OFFERING CIRCULAR

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Silicon Integrated Systems Corp.

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

25,000,000 Global Depositary Shares Representing 250,000,000 Shares of Common Stock (par value NT$10 per share)

Offering Price: U.S.$5.515 per GDS

Each Global Depositary Share (each a “GDS”) represents ten shares of our common stock, par value NT$10 per share (each a “Share”), and is evidenced by a Global Depositary Receipt (each a “GDR”). The GDSs are being offered (the “Offering”) by the Managers (as defined in “Subscription and Sale”) only to non-U.S. persons in offshore transactions outside the United States in reliance on Regulation S (“Regulation S”) under the United States Securities Act of 1933, as amended (the “Securities Act”).

Commencing three months after the closing of this Offering, a holder of the GDSs (a “Holder”) may, provided that we have delivered to the International Commercial Bank of China, as custodian (the “Custodian”), physical share certificates or Shares in book-entry form in respect of the deposited Shares, withdraw and hold the Shares represented by such GDSs (other than a Holder who is a citizen of the People’s Republic of China (the “PRC”) or an entity formed under the laws of the PRC) or request The Bank of New York, as depositary (the “Depositary”), to sell or cause to be sold on behalf of such Holder the Shares represented by the GDSs. Holders of GDSs will have limited voting rights with respect to the Shares represented by the GDSs. See “Description of the Global Depositary Receipts”.

The outstanding Shares are listed on the Taiwan Stock Exchange in Taiwan, Republic of China (the “ROC”). The Company will apply to have the Shares represented by the GDSs offered hereby listed on the Taiwan Stock Exchange in book-entry form as soon as practicable after the closing of the Offering. The closing sale price per Share on the Taiwan Stock Exchange on January 2, 2003 was NT$26.9 (equivalent to U.S.$0.77 at the exchange rate of U.S.$1.00 equals NT$34.789). See “Market Price Information”.

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

The GDRs, the GDSs evidenced thereby and the Shares represented thereby have not been registered under the United States Securities Act, or any state securities laws and are being offered and sold outside the United States in accordance with Regulation S under the Securities Act. For a description of certain restrictions on transfers of the GDSs, see “Transfer Restrictions” and “Subscription and Sale”.

Application has been made to list the GDSs on the Socie´te´ de la Bourse de Luxembourg S.A. (the “Luxembourg Stock Exchange”). We expect the GDSs will be listed on the Luxembourg Stock Exchange after the Closing Date.

The Managers expect to deliver the GDSs through the facilities of Euroclear Bank S.A./N.V. as operator of the Euroclear System (“Euroclear”) and Clearstream Banking, socie´te´ anonyme (“Clearstream, Luxembourg”), against payment on January 7, 2003.

Global Coordinator

Lead Manager

Securities (Asia) Limited

Manager

Yuanta Core Pacific Securities Limited

The Offering Circular is dated January 7, 2003.

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

The distribution of this Offering Circular and the offering and sale of the GDSs in certain jurisdictions may be restricted by laws. 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 GDSs and distribution of this Offering Circular, see “Subscription and Sale”. This Offering Circular does not constitute an offer of, or an invitation by or on behalf of the Company or the Managers to subscribe for or purchase, any of the GDSs in any jurisdiction in which such offer or invitation would be unlawful.

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

The Company has prepared the audited consolidated and non-consolidated financial statements as at and for the years ended December 31, 1999, 2000 and 2001 and unaudited non-consolidated financial statements as at and for the nine-month periods ended September 30, 2001 and 2002, contained herein in accordance with accounting principles generally accepted in the ROC.

		TABL	E OF	CONTENTS
			Page		Page
Summary . . . . . . . . . . . .	.	. . . . . . . . . . . . .	1	Principal Shareholders . . . . . . . . . . . . . . .	71
Risk Factors . . . . . . . . .	.	. . . . . . . . . . . . .	9	Description of Share Capital . . . . . . . . . . .	72
Use of Proceeds . . . . . . . . . . . . . . . . . . . . Dividends and Dividend Policy . . . . . . . . . Capitalization . . . . . . . . . . . . . . . . . . . . . .			26 27 29	Description of Global Depositary Receipts . . . . . . . . . . . . . . . . . . . . . . . . Information Relating to the Depositary . . . Taxation . . . . . . . . . . . . . . . . . . . . . . . . . .	77 86 87
Exchange Rates . . . . . .	.	. . . . . . . . . . . . .	30	Subscription and Sale . . . . . . . . . . . . . . . .	89
Market Price Information		. . . . . . . . . . . . .	31	Legal Matters . . . . . . . . . . . . . . . . . . . . . .	92
Changes in Issued Share	Capital . . . . . . . .		32	Independent Auditors . . . . . . . . . . . . . . . .	92
Selected Financial Data	.	. . . . . . . . . . . . .	33	General Information . . . . . . . . . . . . . . . . .	93
Management’s Discussion Financial Condition and Operation . . . . . . . . . . Business . . . . . . . . . . . . .		and Analysis of Results of . . . . . . . . . . . . . . . . . . . . . . . . . .	35 49	Summary of Principal Differences between ROC GAAP and U.S. GAAP . . . . . . . . . Index to Financial Statements . . . . . . . . . . Appendix A — Foreign Investment and Exchange Controls in the ROC . . . . . . .	95 F-1 A-1
Management . . . . . . . . .	.	. . . . . . . . . . . . .	66	Appendix B — The Securities Market of
Related Party Transactions		. . . . . . . . . . . .	70	The ROC . . . . . . . . . . . . . . . . . . . . . . . .	B-1

CERTAIN DEFINED TERMS, TRADEMARKS AND CURRENCY OF PRESENTATION

Except where the context otherwise requires, all references herein to “SiS” are to Silicon Integrated Systems Corporation and all references to the “Company” and “we” are to SiS or SiS and its subsidiaries, consolidated or non-consolidated, as the context requires. All references herein to “affiliate” are to a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified, as these terms are defined in Rule 405 under the Securities Act. All references herein to “Taiwan” or the “ROC” are to the island of Taiwan and other areas under the effective control of the Republic of China. All references herein to the “ROC Government” or the “ROC Company Law” are references to the government of the Republic of China and the Company Law of the Republic of China, respectively. All references herein to “ROC GAAP” are to the “Rules Governing Preparation of the Financial Statements of Securities Issuers” and accounting principles generally accepted in the ROC and all references herein to “U.S. GAAP” are to accounting principles generally accepted in the United States. All references herein to the “PRC” or “mainland China” are to the People’s Republic of China and do not include Hong Kong, Macau or Taiwan. All references herein to the “TSE” are references to the Taiwan Stock Exchange. All references herein to the “GTSM” are references to The GreTai Securities Market (previously known as the ROC Over-the-Counter Securities Market).

“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. “Direct X” is a registered trademark of Microsoft Corporation.

The Company’s financial statements are prepared using ROC GAAP, and are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions, including the United States, other than those in the ROC. The material differences between ROC GAAP and U.S. GAAP, as applicable to the Company are discussed under “Summary of Significant Differences Between ROC GAAP and U.S. GAAP”. Certain financial amounts presented herein may not correspond directly to the Company’s financial statements included elsewhere herein or may not add up due to rounding.

Except as otherwise indicated, all financial information set forth herein with respect to various members of the Company has been presented in New Taiwan Dollars.

The Company publishes its financial statements in New Taiwan Dollars, the lawful currency of the ROC. All references herein to “New Taiwan Dollars”, “NT Dollars” and “NT$” are to New Taiwan Dollars, all references herein to “United States Dollars”, “U.S. Dollars” and “U.S.$” are to United States Dollars, all references herein to “ C= ” is to Euro Dollars, all references herein to “HK$” is to Hong Kong Dollars, and all references herein to “JP” is to Japanese Yen. All translations from New Taiwan Dollars to United States Dollars were made on the basis of the average of buying and selling exchange rates in Taipei for cable transfers in NT Dollars per U.S. Dollar as certified by the Bank of Taiwan of NT$35.00 = U.S.$1.00 as of December 31, 2001, and of NT$34.92 = U.S.$1.00 as of September 30, 2002, with respect to information for the nine months ended September 30, 2002. All amounts translated into United States Dollars as described above are unaudited and are provided solely for the convenience of the reader, and no representation is made that the NT Dollar or U.S. Dollar amounts referred to herein could have been or could be converted into U.S. Dollars or NT Dollars, as the case may be, at any particular rate, the above rates or at all. See “Exchange Rates”. The closing rate between the NT Dollar and the U.S. Dollar on December 31, 2002 was NT$34.75 = U.S.$1.00.

SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS

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

These forward-looking statements include, but are not limited to statements relating to:

industry and product pricing trends;

developments in technology affecting the market acceptance and competitiveness of our products;
applications for our products;
pricing levels of our and our competitors’ products;
our development and marketing of new products;
our development and maintenance of relationships with our customers and strategic relationships;
the expansion and enhancement of our manufacturing capacity, with respect to capacity expansion at our 8-inch fab;
our development of new process technologies;
our intention to increase the size of our global sales force and increase our efforts to attract OEM customers;
our ability to attract and retain qualified personnel;
our expectations about growth in demand for our products;
our anticipated capital expenditures for the planned expansions of our business and our anticipated use of proceeds from this offering;

iii

our ability to fund our future operations through borrowing or otherwise;

the outcome of litigation, legal proceedings and other claims against us;
our ability to adjust to technological change; and

our ability to effectively compete in a highly competitive environment.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, levels of activity, performance or achievements.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

The Company is a company limited by shares incorporated under the ROC Company Law. Substantially all of the Company’s directors and executive officers, and its respective supervisors, 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 the ROC, or to enforce against any of them judgments obtained in courts outside the ROC.

Any final judgment obtained against the Company or such persons in any court other than the courts of the ROC in respect of any legal suit or proceeding arising out of or relating to the GDSs will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that:

the court rendering the judgment has jurisdiction over the subject matter according to the laws of the ROC;
the judgment is not contrary to the public order or good morals of the ROC;
if the judgment was rendered by default by the court rendering the judgment, 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
judgments of the courts of the ROC are recognized and enforceable in the court rendering the judgment on a reciprocal basis.

A party seeking to enforce a foreign judgment in the ROC would, except under limited circumstances be required to obtain foreign exchange approval from the Central Bank of China for the remittance payment out of the ROC of any amounts recovered in connection with the judgment denominated in a currency other than NT Dollars.

SUMMARY

This summary highlights information found in greater detail elsewhere in this Offering Circular. We urge you to read the entire Offering Circular carefully, especially the risks of investing in our GDSs discussed under “Risk Factors,” before deciding to buy our GDSs.

Our 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 optimizing 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 U.S.$1,500), mainstream (priced from U.S.$800 to U.S.$1,500) and value (priced below U.S.$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. As our business needs require, we expect to increase the capacity of our fab in the future. 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. Our operating losses increased in the first nine months of 2002 compared to those in the first nine months of 2001, which reflected increasing average selling price downward pressure. 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%, 76.9%, and 82.5% of our net revenue in 1999, 2000 and 2001, respectively.

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 through 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-oxide-silicon, 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 (the “ ITC ”) 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. In October 2002, the International Trade Commission made a final determination in favor of United Microelectronics Corporation (“UMC”) for one of the patent infringement claims. The remedy ordered by the ITC involved issuance of an order barring the importation into the United States of integrated circuits, including chipsets and graphics chips, that are made by a process covered by infringed patent and are manufactured abroad and/or imported by or on behalf of us or any of our affiliated companies, parents, subsidiaries, or other related business entities, or our successors or assigns, and motherboards containing the same. The ITC did not order us to pay any damages. The Office of U.S. Trade Representative, after reviewing the limited exclusion order, informed us that the order remains intact. Reserving the right to file an appeal against the ITC in the U.S. Court of Appeals for the Federal Circuit, we have reached a preliminary understanding with UMC on December 24, 2002 to settle the complaints. However, we can not assure you that a final settlement agreement will be reached to the extent to the Company’s satisfaction or at all. While the settlement proceedings are currently in progress, we have already implemented an alternative process and design for integrated circuit products that ultimately are destined for U.S. importation, which aims to result in products manufactured with this alternative process and design not being covered by infringed patent or the limited exclusion order. With respect to the District Court litigation with United Microelectronics Corporation, 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 Access to Low Cost and Leading-edge Manufacturing.

We believe that owning our own fab has increased our knowledge of the manufacturing aspects of the semiconductor business, allowing us to closely integrate design and manufacturing and 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 .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 utilization 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 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.

Corporate Information

Silicon Integrated Systems Corp. was incorporated under the laws of the Republic of China on August 26, 1987. Our principal executive offices are located at No. 16, Creation Rd. I, Science-Based Industrial Park, Hsinchu, Taiwan. Our phone number is (8863) 577-4922. Our web-site is http://www.sis.com.tw. The information on the web-site is not part of this Offering Circular.

The Offering

GDSs offered by us...................... 25,000,000 GDSs GDSs per share ........................... Each GDS

Each GDS represents ten shares of our common shares.

Common shares to be outstanding after this offering ....................

1,338,016,576 common shares. Approximately 18.68% of the common shares to be outstanding following this offering will be represented by the GDSs sold in this offering and 81.32% will be held by existing shareholders. See “Capitalization”.

Dividends and dividend policy ..... To date the Company has not paid any cash dividends on our common stock. The Company’s board of directors does not intend to propose to the shareholders for the foreseeable future that the Company pays cash dividends. The Company has paid annual stock dividends on the common shares since 1995.

Taiwan Stock Exchange symbol ...

2363 for the common shares.

ROC share issuance procedures and temporary limitation on withdrawal of common shares from the GDS facility ...............

Under the ROC share issuance procedures applicable to offerings of GDSs representing newly-issued shares of ROC companies, we will initially deliver to the Custodian a certificate of payment that represents the irrevocable right to receive our common shares that will be represented by the GDSs offered by this Offering Circular. Upon completion of all required ROC share issuance procedures, which typically take no more than 90 days, we will deliver our common shares to the Custodian in exchange for the certificate of payment. Until that exchange has been completed, the GDSs offered by this Offering Circular will represent interests in the certificate of payment held by Custodian. During this period, except as described under “Description of Global Depositary Receipts” in this Offering Circular, holders of GDSs will be entitled to the same rights as if the Custodian were holding the common shares that will be delivered by us in exchange for the certificate of payment. Except where the context otherwise requires, all references in this Offering Circular to the common shares represented by our GDSs assume that we have completed the exchange of common shares for the certificate of payment, and during the period before completion of this exchange those references shall be deemed references to the certificate of payment initially delivered to the Custodian.

In addition, under ROC regulations applicable to offerings of GDSs, newly-issued common shares of ROC companies initially offered in GDS form may not be withdrawn from the GDS facility until three months following the initial delivery of the GDSs. Consequently, for a period of three months following the closing of this offering, owners of the GDSs offered by this Offering Circular will not be able to withdraw the underlying common shares from our GDS facility. See “Description of Global Depositary Receipts”.

	Delivery of Shares represented by	Delivery of Shares represented by	On the Closing Date, the Company will deliver to the
	the GDSs to the Custodian........		Custodian one certificate of payment in respect of the
			underlying Shares represented by the GDSs. The Company
			will file an application, as soon as practicable after the
			Closing Date, with the Taiwan Stock Exchange to have the
			Shares represented by the GDSs listed on the Taiwan Stock
			Exchange in book-entry form and the Company will, on the
			listing date, have delivered to the Custodian through Taiwan
			Securities Central Depositary Co., Ltd.’s book-entry system
			the Shares represented by the GDSs.
	Lock-up arrangement. ..................		The Company has agreed that for a period of 90 days after the
			date of the Subscription Agreement, it will not, without the
			prior written consent of SinoPac Securities (Asia) Limited, on
			behalf of the Managers, and will not announce its intention to,
			directly or indirectly, (a) issue, offer, pledge, sell, contract to
			sell, grant any option to purchase or otherwise dispose of, any
			Shares, any GDSs representing Shares or deposit any Shares
			or any securities convertible into or exchangeable or
			exercisable for GDSs or Shares in any depositary receipt
			facility or (b) enter into any swap or similar agreement that
			transfers, in whole or in part, the economic risk of ownership
			of GDSs or Shares or any securities convertible into or
			exchangeable or exercisable for GDSs or Shares, except that
			the Company (a) may grant options to its employees pursuant
			to its existing employee stock option plan and (b) may issue
			Shares or GDSs upon conversion of its existing convertible
			securities.
	Voting rights ................................		Holders of GDSs will have the right to exercise voting rights
			with respect to the Shares represented by GDSs only in
			accordance with the provisions of the Deposit Agreement. See
			“Risk Factors” and “Description of the Global Depositary
			Receipts — Voting Rights”.
	Dividends ....................................		Holders of GDSs will be entitled to receive dividends, subject
			to the terms of the Deposit Agreement, to the same extent as
			the holders of Shares, less the fees and expenses payable
			under such Deposit Agreement and any ROC tax applicable to
			such dividends. Cash dividends on the Shares, if any, will be
			paid in NT dollars and, subject to any restrictions imposed by
			ROC law and regulations, will be converted into U.S. dollars
			by the Depositary in the manner provided in the Deposit
			Agreement and distributed to holders of GDSs. See
			“Description of Share Capital — Dividends and
			Distributions” and “Description of Global Depositary
			Receipts — Dividends and Other Distributions”.

ROC Taxation of non-ROC	ROC Taxation of non-ROC	Dividends (whether in cash or Shares) declared by the
Holders.....................................		Company out of retained earnings and distributed to a
		Non-ROC Holder (as defined in “Taxation — ROC Taxation”)
		in respect of the Shares represented by GDSs are subject to
		ROC withholding tax currently at the rate of 20% on the
		amount of the distribution (in the case of cash dividends) or
		on the par value of the Shares (in the case of stock dividends).
		The 20% withholding tax can be reduced proportionately to
		the extent the Company previously paid a 10% retained
		earnings tax on the undistributed earnings. Distributions of
		Shares declared by the Company out of capital reserves are
		not subject to ROC withholding tax. Under current ROC law,
		capital gains on the sale of Shares represented by GDSs are
		exempt from ROC income tax. See “Taxation — ROC
		Taxation”.
Transfer restrictions .....................		The GDSs will be subject to certain restrictions on transfer.
		See “Subscription and Sale”.
Use of proceeds ..........................		The net proceeds of this offering will be approximately
		U.S.$137.0 million, after the deduction of underwriting
		commission and estimated offering expenses. We intend to
		use the net proceeds for the repayment of debts and the
		purchase of new machinery and equipment for our fab. See
		“Use of Proceeds”.
Closing date ...............................		The closing of the Offering is on or about January 7, 2003 (the
		“Closing Date”).

The number of common shares to be outstanding after this offering is calculated based on the number of our common shares outstanding as of December 16, 2002.

SUMMARY FINANCIAL DATA

The following table presents summary financial information for the Company. The summary consolidated financial information for the years ended December 31, 1999, 2000 and 2001 presented in this table are derived from the Company’s audited consolidated financial statements and notes thereto that are included elsewhere in this Offering Circular. The summary non-consolidated financial information for the nine months ended September 30, 2001 and 2002 have been derived from the Company’s unaudited non-consolidated financial statements and notes thereto that are included elsewhere in this Offering Circular. The Company’s financial statements were prepared using ROC GAAP and are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in other countries and jurisdictions, including the U.S. and U.K. ROC GAAP differs in many material respects from U.S. GAAP. For a discussion of these differences, see “Summary of Significant Differences Between ROC GAAP and U.S. GAAP” included elsewhere in this Offering Circular. The summary financial information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s financial statements and the notes to those statements included elsewhere in this Offering Circular.

Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,
1999 NT$ $10,845 7,077 3,768 742 999 369 2,110 1,658 194 25 1,827 132 1,959 1	2000 2001 NT$ NT$ (In millions, (Consolidated) $ 7,821 $ 9,987 7,503 7,441 318 2,546 1,194 1,883 723 602 335 566 2,252 3,051 (1,934) (505) 1,195 218 150 800 (889) (1,087) 663 478 (226) (609) — 1	2001 2001 2002 2002 U.S.$(1) NT$ NT$ U.S.$(1) except per share data) (Unaudited, unconsolidated) $ 285 $7,274 $10,870 $ 311 212 5,372 8,348 239 73 1,902 2,522 72 54 1,356 1,442 41 17 424 1,244 36 16 303 519 15 87 2,083 3,205 92 (14) (181) (683) (20 6 165 397 11 23 532 625 18 (31) (548) (911) (27 14 — — — (17) (548) (911) (27 — — — —	2002
			72
			41 36 15
			92
			(20
			11 18
			(27 —
			(27 —
$ 1,960 $ 2.30(2)

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 ........................................... Convertible bonds payable .................. Long-term bank loans — net of current portion................................ Shareholders’ equity ...........................		As at December 31,
	1999 NT$ $12,530 10,288 796 7,276 24,791 5,645 — — — 18,975

(1) Translated into United States Dollars using the average of buying and selling rates published by the Bank of Taiwan at December 31, 2001 of NT$35.00 = U.S.$1.00, and at September 30, 2002 of NT$34.92 = U.S.$1.00. Such translation amounts are unaudited and should not be construed as representations that the NT Dollar amounts were, or have been, or could be, converted into U.S. Dollars at that or any other rate.
(2) Earnings per Share are calculated by dividing net income by the weighted average number of Shares outstanding during each year after adjusting retroactively for the effect of stock dividends and employee’ bonuses.
(3) Earnings per Share are calculated by dividing net income by the weighted average number of shares outstanding during each nine-month period after adjusting retroactively for the effect of stock dividends.

RISK FACTORS

An investment in our GDSs 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 our GDSs and our common shares could decline and you may lose all or part of your investment. Any potential investor in, and buyer of, our GDSs should pay particular attention to the fact that we are an ROC company and are subject to a legal and regulatory environment which in some respects may be different from that which prevails in other countries.

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 (U.S.$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 our GDSs and 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 utilization 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 our GDSs and 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 U.S.$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.

UMC petitioned to the ITC to review particular aspects of the initial determination. The ITC decided to review some, but not all of the issues raised in UMC’s petition. On October 7, 2002, the ITC issued its final determination and a limited exclusion order against us. In its final determination, the ITC found that the asserted ‘352 patent claims either were invalid or were not infringed by our products. The ITC also found that 18 of the 19 claims that UMC asserted from its ‘345 patent were

invalid but certain of our products infringed the valid claim in the ‘345 patent (claim 13). The remedy ordered by the ITC involved issuance of an order barring the importation into the United States of integrated circuits, including chipsets and graphics chips, that are made by a process covered by claim 13 of “345 patent and are manufactured abroad and/or imported by or on behalf of us or any of our affiliated companies, parents, subsidiaries, or other related business entities, or our successors or assigns, and motherboards containing the same. The ITC did not order us to pay any damages. The Office of U.S. Trade Representative, after reviewing the limited exclusion order which is known as a “Presidential Review”, informed us that the order remains intact. Reserving the right to file an appeal against the ITC in the U.S. Court of Appeals for the Federal Circuit, we have reached a preliminary understanding with UMC on December 24, 2002 to settle the complaints. However, we can not assure you that a final settlement agreement will be reached to the extent to the Company’s satisfaction or at all.

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 noninfringement and invalidity of the ‘345 patent and the ‘701 patent. Discovery in the matter is ongoing. The court last conducted a case conference on August 16, 2002 and the parties advised the court that a final determination of UMC’s claims before the ITC was expected in September and accordingly, the court scheduled a subsequent case management conference for November 15, 2002. The ITC’s final determination was entered on October 7, 2002 and remains intact after the Presidential review. In light of the ITC final determination, the parties have met and conferred to postpone the November 15, 2002 case management conference. No trial date has been set so far. In our proposed settlement plan, we will require UMC dropping the civil complaint against us. However, there can be no assurance that UMC will agree to such plan.

While the settlement proceedings are currently in progress, we have already implemented an alternative process and design for integrated circuit products that ultimately are destined for U.S. importation, which aims to result in products manufactured with this alternative process and design not being covered by claim 13 of the ’345 patent or the limited exclusion order. We have presented relevant documentation and analysis related to this alternative process and design to the United States Customs Service, which is responsible for the enforcement of the limited exclusion order, and we hope to procure a certification that the new products being shipped by us are not excluded from importation into the United States by the limited exclusion order. However, we cannot assure you that the certification for the new products can be obtained. We have incurred substantial costs in connection with defending ourselves and implementing alternative processes and designs. In the proposed settlement plan, we will also require UMC not claiming any patent infringement on our alternative processes and designs through a cross-license arrangement. However, we cannot ensure that UMC will not claim that our alternative processes and designs still infringe their patents and therefore our core logic chipset products are subject to the exclusion order. In such case, 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.

process and design not being covered by infringed patent or the limited exclusion order. We cannot ensure that UMC will agree to the proposed settlement plan or, if no final settlement agreement will be entered, will not succeed in the litigation in obtaining significant monetary damages or injunctive or other equitable relief. In such case, 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. Because of the complexity of the technology used and the multitude of patents, copyrights and other overlapping intellectual property rights, the semiconductor industry is characterized 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 and Fujitsu Siemens Computers GmbH, 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. Correspondence between National Semiconductor and us stopped in November 2001 and we have not heard from National Semiconductor regarding the infringement issue since then. In the early months of 2002, communications with the Syndia Corporation began. In the last correspondence, the Syndia Corporation has made an offer to settle at US$700,000. Given that the Syndia Corporation has initiated litigation against other manufacturers and “prosecution laches defense” has been raised by the defendants, we have been advised by our legal counsel engaged to represent us in the Syndia case to await the outcome of such litigation which is expected to finish in January 2003 before responding to the Syndia Corporation’s offer. We cannot assure you that, if a settlement is reached with the Syndia Corporation, the settlement amount will be US$700,000 or the higher or the lower of the same. 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.

