, one business day prior to the settlement date. Euroclear or Clearstream, Luxembourg, as the case may be, will in turn transmit appropriate instruction to the Principal Agent to arrange delivery to the DTC Participant on the settlement date. On the settlement date, such Restricted Bonds will be delivered by book-entry transfer to the relevant account of the DTC Participant and the Registrar will (a) decrease the amount of Unrestricted Bonds registered in the name of the Common Depositary or its nominee and evidenced by the Unrestricted Global Certificate and (b) increase the amount of Restricted Bonds registered in the name of DTC or its nominee and evidenced by the Restricted Global Certificate. Prior to such transfer, the Euroclear or Clearstream, Luxembourg accountholder, as the case may be, will provide the certifications required under the Agency Agreement.

Although DTC, Euroclear and Clearstream, Luxembourg have agreed to the foregoing procedures in order to facilitate transfers of interests in the Unrestricted Global Certificate and in the Restricted Global Certificate among participants and accountholders of DTC, Clearstream, Luxembourg and Euroclear, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Company, the Trustee, the Agents, any custodian, any transfer agent, any registrar or any other agent of the Company will have any responsibility for the performance by DTC, Euroclear or Clearstream, Luxembourg or their respective participants, indirect participants or accountholders of their respective obligations under the rules and procedures governing their operations.

120

DTC has advised the Company that it will take any action permitted to be taken by a holder of Bonds (including the presentation of Bonds for conversion as described below) only at the direction of one or more DTC Participants to whose account or accounts with DTC interests in the Restricted Global Certificate are credited and only in respect of such portion of the aggregate principal amount of Unrestricted Bonds as to which such DTC Participant or DTC Participants has or have given such direction. The giving of notices and other communications by DTC to DTC Participants, by DTC Participants to persons who hold accounts with them and by such persons to holders of beneficial interests in a Global Certificate will be governed by arrangements between them, subject to any statutory or regulatory requirements as may exist from time to time.

DTC has advised the Company as follows: DTC is a limited purpose trust company organised under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the Uniform Commercial Code and a “clearing agency” registered pursuant to the provision of Section 17A of the Exchange Act. DTC was created to hold securities for DTC Participants and facilitate the clearance and settlement of securities transactions between DTC Participants through electronic book-entry changes in accounts of DTC Participants, thereby eliminating the need for physical movement of certificates. DTC Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organisations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly.

Euroclear and Clearstream, Luxembourg each hold securities for participating organisations and facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream, Luxembourg 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, Luxembourg participants are financial institutions throughout the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organisations. Indirect access to Euroclear and Clearstream, Luxembourg is also available to others, such as banks, brokers, dealers and trust companies which clear through or maintain a custodial relationship with a Euroclear or Clearstream, Luxembourg participant, either directly or indirectly.

Meetings

The registered holder (as defined in the Conditions) of each Global Certificate will be treated as two persons for the purposes of any quorum requirements of a meeting of the holders of the Bonds and, at any such meeting, as having one vote in respect of each US$1,000 in principal amount of Bonds in respect of which a Global Certificate is issued. The Trustee may allow to attend and speak (but not to vote) at any meeting of the holders of the Bonds any accountholder (or the representative of any such person) of a clearing system entitled to Bonds in respect of which a Global Certificate is issued on confirmation of entitlement and proof of his identity.

Cancellation

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

Conversion

Subject to the requirements of Euroclear and Clearstream, Luxembourg and DTC (or any Alternative Clearing System, as defined in the Global Certificates), the Conversion Right attaching to the Bonds in respect of which a Global Certificate is issued may be exercised by

121

the presentation of one or more Conversion Notices duly completed by or on behalf of a holder of a book-entry interest in such Bonds. Deposit of the Global Certificates with the Conversion Agent together with the relevant Conversion Notice shall not be required. The provisions of Condition 5 of the Bonds will otherwise apply.

Call Option

No drawing of the Bonds will be required under Condition 7(g) in the event that the Company exercises its call option pursuant to Condition 7(b) in respect of less than the aggregate principal amount of the Bonds in respect of which a Global Certificate is issued.

Put Options

The put options of the holders of the Bonds set out in Conditions 7(d) and 7(e) may be exercised by the holder of a Global Certificate giving notice to the Principal Agent of the principal amount of the Bonds in respect of which the option is exercised and presenting the relevant Global Certificate for endorsement or exercise within the time limits specified in Conditions 7(d) and/or 7(e).

Trustee’s Powers

In considering the interests of the holders of the Bonds the Trustee may, to the extent it considers it appropriate to do so in the circumstances, (a) have regard to such information as may have been made available to it by or on behalf of the relevant clearing system or its operator as to the identity of its accountholders (either individually or by way of category) with entitlements in respect of the Bonds and (b) consider such interests on the basis that such accountholders were the holders of the Bonds in respect of which the Global Certificate is issued.

Enforcement

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

Payment

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

Notices

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

122

Individual Certificates

Individual Certificates for individual holdings of Bonds will not be issued in exchange for interests in Bonds in respect of which the Global Certificates are issued, except in the following circumstances:

(i) (in the case of the Restricted Global Certificate) DTC (or an Alternative Clearing System) notifies the Company that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the Bonds, or ceases to be a “Clearing Agency” registered under the Exchange Act or is at any time no longer eligible to act as such and the Company is unable to locate a qualified successor within 90 days of receiving notice of such ineligibility on the part of DTC (or, as the case may be, such Alternative Clearing System); or
(ii) (in the case of the Unrestricted Global Certificate) either Euroclear or Clearstream, Luxembourg (or an Alternative Clearing System) is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces all intention permanently to cease business or does in fact do so; or
(iii) if instructions have been given for the transfer of an interest in the Bonds evidenced by a Global Certificate to a person who would otherwise take delivery thereof in the form of all interest in the Bonds evidenced by the other Global Certificate where such other Global Certificate has been exchanged for individual Certificates.

In such circumstances, the Company will cause sufficient individual Certificates to be executed and delivered to the Registrar for completion, authentication and despatch to the relevant Bondholders. A person with an interest in the Bonds in respect of which a Global Certificate is issued must provide the Registrar, or (so long as the Bonds are listed on the Luxembourg Stock Exchange) the Luxembourg Agent, with a written order containing instructions and such other information as the Company, the Registrar and (so long as the Bonds are listed on the Luxembourg Stock Exchange) the Luxembourg Agent may require to complete, execute and deliver such individual Certificates. In addition, so long as the Bonds are listed on the Luxembourg Stock Exchange, all the documents regarding the exchange will be made available through the office of the Luxembourg Agent, and the Luxembourg Stock Exchange will be given notifications of the terms of exchange (before the exchange begins), any change in the terms of exchange which have been published and the result of such exchange and such notifications will also be published in accordance with the procedures set out above.

An “Alternative Clearing System” is, in relation to the Restricted Global Certificate, any clearing system on behalf of which the Bonds evidenced by the Restricted Global Certificate may be held, other than DTC, and, in relation to the Unrestricted Global Certificate, any clearing system as shall have been designated by the Company and approved by the Trustee, on behalf of which the Bonds evidenced by the Unrestricted Global Certificate may be held, other than Euroclear and Clearstream, Luxembourg.

123

TRANSFER RESTRICTIONS OF THE BONDS

Because of the following restrictions, purchasers of the Bonds (or beneficial interests therein) are advised to consult legal counsel prior to making any offer, sale, pledge or other transfer thereof. For additional information on procedures and restrictions involving transfers of the Bonds and beneficial interests therein, see “The Global Certificates” .

Each purchaser of the Bonds acknowledges that the Bonds will not be issuable in certificated form except under the limited circumstances described under “The Global Certificates”.

Restricted Bonds

Each purchaser of a Restricted Bond pursuant to Rule 144A, by accepting delivery of this Offering Circular, will be deemed to have represented, agreed and acknowledged that:

(1) It is (a) a qualified institutional buyer within the meaning of Rule 144A (“QIB”), (b) acquiring such Bonds for its own account or for the account of a QIB and (c) aware, and each beneficial owner of such Bonds has been advised, that the sale of such Bonds to it is being made in reliance on Rule 144A.
(2) It understands that such Bonds and the Shares to be issued upon conversion of the Bonds have not been and will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred except (a) in accordance with Rule 144A to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or for the account of a QIB, (b) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (c) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), in each case in accordance with any applicable securities laws of any State of the United States.
(3) It understands that the Restricted Global Certificate and any physical certificates evidencing the Restricted Bonds, unless otherwise agreed between the Company and the Trustee in accordance with applicable law, will bear a legend to the following effect:

THE BONDS OF SILICON INTEGRATED SYSTEMS CORP. (“THE COMPANY”) IN RESPECT OF WHICH THIS CERTIFICATE IS ISSUED (THE “BONDS”) AND THE SHARES OF THE COMPANY (THE “SHARES”) TO BE ISSUED UPON CONVERSION OF THE BONDS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”) TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THE BONDS OR THE SHARES TO BE ISSUED UPON CONVERSION OF THE BONDS.

124

(4) The Company, the Trustee, the Managers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements. If it is acquiring any Bonds for the account of one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgements, representations and agreements on behalf of each such account.
(5) It understands that the Bonds offered in reliance on Rule 144A will be represented by the Restricted Global Certificate. Before any interest in the Restricted Global Certificate may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Unrestricted Global Certificate, it will be required to deliver a written certificate (in the form provided in the Trust Deed) as to compliance with, amongst other things, applicable securities laws.
(6) It understands that in order to convert Bonds into Shares it must make certain representations, warranties and undertakings, including with respect to certain restrictions on transfer which may apply to the Shares issued upon such conversion, contained in the Conversion Notice described under Condition 5(b)(i).

Prospective purchasers are hereby notified that sellers of the Bonds may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.

Unrestricted Bonds

Each purchaser of Bonds outside the United States pursuant to Regulation S and each subsequent purchaser of such Bonds in resales prior to the expiration of a period ending 40 days after the later of the commencement of the offering of the Bonds and the latest closing date of the Bonds (the “Distribution Compliance Period”), by accepting delivery of this Offering Circular and the Bonds, will be deemed to have represented, agreed and acknowledged that:

(1) It is, or at the time the Bonds are purchased will be, the beneficial owner of such Bonds and (i) it is not a US person and it is located outside the United States (within the meaning of Regulation S and (ii) it is not an affiliate of the Company or a person acting on behalf of such an affiliate.
(2) It understands that such Bonds and the Shares to be issued upon conversion of the Bonds have not been and prior to the expiration of the Distribution Compliance Period will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred except (a) in accordance with Rule 144A to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or for the account of a QIB, (b) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S or (c) pursuant to an exemption from registration under the Securities Act provided by Rule 144 thereunder (if available), in each case in accordance with any applicable securities laws of any State of the United States.
(3) The Company, the Trustee, the Managers and their affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements.
(4) During the Distribution Compliance Period, the Unrestricted Global Certificate may be held by the common depositary only for the accounts of Euroclear and Clearstream, Luxembourg, and accordingly, any owner of a beneficial interest in the Unrestricted Global Certificate must hold such interests through Euroclear or Clearstream, Luxembourg during the Distribution Compliance Period.
(5) It understands that in order to convert Bonds into Shares it must make certain representations, warranties and undertakings, including, if conversion is to occur before the expiration of the Distribution Compliance Period, with respect to certain restrictions on transfer which may apply to the Shares issued upon such conversion, contained in the Conversion Notice described under Condition 5(b)(i).

125

THE SECURITIES MARKET OF THE ROC

The information provided in this section has been extracted from various government and other publicly available publications which have not been independently verified by the Company, the Managers or any of their respective affiliates, agents or advisors in connection with the issue of the Bonds. References to the ROC Securities and Futures Commission in this section include both the ROC Securities and Futures Commission and the ROC Securities and Exchange Commission, its predecessor.

The Taiwan Stock Exchange

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

The Taiwan Stock Exchange commenced operations in 1962. During the early 1980s, the Securities and Futures Commission actively encouraged new listings on the Taiwan Stock Exchange and the number of listed companies grew from 119 in 1983 to 584 as of 31 December 2001. As of 31 December 2001, the market capitalisation of companies listed on the Taiwan Stock Exchange was approximately NT$10,239 billion.

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

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

the number and distribution of stockholders;
length of time in business;
shareholding concentration;
amount of capital; and
profitability.

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

The Over-the-Counter Securities Exchange

To complement the Taiwan Stock Exchange, the Over-the-Counter Securities Exchange was established in September 1982 on the initiative of the Securities and Futures Commission to encourage the trading of securities of companies who do not qualify for listing on the Taiwan Stock Exchange. As of 31 December 2001, 333 companies had listed equity securities on the Over-the-Counter Securities Exchange and the total market capitalisation of those companies

126

was NT$1,412 billion. In addition, the Emerging Market of the Over-the-Counter Securities Exchange was established on 1 January 2002 on the initiative of the Securities and Futures Commission to encourage trading of securities of companies which are public companies but which do not qualify for listing on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange.

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 for 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 31 December 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	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 6,802.35 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

Source: Status of Securities Listed on Taiwan Stock Exchange. Base year: 1966 = 100.

As indicated above, the performance of the Taiwan Stock Exchange has in recent years been characterised 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. Fluctuation in the price of securities traded on the Taiwan Stock Exchange is restricted to 7 per cent. above and below the previous day’s closing price in the case of equity securities, and 5 per cent. in the case of debt securities. The price limit for movements below the previous day’s closing price has been modified from time to time by the Ministry of Finance based on market conditions.

Effective 1 July 2000, brokerage commissions can be set at any rate not exceeding 0.1425 per cent. of the transaction price subject to reporting to the Taiwan Stock Exchange.

127

A securities transaction tax of 0.3 per cent. of the transaction price is payable by the seller of equity securities and a securities transaction tax of 0.1 per cent. of the transaction price is payable by the seller of debt securities other than government bonds. These securities transaction taxes are withheld at the time of the transaction. According to the amended Statute of Upgrading Industries, which became effective on 1 February 2002, no securities transaction tax will be imposed on the transfer of the bonds and financial debentures until 31 December 2009.

Sales of shares of listed companies on the Taiwan Stock Exchange are generally sold in “round lots” of 1,000 shares. Investors who desire to sell less than 1,000 shares of a listed company occasionally experience delays in making these sales. Transactions that involve 500 trading lots (500,000 shares) or more must be registered and executed in accordance with Taiwan Stock Exchange guidelines.

Regulation and Supervision

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

The Securities and Futures Commission has responsibility for implementing the ROC 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 ROC Securities and Exchange Law specifically empowers the Securities and Futures Commission to promulgate necessary rules. The ROC Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-term trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors and stockholders who (together with their spouses, minor children and nominees) hold 10 per cent. or more of the shares of the issuer, together with the spouses, minor children and nominees of these parties. The ROC Securities and Exchange Law prohibits trading by “insiders” based on non-public information that materially affects share price movement. “Insiders” include:

directors, supervisors, managers and shareholders who (together with their spouses, minor children and nominees) hold 10 per cent. or more of the issuing company’s shares (together with the spouses, minor children and nominees of these parties);
any person who has learned material, non-public information due to an occupational or controlling relationship with the issuing company; and
any person who has learned material, non-public information from any of the above.

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

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

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

128

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

issuance of warnings;
temporary suspension of operation;
imposition of administrative fines; and
revocation of licences.

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

129

FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

The information in this section has been extracted from publicly available documents which have not been independently verified by the Company, the Managers or any of their respective affiliates or advisors in connection with the issue of the Bonds.

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 authorised securities investment trust enterprises established in Taiwan were permitted to invest in the Taiwan securities market. Since 1 January 1991, qualified foreign institutional investors have been allowed to make investments in the Taiwan listed securities market. Since 1 March 1996, overseas Chinese, foreign institutional and foreign individual investors (other than qualified foreign institutional investors), called “general foreign investors”, have been permitted to make direct investments in the Taiwan listed securities market.

Qualified Foreign Institutional Investors

The Executive Yuan has approved guidelines for direct investment in securities listed on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange in Taiwan by qualified foreign institutional investors. Qualified foreign institutional investors include:

banks that hold securities assets of at least US$200 million, and have experience in the safekeeping or management of securities or assets and in international financial or trust business;
insurance companies that hold securities assets of at least US$200 million;
fund management institutions that manage securities assets of at least US$200 million;
offshore fund management companies of which more than 50 per cent. of the capital is owned by a Taiwan securities investment trust enterprise, provided that the funds to be invested are not derived from sources in Taiwan or mainland China or owned by these offshore fund management companies;
general securities firms that have a net worth of at least US$100 million and have experience in international securities investment;
offshore subsidiary securities firms that are more than 50 per cent. owned by a Taiwan securities firm, or other securities firms that are wholly-owned by these offshore subsidiary securities firms;
offshore subsidiary securities firms that are wholly-owned by a Taiwan securities firm, or other securities firms that are more than 51 per cent. owned by these offshore subsidiary securities firms;
foreign government-owned investment institutions, provided that all of the funds to be invested are owned by the foreign government;
pension funds;
mutual funds, unit trusts or investment trusts that have assets of at least US$200 million;
trust companies that hold securities assets in trust of at least US$200 million, and have experience in the safekeeping or management of securities or assets and in international financial or trust business; and

130

any other professional institutional investors that hold securities or assets of at least US$200 million.

Each qualified foreign institutional investor wishing to invest directly in the Taiwan securities market is required to apply for an investment permit from the Securities and Futures Commission. If the investment amount exceeds US$50 million, an approval from the Central Bank of China is also required. The application to the Securities and Futures Commission and the Central Bank of China requires, among other things:

the appointment of a local agent and custodian;
proof of qualification;
a copy of the custodian contract; and
an affidavit certifying that the foreign institutional investor will not enter into any quota-sharing arrangement with other foreign investors.

Qualified foreign institutional investors who receive a permit may apply to invest up to US$3,000 million and are required to remit the full amount into Taiwan within two years of receiving the investment permit. Capital remitted into Taiwan for investments in the Taiwan securities market may be repatriated at any time. The repatriated capital may be returned to Taiwan at any time within the approved two-year period without a Securities and Futures Commission approval, as long as its aggregate inward remittance after netting off its aggregate outward remittance does not exceed the investment amount approved by the ROC Securities and Futures Commission and Central Bank of China (if applicable). Capital gains and income on investments may also be repatriated at any time.

General Foreign Investors

General foreign investors may generally invest in Taiwan Stock Exchange-listed securities or securities traded on the Over-the-Counter Securities Exchange up to a limit of US$50 million if they are institutional investors and US$5 million if they are individual investors, after obtaining the necessary approvals from the Taiwan Stock Exchange.

Foreign Ownership Limitations

Except for limits imposed by specific laws and regulations on industries under a Negative List as mentioned below, there are generally no limits on the foreign ownership of the issued share capital in a Taiwan Stock Exchange-listed company or an Over-the-Counter Securities Exchange-traded company.

Foreign Investment Approval

Other than:

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

foreign investors who wish to make direct investments in the shares of Taiwan companies may submit a “foreign investment approval” application to the Investment Commission of the Ministry of Economic Affairs of Taiwan or other governmental authority. Foreign investors who obtain this approval will be subject to the Law Governing Investments by Foreigners. The Investment Commission or other governmental authority reviews each foreign investment approval application and approves or disapproves the application after consultation with other governmental agencies. Any non-Taiwan person possessing a foreign investment approval

131

may repatriate annual net profits, interests and cash dividends attributable to an approved investment. Stock dividends, investment capital and capital gains attributable to the investment may be repatriated with approval of the Investment Commission or other governmental authority.

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

Depositary Receipts

In April 1992, the Securities and Futures Commission began allowing Taiwan companies listed on the Taiwan Stock Exchange to sponsor the issuance and sale of depositary receipts evidencing depositary shares. In December 1994, the Ministry of Finance began allowing companies whose shares are traded on the Over-the-Counter Securities Exchange also to sponsor the issuance and sale of depositary receipts evidencing depositary shares. Approvals for these issuances are still required. Approvals are granted for a fixed number of depositary receipts, if the underlying shares are newly issued shares, which may not be increased without a separate Securities and Futures Commission approval. However, the number of depositary receipts may be decreased by the board of directors of the issuing company if such decrease has been authorised at the relevant shareholders’ meeting. Approvals are granted for a maximum number of depositary receipts if the underlying shares are not newly issued shares for cash.

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

stock dividends;
free distributions of shares;
due to the exercise by depositary receipt holders of their preemptive rights in the event of capital increases for cash; or
due to the purchase by depositary receipt holders, directly or through the depositary, of shares on the Taiwan Stock Exchange or the Over-the-Counter Securities Exchange for deposit in the depositary receipt facility. In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the aggregate number of:
the number of issued depositary receipts previously approved by the Securities and Futures Commission; and
the number of depositary shares created from stock dividends, free distributions of shares and rights offerings. These issuances of depositary receipts may only be made to the extent that previously issued depositary receipts have been cancelled and the shares have been sold on the Taiwan Stock Exchange or the Over-theCounter Securities Exchange.

132

For depositary shares that represent new shares issued for cash, three months after the issuance of a depositary receipt, a holder may request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder. For depositary shares that represent previously existing shares, a holder may immediately after the issuance of depositary receipts request the depositary to cause the underlying shares to be sold in Taiwan or to withdraw the shares and deliver the shares to the holder.

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

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

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

into other currencies, including US dollars. In addition, a depositary may convert into NT dollars inward remittances of payments for purchases of underlying shares for deposit in the depositary facility against the creation of depositary shares. A depositary must obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion into foreign currencies from the proceeds from the sale of subscription rights for new shares. It is expected that the Central Bank of China will grant this approval as a routine matter. A depositary receipt holder may, after becoming a holder of shares, convert New Taiwan dollars into other currencies from proceeds from the sale of any underlying shares withdrawn from the depositary receipt facility. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in securities listed on the Taiwan Stock Exchange or traded on the Over-the-Counter Securities Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

Overseas Corporate Bonds

Since 1989, the Securities and Futures Commission has approved a series of overseas corporate bond issues by Taiwan companies listed on the Taiwan Stock Exchange and traded on the Over-the-Counter Exchange. Under current ROC laws, these overseas corporate bonds (if their terms so provide) with Securities and Futures Commission approval, may be converted by non-Taiwan persons, other than mainland Chinese persons, into shares of Taiwan companies or may be converted into depositary receipts issued under the sponsorship of the same Taiwanese company or the shares of other companies, in the case of exchangeable bonds. Public issuing companies may issue corporate debt in offerings outside Taiwan. Proceeds from sales of the shares converted from overseas convertible bonds may be used for reinvestment in securities listed on the Taiwan Stock Exchange or traded on the Over-theCounter Securities Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

133

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

open a securities trading account with a local brokerage firm;
remit funds;
exercise shareholders’ rights; and
perform other matters.

In addition, the converting holder is also required to appoint a custodian bank to hold the securities and cash proceeds in safekeeping, make confirmations and settle trades and report all relevant information. Without making this appointment and opening these accounts, the converting holder would be unable to subsequently hold or sell the shares converted from the bonds on the Taiwan Stock Exchange or otherwise. The converting holder is also required to appoint a tax guarantor for filing tax returns and making tax payments. Without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of Taiwan, the issuing company may convert New Taiwan dollars into other currencies for redemption of the bonds or the repayment of the principal or interest on the bonds. In addition, a converting bondholder may through its local agent convert net proceeds realised from the sale of shares or any stock dividends on the shares. In addition, a bondholder may also convert through its local agent any cash distributions relating to the shares and, after becoming a shareholder, onward remittances of subscription payments in connection with a rights offering.

In addition, any funds received by the converting bondholder may be used for reinvestment in Taiwan securities listed on the Taiwan Stock Exchange or traded on the Over-the-Counter Exchange. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed above.

Exchange Controls

Taiwan’s Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the Ministry of Finance and by the Central Bank of China to handle foreign exchange transactions. Current regulations favour trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, Taiwan companies and residents may, without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$50 million, or its equivalent, and US$5 million, or its equivalent, respectively, each calendar year. These limits apply to remittances involving a conversion between New Taiwan dollars and US dollars or other foreign currencies or vice versa. In addition, all private enterprises are required to register all medium and long-term foreign debt with the Central Bank of China.

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

134

TAXATION

ROC Taxation of Non-residents

The following is a summary under present law of the principal ROC tax consequences of the ownership and disposition of the Bonds or Shares to a Non-Resident Individual or NonResident Entity that holds the Bonds or Shares (each a “Non-ROC Holder”). As used in the preceding sentence, a “Non-Resident Individual” is a foreign national individual who owns the Bonds or Shares and is not physically present in the ROC for 183 days or more during any calendar year and a “Non-Resident Entity” is a corporation or a non-corporate body that owns the Bonds or Shares and is organised under the laws of a jurisdiction other than the ROC and has no fixed place of business or other permanent establishment in the ROC. Prospective purchasers of the Bonds should consult their own tax advisers concerning the tax consequences of owning the Bonds or Shares in the ROC and any other relevant taxing jurisdiction to which they are subject.

Interest and Premium on the Bonds

Payment of premium and interest (if any) on a Bond to a Non-ROC holder are subject to ROC withholding tax at the rate of 20 per cent. at the time of payment. The Company has agreed to pay additional amounts in respect of withholding taxes on the payment of premium or interest (if any). See “Terms and Conditions of the Bonds — Taxation”.

Dividends on the Shares

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

Conversion into Shares

ROC law currently provides no specific provisions regarding the ROC income tax consequences of a conversion of Bonds into Shares. Without further clarification from the ROC tax authorities, it is impossible to conclude with certainty that gain on the conversion of Bonds into Shares will not be deemed a taxable gain, additional interest income (subject to 20 per cent. withholding tax) or otherwise subject to other ROC tax. See “Terms and Conditions of the Bonds — Taxation”.

Capital Gains

Under current ROC law, gains realised upon the sale or other disposition of securities is exempt from ROC income tax. This exemption will apply to a sale or other disposition of the Bonds or Shares. The introduction of a capital gains tax would require the Legislative Yuan to engage in the full legislative process for the enactment of tax legislation.

135

Securities Transaction Tax

The ROC government imposes a securities transaction tax that will apply to sales of Shares. The transaction tax, which is payable by the seller, is generally levied on sales of shares at the rate of 0.3 per cent. of the sales proceeds. Pursuant to the amended Statute of Upgrading Industries, which came into effect on 1 February 2002, no securities transaction tax will be imposed on the transfer of corporate bonds and financial debentures (including the Bonds) until 31 December 2009.

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

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

Preemptive Rights

Distributions of statutory subscription rights for the Shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax, but are subject to securities transaction tax, currently at the rate of 0.3 per cent. of the gross sales amount. Proceeds derived from sales of statutory subscription rights which are not evidenced by securities are subject to capital gains tax at the rate of (1) 25 per cent. of the gains realised by Non-Resident Entity Holders and (2) 35 per cent. of gains realised by Non-Resident Individual Holders. Subject to compliance with ROC law, the Company has the sole discretion to determine whether statutory subscription rights shall be evidenced by the issuance of securities.

Estate Taxation and Gift Tax

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

Tax Treaty

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

U.S. Federal Income Tax Considerations

The following is a discussion of material U.S. federal income tax consequences of owning and disposing of Bonds and Shares received upon the conversion of Bonds. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire Bonds. This discussion applies to you only if (i) you hold Bonds (or Shares received upon the conversion of Bonds) as capital assets for U.S. federal income tax purposes and (ii) you purchase Bonds in connection with this offering at the “issue

136

price” (which will be the price at which a substantial amount of the Bonds is sold for money to persons other than bond houses, brokers, or similar persons acting in the capacity of underwriters, placement agents or wholesalers). This discussion does not address special classes of holders, such as:

certain financial institutions;
insurance companies;
dealers and traders in securities or foreign currencies;
persons holding Bonds or Shares as part of a hedge, straddle or conversion transaction;
persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
persons subject to the alternative minimum tax;
tax-exempt organisations; and
persons that own or are deemed to own more than ten per cent. of any class of our stock.

This discussion is based on the Internal Revenue Code of 1986, as amended, administrative pronouncements, judicial decision and final, temporary and proposed Treasury regulations, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. Please consult your own tax advisers concerning the U.S. federal, state, local and foreign tax consequences of owning and disposing of Bonds (or Shares received upon conversion of Bonds) in your particular circumstances.

The discussion below applies to you only if you are a beneficial owner of Bonds (or Shares received upon conversion of Bonds) and are, for U.S. federal tax purposes:

a citizen or resident of the United States;
a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes, created or organised in or under the laws of the United States or any political subdivision thereof; or
an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

Original Issue Discount

The Bonds will be issued with original issue discount (“OID”) for U.S. federal income tax purposes.

