THSRC - Capital/Financing Update 2016

Taiwan High Speed Rail Corporation

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

US$300,000,000 Zero Coupon Convertible Bonds due 2012

The US$300,000,000 Zero Coupon Convertible Bonds due 2012 (the “Bonds”) will be issued by Taiwan High Speed Rail Corporation, a company limited by shares incorporated in Taiwan, the Republic of China (the “ROC”). Unless previously redeemed, converted, or repurchased and cancelled, the Bonds will be redeemed at 137.69% if a QPO (as defined below) has occurred, or at 144.50% if a QPO has not occurred, of their principal amount on May 15, 2012. See “Terms and Conditions of the Bonds – Redemption, Repurchase and Cancellation – Redemption at Maturity”. The Bonds have been rated B/Stable by Taiwan Ratings Corporation.

The Bonds will not bear interest. The Bonds are convertible at the holders’ option at any time, except during certain closed periods, on or after June 15, 2007 and up to and including April 30, 2012 into our common shares, par value NT$10 per share (our “Common Shares”). On or after the first anniversary of the Listing Date (as defined herein), if any, we may redeem the Bonds, in whole or in part in multiples of US$1,000, at the Early Redemption Amount (as defined in “Terms and conditions of the Bonds – Redemption at the Option of the Issuer”) if our Common Shares have achieved and maintained the price levels specified in this Offering Memorandum. At any time, we may redeem the Bonds, in whole but not in part, at the Early Redemption Amount if the aggregate principal amount of the Bonds that remain outstanding is less than 10% of the aggregate principal amount of Bonds originally issued. If specified changes relating to Republic of China taxation occur, we may redeem the Bonds, in whole but not in part, at the Early Redemption Amount. You may require us to redeem the Bonds, in whole or in part in multiples of US$1,000, on May 15, 2010 (the “Holders’ Put Date”) at 121.15% if a QPO has occurred prior to the Holders’ Put Date, or at 124.72% if a QPO has not occurred prior to the Holders’ Put Date, of their principal amount. You may require us to repurchase the Bonds, in whole or in part, at the Early Redemption Amount upon the occurrence of a change of control or our delisting following a QPO.

See “Risk Factors” on page 11 for a discussion of certain factors to be considered in connection with an investment in the Bonds.

We have received approval-in-principle for the listing of the Bonds on the Singapore Exchange Securities Trading Limited (the “SGX-ST”). The SGX-ST assumes no responsibility for the correctness of any of the statements made or opinions expressed or reports contained in this Offering Memorandum. Admission of the Bonds to the Official List of the SGX-ST is not to be taken as an indication of the merits of us or the Bonds.

Issue Price: 100%

The Bonds and the Common Shares into which the Bonds are convertible have not been and will not be registered under the US Securities Act of 1933, as amended (the “US Securities Act”), or any state securities laws and may not be offered or sold within the United States or to, or for the account or benefit of, any US person (as defined in Regulation S under the US Securities Act (“Regulation S”)) unless registered under the US Securities Act or an exemption from the registration requirements of the US Securities Act is available. The Bonds and the Common Shares into which the Bonds are convertible are being offered and sold only outside the United States in reliance on Regulation S under the US Securities Act. The Bonds and the Common Shares into which the Bonds are convertible are not transferable except in accordance with the restrictions described under “Plan of Distribution” and “Transfer Restrictions”.

The Managers (as defined herein) expect to deliver the Bonds being offered hereby through the facilities of Euroclear and Clearstream, Luxembourg (each as defined herein), against payment therefor on or about May 15, 2007.

Global Coordinator and Sole Bookrunner

Deutsche Bank

Co-Managers

Fubon Securities Co., Ltd

Offering Memorandum dated May 9, 2007

Taiwan Securities Co., Ltd

You should rely only on the information contained in this Offering Memorandum. Neither we nor any of the managers named in “Plan of Distribution” (the “Managers”) has authorized anyone to provide you with different information. You should not assume that the information contained in this Offering Memorandum is accurate as of any date other than the date on the front cover of this Offering Memorandum. Our business, financial condition, results of operations and prospects may have changed since that date.

The Bonds are of a specialist nature and should normally only be bought and traded by investors who are particularly knowledgeable in investment matters. NO UNITED STATES FEDERAL, STATE OR FOREIGN SECURITIES COMMISSION OR REGULATORY AUTHORITY HAS RECOMMENDED THE BONDS OR REVIEWED, PASSED ON, DETERMINED OR CONFIRMED THE ACCURACY OR ADEQUACY OF THIS OFFERING MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY MAY BE A CRIMINAL OFFENSE.

This Offering Memorandum does not constitute an offer to sell or the solicitation of an offer to buy the Bonds in any jurisdiction in which such offer or solicitation is unlawful. The distribution of this Offering Memorandum and this offering, sale and delivery of the Bonds in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Memorandum comes are required by us and the Managers to inform themselves about and to observe any such restrictions. No action is being taken to permit a public offering of the Bonds or the possession or distribution of this Offering Memorandum, in preliminary or final form, in any jurisdiction where action would be required for such purposes. The Bonds may not be offered or sold, directly or indirectly, in the ROC.

Neither the delivery of this Offering Memorandum nor any offering, sale or delivery made hereunder shall, under any circumstance, create any implication that the information contained herein is correct as of any date subsequent to the date of this Offering Memorandum. You should rely only on the information contained in this Offering Memorandum.

We accept responsibility for the information contained in this Offering Memorandum. To the best of our knowledge and belief the information contained in this Offering Memorandum is in accordance with the facts and does not omit anything likely to affect the import of such information. Notwithstanding the above, the information provided herein with respect to the ROC, its political status, its economy and its population and contained in each of the Appendices entitled “The Securities Markets of the ROC” and “Foreign Investment and Exchange Controls in the ROC” has been extracted from publicly available sources, including the Taiwan Stock Exchange and the Chinese Securities Association, that has not been independently verified by us, the Managers or any of our or the Managers’ respective affiliates or advisors in connection with the offering, and we accept responsibility only for accurately extracting the information from such sources.

The Managers make no representation or warranty, express or implied, as to the accuracy or completeness of the information set forth herein, and nothing contained in this Offering Memorandum is, or shall be relied upon as, a promise or representation, whether as to the past or the future. The Managers have not independently verified any of such information and assume no responsibility for its accuracy or completeness.

Each person receiving this Offering Memorandum acknowledges that:

this Offering Memorandum does not contain all the information that would be included in a prospectus for this offering were this offering registered under the US Securities Act;
the financial statements included in this Offering Memorandum have been prepared in accordance with ROC generally accepted accounting principles (“ROC GAAP”), which differ in many significant respects from United States generally accepted accounting principles (“US GAAP”), and thus are not comparable to the financial statements of a United States company, see “Summary of Certain Significant Differences Between ROC GAAP and US GAAP”; and
neither we nor the Managers have authorized any person to give any information or to make any representation concerning us, the Bonds or the Common Shares other than as contained herein and, if given or made, any such information or representation should not be relied upon as having been authorized by us or any of the Managers.

You should not construe the contents of this Offering Memorandum as legal, business or tax advice. You should consult your own attorney, business or financial advisor and tax advisor for legal, business and tax advice.

Each investor in the Bonds must comply with all applicable laws and regulations in force in each jurisdiction in which it purchases, offers or sells the Bonds or distributes this Offering Memorandum and must obtain any consent, approval or permission required by it for the purchase, offer or sale by it of the Bonds under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers or sales, and neither we nor any Manager shall have any responsibility therefor.

In connection with the issue of any Bonds under the offering, a Manager, if any, that is specified in the relevant agreement among managers as the stabilizing manager, or any person acting for the stabilizing manager, may, for a limited period, over-allot or effect transactions with a view to supporting the market price of the Bonds at a level higher than that which might otherwise prevail. However, there may be no obligation on the stabilizing manager (or any agent of the stabilizing manager) to do this. Such stabilizing, if commenced, may be discontinued at any time and must be brought to an end after a limited period. Such stabilizing shall be in compliance with all applicable laws, regulations and rules.

This Offering Memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Bonds may not be circulated or distributed, nor may the Bonds be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Bonds are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the Bonds pursuant to an offer made under Section 275 of the SFA except:

(1) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA;
(2) where no consideration is or will be given for the transfer; or
(3) where the transfer is by operation of law.

iii

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this Offering Memorandum and oral statements that may be made by us or our officers, directors or employees acting on our behalf that are not statements of historical fact constitute “forward-looking statements.” You can identify some of these forward-looking statements by terms such as “expects,” “targets,” “believes,” “plans,” “intends,” “estimates,” “anticipates,” “may,” “will,” “would” and “could” or similar words. However, you should note that these words are not the exclusive means of identifying forward-looking statements. All statements regarding our expected financial position, business strategy, plans and prospects are forward-looking statements. These forward-looking statements, including statements as to:

our expected ridership;
the timing and success of new station openings and station area developments;
our future revenue and profitability;
expected growth in rider demand;
the speed and efficiency of our rail line;
other expected ROC transportation trends;
the ROC government (the “Government”) actions in support of our rail system and affiliated developments;
our capital expenditure plans;
our financing plans; and
other matters discussed in this Offering Memorandum regarding matters that are not historical facts,

are only forecasts based on information currently available to us. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and other factors include, among others:

changes in political, social and economic conditions and the regulatory environment in the ROC;
changes in currency exchange rates;
the level of interest rates prevailing in the ROC;
accidents and natural disasters;
the terms on which we finance our working capital and capital expenditure requirements;
changes in the fares for our services;
our ability to complete station area developments on time and within budget;
fluctuation in property prices and competition from other property developments;
our relationship with the Government;

the Government’s policies relating to transportation and land use planning in the ROC;
changes in competitive conditions and our ability to compete under these conditions; and
other factors beyond our control.

Given the risks and uncertainties that may cause our actual future results, performance or achievements to be materially different than expected, expressed or implied by the forward-looking statements in this Offering Memorandum, we advise you not to place undue reliance on those statements. We are not representing or warranting to you that our actual future results, performance or achievements will be as discussed in those statements. Further, we disclaim any responsibility to update any of those forward-looking statements or publicly announce any revisions to those forward-looking statements to reflect future developments, events or circumstances.

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

We are a company limited by shares and incorporated under the Company Law of the ROC. Most of our directors, executive officers and supervisors and certain of the experts named in this Offering Memorandum are residents of the ROC and substantially all of our assets and such persons are located in the ROC. As a result, it may be difficult for investors to effect service of process upon us or such persons, or to enforce judgments obtained in the courts outside the ROC against us or such persons in the ROC, including those predicated upon the civil liability provisions of the federal securities laws of the United States. Any final judgment obtained against us 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 our shares or Bonds will be enforced by the courts of the ROC without further review of the merits only if the court of the ROC in which enforcement is sought is satisfied that:

the court rendering the judgment had jurisdiction over the subject matter according to the laws of the ROC;
the judgment and the court proceeding resulting in the judgment are 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, (i) we or such person were duly served within a reasonable period of time within the jurisdiction of such court in accordance with the laws and regulations of such jurisdiction, or (ii) process was served on us or such persons with judicial assistance of the ROC; and
judgments of the courts of the ROC would be recognized and enforceable in the jurisdiction of 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 out of the ROC of any amounts recovered in respect of such judgment denominated in a currency other than NT dollars.

CERTAIN CONVENTIONS AND OTHER DATA

Except where the context otherwise requires, all references herein to “we”, “us”, “our company” and “TSHRC” are references to Taiwan High Speed Rail Corporation. All references herein to “Taiwan” or the “ROC” are to the island of Taiwan and other areas under the effective control of the ROC. All references herein to “ROC GAAP” and “US GAAP” are to accounting principles generally accepted in the ROC and the United States, respectively. All references herein to the “PRC” and “China” are to the People’s Republic of China excluding, for the purposes of this Offering Memorandum, Hong Kong, Macau and Taiwan. All references herein to “2004”, “2005” and “2006” are to the fiscal years ended December 31, 2004, 2005 and 2006, respectively.

In this Offering Memorandum, the “ROC Company Law” refers to the Company Law of the ROC. All references to the “Government” are to the government of the ROC. “Ministry of Finance” or “MOF” refers to the ROC Ministry of Finance. “SFB” or “Securities and Futures Bureau” refers to the ROC Securities and Futures Bureau of the Financial Supervisory Commission under the Executive Yuan of the ROC. “ROC FSC” refers to the Financial Supervisory Commission under the Executive Yuan of the ROC.

We publish our financial statements in New Taiwan dollars, the lawful currency of the ROC. All references herein to “US dollars” and “US$” are to United States dollars and references to “NT dollars” and “NT$” are to New Taiwan dollars. All translations from New Taiwan dollars to US dollars or amounts stated as of and for the periods ended December 31, 2006 were made, unless otherwise indicated, on the basis of the exchange rate of NT$32.59 = US$1.00, which represents the noon buying rate of the Federal Reserve Bank of New York on December 29, 2006. All amounts translated into US dollars as described above are provided solely for the convenience of the reader and no representation is made that the NT dollar or US dollar amounts referred to herein could have been or could be converted into US dollars or NT dollars, as the case may be, at any particular rate or at all. See “Exchange Rates”.

Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding.

Our financial statements as of and for the years ended December 31, 2004, 2005 and 2006 have been audited. All our financial statements have been prepared in accordance with the “Rules Governing the Preparation of Financial Statements of Securities Issuers,” other applicable ROC laws and regulations, and ROC GAAP. ROC GAAP differs in many important respects from generally accepted accounting principles in certain other countries. The material differences between ROC GAAP and US GAAP as applicable to us are discussed under “Summary of Certain Significant Differences Between ROC GAAP and US GAAP.”

We commissioned MVA Hong Kong Ltd. of MVA Group (“MVA”), a leading provider of research and advice on transport and other policy areas, to prepare a report for the purpose of providing various industry and other information and illustrating our position in the transportation market in Taiwan. The report was prepared for us by MVA on the basis of ROC statistics available in 2002, and assumed we would begin operation of our business in 2005. The MVA report has not been updated for purposes of this Offering Memorandum. Information from the MVA report as well as statistics publicly available provided by the Government appear in the Industry Overview, Business and other sections of this Offering Memorandum. We believe the MVA report and such information and statistics to be accurate, but only accept responsibility for accurate extraction of such information.

vii

SUMMARY

This summary highlights information contained elsewhere in this Offering Memorandum. This summary may not contain all of the information that you should consider before deciding to invest in the Bonds. We urge you to read this entire Offering Memorandum carefully, including the “Risk Factors” section on page 11 and our financial statements and related notes thereto located elsewhere in this Offering Memorandum.

Overview

We operate a high speed rail in Taiwan, which began revenue operation in the first week of January 2007. The high speed rail constructed and operated under the Taiwan North-South High Speed Rail Project (the “Project”) provides service for intercity travelers in the Western corridor of Taiwan. It is capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying, compared with travel time of some four to five hours by road, and less than 45 minutes between Taipei and Taichung, compared with travel time of some two to three hours by road. The Project is part of the Government’s Plan for National Development into the Next Century, and is designed to address the growing demand for intercity travel in the Western corridor and to enable a more even spread of economic development throughout Taiwan.

The Project is a build-operate-transfer arrangement based on a public/private partnership between us and the Ministry of Transportation and Communications (the “MOTC”), under which we have been awarded by the Government a concession to plan, design, finance, construct and operate the high speed rail. Pursuant to the Construction and Operation Agreement (the “C&OA”) we entered into with the MOTC in July 1998, we are entitled to operate the high speed rail until July 2033. We began the construction of the high speed rail system in the first quarter of 2000, and it was certified for revenue operation beginning in the first week of January 2007. We believe the construction of the high speed rail under the Project represents one of the most challenging infrastructure projects in the world to date. The total construction cost of the high speed rail amounted to approximately NT$489.6 billion.

The high speed rail currently operates at eight Stations, namely Taipei Station, Banciao Station, Taoyuan Station, Hsinchu Station, Taichung Station, Chiayi Station, Tainan Station and Zuoying Station (collectively, our “Stations”) along the high speed rail route. We currently have four different stopping patterns, serving local and long distance riders, with 25 scheduled trains on the high speed rail per direction per day. Under the C&OA, we are required to operate 61 trains per direction per day by September 1, 2007. We target to have 88 trains per direction per day by the end of 2007 or early 2008. According to MVA, the daily number of ROC passenger trips over 20 kilometers will reach 4.19 million by 2033. With our high capacity 12-car trainsets, each of which contains seats for 989 passengers, we target to reach an average daily patronage of 100,700 passengers in 2007, 270,000 passengers in 2015 and 311,000 passengers in 2033. According to the ROC Ministry of the Interior, or the MOI, 94.7% of the ROC population was concentrated along the Western corridor of the island, and about 51.4% of Taiwan’s population is concentrated in three distinct metropolises, namely, Taipei, Taichung and Kaohsiung as of December 31, 2006. We believe the quality and convenience of our service for trips from Taipei to Kaohsiung and cities in between will make the high speed rail an essential mode of transport for the Western corridor.

Development Agreement (the “SADA”) we entered into with the MOTC concurrently with the execution of the C&OA, we also have the right to develop and operate properties surrounding five of our eight Stations, namely our Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations. These properties cover approximately 46.5 hectares of developable land, with a maximum commercial floor space of up to 1.2 million square meters. We have not yet begun development of these areas. We are still in our start-up phase, and have been loss making since inception.

We were incorporated in Taiwan, ROC in May 1998 by the Taiwan High Speed Rail Consortium, which was selected by the ROC Bureau of Taiwan High Speed Rail as the preferred bidder for the Project. In April 2001, we became a publicly traded company, and our Common Shares have been traded over the ROC Emerging Stock Market since September 2003.

Our principal executive and registered offices are located at 3F, 100 Hsin Yi Road Sec. 5, Taipei, Taiwan, ROC, and our telephone number at the above address is (886-2) 8789-2000.

Competitive Strengths

We believe we possess the following competitive strengths:

Modern, convenient and safe
Exclusivity and government support
High speed
High transportation capacity
Punctuality and travel time
Key to expanding transport volume in the Western corridor

Details of our competitive strengths are further described in “Business – Competitive Strengths.”

Business Strategies

We intend to engage the following strategies to enhance our business reputation and our ability to generate profits.

One day lifestyle, consolidating areas of north, central and south Taiwan
Establishing self-sustaining operation and maintenance ability
Encouraging medium- and long-distance trips and tourism
Deploying strong ticketing channels
Diversifying revenues and profitability through station area development
Utilizing our trackwork as a backbone for telecommunication and television network deployment and other projects
Working with the Government and transport providers to increase traffic volume to Stations
Details of our business strategies are further described in “Business – Business
Strategies.”

THE OFFERING

The Issuer . . . . . . . . . . . . . . . . . Taiwan High Speed Rail Corporation The Bond Offering. . . . . . . . . . . US$300,000,000 aggregate principal amount of Zero Coupon Convertible Bonds due 2012 to non-US persons in offshore transactions in reliance on Regulation S under the US Securities Act. Investors’ Placings . . . . . . . . . . As part of the Offering, we have entered into placing agreements with each of GLG Partners LP, OZ Management LLC and entities, other than the Representative, under the control of Deutsche Bank AG (collectively, the “Investors”), and the Representative for the purchase at the Issue Price of an aggregate of US$135 million principal amount of the Bonds. The purchase of the Bonds by the Investors is subject to the Purchase Agreement. Issue Price . . . . . . . . . . . . . . . . . 100% of the principal amount of the Bonds. Closing Date . . . . . . . . . . . . . . . May 15, 2007 Maturity Date. . . . . . . . . . . . . . . May 15, 2012 Interest . . . . . . . . . . . . . . . . . . . . The Bonds will not bear interest. Qualifying Public Offering . . . . QPO means an initial public offering (“IPO”), plus, if necessary, up to three public offerings consecutively following the IPO, of Common Shares or depositary receipts (“DRs”) representing the right to receive Common Shares, exclusively for cash, which complies with certain conditions relating to offering size, minimum distribution and other conditions. To be a QPO, the Common Shares or DRs must be listed on the Taiwan Stock Exchange, the GreTai Securities Market or another internationally recognized exchange in Asia, Europe or the United States (each, a “Recognized Stock Exchange”). We are not obligated to effect a QPO and may effect one or more offerings of our equity securities that do not constitute a QPO. There can be no assurance that a QPO will occur. The listing date for the public offering which meets the aggregated requirements for a QPO is referred to herein as the “Listing Date”.

	Status of the Bonds and		The Bonds will be our direct, unconditional,
	Negative Pledge . . . . . . . . . . .		unsubordinated and, subject to the restriction on liens
			described in the next sentence, unsecured obligations
			and will at all times rank pari passu among themselves
			and with all of our other present and future direct,
			unconditional, unsubordinated and unsecured
			obligations. We will not create security interests to
			secure the payment of, or guarantee or indemnity in
			respect of, any international investment securities
			without granting equivalent security for the Bonds,
			subject to certain exceptions, as described in “Terms
			and Conditions of the Bonds – Status” and “– Certain
			Covenants – Negative Pledge.”
			The Bonds will be effectively subordinated to all of our
			secured obligations with respect to claims against the
			assets securing such obligations. As of December 31,
			2006, we had such debt of approximately NT$321,263.8
			million.
	Conversion Right . . . . . . . . . . . .		Except during certain closed periods described below
			and subject to the terms set forth in “Terms and
			Conditions of the Bonds” and in the Indenture, you may
			convert the Bonds into our Common Shares at any time
			on or after June 15, 2007 and before the close of
			business on April 30, 2012 or, if such Bonds are called
			for redemption prior to such date, then before the close
			of business on the date five business days prior to the
			date fixed for redemption thereof, or, if such day is not
			a business day at the place where such Bonds are
			deposited for conversion, on the immediately preceding
			business day at such place. The conversion price is
			initially NT$10.0 per Common Share. The conversion
			price may be adjusted as described in “Terms and
			Conditions of the Bonds – Conversion – Adjustment to
			Conversion Price” (such price, as adjusted from time to
			time, the “conversion price”).
			You will not be able to convert your Bonds during
			certain closed periods, including:
			� the 60 days immediately preceding and including
			each annual shareholders’ meeting;
			� the 30 days immediately preceding and including
			any special shareholders’ meeting;
			� the five-day period prior to and including a record
			date for distribution of rights, dividends or other
			benefits;

the period beginning from three trading days prior to the day on which we notify the ROC Emerging Stock Market, or any stock exchange where our Common Shares are listed, of the record date for determination of shareholders’ entitlement to dividends or other distributions or benefits with respect to our shares to such record date, which, under current regulations, amounts to a total of 15 trading days plus five calendar days prior to and including such record date;
the period beginning from the record day of capital reduction to the day immediately prior to the first trading date of the Common Shares reissued after the capital reduction; and

			� any period during which we are required by ROC
			law to suspend conversion or close our stock
			transfer books and accordingly may not lawfully
			issue any share capital.
			See “Terms and Conditions of the Bonds – Conversion –
			Conversion Right – Conversion Period.”
Conversion	Price	Adjustment . .	The conversion price will be subject to adjustment for,
			among other things, subdivision or consolidation of our
			Common Shares, bonus issues, rights issues and other
			dilutive events. See “Terms and Conditions of the Bonds
			– Conversion – Adjustments to Conversion Price.”
Conversion	Price	Reset . . . . . . .	The conversion price will be adjusted on any of May 15,
			2008, May 15, 2009 and March 16, 2010 (each, a “Reset
			Date”) if the volume weighted average market price of
			our Common Shares on the ROC Emerging Stock Market
			or, upon the listing of the IPO, the relevant Recognized
			Stock Exchange, for the 15 consecutive trading days
			ending on the Reset Date, converted into US dollars at
			the then prevailing rate, is less than the conversion
			price then in effect, converted into US dollars at the
			fixed exchange rate of NT$33.285 = US$1.00. Upon the
			occurrence of a conversion price reset, the conversion
			price will be reset to 101% of the volume weighted
			average market price.

Notwithstanding the foregoing, any adjustment to the conversion price pursuant to the conversion price reset will be limited so that the adjusted conversion price will not be less than (i) 80% of the initial conversion price, as adjusted from time to time for dilutive events, or (ii) NT$10. Only downward adjustments are permitted. See “Terms and Conditions of the Bonds – Conversion – Conversion Price Reset.” Redemption at Maturity . . . . . . We will redeem the Bonds at 137.69% if a QPO occurs, or at 144.50% if a QPO does not occur, of their principal amount on May 15, 2012. Our Early Redemption We may redeem the Bonds, in whole or in part in Option . . . . . . . . . . . . . . . . . . . multiples of US$1,000, at any time on or after the first anniversary of the Listing Date and prior to the Maturity Date, if any, at the Early Redemption Amount if the market price of our Common Shares, translated into US dollars at the prevailing exchange rate, for a period of 20 consecutive trading days, the last of which occurs not more than ten trading days prior to the date upon which notice of such redemption is published, is at least 125% multiplied by the Early Redemption Amount divided by the adjusted conversion ratio, which is the initial denomination upon issue of the Bonds, US$1,000, divided by the adjusted conversion price. In addition, if at any time the aggregate principal amount of the Bonds outstanding is less than 10% of the aggregate principal amount originally issued, we have the option to redeem such outstanding Bonds in whole but not in part at their Early Redemption Amount. Redemption for Taxation We may, at our option, redeem the Bonds, in whole but Reasons . . . . . . . . . . . . . . . . . not in part, at the Early Redemption Amount if we determine that, as a result of any change in or amendment to the laws or regulations of the ROC or as further described under “Terms and Conditions of the Bonds – Redemption, Repurchase and Cancellation – Redemption for Taxation Reasons,” we have been or will be required to pay additional amounts (as described under “Terms and Conditions of the Bonds – Taxation”) in excess of the additional amounts payable with respect to a deduction or withholding at a rate of 20% of the amount of any payments of interest, if any. Redemption at the Option of The holders may require us to redeem, in whole or in the Holders . . . . . . . . . . . . . . . part in multiples of US$1,000, the Bonds on May 15, 2010 at 121.15% if a QPO has occurred prior to the Holders’ Put Date, or 124.72% if a QPO has not occurred prior to the Holders’ Put Date, of their principal amount.

	Redemption for Change of	Redemption for Change of	Additionally, each holder may require us to repurchase,
	Control, Delisting . . . . . . . . . .		in whole or in part, the holders’ Bonds at the Early
			Redemption Amount upon the occurrence of a change
			of control or our delisting following a QPO.
			See “Terms and Conditions of the Bonds – Repurchase
			at the Option of Holders.”
	Form of Bonds. . . . . . . . . . . . . .		The Bonds will be issued in registered form in the
			denomination of US$1,000 each. The Bonds will be
			offered and sold in principal amounts of US$1,000 or an
			integral multiple thereof and will be transferable in
			principal amounts of US$1,000 or an integral multiple
			thereof. The Bonds will be represented by beneficial
			interests in the Global Bond, deposited on or about the
			Closing Date with a common depositary for, and
			registered in the name of a nominee of, Euroclear Bank
			S.A./N.V., as operator of the Euroclear System
			(“Euroclear”) and Clearstream, Luxembourg Banking,
			société anonyme (“Clearstream, Luxembourg”). Except
			as described herein, definitive bonds with respect to the
			Bonds will not be issued in exchange for beneficial
			interests in the Global Bond.
	Taxation . . . . . . . . . . . . . . . . . . .		Subject to the Terms and Conditions of the Bonds, all
			payments of principal and interest, if any, with respect
			to the Bonds will be made after any deduction or
			withholding for or on account of any present or future
			taxes, duties, assessments or governmental charges of
			whatever nature imposed or levied by or on behalf of
			the government of the ROC or any authority thereof or
			therein having power to tax. With respect to any such
			deduction or withholding from any such payment we
			will, at the time of such payment of principal and
			interest, if any, and subject to certain exceptions set
			forth in this Offering Memorandum, pay such additional
			amounts as will result in the receipt by the holders of
			the amounts which would have been received in the
			absence of any such withholding or deduction. See
			“Terms and Conditions of the Bonds – Taxation.”
	Ratings . . . . . . . . . . . . . . . . . . . .		The Bonds have been rated B/Stable by Taiwan Ratings
			Corporation. Security ratings are not recommendations
			to buy, sell or hold the Bonds. Ratings are subject to
			revision or withdrawal at any time by the rating
			agencies issuing such ratings.
	Governing Law . . . . . . . . . . . . .		The Indenture and the Bonds will be governed by, and
			construed in accordance with, the laws of the State of
			New York.

Trustee, Principal Paying, The Bank of New York, London Branch Transfer and Conversion Agent . . . . . . . . . . . . . . . . . . . Registrar. . . . . . . . . . . . . . . . . . . The Bank of New York Transfer Restrictions . . . . . . . . . The Bonds and Common Shares issuable upon conversion thereof have not been registered under the US Securities Act and are subject to certain restrictions on transfer. Lock-up Agreements . . . . . . . . . Subject to the exceptions discussed below, we and Continental Engineering Corp. (“CEC”) have agreed that, for a 180-day period following the date of this Offering Memorandum, without the prior written consent of Deutsche Bank AG, Hong Kong Branch (the “Representative”), we or it will not, directly or indirectly (1) offer for sale, pledge, encumber, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of, directly or indirectly, any (A) Common Shares, Bonds or securities convertible into or exercisable or exchangeable for Common Shares or Bonds, (B) securities of the same class as our Common Shares or Bonds or (C) other instruments representing interests in securities of the same class as our Common Shares or Bonds; or (2) sell, grant or enter into any option, right, warrant, swap or other arrangement that are with respect to, or transfers to another, in whole or in part, any of the economic consequences of ownership of our Common Shares or Bonds, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of our Common Shares, Bonds or such other securities, in cash or otherwise. In addition, we and CEC have agreed not to announce our or its intention or make any application or filing with any applicable regulatory authority for any of such transactions described in clause (1) or (2) above without the prior written consent of the Representative for a 180-day period following the date of this Offering Memorandum. The second immediately preceding sentence, however, shall not apply to (1) this offering or sale of the Bonds, (2) the issuance of any of our Common Shares after the date of this Offering Memorandum upon conversion of our preferred shares in existence on or prior to the date of this Offering Memorandum, (3) the issuance, sale or transfer by us of

our Common Shares or options to purchase our Common Shares pursuant to any of our employee share option plans or employee share purchase plans in existence as of the date of this Offering Memorandum, (4) the distribution of Common Share dividends or employee bonus shares by us after the date of this Offering Memorandum, (5) the issuance of any of our Common Shares after the date of this Offering Memorandum upon conversion of the Bonds and (6) the application or filing with applicable regulatory authorities for an initial public offering and any announcement and offering (but not a sale) in connection therewith. Each of the Investors has agreed to enter a 90-day lock-up in connection with the Bonds to be purchased by them, subject to certain exceptions. Use of Proceeds . . . . . . . . . . . . The net proceeds to be received by us from this offering of Bonds, after deducting underwriting discounts and commissions but before deducting other transaction expenses, will be approximately US$295.5 million. We intend to use the net proceeds to pay the costs of constructing the high speed rail. Listing. . . . . . . . . . . . . . . . . . . . . We have received approval-in-principle for the listing of the Bonds on the SGX-ST. The Bonds will be traded on the SGX-ST in a minimum board lot size of US$200,000 for so long as the Bonds are listed on the SGX-ST.

SUMMARY FINANCIAL DATA

The following table presents our summary statements of operations and balance sheets data. This summary financial data as of and for the years ended December 31, 2004, 2005 and 2006 should be read in conjunction with our audited financial statements included in this Offering Memorandum. Our financial statements as of and for the years ended December 31, 2004, 2005 and 2006 have been prepared and presented in accordance with ROC GAAP. ROC GAAP differs in certain material respects from US GAAP. See “Summary of Certain Significant Differences Between ROC GAAP and US GAAP.” You should also read the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, which describes a number of factors that have affected our financial results.

Statements of Operations General and administrative expenses . . . . . . . . . . . . Non-operating income and gains. . . . . . . . . . . . . . . . Non-operating expenses and losses . . . . . . . . . . . . . Loss before income tax. . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss before cumulative effect of changes in accounting principle . . . . . . . . . . . . . . . Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per Share Data Basic and diluted loss per share . . . . . . . . . . . . . . . . Balance Sheets Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . Total long-term liabilities(2). . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . .		As of or for the	As of or for the	Years Ended December 31,	Years Ended December 31,
		2004 NT$ (in millions, (1,374) 108 (2,147) (3,413) – (3,413) – (3,413) (1.08) 3,997 296,893 316,179 11,011 221,000 235,470 80,709		2005 2006 NT$ NT$ except per share data) (1,854) (3,130) 147 171 (368) (442) (2,075) (3,401) – – (2,075) (3,401) – (25) (2,075) (3,426) (1.03) (1.32) 2,002 2,260 363,712 421,481 376,611 427,508 23,247 42,592 264,051 302,415 287,541 345,092 89,069 82,416	2006

(1) Includes current portion of long-term debts.

(2) Excludes current portion of long-term debts.

RISK FACTORS

You should pay particular attention to the fact that we are an ROC company and are subject to a legal and regulatory environment that in some respects may be different from that prevailing in other countries. You should consider carefully all the information included in this Offering Memorandum, including the financial statements, and, in particular, should evaluate the following risks before deciding to invest in the Bonds.

Risks Relating to Our Business

We have a limited operating history, we have not yet achieved profitability and we may not be able to achieve profitability in the future.

The revenue operation of the Project commenced in the first week of January 2007. As a result, we had not recorded any operating income as of December 31, 2006, and we have no profit making history that might give a basis for evaluating our business prospects or the future value of our company. We will depend on sustainable ridership and sufficient fares to reach profitability. Factors which will affect our ridership include the pricing of competing modes of transportation, whether passengers view use of our high speed rail as convenient and safe, the levels of business activity and tourism in Taiwan, Government policy and whether the “one day lifestyle” connecting Taiwan’s three metropolitan centers is realized. Our business could be impacted by significant price competition and deflation, both of which would result in lower fares and reduced ridership, while our depreciation and other fixed costs remained constant. Unexpected developments in the socio-economic or political environment in the ROC, competition from other transportation providers, any interruption of our operation of the high speed rail and changes in the Government’s transportation policy may make it difficult for us to achieve profitability.

The revenue operation of the Project commenced in the first week of January 2007, and to date we have conducted limited operations. Our initial business strategy may be subject to significant modifications in the future. Our strategy may not be successful, and if not successful, we may be unable to modify it in a timely and successful manner. As a result, we cannot give any assurance that we will be able to implement our strategy, and your investment in the Bonds is therefore subject to a high degree of risk.

We have incurred substantial debt.

We have incurred substantial debt to finance the construction of the Project. We expect to use a substantial portion of our operating cash flows to repay these debts. Our syndicated loans also contain financial and other covenants which significantly restrict our ability to incur further debt or to change our capital structure and which require the segregation of our cash flows for specific uses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” If we are unable to fund repayments from operating cash flows and external sources, our financial condition will be materially and adversely affected, which may restrict our ability to grow and reduce the quality and reliability of the service we provide, and we may be required to restructure our debt.

Competition in Taiwan from other transport providers may adversely affect us.

We compete with other transport providers, principally automobiles, the Taiwan Railway, which is the government-owned railway servicing all of Taiwan, bus operators and airlines. We believe we possess competitive advantages over each of these modes of transport. Buses are subject to congestion delays on the freeways and highways, in

addition to generally according a longer traveling time due to their frequent stops and landspeed. While fares for our high speed rail are considerably higher than for buses, we believe our service compares favorably on the basis of comfort, convenience and travel time offered by our high speed rail service. The fares of high speed rail are higher than those of the Taiwan Railway, but our high speed rail system provides significantly faster travel time and an overall substantially higher quality of service. As for the airlines, when air in-flight time is considered together with an allowance for airport access time, check-in time requirements, and disembarkation procedures required for air travel, our high speed rail service capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying is fairly competitive. From May 2007, Mandarin Airlines, the last airline providing flights between Taipei and Taichung, has terminated this route. However, we cannot assure you that the high speed, punctuality and safety of our rail service as compared with other transportation modes will be recognized by potential passengers. In addition, domestic airlines announced in March and April 2007 substantial discounts to their airfare during certain off-peak hours. Competition among transport providers may trigger a fare war, and we may be forced to reduce our fare or lose customers to our competitors. Our results of operations and financial condition could be materially and adversely affected as a result.

We may not be able to generate sufficient ticket revenues to cover our operating costs, and our ability to raise fares to cover our operating costs is limited under the C&OA and could be limited by a number of other factors.

Our level of patronage, combined with our fare rate, will determine our ticket revenues. The level of our patronage depends on many factors, including the ease of access to our high speed rail, interconnection of our Stations to other primary modes of transportation, pricing of competing modes of transportation, the condition of the Taiwanese economy, demographic trends and public perception of the safety of our high speed rail. We may also not be able to supply our high speed rail service with sufficient frequency to meet passenger demand, either due to a lack of trained drivers or inability to ramp-up the frequency of our trains in accordance with customer demand. Both a lack of passenger demand and our inability, for whatever reason, to meet passenger demand could result in our generating ticketing revenues insufficient to cover our operating costs.

Our fares are set pursuant to the C&OA in consultation with the MOTC. Although general economic conditions and our actual operating conditions, such as stopping patterns, demand from different areas, distances traveled and peak service periods, are all taken into consideration when determining our fares, we cannot assure you that our fares will be sufficient to cover our costs. In addition, under the terms of the C&OA, our basic fare rate and average fare rate may not be more than 120% of the general fare rate as set by the MOTC in accordance with the C&OA. Our ability to adjust our fares may also be constrained by factors such as elasticity of demand, competition, economic conditions in Taiwan and Government policy. While the fare adjustment mechanism provides an objective, transparent and predictable manner for fare adjustment, we cannot assure you that any fare adjustments would be sufficient to defray increases in operating costs. In this event, our results of operations and financial condition may be materially and adversely affected. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Fares.”

We generate revenues primarily from fares paid by residents and travelers in Taiwan, and from commercial activities within Taiwan, including revenues from station area development, and therefore adverse developments in Taiwan’s economy could reduce these revenues and hurt our business and results of operations.

Our revenues are derived from our business activities in Taiwan, which are directly affected by the performance of Taiwan’s economy. Taiwan’s economy is in turn affected, directly and indirectly, by the performance of the economies of neighboring Asian countries. As a result, adverse economic developments in Taiwan or elsewhere in the Asian region could result in fewer passengers on our high speed rail or reduced rentals or other ancillary revenues from our station area developments, which could have a material adverse effect on our financial condition and results of operations.

Accidents and natural disasters could lead to decreased revenues and increased expenditure and reduce our operating flexibility.

Our operations could be affected by accidents, including major equipment and power failures, collisions, derailments and natural disasters. From time to time, Taiwan has experienced severe earthquakes. Taiwan is particularly vulnerable to earthquakes because most of Taiwan is located in a collision zone between the Philippine Sea plate and the Eurasian plate. An earthquake in March 2002 caused significant damage to both the public and private sectors in Taiwan. Accidents and natural disasters, including earthquakes, typhoons and floods, could slow, interrupt or prevent the operation of the Project and lead to:

decreased revenues;
increased expenses, including insurance premiums;
prolonged interruptions in, or reductions of, the operation of the Project;
a reduction in our operating flexibility;
negative publicity; and
pressure for greater regulation.

In addition, the advanced technologies incorporated in the high speed rail system may not be readily adaptable to the environment in Taiwan and may initially cause difficulties in daily operation, maintenance and repairs. Although we believe that the insurance we have put in place is consistent with industry practice, we cannot assure you that such insurance will be sufficient to cover losses or that such insurance will continue to be available.

During the testing operation and certification process, the high speed rail has experienced certain operational abnormalities which may have delayed our certification for revenue operation and harmed our reputation.

During the testing operation and certification process, the high speed rail has experienced certain operational abnormalities. For example, in early November 2006, the undercarriage of two rail cars were damaged by defective transponder sensors and switch machines on the trackwork in the Hsinchu Station area. In late November 2006, a line clearing vehicle operated by our contractor was derailed during maintenance operation on the north bound track around Chiayi Station. In response to these events, we have further enhanced, among other things, the inspection of our trainsets and trackwork, as well as the training of our personnel. Inspection reports with regard to relevant events were also submitted to the MOTC. These incidents may have delayed the MOTC approval of our

high speed rail for revenue operation, and news reports regarding these incidents may have harmed our reputation, in particular, the public’s perception of safety of the high speed rail. While we believe our high speed rail is among the safest modes of transport in Taiwan, and all previously cited issues have been resolved, if any further derailments or other accidents were to occur on the high speed rail, we could be subject to significant liability for loss of life, injury and property damage, and our operations could be slowed, interrupted or discontinued as a result of public pressure or Government policy, all of which could have a materially adverse effect on our results of operations and financial condition. Furthermore, any Government suspension of our operations due to safety concerns or reduced ridership due to public concerns regarding the safety of the high speed rail could have a material adverse effect on our financial condition and results of operations.