Termination of licensing agreement with respect to the technologies, processes, patents adopted in the manufacture of our products could adversely affect our operating results

The manufacture of certain of our products requires the use of technologies, processes, patents, which license thereof have been granted to us by relevant owners of such technologies, process, patents, as the case may be, pursuant to license agreements entered into between such owners and ourselves on the terms and conditions set forth therein. See “Business - Intellectual Property”. Although we intend to comply and fulfill all of our obligations provided in such licensing agreements, we cannot assure you that we will be deemed by the licensors to have fulfilled our obligations. In particular, with respect to certain licensing agreements which provide for a change in control in our company as a cause for termination, we cannot assure you that the recent cessation of Mr. Eugene C. Y. Duh for serving as our chairman and director and the disposal of the majority of his shares in our company will not be regarded by the relevant licensors to constitute a change in control. However, to date, we have not received any notice of termination from any of the licensors but that does not mean that we will not receive such notice in the near future. In the event any of the licensing agreements is terminated, we will have to develop, or obtain licenses for, alternative technologies or processes in the manufacturing of our products and the development and procurement of new licenses may slow down our production process, place additional financial burdens on us and adversely affect our operating results.

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 PRC. 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 utilization and manufacturing yields and optimize 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 utilization and manufacturing yields, and optimize 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 utilization affect our operating results because a large percentage of our operating costs are fixed. Increases or decreases in our capacity or capacity utilization 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 utilization 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 utilize our equipment and process technologies, which can affect our margins. If we are unable to maintain and improve our capacity, capacity utilization, and manufacturing yields or to optimize 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.

As at September 30, 2002, the capacity at our fab is 28,000 8-inch wafers per month. As our business needs require, we expect to use proceeds of this offering to increase the capacity of our fab in the future. However, as our business continues growing, we will require additional external funding to satisfy our future capital expenditure requirements.

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 .15-micron and .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 cross-licensing agreement with International Business Machines, or IBM, for process-related patents. 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 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% and 13.4%, respectively, of our net revenue in 2001. Our five largest customers and their affiliated companies, together accounted for 70.7%, 76.9% and 82.5% 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 favorably 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 ALi Corporation, 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 characterized 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 utilize 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 organizing 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.

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 June 30 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%; (ii) the shareholders’ equity ratio (net shareholders’ equity/total assets) shall not fall below 50%; and (iii) annual principal-interest margin multiples (net profit before tax + interest charge + depreciation + amortization/interest charge) shall not fall below 2.5 before the end of 2001 and below 3.0 in 2002 and beyond. In connection with our issuance of U.S.$100,000,000 Zero Coupon Convertible Bonds due 2007 (the “Bonds”, which includes U.S.$20,000,000 aggregate principal amount of the optional bonds) in July 2002, the shareholders’ equity ratio has been amended such that it shall not fall below 43%. As of September 30, 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. Because of 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 recognize 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 December 1, 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 our GDSs and our common shares.

We are vulnerable to natural disasters and other events beyond our control, including a serious ongoing drought 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, is currently experiencing a serious drought. If the drought continues 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 epicenter in central Taiwan. The earthquake caused interruptions to power supplies and significant damage to buildings across Taiwan. There have since been a number of smaller earthquakes in Taiwan. Some of these earthquakes also affected our operations and we have had to recalibrate some of the equipment in our fab. Similar incidents may occur in the future, which could 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 September 16 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.

Fluctuations in exchange rates could result in foreign exchange losses.

Currently, the majority of our revenue is denominated in U.S. dollars. Our costs of revenue, operating expenses and capital expenditures are incurred in several currencies, including NT dollars, Japanese yen, U.S. 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 U.S. dollar and the NT dollar will affect the U.S. dollar value of our common shares and the market price of the GDSs and any cash dividends paid in NT dollars on common shares represented by GDSs.

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 minimize the fluctuation of the U.S. dollar/NT dollar exchange rate and to prevent significant decline in the value of the New Taiwan dollar. New Taiwan dollars have depreciated against U.S. dollars from U.S.$1.00 = NT$27.52 on January 2, 1997 to U.S.$1.00 = NT$34.75 on December 31, 2002, based on the noon buying rates published by the Federal Reserve Bank of New York.

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 reorganization 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.

Changes in exchange controls which restrict your ability to convert proceeds from the sale of our GDSs or common shares may reduce the value of your investment.

Under current ROC law, the Depositary, without obtaining further approvals from the Central Bank of China or any other governmental authority or agency of the ROC, may convert NT dollars into other currencies, including U.S. dollars, for:

the proceeds of the sale of common shares represented by GDSs or received as stock dividends on the common shares and deposited into the depositary receipt facility; and
any cash dividends or distributions received in respect of the common shares.

In addition, the Depositary may also convert into NT dollars incoming payments for purchases of common shares for deposit in the depositary receipt facility against the creation of additional GDSs. The Depositary is required to obtain foreign exchange approval from the Central Bank of China on a payment-by-payment basis for conversion from NT dollars into foreign currencies of the proceeds from the sale of subscription rights for new common shares. Although it is expected that the Central Bank of China will grant this approval as a routine matter, we cannot assure you that in the future any approval will be obtained in a timely manner, or at all.

Under current ROC law, a holder, after withdrawing the common shares underlying our GDSs and becoming a holder of our common shares, without obtaining further approval from the Central Bank of China, may convert from NT dollars into other currencies, including U.S. dollars, the following:

the proceeds of the sale of any underlying common shares withdrawn from the depositary receipt facility or received as a stock dividend on the common shares; and

any cash dividends or distribution received.

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

Risks Relating to Ownership of Our GDSs or Our Common 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 March 13, 2000, the TSE Index experienced a 617 point drop, which represented the single largest point decrease in the history of the TSE Index. From January 1, 2000 to December 31, 2000, the TSE Index dropped 45.9%. The Taiwan government has in the past purchased shares listed on the Taiwan Stock Exchange to stabilize that market. On January 2, 2003, the TSE Index closed at 4,524.87. 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 our GDSs and 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 employees’ bonuses paid for any year will be equal to 10% 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 bonuses may be paid in the form of shares valued at their par value of NT$10 per share regardless of the market price of the shares. Because these shares are issued at par value, any issuance of these shares would have a dilutive effect on the GDSs and our common shares.

The total number of GDSs outstanding may increase substantially if the Bonds are convertible into GDSs.

The terms and conditions of the Bonds provide that the Bonds may be convertible into GDSs if GDSs are available and if the relevant authorities approve such conversion. If the Bonds may be convertible into GDSs, the total number of GDSs outstanding may increase substantially, which may affect the prices of our GDSs.

You may not be able to participate in rights offerings and may experience dilution of your holdings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. The Depositary may make these rights available to you. Under the Deposit Agreement, the Depositary will not distribute rights to holders of our GDSs unless permitted by applicable law and otherwise feasible. In particular, the Depositary will not distribute these rights unless the distribution and sale of rights and the securities to which these rights relate are either exempt from or not subject to registration under the Securities Act of 1933, as amended, or the Securities Act, with respect to all holders of our GDSs, or are registered under the provisions of the Securities Act. Similarly, we would not be able to make rights available to holders of common shares in the United States unless an exemption is available or the corresponding shares are registered under the Securities Act. We can give no assurance that we can establish an exemption from registration under the Securities Act, and we

are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of our GDSs or common shares may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

If the Depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or feasible, it will allow the rights to lapse, in which case you will receive no value for these rights.

If an active market for our GDSs fails to develop or be sustained, the price of our GDSs may fall.

Before this offering, there has been no market outside the ROC for our common shares and there has been no market for our GDSs anywhere. Following this offering, the Taiwan Stock Exchange will remain the only market for the common shares. Application has been made to list the GDSs in the Luxembourg Stock Exchange. We cannot assure you that our listing application for the GDSs with the Luxembourg Stock Exchange will be approved. Neither can we predict the extent to which this offering will result in the development of an active, liquid public trading market for our GDSs or how liquid the market will be. Active, liquid trading markets generally result in lower price volatility and more efficient execution of buy and sell orders for investors, compared to less active and less liquid markets. Liquidity of a securities market is often a function of the volume of the underlying shares that are publicly held by unrelated parties.

Although commencing three months following completion of this offering GDS holders are entitled to withdraw the common shares underlying the GDSs from the GDS facility at any time, ROC law requires that the common shares be held in an account in the ROC or sold for the benefit of the holder on the Taiwan Stock Exchange. In connection with any withdrawal of common shares from our GDS facility, the GDSs evidencing these common shares will be cancelled. Unless additional GDSs are issued, the effect of withdrawals will be to reduce the number of outstanding GDSs and, if a significant number of withdrawals are effected, to reduce the liquidity of the GDSs. We cannot assure you that the Depositary will be able to arrange for a sale of deposited shares in a timely manner or at a specified price, particularly during periods of illiquidity or volatility with respect to our common shares.

As a holder of GDSs, your voting rights are limited by the terms of the Deposit Agreement, which may diminish your influence over our corporate affairs and may reduce the value of your GDSs.

As a holder of GDSs, you will generally not be able to exercise voting rights on an individual basis. You may exercise your voting rights with respect to the underlying common shares only in accordance with the provisions of the Deposit Agreement. In particular, except in the election of directors and supervisors (which is by means of cumulative voting), the Depositary will not attempt to carry out voting instructions from GDS holders with respect to any resolution unless holders of at least 51% of the outstanding GDSs request that the Depositary vote in the same manner on that resolution, in which case the Depositary will vote all deposited securities in accordance with those instructions. Otherwise, holders of GDSs shall be deemed to have instructed the Depositary to authorize and appoint the person designated by us as representative of the Depositary and the holders of GDSs to vote, at his or her discretion, all the deposited securities on that resolution, which may not be in the interest of the GDS holders. Further, the Depositary need not vote or give that authorization and appointment unless it receives a legal opinion from our counsel that it is legal for it to do so and that the action will not expose the Depositary to legal liability on the grounds that the voting arrangement is in violation of ROC law.

During any period in which your GDSs represent the irrevocable right to receive our common shares evidenced by the certificate of payment deposited with the Custodian, you may exercise your voting rights in the same manner as if your GDSs represented our common shares. Our shareholder register is currently closed due to our extraordinary shareholders’ meeting to be held on January 14, 2003. As a result, you will not be entitled to voting rights in such extraordinary shareholders’ meeting.

Restrictions on the ability to deposit common shares in to our GDS program may adversely affect the liquidity of our GDSs.

Under the current laws of the ROC, specific prior approval of the Securities and Futures Commission of the ROC may be required in order to deposit common shares into our GDS program and for new GDSs to be issued. See “Annex B — Foreign Investment and Exchange Controls in the ROC — Depositary Receipts.” As a result of these limits on the ability to deposit common shares into our GDS program and the fact that withdrawals of shares underlying our GDSs may reduce the liquidity of the GDSs by reducing the number of GDSs outstanding, the prevailing market price of our GDSs may be different than the prevailing market price of the equivalent number of our common shares on the Taiwan Stock Exchange.

You will not be able to withdraw the common shares underlying our GDSs for a period of three months after the initial delivery of the GDSs.

Under ROC regulations applicable to offerings of GDSs, newly-issued shares of ROC companies initially offered in GDS form may not be withdrawn from the GDS facility until three months following the initial delivery of the GDSs. As a result, for a period of three months following closing of this offering, owners of the GDSs offered by this Offering Circular will not be able to withdraw the underlying common shares from our GDS facility or sell the underlying common shares on the Taiwan Stock Exchange.

You may be required to appoint agents in the ROC to handle various tax and administrative matters if you withdraw common shares from our GDS program and become a shareholder, which may make share ownership burdensome.

If you wish to withdraw common shares from our GDS program and hold your common shares, you are required under ROC law to appoint a tax agent, who also serve as a tax guarantor in the ROC, for filing tax returns and making tax payments. Evidence of the appointment of a tax guarantor and the approval of the appointment by the ROC tax authorities are conditions to your repatriation of profits from the sale of common shares. We cannot assure you that you will be able to appoint and obtain approval for a tax guarantor in a timely manner, or at all.

In addition, you will be required to appoint a local agent in the ROC to open a securities trading account with a local securities brokerage, remit funds and exercise shareholders’ rights. Further, you must also appoint a local bank to act as custodian for handling the confirmation and settlement of trades, the safekeeping securities and cash proceeds and the satisfaction of reporting obligations. Without making these appointments and obtaining approval from the TSE, you will not be able to hold or sell our common shares withdrawn from a depositary receipt facility on the TSE.

USE OF PROCEEDS

The net proceeds to us after deducting underwriting commission and our estimated offering expenses will be approximately U.S.$137.0 million. We intend to use the net proceeds in the following manner:

Approximately U.S.$115.0 million for the repayment of the next four semi-annual payments under each of our five-year domestic secured bonds and our long-term secured syndicated bank loan; and

The remainder will be used to purchase new machinery and equipment for our fab.

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% 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) NT$ $2.10 1.60 2.40 5.58 0.99	Total Common Shares Issued as Stock Dividends 54,285,000 50,453,600 87,905,310 342,527,572 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

(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 August 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 Share Capital — Dividends and Distributions.”

Holders of GDSs will be entitled to receive dividends, subject to the terms of the Deposit Agreement, to the same extent as holders of common shares. Cash dividends will be paid to the Depositary in NT dollars and, except as otherwise described under “Description of Global Depositary Receipts — Dividends and Distributions — Distributions of Cash”, will be converted by the Depositary into U.S. dollars and paid to holders of GDSs according to the terms of the Deposit Agreement. Stock dividends will be distributed to the Depositary, and, except as otherwise described under “Description of Global Depositary Receipts — Dividends and Distributions — Distributions of Shares”, will be distributed by the Depositary, in the form of additional GDSs, to holders of GDSs according to the terms of the Deposit Agreement. Holders of outstanding common shares on a dividend

record date will be entitled to the full dividend declared without regard to any prior or subsequent transfer of common shares. Accordingly, purchasers of GDSs holding outstanding GDSs on the relevant dividend record date will, subject to the terms of the Deposit Agreement, be entitled to the full amount of any dividend declared at our next general meeting of shareholders.

For information relating to ROC withholding taxes payable on dividends, see “Taxation — ROC Taxation — Dividends”. For information relating to ROC foreign exchange controls regarding the conversion by the Depositary of dividends on common shares from NT dollars into U.S. dollars for the payment to holders of GDSs, see “Annex B — Foreign Investment and Exchange Controls in the ROC — Depositary Receipts”.

CAPITALIZATION

The following table sets forth our short-term debt and capitalization as of September 30, 2002, and as adjusted to give effect to the application of the net proceeds of the offering after deducting underwriting discounts and our estimated expenses of the offering.

This table should be read in conjunction with the Company’s unaudited unconsolidated financial statements for the nine months ended September 30, 2002 included elsewhere in this Offering Circular, which were prepared in accordance with ROC GAAP and which may differ in material respects from U.S. GAAP or the generally accepted accounting principles of certain other countries. See “Summary of Significant Differences Between ROC GAAP and U.S. GAAP”.

As of September 30, 2002	As of September 30, 2002	As of September 30, 2002	As of September 30, 2002
Unaudited Actual		As Adjusted
NT$ U.S.$(3) NT$ (In millions, except per share data) $4,935(1) $141 $ 4,935			U.S.$(3) $141
$8,038(2) 2,942 80 11,060 10,880 7,828 — (911) 30 17,827	$230 84 2 316 311 224 — (26) 1 510	$ 8,038 2,942 80 11,060 13,380 10,057 — (911) 30 22,556	$230 84 2
			316
			383 288 — (26 1
			646
$ 28,887	$826	$33,616	$962

(1) Of this amount, NT$2,390 was unguaranteed and secured and NT$2,545 was unguaranteed and unsecured.

(2) All of this long-term debt, net of current portion, was guaranteed and secured.

(3) New Taiwan Dollar amounts have been translated into U.S. Dollars using the average of noon buying and selling exchange rates published by Bank of Taiwan at September 30, 2002 of NT$34.92 = U.S.$1.00 solely for the convenience of the reader.

There has not been any material changes to our capitalization since September 30, 2002.

EXCHANGE RATES

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

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

Year Ended December 31, 1998 ........................................................... 1999 ........................................................... 2000 ........................................................... 2001 ........................................................... 2002 January .................................................. February ................................................ March .................................................... April ...................................................... May ....................................................... June ....................................................... July ....................................................... August ................................................... September .............................................. October .................................................. November .............................................. December ...............................................	Average 33.47 32.27 31.23 33.80 35.02 35.06 35.01 34.90 34.44 33.96 33.39 33.96 34.56 34.95 34.70 34.79	High 35.02 33.24 33.20 35.16 35.10 35.13 35.09 35.00 34.63 34.16 33.87 34.24 34.99 35.17 34.86 34.94	Low 32.04 31.46 30.28 32.27 34.89 34.96 34.92 34.72 34.02 33.53 33.01 33.66 34.11 34.76 34.41 34.73	At Period-End
				32.21 31.46 33.08 34.95 34.96 35.11 35.00 34.72 34.13 33.53 33.75 34.24 34.92 34.76 34.81 34.77

Source: Bank of Taiwan

On January 2, 2003, the closing rate between the NT Dollar and the U.S. Dollar was NT$34.789 = U.S.$1.00.

MARKET PRICE INFORMATION

Our common shares have been listed on the Taiwan Stock Exchange since August 1997. The Taiwan Stock Exchange is an auction market where the securities traded are priced according to supply and demand through announced bid and ask prices. As of December 16, 2002, there were an aggregate of 1,088,016,576 of our common shares outstanding. The following table sets forth, for the periods indicated, the high and low closing prices on the Taiwan Stock Exchange for the common shares.

December 2002 ................. November 2002 ................ October 2002 .................... September 2002 ................ August 2002 ..................... July 2002.......................... June 2002 ......................... May 2002 ......................... April 2002 ........................ March 2002 ...................... February 2002................... January 2002 .................... Year Ended December 31, 2001....... Fourth Quarter.............. Third Quarter ............... Second Quarter ............. First Quarter................. Year Ended December 31, 2000....... Fourth Quarter.............. Third Quarter ............... Second Quarter ............. First Quarter................. Year Ended December 31, 1999....... Year Ended December 31, 1998....... Year Ended December 31, 1997(1) ...	Closing Price Per Share(2)	Closing Price Per Share(2)	Adjusted Price Per	Closing Share(3)	Average Daily Trading Volume	Taiwan Stock Exchange Index	Taiwan Stock Exchange Index
	High	Low	High	Low	(In thousands	High	Low
	NT$ 27.4 26.3 31.2 31.1 35.9 33.0 39.0 45.4 53.50 56.00 54.00 57.50 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$ 21.3 23.4 21.8 28.5 28.4 28.0 27.9 39.2 48.80 49.60 45.80 48.20 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$ 27.4 26.3 31.2 31.1 35.9 33.0 39.0 45.4 53.50 56.00 54.00 57.50 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$ 21.3 23.4 21.8 28.5 28.4 28.0 27.9 39.2 48.80 49.60 45.80 48.20 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) 31,827 4,823.67 36,495 4,813.53 34,024 4,601.37 14,738 4,668.01 27,666 4,968.85 21,301 5,416.50 10,147 5,597.42 12,290 5,910.69 18,188 6,462.30 34,230 6,242.64 30,250 5,968.61 48,430 6,007.33 41,650 6,104.24 66,841 5,551.24 31,366 4,886.86 16,586 5,608.50 51,633 6,104.24 23,364 10,202.20 25,597 6,353.67 20,704 8,585.52 24,423 10,186.17 22,669 10,202.20 16,903 8,608.91 17,520 9,277.09 2,754 10,116.84		4,452.45 4,500.55 3,850.04 4,185.95 4,572.35 4,855.34 5,071.76 5,443.18 6,059.21 5,680.78 5,499.79 5,488.33 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.

(1) Since August 1, 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.

On January 2, 2003, the last reported sale price of our common shares on the Taiwan Stock Exchange was NT$26.9.

The performance of the Taiwan Stock Exchange has in recent years been characterized by extreme price volatility. There are currently limits on the range of daily price movements on the Taiwan Stock Exchange. See “Annex A — the Securities Markets of the ROC — The Taiwan Stock Exchange.”

CHANGES IN ISSUED SHARE CAPITAL

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

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 ......................... September 2002 ...................	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 16,600,139	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) ECB conversion	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 1,088,016,576

(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.

SELECTED FINANCIAL DATA

The following table presents selected financial data for the Company. The selected consolidated financial data for the years ended December 31, 1999, 2000 and 2001 presented in this table are derived from the Company’s audited consolidated financial statements and notes thereto that are included elsewhere in this Offering Circular. The selected non-consolidated financial data for the nine months ended September 30, 2001 and 2002 have been derived from the Company’s unaudited non-consolidated financial statements and notes thereto that are included elsewhere in this Offering Circular. The Company’s financial statements were prepared using ROC GAAP and are not intended to present the financial position and results of operations and cash flows in accordance with accounting principles and practices generally accepted in other countries and jurisdictions, including the U.S. and U.K. ROC GAAP differs in many material respects from U.S. GAAP. For a discussion of these differences, see “Selected of Significant Differences Between ROC GAAP and U.S. GAAP” included elsewhere in this Offering Circular. 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 Company’s financial statements and the notes to those statements included elsewhere in this Offering Circular.

Year ended December 31,	Year ended December 31,	Year ended December 31,	Year ended December 31,	Nine months ended September 30,	Nine months ended September 30,	Nine months ended September 30,
1999 NT$ $10,845 7,077 3,768 742 999 369 2,110 1,658 194 25 1,827 132 1,959 1	2000 2001 2001 2001 2002 2002 NT$ NT$ U.S.$(1) NT$ NT$ U.S.$(1) (In millions, except per share data) (Consolidated) (Unaudited, unconsolidated) $ 7,821 $ 9,987 $285 $7,274 $10,870 $311 7,503 7,441 212 5,372 8,348 239 318 2,546 73 1,902 2,522 72 1,194 1,883 54 1,356 1,442 41 723 602 17 424 1,244 36 335 566 16 303 519 15 2,252 3,051 87 2,083 3,205 92 (1,934) (505) (14) (181) (683) (20) 1,195 218 6 165 397 11 150 800 23 532 625 18 (889) (1,087) (31) (548) (911) (27) 663 478 14 — — — (226) (609) (17) (548) (911) (27) — 1 — — — —					2002
						72
						41 36 15
						92
						(20)
						11 18
						(27) —
						(27) —
$ 1,960 $2.30(2)	$ (226) $(0.21)(2)	$ (608) $(0.57)(2)	$ (17) $(0.02)(2)	(548) (0.51)(3)	(911) (0.85)(3)	(27)
						(0.02)(3)

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 ........ Convertible bonds payable............................. Long-term bank loans — net of current portion Shareholders’ equity ......................................		As at December 31,
	1999 NT$ $12,530 10,288 796 7,276 24,791 5,645 — — — 18,975

(1) Translated into United States Dollars using the average of buying and selling rates published by the Bank of Taiwan at December 31, 2001 of NT$35.00 = U.S.$1.00, and at September 30, 2002 of NT$34.92 = U.S.$1.00. Such translation amounts are unaudited and should not be construed as representations that the NT Dollar amounts were, or have been, or could be, converted into U.S. Dollars at that or any other rate.
(2) Earnings per Share are calculated by dividing net income by the weighted average number of Shares outstanding during each year after adjusting retroactively for the effect of stock dividends and employee’ bonuses.
(3) Earnings per Share are calculated by dividing net income by the weighted average number of shares outstanding during each nine-month period after adjusting retroactively for the effect of stock dividends.

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

This discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and its consolidated subsidiaries and the Non-Consolidated Financial Statements of the Company included elsewhere in this Offering Circular. Such financial statements are English translations of the auditors’ report and financial statements in Chinese prepared for and used in the ROC. The financial statements are not intended to present the financial position and results of operations and cash flows of the Company and its consolidated subsidiaries and the Company, as the case may be, in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than those in the ROC. The standards, procedures and practices utilized to audit such financial statements are those generally accepted and applied in the ROC. See “Summary of Certain Differences between ROC GAAP and U.S. GAAP”. The Company has not quantified the effect of the differences that would arise in the event its financial condition and results of operations were restated or reconciled to U.S. GAAP; however, some of these differences could be material. See “Risk Factors — Risks Relating to the ROC — Financial reporting and accounting standards in the ROC differ from other countries; bonus share issuance”. This Offering Circular contains both consolidated financial statements of the Company and its consolidated subsidiaries and nonconsolidated financial statements of the Company as of and for the years ended December 31, 1999, 2000 and 2001. It also contains non-consolidated financial statements of the Company as of and for the nine months ended September 30, 2001 and 2002. It is not possible to make direct comparisons between information contained in the Consolidated Financial Statements and Non-Consolidated Financial Statements. The Company is not required to, and does not, prepare interim financial statements on a consolidated basis.

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

Overview

We are a leading provider, based on revenue, of integrated and discrete core logic chipsets 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%, 67.3% and 11.8% 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 (U.S.$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 (U.S.$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 (U.S.$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 characterized by relatively high fixed costs. In 2001, 54.9% of our manufacturing costs consisted of depreciation, indirect material costs, amortization of license fees and indirect labor costs. The other significant component of manufacturing costs are outsourcing costs for packaging and testing and direct materials and labor charges. The efficiency of our manufacturing is reflected in our manufacturing costs per unit, which are primarily determined by our fab capacity, capacity utilization 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 utilized 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.

Utilization rate is also a significant determinant of fab efficiency because higher utilization rates also result in spreading manufacturing fixed costs over a larger number of units. Utilization 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. Utilization rates are affected by maximum capacity, the level of customer orders, production efficiency (yields) and product flow management. Other factors affecting our utilization 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 utilization rate at our fab was 96.3% and 75.5% in 2000 and 2001, respectively. These utilization 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, .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 emphasizing 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 percent 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 favorable, 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 (U.S.$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 underutilized, 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.