Accordingly, you will be required to include OID in income for U.S. federal income tax purposes as it accrues, in accordance with a constant yield method based on a compounding of interest, before the receipt of cash payments attributable to this income. Under this method, you generally will be required to include in income increasingly greater amounts of OID in successive accrual periods. Original issue discount income will constitute foreign source income and will generally be considered “passive income” for foreign tax credit purposes.

As described under “Terms and Conditions of the Bonds — Redemption, Purchase and Cancellation — Redemption at the Option of Bondholders”, you will have the right to cause us to redeem all or a portion of your Bonds on the Put Date. If, by utilising the Put Date as the maturity date and the amount that would be payable if the redemption option was exercised on

137

that date in accordance with the terms of the Bonds as the stated redemption price at maturity, the yield on the Bonds would be higher than their yield to stated maturity, then, for purposes of calculating OID, your Bonds will be treated as maturing on the Put Date. If, in that case, you do not, in fact, exercise the option, each Bond would be treated, solely for purposes of calculating OID as if it were redeemed, and a new Bond were issued, on the Put Date for an amount equal to the Bond’s adjusted issue price on that date.

Sale, Exchange or Retirement of Bonds

Upon the sale, exchange or retirement of a Bond (other than a conversion into Shares), you will recognise taxable gain or loss equal to the difference between the amount realised on the sale, exchange or retirement and your adjusted tax basis in the Bond. Such gain or loss, if any, will generally be U.S. source income for purposes of computing your foreign tax credit limitation. For these purposes, your adjusted tax basis in a Bond will generally include any accrued but unpaid OID.

Gain or loss realised on the sale, exchange or retirement of a Bond will generally be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange or retirement the Bond has been held for more than one year. Exceptions to this general rule would apply if we are treated as a “passive foreign investment company”. See “— Passive Foreign Investment Company Rules” below.

As described above under “ROC Taxation — Interest or Premium on the Bonds”, payments of premium on the Bonds at maturity or early redemption or repurchase will be subject to ROC withholding tax at a rate of 20 per cent. We will pay holders additional amounts as described under “Description of the Bonds — Additional Amounts” in respect of this withholding tax and will pay this withholding tax on your behalf. You will be required to include the amount of ROC withholding taxes paid by us on your behalf in gross income for U.S. federal income tax purposes. These ROC withholding taxes will be creditable against your U.S. federal income tax liability, subject to applicable limitations that may vary depending on your particular circumstances. Instead of claiming a credit, you may, at your election, deduct such ROC taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits.

Conversion of Bonds into Shares

Your conversion of a Bond into Shares will not be a taxable event for U.S. federal income tax purposes, except that the receipt of cash, if any, in lieu of a fractional Share will result in capital gain or loss (measured by the difference between the cash received in lieu of the fractional Share and your adjusted tax basis in the fractional Share).

Your adjusted tax basis in Shares received upon a conversion of a Bond will be the same as your basis in the Bond at the time of conversion, reduced by any basis allocated to a fractional share. Your holding period for the Shares received will include your holding period for the Bond converted.

Constructive Dividends in Respect of Bonds

If we were to make a distribution of property to stockholders (for example, distributions of evidences of indebtedness or assets, but generally not stock dividends or rights to subscribe for our common stock) and the conversion price of the Bonds were decreased pursuant to the anti-dilution provisions of the indenture, such decrease would be deemed to result in a distribution to you for U.S. federal income tax purposes. In addition, any other decrease in the conversion price of the Bonds (for example, in connection with the Conversion Price Reset or Special Conversion Price Reset) may, depending on the circumstances, be deemed to result in a distribution to you for U.S. federal income tax purposes. Any deemed distribution will

138

generally be treated in the same manner as an actual distribution on our Shares. See “— Taxation of Distributions on Shares” below. We do not expect our current dividend policy, which is described above under “Dividends and Dividend Policy”, to result in constructive dividends in respect of the Bonds.

Taxation of Distributions on Shares

Distributions paid on Shares, other than certain pro rata distributions of Shares, to the extent paid out of current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be treated as a dividend. The amount of this dividend will include any amounts withheld by us or our paying agent in respect of ROC taxes. The amount of the dividend will be treated as foreign source dividend income to you and will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code. Such dividends will constitute passive income for foreign tax credit purposes.

Dividends paid in New Taiwan dollars will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of your receipt of the dividend, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you generally should not be required to recognise foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if you do not convert the amount of such dividend into U.S. dollars on the date of its receipt.

ROC taxes withheld from cash dividends on Shares, reduced by any ROC credit against the withholding tax on account of the 10 per cent. retained earnings tax imposed on us, will be creditable against your U.S. federal income tax liability, subject to applicable limitations that may vary depending upon your circumstances. Instead of claiming a credit, you may, at your election, deduct such ROC taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. You should consult your own tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits.

The U.S. federal income tax consequences to you of distributions made by us in Shares will depend on the circumstances surrounding the making of the distribution. Pro rata distributions of Shares will generally not be required to be included in your income. However, certain types of Share distributions, such as non-pro rata distributions of Shares or distributions of Shares made to you in connection with the actual or deemed distribution by us of cash or other property to stockholders or holders of Bonds, may result in the current recognition by you of ordinary income. Depending on your particular circumstances, you may not be able to make effective use of foreign tax credits attributable to ROC taxes withheld on distributions made by us in Shares, particularly in the case of distributions of Shares that are not required to be included in your income. However, you may be entitled to a deduction in respect of such ROC taxes, subject to applicable limitations under U.S. law. You should consult your own tax advisers regarding the U.S. federal income tax treatment of distributions made in Shares and your ability to utilise foreign tax credits or deductions in respect of ROC taxes withheld on the making of such distributions in light of your particular circumstances.

Special rules would apply to distributions on Shares if we are treated as a “passive foreign investment company”. See “— Passive Foreign Investment Company Rules” below.

Sale and Other Disposition of Shares

For U.S. federal income tax purposes, gain or loss you realise on the sale or other disposition of Shares will be capital gain or loss, and will be long-term capital gain or loss if you held the Shares for more than one year. Exceptions to this rule would apply if we are treated as a “passive foreign investment company”. See “— Passive Foreign Investment Company Rules” below.

139

The amount of your gain or loss will be equal to the difference between your adjusted tax basis in the Shares disposed of and the amount realised on the disposition. This gain or loss will generally be U.S. source gain or loss for foreign tax credit purposes.

Passive Foreign Investment Company Rules

We believe that we will not be considered a “passive foreign investment company” (“PFIC”) for U.S. federal income tax purposes for the 2002 taxable year or in the foreseeable future. However, since PFIC status depends upon the composition of our income and assets and the market value of our assets (including, among others, equity investments in non-controlled entities) from time to time, there can be no assurance that we will not be considered a PFIC for any taxable year. If we were treated as a PFIC for any taxable year during which you held Shares, certain adverse consequences could apply to you.

If we are treated as a PFIC for any taxable year, gain recognised by you on the sale or other disposition of Shares would be allocated ratably over your holding period for such securities. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax liability attributable to such allocated amounts. Under proposed Treasury regulations (which have a retroactive proposed effective date), the sale or other disposition of the Bonds would be treated in the same manner. Further, any distributions (excluding deemed distributions on the Bonds described above under “— Constructive Dividends in Respect of Bonds”) in respect of Shares in excess of 125 per cent. of the average of the annual distributions on such securities received by you during the preceding three years or your holding period, whichever is shorter, would be subject to taxation as described above. Certain elections (including a mark to market election) may be available to you that may mitigate the adverse consequences resulting from PFIC status.

Information Reporting and Backup Withholding

Payments under the Bonds, distributions on the Shares and sales proceeds with respect to Bonds or Shares that are, in each case, made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) you are a corporation or other exempt recipient or (ii) you provide a correct taxpayer identification number and certify that no loss of exemption from backup withholding has occurred.

The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is furnished to the Internal Revenue Service.

140

SUBSCRIPTION AND SALE

Pursuant to a subscription agreement (the “Subscription Agreement”) dated 11 July 2002 between ING Bank N.V., Bear, Stearns International Limited and Yuanta Core Pacific Securities Co., Ltd. (together, the “Managers”) and the Company, the Managers have severally agreed with the Company, subject to the fulfilment of certain conditions, to subscribe and pay for the Bonds in the principal amounts therein specified at the issue price of 100 per cent. of their principal amount less an underwriting commission and a selling concession aggregating 2.0 per cent. of their principal amount. In addition, the Company has agreed to reimburse the Managers for certain of their expenses in connection with the issue of the Bonds and to indemnify the Managers against certain liabilities. The Subscription Agreement provides that the obligations of the Managers are subject to certain conditions precedent, and entitles the Managers to terminate it in certain circumstances prior to payment being made to the Company.

The Lead Manager is entitled at any time, in whole or in part on one or more occasions, on or after the Closing Date, to require the Company to issue up to a further US$20,000,000 aggregate principal amount of bonds which will have the same terms and conditions as, be fungible and form a single series with the Bonds initially issued, provided that no such further bonds shall be issued after 1 August 2002.

The Managers, or their affiliates, may purchase Bonds for their own account and, to the extent permitted by law, enter into transactions relating to the Bonds, including asset swaps, repackagings and other transactions. Such transactions would be carried out as bilateral trades with selected counter-parties and separately from any offering, sale or resale of the Bonds to which this Offering Circular relates (notwithstanding that such selected counterparties may also be purchasers of the Bonds). These transactions may involve a substantial portion of the Bonds. Furthermore, the Managers may, to the extent permitted by law, make a market with respect to the Bonds but are not obligated to do so, and any market-making with respect to the Bonds may be discontinued at any time without notice.

The Company has agreed that, except as described below, neither it nor any person acting on its behalf will issue, offer, sell, contract to sell or otherwise dispose of any interest in any shares or securities of the same class as the Bonds or Shares (other than pursuant to (i) employee benefits plans, employee stock option plan, or distributions of dividends or employee bonuses in the form of Shares, (ii) the conversion of Bonds or (iii) issuances and sales in connection with the sale of Bonds to the Managers) or any securities representing interests in or convertible into, exchangeable for or which carry rights to subscribe or purchase Bonds or Shares or securities of the same class as the Bonds or Shares or announce plans or otherwise make public an intention to do any of the foregoing (other than as aforesaid), in any such case without the prior written consent of the Lead Manager on behalf of the Managers between the date hereof and the date which is three months after the Closing Date (both dates inclusive) whether such issue, offer, sale, contract to sell or other disposal is restricted to persons in the ROC or otherwise. On and following the Closing Date, ING Bank N.V. or its affiliated companies may hold Bonds which are being offered pursuant to the Offer.

General

No action has been or will be taken in any jurisdiction that would permit a public offering of the Bonds or the Shares issuable upon conversion of the Bonds, or the possession, circulation or distribution of this Offering Circular or any other material relating to the Company, the Bonds or the Shares issuable upon conversion of the Bonds, in any jurisdiction where action for the

141

purpose is required. Accordingly, neither the Bonds nor any Shares issuable upon conversion of the Bonds may be offered or sold, directly or indirectly, and neither this Offering Circular nor any other offering material or advertisements in connection with the Bonds or the Shares issuable upon conversion of the Bonds may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction.

United States

The Bonds and the Shares to be issued upon conversion of the Bonds have not been and will not be registered under the Securities Act, and may not be offered or sold within the United States or to, or for the account or benefit of, US persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S.

Each Manager has agreed that, except as permitted by the Subscription Agreement, it will not offer or sell the Bonds or the Shares to be issued upon conversion (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the Offer and the latest closing date for the Bonds, within the United States or to, or for the account or benefit of, US persons, and it will have sent to each dealer to which it sells Bonds or the Shares to be issued upon conversion of the Bonds (other than a sale pursuant to Rule 144A) during the Distribution Compliance Period a confirmation or other notice setting forth the restrictions on offers and sales of the Bonds or the Shares to be issued on conversion of the Bonds, as the case may be, within the United States or to, or for the account or benefit of, US persons. Terms used in this paragraph have the meanings given to them by Regulation S.

The Bonds are being offered and sold outside the United States to non-US persons in reliance on Regulation S. The Subscription Agreement provides that Managers acting through their US broker-dealer affiliates, may arrange for the offer and resale of the Bonds in the United States only to QIBs in reliance on Rule 144A.

In addition, until 40 days after the commencement of the Offer, an offer or sale of the Bonds or the Shares to be issued on conversion of the Bonds within the United States by a dealer that is not participating in the Offer may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.

United Kingdom

Each Manager has represented and agreed that:

(1) it has not offered or sold and, prior to the expiry of a period of six months from the issue date of the Bonds will not offer or sell any Bonds to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offer of Securities Regulations 1995;
(2) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) received by it in connection with the issue or sale of any Bonds in circumstances in which section 21(1) of the FSMA does not apply to the Company; and
(3) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Bonds in, from or otherwise involving the United Kingdom.

142

Hong Kong

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

ROC

Each Manager has represented and agreed that it has not offered, sold or delivered, and will not offer, sell or deliver, at any time, directly or indirectly, any Bonds in the ROC.

Japan

Each Manager has represented and agreed that the Bonds have not been and will not be registered under the Securities and Exchange Law of Japan (the “Securities and Exchange Law”) and that the Bonds which it subscribes will be subscribed by it as principal. Each Manager has also represented and agreed that, in connection with the initial offering of the Bonds, it will not directly or indirectly offer or sell any Bonds in Japan, or to, or for the benefit of any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan), except pursuant to an exemption from the registration requirements of, and otherwise in compliance with the Securities and Exchange Law and other applicable laws and regulations of Japan.

Singapore

Each Manager has acknowledged that this Offering Circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Manager has represented and agreed that it has not offered or sold and will not offer or sell the Bonds, nor will it circulate or distribute this Offering Circular or any other offering document or material relating to the Bonds, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act 2001 of Singapore (the “SFA”), (ii) to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

143

GENERAL INFORMATION

1 CLEARANCE AND TRADING

The Unrestricted Bonds have been accepted for clearance through Euroclear and Clearstream, Luxembourg under the Common Code 015156015. The International Securities Identification Number (“ISIN”) for the Unrestricted Bonds is XS0151560157. The CUSIP number for the Restricted Bonds is 82706A AA 0. The ISIN for the Restricted Bonds is US82706AAA07 and the Common Code for the Restricted Bonds is 015156368. The Restricted Bonds are expected to be eligible for trading in the PORTAL Market.

2 LISTING

Application has been made to list the Bonds on the Luxembourg Stock Exchange. The legal notice relating to the issue of the Bonds and the Articles of Incorporation of the Company 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 the same may be inspected and copies thereof may be obtained upon request. As long as the Bonds are listed on the Luxembourg Stock Exchange, an Agent for making payments on, transfers and conversions of, the Bonds will be maintained in Luxembourg.

3 ACCOUNTANTS

The consolidated financial statements as of 31 December 2001 and 2000, and for each of the three years in the period ended 31 December 2001 included in this Offering Circular, have been audited by T N Soong & Co, an associate member firm of Deloitte Touche Tohmatsu effective 22 April 2002, independent auditors, as stated in their report appearing herein, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. T N Soong & Co was formerly a member firm of Andersen Worldwide, SC.

4 NO MATERIAL ADVERSE CHANGE

Except as disclosed herein, there has been no significant adverse change in our consolidated financial position since 31 December 2001, the date of the latest audited consolidated financial statements.

5 LITIGATION

Save as disclosed in the section entitled “Risk Factors” and “Business”, neither the Company nor any of its subsidiaries is involved in any litigation, arbitration or administrative proceedings relating to claims which are material in the context of the issue of the Bonds and, so far as any of them is aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

6 APPROVALS AND CONSENTS

The Company has obtained all necessary consents, approvals and authorisations under the prevailing laws of the ROC in connection with the issue of the Bonds. The offer and issue of the Bonds was authorised and approved by the Board of Directors of the Company on 14 December 2001 and by the ROC SFC on 29 January 2002 and an amendment thereto on 4 July 2002.

144

7 AVAILABLE DOCUMENTS

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

Articles of Incorporation of the Company;
a copy of the audit report of the independent accountants and the audited consolidated balance sheets as of 31 December 2000 and 2001 and audited consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended 31 December 1999, 2000 and 2001;
a copy of the unaudited non-consolidated financial statements of the Company for the three-month periods ended and as at 31 March 2001 and 2002;
the Subscription Agreement relating to the Bonds; and
the Trust Deed in respect of the Bonds (which includes the forms of the Global Certificates and the individual Certificates) and the Agency Agreement.

In addition, copies of the most recent annual audited non-consolidated and consolidated financial statements (in the event that the Company becomes obligated under ROC laws and regulations to prepare consolidated financial statements) of the Company in English published by the Company, will be available free of charge at the specified office of the Paying, Conversion, Replacement and Transfer Agent in Luxembourg for as long as the Bonds are listed on the Luxembourg Stock Exchange. The Company publishes both its annual and interim financial statements.

8 GOVERNING LAW

The Trust Deed, the Agency Agreement and the Subscription Agreement are governed by English Law.

9 NOTICES

All notices to Bondholders will be published in a newspaper with general circulation in Luxembourg, which is expected to be the Luxemburger Wort.

10 THE COMPANY

The Company was incorporated under the laws of the Republic of China on 26 August 1987. The Company’s Uniform Registration Number is 22099202. Our principal executive offices are located at No. 16, Creation Rd. 1, Science-Based Industrial Park, Hsinchu, Taiwan, Republic of China. The Company’s phone number is (8663) 577-4922. The Company’s agent for service in England is Hackwood Secretaries Limited at its registered office (currently at One Silk Street, London EC2Y 8HQ, England) and in the United States is Silicon Integrated Systems Corporation, 240 North Wolfe Road, Sunnyvale, California 94086. The phone number of the Company’s agent in the United States is (408) 730-5600.

145

SUMMARY OF PRINCIPAL DIFFERENCES BETWEEN ROC GAAP AND US GAAP

The audited financial statements of the Company are prepared and presented in accordance with ROC GAAP, which differs in certain material respects from US GAAP. Certain principal differences between ROC GAAP applicable to the Company and US GAAP are summarised below. Such presentation should not be taken as inclusive of all ROC GAAP/US GAAP differences. Additionally, no attempt has been made to identify all disclosure, presentation or classification differences that would affect the manner in which events and transactions are presented in the financial statements or notes thereto. Further, no attempt has been made to identify future differences between ROC GAAP and US GAAP as a result of prescribed changes in accounting standards. Regulatory bodies that promulgate ROC GAAP and US GAAP have significant projects ongoing that could affect future comparisons such as this one.

Subject ROC GAAP US GAAP Presentation of Under ROC GAAP requirements, Under US GAAP, parent-company-only Unconsolidated unconsolidated financial statements of unconsolidated financial statements are Financial the Company are presented as the not allowed to be presented as the primary Statements primary financial statements and financial statements for any period. consolidated financial statements as supplemental financial statements. Consolidation Under ROC GAAP, a company is Under US GAAP, consolidation of required to include in its annual controlled subsidiaries is required in the consolidated financial statements only preparation of the consolidated financial those subsidiaries that are directly or statements. indirectly more than 50 per cent. owned. For directly owned subsidiaries (i) with total assets and operating revenues less than 10 per cent. of the company’s unconsolidated total assets and operating revenues, (ii) which are in a negative equity position which is considered to be other than temporary and the company did not guarantee the obligations of the subsidiary or commit to provide additional financial support, or (iii) with business activities which differ from that of the company, the company has the option of whether or not to consolidate such subsidiaries. For purposes of applying the above test, the amounts are determined on the basis of each respective subsidiary’s unconsolidated financial statements. Under ROC SFC requirement, beginning in 1995, if the combined revenues and total assets of all such unconsolidated subsidiaries exceed 30 per cent. of the company’s unconsolidated total assets and operating revenues, then each individual subsidiary with total assets or operating revenues greater than three per cent. of the company’s respective unconsolidated amounts shall be consolidated. Such subsidiaries shall be included in the consolidated financial statements thereafter, unless the percentage of the combined total assets or operating revenues for all such subsidiaries decreases to less than 20 per cent. of the company’s respective unconsolidated amount.

146

Investment in Debt Short-term investments are stated at the and Equity lower of cost or market value, Securities investments in debt securities are stated at the lower of amortised cost or market value. Long-term investments in listed equity securities in respect of which the company does not exercise significant influence on operating and financial decisions of the investee are stated at the lower of cost or market value, and unrealised losses are deducted from shareholders’ equity. Investments in non-listed equity securities in respect of which the company does not exercise significant influence on operating and financial decisions of the investee are stated at cost, subject to permanent impairment test.

Investments in marketable equity securities are classified in one of three categories: trading, held-to-maturity or available-for-sale. Marketable equity securities classified as trading securities are reported at fair value with unrealised gains and losses included in earnings; debt securities classified as held-to maturity securities are reported at amortised cost; and debt and marketable equity securities classified as availablefor-sale securities are reported at fair value with unrealised gains and losses reported in a separate component of shareholders’ equity. Share dividends received are recorded as investment income based on the fair value of the shares.

Stock dividends received are recorded as an increase in voting stock and not as investment income.

Bonuses to According to ROC regulations and the Employees, Article of Incorporation of the Company, Directors and a portion of distributable earnings should Supervisors be set aside as bonuses to employees, directors and supervisors. Bonuses to directors and supervisors are always paid in cash. However, bonuses to employees may be granted in cash or stock or both. All of these appropriations, including stock bonuses which are valued at par value of NT$10, are charged against retained earnings under ROC GAAP, after such appropriations are formally approved by the shareholders in the following year.
Stock Dividends Stock dividends are recorded as a reduction to retained earnings for the par value of the stock issued, and a like amount is recorded to the capital stock account.
Gains on Disposition Gains on the dispositions of property, of Property, Plant plant and equipment generated before and Equipment 2001 are first credited to non-operating income and then transferred, after deducting the applicable income tax, to capital surplus in the applicable fiscal year. Starting 2001, the treatment of gains on disposition of property, plant and equipment is the same under both ROC GAAP and US GAAP.

Under US GAAP, bonuses to employees, directors and supervisors are charged against income. Share issued as part of those bonuses is recorded at fair market value. However, since the amount and form of such bonuses are not finally determinable until the shareholders’ meeting in the subsequent year, the total amount of such bonuses is initially accrued based on management’s estimate of the number of shares to be issued, valued at par value. Any difference between the initially accrued amount and the fair market value of the bonuses upon the issuance of shares is recognised in the year by shareholders of approval. Stock dividends are recorded as reduction to retained earnings based on the fair value of the stock issued, and a like amount is recorded to the capital stock and capital surplus accounts.

Any gains on the dispositions of property, plant and equipment is classified within operating income under US GAAP.

147

Capital Surplus Under ROC GAAP, the following items are treated as capital surplus: (a) premium on issuance of common stocks; (b) gain, net of applicable income tax, on disposal of properties; (c) donations; (d) revaluation increment on properties, and (e) the value of assets of a company acquired in a merger in excess of assumed liabilities and the consideration paid for shares of such company in connection with the acquisition. Starting 2001, the aforementioned item (b) is treated as part of net income.
Accounting for ROC Statement of Financial Accounting Pensions Standards (SFAS) No. 18 “Accounting for Pensions”, effective in 1 January 1996, is substantially similar to U.S. SFAS No. 87, except for the effect of the adoption of ROC SFAS No.18 in relation to the amortisation of unrecognised net transitional obligations.
Impairment of LongROC GAAP has no specific standards Lived Assets and which address impairment of long-lived Long-Lived Assets assets held and used by an entity, to be Disposed of normally such assets would be carried at cost less accumulated depreciation.
Long-term Debt Under ROC GAAP, there is no specific Classification rule on presentation of the portion of long-term debt where certain covenants were breached. Generally, such debt will be presented as non-current as long as there are no indications that such breaches will result in the debt being accelerated.

Under U.S. GAAP, items (a) and (c) are the same as in ROC GAAP; item (b) is recorded as part of net income which is then included as a component of retained earnings; items (d) and (e) are not permitted.

Under US GAAP, the annual pension provision is recognised as a charge to results of operations over the employees’ service period in accordance with SFAS No. 87. SFAS No. 87 focuses on the plan’s benefit formula as the basis for determining the benefit earned, and therefore the cost incurred, for each year. The determination of the benefit earned is actuarially determined, and includes components for service cost, time value of money, return on plan assets and gains or losses from changes in previous assumptions. In certain cases, a minimum liability is recognised through a direct charge to stockholders’ equity.

Under US GAAP, U.S. FAS 121 requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required, and if so, to measure the impairment. If the sum of expected future cash flows, undiscounted and without interest charges, is less than an asset’s carrying value, an impairment loss is recognised; if the sum of the expected future cash flows is greater than an asset’s carrying value, an impairment loss cannot be recognised. Measurement of an impairment loss is based on the fair value of the asset. U.S. FAS 121 also generally requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of the carrying value or fair value less cost to sell.

Under US GAAP, breaches of loan covenants may require the portion of longterm debt due after one year to be classified as current liabilities.

148

Depreciation Lives of In practice, depreciation is generally Depreciation is provided on a straight-line Fixed Assets provided using the guideline service basis over the asset’s estimated useful lives as prescribed by ROC Internal life. No additional depreciation is provided Revenue Code plus one additional year on fully depreciated assets which continue as salvage value. ROC SFC regulations to be used in the business. In general, 55 applicable to public companies require years would be considered too long a that when fixed assets have been fully period over which to depreciate fixed depreciated over the prescribed service assets. life and the underlying asset continues to be used, the remaining unamortised value (i.e. the salvage value portion) is depreciated over the asset’s remaining economic life. The estimated life of a building under ROC GAAP can be depreciated over a period of 55 years.
Treasury Stock Under ROC GAAP, stock held by Under US GAAP, when a subsidiary holds subsidiaries of a company may be its parent’s shares as investments, these accounted for as an asset on the balance shares should be treated as treasury stock sheet. However, effective at the in the consolidated balance sheet as a beginning of 2002, a parent’s stock held reduction in shareholders’ equity. by subsidiaries is treated as treasury stock on the parent’s balance sheet and a reduction in shareholders’ equity.
Compensation Under ROC GAAP, the Company did not Under US GAAP, the sale of treasury stock expense on recognise income or expense in may result in compensation expense treasury stock sold connection with the sale of the based on the difference between the fair to employees Company’s treasury stock. Instead, only market value of the shares at the time of the capital surplus account was the sale over the sale price to the increased by an amount equal to the employees. difference between the aggregate sales price and its aggregate cost of treasury stock sold.
Derivative Financial ROC GAAP does not require that Beginning 1 January 2001, all derivatives Instrument derivatives that do not qualify as hedges contracts are recognised on the balance Transactions to be recorded on the balance sheet at sheet at fair value (including those that do fair value. As such, significant assets or not qualify as hedge), the measurement of obligations, if represented by which takes accounts of all contractually derivatives, will not be recognised for committed future cash flows under the accounting purposes until the payments contract regardless of when they will be become due. Because the rules are paid. If hedge accounting criteria are met, flexible, different companies may apply the rules provide for deferral of gains and different accounting practices to losses in equity for cash flow hedge and derivatives. recognition of offsetting gain or loss on hedged item in the case of a fair value hedge (in both cases, to the extent effective).
Deferred Expenses Under ROC GAAP, deferred expenses Under US GAAP, start-up costs are include organisation costs, issuance generally expensed as incurred. costs of bonds, testing costs of reinstallation of machinery and equipment. The deferred expenses shall be amortised by systematic charges to income over the periods estimated to be benefited.

149

Income Tax

Prior to 1 January 1995, generally, income tax expenses was provided based on current taxable income; deferred income tax was not recognised for timing differences. ROC Statements of Financial Accounting Standards No. 22 (ROC SFAS No. 22) “Accounting for Income Taxes”, was issued in June 1994, and has been adopted by the Company as of 1 January 1995. ROC SFAS No. 22 is similar to US GAAP. However, under ROC GAAP, the cumulative effect of adoption is included in the current year’s provision for income tax rather than being separately presented as the cumulative effect of a change in accounting principle. Under ROC GAAP, a valuation allowance determined is less stringent as compared to US GAAP. Under US GAAP, if a company has experienced cumulative losses in recent years, it is not generally able to consider projections of future operating profits for the purpose of determining the valuation allowance for deferred income tax assets.