Our business depends on third-party contractors and expatriate engineers, and we will need to successfully transfer their technology, skills and know-how to our domestic employees in order to effectively operate the high speed rail.

The supplier, installation contractor and maintenance service provider of our electrical and mechanical core system, or E&M core system, Taiwan Shinkansen Corporation, or TSC, Taiwan Shinkansen International Engineering Corporation, or TSIEC, and Taiwan Shinkansen Maintenance Services Corporation, or TSMSC, respectively, have agreed to transfer relevant technology, technical skills and know-how to us as to the operation and maintenance of our high speed rail. Furthermore, as of March 31, 2007, 127 or 5.0%, of our employees were expatriates from overseas, including Japan, Europe and the United States, working at our company mainly as drivers, driver instructors, operation controllers and technical experts. We also use outside contractors for, among other things, our ongoing program of repairs to tunnel linings, certain repairs and maintenance of escalators and elevators and station cleaning. We expect to increase the level of both in-house and contracted repairs and maintenance to improve passenger service and reliability. We conduct audits on these services provided by such contractors and assure quality through contractual arrangements with these parties. However, non-performance or under-performance by third-party contractors could interrupt or negatively affect the operation of our high speed rail.

We expect our domestic personnel to take up relevant technologies, technical skills and know-how from these contractors, technical experts, drivers, driver instructors and operation controllers in the first two to three years of our operation. Expatriate staff and contractors employed for the construction of the high speed rail are expected to be gradually reduced as we complete construction. While retaining experienced expatriates for their expertise, we will build up our domestic ability to operate the high speed rail system. This may reduce our operation cost and improve our profitability. However, if for any reason we are unable to transfer these technologies, skills and know how, our operating results may suffer and our operations may be interrupted. Furthermore, the difference in languages, cultures and customs may affect the cooperation between our foreign and domestic personnel, which may have a material and adverse effect on our operation in the near term. Finally, if we lose the services of these contractors and third party expatriates prior to the transfer to our domestic staff of their technologies, technical skills or know-how, we may experience interruptions in our operations or discontinuation of our services.

We depend on our key personnel and have experienced turnover in our key management positions.

Our future success is dependent upon the continued services of our key executives, as we rely on their industry experience and expertise in our business operations. Ms. Nita Ying, our chairman and former chief executive officer, is vital to the design, planning, management and promotion of the Project. We will also rely heavily on our chief executive officer, Dr. Chin-der Ou, our chief operating officer, Alex Chang, and our chief financial officer, Robert Hung, for their business vision, management skills, technical expertise and industry experience. If any of Dr. Ou, Mr. Chang or Mr. Hung were unable or unwilling to continue in their present positions, we may not be able to replace them easily and our business may be disrupted. We do not maintain life insurance for Dr. Ou, Mr. Chang or Mr. Hung or for any of our other key employees.

Since our inception in 1998, we have employed two different chief executive officers and three different chief financial officers, with Dr. Ou joining us in October 2006 and Mr. Hung joining us in February 2006. We appointed individuals to these key executive positions as appropriate to the different phases of development for the Project - planning and bidding, construction and operation. However, the lack of continuity in management may create operational difficulties for our current key employees, including a lack of familiarity with historical corporate policies and decision making processes, a lack of understanding of prior financial planning and a lack of personal relationships with Government and corporate entities involved in the Project. These difficulties may in turn impact the ability of our key executive officers to effectively manage our operations, thus materially and adversely affecting our results of operations and financial condition.

We are exposed to the impact of interest rate and foreign currency fluctuations.

Significant amounts of our accounts payable in connection with our construction contracts are denominated in foreign currencies and our debt incurred carries floating interest rates. In order to reduce our exposure to movements in interest rates and exchange rates, we have typically hedged a portion of such exposure. However, the impact of interest rate and foreign currency movements may not be totally eliminated. An increase in interest rates, or fluctuations in exchange rates between the NT dollar and other currencies, may limit the availability or increase the cost of such swaps or hedging instruments. This may increase our borrowing costs or reduce the availability of funding.

We are dependent on our IT systems for operation of the high speed rail system and the management of our business.

We rely on the rail operation and control systems provided by TSC to time the departure and arrivals of our high speed trains. Precise synchronization of our train schedules is essential to the safe and cost-efficient operation of our high speed rail. We maintain a back-up control system on an offsite server which we may use in the event our primary control system fails. However, if we for any reason experience a failure in our control systems, or they contain programming errors which affect the timing of our trains, we may be forced to slow, interrupt or cease operations, and could experience accidents on the high speed rail. We also rely on our ticketing and vending systems to book passengers on our high speed rail and issue tickets to passengers. At the outset of our revenue operation, overbooking and malfunctioning of ticketing vendor machines occurred as a result of improper design of our reservation system and ticket vending machines.

Separately, we rely on business management systems to manage our business, in particular our accounting records and our supply chain. We maintain a back-up IT system on an offsite server which we may use in the event our primary business management system fails. However, if we for any reason experience a failure in our business management system, we may not be able to provide timely and accurate financial and operating data to our management and investors. The realization of any of the foregoing risks could have a materially adverse effect on our results of operations and financial condition.

Connecting transportation links and local public transportation arrangements for our Stations in Taoyuan, Hsinchu, Taichung, Chiayi, Tainan and Kaohsiung may not be sufficient.

Most of our Stations are located away from city centers, and we rely on transportation links to connect to city centers where most passenger trips originate. Substantial parking space is allocated in each of our Stations, and our Stations are constructed with suitable interchange facilities. Pursuant to the C&OA, the MOTC has undertaken to coordinate with various levels of government authorities in order to, among other things, complete access roads and linkage to the high speed rail system, and 28 of 30 planned projects have been completed as of the date of this Offering Memorandum. The MOTC has also coordinated with other relevant governmental agencies to connect mass rapid transport and commuter rail to the high speed rail and has further guaranteed the availability of bus transport from our Stations to city centers sufficient to handle our maximum volume of passengers for each Station. We are also cooperating with shuttle bus companies, taxi operators and car rental companies to enhance passengers’ access to our Stations. We cannot assure you, however, that such transportation links and local public transportation arrangements will carry a sufficient volume of passengers to satisfy the demand of our customers, or that they will provide swift transport to and from our Stations, maintaining our speed advantage over other transport systems. Insufficient connecting transportation links and local public transportation arrangements for our Stations, or significant changes to these links and arrangements, may have a material and adverse effect on our revenues.

Defaults under our syndicated loans could materially and adversely affect our financial condition.

We have entered into two syndicated loan agreements, both of which contain financial and other covenants. We are required to test our compliance with financial covenants based on our audited financial statements at December 31 of each year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

In the past, we violated these covenants by either failing to increase our paid in capital or failing to maintain our debt-to-equity ratio or debt-service coverage ratio as required by one of the syndicated loan agreements. Under the terms of this syndicated loan agreement, if we breach one or more financial covenants, we may be restricted by the lending banks from accessing the undrawn amount remaining under the syndicated loan and lose our discounted interest rate. From time to time, we negotiate with the lending banks about the amendments to the syndicated loan agreement and modify the financial covenants accordingly. However, no assurance can be given that our lending banks will agree to amend the syndicated loan agreements in the future for our failure to meet financial covenants. Depending on the financial performance of our business, economic and market conditions generally and our ability to raise additional funds

through debt facilities or the equity capital markets, we may breach one or more of our financial covenants in the forthcoming financial periods. The restriction on utilizing undrawn amounts under our syndicated loans or the loss of discounted interest rate as a result may have a material and adverse effect on our liquidity and our interest expense.

Our future station area development business will be subject to fluctuations in the Taiwan property market as well as to general risks incidental to the ownership and management of properties, and we have limited experience in property development.

Our level of patronage, combined with our fare rate, will determine our ticket revenues. In addition, we expect our station area development business to account for a portion of our future revenue. We have limited or no experience in the planning, construction, sale and management of property developments. The business of real estate development is subject to a number of inherent risks. Historically, the Taiwan property market has preformed cyclically, in line with the rate of economic growth and political and economic developments. Our station area development business will expose us to the risks that construction may not be completed on schedule or within budget, that a development may be affected by governmental regulations, that developed properties may not be leased or sold on profitable terms and that purchasers may default. The terms on which property developers are prepared to bid for our possible development projects will also be affected by the state of the property market at the time of tender.

We do not expect to finance our station area development business with funds from sources other than the station area land grants provided by the Government. The station area development business may, however, require significant management resources, and expose us to business operation risk, such as contractual disputes and litigation, that could materially and adversely affect our results of operations and financial condition.

Any future outbreak of severe acute respiratory syndrome, avian influenza or any other new or unusual diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

Taiwan experienced an outbreak of severe acute respiratory syndrome, or SARS, a contagious form of atypical pneumonia in early 2003. In addition, several countries in Asia and Europe reported cases of avian influenza, or bird flu since 2005. While there have been no known cases of human-to-human transmission of bird flu, there can be no assurance that the virus will not mutate, thereby causing a human pandemic in Taiwan. We cannot assure you that there will not be any future outbreak of SARS, bird flu, or an outbreak of another contagious disease for which there is no known cure in the future. Any outbreak of SARS, bird flu, or any other contagious disease may cause patronage on our high speed rail to materially decrease. Furthermore, our ability to adequately staff and maintain our operations may be significantly disrupted in such circumstances. In addition, any future outbreak of SARS, bird flu, or any other contagious disease may severely restrict the general level of economic activity in Taiwan, which may also adversely affect our business and prospects. As a result, we cannot assure you that any future outbreak of SARS, bird flu, or any other contagious disease would not have a material adverse effect on our financial condition and results of operations.

Historical and forward-looking market data and projected ridership of the high speed rail may not be accurate.

This Offering Memorandum contains historical market data regarding the transportation industry, demographics and economic development in Taiwan, as well as future projections for these market data and the expected ridership of our high speed rail.

We have compiled this data from a number of sources, and made these projections based on data. Most significantly, we commissioned MVA, a leading provider of research and advice on transport and other policy areas, to prepare a report for the purpose of providing various industry and other information and illustrating our position in the transportation market in Taiwan. The report was prepared for us by MVA on the basis of ROC statistics available in 2002, and assumed we would begin operation of our business in 2005. The MVA report has not been updated for purposes of this Offering Memorandum.

Information from the MVA report as well as statistics publicly available provided by the Government appear throughout this Offering Memorandum. We believe such information and statistics to be accurate, but only accept responsibility for accurate extraction of such information. Furthermore, while we have undertaken to consider all relevant factors in projecting the ridership for our high speed rail, these projections contain inherent uncertainties and may not materialize for any number of reasons. You therefore should not place undue reliance on the historical and forward-looking market data and projected ridership for our high speed rail contained in this Offering Memorandum. Moreover, to the extent our projections and assumptions are inaccurate, our results of operations and financial condition may not reach the levels we had projected, and we therefore may not have sufficient cash flows to service our debt obligations, including the Bonds.

Risks Relating to Taiwan, Republic of China

The value of our Common Shares and the Bonds may be adversely affected by the volatility of the ROC securities markets.

We expect to complete our initial public offering on the Taiwan Stock Exchange prior to maturity of the Bonds. The ROC securities markets are smaller and more volatile than the securities markets in the United States and some European countries. The ROC securities markets have experienced substantial fluctuations in the prices and volumes of sales of listed securities. The ROC securities markets have experienced issues such as market manipulation, insider trading and payment defaults. The ROC FSC has on several occasions restricted the daily downward price movement of the ROC securities markets and implemented other measures to prevent significant swings in the value of the securities traded on these markets. The inability of the ROC FSC to prevent future declines in the ROC securities markets could adversely affect the market price and liquidity of the securities of ROC companies, including our Common Shares and the Bonds, in both domestic and international markets.

Strained relations between the Republic of China and the People’s Republic of China could negatively affect our business and the market price of our securities.

We are incorporated in the ROC, all of our assets are located in Taiwan and all of our operations are conducted in Taiwan. The ROC has a unique international political status. Although the Chinese nation has existed for several thousand years, since 1949 Taiwan and the Chinese mainland have been separately governed. The ROC, founded in 1912, governs Taiwan, while the PRC, founded in 1949, has governed the Chinese mainland for nearly 60 years.

The PRC does not recognize the legitimacy of the ROC. Although significant economic and cultural relations have been established during recent years between the ROC and the PRC, relations have often been strained. The government of the PRC has indicated that it may use military force to gain control over Taiwan in some

circumstances, such as a declaration of independence by Taiwan, the prolonged delay by the ROC to commence reunification negotiations or the refusal by the ROC to accept the PRC’s stated “one China” policy. Tensions between the ROC and the PRC may reduce investors’ confidence in the capital markets of the ROC and thus adversely affect the market value of the Bonds and our Common Shares.

Political uncertainty in the ROC could negatively affect our business and the market price of our securities.

Taiwan’s President, his family and their associates have recently been the subjects of a series of investigations regarding alleged embezzlement and insider trading. In December 2006, the President’s son-in-law was sentenced to six-year imprisonment by the Taipei District Court for insider trading. The President’s wife and his two former aides were indicted in November 2006 on charges of misusing money from a secret diplomatic fund under the President’s control. Several motions have been floored in the ROC legislature to depose the President, but have failed. Since September 2006, Taiwan has experienced a series of protests, sit-ins and marches calling for the resignation of the President. Such political uncertainty in the ROC may reduce investors’ confidence in the capital markets of the ROC and thus adversely affect the market value of the Bonds and our Common Shares.

We are subject to ROC GAAP, which differs from US GAAP in many material respects.

We are subject to financial reporting requirements in Taiwan that differ in significant respects from those applicable to companies in certain other countries, including the United States and the United Kingdom. In addition, our financial statements are prepared in accordance with ROC GAAP, which differs in certain material respects from US GAAP. For example, under ROC GAAP, bonuses paid to employees associated with the distribution of earnings, whether in the form of cash or Common Shares, and remuneration paid to directors and supervisors, if any, are paid directly out of retained earnings and are not recognized as expenses. In addition, the distribution of employee bonus shares will dilute the holdings of our company’s shareholders. We have not quantified or identified the impact of the differences between ROC GAAP and US GAAP in this Offering Memorandum. See “Summary of Certain Significant Differences Between ROC GAAP and US GAAP”. That summary may be incomplete, and you should consult your own professional advisers for an understanding of such differences and how they impact the financial information contained herein.

Implementation of the Alternative Minimum Tax (“AMT”) may affect our tax exemptions.

According to the newly implemented ROC Alternative Minimum Tax Act effective from January 1, 2006, a company will be subject to a 10% AMT if its annual adjusted taxable income exceeds NT$2 million, and an individual will be subject to a 20% AMT if his or her annual adjusted taxable income exceeds NT$6 million. The imposition of the AMT is designed to remedy the current excessive tax incentives for individuals and businesses. For businesses, the income which previously enjoyed tax-exemption privileges under relevant tax regulations, such as the Statute for Promotion of Private Participation in Infrastructure Projects (the “Promotion Statute”) and the Statute for Encouragement of Private Participation in Transportation Infrastructure Projects (the “Encouragement Statute”) will be subject to the new AMT system for the calculation of business taxpayers’ aggregate taxable incomes. While we are unable to determine the future impact of the new AMT system on our business operations, as such impact

depends on our future financial condition, any such impact may be adverse to our financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Tax Incentives”.

Your investment may be adversely affected by earthquakes in Taiwan.

From time to time, Taiwan has experienced severe earthquakes. Taiwan is particularly vulnerable to earthquakes because most of Taiwan is located in a collision zone between the Philippine Sea plate and the Eurasian plate. An earthquake in March 2002 caused significant damages in both public and private sectors in Taiwan. We believe that our rail system is built to withstand similar and even more severe earthquakes. We cannot guarantee, however, that future earthquakes will not cause material damage to our track systems and Stations or power outages, which may disrupt our operations. Although we maintain property and business interruption insurance for such risks, there is no guarantee that future damages or business loss from earthquakes will be covered by such insurance, that we will be able to collect from our insurance carriers, should we choose to claim under our insurance policies, or that such coverage will be sufficient. A major earthquake in Taiwan could therefore adversely affect our business, operating results and financial condition, along with the market prices of our Common Shares or the Bonds.

Risks Relating to the Bonds

Your right to receive payments on the Bonds is structurally subordinated.

As of December 31, 2006, we had total debt of NT$329.6 billion, of which NT$8.3 billion was unsecured and short-term bank loans and NT$26.8 billion of corporate bonds. In addition, as of December 31, 2006, we had secured NT$13.0 billion of our assets as a performance bond with the MOTC. The Bonds will be effectively subordinated to any of our secured obligations with respect to assets that secure such obligations. The terms of the Bonds do not prevent us from incurring additional debt in the future and we are generally permitted to secure this indebtedness, although our existing financial covenants may restrict our future borrowings. If we incur further indebtedness, our ability to make payments on the Bonds and, if required, to redeem the Bonds may be adversely affected.

An active trading market for the Bonds may not develop.

The Bonds constitute a new issue of securities for which there is no existing market. We have received approval-in-principle for the listing of the Bonds on the SGX-ST. Trading is expected to commence after the Bonds are first issued. There can be no assurance that such listing, which is not a condition of issuance, will be obtained or, if obtained, will provide liquidity for the Bonds. Although the Managers have advised us that they currently intend to make a market in the Bonds, they are not obligated to do so and any market-making activity with respect to the Bonds, if commenced, may be discontinued at any time.

There can be no assurance that a trading market for the Bonds will develop in the future. If such a market were to develop, the Bonds could trade at prices that may be higher or lower than the price you originally paid for them depending on many factors, including:

prevailing interest rates;
our financial position;
the price of our Common Shares;

the financial condition and stability of the ROC and other Asian financial markets;
political, legal and economic developments in the United States, Taiwan and elsewhere in the world; and
the market conditions for similar securities.

The ROC Emerging Stock Market is not an active trading market, and we may not be able to list our Common Shares on the Taiwan Stock Exchange.

The ROC Emerging Stock Market was established for trading securities not listed on the Taiwan Stock Exchange or the GreTai Securities Market. Trading on the ROC Emerging Stock Market begins with a quotation for the shares by a recommending securities firm, and investors can, through brokers, then place orders via the emerging stock electronic trading system of the GreTai Securities Market, or directly negotiate with market makers if the volume of the order exceeds 100,000 shares. There is currently no broadly followed and established trading market for our Common Shares, and our average trading volume on the ROC Emerging Stock Market for the month of December 2006 was 3,915,762 shares, or 0.08% of our issued and outstanding Common Shares. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market significantly reduces the liquidity of shares. An established trading market for our Common Shares may never develop or be maintained.

The trading volume of our Common Shares on the ROC Emerging Stock Market may be limited and sporadic. As a result of such trading activity, the quoted prices for our Common Shares on the ROC Emerging Stock Market are not a reliable indicator of the fair market value. In addition, if our Common Shares cease to be quoted, holders would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our Common Shares, and as a result the market value of our Common Shares likely would decline.

We are preparing to apply to list our Common Shares on the Taiwan Stock Exchange. Although certain special relief from general listing requirements apply to the listing of infrastructure projects such as ours, we cannot assure you that we will be able to meet these requirements or other listing requirements in respect of financial, operating history and corporate governance applicable to companies seeking a listing on the Taiwan Stock Exchange. See “Appendix A – The Securities Markets of the ROC – The Taiwan Stock Exchange.” Should we fail to obtain a listing on the Taiwan Stock Exchange, you may only be able to trade your Common Shares over the ROC Emerging Stock Market.

There can be no assurance that any public offering or offerings undertaken by us will, in the aggregate, constitute a QPO, nor can there be any assurance that we will undertake a public offering.

There can be no assurance as to whether or when a QPO will be completed by us. In addition, we have no obligation to conduct any such public offering. Although it is our current strategic objective to effect one or several offerings that in the aggregate constitute a QPO, market conditions may change and such strategic objectives may also change. In addition, our ability to complete a QPO is subject to various government approvals and is affected by many factors, including factors outside our control. For example, the ability to complete a QPO is subject to our future financial performance, which will depend in part upon general economic conditions in Taiwan.

The ability to successfully complete a QPO will also depend on conditions in the equity markets in general at the time of such an offering. As a result, there can be no assurance that any public offering(s) undertaken by us will constitute a QPO(s).

Holders of the Bonds will bear the risk of fluctuations in the price of our Common Shares.

The market price of the Bonds at any time will be affected by fluctuations in the price of our Common Shares. It is impossible to predict whether the price of our Common Shares will rise or fall. Market prices of our Common Shares will be influenced by, among other things, our results of operations and political, economic, financial and other factors that can affect the ROC securities markets. Any decline in the price of our Common Shares would adversely affect the secondary market price of the Bonds. Since the trading of our Common Shares on the ROC Emerging Market began in September 2003, the reported market price of our Common Shares on the Emerging Stock Market peaked at NT$13.10 per Common Share in the first quarter of 2004, and closed as low as NT$6.45 per Common Share in the fourth quarter of 2003. As of December 31, 2005 and December 31, 2006, the reported market price of our Common shares were NT$7.0 per Common Share and NT$11.6 per Common Share, respectively. A number of factors contributed to the increase in our share price, including investor expectations as to the growth of our operations, our ability to secure riders and other factors. If investors believe that any of these or other factors taken into consideration when valuing our Common Shares may not meet their expectations, or if investor confidence in the Project is otherwise shaken, the market price of our Common Shares, and thus the Bonds, could decline rapidly.

The imposition of foreign exchange restrictions may have an adverse effect on foreign investors’ ability to acquire Taiwan securities, including the Bonds and our Common Shares.

The ROC Government may impose foreign exchange restrictions in certain emergency situations, including situations where there are sudden fluctuations in interest rates or exchange rates, where the Government experiences extreme difficulty in stabilizing the balance of payments or where there are substantial disturbances in the financial and capital markets in Taiwan. No assurance can be given that such restrictions will not adversely affect, among other things, the market price of the Bonds and our Common Shares.

We may be unable to redeem the Bonds.

Under certain circumstances described in “Terms and Conditions of the Bonds” and the Indenture, holders of the Bonds have the option to require us to redeem all or part of the Bonds held by such holders. We may have to spend significant amounts of funds to redeem the Bonds put to us in such circumstances, and obligations to make such redemptions may occur at a time when we have insufficient liquidity to make such redemptions. Such redemptions may require us to borrow funds or otherwise convert long-term investments to liquid funds, which could adversely affect our financial condition, results of operations and the market price of the Bonds and our Common Shares.

Our public shareholders may have difficulty protecting their interests.

Our corporate affairs are governed by our Articles of Incorporation and laws governing ROC corporations. The rights of our shareholders to bring shareholders’ suits against us or our board of directors under ROC law are much more limited than those of

the shareholders of corporations formed in other jurisdictions, such as the United States. Therefore, our public shareholders may have more difficulty in protecting their interests in connection with actions taken by the management, members of the board of directors or controlling shareholders than they would as shareholders of a corporation formed in a different jurisdiction, such as the United States. Moreover, a party seeking to enforce a foreign judgment in Taiwan may encounter difficulties entering or enforcing a foreign judgment. See “Enforceability of Foreign Judgments in the ROC”.

Future sales of securities by us or our existing shareholders may adversely impact the market price of the Bonds and our Common Shares.

The market price of the Bonds and our Common Shares could decline as a result of future sales of a large number of Common Shares or the perception that such sales could occur. If we or the holders of our Common Shares sell a large number of Common Shares, the market price for the Bonds or our Common Shares could be depressed. Although we and CEC have agreed, subject to certain exceptions, not to offer, sell or agree to sell, directly or indirectly, or otherwise dispose of any securities subject to lock-up agreements without the prior written consent of the Representative for a period of 180 days from the date of this Offering Memorandum, if the Representative consents, in its sole discretion, to an earlier sale, or when the respective lock-up periods expire, we and CEC will be able to sell the securities in the public market, subject to legal restrictions.

As part of the Offering, we have entered into placing agreements with each of GLG Partners LP, OZ Management LLC and entities, other than the Representative, under the control of Deutsche Bank AG, and the Representative for the purchase at the Issue Price of an aggregate of US$135 million principal amount of the Bonds. The purchase of the Bonds by the Investors is subject to the Purchase Agreement. Although each of the Investors has agreed to enter a 90-day lock-up in connection with the Bonds to be purchased by them, such restriction is subject to certain exceptions. In addition, these lock-up restrictions will not apply to any offering or sale of our Common Shares or other securities by any party who is not subject to such lock-up arrangements.

Holders of the Bonds will have no rights as holders of Common Shares until the Bonds are converted, and there are limitations on your ability to exercise conversion rights.

Unless and until the holders of the Bonds acquire Common Shares upon conversion of the Bonds, the holders of the Bonds will have no rights with respect to our Common Shares, including any voting rights or rights to receive any regular dividends or other distributions with respect to our Common Shares. If the Bonds are converted, converting holders will be entitled to exercise the rights of holders of our Common Shares only as to actions for which the applicable record date occurs after the Conversion Date.

You will not be able to exercise your conversion rights during certain closed periods. In addition, under current ROC law, regulations and policy, PRC persons are not permitted to hold or convert the Bonds or to register as our shareholders. See “Terms and Conditions of the Bonds – Conversion”.

The Bonds and any Common Shares received upon conversion are subject to restrictions on transfer.

The Bonds and any Common Shares received upon conversion of the Bonds are subject to restrictions on transfer as described under “Transfer Restrictions”. These transfer restrictions may adversely affect the liquidity of the Bonds and our Common

Shares. To exercise the right of conversion with respect to a Bond, a holder must make certain representations and agreements in the conversion notice as described in “Terms and Conditions of the Bonds – Conversion”. In addition, non-ROC holders seeking to exercise their conversion rights and receive Common Shares will be required to appoint a local agent, a custodian and a tax guarantor, and to establish a trading account with a local securities brokerage firm in accordance with applicable ROC laws and regulations. These requirements may further negatively affect the liquidity of the Bonds and may limit a non-ROC bondholder’s ability to take advantage of short-term increases in the market price of the Common Shares.

You must satisfy certain requirements in Taiwan, including registration with the Taiwan Stock Exchange and appointing a tax guarantor, a local agent and a custodian, before you can exercise your conversion rights and receive Common Shares.

Any non-ROC holder exercising its conversion rights will be required to register with the Taiwan Stock Exchange. Any such non-ROC holder will also be required to appoint an agent in Taiwan for filing tax returns and making tax payments. Such agent, or tax guarantor, will be required to meet the qualifications set by the ROC Ministry of Finance and to act as the guarantor of such converting holder’s tax payment obligations. You might not be able to appoint and obtain approval for a tax guarantor in a timely manner. In addition, under current ROC laws, any such non-ROC holder will be required to appoint a local agent in Taiwan to, among other things, open a securities trading account with a local securities brokerage firm and an NT dollar bank account, remit funds or exercise shareholders’ rights. Furthermore, any such non-ROC holder must appoint a local bank to act as custodian for confirmation and settlement of trades, safekeeping of securities and cash proceeds, and reporting and declaration of information. Without satisfying these requirements, you will not be able to hold or sell or otherwise transfer the Common Shares. See “Terms and Conditions of the Bonds – Conversion – Conversion right”.

A holder of the Bonds or its designee requesting the conversion of the Bonds into Common Shares may be required to provide certain information to us, and failure to provide such information may result in a delay of the conversion.

A holder of the Bonds or its designee requesting the conversion of the Bonds into Common Shares may be required to provide certain information to us or the Conversion Agent (as defined herein), including the name and nationality of the person to be registered as the shareholder and the number of Common Shares to be acquired by such person and the number of Common Shares acquired by such person in the past through the date of the conversion of the Bonds. Under applicable ROC law, we are required to report to the ROC FSC if the person to be registered as a shareholder (1) is a “related party” of ours as defined in the ROC Statement of Financial Accounting Standard No. 6, or (2), together with the Common Shares converted, will hold, immediately following such conversion, more than 10% of the total number of our Common Shares expected to be converted based on the conversion price at the time of issue of the Bonds. Failure to provide such information may result in a delay of the conversion of the Bonds.

Fluctuations in the exchange rate between the NT dollar and the US dollar may have a material adverse effect on the value of the Bonds or our Common Shares in US dollar terms.

Although the principal amount of the Bonds is denominated in US dollars, our Common Shares are traded in NT dollars. Fluctuations in the exchange rate between the NT dollar and the US dollar will affect, among other things, the secondary market price of the Bonds and the US dollar equivalent of our Common Shares received upon conversion of the Bonds. See “Exchange Rates”.

Holders of Common Shares may not be able to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. If registration is required in any jurisdiction with respect to the offer to holders of shares or rights, or the shares or other relevant property to which such rights relate, we will not effect such offer or sale to holders in that jurisdiction, unless we have obtained an exemption from, or effected a registration in accordance with, the requirements of such jurisdiction. We are not obligated to obtain any exemption or effect any registration. Accordingly, holders of Common Shares may be unable to participate in rights offerings by us and may experience dilution of their holdings as a result.

The value of your investment may be adversely affected by the volatility of the ROC securities market.

The ROC securities market is smaller and more volatile than the securities markets in the United States, Europe and certain other countries. Market volatility could adversely affect the market price and liquidity of the securities of ROC companies, including our Common Shares into which the Bonds are convertible, in both domestic and international markets.

Employee stock bonuses paid by us may dilute the holdings and associated rights of holders who convert the Bonds to Common Shares.

Taiwanese companies generally pay employee stock bonuses, in the form of cash or stock, to their employees and our Articles of Incorporation provide that, after certain deductions and provisions, employees should receive bonuses in aggregate of no less than 1% of our annual net income, after deduction of taxes due, prior years’ losses, other necessary legal or special reserves and payment of the interest of our preferred shares. See “Business – Employees” and “Description of Our Share Capital – Dividends and Distributions.” Any distributions in the form of new shares to employees will effectively dilute the holdings and associated rights of holders who convert the Bonds to Common Shares.

USE OF PROCEEDS

The net proceeds to be received by us from this offering, after deducting underwriting discounts and commissions but before deducting other transaction expenses, will be approximately US$295.5 million. We intend to use the net proceeds to pay the costs of constructing the high speed rail.

MARKET PRICE INFORMATION

Our Common Shares have been traded on the ROC Emerging Stock Market since September 2003. The table below sets forth, for the periods indicated, the high and low market prices and the average daily volume of trading activity on the ROC Emerging Stock Market for our Common Shares. The last reported market price for our Common Shares on the ROC Emerging Stock Market on May 4, 2007 was NT$9.00 per Common Share.

2003 Third quarter (from September 5) . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter (through May 4) . . . . . . . . . . . . .	Market Price per Common Share High Low NT$ NT$ 7.60 7.05 7.60 6.45 13.10 6.70 10.80 8.10 8.20 7.95 9.30 8.10 8.80 8.05 8.42 7.89 8.10 6.92 8.30 7.00 8.35 6.87 10.09 7.69 10.12 9.50 12.10 9.90 11.80 8.95 9.45 8.95	Average Daily Trading Volume in Shares
	High NT$ 7.60 7.60 13.10 10.80 8.20 9.30 8.80 8.42 8.10 8.30 8.35 10.09 10.12 12.10 11.80 9.45	in Shares
		(in thousands) 43.2 150.1 2,520.1 1,117.9 542.9 538.7 804.5 574.1 577.2 505.6 603.3 1,264.9 747.8 7,025.0 2,393.3 1,650.6

Source: The ROC Emerging Stock Market.

The stock markets in Taiwan have experienced substantial fluctuations in the prices of securities and there is currently no limit on the range of daily price movements of securities traded over the ROC Emerging Stock Market. See “Risk Factors – Risks Relating to the bonds – The value of your investment may be adversely affected by the volatility of the ROC securities market” and “Appendix A: The Securities Markets of the ROC – The ROC Emerging Stock Market”. Furthermore, there may be limited liquidity for our Common Shares on the ROC Emerging Stock Market. See “Risk Factors – The ROC Emerging Stock Market is not an active trading market, and we may not be able to list our Common Shares on the Taiwan Stock Exchange.”

EXCHANGE RATES

The following table sets forth the average rates, high, low and period-end Noon Buying Rate in the City of New York for cable transfers between NT dollars and US dollars (in NT dollars per US dollar) for the periods indicated. No representation is made that the NT dollar amounts actually represent such US dollar amounts or could have been, or could be, converted into US dollars at the rate indicated, at any other rate or at all.

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 January. . . . . . . . . . . . . . . . . . . . . . . . February . . . . . . . . . . . . . . . . . . . . . . . March . . . . . . . . . . . . . . . . . . . . . . . . . April . . . . . . . . . . . . . . . . . . . . . . . . . . May (through May 4) . . . . . . . . . . . . .	NT dollar/US dollar	NT dollar/US dollar	Noon Buying Rate	Noon Buying Rate
	Average(1) 31.26 33.82 34.53 34.41 33.37 32.13 32.55 32.76 32.97 33.01 33.15 33.32	High 33.25 35.13 35.16 34.98 34.16 33.77 33.31 32.99 33.08 33.13 33.33 33.35	Low 30.35 32.23 32.85 33.72 31.74 30.65 31.28 32.38 32.86 32.84 33.05 33.27	Period End
				33.17 35.00 34.70 33.99 31.74 32.80 32.59 32.95 32.98 33.01 33.33 33.27

Source: The Federal Reserve Bank of New York.

(1) Annual average is the average of month-end rates during the period. Monthly average is the average of daily rates during the period.

DIVIDENDS AND DIVIDEND POLICY

Except in limited circumstances, we are not permitted under ROC Company Law to distribute dividends or make other distributions to shareholders in respect of any year in which we did not record net income. ROC Company Law also requires that 10% of annual net income, less tax due and prior years’ losses, be set aside as a legal reserve until such time as the accumulated legal reserve equals our paid-in capital. We are also required to set aside a special reserve equal to the amounts to be deducted from the shareholders equity in accordance with the ROC FSC regulations, and we may set aside a special reserve when we deem necessary pursuant to our Articles of Incorporation. Our Articles of Incorporation provide that 1% and 1% of our annual net income, after deduction of taxes due, prior years’ losses, other necessary legal or special reserve and payment of the interest on our preferred shares, be paid to employees as bonuses and to the directors and supervisors as remuneration, respectively. The balance thereof can be paid to the holders of our Common Shares as dividends upon a resolution of the annual shareholders’ meeting. Notwithstanding the forgoing restrictions, we may, to the extent approved by the Ministry of Economic Affairs, distribute, and have distributed, interests to the holders of our preferred shares before the commencement of our revenue operations. See “Description of Share Capital.” Holders of our outstanding shares on a dividend record date will be entitled to the full dividend declared without regard to any subsequent transfer of such shares.

Profits of our company may be distributed by way of cash dividends and/or stock dividends. In appropriating earnings for distribution, the primary factors to be considered include our requirements for future expansion and our cash flow. In addition, we have agreed to (i) pay profit sharing return to the MOTC under the C&OA and (ii) maintain certain special accounts under the syndicated loan agreement we entered into in February 2000, which effectively reduces the portion of our retained earnings available for distribution to shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and “Business – Concession and Regulation – Construction and Operation Agreement”. In 2004, 2005 and 2006, we distributed cash dividends to the holders of our preferred shares in the aggregate amount of NT$1,270.2 million, NT$2,008.1 million and NT$3,071.2 million, respectively. Since the stock dividend of 17,350 Common Shares distributed in 1999, we have not paid any dividend to our holders of Common Shares. For information relating to ROC withholding taxes payable on cash and stock dividends, see “ROC Taxation – Dividends”.

CAPITALIZATION AND INDEBTEDNESS

The following table sets forth our cash and cash equivalents, short-term and long-term indebtedness, shareholders’ equity and total capitalization on an audited basis as of December 31, 2006 under ROC GAAP (1) on an actual basis, and (2) on an adjusted basis to give effect to the offering of the Bonds and the other material changes described below. This table should be read in conjunction with our financial statements, including the notes to those statements, included elsewhere in this Offering Memorandum.

There has been no material change in our capitalization and indebtedness since December 31, 2006, other than:

the issuance of NT$9.8 billion secured domestic bonds;
the payment of our corporate bonds due in late April and early May 2007 in an aggregate amount of NT$10.0 billion with the proceeds from the issuance of the secured domestic bonds described above and with our working capital;
draw down of NT$17.0 billion under the Second Syndicated Loan Agreement; and
this Offering.

Short-term indebtedness(1) Short-term debts . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term indebtedness(2) Long-term debts. . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term indebtedness . . . . . . . . . . . . . . . . . . . Shareholders’ equity Capital stock: Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible preferred stock . . . . . . . . . . . . . . . . . Retained earnings (accumulated deficits) in the development stage: Legal reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficits . . . . . . . . . . . . . . . . . . . . . . Provisions for dividends – preferred stock . . . . . Unrealized losses on financial instruments . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . Total capitalization(3) . . . . . . . . . . . . . . . . . . . . . . . . .		As of December 31, 2006	As of December 31, 2006	As of December 31, 2006
		Actual NT$ 17,160 10,000 285,615 16,800 302,415 50,509 54,592 40 (13,149) (9,512) (64) 82,416 384,831	As adjusted for subsequent events and this Offering(4)
			NT$ (in millions) 17,160 – 302,615 36,377 338,992 50,509 54,592 40 (13,149) (9,512) (64) 82,416 421,408	US$ 527 – 9,286 1,116 10,402 1,550 1,675 1 (403) (292) (2) 2,529 12,931

(1) Includes short-term bank loans and current portion of long-term bank loans and bonds payable.

(2) Excludes current portion of long-term indebtedness.

(3) Total capitalization is the sum of Long-Term Indebtedness and Shareholders’ Equity.

(4) Adjusted for subsequent events from December 31, 2006 through the date of this Offering Memorandum, including (1) the issuance of NT$9.8 billion secured domestic bonds, which increases our long-term bonds payable in the amount of NT$9.8 billion; (2) the payment of our corporate bonds due in late April and early May 2007 in an aggregate amount of NT$10.0 billion with the proceeds from the issuance of the secured domestic bonds described above and with our working capital, which decreases our short-term bonds payable in the amount of NT$10.0 billion; (3) draw down of NT$17.0 billion under the Second Syndicated Loan Agreement, which increases our long-term debts in the amount of NT$17.0 billion; and (4) this Offering, which increases our long-term bonds payable in the amount of NT$9,777.0 million.

SELECTED FINANCIAL DATA

The following table presents our summary statement of operations and balance sheets data. This selected financial data as of and for the years ended December 31, 2004, 2005 and 2006 should be read in conjunction with our audited financial statements included in this Offering Memorandum. Our financial statements as of and for the years ended December 31, 2004, 2005 and 2006 have been prepared and presented in accordance with ROC GAAP. ROC GAAP differs in certain material respects from US GAAP. See “Summary of Certain Significant Differences Between ROC GAAP and US GAAP.” You should also read the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, which describes a number of factors that have affected our financial results.

Statements of Operations General and administrative expenses . . . . . . . . . . . . Non-operating income and gains. . . . . . . . . . . . . . . . Non-operating expenses and losses . . . . . . . . . . . . . Loss before income tax. . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss before cumulative effect of changes in accounting principle . . . . . . . . . . . . . . . Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Per Share Data Basic and diluted loss per share . . . . . . . . . . . . . . . . Balance Sheets Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities(1) . . . . . . . . . . . . . . . . . . . . . . Total long-term liabilities(2). . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . .		As of or for the	As of or for the	Years Ended December 31,	Years Ended December 31,
		2004 NT$ (in millions, (1,374) 108 (2,147) (3,413) – (3,413) – (3,413) (1.08) 3,997 296,893 316,179 11,011 221,000 235,470 80,709		2005 2006 NT$ NT$ except per share data) (1,854) (3,130) 147 171 (368) (442) (2,075) (3,401) – – (2,075) (3,401) – (25) (2,075) (3,426) (1.03) (1.32) 2,002 2,260 363,712 421,481 376,611 427,508 23,247 42,592 264,051 302,415 287,541 345,092 89,069 82,416	2006

(1) Includes current portion of long-term debts.

(2) Excludes current portion of long-term debts.

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

The following discussion should be read in conjunction with “Selected Financial Data” and our audited financial statements as of and for the years ended December 31, 2004, 2005 and 2006, including the notes to those financial statements, included elsewhere in this Offering Memorandum. Our financial statements have been prepared and presented in accordance with ROC GAAP, which differs in certain material respects from US GAAP, as discussed under “Summary of Certain Significant Differences Between ROC GAAP and US GAAP.” As of December 31, 2006, we had recorded no operating income as we had not started revenue operation of our business. As a result, the following discussion is not necessarily indicative of the results we may achieve after the commencement of revenue operation of our business.