Results of Operations

Cost of Revenue

Our cost of revenue consists principally of:

raw materials costs;

direct labor costs;

overhead costs, including depreciation expense, amortized fixed license costs for products ready for mass production, indirect labor 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 (U.S.$98 million) in 2001, which represented 14.1% and 46.4%, 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, amortization 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 amortize 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 amortized 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 amortized 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% and 61.5%, 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 million (U.S.$14 million) in 2001. In the first nine months quarters of 2002 we recorded losses from operations of NT$683 million (U.S.$20 million). They also reflect increasing average selling prices of our products during 2000 and 2001 and the decreasing average selling prices in the first nine months of 2002.

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 ................................................................... Minority interest in loss of subsidiaries ........................................................... Net income (loss).............................................................................................	Nine months ended September 30,	Nine months ended September 30,
	(unaudited)
	2001 100.0% 73.9 26.1 18.6 5.8 4.2 28.6 (2.5) 2.3 7.3 (7.5) 0.0 (7.5)	2002
		100.0% 76.8 23.2 13.3 11.4 4.8 29.5 (6.3) 3.7 5.8 (8.4) 0.0 (8.4)

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

Net revenue. Our net revenue increased 49.4% from NT$7,274 million in the first nine months of 2001 to NT$10,870 million (U.S.$311 million) in the first nine months of 2002. The increase was primarily due to an increase in the number of products sold in the first nine months of 2002 as compared to 2001, which consists of the newly introduced products for Pentium 4 and existing products for Pentium III.

Gross profit. Our gross margin decreased from 26.1% in the first nine months of 2001 to 23.2% in the first nine months of 2002. The decrease was primarily due to the lower average selling prices because our products for Pentium III were at the end of their life cycles and we had to sell them at lower prices. In the first nine 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 increased 6.4% from NT$1,356 million in the first nine months of 2001 to NT$1,442 million (U.S.$41 million) in the first nine months of 2002. These expenses represented 18.6% and 13.3% of net revenue in the first nine months of 2001 and 2002, respectively.

Marketing and sales expenses. Our marketing and sales expenses increased 193.4% from NT$424 million in the first nine months of 2001 to NT$1,244 million (U.S.$36 million) in the first nine months of 2002. These expenses represented 5.8% and 11.4% of net revenue in the first nine months of 2001 and 2002, respectively. This increase in the first nine months of 2002 as compared to 2001 was due to increased sales amount in this period. 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. Our general and administrative expenses increased 71.6% from NT$303 million in the first nine months of 2001 to NT$519 million (U.S.$15 million) in the first nine months of 2002. These expenses represented 4.2% and 4.8% of net revenue in the first nine months of 2001 and 2002, respectively. This increase was primarily due to increased legal fees relating to our patent and trade secrets litigation with UMC, and due in part to increased reserves for bad debt. UMC filed its claims in the last quarter of 2000 and the first quarter of 2001. We had professional service expenses, which includes legal fees, in the amount of NT$108 million in the first nine months of 2001 and had expense of NT$212 million (U.S.$6 million) in the first nine months of 2002 for professional services, consisting mostly of legal fees in connection with the UMC litigation.

Total non-operating income. Our total non-operating income increased 140.9% from NT$165 million in the first nine months of 2001 to NT$397 million (U.S.$11 million) in the first nine months of 2002. These changes were principally due to the disposal of our long-term investment in Vanguard International Semiconductor Corp.

Total non-operating expenses. Our total non-operating expenses increased 17.7% from NT$532 million in the first nine months of 2001 to NT$625 million (U.S.$18 million) in the first nine months of 2002. This increase was primarily due to the losses in the investment of InveStar.

Income tax benefit. We did not record an income tax benefit in the first nine 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 December	31,
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% from NT$10,845 million in 1999 to NT$7,821 million in 2000, but increased by 27.7% to NT$9,987 million (U.S.$285 million) in 2001. The decrease in 2000 compared to 1999 was principally due to our inability to fulfill all customer orders for our higher end products in 2000. In 1999, we outsourced 100% 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% in 1999 to 4.1% in 2000, but increased to 25.5% 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% from NT$742 million in 1999 to NT$1,194 million in 2000, and increased 57.7% to NT$1,883 million (U.S.$54 million) in 2001. These expenses represented 6.8%, 15.3% and 18.9% 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, amortization 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% from NT$999 million in 1999 to NT$723 million in 2000, and decreased 16.7% to NT$602 million (U.S.$17 million) in 2001. These expenses represented 9.2%, 9.2% and 6.0% 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% from NT$369 million in 1999 to NT$335 million in 2000, but increased 69.0% to NT$566 million (U.S.$16 million) in 2001. These expenses represented 3.4%, 4.3% and 5.7% 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% from NT$194 million in 1999 to NT$1,195 million in 2000, but decreased 81.8% to NT$218 million (U.S.$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% from NT$25 million in 1999 to NT$150 million in 2000 and increased 433.3% to NT$800 million (U.S.$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 (U.S.$1 million) of factoring expenses, and NT$56 million (U.S.$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% from NT$132 million in 1999 to NT$663 million in 2000, but decreased 27.9% to NT$478 million (U.S.$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 September 30, 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 U.S. GAAP as applied to our financial statements, see “Summary of Significant Differences Between ROC GAAP and U.S. GAAP” included elsewhere in this Offering Circular.

				Three months ended	Three months ended
Sept. 30, 2000 NT$ $2,329 1,801 528 311 255 61 627 (99) 4 — 22 10 — 13 49 48 — — — — 8 56 (106) 101	Dec. 31, 2000 NT$ $2,303 2,075 228 387 210 74 671 (443) 7 — 23 — — 5 35 68 — — — — 39 107 (515) —	Mar. 31, 2001 June 30, 2001 Sept. 30, 2001 NT$ NT$ NT$ (Unaudited) (In millions) $2,402 $2,520 $2,352 1,829 1,911 1,633 573 609 719 459 442 455 159 135 130 65 115 123 683 692 708 (110) (83) 11 16 15 13 — — — 17 12 5 13 67 — — — — 3 10 2 49 104 20 140 186 178 — — — — — — — — — — — — 6 6 23 146 192 201 (207) (171) (170) — — —			Dec. 31, 2001 NT$ $2,705 2,061 644 542 195 193 930 (286) — — 11 22 13 5 51 174 — — 56 44 22 296 (531) 471	Mar. 31, 2002 NT$ $3,576 2,485 1,091 449 316 165 930 161 — — 5 9 13 1 28 161 — — — 2 — 163 26 —	Jun. 30, 2002 NT$ $3,220 2,507 713 531 381 154 1,066 (353) 283 47 4 32 18 10 394 151 3 — — 7 9 170 (129) —	Sep. 30, 2002 NT$ $4,074 3,356 718 462 547 200 1,209 (491) — — 3 — 14 2 19 164 120 41 — 6 5 336 (808) —	Sep. 30, 2002
									U.S.$ $117 96
									21
									13 16 6
									35
									(14)
									— — — — — —
									—
									5 3 1 — — —
									9
									(23) —
$ (5)	$ (515)	$ (207)	$ (171)	$ (170)	$ (60)	$ 26	$ (129)	$ (808)	$ (23)

			Three months ended	Three months ended	Three months ended
Sept. 30, 2000 Dec. 31, 2000 Mar. 31, 2001 June 30, 2001 Sept. 30, 2001 Dec. 31, 2001 Mar. 31, 2002 Jun. 30, 2002 Sep. 30, 2002 (Unaudited) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 77.3 90.1 76.1 75.8 69.4 76.2 69.5 77.9 82.4 22.7 9.9 23.9 24.2 30.6 23.8 30.5 22.1 17.6 13.3 16.8 19.1 17.5 19.3 20.1 12.6 16.5 11.3 11.0 9.1 6.6 5.4 5.5 7.2 8.8 11.8 13.4 2.6 3.2 2.7 4.6 5.3 7.1 4.6 4.8 4.9 26.9 29.1 28.4 27.5 30.1 34.4 26.0 33.1 29.6 (4.2) (19.2) (4.5) (3.3) 0.5 (10.6) 4.5 (11.0) (12.0 0.2 0.3 0.7 0.6 0.6 0.0 0.0 8.8 0.0 — — — — — — — 1.6 — 1.0 1.0 0.7 0.5 0.2 0.4 0.1 0.1 0.1 0.4 0.0 0.5 2.6 0.0 0.8 0.3 1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.4 0.6 0.3 0.5 0.2 0.1 0.4 0.1 0.2 0.0 0.2 0.0								Sep. 30, 2002
								17.6
								11.3 13.4 4.9
								29.6
								(12.0
								0.0 — 0.1 0.0 0.3 0.0
2.1	1.5	2.0	4.1	0.9	1.9	0.8	12.3
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	4.7 — 0.1 0.0 0.2 0.3 5.3 (4.0) 0.0	4.0 1.0 2.9 0.0 0.1 0.1
								8.1
								(19.7 0.0
(0.2)	(22.4)	(8.6)	(6.8)	(7.2)	(2.2)	0.7	(4.0)

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. As at September 30, 2002, the capacity at our fab was 28,000 8-inch wafers per month. As our business needs require, we expect to increase the capacity of our fab in the future.

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$2,334 million of capital expenditures in 2002 (compared to approximately NT$3,944 million (U.S.$113 million) in 2001), including approximately NT$519 million relating to our new research and development facility in Hsinchu, NT$692 million to introduce copper-based process technologies at our fab, NT$228 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. The sale of additional equity would result in additional dilution to our shareholders.

Unused credit lines for short-term bank loans as of September 30, 2002 were approximately NT$2,845 million (U.S.$81 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 June 30 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%; (ii) the shareholders’ equity ratio (net shareholders’ equity/total assets) shall not fall below 50%; and (iii) annual principal-interest margin multiples (net profit before tax + interest charge + depreciation + amortization/interest charge) shall not fall below 2.5 before the end of 2001 and below 3.0 in 2002 and beyond. In connection with our issuance of U.S.$100,000,000 zero coupon convertible bonds due 2007 in July 2002, the shareholders’ equity ratio has been amended such that it shall not fall below 43%. As of September 30, 2002, we believe that we were in compliance with the financial and other covenants in these agreements.

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 installments 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% 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 installments 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. In July 2002, we issued five-year Euro Convertible Bonds with an aggregate amount of U.S.$100,000,000 due on 2007. At September 30, 2002, we had short-term bank loans and letters of credit outstanding of NT$2,277 million (U.S.$65 million), secured bonds outstanding with aggregate face value of NT$2,570 million (U.S.$73 million) and long-term bank loans outstanding of NT$8,014 million (U.S.$229 million).

The following table summarizes our obligations and commitments as of September 30, 2002 to make future payments under contracts, such as bank debt agreements, other debt agreements, license agreements and lease agreements.

	Payments Due by Period	Payments Due by Period	Payments Due by Period
Total NT$ $ 2,277 8,014 2,570 2,914 193 131 1,955	Less than 1 year 1-3 years NT$ NT$ (In millions) $ 2,277 — 1,684 $ 5,054 860 1,710 — 2,914 113 80 10 31 541 1,065		4-5 years NT$ — $ 1,276 — — — 21 349	After 5 years
				NT$ — — — — — $ 69 —
$ 18,054	$ 5,485	$ 10,854	$ 1,646	$ 69

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% and 100% of the factored receivable to us at the time of entering into the factoring agreement. The remaining 20%, if applicable, is due to us at the end of the term of the factored receivable. In 2001, we factored accounts receivable totaling NT$2,486 million (U.S.$71 million) and recorded a factoring expense of NT$44 million (U.S.$1 million). In the first three quarters of 2002, we factored accounts receivable totaling NT$2,404 million (U.S.$69 million) and recorded a factoring expense of NT$15 million (U.S.$0.4 million). 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 September 30, 2002, we had NT$2,729 million (U.S.$78 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 (U.S.$48 million) in 2000 and 2001, respectively, and cash flows from operations of NT$(154) million (U.S.$(4) million) in the first nine months of 2002. Although we had a net loss in 2001 of NT$608 million (U.S.$17 million), we had a positive cash flow from operations of NT$1,692 million (U.S.$48 million) in that period as a result of non-cash depreciation and amortization expense of NT$4,087 million (U.S.$117 million). The amount of cash that we generated in 2001 was reduced by increases in inventories of NT$1,971 million (U.S.$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 (U.S.$24 million) as a result of factoring transactions. The amount of cash that we generated in the first nine months of 2002 was reduced by increases in accounts and notes receivable of NT$3,027 million (U.S.$87 million).

Net cash used in our investment activities in 2000 and 2001 was NT$18,861 million and NT$3,787 million (U.S.$108 million), respectively, and net cash used in our investment activities in the first three quarters of 2002 was NT$2,546 million (U.S.$73 million). Reflected in those net amounts in 2000, 2001 and the first three quarters of 2002 is a total use of cash in investment activities of NT$17,822 million, NT$3,944 million (U.S.$113 million), and NT$2,020 million (U.S.$58 million) respectively, primarily used to purchase equipment.

Net cash provided by our financing activities in 2001 was NT$2,127 million (U.S.$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 quarters of 2002 was NT$2,520 million (U.S.$72 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%, 1.3% and (0.01%) 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 utilize derivative financial instruments, the application of which, pursuant to our internal guidelines, is for hedging purposes and not speculative purposes.

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

At December 31, 2001, we had payables of NT$1,558 million (U.S.$45 million), U.S.$52 million, Yen 1,327 million (U.S.$10 million), and smaller amounts in other currencies. At December 31, 2001, we had short-term loans in foreign currencies in the following amounts: U.S.$1 million, Yen 98 million (U.S.$1 million), Euro 8 million (U.S.$7 million) and NLG 4 million (U.S.$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 September 30, 2002.

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 ........................
Euro convertible Bonds........................
Average interest rate ........................

2002
2003
2004
2005
2006
2007 and
Thereafter
—
860
860
850
—
—
—
5.42%
5.42%
5.42%
—
—
637
1,273
1,273
1,273
1,273
635
3.2030%
3.2030%
3.2030%
3.2030%
3.2030%
3.2030%
—
413
413
413
411
—
—
4.1226%
4.1226%
4.1226%
4.1226%
—
—
2,914
—
4.63%

Foreign currency risk

Currently, the majority of our revenues are denominated in U.S. dollars. Our cost of revenue, operating expenses and capital expenditures are incurred in several currencies, including NT dollars, Japanese yen, U.S. dollars and Euros. We are particularly affected by fluctuations in the exchange rate between the U.S. 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 minimize 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 amortized 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 September 30, 2002, we had outstanding forward exchange contracts to sell U.S. dollars at a contract amount of U.S.$56 million, which are described in more detail in Note 22 to the unaudited unconsolidated 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 define 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 September 30, 2002, we had 1,756 employees, 1,140 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 U.S.$1,500), mainstream PCs (priced from U.S.$800 to U.S.$1,500), and value PCs (priced below U.S.$800).

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) (RAM)
Front graphics processor) Memory
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 favor 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 a large and growing market. 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. 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.

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, customize 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, ALi Corporation, 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 utilization 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 utilization 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 volume of integrated chipsets and discrete chipsets represented approximately 75% and 25% of our total chipsets sales volume, respectively. In the first nine months of 2002, sales volume of integrated and discrete chipsets represented approximately 62% and 38% of our total chipset sales volume, 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% 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 Access to Low Cost and Leading-edge Manufacturing

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. We believe that owning our own fab has increased our knowledge of the manufacturing aspects of the semiconductor business, allowing us to closely integrate design and manufacturing and 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 .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 utilization 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 as at September 30, 2002, we have approximately 650 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-to-market, 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 through 2005, a semiconductor technology license agreement with Rambus Inc. until the expiration of the relevant patent for such technology, a development and license agreement with respect to “Euphlite devices” with National Semiconductor Corporation and an IC license agreement in respect of communication concept for data transmission systems with Koninklijke Philips Electronics N.V. until the expiration of the related patent rights. 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 a technology licence agreement covering the transfer of and/or licensing 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 recognized 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%, 84.6% and 86.6%, 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% 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%, 10.6% and 12.7%, 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 SiS R658 ................................................ SiS 655 .................................................. SiS 648 .................................................. SiS 645DX ............................................. SiS 645 .................................................. AMD K7 SiS 746 .................................................. SiS 745(1) ............................................... SiS 735(2) ............................................... SiS 733 .................................................. Integrated Solutions Intel Pentium 4 SiS 651 .................................................. SiS 650 .................................................. AMD K7 SiS 740 .................................................. SiS 730S ................................................ Intel Pentium III SiS 630S ................................................ SiS 630 .................................................. SiS 630E ................................................ South Bridge 963......................................................... 962......................................................... 961......................................................... GPUs SiS 336-Xabre 600 ................................ SiS 328-Xabre 80 .................................. SiS 334-Xabre 400 ................................ SiS 333 Xabre 200 ................................ SiS 315 ................................................. SiS 315B ............................................... SiS305 .................................................. SiS300 .................................................. SiS 301 ................................................. SiS 301LV ............................................. SiS 302LV ............................................. SiS 6326 DVD ...................................... SiS 6326 AGP ....................................... SiS 6326 ...............................................	Quarter Introduced Q3 02 Q3 02 Q2 02 Q1 02 Q3 01 Q2 02 Q4 01 Q1 01 Q1 01 Q1 02 Q3 01 Q3 01 Q3 00 Q4 00 Q3 99 Q2 00 Q202 Q202 Q301 Q3 02 Q2 02 Q2 02 Q2 03 Q3 01 Q4 01 Q2 00 Q3 99 Q3 99 Q1 02 Q2 02 Q2 97 Q2 97 Q3 97	Features
		RDRAM 1066 ECC; AGP 8x Dual DDR 266/333; AGP 8x DDR 333; AGP 8x DDR 333; AGP 8x DDR 333; AGP 8x SDR/DDR; AGP8x DDR 333/IEEE 1394 SDR/DDR; K7 Single Chip 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 ATA133, USB2.0, IEEE 1394a, MnTIOL 1GB/sec ATA133, USB2.0, IEEE 1394a ATA100(3), USB1.1(4) AGP 8x, Direct x8, core speed 275 MHZ AGP 4x, Direct x8, core speed 166 MHZ AGP 8x, Direct x8, core speed 250 MHZ AGP 8x, Direct x8, core speed 200 MHZ 256 bit GPU 256 bit GPU 128 bit VGA 128 bit VGA TMDS & TV-out 1 channel LVDS & TV-out 2 channel LVDS & TV-out 64 bit VGA with DVD decoder 64 bit VGA with TV-out 64 bit VGA with AGP interface

(1) 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.
(2) Single chip refers to the North Bridge and South Bridge functionality being combined in a single chip.
(3) 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.
(4) 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 SiS 336-Xabre 600 ................................ SiS 328-Xabre 80 .................................. SiS 334-Xabre 400 ................................ SiS 333 Xabre 200 ................................ SiS 315 ................................................. SiS 315B ............................................... SiS305 .................................................. SiS300 .................................................. SiS 301 ................................................. SiS 301LV ............................................. SiS 302LV ............................................. SiS 6326 DVD ...................................... SiS 6326 AGP ....................................... SiS 6326 ...............................................	Quarter Introduced Q3 02 Q2 02 Q2 02 Q2 03 Q3 01 Q4 01 Q2 00 Q3 99 Q3 99 Q1 02 Q2 02 Q2 97 Q2 97 Q3 97	Key Features
		AGP 8x, Direct x8(1), core speed(2) 275 MHZ(3) AGP 4x, Direct x8, core speed 166 MHZ(3) AGP 8x, Direct x8, core speed 250 MHZ(3) AGP 8x, Direct x8, core speed 200 MHZ(3) 256 bit GPU 256 bit GPU 128 bit VGA(4) 128 bit VGA TMDS(5) & TV-out 1 channel LVDS & TV-out 2 channel LVDS & TV-out 64 bit VGA with DVD decoder 64 bit VGA with TV-out 64 bit VGA with AGP interface

(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 minimized 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%, 76.9%, and 82.5% 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% of our net revenue in 1999, 2000 or 2001. ECS and ASUSTek accounted for 52.1% and 13.4%, 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 45.1% 7.6 6.5 5.9 5.6	2000 ECS(1) Acer Computer Ltd. Universal Scientific Industrial Co., Ltd. Fullerton Technology Co., Ltd.(2) ASUSTek	% of Net Revenue 48.2% 9.1 7.3 6.3 6.0	2001 ECS(1) ASUSTek Fullerton Technology Co., Ltd.(2) Mitac Technology Corporation Acer Computer Ltd.	% of Net Revenue
					52.1% 13.4 7.6 4.9 4.5

(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. As of September 30, 2002, 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 December 17, the 10,000,000 pledged ECS shares were valued in the aggregate at NT$650 million based on the closing price per share on that date of NT$65 on the Taiwan Stock Exchange. In 2001, Prewell, at 41.7%, and ECS, at 10.1%, 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	Geographic Area		Year Ended December 31,	Year Ended December 31,
		1999	2000	2001	2001
East Asia (Hong Kong and China) ................. Northeast Asia (Japan and Korea) .................. Europe and America....................................... Southeast Asia ...............................................		NT$ 5,257 70 56 16	NT$ NT$ (In millions) 4,451 5,011 20 28 30 13 15 7		U.S.$ 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 standardization and refinement of our internal processes, and our fab utilization 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 utilization 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 .15-micron and .18-micron technology. Approximately 60% of our processes are .18-micron technology, used principally for production of discrete chipsets and older integrated chipsets, and 40% are .15-micron technology primarily used for GPUs and newer integrated chipsets.

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% of our net revenue in 2001 and 11.6% of our net revenue in the first nine months of 2002. The three largest components of raw materials costs — chemicals, wafers and gas — accounted for 31%, 21% and 14%, respectively, of our raw materials costs in 2001 and 29%, 22% and 14%, respectively, of our raw materials costs in the first nine 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, experienced a serious drought in the spring and summer seasons of 2002. Currently, the Hsinchu area is facing another possible drought, which may cause a serious shortage of water in 2003 if the drought continues. If 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. We are a shareholder of OSE. 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 (U.S.$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 recognized 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 categorize 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. As at September 30, 2002, we had a total of 76 employees performing sales and marketing functions, including six in the United States, three in Hong Kong and one in Beijing. 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-tomarket, and good price-to-performance product characteristics. As at September 30, 2002, we had 57 employees who provide customer service and support. We emphasize 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 through 2005, a semiconductor technology license agreement with Rambus Inc. until the expiration of the relevant patent for such technology, a development and license agreement with respect to “Euphlite devices” with National Semiconductor Corporation and an IC license agreement in respect of communication concept for data transmission systems with Koninklijke Philips Electronics N.V. until the expiration of the related patent rights. 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 characterized by rapid changes in technology and short product life cycles, making time-to-market critical for successful commercialization 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 totaled approximately NT$742 million, NT$1,194 million and NT$1,883 million (U.S.$54 million), respectively. These expenditures represented approximately 6.8%, 15.3%, and 18.9% of net revenue in 1999, 2000 and 2001, respectively.

In the first nine months of 2002, our research and development expenditures totaled approximately NT$1,442 million (U.S.$41 million) which represented approximately 13% of net revenue in that period.

Our research and development efforts are focused on product design and process engineering. As of September 30, 2002, we employed 650 people in research and development, of whom approximately 91% were focused on product design, and approximately 9% on process engineering. Approximately 535 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 (U.S.$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. However, the building and a substantial portion of the equipment have been mortgaged in favor of banks as collateral for our obligations in connection with our NT$7,000 million syndicated bank loan, our NT$1,650 million syndicated bank loan and the bank guarantee for our NT$3,000 million domestic bonds.

We have a new research and development facility in Hsinchu, which was completed in July 2002. The new research and development facility is located outside the Hsinchu Science-Based Industrial Park and is built on land comprising 25 land codes totaling approximately 120,000 square feet. We are the registered owner of land comprising 19 land codes on which we have begun construction. They total approximately 80,000 square feet. Due to land transfer restrictions, the remainder land comprising six land codes are registered under the name of Hsin-Ron Duh, daughter of Eugene C.Y. Duh, the former Chairman of our Board of Directors. Pursuant to a written agreement between us and Ms. Duh, Ms. Duh has granted us unrestricted usage rights, has agreed to transfer the registered title to us upon our request, and has mortgaged the land in favor of us. 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.

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 .15-micron technology and .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 September 30, 2002, we had over 642 patents either pending or under review worldwide. Our issued patents have expiration dates ranging from 2005 to 2020.

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 through 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 installments through 2005.

We have also entered into licensing agreements with National Semiconductor Corporation, Rambus Inc., ARM Limited and Koninklijke Philips Electronics N.V., respectively.

Our ability to compete also depends on our ability to operate without infringing the proprietary rights of others. The semiconductor industry is generally characterized 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 (U.S.$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

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 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 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 we have developed would not infringe the ‘345 patent. UMC petitioned to the ITC to review particulars aspects of the initial determination. The ITC decided to review some, but not all of the issues raised in UMC’s petition. On October 7, 2002, the ITC issued its final determination and a limited exclusion order against us. In its final determination, the ITC found that the asserted ‘352 patent claims either were invalid or were not infringed by our products. The ITC also found that 18 of the 19 claims that UMC asserted from its ‘345 patents were invalid but certain of our products infringed the valid claim in the ‘345 patent (claim 13). The remedy ordered by the ITC involved issuance of an order barring the importation into the United States of integrated circuits, including chipsets and graphics chips, that are made by a process covered by claim 13 of ‘345 patent and are manufactured abroad and/or imported by or on behalf of us or any of our affiliated companies, patents, subsidiaries, or other related business entities, or our successors or assigns, and motherboards UMC

petitioned to the ITC to review particular aspects of the initial determination. The ITC decided to review some, but not all of the issues raised in UMC’s petition. On October 7, 2002, the ITC issued its final determination and a limited exclusion order against us. In its final determination, the ITC found that the asserted ‘352 patent claims either were invalid or were not infringed by our products. The ITC also found that 18 of the 19 claims that UMC asserted from its ‘345 patent were invalid but certain of our products infringed the valid claim in the ‘345 patent (claim 13). The remedy ordered by the ITC involved issuance of an order barring the importation into the United States of integrated circuits, including chipsets and graphics chips, that are made by a process covered by claim 13 of “345 patent and are manufactured abroad and/or imported by or on behalf of us or any of our affiliated companies, parents, subsidiaries, or other related business entities, or our successors or assigns, and motherboards containing the same. The ITC did not order us to pay any damages. The Office of U.S. Trade Representative, after reviewing the limited exclusion order which is known as a “Presidential Review”, informed us that the order remains intact. Reserving the right to file an appeal against the ITC in the U.S. Court of Appeals for the Federal Circuit, we have reached a preliminary understanding with UMC on December 24, 2002 to settle the complaints. However, we can not assure you that a final settlement agreement will be reached to the extent to the Company’s satisfaction or at all.