Under US GAAP, current tax liabilities are recognised for estimated taxes payable for the current period. US SFAS 109 requires that all material temporary differences between the carrying values of assets and liabilities and their respective tax bases be recognised as deferred tax liabilities or assets. A valuation allowance is provided on deferred tax assets to the extent that it is not “more likely than not” that such deferred tax assets will be realised. A change in tax rate or law requires an adjustment to such deferred tax assets and liabilities in the period of enactment, and is reported as a part of results of operations.

Retained Earnings Companies in the ROC are subject to a Tax 10 per cent. surtax on profits retained and earned after 31 December 1997. If the retained profits are distributed to the shareholders in the following fiscal year, the surtax can be avoid. Under ROC GAAP, surtax is recorded in the statement of income in the following fiscal year if the earnings are not distributed to the shareholders.

Under US GAAP, income tax expense related to the 10 per cent. retained profit tax is recorded in the statement of income in the year that the profits were earned.

Comprehensive There is no requirement to present Comprehensive income and its Income comprehensive income. components (revenues, expenses, gains and losses) must be presented in a full set of financial statements under US GAAP. Comprehensive income includes all changes in stockholders’ equity during a period, except those resulting from investments by or distributions to owners, including certain items not included in the current results of operations.

150

Stock Options ROC GAAP has no specific accounting Under US GAAP, APB Opinion No. 25 practice regarding stock option, or the “Accounting for Stock Issued to disclosures of stock options. Employees” and SFAS No. 123 “Accounting for Stock-Based Compensation” have outlined detail principals on how to account for the accounting and reporting of stock-based compensation plans. In general, either the intrinsic value or fair value of options granted must be recognised as compensation expenses over the service period. Compensated ROC GAAP has no specific accounting Compensated absences must be accrued Absences practice regarding compensated based on the liability for employees’ rights absences. to receive compensation for future absences when the benefits can be accumulated or vested over the service period. Classification There is no specific rule on account Under US GAAP, the presentation of scrap presentation on the statement of income income, inventory allowance, between cost of good sold, operating restructuring expenses, impairment loss expense and non-operating expenses of fixed asses and earthquake losses are such as scrap income, inventory generally recorded under income from allowance, restructuring expenses, continuing operations, not as nonimpairment loss of fixed assets and operating expenses. earthquake losses under ROC GAAP. Earnings Per Share A company computes earnings per share Under US GAAP, when a simple capital based on the weighted average number structure exists, basic earnings per share of outstanding shares is retroactively is based on the weighted average number adjusted for stock dividends and new of shares outstanding. When a complex common stock issuance issued through capital structure exists, diluted earnings unappropriated earnings and capital per share is based on the weighted surplus. average number of shares outstanding plus the number of additional shares that would have been outstanding if dilutive potential common shares had been issued, with appropriate adjustments to income or loss that would result from the assumed conversions of those potential common shares. The materiality of the dilutive effect is not considered. Basic and diluted earnings per share calculations are not retroactively adjusted for new common stock issued through unappropriated earnings and capital surplus.

The information set forth above do not in any way attempt to quantify the effects of the aforementioned differences between ROC GAAP and US GAAP. Accordingly, there can be no assurance that net income and shareholders’ equity reported in accordance with ROC GAAP would not be lower if determined in accordance with US GAAP.

151

FINANCIAL STATEMENTS

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and the Shareholders

Silicon Integrated Systems Corp.

We have audited the accompanying consolidated balance sheets of Silicon Integrated Systems Corp. (a Republic of China Corporation) and Subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended December 31, 1999, 2000 and 2001, all expressed in 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.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Silicon Integrated Systems Corp. and Subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for the years ended December 31, 1999, 2000 and 2001, in conformity with generally accepted accounting principles in the Republic of China.

T N Soong & Co

An Associate Member Firm of Deloitte Touche Tohmatsu effective April 22, 2002 Former Member Firm of Andersen Worldwide, SC Taipei, Taiwan, ROC March 8, 2002 (except as to Note 3

which is as of March 29, 2002 and Note 20c

which is as of May 6, 2002)

152

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS December 31, 2000 and 2001

ASSETS CURRENT ASSETS Cash � � � � � � � � � � � � � � Pledged time deposits (Note 18) � � � � � � � � Short-term investments (Note 2) � � � � � � � � Notes receivable (Note 2) � � � � � � � � � Accounts receivable — net (Notes 2 and 4) � � � � � Inventories — net (Notes 2 and 5) � � � � � � � Deferred income tax assets (Notes 2 and 16) � � � � � Prepaid expenses and other current assets (Note 4) � � � Total Current Assets � � � � � � � � � � � LONG-TERM INVESTMENTS (Notes 2, 6 and 17) � � � PROPERTY, PLANT AND EQUIPMENT (Notes 2, 7, 18 and 19) Cost Land � � � � � � � � � � � � � � Buildings and auxiliary equipment � � � � � � � Machinery and equipment � � � � � � � � � Furniture and fixtures � � � � � � � � � � Transportation equipment � � � � � � � � � Equipment under capital lease � � � � � � � � Total cost � � � � � � � � � � � � � Accumulated depreciation � � � � � � � � � Construction in progress and prepayment for equipment � � Net Property, Plant and Equipment � � � � � � � INTANGIBLE ASSETS — NET (Notes 2 and 8) � � � � OTHER ASSETS Deferred income tax assets (Notes 2 and 16) � � � � � Land held for future construction (Note 17) � � � � � Refundable deposits � � � � � � � � � � � Other assets � � � � � � � � � � � � � Total Other Assets � � � � � � � � � � � TOTAL ASSETS � � � � � � � � � � � �	2000	2001	2001
	NT$ NT$ US$ (Note 3) (In Thousands, Except Par Value) 2,928,185 2,962,996 84,657 4,400 4,100 117 1,930,451 — — 1,211,511 361,407 10,326 1,927,972 1,898,784 54,251 1,830,370 3,801,668 108,619 89,076 105,638 3,018 184,900 617,043 17,630 10,106,865 9,751,636 278,618 583,765 1,663,732 47,535 439,671 439,671 12,562 1,408,834 1,521,686 43,477 16,966,968 24,452,717 698,649 104,510 119,575 3,416 6,168 6,168 176 315,234 335,702 9,592 19,241,385 26,875,519 767,872 (1,812,075) (5,468,789) (156,251) 5,574,987 416,333 11,895 23,004,297 21,823,063 623,516 414,339 1,366,687 39,049 1,071,060 1,531,257 43,750 79,024 79,024 2,258 10,748 11,603 331 3,659 2,366 68 1,164,491 1,624,250 46,407
	35,273,757	36,229,368	1,035,125

153

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

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

LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term bank loans (Note 9) � � � � � � � � Notes and accounts payable � � � � � � � � � Accounts payable to related parties (Note 17) � � � � License fees and royalty payable — current (Note 20) � � � � � � � � � � � � � Payable for properties � � � � � � � � � � Accrued expenses and other current liabilities (Note 10) � � � � � � � � � � � � � Current portion of bonds payable, long-term bank loans and obligation under capital lease (Notes 2, 11, 12, 18 and 19) � � � � � � � � Total Current Liabilities � � � � � � � � � � LONG-TERM LIABILITIES Bonds payable — net of current portion (Notes 11 and 18) � � � � � � � � � � � Long-term bank loans — net of current portion (Notes 12 and 18) � � � � � � � � � � � License fees and royalty payable — net of current portion (Note 20) � � � � � � � � � � � � � Accrued pension cost (Notes 2 and 13) � � � � � � Obligation under capital lease — net of current portion (Notes 2 and 19) � � � � � � � � � � � � � Total Long-term Liabilities � � � � � � � � � Total Liabilities � � � � � � � � � � � � MINORITY INTEREST � � � � � � � � � � SHAREHOLDERS’ EQUITY (Notes 2, 14 and 15) Capital stock — NT$10 par value Authorized — 1,800,000 thousand shares Issued — 974,015 thousand shares in 2000 and 1,071,416 thousand shares in 2001 � � � � � � � � Capital surplus � � � � � � � � � � � � Retained earnings: Appropriated as legal reserve � � � � � � � � Accumulated deficits � � � � � � � � � � Cumulative translation adjustments � � � � � � � Treasury stock (cost) — 10,689 thousand shares � � � � Total Shareholders’ Equity � � � � � � � � � TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY � � �	2000	2001	2001
	NT$ NT$ US$ (Note 3) (In Thousands, Except Par Value) 2,050,000 2,204,630 62,989 951,579 909,243 25,978 186,230 57,834 1,653 198,447 395,263 11,293 2,605,575 1,159,905 33,140 555,826 860,858 24,596 109,346 1,813,665 51,819 6,657,003 7,401,398 211,468 3,000,000 2,570,001 73,429 7,000,000 7,377,273 210,779 — 524,250 14,979 42,459 55,272 1,579 131,601 30,067 859 10,174,060 10,556,863 301,625 16,831,063 17,958,261 513,093 74,534 78,044 2,230 9,740,149 10,714,164 306,119 8,682,482 7,740,182 221,148 525,835 314,911 8,998 (210,924) (607,972) (17,371) 21,119 31,778 908 (390,501) — — 18,368,160 18,193,063 519,802
	35,273,757	36,229,368	1,035,125

The accompanying notes are an integral part of the consolidated financial statements.

154

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999, 2000 and 2001

NET REVENUE (Note 2) � � � � � � COST OF REVENUE (Note 17) � � � � � GROSS PROFIT � � � � � � � � OPERATING EXPENSES (Note 17) Research and development (Note 2) � � � � Marketing and sales (Note 2) � � � � � General and administrative � � � � � � Total Operating Expenses � � � � � � INCOME (LOSS) FROM OPERATIONS � � � NON-OPERATING INCOME Foreign exchange gain — net (Note 2) � � � Gain on disposal of investments (Note 2) � � Interest income � � � � � � � � � Reversal of allowance for losses on short-term investments � � � � � � Dividends and other (Notes 2 and 17) � � � Total Non-Operating Income � � � � � � NON-OPERATING EXPENSES Interest expense � � � � � � � � Indemnity � � � � � � � � � � Factoring expense (Note 4) � � � � � � Foreign exchange loss — net (Note 2) � � � Other � � � � � � � � � � � Total Non-Operating Expenses � � � � � INCOME (LOSS) BEFORE INCOME TAX � � INCOME TAX BENEFIT (Notes 2 and 16) � � INCOME (LOSS) BEFORE MINORITY INTEREST MINORITY INTEREST IN LOSS OF SUBSIDIARIES � � � � � � � � NET INCOME (LOSS) � � � � � � � Earnings (Loss) Per Share � � � � � � Weighted Average Number of Shares Outstanding (retroactively adjusted for the subsequent stock dividends and employee stock bonuses distributed) � � � � � � � � �	1999	2000	2001	2001
	NT$ NT$ NT$ US$ (Note 3) (In Thousands, Except Earnings (Loss) Per Share) 10,845,347 7,821,196 9,987,590 285,360 7,077,541 7,503,025 7,441,405 212,612 3,767,806 318,171 2,546,185 72,748 741,809 1,193,849 1,883,013 53,801 999,436 722,938 602,396 17,211 368,539 335,148 565,854 16,167 2,109,784 2,251,935 3,051,263 87,179 1,658,022 (1,933,764) (505,078) (14,431) — 76,950 93,728 2,678 7,701 906,129 45,045 1,287 174,042 182,801 46,039 1,316 4,650 — — — 7,787 29,257 32,906 940 194,180 1,195,137 217,718 6,221 2,171 128,604 678,612 19,389 — — 55,920 1,598 — — 43,812 1,252 17,866 — — — 4,540 21,417 21,428 612 24,577 150,021 799,772 22,851 1,827,625 (888,648) (1,087,132) (31,061) 131,621 662,260 478,480 13,671 1,959,246 (226,388) (608,652) (17,390) 607 456 680 19
	1,959,853 2.30 851,208	(225,932) (0.21) 1,070,799	(607,972) (0.57) 1,064,941	(17,371) (0.02) 1,064,941

The accompanying notes are an integral part of the consolidated financial statements.

155

				Treasury Total	Stock Shareholders’	(Note 15) Equity	NT$ NT$		— 5,019,516		— 12,000,000		— —	— —	— —	— (4,789)	— 1,959,853	— 18,974,580		— —	— —	— —	— —		— —	— 10,013	— (225,932)		(390,501) (390,501)	(390,501) 18,368,160	— —	— —	390,501 422,216	— 10,659	— (607,972)	— 18,193,063
				Cumulative	Translation	Adjustments	NT$		15,895		—		—	—	—	(4,789)	—	11,106		—	—	—	—		—	10,013	—		—	21,119	—	—	—	10,659	—	31,778
For the Years Ended December 31, 1999, 2000 and 2001	Capital Stock Capital Surplus (Notes 2 and 14) Retained Earnings (Deficit) (Note 14)	Paid-in Gain on	Paid-in Capital Disposal of Unappropriated	Capital in from sale Property, Earnings	Excess of of Treasury Plant and Legal (Accumulated	Shares Amount Par Value Stock Equipment Total Reserve Deficits) Total	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	(In Thousands)	366,272 3,662,721 7,732 — 9,148 16,880 222,392 1,101,628 1,324,020		150,000 1,500,000 10,500,000 — — 10,500,000 — — —		— — — — — — 107,458 (107,458) —	9,672 96,713 — — — — — (96,713) (96,713)	87,905 879,053 — — — — — (879,053) (879,053)	— — — — — — — — —	— — — — — — — 1,959,853 1,959,853	613,849 6,138,487 10,507,732 — 9,148 10,516,880 329,850 1,978,257 2,308,107		— — — — — — 195,985 (195,985) —	17,638 176,387 — — — — — (176,387) (176,387)	158,987 1,589,868 — — — — — (1,589,868) (1,589,868)	183,541 1,835,407 (1,835,407) — — (1,835,407) — — —		— — — — 1,009 1,009 — (1,009) (1,009)	— — — — — — — — —	— — — — — — — (225,932) (225,932)		— — — — — — — — —	974,015 9,740,149 8,672,325 — 10,157 8,682,482 525,835 (210,924) 314,911	— — — — — — (210,924) 210,924 —	97,401 974,015 (974,015) — — (974,015) — — —	— — — 31,715 — 31,715 — — —	— — — — — — — — —	— — — — — — — (607,972) (607,972)	1,071,416 10,714,164 7,698,310 31,715 10,157 7,740,182 314,911 (607,972) (293,061)
									�		�		�	�	�	�	�	�		�	�	�	�		�	�	�		�	�	�	�	�	�	�	�
									BALANCE, JANUARY 1, 1999 � �	Issuance of common stock —	November 4, 1999 � � � �	Appropriation from prior year’s earnings	Legal reserve � � � � �	Bonus to employees — stock � �	Stock dividends — 24% � � �	Translation adjustment on subsidiaries�	Net income in 1999 � � � �	BALANCE, DECEMBER 31, 1999� �	Appropriation from prior year’s earnings	Legal reserve � � � � �	Bonus to employees — stock � �	Stock dividends — 26% � � �	Transfer of capital surplus into capital �	Transfer of gain on disposal of Property,	plant and equipment � � �	Translation adjustments on subsidiaries	Net loss in 2000 � � � � �	Acquisition of treasury stock — 10,689	thousand shares � � � �	BALANCE, DECEMBER 31, 2000� �	Transfer of legal reserve to offset deficit	Transfer of capital surplus into capital �	Sales of treasury stock to employees �	Translation adjustments on subsidiaries	Net loss in 2001 � � � � �	BALANCE, DECEMBER 31, 2001� �

156

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 2000 and 2001

CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) � � � � � � � � Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation � � � � � � � � � Amortization of intangible assets � � � � Net loss on disposal of property, plant and equipment � � � � � � � � � Gain on disposal of long-term investments � � Impairment loss on investment� � � � � Deferred income taxes� � � � � � � Accrued pension cost � � � � � � � Minority interests in earnings of subsidiaries � Changes in operating assets and liabilities: Decrease (increase) in: Notes receivable � � � � � � � Accounts receivable � � � � � � Inventories � � � � � � � � Prepaid expenses and other current assets � � � � � � � � � Increase (decrease) in: Notes and accounts payable � � � � License fees and royalty payable � � � Accrued expenses and other current liabilities � � � � � � � � Net Cash Provided by (Used in) Operating Activities � � � � � � � � � � CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from (acquisitions of) short-term investments � � � � � � � � � Acquisitions of: Intangible assets � � � � � � � � Long-term investments� � � � � � � Property, plant and equipment � � � � � Other assets — land � � � � � � � Other assets � � � � � � � � � Proceeds from disposal of: Long-term investments� � � � � � � Property, plant and equipment � � � � � Decrease in pledged time deposits � � � � Decrease (increase) in refundable deposits � � Net Cash Used in Investing Activities � � �	1999	2000	2001	2001
	NT$ 1,959,853 240,611 56,538 91 — 3,899 (268,147) 7,650 (607) 19,028 (645,906) (659,096) 29,567 358,054 181,911 305,065 1,588,511 (44,650) (273,726) (72,504) (2,792,417) — — 182 100 — 1,644 (3,181,371)	NT$ NT$ (In Thousands) (225,932) (607,972) 1,220,622 3,669,746 136,498 417,012 7,342 9,776 (892,959) — — — (643,960) (476,185) 12,992 12,813 (456) (680) (1,153,267) 850,104 332,366 29,188 (954,421) (1,971,298) (78,139) (432,143) (344,659) (170,732) 16,536 57,016 28,928 305,032 (2,538,509) 1,691,677 (1,840,451) 1,930,451 (278,830) (703,417) — (1,069,495) (17,822,364) (3,943,941) (79,024) — — (45) 1,114,688 — 55,083 — — 300 (9,774) (855) (18,860,672) (3,787,002)		US$ (Note 3) (17,371) 104,850 11,915 279 — — (13,605) 366 (19) 24,289 834 (56,323) (12,347) (4,878) 1,629 8,715 48,334 55,156 (20,098) (30,557) (112,684) — (1) — — 8 (24) (108,200)

(Forward)

157

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

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

1999	2000	2001	2001
NT$ — — — 12,000,000 — 107,247 — 12,107,247 (2,478) 10,511,909 2,018,301	NT$ NT$ (In Thousands) 2,050,000 154,630 3,000,000 — 7,000,000 1,650,000 — — — 422,216 133,420 (99,941) (390,501) — 11,792,919 2,126,905 4,237 3,231 (9,602,025) 34,811 12,530,210 2,928,185		US$ (Note 3) 4,418 — 47,143 — 12,063 (2,855) — 60,769 92 995 83,662
12,530,210 136,687 2,262 25,025 —	2,928,185 219,407 48,687 119,624 98,735	2,962,996 47,989 666,165 5,063 41,950	84,657 1,371 19,033 145 1,199 (71,379) (41,305) (112,684) (39,071) 18,973 (20,098) 51,819 3,592
(6,123,202) 3,330,785	(17,011,178) (811,186)	(2,498,271) (1,445,670)	(71,379 (41,305
(2,792,417)	(17,822,364)	(3,943,941)
(273,726) —	(278,830) —	(1,367,467) 664,050	(39,071 18,973
(273,726) 36,657 —	(278,830) 109,346 —	(703,417) 1,813,665 125,729

The accompanying notes are an integral part of the consolidated financial statements.

158

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts are in Thousands of Dollars, Unless Specified Otherwise)

1. General

Silicon Integrated Systems Corp. (SiS) was incorporated on August 26, 1987 in the Republic of China (ROC) and its shares have been listed and traded on the Taiwan Stock Exchange since August 1, 1997.

SiS is engaged in the design, research, development and manufacturing of integrated circuits, including core logic chipsets, 3D graphic and connectivity chips for mainstream PC and networking applications, testing service, and limited related trading business.

SiS has a wholly-owned subsidiary, Silicon Integrated Systems Corporation (SiS-USA), a 99.99% owned subsidiary, Silicon Integrated Systems Limited (SiS-HK), and a 62.5% owned subsidiary, Investar Venture CPU Capital Fund, Inc. LDC. (IVCF) and is diagrammed below:

100% 99.99% 62.5% SiS	100% 99.99% 62.5% SiS	100% 99.99% 62.5% SiS	100% 99.99% 62.5% SiS	100% 99.99% 62.5% SiS
SiS-USA		SiS-HK		IVCF

SiS-USA and SiS-HK are engaged in marketing and product service activities for SiS, while IVCF, a fund managed by Investar, a Taiwanese venture capital organization, is engaged in investment activities.

2. Summary of Significant Accounting Policies

A. Consolidation

The consolidated financial statements include the accounts of SiS and the aforementioned subsidiaries (hereinafter, referred to individually or collectively as “Company”). All significant inter-company accounts and transactions have been eliminated in the consolidation.

Minority interests in IVCF and SiS-HK are presented separately in the consolidated financial statements.

B. Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the ROC requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

C. Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, short-term investments and notes and accounts receivable. Cash and short-term investments are deposited with financial institutions that management believes are credit worthy. The Company’s notes and accounts receivable are derived from revenues earned from customers located in Asia, the United States and Europe. A substantial portion of revenues is made to a small number of customers on extended credit.

The following table summarizes the revenues from customers, all of which were third parties, in excess of 10% of total net revenue:

Company A � � � � � � � � � � � � � B � � � � � � � � � � � � � C � � � � � � � � � � � � �	1999 44% 8% —	2000 48% 6% —	2001
			42% 11% 10%

159

At December 31, 2000, company A accounted for 85% of notes and accounts receivable. As of December 31, 2001, companies A and B accounted for 56% and 12% of notes and accounts receivable, respectively. In addition, the Company also received a pledge of marketable securities as collateral for the above company A’s receivables.

Credit evaluation of the customer is performed and allowance for potential credit losses based on the past experience and overall aging is maintained.

D. Short-Term Investments

These are open-ended funds and are carried at the lower of aggregate cost or market value. Costs of such investments sold are determined by the weighted average method.

E. Inventories

Inventories are stated at the lower of standard cost (adjusted to approximate weighted average cost) or market value. Market value represents net realizable value for finished goods and work in process, and replacement costs for raw materials and supplies.

F. Long-Term Investments

These investments are accounted for by the cost method. An allowance for decline in value is recognised as follows:

a. Listed stocks or stock traded over the counter: If the decline in market value is considered temporary, a credit is made to an allowance for decline in value with a corresponding debit to shareholders’ equity. The allowance is then debited for any subsequent recovery of the market value to the extent of the balance of the allowance. However, if the decline in value is considered irrecoverable, the allowance for decline in value is reversed and the debit to shareholders’ equity is charged to income.
b. Other than listed stocks or stocks traded over the counter: The decline in value is charged to current income only if the decline is irrecoverable.

Cash dividends received in the year the investment is made are credited to the cost of the investment while cash dividends received in subsequent years are recognised as investment income. No investment income is recognised on stock dividends received other than an increase in the number of shares of stock held on the ex-dividend date.

The costs of investments sold are determined by the weighted average method.

G. Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Major additions, renewals and betterments, and interest expenses incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease. The effective interest method is used to allocate each lease payment between principal and interest expense.

Depreciation is provided on the straight-line method over estimated service lives which range as follows: Buildings and auxiliary equipment, 3 to 55 years; machinery and equipment, 3 to 10 years; furniture and fixtures, 3 to 8 years; transportation equipment, 5 years and leased equipment, 3 years.

Upon sale or disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to current income. Any such gain generated before 2001, less applicable income tax, is transferred to capital surplus at end of the year.

H. Intangible Assets

Intangible assets consist of software and licenses and are amortised using the straight-line method over 3 to 5 years.

I. Pension Costs

Effective December 31, 1995 SiS adopted ROC Statement of Financial Accounting Standards (SFAS) No. 18, “Accounting for Pensions”, which requires: (a) actuarial calculations of pension obligations, (b)

160

recognition of minimum pension liability, as defined, as of the end of each year starting 1996 as both assets and liabilities, and (c) recognition of annual pension costs based on actuarial calculations starting January 1, 1996. Prior to the adoption of SFAS No. 18, pension costs were recognised based on the estimated amount of the monthly contribution to the fund.

J. Revenue Recognition

The Company’s products are sold directly to customers. Revenue is recognised at the time of shipment or delivery depending on the shipment terms, which is when title is transferred. The four criteria for revenue recognition are the existence of evidence of sales, actual shipment, fixed or determinable selling price, and reasonable assurance of collectibility.

The Company also sells its products to distributors with substantial independent operations under sales arrangements whose terms do not allow for rights of return or price protection on unsold products held by them. In these instances, the Company recognises revenue when it ships the product directly to the distributors.

Allowance for sales return and discounts are provided at the time of the recognition of the related revenues on the basis of experience and these provisions are deducted from sales.

K. Research and Development

Research and development costs consist of expenditures incurred during the course of planned search and investigation aimed at the discovery of new knowledge that will be useful in developing new products or processes, or at significantly enhancing existing products or production processes as well as expenditures incurred for the design, testing of product alternatives or construction of prototypes. All expenditures related to research and development activities of the Company are charged to current income.

In addition, our R&D expense includes amortisation associated with license of process technology.

L. Advertising Expenses

The Company expenses all advertising and promotional costs as incurred. Advertising expenses incurred in the years ended December 31, 1999, 2000 and 2001 were NT$19,368, NT$15,652 and NT$46,860 (US$1,339), respectively.

M. Marketing Expenses

Shipping and Handling Expense. The Company expenses all shipping and handling costs as marketing expenses for moving the product to the customers’ designated location. Shipping and handling expenses incurred in the years ended December 31, 1999, 2000 and 2001 were NT$15,229, NT$10,558 and NT$6,830 (US$195), respectively.

Royalty expenses. The Company charges to marketing expenses royalties where such are based on units sold.

N. Income Tax

The Company uses the asset and liability method of accounting for income tax. Under this method, deferred income taxes are recognised for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. A valuation allowance is recognised if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then it will be classified as current or non-current based on the expected reversal date of the temporary difference.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Income tax, at a rate of 10%, on undistributed earnings are recorded as expense in the year when the shareholders adopt a resolution that the earnings shall be retained.

161

O. Forward Exchange Contracts

The premium or discount of the forward exchange contract, recorded in New Taiwan dollars as assets and/or liabilities, is computed using the foreign currency amount of the contract multiplied by the difference between the contracted forward rate and the spot rates at the inception dates of the contract. The premium or discount is amortised using the straight-line method over the term of the forward contract with the amortisation charged to income.

On the balance sheet dates, the gains or losses on the contracts, computed by multiplying the foreign currency amount of the contracts by the difference between the spot rates at the balance sheet dates and the spot rates at the inception dates (or the spot rates last used to measure a gain or loss on that contract for an earlier period), are charged to income. Also, the receivables and payables related to the contracts are netted out, and the resulting net amount is presented as either an asset or a liability.

P. Foreign-Currency Transactions

Foreign-currency transactions, other than derivative financial instruments, are recorded in New Taiwan Dollars at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan Dollars, or when foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. At year-end, the balances of foreign-currency assets and liabilities are restated based on prevailing exchange rates and any resulting gains or losses are credited or charged to income.

Q. Translation of Foreign-Currency Financial Statements

ROC Financial Accounting Standards (FAS) No.14, “Accounting for Foreign-Currency Transactions” applies to foreign operations, with the local currency of each foreign subsidiary as its functional currency. The financial statements of the foreign subsidiaries are translated into New Taiwan Dollars at the following exchange rates: assets and liabilities — current rate; shareholders’ equity — historical rates, income and expenses — weighted average rate during the year. The resulting translation adjustment is recorded as separate component of shareholders’ equity.

R. Earnings Per Share

Earnings per share is calculated by dividing net income by the average number of shares outstanding in each year, adjusted retroactively for stock dividends and stock bonuses issued subsequently.

3. US Dollar Amounts

The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars. For convenience only, US dollar amounts presented in the accompanying consolidated financial statements have been translated from New Taiwan dollars at the noon buying rate in New York City for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York as of March 29, 2002, which was NT$35 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into US dollars at this or any other rate of exchange.

4. Accounts Receivable — Net

	December 31	December 31
2000 NT$ 2,049,384 (69,412) (52,000)	2001
	NT$ 2,051,784 (69,000) (84,000)	US$ (Note 3) 58,622 (1,971) (2,400)
1,927,972	1,898,784	54,251

In 2001, the Company entered into agreements to sell accounts receivable to factors without recourse. Factored accounts receivable and due from factors as of December 31, 2001 were NT$2,486,045 (US$71,030) and NT$444,047 (US$12,687), respectively. The factors assess a finance charge which is reflected in non-operating expense as a factoring expense.

162

Under the factoring agreements, the Company is assessed a periodic finance charge, based on the uncollected balance of the factored receivables over a fixed term of 120 to 180 days. At the end of the fixed term, no further finance charges are assessed, even if the factor has not collected on the receivables.