Overview

We operate the high speed rail recently opened under the Project. The Project is a build-operate-transfer arrangement based on a public/private partnership between us and the MOTC, under which we have been awarded by the Government a concession to plan, design, finance, construct and operate the high speed rail. Pursuant to the C&OA we entered into with the MOTC in July 1998, we will operate the high speed rail until July 2033. We began the construction of the high speed rail system in the first quarter of 2000, and it was certified for revenue operation beginning in the first week of January 2007.

In addition to ticketing revenue, we also derive revenue from our Stations by leasing advertising space, leasing retail space and operating car parking facilities. Under the terms of the SADA, we also have the right to develop and operate properties surrounding five of our eight Stations, namely our Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations. These properties cover approximately 46.5 hectares of developable land, with a maximum commercial floor space of up to 1.2 million square meters. We have not yet begun development of these areas.

As of December 31, 2006, we had recorded no operating income, as we had not started revenue operation of our business. The overview of key factors affecting our business below therefore sets forth the factors we believe will affect our future profitability, and is not derived from a review of our historical results of operations. The discussion of results of operations for the years ended December 31, 2004, 2005 and 2006 analyzes our losses made during the construction phase of the Project, and does not provide a meaningful indication of the factors we expect to affect our results of operations for periods in which the high speed rail is in operation. Our net loss was NT$3,412.9 million, NT$2,075.4 million and NT$3,426.4 million for the years ended December 31, 2004, 2005 and 2006, respectively. In 2006, we recorded a NT$24.7 million cumulative effect of change in accounting principle in connection with the marking to market of our financial instruments.

Factors Affecting Our Future Results of Operations

We believe our future revenues will generally be affected by, among other factors, patronage, fare levels, competition, the state of the Taiwanese economy, which affects fare levels, consumer preferences amongst transportation modes and frequency of travel, and demographic trends. Our future results of operations will also be significantly affected by the depreciation of our assets and the costs associated with financing the Project.

Patronage

Our level of patronage, combined with our fare rate, will determine our net revenues.

Our high speed rail provides service for intercity travelers in the Western corridor of Taiwan. The total population of Taiwan stood at 22.9 million as of December 31, 2006. According to the MOI, Taiwan is one of the most densely populated areas in the world, with an average population density of 636 people per square kilometer as of December 31, 2006. In addition, 94.7% of the ROC population was concentrated along the Western corridor of the island, with about 51.4% of Taiwan’s population concentrated in three distinct metropolises, namely, Taipei, Taichung and Kaohsiung as of December 31, 2006, according to the MOI.

With our high capacity 12-car trainsets, each of which contains seats for 989 passengers, and a large pool of potential riders, we target to reach an average daily patronage of 100,700 passengers in 2007, 270,000 passengers in 2015 and 311,000 passengers in 2033. The accuracy of these projections will depend on many factors, including the ease of access to our high speed rail, interconnection of our Stations to other primary modes of transportation, pricing of competing modes of transportation, the condition of the Taiwanese economy, demographic trends and public perception of the safety of our high speed rail. Our ability to increase our patronage levels will also depend on our securing sufficient drivers for our trains, attracting customers through advertising and other promotional efforts, having sufficient support and operations personnel, and our ticketing and other systems supporting the increased passenger volume and our passenger loading speed. The following figure shows our patronage projection for the period from 2007 and 2033.

Ridership (per day)[(1)]

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350,000
311,000
306,000
298,000
285,000
300,000
270,000
261000
250,000 233,000
219,000
200,000
150,000
(2)
100,000 100,700
50,000
0
2000 2005 2010 2015 2020 2025 2030 2035
(Ridership per day)
----- End of picture text -----

(1) Ridership projection does not include any increase in induced demand.

(2) Adjusted based on actual first quarter operations. Source: MVA

Fares

As of the date of this Offering Memorandum, the general fare rate as set by the MOTC pursuant to the C&OA is NT$3.655 per person per kilometer, and is adjusted annually based on the consumer price index in Taiwan, to the extent that the accumulated change of the consumer price index is no less than 3%. Under the terms of the C&OA, we may set our base fare rate up to 20% higher than the general fare rate set by the MOTC. There is no minimum fare requirement under the C&OA. As of the date of this Offering Memorandum, our basic fare rate is NT$4.386 per person per kilometer, or 120% of the general fare rate. Under the C&OA, we may further adjust fares based on stopping patterns and distance traveled. We may also raise fares during periods of heavy rail usage by up to 20% of our basic fare rate. However, the average fare rate may not exceed 120% of the general fare rate set by the MOTC. The fares for business class are not subject to restriction under the C&OA. In case of substantial increased costs resulting from changes in national policies or economic factors, such as an increase in oil prices, we may submit to the MOTC a special fare plan to further increase our fares.

Our ticket fares are reduced by 50% for the elderly, children and the handicapped. We are allowed under the C&OA to lower our fares below the general fare, and in the first month of our revenue operation, we lowered our ticket fares by 50% as a promotional event.

Competition

We compete with other transport providers, principally automobiles, the Taiwan Railway, bus operators and airlines. Both buses and automobiles are subject to congestion delays on the freeways and highways, in addition buses are subject to generally according a longer traveling time due to their frequent stops and landspeed. While fares for our high speed rail are considerably higher than for buses, we believe our service compares favorably on the basis of comfort, convenience and travel time. The fares of high speed rail are higher than those of the Taiwan Railway, but the high speed rail system provides significantly faster travel time and an overall substantially higher quality of service. As for the airlines, when air in-flight time is considered together with an allowance for airport access time, check-in time requirements, and disembarkation procedures required for air travel, our high speed rail service capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying is fairly competitive. From May 2007, Mandarin Airlines, the last airline providing flights between Taipei and Taichung, has terminated this route.

On an average day in 2002, the latest period for which information was available, there were approximately 3.85 million intercity trips being made in Taiwan with approximately 72% of travel by car, 19% by bus, 8% using Taiwan Railway services and 1% traveling via air, according to MVA. Our patronage depends on how many passengers we can attract and retain from our competitors in the market, and our fares may be adjusted in response to competition from other transportation providers. Currently, our fares are higher compared with those of the Taiwan Railway and buses, and airlines may implement price reductions in order to retain or attract passengers. Competition among transport providers may trigger a price war, and we may be forced to reduce our fares or lose customers to other competitors. In the event of a significant downturn in the ROC economy, we may find that potential patrons increase their reliance on automobiles and buses, which offer lower effective fares as the value attributed to time declines.

The Taiwanese Economy and Demographic Trends

Taiwan has been one of the fastest growing economies in Asia, with an average gross domestic product, or GDP, growth of just under 3.4% per annum over the period 1996 to 2005, according to the Directorate General of Budget, Accounting and Statistics under the Executive Yuan of the ROC, or the ROC DGBAS. The total population of Taiwan is expected to peak at 24.4 million people in 2023, according to MVA. According to the ROC DGBAS, in 2005, the GDP of Taiwan was US$346.4 billion with a per capita GDP of US$15,291, which is the fourth highest in Asia, excluding Japan, after Singapore, Hong Kong and South Korea. The average annual growth of GDP is expected to be 4.0% between 2008 and 2012 according to MVA. In terms of transport spending, the annual average household expenditure on transportation in Taiwan soared from NT$53,270 in 1995 to NT$65,996 in 2005, according to the ROC DGBAS. We expect our revenue to grow along with the growth of Taiwan’s economy and population, as well as expected increased expenditures allocated on transportation. We believe the demand for our high speed rail, providing faster travel time and an overall substantially higher quality of service as compared to other modes of transport, will increase along with improving living standards in Taiwan.

We seek to encourage long- and medium-distance trips, which enjoy higher operating margins, and have cooperative agreements with travel agents to promote package tours based around our rail service. To the extent the ROC economy declines, however, our potential passengers may not take these leisure trips, or may turn to less expensive modes of transport. Moreover, adverse economic developments in Taiwan or elsewhere in the Asian region could result in less frequency of travel on our high speed rail, either due to less travel by passengers or a loss of passengers to other cheaper transportation modes. Our projected ridership will also be diminished to the extent Taiwan’s population, or the population in the Western corridor, does not grow as expected, or decreases.

Plan of Financing

Of the estimated NT$489.6 billion required to complete and begin operation of the Project, we have financed NT$103.2 billion through the sale of equity securities, NT$348.3 billion through two domestic syndicated loans, NT$4.3 billion through interest income and the remaining approximately NT$9 billion through this Offering and our working capital, and plan to finance a further NT$24.8 billion through an expected increase in the facility amount under the Second Syndicated Loan by the end of June 2007. Our debt obligations carry financial covenants which restrict the ways in which we finance our operations. See “– Liquidity and Capital Resources” below. A significant portion of our future cash flows from operations will be used for our contractual principal, interest and dividend payment obligations under our syndicated loan facilities, preferred shares and corporate bonds. To the extent our cash flows from operations are insufficient to cover these obligations we may need to borrow further funds or restructure these obligations. See “– Liquidity and Capital Resources” for a discussion of these obligations.

Station Area Development Assets and Revenues

Concurrently with the execution of the C&OA, we entered into the SADA with the MOTC for the use and development of the station land and business development areas surrounding five of our eight Stations. We have been granted the right to develop and use the Station land and the business development areas surrounding the Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations. The land for the Chiayi Station was delivered to us in February 2004, and we expect the lands for the Taoyuan, Hsinchu, Taichung and Tainan Stations to be delivered to us in the first half of 2007. The concession period for

development and operation of the business development areas is 50 years from the delivery of the respective land to us. The concession period for development and use of all Station land is the same as the concession period of 35 years for the construction and operation of the high speed rail as provided in the C&OA.

While we may not transfer the transportation facilities in the business development areas or the land rights therein, we may, with the consent of the MOTC, lease or create liens over such facilities or land use rights for a term not exceeding the concession period. We expect to develop these five sites to take advantage of the business environment in the surrounding areas, and in line with the wishes of local governments and business with whom we will cooperate to develop the sites. While we expect the land use rights for the business development areas to be recognized as significant property assets in 2007, and to have the potential to generate additional revenue for our Company, we do not currently plan to invest our own capital in these projects. We instead expect to use leases, liens or joint ventures to finance the development of these sites.

Upon the delivery of the respective business development areas and until 30 days after the transfer or six months after the termination of the concession period, we have agreed to provide performance bonds in the amount of NT$300 million, NT$200 million, NT$300 million, NT$200 million and NT$200 million for our performance of our obligations and responsibilities pertaining to the development and use of the business development areas at Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations, respectively.

Critical Accounting Policies

The preparation of financial statements and disclosures in conformity with ROC GAAP requires our management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and the accompanying notes. The amounts of assets and liabilities reported in our balance sheets and the amounts of revenues and expenses reported for each of the periods are affected by estimates and assumptions which are used for, but not limited to, accounting for asset impairments and deferred tax assets. Actual results could differ from these estimates. Note 2 to our audited financial statements as of and for the years ended December 31, 2004, 2005 and 2006 included elsewhere in this Offering Memorandum describe the significant accounting policies and methods used in the preparation of our financial statements. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our financial statements.

Asset impairment

We review assets, being assets or cash generating units, for impairment in accordance with ROC SFAS No. 35, which became effective with respect to our financial year commencing January 1, 2005. We review assets or cash generating units on each balance sheet date where there are circumstances which indicate that the carrying value of an asset may not be recoverable. We estimate the recoverable value of these assets using an income approach. Under the income approach, we calculate the recoverable value of a reporting unit based on the present value of estimated future cash flows. We recognize an impairment loss when the estimated recoverable value of the asset is less than the carrying value. We are also permitted to reverse impairment losses under limited circumstances.

Determining the recoverable value of a reporting unit or an asset is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions, and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

Income taxes

We have a significant amount of potential deferred tax assets as a result of the various tax credits available to us under ROC governmental tax incentive programs and net operating loss carryforwards. ROC GAAP requires less stringent criteria by which such valuation allowance is determined, compared to some accounting requirements in other countries. Under ROC GAAP, cumulative losses in recent years are a significant piece of negative evidence which can be overcome with projections of future taxable income for the purpose of determining the valuation allowance. The recognition of net deferred tax assets under ROC GAAP resulted primarily from the projection of income before tax for future accounting periods. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have considered future market growth, forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which we operate, and prudent and feasible tax planning strategies in determining the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. In order for us to realize our deferred tax assets we must be able to generate sufficient taxable income. We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when identified.

Results of Operations

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

General and administrative expenses

General and administrative expenses increased by 68.8% to NT$3,130.0 million in 2006 from NT$1,853.8 million in 2005, primarily due to increases in personnel expenses for contract and payroll employees, as we hired contract drivers, train and station services personnel and security services in preparation for revenue operation of the high speed rail. We further incurred advertising expenditures to heighten public awareness of the high speed rail.

Non-Operating Expenses and Losses

Our non-operating income and gains increased by 16.2% to NT$170.6 million in 2006 from NT$146.8 million in 2005. The increase in non-operating income and gains was primarily attributable to an increase in gain on sale of financial products, partially offset by a decrease in foreign exchange gain. Non-operating expenses and losses increased by 20.1% to NT$442.3 million in 2006 from NT$368.4 million in 2005, primarily as a result of an increase in expenses due to the drawdown from our Second Syndicated Loan we

entered into in 2006 and NT$51.0 million net loss from marking to market our financial instruments, including forward foreign exchange contracts and foreign currency swap contracts, partially offset by the absence of indemnification claims payable in 2006, as the compensation due to Eurotrain was fully paid in 2005.

Income Tax Expense and Net Loss

We had no income tax expense in 2006 and 2005 as we recorded no taxable income.

As a result of the cumulative effect of the above factors, we recorded net loss of NT$3,401.7 million in 2006, compared to a net loss of NT$2,075.4 million in 2005. In addition, we recorded a NT$24.7 million cumulative effect of change in accounting principle in connection with the marking to market of our financial instruments, resulting in a total net loss of NT$3,426.4 million in 2006.

Year Ended December 31, 2005 Compared to Year Ended December, 31 2004

General and administrative expenses

General and administrative expenses increased by 35.0% to NT$1,853.8 million in 2005 from NT$1,373.6 million in 2004, primarily due to increases in personnel expenses as the construction of the high speed rail was near completion, and we therefore recruited more employees in preparation for the operation of the high speed rail.

Non-Operating Expenses and Losses

Our non-operating income and gains increased by 36.4% to NT$146.8 million in 2005 from NT$107.6 million in 2004. The increase in non-operating income and gains was primarily attributable to an increase in interest income and an increase in net foreign exchange gain, partially offset by a decrease in gain on sale of financial instruments. Non-operating expenses and losses decreased by 82.8% to NT$368.4 million in 2005 from NT$2,146.9 million in 2004, primarily as a result of the absence of net foreign exchange loss and a decrease in loss due to indemnification, as we paid NT$2,085.2 million in 2004 pursuant to the settlement agreement with Eurotrain, partially offset by an increase in interest expenses and an increase in losses on disposal and obsolescence of fixed assets.

Income Tax Expense and Net Loss

We had no income tax expense in 2005 and 2004 as we recorded no taxable income.

As a result of the cumulative effect of the above factors, we recorded net loss of NT$2,075.4 million in 2005, compared to a net loss of NT$3,412.9 million in 2004.

Liquidity and Capital Resources

To date, our principal sources of cash have been cash flow from our financing activities. We have also begun in January 2007 to generate cash flows from operations. Our primary uses of cash have been to fund capital expenditures related to the construction of the Project.

Net increase in cash and cash equivalents in 2006 was NT$549.7 million, compared to net cash outflow of NT$487.4 million in 2005. The net cash inflow in 2006 resulted primarily from a NT$7,281.4 million decrease in net cash used in investing activities, partially offset by a NT$6,222.0 million decrease in net cash provided by financing activities and a NT$22.2 million increase in net cash used in operating activities. Net decrease in cash and cash equivalents in 2005 was NT$487.4 million, compared to a net

increase in cash and cash equivalents of NT$403.0 million in 2004. The net cash outflow in 2005 resulted primarily from a NT$28,104.0 million decrease in net cash provided by financing activities, partially offset by a NT$1,339.6 million decrease in net cash used in operating activities and a NT$25,874.0 million decrease in net cash used in investing activities.

Our net cash used in operating activities amounted to NT$2,128.0 million and NT$2,105.8 million in 2006 and 2005, respectively, including non-cash depreciation and amortization expense for office furniture and fixtures of NT$149.6 million and NT$163.2 million in those two periods, respectively. The increase in net cash used in operating activities in 2006 was primarily the result of an increase in net loss recorded in 2006 and an increase in inventories, partially offset by a decrease in prepayments and other current assets and an increase in accounts payable, accrued expenses and other current liabilities. Our net cash used in operating activities amounted to NT$2,105.8 million and NT$3,445.4 million in 2005 and 2004, respectively, including non-cash depreciation and amortization of NT$163.2 million and NT$111.9 million in those two periods, respectively. The decrease in net cash used in operating activities in 2005 was primarily the result of a decrease in net loss recorded in 2005, an increase in depreciation and an increase in accrued expenses and other current liabilities, partially offset by an increase in accrued expenses and an increase in prepayments and other current assets, primarily refundable VAT.

Net cash used in investing activities in 2006 amounted to NT$52,714.6 million, as compared to NT$59,996.0 million in 2005. This decrease was primarily the result of a decrease in additions to fixed assets and a decrease in restricted current and non-current assets, partially offset by an increase in current available-for-sale financial assets, a decrease in hedging derivative financial instruments, an increase in deferred charges and an increase in other assets. Net cash used in investing activities in 2005 amounted to NT$59,996.0 million, as compared to NT$85,869.9 million in 2004. This decrease was primarily the result of a decrease in current available-for-sale financial assets, a decrease in additions to fixed assets, a decrease in restricted current and non-current assets and an increase in hedging derivative financial instruments, partially offset by an increase in prepayments and other current assets, an increase in refundable deposits and the absence of decrease in forward contract receivables.

Net cash provided by our financing activities in 2006 amounted to NT$55,392.3 million, as compared to net cash provided by our financing activities in the amount of NT$61,614.4 million in 2005. The decrease was primarily the result of the absence an issuance of preferred stock in 2006 and an increase in the payment of preferred stock dividends, partially offset by an increase in long-term and short-term borrowings. Net cash provided by our financing activities in 2005 amounted to NT$61,614.4 million, as compared to net cash provided by our financing activities in the amount of NT$89,718.3 million in 2004. The decrease in 2005 was primarily the result of a decrease in long-term and short-term borrowings and an increase in the payment of preferred stock dividends, partially offset by an increase in the issuance of preferred stock and the absence of the issuance cost of preferred stock.

In connection with the construction of the high speed rail, we made cash payments in the amounts of NT$78,160.2 million, NT$66,783.9 million and NT$59,342.3 million in 2004, 2005 and 2006, respectively. Our cash requirements for 2004, 2005 and 2006 were primarily for capital expenditures.

As of December 31, 2006, our current liabilities amounted to NT$42,592.4 million. These current liabilities principally include:

current portion of long-term bank loans;
construction cost payable;
short-term loans; and
preferred stock dividend payable.

The following table lists the amounts of our historical principal contractual obligations for each of the years ended December 31, 2004, 2005 and 2006.

Principal contractual obligations Long-term bank loans . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total principal contractual obligations . . . . . . . . . . .	Principal contractual obligations Long-term bank loans . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total principal contractual obligations . . . . . . . . . . .		For the years ended December 31,	For the years ended December 31,	For the years ended December 31,	For the years ended December 31,	For the years ended December 31,
	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . obligations . . . . . . . . . . .		2004 (in 194,200 26,800 39,714 260,714		2005 NT$ millions) 240,500 26,800 53,221 320,521		2006
Long-term bank loans . . . Corporate bonds . . . . . . . Preferred shares . . . . . . . Total principal contractual							294,464 26,800 52,711 373,975

Set forth below are the aggregate amounts, as of December 31, 2006, of our future cash payment obligations under our existing debt and other contractual arrangements.

Contractual obligations Long-term bank loans . . . . . . . . Corporate bonds . . . . . . . . . . . . Preferred shares(1). . . . . . . . . . . Total contractual cash obligations . . . . . . . . . . . . . . .	Contractual obligations Long-term bank loans . . . . . . . . Corporate bonds . . . . . . . . . . . . Preferred shares(1). . . . . . . . . . . Total contractual cash obligations . . . . . . . . . . . . . . .			Payments due by period	Payments due by period	Payments due by period
	ans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ash . . . . . . . . . . .		Total 294,464 26,800 52,711 373,975	Less Than 1 Year 1-3 Years (in NT$ millions) 8,849 25,699 10,000 16,800 – 52,711 18,849 95,210		4-5 Years 31,037 – – 31,037	After 5 Years
Long-term bank lo Corporate bonds . Preferred shares(1) Total contractual c obligations . . . .							228,879 – – 228,879

(1) Dividends on the preferred shares are distributed once a year after the ordinary shareholders’ meeting ratifies the financial reports, and our Board of Directors may fix a record date and declare distribution of previous year’s dividends. If there is no earning or insufficient earnings for dividends distribution of preferred shares for a given year, the distribution of dividends may be deferred, and such unpaid dividends have preference on profits made in subsequent years.

Under the C&OA and the Tripartite Agreement (as defined below), if we become unable to repay our debts under the First Syndicated Loan Agreement and such default is not remedied within the grace period provided in the Tripartite Agreement, the C&OA will be terminated and we will transfer our assets to the MOTC, which will pay the price for such assets pursuant to the terms of the C&OA. See “Business – The Taiwan North-South High Speed Rail Project – The Concessions – Construction and Operation Agreement”.

On February 2, 2000, we entered into an NT$323.3 billion syndicated loan agreement with 25 banks (the “First Syndicated Loan Agreement”) as amended from time to time, for which Chiao Tung Bank (currently renamed as Mega International Commercial Bank) acted as the agent bank, for the purpose of funding the construction of the Project, securing the guarantee for our corporate bonds to be issued, providing guarantee for payment of installments of customs duty on import of supplies necessary for construction of the high

speed rail and funding our performance bond to be provided under the C&OA. There are five tranches under the First Syndicated Loan Agreement in the amounts of NT$308.3 billion, NT$7.5 billion, NT$28.3 billion, NT$3.3 billion and NT$15 billion. Under the First Syndicated Loan Agreement, we were originally required to meet the following year-end financial ratio requirements during the term of the syndicated loan: (1) the debt-to-equity ratio must not be higher than 300%, 280%, 220% and 120% for 2000-2005, 2006-2008, 2009-2013 and from 2014, respectively; and (2) the debt-service coverage ratio must not be lower than 1.1, 1.3 and 1.5 for 2006-2008, 2009-2013 and from 2014, respectively. Although we were unable to meet such financial ratio requirements in the past, the lending banks of the First Syndicated Loan Agreement have agreed to amend such financial ratio requirements from time to time. Currently, we are required to meet the following year-end financial ratio requirements during the term of the syndicated loan: (1) the debt-to-equity ratio must not be higher than 300%, 300%, 280%, 220% and 150% for 2000-2004, 2008, 2009, 2010 to 2013 and from 2014, respectively; and (2) the debt-service coverage ratio must not be lower than 1.1 and 1.3 for 2008 and from 2009, respectively. Under the terms of the First Syndicated Loan Agreement, the failure to satisfy these covenants would result in the restriction of our ability to access the then-undrawn amount remaining under the syndicated loan and the loss of our discounted interest rate for NT$240 billion of the NT$308.3 billion tranche. We were also required to increase our issued share capital to no less than NT$123.2 billion by December 31, 2008. In addition, without written consent from the agent bank, we may not incur any loan, endorsement or guarantee in the amount of more than NT$1 billion, or in the aggregate amount of NT$5 billion. As of the date this Offering Memorandum, the maximum amount under the First Syndicated Loan Agreement has been drawn down.

Concurrently with the execution of the First Syndicated Loan Agreement, we entered into the Taiwan North-South High Speed Rail Project Tripartite Agreement (the “Tripartite Agreement”) with the MOTC and Chiao Tung Bank, on behalf of the 25 banks under the First Syndicated Loan Agreement, for the security of our payment obligations thereunder, except for the NT$15 billion tranche funding our performance bond. The MOTC agreed with us to (1) create liens or other forms of security interests on the assets obtained from the construction of the high speed rail, including personal property, real property and other rights, in favor of Chiao Tung Bank on behalf of the lending banks and (2) transfer to Chiao Tung Bank on behalf of the lending banks our right to seek monetary claims from the MOTC pursuant to the C&OA, including, without limitation, the right to seek rental payments and payment of the asset transfer price. The MOTC agreed to, upon the termination of the C&OA, assume our indebtedness in the amounts provided in the Tripartite Agreement in a maximum amount equal to the asset price they would pay to the lending banks as calculated pursuant to the C&OA. The asset price paid by the MOTC will go first to the First Syndicated Loan lending banks, then to the Second Syndicated Loan lending banks and the remainder to the Company. Under the terms of the Tripartite Agreement, our material breach of the First Syndicated Loan Agreement, such as the failure to increase issued share capital as required, default in the payment of principal or interest payment to the lending banks or insurance companies or failure to maintain a certain amount in the debt service special account (as described below), may also constitute a breach of contract under the C&OA, and we and the MOTC agreed to terminate the C&OA accordingly, unless such material breach is otherwise remedied in six months.

On July 31, 2006, we entered into an NT$40.7 billion syndicated loan agreement with seven banks (the “Second Syndicated Loan Agreement”), for which Taipei Fubon Bank acted as the agent bank, for the purpose of funding the construction and operation of the Project. There are two tranches in the amount of NT$19.883 billion and NT$20.817 billion

under the Second Syndicated Loan Agreement. We expect to increase the Second Syndicated Loan Agreement by NT$24.8 billion, to an aggregate of NT$65.5 billion, and draw down additional tranches under the Second Syndicated Loan Agreement pursuant to a supplemental agreement thereto to be entered into with Lehman Brothers as an additional lending bank. We are required to meet the following year-end financial ratio requirements during the term of the syndicated loan: (1) the debt-to-equity ratio must not be higher than 300%, 280%, 220% and 150% for 2008, 2009, 2010-2013 and from 2014, respectively; and (2) the debt-service coverage ratio must not be lower than 1.3 from 2009. Under the terms of the Second Syndicated Loan Agreement, the failure to satisfy this covenant would result in restriction of our ability to access the then-undrawn amount remaining under the syndicated loan and a penalty in the amount of 0.02% per annum of the outstanding amount if such failure is not remedied prior to the end of the following September. As of April 30, 2007, NT$32.4 billion has been drawn down under the Second Syndicated Loan Agreement. Under the terms of the Second Syndicated Loan Agreement, as agreed by the MOTC, we further transferred to Taipei Fubon Bank on behalf of the lending banks the rest of our right to seek monetary claims from the MOTC pursuant to the C&OA to secure the payment obligation thereunder in addition to the amount transferred to Chiao Tung Bank pursuant to the Tripartite Agreement securing our payment obligation under the First Syndicated Loan Agreement. We expect to further grant to the lending banks of the additional tranches under the Second Syndicated Loan Agreement a mortgage over the land use rights on the business development areas at five Stations, including Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations along the high speed railway route which we have a right to develop.

Under the terms of the First Syndicated Loan Agreement, we agreed to establish several special limited use accounts, and to fund minimum balances in these accounts to cover our financial commitments. These accounts include the income special account, the operation special account, the debt service special account and the capital expenditure special account. We are required to deposit our operating income as well as cash received from share issuances after January 2007 in the income special account. The funds in the income special account will be utilized in the following order: (1) payment of operating costs and expenses of the high speed rail and affiliated businesses; (2) expenditures for asset increases and replacement as approved by the agent bank; (3) payment of interest, default interest, penalties and other fees under the First Syndicated Loan Agreement, loan agreements with insurance companies as permitted under the First Syndicated Loan Agreement and corporate bonds; (4) payment of principal of the First Syndicated Loan Agreement, loan agreements with insurance companies as permitted under the First Syndicated Loan Agreement and corporate bonds; (5) payment of interest, default interest, penalties and other fees under the Second Syndicated Loan Agreement; (6) payment of principal under the Second Syndicated Loan Agreement; (7) deposit in the debt service special account as provided in the First Syndicated Loan Agreement or purchase of financial products, as agreed by the agent bank; (8) deposit in the debt service special account as provided in the Second Syndicated Loan Agreement or purchasing financial products, as agreed by the agent bank thereunder; (9) payment of interest, default interest, penalties and other fees of other obligations as approved by the agent bank and in accordance with the C&OA; (10) payment of principal of other obligations as approved by the agent bank and in accordance with the C&OA; (11) deposit in the capital expenditure special account as provided in the First Syndicated Loan Agreement; (12) payment of the then-due profit sharing return as provided in the C&OA; and (13) payment of bonus or dividends or for other purposes as decided by THSRC.

From the commencement of our revenue operation, after making payment in accordance with items (1), (2), (3), (4), (5), (6), (9) and (10) above, the residual amount in the income special account, after deducting the operating costs for operation and maintenance of the high speed rail, its equipment and the affiliated business in the first month in the succeeding year, should be deposited in the debt service special account on the last business day each year or used to purchase the financial instruments, including government bonds or short-term bills, as otherwise approved by the agent bank. In addition, from December 31, 2008, we should have in the debt service special account an amount equal to the interest payable, including guarantee fees, in the following three months under the First Syndicated Loan Agreement and loan agreements with insurance companies, as well as an aggregate amount equal to the interest payable in the following interest period plus the principal payable in the following six months under the terms of our corporate bonds. The operating special account is to receive our projected monthly operating costs. From December 2009, we are required to deposit one third of our projected capital expenditures in the following three fiscal years in the capital expenditure special account and may transfer the amounts for respective fiscal years to the income special account annually for utilization from 2010.

As of December 31, 2006, we had issued three corporate bonds in the aggregate principal amount of NT$26.8 billion with maturities from 2007 to 2009, bearing interest at an effective rate of 1.7424%-3.5000% per annum. These securities do not have early put options and we may not repurchase the securities prior to their respective maturity dates. The payment of the principal and interest under respective corporate bonds are guaranteed by the 25 lending banks of our First Syndicated Loan Agreement.

In April 2007, we adopted an offering plan for NT$9.8 billion secured domestic bonds, comprised of class A Bonds, class B Bonds and class C Bonds for a part of the payment of our corporate bonds described above, which were due in late April and early May 2007 in an aggregate amount of NT$10 million. The class A Bonds were issued in May 2007 and mature in May 2012, with an aggregate principal amount of NT$4.0 billion and bearing interest at 2.07% per annum. The class B Bonds were issued in the end of April 2007 and will mature in April 2013, with an aggregate principal amount of NT$3.0 billion and bearing interest at 2.12% per annum. The class C Bonds were issued in the end of April 2007 and will mature in April 2014, with an aggregate principal amount of NT$2.8 billion and bearing interest at 2.17% per annum. The payment of the principal and interest under respective corporate bonds are guaranteed by the 21 lending banks of our First Syndicated Loan Agreement.

Market Risk

Our exposure to financial market risks derives primarily from changes in interest rates and foreign exchange rates. To mitigate these risks, we utilize derivative financial instruments, the application of which, pursuant to our internal guidelines, is primarily for hedging purposes and not for speculative purposes.

Interest Rate Risk

Our exposure to interest rate risks relates primarily to our long-term bank loans. Net increase of interest expense on these transactions for the year ended December 31, 2006 was NT$146.2 million. As of December 31, 2006, we had no derivative transactions to hedge our interest rate risks.

We are exposed to substantial interest rate risk on our existing floating rate debt and on additional debt financing we may incur. Upward fluctuations in interest rates increase the costs of both existing and new debt. The interest rate that we will be able to obtain in a new debt financing will depend on market conditions at that time and may differ from the rates we have secured on our current debt.

The following table sets forth the repayment schedule of our variable rate, long-term bank loans:

As of December 31 2006

	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006

Long-term bank loans NT$ denominated . . . .			Expected Maturity Date			2012 and thereafter	Total	Fair Value	Weighted Average Interest Rate
	2007	2008	2009	2010	2011
	8,849,232	10,185,464	7,756,464	(in thousands, except interest rate) 7,756,464 15,518,668 244,397,503			294,463,795	294,463,795	4.02%

The following table sets forth the repayment schedule of our fixed-rate, long-term debt obligations:

As of December 31 2006

	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006	As of December 31 2006

porate bonds NT$ denominated . . . . . . .		Expected Maturity		Date	2011	Total	Fair Value	Interest Rate
	2007	2008	2009	2010
	10,000,000	12,800,000	(in thousands, except interest rate) 4,000,000 – – 26,800,000				26,800,000	1.74%~3.5%

Corporate bonds NT$

Foreign Exchange Gains or Losses

Our capital expenditures are primarily denominated in Japanese yen and US dollars. To the extent we experience foreign exchange exposure in Japanese Yen, US dollars and Euros, we attempt to hedge such exposure through spot contracts, forward exchange contracts and foreign currency option contracts. We enter into these transactions with various financial institutions to hedge our foreign exchange exposure. The tables below provide the nominal contract amounts regarding such contracts as of December 31 2004, 2005 and 2006 (in thousands):

USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Contract Amount (Nominal	Contract Amount (Nominal	Amount)
	2004 1,385,539 98,147,990 749	2005 1,172,930 90,396,511 –	2006
			463,856 36,113,745 –

Tax Incentives

Pursuant to the Encouragement Statute, we enjoy preferential tax treatment. We are exempt from business income tax for up to five years from the year in which we begin to have taxable income. We may defer this five-year period of tax exemption at our discretion for four years from the year in which we begin to have taxable income, and the maximum period of such deferment shall not exceed three years.

5% to 20% of our expenditures on the following items are deductible from our business income tax payable in the same year. If the tax payable is less than the deductible amount, such deductible amount may be carried forward for up to four years.

Equipment and technology for construction and operation of the high speed rail: currently at a deductible rate of 5%-15%
Environmental equipment and technology: currently at a deductible rate of 5%-20%
Research and development and personnel training: currently at a deductible rate of 15%-20%

The deductible amount in each year shall not exceed 50% of the business income tax payable in such year, but the deduction in the last year of the exemption period is not subject to this limitation.

Machinery, equipment, rolling stock and construction and training equipment as well as parts and components imported for the construction of the high speed rail are exempted from customs duties; provided, however, that the purpose for the use of such items is confirmed by the MOTC and that the Ministry of Economic Affairs certifies that such items are not available domestically. As of December 31, 2006, exemption for our customs duties amounted to NT$2.1 billion. Customs for the machinery, equipment, training apparatuses, rolling stock and parts and components thereof imported for the operation of the high speed rail may be deferred and paid by installments one year after the commencement of our operations, if the purpose for the use of such items is confirmed by the MOTC and we provide acceptable guarantees for the customs duties payable. We are still in discussions with the MOTC as to the applicability of this customs duty exemption for rolling stock and other equipment imported in 2006. The aggregate duty exemption in question totals NT$1.1 billion. Separately, we enjoy a 50% tax deduction on building tax for the real property we use directly for our operations during the construction and operation of the Project.

Our affiliated businesses are not entitled to the above tax incentives.

Corporate and individual holders who hold for at least two years the registered shares issued for our establishment or expansion may credit up to 20% of their subscription payment against their income tax payable for the year in which the two-year holding requirement is met. If the tax payable is less than the creditable amount, the balance may be credited against the tax payments for the next four years. The total investment credit deductible by an individual or enterprise each year may not exceed 50% of the income tax payable for the same year. This limit, however, shall not apply to the credit in the last year.

According to the newly implemented Alternative Minimum Tax (the “AMT”) Act effective from January 1, 2006, businesses and individuals are subject to the AMT, where a company will be subject to a 10% AMT if its income exceeds NT$2 million, and an individual will be subject to a 20% AMT if his/her income exceeds NT$6 million. The AMT burden is designed to remedy the current excessive tax incentives for individual and business. For businesses, the income which previously enjoyed tax-exemption privileges under relevant tax regulations, such as the Promotion Statute and the Encouragement Statute will be subject to the new AMT system for the calculation of business taxpayers’ aggregate taxable incomes. However, the AMT Act also regulates that enterprises already qualified for five-year tax holidays can continue to enjoy tax incentives under certain circumstances provided under the AMT Act.

Recent Accounting Pronouncements

In July 2006, the ROC Accounting Research and Develop Foundation, or the ARDF, issued the ROC Statement of Financial Accounting Standards, or SFAS, No. 37,”Accounting for Intangible Assets,” to define intangible assets, establish a framework

for measuring and recognition, as well as require disclosure in accordance with accounting principles generally accepted in the ROC. SFAS No. 37 will be effective for financial statements issued for the fiscal year beginning after January 1, 2007. The adoption of this new accounting standard is not expected to have any significant impact to the Company in 2007 and prior years as the Company does not have the related intangible assets covered by this new accounting standard.

RECENT DEVELOPMENTS

We have filed with the ROC FSC our audited financial statements for each of 2004, 2005 and 2006. Those financial statements have been audited by KPMG Certified Public Accountants, auditors of our company, who conducted the audit of such financial statements in accordance with “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants” and auditing standards generally accepted in the ROC.

In accordance with the requirement under the “ROC Over-the-Counter Securities Exchange Regulations Governing Review of Emerging Stocks Traded on the Over-the-Counter Market”, we announced in early February, March, April and May 2007 our net sales for January, February, March and April 2007, being NT$599.3 million, NT$669.3 million, NT$867.7 million and NT$1,030.3 million, respectively. These monthly net sales figures have not been audited or reviewed by any certified public accountants and may not be indicative of our company’s net sales or income before income tax for the full year 2007.

INDUSTRY OVERVIEW

The market statistics quoted below provided by MVA were prepared on the basis of ROC statistics available for 2002 and assume revenue operation of the high speed rail would commence in 2005. An update of these statistics has not been prepared by MVA for the purposes of this Offering Memorandum.

Socio-Economic Development in the Western corridor of Taiwan

Taiwan has been one of the fastest growing economies in Asia, with an average GDP growth of just under 3.4% per annum over the period 1996 to 2005, according to the ROC DGBAS. In 2005, the GDP of Taiwan was US$346.4 billion with per capita GDP at US$15,291, which is the fourth highest in Asia (excluding Japan) after Singapore, Hong Kong and South Korea. The following table shows Taiwan’s GDP forecast to year 2033.

Real Annual GDP Growth for Taiwan, 2003 to 2033

Period 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008-2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013-2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018-2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023-2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028-2033. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Average Annual Growth
	4.2% 4.0% 3.5% 3.0% 2.5% 2.0%

Period
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2008-2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013-2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018-2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023-2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2028-2033. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Average Annual
Growth

4.2%
4.0%
3.5%
3.0%
2.5%
2.0%

Source: MVA

According to the MOI, the total population of Taiwan stood at 22.9 million as of December 31, 2006 and it is one of the most densely populated areas in the world with an average population density of 636 people per square kilometer. The following figure shows the population density for Taiwan and selected countries in Asia and Europe for 2005.

Population density

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1,200
985
1,000
800
636
600 480
392
400 341 339 336
246 232
200
0
Bangladesh Taiwan South Korea Luxembourg Belgium Japan India UK Germany
2Population per km
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Source: United Nations World Population Prospects (2004 revision)

As of December 31, 2006, 94.7% of the population is concentrated along the Western corridor of the island, and about 51.4% of Taiwan’s population was concentrated in three distinct metropolises, namely, Taipei, Taichung and Kaohsiung, according to the MOI. The following table provides a summary of the population forecasts for Taiwan and the three major cities in the Western corridor.

Year 2010 . . . 2013 . . . 2023 . . . 2033 . . .	Taiwan (excluding outlying islands)(1) 23,446,000 23,710,000 24,376,000 23,265,000	Taipei City(1) 2,430,000 2,353,000 2,124,000 2,065,000	Population Forecasts % of Population of Taiwan Taichung City(1) % of Population of Taiwan 10.4% 1,505,000 6.4% 9.9% 1,509,000 6.4% 8.7% 1,510,000 6.2% 8.9% 1,496,000 6.4%	Kaohsiung City(1) 2,182,000 2,175,000 2,102,000 2,067,000	% of Population of Taiwan 9.3% 9.2% 8.6% 8.9%

(1) Figures include suburbs Source: MVA

Taiwan’s economy has moved in recent decades towards being more service-oriented, with tertiary industry emerging as the major employment source in Taiwan, accounting for 57.9% of Taiwan’s working population as of 2005, according to the ROC DGBAS. According to the ROC DGBAS, the Western corridor accounted for more than 95.1% of the employed workforce in Taiwan, with the metropolises of Taipei, Taichung and Kaohsiung accounting for approximately 51.7% of the total in 2005. Taipei City as a major service center had 80.5% of its working population in the tertiary sector in 2005, while the corresponding proportions for Taichung and Kaohsiung City were 71.4% and 67.3%, respectively, according to the ROC DGBAS. The following table shows the assumed projected growth in secondary and tertiary sector employment for Taiwan and the three cities of Taipei, Taichung and Kaohsiung.