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 noninfringement and invalidity of the ‘345 patent and the ‘701 patent. The court last conducted a case conference on August 16, 2002 and the parties advised the court that a final determination of UMC’s claims before the ITC was expected in September and accordingly, the court scheduled a subsequent case management conference for November 15, 2002. The ITC’s final determination was entered on October 7, 2002 and remains intact after the Presidential review. In light of the ITC final determination, the parties have met and conferred to postpone the November 15, 2002 case management conference. No trial date has been set so far. In our proposed settlement plan, we will require UMC dropping the civil complaint against us. However, there can be no assurance that UMC will agree to such plan.

While the settlement proceedings are currently in progress, we have already implemented an alternative process and design for integrated circuit products that ultimately are destined for U.S. importation, which aims to result in products manufactured with this alternative process and design not being covered by claim 13 of the ‘345 patent or the limited exclusion order. We have presented relevant documentation and analysis related to this alternative process and design to the United States Customs Service, which is responsible for the enforcement of the limited exclusion order, and we hope to procure a certification that the new products being shipped by us are not excluded from importation into the United States by the limited exclusion order. However, we cannot assure you that the certification for the new products can be obtained. We have incurred substantial costs in connection with defending ourselves and implementing alternative processes and designs. In the proposed settlement plan, we will also require UMC not claiming any patent infringement on our alternative processes and designs through a cross-license arrangement. However, we cannot ensure that UMC will not claim that our alternative processes and designs still infringe their patents and therefore our core logic chipset products are subject to the exclusion order. In such case, 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.

Because we are still negotiating with UMC for the settlement plan, we cannot estimate the effect of the proceedings, if nonetheless commenced, 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 and us can reach a mutually acceptable settlement plan and a final settlement agreement, we have already implemented an alternative process and design for integrated circuit products that ultimately are destined for U.S. importation, which aims to result in products manufactured with this alternative process and design not being covered by infringed patent or the limited exclusion order. We cannot ensure that UMC will agree to the proposed settlement plan or, if no final settlement agreement will be entered, will not succeed in the litigation in obtaining significant monetary damages or injunctive or other equitable relief. In such case, 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.

Currently, we are reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, the Syndia Corporation and Fujitsu Siemens Computers GmbH, 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. Correspondence between National Semiconductor and us stopped in November 2001 and we have not heard from National Semiconductor regarding the infringement issue since then. In the early months of 2002, communications with the Syndia Corporation began. In the last correspondence, the Syndia Corporation has made an offer to settle at US$700,000. Given that the Syndia Corporation has initiated litigation against other manufacturers and “prosecution laches defense” has been raised by the defendants, we have been advised by our legal counsel engaged to represent us in the Syndia case to await the outcome of such litigation which is expected to finish in January 2003 before responding to the Syndia Corporation’s offer. We cannot assure you that, if a settlement is reached with the Syndia Corporation, the settlement amount will be US$700,000 or the higher or the lower of the same.

Employees

As of September 30, 2002, we had 1,756 employees, which included 1,140 engineers, 352 technicians and 264 clerical and administrative staff. In our operations, we employed 10 persons who do not reside in Taiwan. Approximately 23% of our employees as of September 30, 2002 had undergraduate degrees, another 44% held master’s degrees and another 1% 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 September 30, 2002.

Subsidiary Silicon Integrated Systems Corporation(1) Silicon Integrated Systems Limited(1) InveStar CPU Venture Capital Fund, Inc. LDC(1)	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%

(1) Our consolidated subsidiaries.

MANAGEMENT

Directors, Supervisors and Executive Officers

The following table sets forth information with respect to our directors, supervisors and executive officers as of November 30, 2002.

Name Directors S. Samuel Liu ........................... Hsin-Shen 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 53 55 49 49 47 58 42 39 43 38 41	Position
		Chairman, President and Chief Executive Officer Director Director(1) Director Supervisor(2) Supervisor Vice President, Integrated Product Division and Connectivity Product Division Vice President, Corporate Services Vice President, Quality Assurance Chief Financial Officer Director of Die Production

(1) Representative of Lanching Investment Ltd.

(2) Representative of Consolidated Marketing Corporation

Dr. S. Samuel Liu has served as a director since 1992 and as our president and chief executive officer since 1990. He became our Chairman of the board of director in 2002. 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.

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.

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, 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 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. The business address for Shing Wong is Silicon Integrated Systems Corporation, 240 North Wolfe Road, Sunnyvale, California, 94086, USA.

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 board of directors is responsible for the management of our business. Our board of directors consists of seven members. However, three of our directors ceased to serve as our directors during 2002 and, as a result, our board of directors has three vacancies. We plan to hold an extraordinary shareholders’ meeting on January 14, 2003, in which we expect that the shareholders will elect additional directors to fill the vacancies.

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. If our supervisors fail to perform their duties or violate laws and regulations or our articles of incorporation during the performance of their duties, and that failure causes damages to us, they are obligated to indemnify us for those damages. 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 for a bona fide reason, not limited to breach of duties, 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. 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$10.6 million, NT$0.2 million and NT$17.8 million, respectively, 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. As of December 16, 2002, our directors, supervisors and executive officers respectively hold 49,305,138 shares, 5,606,768 shares and 4,819,154 shares of our Common Stock.

Our former Chairman, Eugene C.Y. Duh, was paid a transportation fee of NT$0.6 million (U.S.$17,140) in 2001. Our Chairman (effective in October 2002), President and Chief Executive Officer, S. Samuel Liu, was paid total remunerations of NT$9.4 million (U.S.$0.3 million) in 2001. Directors and supervisors were each paid a transportation fee of NT$0.1 million (U.S.$3,429) in 2001.

Interests of Management in Certain Transactions

Currently, there are no loans or guarantees outstanding granted or provided by us for the interest of our directors, supervisors or executive officers. There are no unusual transactions effected between the Company and any of its directors, supervisors and executive officers. Several of our directors, supervisors and executive officers also serve as directors, supervisors or executive officers of companies with which we do business. These companies include our affiliates. We conduct these transactions on an arms-length basis. See “Related Party Transactions”.

Stock Option Plan

On December 28, 2001, we obtained the approval of the ROC Securities and Futures Commission (the “SFC”) for the issuance of employee stock options. On December 13, 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%, 75% and 100% in the second, third and fourth anniversary dates, respectively. The options are not transferable. As at September 30, 2002, we issued 29,950,000 options pursuant to the plan at an exercise price of NT$45.8 per common share. In September 2002, we further applied with the SFC for the issuance of 20,000,000 options pursuant to the plan. We plan to issue such options upon obtaining approval from our board of directors.

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% and 15% 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. Prior to the offering, we expect that our employees will have waived their preemptive rights with respect to the common shares to be issued represented by the GDSs offered by this Offering Circular.

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% of the remaining portion of our net income for any year shall be allocated to employees’ bonuses. We may pay employee bonuses in the form of common 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 May 18, 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 July 20, 2001. For each employee, the sale was contingent on that employee continuing to be employed with us through December 31, 2001. Our average cost basis in the shares was NT$36.50 per share. Under ROC GAAP, we did not recognize 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 January 1, 1999 through 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% 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% 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 favorable 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 former 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 (U.S.$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 favorable as those that could have been obtained from unrelated parties.

On September 21, 2001, we purchased 90 million non-voting shares of preferred stock of OSE for NT$1,035 million (U.S.$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 year. As of December 31, 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 land comprising six land codes in Hsinchu for the new facilities for research and development activities. Due to land transfer restrictions the land was registered under the name of Hsin-Ron Duh. Hsin-Ron Duh is the daughter of Eugene C. Y. Duh, the former Chairman of our board of directors. We paid the purchase price of the land 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, has agreed to transfer the registered title to us upon our request, and has mortgaged the land in favor of us. 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

In so far as known to the Company, as of September 30, 2002, there is no person other than our directors who, directly or indirectly, is interested in 10% or more of the our capital.

DESCRIPTION OF SHARE CAPITAL

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. This information is only a summary, and you should read our articles of incorporation, for a more complete description of these matters. See “Where You Can Find More Information” for information on how to obtain copies of these documents.

General

Our authorized 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 December 16, 2002, 1,088,016,576 of our common shares had been fully paid-in and were outstanding. All of our common shares are in registered form. Currently, we have U.S.$83,450,000 Euro convertible bonds outstanding, and 87,245,578 Shares will be issued based on the current conversion price if the convertible bonds are fully converted into our Common Shares.

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 authorized in the articles of incorporation; and
the approvals 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 accumulated earnings. The ROC Company Law also requires that 10% 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% of the remaining portion of our net income for any year shall be allocated to employees’ bonuses. 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% 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, the ROC Company Law permits us to make distributions of additional common shares to our shareholders by capitalizing reserves, including the legal reserve and capital surplus consisting of premium from issuing stock and earnings from gifts received. However, the capitalized portion payable out of our legal reserve is limited to 50% of the total accumulated legal reserve, and only to the extent the accumulated legal reserve exceeds 50% 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 has equal right to the approved dividend or other distribution.

For information as to ROC taxes on dividends and distributions, see “Taxation — ROC Taxation.”

Preemptive Rights and Issues of Additional Common Shares

Under the ROC Company Law, when a ROC company issues new shares for cash, the company’s employees, whether or not they are shareholders of the company, have rights to subscribe for a percentage between 10% to 15%, determined by the board of directors, of the new issue. Our employees have waived their preemptive rights with respect to the common shares to be issued represented by the GDSs offered by this Offering Circular. Existing shareholders who are registered 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 GreTai Securities Market that intends to offer new shares for cash must offer at least 10% 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 in which existing shareholders may have preemptive rights. In connection with the offering, the preemptive rights of our shareholders to the shares represented by the GDSs to be sold by us have been waived by a resolution adopted at a shareholders’ meeting held on May 22, 2001. According to the amended Securities and Exchange Law which became effective on February 8, 2002, the preemptive rights provisions will not apply to offerings of new shares through a private placement approved at a shareholders’ meeting.

Authorized but unissued shares 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. As previously required by law, our articles of incorporation provide that the vote cast by a shareholder of more than 3% of the total issued and outstanding common shares will be discounted by 1% of that portion of the holding in excess of the 3% level. According to the amended ROC Company Law, as effective on November 14, 2001, our articles of incorporation were amended to eliminate this voting discount. Except as otherwise provided by law, a resolution may be adopted by the holders of a 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 authorized 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 favor 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% 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. Voting rights attached to our shares exercised by our shareholders’ proxy are subject to the proxy regulation promulgated by the ROC Securities and Futures Commission.

Holders of our GDSs will not be able to exercise the voting rights on shares represented by the GDSs on an individual basis. See “Description of Global Depositary Receipts — Voting Rights.”

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% 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% 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% of our total issued and outstanding shares. In addition, the total cost of the purchased shares may not exceed the aggregate amount of our retained earnings, any premium from share issuances and the realized portion of our capital reserve. The shares purchased by us 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.

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

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% 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.

DESCRIPTION OF GLOBAL DEPOSITARY RECEIPTS

Global Depositary Receipts

The Bank of New York, as Depositary, will execute and deliver the GDRs. GDRs are Global Depositary Receipts. Each GDR is a certificate evidencing a specific number of Global Depositary Shares, also referred to as GDSs. Each GDS will represent 10 common shares (or a right to receive 10 common shares) deposited with the principal Taipei office of the International Commercial Bank of China, as Custodian for the Depositary in the ROC. Shares sold by us in this offering will initially be evidenced by a certificate of payment that will be deposited with the Custodian. Each GDS will also represent any other securities, cash or other property which may be held by the Depositary. The Depositary’s office at which the GDRs will be administered is located at 101 Barclay Street, New York, New York 10286.

Subject to the matters disclosed in the third paragraph below, GDSs may be held either directly (by having an GDR registered in your name) or indirectly through your broker or other financial institution. If you hold GDSs directly, you are an GDR holder. This description assumes you hold your GDSs directly. If you hold the GDSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of GDR holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.

As a GDR holder, we will not treat you as one of our shareholders who are entitled to shareholder rights, which will be governed by ROC law. The Depositary will be the holder of the common shares underlying your GDSs. As a holder of GDRs, you will have GDR holder rights. A Deposit Agreement among us, the Depositary and you, as an GDR holder, and the beneficial owners of GDRs sets out GDR holder rights as well as the rights and obligations of the Depositary. New York law governs the Deposit Agreement and the GDRs.

Each GDR will bear the following legend:

NEITHER THE GLOBAL DEPOSITARY SHARES EVIDENCED HEREBY, NOR THE SHARES REPRESENTED THEREBY HAVE BEEN OR WILL BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THOSE SECURITIES MAY NOT BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED PRIOR TO THE EXPIRATION OF THE RESTRICTED PERIOD (DEFINED AS 40 DAYS AFTER THE LATER OF (I) THE COMMENCEMENT OF THE OFFERING OF GLOBAL DEPOSITARY SHARES AND (II) THE RELATED CLOSING) EXCEPT (1) OUTSIDE THE UNITED STATES TO A PERSON OTHER THAN A U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT OR (2) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT.

UPON THE EXPIRATION OF THE RESTRICTED PERIOD, THE GLOBAL DEPOSITARY SHARES EVIDENCED HEREBY AND THE DEPOSITED SECURITIES REPRESENTED THEREBY SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS ON TRANSFER PROVIDED IN THIS LEGEND IF, AT THE TIME OF SUCH EXPIRATION, THE OFFER AND SALE OF THE GLOBAL DEPOSITARY SHARES EVIDENCED HEREBY AND THE DEPOSITED SECURITIES REPRESENTED THEREBY BY THE HOLDER THEREOF IN THE UNITED STATES WOULD NOT BE RESTRICTED UNDER THE SECURITIES LAWS OF THE UNITED STATES OR ANY STATE OF THE UNITED STATES.

The Company and the Depositary have applied to each of Euroclear Bank S.A./N.V., also called Euroclear, and Clearstream Banking, socie´te´ anonyme , also called Clearstream Luxembourg, for acceptance of the GDSs for its book-entry settlement system. So long as the GDSs are eligible for book-entry settlement with Euroclear and Clearstream Luxembourg, unless otherwise required by law, all the GDSs will be represented by a global GDR registered in the name of a nominee of a common depositary for Euroclear and Clearstream Luxembourg and no beneficial owner of GDSs will receive or be entitled to receive a separate GDR evidencing those GDSs.

Transfers of GDSs will be permitted within Euroclear and Clearstream Luxembourg in accordance with the usual rules and operating procedures of those systems.

If, at any time when GDSs are evidenced by a global GDR, Euroclear or Clearstream Luxemburg ceases to make its book-entry settlement system available for the GDSs, the Company shall consult with the Depositary regarding other arrangements for book-entry settlement. Only in the event that it is impracticable without undue effort or expense to continue to make the GDSs available in book-entry form as determined by the Company and the Depositary will the Company instruct the Depositary to make separate GDRs available to the beneficial owners, which availability will be subject to such additions, deletions and modifications to the form of GDR and the Deposit Agreement, and subject to the requirements of any other documents, statements or certifications in connection therewith, as the Company and the Depositary may agree.

The following is a summary of the material provisions of the Deposit Agreement. For more complete information, you should read the entire Deposit Agreement, which includes the form of GDR. Directions on how to obtain copies of that document are provided on the “General Information” section of this Offering Circular.

Dividends and Other Distributions

How will you receive dividends and other distributions on the common shares?

The Depositary has agreed to pay to you the cash dividends or other distributions it or the Custodian receives on common shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of common shares your GDSs represent.

Cash. The Depositary will convert any cash dividend or other cash distribution we pay on the common shares into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If that is not possible or if any government approval is needed and can not be obtained, the Deposit Agreement allows the Depositary to distribute the foreign currency only to those GDR holders to whom it is possible to do so. It will hold the foreign currency it cannot convert for the account of the GDR holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest.

Before making a distribution, the Depositary will deduct any withholding taxes that must be paid. See “Taxation”. It will distribute only whole U.S. dollars and cents and will round fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the Depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.

Common shares. The Depositary may distribute additional GDSs representing any common shares we distribute as a dividend or free distribution. The Depositary will only distribute whole GDSs. It will sell common shares which would require it to deliver a fractional GDS and distribute the net proceeds in the same way as it does with cash. If the Depositary does not distribute additional GDRs, the outstanding GDSs will also represent the new common shares.

Rights to purchase additional common shares. If we offer holders of our securities any rights to subscribe for additional common shares or any other rights, the Depositary may make these rights available to you. If the Depositary decides it is not legal and practical to make the rights available but that it is practical to sell the rights, the Depositary will use reasonable efforts to sell the rights and distribute the proceeds in the same way as it does with cash. The Depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.

If the Depositary makes rights available to you, it will exercise the rights and purchase the common shares on your behalf. The Depositary will then deposit the common shares and deliver GDSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay.

U.S. securities laws may restrict transfers and cancellation of the GDSs represented by common shares purchased upon exercise of rights. For example, you may not be able to trade these GDSs freely in the United States. In this case, the Depositary may deliver restricted depositary shares that have the same terms as the GDRs described in this section except for changes needed to put the necessary restrictions in place.

Other Distributions. The Depositary will send to you anything else we distribute on deposited securities by any means it thinks is legal, fair and practical. If it cannot make the distribution in that way, the Depositary has a choice. It may decide to sell what we distributed and distribute the net proceeds, in the same way as it does with cash. Or, it may decide to hold what we distributed, in which case GDSs will also represent the newly distributed property. The Depositary is not required to distribute any securities to you unless we provide to it evidence that it is legal to make that distribution.

The Depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any GDR holders. We have no obligation to register GDSs, common shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of GDRs, common shares, rights or anything else to GDR holders. This means that you may not receive the distributions we make on our common shares or any value for them if it is illegal or impractical for us to make them available to you.

Deposit, Withdrawal and Cancellation

How are GDSs issued?

We and the Depositary have been advised that under ROC law, no deposits of common shares may be made in the GDR facility, and no GDSs may be issued against those deposits, without specific approval of the ROC Securities and Futures Commission (the “SFC”) except in connection with the issuance of additional GDSs in connection with:

dividends on or free distributions of common shares

the exercise by GDR holders of preemptive rights applicable to common shares represented by GDSs
the purchase directly by any person or through any depositary of common shares on the TSE for deposit in the GDR facility, if the total number of GDSs outstanding after the issuance will not exceed the number of issued GDSs previously approved by the SFC (after any adjustment in the number of common shares represented by each GDS and taking into account issuances under the first two bullet points)

The Depositary and the Company have been advised that under current ROC law, issuances of additional GDSs against deposits of Shares under the third bullet above will be permitted only to the extent that previously issued GDSs have been cancelled and the Shares withdrawn from the depositary receipt facility upon cancellation of such GDSs that have been sold on the TSE.

Subject to the limitations described above, the Depositary will deliver GDSs if you or your broker deposit common shares or evidence of rights to receive common shares with the Custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the Depositary will register the appropriate number of GDSs in the names you request and will deliver the GDRs at its office to the persons you request.

Prior to the time a registration statement becomes effective under the Securities Act with respect to the GDSs, which time is referred to as the Effective Time, any deposit of common shares must be accompanied by a written acknowledgement, certification and agreement by or on behalf of the person acquiring beneficial ownership of GDSs:

Acknowledging that the GDSs and the common shares represented thereby have not been and will not be registered under the Securities Act.
Certifying that either: (1) that person is, or at the time the common shares are deposited and at the time the GDRs are issued will be, the beneficial owner of the common shares and the GDSs, and (i) that person is not a U.S. person (as defined in Regulation S under the Securities Act) and is located outside the United States (within the meaning of Regulation S) and acquired, or has agreed to acquire and will have acquired, the common shares to be deposited outside the United States, (ii) that person is not an affiliate of the Company or a person acting on behalf of such an affiliate, and (iii) that person is not in the business of buying and selling securities or, if that person is in such business, that person did not acquire the securities to be deposited from the Company or any affiliate thereof in the initial distribution of the GDSs and common shares.
Agreeing that prior to expiration of the Restricted Period, that person will not offer, sell, pledge or otherwise transfer the GDSs or the common shares represented thereby except (a) outside the United States to a person other than a U.S. person in accordance with Rule 903 or 904 of Regulation S or (b) pursuant to an effective registration statement under the Securities Act, in either case in accordance with any applicable securities laws of any state of the United States.

How do GDS holders cancel a GDR and obtain common shares?

You may turn in your GDRs at the depositary’s office. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the Depositary will deliver the common shares and any other deposited securities underlying the GDR to you or a person you designate at the office of the Custodian or through the book-entry system maintained by the Taiwan Securities Central Depositary Co., Ltd. Or, at your request, risk and expense, the Depositary will deliver the deposited securities at its office, if feasible.

As an alternative to receiving delivery of the deposited securities upon surrender of GDSs, you may instead request that the Depositary sell the common shares the GDSs represent and deliver the proceeds of the sale. If you make that request, the Depositary will direct the Custodian to deliver the common shares to a securities company in the ROC for sale. When it receives proceeds of a sale, the Depositary will convert the net proceeds into dollars and pay the dollars to your order, after deduction of its fees and expenses. We cannot assure you that the Depositary will be able to sell common shares in a timely manner or at a favorable price or at all, especially during periods of illiquidity or volatility in the market for common shares. Any effort of the Depositary to sell shares will be entirely at your risk and expense.

You will not be able to surrender your GDSs purchased in this offering for the purpose of withdrawal of the common shares until the later of

three months after the closing date and

the date on which certificates for the common shares have been delivered in exchange for the certificate of payment that will be deposited at closing.

Until the later of 40 days after the last closing date with respect to the GDSs and the completion of the distribution of the GDSs in this offering, which period is referred to as the Restricted Period, any surrender of GDSs for the purpose of withdrawal of common shares must be accompanied by a written acknowledgement, representation and agreement by or on behalf of the person that will be the beneficial owner of the common shares upon withdrawal to the effect that:

that person has sold or otherwise transferred, or agreed to sell or otherwise transfer and at or prior to the time of withdrawal will have sold or otherwise transferred, the GDSs or the common shares outside the United States to a person other than a U.S. person in accordance with Rule 903 or 904 of Regulation S under the Securities Act, and that person is, or prior to such sale or other transfer was, the beneficial owner of the GDSs, or
that person will be the beneficial owner of the common shares upon withdrawal, and, accordingly, agrees that, prior to the expiration of the Restricted Period, that person will not offer, sell, pledge or otherwise transfer the common shares except (A) outside the United States to a person other than a U.S. person in accordance with Rule 903 or 904 of Regulation S under the Securities Act or (B) pursuant to an effective registration statement under the Securities Act.

Voting Rights

How do you vote?

You may instruct the Depositary to vote the common shares underlying your GDRs, but only if we ask the Depositary to ask for your instructions. If we ask for your instructions, the Depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you. The materials will (1) describe the matters to be voted on and (2) explain how you may instruct the Depositary to vote the common shares or other deposited securities underlying your GDSs as you direct. For instructions to be valid, the Depositary must receive them on or before the date the Depositary establishes for that purpose. The Depositary will try, as far as practical, subject to ROC law and the provisions of the our articles of incorporation, to vote or to have its agents vote the common shares or other deposited securities as you instruct. However, since ROC law requires the Depositary to vote all its shares in the same manner on any matter to be voted on (other than election of directors and supervisors), the Depositary will only attempt to carry out voting instructions if the holders of at least 51% of the outstanding GDSs request it to vote in the same manner on any question. Otherwise, the Depositary will consider you to have authorized and directed it to give a discretionary proxy to a person designated by us to vote all the deposited securities represented by your GDSs, and the Deposit Agreement may require the Depositary to do so unless we direct otherwise. In addition to the above limitations, the Depositary is not required to vote or give a discretionary proxy to anyone to vote as described in this paragraph unless it receives a legal opinion from our counsel that voting the deposited shares in that manner is legal and will not expose the Depositary to potential legal liability.

In the election of directors and supervisors, which is by cumulative voting, the Depositary is permitted to split its vote and will try to carry out all voting instructions it receives. If the Depositary does not receive your instructions on how to vote for the election of directors and supervisors, the Depositary will consider you to have instructed and directed it to give a discretionary proxy to a person designated by us to vote your deposited securities for election of directors and supervisors and the Deposit Agreement requires it to do so unless we direct otherwise.

The Depositary will only vote or attempt to vote as you instruct or as described above. Except for giving voting instructions that are subject to the limitations described above, you won’t be able to exercise your right to vote unless you surrender your GDSs and become a holder of the common shares. However, you may not know about the meeting enough in advance to withdraw the common shares. We can not assure you that you will receive the voting materials in time to ensure that you can instruct the Depositary to vote your common shares. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and there may be nothing you can do if your common shares are not voted as you requested.