5. Inventories

	December 31
2000 NT$ 381,727 1,165,145 283,498	2001
	NT$ 1,443,266 2,089,329 269,073	US$ (Note 3) 41,236 59,695 7,688
1,830,370	3,801,668	108,619

6. Long-Term Investments

December 31,	December 31,
2000 Carrying Value % of Ownership NT$ 396,297 2.0 2,220 2.0 — — — — 185,248 6.1		2001
Carrying Value NT$ 396,297 2,220 — — 185,248	Carrying	Value US$ 11,323 63 29,571 986 5,592	% of Ownership
	NT$ 396,297 2,220 1,035,000 34,495 195,720		(Note 3) 2.0 2.0 — — 5.8
583,765	1,663,732	47,535

The average market values of the VIS shares owned by SiS as of December 31, 2000 and 2001 were NT$578,692 and NT$441,281 (US$12,608), respectively.

7. Accumulated Depreciation

	December 31
2000 NT$ 167,776 1,533,634 50,802 3,308 56,555	2001
	NT$ 261,355 4,955,559 70,023 4,225 177,627	US$ (Note 3) 7,467 141,587 2,001 121 5,075
1,812,075	5,468,789	156,251

Capitalized interest expense was NT$98,735 and NT$41,950 (US$1,199) for the years ended December 31, 2000 and 2001, respectively. The rate used in calculation of capitalization of interest was 6.12% for the years ended December 31, 2000 and 2001.

163

8. Intangible Assets — Net

	December 31
2000 NT$ 499,982 98,262 598,244 134,503 49,402 183,905	2001
	NT$ 855,670 1,085,913 1,941,583 329,750 245,146 574,896	US$ (Note 3) 24,448 31,026 55,474 9,422 7,004 16,426
414,339	1,366,687	39,048

9. Short-Term Bank Loans

				December 31
			2000	2001
			NT$	NT$	US$
					(Note 3)
Working capital loans: 2000 — repayable in December 2001,
interest at floating rates, 6.20% — 7.10%; 2001 — repayable
in March 2002, interest at floating rates, 3.60% — 5.00%		�	2,050,000	1,850,000	52,857
L/C with banks: denominated in foreign currencies,
(US$1,109, ¥97,650, EUR7,610 and NLG3,867), due in	150 —
180 days after acceptance, interest at 1.50% — 4.57%	�	�	—	354,630	10,132
			2,050,000	2,204,630	62,989

Unused credit lines for short-term bank loans as of December 31, 2001 were approximately NT$2,592,394 (US$74,068).

The due date for the working capital loan due in March 2002 has been extended to June 2002.

10. Accrued Expenses and Other Current Liabilities

	December 31
2000 NT$ 165,495 — 79,945 638 — — — 3,533 36,650 35,894 233,671	2001
	NT$ 161,013 116,376 92,392 98,623 55,920 23,662 27,764 4,208 — — 280,900	US$ (Note 3) 4,600 3,325 2,640 2,818 1,598 676 793 120 — — 8,026
555,826	860,858	24,596

164

11. Bonds Payable

These are five-year domestic secured bonds issued on July 4, 2000 with aggregate face value of NT$3,000,000 (US$85,714) and bear interest at 5.42% payable semi-annually. The bonds are due in semi-annual installments commencing July 2002 and are to be fully repaid by July 2005.

The bond agreement requires, among other things, the maintenance of specific financial ratios, including current ratio, shareholders’ equity ratio and interest coverage ratio, which are tested on both a semi-annual and annual basis. As of December 31, 2001, management believes that the Company was in compliance with the financial and other covenants in the bond agreement. It also contains a cross default provision whereby an event of default under either of the Company’s long-term bank loans could trigger an event of default under these bonds and could result in the entire amount of principal and interest under the bonds being accelerated and immediately due and payable. The event of default under the bond agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability. As disclosed in Note 20c, there is a potential material adverse litigation pending against the Company with respect to United Microelectronics Corporation (“UMC”). As of December 31, 2001, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under these debt obligations are aware of this litigation, and they have not accelerated any amounts under these obligations.

Future minimum principal payments under the Company’s bond agreement as of December 31, 2001 are as follows:

Year		Amounts	Amounts
2002� � � � � � � � � � � � � � � 2003� � � � � � � � � � � � � � � 2004� � � � � � � � � � � � � � � 2005� � � � � � � � � � � � � � �		NT$ US$ (Note 3) 429,999 12,286 859,998 24,571 859,998 24,571 850,005 24,286
		3,000,000	85,714

12. Long-Term Bank Loans

	December 31
2000 NT$ 7,000,000 — 7,000,000 —	2001
	NT$ 7,000,000 1,650,000 8,650,000 1,272,727	US$ (Note 3) 200,000 47,143 247,143 36,364
7,000,000	7,377,273	210,779

The loan agreements require, among other things, the maintenance of specific financial ratios, including current ratio, shareholders’ equity ratio and interest coverage ratio, which are tested on both a semi-annual and annual basis. As of December 31, 2001, management believes that the Company was in compliance with the financial and other covenants in the loan agreements. Each of the loan agreements contains a cross default provision whereby an event of default under the other loan or the Company’s five-year domestic secured bonds could trigger an event of default under the loan and could result in the entire amount of principal and interest under the loan being accelerated and immediately due and payable. The event of default under the loan agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability and any provisional injunction or attachment which involves a disputed amount of more than NT$1,000 million (US$29 million). As disclosed in Note 20c, there is a potential material adverse litigation

165

pending against the Company with respect to UMC. As of December 31, 2001, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under the debt obligations are aware of this litigation, and they have not accelerated any amounts under the obligations.

The details of assets pledged as collateral are shown in Note 18.

Future minimum principal payments under the Company’s loan agreements as of December 31, 2001 are as follows:

Year		Amounts
2002� � � � � � � � � � � � � � � 2003� � � � � � � � � � � � � � � 2004� � � � � � � � � � � � � � � 2005� � � � � � � � � � � � � � � 2006 and thereafter � � � � � � � � � � �		NT$ 1,272,727 1,685,227 1,685,227 1,685,227 2,321,592	US$ (Note 3) 36,364 48,149 48,149 48,149 66,332
		8,650,000	247,143

13. Pension Plan

SiS has a pension plan for all regular employees, which provides benefits based on length of service and average monthly salary for the final six months in service. SiS makes monthly contributions, equal to 2% of salaries, to a pension fund that is administered by a pension fund monitoring committee and deposited in the committee’s name in the Central Trust of China.

Certain pension information is as follows:

	Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31
1999 NT$ 17,154 3,372 (2,266) 127		2000 NT$ 27,751 4,780 (3,133) 447			2001
					NT$ 30,573 7,226 (4,268) 447	US$ (Note 3) 874 206 (122) 13
		29,845	33,978 December 31			971
				2001
				NT$ — (57,074) (57,074) (90,777) (147,851) 85,716		US$ (Note 3) — (1,631) (1,631) (2,594) (4,225) 2,449

	(58,797)			(62,135)		(1,776)

166

December 31

	December 31	December 31	December 31

Unrecognised net transition obligation � � � � � Unrecognised net loss (gain) � � � � � � � Accrued pension cost � � � � � � � � c. Actuarial assumptions: Discount rates used in determining present values � Future salary increase rate � � � � � � � Expected rate of return on plan assets � � � � d. Contributions to pension fund e. Payments from pension fund � � � � � � �	2000 NT$ 8,481 7,857	2001
		NT$ 8,034 (1,171)	US$ (Note 3) 230 (33)
	(42,459) 6.0% 7.0% 6.0% 16,853 —	(55,272) 5.0% 5.0% 5.0% 21,165 —	(1,579) 5.0% 5.0% 5.0% 605 —

SiS-USA has also established a 401(k) plan (the Plan) that is available to all employees. Under the Plan, employees may defer portions of their salaries as a contribution to the Plan. SiS-USA provided contributions of US$21 and US$12 respectively, for the years ended December 31, 2000 and 2001, based upon a percentage of salaries.

14. Shareholders’ Equity

Capital surplus, pursuant to ROC Company Law, can only be used to offset a deficit or be transferred to capital (as a stock dividend). Such transfers from capital surplus to capital (as a stock dividend) are limited to the following: (i) donations (donated capital); (ii) the excess of the issue price over the par value of capital stock issued; (iii) the excess of the sale price over the par value of treasury stock sold; and (iv) the excess of the issue price over the par value of shares issued in a business combination.

SiS’s Articles of Incorporation provides that the following shall be appropriated from the annual net income after deducting any deficit and 10% legal reserve:

a. 10% as a bonus to employees,
b. The remainder is appropriated according to the shareholders’ resolution.

These appropriations are made by shareholder resolution at the annual meeting occurring in the following year and given effect in the financial statements of that year.

Dividends are distributed in cash and/or in the form of stock. Since the Company is in a capital-intensive industry, the Articles of Incorporation of the Company provide that the distribution of profits shall be made preferably by way of stock dividend. The total of cash dividend paid (in any given year) shall not exceed 20% of total dividends paid and/or distributed.

The ROC Company Law provides that the aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the SiS’s outstanding capital stock. Such reserve can only be used to offset a deficit; also, when the reserve has reached 50% of the aggregate par value of the SiS’s outstanding capital stock, up to 50% thereof can be distributed as stock dividend.

Pursuant to existing regulations promulgated by the Securities and Futures Commission (SFC), a special reserve equivalent to the debit balance of any account shown in the shareholders’ equity section of the balance sheets, other than the deficit, shall be made from unappropriated retained earnings. The special reserve shall be adjusted accordingly based on the debit balance of such accounts as at year-end.

The Integrated Income Tax System that took effect on January 1, 1998 provides that resident individual shareholders are allowed a tax credit for the income tax paid by the Company on earnings generated from the effective date. An Imputation Credit Account (ICA) is maintained by the Company to monitor income tax actually paid by or withheld from the Company and the tax credit allocated to each shareholder. The maximum credit available for allocation to each resident shareholder cannot exceed the balance shown in the ICA on the date of distribution of dividends.

167

In 2001, the Company adopted a 2001 Employee Stock Option plan (“the Plan”). The Plan reserves 30 million units of option, each representing 1 share of common stock, with a total of 30 million shares for issuance. The options under the Plan generally vest over a period from two years after the date of grant at a certain percentage, and can be exercised within five years from two years after the date of grant. As of December 31, 2001, none of the options had been granted.

On December 14, 2001, the Board of Directors approved the planned issuance of common shares in the form of American Depositary Shares (ADS) by the issuance of new shares of up to 250 million shares along with existing shares of up to 30 million shares from current shareholders. As of March 8, 2002, the Company has already obtained ROC SFC’s approval.

On December 14, 2001, the Board of Directors also approved the planned issuance of European convertible Bonds (ECB) amounting to US$150,000. The ECB is expected to be issued and listed on the London or Luxembourg Stock Exchange. As of March 8, 2002, the Company has already obtained ROC SFC’s approval.

15. Treasury Stock

In 2000, SiS purchased 10.7 million shares of its own outstanding capital stock in the stock market for the purpose of subsequently transferring or selling those shares to employees. Those shares have been completely transferred to employees on July 20, 2001 at a price of NT$39.5 per share.

The maximum number of treasury shares and the maximum balance that SiS had during the year ended December 31, 2001 were 10.7 million shares and NT$390,501 (US$11,157), respectively. SiS was in compliance with the following SFC regulation.

According to the SFC regulation, a company may acquire no more than 10% of the total issued shares of its own capital stock. While held by the Company, the redeemed shares are not available for pledge and cannot be voted. In addition, the aggregate acquisition cost cannot exceed the combined balance of the retained earnings and specific capital surplus.

16. Income Tax

a. Income tax benefit is summarized as follows:

	Year Ended December 31	Year Ended December 31
1999 NT$ (118,226) 268,147 (18,300)	2000 NT$ (153) 643,960 18,453	2001
		NT$ (335) 476,185 2,630	US$ (Note 3) (9) 13,605 75
131,621	662,260	478,480	13,671

168

b. Reconciliation between income tax calculated on pretax financial statement income based on the statutory tax rate is as follows:

	Year Ended December 31	Year Ended December 31
1999 NT$ (359,578) 158,085 (32,087) — 5,869 — 92,701 318,528 (33,597) (18,300)	2000 NT$ 177,729 — (153) 181,225 (27,867) — — 1,849,603 (1,536,730) 18,453	2001
		NT$ 271,783 — (335) 11,059 3,393 79,284 — 651,205 (540,539) 2,630	US$ (Note 3) 7,765 — (9) 316 97 2,265 — 18,606 (15,444) 75
131,621	662,260	478,480	13,671

c. Deferred income tax assets and liabilities as of December 31, 2000 and 2001 are as follows:

										December 31
									2000	2001
									NT$	NT$	US$
											(Note 3)
Current:
Tax credit on R&D expenditures			�	�	�	�	�	�	21,915	68,215	1,949
Tax credit on machinery and equipment					�	�	�	�	5,926	—	—
Temporary differences:
Provision for inventory		�	�	�	�	�	�	�	42,000	56,275	1,608
Allowance for sales returns			�	�	�	�	�	�	7,865	12,750	364
Allowance for doubtful accounts				�	�	�	�	�	7,324	11,180	319
Unrealized exchange	loss�		�	�	�	�	�	�	(4,745)	(10,894)	(311)
Accruals and others	�	�	�	�	�	�	�	�	3,045	25,741	735
Loss carryforwards�	�	�	�	�	�	�	�	�	5,746	10,586	303
									89,706	173,853	4,967
Valuation allowance	�	�	�	�	�	�	�	�	—	(68,215)	(1,949)
									89,076	105,638	3,018

169

	December 31
2000 NT$ 397,192 1,971,722 317,137 (55,860) 11,165 31 2,641,387 (1,570,327)	2001
	NT$ 816,748 2,162,997 801,598 (228,905) 13,956 7,514 3,573,908 (2,042,651)	US$ (Note 3) 23,335 61,800 22,903 (6,540) 399 215 102,112 (58,362)
1,071,060	1,531,257	43,750

d. The related information under the Integrated Income Tax System is as follows:

Shareholders’ imputed tax credit � � � � � �		December 31
	2000	2001
	NT$ 39	NT$ US$ (Note 3) 256 7

The imputation credit allocated to each shareholder is based on the balance of the ICA on the date of distribution of dividend. Thus, the tax credit ratio applicable on the date of the distribution may differ from the tax credit ratio as of December 31, 1999, which was 4.32%. There was no actual creditable ratio in 2000 and 2001 because of the Company reported deficits in both years.

e. As of December 31, 2001, the unused tax credits, mainly pertaining to investment in machinery and equipment, R&D expenditures and unused loss carryforwards amounted to NT$3,047,960 (US$87,085) and NT$801,598 (US$22,903), respectively, which will expire from 2002 to 2006.

The effective tax rates for deferred income tax in 2000 and 2001 were 20% and 25%, respectively.

f. The income of SiS attributable to the following projects and services is exempt from income tax:

Expansion of first manufacturing plant in 1998 � � � � � Expansion of first manufacturing plant in 1999 � � � � � Expansion of first manufacturing plant in 2000 � � � � �	Tax-Exemption Period
	� 1998 to 2001 � 2000 to 2003 � 2002 to 2005

Income tax returns through 1997 have been examined and cleared by the tax authorities.

17. Related Party Transactions

a. The Company engaged in business transactions with the following related parties:
i. Orient Semiconductor Electronics (OSE): its chairman is the spouse of the Company’s chairman and is also a director of the Company.
ii. Consolidated Marketing Corporation (CMC): supervisor of the Company.
iii. Hsin-Ron Duh: daughter of the Company’s chairman.

170

b. The significant transactions with these related parties, other than those disclosed in other notes, were summarized as follows:

For the year OSE Sales � � � � � � � � � Subcontracted assembly and test � � Rental expense � � � � � � CMC Sales � � � � � � � � � At end of year OSE Other receivables — dividend income � � Long-term investments � � � � � Accounts payable � � � � � �		1999 NT$ 231 1,196,267 5,250 613		2000 NT$ — 837,293 — 1,246 — — 186,230		2001
						NT$ US$ (Note 3) — — 1,277,044 36,487 — — — — 12,600 360 1,035,000 29,571 57,834 1,653

SiS acquired 90 million shares of non-voting OSE preferred stock, out of 150 million shares sold, on September 21, 2001 for NT$1,035,000 (US$29,571) or NT$11.50 per share. The OSE preferred stock pays cumulative dividends at the rate of 5.60% and has a mandatory one-for-one conversion feature into common shares of OSE at the end of the third year. The preferred shares have no quoted market price; the OSE common shares had quoted market prices of NT$6.05 on September 21, 2001 and NT$12.00 on December 31, 2001. SiS recognised dividend income of NT$12,600 (US$360) as non-operating income for the year ended December 31, 2001.

In August 2000, the Company also purchased a parcel of land in Hsinchu, ROC for the new facilities for research and development activities. This parcel of land is zoned as farmland and, as required by regulation in Taiwan, must be owned by a natural person. To comply with this regulation, the parcel was registered under the name of Hsin-Ron Duh. The Company paid the purchase price of the parcel on behalf of Ms. Duh, registered it in her name and obtained a mortgage on the property. Pursuant to an agreement between the Company and Ms. Duh, Ms. Duh has granted the Company unrestricted usage rights and has agreed to transfer the registered title to the Company when the land is no longer zoned as farmland and the Company is responsible for all taxes and expenses incurred for the Company’s usage of the land.

The price and payment terms for subcontract expenditures to OSE are the same as those from other suppliers.

The Company also paid rental expenses to OSE on certain equipment, qualifying as an operating lease, based on a certain percentage markup on the depreciation expenses.

18. Pledged or Mortgaged Assets

The following assets are pledged or mortgaged as collateral for long-term bank loans, bonds payable, cooperative research plan security deposit and customs duties:

Pledged time deposits � � � � � � � � � � Property, plant and equipment — net � � � � � �	2000		2001
	NT$ 4,400 14,216,604		NT$ 4,100 14,641,326	US$ (Note 3) 117 418,324
	14,221,004		14,645,426	418,441

19. Long-Term Leases

SiS leases the site of its manufacturing plant from the Hsinchu Science-Based Industrial Park Administration under agreements which will expire on various dates from July 2014 to October 2019 but are renewable upon expiration. SiS also leases certain equipment under capital leases that expire in October 2003. There are provisions in the leases that provide for a bargain purchase option upon the expiration of the leases.

171

SiS-USA occupies its principal facility under a non-cancelable operating lease agreement that expires in March 2004 while SiS-HK leases land and buildings that expires under leases that expire in 2002.

As of December 31, 2001, minimum lease payments under all leases were as follows:

Year	Capital Leases	Capital Leases	Capital Leases	Operating Leases	Operating Leases
2002 � � � � � � � � � � 2003 � � � � � � � � � � 2004 � � � � � � � � � � 2005 � � � � � � � � � � 2006 � � � � � � � � � � 2007 and thereafter � � � � � � �	NT$ 113,578 37,943 — — — —		US$ (Note 3) 3,245 1,084 — — — —	NT$ 16,723 16,442 11,913 10,403 10,403 85,178	US$ (Note 3) 478 470 340 297 297 2,434
Total minimum lease payments � � � � Less: Amount representing interest � � � � Present value of minimum lease payments � � Less: Current portion � � � � � � � Long-term capital lease obligations � � � �	151,521 (10,515) 141,006 (110,939)		4,329	151,062	4,316
		) )	(300) 4,029 (3,170)
	141,006 (110,939
	30,067		859

The total depreciation expense of the equipment under capital leases was NT$4,634, NT$51,921 and NT$121,072 (US$3,459) for the years ended December 31, 1999, 2000 and 2001, respectively. The total rental expense under operating leases were NT$4,593, NT$27,076 and NT$25,882 (US$739) for the years ended December 31, 1999, 2000 and 2001, respectively.

20. Commitments and Contingencies

Commitments and contingencies as of December 31, 2001, except those disclosed in other notes, were as follows:

a. The remaining unbilled amount of construction contracts related to the 8-inch wafer fabrication plants, ultra pure water, evaporator water system and clean room is NT$332,694 (US$9,506). The Company also entered into an agreement relating to the construction of an R&D building which has a remaining unbilled amount of NT$385,777 (US$11,022).
b. Unused letters of credit for the Company aggregate approximately US$7,575, ¥133,800, SEK 60, and DEM 900.
c. In January 2001, United Microelectronics Corporation, together with its affiliates UMC Group USA and United Foundry Service, Inc., collectively referred to as UMC, filed a complaint against the Company with the U.S. International Trade Commission, or ITC, to bar the Company from importing or selling products into the United States that UMC asserts infringe two U.S. patents nos. 6,117,345 and 5,559,352, referred to as the ‘345 and ‘352 patents, respectively. UMC also requested a permanent cease and desist order and any other penalties the ITC deems appropriate. The ITC commenced an investigation in February 2001 based on UMC’s complaint. Evidentiary hearings on the merits of UMC’s claims were held before an ITC administrative law judge in late 2001. The Company asserted defenses including non-infringement, patent invalidity and the “no domestic industry” defense. In addition, the administrative law judge was asked to determine whether alternative processes that the Company developed infringe the patents. On May 6, 2002, the administrative law judge issued his initial determination in the form of a recommendation to the ITC. The administrative law judge found that both the ‘345 patent and the ‘352 patent were invalid. In addition, the administrative law judge found that even if the ‘345 patent and ‘352 patent were valid, the ‘352 patent was not infringed and that an alternative process technology that the Company developed would not infringe the ‘345 patent. The parties may petition the ITC for review of the initial determination made by the administrative law judge. The expected date for the final determination by the ITC in the investigation is September 6, 2002. If the ITC does not follow the administrative law judge’s initial determination and UMC were to prevail in the ITC proceeding, the ITC has the authority to issue an exclusion order restricting importation into the United States of products covered by that exclusion order. The ITC does not have the authority to award monetary damages.

172

and misappropriated of trade secrets, engaged in unfair competition in violation of federal and state law, breached non-disclosure agreements, intentionally interfered with plaintiffs’ contracts with certain of its former employees, and been unjustly enriched at plaintiffs’ expense. The Company answered the complaint, disputing plaintiffs’ claims and raising various defenses including non-infringement and invalidity of the ‘345 patent and the ‘701 patent. Discovery in the matter is ongoing, and the parties are awaiting the results of a claim construction hearing in April 2002 for the ‘701 patent. The ‘345 patent claim has been stayed pending resolution of the ITC proceeding described above. No trial date has been set in the litigation.

While the Company believes that it has presented meritorious defenses, due to the nature of the ITC proceeding and the litigation with UMC and because the litigation is still in the pre-trial stage, management cannot estimate the effect of the proceedings, and the total expenses, or the possible loss, if any, that may ultimately be incurred in connection with UMC’s allegations.

Currently, the Company is reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, and the Syndia Corporation, claiming that Company technologies infringe patents held by them. During 2001, the Company held meetings with National Semiconductor in which it discussed its technology and the patents asserted by them and the reasons why it believes that its technology does not infringe patents asserted by them.

d. The Company has entered into various license agreements with third parties. The future committed cash payments for license fees over the next five years are as follows at December 31, 2001.

Year		Amounts
2002 � � � � � � � � � � � � � 2003 � � � � � � � � � � � � � 2004 � � � � � � � � � � � � � 2005 � � � � � � � � � � � � � 2006 and thereafter � � � � � � � � � �		NT$ 856,275 506,775 524,250 541,725 349,500	US$ (Note 3) 24,465 14,479 14,979 15,478 9,986
		2,778,525	79,387

Of the above amount, NT$664,050 (US$18,973) relating to 2001 has been accrued in the accompanying financial statements. In addition, the Company also pays per-unit royalties on certain products.

e. The Company’s principal licensing agreements are with three parties: International Business Machines Corporation (“IBM”), Toshiba Corporation (“Toshiba”) and Intel Corporation (“Intel”).
(1) IBM. The license with IBM is a non-exclusive, worldwide cross-license covering licensed patents in existence on the date of the agreement. The IBM license provides for payment by the Company of a fixed non-refundable amount. The Company has assigned no value to its cross-license of Company patents to IBM. The cost to the Company of the IBM license has been capitalized as an intangible asset, which is being amortised over the term of the agreement. The amortisation cost is being included in research and development costs up to the time the Company is ready to mass produce the realized products developed from the licensed IBM patents. Thereafter, amortisation expenses will be included in cost of sales.
(2) Toshiba. The license with Toshiba covers certain Toshiba CMOS technology. For certain Toshiba CMOS technology, the company is paying a fixed, non-refundable amount. The Company has assigned no value for its cross-license of Company patents to Toshiba. The Company is capitalizing the fixed amount it has paid Toshiba to date, rather than the entire fixed amount due for the license as the Company has not yet received the related technologies associated with the license and will amortise the paid amounts over the license term when the technologies have been received. As with the IBM agreement, the Company’s amortisation of the fixed portion of the Toshiba license will be included in the research and development costs until the Company’s related products are ready for mass production. Thereafter, amortisation costs will be included in cost of sales.

The Toshiba license also requires the Company to pay variable royalty fees based on the Company’s sales of products using certain Toshiba CMOS technologies. As of December 31, 2001, there was no obligation to pay any variable fees. The variable royalties will be expensed as marketing and sales expenses when the Company sells products using the Toshiba CMOS technologies.

173

The Toshiba license also provides that Toshiba will provide the Company with technical assistance in order that the Company may acquire reasonable expertise with respect to certain technical information relating to the licensed Toshiba CMOS technologies. The amounts that will be paid by the Company in consideration for this technical assistance will be capitalized and amortised, with such amortisation to be charged to research and development expense. To date, the Company has not received this technical assistance, and has not paid any of the technical assistance fees as of December 31, 2001.

(3) Intel. The Company’s licenses with Intel are also non-exclusive, worldwide cross-licenses for certain Pentium technology. For these licenses, the Company is paying variable royalty fees based on the Company’s sales of products using Intel’s technology. These royalties are expensed as marketing and sales expenses as they are incurred. The Company has assigned no value for its cross-license of Company patents to Intel.
f. On February 18, 2002, the Company agreed a settlement amount of US$1,600 for an alleged patent infringement claim by a third party existing at December 31, 2001. The Company has accrued this liability as of December 31, 2001 as indemnity expense as a component of non-operating expenses in the accompanying 2001 consolidated statement of income. (See Note 10).

21. Financial Instruments

The Company had entered into forward contracts in 1999, 2000 and 2001 to hedge its exposures to fluctuations on foreign currency rates on its foreign currency-denominated receivables or payables. The strategy is to hedge most of the market price risks.

The following are information on forward exchange contracts:

a. Open forward exchange contracts as of December 31, 1999, 2000 and 2001:

Year 1999 � � 2000 � � 2001 � �	Contract Sell Buy Buy Sell Buy	Currency US$ US$ US$ US$ EUR	Total Contract Amount US$15,100 US$ 6,538 US$ 7,200 US$40,000 EUR 9,000	Fair Value NT$ 474,123 205,484 251,921 1,399,120 277,967	Maturity January 2000 to February 2000 January 2000 January 2001 to February 2001 May 2002 March 2002	Total Contracted Forward Amount
						NT$ 476,000 206,674 235,074 1,378,602 282,915

Receivables of NT$733 and NT$2,926 and a payable of NT$23,662 (US$676) as of December 31, 1999, 2000 and 2001, respectively, on open forward exchange contracts are included under current assets or liabilities.

Net exchange gains or losses derived from settled forward exchange contracts for the years ended December 31, 1999, 2000 and 2001 were a gain of NT$376 and losses of NT$18,701 and NT$40,308 (US$1,152), respectively.

b. Transaction risks
1) Credit risk . The banks with which the Company has entered into the above contracts are reputable and, therefore, management believes that the Company is not exposed to significant credit risks arising from probable default by such counter parties.
2) Market price risk . The Company is exposed to fluctuations on currency exchange rates on foreign currency-denominated receivables or payables.
3) Liquidity and cash flow . The net cash requirement on forward contracts is the difference between the contract forward rate and the spot rate at settlement dates. Management does not believe that such requirements are significant.