Year 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Taiwan Secondary and Tertiary Employment Taiwan (excluding outlying islands)(1) Taipei City(1) Taichung City(1) 10,171,000 1,703,000 753,000 10,419,000 1,771,000 771,000 10,969,000 1,833,000 815,000 11,032,000 1,820,000 819,000	Forecasts Kaohsiung City(1)
		1,089,000 1,119,000 1,182,000 1,185,000

(1) Figures include suburbs Source: MVA

The total number of households in Taiwan grew from approximately 5.9 million in 1996 to 7.2 million in 2005, with the average annual income per household increasing from NT$1.05 million to NT$1.13 million during this period, according to the ROC DGBAS. The annual average disposable income and consumption expenditure per household of Taiwan exhibited a similar pattern as household income grew. The average annual disposable income of Taiwan went up from NT$826,378 in 1996 to a high of NT$894,574 in 2005, according to the ROC DGBAS. In terms of transport spending, the annual average household expenditure on transportation in Taiwan soared from NT$55,504 in 1996 to

NT$65,996 in 2005. Transportation as a percentage of total annual household expenditure increased from 7.0 % in 1996 to a share of 7.4% in 2005, according to the ROC DGBAS. The following table shows the household size of Taiwan and selected major cities in the Western corridor over the forecast period.

Year 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Taiwan (excluding outlying islands)(1) 3.14 3.08 2.88 2.69	Household Size Forecasts Taipei City(1) Taichung City(1) 2.80 3.08 2.75 3.02 2.59 2.83 2.43 2.66	Kaohsiung City(1)
			2.85 2.79 2.61 2.45

(1) Figures include suburbs Source: MVA

Socio-economic development in the Western corridor of Taiwan has been, and is expected to be, the driving force of the increase in the intercity travel demand.

Intercity Travel Demand

According to MVA, intercity travel is expected to grow until 2033 along with the growth of Taiwan’s economy, population and secondary and tertiary employment, as well as increases in annual average disposable income and annual average household expenditure on transportation, but lower growth is projected from 2013, reflecting certain physical limits in trip making, the continuing aging of the population and changes in information technology, all of which could contribute towards the saturation of trips in future years. The following figure shows the projected growth in intercity travel, averaging some 2.1% per annum from 2002 to 2013 and slowing to an average of some 0.3% per annum growth to the year 2033.

Unit: 1,000 passengers/day

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6,000
5,500
5,141 5,144
5,000 4,842
4,659
4,500
4,190
4,000
2008 2013 2018 2023 2028 2033
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Source: MVA

According to MVA, the share of trip ends in Taipei is forecast to decrease in the future as a result of the decrease in population. On the other hand, other major cities in the Western corridor are projected to have an increasing share in total intercity trip ends in future years due to rapidly growing population and tertiary employment. In the case of Kaohsiung, the marginal fall in its sector share in future years reflects its slower growth in projected population and tertiary employment.

Trip End Forecasts by Sector

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30%
25%
20%
15%
10%
5%
0%
Taipei Taoyuan Hsinchu Miaoli Taichung Changhua Yunlin Chiayi Tainan Kaohsiung Eastern
2005 2013 2033
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Source: MVA

Trip Distribution Forecasts by Sector Pairs

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18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Taipei- Taipei- Taichung-Kaohsiung- Tainan- Taipei- Taichung- Chiayi- Taipei- Chiayi- Taipei- Taichung- Taipei- Taipei-
Taipei Taoyuan Taichung KaohsiungKaohsiung Hsinchu Changhua Chiayi Taichung Tainan Taichung Kaohsiung Tainan Kaohsiung
2005 2013 2033
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Source: MVA

The following figure shows the GDP and ridership in the Western corridor between 1968 and 2004.

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Unit: 1,000 passengers/day
6,000 12,000
GDP 5,144
4,842
5,000 Ridership 4,190 10,000
5,141
4,659
4,000 8,000
Forecasts
Historical Data
(1967 ~ 2002)
3,000 6,000
2,000 4,000
1,000 2,000
2005 2010
0 GDP
1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023 2028 2033
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Source: MVA

The high population density in the Western corridor and high demand for medium-distance travel between densely populated urban areas are favorable for the operation of the high speed rail as compared to regular passenger rail. As the economy grows and demand increases, transportation modes which are able to provide high speed, punctual and safe services between major cities, such as the high speed rail, are expected to play an important role in intercity travel in the Western corridor.

Transportation Network Development in the Western corridor of Taiwan

Principal modes of transport in Taiwan are automobiles, buses, the Taiwan Railway and airlines. The range of travel services available to intercity travelers in Taiwan is fairly broad and includes both expensive and fast services as well as slow and inexpensive ones.

The intercity road system provides an extensive north-south network service but is becoming increasingly congested. Despite the provision of additional capacity with the completion of new road systems, the usage is expected to continue to outstrip the practical supply of road space. A car trip from Taipei to Taichung typically requires between two to three hours, depending on traffic conditions, but can take up to four to five hours during peak hours and on weekends and public holidays, and the two primary highways are subject to frequent delays due to accidents, weather and natural disasters. On the other hand, increasing oil prices may discourage travelers from using private vehicles on the road. The price of standard crude oil on the New York Mercantile Exchange, the world’s largest physical commodity futures exchange, was under US$25 per barrel in September 2003 and topped a record price of more than US$75 per barrel in July 2006. The following table shows the projected car ownership per 1,000 people in Taiwan over the forecast period.

Year 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Car Ownership (per 1,000 population) Forecasts Taiwan (excluding outlying islands)(1) Taipei City(1) Taichung City(1) Kaohsiung City(1) 234 243 280 233 238 251 285 238 267 277 319 271 283 294 339 289	Car Ownership (per 1,000 population) Forecasts Taiwan (excluding outlying islands)(1) Taipei City(1) Taichung City(1) Kaohsiung City(1) 234 243 280 233 238 251 285 238 267 277 319 271 283 294 339 289
		233 238 271 289

(1) Figures include suburbs Source: MVA

Buses are not only subject to congestion delays on the freeway and highways like private vehicles, but also have a longer traveling time due to the nature of operation, such as having to stop and start and make detours for passenger drop-off and pick-up.

Intercity rail travel is provided by the Government through the Taiwan Railway, which operates from Taipei to the main cities both on the west and east coast of the island. According to MVA, of the Taiwan Railway services, the intercity express trains have a market share of about 77% with the remaining 23% being regular train services in 2002. Among the three different classes of express trains provided by the Taiwan Railway, it takes approximately 4 hours to 6.5 hours to travel from Taipei to Kaohsiung, according to the Taiwan Railway. Taiwan Railway trains are extremely crowded during peak hours and on weekends and public holidays. The congestion of the road system and the short supply of Taiwan Railway services require alternative transportation modes of high speed and high capacity to address the growing demand for intercity travel.

Domestic air travel has experienced a decline in market share in the last several years, reflected in part by the withdrawal of discounted fares. In 2005, the domestic airlines carried some 9.6 million passengers, compared to 13.1 million in 2000, representing a decline of about 6.4% per annum, according to the MOTC. Of the total domestic air travel in 2005, the four main routes in the Western corridor, Taipei – Kaohsiung, Taipei – Tainan, Taipei – Taichung and Taipei – Chiayi, accounted for a market share of 46.9%, carrying approximately 12,300 passengers daily, according to the MOTC. The Taipei – Kaohsiung route alone accounted for a share of 31.4% or around 8,200 passengers daily, according to the MOTC. Against the backdrop of worsening road traffic congestion, air travel overall is expected to grow, especially for business purposes and for wealthier passengers. However, from May 2007, Mandarin Airlines, the last airline providing flights between Taipei and Taichung, has terminated this route as a result of competition from the high speed rail, which provides faster and more economic transportation if air in-flight time is considered together with an allowance for airport access time, check-in time requirements and disembarkation procedures required for air travel.

The high speed rail has higher passenger capacity compared with airlines and higher speed compared with the regular passenger railway, it also carries more passengers at a higher speed than buses and automobiles. The following tables present travel time and costs for the main intercity modes for medium- distance (between Taipei and Taichung) and long-distance (between Taipei and Kaohsiung) travel, except for private cars, in 2005.

Comparison of Medium – Distance Intercity Modes Taipei to Taichung (160 kilometers) Bus (Kuo-Kuang Motor Transport Company Ltd.) . . . . . . . . . . . Taiwan Railway – Tze Chiang . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Railway – Chu Kuang . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Railway – Fu Hsing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Air(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High speed rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Total Fare (NT$) 260 375 289 241 1342 700	Travel Time (minutes)(1)
		165 125 165 180 75(3) 45

(1) Excluding access time

(2) From May 2007, Mandarin Airlines, the last airline providing flights between Taipei and Taichung, has terminated this route.

(3) Includes minimum 30 minutes check-in time requirement, plus 10 minutes for disembarkation at destination

Source: Public information

Comparison of Long Distance Intercity Modes Taipei to Kaohsiung (346 kilometers) Bus (Kuo-Kuang Motor Transport Company Ltd.) . . . . . . . . . . . Taiwan Railway – Tze Chiang . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Railway – Chu Kuang . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Railway – Fu Hsing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Air – TransAsia Airways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High speed rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Total Fare (NT$) 500 845 651 544 2,150 1,490	Travel Time (minutes)(1)
		325 280 365 410 90(2) 87

(1) Excluding access time

(2) Includes minimum 30 minutes check-in time requirement, plus 10 minutes for disembarkation at destination

Source: Public information

The following figure shows market shares of each of the above transportation modes in May 2005 in respect of different transportation periods.

Market shares (by trips) of transportation modes

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Weekdays
Airlines
Railway 1.0%
11.0%
Buses
10.1%
Cars
77.9%
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Weekend
Airlines
Railway 0.5%
10.7%
Buses
10.2%
Cars
78.6%
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Source: The Demand Model of Intercity Transportation Systems under National Sustainable Development in Taiwan (2/4), the Institute of Transportation, May 2006

According to MVA, the high speed rail is expected to secure a market share of 14% of total inter-city traffic in terms of passenger-kilometers in the initial ramp-up stage, assuming that we begin our operation with 88 scheduled trains per direction per day. Given our gradual ramp-up schedule, which started with 19 scheduled trains per direction per day, however, it is highly unlikely that we will be able to reach such market share as forecasted by MVA. Based on MVA’s forecast adjusted by our current ramp-up schedule, we expect to have an average daily ridership of around 100,700 riders for 2007 (36.8 million a year). Near-term projections by MVA should not be taken into account without referring to our actual ridership. By 2033, MVA expects the high speed rail’s share to grow to 20% of total inter-city traffic, or a daily ridership of 306,000 riders (111.7 million a year), with an average travel distance of 200 kilometers.

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Inter-city traffic share- 2005
Buses
16%
Rail
8%
Air
Cars
2%
60%
HSR
14%
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----- Start of picture text -----

Inter-city traffic share- 2033
Buses
12%
Rail
9%
Air
2%
Cars
57%
HSR
20%
----- End of picture text -----

Inter-City Transportation Market Forecasts Total passenger-km per day . . . . . . . . . . . . . . . . . Implied market size (passenger-km/day) Car . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Air. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THSRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2005 260,980,000 156,588,000 41,756,800 20,878,400 5,219,600 36,537,200	2033 311,000,000 174,420,000 36,720,000 27,540,000 6,120,000 61,200,000	Compound Annual Growth Rate
			0.7% 0.4% (0.5)% 1.1% 0.6% 2.0%

Source: MVA

Tourism in Taiwan

According to the ROC Tourism Bureau of the MOTC, or the Tourism Bureau, the average number of domestic tourist trips per person per year was 5.39, 5.70 and 4.78 in 2003, 2004 and 2005, respectively, while the travel rate, which means the percentage of people who make at least one trip in any given year, increased from 86.1% in 2001 to 91.3% in 2005. Foreign visitor arrivals also increased from 2.8 million in 2001 to 3.4 million in 2005, and the foreign exchange income contributed by foreign visitors increased from US$4.3 billion in 2001 to US$5.0 billion in 2005. For domestic travelers, transportation fees accounted for 23.2% of the average total travel fees in 2005. Generally, the most popular tourist sites are located in the northern, central and southern districts, in which the high speed rail operates. In 2005, one day trips accounted for 64.0% of the total tourist trips made by domestic travelers, and the average number of days of tourist trips was 1.64.

In 2006, the Tourism Bureau promulgated a “Doubling of Tourist Arrivals Plan” promoting national scenic area development and management, raising the overall service level at tourism and recreation areas, and developing new visitor source markets. The Tourism Bureau also worked with our company to establish tourist service centers in our Stations for the provision of traveling information and promotion. Intercity transportation demand on the island is expected to grow along with the development of the tourism industry. Transportation modes catering to domestic traveler’s short-term trip preference, such as the high speed rail, are expected to play an important role.

Government Transportation Policy

According to the latest version of the Transportation Policy White Paper published by the MOTC in January 2002, the Government’s intercity transportation policy contemplates:

containing the use of private vehicles and encouraging the use of public transportation systems;
conducting stable highway construction and enhancing management and maintenance;
strengthening the operation environment of public buses and airlines and increasing service quality;
increasing service quality of the Taiwan Railway and transforming it into a regional mass rapid transit system; and
constructing a high speed rail system with private funds.

In the Transportation Policy White Paper, the MOTC also emphasized environment protection in terms of transportation and relief of congestion of the road system in the Western corridor. The Government contemplated the high speed rail project as a means of addressing the growing demand for intercity travel in the Western corridor and enabling a more even spread of economic development and urbanization throughout Taiwan by linking the north and south. Significant government policy support for the high speed rail is expected to continue.

BUSINESS

General

We operate a high speed rail in Taiwan, which began revenue operation in the first week of January 2007. The high speed rail constructed and operated under the Project provides service for intercity travelers in the Western corridor of Taiwan. It is capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying, the key northern and southern cities in Taiwan, compared with travel time of some four to five hours by road, and less than 45 minutes between Taipei and Taichung, compared with travel time of some two to three hours by road. The Project is part of the Government’s Plan for National Development into the Next Century, and is designed to address the growing demand for intercity travel in the Western corridor and to enable a more even spread of economic development throughout Taiwan.

The Project is a build-operate-transfer arrangement based on a public/private partnership between us and the MOTC, under which we have been awarded by the Government a concession to plan, design, finance, construct and operate the high speed rail. Pursuant to the C&OA we entered into with the MOTC in July 1998, we are entitled to operate the high speed rail until July 2033. We began the construction of the high speed rail system in the first quarter of 2000, and it was certified for revenue operation beginning in the first week of January 2007. We believe the construction of the high speed rail under the Project represents one of the most challenging infrastructure projects in the world to date. The total construction and initial operation cost of the high speed rail amounted to approximately NT$489.6 billion.

The high speed rail currently operates eight Stations, namely Taipei Station, Banciao Station, Taoyuan Station, Hsinchu Station, Taichung Station, Chiayi Station, Tainan Station and Zuoying Station along the high speed rail route. We currently have four different stopping patterns, serving local and long distance riders, with 25 scheduled trains on the high speed rail per direction per day. Under the C&OA, we are required to operate 61 trains per direction per day by September 1, 2007. We target to have 88 trains per direction per day by the end of 2007 or early 2008. According to MVA, the daily number of ROC passenger trips over 20 kilometers will reach 4.19 million by 2033. With our high capacity 12-car trainsets, each of which contains seats for 989 passengers, we target to have an average daily patronage of 100,700 passengers in 2007, 270,000 passengers in 2015 and 311,000 passengers in 2033. According to the MOI, 94.7% of the ROC population is concentrated along the Western corridor of the island, and about 51.4% of Taiwan’s population was concentrated in three distinct metropolises, namely, Taipei, Taichung and Kaohsiung as of December 31, 2006. We believe the quality and convenience of our service for trips from Taipei to Kaohsiung and cities in between will make the high speed rail an essential mode of transport for the Western corridor.

We began generating ticketing revenues in the first week of January 2007. In addition, we also derive revenue from our Stations by leasing advertising space, leasing retail space and operating car parking facilities. Under the terms of the SADA we entered into with the MOTC concurrently with the execution of the C&OA, we also have the right to develop and operate properties surrounding five of our eight Stations, namely our Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations. These properties cover approximately 46.5 hectares of developable land, with a maximum commercial floor space of up to 1.2 million square meters. We have not yet begun development of these areas. We are still in our start-up phase, and have been loss making since inception.

Competitive Strengths

Modern, convenient and safe

Our high speed rail significantly reduces travel times for our patrons at a cost that is competitive with other available modes of transportation. Its path through the Western corridor of Taiwan links together all of the significant population centers on the West of the island. Our Stations have ample interconnections to highways, bus routes, the Taiwan Railway, mass rapid transit and airports making it convenient for our passengers to include our high speed rail when planning their journeys. In addition, we believe the high speed rail’s safety is appreciated by the elderly in Taiwan as compared with air traveling, and it provides a comfortable transportation mode connecting north and south for family reunions.

Exclusivity and government support

Pursuant to the C&OA, the MOTC has warranted not to construct or permit the construction of any other high speed railway parallel to or competing with the Project until 2028. We do not expect competition from any similar transportation provider. The MOTC agreed to provide necessary regulatory assistance as well as financial support in connection with the Project. In addition, the MOTC also agreed to coordinate with various levels of government authorities in order to, among other things, complete access roads and linkage to the high speed rail system.

High speed

Among all publicly available intercity transportation modes in Taiwan, our high speed rail system is second only to airlines in terms of traveling speed, providing a great competitive advantage in trips over 60 km in length. Our rail system operates 700T rolling stock designed based on the “Shinkansen 700 Series”, as commercially operated in Japan, and operates at peak speeds of up to 300 kilometers per hour, being more than three times faster than automobiles, the most popular form of transport along our routes.

High transportation capacity

Our 30 trainsets carry 989 passengers each, and we target to have 88 trains on the high speed rail per direction per day by the end of 2007 or early 2008. We believe the high speed rail will serve as a highly efficient traffic backbone in Taiwan and target to reach an average daily patronage of 100,700 passengers in 2007, 270,000 passengers in 2015 and 311,000 passengers in 2033. Our ability to precisely time our train arrivals and departures allows us to maximize the volume of daily riders, realizing significant economies of scale once large rider volumes are achieved.

Punctuality and travel time

We have a state-of-the-art operating control center that monitors and controls the overall train schedule to ensure reliable service. In March 2007, we had an on-time ratio of 99.9%, which evidences the strict punctuality of our systems and is better than domestic airlines in the ROC achieved in 2006, according to the MOTC. Automobiles, as the dominant form of transport in the ROC, are subject to significant variations in travel times, as are buses. A car trip from Taipei to Taichung typically requires between two to three hours, depending on traffic conditions but can take up to four to five hours, and the two primary highways are subject to frequent delays due to accidents, weather and natural disasters. We also believe the Taiwan Railway has a significantly lower on-time ratio than our high speed rail.

Key to expanding transport volume in the Western corridor

According to the MOI, 94.7% of the population is concentrated along the Western corridor of the island, and about 51.4% of Taiwan’s population was concentrated in three distinct metropolises, namely, Taipei, Taichung and Kaohsiung as of December 31, 2006. Our 345-kilometer high speed rail, providing quality service for inter-city travelers from Taipei to Kaohsiung Zuoying via Taichung, is positioned to play a key role in expanding transport in the Western corridor by linking together all of the significant population centers on the West of the island. We target to purchase eight additional trainsets by 2009, and our rail system will accommodate up to 104 trips operating per day in response to expected increasing transport demand.

Business Strategies

One day lifestyle, consolidating areas of north, central and south Taiwan

We aim to create a first-class transportation network that facilitates the interconnection of communities in the Western corridor. The high speed rail service is capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying, compared with travel time of some four to five hours by road, and less than 45 minutes between Taipei and Taichung, compared with travel time of some two to three hours by road. Its high speed and economic pricing provide passengers with an unprecedented and convenient traveling mode, which we expect to bring a revolution to Taiwanese lifestyles and increase the island’s urbanization rate. We believe the introduction of our service will consolidate areas of north, central and south Taiwan by allowing passengers to accomplish in a single day business and personal trips that in the past would have required two or three days. In April 2007, we cooperated with New Aspect Cultural and Educational Foundation and one of our partner travel agencies for the promotion of a musical event in Taipei, targeted at customers interested in cultural events living in Central and Southern Taiwan. Our passengers were able to order tickets for the musical at discounted prices, and travel packages containing high speed rail and musical tickets were also made available to our customers. We expect our high speed rail service will play an attractive role in the daily life of Taiwan residents.

Establishing self-sustaining operation and maintenance ability

As of March 31, 2007, 127, or 5.0% of our employees were expatriates from overseas, including Japan, Europe and the United States. These employees serve primarily as drivers, driver instructors, operation controllers and technical experts. The supplier, installation contractor and maintenance service provider of our E&M core system, namely TSC, TSIEC and TSMSC, respectively, agreed to provide training to us. We expect our domestic personnel to take up relevant technologies, technical skills and know-how from these contractors, technical experts, drivers, driver instructors and operation controllers in the first two to three years of our revenue operation. Expatriate staff and contractors employed for the construction of the high speed rail are expected to gradually be reduced as construction is completed. While retaining experienced expatriates for their expertise, we will also build up our domestic ability to operate the high speed rail system. This may reduce our operation cost and improve our profitability.

Encouraging medium- and long-distance trips and tourism

We currently have four different stopping patterns, including one in which our trainsets stop at every Station and another in which our trainsets only stop in Taipei Station, Banciao Station, Taichung Station and Zuoying Station. At the initial stage of our

operation, we have more trains stopping at every Station so as to make our passengers familiar with the operation of our high speed rail. In the long run, we expect to have more non-stop express trains as riders grow accustomed to using our high speed rail for longand medium-distance trips, in particular tourism. We both compete favorably on pricing and travel times for medium- and long-distance trips, and enjoy higher operating margins for these trips. We seek to encourage the use of our high speed rail for longer trips both through advertising to commuters and have cooperative agreements with travel agents to promote package tours based around our rail service.

Deploying strong ticketing channels

In addition to tickets sold at our Stations, passengers are able to reserve tickets by phone. We also plan to provide an online ticketing system as well as group tickets. We will cooperate with convenience store operators in Taiwan to make our tickets booked by phone available for pick-up at convenience stores throughout the island. Tickets and travel packages including tickets for our high speed rail are also sold through travel agents. We expect to develop more convenient and diversified sales channels to increase our ticket sales.

Diversifying revenues and profitability through station area development

Under the terms of the C&OA and the SADA, we have the right to develop, construct and manage business development areas surrounding five Stations covering an area of approximately 46.5 hectares with a maximum commercial floor space of up to 1.2 million square meters. We may conduct the station area development ourselves or enter into cooperative agreements with third parties. We believe that the attractiveness of the convenient transport provided by us could stimulate property development opportunities near our Stations, enhance land values along our high speed rail and assist us in diversifying revenues and profitability beyond our high speed rail operation.

Utilizing our trackwork as a backbone for telecommunication and television network deployment and other projects

We may provide mobile phone and Wi-Fi coverage for the high speed rail. We also may utilize our trackwork for the laying of television cables. We believe the trackwork of our 345-kilometer high speed rail can thus function as the backbone for telecommunication and television network deployment, which may become an additional source of revenue for us.

Working with the Government and transport providers to increase traffic volume to Stations

success of our operation depends on building ridership, and we also cooperate with shuttle bus companies, taxi operators and car rental companies to enhance passengers’ access to our high speed rail ourselves.

The Taiwan North-South High Speed Rail Project

Project Background

The continual economic development of Taiwan over the last thirty years has placed a significant strain on the existing modes of transportation in the Western corridor of the island. According to MVA, trips between cities of more than 20 kilometers will reach 261.0 million passenger-kilometers for 2007 and 306.0 million passenger-kilometers for 2033. The existing travel options of air, highway or narrow gauge railway operated by the Taiwan Railway can no longer accommodate the growing passenger traffic. The Government has chosen to implement a high speed railway as an alternative mode of transportation due to its speed, reliability, comfort, convenience, safety and environmental benefits, as well as its relatively low land use requirements.

The Project is based on a public/private partnership structure between us and the MOTC, under which we have been awarded by the Government a concession to plan, design, finance, construct and operate the Project under a build-operate-transfer arrangement for a period of 35 years from signing of the concession agreement. The Project began construction in the first quarter of 2000, and has been in revenue operation since January 2007.

In July 1998, we entered into the C&OA with the MOTC, under which we are committed to construct and operate the Project, as well as the SADA under which the MOTC granted us the right to develop and manage commercial floor space at six Station sites for a period of 35 years, and in areas surrounding five Stations for a period of 50 years. The following map sets forth the route and Stations completed and contemplated for the high speed rail system.

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

Nangang Station
Sijhih Depot
Banciao Station
Taipei Station
Lioujia Depot
Taoyuan Station
Hsinchu Station
Wurih Depot
Taichung Station
Taibao Depot
Chiayi Station
Yanchao Main Tainan Station
workshop
Zuoying Station
Zuoying Depot
N
Current stations and depots
Under construction
----- End of picture text -----

The Concessions

Construction and Operation Agreement

The C&OA was entered into by and between the MOTC and us in July 1998. Its terms govern the structure of the build-operate-transfer structure of the Project. Under the Promotion Statute, upon the expiration of our concession period, the MOTC may give us priority to enter into a contract to continue the operation of the high speed rail. Key provisions of the C&OA are as follows:

Concession and Concession Periods. We are granted the right to (i) construct and operate the high speed rail and relevant ancillary facilities between Taipei and Kaohsiung via Taichung, (ii) develop, build and operate the station areas at Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations, and (iii) conduct businesses ancillary to the operation of the high speed rail. The concession period in connection with the construction and operation of the high speed rail, which comprises the construction concession period and the operation concession period, as well as the concession period for our affiliated business, are 35 years from the date of execution of the C&OA. The concession period for our ancillary business operation shall be the same with the concession period of construction and operation of high speed rail. The concession period for development and operation of the business development areas surrounding Stations is 50 years from the delivery of the respective lands to us. The land for the Chiayi Stations was delivered to us in February 2004, and we expect the lands for the Taoyuan, Hsinchu, Taichung, and Tainan Stations to be delivered to us in first half of 2007.

Scope of Work. The MOTC is responsible for the acquisition and delivery to us for use of the transportation infrastructure land and station area land of the high speed rail. The MOTC also agreed to plan, design and execute the civil work for the route between Nangang and Banciao. We are otherwise responsible for the planning, design, construction, operation and maintenance of the high speed rail.

Land Use Rights and Rent. The MOTC shall provide transportation infrastructure land, including route land, maintenance bases and Station land by creating land use rights in favor of us for the relevant lands or leasing them to us. We pay rent for the transportation infrastructure land to the MOTC.

Support from the Government and Exclusivity. The MOTC will provide necessary regulatory assistance as well as financial support in connection with the Project. In addition, the MOTC also agreed to coordinate with all relevant levels and branches of the Government in order to, among other things, complete access roads and linkage to the high speed rail system and arrange for coordination between the high speed rail system and other mass transportation systems. From the effective date of the C&OA, the MOTC warrants not to construct or permit the construction of any other high speed railway parallel to and competing with the high speed rail between Taipei and Kaohsiung until 2028.

Financial Covenants. During the construction period, the total number of shares held by our promoters shall not be less than 25% of the number of our total issued shares. During the operation period, the equity of our shareholders at the end of each fiscal year shall not be less than 25% of our total assets. The MOTC may require us to increase our capital or take other necessary measures of improvement within a given period of time for failure to meet these covenants. In addition, the approval of the MOTC is required for our investment in businesses other than the high speed rail, the station developments and affiliated businesses operated in our Stations.

Profit Sharing Return to the MOTC. During our operation of the high speed rail, we undertake to return by profit sharing, on an annual basis and paid by June 30 in each year, 10% of the net income before tax to the MOTC. These funds are to be used by the MOTC for projects associated with the development of the high speed rail. If the total amount of our cumulative profit sharing return is less than the amounts listed below, we have further agreed to pay the following amounts:

Period As of the end of the 5th year of entire-line service . . . . . . . . . . . . . . . . As of the end of the 10th year of entire-line service . . . . . . . . . . . . . . . As of the end of the 15th year of entire-line service . . . . . . . . . . . . . . . As of the end of the 20th year of entire-line service . . . . . . . . . . . . . . . As of the end of the 25th year of entire-line service . . . . . . . . . . . . . . . As of the expiration of the concession operation period of the high speed rail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cumulative Profit Sharing Requirement
	NT$2 billion NT$10 billion NT$25 billion NT$48 billion NT$75 billion NT$108 billion

Period
As of the end of the 5th year of entire-line service . . . . . . . . . . . . . . . .
As of the end of the 10th year of entire-line service . . . . . . . . . . . . . . .
As of the end of the 15th year of entire-line service . . . . . . . . . . . . . . .
As of the end of the 20th year of entire-line service . . . . . . . . . . . . . . .
As of the end of the 25th year of entire-line service . . . . . . . . . . . . . . .
As of the expiration of the concession operation period of
the high speed rail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cumulative Profit
Sharing Requirement

NT$2 billion
NT$10 billion
NT$25 billion
NT$48 billion
NT$75 billion
NT$108 billion

If profit sharing return to be made is deferred for financial reasons with the consent of the MOTC for any one year, we will pay interest on the overdue amount based on the statutory interest rate in the ROC, which is currently 5% per annum. The outstanding amount due must be paid in full before the expiration of each five-year period listed above. If we fail to pay the cumulative profit sharing return in full at the end of any five-year period, we will also pay interest on the overdue amount calculated at 5% per annum. Except for the abovementioned, we should pay a default penalty calculated at the

rate of 0.05% per day to the MOTC if we delay the payment of profit sharing return. The overdue amount must be paid in full before the expiration of the operation concession period.

Transfer. From five years prior to the expiration of the concession period, we and the MOTC will commence negotiation over an asset transfer contract and will execute such contract in two years so as to transfer all existing operating assets and other assets necessary for the operation of the high speed rail which are obtained by us in accordance with the C&OA, except for land obtained by us on our own account. Other than certain assets purchased by us as agreed by the MOTC during the five-year period immediately preceding the expiration of the concession period, all the assets will be transferred without compensation.

If the C&OA is terminated during the operation period and before the expiration of the concession period, we will transfer to the MOTC all existing useful operating assets and works in progress which we built or own and which are necessary for the operation of the high speed rail. An impartial and professional valuation institution shall also examine the assets and prepare an asset appraisal report. Upon such transfer, MOTC will, at our request, pay the transfer consideration payable to us directly, to a financial institution or to any other beneficiary designated by us.

Quality Assurance. We are required to establish a quality assurance program for the Project, and will allow MOTC to conduct quality assurance examinations. Representatives from the ROC Bureau of Taiwan High Speed Rail and general consultants may conduct quality assurance examinations on the Project approximately every six months from late 2000. Unscheduled quality examinations are carried out when necessary. In order to ensure that the high speed rail system planned, designed and constructed by us meets the requirements for function, quality and safety. We are also required to, at our own expense, retain independent professional institutions approved in advance by the MOTC to conduct and submit reports on the examination and validation of our high speed rail.

Insurance. In addition to insurance required by law, we agreed to purchase and maintain, or procure our contractors, suppliers or professional consultants to purchase and maintain, insurance policies in connection with cargo transportation insurance, construction and erection all risks insurance and professional consultants’ liability insurance during the construction period, and property all risks insurance and public accident liability insurance during the operation period.

Performance Bond. We agreed to provide a performance bond in the amount of NT$15 billion to the MOTC during the construction period and in the first six months after the operation of the high speed rail. The performance bond may be substituted with assets as they are built with a value up to NT$13 billion. As of December 31, 2006, we had secured NT$13.0 billion of our assets and issued a NT$2.0 billion letter of credit under the First Syndicated Loan as a performance bond to the MOTC. Before the operation period begins and until six months after the concession period is expired or the C&OA is terminated, we have agreed to provide a performance bond in the amount of NT$5 billion, which may be reduced by NT$0.5 billion on an annual basis if we do not commit any breach of the C&OA, provided that the performance bond may not be reduced below NT$2 billion.

Force Majeure and Exception. The term “Force Majeure” includes material natural disasters, material changes in the international state of affairs, material changes in the domestic or international economy, civil riot, disturbance or strike, other than strike within THSRC, civil protest or obstruction, nuclear incident, outbreak of contagious disease or other events beyond the reasonable control of either the MOTC or us which have a

material effect on the construction or operation of our high speed rail. The term “Excluded Events” refers to, due to causes not attributable to us, any non-issuance, notwithstanding the MOTC’s assistance, of any governmental permit or license necessary for the performance of the C&OA, any change in law or regulation or any government authority’s administrative order, sanction, action or inaction which has a material adverse impact on the construction or operation by us of the high speed rail or our financial condition, and other events which are not Force Majeure in nature but are considered Excluded Events by the Conciliation Committee. Upon determination by both parties or the Conciliation Committee of Force Majeure or an Excluded Event, the parties shall promptly adopt one or more remedial measures, including remedy for damages, measures for restoration, amendment to the C&OA or termination of the C&OA. We do not incur liabilities for delay because of Force Majeure or Excluded Events, and we may require the MOTC or other governmental authorities to reduce or exempt us from relevant taxes, suspend the contribution of the profit sharing return or provide financial assistance. The C&OA may be terminated either by the MOTC or us if any Force Majeure or Excluded Event prevents us from constructing or operating the Project, and no agreement can be reached between us the MOTC within one year from the Force Majeure or Excluded Event.

Breach of Contract and Dispute Resolution. Our non-compliance with the C&OA shall constitute a default, which should be remedied within the time required by the MOTC. Improper construction or operation of the Project, a material delay in construction work, a default not remedied within the required time and materially affecting the operation of the high speed rail or other events which have a material impact on the construction or operation of the high speed rail, as determined by the MOTC, shall constitute a breach of contract. In the event of breach of contract, the MOTC may suspend the construction or operation of the Project, revoke our permit for construction or operation, and terminate the C&OA. A Conciliation Committee is established under the C&OA to consult on and resolve the issues in respect of the C&OA and any other matters and disputes with regard the Project, and may submit disputes to arbitration. The arbitration should be conducted in Taipei, ROC in accordance with the ROC Commercial Arbitration Act. The Taipei District Court of Taiwan, ROC shall be the court of first instance in the event that either party initiates litigation to revoke an arbitration award.

Station Area Development Agreement

Concurrently with the execution of the C&OA, we entered into the SADA with the MOTC for the use and development of the Station land and business development areas surrounding five of our eight Stations.

Concession and Concession Period. We are granted the right to develop and use the Station land and the business development areas of Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations. The land for the Chiayi Station was delivered to us in February 2004, and we expect the lands for the Taoyuan, Hsinchu, Taichung and Tainan Stations to be delivered to us in June 2007. The concession period for development and operation of the business development areas is 50 years from the delivery of the respective land to us. The concession period for development and use of all Station land is the same as the concession period of 35 years for the construction and operation of the high speed rail as provided in the C&OA.

Land Use Rights and Rent. The MOTC shall create land use rights over the business development areas in favor of us for the land. The use of the Station land shall be governed by the C&OA. We shall pay rent for the business development areas to the MOTC pursuant to the Encouragement Statute and relevant rules, which is equivalent to 3.0% of the respective declared land value. We may not transfer the transportation

facilities in the business development areas and the land rights therein; provided that with the consent of the MOTC, we may lease or create liens over such facilities or land use rights for a term not exceeding the concession period.

Transfer. The transfer of assets within the Station land shall be governed by the C&OA. From five years prior to the expiration of the concession period, we and the MOTC will commence negotiation over an asset transfer contract and will execute such contract in two years so as to transfer all existing assets and facilities, the title of which are obtained by us during the term of SADA. Unless otherwise provided by law or agreed to by the MOTC and us, in the event of early termination of the SADA or development and use of any Station area, the applicable land use rights of and the assets and works in progress thereon owned by us should be appraised by an impartial appraiser appointed by the MOTC and transferred to a successor publicly solicited with a price agreed upon between the MOTC and us based on the appraisal price. Proceeds from the disposition of the land use rights of Station areas and the assets and work in process thereon should be allocated between the MOTC and us in proportion to respective appraisal values, after the deduction of any costs arising out of the disposition. Performance Bonds. Upon the delivery of the respective business development areas and until 30 days after the transfer or six months after the termination of the concession, we agree to provide performance bonds in the amount of NT$300 million, NT$200 million, NT$300 million, NT$200 million and NT$200 million for our performance of our obligations and responsibilities pertaining to the development and use of business development areas at Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations, respectively.

Force Majeure and Exception. The term “Force Majeure” refers to material natural disasters, material change in the international state of affairs, material changes in the domestic or international economy, civil riot, civil protest or obstruction, nuclear incident, contagious disease or other events beyond the reasonable control of either the MOTC or us which have a material effect on the development and use of Station areas under SADA. The term “Excluded Events” refers to, due to causes not attributable to us, any non-issuance, notwithstanding the MOTC’s assistance, of any governmental permit or license necessary for the performance of the SADA, any change of law or regulation or any government authority’s administrative order, sanction, action or inaction which has a material adverse impact on the development and use by us or our financial condition, and other events which are not Force Majeure in nature but are considered Excluded Events by the Conciliation Committee. Upon determination by both parties or the Conciliation Committee of Force Majeure or an Excluded Event, the parties shall promptly adopt one or more remedial measures, including remedy for damages and amendment to the agreement. We do not incur liabilities for delay because of Force Majeure or Excluded Events, and we may require the MOTC or relevant governmental authorities to reduce or exempt us from relevant taxes and suspend or extend the concession period. We may terminate the development and use of the Station areas, in whole or in part, if any Force Majeure or Excluded Event prevents us from developing or using the Station area after the remedial measures, and no agreement can be reached between us the MOTC as to remedy within six months from the occurrence of the Force Majeure or Excluded Event.

Breach of Contract and Dispute Resolution. Our non-compliance with the SADA shall constitute a default, which should be remedied within the time as required by the MOTC. Failure to complete the transportation facilities to meet the need of the construction and operation of the high speed rail, violation of the restriction on the disposal of the land use

rights and transportation facilities and assets in the Station areas, failure to settle disputes over assets for transfer, or a default not remedied within the required time and materially affecting the development and use of a Station area shall constitute a breach of contract, and the MOTC may terminate the development and use, in whole or in part, of the particular Station areas where the breach of contract occurs. A Conciliation Committee is established under the SADA to resolve disputes and submit disputes to arbitration. The arbitration should be conducted in Taipei, ROC in accordance with the ROC Commercial Arbitration Act. The Taipei District Court of Taiwan, ROC shall be the court of first instance in the event that either party initiates litigation to revoke an arbitration award.

Construction of the Project

The construction work for the Project includes mainly advanced work, civil work, Stations, trackwork, electrical and mechanical core system, depots and maintenance bases. We began the construction in the first quarter of 2000, and the high speed rail system was verified for revenue operation by Lloyd’s Register Group in November 2006 and the MOTC in December 2006. We set international safety standards for the construction of the Project and required our contractors and their sub-contractors to implement these standards.

Advanced Work

The advanced work included, among other things, utilities relocation, work site investigation, survey and boring tests, and was completed in July 2003.

Civil Work

The civil work for the 330-kilometer high speed rail (excluding the civil work between Nangang and Banciao for which the MOTC was responsible) was conducted under the terms of 12 main civil works contracts. The construction commenced in March 2000 and was completed in August 2004. Approximately 73% of the route consists of viaducts and bridges (242 kilometers), 15% of tunnels (48 kilometers) and 12% of earthworks (40 kilometers).

Electrical and Mechanical Core System

We entered into the E&M Core System Supply Contract and the E&M Core System Integration and Installation Contracts (collectively, the “E&M Core System Contracts”) with TSC and TSIEC, respectively, in December 2000.

Under the terms of the E&M Core System Contracts, TSC and TSIEC are responsible to deliver rolling stock required for the operation of the high speed rail and to supply and install simulators needed for the training of drivers, signaling systems, power supply systems, communication systems, wayside electrical and mechanical facilities as well as the conceptual design of maintenance bases and depots, and related training facilities. Our traction motors and drive trains are warranted free from defects in design, material and workmanship for five years after acceptance or 2.5 million kilometers, whichever comes first. We have a warranty period of three to ten years for other parts of the E&M core system under the E&M Core System Contracts.

The central control function for the E&M core system is located at the operation control center at Taoyuan Station. It contains necessary displays, control workstations and communications apparatuses, as well as operating and maintenance personnel to operate the high speed rail. The operation control center serves as the focal point from which all operations are supervised and regulated.

Our 700T rolling stock is designed based on the “Shinkansen 700 Series”, as commercially operated in Japan. It operates at a peak speed of 300 kilometers per hour. We have employed 30 high capacity trains, each of which contains seats for 989 passengers with 12 cars, one of which is a business class car with 66 seats. We target to purchase about eight additional trainsets by 2009, in which case our rail system could accommodate up to 104 trips per day per direction.