Fees and Expenses

*Persons depositing common*
*shares or GDR holders must*
*pay:*	*For:*
$5.00 (or less) per 100 GDSs (or		Issuance of	GDSs, including			issuances		resulting from a
portion of 100 GDSs)		distribution	of	common	shares		or	rights	or	other
		property
		Cancellation of		GDSs for	the purpose of withdrawal,
		including if the Deposit Agreement terminates							or if you
		request, the Depositary to			sell common shares
$.02 (or less) per GDS		Any cash distribution to you
A fee equivalent to the fee that		Distribution of		securities		distributed		to holders				of
would be payable if securities		deposited	securities which			are	distributed		by		the
distributed to you had been		Depositary	to GDR holders
common shares and the
common shares had been
deposited for issuance of GDSs
$.02 (or less) per GDSs per		Depositary	services
calendar year (to the extent the
Depositary has not collected a
$.02 cash distribution fee
during that year)
Registration or transfer fees		Transfer and registration of common shares on							our share
		register to	or from the name of the Depositary or									its
		agent when	you deposit or withdraw common shares.								No
		charges of this type are currently made.
Expenses of the Depositary in
converting foreign currency to
U.S. dollars
Expenses of the Depositary		Cable, telex and facsimile			transmissions
		(when expressly		provided in		the Deposit Agreement)
Taxes and other governmental
charges the Depositary or the
Custodian have to pay on any
GDR or common share
underlying an GDR, for
example, stock transfer taxes,
stamp duty or withholding
taxes
Any charges incurred by the		No charges	of this type are currently made in						the	ROC
Depositary or its agents for		market.
servicing the deposited
securities

Payment of Taxes

The Depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not enough to pay the taxes. If the Depositary sells deposited securities, it will, if appropriate, reduce the number of GDSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.

Reclassifications, Recapitalizations and Mergers

If we:

Then:

Change the nominal or par value of our common shares
Reclassify, split up or consolidate any of the deposited securities

The cash, common shares or other securities received by the Depositary will become deposited securities. Each GDS will automatically represent its equal share of the new deposited securities.

Distribute securities on the common shares that are not distributed to you
Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action

The Depositary may, and will if we ask it to, distribute some or all of the cash, common shares or other securities it received. It may also deliver new GDRs or ask you to surrender your outstanding GDRs in exchange for new GDRs identifying the new deposited securities.

Amendment and Termination

How may the Deposit Agreement be amended?

We may agree with the Depositary to amend the Deposit Agreement and the GDRs without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the Depositary for registration fees, facsimile costs, delivery charges or similar items, or prejudices a substantial right of GDR holders, it will not become effective for outstanding GDRs until 30 days after the Depositary notifies GDR holders you of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your GDR, to agree to the amendment and to be bound by the GDRs and the Deposit Agreement as amended.

How may the Deposit Agreement be terminated?

The Depositary will terminate the Deposit Agreement if we ask it to do so. The Depositary may also terminate the Deposit Agreement if the Depositary has told us that it would like to resign and we have not appointed a new depositary bank within 60 days. In either case, the Depositary must notify you at least 30 days before termination.

After termination, the Depositary and its agents will do the following under the Deposit Agreement but nothing else:

advise you that the Deposit Agreement is terminated,

collect distributions on the deposited securities,
sell rights and other property and

deliver common shares and other deposited securities upon cancellation of GDRs.

One year after termination, the Depositary may sell any remaining deposited securities by public or private sale. After that, the Depositary will hold the money it received on the sale, as well as any other cash it is holding under the Deposit Agreement for the pro rata benefit of the GDR holders that have not surrendered their GDRs. It will not invest the money and has no liability for interest. The depositary’s only obligations will be to account for the money and other cash. After termination our only obligations will be to indemnify the Depositary and to pay fees and expenses of the Depositary that we agreed to pay.

Limitations on Obligations and Liability

Limits on our Obligations and the Obligations of the Depositary; Limits on Liability to Holders of GDRs

The Deposit Agreement expressly limits our obligations and the obligations of the Depositary. It also limits our liability and the liability of the Depositary. We and the Depositary:

are only obligated to take the actions specifically set forth in the Deposit Agreement without negligence or bad faith;
are not liable if either of us is prevented or delayed by law or circumstances beyond our control from performing our obligations under the Deposit Agreement;
are not liable if either of us exercises discretion permitted under the Deposit Agreement;
have no obligation to become involved in a lawsuit or other proceeding related to the GDRs or the Deposit Agreement on your behalf or on behalf of any other party;
may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party.

In the Deposit Agreement, we agree to indemnify the Depositary for acting as depositary, except for losses caused by the depositary’s own negligence or bad faith, and the depositary agrees to indemnify us for losses resulting from its negligence or bad faith.

Requirements for Depositary Actions

Before the Depositary will deliver or register a transfer of an GDR, make a distribution on an GDR, or permit withdrawal of common shares, the Depositary may require:

payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any common shares or other deposited securities;
satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
compliance with regulations it may establish, from time to time, consistent with the Deposit Agreement, including presentation of transfer documents.

The Depositary may refuse to deliver GDRs or register transfers of GDRs generally when the transfer books of the Depositary or our transfer books are closed or at any time if the Depositary or we think it advisable to do so.

Your Right to Receive the Common shares Underlying your GDRs

At and after the Effective Time, you have the right to cancel your GDRs and withdraw the underlying common shares at any time except:

When temporary delays arise because: (i) the Depositary has closed its transfer books or we have closed our transfer books; (ii) the transfer of common shares is blocked to permit voting at a shareholders’ meeting; or (iii) we are paying a dividend on our common shares.
When you or other GDR holders seeking to withdraw common shares owe money to pay fees, taxes and similar charges.
When it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to GDRs or to the withdrawal of common shares or other deposited securities.

This right of withdrawal may not be limited by any other provision of the Deposit Agreement.

Pre-release of GDRs

The Deposit Agreement permits the Depositary to deliver GDRs before deposit of the underlying common shares. This is called a pre-release of the GDR. The Depositary may also deliver common shares upon cancellation of pre-released GDRs (even if the GDRs are canceled before the pre-release transaction has been closed out). A pre-release is closed out as soon as the underlying common shares or GDRs are delivered to the Depositary. The Depositary may receive GDRs instead of common shares to close out a pre-release. The Depositary may pre-release GDRs only under the following conditions:

before or at the time of the pre-release, the person to whom the pre-release is being made represents to the Depositary in writing that it or its customer owns the common shares or GDRs to be deposited;
the pre-release is fully collateralized with cash or other collateral that the Depositary considers appropriate; and
the Depositary must be able to close out the pre-release on not more than five business days’ notice.

In addition, the Depositary will limit the number of GDSs that may be outstanding at any time as a result of pre-release, although the Depositary may disregard the limit from time to time, if it thinks it is appropriate to do so. Prior to the Effective Time, each person to whom a pre-release is to be made must deliver to the Depositary a written certification and agreement as described above under “Deposit, Withdrawal and Cancellation — How are GDSs issued?”.

INFORMATION RELATING TO THE DEPOSITARY

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

The Bank of New York company, Inc. is subject to the reporting requirements of the Exchange Act. The Bank of New York Company, Inc.’s audited consolidated financial statements at and for the year ended December 31, 2001 are contained in its Annual Report on Form 10-K for the year ended December 31, 2001 filed with the SEC, and its unaudited consolidated financial statements at and for the nine months ended September 30, 2002 are contained in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 filed with the SEC.

A copy of The Bank of New York’s Articles of Association, as amended, together with copies of the above-referenced Form 10-K and Form 10-Q, will be available for inspection at the principal executive offices of the Depositary in New York, at the Depositary’s principal office in London and at the principal office of the Bank of New York (Luxembourg) S.A., Aerogolf Center, 1A, Hoehenhof, L-1736 Sennigerberg, Luxembourg.

TAXATION

ROC Taxation

This discussion describes the material ROC tax consequences of the ownership and disposition of GDSs representing common shares to a non-resident individual or entity. It applies to you only if you are:

an individual who is not a ROC citizen and is not physically present in the ROC for 183 days or more during any calendar year; or
a corporation or a non-corporate body that is organized under the laws of a jurisdiction other than the ROC for profit-making purposes and has no fixed place of business or other permanent establishment in the ROC.

You should also consult your tax advisors concerning the ROC tax consequences of owning GDSs.

Dividends

Dividends declared by us out of our retained earnings and distributed to you are subject to ROC withholding tax, currently at the rate of 20%, on the amount of the distribution in the case of cash dividends or on the par value of the common shares in the case of stock dividends. However, a 10% ROC retained earnings tax paid by us on our undistributed after-tax earnings, if any, would provide a credit up to 10% of the gross amount of any dividends declared out of such earnings that would reduce the 20% ROC tax imposed on these distributions. Dividends paid by us out of our capital reserves are not subject to ROC withholding tax.

Capital Gains

Under current ROC law, capital gains on share securities transactions are exempt from income tax.

Subscription Rights

Distributions of statutory subscription rights for common shares in compliance with ROC law are not subject to any ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are exempted from income tax but are subject to securities transaction tax at the rate of 0.3% of the gross amount received. Proceeds derived from sales of statutory subscription rights which are not evidenced by securities are subject to capital gains tax at the rate of:

35% of the gains realized if you are a natural person; or
25% of the gains realized if you are an entity.

Subject to compliance with ROC law, we, at our sole discretion, can determine whether statutory subscription rights shall be evidenced by issuance of securities.

Securities Transaction Tax

A securities transaction tax, at the rate of 0.3% of the gross amount received, will be withheld upon a sale of common shares in the ROC. Transfers of GDSs are not subject to ROC securities transaction tax. Withdrawal of common shares from the deposit facility is not subject to ROC securities transaction tax.

Estate and Gift Tax

ROC estate tax is payable on any property within the ROC of a deceased who is an individual, and ROC gift tax is payable on any property within the ROC donated by any such person. Estate tax is currently payable at rates ranging from 2% of the first NT$600,000 to 50% of amounts over NT$100,000,000. Gift tax is payable at rates ranging from 4% of the first NT$600,000 to 50% of amounts over NT$45,000,000. Under ROC estate and gift tax laws, common shares issued by ROC companies are deemed located in the ROC regardless of the location of the holder. It is unclear whether a holder of GDSs will be considered to hold common shares for this purpose since there is no authority directly indicating whether a GDS holder will be treated as owning the shares represented by the GDS.

Tax Treaty

The ROC does not have an income tax treaty with the United States. On the other hand, the ROC currently has income tax treaties with Indonesia, Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Macedonia, Swaziland, Gambia and The Netherlands, which may limit the rate of ROC withholding tax on dividends paid with respect to common shares of ROC companies. It is unclear whether if you hold GDSs, you will be considered to hold common shares for the purposes of these treaties. Accordingly, if you may otherwise be entitled to the benefits of the relevant income tax treaty, you should consult your tax advisors concerning your eligibility for the benefits with respect to the GDSs.

SUBSCRIPTION AND SALE

SinoPac Securities (Asia) Limited (the “ Lead Manager ”) and Yuanta Core Pacific Co., Ltd. (together with the Lead Manager, the “ Managers ”) have, pursuant to a Subscription Agreement dated even date of this Offering Circular, severally and not jointly agreed with the Company to subscribe and purchase the GDSs at the issue price per GDS of U.S.$5.515 less a combined management, underwriting commission and selling concession of 1.0% of the proceeds, subject to certain applicable reimbursements. The Subscription Agreement entitles the Managers to terminate in certain circumstances, including failure to fulfill certain conditions precedent, prior to payment being made to us. The price at which the GDSs are offered may be changed at any time without notice.

The underwriters may offer and sell the GDSs outside the United States in transactions that are not subject to the registration requirements of the Securities Act pursuant to Regulation S thereunder.

The offering of the GDSs is made for delivery, when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of GDSs in whole or in part.

The Company and the Managers have represented and agreed in connection with the offering that they have not engaged in, and they will not engage in, any directed selling efforts (as defined in Regulation S) of the GDSs. The Company and the Managers have represented and agreed in connection with the offering that none of their affiliates or any person acting on their behalf or on behalf of any of their affiliates have engaged in, and they will not engage in, such directed selling efforts in connection with the offering.

The Company has agreed that for a period of 90 days after the date of the Subscription Agreement, it will not, without the prior written consent of SinoPac Securities (Asia) Limited, on behalf of the Managers, and will not announce their intention to, directly or indirectly, (a) issue, offer, pledge, sell, contract to sell, grant any option to purchase or otherwise dispose of, any Shares, any GDSs representing Shares or deposit any Shares or any securities convertible into or exchangeable or exercisable for GDSs or Shares in any depositary receipt facility or (b) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of GDSs of Shares or any securities convertible into or exchangeable or exercisable for GDSs or Shares, except that the Company (a) may grant options to its employees pursuant to its existing employee stock option plan and (b) may issue Shares or GDSs upon conversion of its existing convertible securities.

Selling Restrictions

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

United States

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

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

United Kingdom

Each Manager will represent and warrant in the Subscription and Purchase Agreement that

(i) it has not offered or sold, and prior to the date six months after the closing of the Offering will not offer or sell, any International GDSs in the United Kingdom by means of any document other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments, (as principal or agent) for purposes of their businesses or otherwise in circumstances that do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995,
(ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the International GDSs in, from or otherwise involving the United Kingdom, and
(iii) it has only issued or passed on, and will only issue or pass on, in the United Kingdom, any document received by it in connection with the issue of the GDSs, to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended) or is a person to whom the document may otherwise lawfully be issued or passed on.

The ROC

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

Hong Kong

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

Japan

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

Singapore

Offering Circular has not been registered as a prospectus with the Monetary Authority of Singapore, and the GDSs will be offered in Singapore only pursuant to exemptions invoked under Sections 274 and/or 275 of the Securities and Futures Act 2001 (the “ SFA ”). Accordingly, each Manager offering the GDSs acknowledges and agrees that it has not offered or sold and will not offer or sell the GDSs nor will it circulate or distribute the Offering Circular or any other offering document or material relating to the GDSs, either 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 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 provisions of the SFA.

LEGAL MATTERS

Certain legal matters with respect to the GDSs will be passed upon for the Company by Chen & Lin Attorneys-at-Law, and for the Managers by Baker & McKenzie. Baker & McKenzie will rely upon Chen & Lin Attorneys-at-Law with respect to certain matters of ROC law. Chen & Lin Attorneysat-Law will rely upon Baker & McKenzie with respect to certain matters of United States federal and New York law.

INDEPENDENT AUDITORS

The consolidated and non-consolidated financial statements of the Company as of and for the years ended December 31, 1999, 2000, and 2001 included in this Offering Circular have been audited or reviewed by T N Soong & Co., an Associate Member Firm of Deloitte Touche Tohmatsu, independent auditors, as stated in their reports appearing herein.

GENERAL INFORMATION

Registered Office and Principal Place of Business

The Company was incorporated under the laws of the Republic of China on August 26, 1987. The Company’s Uniform Registration Number is 22099202. The Company’s principal executive offices are located at No. 16, Creation Road I, Science-Based Industrial Park, Hsinchu, Taiwan, Republic of China. The Company’s phone number is (8863) 577-4922.

Authorizations

The Company’s offering of the GDSs and the issue of the underlying Shares were authorized and approved by the Shareholders’ meeting held on May 22, 2001 and the Board of Directors of the Company at the meeting held on August 23, 2002.

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

Listing and Trading

Application has been made to list the GDSs on the Luxembourg Stock Exchange. The legal notice relating to the issue of the GDSs, the Articles of Incorporation of the Company, the Articles of Association and the by-laws of the Depositary and the Deposit Agreement will be registered prior to the listing with the Registrar of the District Court in Luxembourg (Greffier en Chef du Tribunal d’Arrondissement de et a` Luxembourg) , where such documents are available for inspection and where copies thereof can be obtained upon request.

For so long as the GDSs are listed on the Luxembourg Stock Exchange, the Company will publish all notices to holders of GDSs in the Luxemburger Wort in Luxembourg. The Bank of New York (Luxembourg) S.A. will serve as the intermediary between the Luxembourg Stock Exchange and the persons connected with the issuance and listing of the GDSs for so long as the GDSs remain listed on the Luxembourg Stock Exchange.

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 GDSs and, so far as any of them is aware, no such litigation, arbitration or administrative proceedings are pending or threatened.

No Material Adverse Change

There has been no significant adverse change in our consolidated financial position since December 31, 2001, the date of the latest audited consolidated financial statements.

Financial Statements

The consolidated and non-consolidated financial statements as of December 31, 2001, 2000 and 1999 included in this Offering Circular, have been audited by T N Soong & Co, an associate member firm of Deloitte Touche Tohmatsu, effective April 22, 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.

Documents Available

Copies (and certified English translations where the documents are not in English) of the following documents may be inspected at the specified office of The Bank of New York (Luxembourg) S.A., Aerogolf Centre, 1A, Hoehenhof, L-1736 Senningerberg, Grand Duchy of Luxembourg, for as long as the GDSs are listed on the Luxembourg Stock Exchange:

Articles of Incorporation of the Company;

the Subscription Agreement relating to the GDSs; and
the Deposit Agreement which includes the form of the Global GDRs and the definitive GDRs.

In addition, copies of the latest consolidated and non-consolidated annual financial statements, and non-consolidated semi-annual and quarterly financial statements (in each case in English) of the Company will be available free of charge at the specified office of The Bank of New York (Luxembourg) S.A., in Luxembourg for so long as the GDSs are listed on the Luxembourg Stock Exchange. The Company’s annual consolidated and non-consolidated financial statements are audited by its auditors.

Clearance

Trades on the Luxembourg Stock Exchange will be settled through Euroclear or Clearstream. Euroclear and Clearstream have only accepted for clearance those GDSs represented by the Master GDR.

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

CUSIP	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82706A 10 2
Common Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 016049085
ISIN	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . US82706A1025

Governing Law

The GDSs, the Deposit Agreement and the Subscription Agreement are governed by the laws of the State of New York, the United States of America.

Euro Convertible Bonds Convertible into GDRs

The Company issued the Bonds in July 2002. Under Condition 5 of the Bonds, the Company committed to the holders of the Bonds (the “Bondholders”) that, if the Company shall establish a depositary facility for issuing, among other things, GDRs, 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 GDRs (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 for the issuance of GDRs (or other scrips evidencing Shares) on behalf of a converting Bondholder; so that, subject to the approvals of relevant competent authorities, a converting Bondholder may elect to receive such GDRs (or other scrips) evidencing the GDSs which represent the shares issuable to it upon conversion. Accordingly, the Company may be obliged to issue additional GDRs upon Bondholders’ election to fulfill its commitment under terms and conditions of the Bonds.

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

The audited financial statements of the Company are prepared and presented in accordance with ROC GAAP, which differs in certain material respects from U.S. GAAP. Certain principal differences between ROC GAAP applicable to the Company and U.S. GAAP are summarized below. Such presentation should not be taken as inclusive of all ROC GAAP/U.S. 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 U.S. GAAP as a result of prescribed changes in accounting standards. Regulatory bodies that promulgate ROC GAAP and U.S. GAAP have significant projects ongoing that could affect future comparisons such as this one.

Subject Presentation of Unconsolidated Financial Statements Consolidation	ROC GAAP Under ROC GAAP requirements, unconsolidated financial statements of the Company are presented as the primary financial statements and consolidated financial statements as supplemental financial statements. Under ROC GAAP, a company is required to include in its annual consolidated financial statements only those subsidiaries that are directly or 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 SF0 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	U.S. GAAP
		Under U.S. GAAP, parent-company- only unconsolidated financial statements are not allowed to be presented as the primary financial statements for any period. Under U.S. GAAP, consolidation of controlled subsidiaries is required in the preparation of the consolidated financial statements.

Subject

U.S. GAAP

ROC GAAP

combined total assets or operating revenues for all such subsidiaries decreases to less than 20 per cent. of the company’s respective unconsolidated amount. Investment in Debt and Equity Short-term investments are stated at the Investments in marketable equity Securities lower of cost or market value, securities are classified in one of three investments in debt securities are stated categories: trading, held-to-maturity or at the lower of amortised cost or market available-for-sale. Marketable equity value. Long-term investments in listed securities classified as trading securities equity securities in respect of which the are reported at fair value with unrealised company does not exercise significant gains and losses included in earnings; influence on operating and financial debt securities classified as held-to decisions of the investee are stated at the maturity securities are reported at lower of cost or market value, and amortised cost; and debt and marketable unrealised losses are deducted from equity securities classified as availableshareholders’ equity. Investments in nonfor-sale securities are reported at fair listed equity securities in respect of value with unrealised gains and losses which the company does not exercise reported in a separate component of significant influence on operating and shareholders’ equity. Share dividends financial decisions of the investee are received are recorded as investment stated at cost, subject to permanent income based on the fair value of the impairment test. shares. Stock dividends received are recorded as an increase in voting stock and not as investment income. Bonuses to Employees, Directors and According to ROC regulations and the Under U.S. GAAP, bonuses to Supervisors Article of Incorporation of the Company, employees, directors and supervisors are a portion of distributable earnings should charged against income. Share issued as be set aside as bonuses to employees, part of those bonuses is recorded at fair directors and supervisors. Bonuses to market value. However, since the amount directors and supervisors are always paid and form of such bonuses are not finally in cash. However, bonuses to employees determinable until the shareholders’ may be granted in cash or stock or both. meeting in the subsequent year, the total All of these appropriations, including amount of such bonuses is initially stock bonuses which are valued at par accrued based on management’s estimate value of NT$10, are charged against of the number of shares to be issued, retained earnings under ROC GAAP, valued at par value. Any difference after such appropriations are formally between the initially accrued amount and approved by the shareholders in the the fair market value of the bonuses upon following year. the issuance of shares is recognised in the year by shareholders of approval. Stock Dividends Stock dividends are recorded as a Stock dividends are recorded as reduction to retained earnings for the par reduction to retained earnings based on value of the stock issued, and a like the fair value of the stock issued, and a amount is recorded to the capital stock like amount is recorded to the capital account. stock and capital surplus accounts.

Subject Gains on Disposition of Property, Plant and Equipment Capital Surplus Inventory Valuation Accounting for Pensions	ROC GAAP Gains on the dispositions of property, plant and equipment generated before 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 U.S. GAAP. 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. Under ROC GAAP, inventories should be valued at the lower of cost or market, with market generally defined as net realizable value for finished goods and replacement cost for raw materials and work-in-process. ROC Statement of Financial Accounting Standards (SFAS) No. 18 “Accounting for Pensions”, effective in January 1, 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.	U.S. GAAP
		Any gains on the dispositions of property, plant and equipment is classified within operating income under U.S. GAAP. 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 U.S. GAAP, a write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot be marked up based on changes in underlying facts and circumstances. Under U.S. 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.

Subject ROC GAAP U.S. GAAP
Impairment of Long-Lived Assets and ROC GAAP has no specific standards Under U.S. GAAP, SFAS No 144 Long-Lived Assets to be Disposed of which address impairment of long-lived “Accounting for the Impairment or assets held and used by an entity, Disposal of Long-Lived Assets” which is normally such assets would be carried at required to be applied by the entities by cost less accumulated depreciation. January 1, 2002, retains the requirement of SFAS No. 121 that an impairment loss be recognized if the carrying value of the asset is not recoverable from its undiscounted cash flow; the impairment loss is measured as the difference between fair values and carrying values of the assets. This Statement also requires long-lived assets to be disposed of other than by sale to be considered held and used until they are disposed. It also broadens the scope of APB Opinion No. 30 for the presentation of discontinued operations separately from continuing operations to include a component of an entity that either has been disposed of or is classified as held for sales. In addition, discontinued operations are no longer measured on a net realizable value basis, and expected future operating losses must be reflected in the periods incurred, rather than at the measurement date as previously required under APB Opinion No. 30.

Long-term Debt Classification Under ROC GAAP, there is no specific Under U.S. GAAP, breaches of loan rule on presentation of the portion of covenants may require the portion of long-term debt where certain covenants long-term debt due after one year to be were breached. Generally, such debt will classified as current liabilities. be presented as non-current as long as there are no indications that such breaches will result in the debt being accelerated.

Depreciation Lives of Fixed Assets In practice, depreciation is generally Depreciation is provided on a straightprovided using the guideline service line basis over the asset’s estimated lives as prescribed by ROC Internal useful life. No additional depreciation is Revenue Code plus one additional year provided on fully depreciated assets as salvage value. ROC SFC regulations which continue to be used in the applicable to public companies require business. In general, 55 years would be that when fixed assets have been fully considered too long a period over which depreciated over the prescribed service to depreciate fixed 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.

Subject ROC GAAP U.S. GAAP Treasury Stock Under ROC GAAP, stock held by Under U.S. GAAP, when a subsidiary subsidiaries of a company may be holds its parent’s shares as investments, accounted for as an asset on the balance these shares should be treated as treasury sheet. However, effective at the stock in the consolidated balance sheet beginning of 2002, a parent’s stock held as a reduction in shareholders’ equity. by subsidiaries is treated as treasury stock on the parent’s balance sheet and a reduction in shareholders” equity. Compensation expense on treasury Under ROC GAAP, the Company did not Under U.S. GAAP, the sale of treasury stock sold to employees recognise income or expense in stock may result in compensation connection with the sale of the expense based on the difference between Company’s treasury stock. Instead, only the fair market value of the shares at the the capital surplus account was increased time of the sale over the sale price to the by an amount equal to the difference employees. between the aggregate sales price and its aggregate cost of treasury stock sold. Derivative Financial Instrument ROC GAAP does not require that Beginning January 1, 2001, all Transactions derivatives that do not qualify as hedges derivatives contracts are recognised on to be recorded on the balance sheet at the balance sheet at fair value (including fair value. As such, significant assets or those that do not qualify as hedge), the obligations, if represented by measurement of which takes accounts of derivatives, will not be recognised for all contractually committed future cash accounting purposes until the payments flows under the contract regardless of become due. Because the rules are when they will be paid. If hedge flexible, different companies may apply accounting criteria are met, the rules different accounting practices to provide for deferral of gains and losses derivatives. in equity for cash flow hedge and 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 U.S. 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.