174

c. Fair value of financial instruments

December 31, 2000 Non-derivative financial instruments Carrying Value Fair Value NT$ NT$ Assets Cash � � � � � � 2,928,185 2,928,185 Pledge time deposits � � 4,400 4,400 Short-term investments � � 1,930,451 1,945,321 Notes receivable � � � 1,211,511 1,211,511 Accounts receivable � � � 1,927,972 1,927,972 Long-term investments � � 583,765 766,160 Refundable deposits � � � 10,748 10,748 Liabilities Short-term bank loans � � 2,050,000 2,050,000 Notes and accounts payable � 951,579 951,579 Accounts payable to related parties � � � � � 186,230 186,230 Payable for properties � � 2,605,575 2,605,575 License fees and royalty payable (including current portion) � � � � � 198,447 188,244 Bonds payable (including current portion) � � � 3,000,000 3,000,000 Long-term bank loans (including current portion) � 7,000,000 7,000,000 Obligation under capital lease (including current portion) � 240,947 240,947 Derivative financial instruments Forward exchange contracts — sell � � � � � — — Forward exchange contracts — buy � � � � � 235,074 251,921	December 31, 2001	December 31, 2001
	Carrying Value NT$ US$ (Note 3) 2,962,996 84,657 4,100 117 — — 361,407 10,326 1,898,784 54,251 1,663,732 47,535 11,603 331 2,204,630 62,989 909,243 25,978 57,834 1,653 1,159,905 33,140 919,513 26,272 3,000,000 85,714 8,650,000 247,143 141,006 4,029 1,378,602 39,389 282,915 8,083	Fair Value
		NT$ US$ (Note 3) 2,962,996 84,657 4,100 117 — — 361,407 10,326 1,898,784 54,251 1,708,716 48,820 11,603 331 2,204,630 62,989 909,243 25,978 57,834 1,653 1,159,905 33,140 833,121 23,803 3,000,000 85,714 8,650,000 247,143 141,006 4,029 1,399,120 39,975 277,967 7,942

The methods and assumptions applied in estimating fair value were as follows:

1) Short-term financial instruments — carrying values.
2) Short-term investments — market values.
3) Long-term investments — market value for listed companies and net equity value for others.
4) Refundable deposits — carrying values.
5) Long-term liabilities — Fair values are their carrying values as they use floating interest rates. Fair value of license fees and royalty payable is based on future stated payments discounted at interest rate of similar long-term liabilities.
6) Derivative financial instruments — based on the quotations from bank.

Only the fair values of certain non-derivative financial instruments are disclosed above. Accordingly, the sum of the fair values of the financial instruments listed above is not equal to the fair value of the Company.

175

22. Segment Financial Information

Except for the following disclosures on foreign market sales and major customers, the Company has determined that it has only one reportable segment, engaged in one industry, the design, manufacture and sale of integrated circuits.

a. Foreign market sales

Geographic Area East Asia (Hong Kong and China) � � Northeast Asia (Japan and Korea) � � Europe and America � � � � � Southeast Asia � � � � � � �				Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31
		1999 NT$ 5,256,856 69,932 55,607 16,072 5,398,467		2000 NT$ 4,451,136 19,903 29,649 14,531 4,515,219		2001
						NT$ 5,011,119 28,345 12,545 6,541 5,058,550	US$ (Note 3) 143,175 810 358 187 144,530

b. Major customers

	Year Ended December 31	Year Ended December 31
1999 Amount % NT$ 4,728,578 44 826,697 8 — —	2000 Amount % NT$ 3,784,438 48 467,874 6 3,025 —	2001
Amount NT$ 4,728,578 826,697 —	Amount NT$ 3,784,438 467,874 3,025	Amount NT$ US$ (Note 3) 4,167,569 119,073 1,084,267 30,979 1,010,871 28,882	%
			42 11 10

176

SILICON INTEGRATED SYSTEMS CORP.

BALANCE SHEETS (Unaudited) March 31, 2001 and 2002 (Unconsolidated)

ASSETS CURRENT ASSETS Cash � � � � � � � � � � � � � � � Pledged time deposits (Note 21) � � � � � � � � Short-term investments (Notes 2 and 4) � � � � � � Notes receivable — net of allowance for doubtful accounts NT$9,000 in 2002 (Note 2) � � � � � � � � � Accounts receivable — net (Notes 2, 5 and 20) � � � � Inventories — net (Notes 2 and 6) � � � � � � � Deferred income tax assets (Notes 2 and 18) � � � � � Prepaid expenses and other current assets (Notes 5 and 20) � Total Current Assets � � � � � � � � � � � LONG-TERM INVESTMENTS (Notes 2, 7 and 20)� � � � PROPERTY, PLANT AND EQUIPMENT (Notes 2, 8, 21 and 22) Cost Land � � � � � � � � � � � � � � Buildings and auxiliary equipment � � � � � � � Machinery and equipment � � � � � � � � � Furniture and fixtures � � � � � � � � � � Transportation equipment � � � � � � � � � Equipment under capital lease � � � � � � � � Total cost � � � � � � � � � � � � � Accumulated depreciation� � � � � � � � � � Construction in progress and prepayment for equipment � � Net Property, Plant and Equipment � � � � � � � INTANGIBLE ASSETS — NET (Notes 2 and 9) � � � � OTHER ASSETS Deferred income tax assets (Notes 2 and 18) � � � � � Land held for future construction (Note 20) � � � � � Refundable deposits � � � � � � � � � � � Total Other Assets � � � � � � � � � � � TOTAL ASSETS � � � � � � � � � � � �	2001	2002	2002
	NT$ NT$ US$ (Note 3) (Unaudited) (In Thousands, Except Par Value) 1,477,719 2,298,232 65,664 4,400 4,100 117 1,178,355 — — 1,021,368 298,653 8,533 2,898,123 3,326,679 95,047 2,163,520 3,731,325 106,609 67,888 117,486 3,357 149,827 396,502 11,329 8,961,200 10,172,977 290,656 595,889 1,690,567 48,302 439,671 439,671 12,562 1,446,808 1,522,350 43,496 20,525,754 24,607,810 703,080 99,724 113,222 3,235 6,168 6,168 176 335,702 335,702 9,592 22,853,827 27,024,923 772,141 (2,622,762) (6,482,814) (185,223) 2,404,256 571,527 16,329 22,635,321 21,113,636 603,247 1,262,850 1,654,086 47,260 1,085,649 1,506,432 43,041 79,024 79,024 2,258 10,748 11,728 335 1,175,421 1,597,184 45,634
	34,630,681	36,228,450	1,035,099

177

SILICON INTEGRATED SYSTEMS CORP.

BALANCE SHEETS — (Continued) (Unaudited) March 31, 2001 and 2002 (Unconsolidated)

LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES Short-term bank loans (Note 10) � � � � � � � � Notes and accounts payable � � � � � � � � � Accounts payable to related parties (Note 20)� � � � � Accrued expenses and other current liabilities (Notes 12, 20, 23 and 24) � � � � � � � � � � � � Payable for properties � � � � � � � � � � License fees and royalty payable — current (Notes 9 and 23) � Current portion of bonds, long-term bank loans and obligation under capital lease (Notes 2, 11, 13 and 22) � � � � Deferred intercompany profit (Note 2)� � � � � � � Total Current Liabilities � � � � � � � � � � LONG-TERM LIABILITIES Bonds payable — net of current portion (Notes 11 and 21) � Long-term bank loans — net of current portion (Notes 13 and 21) � � � � � � � � � � � Obligation under capital lease — net of current portion (Notes 2 and 22) � � � � � � � � � � � License fees and royalty payable — net of current portion (Notes 9 and 23) � � � � � � � � � � � Total Long-term Liabilities� � � � � � � � � � ACCRUED PENSION COST (Notes 2 and 14)� � � � � Total Liabilities � � � � � � � � � � � � SHAREHOLDERS’ EQUITY (Notes 2, 15, 16 and 17) Capital stock — NT$10 par value Authorized — 1,800,000 thousand shares Issued — 974,015 thousand shares in 2001 and 1,071,416 thousand shares in 2002 � � � � � � � � � Capital surplus � � � � � � � � � � � � Retained earnings: Appropriated as legal reserve � � � � � � � � Accumulated deficits � � � � � � � � � � Cumulative translation adjustments � � � � � � � Treasury stock (cost) — 10,689 thousand shares � � � � Total Shareholders’ Equity � � � � � � � � � TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY � � �	2001	2002	2002
	NT$ NT$ US$ (Note 3) (Unaudited) (In Thousands, Except Par Value) 2,050,000 2,704,163 77,262 907,888 966,567 27,616 100,271 4,781 137 440,217 843,488 24,100 1,752,979 658,745 18,821 270,479 485,364 13,868 112,486 2,440,182 69,719 1,566 1,280 37 5,635,886 8,104,570 231,560 3,000,000 2,140,002 61,143 7,000,000 7,171,023 204,886 130,050 10,081 288 658,825 524,250 14,979 10,788,875 9,845,356 281,296 46,016 59,512 1,700 16,470,777 18,009,438 514,556 9,740,149 10,714,164 306,119 8,682,482 7,740,182 221,148 525,835 314,911 8,998 (417,646) (582,244) (16,636) 19,585 31,999 914 (390,501) — — 18,159,904 18,219,012 520,543
	34,630,681	36,228,450	1,035,099

The accompanying notes are an integral part of the financial statements.

178

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF INCOME (Unaudited) For the Three Months Ended March 31, 2001 and 2002 (Unconsolidated)

NET REVENUE (Notes 2 and 20) � � � � � � � � COST OF REVENUE (Note 20) � � � � � � � � UNREALIZED INTERCOMPANY TRANSACTION — NET (Note 2) � � � � � � � � � � � � � GROSS PROFIT � � � � � � � � � � � � OPERATING EXPENSES (Note 20) Research and development (Note 2) � � � � � � � Marketing � � � � � � � � � � � � � General and administrative � � � � � � � � � Total Operating Expenses� � � � � � � � � � INCOME (LOSS) FROM OPERATIONS � � � � � � NON-OPERATING INCOME Dividends income (Note 20) � � � � � � � � � Foreign exchange gain — net (Note 2) � � � � � � Interest income � � � � � � � � � � � � Gain on disposal of short-term investments (Note 2) � � � Other� � � � � � � � � � � � � � � Total Non-Operating Income � � � � � � � � � NON-OPERATING EXPENSES Interest expense � � � � � � � � � � � � Factoring expense (Note 5) � � � � � � � � � Equity in net loss of investee companies (Notes 2 and 7) � � Total Non-Operating Expenses � � � � � � � � INCOME (LOSS) BEFORE INCOME TAX � � � � � � INCOME TAX BENEFIT (Notes 2 and 18) � � � � � � NET INCOME (LOSS)� � � � � � � � � � � Earnings (loss) per share (Note 19) Basic � � � � � � � � � � � � � � Diluted � � � � � � � � � � � � � � Shares used in earnings (loss) per share calculation Basic � � � � � � � � � � � � � � Diluted � � � � � � � � � � � � � �	2001	2002	2002	2002
	NT$ NT$ US$ (Note 3) (Unaudited) (In Thousands, Except Earnings (Loss) Per Share) 2,402,616 3,576,008 102,172 1,829,288 2,484,386 70,982 212 366 11 573,116 1,091,256 31,179 459,155 449,247 12,836 159,154 316,381 9,039 64,359 164,485 4,700 682,668 930,113 26,575 (109,552) 161,143 4,604 — 12,600 360 12,922 9,451 270 16,581 4,912 140 16,151 — — 3,057 817 24 48,711 27,780 794 140,176 161,058 4,602 — 1,768 50 5,705 369 11 145,881 163,195 4,663 (206,722) 25,728 735 — — —
	(206,722) (0.20) (0.20) 1,059,659 1,059,659		25,728 0.02 0.02 1,071,416 1,084,062	735 0.0007 0.0007 1,071,416 1,084,062

The accompanying notes are an integral part of the financial statements.

179

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF CASH FLOWS (Unaudited) For the Three Months Ended March 31, 2001 and 2002 (Unconsolidated)

CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)� � � � � � � � � � � � Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation � � � � � � � � � � � � Amortization of intangible assets � � � � � � � Net gain on disposal of property, plant and equipment � � Equity in net loss of investee companies � � � � � Unrealized intercompany transaction � � � � � � Deferred income taxes � � � � � � � � � � Accrued pension cost � � � � � � � � � � Changes in operating assets and liabilities: Decrease (increase) in: Notes receivable � � � � � � � � � � Accounts receivable � � � � � � � � � Inventories� � � � � � � � � � � � Prepaid expenses and other current assets� � � � Increase (decrease) in: Notes and accounts payable � � � � � � � Accounts payable to related parties � � � � � License fees and royalty payable � � � � � � Accrued expenses and other current liabilities � � � Net Cash Provided by (Used in) Operating Activities � � � CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of: Short-term investments� � � � � � � � � � Property, plant and equipment � � � � � � � � Acquisitions of: Long-term investments � � � � � � � � � � Property, plant and equipment � � � � � � � � Intangible assets � � � � � � � � � � � Increase in refundable deposits � � � � � � � � Net Cash Used in Investing Activities � � � � � � �	2001	2002
	NT$ NT$ (Unaudited) (In Thousands) (206,722) 25,728 817,914 1,020,866 88,223 132,928 — (5) 5,705 369 212 366 (216) — 3,557 4,240 190,143 62,754 (951,792) (1,413,091) (346,125) 63,902 33,241 221,021 (43,533) 57,996 (85,959) (53,053) (31,993) 90,101 (116,528) (26,509) (643,873) 187,613 752,096 — — 76 — (34,970) (1,302,025) (812,964) (173,884) (420,327) — (125) (723,813) (1,268,310)		US$ (Note 3) 735 29,168 3,798 — 11 10 — 121 1,793 (40,374) 1,826 6,315 1,657 (1,516) 2,574 (757) 5,361 — 2 (999) (23,228) (12,009) (4) (36,238)

180

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF CASH FLOWS — (Continued) (Unaudited) For the Three Months Ended March 31, 2001 and 2002 (Unconsolidated)

2001	2002
NT$ NT$ (Unaudited) (In Thousands) — 499,533 1,602 (29,718) 1,602 469,815 (1,366,084) (610,882) 2,843,803 2,909,114		US$ (Note 3) 14,272 (849) 13,423 (17,454) 83,118
1,477,719 175,892 37,872 1,666	2,298,232 211,444 — 88	65,664 6,041 — 3 8,909 14,319 23,228 12,009 — 12,009 69,719
449,429 852,596	311,804 501,160	8,909 14,319
1,302,025	812,964
936,734 (762,850)	420,327 —	12,009 —
173,884 112,486	420,327 2,440,182

The accompanying notes are an integral part of the financial statements.

181

SILICON INTEGRATED SYSTEMS CORP.

NOTES TO FINANCIAL STATEMENTS (Unaudited) (Unconsolidated) (Amounts are in Thousands of Dollars, Unless Specified Otherwise)

1. General

Silicon Integrated Systems Corp. (the “Company”) was incorporated on August 26, 1987 in the Republic of China (ROC) and its shares have been listed and traded on the Taiwan Stock Exchange since August 1, 1997.

The Company is engaged in the design, research, development and manufacturing of integrated circuits, including core logic chipsets, 3D graphic and connectivity chips for mainstream PC and networking applications, testing service, and limited related trading business.

2. Summary of Significant Accounting Policies

A. Unaudited Unconsolidated Financial Statements

The interim financial information contained herein is unaudited and unconsolidated in accordance to the Generally Accepted Accounting Principal in the Republic of China (“ROC GAAP”), but in the opinion of management, reflects all adjustments which are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. All adjustments are of normal, recurring nature. Results of operations for interim periods presented herein are not necessarily indicative of results of operations for the entire year.

The accounting for the subsidiaries are accounted for as investment under equity method (see Note 2H).

B. Use of Estimates

C. Concentration of Credit Risk

The following table summarizes the revenues from customers, all of which were third parties, in excess of 10% of total net revenues:

Company A � � � � � � � � � � � � � � B � � � � � � � � � � � � � �	2001 40% 21%	2002
		38% 18%

At March 31, 2001, company A accounted for 74% of notes and accounts receivable. As of March 31, 2002, companies A and B accounted for 64% and 15%of notes and accounts receivable, respectively. In addition, the Company also received a pledge of marketable securities as collateral for the above company A’s receivables.

Credit evaluation of the customer is performed and allowance for potential credit losses based on the past experience and overall aging is maintained.

182

D. Short-Term Investments

Short-term investments are carried at the lower of aggregate cost or market value. Costs of such investments sold are determined by the weighted-average method.

E. Revenue Recognition

Allowance for sales return and discounts are provided at the time of the recognition of the related revenues on the basis of experience and these provisions are deducted from sales.

F. Research and Development

Research and development (R&D) costs consist of expenditures incurred during the course of planned search and investigation aimed at the discovery of new knowledge that will be useful in developing new products or processes, or at significantly enhancing existing products or production processes as well as expenditures incurred for the design, testing of product alternatives or construction of prototypes. All expenditures related to research and development activities of the Company are charged to current income.

In addition, our R&D expense includes amortisation associated with license of process technology.

G. Inventories

H. Long-Term Investments

Investments in shares of stock of companies wherein the Company exercises significant influence on their operating and financial policy decisions are accounted for using the equity method. Under the equity method, the investment are initially carried at cost and subsequently adjusted for the proportionate equity of the Company in the net income or net loss of the investees.

The entire amount of the gains or losses on sales to majority owned subsidiaries are deferred until such gains or losses are realized through the subsequent sale of the related products to third parties. On the other hand, the gains or losses on the sales made by the subsidiaries to the Company are deferred by the Company to the extent of its equity interest in such subsidiaries until such gains or losses are realized also through the subsequent sale of the related products to unrelated parties.

Other stock investments are accounted for by the cost method. An allowance for decline in value is recognised as follows:

a. Listed stocks or stock traded over the counter: If the decline in market value is considered temporary, a credit is made to an allowance for decline in value with a corresponding debit to shareholders’ equity. The allowance is then debited for any subsequent recovery of the market value to the extent of the balance of the allowance. However, if the decline in value is considered irrecoverable, the allowance for decline in value is reversed and the debit to shareholders’ equity is charged to income.
b. Other than listed stocks or stocks traded over the counter: The decline in value is charged to current income only if the decline is irrecoverable.

183

The costs of investments sold are determined using the weighted-average method.

I. Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Major additions, renewals and betterments, and interest expenses incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease. The effective interest rate method is used to allocate each lease payment between principal and interest expense.

Upon sale or disposal of items of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to current income.

J. Intangible Assets

Intangible assets consist of software and licenses and are amortised using the straight-line method over 3 to 5 years.

K. Pension Costs

Net periodic pension costs are recorded on the basis of actuarial calculations and the unrecognised net transition obligation is amortised over 24 years.

L. Advertising Expenses

The Company expenses all advertising and promotional costs as incurred. Advertising expenses incurred for the three months ended March 31, 2001 and 2002 were NT$208 and NT$110 (US$3), respectively.

M. Income Tax

The Company uses the asset and liability method of accounting for income tax. Under this method, deferred income taxes are recognised for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. A valuation allowance is recognised if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. A deferred tax asset or liability should, according to the classification of its related asset or liability, be classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then it should be classified as current or non-current based on the expected reversal date of the temporary difference.

Any tax credit arising from investments in machinery, equipment and technology, and R & D expenditures are recognised currently.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Income tax, at a rate of 10%, on undistributed earnings are recorded as expense in the year when the shareholders approved the retention of the earnings.

N. Treasury Stock

The acquisition of the Company’s own shares (the “treasury stock”) is accounted for under the cost method. The cost method results in debiting the treasury stock account for the reacquisition cost and reporting this account as a deduction from shareholders’ equity account. If the treasury shares are reissued at a price in excess of the acquisition cost, the excess is credited to paid-in capital from treasury stock. If the treasury shares are reissued at less than acquisition cost, the deficiency is treated first as a reduction of any paid-in capital related to previous reissuances. If the balance in paid-in capital from treasury stock is insufficient to absorb the deficiency, the reminder is recorded as a reduction of retained earnings.

184

O. Forward Exchange Contracts

The premium or discount of the forward exchange contracts, recorded in New Taiwan dollars as assets and/or liabilities, is computed using the foreign currency amount of the contract multiplied by the difference between the contracted forward rate and the spot rates at the inception dates of the contract. The premium or discount is amortised using the straight-line method over the term of the forward contract with the amortisation charged to income.

P. Foreign-Currency Transactions

Foreign-currency transactions, other than derivative financial instruments, are recorded in New Taiwan Dollars at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan Dollars, or when foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheets dates, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulting differences are credited or charged to current income except those foreign currency denominated long-term investments where such differences are accounted for as translation adjustment under shareholders’ equity.

Q. Earnings (Loss) Per Share

ROC SFAS 24 “Earnings Per Share”, establishes standards for computing and presenting earnings per share. Basic earnings per share is calculated using the average number of common shares outstanding. Diluted earnings per share is calculated using the weighted average number of common and diluted common equivalent shares outstanding during the period, using the treasury stock method for options.

3. US Dollar Amounts

The Company maintains its accounts and expresses its financial statements in New Taiwan dollars. For convenience only, US dollar amounts presented in the accompanying financial statements have been translated from New Taiwan dollars at the noon buying rate in New York City for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York as of March 29, 2002, which was NT$35 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into US dollars at this or any other rate of exchange.

4. Short-Term Investments

Open-end fund � � � � � � � � � � � � � � European convertible bonds � � � � � � � � � � � Market values� � � � � � � � � � � � � � �	March 31, 2001	March 31, 2001
		NT$ 1,000,000 178,335
		1,178,335 1,196,254

The market values were based on net asset value of funds as of March 31, 2001 and the average closing price of the bonds in March.

185

5. Accounts Receivables — Net

Related parties � � � � � � � � � � � Third parties � � � � � � � � � � � � Allowances for: Doubtful accounts � � � � � � � � � � Sales returns and discounts � � � � � � � �				March 31
		2001 NT$ 25,439 3,006,107 81,423 52,000 2,872,684 2,898,123		2002
				NT$ 39,711 3,528,138 108,170 133,000 3,286,968 3,326,679	US$ (Note 3) 1,134 100,804 3,091 3,800 93,913 95,047

In September 2001, the Company entered into agreements to sell accounts receivable to factors without recourse. Accounts receivable due from factors as of March 31, 2002 was NT$259,454 (US$7,413)(shown in the balance sheet as part of “other current assets” account). The factors assess a finance charge that is reflected in non-operating expense as a factoring expense.

6. Inventories — Net

	March 31
2001 NT$ 609,357 1,310,475 432,688 2,352,520 189,000	2002
	NT$ 1,367,048 2,224,497 358,030 3,949,575 218,250	US$ (Note 3) 39,059 63,557 10,229 112,845 6,236
2,163,520	3,731,325	106,609

186

7. Long-Term Investments

	March 31
2001 Carrying Value % of Ownership NT$ 60,473 100.0 13,859 100.0 123,040 62.5 396,297 2.0 2,220 2.0 — — — —		2002
Carrying Value NT$ 60,473 13,859 123,040 396,297 2,220 — —	Carrying Value	Carrying Value US$ (Note 3) 1,227 422 3,711 11,323 63 29,571 1,985		% of Ownership
	NT$ 42,943 14,770 129,872 396,297 2,220 1,035,000 69,465			100.0 100.0 62.5 2.0 2.0 — —
595,889	1,690,567		48,302

The carrying values of equity-accounted investments and the related equity in net income or net loss for the three months ended March 31, 2001 and 2002 were based on unreviewed and reviewed financial statements, respectively. The equity in net income or loss is summarized as follows:

SiS-USA � � � � � � � � � � � � � SiS-HK � � � � � � � � � � � � � IVCF� � � � � � � � � � � � � �		Three Months Ended March 31	Three Months Ended March 31
		2001 NT$ (6,940) 1,514 (279)	2002
			NT$ US$ (Note 3) 213 6 (213) (6) (369) (11)
		(5,705)	(369) (11)

The average market values of VIS shares owned by the Company as of March 31, 2001 and 2002 were NT$784,623 and NT$691,526 (US$19,758), respectively.

8. Accumulated Depreciation

	March 31
2001 NT$ 188,507 2,288,687 48,328 3,538 93,702	2002
	NT$ 287,546 5,917,037 68,203 4,426 205,602	US$ (Note 3) 8,216 169,058 1,949 126 5,874
2,622,762	6,482,814	185,223

Capitalized interest expense was NT$37,872 for the three months ended March 31, 2001. The rate used in calculation of capitalization of interest was 6.12% for the three months ended March 31, 2001.

187

9. Intangible Assets — Net

	March 31	March 31
2001 NT$ 611,920 920,308 1,532,228 175,316 94,062	2002
	NT$ US$ (Note 3) 978,008 27,943 1,383,903 39,540 2,361,911 67,483 407,336 11,638 300,489 8,585
269,378 1,262,850	707,825 1,654,086	20,223 47,260

10. Short-Term Bank Loans

				March 31
			2001		2002
			NT$	NT$		US$
						(Note 3)
Working capital loans: 2001 — repayable in December 2001,
interest at floating rates, 5.95%-7.10%; 2002 — repayable in
February 2003, interest at floating rates, 3.50%-6.22%	�	�	2,050,000	2,350,000		67,143
L/C with banks: denominated in foreign currencies, (¥461,889
and EUR7,610), due in 90-180 days after acceptance of	the
L/C, interest at 0.63%-4.33% � � � � � �	�	�	—	354,163		10,119
			2,050,000	2,704,163		77,262

11. Bonds Payable

	March 31	March 31
2001 NT$ 3,000,000 —	2002
	NT$ US$ (Note 3) 3,000,000 85,714 859,998 24,571
3,000,000	2,140,002	61,143

The bond agreement requires, among other things, the maintenance of specific financial ratios, including current ratio, shareholders equity ratio and interest coverage ratio, which are tested on both a semi-annual and annual basis. As of March 31, 2002, management believes that the Company was in compliance with the financial and other covenants in the bond agreement. It also contains a cross default provision whereby an event of default under either of the Company’s long-term bank loans could trigger an event of default under these bonds and could result in the entire amount of principal and interest under the bonds being accelerated and immediately due and payable. The event of default under the bond agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability. As disclosed in Note 23c, there is a potential material adverse litigation pending against the Company with respect to United Microelectronics Corporation (“UMC”). As of March 31, 2002, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under the debt obligations are aware of this litigation, and they have not accelerated any amounts under the obligations.

188

Future minimum principal payments under the Company’s bond agreement as of March 31, 2002 are as follows:

Year ended December 31,		Amounts	Amounts
2002� � � � � � � � � � � � � � � 2003� � � � � � � � � � � � � � � 2004� � � � � � � � � � � � � � � 2005� � � � � � � � � � � � � � � Less — current portion� � � � � � � � � � �		NT$ US$ (Note 3) 429,999 12,286 859,998 24,571 859,998 24,571 850,005 24,286 3,000,000 85,714 859,998 24,571
		2,140,002	61,143

12. Accrued Expenses and Other Current Liabilities

	March 31
2001 NT$ 9,507 135,637 — — 44,229 12,855 41,762 44,013 6,955 — 2,448 8,722 134,089	2002
	NT$ 124,439 112,061 97,697 55,920 52,685 42,122 32,126 28,112 14,538 10,309 5,371 4,582 263,526	US$ (Note 3) 3,555 3,202 2,791 1,598 1,505 1,204 918 803 415 295 154 131 7,529
440,217	843,488	24,100

13. Long-Term Bank Loans

								March 31
							2001		2002
							NT$	NT$		US$
										(Note 3)
Long-term secured syndicated loans: Repayable in semi-annual
installments of varying amounts commencing			from	June 2002
until June 2007; interest at a floating	rate,	6.4535% in 2001
and 3.8372% in 2002 � � �	�	�	�	�	�	�	7,000,000	7,000,000		200,000
Long-term secured syndicate loans: Repayable			in semi-annual
installments commencing from March	2003	until September
2006; interest at a floating rate of 4.4926%�			�	�	�	�	—	1,650,000		47,143
							7,000,000	8,650,000		247,143
Less — current portion� � � �	�	�	�	�	�	�	—	1,478,977		42,257
							7,000,000	7,171,023		204,886

189

whereby an event of default under the other loan or the Company’s five-year domestic secured bonds could trigger an event of default under the loan and could result in the entire amount of principal and interest under the loan being accelerated and immediately due and payable. The event of default under the loan agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability and any provisional injunction or attachment which involves a disputed amount of more than NT$1,000 million (US$29 million). As disclosed in Note 23c, there is a potential material adverse litigation pending against the Company with respect to UMC. As of March 31, 2002, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under the debt obligations are aware of this litigation, and they have not accelerated any amounts under the obligations.