Stations

We designed and constructed the Stations in accordance with the requirements of various government agencies as well as the C&OA. The construction of eight Stations, namely Taipei Station, Banciao Station, Taoyuan Station, Hsinchu Station, Taichung Station, Chiayi Station, Tainan Station and Zuoying Station has been completed to date. Stations in Miaoli, Changhua and Yunlin are contemplated if demand exists for the service.

Taipei Station, Taoyuan Station and Banciao Station are underground stations, while Hsinchu Station, Taichung Station, Chiayi Station, Tainan Station and Zuoying Station are above ground. Other than Taipei Station, Banciao Station and Zuoying Station, our stations are located outside urban areas. Access of passengers to these Stations relies on connecting transportation links provided by the Government.

Trackwork

The technology for the design and construction of the high speed rail is different from that of traditional railways. More stringent design and technology, such as continuous welded rail, is required for the high speed rail to ensure the safety, comfort and ease of maintenance and repair. We have one track for north bound trains and another for south bound trains. We use standard gauge (1435 millimeter), non-ballasted slab track at 4.5m centers for the double track main line. Ballasted track are used in depots and maintenance bases. Rails of JIS60 standard, as promulgated by the Japanese Industrial Standards Committee, are used for our main line and depot tracks, and the rails of our main line are continuously welded, except where topographically restricted, so as to ensure smoothness of operation and train stability.

We selected our trackwork contractors from those who have been pre-qualified based on their previous experience on trackwork construction. The trackwork contractors were required to design and construct the track in accordance with guidelines provided by us, which required the use of proven trackwork systems.

In the event that any portion of our civil work or trackwork is found to be defective or to not conform with requirements as a result of a breach of contract or any other default on the part of the contractor within 15 years from the issue of a certificate of substantial completion, we are entitled to require the contractor to either rectify the defect or to compensate us for the defect.

Depots

We have constructed four depots located in Lioujia in Hsinchu, Wurih in Taichung, Taibao in Tainan and Zuoying in Kaohsiung, to provide train cleaning, servicing and overnight stabling. Our main workshop is located in Yanchao, Kaohsiung, and is the principal facility for heavy overhaul of our rolling stock.

Operation of the Project

Scheduling

We currently have four different stopping patterns, including one with 14 scheduled trains per direction per day in which our trains stop at every Station and another with seven scheduled trains per direction per day in which our trains only stop in Taipei Station, Banciao Station, Taichung Station and Zuoying Station. We currently operate 25 scheduled trains on the high speed rail per direction per day. At the initial stage of our operation, we have more trains stopping at every Station so as to make our passengers familiar with the operation of our high speed rail. In the long run, we expect to have more non-stop express trains as riders grow accustomed to using our high speed rail for longand medium-distance trips, in particular tourism.

Our service currently begins at 6:50 in the morning and extends until 22:40, with maintenance occurring outside the service period. We expect to increase the number of trains during holiday seasons if necessary to facilitate increased demand from our passengers. Under the C&OA, we are required to operate 61 trains per direction per day by September 1, 2007. We target to have 88 scheduled trains per direction per day by the end of 2007 or early 2008. With our 88 scheduled trains per direction per day, we will provide five different stopping patterns each having 13 to 26 scheduled trains per direction per day. The following figure shows our different stopping patterns and their respective numbers of scheduled trains currently and after ramp-up.

Operation Schedule

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Fares

Under the terms of the C&OA, our average fare rate may not exceed 120% of the general fare rate set by the MOTC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview – Fares.” Within this limit, we are able to adjust fare rates in consideration of different stopping patterns, demand from different areas, distances and service periods. We are also allowed to have different prices for our business-class cars, group tickets, term tickets and round-trip tickets. We intend to adopt a fare policy of decreasing fare per incremental mileage so as to encourage longand medium-distance travel, as we enjoy higher operating margins for these trips.

Our current fare tables are set forth below. We do not presently expect to adjust our standard or business fares, other than for our annual consumer price index adjustment allowed by the C&OA.

Taipei . . . . . . . Banciao . . . . . Taoyuan . . . . . Hsinchu . . . . . Taichung. . . . . Chiayi . . . . . . . Tainan. . . . . . . Zuoying . . . . . Taipei . . . . . . . Banciao . . . . . Taoyuan . . . . . Hsinchu . . . . . Taichung. . . . . Chiayi . . . . . . . Tainan. . . . . . . Zuoying . . . . .	Taipei – 40 160 290 700 1,080 1,350 1,490 Taipei – 260 440 640 1,250 1,820 2,230 2,440	Banciao – – 130 260 670 1,050 1,320 1,460 Banciao – – 400 590 1,210 1,780 2,180 2,390	Taoyuan – – – 130 540 920 1,190 1,330 Taoyuan – – – 400 1,010 1,580 1,990 2,200	Standard Class Hsinchu Taichung NT$ – – – – – – – – 410 – 790 380 1,060 650 1,200 790 Business Class Hsinchu Taichung NT$ – – – – – – – – 820 – 1,390 770 1,790 1,180 2,000 1,390	Chiayi – – – – – – 280 410 Chiayi – – – – – – 620 820	Tainan – – – – – – – 140 Tainan – – – – – – – 410	Zuoying
							– – – – – – – – Zuoying
							– – – – – – – –

The ticket fares for senior citizens, handicapped persons and children are 50% less than the general fares. We may offer discounted rates. We offered 50% discounted fares to attract passengers for the first month of revenue operation.

Passenger Services

We have one business-class car and 11 standard-class cars for each of our 12-car trains. Handicap-friendly and humanized in-train facilities, such as ergonomic seats, seat tables, electronic displays, vending machines, restrooms, luggage compartments and external display systems, are provided in our cars. Additional in-train service facilities such as personal music earphone jacks and electricity outlets are provided in business-class cars. At Stations, handicap-friendly facilities and information, communication, restrooms and food services are available for boarding passengers.

Connection to Stations

Most of our Stations are located away from city centers, and we rely on transportation links to connect to city centers where most passenger trips originate. Substantial parking space is allocated in each of our Stations, and our Stations are constructed with suitable interchange facilities. Pursuant to the C&OA, the MOTC has undertaken to coordinate with various levels of government authorities in order to, among other things, complete access roads and linkage to the high speed rail system, and 28 of 30 planned projects have been completed as of the date of this Offering Memorandum. The MOTC has also coordinated with other relevant governmental agencies for the arrangement to connect mass rapid transportation and commuter rail to the high speed rail and has further guaranteed the availability of bus transport from our high speed rail Stations to city centers sufficient to handle our maximum volume of passengers for each Station. The success of our operation depends on building ridership, and we also cooperate with shuttle bus companies, taxi operators and car rental companies to enhance passengers’ access to our high speed rail.

Ticketing Channels

Ticketing vending machines are installed at each of our Stations. Ticket selling windows are also available to provide face-to-face services for the sale of special-fare tickets or for passengers who cannot operate vending machines. Passengers are able to reserve tickets by phone. We also plan to provide group tickets directly to corporate and other customers.

Currently, we have a sales team dedicated to develop 200 targeted corporate customers, and a web-based corporate user interface will be launched to capture further corporate customers. In the future, once a corporate customer obtains authorization from us with a valid username and password, its employees can make reservation through the web against a specific corporate account. We will provide a rebate to our corporate customers based on the volume purchased at the year end, which is expected to be 15.0%.

We will cooperate with convenience store operators in Taiwan to make our tickets booked by phone available for pick-up at convenience stores throughout the island. Tickets and travel packages including tickets for our high speed rail are also sold through travel agents. We are also selling ticket package with airlines aiming targeting international travelers in Taiwan. We expect to develop more convenient and diversified sales channels to increase our ticket sales.

Safety

The provision of a safe and reliable service is at the core of our operations, and we strive for the highest standards of safety for our customers, staff, contractors and the general public. Our safety committee on behalf of our board of directors is responsible for the management and supervision of safety in connection with the high speed rail system and its employees. We have in place a safety management system the objective of which is to achieve a culture of safety awareness, continual improvement in safety and reduction of rail safety risks to levels which are as low as reasonably practicable. The safety management system also requires a comprehensive audit system which includes periodical reviews of our safety management practices by international experts. Regular exercises are conducted in simulated emergency situations to develop a close coordination between our staff and emergency services and to ensure the efficient recovery of rail operations in the event that an emergency occurs.

The design of the high speed rail has built-in safety features such as:

a signaling system which is designed to prevent collisions between trains;
automatic switch-over of power supply sources in order to ensure continuous traction power for trains;
the operation control center of the railway system with communications facilities which are designed to enable effective control during emergencies; and
disaster warning systems installed along the track to detect and warn of dangerous conditions, such as earthquakes and floods, as well as man-made incidents, such as intrusions into right of way;

We also seek to achieve our safety-related strategy through comprehensive training that is provided to operations staff as well as through passenger-oriented initiatives, such as safety campaigns and promotions.

During the seven-year construction of the Project, our contractors and their sub-contractors experienced 38 injuries and 38 deaths through various accidents at several sites in working on the Project.

Affiliated Businesses

We derive revenue from advertising space in our Stations, the leasing of retail space in our Stations and from our car parking facilities of our Stations. We began revenue operation of these businesses in January 2007.

We entered into an advertising cooperation agreement with Dentsu (Taiwan) Inc., or Dentsu, under the terms of which Dentsu is responsible for advertising arrangements in our Stations and pays us monthly royalties and annual profit sharing returns based on its advertising revenue from our Stations starting from 2007. We have 7,452 square meters of retail space along our high speed rail, comprising more than 60 kiosks and stores which provide a wide range of goods and services, including those provided by globally recognized brands, such as Seven-Eleven, McDonald’s and Starbucks Coffee. Under the terms of the tenancy agreements we entered into with our tenants, our tenants shall pay fixed rents on a monthly basis. The terms of these tenancy agreements are from three years to five years, and we may terminate the tenancy for tenants’ violation of the tenancy agreements. There are also self-service concessions and vending machines which provide a range of goods and services. As of April 30, 2007, the occupancy rate of our kiosks and stores was over 50%.

We may arrange for specialized mobile phone and Wi-Fi coverage for the high speed rail. We also may use our trackwork for the deployment of television cables.

Station Area Development

Under the terms of the C&OA and the SADA, we have the right to develop, construct and manage business development areas at five Stations, including Taoyuan, Hsinchu, Taichung, Chiayi and Tainan Stations along the high speed railway route. The land surrounding the Chiayi Station was delivered to us in February 2004 and a land use right was created in favor of us over such land. We will be granted the land use rights upon completion of development approval by the MOTC and local government authorities. The business development areas in aggregate are about 46.5 hectares, with Taoyuan, Hsinchu, Taichung, Chiayi and Tainan of 10.7, 5.0, 17.5, 5.4 and 7.9 hectares, respectively, and the

maximum commercial floorage is up to 1.2 million square meters. We expect the land surrounding Taoyuan, Hsinchu, Taichung and Tainan Stations to be delivered to us in June 2007.

To the extent we are compliant with the relevant urban design plans of local governments, we may operate a wide range of businesses in these development areas. We will also take local culture into consideration when developing Station areas. We may undertake the station area developments ourselves, or enter into cooperative arrangements with third parties. We do not currently plan to invest our own capital to the development of these sites but instead expect to finance the development through borrowing secured by the sites, joint ventures or lease of the properties.

The development and use of the Station areas must be in accordance with the terms of the SADA, the review results of the Station Development Area Review Committee formed by the MOTC under the Urban Planning Law and comprised of local governments, scholars and experts, our Station Area Development Plans proposed in July 1999, the High Speed Rail Designated Area Plan as promulgated by the Government under the Urban Planning Law and other urban design plans and regulations.

We are still in the planning phase for the development of the respective sites. The table below summarizes our current development plan for each Station. We may not carry out the development plans listed below for any number of reasons, including failure to obtain government approval, inability to finance the project or lack of experience in managing such development projects. See “Risk Factors – Our future station area development business will be subject to fluctuations in the Taiwan property market as well as to general risks incidental to the ownership and management of properties, and we have limited experience in property development.”

Stations Taoyuan . . . . . . . Hsinchu . . . . . . . Taichung. . . . . . . Chiayi . . . . . . . . . Tainan. . . . . . . . .	Theme Theme center Net park City within the city Resort center Culture and recreation center	Developments Under Consideration
		Dome theme parks and amusement parks, business and commercial centers, shopping centers, hotels Business and commercial center, exhibitions, hotels, shopping centers, theme restaurant Shopping center, hotels, indoor theme park, intelligent office buildings Resorts, community centers, recreation centers Shopping centers, business hotels, exhibition centers

Extension Projects

In addition to the eight Stations currently in operation, we are contemplating the construction of three additional Stations in Miaoli, Changhua and Yunlin, depending on the growth of population and demand. Land for these additional Stations has been obtained. Furthermore, Nangang Station is currently under construction and is expected to begin operation in 2009. We also plan to construct an additional depot in Sijhih for train storage and servicing.

Relationship with the Government

The Project is part of the Government’s Plan for National Development into the Next Century. During the construction of the high speed rail, the Government has given various regulatory assistance in connection with the Project in accordance with the C&OA and the SADA, as well as the Promotion Statute and the Encouragement Statute. In addition, the Government entered into the Tripartite Agreement to secure our funding for the Project. The access roads and linkage to the high speed rail system and arrangement for connection to the high speed rail system and other mass transportation systems is indispensable for the Project. The Government is obligated pursuant to the C&OA to provide adequate interconnection and transport services to and from our Stations. Through the investment of National Development Fund of the Executive Yuan and Taiwan Sugar Corporation, a state-owned enterprise, the Government has a total of two representatives on our board of directors and two supervisors, to ensure active cooperation for the Project. As the success of the high speed rail plays an important part in the Government’s general transportation policy, we expect to continue working hand-in-hand with the Government under our public/private partnership outlined in the C&OA and the SADA to realize successful operation of the Project.

Supplies and Power

We store consumables, such as food, beverages and cleaning products, and components, such as rails and tracks, signaling system and elevator and escalator spare parts for daily operation and maintenance use. We maintain a supply on-hand of strategic spare parts necessary to keep the E&M core system in full operation. Currently, most of our significant E&M core system spare parts are procured from our E&M core system supplier and installer, but we expect to secure multiple suppliers for these parts in the future. Inventory and warehouse operations are controlled by a logistics computer system which facilitates online data analysis on stock levels, parts movement and actual consumption versus forecast, enabling supplies to be requisitioned automatically. We determine our procurement strategies based on the procurement costs, characteristics of the supplies, market conditions and other factors, and generally use multiple sources of supply.

We submitted our electricity usage plans for respective power substations to Taiwan Power Company, Ltd. and have electrical supply arrangements in place. We have a base rate for the electricity used, and the allotment for electricity provided is determined based on our actual usage, which may be adjusted with application to the Taiwan Power Company, Ltd. We use electricity in many areas of our business, including for the operation of our trains, signaling and communications systems, air conditioning, lighting, repairs and maintenance, passenger information and for general administrative purposes. We employ back-up diesel generators at our Stations and depots. We continually monitor the availability of incoming electricity as well as the distribution of power to all parts of our high speed rail system.

Our electrification system consists of power substations, the overhead catenary system, the supervisory control and data acquisition system and uninterrupted power supplies. The overhead catenary system feeds power at a nominal voltage of 25kV, 60Hz from substations, sectioning stations and paralleling stations to the trains. Power is collected by the pantographs of the trains. The overhead catenary system for the main line is designed for normal operation at 300 kilometers per hour. Each of seven substations for the main line has two independent incoming feeder lines from the Taiwan

Power Company, Ltd. This ensures the availability of our power supply. In addition, two adjacent substations to any substation are capable of supplying power to such feeder station in emergencies or during maintenance.

Maintenance

We have a program of regular repairs and maintenance of our plant, equipment and E&M core system, as well as our civil structural assets, including tunnels, viaducts, bridges, Stations and depot structures. We intend to ensure and maintain a high standard of safety and reliability and have budgeted NT$1,483 million for maintenance in 2007.

When not in use, trains are stationed at maintenance depots for cleaning and periodic inspections and maintenance. Under our current maintenance plan, every three years or after trains running on the high speed rail have traveled approximately 1.2 million kilometers, trains are overhauled at the Yanchao main workshop. Overhaul areas of focus include, among others, bogies, transmission systems, pantographs, traction motors and control circuit devices. Functional and detailed inspection is carried out by dismounting relevant components from the rolling stock, and worn or decrepit parts are replaced. Depending on the category of the equipment or assets, our E&M core system, trackwork and civil structures are regularly inspected to ensure safe service.

In order to reduce response time, we allocate maintenance teams and material supplies along the high speed rail and Stations. Our technical management team is responsible for the maintenance of rolling stock, signaling and communication, power and trackwork, while our depot management team is responsible for administrative and logistics support. As of March 31, 2007, we had 667 employees, or 26.5% of our workforce, in our technical management team and depot management team. Railway related knowledge, skills and training as well as qualification certificates and physical examinations are required for our maintenance staff.

We entered into a service agreement with TSMSC in September 2006 for the maintenance of our E&M core system and expect to build up our own maintenance ability in the next two to three years. We also intend to engage external contractors’ skilled labor and equipment so as to reduce capital expenditure for the maintenance of our trackwork. We require employees of our subcontractors to have training and qualifications adequate for their function.

Training

We have training programs and certification procedures for key positions in our railway operation division. Our E&M core system supplier and installation contractors also provided assistance with our training programs. We require our seasoned foreign drivers to take training programs of more than 400 hours so as to be familiar with our high speed rail system. Newly recruited local drivers are required to take training programs of more than 1,300 hours and complete qualification process before operating the high speed rail. Under the terms of the maintenance service agreement with TSMSC, TSMSC assigns qualified and competent technical personnel to provide practical instruction, guidance and coaching to our maintenance staff.

Competition

We compete with other transport providers, principally bus operators, the Taiwan Railway and airlines. Buses are subject to congestion delays on the freeways and highways, in addition to generally requiring a longer traveling time due to their frequent stops and landspeed. While fares for our high speed rail are considerably higher than for buses, we believe our service compares favorably on the basis of comfort, convenience and travel time offered by our high speed rail service. The fares of high speed rail are higher than those of the Taiwan Railway, but the high speed rail system provides significantly faster travel time and an overall substantially higher quality of service. As for the airlines, when air in-flight time is considered together with an allowance for airport access time, check-in time requirements, and disembarkation procedures required for air travel, our high speed rail service capable of journey times of less than 90 minutes between Taipei and Kaohsiung Zuoying is fairly competitive. From May 2007, Mandarin Airlines, the last airline providing flights between Taipei and Taichung, has terminated this route.

Quality Management

According to the terms of the C&OA, a quality assurance program has been established for the Project, and we allow MOTC to conduct quality assurance examinations.

The quality assurance program was prepared in accordance with the ISO 9001 Quality Standards as well as the ROC CNS12681 Quality System. We are in the process of applying for recognition of our compliance with the ROC CNS12681 Quality System. In addition to the establishment of quality assurance policies and handbooks internally, we have incorporated those quality assurance standards into our contractual agreements with contractors. Contractors associated with the Project have to comply with those quality assurance standards and allow us to conduct quality assurance examinations. Pursuant to the C&OA, representatives from the ROC Bureau of Taiwan High Speed Rail and general consultants have conducted quality assurance examinations on the Project approximately every six months since late 2000. They also conduct unscheduled quality examinations as necessary.

In order to ensure that the high speed rail system planned, designed and constructed by us meets the requirements for function, quality and safety, we are required under the terms of the C&OA, at our own expense, to retain independent professional institutions approved in advance by the MOTC to conduct and submit reports on the examination and validation of our high speed rail. The work scope of these independent professional institutions included assessment of the system safety, review of internal rules of design, audit of the construction process and examination of system integration. The verification process was not limited to procedural or documentary inspection but also included on-site examination and test. The independent professional institutions were required to submit verification results periodically to us and the MOTC and to report immediately about non-compliance with regulatory requirements. We rectified the defects and insufficiencies in accordance with the verification results prepared by the independent professional institutions.

During the construction period of the high speed rail, we mandated International Railway Engineering Group as our independent checking engineer and independent site engineer to verify and check the design and construction works of the Project. In November 2006, Lloyd’s Register Group, an independent risk management organization providing risk assessment, mitigation services and management systems certification,

issued an independent verification and validation report, according to which the construction and test results of our high speed rail system were certified to fulfill the organization’s requirements in terms of function, quality and safety. The high speed rail system was certified for revenue operation beginning in the first week of January 2007.

Environmental Matters

During the construction period, we require our contractors to draw up environment management plans based on the commitments to environmental protection set forth in the High Speed Rail Environmental Impact Assessment Report approved by the Environmental Protection Administration under the Executive Yuan of the ROC (the “ROC EPA”) in 1995 and to implement the measures as planned during the construction period to reduce any negative environmental impact. We required our contractors to implement environmental monitoring inside and outside construction sites during the construction period. The monitoring reports produced were compiled as quarterly reports and filed with the ROC EPA.

We required the train supplier to reduce the operating noise of our trainsets through weight reduction and by adopting low-noise pantographs. Sound barriers 1.25 meters or higher were installed along the high speed rail route to block noise. We further adopted the Japanese Shinkansen Environmental Vibration Requirement as referenced in the Taiwan High Speed Rail Environmental Protection Specification approved by MOTC for environmental protection in relation to operating vibration.

After the revenue operation of the high speed rail, we continued to implement environmental management and monitoring measures with an eye on reducing the impact of the high speed rail on the environment. We expect to implement noise prevention projects in 2007. We also monitor the noise and vibration caused by the operation of the high speed rail and are committed to take measures to mitigate the impact on the environment. Our Stations have been constructed in compliance with ROC standards for environmentally-friendly buildings, and our impact on local water quality has been reviewed by the ROC EPA.

Legal Proceedings

We are not involved in any material legal or arbitration proceedings which may have, or have had in the last twelve months, a significant effect on our financial position, nor are there any such proceedings pending or threatened of which we are aware.

In January 2002, Eurotrain Consortium (“Eurotrain”), comprised of Alstom Transport S.A. and Siemens Aktiengesellschaft, filed with the International Court of Arbitration (the “ICC”) a claim against us in connection with a consortium agreement we entered into with Eurotrain in January 1997 for the Project. In its complaint, Eurotrain alleged that the execution of the E&M Core System Contracts between us and TSC and TSCIEC infringed its rights and benefits. Eurotrain claimed that it suffered losses in preparing to bid for the Project, as we eventually chose the E&M core system provided by TSC and TSIEC over the Eurotrain E&M core system. Eurotrain also made a claim for the expected profits from the provision of the E&M core system to us had we signed the contracts with Eurotrain. The ICC awarded Eurotrain reliance damages and claimed unjust enrichment compensation in the amount of US$32.4 million and US$35.7 million, respectively. In addition, we were held liable for the arbitration expense in the amount of US$1.2 million and the legal expense of Eurotrain in the amount of US$3.8 million. We settled with Eurotrain in November 2004 and agreed to pay Eurotrain US$65 million. Such amount plus interest accrued was paid in January 2005.

We were fined by Miaoli County government in January 2007 in the amount of NT$1.5 million for alleged violation of the ROC Environmental Impact Assessment Law because of the noise produced by our trainsets around Miaoli County area is higher than the level provided in the High Speed Rail Environmental Impact Assessment Report. We have appealed to the Environmental Protection Administration of the Executive Yuan.

Insurance

During the construction period of the Project, we maintained an owner-controlled insurance policy with reputable insurance companies, including Mitsui Marine & Fire Insurance Co., Ltd. Taipei Branch, Tong Tai Insurance Company Limited, Shin Kong Insurance Company Limited and Fubon Insurance Company Limited, covering the whole Project, including the permanent works, plants, E&M core system and spare parts incorporated or to be incorporated therein or temporary works materials and all temporary buildings and/or contents and all other property of our company or for which we were responsible. Since the revenue operation of the high speed rail, we have maintained a property damage and business interruption insurance policy covering physical loss or damage to our assets due to insured perils such as fire, explosion, earthquake, typhoon, flood, collision and derailment as well as loss arising from an interruption of or interference with business as a result of property damage. We also maintain a comprehensive general and passenger liability insurance policy covering our legal liability to third parties, including passengers. We also maintain liability insurance for our directors, supervisors and Chief Executive Officer. We consider our insurance coverage to be in line with industry practice. However, significant damage to any of our Stations or trackwork, whether as a result of natural disasters or other causes, could have a material adverse effect on our results of operations.

Employees

As of March 31, 2007, we had 2,520 employees, of whom 1,908 were employed in operation, 361 in construction, 22 in sales and marketing and 76 in administration; 127 of our employees were expatriates from overseas including Japan, Europe and the United States. As of December 31, 2006 and 2005, we had 2,353 employees and 1,769 employees, respectively. Our continued success is dependent in large part on our ability to attract, retain, train and motivate qualified operational, technical and management personnel. As of March 31, 2007, over 73% of our employees have received bachelor or higher educational degrees.

Our employees are not covered by any collective bargaining agreements. We consider our relationship with our employees to be good. In compliance with ROC law, we provide labor insurance and health benefits to our employees. In addition, we also provide group medical insurance to our employees in accordance with local industry practice. To date, we have not experienced any labor disputes.

We have a profit-sharing program for our full-time employees, including executive officers. Under our Articles of Incorporation, no less than 1% of our annual net income, after provision for tax due and losses incurred in prior years, deduction of the legal reserve and other necessary reserve, must be allocated as a special bonus to employees.

We maintain a pension plan for our employees in accordance with the ROC Labor Standards Law, or the ROC Labor Law. Pursuant to the ROC Labor Law and its relevant regulations, an employer has an obligation to contribute on a monthly basis an amount between 2% to 15% of an employee’s total monthly wage payment to the retirement fund of our pension plan in the Central Trust of China, or the CTC. The applicable rate of

contribution under the ROC Labor Law is determined by taking into account the seniority of employees, the wage structure, the employee turnover rate during the preceding five years, the number of employees who will retire over the succeeding five years and the amount of funds that were in our retirement account. The contribution rate used by us, determined in accordance with the ROC Labor Law and approved by the relevant government authorities, was 2% in each of the last three years. The estimated contribution rate required to fully fund the pension plan liabilities based on actuarial calculations was 2% for 2004, 2% for 2005 and 2% for 2006. As of March 31, 2007, the retirement fund under our pension plan had accrued approximately NT$305.8 million in reserves. Under the ROC Labor Pension Act, a ROC law governing pension funds which became effective on July 1, 2005, we have an obligation to contribute on a monthly basis an amount equal to 6% of each employee’s monthly wage into an account in each employee’s individual name maintained with the Bureau of Labor Insurance if such employee has enrolled in the new pension scheme under the Labor Pension Act. As the pension fund will be deposited in each employee’s individual account, such pension fund is portable with each employee. Employees who joined us on or after July 1, 2005 have to enroll in the new plan while those who joined us before that date may choose within the next five years to enroll in either the new one or the old one. For those employees who choose to enroll in the new plan and keep benefits under the old plan, we contribute 6% of each employee’s monthly wage as required by the ROC Labor Pension Act, while contributing to the CTC on the basis of actuarial calculation for the liability during the service years prior to such employee’s adoption of the new plan.

REGULATION

The following is a summary of significant ROC laws and regulations applicable to us. Unless otherwise specified, all the laws and regulations referred to herein are laws and regulations of the ROC and all the government authorities referred to herein are government authorities of the ROC.

Overview

As a company conducting a public transportation business, we are subject to extensive regulation and supervision by the MOTC pursuant to the Railway Act, the Statute for Promotion of Private Participation in Infrastructure Projects, (the “Promotion Statute”), and the Statute for Encouragement of Private Participation in Transportation Infrastructure Projects, (the “Encouragement Statute”) (collectively, the “Statutes”), and other laws and regulations as generally applicable.

Regulatory Authorities

The primary regulatory authority for Taiwan’s public transportation systems is the MOTC. The MOTC is responsible for the administration of all transportation operations and enterprises in the ROC. This includes, among other things, promulgating relevant policies, drafting laws for approval by the legislative authorities, formulating regulations and overseeing transportation operations and businesses.

Railways in Taiwan are classified into four categories – general railways, mass rapid transit systems, high-speed rail and others. Among them, the general railways are operated by the Taiwan Railway and maintained by the Railway Reconstruction Bureau, both of which are agencies under the MOTC. The Bureau of High Speed Rail of the MOTC is responsible for the administration of construction of high-speed rails and mass rapid transit systems. Their scope of authority includes:

administration of private investment projects, market analyses and transportation planning, integration of engineering and operation interfaces, traffic and travel safety planning and financial planning;
support planning, analyses, design and construction technologies to line, structure, civil engineering, survey, position control, architecture, bridge, tunnel, water, electricity and air conditioning, landscape, power supply, catenary, signal, communication, ventilation, cars and equipment of relevant maintenance shops;
contractual matters such as bidding, contracting, contract management and audit, work site safety and hygiene, dispute and lawsuit concerning construction, planning control, quality control, acceptance of construction and settlement of accounts after completion of work;
limitation on building on land, change of urban renewal plan, expropriation of land, purchase of land, registration of the land for rights of way, management of land maps and ownership and planning of use and development of land;
planning and design of rail and other interfaces, engineering, drawing and examination of technical standards and specifications, integration of technical interfaces, test of integrated system, environmental protection, pattern management and other technical development and training;

establishment of engineering information systems, establishment and management of network, management of technical documents, support of information technology, maintenance of hardware and management of information and training; and
other matters pertaining to high-speed rail and mass transit system projects.

The Bureau of High Speed Rail is our primary regulator.

Railway Act

Pursuant to the Railway Act, the MOTC is empowered to approve the construction, extension, transfer and operation of civilian-operated railways and supervise civilian-operated railways such as the Project.

Pursuant to the Railway Act, the construction of a railway should be completed within the time period approved by the MOTC, and any extension should be approved by the MOTC. If all or any part of the railway construction is completed, the operation thereof should not commence without satisfactory inspection by and approval from the MOTC.

In addition, under the Railway Act, the MOTC’s prior approval is required if the operator of a civilian-operated railway changes its form of incorporation, increases or decreases its capital, rents its business, mortgages its properties, transfers management or ceases operation. The MOTC may periodically inspect civilian-operated railways.

All railway tariffs are subject to the approval of the MOTC. We are required to invite the representatives of the MOTC to attend our shareholders’ meeting and provide their guidance.

The Encouragement Statute and the Promotion Statute

In order to effectively improve the capacity and service of intercity transportation systems in the Western corridor of Taiwan, the ROC government undertook the Project. The Legislative Yuan passed a resolution in 1993 to adopt the build-operate-transfer model for the Project. The MOTC then engaged in proposing drafts of the relevant laws and regulations for the high-speed rail project, and the Encouragement Statute was passed and promulgated by the Legislative Yuan in 1994. The Encouragement Statute was last amended in 2002.

The Legislative Yuan further promulgated the Promotion Statute in 2000, which was last amended in 2001 and applies to matters in relation to the promotion of private participation in infrastructure projects. The Promotion Statute shall not affect any of our rights and obligations under the C&OA, which was executed by the MOTC and us prior to the promulgation of the Promotion Statute. For any matters not specified in the C&OA, the provisions of the Statutes shall apply if such provisions are more favorable to us.

The Statutes establish the framework for and govern various aspects of the participation of the private sector in public infrastructure projects, including:

limitation on the Government’s shareholding,
land acquisition and development,
financing and tax benefit,
application, selection procedure and evaluation, and
supervision and administration.

Selection Committee

Under the build-operate-transfer model the Project shall be constructed and operated by private sector entities selected according to the Encouragement Statute. The Encouragement Statute requires that the MOTC organize a selection committee with the purpose of examining and evaluating the private sector bidders. Selection criteria for bidders consists of ability to construct and operate a project, the organization of the bidders, the feasibility of their financial plans, the income of any affiliated business, ability to pay royalty and their requirements for Government investment or support. After assessing the aforementioned criteria, the selection committee will select the preferred bidder. We were selected as the preferred bidder by the selection committee in September 1997.

Shareholding Limit of Government

The term “private institution” as referred to in the Statutes shall mean a company established under ROC Company Law. If its equity is owned directly or indirectly by the Government and Government-owned enterprises, their shareholding in the private institution in aggregate shall not exceed 20% of the total paid-in capital of such private institution.

As of April 11, 2006, the National Development Fund of the Executive Yuan owned 6.00% of our outstanding Common Shares, and we had no other Government investment in our company. As such, we are considered a “private institution” under the Statutes.

Land Acquisition and Development

Under the terms of the Statutes, if any land required for the Project involves a change in urban planning, the MOTC shall coordinate with relevant authorities in charge of the urban planning to initiate prompt changes in accordance with the Urban Planning Law. Where the land required by the Project involves any changes in the use of the non-urban land, the MOTC shall coordinate with relevant authorities in charge of the area planning after receiving approval for requisition or land allotment.

After completing the allocation or expropriation process, the MOTC may enact a fixed term in respective land lease agreements or land use agreements allowing the use of the land for route land, depots and Stations by us with leases or land use rights. The rents for leasing or using the lands shall be determined in accordance with the regulations for favorable rents regarding public land leases and land use rights in infrastructure projects.

Financing

Under the Statutes, the MOTC may coordinate with financial institutions or special funds for the provision of long-term loans to us. Loans provided to us by financial institutions shall not be subject to restrictions under the ROC Banking Law. The MOTC may subsidize a part of the interest accrued from our loans, subject to budget approval.

Under the Enforcement Rules of the Statute for Promotion of Private Participation in Infrastructure Projects we may transfer, lease or create encumbrances on our operating assets and equipment, subject to the consent of the MOTC and the following conditions:

the lease or encumbrance shall not affect the operation of the Project;
the operating assets and equipment are not required to be transferred back to the Government under the terms of the C&OA;

for the operating assets and equipment required to be transferred to the Government under the terms of the C&OA, the term of lease or any encumbrance is limited to a period not exceeding the concession period of the Project; and
a plan for repaying the debt should be approved by the MOTC when the encumbrance is created.

Issuance of Corporate Bonds

Under the ROC Company Law, the total amount of corporate bonds issued by a company limited by shares, including our company, shall not exceed the value equal to a company’s assets deducting all liabilities and intangible assets (the “Balance”) and the total amount of unsecured corporate bonds shall not exceed one-half of the Balance. A company shall not issue unsecured corporate bonds if its average annual net profit after tax in the most recent three years, or if the company has been in operation for less than three years, in the years the company has been in operation, does not equal or exceed 150% of the aggregate amount of the interest payable on the corporate bonds intended to be issued. Furthermore, a company shall not issue corporate bonds if its average annual net profit after tax in the most recent three years, or if the company has been in operation for less than three years, in the years the company has been in operation, does not equal or exceed 100% of the total amount of the interest payable on the corporate bonds intended to be issued, provided, however, that the corporate bonds issued with bank guarantees shall not be included.

Notwithstanding the abovementioned restrictions, we may issue corporate bonds for the funds of the Project pursuant the Promotion Statute, provided, however, that the total amount issued is subject to the approval of the FSC after consulting with the MOTC.

Tax Benefit

Pursuant to the Encouragement Statute, we enjoy preferential tax treatment. We are exempt form business income tax for up to five years from the year in which we begin to have taxable income. We may defer this five-year period of tax exemption at our discretion for four years from the year in which we begin to have taxable income, and the maximum period of such deferment shall not exceed three years.

equipment and technology for construction and operation of the high speed rail: currently at a deductible rate of 7% for equipment and 5% for technology according to the Regulation Governing Tax Deductible Applicable for Transportation Infrastructure Participated by Private Institutions, but the above tax deductible rate is not applicable to us as we entered into C&OA before such tax deductible rate becomes effective, and we enjoy a deductible rate of 5%-15%
environmental equipment and technology: currently at a deductible rate of 7% equipment and 5% for technology according to the Regulation Governing Tax Deductible Applicable for Transportation Infrastructure Participated by Private Institutions, but the above tax deductible rate is not applicable to us as we entered into C&OA before such tax deductible rate becomes effective, and we enjoy a deductible rate of 5%-20%

research and development and personnel training: currently at a deductible rate of 15%-20%

The deductible amount in each year shall not exceed 50% of the business income tax payable in such year, but the deduction in the last year of the exemption period is not subject to this limitation.

Machinery, equipment, rolling stock and construction and training equipment as well as parts and components imported for the construction of the high speed rail are exempted from customs duties; provided, however, that the purpose for the use of such items is confirmed by the MOTC and that the Ministry of Economic Affairs certifies that such items are not available domestically. Customs for the machinery, equipment, training apparatuses, rolling stock and parts and components thereof imported for the operation of the high speed rail may be deferred and paid by installments one year after the commencement of our operations, if the purpose for the use of such items is confirmed by the MOTC and we provide acceptable guarantees for the customs duties payable. We are still in discussions with the MOTC as to the applicability of this customs duty exemption for rolling stock and other equipment imported in 2006. The aggregate duty exemption in question totals NT$1.1 billion.

We enjoy a 50% tax deduction on building tax for the real property we use directly for our operations during the construction and operation of the Project.

Affiliated businesses are not entitled to the above tax incentives.

MANAGEMENT

Directors and Supervisors

The ROC Company Law and our Articles of Incorporation provide that our directors are 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 Common Shares, is present. The chairman is a director elected by and from our board. Our board of directors is responsible for the management of our business. Our articles of incorporation provide for a 9 to15 member board, and we currently have 15 members on the board, including three independent directors.

We currently have three supervisors, including one independent supervisor. Each supervisor is elected by our shareholders for a three-year term at the general shareholders’ meeting. The supervisors’ duties and powers include, but are not limited to, investigation of our business and financial condition, inspection of our corporate records, verification of statements by our board of directors at shareholders’ meetings, calling of shareholders’ meetings when our board of directors does not or cannot call shareholders’ meeting and/or when such meeting is necessary to our company’s benefit, representing us in negotiations with our directors and notification, when appropriate, to the board of directors to cease acting in contravention of any applicable law or regulation or in contravention of our articles of incorporation or against the shareholders’ meeting’s resolutions. In accordance with the ROC Company Law, a supervisor cannot concurrently serve as a director, managerial officer or other staff member. The ROC Company Law requires at least two supervisors be appointed at all times for a public company, such as our Company.

Directors and supervisors may serve any number of consecutive terms and may be removed from office at any time for a bona fide reason, including breach of duties, by a resolution adopted at a general shareholders’ meeting. The terms of all our current directors and supervisors expire on June 21, 2007.

The following table shows certain specified information with respect to each director and supervisor:

Name (represented shareholder)(1) Nita Ing (Continental Engineering Corporation) . . . . . . . . . . . . . . . Jack T. Sun (Pacific Electric Wire & Cable Co., Ltd.). . . . . . . . . . . . . . Chun-Chi Chiu (Teco Electric & Machinery Co., Ltd.) . . . . . . . . . . . Li Ching Ko (EVA Airways Corporation) . Daniel Tsai (Taipei-Fubon Commercial Bank) . . . . . . . . . . . . . . . . . . . Jen-Shyong Ho (Tung Ho Steel Enterprise Corporation) . . . . . . . . . Shinkong Insurance Co., Ltd. . . . . . . .	Position Chairman Director Director Director Director Director Director	Since April 1998 April 1998 April 1998 (September 2006 for Ms. Chiu) April 1998 (July 2001 for Ms. Ko) April 1998 June 2001 June 2001	Number of shares held directly as of March 31, 2007(2) 752,370,000 343,364,000 475,151,447 126,735,000 50,694,000 112,763,440 30,800,000	Number of shares held through connected persons as of March 31, 2007 – – – – – – –	Percentage of total shares issued as of March 31, 2007
					7.16% 3.27% 4.52% 1.21% 0.48% 1.07% 0.29%

Name (represented shareholder)(1) Sheng-Fong Lin (National Development Fund of the Executive Yuan) . . . . . . Cheng-Hsieh Yu (Taiwan Sugar Corporation) . . . . . . . . . . . . . . . Arthur Yu-Cheng Chiao (Walsin Lihwa Corporation) . . . . . . . . . . . . . . . John Yu (CTCI Foundation) . . . . . . . . Kuo-Shui Chao (China Aviation Development Foundation) . . . . . . . Wen-Yuan Lin . . . . . . . . . . . . . . . . Chen-Kuo Lin . . . . . . . . . . . . . . . . Benny Ting-Wu Hu . . . . . . . . . . . . . Jorn-Hun Huang (Taiwan Sugar Corporation) . . . . . . . . . . . . . . . Chiu-Shiang Lu (National Development Fund of the Executive Yuan) . . . . . . C.I. Wang. . . . . . . . . . . . . . . . . . .	Position Director Director Director Director Director Independent Director Independent Director Independent Director Supervisor Supervisor Independent Supervisor	Since June 2001 (February 2006 for Mr. Lin) June 2000 (July 2005 for Mr. Yu) January 2006 January 2006 January 2006 (January 2007 for Mr. Chao) May 2003 May 2003 May 2003 May 2002 May 2003 (Sept. 2006 for Ms. Lu) May 2003	Number of shares held directly as of March 31, 2007(2) 300,000,001 500,000,000 50,000,000 322,580,000 483,920,000 – – – 500,000,000 300,000,001 –	Number of shares held through connected persons as of March 31, 2007 – – – – – – – – – – –	Percentage of total shares issued as of March 31, 2007
					2.85% 4.76% 0.48% 3.07% 4.60% – – – 4.76% 2.85% –

(1) In accordance with ROC law, each director or supervisor is elected either in his or her capacity as an individual or in his or her capacity as a representative of a corporate or Government shareholder.