Subject

U.S. GAAP

ROC GAAP

Income Tax	Prior to January 1, 1995, generally,	Under U.S. GAAP, current tax liabilities
	income tax expenses was provided based	are recognised for estimated taxes
	on current taxable income; deferred	payable for the current period. U.S.
	income tax was not recognised for timing	SFAS 109 requires that all material
	differences. ROC Statements of	temporary differences between the
	Financial Accounting Standards No. 22	carrying values of assets and liabilities
	(ROC SFAS No. 22) “Accounting for	and their respective tax bases be
	Income Taxes’, was issued in June 1994,	recognised as deferred tax liabilities or
	and has been adopted by the Company as	assets. A valuation allowance is provided
	of January 1, 1995. ROC SFAS No.22 is	on deferred tax assets to the extent that it
	similar to U.S. GAAP. However, under	is not “more likely than not’ that such
	ROC GAAP, the cumulative effect of	deferred tax assets will be realised. A
	adoption is included in the current year’s	change in tax rate or law requires an
	provision for income tax rather than	adjustment to such deferred tax assets
	being separately presented as the	and liabilities in the period of enactment,
	cumulative effect of a change in	and is reported as a part of results of
	accounting principle. Under ROC GAAP,	operations.
	a valuation allowance determined is less
	stringent as compared to U.S. GAAP.
	Under U.S. GAAP, if a company has
	experienced cumulative losses in recent
	years, it is not generally able to consider
	projections of future operating profits for
	the purpose of determining the valuation
	allowance for deferred income tax assets.
Retained Earnings Tax	Companies in the ROC are subject to a	Under U.S. GAAP, income tax expense
	10 per cent. surtax on profits retained	related to the 10 per cent. retained profit
	and earned after December 31, 1997. If	tax is recorded in the statement of
	the retained profits are distributed to the	income in the year that the profits were
	shareholders in the following fiscal year,	earned.
	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.
Comprehensive Income	There is no requirement to	Comprehensive income and its
	comprehensive income.	components (revenues, expenses, gains
		and losses) must be presented in a full set
		of financial statements under U.S.
		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.

100

Subject

U.S. GAAP


Subject Stock Options Compensated Absences Classification Earnings Per Share	ROC GAAP ROC GAAP has no specific accounting practice regarding stock option, or the disclosures of stock options. ROC GAAP has no specific accounting regarding compensated practice absences. There is no specific rule on account presentation on the statement of income between cost of good sold, operating expense and non-operating expenses such as scrap income, inventory allowance, restructuring expenses, impairment loss of fixed assets and earthquake losses under ROC GAAP. A company computes earnings per share based on the weighted average number of outstanding shares is retroactively adjusted for stock dividends and new common stock issuance issued through unappropriated earnings and capital surplus.	U.S. GAAP
		Under U.S. GAAP, APB Opinion No. 25 “Accounting for Stock Issued to 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 absences must be accrued based on the liability for employees’ rights to receive compensation for future absences when the benefits can be accumulated or vested over the service period. Under U.S. GAAP, the presentation of scrap income, inventory allowance, restructuring expenses, impairment loss of fixed asses and earthquake losses are generally recorded under income from continuing operations, not as non- operating expenses. Under U.S. GAAP, when a simple capital structure exists, basic earnings per share is based on the weighted average number of shares outstanding. When a complex capital structure exists, diluted earnings per share is based on the weighted 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.

101

Subject

U.S. GAAP

ROC GAAP

Goodwill and Other Intangible Assets ..

Under ROC GAAP, acquired goodwill and other intangible assets, such as patents, technology transfer fees, licenses fees and the likes should be amortized by systematic charges to income over the period estimated to be benefited. The period of amortization for goodwill should not, however, exceed twenty years.

Under U.S. GAAP, SFAS No. 142 “Goodwill and Other Intangible Assets”, effective on December 15, 2001, requires that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested for impairment at least annually by comparing the fair values of those assets with their recorded amounts (a two-step process). Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of an arbitrary ceiling. Also, this statement requires disclosure of information about goodwill and other intangible assets in the years subsequent to their acquisition that was not previously required.

The information set forth above do not in any way attempt to quantify the effects of the aforementioned differences between ROC GAAP and U.S. 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 U.S. GAAP.

102

INDEX TO FINANCIAL STATEMENTS

			Page
Report of Independent Accountants . . . . . . . . . . . . . . . . . .	. . . . .	. . . . . . . . . . . . . . . . . . . . .	F-3
Consolidated Balance Sheets as of December 31, 2000 and	2001	. . . . . . . . . . . . . . . . . . . . .	F-4
Consolidated Statements of Income
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	F-6
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	F-7
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	F-8
Notes to Consolidated Financial Statements
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	F-10
Report of Independent Accountants . . . . . . . . . . . . . . . . . .	. . . . .	. . . . . . . . . . . . . . . . . . . . .	N-1
Non-Consolidated Balance Sheets as of December 31, 1999, 2000		and 2001 . . . . . . . . . . . . .	N-2
Non-Consolidated Statements of Income
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	N-4
Non-Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	N-5
Non-Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	N-6
Notes to Non-Consolidated Financial Statements
for the years ended December 31, 1999, 2000 and 2001	. . . . .	. . . . . . . . . . . . . . . . . . . . .	N-8
Unaudited Non-Consolidated Balance Sheets as of September 30,		2001 and 2002 . . . . . . . . .	P-1
Unaudited Non-Consolidated Statements of Income for the	nine months ended
September 30, 2001 and 2002 . . . . . . . . . . . . . . . . . . . .	. . . . .	. . . . . . . . . . . . . . . . . . . . .	P-3
Unaudited Non-Consolidated Statements of Cash Flows
for the nine months ended September 30, 2001 and 2002	. . . . .	. . . . . . . . . . . . . . . . . . . . .	P-5
Notes to Unaudited Non-Consolidated Financial Statements
for the nine months ended September 30, 2001 and 2002	. . . . .	. . . . . . . . . . . . . . . . . . . . .	P-7

F-1

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F-2

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 20c which is as of May 6, 2002)

F-3

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS December 31, 2000 and 2001

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
		278,618
		47,535
		12,562 43,477 698,649 3,416 176 9,592
		767,872 (156,251) 11,895
		623,516
		39,049
		43,750 2,258 331 68
		46,407
35,273,757	36,229,368	1,035,125

F-4

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

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

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
		211,468
		73,429 210,779 14,979 1,579 859
		301,625
		513,093
		2,230
		306,119 221,148 8,998 (17,371) 908 —
		519,802
35,273,757	36,229,368	1,035,125

The accompanying notes are an integral part of the consolidated financial statements.

F-5

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 1999, 2000 and 2001

1999	2000	2001	2001
NT$ NT$ NT$ (In Thousands, Except Earnings (Loss) Per 10,845,347 7,821,196 9,987,590 7,077,541 7,503,025 7,441,405 3,767,806 318,171 2,546,185 741,809 1,193,849 1,883,013 999,436 722,938 602,396 368,539 335,148 565,854 2,109,784 2,251,935 3,051,263 1,658,022 (1,933,764) (505,078) — 76,950 93,728 7,701 906,129 45,045 174,042 182,801 46,039 4,650 — — 7,787 29,257 32,906 194,180 1,195,137 217,718 2,171 128,604 678,612 — — 55,920 — — 43,812 17,866 — — 4,540 21,417 21,428 24,577 150,021 799,772 1,827,625 (888,648) (1,087,132) 131,621 662,260 478,480 1,959,246 (226,388) (608,652) 607 456 680			US$ (Note 3) Share) 285,360 212,612
			72,748
			53,801 17,211 16,167
			87,179
			(14,431)
			2,678 1,287 1,316 — 940
			6,221
			19,389 1,598 1,252 — 612
			22,851
			(31,061) 13,671
			(17,390) 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.

F-6

							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
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	For the Years Ended December 31, 1999, 2000 and 2001	Retained Earnings (Deficit)	Capital Stock Capital Surplus (Notes 2 and 14) (Note 14)	Paid-in Gain on	Capital Disposal	Paid-in from sale of Unappropriated	Capital in of Property, Earnings Cumulative	Excess of Treasury Plant and Legal (Accumulated Translation	Shares Amount Par Value Stock Equipment Total Reserve Deficits) Total Adjustments	NT$ 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 15,895		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) —	— — — — — — — — — (4,789)	— — — — — — — 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 11,106		— — — — — — 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) —	— — — — — — — — — 10,013	— — — — — — — (225,932) (225,932) —		— — — — — — — — — —	974,015 9,740,149 8,672,325 — 10,157 8,682,482 525,835 (210,924) 314,911 21,119	— — — — — — (210,924) 210,924 — —	97,401 974,015 (974,015) — — (974,015) — — — —	— — — 31,715 — 31,715 — — — —	— — — — — — — — — 10,659	— — — — — — — (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) 31,778
												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.....................

F-7

SILICON INTEGRATED SYSTEMS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 2000 and 2001

1999	2000	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)

F-8

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
(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)	(112,684
(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	(20,098
			51,819
			3,592

The accompanying notes are an integral part of the consolidated financial statements.

F-9

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:

==> picture [328 x 76] intentionally omitted <==

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

SiS
100% 99.99% 62.5%
SiS-USA SiS-HK IVCF
----- End of picture text -----

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.

F-10

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%

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.

F-11

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.

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) 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.

F-12

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.

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.

F-13

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 December 31, 2001, 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
	2000	2001
	NT$	NT$	US$
			(Note 3)
Accounts receivable .................................................................	2,049,384	2,051,784	58,622
Less — Allowances for:
Doubtful accounts ................................................................	(69,412)	(69,000)	(1,971)
Sales returns and discounts ..................................................	(52,000)	(84,000)	(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.

F-14

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	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,
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 NT$ US$ 396,297 11,323 2,220 63 1,035,000 29,571 34,495 986 195,720 5,592	% of Ownership
	NT$ 396,297 2,220 1,035,000 34,495 195,720	(Note 3) 2.0 2.0 — — 5.8

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.

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7. ACCUMULATED DEPRECIATION

		December 31
	2000	2001
	NT$	NT$	US$
			(Note 3)
Buildings and auxiliary equipment ...........................................	167,776	261,355	7,467
Machinery and equipment ........................................................	1,533,634	4,955,559	141,587
Furniture and fixtures ...............................................................	50,802	70,023	2,001
Transportation equipment .........................................................	3,308	4,225	121
Equipment under capital lease ..................................................	56,555	177,627	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.

8. INTANGIBLE ASSETS — NET

	December 31	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

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9. SHORT-TERM BANK LOANS

	December 31	December 31
2000 NT$ 2,050,000 —	2001
	NT$ 1,850,000 354,630	US$ (Note 3) 52,857 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	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

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.

F-17

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$ 429,999 859,998 859,998 850,005	US$ (Note 3) 12,286 24,571 24,571 24,286
	3,000,000	85,714

12. LONG-TERM BANK LOANS

	December 31	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

F-18

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 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	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.

F-19

Certain pension information is as follows:

	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
18,387	29,845	33,978	971

	December 31	December 31
2000 NT$ — (33,344) (33,344) (87,084) (120,428) 61,631 (58,797) 8,481 7,857	2001
	NT$ — (57,074) (57,074) (90,777) (147,851) 85,716 (62,135) 8,034 (1,171)	US$ (Note 3) — (1,631)
		(1,631) (2,594)
		(4,225) 2,449
		(1,776) 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.

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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.

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.

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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
	1999	2000	2001
	NT$	NT$	NT$	US$
				(Note 3)
Current income tax payable ................	(118,226)	(153)	(335)	(9)
Deferred income tax ...........................	268,147	643,960	476,185	13,605
Adjustment of prior years’
income taxes ..................................	(18,300)	18,453	2,630	75
Income tax benefit ..............................	131,621	662,260	478,480	13,671

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	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

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c. Deferred income tax assets and liabilities as of December 31, 2000 and 2001 are as follows:

	December 31	December 31
2000 NT$ 21,915 5,926 42,000 7,865 7,324 (4,745) 3,045 5,746 89,076 —	2001
	NT$ 68,215 — 56,275 12,750 11,180 (10,894) 25,741 10,586 173,853 (68,215)	US$ (Note 3) 1,949 — 1,608 364 319 (311 735 303
		4,967 (1,949
89,076	105,638 December 31	3,018

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

F-23

d. The related information under the Integrated Income Tax System is as follows:

Shareholders’ imputed tax credit......................................		December 31
	2000 NT$ 39	2001
		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.

F-24

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.
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	2001
			NT$ — 1,277,044 — — 12,600 1,035,000 57,834	US$ (Note 3) —
				36,487
				—
				—
				360
				29,571
				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.

F-25

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	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.

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.

F-26

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

F-27

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.

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	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

F-28

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.

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 crosslicenses 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).

F-29

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.

F-30

c. Fair value of financial instruments

December Non-derivative financial instruments Carrying Value NT$ Assets Cash ............................. 2,928,185 Pledge time deposits .... 4,400 Short-term investments . 1,930,451 Notes receivable ........... 1,211,511 Accounts receivable ..... 1,927,972 Long-term investments . 583,765 Refundable deposits ..... 10,748 Liabilities Short-term bank loans .. 2,050,000 Notes and accounts payable .................... 951,579 Accounts payable to related parties .......... 186,230 Payable for properties .. 2,605,575 License fees and royalty payable (including current portion) ........ 198,447 Bonds payable (including current portion) ..................... 3,000,000 Long-term bank loans (including current portion) .................... 7,000,000 Obligation under capital lease (including current portion) ........ 240,947 Derivative financial instruments Forward exchange contracts — sell ...................... — Forward exchange contracts — buy ..................... 235,074	December Non-derivative financial instruments Carrying Value NT$ Assets Cash ............................. 2,928,185 Pledge time deposits .... 4,400 Short-term investments . 1,930,451 Notes receivable ........... 1,211,511 Accounts receivable ..... 1,927,972 Long-term investments . 583,765 Refundable deposits ..... 10,748 Liabilities Short-term bank loans .. 2,050,000 Notes and accounts payable .................... 951,579 Accounts payable to related parties .......... 186,230 Payable for properties .. 2,605,575 License fees and royalty payable (including current portion) ........ 198,447 Bonds payable (including current portion) ..................... 3,000,000 Long-term bank loans (including current portion) .................... 7,000,000 Obligation under capital lease (including current portion) ........ 240,947 Derivative financial instruments Forward exchange contracts — sell ...................... — Forward exchange contracts — buy ..................... 235,074	December	31, 2000	December	31, 2001
		Carrying Value	Fair Value	Carrying Value	Fair Value
			NT$ 2,928,185 4,400 1,945,321 1,211,511 1,927,972 766,160 10,748 2,050,000 951,579 186,230 2,605,575 188,244 3,000,000 7,000,000 240,947 — 251,921	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	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.

F-31

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.

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

		Year Ended	December 31
Geographic Area	1999	2000	2001
	NT$	NT$	NT$	US$
				(Note	3)
East Asia (Hong Kong and China) ......	5,256,856	4,451,136	5,011,119	143,175
Northeast Asia (Japan and Korea) .......	69,932	19,903	28,345		810
Europe and America ...........................	55,607	29,649	12,545		358
Southeast Asia ....................................	16,072	14,531	6,541		187
	5,398,467	4,515,219	5,058,550	144,530

b. Major customers

Customer			Year Ended December 31	Year Ended December 31	Year Ended December 31
	1999 Amount %		2000 Amount %		2001
	Amount		Amount		Amount	%
A ................ B ................ C ................	NT$ 4,728,578 826,697 —	44 8 —	NT$ 3,784,438 467,874 3,025	48 6 —	NT$ US$ (Note 3) 4,167,569 119,073 1,084,267 30,979 1,010,871 28,882	42 11 10

F-32

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 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.

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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)

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.

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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$ — 1,301,569 91,360 166,612 435,030 3,416,761 181,911 36,072 854 5,630,169 — — 70,857 — 70,857 29,467 5,730,493 6,138,487 10,516,880 329,850 1,978,257 11,106 — 18,974,580	NT$ 2,050,000 951,421 — 186,230 556,745 2,605,575 198,447 109,333 1,354 6,659,105 3,000,000 7,000,000 131,601 — 10,131,601 42,459 16,833,165 9,740,149 8,682,482 525,835 (210,924) 21,119 (390,501) 18,368,160	NT$ 2,204,630 908,571 — 57,834 869,997 1,159,905 395,263 1,813,665 914 7,410,779 2,570,001 7,377,273 30,067 524,250 10,501,591 55,272 17,967,642 10,714,164 7,740,182 314,911 (607,972) 31,778 — 18,193,063	US$ (Note 3) 62,990 25,959 — 1,653 24,857 33,140 11,293 51,819 26
			211,737
			73,429 210,779 859 14,978
			300,045
			1,579
			513,361
			306,119 221,148 8,998 (17,371) 908 —
			519,802
24,705,073	35,201,325	36,160,705	1,033,163

The accompanying notes are an integral part of the financial statements.

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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)

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.

N-4

									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
ENGLISH TRANSLATION OF FINANCIAL STATEMENTS ORIGINALLY ISSUED IN CHINESE	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

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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)

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)

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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
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	112,681
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	20,098
			51,819
			3,592

The accompanying notes are an integral part of the financial statements.

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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

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.

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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.
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

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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.

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 December 31, 2001, 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.

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4. ACCOUNTS RECEIVABLES — NET

		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.

5. INVENTORIES — NET

	December 31	December 31	December 31
1999 NT$ 326,265 456,004 112,204 894,473 (20,000)	2000 NT$ 498,809 1,242,937 285,649 2,027,395 (210,000)	2001
		NT$ 1,533,960 2,194,138 273,228 4,001,326 (206,099)	US$ (Note 3) 43,827 62,690 7,807
			114,324 (5,889)
874,473	1,817,395	3,795,227	108,435

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6. LONG-TERM INVESTMENTS

			December 31
19	99 % of Ownership 100.0 100.0 62.5 3.0 2.0 — —	20	00 % of Ownership 100.0 100.0 62.5 2.0 2.0 — —		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 — —		Carrying Value NT$ 42,674 14,986 130,073 396,297 2,220 1,035,000 34,495	% of Ownership 100.0 100.0 62.5 2.0 2.0 — —	Carrying Value
						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.

The equity in net income or net loss, which are recognized based on audited financial statements are summarized as follows:

	Year Ended December 31	Year Ended December 31	Year Ended December 31
1999 NT$ 46,977 (3,301) (1,012)	2000 NT$ (3,089) 10,554 (760)	2001
		NT$ (28,185) 1,781 (1,133)	US$ (Note 3) (805 51 (32
42,664	6,705	(27,537)	(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.

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7. ACCUMULATED DEPRECIATION

		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
	1999	2000		2001
	NT$	NT$	NT$		US$
					(Note	3)
Total amount of equipment
under capital lease .....................................	111,164	315,234	335,702		9,591
Present value of obligation
under capital lease .....................................	106,929	240,934	141,006		4,029
Less - current portion of obligation
under capital lease .....................................	(36,072)	(109,333)	(110,939)		(3,170)
	70,857	131,601	30,067			859

8. INTANGIBLE ASSETS — NET

	December 31	December 31	December 31
1999 NT$ 203,348 66,910	2000 NT$ 365,479 48,860	2001
		NT$ 525,920 840,767	US$ (Note 3) 15,026 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.

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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	December 31
1999 NT$ — —	2000 NT$ 2,050,000 —	2001
		NT$ 1,850,000 354,630	US$ (Note 3) 52,857 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	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

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.

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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	December 31
1999 NT$ — — — —	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

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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

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.

Certain pension information is as follows:

	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
18,387	29,845	33,978	971

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	December 31	December 31	December 31
1999 NT$ — (18,380) (18,380) (55,164) (73,544) 41,450 (32,094) 8,928 (7,101)	2000 NT$ — (33,344) (33,344) (87,084) (120,428) 61,631 (58,797) 8,481 7,857	2001
		NT$ — (57,074) (57,074) (90,777) (147,851) 85,716 (62,135) 8,034 (1,171)	US$ (Note 3) — (1,631)
			(1,631) (2,594) (4,225) 2,449
			(1,776) 230 (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,

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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.

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.

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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)

b. Income tax benefit for the year ended December 31, 1999, 2000 and 2001 consist of:

	Year Ended December 31	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

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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	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
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	43,750

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%.

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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

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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	2001
			NT$ — 1,277,044 — 6,616 15,258 118,577 10,173 — 12,600 57,834 1,306 14,207 28,344 1,739 —	US$ (Note 3) —
				36,487
				—
				189
				436
				3,388
				291
				—
				360
				1,653
				37
				406
				810
				50
				—

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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.

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

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	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.

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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.

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.

N-24

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$ 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 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.

N-25

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 crosslicenses 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 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 foreigncurrency 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 March 2002	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.

N-26

c. Fair value of financial instruments

Non-derivative Financial instruments	Non-derivative Financial instruments	December 31, 1999	December 31, 1999	December 31, 2000	December 31, 2000	December 31	December 31
		Carrying Value	Fair Value	Carrying Value	Fair Value	Carrying Value	Fair Value
NT$ NT$ Assets Cash ..................................................... 12,423,763 12,423,763 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				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	NT$ 2,843,803 4,400 1,945,321 1,211,511 1,946,331 785,523 10,748 2,050,000 951,421 186,230 2,605,575 188,244 3,000,000 7,000,000 240,934 — 251,921	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	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.

N-27

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	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	Customer	1999	1999	2000	2000		2001
		Amount	%	Amount	%	Amount	Amount	%
A ....................... B ....................... C .......................		NT$ 4,728,578 826,697 —	44 8 —	NT$ 3,784,438 467,874 3,025	48 6 —	NT$ 4,167,569 1,084,267 1,010,871	US$ (Note 3) 119,073 30,979 28,882	42 11 10

N-28



				Market		Value or	Net Asset	Value		NT$42,674	(Note)	14,986	(Note)	130,073	(Note)	441,281	2,220	(Note)		—		—	—
			December 31, 2001			Percentage	Carrying of	Value Ownership		NT$42,674 100.0		14,986 100.0		130,073 62.5		396,297 2.0	2,220 2.0			1,035,000 —		34,495 —	195,720 5.76
							Shares	(Thousand)		80,100		1,000		3,500		37,239	269			90,000		377	1,600
MARKETABLE SECURITIES HELD	December 31, 2001	(Amounts in Thousands)		Relationship with the Company Financial Statement Account						Subsidiary Long-term investments		Subsidiary Long-term investments		Subsidiary Long-term investments		— Long-term investments	— Long-term investments			It’s chairman is the spouse of the Long-term investments	Company’s chairman	— Long-term investments	— Long-term investments
				Marketable Securities Type		and Name			Common stock	SiS-USA		SiS-HK		IVCF		VIS	VADEM		Preferred stock	OSE		GlobiTech	Rise Technology Company
					Held Company Name				Silicon Integrated Systems Corp.														IVCF

N-29



					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
SILICON INTEGRATED SYSTEMS CORP.	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.

N-30

						Investment Gain (Loss)		(NT$28,185)	1,781	(1,133)
SILICON INTEGRATED SYSTEMS CORP.	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.

N-31

SILICON INTEGRATED SYSTEMS CORP.

BALANCE SHEETS (Unaudited) September 30, 2001 and 2002

(Unconsolidated)

(In Thousands, Except Par Value)

2001	2002	2002
NT$ $ 3,128,843 4,400 1,042,297 1,778,874 3,412,712 24,656 447,253 9,839,035 1,456,126 439,671 1,496,887 23,097,134 109,484 6,168 335,702 25,485,046 (4,497,236) 1,605,975 22,593,785 1,167,851 1,128,881 79,024 10,738 1,218,643	NT$ $ 2,728,773 4,100 1,922,369 3,380,261 3,266,082 73,652 1,009,233 12,384,470 1,380,124 439,671 2,337,955 24,629,613 111,233 6,168 360,138 27,884,778 (8,334,619) 961,410 20,511,569 2,185,895 1,550,266 79,024 6,811 1,636,101	US$ (Note 3) $ 78,144 117 55,051 96,800 93,531 2,109 28,901
		354,653
		39,523
		12,591 66,952 705,315 3,185 177 10,313
		798,533 (238,678) 27,532
		587,387
		62,597 44,395 2,263 195
		46,853
$36,275,440	$38,098,159	$1,091,013

The accompanying notes are an integral part of the financial statements.

P-1

SILICON INTEGRATED SYSTEMS CORP.

BALANCE SHEETS — (Continued) (Unaudited)

September 30, 2001 and 2002 (Unconsolidated)

(In Thousands, Except Par Value)

2001	2002	2002
NT$ $ 1,730,502 1,247,316 41,744 458,159 1,942,342 361,174 1,199,716 298 6,981,251 2,570,001 — 8,013,636 54,160 520,125 11,157,922 52,640 18,191,813 10,714,164 7,740,182 314,911 (547,705) (167,278) 29,353 18,083,627	NT$ $ 2,276,803 1,014,741 — 1,148,595 951,784 726,995 2,658,456 — 8,777,374 1,710,003 2,941,807 6,328,409 80,428 366,660 11,427,307 65,834 20,270,515 10,880,166 7,828,398 — (910,951) — 30,031 17,827,644	US$ (Note 3) $ 65,201 29,059 — 32,892 27,256 20,819 76,130 —
		251,357
		48,969 84,244 181,226 2,304 10,500
		327,243
		1,885
		580,485
		311,574 224,181 — (26,087) — 860
		510,528
$36,275,440	$38,098,159	$1,091,013

The accompanying notes are an integral part of the financial statements.