Future minimum principal payments under the Company’s loan agreements as of March 31, 2002 are as follows:

Year ended December 31,		Amounts
2002� � � � � � � � � � � � � � � 2003� � � � � � � � � � � � � � � 2004� � � � � � � � � � � � � � � 2005� � � � � � � � � � � � � � � 2006 and thereafter � � � � � � � � � � � Less — current portion� � � � � � � � � � �		NT$ 1,272,727 1,685,227 1,685,227 1,685,227 2,321,592 8,650,000 1,478,977	US$ (Note 3) 36,364 48,149 48,149 48,149 66,332 247,143 42,257
		7,171,023	204,886

14. Pension Plan

The Company has a pension plan for all regular employees, which provides benefits based on length of service and average monthly salary for the final six months in service. The Company makes monthly contributions, equal to 2% of salaries, to a pension fund that is administered by a pension fund monitoring committee and deposited in the committee’s name in the Central Trust of China.

Pension costs for the three months ended March 31, 2001 and 2002 were NT$8,495 and NT$9,674 (US$276), respectively, and the balances of the pension fund as of March 31, 2001 and 2002 were NT$66,568 and NT$91,150 (US$2,604), respectively.

15. Shareholders’ Equity

Capital surplus, pursuant to ROC Company Law, can only be used to offset a deficit or be transferred to capital (as a stock dividend). Such transfer from capital surplus to capital (as a stock dividend) are limited to the following: (i) donations (donated capital); (ii) the excess of the issue price over the par value of the capital stock issued; (iii) the excess of the sale price over the par value of treasury stock sold; and (iv) the excess of the issue price over the par value of shares issued in a business combination.

The Company’s Articles of Incorporation provides that the following shall be appropriated from the annual net income after deducting any deficit and 10% legal reserve:

a. 10% as a bonus to employees,
b. The remainder is appropriated according to the shareholders’ resolution.

These appropriations are made by shareholder resolution at the annual meeting occurring in the following year and given effect in the financial statements of that year.

The ROC Company Law provides that the aforementioned appropriation for legal reserve shall be made until the reserve equals the aggregate par value of the Company’s outstanding capital stock. Such reserve can only be used to offset a deficit; also, when the reserve has reached 50% of the aggregate par value of the Company’s outstanding capital stock, up to 50% thereof can be distributed as stock dividend.

190

On December 14, 2001, the Board of Directors approved the planned issuance of common shares in the form of American Depositary Shares (ADS) by the issuance of new shares of up to 250,000 thousand shares along with existing shares of up to 30,000 thousand shares from current shareholders. On March 27, 2002, the Board of Directors also approved an increase of ADS issuance of up to 7,500 thousand shares from existing shareholders which has not obtained SFC’s approval as of April 22, 2002.

On December 14, 2001, the Board of Directors approved the planned issuance of European convertible Bonds (ECB) amounting to US$150,000. The ECB is expected to be issued and listed on the London or Luxembourg Stock Exchange. As of April 22, 2002, the Company has already obtained ROC SFC’s approval.

16. Stock Option

In 2001, the Company adopted a 2001 Employee Stock Option plan (“the Plan”). The Plan reserves 30,000 thousand units of option, each representing 1 share of common stock, with a total of 30,000 thousand shares for issuance. The options under the Plan generally vest over a period from two years after the date of grant at a certain percentage, and can be exercised within five years from two years after the date of grant. As of April 22, 2002, 29,950 thousand units of the options has been granted with the exercise price of NT$45.8 per share.

A summary of the Company’s stock option activity and related information through March 31, 2002 is as follows:

Number authorized at December 28, 2001 � � Balance at December 31, 2001� � � � � Granted � � � � � � � � � � Exercise� � � � � � � � � � Cancelled � � � � � � � � � Balance at March 31, 2002 � � � � �	Available for Grant		Number of Outstanding Shares	Range of Exercise Price	Weighted Average Exercise Price
	30,000,000 30,000,000 (29,950,000) — —		— — 29,950,000 — —	NT$ — — 45.8 — —	NT$ — — 45.8 — —
	50,000		29,950,000

The following table summarizes information about stock options outstanding as of March 31, 2002:

Exercise Price NT$45.8 � � � � � � �	Options Outstanding	Options Outstanding	Options Outstanding	Options Exercisable	Options Exercisable
	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price	Number Exercisable and Vested	Weighted Average Exercise Price
	29,950,000	6.92	NT$ 45.8	—	NT$ —

191

17. Treasury Stock (Common Stock)

On July 20, 2001, the entire treasury stocks have been transferred to employees at a price of NT$39.5 per share.

18. Income Tax

a. The Company did not have current income tax payable for the periods ended March 31, 2001 and 2002.
b. Income tax benefit for the periods ended March 31, 2001 and 2002 consist of:

									Three	Months Ended March 31	Months Ended March 31
									2001		2002
									NT$	NT$	US$
											(Note 3)
Net change in deferred income tax			assets:
Tax credit on machinery and equipment					�	�	�	�	169,137	—	—
Tax credit on R&D expenditures			�	�	�	�	�	�	105,350	76,486	2,185
Loss carryforwards�	�	�	�	�	�	�	�	�	—	17,282	494
Temporary differences	�	�	�	�	�	�	�	�	155	(20,772)	(593)
Valuation allowance	�	�	�	�	�	�	�	�	(274,426)	(72,996)	(2,086)
Adjustments of income tax in prior			year	�	�	�	�	�	(216)	—	—
Income tax benefit �	�	�	�	�	�	�	�	�	—	—	—

c. Deferred income tax assets (liabilities) consist of the tax effects of the following:

	March 31
2001 NT$ 21,915 5,926 40,047 —	2002
	NT$ 68,215 — 117,486 (68,215)	US$ (Note 3) 1,949 — 3,357 (1,949)
67,888 502,542 2,140,859 317,137 (30,136) (1,844,753) 1,085,649	117,486	3,357 25,521 61,800 23,396 (7,229) (60,447) 43,041
	893,234 2,162,997 818,880 (253,032) (2,115,647)	25,521 61,800 23,396 (7,229 (60,447
	1,506,432

The effective tax rates used to determine the deferred income tax as of March 31, 2001 and 2002 were both 25%.

d. Integrated income tax information. The balances of the ICA (see Note 15) were both NT$256 (US$7) as of March 31, 2001 and 2002.

192

e. As of March 31, 2002, the unused tax credits, mainly pertaining to investment in machinery and equipment, R&D expenditures and unused loss carryforwards amounted to NT$3,124,446 (US$89,270) and NT$818,880 (US$23,396), respectively, which will expire from 2002 to 2007.

The income of the Company attributable to the following projects and services is exempt from income tax:

Expansion of first manufacturing plant in 1998 � � � � � Expansion of first manufacturing plant in 1999 � � � � � Expansion of first manufacturing plant in 2000 � � � � �	Tax-Exemption Period
	� 1998 to 2001 � 2000 to 2003 � 2002 to 2005

Income tax returns through 1997 have been examined and cleared by the tax authorities.

19. Earnings Per Share (EPS)

A reconciliation of numerator and denominator of basic and diluted earnings (loss) per share calculations is provided as follows:

Three Months Ended March 31	Three Months Ended March 31	Three Months Ended March 31
2001		2002
NT$ (206,722)	NT$ 25,728	US$ (Note 3) 735 1,071,416 12,646 1,084,062 0.0007 0.0007
1,059,659 —	1,071,416 12,646	1,071,416 12,646
1,059,659 (0.20) (0.20)	1,084,062 0.02 0.02

The number of shares outstanding has been retroactively adjusted in the calculation of the weighted average number of shares outstanding to reflect the effect of transfer of capital surplus into capital.

20. Related Party Transactions

a. The Company engaged in business transactions with the following related parties:
i. Orient Semiconductor Electronics (OSE): its chairman is the spouse of the Company’s chairman and is also a director of the Company.
ii. SiS-USA: a subsidiary
iii. SiS-HK: a subsidiary
iv. Hsin-Ron Duh: daughter of the Company’s chairman.

193

b. The significant transactions with these related parties, other than those disclosed in other notes, were summarized as follows:

For the period OSE Subcontracted assembly and test � � � � � Dividends income � � � � � � � � � SiS-USA Commission expense � � � � � � � � Technical service fee � � � � � � � � SiS-HK Sales � � � � � � � � � � � Commission expense � � � � � � � � At end of period OSE Dividends receivable � � � � � � � � Accounts payable � � � � � � � � � Accrued expense � � � � � � � � � SiS-USA Accounts payable � � � � � � � � � Accrued expenses � � � � � � � � � SiS-HK Accounts receivable � � � � � � � � Accrued expenses � � � � � � � � �		2001 NT$ 139,819 — 2,610 3,662 40,559 3,572 — 100,065 13 206 9,189 25,439 2,615		2002
				NT$ US$ (Note 3) 352,651 10,076 12,600 360 13,370 382 5,274 151 49,899 1,426 1,933 55 25,200 720 4,781 137 — — — — 16,554 473 39,711 1,134 1,487 42

The Company acquired 90,000 thousand shares of non-voting OSE preferred stock, out of 150,000 thousand shares sold, on September 21, 2001 for NT$1,035,000 or NT$11.50 per share. The OSE preferred stock pays cumulative dividend at 5.60% and has a mandatory one for one conversion feature into common stock of OSE at the end of the third year. The Company recognised dividend income of NT$12,600 (US$360) as non-operating income for the three months ended March 31, 2002.

In August 2000, the Company purchased a parcel of land in Hsinchu, ROC as the site for the new facilities for research and development activities. This parcel of land is zoned as farmland and, as required by regulation in Taiwan, must be owned by a natural person. To comply with this regulation, the parcel was registered under the name of Hsin-Ron Duh. The Company paid the purchase price of the parcel on behalf of Ms. Duh, registered it in her name and obtained a mortgage on the property. Pursuant to an agreement between the Company and Ms. Duh, Ms. Duh has granted the Company unrestricted usage rights and has agreed to transfer the registered title to the Company when the land is no longer zoned as farmland. The Company, also under the agreement, is responsible for all taxes and expenses incurred for the usage of the land.

Sales to related parties are based on normal sales prices and collection terms. The subcontracted assembly and test expense paid to OSE is based on normal payment terms. The Company authorized SiS-USA and SiS-HK to conduct sales orders and accounts receivables overseas and agreed to pay the commission expense based on the proportion to sales. Furthermore, the Company authorized SiS-USA to provide product warranty and to collect marketing information. The Company agreed to pay SiS-USA the technical service fee by month.

194

21. Pledged or Mortgaged Assets

The following assets are pledged or mortgaged as collateral for long-term loans, bonds payable, cooperative research plan security deposit and customs duties:

	March 31
2001 NT$ 4,400 13,643,221	2002
	NT$ 4,100 13,924,802	US$ (Note 3) 117 397,852
13,647,621	13,928,902	397,969

22. Long-Term Leases

The Company leases the site of its manufacturing plant from the Hsinchu Science-Based Industrial Park Administration under agreement which will expire on various dates from July 2014 to October 2019 but renewable upon expiration. Annual rentals, which are subject to adjustments, currently amount to NT$10,403 (US$297). The Company also leases certain equipment under capital leases that expire in October 2003. There are provisions in the leases that provide for a bargain purchase option upon the expiration of the leases.

As of March 31, 2002, minimum lease payments under all leases were as follows:

Year	Capital leases	Capital leases	Capital leases	Operating leases	Operating leases
2002 � � � � � � � � � � 2003 � � � � � � � � � � 2004 � � � � � � � � � � 2005 � � � � � � � � � � 2006 � � � � � � � � � � 2007 and therefore � � � � � � �	NT$ US$ (Note 3) 82,419 2,355 36,136 1,032 — — — — — — — —			NT$ US$ (Note 3) 7,672 219 10,403 297 10,403 297 10,403 297 10,403 297 86,602 2,475
Total minimum lease payments� � � � � Less: Amount representing interest � � � � Present value of minimum lease payments � � Less: Current portion � � � � � � � Long-term capital lease obligations � � � �	118,555 (7,267) 111,288 (101,207)		3,387	135,866	3,882
		) )	(207) 3,180 (2,892)
	111,288 (101,207
	10,081		288

The total depreciation expense of the equipment under capital leases was NT$37,147 and NT$27,975 (US$799) for the three months ended March 31, 2001 and 2002, respectively. The total rental expense under operating leases were NT$8,105 and NT$7,987 (US$228) for the three months ended March 31, 2001 and 2002, respectively.

23. Significant Commitments and Contingencies

Commitments and contingencies as of March 31, 2002, except those disclosed in other notes, were as follows:

a. The remaining unbilled amount of construction contracts related to the 8-inch wafer fabrication plants, ultra pure water, evaporator water system and clean room is NT$260,604 (US$7,446). The Company also entered into an agreement relating to the constructing of an R&D building which has a remaining unbilled amount of NT$429,095 (US$12,260).
b. Unused letters of credit for the Company aggregate approximately US$4,910, ¥63,860, DEM74, and SEK60.
c. In January 2001, United Microelectronics Corporation, together with its affiliates UMC Group USA and United Foundry Service, Inc., collectively referred to as UMC, filed a complaint against the Company with the U.S. International Trade Commission, or ITC, to bar the Company from importing or selling products into the United States that UMC asserts infringe two U.S. patents nos. 6,117,345 and 5,559,352, referred

195

to as the ‘345 and ‘352 patents, respectively. UMC also requested a permanent cease and desist order and any other penalties the ITC deems appropriate. The ITC commenced an investigation in February 2001 based on UMC’s complaint. Evidentiary hearings on the merits of UMC’s claims were held before an ITC administrative law judge in late 2001. The Company asserted defenses including non-infringement, patent invalidity and the “no domestic industry” defense. In addition, the administrative law judge was asked to determine whether alternative processes that the Company developed infringe the patents. On May 6, 2002, the administrative law judge issued his initial determination in the form of a recommendation to the ITC. The administrative law judge found that both the ‘345 patent and the ‘352 patent were invalid. In addition, the administrative law judge found that even if the ‘345 patent and ‘352 patent were valid, the ‘352 patent was not infringed and that an alternative process technology that the Company developed would not infringe the ‘345 patent. The parties may petition the ITC for review of the initial determination made by the administrative law judge. The expected date for the final determination by the ITC in the investigation is September 6, 2002. If the ITC does not follow the administrative law judge’s initial determination and UMC were to prevail in the ITC proceeding, the ITC has the authority to issue an exclusion order restricting importation into the United States of products covered by that exclusion order. The ITC does not have the authority to award monetary damages.

In addition, in December 2000, United Microelectronics Corporation, together with its affiliate UMC Group USA, Inc., referred to as plaintiffs, filed a civil complaint against the Company in the U.S. District Court for the Northern District of California seeking monetary damages, and injunctive and other equitable relief. The suit alleges that the Company infringed plaintiffs’ intellectual property rights, including infringement of the ‘345 patent and an additional U.S. patent no. 5,580,701, referred to as the ‘701 patent, and misappropriated of trade secrets, engaged in unfair competition in violation of federal and state law, breached non-disclosure agreements, intentionally interfered with plaintiffs’ contracts with certain of its former employees, and been unjustly enriched at plaintiffs’ expense. The Company answered the complaint, disputing plaintiffs’ claims and raising various defenses including non-infringement and invalidity of the ‘345 patent and the ‘701 patent. Discovery in the matter is ongoing, and the parties are awaiting the results of a claim construction hearing in April 2002 for the ‘701 patent. The ‘345 patent claim has been stayed pending resolution of the ITC proceeding described above. No trial date has been set in the litigation.

d. The Company has entered into various license agreements with third parties. The future committed cash payments for license fees over the next five years are as follows at March 31, 2002.

Year		Amounts
2002 � � � � � � � � � � � � � 2003 � � � � � � � � � � � � � 2004 � � � � � � � � � � � � � 2005 � � � � � � � � � � � � � 2006 and thereafter � � � � � � � � � �		NT$ US$ (Note 3) 559,920 15,998 507,428 14,498 524,925 14,998 542,423 15,498 349,950 9,998

Of the above amount, NT$664,050 (US$18,973) has been accrued in the accompanying financial statements.

The Company’s principal licensing agreements are with three parties: International Business Machines Corporation (“IBM”), Toshiba Corporation (“Toshiba”) and Intel Corporation (“Intel”).

(1) IBM . The license with IBM is a non-exclusive, worldwide cross-license covering licensed patents in existence on the date of the agreement. The IBM license provides for payment by the Company of a fixed non-refundable amount. The Company has assigned no value to its cross-license of Company patents to IBM. The cost to the Company of the IBM license has been capitalized as an

196

intangible asset, which is being amortised over the term of the agreement. The amortisation cost is being included in research and development costs up to the time the Company is ready to mass produce the realized products developed from the licensed IBM patents. Thereafter, amortisation expenses will be included in cost of sales.

(2) Toshiba . The license with Toshiba covers certain Toshiba CMOS technology. For certain Toshiba CMOS technology, the company is paying a fixed, non-refundable amount. The Company has assigned no value for its cross-license of Company patents to Toshiba. The Company is capitalizing the fixed amount it has paid Toshiba to date, rather than the entire fixed amount due for the license as the Company has not yet received the related technologies associated with the license and will amortise the paid amounts over the license term when the technologies have been received. As with the IBM agreement, the Company’s amortisation of the fixed portion of the Toshiba license will be included in the research and development costs until the Company’s related products are ready for mass production. Thereafter, amortisation costs will be included in cost of sales.

The Toshiba license also requires the Company to pay variable royalty fees based on the Company’s sales of products using certain Toshiba CMOS technologies. As of March 31, 2002, there was no obligation to pay any variable fees. The variable royalties will be expensed as marketing and sales expenses when the Company sells products using the Toshiba CMOS technologies.

(3) Intel . The Company’s licenses with Intel are also non-exclusive, worldwide cross-licenses for certain Pentium technology. For these licenses, the Company is paying variable royalty fees based on the Company’s sales of products using Intel’s technology. These royalties are expensed as marketing and sales expenses as they are incurred. The Company has assigned no value for its cross-license of Company patents to Intel.
e. On February 18, 2002, the Company agreed a settlement amount of US$1,600 for an alleged patent infringement claim by a third party existing at December 31, 2001. The Company has accrued this liability as of December 31, 2001 as indemnity expense.

24. Derivative Financial Instruments

The Company had entered into derivative instrument transactions in 2002 to hedge its exposures to fluctuations on foreign currency rates on its foreign currency-denominated receivables or payables. The strategy is to hedge most of the market price risks. Certain information on these contracts is as follows:

a. Open forward exchange contracts as of March 31, 2002:

Contract	Currency USD	Total Contract Amount (Thousand) US$52,000	Fair Value (Thousand) NT$1,820,378	Maturity May 2002-September 2002	Total Contracted Forward Amount (Thousand)
Sell					NT$1,815,440

The foregoing forward exchange contracts entered into were to hedge the Company’s foreign currencydenominated notes receivable of US$7,756 and accounts receivable of US$89,034.

A payable of NT$4,582 (US$131) as of March 31, 2002, generated from open forward exchange contracts are included under current liabilities.

Net exchange losses derived from settled forward exchange contracts for the three months ended March 31, 2002 were NT$15,798 (US$451).

197

b. Transaction risks
1) Credit risk . The banks with which the Company has entered into the above contracts are reputable and, therefore, management believes that the Company is not exposed to significant credit risks arising from probable default by such counter parties.
2) Market price risk . The Company is exposed to fluctuations on currency exchange rates on foreign currency-denominated receivables or payables.
3) Liquidity and cash flow . The net cash requirement on forward contracts is the difference between the contract forward rate and the spot rate at settlement dates. Management does not believe that such requirements are significant.
c. Fair value of financial instruments

Nonderivative financial instruments Assets Cash � � � � � � Pledged time deposits � � Short-term investments � � Notes receivable� � � � Accounts receivable � � � Long-term investments � � Refundable deposits � � � Liabilities Short-term bank loans � � Notes and accounts payable � Accounts payable to related parties � � � � � Payable for properties � � License fees and royalty payable (including current portion) � � � � � Bonds payable (including current portion) � � � Long-term bank loans (including current portion) � Obligation under capital lease (including current portion) � Derivative financial instruments Forward exchange contracts — sell � � � � � �	March 31, 2001	March 31, 2001	March 31, 2002	March 31, 2002
	Carrying Value	Fair Value	Carrying Value	Fair Value
	NT$ 1,477,719 4,400 1,178,355 1,021,368 2,898,123 595,889 10,748 2,050,000 907,888 100,271 1,752,979 929,304 3,000,000 7,000,000 242,536 1,083,964	NT$ 1,477,719 4,400 1,196,254 1,021,368 2,898,123 984,215 10,748 2,050,000 907,888 100,271 1,752,979 823,203 3,000,000 7,000,000 242,536 1,093,572	NT$ US$ (Note 3) 2,298,232 65,664 4,100 117 — — 298,653 8,533 3,326,679 95,047 1,690,567 48,302 11,728 335 2,704,163 77,262 966,567 27,616 4,781 137 658,745 18,821 1,009,614 28,847 3,000,000 85,714 8,650,000 247,143 111,288 3,180 1,815,440 51,870	NT$ US$ (Note 3) 2,298,232 65,664 4,100 117 — — 298,653 8,533 3,326,679 95,047 1,985,796 56,737 11,728 335 2,704,163 77,262 966,567 27,616 4,781 137 658,745 18,821 926,326 26,466 3,000,000 85,714 8,650,000 247,143 111,288 3,180 1,820,378 52,011

The methods and assumptions applied in estimating fair value were as follows:

1) Short-term financial instruments — carrying values.
2) Short-term investments — market values.
3) Long-term investments — market value for listed companies and net equity value for others.
4) Refundable deposits — carrying values.

198

5) Long-term liabilities — fair values are their carrying values as they use floating interest rates. Fair value of license fees and royalty payable is based on future stated payments discounted at interest rate of similar long-term liabilities.
6) Derivative financial instruments — based on the quotations from bank.

199

FINANCIAL STATEMENTS

ENGLISH TRANSLATION OF A REPORT ORIGINALLY ISSUED IN CHINESE

INDEPENDENT AUDITOR’S REPORT

The Board of Directors and the Shareholders Silicon Integrated Systems Corp.

We have audited the accompanying balance sheets of Silicon Integrated Systems Corp. as of December 31, 1999, 2000 and 2001, and the related statements of income, changes in shareholders’ equity and cash flows for the years ended December 31, 1999, 2000 and 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Silicon Integrated Systems Corp. as of December 31, 1999, 2000 and 2001, and the results of its operations and its cash flows for the years ended December 31, 1999, 2000 and 2001 in conformity with accounting principles generally accepted in the Republic of China.

T N Soong & Co An Associate Member Firm of Deloitte Touche Tohmatsu effective April 22, 2002 Former Member Firm of Andersen Worldwide, SC Taipei, Taiwan, ROC March 8, 2002 (except as to Note 3 which is as of March 29, 2002 and Note 20c which is as of May 6, 2002)

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in the Republic of China.

200

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

BALANCE SHEETS December 31, 1999, 2000 and 2001 (In Thousands, Except Par Value)

ASSETS CURRENT ASSETS Cash � � � � � � � � � � � Pledged time deposits (Note 18) � � � � � Short-term investments (Note 2) � � � � � Notes receivable � � � � � � � � Accounts receivable: Third party customers (Notes 2 and 4) � � � Related parties (Notes 4 and 17) � � � � Inventories — net (Notes 2 and 5) � � � � Deferred income taxes assets (Notes 2 and 16) � Prepaid expenses and other current assets (Note 4) � � � � � � � � � � Total Current Assets � � � � � � � � LONG-TERM INVESTMENTS (Notes 2 and 6) � PROPERTY, PLANT AND EQUIPMENT (Notes 2, 7 and 18) Cost Land � � � � � � � � � � � Buildings and auxiliary equipment � � � � Machinery and equipment � � � � � � Furniture and fixtures � � � � � � � Transportation equipment � � � � � � Equipment under capital lease � � � � Total cost � � � � � � � � � � Accumulated depreciation � � � � � � Construction in progress and prepayment for equipment � � � � � � � � � Net Property, Plant and Equipment � � � � INTANGIBLE ASSETS — NET (Notes 2 and 8) � OTHER ASSETS Deferred income taxes assets (Notes 2 and 16) � Land held for future construction (Note 9) � � Refundable deposits � � � � � � � � Total Other Assets � � � � � � � � TOTAL ASSETS � � � � � � � � �	1999	2000	2001	2001
	NT$ 12,423,763 4,400 90,000 42,581 2,267,473 31,763 874,473 4,369 103,161 15,841,983 808,139 42,367 694,002 1,284,155 56,177 3,946 111,164 2,191,811 (671,178) 5,753,900 7,274,533 270,258 509,186 — 974 510,160	NT$ 2,843,803 4,400 1,930,451 1,211,511 1,911,474 34,857 1,817,395 81,798 183,068 10,018,757 603,128 439,671 1,408,834 16,966,968 96,792 6,168 315,234 19,233,667 (1,804,848) 5,574,987 23,003,806 414,339 1,071,523 79,024 10,748 1,161,295	NT$ 2,909,114 4,100 — 361,407 1,885,244 28,344 3,795,227 92,661 617,523 9,693,620 1,655,745 439,671 1,521,686 24,452,717 112,446 6,168 335,702 26,868,390 (5,461,954) 416,333 21,822,769 1,366,687 1,531,257 79,024 11,603 1,621,884	US$ (Note 3) 83,118 117 — 10,326 53,864 810 108,435 2,647 17,644 276,961 47,307 12,562 43,477 698,649 3,213 176 9,591 767,668 (156,056) 11,895 623,507 39,048 43,750 2,258 332 46,340
	24,705,073	35,201,325	36,160,705	1,033,163

The accompanying notes are an integral part of the financial statements.

201

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

BALANCE SHEETS — (Continued) December 31, 1999, 2000 and 2001 (In Thousands, Except Par Value)

					1999	2000	2001	2001
					NT$	NT$	NT$	US$
								(Note 3)
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Short-term bank loans (Note 10) �	�	�	�	�	—	2,050,000	2,204,630	62,990
Notes and accounts payable � �	�	�	�	�	1,301,569	951,421	908,571	25,959
Income taxable � � � � �	�	�	�	�	91,360	—	—	—
Accounts payable to related parties (Note 17)				�	166,612	186,230	57,834	1,653
Accrued expenses and other current	liabilities
(Note 17) � � � � � �	�	�	�	�	435,030	556,745	869,997	24,857
Payable for properties � � �	�	�	�	�	3,416,761	2,605,575	1,159,905	33,140
License fees and royalty payable —	current
(Note 8) � � � � � �	�	�	�	�	181,911	198,447	395,263	11,293
Current portion of bonds payable, long-term			bank
loans and obligation under capital	lease
(Notes 2, 7, 11 and 12) � �	�	�	�	�	36,072	109,333	1,813,665	51,819
Deferred intercompany profit (Note 2)		�	�	�	854	1,354	914	26
Total Current Liabilities � � �	�	�	�	�	5,630,169	6,659,105	7,410,779	211,737
LONG-TERM LIABILITIES
Bonds payable — net of current portion
(Notes 11 and 18) � � � �	�	�	�	�	—	3,000,000	2,570,001	73,429
Long-term bank loans — net of current portion
(Notes 12 and 18) � � � �	�	�	�	�	—	7,000,000	7,377,273	210,779
Obligation under capital lease - net of current
portion (Notes 2 and 7) � �	�	�	�	�	70,857	131,601	30,067	859
License fees and royalty payable —	net	of current
portion (Note 8) � � � �	�	�	�	�	—	—	524,250	14,978
Total Long-term Liabilities � �	�	�	�	�	70,857	10,131,601	10,501,591	300,045
ACCRUED PENSION COST (Notes 2 and 13)				�	29,467	42,459	55,272	1,579
Total Liabilities � � � � �	�	�	�	�	5,730,493	16,833,165	17,967,642	513,361
SHAREHOLDERS’ EQUITY _(Notes 2, 14 _		and 15)
Capital stock — NT$10 par value
Authorized — 1,800,000 thousand	shares
Issued — 613,849 thousand shares in		1999,
974,015 thousand shares in 2000 and
1,071,416 thousand shares in 2001		�	�	�	6,138,487	9,740,149	10,714,164	306,119
Capital surplus � � � � �	�	�	�	�	10,516,880	8,682,482	7,740,182	221,148
Retained earnings:
Appropriated as legal reserve �	�	�	�	�	329,850	525,835	314,911	8,998
Accumulated deficits � � �	�	�	�	�	1,978,257	(210,924)	(607,972)	(17,371)
Cumulative translation adjustments	�	�	�	�	11,106	21,119	31,778	908
Treasury stock (cost) — 10,689 thousand shares					—	(390,501)	—	—
Total Shareholders’ Equity � �	�	�	�	�	18,974,580	18,368,160	18,193,063	519,802
TOTAL LIABILITIES AND SHAREHOLDERS’
EQUITY � � � � � �	�	�	�	�	24,705,073	35,201,325	36,160,705	1,033,163

The accompanying notes are an integral part of the financial statements.