(2) Indicates the number of shares held by the corporate or Government shareholder represented by the director or supervisor.

Nita Ing has served as our chairman since April 1998. Ms. Ing is also the president of Continental Engineering Corporation, the chairman of Voice of Taipei Broadcasting Co., Ltd. and the chairman of Hao Ran Foundation. Ms. Ing also serves as a director at TSRC Corporation and American Bridge Company. Ms. Ing holds a Bachelor of Arts in economics from University of California, Los Angeles.

Jack T. Sun has served as our director since April 1998. Mr. Sun is also the vice chairman of Pacific Electric Wire & Cable Co., Ltd., or Pacific Electric, and a director of Taiwan Aerospace Co., Ltd. Mr. Sun holds a Bachelor of Arts in international trade from TamKang University. Mr. Sun is currently on criminal and civil trial in the Taipei District Court in connection with alleged embezzlement during the 1990s at Pacific Electric. Mr. Sun has been indicted for offenses including breach of trust and violation of the ROC Business Accounting Law and the ROC Securities and Exchange Law.

Chun-Chi Chiu has served as our director since September 2006. Ms. Chiu is also the president and spokesperson of Teco Electric & Machinery Co., Ltd. Ms. holds a Bachelor of Arts in business administration from National Taiwan University and a MBA from Michigan University.

Li Ching Ko has served as our director since July 2001. Ms. Ko is also a supervisor of EVA Airways Corp., Evergreen Corp. (Taiwan) Ltd., Evergreen International Storage and Transportation Corp., Central Reinsurance Corp. and UNI Airways Corp. Ms. Ko was also an executive vice president of Evergreen International Corp..

Daniel Tsai has served as our director since April 1998. Mr. Tsai is also the chairman of Fubon Financial Holding Company, the chairman of Taiwan Fixed Network Co., Ltd., and the vice chairman of Taiwan Mobile Co., Ltd. Mr. Tsai holds a LL.M. degree from Georgetown University and a Bachelor of Arts in law from National Taiwan University.

Jen-Shyong Ho has served as our director since June 2001. Mr. Ho is also the chairman and chief executive officer of Tung Ho Steel Enterprise Corporation. Mr. Ho holds a Bachelor of Arts in economics from National Taiwan University and a Masters in Economics from Indiana University.

Sheng-Fong Lin has served as our director since February 2006. Mr. Lin was also a minister without portfolio of the Executive Yuan. Mr. Lin holds a Masters in journalism from National Chen-Chi University and a doctorate in architecture from University of California, Berkeley. Mr. Lin is currently an associate professor in the department of architecture design in Shin Chien University.

Cheng-Hsieh Yu has served as our director since July 2005. Mr. Yu is also the chairman of Taiwan Sugar Corporation. Mr. Yu holds a MBA from I-Shou University.

Arthur Yu-Cheng Chiao has served as our director since January 2006. Mr. Chiao is also the chairman of Winbond Electronics Corporation. Mr. Chiao holds a Bachelor degree in telecommunication engineering from National Chiao Tung University and a Masters in Electronics Engineering from University of Washington.

John Yu has served as our director since January 2006. Mr. Yu is also the chairman of CTCI Foundation and the chairman of CTCI Corporation. Mr. Yu holds a Bachelor of Science in electrical engineering from National Taiwan University.

Kuo-Shui Chao has served as our director since January 2007. Mr. Chao is also a director of China Airlines Corp., a director of Mandarin Airlines Corp. and a director of Taoyuan International Airport Services Co. Ltd. Mr. Chao holds a Bachelor of Arts in foreign languages and literature from Chinese Culture University and a Masters in business administration from National Chengchi University.

Wen-Yuan Lin has served as our independent director since May 2003. Mr. Lin is also the chairman of Taiwan Cogeneration Corporation. Mr. Lin holds a Bachelor of Arts in civil engineering from University of Hawaii.

Chen-Kuo Lin has served as our independent director since May 2003. Mr. Lin is also the chairman of Tunghai University. Mr. Lin holds a Bachelor of Arts in economics from National Taiwan University.

Benny Ting-Wu Hu has served as our independent director since May 2003. Mr. Hu is also the chairman of Federation Health Management Co., Ltd. and the chairman of NTU Innovation Incubation Center. Mr. Hu has served as a director at USI Corporation and Yang Ming Marine Transport Corporation and as a supervisor at Winbond Electronics Corporation and China Steel Corporation. Mr. Hu holds a Bachelor of Arts in politics from National Taiwan University, a Masters in International Economics from Yale University and a MBA from the Wharton School of the University of Pennsylvania.

Jorn-Hun Huang has served as our supervisor since May 2002. Mr. Huang is also a vice president of Taiwan Sugar Corporation. Mr. Huang holds a Bachelor of Arts in accounting from National Chen-Chi University.

Chiu-Shiang Lu has served as our supervisor since September 2006. Ms. Lu is also a deputy director of the Directorate-General of Budget, Accounting and Statistics of the Executive Yuan and an accounting director of the Ministry of Examination. Ms. Lu holds a MBA from Concordia University.

C.I. Wang has served as our independent supervisor since May 2003. Mr. Wang is the partner of Ching-I Certified Public Accountants. Mr. Wang has served as a director of Yuan Ze University. Mr. Wang holds a Bachelor of Arts in business administration from National Cheng Kung University and a Master of Science in accountancy from University of Illinois.

Executive Officers

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

Name Dr. Chin-Der Ou . . . . . . . . . . . . K. H. Lee . . . . . . . . . . . . . . . . Alex Chang . . . . . . . . . . . . . . Robert Hung . . . . . . . . . . . . . . Ricardo Tan . . . . . . . . . . . . . . Rae Chung . . . . . . . . . . . . . . . Min Chen. . . . . . . . . . . . . . . . Arthur Chiang . . . . . . . . . . . . . Ted Chia . . . . . . . . . . . . . . . . T.D. Chen. . . . . . . . . . . . . . . . Klaus Liu . . . . . . . . . . . . . . . . John Popoff . . . . . . . . . . . . . . Peter D. Orange . . . . . . . . . . . . Dr. T. C. Kao . . . . . . . . . . . . . . Dr. Jeder Hseih . . . . . . . . . . . . Bernard M. Fleming. . . . . . . . . . Eleanore New . . . . . . . . . . . . .	Position Chief Executive Officer Executive Vice President Chief Operation Officer Chief Financial Officer Senior Vice President Vice President Vice President Vice President Vice President Secretariat General Vice President Vice President Vice President Vice President Vice President Vice President Vice President	Years with us 1 7 1 1 7 2 1 7 7 8 4 6 8 8 8 8 1	Age 63 64 62 59 61 40 51 48 47 59 49 55 71 58 55 53 53	Number of shares held directly as of March 31, 2007 – – – – 65,000 – – 159,461 80,000 25,000 – – – 950,000 40,000 – –	Number of shares held through connected persons as of March 31, 2007 – – – – – – – – – – – – – – – – –	Percentage of total shares issued as of March 31, 2007
						0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.01% 0.00% 0.00% 0.00%

Dr. Chin-Der Ou has served as our chief executive officer since June 2006. Dr. Ou is a registered professional engineer in the ROC and was the chairman of the Public Construction Commission, the Executive Yuan. Dr. Ou is also the chairman of Taipei Smart Card Corporation. Dr. Ou holds a doctorate in soil mechanics from Case Western Reserve University.

K. H. Lee has served as our executive vice president since January 1999. Mr. Lee was a government highway engineer and a principal assistant secretary for transport in Hong Kong and served as the regional head of MVA Asia Ltd. Mr. Lee holds a Bachelor of Arts in engineering from Hong Kong University.

Alex Chang has served as our chief operation officer since August 2006. Mr. Chang was the chairman of NOVA Benchmarking Group and a vice president of Taipei Rapid Transit Corporation. Mr. Chang holds a Masters in Management Science from National Chiao Tung University and an EMBA from National Taiwan University of Science and Technology.

Robert Hung has served as our chief financial officer since February 2006. Mr. Hung was the president UNIFLEX Technology Inc. and a vice president of Bank of America in Taipei. Mr. Hung holds a Masters in Economics from Illinois State University.

Ricardo Tan has served as our senior vice president of the construction management division since December 1999. Mr. Tan graduated from Chinese Air Force Technology School.

Rae Chung has served as our vice president of the marketing division of the marketing division since October 2004. Ms. Chung was marketing managers of Cloud Gate Dance Theatre of Taiwan and DingXin Group, and a business marketing manager of Anchor Co. Ms. Chung holds a Bachelor of Arts in economics from TamKang University.

Min Chen has served as our vice president of the information technology division since February 2006. Mr. Chen was a vice president of Chinatrust Commercial Bank and holds a Masters in Computer Science from Ohio University.

Arthur Chiang has served as our vice president of the administration division since January 1999. Mr. Chiang was an assistant vice president of Continental Engineering Corporation and holds a Masters in Public Administration from National Cheng-Chi University.

Ted Chia has served as our vice president of the public affairs division since May 1999. Mr. Chia was a councilor of Kaohsiung City Council and worked as a correspondent for China Times Express before joining us. Mr. Chia holds a Masters in Political Science from National Sun Yat-Sen University.

T.D. Chen has served as our secretariat-general since August 1998. Mr. Chen was a vice president of TSRC Corporation. Mr. Chen holds a Bachelor of Arts in accounting and statistics from National Cheng Kung University.

Klaus Liu has served as our vice president of the legal division since August 2002. Mr. Liu was a legal assistant vice president of TSRC Corporation and holds a Masters in Law from University of Munich.

John Popoff has served as our vice president of the Integrated Railway Verification and Validation Task Force since 2000. Mr. Popoff was the project supervisor of Amtrak High-Speed Rail between Boston and New York, United States and a manager of electric and machinery department of the electrified rail between Vancouver and Columbia B.C., Canada. Mr. Popoff holds a Bachelor of Arts in electric engineering from Columbia B. C. University, Canada.

Peter D. Orange has served as our vice president of the construction management division since January 1998. Mr. Orange is a registered civil engineer in New Zealand and had 23 years of experience in civil engineering in Hong Kong. Mr. Orange has had participated in projects of tunnels and bridges of large scale for the past 25 years. Mr. Orange holds a Bachelor of Arts in civil engineering from University of Canterbury, New Zealand.

Dr. T. C. Kao has served as our vice president of Operation Preparation Task Force since October 1998. Dr. Kao was the chief executive officer of Eastern Construction Co. and has participated in projects including the metropolitan transit system in Taipei and Singapore, design project for underground rail system in metropolitan area of Taipei, project management for Kaohsiung International Harbor and Airport and management for Keelung River project. Dr. Kao holds a doctorate in civil and environmental engineering from University of California, Berkeley.

Dr. Jeder Hseih has served as our vice president of the construction management division since October 1998. Dr. Hseih was an assistant vice president of Join Engineering Consultants Corporation and holds a doctorate in civil engineering from University of Houston.

Bernard M. Fleming has served as our vice president of the contract administration division since January 1998. Mr. Fleming is a barrister and solicitor of New Zealand, a solicitor of England and Wales, and solicitor of Hong Kong. Mr. Fleming was also members of Chartered Institute of Arbitrators and International Bar Association and the chairman of Buildings Appeal Tribunal, Hong Kong. Before joining us, Mr. Fleming had 30 years of experience in the construction industry in New Zealand and Hong Kong. Mr. Fleming holds a Masters in Law and a Bachelor of Arts in law from University of Canterbury, New Zealand.

Eleanore New has served as our vice president of the financing division since June 2006. Ms. New was a senior vice president in Taishin Bank and worked at the Taipei branches of Union Bank of Switzerland and Bank of America. Ms. New holds a MBA from New York Institute of Technology.

Compensation of Directors, Supervisors and Executive Officers

In 2006, our directors, supervisors and executive officers, in such capacities, received aggregate remuneration or benefits in kind from us of approximately NT$171.9 million. Remuneration or benefits in kind paid to our directors, supervisors and executive officers, each as a group, were NT$18.0 million, NT$0.9 million and NT$153.0 million, respectively. There are no outstanding loans granted by us to any of the directors, supervisors or executive officers and there are no outstanding guarantees provided by us for the benefit of any of the directors, supervisors or executive officers.

Interests of Management in Certain Transactions

Certain 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. See “Principal Shareholders,” “Related Party Transactions” and note 5 to our financial statements. Subject to certain exceptions, our policy on transactions with related parties is that such transactions shall be conducted on a basis substantially as favorable to us as would be obtainable in a comparable arms-length transaction with a person other than a related party. Our directors, supervisors, executive officers and other members of our management and administrative staff do not have any interests, other than in the ordinary course of business, in our business transactions.

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information as of April 1, 2007, the most recent record date, with respect to our Common Shares and preferred shares owned by each of our ten largest holders of Common Shares and preferred shares in aggregate, according to our records, and by all directors, supervisors and executive officers as a group:

Name of shareholder Continental Engineering Corporation. . . . . . . . . . China Steel Corporation . . . . Taiwan Sugar Corporation . . . China Aviation Development Foundation . . . . . . . . . . Teco Electric & Machinery Co., Ltd. . . . . . . . . . . . Pacific Electric Wire & Cable Co., Ltd. . . . . . . . . . . . CTCI Foundation . . . . . . . . National Development Fund of the Executive Yuan . . . . . Fubon Life Insurance Co., Ltd. . . . . . . . . . . . Taiwan Shinkansen Corporation. . . . . . . . . .	Number of Common Shares as of April 1, 2007 403,470,000 – 500,000,000 – 442,893,447 343,364,000 – 300,000,001 40,555,200 240,000,000	Percentage of total Common Shares issued as of April 1, 2007 7.94% – 9.84% 0.00% 8.72% 6.76% – 5.90% 0.80% 4.72%	Number of preferred shares as of April 1, 2007 348,900,000 605,370,000 – 483,920,000 32,258,000 – 322,580,000 – 212,821,000 –	Percentage of total preferred shares issued as of April 1, 2007 6.43% 11.15% – 8.91% 0.59% – 5.94% – 3.92% –	Number of shares as of April 1, 2007 752,370,000 605,370,000 500,000,000 483,920,000 475,151,447 343,364,000 322,580,000 300,000,001 253,376,200 240,000,000	Percentage of total shares issued as of April 1, 2007
						7.16% 5.76% 4.76% 4.60% 4.52% 3.27% 3.07% 2.85% 2.41% 2.28%

As of December 31, 2006, our directors and supervisors in aggregate, as well as executive officers, in each case together with members of their immediate families and the Government or corporate shareholders represented by them, owned of record 2,286,156,448 Common Shares and 1,319,461 Common Shares, respectively, or approximately 44.99% and 0.03%, respectively, of our total issued Common Shares, and record 1,262,221,440 preferred shares and nil preferred shares, respectively, or approximately 23.25% and nil, respectively, of our total issued preferred shares.

RELATED PARTY TRANSACTIONS

We have entered into a number of transactions with our affiliates and may, in the future, enter into additional transactions with them and other related parties. See note 5 of the notes to our audited financial statements, for detailed information with respect to related party transactions.

We and certain of our affiliates may, in the ordinary course of business, enter into transactions with each other or one another from time to time.

For the years ended December 31, 2004, 2005 and 2006, construction costs paid to related parties as our contractors for construction in progress amounted to NT$5,303.0 million, NT$3,375.2 million and NT$822.0 million, respectively, and constituted 7.28%, 5.05% and 1.42%, respectively, of total construction costs for construction in progress in those periods. As of December 31, 2004, 2005 and 2006, construction payables, including construction retentions, to related parties as our contractors amounted to NT$432.0 million, NT$687.2 million and NT$298.3 million, respectively.

Our director, Taipei Fubon Commercial Bank Co., Ltd., or Taipei Fubon, is one of the lending banks under the First Syndicated Loan Agreement. As of December 31, 2004, 2005 and 2006, long-term loan from Taipei Fubon was NT$6,000.8 million, NT$7,431.5 million and NT$11,651.7 million, respectively. For the years ended December 31, 2004, 2005 and 2006, we paid interest to Taipei Fubon in the amount of NT$125.0 million, NT$189.8 million and NT$310.6 million, respectively. We also pledged time deposits as collateral to Taipei Fubon for a short-term loan under a credit facility. As of December 31, 2004, 2005 and 2006, such pledged time deposits amounted to NT$125.7 million, NT$0 and NT$112.0 million, respectively, which were recorded as restricted current assets.

Our director, Shin Kong Insurance Company Limited, or Shin Kong, is one of the co-insurers of the owner-controlled insurance policy we maintained during the construction period. We paid premiums to Shin Kong in the amount of NT$112.5 million, NT$0 and NT$55.5 million in 2004, 2005 and 2006, respectively. As of December 31, 2004, 2005 and 2006, all amounts due under the owner-controlled insurance policy were paid.

CHANGES IN ISSUED SHARE CAPITAL

Changes in our issued share capital since our inception through December 31, 2006 are set forth below:

Record date May 1998 . . . . . . . . April 1999. . . . . . . . August 1999. . . . . . May 2000 . . . . . . . . July 2000 . . . . . . . . September 2001 . . January 2003 . . . . . September 2003 . . January 2004 . . . . . February 2004 . . . . March 2004 . . . . . . April 2004. . . . . . . . August 2004. . . . . . September 2004 . . November 2004 . . . April 2005. . . . . . . . September 2005 . .	Type of issue Initial issuance Issuance of Common Shares for cash Capitalization of retained earnings Issuance of Common Shares for cash Issuance of Common Shares for cash Issuance of Common Shares for cash Issuance of Series A convertible preferred shares Issuance of Series B convertible preferred shares Issuance of Series C-1 convertible preferred shares Issuance of Series C-2 convertible preferred shares Issuance of Series C-3 convertible preferred shares Issuance of Series C-4 convertible preferred shares Issuance of Series C-5 convertible preferred shares Issuance of Series C-6 convertible preferred shares Issuance of Series C-7 convertible preferred shares Issuance of Series C-8 convertible preferred shares Issuance of Series C-9 convertible preferred shares	Number of shares issued Total number of shares issued (in thousands) 1,250,000 1,250,000 750,000 2,000,000 17,350 2,017,350 1,000,000 3,017,350 1,054,750 4,072,100 927,800 4,999,900 2,690,000 7,689,900 134,249.5 7,824,149.5 161,300 7,985,449.5 151,400 8,136,849.5 74,600 8,211,449.5 107,620 8,319,069.5 637,077 8,956,146.5 64,500 9,020,646.5 37,010 9,057,656.5 645,900 9,703,556.5 806,500 10,510,056.5	Total number of shares issued

DESCRIPTION OF SHARE CAPITAL

Set forth below is certain information relating to our share capital, including brief summaries of certain provisions of our articles of incorporation, the ROC Securities and Exchange Law and the regulations promulgated thereunder and ROC Company Law, all as currently in effect.

General

Our authorized share capital is NT$120 billion consisting of 12 billion shares with a par value of NT$10. As of March 31, 2007, there were 5,081,100,000 Common Shares, 2,609,000,000 Series A preferred shares, 134,049,500 Series B preferred shares and 2,685,907,000 Series C preferred shares issued and outstanding.

Preferred Shares

Our Series A and Series B preferred shares are issued at par with interest payable in cash once a year at 5% per annum based on the par value. Our Series C preferred shares are issued at NT$9.3 per share with interest payable in cash once a year at an annual rate of 9.5% per annum for the first two years and an annual rate of 0% for the subsequent two years, calculated on the basis of the issuing price. Interests on our Series A, Series B and Series C preferred shares are distributed once a year after the ordinary shareholders’ meeting ratifies the financial reports and our Board of Directors may fix a record date and declare distribution of previous year’s dividends. If there is no earning or insufficient earnings for interests distribution of our preferred shares for a given year, such unpaid interests have preference on profits made in subsequent years.

Our Series A and Series B preferred shares shall have a maturity term of six years, however, we may elect to extend the terms by thirteen months within three months prior to their maturity. We may redeem Series A and Series B preferred shares upon maturity at par value. If we are unable to redeem all the Series A and Series B preferred shares due to applicable law, the rights and obligation under our Series A and Series B preferred shares shall extend until redemption. Our Series C preferred shares shall have a term of four years. We may redeem Series C preferred shares upon maturity at the issuing price. If we are refrained from redeeming all the Series C preferred shares due to the laws or regulations, the unredeemed preferred shares shall have interest at an annual rate of 4.71% per annum and the rights and obligations under our Series C preferred shares shall extend until redemption.

Our Series A, Series B and Series C preferred shares have neither the rights conferred upon our Common Shares with respect to earning and capital surplus nor the rights of voting in the shareholders’ meeting, but they are entitled to the new share subscription as Common Shares. Moreover, our Series A, Series B and Series C preferred shares have liquidation preference over Common Share equal to their issue price. For the avoidance of doubt, the preferred shares have no preference over the Bonds at liquidation. Holders of Series A, Series B and Series C preferred shares may be elected as directors or supervisor. Series A, Series B and Series C preferred shares may be converted into our Common Shares pursuant to their terms and conditions of issuance and conversion.

In January 2003 and September 2003, we issued 2,690.0 million Series A preferred shares and 134.2 million Series B preferred shares, respectively. The maturity of our Series A and Series B preferred shares is in January 2009 and September 2009, respectively, which may be extended by thirteen months within three months prior to their maturity at our election. Between January 2004 and September 2005, we issued

2,685.9 million Series C preferred shares, in nine offerings, the maturity of which is between January 2008 and September 2009. We may not extend their maturity without the approval by a meeting of each of our holders of Common Shares and holders of such preferred shares. A Holder of our Series A, B or C preferred shares may convert its preferred shares into Common Shares, in whole but not in part, at a 1:1 ratio three years after their respective issue dates until three months before their respective maturity dates.

We may not issue any new preferred shares without the approval by a meeting of our holders of Common Shares. See also “Changes in Issued Share Capital” for changes in our preferred share capital since our inception through December 31, 2006.

Domestic Secured Bonds

In April 2002, we issued secured domestic bonds with an aggregate principal amount of NT$10 billion. The bonds comprise three classes: A, B and C. The class A bonds due in April 2007 represent NT$3.7 billion and bear the interest at 3.5% per annum. The class B bonds due in April 2007 represent NT$3.4 billion and bear the interest at 3.47% per annum. The class C bonds due in April 2007 represent NT$2.9 billion and bear the interest at 3.455% per annum.

In April 2003, we issued secured domestic bonds with an aggregate principal amount of NT$10.0 billion. The bonds comprise four classes: A, B, C and D. The class A bonds due in April 2008 represent NT$3.5 billion and bear the interest at 1.75% per annum. The class B bonds due in April 2008 represent NT$2.5 billion and bear the interest at 1.7424% per annum. The class C bonds due in April 2009 represent NT$3.0 billion and bear the interest at 1.90% per annum. The class D bonds due in April 2009 represent NT$1.0 billion and bear the interest at 1.8911% per annum.

In September 2003, we issued secured domestic bonds with an aggregate principal amount of NT$6.8 billion. The bonds comprise four classes: A, B and C. The class A bonds due in September 2008 represent NT$2.5 billion and bear the interest at 1.9% per annum. The class B bonds due in September 2008 represent NT$2.3 billion and bear the interest at 1.8911% per annum. The class C bonds due in September 2008 represent NT$2.0 billion and bear the interest at 1.8866% per annum.

In April 2007, we adopted an offering plan for NT$9.8 billion secured domestic bonds, comprised of class A Bonds, class B Bonds and class C Bonds. The class A Bonds were issued in May 2007 and mature in May 2012, with an aggregate principal amount of NT$4.0 billion and bearing interest at 2.07% per annum. The class B Bonds were issued in the end of April 2007 and will mature in April 2013, with an aggregate principal amount of NT$3.0 billion and bearing interest at 2.12% per annum. The class C Bonds were issued in the end of April 2007 and will mature in April 2014, with an aggregate principal amount of NT$2.8 billion and bearing interest at 2.17% per annum.

The Company Law and the Securities and Exchange Law provide that any change in issued share capital of a public company, such as us, requires approval of the board of directors, an amendment to its articles of incorporation (which requires shareholder approval if it also involves a change in our authorized share capital), and the approval of the FSC and the MOEA.

Dividends

Under the Company Law, except under certain limited circumstance, a ROC company is not permitted to distribute dividends or make any other distributions to shareholders at any time other than when it is generating net profits (“Earnings”). Before distributing a

dividend or making any other distribution to shareholders from Earnings, a company must first apply such Earnings to its losses suffered in previous years, if any, pay all outstanding taxes and set aside the legal reserve referred to below.

Following approval of the financial statements for the preceding fiscal year by the shareholders in any ordinary shareholders’ meeting, dividends are, unless otherwise stipulated under that company’s articles of incorporation, distributed in proportion to the number of shares owned by each shareholder as listed on the register of shareholders as at the relevant record date determined by the board of directors (“Annual Dividends”). Annual Dividends may be distributed either in cash or in the form of common stock or a combination thereof. The ratio between any cash dividend and stock dividend is proposed by the board of directors and is determined by the shareholders at a shareholders’ meeting. Our practice with respect to the payment of dividends is referred to “Dividends and Dividend Policy”.

The Company Law provides that a company is required to set aside a legal reserve in an amount equal to 10% of its Earnings (less losses, if any, of previous years and applicable taxes) until such time as the legal reserve equals its paid-up capital. Our Articles of Incorporation provide that, after we pay our taxes, recover any losses incurred in prior years, deduct the legal reserve and/or special reserve and pay the interest of our preferred shares from our net income, the remaining balance may be distributed in the following manner if so resolved by the shareholders’ meeting:

(i) 1% as remuneration to directors and supervisors;
(ii) 1% as employees’ bonuses; and
(iii) the remaining portion, together with the undistributed retained earnings in the previous years, as shareholders’ dividends or bonus according to the distribution plan proposed by the Board of Directors and approved by the shareholders.

Our Articles of Incorporation also provide that upon approval of the Ministry of Economic Affairs, we may distribute preferred stock dividends before the commencement of revenue operation without subject to the above restriction on distribution of dividends. However, such distribution shall be accounted as prepaid preferred stock dividends under the account of shareholders’ equity on the balance sheet. After the commencement of revenue operation, each distribution of dividends or bonus for the amount exceeding 6% of the paid-in capital shall be offset against the prepaid amount.

Distribution of Additional Shares

In addition to dividends paid out of Earnings of a company, the Company Law also permits a company to make distributions to shareholders in the form of additional shares from reserves (including its legal reserve referred to above certain other reserves). For information as to ROC taxes on cash and stock dividends, see “Taxation”. However, the capitalized portion payable out of the company’s legal reserves is limited to 50% of the total accumulated legal reserve and the capitalization of the legal reserve can only be effected when the accumulated legal reserve exceeds 50% of the company’s paid-in capital.

Pre-emptive Rights and Issue of Additional Shares

The Company Law provides that between 10% and 15% of any new issue of shares of capital stock sold for cash must be offered first to the issuing company’s employees. In addition, the Securities and Exchange Law and the relevant securities regulations requires that, if a public company, such as us Company, intends to offer new shares for cash, at

least 10% of such issue must be offered to the public except under certain circumstances or when exempted by the FSC. This percentage can be increased by a resolution passed at a shareholders’ meeting, thereby reducing the number of new shares subject to the pre-emptive rights of existing shareholders. Unless the percentage of shares to be offered to the public is increase by shareholders, existing shareholders who are listed on the shareholders’ register as of the record date have a pre-emptive right to acquire the remaining 75% to 80% of the issue.

Meeting of Shareholders

Our annual ordinary shareholders’ meeting is usually held in Taipei, Taiwan, as determined by the board of directors, within six months following the end of each fiscal year. Extraordinary meetings of shareholders may be convened by resolution of the board of directors whenever they consider it necessary or by shareholders under certain circumstances. Extraordinary meetings of shareholders may also be convened by a supervisor of the company when the board of directors does not or cannot convene a meeting of shareholders and/or when such a meeting is necessary to the company’s benefit. Notice in writing of ordinary and extraordinary shareholders’ meetings sating the place, time and purpose thereof must be dispatched to each shareholder at least 30 days and 15 days, respectively, prior to the date set for the meeting.

Voting Rights

A holder of Shares has one vote for each share. Except as otherwise provided by law, a shareholders’ resolution is passed or adopted if voted in favor by the majority present at a shareholders’ meeting at which a quorum is present (being holders of more than 50% of the issued and outstanding common stock present in person or by proxy). With respect to election of the company’s directors and supervisors by shareholders, it is carried out on a cumulative voting basis. The votes of independent directors and supervisors will be calculated separately.

Notwithstanding the above, in order to approve certain major corporate actions, including any amendment to the articles of incorporation of a company (which is required for, inter alia, any increase in authorized share capital), the dissolution or amalgamation of a company, the transfer of all or an important part of its business or its 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 operation, the execution, amendment or termination of any contract that leaves or mandates a company’s operation to other persons, or operates frequently the business for the joint interest of a company and other persons, the merger or spin-off, the removal of directors or supervisors of a company, or the distribution of any stock dividend, the Company Law provides that a resolution has to be passed at a meeting of the shareholders with a quorum of holders of at least two-third of all issued and outstanding common stock at which the majority present vote in favor thereof. Alternatively, in the case of a public company, such as the company, such a resolution may be approved by the holders of at least two-third of the common stock represented at a meeting of shareholders with a quorum of holders of at least a majority of issued and outstanding common stock.

A shareholder may be represented at an ordinary or extraordinary meeting by proxy. A valid proxy form must be delivered to the company at least five days prior to the date fixed for the ordinary or extraordinary meeting. Voting rights attached to Shares that are exercised by the company’s shareholders’ proxies are subject to ROC proxy regulations. Except for trust enterprises or share registrars approved by the ROC FSC, where one

person is appointed as proxy by two or more shareholders who together hold more than 3% of the company’s total issued Shares, the proxy shall be treated as if it owned only 3% of the company’s total issued Shares.

Registration of Shareholders and Record Dates

We maintains the register of shareholders at its office in Taipei, Taiwan and enters transfers of common stock in the register of shareholders upon presentation of the certificates in respect of the common stock transferred accompanies by other required documents other than transferred through book-entry system.

As mentioned above, the record date for an Annual Dividend will be determined and announced by us. For the purpose of determining the shareholders of common stock entitled to Annual Dividends and other rights pertaining to the common stock, the Company Law provides that the register of shareholders is closed for a period of 60 days, 30 days and five days immediately before the date of each ordinary shareholders’ meeting, each extraordinary shareholders’ meeting and the record date for distribution of dividends or other rights and interest, respectively.

Annual Financial Statements

Under the Company Law, 10 days before our ordinary shareholders’ meeting, our annual financial statements must be available at our principal office in Taipei for inspection by the shareholders.

Transfer of Shares

Under the Company Law, the transfer of common stock (in registered form) is effected by endorsement and delivery of share certificates. In order to assert shareholders’ rights against the company, the transferee must have his name and address registered on the company’s register of shareholders. Shareholders are required to register their respective specimen seal or chop with the company. The settlement of trading of our Common Shares is either carried out on the book-entry system maintained by Taiwan Depository & Clearing Corporation or by endorsement and delivery of Common Shares in registered form.

Acquisition by a Company of Its Own Shares

With minor exceptions, a company cannot acquire its own shares under the Company Law.

Under the Securities and Exchange Law, a company may, by a board resolution adopted by majority consent at a meeting with two-third of directors present, purchase shares on the TSE, Gre-Tai Securities Market, or GTSM, or by a tender offer, in accordance with the procedures prescribed by the FSC, for the following purposes: (i) to transfer shares to its employees; (ii) to convert bonds with warrants, preferred shares with warrants, convertible bonds, convertible preferred shares or certificates of warrants issued by a company into shares; (iii) if necessary, to maintain its credit and shareholders’ equity; provided that the shares so purchased shall be cancelled thereafter. The shares purchased by a company in the case of clauses (i) and (ii) above are to be transferred to the intended transferees within three years from the repurchase, failing which they will be cancelled and a company will be required to complete and amendment registration for the cancellation. In the case of clause (iii) above, the shares purchased by the company must be cancelled within six month after repurchase.

A company is not allowed to purchase more than 10% of its total issued and outstanding shares. In addition, the company may not spend more than the aggregate amount of the retained earnings, the premium from issuing shares and the realized portion of the capital reserve to purchase its shares. A company may not pledge or hypothecate any purchased shares. In additional, the company may not exercise any shareholders’ rights attaching to such shares. In the event that the company purchases its shares on the TSE, GTSM, its affiliates, directors, managers and their respective spouses and minor children and/or nominees are prohibited from selling any shares during the period which a company purchases its shares.

The above purchase by a company of its own shares under the Securities and Exchange Law is not applicable to a company whose shares are traded on the ROC Emerging Stock Market, such as us.

Liquidation Rights

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

Other Rights of Shareholders

Under the ROC Company Law, dissenting shareholders are entitled to appraisal rights in certain major corporate actions such as a proposed amalgamation by a company. A dissenting shareholder may request a company to redeem all of the shares owned by the shareholder at a fair price determined by mutual agreement or determined by a court order if any agreement cannot be reached. Shareholders may exercise their appraisal rights by serving written notice on the company prior to the related shareholders’ meeting and/or by raising and registering an objection at the shareholders’ meeting. In addition to appraisal rights, shareholders have the right to sue for the annulment of any resolution adopted at a shareholders’ meeting where the procedure were legally defective within 30 days after the date of such shareholders’ meeting.

One or more shareholders who have held more than 3% of issued and outstanding shares of a company for more than one year may require a supervisor to bring a derivative action on behalf of the company against a director for the director’s liability to the company as a result of the director’s unlawful actions or failure to act. In addition, one or more shareholders who have held more than 3% of the issued and outstanding shares of a company for more than one year may require the board of directors to convene an extraordinary shareholders’ meeting by sending a written request to the board of directors.

The ROC Company Law has been newly amended to allow shareholders holding 1% or more of the total issued shares of a company to submit, during the period of time prescribed by the company, one proposal in writing for discussion at the ordinary meeting of shareholders. The amendment also provides that a company may adopt a nomination procedure for election of directors or supervisors. If a company wishes to adopt the nomination procedure, it must be stipulated in its articles of incorporation. With such provision in the articles of incorporation of a company, shareholders representing 1% or more of the total issued shares of such company may submit a candidate list to the company along with relevant information and supporting documents. Our articles of incorporation currently adopt such nomination procedure for the election of our independent directors.

TERMS AND CONDITIONS OF THE BONDS

The following (except for the statements in italics) is the text of the terms and conditions (the “Conditions”) of the Bonds, which appear on the Global Certificate representing the Bonds and on the reverse of each definitive certificate which may be issued in respect of the Bonds. The terms and conditions should be read in conjunction with the section entitled “The Global Certificate” contained elsewhere in this Offering Memorandum.

The issue of US$300,000,000 Zero Coupon Convertible Bonds due 2012 (the “Bonds”) of Taiwan High Speed Rail Corporation (the “Company”) was authorized by a resolution of the Board of Directors of the Company adopted on November 10, 2006. The Bonds will be issued pursuant to an indenture (the “Indenture”) dated as of May 15, 2007 between the Company and The Bank of New York, London Branch, as trustee (the “Trustee”, which term shall include all persons for the time being appointed as trustee or trustees under the Indenture) for the holders of the Bonds. The Company will also enter into a paying and conversion agency agreement (the “Agency Agreement”) dated as of May 15, 2007 with The Bank of New York, London Branch, as the Trustee, The Bank of New York as the registrar for the Bonds and The Bank of New York, London Branch, as the principal paying, conversion and transfer agent appointed thereunder (collectively with the registrar, the “Agents” in relation to the Bonds). The registrar, principal paying agent, paying agents, conversion agents and transfer agents for the time being are referred to below as the “Registrar”, the “Principal Paying Agent”, the “Paying Agents” (which expression shall include the Principal Paying Agent), the “Conversion Agents” (which expression shall include the Principal Paying Agent) and the “Transfer Agents” (which expression shall include the Registrar), respectively. The statements in these Conditions include summaries of, and are subject to, the detailed provisions of the Indenture. Copies of the Indenture and the Agency Agreement are available for inspection by holders of the Bonds during normal business hours at the principal office of the Trustee being at the date hereof at 40th Floor, One Canada Square, London E14 5AL, England, and at the specified offices of each of the Agents. The holders of the Bonds should read the Indenture and the Agency Agreement in their entirety, as they are bound by, and are deemed to have notice of, all the provisions of the Indenture and the Agency Agreement. Capitalized terms used in these Conditions without definition are used as defined in the Indenture.

1 STATUS

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

For the purpose of these Conditions, “Shares” means ordinary shares of NT$10 each of the Company or shares of any class or classes resulting from any subdivision, consolidation or re-classification of those shares, which as between themselves have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation or dissolution of the Company; provided that in the event of a QPO (as defined in Condition 6(B)) or any public offer or listing of Shares or analogous event, “Shares” shall also mean Shares which are the subject matter of the QPO or public offer or listing or analogous event, whether such Shares are still Shares in the Company or are shares in some other company structured for the purpose of such QPO, public offer or

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listing or such analogous event; provided however further that, the term “Share” or “Shares” means, when used to refer to the class or classes of the Company’s capital stock into which the Bonds are convertible and when used in certain other instances, only the Company’s common shares, NT$10 par value per share.

2 FORM, DENOMINATION AND TITLE

(A) Form and Denomination

The Bonds are issued in registered form, without coupons, in the denomination of US$1,000 each. The Bonds shall be offered, sold and transferred in the principal amount of US$1,000 or an integral multiple thereof. The Bonds shall initially be represented by a global certificate (the “Global Certificate”), and only under the limited circumstances described in the Global Certificate and the Indenture shall definitive bond certificates (each a “Definitive Certificate”) be issued to holders of the Bonds in respect of their individual registered holdings. Each Definitive Certificate, if issued, shall be serially numbered and shall have an identifying number which shall be recorded on the relevant Definitive Certificate and in the register of holders of the Bonds, which the Company shall procure to be kept by the Registrar. The Bonds are not issuable in bearer form.

For the purposes of these Conditions, a “Certificate” means a Definitive Certificate or the Global Certificate.

The Bonds shall initially be represented by the Global Certificate and deposited with, and registered in the name of a nominee of, The Bank of New York, London Branch, as common depositary for Euroclear and Clearstream, Luxembourg. The Global Certificate shall contain or incorporate by reference the Conditions.

(B) Title

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

(C) Further Issues

The Company may from time to time without the consent of the holders of the Bonds, to the extent permitted under the laws of the ROC, create and issue further securities having the same terms and conditions as the Bonds in all respects (except for the issue date, issue price and to the extent necessary, certain temporary securities law transfer restrictions) so that such further issues shall be consolidated and form a single series with the outstanding Bonds.

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3 CERTAIN COVENANTS

(A) Negative Pledge

So long as any of the Bonds remains outstanding (as defined in the Indenture), the Company shall not, and shall not permit any of its Principal Subsidiaries (as defined below) to, create or permit to subsist any mortgage, charge, pledge, lien or other form of encumbrance or security interest (“Security”) upon the whole or any part of the undertaking, property, assets or revenues of the Company or such Principal Subsidiary, as the case may be, present or future, to secure for the benefit of the holders of any International Investment Securities (as defined below) any payment of any sum due in respect of or under any guarantee of or payment under any indemnity or other like obligation relating to any such International Investment Securities, unless, in any such case, at the same time or prior thereto, either (i) the same Security is granted to the holders of the Bonds equally and ratably or (ii) effective provision is made to secure the Bonds with a guarantee, indemnity or other like obligation or such other security as shall be approved by holders of not less than a majority of the principal amount of the Bonds then outstanding.

For the purposes of these Conditions:

“International Investment Securities” mean bonds, debentures, notes or other similar investment securities of the Company or any of its Principal Subsidiaries evidencing indebtedness with a maturity of not less than one year that (a) either (i) are by their terms payable, or confer a right to receive payment, in any currency other than the currency of the country of incorporation of the issuer or (ii) are denominated or payable in the currency of the country of incorporation of the issuer and more than 50% of the aggregate principal amount thereof is initially distributed outside the country of incorporation of the issuer by or with its authorization; and (b) are for the time being, or are capable of being, quoted, listed, ordinarily dealt in or traded on any stock exchange, quotation system or over-the-counter or other similar securities market outside the country of incorporation of the issuer.