P-2

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF INCOME

(Unaudited)

For the Nine Months Ended September 30, 2001 and 2002 (Unconsolidated)

(In Thousands, Except Loss Per Share)

2001	2002	2002
NT$ $7,440,577 166,530 7,274,047 5,373,508 1,056 1,901,595 1,356,250 423,964 302,713 2,082,927 (181,332) 44,837 — — 33,594 71,977 14,663 165,071 504,860 22,958 3,626 — — 531,444	NT$ $11,334,630 464,414 10,870,216 8,348,500 914 2,522,630 1,442,471 1,243,981 519,427 3,205,879 (683,249) 282,574 47,620 45,360 12,453 — 9,720 397,727 475,789 123,242 14,996 342 11,060 625,429	US$ (Note 3) $324,588 13,299
		311,289 239,075 26
		72,240
		41,308 35,624 14,875
		91,807
		(19,567)
		8,092 1,364 1,299 357 — 278
		11,390
		13,625 3,529 429 10 317
		17,910

(Forward)

P-3

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF INCOME — (Continued) (Unaudited) For the Nine Months Ended September 30, 2001 and 2002 (Unconsolidated)

(In Thousands, Except Loss Per Share)

2001 NT$ $(547,705) — $(547,705)	2002	2002	2002
	NT$ $(910,951) — $(910,951) 2002		US$ (Note 3) $(26,087) —
			$(26,087)

Before Income Tax		After Income Tax
		NT$ US$ (Note 3) $(0.85) $(0.02)

The accompanying notes are an integral part of the financial statements.

P-4

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF CASH FLOWS

(Unaudited) For the Nine Months Ended September 30, 2001 and 2002 (Unconsolidated) (In Thousands)

2001	2002	2002
NT$ $ (547,705) 2,692,387 299,261 — 22,958 — (1,056) — 10,181 (216) — 169,214 167,457 (1,595,317) (264,185) 295,895 (144,486) (71,024) 1,033,364 (2,945,599) (397,483) (1,035,000) — — 10 1,930,451 (2,447,621)	NT$ $ (910,951) 3,055,050 430,839 (281,238) 123,242 2,220 (914) (47,620) 10,562 — 27,733 (1,560,962) (1,466,673) 529,145 (391,710) 106,170 (57,834) 278,598 (154,343) (2,020,352) (1,075,907) (34,970) 464,622 116,001 4,792 — (2,545,814)	US$ (Note 3) $(26,087) 87,487 12,338 (8,054) 3,529 64 (26) (1,364) 303 — 794 (44,701) (42,001) 15,153 (11,217) 3,040 (1,656) 7,978
		(4,420)
		(57,856) (30,811) (1,001) 13,305 3,322 137 —
		(72,904)

(Forward)

P-5

SILICON INTEGRATED SYSTEMS CORP.

STATEMENTS OF CASH FLOWS — (Continued) (Unaudited) For the Nine Months Ended September 30, 2001 and 2002 (Unconsolidated) (In Thousands)

2001	2002	2002
NT$ $ (319,498) — 1,650,000 — 422,216 (53,421) 1,699,297 285,040 2,843,803	NT$ $ 72,173 3,461,353 (636,364) (429,999) — 52,653 2,519,816 (180,341) 2,909,114	US$
		(Note 3) $ 2,067 99,122 (18,223 (12,314 — 1,508
		72,160
		(5,164 83,308
$3,128,843 $ 541,481 $ 41,950 $ 3,446	$2,728,773 $ 520,171 $ 5,681 $ 1,204	$ 78,144
		$ 14,896
		$ 163
		$ 34
$2,282,366 663,233	$1,812,231 208,121	$ 51,896 5,960
$2,945,599	$2,020,352	$ 57,856
$1,052,773 (655,290)	$1,250,049 (174,142)	$ 35,798 (4,987
$ 397,483 $1,199,716 $ —	$1,075,907 $2,658,456 $ 547,279	$ 30,811
		$ 76,130
		$ 15,672

The accompanying notes are an integral part of the financial statements.

P-6

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

Unaudited unconsolidated financial statements

The interim financial information contained herein is unaudited and unconsolidated in accordance to the General 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 necessary indicative of results of operations for the entire year.

The accounting for the subsidiaries are accounted for as investment under equity method.

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.

Allowance for doubtful receivables

Allowance for doubtful receivables are provided based on a review of the collectibility of accounts receivable.

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 of products and risk of ownerships 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 right of return or price protection on unsold products held by them. In these instances, the Company recognizes revenue when it ships the products directly to the distributors.

Allowance for sales returns 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.

P-7

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 works in process, and replacement costs for raw materials and supplies.

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 investments 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.

Other stock investments are accounted for by the cost method. An allowance for decline in value is recognized as follows:

a. Listed stocks or stocks 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.

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 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.

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; equipment under capital lease, 3 to 4 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.

P-8

Intangible assets

Intangible assets are amortized on the straight-line method over the following periods: License agreements, 3 to 5 years; software, 3 years; issuance costs of the convertible bonds, the period from the date of issuance to the expiration date of redemption.

Convertible bonds

The capital stock account is credited with the par value of the Company’s common shares into which the bonds are converted with the excess of the carrying value of the bonds and other assets and liabilities related to such convertible bonds as of the date of the conversion over the amounts credited into capital stock account as described above credited to the capital surplus account.

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 deductible 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 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, than it should be classified as current or non-current based on the expected reversal date of temporary difference.

Any tax credit arising from investments on machinery, equipment and technology, and R&D expenditures are recognized currently.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Income taxes, at a rate of 10%, on undistributed earnings are recorded as expense in the year when the shareholders approved the retention of the earnings.

Forward exchange contracts

Forward exchange contracts for hedging purposes are recorded at the spot rate on the contract date. 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.

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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.

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 September 30, 2002, which was NT$34.92 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

	September 30	September 30
2001 NT$ $ 8,470 1,928,181 105,777 52,000 1,770,404	2002
	NT$ $ 32,763 3,749,986 174,537 227,951 3,347,498	US$ (Note 3) $ 938
		107,388 4,998 6,528
		95,862
$1,778,874	$3,380,261	$ 96,800

The Company entered into agreements to sell accounts receivable to factors without recourse. Accounts receivable due from factors as of September 30, 2001 and 2002 was NT$268,291 thousand and NT$159,654 thousand (US$4,572 thousand), respectively, (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.

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 60 to 90 days. At the end of the fixed term, no further finance charges are assessed, even if the factor has not collected on the receivables.

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5. INVENTORIES — NET

	September 30	September 30
2001 NT$ $ 940,274 2,320,149 290,966 3,551,389 138,677	2002
	NT$ $1,189,426 2,328,014 210,642 3,728,082 462,000	US$ (Note 3) $ 34,062 66,667 6,032
		106,761 13,230
$3,412,712	$3,266,082	$ 93,531

6. LONG-TERM INVESTMENTS

	September 30
2001 Carrying Value % of Ownership NT$ $ 46,938 100 14,199 100 128,750 63 1,035,000 — 396,297 2 — — 2,220 2 1,623,404 167,278		2002
Carrying Value NT$ $ 46,938 14,199 128,750 1,035,000 396,297 — 2,220 1,623,404 167,278	Carrying Value NT$ $ 40,874 14,979 6,892 1,035,000 212,914 69,465 — 1,380,124 —	Carrying Value US$ (Note 3) $ 1,171 429 198 29,639 6,097 1,989 — 39,523 —	% of Ownership
			100 100 63 — — 4 —

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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 thousand (US$29,639 thousand) or NT$11.50 per share. The OSE preferred stock pays cumulative dividends 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 dividends income of NT$45,360 thousand (US$1,299 thousand) as non-operating income for the nine months ended September 30, 2002.

The carrying values of equity-accounted investments and the related equity in net income or net loss for the nine months ended September 30, 2001 and 2002 were based on unreviewed and reviewed financial statements, respectively. The equity in net income or loss is summarized as follows:

Nine Months Ended September 30	Nine Months Ended September 30	Nine Months Ended September 30
2001 NT$ $ (23,316) 1,213 (855)	2002
	NT$ $ (1,741) 21 (121,522)	US$ (Note 3) $ (50 1 (3,480
$ (22,958)	$ (123,242)	$ (3,529

IVCF is engaged mainly in the investment in venture capital fund. The Company’s investment loss from IVCF for the nine months ended September 30, 2002 was resulting from the impairment investment loss recognized by IVCF.

The average market values of VIS shares owned by the Company in September 2001 and 2002 were NT$229,019 thousand and NT$218,275 thousand (US$6,251 thousand), respectively.

7. PROPERTY, PLANT AND EQUIPMENT

	September 30	September 30
2001 NT$ $ 235,074 4,050,498 58,013 3,999 149,652	2002
	NT$ $ 341,019 7,761,452 71,449 4,828 155,871	US$ (Note 3) $ 9,766 222,264 2,046 138 4,464
$4,497,236	$8,334,619	$238,678

Total depreciation expenses for the nine months ended September 30, 2001 and 2002 were NT$2,692,387 thousand and NT$3,055,050 thousand (US$87,487 thousand), respectively, and interest expenses, including amounts capitalized of NT$41,950 thousand and NT$5,681 thousand (US$163 thousand), for the nine months ended September 30, 2001 and 2002 were NT$546,810 thousand and NT$481,470 thousand (US$13,788 thousand), respectively. The rates used in capitalization of the interests were 6.12% in 2001 and 2.88%~5.28% in 2002.

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The Company has entered into agreements to lease certain equipment that qualifies as capital leases and will expire in March 2005. Information of capital leases is summarized as follows:

	September 30	September 30
2001 NT$ $335,702	2002
	NT$ $360,138	US$ (Note 3) $10,313
$187,513 133,353	$193,659 113,231	$ 5,546 3,242
$ 54,160	$ 80,428	$ 2,304

8. INTANGIBLE ASSETS — NET

	September 30	September 30
2001 NT$ $ 738,787 429,064 —	2002
	NT$ $1,326,514 798,774 60,607	US$ (Note 3) $37,987 22,874 1,736
$1,167,851	$2,185,895 September 30	$62,597

2001 NT$ $1,250,000 480,502	2002
	NT$ $2,250,000 26,803	US$ (Note 3) $64,433 768
$1,730,502	$2,276,803	$65,201

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10. BONDS PAYABLE

	September 30	September 30
2001 NT$ $3,000,000 429,999	2002
	NT$ $2,570,001 859,998	US$ (Note 3) $73,597 24,628
$2,570,001	$1,710,003	$48,969

These are five-year domestic secured bonds issued on July 4, 2000 with aggregate face value of NT$3,000,000 thousand (US$85,911 thousand) 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. 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 21c, there is a potential material adverse litigation pending against the Company with respect to United Microelectronics Corporation (“UMC”). As of September 30, 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 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 September 30, 2002 are as follows:

Year	Amounts	Amounts
2003 ..................................................................................................................... 2004 ..................................................................................................................... 2005 ..................................................................................................................... Less — current portion .........................................................................................	NT$ $ 859,998 859,998 850,005 2,570,001 859,998	US$ (Note 3) $24,628 24,628 24,341
		73,597 24,628
	$1,710,003	$48,969

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11. CONVERTIBLE BONDS PAYABLE

Aggregate face value of bonds issued .................................................................. Less: Converted into 16,600 thousand shares ........................................................ Add: Accrued redemption premium ......................................................................	September	30, 2002
	NT$ $3,473,267 559,193 27,733	US$ (Note 3) $99,464 16,014 794
	$2,941,807	$84,244

These are five year zero coupon convertible bonds (the “Bonds”) issued and listed in Luxembourg Stock Exchange in July 2002 with an aggregate face value of US$100,000 thousand. The Bonds are convertible into common shares of the Company at NT$33 per share (subject to adjustment as described in the agreement) from August 18, 2002 to June 18, 2007 and will mature on July 18, 2007. The Bonds can be redeemed at the option of the holders at 107.545% of their principal amount on July 18, 2004 (redemption at the option of bondholders), or at 119.944% of their principal amount at maturity (redemption at maturity). Under certain conditions, either bondholders or the Company may redeem the bonds prior to the maturity date.

12. LONG-TERM BANK LOANS

	September 30	September 30
2001 NT$ $7,000,000 1,650,000 8,650,000 636,364	2002
	NT$ $6,363,636 1,650,000 8,013,636 1,685,227	US$ (Note 3) $182,235 47,251
		229,486 48,260
$8,013,636	$6,328,409	$181,226

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. 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 thousand (US$28,637 thousand). As disclosed in Note 21c, there is a potential material adverse litigation pending against the Company with respect to UMC. As of September 30, 2002, the result or likely result of this litigation is unknown. While it

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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 the obligations.

Future minimum principal payments under the Company’s loan agreements as of September 30, 2002 are as follows:

Year	Amounts	Amounts
2002 ..................................................................................................................... 2003 ..................................................................................................................... 2004 ..................................................................................................................... 2005 ..................................................................................................................... 2006 and thereafter ............................................................................................... Less — current portion .........................................................................................	NT$ $ 636,363 1,685,227 1,685,227 1,685,227 2,321,592 8,013,636 1,685,227	US$ (Note 3) $ 18,223 48,260 48,260 48,260 66,483
		229,486 48,260
	$6,328,409	$181,226

13. PENSION PLAN

Pension costs for the nine months ended September 30, 2001 and 2002 were NT$25,484 thousand and NT$29,021 thousand (US$831 thousand), respectively, and the balances of the pension fund as of September 30, 2001 and 2002 were NT$76,933 thousand and NT$102,981 thousand (US$2,949 thousand), respectively.

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 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.

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The Company received approvals from SFC on December 28, 2001 and September 11, 2002 on its adoption of employee stock option plans (“the Plans”). The Plans aggregately reserve 50,000 thousand units of option, each representing 1 share of common stock, on a total of 50,000 thousand common shares for issuance. The options under the Plans 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 October 14 , 2002, 29,950 thousand units of the options has been granted with the exercise price of NT$45.8 per unit.

On August 23, 2002, the Board of Directors approved the planned issuance of common shares in the form of Global Depositary shares (GDS) by the issuance of new shares of up to 250,000 thousand shares, with par value NT$10 per shares. As of October 14, 2002, the Company has not yet obtained SFC’s approval.

15. TREASURY STOCK (COMMON STOCK)

Purpose of Purchase Nine months ended September 30, 2001 Held for subsequent transferring to employees...........................	Beginning Shares Decrease Ending Shares (Shares in Thousand) 10,689 10,689 —	Ending Shares

On June 27, 2001, the entire treasury stocks have been transferred to employees at a price of NT$39.5 per share.

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16. INCOME TAX

a. The Company did not have current income tax payable for the periods ended September 30, 2001 and 2002.
b. Income tax benefit for the periods ended September 30, 2001 and 2002 consist of:

		Nine Months	Ended September 30	Ended September 30	Ended September 30	Ended September 30
	2001			2002
	NT$		NT$		US$
					(Note 3)
Net change in deferred income tax assets:
Tax credit on R&D expenditures ................................	$	334,780	$	519,306	$	14,871
Tax credit on machinery and equipment ......................		182,136		97,272		2,785
Loss carryforwards ......................................................		340,281		581,579		16,655
Temporary differences .................................................		(138,576)		(402,497)		(11,526)
Valuation allowance.........................................................		(718,405)		(795,660)		(22,785)
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:

	September 30	September 30
2001 NT$ $ 21,915 5,926 24,656 (27,841)	2002
	NT$ $ 68,215 — 168,645 (163,208)	US$ (Note 3) $ 1,953 — 4,829 (4,673
$ 24,656	$ 73,652	$ 2,109
$ 731,972 2,153,858 657,418 (153,476) (2,260,891)	$ 1,336,054 2,260,269 1,383,177 (685,916) (2,743,318)	$ 38,261 64,727 39,610 (19,642 (78,561
$ 1,128,881	$ 1,550,266	$ 44,395

The effective tax rates used to determine the deferred income tax as of September 30, 2001 and 2002 were both 25%.

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d. Integrated income tax information. The balances of the ICA were both NT$256 thousand (US$7 thousand) as of September 30, 2001 and 2002.

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 2001 and 2002 because of the Company reported deficits in both years.

e. As of September 30, 2002, investment tax credits consisted of followings:

	Total Creditable	Total Creditable	Remaining Creditable	Remaining Creditable	Yearof
Items Investments on machinery and equipment	Amounts NT$ $ 394,997 1,609,469 158,503 97,300	Amounts US$ $11,312 46,090 4,539 2,786	Amounts NT$ $ 394,997 1,609,469 158,503 97,300	Amounts US$ (Note 3) $11,312 46,090 4,539 2,786	Expiry
					2003 2004 2005 2006
	$2,260,269	$64,727	$2,260,269
	$ 68,215 88,545 339,381 631,255 276,873	$ 1,953 2,536 9,719 18,077 7,929	$ 68,215 88,545 339,381 631,255 276,873	$ 1,953 2,536 9,719 18,077 7,929
	$1,404,269	$40,214	$1,404,269
	$ 452,588 507,669 422,920	$12,961 14,538 12,111	$ 452,588 507,669 422,920	$12,961 14,538 12,111

The income of the Company attributable to the following projects and services is exempt from income tax:

Expansion of first manufacturing plant in 1999..................................................... Expansion of first manufacturing plant in 2000.....................................................	Tax-Exemption Period
	2000 to 2003 2002 to 2005

Income tax returns through 1999, except 1998, have been examined and cleared by the tax authorities.

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17. EARNINGS PER SHARE (EPS)

A reconciliation of numerator and denominator of basic and diluted loss per share calculations is provided as follows:

Nine Months Ended September 30	Nine Months Ended September 30	Nine Months Ended September 30
2001 NT$ $ (547,705) $1,064,095 — $1,064,095 $ (0.51)	2002
	NT$ $ (910,951) $1,074,960 — $1,074,960 $ (0.85)	US$
		(Note 3) $ (26,087)
		$1,074,960 —
		$1,074,960
		$ (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.

18. RELATED PARTY TRANSACTIONS

a. The Company engaged in business transactions with the following related parties:

Related Parties OSE .......................................................... SiS-USA ................................................... SiS-HK ..................................................... Hsin-Ron Duh ...........................................	Relationship
	It’s chairman is the spouse of the Company’s chairman A subsidiary A subsidiary A daughter of the Company’s chairman

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b. The significant transactions with these related parties, other than those disclosed in other notes, were summarized as follows:

Nine Months Ended September 30	Nine Months Ended September 30	Nine Months Ended September 30
2001 NT$ $ 73,408 $ 7,515 $ 5,324 $ 11,360 $590,061 $ — $ 8,470 $ 1,325 $ 526 $ 10,964 $ — $ — $ 41,744	2002
	NT$ $ 160,201 $ 5,769 $ 26,007 $ 11,731 $1,318,095 $ 45,360 $ 32,763 $ — $ 4,911 $ 6,548 $ 57,960 $ 544,071 $ —	US$ (Note 3) $ 4,588
		$ 165
		$ 745
		$ 336
		$37,746
		$ 1,299
		$ 938
		$ —
		$ 141
		$ 188
		$ 1,660
		$15,580
		$ —

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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 grant 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 prepaid expense made to OSE is merely to ensure the subcontracted assembly and test capacity is adequate and related discount on the subcontract expense is provided based on normal condition.

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.

19. 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:

	September 30	September 30
2001 NT$ $ 4,400 15,357,850	2002
	NT$ $ 4,100 12,729,009	US$ (Note 3) $ 117 364,520
$15,362,250	$12,733,109	$364,637

20. 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 thousand (US$298 thousand). Future minimum rentals are as follows:

Year	Amounts	Amounts
2002 4th quarters .................................................................................................. 2003 ..................................................................................................................... 2004 ..................................................................................................................... 2005 ..................................................................................................................... 2006 ..................................................................................................................... 2007 and thereafter ...............................................................................................	NT$ $ 2,601 10,403 10,403 10,403 10,403 86,539	US$ (Note 3) $ 74 298 298 298 298 2,478
	$130,752	$3,744

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21. SIGNIFICANT COMMITMENTS AND CONTINGENCIES

Commitments and contingencies as of September 30, 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$397,069 thousand (US$11,371 thousand). The Company also entered into an agreement related to the constructing of an R&D building which has a remaining unbilled amount of NT$243,526 thousand (US$6,974 thousand).
b. Unused letters of credit for the Company aggregate approximately US$12,194 thousand, ¥179,460 thousand, EUR460 thousand and SEK60 thousand.
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. However, UMC petitioned the ITC for review of the initial determination made by the administrative law judge. On October 7, 2002, ITC issued a notice of final determination which followed the administrative law judge’s initial determination held that the UMC patents in question are invalid, with respect to all but one of the twenty-nine individual claims. The ITC has thus issued a limited exclusion order to restrict import into the United States of the Company’s integrated circuits manufactured under process related to that claim, but the ITC did not have the authority to award monetary damages. The Company partially disagreed with the determination, and is contemplating an appeal of the adverse ruling to the U.S Court of Appeals for the Federal Circuit. The Company has adopted a new manufacturing process to manufacture redesigned products for import to the United States. Therefore, the Company believes that the production and product shipments will be unaffected, and there will be no impact on customer supplies and imports to 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 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. The ’345 patent claim has been stayed pending resolution of the ITC proceeding described above. Discovery in the remaining matters other than ’345 patent are on going. The Court has set a case management conference for November 15, 2002. It is anticipated that a trial date may be set at conference.

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Currently, the Company is reviewing correspondence from National Semiconductor Corporation, referred to as National Semiconductor, the Lemelson Medical, Education & Research Foundation, Limited Partnership, Syndia Corporation and Wisconsin Alumni Research Foundation 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 International Business Machines Corporation (“IBM”) and Toshiba Corporation (“Toshiba”). Under the agreements, the Company shall pay technical license fees in the amount of US$67,000 thousand in an agreed payment schedule and royalty fees based on the Company’s sales of products using the related technologies. As of September 30, 2002, the Company has accrued the abovementioned technical license fees aggregating to NT$523,800 thousand (US$15,000 thousand) (shown in the balance sheets as part of “license fees and royalty payable”).

22. 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 September 30, 2002:

Contract Sell ....................................	Currency USD	Total Contract Amount (Thousand) US$56,000	Fair Value (Thousand) (NT$1,620)	Credit Risk
				(Thousand) NT$492

The foregoing forward exchange contracts entered into were to hedge the Company’s foreign currency-denominated notes receivable of US$57,259 thousand and accounts receivable of US$4,783 thousand.

A payable of NT$64,216 thousand (US$1,839 thousand) as of September 30, 2002, generated from open forward exchange contracts are included under current liabilities.

Net exchange gains derived from settled forward exchange contracts for the nine months ended September 30, 2002 were NT$44,960 thousand (US$1,288 thousand).

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. Gains or losses from forward exchange contracts are likely to be offset by gains or losses from receivables and payables. Thus market price risks from exchange rate are minimal.

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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.
4) Kinds and purpose of derivative financial instruments held and related strategies. The Company contracts or enters into derivative financial transactions, completely for hedging purpose other than trading. The Company enters into forward exchange contracts to hedge the effect of exchange rate fluctuations on net foreign currencydenominated assets and liabilities. The purpose of hedging strategies is to hedge market risk the Company is exposed to. The Company has designated hedging instruments with high correlations with the fair value of the hedged item and periodically evaluates the effectiveness of the instruments.
c. Fair value of financial instruments

September 30 2001 2002 Carrying Value Fair Value Carrying Value Fair Value NT$ NT$ NT$ US$ (Note3) NT$ US$ (Note3) Nonderivative financial instruments Assets Cash .......................................... $3,128,843 $3,128,843 $2,728,773 $ 78,144 $2,728,773 $ 78,144 Pledged time deposits ................ 4,400 4,400 4,100 117 4,100 117 Notes receivable ........................ 1,042,297 1,042,297 1,922,369 55,051 1,922,369 55,051 Accounts receivable — net ........ 1,778,874 1,778,874 3,380,261 96,800 3,380,261 96,800 Long-term investments ............... 1,456,126 1,456,126 1,380,124 39,523 1,385,485 39,677 Refundable deposits ................... 10,738 10,738 6,811 195 6,811 195 Liabilities Short-term bank loans ................ 1,730,502 1,730,502 2,276,803 65,201 2,276,803 65,201 Notes and accounts payable ....... 1,247,316 1,247,316 1,014,741 29,059 1,014,741 29,059 Accounts payable to related parties ................................... 41,744 41,744 — — — — Payable for properties ................ 1,942,342 1,942,342 951,784 27,256 951,784 27,256 License fees and royalty payable (including current portion) ..... 881,299 881,299 1,093,655 31,319 1,013,870 29,034 Bonds payable (including current portion)...................... 3,000,000 3,000,000 2,570,001 73,597 2,570,001 73,597 Convertible bonds payables........ — — 2,941,807 84,244 2,941,807 84,244 Long-term bank loans (including current portion) ..... 8,650,000 8,650,000 8,013,636 229,486 8,013,636 229,486 Obligation under capital lease (including current portion) ..... 187,513 187,513 193,659 5,546 193,659 5,546 Derivative financial instruments Forward exchange contracts — sell ................................... 4,875 4,672 64,216 1,839 (1,620) (46) Forward exchange contracts — buy ................................... 728 (993) — — — —		September 30	September 30
	2001 Carrying Value Fair Value	2002
	Carrying Value	Carrying Value	Fair Value

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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.
7) 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.

23. ADDITIONAL DISCLOSURES

Except for the following, 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 million or 20% of the paid-in capital (please see Table 2 attached);
c. Total purchase from or sale to related parties amounting to at least NT$100 million or 20% of the paid-in capital (please see Table 3 attached);
d. Names, locations, and related information of investees on which the Company exercises significant influence (please see Table 4 attached);
e. Derivative financial transactions (please see Note 22).