202

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

STATEMENTS OF INCOME For the Years Ended December 31, 1999, 2000 and 2001 (In Thousands, Except Earnings (Loss) Per Share)

REVENUE � � � � � � � � � � SALES RETURNS AND ALLOWANCES � � � NET REVENUE (Notes 2 and 17) � � � � COST OF REVENUE (Note 17) � � � � � REALIZED (UNREALIZED) INTERCOMPANY TRANSACTION — NET (Note 2) � � � � GROSS PROFIT� � � � � � � � � OPERATING EXPENSES (Note 17) Research and development � � � � � � Marketing � � � � � � � � � � General and administrative � � � � � � Total Operating Expenses � � � � � � INCOME (LOSS) FROM OPERATIONS � � � NON-OPERATING INCOME Foreign exchange gain — net (Note 2) � � � Gain on disposal of investments (Note 2)� � � Interest income � � � � � � � � � Dividends income (Notes 2 and 6) � � � � Equity in net income of investee companies — net (Notes 2 and 6) � � � � Reversal of provision on short-term investment � Other � � � � � � � � � � � Total Non-Operating Income � � � � � � NON-OPERATING EXPENSES Interest expense� � � � � � � � � Factoring expense (Note 4) � � � � � � Foreign exchange loss — net (Note 2) � � � Equity in net loss of investee companies — net (Notes 2 and 6) � � � � � � � � Other � � � � � � � � � � � Total Non-Operating Expenses � � � � � INCOME (LOSS) BEFORE INCOME TAX� � � INCOME TAX BENEFIT (Notes 2 and 16) � � NET INCOME (LOSS) � � � � � � � EARNINGS (LOSS) PER SHARE Based on weighted-average number of shares outstanding of 487,684 thousand in 1999, 973,454 thousand in 2000 and 1,064,941 thousand in 2001 � � � � � � � � Based on weighted-average number of shares outstanding — retroactively adjusted � � �	1999	2000	2001	2001
	NT$ 10,999,544 159,261 10,840,283 7,063,970 1,718 3,778,031 756,375 1,145,174 287,620 2,189,169 1,588,862 — 3,801 172,457 — 42,664 4,650 6,095 229,667 2,171 — 17,829 — 640 20,640 1,797,889 161,964	NT$ 8,051,214 218,894 7,832,320 7,528,397 (500) 303,423 1,207,918 781,706 257,951 2,247,575 (1,944,152) 77,096 906,129 179,150 — 6,705 — 29,918 1,198,998 128,604 — — — 8,219 136,823 (881,977) 656,045	NT$ 10,240,215 261,040 9,979,175 7,433,765 440 2,545,850 1,898,271 619,185 495,374 3,012,830 (466,980) 93,707 45,045 44,348 12,600 — — 20,236 215,936 678,612 43,812 — 27,537 77,348 827,309 (1,078,353) 470,381	US$ (Note 3) 292,577 7,458 285,119 212,393 13 72,739 54,236 17,691 14,154 86,081 (13,342) 2,677 1,287 1,267 360 — — 578 6,169 19,389 1,252 — 786 2,210 23,637 (30,810) 13,439
	1,959,853 4.02 2.30	(225,932) (0.23) (0.21)	(607,972) (0.57)	(17,371) (0.02)

The accompanying notes are an integral part of the financial statements.

203

										TOTAL	SHAREHOLDERS’	EQUITY	NT$	5,019,516		12,000,000		—	—	—	(4,789)	1,959,853			—	—	—	—		—	10,013	(225,932)		(390,501)	18,368,160	—	—	422,216	10,659	(607,972)	18,193,063
										TREASURY	STOCK	(Note 15)	NT$	—		—		—	—	—	—	—	18,974,580		—	—	—	—		—	—	—		(390,501)	(390,501)	—	—	390,501	—	—	—
SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES	ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	For the Years Ended December 31, 1999, 2000 and 2001	(In Thousands)	RETAINED EARNINGS (DEFICIT)	CAPITAL STOCK CAPITAL SURPLUS (Notes 2 and 14 ) (Note 14)	Paid-in	Capital Gain on	Paid-in Arised from Disposal of Unappropriated	Capital in Sale of Property, Earnings CUMULATIVE	Shares Excess of Treasury Plant and Legal (Accumulated TRANSLATION	(Thousand) Amount Par Value Stock Equipment Total Reserve Deficits) Total ADJUSTMENTS	NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$ NT$	BALANCE, JANUARY 1, 1999 � � 366,272 3,662,721 7,732 — 9,148 16,880 222,392 1,101,628 1,324,020 15,895	Issuance of common stock —	November 4, 1999 � � � � 150,000 1,500,000 10,500,000 — — 10,500,000 — — — —	Appropriation from prior year’s earnings	Legal reserve � � � � � — — — — — — 107,458 (107,458) — —	Bonus to employees — stock � � 9,672 96,713 — — — — — (96,713) (96,713) —	Stock dividends — 24% � � � 87,905 879,053 — — — — — (879,053) (879,053) —	Translation adjustment on subsidiaries � — — — — — — — — — (4,789)	Net income in 1999 � � � � — — — — — — — 1,959,853 1,959,853 —	BALANCE, DECEMBER 31, 1999 � � 613,849 6,138,487 10,507,732 — 9,148 10,516,880 329,850 1,978,257 2,308,107 11,106	Appropriation from prior year’s earnings�	Legal reserve � � � � � — — — — — — 195,985 (195,985) — —	Bonus to employees — stock � � 17,638 176,387 — — — — — (176,387) (176,387) —	Stock dividends — 26% � � � 158,987 1,589,868 — — — — — (1,589,868) (1,589,868) —	Transfer of capital surplus into capital � 183,541 1,835,407 (1,835,407) — — (1,835,407) — — — —	Transfer of gain on disposal of property,	plant and equipment � � � — — — — 1,009 1,009 — (1,009) (1,009) —	Translation adjustments on subsidiaries� — — — — — — — — — 10,013	Net loss in 2000 � � � � � — — — — — — — (225,932) (225,932) —	Acquisition of treasury stock — 10,689	thousand shares � � � � — — — — — — — — — —	BALANCE, DECEMBER 31, 2000 � � 974,015 9,740,149 8,672,325 — 10,157 8,682,482 525,835 (210,924) 314,911 21,119	Transfer of legal reserve to offset deficit — — — — — — (210,924) 210,924 — —	Transfer of capital surplus into capital � 97,401 974,015 (974,015) — — (974,015) — — — —	Sales of treasury stock to employees � — — — 31,715 — 31,715 — — — —	Translation adjustments on subsidiaries� — — — — — — — — — 10,659	Net loss in 2001 � � � � � — — — — — — — (607,972) (607,972) —	BALANCE, DECEMBER 31, 2001 � � 1,071,416 10,714,164 7,698,310 31,715 10,157 7,740,182 314,911 (607,972) (293,061) 31,778	The accompanying notes are an integral part of the consolidated financial statements.

204

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 2000 and 2001 (In Thousands)

CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) � � � � � � � � Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation � � � � � � � � � Amortization of intangible assets � � � � Equity in net loss (income) of investee companies — net � � � � � � � Unrealized (realized) intercompany transaction� Deferred income taxes� � � � � � � Net loss on disposal of property, plant and equipment� � � � � � � Gain on disposal of long-term investments � � Impairment loss on investment� � � � � Accrued pension cost � � � � � � � Changes in operating assets and liabilities: Decrease (increase) in: Notes receivable � � � � � � � Accounts receivable � � � � � � Inventories � � � � � � � � Prepaid expenses and other current assets � � � � � � � � � Increase (decrease) in: Notes and accounts payable � � � � Accounts payable to related parties � � Income tax payable � � � � � � License fees and royalty payable � � � Accrued expenses and other current liabilities � � � � � � Net Cash Provided by (Used in) operating Activities � � � � � � � CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from (acquisitions of) short-term investments � � � � � � Acquisitions of: Long-term investments� � � � � � � Property, plant and equipment � � � � � Intangible assets � � � � � � � � Other assets — land � � � � � � � Proceeds from disposal of: Long-term investments� � � � � � � Property, plant and equipment � � � � � Decrease in pledged time deposits � � � � Decrease (increase) in refundable deposits � � Net Cash Used in Investing Activities � � �	1999	2000	2001	2001
	NT$ 1,959,853 239,721 54,722 (42,664) (1,718) (266,403) 91 — 3,899 7,650 34,691 (644,600) (661,597) 26,414 388,001 (39,842) 91,360 181,911 217,205 1,548,694 (44,650) (72,504) (2,792,161) (273,726) — 182 100 — 1,644 (3,181,115)	NT$ (225,932) 1,219,869 134,749 (6,705) 500 (639,766) 6,874 (892,959) — 12,992 (1,168,930) 352,905 (942,922) (79,907) (350,148) 19,618 (91,360) 16,536 121,715 (2,512,871) (1,840,451) — (17,822,285) (278,830) (79,024) 1,114,688 55,083 — (9,774) (18,860,593)	NT$ (607,972) 3,669,416 415,119 27,537 (440) (470,597) 9,776 — — 12,813 850,104 32,743 (1,977,832) (434,455) (42,850) (128,396) — 57,016 313,252 1,725,234 1,930,451 (1,069,495) (3,943,825) (703,417) — — — 300 (855) (3,786,841)	US$ (Note 3) (17,371) 104,840 11,861 786 (13) (13,446) 279 — — 366 24,289 936 (56,509) (12,413) (1,224) (3,668) — 1,629 8,950 49,292 55,156 (30,557) (112,681) (20,098) — — — 9 (24) (108,195)

(Forward)

205

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

STATEMENTS OF CASH FLOWS — (Continued) For the Years Ended December 31, 1999, 2000 and 2001 (In Thousands)

1999	2000	2001	2001
NT$ — — — 12,000,000 — 106,929 — 12,106,929 10,474,508 1,949,255	NT$ 2,050,000 3,000,000 7,000,000 — — 134,005 (390,501) 11,793,504 (9,579,960) 12,423,763	NT$ 154,630 — 1,650,000 — 422,216 (99,928) — 2,126,918 65,311 2,843,803	US$ (Note 3) 4,418 — 47,143 — 12,063 (2,855) — 60,769 1,866 81,252
12,423,763 2,171 13,079 —	2,843,803 48,659 102,671 98,735	2,909,114 666,165 4,552 41,950	83,118 19,033 130 1,199 71,376 41,305 112,681 39,071 (18,973) 20,098 51,819 3,592
6,122,946 (3,330,785)	17,011,099 811,186	2,498,155 1,445,670	71,376 41,305
2,792,161	17,822,285	3,943,825
273,726 —	278,830 —	1,367,467 (664,050)	39,071 (18,973
273,726 36,072 —	278,830 109,333 —	703,417 1,813,665 125,729

The accompanying notes are an integral part of the financial statements.

206

SILICON INTEGRATED SYSTEMS CORP.

ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE

NOTES TO FINANCIAL STATEMENTS (Amounts are in Thousands of Dollars, Unless Specified Otherwise)

1. GENERAL

Silicon Integrated Systems Corp. (the Company) was incorporated on August 26, 1987 and its shares have been listed and traded on the Taiwan Stock Exchange since August 1997.

The Company is engaged in the design, research, development and manufacture of specific application integrated circuits, including core logic chipsets, 3D graphic and connectivity chips for mainstream PC and networking applications. It also provides testing services for integrated circuits and engaged in limited related trading business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Short-term investments

These are open-end funds and are carried at the lower of aggregate cost or market value. Costs of such investments sold are determined using the weighted-average method.

Revenue recognition

The Company’s products are sold directly to customers. Revenue is recognized at the time of shipment or delivery depending on the shipment terms, which is when title is transferred. The four criteria for revenue recognition are the existence of evidence of sales, actual shipment, fixed or determinable selling prices, and reasonable assurance of collectibility.

The Company also sells its products to distributors with substantial independent operations under sales agreements whose terms do not allow for rights of return or price protection on unsold products held by them. In these instances, the Company recognizes revenue when it ships the product to the distributors.

Allowance for sales return and discounts are provided at the time of the recognition of the related revenues on the basis of experience and these provisions are deducted from sales.

Inventories

Long-term investments

Other stock investments are accounted for by the cost method. An allowance for decline in value is recognized as follows:

a. Listed stocks or stock traded over the counter: If the decline in market value is considered temporary, a credit is made to an allowance for decline in value with a corresponding debit to shareholders’ equity. The allowance is then debited for any subsequent recovery of the market value to the extent of the balance of the allowance. However, if the decline in value is considered irrecoverable, the allowance for decline in value is reversed and the debit to shareholders’ equity is charged to income.

207

b. Other than listed stocks or stocks traded over the counter: The decline in value is charged to current income only if the decline is irrecoverable.

Cash dividends received in the year the investment is made are credited to the cost of the investment while cash dividends received in subsequent years are recognized as investment income. No investment income is recognized on stock dividends received other than an increase in the number of shares of stock held on the ex-dividend date.

The costs of investments sold are determined using the weighted-average method.

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation. Major additions, renewals and betterment, and interest expenses incurred during the construction period are capitalized, while maintenance and repairs are expensed currently. Properties covered by agreements qualifying as capital leases are carried at the lower of the leased equipment’s market value or the present value of the minimum lease payments at the inception date of the lease. The effective interest rate method is used to allocate each lease payment between principal and interest expense.

Depreciation is computed using the straight-line method over estimated service lives which range as follows: Buildings and auxiliary equipment, 3 to 55 years; machinery and equipment, 3 to 10 years; furniture and fixtures, 3 to 8 years; transportation equipment, 5 years; leased equipment, 3 years. The carrying values of the properties that have reached their original estimated service lives but are still in use are continuously depreciated over their re-estimated remaining service lives.

Upon sale or disposal of items of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to current income. Any such gain generated prior to 2001, less applicable income tax, is transferred to capital surplus at end of the year.

Intangible assets

Intangible assets are amortized using the straight-line method over the following periods: Software, 3 years; license agreements, 3 years to 5 years.

Pension costs

Net periodic pension costs are recorded on the basis of actuarial calculations and the unrecognized net transition obligation is amortized over 24 years.

Income tax

The Company uses the asset and liability method of accounting for income tax. Under this method, deferred income taxes are recognized for the tax effects of temporary differences, unused tax credits, and operating loss carryforwards. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. A deferred tax asset or liability is, according to the classification of its related asset or liability, classified as current or non-current. However, if a deferred asset or liability cannot be related to an asset or liability in the financial statements, then it will be classified as current or non-current based on the expected reversal date of the temporary difference.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Income tax, at a rate of 10%, on undistributed earnings are recorded as expense in the year when the shareholders approved the retention of the earnings.

Derivative financial instruments

The premium or discount of the forward exchange contracts, recorded in New Taiwan dollars as assets and/or liabilities, is computed using the foreign currency amount of the contract multiplied by the difference between the contracted forward rate and the spot rates at the inception dates of the contract. The premium or discount is amortized using the straight-line method over the term of the forward contract with the amortization charged to income.

208

Foreign-currency transactions

Foreign-currency transactions, other than derivative financial instruments, are recorded in New Taiwan Dollars at the rates of exchange in effect when the transactions occur. Gains or losses resulting from the application of different foreign exchange rates when cash in foreign currency is converted into New Taiwan Dollars, or when foreign-currency receivables and payables are settled, are credited or charged to income in the year of conversion or settlement. On the balance sheets dates, the balances of foreign-currency assets and liabilities are restated at prevailing exchange rates, and the resulting differences are credited or charged to current income except those foreign currency denominated long-term investments where such differences are accounted for as translation adjustment under shareholders’ equity.

Reclassifications

Certain accounts in the financial statement as of and for the year ended December 31, 1999 and 2000 have been reclassified to conform to the financial statement as of and for the year ended December 31, 2001.

3. U.S. DOLLARS AMOUNTS

The Company maintains its accounts and expresses its consolidated financial statements in New Taiwan dollars. For convenience only, U.S. dollar amounts presented in the accompanying financial statements have been translated from New Taiwan dollars at the noon buying rate in New York City for cable transfers in New Taiwan dollars as certified for customs purposes by the Federal Reserve Bank of New York as of March 29, 2002, which was NT$35 to US$1. The convenience translations should not be construed as representations that the New Taiwan dollar amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.

4. ACCOUNTS RECEIVABLES — NET

										December 31	December 31
									1999	2000		2001
									NT$	NT$	NT$		US$
													(Note 3)
Related parties	�	�	�	�	�	�	�	�	31,763	34,857	28,344		810
Third parties�	�	�	�	�	�	�	�	�	2,303,953	2,032,886	2,038,244		58,235
Allowances for:
Doubtful accounts		�	�	�	�	�	�	�	(30,000)	(69,412)	(69,000)		(1,971)
Sales returns	and	discounts		�	�	�	�	�	(6,480)	(52,000)	(84,000)		(2,400)
									2,267,473	1,911,474	1,885,244		53,864
									2,299,236	1,946,331	1,913,588		54,674

In 2001, the Company entered into agreements to sell accounts receivable to factors without recourse. Factored accounts receivable and due from factors as of December 31, 2001 were NT$2,486,045 (US$71,030) and NT$444,047 (US$12,687), respectively. The factors assess a finance charge that is reflected in non-operating expense as a factoring expense.

Under the factoring agreements, the Company is assessed a period finance charge, based on the uncollected balance of the factored receivables over a fixed term of 120 to 180 days. At the end of the fixed term, no further finance charges are assessed, even if the factor has not collected on the receivables.

209

5. INVENTORIES — NET

Finished goods � � � � � � � � Works in process� � � � � � � � Materials and supplies � � � � � � Less - allowance for losses � � � � �				December 31	December 31	December 31	December 31
		1999 NT$ 326,265 456,004 112,204 894,473 (20,000) 874,473		2000 NT$ 498,809 1,242,937 285,649 2,027,395 (210,000) 1,817,395		2001
						NT$ 1,533,960 2,194,138 273,228 4,001,326 (206,099) 3,795,227	US$ (Note 3) 43,827 62,690 7,807 114,324 (5,889) 108,435

6. LONG-TERM INVESTMENTS

	December 31	December 31	December 31
1999 Carrying Value % of Ownership NT$ 67,745 100.0 1,263 100.0 118,885 62.5 618,026 3.0 2,220 2.0 — — — —	2000		Carrying Value NT$ 42,674 14,986 130,073 396,297 2,220 1,035,000 34,495	2001
Carrying Value NT$ 67,745 1,263 118,885 618,026 2,220 — —	Carrying Value NT$ 67,973 12,416 124,222 396,297 2,220 — —	% of Ownership		% of Ownership 100.0 100.0 62.5 2.0 2.0 — —	Carrying Value
		100.0 100.0 62.5 2.0 2.0 — —			US$ (Note 3) 1,219 428 3,717 11,323 63 29,571 986
808,139	603,128		1,655,745		47,307

The Company acquired 90,000 thousand shares of non-voting OSE preferred stock, out of 150,000 thousand shares sold, on September 21, 2001 for NT$1,035,000 or NT$11.50 per share. The OSE preferred stock pays cumulative dividend at 5.60% and has a mandatory one for one conversion feature into common stock of OSE at the end of the third year. The Company recognized dividend income of NT$12,600 (US$360) as non-operating income for the year ended December 31, 2001.

210

The equity in net income or net loss, which are recognized based on audited financial statements are summarized as follows:

SiS-USA � � � � � � � � � SiS-HK � � � � � � � � � � IVCF � � � � � � � � � �			Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31
		1999 NT$ 46,977 (3,301) (1,012) 42,664		2000 NT$ (3,089) 10,554 (760) 6,705		2001
						NT$ (28,185) 1,781 (1,133) (27,537)	US$ (Note 3) (805) 51 (32) (786)

The average market values of VIS shares owned by the Company as of December 31, 1999, 2000 and 2001 were NT$2,381,042, NT$578,692 and NT$441,281 (US$12,608), respectively.

7. ACCUMULATED DEPRECIATION

							December 31	December 31
						1999	2000		2001
						NT$	NT$	NT$		US$
										(Note 3)
Buildings and auxiliary equipment		�	�	�	�	107,255	167,776	261,355		7,467
Machinery and equipment �	�	�	�	�	�	527,417	1,533,634	4,955,559		141,587
Furniture and fixtures � �	�	�	�	�	�	29,348	43,575	63,188		1,806
Transportation equipment �	�	�	�	�	�	2,524	3,308	4,225		121
Equipment under capital lease	�	�	�	�	�	4,634	56,555	177,627		5,075
						671,178	1,804,848	5,461,954		156,056

Capitalized interest expense was NT$0, NT$98,735 and NT$41,950 (US$ 1,199) for the years ended December 31, 1999, 2000 and 2001, respectively. The rate used in calculation of capitalization of interest was 6.12% for the years ended December 31, 2000 and 2001.

The Company has entered into agreements to lease certain equipment that qualifies as capital leases and will expire in October 2003. Information of capital leases is summarized as follows:

	December 31	December 31	December 31
1999	2000	2001
NT$ 111,164	NT$ 315,234	NT$ 335,702	US$ (Note 3) 9,591 4,029 (3,170) 859
106,929 (36,072)	240,934 (109,333)	141,006 (110,939)	4,029 (3,170
70,857	131,601	30,067

211

8. INTANGIBLE ASSETS — NET

											December 31	December 31
										1999	2000		2001
										NT$	NT$	NT$		US$
														(Note 3)
Software	�	�	�	�	�	�	�	�	�	203,348	365,479	525,920		15,026
License agreements			_(Note _	20d)		�	�	�	�	66,910	48,860	840,767		24,022
										270,258	414,339	1,366,687		39,048

The Company has entered into various license agreements with foreign companies. The Company pays royalties in consideration of various license agreements.

9. OTHER ASSETS — LAND

In August 2000, the Company purchased a parcel of land in Hsinchu, ROC as the site for the new facilities for research and development activities. This parcel of land is zoned as farmland and, as required by regulation in Taiwan, must be owned by a natural person. To comply with this regulation, the parcel was registered under the name of Hsin-Ron Duh, daughter of the Company’s chairman. The Company paid the purchase price of the parcel on behalf of Ms. Duh, registered it in her name and obtained a mortgage on the property. Pursuant to an agreement between the Company and Ms. Duh, Ms. Duh has granted us unrestricted usage rights and has agreed to transfer the registered title to the Company when the land is no longer zoned as farmland. The Company, also under the agreement, is responsible for all taxes and expenses incurred for our usage of the land.

10. SHORT-TERM BANK LOANS

					December 31	December 31
			1999		2000		2001
			NT$		NT$	NT$		US$
								(Note 3)
Working capital loans: 2000 — repayable in
December 2001, interest at floating rates,
6.20%-7.10%; 2001 — repayable in March
2002, interest at floating rates, 3.60%-5.00%		�		—	2,050,000	1,850,000		52,857
L/C with banks: Denominated in foreign
currencies, (US$1,109, ¥97,650, EUR7,610 and
NLG3,867), due in 150-180 days after
acceptance, interest at 1.50%-4.57% �	�	�		—	—	354,630		10,133
				—	2,050,000	2,204,630		62,990

Unused credit lines for short-term bank loans as of December 31, 2001 were approximately NT$2,592,394 (US$74,068).

The due date for the working capital loan due in March 2002 has been extended to June 2002.

11. BONDS ISSUED

	December 31	December 31
1999 NT$ — —	2000 NT$ 3,000,000 —	2001
		NT$ 3,000,000 (429,999)	US$ (Note 3) 85,714 (12,285)
—	3,000,000	2,570,001	73,429

212

These are five-year domestic secured bonds issued on July 4, 2000 with aggregate face value of NT$3,000,000 (US$85,714). These bear interest at 5.42% that is payable semi-annually. The bonds are due in semi-annual installments commencing July 2002 and are to be fully repaid by July 2005.

The bond agreement requires, among other things, the maintenance of specific financial ratios, including current ratio, shareholders’ equity ratio and interest coverage ratio, which are tested on both a semi-annual and annual basis. As of December 31, 2001, management believes that the Company was in compliance with the financial and other covenants in the bond agreement. It also contains a cross default provision whereby an event of default under either of Company’s long-term bank loans could trigger an event of default under these bonds and could result in the entire amount of principal and interest under the bonds being accelerated and immediately due and payable. The event of default under the bond agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability. As disclosed in Note 20c, there is a potential material adverse litigation pending against the Company with respect to United Microelectronics Corporation (“UMC”). As of December 31, 2001, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under these debt obligations are aware of this litigation, and they have not accelerated any amounts under these obligations.

On December 14, 2001, the Board of Directors approved the planned issuance of European convertible Bonds (ECB) amounting to US$150,000 thousand. The ECB is expected to be issued and listed on the London or Luxembourg Stock Exchange. As of March 8, 2002, the Company has already obtained ROC SFC’s approval said ECB issuance.

12. LONG-TERM BANK LOANS

							December 31	December 31
					1999		2000		2001
					NT$		NT$	NT$		US$
										(Note 3)
Long-term secured syndicated loans:
Repayable in semi-annual installments of
varying amounts commencing from		June
2002 until June 2007; interest	at a	floating
rate, 6.4535% in 2000 and 3.9693% in			2001			—	7,000,000	7,000,000		200,000
Long-term secured syndicate loans:		�	�	�
Repayable in semi-annual installments
commencing from March 2003	until
September 2006; interest at a	floating		rate,
4.7216% � � � �	�	�	�	�		—	—	1,650,000		47,143
						—	7,000,000	8,650,000		247,143
Less - current portion � �	�	�	�	�		—	—	(1,272,727)		(36,364)
						—	7,000,000	7,377,273		210,779

The loan agreements requires, among other things, the maintenance of specific financial ratios, including current ratio, shareholders’ equity ratio and interest coverage ratio, which are tested on both a semi-annual and annual basis. As of December 31, 2001, management believes that the Company was in compliance with the financial and other covenants in the loan agreements. Each of the loan agreement contains a cross default provision whereby an event of default under the other loan or the Company’s five-year domestic secured bonds could trigger an event of default under the loan and could result in the entire amount of principal and interest under the loan being accelerated and immediately due and payable. The event of default under the loan agreements, among other things, includes any material adverse litigation or arbitration against the Company that affects its repayment ability and any provisional injunction or attachment which involves a disputed amount of more than NT$1,000,000 (US$28,581). As disclosed in Note 20c, there is a potential material adverse litigation pending against the Company with respect to UMC. As of December 31, 2001, the result or likely result of this litigation is unknown. While it is possible that the lenders may determine that the existence of the Company’s litigation with UMC causes it to be in default, the Company believes the lenders under these debt obligations are aware of this litigation, and they have not accelerated any amounts under these obligations.

13. PENSION PLAN

213

Certain pension information is as follows:

	Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31	Year Ended December 31
1999 NT$ 17,154 3,372 (2,266) 127		2000 NT$ 27,751 4,780 (3,133) 447		2001
				NT$ US$ (Note 3) 30,573 874 7,226 206 (4,268) (122) 447 13
18,387		29,845 33,978 971 December 31
1999 NT$ — (18,380) (18,380) (55,164) (73,544) 41,450 (32,094) 8,928 (7,101)			2001
			NT$ US$ (Note 3) — — (57,074) (1,631) (57,074) (1,631) (90,777) (2,594) (147,851) (4,225) 85,716 2,449 (62,135) (1,776) 8,034 230 (1,171) (33)
(30,267) — 6.5% 7.5% 6.5% 9,629 —	(42,459) — 6.0% 7.0% 6.0% 16,853 —		(55,272) — 5.0% 5.0% 5.0% 21,165 —		(1,579) — 5.0% 5.0% 5.0% 605 —

14. SHAREHOLDERS’ EQUITY

Capital surplus, pursuant to ROC Company Law, can only be used to offset a deficit or be transferred to capital (as a stock dividend). Such transfer from capital surplus to capital (as a stock dividend) are limited to the following: (i) donations (donated capital); (ii) the excess of the issue price over the par value of capital stock; (iii) the excess of the sale price over the par value of treasury stock; and (iv) the excess of the issue price over the par value of shares issued in a business combination.

The Company’s Articles of Incorporation provides that the following shall be appropriated from the annual net income after deducting any deficit and 10% legal reserve:

a. 10% as a bonus to employees,
b. The remainder is appropriated according to the shareholders’ resolution.