“Principal Subsidiary” in relation to the Company means any corporation or other business entity 50% or more of the outstanding voting stock of which is for the time being owned directly or indirectly by the Company and either (a) the operating revenues of which, as shown by the accounts (consolidated in the case of an entity which itself has subsidiaries) of such entity upon which the most recent audited consolidated accounts of the Company have been based, are at least 10% of the consolidated operating revenues of the Company as shown by such audited consolidated accounts; or (b) the total assets of which, as shown by the aforementioned accounts, are at least 10% of the consolidated total assets of the Company, as shown by such audited consolidated accounts.

(B) Merger, Amalgamation or Consolidation

So long as any of the Bonds remains outstanding (as defined in the Indenture), the Company shall not merge, amalgamate or consolidate with or into any other corporation or entity (if the Company is not the continuing entity) or sell or transfer all, or substantially all, of its assets, whether as a single transaction or a number of transactions, related or not, to any corporation, entity or person or to one or more members of any group under the common control of any corporation, entity or person (the consummation of any such event, a “Merger”) unless:

(i) the Company has notified the holders of the Bonds of such event in accordance with Condition 16;

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(ii) the Company and the corporation, entity or person resulting from such merger, amalgamation or consolidation or the corporation or the entity which has acquired such assets (the “Successor Company”), as the case may be, have executed an indenture supplemental to the Indenture, in form and substance satisfactory to the Trustee, and the supplemental indenture includes the following: (a) the express assumption by the Successor Company of the Company’s obligations under the Bonds, the Indenture and the Agency Agreement, including the covenants contained in this Condition 3(B) relating to any subsequent Mergers; (b) provisions for the convertibility of each Bond then outstanding (during the period in which such Bond shall be convertible) into the class and amount of shares and other securities, cash and other property receivable upon such Merger by a holder of the number of Shares into which such Bonds would have been convertible immediately prior to such Merger (assuming for such purpose that the Bonds were convertible at the time of such Merger) at the Conversion Price (as defined in Condition 7(A)(iii)) as adjusted from time to time pursuant to the Indenture; and (c) provisions for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in Condition 7(C);
(iii) immediately after giving effect to such Merger, no Event of Default (as defined in Condition 11(A)) shall have occurred or be continuing or would result therefrom; and
(iv) the provisions described under Conditions 9(C) and 10 shall be applicable to the Successor Company and the above provisions of this Condition 3(B) shall apply in the same way to any subsequent Mergers.

4 TRANSFERS OF BONDS; ISSUE OF CERTIFICATES

(A) Transfers

Subject to Condition 4(D), a Bond may be transferred as follows: (i) in the case of a Bond represented by a Definitive Certificate, by depositing such certificate at the specified office of any Transfer Agent, with the form of transfer on the back of such certificate duly completed and signed, and (ii) in the case of a Bond represented by the Global Certificate, by depositing a form of transfer obtainable from any Transfer Agent, duly completed and executed, at such office. In each case, such deposit shall be accompanied by any other evidence that such Transfer Agent may reasonably require.

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

(B) Delivery of New Definitive Certificates

Each new Definitive Certificate to be issued upon transfer of the Bonds shall, within five Transfer Business Days of receipt by the relevant Transfer Agent of the duly completed and signed form of transfer, be mailed by uninsured mail at the risk of the holder entitled to the Bonds to the address specified in the form of transfer.

Where some but not all the Bonds in respect of which a Definitive Certificate is issued are to be transferred, converted or redeemed, a new Definitive Certificate in respect of the Bonds not so transferred, converted or redeemed shall, within five Transfer Business Days of deposit or surrender of the original certificate with or to the relevant

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Agent, be mailed by uninsured mail at the risk of the holder of the Bonds not so transferred, converted or redeemed to the address of such holder appearing on the Bond Register.

For the purposes of this Condition 4:

“Transfer Business Day” means a day (other than a Saturday or Sunday) on which banks are open for business in the city in which the specified offices of the relevant Transfer Agent with whom a Definitive Certificate is deposited in connection with a transfer and the Registrar are located.

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

(C) Formalities Free of Charge

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

(D) Restricted Transfer Period

No holder of the Bonds may require the transfer of a Bond to be registered (i) during the period of 15 days ending on (and including) the due date for any payment in respect of the Bond pursuant to Condition 9(A), (ii) after such Bond has been selected for redemption pursuant to Condition 9(B), (iii) following exercise by the holder of its option to require the Company to redeem the Bonds pursuant to Conditions 9(D), 9(E) or 9(F), (iv) following exercise by the holder of its option to convert its Bonds pursuant to Condition 7(A) or (v) during the period of seven days ending on (and including) any Interest Payment Date (as defined in Condition 5(A).

(E) Provisions on Transfer

All transfers of the Bonds and entries on the Bond Register shall be made subject to the detailed provisions concerning transfer of the Bonds (the “Regulations”) set forth in the Agency Agreement. The regulations may be changed by the Company, with the prior written approval of the Trustee and the Registrar. A copy of the current Regulations shall be mailed at the Company’s expense by the Registrar to any holder of the Bonds upon written request.

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5 INTEREST

(A) Interest Payments

The Bonds will not bear interest.

(B) Default Interest Payments

Notwithstanding the foregoing, if a Bond is due for redemption or repayment and upon due presentation, payment of the outstanding principal of the Bond is withheld or refused or default is otherwise made in respect of any such payment, interest will accrue at the Default Interest Rate (as defined in Condition 8(E)), both after as well as before any judgment, up to but excluding the date on which payment in full of the outstanding principal of the Bond and accrued interest thereon is made.

(C) Calculation of Interest

Subject to Condition 5(B), interest on the Bonds will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the actual number of days elapsed during that month.

6 QUALIFYING PUBLIC OFFERING

(A) Endeavor to Effect a Qualifying Public Offering

The Company shall use its best endeavors to ensure that the Listing Date (as defined in Condition 6(B)) shall occur on or prior to the date which is 24 calendar months after the Issue Date.

(B) Certain Definitions

As used in these Conditions,

“QPO” means an initial public offering (“IPO”), plus, if necessary, up to three public offerings consecutively following the IPO, of QPO Securities, which together, if necessary, comply with (x) the rules of a Recognized Stock Exchange and (y) the following conditions: (i) offerings of QPO Securities are made to the public for subscription or sale exclusively for cash, accompanied (or preceded) by the grant of listing of, and permission to deal in, the QPO Securities by a Recognized Stock Exchange;

(ii) the gross proceeds (if necessary, translated into U.S. dollars at the Fixed Exchange Rate as defined in Condition 7(A)) of the QPO Securities sold by the Company and/or any selling shareholders in the offerings in aggregate is equal to or greater than US$300 million;
(iii) the product of (a) the number of QPO Securities not held by an affiliate of the Company (meaning a party or parties acting in concert that in aggregate holding the voting rights of 5% or more of the Company’s outstanding securities prior to the IPO) and (b) the average trading price of the QPO Securities on the Listing Date is equal to or greater than US$300 million;
(iv) an aggregate of not less than 30 separate institutional investors that are not related parties of the Company (as defined under ROC GAAP) and are not ROC entities shall have purchased QPO Securities in such offerings;

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(v) a duly authorized officer of the Company shall have certified in writing to the Trustee that, immediately after giving effect to any offering under this Condition 6(B), no Event of Default hereunder, and no event which, with the giving of notice or the passage of time, or both, would constitute an Event of Default hereunder, shall have occurred and be continuing; and
(vi) the Company shall have obtained approval or in-principle approval from a Recognized Stock Exchange to list the Shares into which the Bonds are convertible.

For the avoidance of doubt, a QPO may be achieved through a single, two, three or four consecutive public offerings; four public offerings need not occur in order to effect a QPO.

“QPO Securities” means Shares, or depositary receipts (“DRs”) representing the right to receive Shares, subject to an offering or listing that constitutes a QPO within the meaning of this Condition 6.

“Listing Date” means the listing date for the public offering which when aggregated with the other eligible public offerings, if any, in total fulfills the aggregated requirements for a QPO.

“Recognized Stock Exchange” means the Taiwan Stock Exchange, the GreTai Securities Market or another internationally recognized exchange in Asia, Europe or the United States.

“Relevant Stock Exchange” means the RESM or, upon listing of the IPO, a Recognized Stock Exchange on which the IPO occurs.

“RESM” means the ROC Emerging Stock Market.

(C) Notice of Intended QPO

For each of the IPO and any public offerings pursuant to this Condition 6, if the offering (i) is approved by a Recognized Stock Exchange and such approval has been communicated to the Company, and (ii) is proposed to be effected, the Company will (to the extent permitted by applicable law) notify the Trustee and the Bondholders of the intended offer to the public and listing of the Shares in accordance with Condition 16.

(D) QPO Certification

A QPO shall not be deemed to have occurred unless Deutsche Bank, together with an independent investment bank of international repute selected by the Company and approved in writing by the Trustee, which may be the lead manager of the IPO or any of the other offerings under this Condition 6, shall have determined, as evidenced by a certificate delivered to the Company and the Trustee, that the offer or offers to the public and listing of the QPO Securities notified pursuant to Condition 6(C) satisfy the conditions set out in Condition 6(B) and qualify as QPO(s) for the purpose of these Conditions (the “QPO Certification”). The Company undertakes to provide such information and documents as Deutsche Bank and such independent investment bank of international repute shall reasonably require for the purpose of making the certification pursuant to this Condition 6(D). The Company agrees and will ensure that the Bondholders will not bear any of the costs and expenses of the determination and certification required by this Condition 6(D). The Company shall procure that such QPO Certification be promptly communicated to the Trustee and the Bondholders in accordance with Condition 16. The

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Company shall also forthwith notify the Trustee and the Bondholders in accordance with Condition 16 if Deutsche Bank and such independent investment bank of international repute refuse or fail to issue a QPO Certification.

7 CONVERSION

The Company will, within five Trading Days (as defined below) from each Conversion Date (as defined in Condition 7(B)(i)), issue and deliver the Shares, through book-entry, to the converting holder or its designee, subject to applicable law and the provisions of the Indenture and the Agency Agreement relating to the conversion.

(A) Conversion Right

(i) Conversion Period

Subject to the terms set forth herein and in the Indenture, each holder of the Bonds has the right (the “Conversion Right”) under the Indenture to convert any Bond into Shares. Subject to and upon compliance with the provisions of this Condition 7, the Conversion Right attaching to any Bond may be exercised, at the option of the holder of the Bonds and to the extent provided herein, at any time (a) on or after June 15, 2007 and prior to the close of business (at the place where such Bond is deposited for conversion) on April 30, 2012 (or if such day shall not be a Conversion Business Day (as defined below) at such place, on the immediately preceding Conversion Business Day at such place) (but in no event thereafter) or (b) if such Bond shall have been called for redemption prior to April 30, 2012, then up to the close of business (at the place aforesaid) on the fifth Conversion Business Day prior to the date fixed for redemption thereof (the “Conversion Period”); provided , however, that the Conversion Right during any Closed Period (as defined below) shall be suspended and the Conversion Period shall not include any such Closed Period; provided that if such day is not a Business Day at the place where such Bonds are deposited for conversion, on the immediately preceding Business Day at such place. The Company shall give timely (and if practicable prior) notice of the commencement of any Closed Period to holders of the Bonds in accordance with Condition 16 and to the Trustee and all Conversion Agents in accordance with the provisions of the Indenture and the Agency Agreement.

For the purposes of these Conditions:

“Closed Period” means: (i) the 60-day period prior to and including the date of any general shareholders’ meeting of the Company; (ii) the 30-day period prior to and including the date of any special shareholders’ meeting of the Company; (iii) the five-day period prior to and including a record date for distribution of rights, dividends or other benefits; (iv) the period beginning on the third Trading Day prior to the Company’s notification to the Relevant Stock Exchange of a record date for the determination of the identity of shareholders entitled to subscribe for new Shares or receive dividend distributions or other rights or benefits to the date of such record date; (v) the period beginning from the record day of capital reduction to the day immediately prior to the first Trading Date of the shares reissued after the capital reduction; and (vi) such other periods during which the Company may be required to close its shareholders’ register under ROC laws and regulations applicable from time to time.

“Trading Day” means a day when a Relevant Stock Exchange is open for trading of securities. For the purposes of this Condition 7:

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“Conversion Business Day” means a day (other than a Saturday or Sunday) on which commercial banks are open for business in the city in which the specified office of the relevant Conversion Agent is located.

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

Under current ROC law, a non-ROC converting holder of the Bonds, before exercising his conversion right to convert the Bonds into Shares, is required to register with the Taiwan Stock Exchange (the “TSE”) (in accordance with the registration requirement for foreign institutional investors or foreign individual investors), and a non-ROC converting holders of the Bonds, when exercising the Conversion Right, is required to appoint a local agent, referred to as a tax guarantor (whose qualifications are set by the ROC Ministry of Finance), in the ROC to file tax returns and make tax payments on its behalf. Under current ROC law, a non-ROC converting holder of any Bond, when exercising its conversion right to convert its Bond into Shares, is also required to appoint a local agent in the ROC with such qualifications as are set by the ROC FSC. The local agent has the power to take the following actions on behalf of and as agent for the converting holder: open a securities trading account with a local brokerage firm and a NT Dollar bank account, pay ROC withholding taxes, remit funds, exercise shareholders’ rights, and perform such other matters as may be designated by the converting holder. In addition, such non-ROC converting Bondholder must also appoint a custodian bank to hold the securities and any cash proceeds for safekeeping, confirm and settle trades and report all relevant information. Without meeting these requirements, the converting holder would not be able to receive, hold, sell or otherwise transfer the Shares into which the Bonds may have been converted on the RESM or otherwise. See “Foreign Investment and Exchange Controls in the ROC” and “Description of Our Share Capital”.

(ii) Number of Shares Issuable on Conversion

The number of Shares issuable upon conversion of any Bond shall be determined by dividing the principal amount of a Bond (translated into New Taiwan Dollars at a fixed exchange rate of NT$33.285 = US$1.00, the “Fixed Exchange Rate”) by the Conversion Price in effect on the Conversion Date (as defined in Condition 7(B)(i)). If more than one Bond shall be deposited for conversion at any one time by the same holder of the Bonds, the number of Shares to be issued upon conversion thereof shall be calculated on the basis of the aggregate principal amount of the Bonds so deposited. Fractions of Shares shall not be issued on conversion, and cash adjustments shall not be made in respect thereof by the Company. Notwithstanding the foregoing, in the event of a consolidation or reclassification of Shares by operation of law or otherwise that occurs after May 15, 2007 (the “Issue Date”), the Company shall upon conversion of the Bonds pay in US Dollars a sum equal to such portion of the principal amount of the Bonds deposited for conversion as

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corresponds to any fraction of a Share not issued as aforesaid if such sum exceeds US$10. For the purpose of calculating the amount of such payment, the Company shall use the Fixed Exchange Rate.

(iii) Initial Conversion Price

The price at which Shares shall be issued upon conversion shall initially be NT$10.0 per Share (as adjusted from time to time, the “Conversion Price”), but shall be subject to adjustment in the manner provided in Conditions 7(C) and 7(D).

(iv) Survival on default

Notwithstanding the provisions of Condition 7(A)(i), if an Event of Default (as defined in Condition 11(A)) occurs, the Conversion Right attaching to a Bond shall continue to be exercisable up to and including the close of business (at the place where the relevant Conversion Notice (as defined in Condition 7(B)(i)) is deposited for conversion) on the date upon which (a) the full amount of the monies payable in respect of such Bond has been duly received by the Trustee or the Principal Paying Agent and (b) notice of such receipt has been duly given to the holders of the Bonds.

(B) Conversion Procedures

(i) Exercise procedures; Conversion Notice; Deposit Date; Conversion Date

To exercise the Conversion Right attaching to any Bond, a holder of the Bond shall deposit the following at its own expense between 9:00 a.m. and 3:00 p.m. (local time at the specified office referred to below) on any Conversion Business Day during the Conversion Period at the specified office of a Conversion Agent outside the ROC:

(a) a notice of conversion (a “Conversion Notice”) in duplicate, duly completed and signed, in the then current form obtainable from the specified office of any Conversion Agent, together with the relevant Definitive Certificate, if issued, in respect of the relevant Bond;
(b) any certificates and other documents as may be required under the law of the ROC or the jurisdiction in which such Conversion Agent is located; and
(c) any amount required to be paid by the holder of the Bond referred to in Condition 7(B)(ii) below.

Any of the above items deposited after 3:00 p.m. as specified above or on a day that is not a Conversion Business Day shall for all purposes be deemed to have been deposited with that Conversion Agent on the immediately succeeding Conversion Business Day. Any of the above items deposited on the day immediately prior to a Closed Period or during the Closed Period shall for all purposes be deemed to have been deposited with that Conversion Agent on the first Conversion Business Day immediately after the end of the Closed Period. The Conversion Notice shall contain, among other things: (1) contact information of the local agent appointed by the converting holder; (2) an irrevocable instruction to convert the Bonds into Shares; and (3) other information required by ROC laws and regulations. Once deposited, the Conversion Notice may not be withdrawn without the Company’s written consent. The price at which such Bond shall be converted shall be the Conversion Price in effect on the Conversion Date (as defined below).

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The Company, or a Conversion Agent on its behalf, may reject any incomplete or incorrect Conversion Notice or any Conversion Notice that is not accompanied by any amount payable under Condition 7(B)(ii). All costs and expenses incurred or caused by an incomplete or incorrect Conversion Notice shall be for the account of the relevant holder.

For the purposes of these Conditions:

“Deposit Date” means the date on which (i) any Definitive Certificate, if issued, in respect of a Bond, (ii) the duly signed and completed Conversion Notice, in duplicate, relating thereto, (iii) any certificates or other documents, as may be required, and (iv) the payments referred to in Condition 7(B)(ii) below, as may be required, have all been deposited with a Conversion Agent.

“Conversion Date” means the first Trading Day following the Deposit Date that is not within a Closed Period.

(ii) Taxes and expenses

As conditions precedent to the exercise of the Conversion Right attaching to any Bond, together with the delivery of the Conversion Notice, the Definitive Certificate, if issued, and any certificates or other documents as may be required, the holder of the Bond must pay all stamp, issue, registration, excise and similar taxes, duties and transfer costs, if any, arising on conversion in the country in which the Bond is deposited for conversion or payable in any jurisdiction upon the issue or delivery of Shares or any other property or cash upon conversion to or to the order of a person other than the converting holder of the Bond. Except as aforesaid, the Company shall pay the expenses arising in the ROC on the issue of Shares upon conversion of the Bond and all charges of the Conversion Agents in connection therewith as provided in the Agency Agreement.

(iii) Holder of record

With effect from the opening of business in the ROC on the Conversion Date, the Company shall deem the converting holder of a Bond (or its designee) as indicated in the Conversion Notice, to have become the holder of record of the number of Shares to be issued upon such conversion (disregarding any retroactive adjustment of the Conversion Price referred to below prior to the time such retroactive adjustment shall have become effective). At such time, subject to Condition 7(B)(iv), the rights of such converting holder with respect to the Bond deposited for conversion shall cease, except rights arising under Condition 7(B)(v).

(iv) Delivery of Shares

On the Conversion Date, the Company shall register the converting holder of a Bond or its designee, in the Company’s register of shareholders as the owner of the number of Shares to be issued pursuant to Condition 7(B)(iii) upon conversion of the Bonds deposited by such holder. Subject as set forth below and subject further to any applicable limitations then imposed by ROC laws and regulations (including any limitation on foreign ownership of Shares) and the obtaining of approval of a Relevant Stock Exchange, if any, in accordance with the request made in the relevant Conversion Notice, the Company shall deliver as soon as practicable, and in any event within five Trading Days after the Conversion Date, for the benefit of the converting holder, the following:

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(a) the relevant Shares, through book-entry transfer to an account registered in the name of the converting holder or its designee at Taiwan Depositary & Clearing Corporation, or its successor;
(b) any other property or cash (including, without limitation, cash payable pursuant to Condition 7(A)(ii)) required to be delivered upon conversion; and
(c) such documents as may be required by law to effect the delivery thereof.

If the converting holder of the Bonds or its designee does not have an account at Taiwan Depositary & Clearing Corporation, the relevant shares will only be delivered after such an account is opened by the converting holder or its designee.

(v) Retroactive adjustment of Conversion Price

If (a) the Conversion Date in relation to any Bond shall be on or after a date with effect from which an adjustment to the Conversion Price takes retroactive effect pursuant to any of the provisions referred to in Condition 7(C) and in the Indenture and (b) the relevant Conversion Date falls on a date when the relevant adjustment has not been reflected in the Conversion Price, the Company shall, within 20 days after the date of such adjustment of the Conversion Price, issue and deliver to the local agent appointed by the converting holder of the Bond such number of Shares as is equal to the excess of (1) the number of Shares that would have been required to be issued on conversion of such Bond if the relevant retroactive adjustment had been made as of the said Conversion Date over (2) the number of Shares previously issued pursuant to such conversion; and in such event and in respect of such number of Shares, references in Conditions 7(B)(iii) and 7(B)(iv) to the Conversion Date shall be deemed to refer to the date upon which such retroactive adjustment becomes effective, disregarding the fact that it becomes effective retroactively. Fractions of Shares shall not be issued and no cash adjustment shall be made in respect thereof.

(vi) Dividends and other entitlements

Shares issued on conversion of Bonds (if applicable) will in all respects rank pari passu with the Shares in issue on the relevant Conversion Date (except for any right the record date for which precedes such Conversion Date and except for any other right excluded by mandatory provisions of applicable law).

A converting holder of the Bond shall be entitled to any annual dividend distributions of the Company if the Conversion Date is prior to the relevant record date (and the relevant closure of the shareholders’ register) for determining the identity of shareholders who are entitled to such dividend distributions.

(vii) Conversion Agents

The Company reserves the right, subject to the provisions of the Agency Agreement, at any time, to vary or terminate the appointment of any Conversion Agent and to appoint other Conversion Agents; provided that the Company shall at all times maintain Conversion Agents having specified offices in London. Notice of any such termination or appointment and of any changes in the specified offices of the Conversion Agents shall be given promptly by the Company to the holders of the Bonds in accordance with Condition 16 and to the Trustee in accordance with the Indenture.

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(viii) Satisfaction of the Company’s obligations

The Company’s delivery to the converting Bondholder of the number of Shares into which such converting Bondholder’s Bonds are convertible will be deemed to satisfy the Company’s obligation to pay the principal and premium (if any) of the Bonds at maturity, upon redemption or acceleration in accordance with the Indenture.

The Company has certain disclosure obligations and reporting obligations under ROC law and regulation if:

(a) the person to be registered as a shareholder is a “related party” of the Company under Statements of Financial Accounting Standard No. 6 of the ROC and such person beneficially owns Shares converted from the Bonds; or
(b) the person to be registered as a holder of Shares owns Shares converted from the Bonds and the Shares converted exceed 10% of the total number of Shares expected to be converted based on the conversion price at the time of issue of the Bonds.

Due to these obligations, the Company may, through the Principal Agent, ask converting holders of the Bonds to disclose the name and nationality of the person to be registered as the shareholder, the total number of Shares which such person is holding or will hold by converting such Bonds into Shares in accordance with these Conditions, and to provide proof of identity and genuineness of any signature and other documents before it converts the Bonds. The conversion of the Bonds may be delayed until the Principal Agent receives the required information and evidence of compliance with relevant laws and regulation by the converting holder of the Bonds. The information that the holders of the Bonds are required to provide includes the name and nationality of the person to be registered as shareholder and the total number of Shares such person has or will receive in connection with the Bonds such person is converting or has converted in the past.

(C) Adjustments to Conversion Price

The Conversion Price shall be subject to adjustment as follows (each such adjustment, an “Anti-dilution Adjustment”):

(i) Free distribution and bonus issue of Shares and declaration of dividend in Shares:

If the Company shall (a) make a free distribution of Shares, (b) make a bonus issue of its Shares (excluding Shares issued pursuant to any employee stock bonus or profit-sharing arrangements described in Condition 7(C)(ix)) or (c) declare a dividend in Shares, then the Conversion Price shall be adjusted in accordance with the following formula:

NCP = OCP x [N/(N+n)]

where:

NCP = the Conversion Price after such adjustment.

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OCP = the Conversion Price in effect (1) on the date when such distribution, bonus issue or dividend is declared or (2) on the relevant record date (if the Company has fixed a prior record date for the determination of shareholders entitled to receive any such distribution, bonus issue or dividend).
N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) (1) at the time of issuance of such dividend or bonus issue or distribution or (2) at the close of business in the ROC on the relevant record date, as the case may be.
n = the number of Shares to be distributed to shareholders as a dividend, bonus issue or distribution.

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

Effective date of adjustment: An adjustment made pursuant to this Condition 7(C)(i) shall become effective immediately on the relevant event referred to in this Condition 7(C)(i) becoming effective or, if a record date is fixed therefor, immediately after such record date; provided that in the case of a free distribution or bonus issue of Shares or dividend in Shares which must, under applicable laws of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the board of directors of the Company before being legally paid or made, and which is so approved after the record date fixed for the determination of shareholders entitled to receive such distribution, bonus issue or dividend, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.

(ii) Division, consolidation and reclassification of Shares:

If the Company shall (a) divide its outstanding Shares, (b) consolidate its outstanding Shares into a smaller number of Shares, or (c) re-classify any of its Shares into other securities of the Company, then the Conversion Price shall be appropriately adjusted so that the holder of any Bond, the Conversion Date in respect of which occurs after the coming into effect of the adjustment described in this Condition 7(C)(ii), shall be entitled to receive on exercise of the Conversion Right the number of Shares and/or other securities of the Company which he would have held or have been entitled to receive after the happening of any of the events described above had such Bond been converted immediately prior to the happening of such event (or, if the Company has fixed a prior record date for the determination of shareholders entitled to receive any such free distribution or bonus issue of Shares or other securities issued upon any such division, consolidation or reclassification, immediately prior to such record date), but without prejudice to the effect of any other adjustment to the Conversion Price made with effect from the date of the happening of such event (or such record date) or any time thereafter.

Effective date of adjustment: An adjustment made pursuant to this Condition 7(C)(ii) shall become effective immediately on the relevant event referred to in this Condition 7(C)(ii) becoming effective or, if a record date is fixed therefor, immediately after such record date; provided that in the case of a division, consolidation or reclassification of Shares which must, under applicable laws of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the board of directors of the Company before being legally paid or made,

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and which is so approved after the record date fixed for the determination of shareholders entitled to receive such distribution or bonus issue of Shares or other securities issued upon such consolidation or reclassification, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date.

(iii) Concurrent adjustment events:

If the Company shall declare a dividend in, or make a free distribution or bonus issue of, Shares, which dividend, issue or distribution is to be paid or made to shareholders as of a record date which is also:

(a) the record date for the issue of any rights or warrants which requires an adjustment of the Conversion Price pursuant to Condition 7(C)(iv), 7(C)(v) or 7(C)(vi);
(b) the day immediately before the date of issue of any securities convertible into or exchangeable for Shares which requires an adjustment of the Conversion Price pursuant to Condition 7(C)(viii);
(c) the day immediately before the date of issue of any Shares which requires an adjustment of the Conversion Price pursuant to Condition 7(C)(ix) or (if applicable) the record date for the determination of stock dividend entitlement as referred to in Condition 7(C)(ix);
(d) the day immediately before the date of issue of any rights, options or warrants which requires an adjustment of the Conversion Price pursuant to Condition 7(C)(x); or
(e) determined by the Company and notified by the Company to the Trustee in writing to be the relevant date for an event or circumstance which requires an adjustment to the Conversion Price pursuant to Condition 7(C)(xii),

then (except where such dividend, bonus issue or free distribution gives rise to a retroactive adjustment of the Conversion Price under Condition 7(C)(i)) no adjustment of the Conversion Price in respect of such dividend, bonus issue or free distribution shall be made under Condition 7(C)(i), but in lieu thereof an adjustment shall be made under Condition 7(C)(iv), 7(C)(v), 7(C)(vi), 7(C)(viii), 7(C)(ix) or 7(C)(x) (as the case may require) by including in the denominator of the fraction described therein the aggregate number of Shares to be issued pursuant to such dividend, bonus issue or free distribution.

(iv) Rights issues to shareholders:

If the Company shall grant, issue or offer to the holders of Shares rights entitling them to subscribe for or purchase Shares (a “Rights Issue”, which expression shall include those Shares which are required to be offered to employees and persons other than shareholders in connection with such grant, issue or offer):

(a) at a consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price (as defined in Condition 7(C)(xiv)) per Share at such record date; or
(b) at a consideration per Share receivable by the Company which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration,

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then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such rights or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

where:

NCP = the Conversion Price after such adjustment.
OCP = the Conversion Price before such adjustment.
N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.
n = the number of Shares issued pursuant to the Rights Issue at the said consideration.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

Effective date of adjustment: Subject as provided below, such adjustment shall become effective immediately upon the issue of Shares pursuant to the Rights Issue but retroactively to immediately after the record date mentioned above.

(v) Warrants issued to shareholders:

If the Company shall grant, issue or offer to the holders of Shares warrants entitling them to subscribe for or purchase Shares:

(a) at a consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) which is fixed on or prior to the record date for the determination of shareholders entitled to receive such warrants and is less than the Current Market Price per Share at such record date; or
(b) at a consideration per Share receivable by the Company which is fixed after the record date mentioned above and is less than the Current Market Price per Share on the date the Company fixes the said consideration,

then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such warrants or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.

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n = the number of Shares to be issued upon exercise of such warrants at the said consideration which, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (aa) the number of warrants which underwriters have agreed to underwrite as referred to below or, as the case may be, (bb) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa).
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

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

Warrants not subscribed for by shareholders: If, in connection with a grant, issue or offer to the holders of Shares of warrants entitling them to subscribe for or purchase Shares in the circumstances described in (a) and (b) of this Condition 7(C)(v), any warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

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

(vi) Issues of rights or warrants for equity-related securities to shareholders:

If the Company shall grant, issue or offer to the holders of Shares rights or warrants entitling them to subscribe for or purchase any securities convertible into or exchangeable for Shares:

(a) at a consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) which is fixed on or prior to the record date mentioned below and is less than the Current Market Price per Share at such record date; or

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(b) at a consideration per Share receivable by the Company (determined as aforesaid) which is fixed after the record date mentioned below and is less than the Current Market Price per Share on the date the Company fixes the said consideration,

then the Conversion Price in effect (in a case within (a) above) on the record date for the determination of shareholders entitled to receive such rights or warrants or (in a case within (b) above) on the date the Company fixes the said consideration shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC (in a case within (a) above) on such record date or (in a case within (b) above) on the date the Company fixes the said consideration.
n = the number of Shares initially to be issued upon exercise of such rights or warrants and conversion or exchange of such convertible or exchangeable securities at the said consideration being, in the case of rights, (aa) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities which the underwriters have agreed to underwrite as referred to below or, as the case may be, (bb) the number of Shares initially to be issued upon conversion or exchange of the number of such convertible or exchangeable securities for which applications are received from shareholders as referred to below save to the extent already adjusted for under (aa) and which, in the case of warrants, where no applications by shareholders entitled to such warrants are required, shall be based on the number of warrants issued. Where applications by shareholders entitled to such warrants are required, the number of such Shares shall be calculated based upon (x) the number of warrants which underwriters have agreed to underwrite as referred to below or, as the case may be, (y) the number of warrants for which applications are received from shareholders as referred to below save to the extent already adjusted for under (x).
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share specified in (a) or, as the case may be, (b) above.

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

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Rights or warrants not taken up by shareholders: If, in connection with a grant, issue or offer to the holders of Shares of rights or warrants entitling them to subscribe for or purchase securities convertible into or exchangeable for Shares in the circumstances described in this Condition 7(C)(vi), any convertible or exchangeable securities or warrants which are not subscribed for or purchased by the shareholders entitled thereto are underwritten by others prior to the latest date for the submission of applications for such convertible or exchangeable securities or warrants, an adjustment shall be made to the Conversion Price in accordance with the above provisions which shall become effective immediately after the date the underwriters agree to underwrite the same or (if later) immediately after the Company fixes the said consideration but retroactively to immediately after the record date mentioned above.

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

(vii) Capital Distribution:

If the Company shall pay or make to its shareholders any Capital Distribution (as defined below) consisting in whole or in part of assets other than cash, then the Conversion Price shall be adjusted in accordance with the following formula:

NCP = OCP x [(CMP-fmv)/CMP]

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv).

CMP = the Current Market Price per Share on the record date for the determination of shareholders entitled to receive the Capital Distribution.
fmv = the aggregate fair market value on the date of such announcement, as determined in good faith by a leading independent investment bank of international repute selected by the Company and acting as an expert, of the portion of the Capital Distribution attributable to one Share.

If the Company shall pay or make to its shareholders any Capital Distribution in cash only then, in such case, the Conversion Price shall be adjusted in accordance with the following formula:

NCP = OCP x [(M-C)/M]

where:

NCP and OCP shall have the meanings ascribed thereto in Condition 7(C)(iv).

M = the Current Market Price per Share on such record date.

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C = the amount of Capital Distribution in cash so distributed, applicable to one Share, provided that with respect to any purchases of Capital Stock by the Company, C shall be equal to the excess of the price per Share paid by the Company over the then current trading price per Share on a Relevant Stock Exchange on the applicable Trading Day.

Effective date of adjustment: Any adjustment required by a Capital Distribution shall become effective immediately after the record date for the determination of shareholders entitled to receive such Capital Distribution; provided that (a) in the case of such a Capital Distribution which must, under applicable law of the ROC, be submitted for approval to a general meeting of shareholders or be approved by a meeting of the Board of Directors of the Company before such Capital Distribution may legally be made and is so approved after the record date fixed for the determination of shareholders entitled to receive such Capital Distribution, such adjustment shall, immediately upon such approval being given by such meeting, become effective retroactively to immediately after such record date and (b) if the fair market value of such Capital Distribution cannot be determined until the record date fixed for the determination of shareholders entitled to receive such Capital Distribution, such adjustment shall, immediately upon such fair market value being determined become effective retroactively to immediately after such record date.

For the purposes of this Condition 7(C)(vii):

“Capital Distribution” means any cash dividend, distribution of cash, distribution of assets in specie or other property (whenever paid or made and however described) or payment on redemption, or for the purchase of, Capital Stock of the Company made by the Company for any fiscal year, provided that with respect to any purchases of Capital Stock by the Company, it shall not be a Capital Distribution where the price per Share paid by the Company does not exceed the then current trading price per Share on a Relevant Stock Exchange on the applicable Trading Day. For the avoidance of doubt, Capital Distribution does not include the redemption at maturity or payment of preferred stock dividends on preferred stock outstanding on the date hereof and pursuant to the terms in effect on the date hereof.

“Capital Stock” means, with respect to the Company, any and all shares, interests, participation or other equivalents (however designated), including all common stock and all preferred stock of the Company.

(viii) Issue of convertible or exchangeable securities other than to shareholders or on exercise of warrants:

If the Company shall issue any securities initially convertible into or exchangeable for Shares (other than the Bonds, or in any of the circumstances described in Condition 7(C)(vi) and Condition 7(C)(x)), and the consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such securities is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of issue of such convertible or exchangeable securities shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

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where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv).

N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC on the day immediately prior to the date of such issue.
n = the number of Shares to be issued upon conversion or exchange of such convertible or exchangeable securities at the initial conversion or exchange price or rate.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share.

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

(ix) Other issues of Shares:

If the Company shall issue any Shares (other than Shares issued upon conversion or exchange of any convertible or exchangeable securities (including the Bonds) issued by the Company or upon exercise of any rights or warrants granted, offered or issued by the Company or in any of the circumstances described in Conditions 7(C)(i) and 7(C)(ii) or to shareholders of any company which merges with the Company in proportion to their shareholdings in such company immediately prior to such merger, upon such merger, but including Shares issued pursuant to any employee stock bonus or profit sharing arrangements) for a consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the issue of such Shares is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the issue of such additional Shares shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC on the day immediately prior to the date of issue of such additional Shares.
n = the number of additional Shares issued as aforesaid.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share.

Effective date of adjustment: Such adjustment shall become effective as of the calendar day in the ROC of the issue of such additional Shares or, in the case of an issue to employees under any employee stock bonus or profit sharing arrangements,

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where such an issue is announced at the same time as a stock dividend, such adjustment shall become effective as of the record date for determination of the identity of the shareholders entitled to receive any such dividend.

(x) Issue of equity related securities:

If the Company shall grant, issue or offer options, warrants or rights (excluding those rights and warrants referred to in Conditions 7(C)(iv), 7(C)(v) and 7(C)(vi) to subscribe for or purchase Shares or securities convertible into or exchangeable for Shares and the consideration per Share receivable by the Company (determined as provided in Condition 7(C)(xv)) shall be less than the Current Market Price per Share on the date in the ROC on which the Company fixes the said consideration (or, if the offer, grant or issue of such rights, options or warrants is subject to approval by a general meeting of shareholders, on the date on which the Board of Directors of the Company fixes the consideration to be recommended at such meeting), then the Conversion Price in effect immediately prior to the date of the offer, grant or issue of such rights, options or warrants shall be adjusted in accordance with the following formula:

NCP = OCP x [(N+v)/(N+n)]

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Shares outstanding (having regard to Condition 7(C)(xvii)) at the close of business in the ROC on the day immediately prior to the date of such issue.
n = the number of Shares to be issued on exercise of such rights or warrants and (if applicable) conversion or exchange of such convertible or exchangeable securities at the said consideration.
v = the number of Shares which the aggregate consideration receivable by the Company (determined as provided in Condition 7(C)(xv)) would purchase at such Current Market Price per Share.

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

(xi) Tender or exchange offer:

In case a tender or exchange offer made by the Company or any subsidiary for all or any portion of the Shares shall expire and such tender or exchange offer shall involve the payment by the Company or such subsidiary of consideration per Share having a fair market value (as determined by the Board of Directors of the Company or such subsidiary, whose determination shall, if made in good faith, be conclusive evidence of such fair market value) at the last time (the “Expiration Date”) tenders or exchanges could have been made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Current Market Price per Share, as of the Expiration Date, the Conversion Price shall be adjusted in accordance with the following formula:

NCP = OCP x [(N x CMP)/[fmv+[(N-n) x CMP]]]

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where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Shares outstanding (including any tendered or exchanged Shares) on the Expiration Date.
CMP = Current Market Price per Share as of the Expiration Date.
fmv = the fair market value of the aggregate consideration payable to the holders of Shares based on the acceptance (up to a maximum specified in the terms of the tender or exchange offer) of all Shares validly tendered or exchanged and not withdrawn as of the Expiration Date (the Shares deemed so accepted up to any such maximum, being referred to as the “Purchased Shares”).
n = the number of Purchased Shares.

Effective date of adjustment: Such adjustment shall become retroactively effective immediately prior to the opening of business on the day following the Expiration Date.

Tender or exchange offer not completed: If the Company is obligated to purchase Shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchase or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made.

(xii) Analogous events and modifications:

If (a) the rights of conversion or exchange, purchase or subscription attaching to any options, rights or warrants to subscribe for or purchase Shares or any securities convertible into or exchangeable for, or which carry rights to subscribe for or purchase Shares, are modified (other than pursuant to and as provided in the terms and conditions of such options, rights, warrants or securities) or (b) the Company determines or written notice has been given to the Trustee that any other event or circumstance has occurred which has or would have an effect on the position of the holders of the Bonds as a class compared with the position of the holders of all the securities (and options and rights relating thereto) of the Company, taken as a class which is analogous to any of the events referred to in Conditions 7(C)(i) to 7(C)(xi), then, in any such case, the Company shall notify the Trustee thereof or if the Trustee has been notified under (b), the Trustee shall notify the Company thereof and the Company shall consult with a leading independent investment bank of international repute selected by the Company as to what adjustment, if any, should be made to the Conversion Price (and the timing of any such adjustment) to preserve the value of the Conversion Right and will make any such adjustment.

(xiii) Simultaneous issues of different classes of shares:

In the event of simultaneous issues of two or more classes of share capital comprising Shares or rights or warrants in respect of, or securities convertible into or exchangeable for, two or more classes of share capital comprising Shares, then, for the purposes of this Condition 7(C)(xiii), the formula:

NCP = OCP x ((N+v)/(N+n))

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shall be restated as:

NCP = OCP x [(N+vl+v2+v3)/(N+nl+n2+n3)]

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

(xiv) Current Market Price per Share:

For the purpose of these Conditions, the “Current Market Price”, in relation to the Shares, for any date means the arithmetic average of the Closing Prices (as defined below) of the relevant Shares for the 30 consecutive Trading Days commencing 45 Trading Days before such date; provided, however, if no Closing Price is available for one or more Trading Days, such day or days shall be disregarded in any relevant calculation and shall be deemed not to have existed when ascertaining any period of consecutive Trading Days. If the Company has more than one class of share capital comprising Shares, then the relevant Current Market Price for Shares shall be the price for that class of Shares the issue of which (or of rights or warrants in respect of, or securities convertible into or exchangeable for, that class of Shares) gives rise to the adjustment in question.