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				Market		Value or	Net Asset	Value		NT$40,874	(Note)	14,979	(Note)	6,892	(Note)	218,275	—		1,035,000		69,465	—
			September 30, 2002			Percentage	Carrying of	Value Ownership		NT$40,874 100		14,979 100		6,892 63		212,914 —	— —		1,035,000 —		69,465 4	— 7
							Shares	(Thousand)		80,100		1,000		3,500		20,007	269		90,000		1,333	1,600
MARKETABLE SECURITIES HELD	September 30, 2002	(Amounts in Thousands)		Type and Name of Marketable Securities Relationship with the Company Financial Statement Account					Common stock	SiS-USA Subsidiary Long-term investments		SiS-HK Subsidiary Long-term investments		IVCF Subsidiary Long-term investments		VIS — Long-term investments	VADEM — Long-term investments	Preferred stock	OSE OSE’s chairman is the spouse of Long-term investments	the Company’s chairman	GlobiTech — Long-term investments	Rise Technology Company — Long-term investments

					Held Company Name				Silicon Integrated Systems Corp.													IVCF

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OR 20% OF THE PAID-IN CAPITAL	For the Nine Months Ended September 30, 2002	(Amounts in Thousands)	Type and Name of Marketable Securities Financial Statement Account Counter- Party Nature of Relationship Beginning Balance Acquisition Disposal Ending Balance Shares (Thousand) Amount Shares (Thousand) Amount Shares (Thousand) Amount Carrying Value Gain (Loss) on Disposal Shares (Thousand) Amount			Fund	Ta Chong Gallop Bond Short-term — — — NT$— 54,047 NT$544,000 54,047 NT$544,609 NT$544,000 NT$609 — NT$—	Fund investments	Yuan Da Duo Li Bond Short-term — — — — 14,751 200,000 14,751 200,354 200,000 354 — —	Fund investments	Barits Bond Fund Short-term — — — — 17,709 200,000 17,709 200,372 200,000 372 — —	investments	Common stock	VIS Long-term — — 37,239 396,297 — — 17,232 464,622 183,383 281,239 20,007 212,914	investments
				Company Name		Silicon Integrated	Systems Corp.

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				Note		(Note 18)					(Note18)
OR 20% OF THE PAID-IN CAPITAL	For the Nine Months Ended September 30, 2002	(Amounts in Thousands)	Company Name Related Party Nature of Relationship Transaction Details Abnormal Transaction Note/Accounts Payable or Receivable Payment Payment Ending		Purchase/Sale Amount % to Total Terms Unit Price Terms Balance % to Total	Silicon Integrated Systems Corp. SiS-HK Subsidiary Sale NT$160,201 1 Same as — — Accounts 1	ordinary receivable of	transactions NT$32,763	of the same	nature	OSE Its chairman is the Subcontracted 1,318,095 28 Same as — — Prepaid 54	spouse of the assembly and test ordinary expenses of	Company’s transactions NT$544,071	chairman of the same	nature

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September 30, 2002	(Amounts in Thousands)	Original Investment Amount Balance as of September 30, 2002	Investor Company Investee Company Location Main Businesses and Products Gain (loss) of the Investee Investment Gain (Loss) September 30, December 31, Shares Percentage of Carrying	2002 2001 (Thousand) Ownership Value	Silicon Integrated Systems Corp. SiS-USA California, U.S.A. Sale of I/C System NT$20,360 NT$20,360 80,100 100 NT$40,874 (NT$1,741) (NT$1,741)	SiS-HK Hong Kong Sale of I/C System 3,410 3,410 1,000 100 14,979 21 21	IVCF Cayman Islands, Investment in venture 110,630 110,630 3,500 63 6,892 (194,435) (121,522)	British West Indies capital fund

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APPENDIX A — FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

The information presented in this appendix has been extracted from publicly available documents which have not been prepared or independently verified by the Company, the Managers, the Trustee or any of their respective affiliates or advisors in connection with the offering.

Foreign Investment

Historically, foreign investment in the ROC securities market has been restricted. From 1983 onwards, however, the ROC Government has from time to time enacted legislation and adopted regulations to permit foreign investment in the ROC securities market.

Depositary Receipts

In April 1992, the ROC SFC promulgated regulations permitting ROC companies with securities listed on the TSE, with the prior approval of the ROC SFC, to sponsor the issuance and sale to foreign investors of depositary receipts evidencing depositary shares. In December 1994, a series of new regulations was promulgated by the ROC Ministry of Finance allowing companies whose shares are traded on the GTSM to sponsor, upon approval by the ROC SFC, the issuance and sale of depositary receipts. In October 2002, the ROC SFC further permitted public companies to sponsor the issuance of depository receipts on a private placement basis.

The ROC laws and regulations provide that any depositary receipt holder may, from three months after the issue date of the depositary receipts (in the case that the deposited shares are new shares) or immediately (in the case that the deposited shares are existing shares), request the depositary bank either to cause the underlying shares to be sold in the ROC and distribute the proceeds of such sale to the depositary receipt holder or to withdraw the underlying shares from the depositary receipt facility and deliver such shares to such holder. A citizen of the PRC or an entity organized under the laws of the PRC is not permitted to withdraw and hold the Shares.

Under existing ROC laws and regulations, a depositary may, without obtaining further approvals from the CBC or any other government authority or agency of the ROC, convert NT Dollars into other currencies, including U.S. Dollars, in respect of the proceeds of the sale of shares represented by depositary receipts or received as stock dividends in respect of such shares and deposited into the depositary receipt facility and any cash dividends or distributions received in respect of such shares. In addition, a depositary may convert inward remittances of payments into NT Dollars for purchases of underlying shares for deposit in the depositary receipt facility against the creation of additional depositary receipts. In addition, a depositary receipt holder may, after becoming a holder of shares, convert NT dollars into other currencies for proceeds from the sale of any underlying shares withdrawn from the depositary receipt facility. A depositary must obtain foreign exchange approval from the CBC on a payment-by-payment basis for conversion from NT Dollars into foreign currencies in respect of the proceeds from the sale of subscription rights for new shares or the depositary’s conversion from foreign currencies into NT Dollars for subscription payments in respect of rights offerings. It is expected that the Central Bank of China will grant such foreign exchange approval as a routine matter.

A depository receipt holder wishing to withdraw shares represented by depository receipts in order to hold the shares is required to appoint a qualified local agent to, amongst 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 any cash proceeds in safekeeping, to make confirmations, to settle trades and to report all relevant information. Furthermore, the withdrawing holder is required to appoint a tax agent, who also has to serve as a tax guarantor in the ROC, for filing tax returns and making tax payments. Without making these appointments and obtaining approval from the TSE, the withdrawing holder would be unable to receive hold or subsequently sell shares withdrawn from a depository receipt facility on the TSE or otherwise.

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In addition, any such cash received by the depositary receipt holder (qualified as a QFII (as hereinafter defined) or a non-ROC resident foreign investor (“General Foreign Investor”)) may be used for further investment in ROC securities, subject to the requirements and restrictions generally applicable to QFIIs and General Foreign Investors (as applicable). Such further investment will be calculated towards the applicable investment quota.

Overseas Corporate Bonds

Since 1989, the ROC SFC has approved a series of overseas corporate bond issues (“OCBs”) by ROC companies listed on the TSE in offerings directed outside the ROC. Since December 1994, the ROC SFC has also permitted ROC companies whose shares are traded on the GTSM to issue and offer OCBs. In 2002, the ROC SFC further permitted public companies to issue OCBs on a private placement basis.

Under the current ROC laws and policies, OCBs can be converted by bondholders (other than PRC persons) into shares of the relevant ROC companies or (subject to the ROC SFC approval) may be converted into depositary receipts issued under the sponsorship of the same ROC company or the shares of other companies, in case of exchangeable bonds. Public issuing companies may issue corporate debt in offerings outside the ROC. Proceeds from sales of the shares converted from OCBs may be used for re-investment in securities listed on the TSE or traded on the GTSM. These reinvestments will need to comply with the limitations and restrictions which apply to qualified foreign institutional investors or general foreign investors discussed below.

Under current ROC law, a converting bondholder when exercising the conversion right to convert the bonds into shares of an ROC company is required to appoint a local agent (with such qualifications as are set by the ROC SFC) to open a securities trading account with a local brokerage firm, remit funds, exercise shareholders’ rights and perform such other actions as may be designated by such converting bondholder, on behalf of and as agent for such converting bondholder. In addition, the converting bondholder is 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 and such converting bondholder is also required to appoint a tax agent, who also has to serve as a tax guarantor in the ROC, for filing tax returns and making tax payments.

Unless otherwise limited by the CBC, an ROC Company may, without obtaining further approvals from the CBC or any other government authority of the ROC, convert NT Dollars to other currencies, including U.S. Dollars, in respect of the proceeds of the redemption of the Bonds or payment of interest on, or the repayment of principal upon maturity of, the Bonds.

In addition, a non-ROC converting bondholder may, through its local agent and without obtaining prior approval from the CBC, convert NT Dollars into foreign currencies of net proceeds realized from the sale of the converted shares or any stock dividends relating to such shares, or any cash dividend or other cash distribution in respect of such shares, as well as for inward remittances of subscription payments in connection with a rights offering and tax payment.

Any such cash received by the converting bondholder (qualified as a QFII or General Foreign Investor) may be used for further investment in ROC securities subject to the requirements and restrictions generally applicable to QFIIs and General Foreign Investors (as applicable). Such further investment will be used in calculating the applicable investment quota.

Direct Share Offerings

The ROC Government has permitted ROC companies listed on the TSE or the GTSM to issue shares directly (not through depositary receipt facilities) overseas. In addition, public companies may issue shares directly overseas on a private placement basis.

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Qualified Foreign Institutional Investors

The Executive Yuan has approved guidelines for direct investment in ROC securities listed on the TSE, GTSM or emerging stocks or other ROC securities approved by the ROC SFC by certain qualified foreign institutional investors (each a “QFII”) that applied for and received, ROC SFC and, if applicable, CBC approval. According to the ruling letter issued by the ROC SFC on January 7, 2003, the ROC SFC relaxes restrictions on qualifications of QFIIs by reducing the asset requirement and canceling the experience requirement. According to such new regulation, QFIIs include:

(i) banks which hold securities assets of at least U.S.$100 million;
(ii) insurance companies which hold securities assets of at least U.S.$100 million;
(iii) fund management institutions which manage securities assets of at least U.S.$100 million;
(iv) offshore fund management companies which are more than 50% owned by a ROC securities investment trust enterprise provided that the funds to be invested do not come from sources in the ROC or PRC and are not owned by such offshore fund management companies;
(v) general securities firms which have a net worth of at least U.S.$50 million;
(vi) offshore securities firms which are more than 50% owned by a ROC securities firm, or other offshore securities firms which are wholly owned by such offshore securities firms;
(vii) offshore securities firms which are wholly-owned by a ROC securities firms, or other offshore securities firms which are more than 51% owned by such offshore securities firms;
(viii)foreign government-owned investment institutions provided that all the funds to be invested shall be owned by the foreign government;
(ix) pension funds;
(x) mutual funds, unit trusts or investment trusts which have assets of at least U.S.$100 million;
(xi) trust companies which hold securities assets in trust of at least U.S.$100 million;
(xii) academic or charitable institutions whose by-laws or articles of incorporation state that their own internal funds may be used in investments and the management of the investments shall be delegated to outside managers; and
(xiii)any other professional institutional investors which hold securities or assets of at least U.S.$100 million.

In addition, the new regulation, subject to the restrictions and qualifications imposed thereby, also relaxes restrictions on QFIIs’ trading activities of futures and permits the QFIIs to trade the financial derivatives relating to interest rate of New Taiwan Dollar.

Each QFII who wishes to invest directly in the ROC securities market is required to apply for an investment permit from the ROC SFC, provided that any application for investment exceeding U.S.$50 million will require approvals from both the CBC and the ROC SFC. QFIIs who receive the permit(s) may currently invest up to U.S.$3 billion, with certain limited exceptions. Except for some restrictions imposed by specific law and regulation, from January 1, 2001, the individual and aggregate foreign ownership of the issued share capital in a TSE listed company or a GTSM traded company is not restricted. ROC custodians for QFIIs are required to submit to the CBC and the ROC SFC a report of trading activities and status of assets under custody and other matters every month. Capital remitted to the ROC under these guidelines may be remitted out of the ROC at any time after the date such capital is remitted to the ROC. Capital remitted out of the ROC may be returned to the

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ROC within the approved two-year period without ROC SFC approval so long as its aggregate inward remittance after netting off its aggregate outward remittance does not exceed the investment amount approved by the ROC SFC and the CBC (if applicable). Capital gains and income on investments may be remitted out of the ROC at any time.

General Foreign Investors

Except for QFIIs, General Foreign Investors may currently invest in ROC securities up to U.S.$5 million (in the case of individual investors) and U.S.$50 million (in the case of institutional investors) after obtaining approval issued by the TSE. General Foreign Investors are also subject to the foreign ownership limitations on certain specified industries as described in “Prohibited and Restricted Industries”.

Foreign Investment Approval

With the exception of QFIIs, General Foreign Investors and investors in OCBs and depositary receipts, under existing ROC laws and regulations relating to foreign investment, investors (both institutional and individual) who are not ROC persons and wish to make direct investment in the shares of ROC companies are required to submit a Foreign Investment Approval (“FIA”) application to the Investment Commission of the MOEA or other government authority. The Investment Commission or such other government authority reviews each FIA application and approves or disapproves each application after consultation with other government agencies (such as the CBC and the ROC SFC). Under current law, any non-ROC person possessing an FIA may remit capital for the approved investment and is entitled to repatriate annual net profits, interest and cash dividends attributable to such investment. Stock dividends, investment capital and capital gains attributable to such investment may be repatriated after approvals of the Investment Commission or other government authorities have been obtained.

Prohibited and Restricted Industries

In addition to the general restriction against direct investment by non-ROC persons in shares of ROC companies, non-ROC persons are currently prohibited from investing in certain industries in the ROC pursuant to the Negative List as amended by the Executive Yuan from time to time. The prohibition on foreign investment in the prohibited industries specified in the Negative List is absolute and provides no specific exemption from its application. Pursuant to the Negative List, certain other industries are restricted so that non-ROC persons may invest in such industries only up to a specified level and with the specific approval of the relevant competent authority which is responsible for enforcing the relevant legislation which the Negative List is intended to implement. The business of the Company is not in a prohibited or restricted industry under the Negative List.

Exchange Controls

The ROC’s Foreign Exchange Control Statute and regulations thereunder provide that all foreign exchange transactions must be executed by banks designated to handle such business by the ROC MOF and by the CBC. Current regulations favor trade-related foreign exchange transactions.

Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters, and all foreign currency needed for the import of merchandise and services may be purchased freely from the designated banks for conducting foreign exchange.

ROC companies, foreign companies recognized by the ROC government, resident individuals and foreigners with an alien resident certificate may also, without foreign exchange approval, remit into and out of the ROC foreign currencies of up to U.S.$50 million (or its equivalent) and U.S.$5 million (or its equivalent), respectively, in each calendar year. The above limits apply to remittances involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies. Furthermore, any remittance of foreign currency into the ROC by an ROC company or resident individual in a year will be offset by the amount remitted out of the ROC by the company or individual (as applicable)

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within its annual quota and will not use up its annual inward remittance quota to the extent of such offset. The above limits apply to remittance involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies. A requirement is also imposed on all enterprises to register medium-and-long-term foreign debt with the CBC.

In addition, foreign persons may, subject to certain required documents, but without foreign exchange approval of the CBC, remit outside and into the ROC foreign currencies of up to U.S.$100,000 (or its equivalent) for each remittance. The above limit applies only to remittances involving a conversion between NT Dollars and U.S. Dollars or other foreign currencies.

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APPENDIX B — THE SECURITIES MARKET OF THE ROC

In 1960, the ROC Government established the Securities and Exchange Commission to supervise and control all aspects of the securities market. The Securities and Exchange Commission of the ROC was restructured in early 1997 and renamed as the ROC SFC. In the 1970’s and the early 1980’s, the ROC Government implemented a number of steps designed to upgrade the quality and importance of the ROC securities market, such as encouraging listing on the TSE and establishing an over-thecounter market. In the mid-1980’s, the ROC Government began to revise its laws and regulations in a manner designed to facilitate the gradual internationalization of the ROC securities market.

The Taiwan Stock Exchange

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

The TSE commenced operations in 1962. During the early 1980s, the ROC SFC actively encouraged new listings on the TSE and the number of listed companies grew from 119 in 1983 to 643 by October 31, 2002. As of October 31, 2002, the market capitalization of companies listed on the TSE was NT$9,184 billion.

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

The TSE requirements for listing are based on the following company attributes:

the number and distribution of stockholders;

length of time in business;

amount of capital; and

profitability.

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

The GreTai Securities Market

To complement the TSE, the GTSM was established in September 1982 on the initiative of the ROC SFC to encourage the trading of securities of companies who do not qualify for listing on the TSE. As of December 3, 2002, 371 companies have listed equity securities on the GTSM and the total market capitalization of those companies was NT$635 billion.

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In addition, the Emerging Market was established on January 2, 2002 on the initiative of the ROC SFC to encourage trading of securities of companies that do not qualify for listing on the TSE or the GTSM. The price of shares is decided by negotiation between securities firms and investors. As of November 1, 2002, 133 companies have registered equity securities on the Emerging Market.

The following table sets forth, for the periods indicated, certain information relating to the GTSM Index:

Period ended 1995................................... 1996................................... 1997................................... 1998................................... 1999................................... 2000................................... 2001................................... 2002 (through December 3)...................	Number of listed companies at period end 41 79 114 176 264 300 333 371	Trading value (in millions of NT Dollars) 2,796 453,509 2,310,659 1,198,158 1,899,925 4,479,663 2,326,889 2,611,613	Index high 101.96 234.83 343.99 281.41 207.18 329.47 136.23 163.00	Index low 94.02 99.92 210.22 163.89 138.99 99.86 106.74 89.71	Index at period end
					101.96 233.09 245.05 165.80 207.18 104.93 136.23 104.91

Sources: GTSM Monthly Review; GTSM Data Base; Taiwan Economic Journal.

Taiwan Stock Exchange Index

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

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

The following table shows for the periods indicated information relating to the TSE Index.

Period Ended 1990 .............................................................. 1991 .............................................................. 1992 .............................................................. 1993 .............................................................. 1994 .............................................................. 1995 .............................................................. 1996 .............................................................. 1997 .............................................................. 1998 .............................................................. 1999 .............................................................. 2000 .............................................................. 2001 .............................................................. 2002 (through October 31) ...............................................	Number of Listed Companies at Period End 199 221 56 285 313 347 375 404 437 462 474 584 643	Index High 12,495.34 4,305.22 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 6,462.30	Index Low 2,560.47 3,316.26 3,327.67 3,135.56 5,194.63 4,503.37 4,690.22 6,820.35 6,251.38 5,475.00 8,349.91 3,446.26 3,850.04	Index at Period End
				4,530.16 3,377.06 4,600.67 6,070.56 7,124.66 5,173.73 6,933.94 8,187.27 6,418.43 8,448.84 8,842.63 5,551.24 4,759.14

Source: Status of Securities Listed on Taiwan Stock Exchange.

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

Price Limits, Commissions, Transaction Tax and Other Matters

The TSE has placed limits on block trading and on the range of daily price movements. Transactions that involve 500 trading lots or more must be registered and executed pursuant to certain TSE guidelines. Fluctuations in the price of stock traded on the TSE are currently subject to a restriction of 7% above and below the previous day’s closing price (or reference price set by the TSE if the previous day’s closing price is not available because of lack of trading activity) in the case of equity securities, and 5% in the case of debt securities. Brokerage commissions are proposed by the TSE and approved by the ROC SFC. The current approved maximum brokerage commission is 0.1425% of the transaction price for equity securities; however, a lower rate may be charged to clients by securities firms at their sole discretion, provided that they must report such rate to the TSE. A securities transaction tax, currently levied at the rate of 0.3% of the transaction price, is payable by the seller of equity securities and a tax at the rate of 0.1% of the transaction price is payable by the seller of debt securities other than government bonds. Such securities transaction taxes are withheld at the time of the transaction giving rise to such taxes. According to the amended Statute for Upgrading Industries effective as of February 1, 2002, no securities transaction tax will be imposed on the sale of the Bonds from February 1, 2002 to December 31, 2009. Sales of shares of companies listed on the TSE are currently sold in lots of 1,000 shares. Odd lot trading, or the purchase or sale of less than 1,000 shares, can be conducted in after-hours trading. Investors who desire to sell odd lots of shares of a listed company occasionally experience delays in effecting such sales.

Regulation and Supervision

The ROC SFC has been under the jurisdiction of the Ministry of Finance since 1981. The ROC SFC has extensive regulatory authority over companies listed on the TSE, companies whose shares are traded on the GTSM and unlisted public-issue companies. Such companies are generally required to obtain approval from, or registration with, the ROC SFC for all securities offerings. The ROC SFC has promulgated regulations requiring, unless otherwise exempted, periodic reporting of financial and operating information by all public-issue companies. In addition, the ROC SFC is responsible for the establishment of standards for financial reporting and carries out licensing and supervision with respect to the other participants in the ROC securities markets. The ROC SFC has responsibility for implementation of the ROC Securities and Exchange Law and for overall administration of governmental policies in the ROC securities markets. It has extensive regulatory authority over the offering, issuing and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the ROC SFC to promulgate rules under certain circumstances.

The ROC Securities and Exchange Law prohibits market manipulation. It permits a company to recover certain short swing trading profits made through purchases and sales within six months by directors, managerial personnel, supervisors and shareholders, together with their spouses, minor children and nominees, holding 10% or more of the shares of the company, as well as 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. Pursuant to the ROC Securities and Exchange Law, the term “insiders” includes directors, supervisors, managers and shareholders (together with their spouses, minor children and nominees) having more than 10% or more shareholding, as well as spouses, minor children and nominees of the parties, or any person who has learned such information due to an occupational or controlling relationship with the issuing company and any person who has learned such information from any of the foregoing. Sanctions can include prison terms. 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 a company’s contracts, reports and other evidentiary documents that are related to securities transactions. ROC SFC regulations require that financial reports of listed companies be audited by accounting firms consisting of at least three certified public accountants and be signed by at least two certified public accountants.

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The ROC Securities and Exchange Law also provides for, among other things, regulations relating to public offerings of securities; measures to strengthen the capital structure of issuers; civil liability for material misstatements or omissions made by issuers; more stringent regulation of the securities activities of officers, supervisors, directors and major shareholders of issuers; regulations regarding tender offers; and a significant expansion of the prohibitions against insider trading, including the imposition of treble civil damages and criminal sanctions.

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

In addition to providing a market for securities trading, the TSE has primary responsibility for reviewing applications by issuers to list securities on the TSE and the GTSM has primary responsibility for reviewing applications by issuers to list securities on the GTSM. The ROC SFC reviews all securities offerings by listed companies. If issuers of listed securities violate relevant laws and regulations or encounter significant difficulties, the TSE and the GTSM may, with the approval of the ROC SFC, delist securities of such issuers.

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REGISTERED OFFICE OF THE COMPANY

Silicon Integrated Systems Corporation

No. 16 Creation Road I Science-based Industrial Park Hsinchu, Taiwan, ROC

DEPOSITARY

CUSTODIAN

The Bank of New York

101 Barclay Street 22nd Floor West New York, NY 10286 U.S.A.

International Commercial Bank of China

3F, 2 Chung King South Road, Sec. 1 Taipei, Taiwan, ROC

AUDITORS TO THE COMPANY

T N Soong & Co

7F, 11 Park Avenue 2nd Road Science-based Industrial Park Hsinchu, Taiwan, ROC

ROC LEGAL ADVISORS TO THE COMPANY

U.S. LEGAL ADVISORS TO THE MANAGERS

Chen & Lin Attorneys-at-Law Bank Tower, 4th Floor 205 Tun Hwa North Road Taipei, Taiwan, ROC

Baker & McKenzie

14/F, Hutchison House 10 Harcourt Road Hong Kong

LUXEMBOURG LISTING AND INTERMEDIARY AGENT

The Bank of New York (Luxembourg) S.A.

Aerogolf Centre 1A, Hoehenhof

L-1736 Senningerberg Grand Duchy of Luxembourg

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Printed by IFN Financial Press Limited 22980

AI assistant

SiS — Capital/Financing Update 2014

52031_rns_2014-04-10_29c8e174-2597-4fc2-b7b8-07cbfc82892b.pdf

Silicon Integrated Systems Corp.

25,000,000 Global Depositary Shares Representing 250,000,000 Shares of Common Stock (par value NT$10 per share)

Offering Price: U.S.$5.515 per GDS

Securities (Asia) Limited

Yuanta Core Pacific Securities Limited

TABLE OF CONTENTS

CERTAIN DEFINED TERMS, TRADEMARKS AND CURRENCY OF PRESENTATION

SPECIAL NOTES REGARDING FORWARD-LOOKING STATEMENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

SUMMARY

Our Company

Our Approach and Strategy

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

Maintain Access to Low Cost and Leading-edge Manufacturing.

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.

Corporate Information

The Offering

SUMMARY FINANCIAL DATA

RISK FACTORS

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

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

Risks Relating to Intellectual Property

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

Termination of licensing agreement with respect to the technologies, processes, patents adopted in the manufacture of our products could adversely affect our operating results

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

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

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.

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.

Risks Relating to Our Strategy of Being An Integrated Device Manufacturer

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

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.

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

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.

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

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

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.

Risks Relating to New Markets and New Products

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.

Risks Relating to the Republic of China

Fluctuations in exchange rates could result in foreign exchange losses.

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

Changes in exchange controls which restrict your ability to convert proceeds from the sale of our GDSs or common shares may reduce the value of your investment.

Risks Relating to Ownership of Our GDSs or Our Common Shares

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

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

You may not be able to participate in rights offerings and may experience dilution of your holdings.

You may be required to appoint agents in the ROC to handle various tax and administrative matters if you withdraw common shares from our GDS program and become a shareholder, which may make share ownership burdensome.

USE OF PROCEEDS

DIVIDENDS AND DIVIDEND POLICY

CAPITALIZATION

EXCHANGE RATES

MARKET PRICE INFORMATION

CHANGES IN ISSUED SHARE CAPITAL

SELECTED FINANCIAL DATA

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

Overview

Shift from fabless to IDM

Pricing and product life cycles

Results of Operations

Cost of Revenue

Operating Expenses

Income (Loss) from Operations

Non-Operating Income and Expenses

Comparison of Results of Operations

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

1999 compared with 2000 and 2000 compared with 2001

Quarterly Results of Operations

Liquidity and Capital Resources

Inflation

SiS Capital/Financing Update 2014