214

These appropriations are made by shareholder resolution at the annual meeting occurring in the following year and given effect in the financial statements of that year.

In 2001, the Company adopted a 2001 Employee Stock Option plan (“the Plan”). The Plan reserves 30,000 thousand units of option, each representing 1 share of common stock, with a total of 30,000 thousand shares for issuance. The options under the Plan generally vest over a period from two years after the date of grant at a certain percentage, and can be exercised within five years from two years after the date of grant. As of March 8, 2002, 29,950 thousand units of the options has been granted with the exercise price of NT$45.8 per share.

On December 14, 2001, the Board of Directors approved the planned issuance of common shares in the form of American Depositary Shares (ADS) by the issuance of new shares of up to 250,000 thousand shares along with existing shares of up to 30,000 thousand shares from current shareholders. As of March 8, 2002, the Company has already obtained ROC SFC’s approval for said ADR issuance.

15. TREASURY STOCK

In 2000, the Company purchased 10,689 thousand shares of its own outstanding capital stock in the stock market for the purpose of subsequently transferring or selling those shares to employees. Those shares have been completely transferred to employees on July 20, 2001 at a price of NT$39.5 per share.

The maximum number of treasury shares and its balance that the Company has during the year ended December 31, 2001 were 10,689 thousand shares and NT$390,501 (US$11,157) respectively. The Company was in compliance with the following SFC regulation.

According to the SFC regulation, a company may acquire no more than 10% of the total issued shares of its own capital stock. While held by the Company, the redeemed shares are not available for pledge and cannot be voted. In additions, the aggregate acquisition cost cannot exceed combined balance of the retained earnings and specific capital surplus.

16. INCOME TAX

a. For the years ended December 31, 2000 and 2001, the Company did not have current income tax expense. The current income tax expense for the year ended December 31, 1999 is as follows.

Income tax expense base on “income before income tax” at statutory rate (20%) � � � � � � � � � � � � � Tax effects of adjustments: � � � � � � � � � � Tax-exempt income � � � � � � � � � � � Permanent differences � � � � � � � � � � � Income tax expense — current � � � � � � � � �	1999
	($359,578) 158,085 22,653
	($178,840)

215

b. Income tax benefit for the year ended December 31, 1999, 2000 and 2001 consist of:

	Year Ended December 31	Year Ended December 31
1999 NT$ (178,840) 92,701 266,403 — — — — — (18,300)	2000 NT$ — — 1,977,648 (128,045) 317,137 9,756 (1,536,730) 16,279 —	2001
		NT$ — — 185,349 465,856 484,461 (124,530) (540,539) (216) —	US$ (Note 3) — — 5,295 13,310 13,842 (3,558) (15,444) (6) —
161,964	656,045	470,381	13,439

c. Deferred income tax assets as of December 31, 1999, 2000 and 2001 consist of the tax effects of the following:

	December 31	December 31
1999 NT$ 4,369 — — —	2000 NT$ 21,915 5,926 53,957 —	2001
		NT$ 68,215 — 92,661 (68,215)	US$ (Note 3) 1,949 — 2,647 (1,949)
4,369	81,798	92,661	2,647 23,335 61,800 22,903 (5,927) (58,361) 43,750
542,783 — — — (33,597)	397,192 1,971,722 317,137 (44,201) (1,570,327)	816,748 2,162,997 801,598 (207,435) (2,042,651)	23,335 61,800 22,903 (5,927 (58,361
509,186	1,071,523	1,531,257

The effective tax rates for deferred income tax in 1999, 2000 and 2001 were 20%, 20% and 25%, respectively.

d. The related information under the Integrated Income Tax System is as follows:

Shareholders’ imputed tax credits � � �		December 31	December 31
	1999	2000	2001
	NT$ 13,166	NT$ 39	NT$ US$ (Note 3) 256 7

The imputation credit allocated to each shareholder is based on the balance of the ICA on the date of distribution of dividend. There was no actual creditable ratio in 2000 and 2001 because of the Company reported deficits in both years. The actual tax credit ratio applicable on the date of distribution of the earnings generated as of December 31, 1999 was 4.32%.

216

The balance and year of expiry of unused investment tax credits as of December 31, 2001 are as follows:

Year of Expiry 2002 � � � � � 2003 � � � � � 2004 � � � � � 2005 � � � � � 2006 � � � � �	Machinery and Equipment NT$ — 394,997 1,609,497 158,503 —	R&D Expenditures NT$ 68,215 88,545 339,381 388,822 —	Loss Carryforwards
			NT$ — — — 452,588 349,010

The income of the Company attributable to the following projects and services is exempt from income tax:

Expansion of first manufacturing plant in 1998 � � � � � Expansion of first manufacturing plant in 1999 � � � � � Expansion of first manufacturing plant in 2000 � � � � �	Tax-Exemption Period
	� 1998 to 2001 � 2000 to 2003 � 2002 to 2005

Income tax returns through 1997 have been examined and cleared by the tax authorities.

17. RELATED PARTY TRANSACTIONS

a. The Company engaged in business transactions with the following related parties:

Related Parties OSE SiS-USA SiS-HK Consolidated Marketing Corporation (CMC)	Relationship It’s chairman is the spouse of the Company’s chairman and is also a director of the Company A subsidiary A subsidiary A supervisor of the Company

217

b. The significant transactions with these related parties, other than those disclosed in other notes, were summarized as follows:

For the year OSE Sales � � � � � � � � � Subcontracted assembly and test � � Rental expense � � � � � � SiS-USA Commission expense � � � � � Technical service fee � � � � � SiS-HK Sales � � � � � � � � � Commission expense � � � � � CMC Sales � � � � � � � � � At end of year OSE Dividends receivable � � � � � Accounts payable � � � � � � SiS-USA Accrued commission � � � � � Accrued expenses � � � � � � SiS-HK Accounts receivable � � � � � Accrued commission � � � � � Accrued expenses � � � � � �		1999 NT$ 231 1,196,267 5,250 129,884 14,566 242,154 15,854 613 — 166,612 23,946 4,170 31,763 3,726 52		2000 NT$ — 837,293 — 39,664 14,069 198,697 19,104 1,246 — 186,230 261 6,206 34,857 2,388 36		2001
						NT$ US$ (Note 3) — — 1,277,044 36,487 — — 6,616 189 15,258 436 118,577 3,388 10,173 291 — — 12,600 360 57,834 1,653 1,306 37 14,207 406 28,344 810 1,739 50 — —

18. PLEDGED OR MORTGAGED ASSETS

The following assets are pledged or mortgaged as collateral for long-term loans, bonds payable, cooperative research plan security deposit and customs duties:

								1999	2000	2001
								NT$	NT$	NT$	US$
											(Note 3)
Pledged	time deposits	�	�	�	�	�	�	4,400	4,400	4,100	117
Property,	plant and equipment		—	net	�	�	�	—	14,216,604	14,641,326	418,324
								4,400	14,221,004	14,645,426	418,441

218

19. SIGNIFICANT LONG-TERM OPERATING LEASES

The Company leases the site of its manufacturing plant from the Hsinchu Science-Based Industrial Park Administration under agreement which will expire on various dates from July 2014 to October 2019 but renewable upon expiration. There are provisions in the lease that provide for a bargain purchase option upon the expiration of the leases. Annual rentals, which are subject to adjustments, currently amount to NT$10,403. Future minimum rentals are as follows:

Year		Amount
2002 � � � � � � � � � � � � � � 2003 � � � � � � � � � � � � � � 2004 � � � � � � � � � � � � � � 2005 � � � � � � � � � � � � � � 2006 � � � � � � � � � � � � � � 2007 and thereafter � � � � � � � � � � �		NT$ 10,403 10,403 10,403 10,403 10,403 85,178	US$ 297 297 297 297 297 2,434
		137,193	3,919

20. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Commitments and contingencies as of December 31, 2001, except those disclosed in other notes, were as follows:

a. The remaining unbilled amount of construction contracts related to the 8-inch wafer fabrication plants, ultra pure water, evaporator water system and clean room is NT$332,694 (US$9,506). The Company also entered into an agreement relating to the constructing of an R&D building which has a remaining unbilled amount of NT$385,777 (US$11,022).
b. Unused letters of credit for the Company aggregate approximately US$7,575, ¥133,800, SEK60, and DEM900.
c. In January 2001, United Microelectronics Corporation, together with its affiliate UMC Group USA and United Foundry Service, Inc., collectively referred to as UMC, filed a complaint against the Company with the United States International Trade commission, or ITC, to bar the Company from importing or selling products into the United States that UMC asserts infringe two U.S. patents nos. 6,117,345 and 5,559,352, referred to as the ’345 and ’352 patents, respectively. UMC also requested a permanent cease and desist order and any other penalties the ITC deems appropriate. The ITC commenced an investigation in February 2001 based on UMC’s complaint. Evidentiary hearings on the merits of UMC’s claims were held before an ITC administrative law judge in late 2001. The Company asserted defenses including non-infringement, patent invalidity and the “no domestic industry” defense. In addition, the administrative law judge was asked to determine whether alternative processes that the Company developed infringe the patents. On May 6, 2002, the administrative law judge issued his initial determination in the form of a recommendation to the ITC. The administrative law judge found that both the ’345 patent and the ’352 patent were invalid. In addition, the administrative law judge found that even if the ’345 patent and ’352 patent were valid, the ’352 patent was not infringed and that an alternative process technology that the Company developed would not infringe the ’345 patent. The parties may petition the ITC for review of the initial determination made by the administrative law judge. The expected date for the final determination by the ITC in the investigation is September 6, 2002. If the ITC does not follow the administrative law judge’s initial determination and UMC were to prevail in the ITC proceeding, the ITC has the authority to issue an exclusion order restricting importation into the United States of products covered by that exclusion order. The ITC does not have the authority to award monetary damages.

In addition, in December 2000, United Microelectronics Corporation, together with its affiliate UMC Group USA Inc., referred to as plaintiffs, filed a civil complaint against the Company in the U.S. District Court for the Northern District of California seeking monetary damages, and injunctive and other equitable relief. The suit alleges that the Company infringed plaintiffs’ intellectual property rights, including infringement of the ’345 patent and an additional U.S. patent no. 5,580,701, referred to as the ’701 patent, and misappropriation of trade secrets, engaged in unfair competition in violation of federal and state law, breached non-disclosure agreements, intentionally interfered with plaintiffs’ contracts with certain of its former employees, and been unjustly enriched at plaintiffs’ expense. The Company answered the complaint, disputing plaintiffs’ claims and raising various defenses including non-infringement and invalidity of the ’345 patent and the ’701 patent. Discovery in the matter is ongoing, and the parties are awaiting the result of a claim construction hearing in April 2002 for the ’701 patent. The ’345 patent claim has been stayed pending resolution of the ITC proceeding described above. No trial date has been set in the litigation.

219

Currently, the Company is reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, and the Syndia Corporation, claiming that the Company technologies infringe patents held by them. During 2001, the Company held meetings with National Semiconductor in which it discussed its technology and the patents asserted by them and the reasons why it believes that its technology does not infringe patents asserted by them.

d. The Company has entered into various license agreements with third parties. The future committed cash payments for license fees over the next five years are as follows at December 31, 2001.

Year		Amounts	Amounts
2002 � � � � � � � � � � � � � 2003 � � � � � � � � � � � � � 2004 � � � � � � � � � � � � � 2005 � � � � � � � � � � � � � 2006 and thereafter � � � � � � � � � �		NT$ US$ (Note 3) 856,275 24,465 506,775 14,479 524,250 14,979 541,725 15,478 349,500 9,986
		2,778,525	79,387

Of the above amount, NT$664,050 (US$18,973) relating to 2001 have been accrued in the accompanying financial statements.

The Company’s principal licensing agreements are with three parties: International Business Machines Corporation (“IBM”), Toshiba Corporation (“Toshiba”) and Intel Corporation (“Intel”).

1) IBM. The license with IBM is a non-exclusive, worldwide cross-license covering licensed patents in existence on the date of the agreement. The IBM license provides for payment by the Company of a fixed non-refundable amount. The Company has assigned no value to its cross-license of Company patents to IBM. The cost to the Company of the IBM license has been capitalized as an intangible asset, which is being amortized over the term of the agreement. The amortization cost is being included in research and development costs up to the time the Company is ready to mass produce the realized products developed from the licensed IBM patents. Thereafter, amortization expenses will be included in cost of sales.
2) Toshiba. The license with Toshiba covers certain Toshiba CMOS technology. For certain Toshiba CMOS technology, the Company is paying a fixed, non-refundable amount. The Company has assigned no value for its cross-license of Company patents to Toshiba. The Company is capitalizing the fixed amount it has paid Toshiba to date, rather than the entire fixed amount due for the license as the Company has not yet received the related technologies associated with the license and will amortize the paid amounts over the license term when the technologies have been received. As with the IBM agreement, the Company’s amortization of the fixed portion of the Toshiba license will be included in the research and development costs until the Company’s related products are ready for mass production. Thereafter, amortization costs will be included in cost of sales.

The Toshiba license also requires the Company to pay various royalty fees based on the Company’s sales of products using certain Toshiba CMOS technologies. As of December 31, 2001, there was no obligation to pay any various fees. The variable royalties will be expensed as marketing and sales expenses when the Company sells products using the Toshiba CMOS technologies.

The Toshiba license also provides that Toshiba will provide the Company with technical assistance in order that the Company may acquire reasonable expertise with respect to certain technical information relating to the licensed Toshiba CMOS technologies. The amounts that will be paid by the Company in consideration for this technical assistance will be capitalized and amortized, with such amortization to be charged to research and development expense. To date, the Company has not received this technical assistance, and has not paid any of the technical assistance fees as of December 31, 2001.

3) Intel. The Company’s licenses with Intel are also non-exclusive, worldwide cross-licenses for certain Pentium technology. For these licenses, the Company is paying variable royalty fees based on the Company’s sales of products using Intel’s technology. These royalties are expensed as marketing and sales expenses as they are incurred. The Company has assigned no value for its cross-license of Company patents to Intel.

220

e. On February 18, 2002, the Company agreed a settlement amount of US$1,600 for an alleged patent infringement claim by a third party existing at December 31, 2001. The Company has accrued this liability as of December 31, 2001 as indemnity expense as a component of non-operating expenses in the accompanying statement of income.

21. DERIVATIVE FINANCIAL INSTRUMENTS

The Company had entered into derivative instrument transactions in 2001 to hedge foreign-currency denominated receivables or payables. The strategy is to hedge most of the market price risks. Certain information on these contracts is as follows:

a. Open forward exchange contracts as of December 31, 2001:

Contract Sell Buy	Currency USD EUR	Total Contract Amount (Thousand) US$40,000 EUR9,000	Fair Value (Thousand) NT$1,399,120 NT$ 277,967	Maturity May 2002 March2002	Total Contracted Forward Amount (Thousand)
					NT$1,378,602 NT$ 282,915

Payable of NT$23,662 (US$676) (shown in the balance sheet as part of “other current assets” account) as of December 31, 2001, generated from open forward exchange contracts are included under current assets or liabilities.

Net exchange gains or losses derived from settled forward exchange contracts for the year ended December 31, 1999, 2000 and 2001 were a gain of NT$376 and losses of NT$18,701 and NT$40,308 (US$1,152), respectively.

b. Transaction risks
1) Credit risk. The banks with which the Company has entered into the above contracts are reputable and, therefore, management believes that the Company is not exposed to significant credit risks arising from probable default by such counter parties.
2) Market price risk. The Company is exposed to fluctuations on currency exchange rates on foreign currency-denominated receivables or payables.
3) Liquidity and cash flow. The net cash requirement on forward contracts is the difference between the contract forward rate and the spot rate at settlement dates. Management does not believe that such requirements are significant.

221

c. Fair value of financial instruments

December 31, 1999 Carrying Value Fair Value NT$ NT$ Nonderivative financial instruments Assets Cash � � � � � �12,423,76312,423,763 Pledged time deposits � � � 4,400 4,400 Short-term investments � � � 90,000 90,579 Notes receivable � � � � 42,581 42,581 Accounts receivable � � �2,299,236 2,299,236 Long-term investments � � � 808,139 2,571,155 Refundable deposits � � � 974 974 Liabilities Short-term bank loans � � � — — Notes and accounts payable � �1,301,569 1,301,569 Accounts payable to related parties � 166,612 166,612 Payable for properties � � �3,416,761 3,416,761 License fees and royalty payable (including current portion) � � 181,911 181,911 Bonds payable (including current portion) � � — — Long-term bank loans (including current portion) � � — — Obligation under capital lease (including current portion) � � 106,929 106,929 Derivative financial instruments Forward exchange contracts — sell � 476,864 474,123 Forward exchange contracts — buy 206,819 205,484	December 31, 2000 Carrying Value Fair Value NT$ NT$ 2,843,803 2,843,803 4,400 4,400 1,930,451 1,945,321 1,211,511 1,211,511 1,946,331 1,946,331 603,128 785,523 10,748 10,748 2,050,000 2,050,000 951,421 951,421 186,230 186,230 2,605,575 2,605,575 198,447 188,244 3,000,000 3,000,000 7,000,000 7,000,000 240,934 240,934 — — 235,074 251,921	December 31	December 31
	Carrying Value NT$ 2,843,803 4,400 1,930,451 1,211,511 1,946,331 603,128 10,748 2,050,000 951,421 186,230 2,605,575 198,447 3,000,000 7,000,000 240,934 — 235,074	Carrying Value NT$ US$ 2,909,114 83,118 4,100 117 — — 361,407 10,326 1,913,588 54,674 1,655,745 47,307 11,603 332 2,204,630 62,990 908,571 25,959 57,834 1,653 1,159,905 33,140 919,513 26,271 3,000,000 85,714 8,650,000 247,143 141,006 4,029 1,378,602 39,389 282,915 8,083	Fair Value
			NT$ US$ (Note 3) 2,909,114 83,118 4,100 117 — — 361,407 10,326 1,913,588 54,674 1,700,729 48,592 11,603 332 2,204,630 62,990 908,571 25,959 57,834 1,653 1,159,905 33,140 833,121 23,803 3,000,000 85,714 8,650,000 247,143 141,006 4,029 1,399,120 39,975 277,967 7,942

The methods and assumptions applied in estimating fair value were as follows:

1) Short-term financial instruments — carrying values.
2) Short-term investments — market values.
3) Long-term investments — market value for listed companies and net equity value for others.
4) Refundable deposits — carrying values.
5) Long-term liabilities — Fair values are their carrying values as they use floating interest rates. Fair value of license fees and royalty payable is based on future stated payments discounted at interest rate of similar long-term liabilities.
6) Derivative financial instruments - based on the quotations from bank.

222

22. ADDITIONAL DISCLOSURES

Except the followings, the Company has no other significant transactions, investees and investments in Mainland China information that are the additional disclosures required by the SFC:

a. Marketable securities held (please see Table 1 attached);
b. Marketable securities acquired and disposed of at costs or prices of at least NT$100,000 or 20% of the paid-in capital (please see Table 2 attached);
c. Information regarding names, locations and others of investee on which the company exercises significant influences (please see Table 3 attached);
d. Derivative financial transactions (please see Note 21).

23. SEGMENT FINANCIAL INFORMATION

a. Industry. The Company has no business outside the manufacture and sale of specific application integrated circuit.
b. Geographic information. The Company has no operations outside of the ROC.
c. Export sales.

Geographic Area Hong Kong � � � � � � � Northeast Asia � � � � � � � Europe and America � � � � � Southeast Asia � � � � � � �		1999		2000		2001
		NT$ 5,252,178 69,932 55,607 16,072		NT$ 4,462,827 19,903 29,649 14,531		NT$ 5,003,078 28,345 12,545 6,541	US$ (Note 3) 142,945 810 358 187
		5,393,789		4,526,910		5,050,509	144,300

d. Major customers. Sales to customers representing at least 10% total sales are as follows:

Customer A B C	1999 Amount % NT$ 4,728,578 44 826,697 8 — —	2000 Amount % NT$ 3,784,438 48 467,874 6 3,025 —		2001
	Amount NT$ 4,728,578 826,697 —	Amount NT$ 3,784,438 467,874 3,025	Amount NT$ 4,167,569 1,084,267 1,010,871	Amount US$ (Note 3) 119,073 30,979 28,882	%
					42 11 10

223



				Market Value or	Net Asset	Value		NT$42,674	(Note)	14,986	(Note)	130,073	(Note)	441,281	2,220	(Note)		—		—	—
MARKETABLE SECURITIES HELD	December 31, 2001	(Amounts in Thousands)	December 31, 2001	Held Company Name Marketable Securities Type and Name Relationship with the Company Financial Statement Account Percentage	Shares Carrying of	(Thousand) Value Ownership	Silicon Integrated Systems Corp. Common stock	SiS-USA Subsidiary Long-term investments 80,100 NT$42,674 100.0		SiS-HK Subsidiary Long-term investments 1,000 14,986 100.0		IVCF Subsidiary Long-term investments 3,500 130,073 62.5		VIS — Long-term investments 37,239 396,297 2.0	VADEM — Long-term investments 269 2,220 2.0		Preferred stock	OSE It’s chairman is the spouse of Long-term investments 90,000 1,035,000 —	the Company’s chairman	GlobiTech — Long-term investments 377 34,495 —	IVCF Rise Technology Company — Long-term investments 1,600 195,720 5.76	Note: For those not listed companies the estimated fair market value of the securities held is based on the net asset value of the invested companies.

224



				Ending Balance	Gain on Shares	Disposal (Thousand) Amount			NT$17,558 — NT$—		8,727 — —		3,365 — —		3,258 — —		11,926 — —			10,226 — —			— 90,000 1,035,000
MARKETABLE SECURITIES ACQUIRED AND DISPOSED OF	AT COSTS OR PRICES OF AT LEAST NT$100,000 OR 20% OF THE PAID-IN CAPITAL	For the Year Ended December 31, 2001	(Amounts in Thousands)	Marketable Securities Type and Name Financial Statement Account Counter- Party Nature of the Relationship Beginning Balance Acquisition Disposal Shares (Thousand) Amount Shares (Thousand) Amount Shares (Thousand) Amount Carrying Value			Beneficiary certificate		Ta-Hwa Bond Fund Short-term — — 44,353 NT$500,000 17,380 NT$200,000 61,733 NT$717,558 NT$700,000	investments	Barits Bond Fund Short-term — — 47,442 500,451 — — 47,442 509,178 500,451	investments	Yuan Ta Duo Le Short-term — — 27,446 350,000 — — 27,446 353,365 350,000	Bond Fund investments	Fuh-Hwa Bond Fund Short-term — — 6,956 80,000 10,427 120,000 17,383 203,258 200,000	investments	Ta Chong Bond Fund Short-term — — 44,278 500,000 — — 44,278 511,926 500,000	investments	Bond	OSE European Short-term — — — — — 178,355 — 188,581 178,355	Convertible Bonds investments	Preferred stock	OSE Long-term OSE It’s chairman is the — — 90,000 1,035,000 — — —	investments spouse of the	Company’s chairman
					Company Name		Silicon Integrated	Systems Corp.

225

					Investment Gain (Loss)		(NT$28,185)		1,781	(1,133)
INFORMATION REGARDING NAMES, LOCATIONS AND OTHERS OF	INVESTEE ON WHICH THE COMPANY EXERCISES SIGNIFICANT INFLUENCES	For the Year Ended December 31, 2001		(Amounts in Thousands)	Investee Company Location Main Business and Products Original Investment Amount Balance as of December 31, 2001 Net Income (Loss) of the Investee December 31, 2001 December 31, 2000 Shares (Thousand) % Carrying Value		SiS-USA California, USA Sales of I/C system NT$20,360 NT$20,360 80,100 100 NT$42,674 (NT$28,185)		SiS-HK Hong Kong Sales of I/C system 3,410 3,410 1,000 100 14,986 1,781	IVCF Cayman Islands, Investment in venture 110,630 110,630 3,500 62.5 130,073 (1,813)	British West Indies capital fund
					Investor Company		Silicon Integrated Systems	Corp.

226

REGISTERED AND HEAD OFFICE OF THE COMPANY

Silicon Integrated Systems Corp.

No. 16, Creation Rd. 1 Science-Based Industrial Park Hsinchu Taiwan Republic of China

TRUSTEE PRINCIPAL PAYING, REGISTRAR CONVERSION AND TRANSFER AGENT

The Bank of New York The Bank of New York The Bank of New York 48th Floor 48th Floor 101 Barclay Street One Canada Square One Canada Square Floor 21W London E14 5AL London E14 5AL New York, N. Y. 10286 United Kingdom United Kingdom United States

The Bank of New York

LISTING AGENT AND PAYING, CONVERSION, REPLACEMENT AND TRANSFER AGENT

The Bank of New York (Luxembourg) S.A.

Aerogolf Center 1A, Hoehenhof L-1736 Senningerberg Luxembourg

LEGAL ADVISERS

To the Managers as to English law and US law To the Trustee as to English law Linklaters Linklaters 10th Floor 10th Floor Alexandra House Alexandra House Chater Road Chater Road Hong Kong Hong Kong To the Company as to ROC law To the Company as to US law Lee and Li Davis Polk & Wardwell 7th Floor, 201 Tun Hua North Road, 1600 El Camino Real Taipei 105, Menlo Park Taiwan California United States

INDEPENDENT AUDITORS OF THE COMPANY

T N Soong & Co

12th Floor, No. 11 Park Avenue 2nd Road Hsinchu Science-Based

Industrial Park Hsinchu Taiwan Republic of China

==> picture [103 x 61] intentionally omitted <==

Printed by IFN Financial Press Limited

22528

AI assistant

SiS — Capital/Financing Update 2014

52031_rns_2014-04-10_9af801e4-9125-42cf-9bc1-d216f5f84bda.pdf

Silicon Integrated Systems Corp.

US$80,000,000 Zero Coupon Convertible Bonds due 2007

Issue Price: 100 per cent.

Investing in the Bonds carries certain risks. See “Risk Factors”.

Sole Bookrunner and Lead Manager

Co-Lead Managers

ENFORCEABILITY OF FOREIGN JUDGEMENTS IN THE ROC

TABLE OF CONTENTS

SUMMARY

The Company

Our Approach and Strategy

The Bonds

Summary Financial and Operating Data

RISK FACTORS

Risks Relating to Our History of Losses and Fluctuations in Our Revenue and Earnings

Risks Relating to Intellectual Property

Risks Relating to Intel’s Influence in the Microprocessor and Chipset Markets

Risks Relating to Our Strategy of Being An Integrated Device Manufacturer

Risks Relating to Hiring and Retaining Key Personnel

Our business could suffer if we are unable to retain and recruit qualified personnel

Risks Relating to Customer Concentration

Dependence on a limited number of customers may harm our revenue and profitability

Risks Relating to the Competitiveness of Our Products

Risks Relating to New Markets and New Products

Risks Relating to our Long-term Debt

Risks Relating to the Republic of China

You may have difficulty enforcing any judgement obtained outside the ROC against us or our directors and supervisors or executive officers

Fluctuations in exchange rates could result in foreign exchange losses

Risks Relating to Ownership of the Bonds or the Shares

The markets for the Bonds and the Shares

There are limitations on the ability of Bondholders to exercise the Conversion Right

ROC capital gains tax may be imposed on transactions on the Shares

USE OF PROCEEDS

EXCHANGE RATE INFORMATION

CAPITALISATION

SELECTED FINANCIAL AND OPERATING DATA

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

Overview

Critical Accounting Policies

Results of Operations

Cost of Revenue

Operating Expenses

Income (Loss) from Operations

Non-Operating Income and Expenses

Comparison of Results of Operations

The first three months of 2001 compared with the first three months of 2002 (unconsolidated)

1999 compared with 2000 and 2000 compared with 2001

Quarterly Results of Operations

Liquidity and Capital Resources

Inflation

Qualitative and Quantitative Disclosures about Market Risk

Interest rate risk

Foreign currency risk

BUSINESS

General

Industry Background

The Personal Computer Market

PC Components

Core Logic Chipsets

Integrated Core Logic Chipset

Core Logic Market

Leading-edge Manufacturing

Our Approach and Strategy

Maintain Low Cost, Leading-edge Manufacturing Through Our IDM Strategy

Deliver Cost-effective, Technologically Advanced Products in a Rapid Time Frame

Maintain Intel and AMD Relationships

Leverage Strategic Technology Relationships

Enhance Customer Relationships and Market Penetration

Products

Core Logic Chipsets

GPUs

Customers

Competition

Manufacturing and Quality Control

Manufacturing

Equipment

Raw Materials

SiS Capital/Financing Update 2014