If during the said 45 Trading Days or any period thereafter up to but excluding the date as of which the adjustment of the Conversion Price in question shall be effected, any event (other than the event which requires the adjustment in question) shall occur which gives rise to a separate adjustment to the Conversion Price under the provisions of these Conditions, then the Current Market Price as determined above shall be adjusted in such manner and to such extent as a leading independent investment bank of international repute selected by the Company shall deem appropriate and fair to compensate for the effect thereof.

For the purpose of these Conditions, “Closing Price”, in relation to the Shares, for each Trading Day means the last reported transaction price or, if no transaction takes place on such day, the last available reported transaction price of the Shares on a Relevant Stock Exchange in effect on the Trading Day immediately preceding such day or, if the Shares are not at that time listed or admitted to trading on the Relevant Stock Exchange, the average of the closing bid and offered prices of the Shares for such day as furnished by a leading independent securities firm licensed to trade on a Relevant Stock Exchange selected by the Company for that purpose.

(xv) Consideration receivable by the Company:

For the purposes of any calculation of the consideration receivable by the Company pursuant to Conditions 7(C)(iv), 7(C)(v), 7(C)(vi), 7(C)(viii), 7(C)(ix) and 7(C)(x), the following provisions shall be applicable:

(a) in the case of the issue of Shares for cash, the consideration shall be the amount of such cash, provided that in no such case shall any deduction be made for any commissions or any expenses paid or incurred by the Company for any underwriting of the issue or otherwise in connection therewith;

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(b) in the case of the issue of Shares for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Company (and in making such determination the Company shall consult a leading independent investment bank of international repute selected by the Company and shall take fully into account the advice received from such bank) or, if pursuant to applicable law of the ROC such determination is to be made by application to a court of competent jurisdiction, as determined by such court or an appraiser appointed by such court, irrespective of the accounting treatment thereof;
(c) in the case of the issue (whether initially or upon the exercise of rights or warrants) of securities convertible into or exchangeable for Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for such securities and (if applicable) rights or warrants plus the additional consideration (if any) to be received by the Company upon (and assuming) the conversion or exchange of such securities at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in (a) and (b) above) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) such conversion or exchange at the initial conversion or exchange price or rate and (if applicable) the exercise of such rights or warrants at the initial subscription or purchase price;
(d) in the case of the issue of rights or warrants to subscribe for or purchase Shares, the aggregate consideration receivable by the Company shall be deemed to be the consideration received by the Company for any such rights or warrants plus the additional consideration to be received by the Company upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price (the consideration in each case to be determined in the same manner as provided in (a) and (b) above) and the consideration per Share receivable by the Company shall be such aggregate consideration divided by the number of Shares to be issued upon (and assuming) the exercise of such rights or warrants at the initial subscription or purchase price;
(e) if any of the consideration referred to in any of the preceding paragraphs of this Condition 7(C)(xv) is receivable in a currency other than NT Dollars, such consideration shall (in any case where there is a fixed rate of exchange between the NT Dollar and the relevant currency for the purposes of the issue of the Shares, the conversion or exchange of such securities or the exercise of such rights or warrants) be translated into NT Dollars for the purposes of this Condition 7(C)(xv) at such fixed rate of exchange and shall (in all other cases) be translated into NT Dollars at the mean of the exchange rate quotations (being quotations for the cross rate through US Dollars if no direct rate is quoted) by a leading bank in the ROC for buying and selling spot units of the relevant currency by telegraphic transfer against NT Dollars on the date as of which the said consideration is required to be calculated as aforesaid; and

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(f) in the case of the issue of Shares (including, without limitation, to employees under any employee stock bonus or profit sharing arrangements) credited as fully paid out of retained earnings or capitalization of reserves at their par value, the aggregate consideration receivable by the Company shall be deemed to be zero (and accordingly the number of Shares which such aggregate consideration receivable by the Company could purchase at the relevant Current Market Price per Share shall also be deemed to be zero).

(xvi) Reduction of share capital

If the Company reduces its share capital other than by means of canceling any Shares or repurchases any Shares and for the purposes of holding such Shares in treasury, then the Conversion Price in effect on the record date for such capital reduction shall be adjusted in accordance with the following formula:

NCP = OCP x (N/n)

where:

NCP and OCP have the meanings ascribed thereto in Condition 7(C)(iv) above.

N = the number of Common Shares outstanding immediately prior to such capital reduction.
n = the number of Common Shares outstanding immediately after such capital reduction.

For the avoidance of doubt, no adjustment to the Conversion Price under this Condition 7(C)(xvi) will be required if the Company cancels any Shares or repurchases any Shares for the purposes of holding such Shares in treasury.

Effective date of adjustment : Such adjustment shall become effective immediately on the record date of such capital reduction.

(xvii) Cumulative adjustments:

If, at the time of computing an adjustment (the “later adjustment”) of the Conversion Price pursuant to any of Conditions 7(C)(i), 7(C)(iv), 7(C)(v), 7(C)(vi), 7(C)(viii), 7(C)(ix) and 7(C)(x), the Conversion Price already incorporates an adjustment made (or taken or to be taken into account pursuant to the proviso to Condition 7(C)(xviii)) to reflect an issue of Shares or of securities convertible into or exchangeable for Shares or of rights or warrants to subscribe for or purchase Shares or securities, to the extent that the number of such Shares or securities taken into account for the purposes of calculating such adjustment exceeds the number of such Shares in issue at the time relevant for ascertaining the number of outstanding Shares for the purposes of computing the later adjustment, such excess Shares shall be deemed to be outstanding for the purposes of making such computation.

(xviii) Minor adjustments:

No adjustment of the Conversion Price will be made where such adjustment would be less than 1% of the Conversion Price then in effect; provided, however, that any adjustment that by reason of this Condition 7(C)(xviii) is not required to be made will be carried forward and taken into account (as if such adjustment had been made

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at the time when it would have been made but for the provision of this Condition 7(C)(xviii)) in determining any subsequent adjustment. Except as otherwise described below, the Conversion Price may at any time be reduced by the Company.

(xix) Minimum Conversion Price:

Notwithstanding the provisions of this Condition 7(C), the Conversion Price shall not be reduced below the net value per Share as determined in the most recent audited or reviewed financial statements of the Company prior to the Issue Date or the par value of the Shares (NT$10 at the date hereof) as a result of any adjustment made hereunder, unless, under applicable law then in effect, the Bonds could be converted at such reduced Conversion Price into legally issued, fully paid and non-assessable Shares.

(xx) Reference to “fixed”:

Any references in this Condition 7(C) to the date on which a consideration is “fixed” shall, where the consideration is originally expressed by reference to a formula which cannot be expressed as an actual cash amount until a later date, be construed as a reference to the first day on which such actual cash amount can be ascertained.

(xxi) Trustee not obliged to monitor:

The Trustee shall not be under any duty to monitor whether any event or circumstance has occurred or exists that might fall within Condition 7(C)(i) to (xiii) and shall not be responsible to the Bondholders for any loss arising from any failure by it to do so.

(xxii) Calculations:

All calculations relating to adjustment of the Conversion Price shall be performed by the Company. All calculations under this Condition 7(C) shall be made to the nearest.001 of a share of securities or other property or nearest cent of a dollar, as the case may be. If any doubt shall arise as to the appropriate adjustment to the Conversion Price, a certificate from a leading independent investment bank of international repute selected by the Company shall be conclusive and binding on all concerned save in the case of manifest error.

(xxiii) Treasury Shares:

In determining the number of Shares outstanding under this Condition 7(C), any treasury share purchased by the Company, which has not been cancelled, shall be included in such determination. No adjustment shall be made to the Conversion Price under this Condition 7(C) upon the cancellation of any treasury shares held by it in accordance with ROC laws and regulations.

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(D) Conversion Price Reset

If the Volume Weighted Average Market Price (as defined below) on any of May 15, 2008, May 15, 2009 and March 16, 2010 (each, a “Reset Date”), converted into US Dollars at the Prevailing Rate on the Reset Date, shall be less than the Conversion Price, converted into US Dollars at the Fixed Exchange Rate, the Conversion Price shall be adjusted downward in accordance with the following formula:

==> picture [443 x 24] intentionally omitted <==

Provided that:

(a) The adjusted Conversion Price shall be rounded upwards, if necessary, to the nearest NT$0.01.
(b) Any adjustment shall be limited so that the Conversion Price adjusted in accordance with this Condition 7(D) shall not be less than (i) NT$10 or (ii) 80% of the initial Conversion Price (or if the initial Conversion Price has been adjusted to reflect any adjustments required under Condition 7(C) above that may have occurred prior to the relevant Reset Date, of such adjusted Conversion Price).
(c) The provisions of Condition 7(C) shall apply in a corresponding manner to this Condition 7(D) to ensure that appropriate adjustments shall be made to any Closing Price to reflect any adjustments made to the Conversion Price in accordance with Condition 7(C).
(d) The Conversion Price shall not be reduced to an amount below the par value of the Shares.
(e) For the avoidance of doubt, (1) any adjustments shall only be downward adjustments and (2) an adjustment may be made in respect of a subsequent Reset Date notwithstanding that an adjustment may have been made in respect of an earlier Reset Date.

Any such adjustment shall become effective as of the relevant Reset Date and shall be notified by the Company to the holders of the Bonds as soon as practicable in accordance with Condition 16 and to all Conversion Agents in accordance with the provisions of the Agency Agreement.

For the purposes of these Conditions:

“Prevailing Rate” means the average of the fixing rate at 11 a.m. for the purchase of US Dollars with NT Dollars quoted by Taipei Forex Inc. on each Trading Day which corresponds to the 15 consecutive Trading Days used in calculating the Volume Weighted Average Market Price.

“Volume Weighted Average Market Price” in relation to the Reset Date means the volume weighted average market price of the Shares on a Relevant Stock Exchange for the period of 15 consecutive Trading Days immediately before and including the Reset Date; provided, however, if no Volume Weighted Average Market Price is available for one or more Trading Days, such day or days shall be disregarded in any relevant calculation and shall be deemed not to have existed when ascertaining any period of consecutive Trading Days.

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(E) Conversion Undertakings

(i) Listing of the Shares:

The Company will use its best efforts to ensure that it maintains a listing for all Shares, including the Shares issued upon conversion of the Bonds, on the Relevant Stock Exchange.

(ii) Closed Periods:

The Company undertakes to ensure (to the extent of any discretion it has in respect of the length of any Closed Period) that any Closed Period is for as short a period as is reasonably practicable having regard to applicable laws, regulations and practices.

(iii) Notice:

In the event of an adjustment to the Conversion Price in accordance with this Condition 7, the holders of the Bonds will be notified in accordance with Condition 16.

(iv) Protection of Conversion Rights:

The Company has also given certain other undertakings in the Indenture for the protection of the Conversion Rights.

8 PAYMENTS

(A) Manner of Payment

Payment in respect of a Bond shall be made (i) by transfer to the registered account of the holder of the Bond or (ii) if such holder does not have a registered account, by a US Dollar check drawn on a bank in New York City mailed to its registered address. Payments of principal, interest (if any) and premium (if any), however, under a Bond represented by a Definitive Certificate shall only be made after surrender of the relevant certificate at the specified office of an Agent.

References in these Conditions, the Indenture and the Agency Agreement to payment in respect of a Bond shall, where the context so permits, be deemed to include not only a reference to the principal but also to any premium (if any), interest, Additional Amounts (as defined in Condition 10) and other amounts payable thereon.

(B) Registered Account and Address

The registered account and address of a holder of the Bonds means its US Dollar account maintained by or on behalf of it with a bank in New York City and address appearing on the Bond Register at the close of business on the second Payment Business Day (as defined below) before the due date for payment.

(C) Fiscal Laws

All payments are subject in all cases to any applicable fiscal or other laws and regulations, but without prejudice to the provisions of Condition 10. No commissions or expenses shall be charged to the holders of the Bonds in respect of such payments.

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(D) Date of Payment

Where payment is to be made by transfer to a registered account, payment instructions for value on the due date (or, if that date is not a Payment Business Day (as defined below), for value on the next Payment Business Day) shall be initiated. Where payment is to be made by check, the check shall be mailed (at the risk of the holders of the Bonds) on the Payment Business Day preceding the due date for payment. Notwithstanding the above, payment of principal of a Bond represented by a Definitive Certificate shall not be made earlier than the Payment Business Day on which the relevant Definitive Certificate is surrendered at the specified office of an Agent.

For the purposes of this Condition 8 and Condition 9:

“Payment Business Day” means a day (other than a Saturday or Sunday) on which commercial banks are open for business in New York City, London, Taipei and the city where the office of each relevant Paying Agent is located and, in the case of the surrender of a Definitive Certificate, in New York City and in the place where the Definitive Certificate is surrendered.

(E) Default Interest and Payment Delay

If the Company fails to pay any sum in respect of the Bonds when the same becomes due and payable under these Conditions, interest shall accrue on the overdue sum at the rate of 5.0% per annum (the “Default Interest Rate”) from the due date and ending on the date on which payment is made to the holders of the Bonds (both dates inclusive) (the “Default Interest”). The Default Interest shall accrue on the basis of the actual number of days elapsed and a 360-day year consisting of 12 months of 30 days each.

A holder of the Bonds shall not be entitled to any interest or other payment for any delay in receiving the amount due if (i) the due date is not a Payment Business Day, (ii) the Bonds are represented by a Definitive Certificate and the holder is late in surrendering its Definitive Certificate (if required to do so) or (iii) a check mailed in accordance with this Condition 8 arrives after the due date for payment.

(F) Partial Payments

If the amount of principal and premium (if any) which is due on the Bonds is not paid in full, the Registrar will annotate the Bond Register with a record of the amount of principal and/or premium, in fact paid.

9 REDEMPTION, REPURCHASE AND CANCELLATION

(A) Redemption at Maturity

Unless previously redeemed, repurchased and cancelled, or converted as herein provided, the Company shall redeem the Bonds at 137.69 % of their principal amount if a QPO has occurred, or 144.50% of their principal amount if a QPO has not occurred, in each case in US Dollars on the Maturity Date, or if such day is not a Payment Business Day, on the immediately preceding Payment Business Day. The Bonds may be redeemed prior to that date only as provided in Conditions 9(B), 9(C), 9(D), 9(E) and 9(F) below, but without prejudice to Condition 11.

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(B) Redemption at the Option of the Company

At any time after 12 months from the Listing Date and prior to the Maturity Date, the Company may, having given not less than 30 nor more than 60 days’ notice to the holders of the Bonds (which notice shall be irrevocable and delivered in accordance with Condition 9(I) and Condition 16), redeem the Bonds, in whole or in part (being US$1,000 in principal amount or an integral multiple thereof), at the Early Redemption Amount (as defined herein) on the relevant date of redemption; provided, however, that no such redemption may be made unless the Closing Price (as defined in Condition 7(C)) of the Shares, translated into US Dollars at the Prevailing Rate (as defined in Condition 7(D)), for a period of 20 consecutive Trading Days, the last of which occurs not more than ten Trading Days prior to the date upon which notice of such redemption is published, is at least 125% multiplied by the Early Redemption Amount divided by the Adjusted Conversion Ratio (as defined below). If an event giving rise to a change in the Conversion Price occurs during any such 20 consecutive Trading Day period, appropriate adjustments for the relevant days shall be made for the purpose of calculating the Closing Price for such days.

Notwithstanding the conditions to the Company’s right to redeem the Bonds set forth in the immediately preceding paragraph, at any time, the Company may, having given not less than 30 nor more than 60 days’ notice to the holders (which notice shall be irrevocable and delivered in accordance with Condition 9(I) and Condition 16), redeem the Bonds, in whole but not in part, at the then effective Early Redemption Amount if more than 90% in principal amount of the Bonds has already been redeemed, repurchased and cancelled, or converted as herein provided.

No notice of redemption given under this Condition 9(B) shall be effective if it specifies a date for redemption which falls during a Closed Period (as defined in Condition 7(A)). Upon the expiry of any effective notice of redemption, the Company will be bound to redeem the Bonds to which such notice relates at the date fixed for redemption.

For the purposes of this Condition 9(B):

“Adjusted Conversion Ratio” means the initial denomination upon issue of the Bonds, which is US$1,000, divided by the adjusted Conversion Price.

(C) Redemption for Taxation Reasons

At any time, the Company may, having given not less than 30 nor more than 60 days’ notice (a “Tax Redemption Notice”) to the holders of the Bonds (which notice shall be irrevocable and delivered in accordance with Condition 9(I) and Condition 16), subject to the provisions of the last paragraph of this Condition 9(C), redeem the Bonds, in whole but not in part, at the then effective Early Redemption Amount, on the date fixed for redemption in the Tax Redemption Notice (the “Tax Redemption Date”), provided that the Company satisfies the Trustee that, immediately prior to the giving of such notice:

(i) the Company has or shall become obliged to pay Additional Amounts (as defined in Condition 10) as a result of any change in, or amendment to, the laws or regulations of the ROC or any political subdivision or any authority thereof or therein having power to tax, or any change in the general application or official interpretation of such laws or regulations, which change or amendment becomes effective after the Issue Date and would require the Company to gross up for payment of principal or to gross up for payment of interest or premium, if any, at a rate greater than 20%; and

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(ii) such obligation cannot be avoided by the Company taking reasonable measures available to it.

Notwithstanding the foregoing, no such Tax Redemption Notice shall be given earlier than 90 days prior to the earliest date on which the Company would be obliged to pay such Additional Amounts, were a payment on the Bonds then due.

Prior to the delivery of any Tax Redemption Notice pursuant to this Condition 9(C), the Company shall deliver to the Trustee, at the Company’s expense, (1) a certificate signed by two Authorized Officers stating that the obligation referred to in clause (i) above cannot be avoided by taking reasonable measures available to it, and (2) an opinion addressed to the Trustee by an independent law firm of recognized standing admitted to practice in the ROC or written advice of a qualified tax adviser of recognized standing in the ROC to the effect that the Company has or will become obligated to pay such Additional Amounts as a result of such change or amendment, and the Trustee shall be entitled to accept such certificate and opinion or advice as sufficient and conclusive evidence of the fulfillment of the conditions precedent referred to in this Condition 9(C), in which event it shall be conclusive and binding on the holders of the Bonds. The Bonds in respect of which a notice of redemption has been given under Condition 9(B), 9(D), 9(E) or 9(F) shall not be affected by any notice given subsequently under this Condition 9(C).

If the Company gives a Tax Redemption Notice under this Condition 9(C), each holder of the Bonds shall have the right (the “Non-Redemption Option”) to elect that all or a portion (being US$1,000 in principal amount or an integral multiple thereof) of its Bonds not be redeemed. Upon the exercise of the Non-Redemption Option with respect to such Bonds, no Additional Amounts referred to in Condition 10 shall be payable on the payments due after the relevant Tax Redemption Date and, subject to Condition 10, such payments shall be made subject to the deduction or withholding required under the laws or regulations of the ROC. For the avoidance of doubt, any Additional Amount that had been payable in respect of the Bonds under Condition 10 as a result of the laws or regulations of the ROC in effect on the Issue Date shall continue to be payable to such holders of the Bonds.

To exercise the Non-Redemption Option pursuant to this Condition 9(C), the holder of the relevant Bond must complete, sign and deposit at the specified office of any Paying Agent a duly completed and signed current notice of exercise, obtainable from the specified office of any Paying Agent, together with the Definitive Certificate, if one has been issued, on or before the day falling 10 days prior to the Tax Redemption Date.

(D) Redemption at the Option of the Holders

Unless previously redeemed, repurchased and cancelled, or converted as herein provided, each holder of the Bonds shall have the right (“Holders’ Put Right”), at such holder’s option, to require the Company to redeem, in whole or in part (being US$1,000 in principal amount or an integral multiple thereof), the Bonds held by such holder on May 15, 2010 (“Holders’ Put Date”) at 121.15% of their principal amount if a QPO has occurred prior to the Holders’ Put Date, or 124.72% of their principal amount if a QPO has not occurred prior to the Holders’ Put Date.

(E) Redemption in the Event of Delisting

Unless previously redeemed, repurchased and cancelled, or converted as herein provided, in the event a QPO has occurred, and the Shares or DRs are subsequently delisted from the stock exchange on which the QPO occurred for a period exceeding five consecutive Trading Days (a “Delisting”), each holder shall have the right (a “Delisting Put

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Right”), at such holder’s option, to require the Company to redeem such holder’s Bonds, in whole or in part, at the then effective Early Redemption Amount on the 20th Payment Business Day following the date on which the Company notifies the Trustee of the Delisting in accordance with Condition 9(I)(ii).

(F) Redemption in the Event of a Change of Control

Unless previously redeemed, repurchased and cancelled, or converted as herein provided, if a Change of Control (as defined below) occurs, each holder shall have the right (a “Change-of-Control Put Right”), at such holder’s option, to require the Company to redeem such holder’s Bonds, in whole or in part, on the date set by the Company for such redemption at the then effective Early Redemption Amount, which shall be not less than 30 nor more than 60 days following the date on which the Company notifies the Trustee of the Change of Control in accordance with Condition 9(I)(ii).

For the purposes of this Condition 9(F):

“Control” means the right to appoint and/or remove all or a majority of the members of the board of directors or other governing body of the Company, whether such right is obtained directly or indirectly by ownership of share capital, the possession of voting rights, contract or otherwise.

A “Change of Control” occurs when:

(a) any person or persons, whether individually or acting in concert as a group, acquires Control of the Company and such person or persons does not or do not have, and would not be deemed to have, Control of the Company on the Issue Date;
(b) the Company consolidates with or merges into or sells or transfers all or substantially all of the Company’s assets to any other person, unless the consolidation, merger, sale or transfer shall not result in the other person or persons acquiring Control over the Company or the successor entity; or
(c) one or more other persons acquires the legal or beneficial ownership of all or substantially all of the Company’s capital stock.

A “person” includes any individual, company, corporation, firm, partnership, joint venture, undertaking, association, organization, trust, state or agency of a state (in each case whether or not being a separate legal entity) but does not include the Company’s directors or any other governing board and does not include the Company’s majority-owned direct or indirect Subsidiaries.

(G) Repurchase and Cancellation

The Company may at any time and from time to time repurchase the Bonds in the open market or otherwise at any price. The Company shall promptly surrender any Bonds so purchased to the Registrar for cancellation.

(H) Cancellation

All Bonds that are redeemed, repurchased or converted and surrendered to any Agent shall forthwith be cancelled. In the case of Bonds represented by Definitive Certificates, certificates in respect of all Bonds cancelled shall be forwarded to or to the order of the Registrar. Bonds cancelled may not be reissued or resold.

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(I) Redemption Procedures

(i) Notice of exercise of the Company’s option to redeem

To exercise its right to redeem the Bonds in accordance with Condition 9(B) or 9(C), the Company shall provide the relevant information to the Trustee with sufficient time in advance to enable the Trustee to comply with Condition 9(I)(vi) in the case of a partial redemption pursuant to Condition 9(B) and notify each holder of the Bonds not less than 30 nor more than 60 days prior to the redemption date. Such notice shall be irrevocable upon its dispatch by the Trustee to the holders. Such notice shall be provided in accordance with Condition 16.

(ii) Notice of put rights

The Company shall provide the relevant information to the Trustee with sufficient time in advance (or, in the case of a Delisting or Change of Control, promptly after the Company’s becoming aware, but in any event within seven days, of such an event) to enable the Trustee to notify each holder of the Bonds (a) in the case of a redemption in accordance with Condition 9(D) or 9(F), not less than 30 nor more than 60 days prior to the Holders’ Put Date or the date set by the Company for redemption in accordance with Condition 9(F), as the case may be, or (b) in the case of a redemption in accordance with Condition 9(E), 20 Payment Business Days prior to the Bondholder’s redemption date thereunder. Any such notice shall be provided in accordance with Condition 16.

(iii) Form of notice

The notice mentioned in clauses (i) and (ii) above shall state, as appropriate:

(a) the redemption date;
(b) in the case of a Delisting, the date of such Delisting and, briefly, the events causing such Delisting;
(c) in the case of a Change of Control, the date of such Change of Control and, briefly, the events causing such Change of Control;
(d) the date by which the Put Notice (as defined in Condition 9(I)(iv)), if applicable, must be given by the holder;
(e) the Closing Price of the Shares on the most recent practicable Trading Day for which such Closing Price can be provided;
(f) the Redemption Price and the method by which such amount shall be paid;
(g) the names and addresses of all Paying Agents;
(h) briefly, the Conversion Rights of the holders of the Bonds, the Conversion Price then in effect and the date on which the right to convert the Bonds or the portions thereof to be redeemed will expire;
(i) the procedures that a holder must follow and the requirements that such holder must satisfy in order to exercise any of the Holders’ Put Rights, Delisting Put Rights or Change-of-Control Put Rights, if applicable, and the Conversion Rights attached to its Bonds;
(j) the procedures that a holder who has delivered a Put Notice must follow in order to withdraw such notice;

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(k) the principal amount of the Bonds outstanding as of the latest practicable date prior to the delivery of the notice;
(l) any identifying numbers of the Bonds and/or Definitive Certificates to be redeemed in the case of a redemption of less than all of the Bonds then outstanding pursuant to Condition 9(B);
(m) the place or places of payment; and
(n) that payment will be made upon presentation and surrender of the Bonds to be redeemed.

(iv) Exercise of put rights

To exercise a Holders’ Put Right, Delisting Put Right or Change-of-Control Put Right, as the case may be, a holder must deliver a written notice of the exercise of such right in the form obtainable from any of the Agents (a “Put Notice”), together with the Definitive Certificate, if any, in respect of the relevant Bond, to any Paying Agent on any Payment Business Day that is not fewer than 10 Payment Business Days prior to the relevant redemption date. Once deposited, a Put Notice may not be withdrawn without the consent of the Company.

(v) Payment for Bonds represented by Definitive Certificates

Payment of the relevant Redemption Price upon exercise of the Holders’ Put Right, Delisting Put Right or Change-of-Control Put Right attaching to any Bond represented by a Definitive Certificate for which a Put Notice has been delivered is conditioned upon the delivery of such Definitive Certificate (together with any necessary endorsements) to any Paying Agent. Payment shall be made promptly following the later of the relevant redemption date and the time of delivery of such Definitive Certificate. If the Paying Agent holds on the relevant redemption date money sufficient to pay the Redemption Price for a Bond for which a Put Notice has been delivered, then, whether or not the Definitive Certificate representing such Bond is delivered to the Paying Agent, on and after the relevant redemption date, (a) such Bond shall cease to be outstanding; (b) the interest, if any, on such Bond shall cease to accrue; (c) such Bond shall be deemed paid; and (d) all other rights of the holder shall terminate, other than the right to receive the Redemption Price.

(vi) Partial redemption

In the case of a redemption of less than all of the Bonds then outstanding pursuant to Condition 9(B), the Bonds shall be redeemed pro rata or selected individually by lot by the Trustee, in such place as the Trustee shall approve and in such manner as the Trustee shall deem to be appropriate and fair, not more than 70 days nor less than 40 days prior to the date fixed for redemption.

(vii) Precedence of notices

If more than one notice is given pursuant to this Condition 9 pursuant to which a Bond or Bonds is or are to be redeemed, the first of such notices to be given shall prevail.

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(viii) Early Redemption Amount

The “Early Redemption Amount” of a Bond, for each US$1,000 principal amount of the Bonds, is determined so that it represents for the Bondholder a gross yield of 6.50% per annum if a QPO has occurred, and 7.50% per annum if a QPO has not occurred, in each case calculated on a semi-annual basis. The applicable Early Redemption Amount for each US$1,000 principal amount of Bonds is calculated in accordance with the following formula, rounded (if necessary) to two decimal places with 0.005 being rounded upwards (provided that if the date fixed for redemption is the Semi-Annual Date (as set out below), such Early Redemption Amount shall be as set out in the table below in respect of such Semi-Annual Date):

Early Redemption Amount = Previous Redemption Amount x (1 +r/2)[d/p]

If a QPO has not occurred, Previous Redemption Amount = the Early Redemption Amount for each US$1,000 principal amount of the Bonds on the Semi-Annual Date immediately preceding the date fixed for redemption as set out below (or if the Bonds are to be redeemed prior to November 15, 2007, US$1,000):

Semi-Annual Date November 15, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Early Redemption Amount
	(US$) 1,037.50 1,076.41 1,116.77 1,158.65 1,202.10 1,247.18 1,293.95 1,342.47 1,392.81

Semi-Annual Date
November 15, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Early Redemption
Amount

(US$)
1,037.50
1,076.41
1,116.77
1,158.65
1,202.10
1,247.18
1,293.95
1,342.47
1,392.81

If a QPO has occurred, Previous Redemption Amount = the Early Redemption Amount for each US$1,000 principal amount of the Bonds on the Semi-Annual Date immediately preceding the date fixed for redemption as set out below (or if the Bonds are to be redeemed prior to November 15, 2007, US$1,000):

Semi-Annual Date November 15, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . November 15, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Early Redemption Amount
	(US$) 1,032.50 1,066.06 1,100.70 1.136.48 1,173.41 1,211.55 1,250.92 1,291.58 1,333.55

Early Redemption
Amount

(US$)
1,032.50
1,066.06
1,100.70
1.136.48
1,173.41
1,211.55
1,250.92
1,291.58
1,333.55

r = 6.5% if a QPO has occurred, or 7.5% if a QPO has not occurred, expressed as a fraction.

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d = number of days from and including the immediately preceding Semi-Annual Date (or if the Bonds are to be redeemed on or before November 15, 2007, from and including the Closing Date) to, but excluding, the date fixed for redemption, calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in each case of an incomplete month, the number of days elapsed.
p = 180.

10 TAXATION

Unless otherwise exempted under any applicable tax treaty, interest (if any) and premium (if any) payable on the Bonds to non-residents of the ROC is currently subject to a withholding tax in the ROC equal to 20% of the gross amount of such interest (if any) and premium (if any). A securities transaction tax of 0.3% levied on proceeds from the sale of common shares will be payable by the seller of the common shares.

Subject to Condition 9(C), all payments in respect of the Bonds by the Company shall be made free and clear of, and without any deduction or withholding for or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature (“Taxes”) imposed, levied, collected, withheld or assessed by or on behalf of the government of the ROC or any authority thereof or therein having power to tax unless such withholding or deduction is required by law. If such deduction or withholding from any such payment is required by law, the Company shall pay such additional amounts (“Additional Amounts”) as will result in the receipt by the holders of the Bonds of the amounts that would have been receivable in the absence of any such deduction or withholding, except that no Additional Amounts shall be payable in respect of any Bond:

(i) to, or on behalf of, a holder of the Bond or its beneficial owner who is subject to such taxes, duties, assessments or governmental charges in respect of such Bond by reason of its being connected with the ROC otherwise than merely by holding such Bond or by the receipt of payments in respect of the Bond;
(ii) to or on behalf of a holder of the Bond or its beneficial owner to the extent that such holder or beneficial owner would not be liable for or subject to such deduction or withholding by making a declaration of non-residence or other claim for exemption to the relevant tax authorities if such holder or beneficial owner is eligible to make such declaration or claim and, such holder or beneficial owner fails to timely do so;
(iii) if the Definitive Certificate, if issued, in respect of the Bond is presented for payment (where presentation is required) more than 30 days after the relevant date (as defined below) except to the extent that the holder would have been entitled to such Additional Amounts on surrendering the relevant certificate for payment on the last day of such 30-day period;
(iv) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings income or any other law implementing or complying with, or introduced in order to conform to, such Directive or other Directive;
(v) to or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting (where presentation is required) the relevant Bond to another Paying Agent in a Member State of the European Union; or

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(vi) any estate, inheritance, gift, sale, transfer, stamp, personal property or similar tax, assessment or other governmental charge.

In addition, the Company shall not be obligated to pay Additional Amounts if the holder of the Bond is a fiduciary, partnership or other than the sole beneficial owner of any payment to the extent that a beneficiary or settler with respect to a fiduciary, a member of a partnership or the beneficial owner of that payment would not have been entitled to the Additional Amounts if it had been the holder of the Bond.

For the purposes of this Condition 10:

“Relevant date” in relation to any Bond means (a) the due date for payment in respect thereof, or (b) if the full amount of the monies payable on such due date has not been received by the Trustee or the Principal Paying Agent on or prior to such due date, the date on which notice is duly given to the holders of the Bonds that such monies have been so received.

References in these Conditions to principal, Redemption Price, premium, interest and any other amounts payable in respect of the Bonds shall be deemed also to refer to any Additional Amounts that may be payable in respect thereof under this Condition 10.

11 EVENTS OF DEFAULT

(A) Notification

The Trustee shall notify all holders of the Bonds in accordance with Condition 16 of the occurrence of Event of Default as soon as reasonably practicable but in any event within 30 days of the date on which the Trustee shall have received written notice of such Event of Default, unless the Trustee shall determine in its absolute discretion that failure to give such notice is in the best interests of the holders of the Bonds or such Default has been cured or waived and the Trustee shall have been so notified in writing before the giving of such notice. If an Event of Default occurs and is continuing, then and in every such case, the Trustee in its sole discretion may, and if so requested in writing by the holders of not less than 25% in principal amount of the Bonds then outstanding shall, subject to the Trustee’s right to be indemnified or secured by the holders of the Bonds to the Trustee’s satisfaction, declare all the Bonds then outstanding to be due and payable immediately by a notice in writing to the Company and also give notice of such acceleration to holders of the Bonds in accordance with Condition 16 upon which the Bonds shall forthwith become immediately due and payable at the then effective Early Redemption Amount, plus any accrued interest payable. Notwithstanding the foregoing, if any of the events specified in clauses (vii), (viii) and (ix) below shall have occurred, the Bonds shall forthwith become immediately due and payable at the then effective Early Redemption Amount, plus any accrued interest payable, without regard to the giving of any such notice.

An “Event of Default” occurs if:

(i) the Company fails to make any payment of all or any part of the principal of, or premium, if any, interest, if any, or Early Redemption Amount on the Bonds after the same shall become due and payable and such failure continues for a period of seven days;
(ii) the Company fails to deliver Shares as and when such Shares are required to be delivered upon the conversion of a Bond;

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(iii) the Company defaults in performance or observance of or compliance with any of its other obligations set out in the Bonds or the Indenture, which default is incapable of remedy or is not remedied within 30 days after written notice of such default shall have been given to the Company by the Trustee;
(iv) there shall have been entered against the Company or any of its Principal Subsidiaries (as defined in Condition 3) a final judgment, decree or order by a court of competent jurisdiction for the payment of money in excess of US$30 million with respect to the Company or any of its Principal Subsidiaries (or its equivalent in any other currency or currencies) and 45 days shall have passed since the entry of the order without it being bonded, satisfied, discharged or stayed;
(v) (a) any other present or future indebtedness of the Company or any of its Principal Subsidiaries (as defined in Condition 3) for or in respect of monies borrowed or raised becomes due and payable prior to its stated maturity by reason of any event of default, howsoever described, or any such indebtedness is not paid when due or, as the case may be, within any applicable grace period originally provided for or (b) the Company or any of its Principal Subsidiaries fails to pay when due any amount payable by the Company or such Principal Subsidiary, as the case may be, under any present or future guarantee or indemnity or arrangement or obligation having a like or similar effect, howsoever described, for any monies borrowed; provided that the aggregate amount of the relevant indebtedness or amount payable in respect of which one or more events mentioned above in this paragraph (v) have occurred equals or exceeds US$30 million or its equivalent in any other currency (determined as provided below), and provided further that where two or more of the Company and/or its Principal Subsidiaries are liable for the payment of the same relevant indebtedness or guarantee (whether liable jointly and severally, by way of guarantee, surety or otherwise), any such amount shall be counted once only;
(vi) an encumbrancer takes possession or a receiver, manager or other similar officer is appointed, or a distress, execution or seizure before judgment is levied, enforced or sued out upon, against or in respect of the whole or any substantial part of the property, assets or revenues of the Company or any of its Principal Subsidiaries and the same is not stayed, discharged, released or satisfied (as the case may be) within 45 days of such taking of possession, appointment, levying, enforcement or suing out (as the case may be);
(vii) a decree or order by a court having jurisdiction shall have been entered adjudging the Company or any of its Principal Subsidiaries bankrupt or insolvent, or approving a petition seeking the Company’s reorganization or that of any of its Principal Subsidiaries under any applicable bankruptcy, insolvency or reorganization law, or for the appointment of an administrator or a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of, or all or a substantial part of the business or assets of, or for the winding-up or liquidation of the affairs of, the Company or any of its Principal Subsidiaries;
(viii) an order is made or an effective resolution shall be passed for the winding-up, dissolution or liquidation of the Company or that of any of its Principal Subsidiaries, or the Company or any of its Principal Subsidiaries becomes capable of being dissolved under the laws of its place of incorporation (except for the purpose of and followed by a solvent reconstruction, merger, consolidation, amalgamation or other similar arrangement the terms of which

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are approved by holders of not less than 75% in principal amount of the Bonds outstanding), or the Company or any of its Principal Subsidiaries shall institute proceedings to be adjudicated as a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking reorganization or arrangement under any applicable bankruptcy, insolvency or reorganization law, or shall consent to the filing of any such petition, or shall consent to the appointment of a receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it or of all or a substantial part of its business or assets, or shall make a general assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or the Company or any of its Principal Subsidiaries becomes bankrupt, insolvent or is unable to pay its debts as they mature, or the Company or any of its Principal Subsidiaries stops or threatens to cease to carry on its business or a substantial part of its business, or corporate action shall be taken by the Company or any of its Principal Subsidiaries in furtherance of any of the aforesaid purposes;

(ix) proceedings shall have been initiated against the Company or any of its Principal Subsidiaries under any applicable bankruptcy, insolvency, or reorganization law and such proceedings shall not have been discharged or stayed within a period of 90 days;
(x) the Company shall merge, amalgamate or consolidate with any other corporation or entity (if the Company is not the continuing entity) or shall sell or dispose of substantially all its business or assets whether as a single transaction or a number of transactions, related or not, to any person without obtaining (1) the prior approval by holders of not less than 75% in principal amount of the Bonds outstanding and (2) the written agreement of such person to assume the obligations of the Company under the Bonds and the Indenture; provided that such agreement by such other person shall not be required if such assumption shall be effective by operation of law;
(xi) a moratorium is agreed or declared in respect of any indebtedness of the Company or any of its Principal Subsidiaries or any governmental authority or agency condemns, seizes, compulsorily purchases or expropriates all or a substantial part of the assets or shares of the Company or any of its Principal Subsidiaries; or
(xii) any action, condition or thing (including the obtaining or effecting of any necessary consent, approval, authorization, exemption, filing, license, order, recording or registration) at any time required to be taken, fulfilled or done in order to (i) enable the Company lawfully to enter into, exercise its rights and perform and comply with its obligations under the Bonds and the Indenture, (ii) ensure that those obligations are legally binding and enforceable and (iii) make the Bonds and the Indenture admissible in evidence in the courts of the ROC is not taken, fulfilled or done, and such case is incapable of remedy or, if capable of remedy, is not remedied within 30 days after written notice thereof shall have been given to the Company by the Trustee.

For the purposes of clauses (iv) and (v) above, any indebtedness which is in a currency other than US Dollars shall be translated into US Dollars at the spot rate for the sale of US Dollars against the purchase of the relevant currency quoted by any leading

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bank in the relevant market selected by the Trustee on any day when the Trustee requests such a quotation for such purposes. If no direct spot rate is available, a rate shall be calculated by reference to the cross-rates through US Dollars of the relevant currency.

(B) Default Cure Amount

Notwithstanding receipt of any payment after the acceleration of the Bonds following an event specified in Condition 11(A)(ii), a holder of the Bonds may exercise its Conversion Right by depositing a Conversion Notice with a Conversion Agent or Paying Agent during the period from and including the date of a default notice with respect to an event specified in Condition 11(A)(ii) (at which time the Company will notify the holder of the Bonds of the number of Shares per Bond to be delivered upon such conversion, assuming all the then outstanding Bonds are converted) to and including the 30th business day after such payment.

If the Conversion Right attached to any Bond is exercised pursuant to this Condition 11(B), the Company will deliver Shares (which number will be disclosed to such holder of the Bonds as soon as practicable after the Conversion Notice is given) in accordance with the Conditions, except that the Company shall have 10 Business Days before it is required to register the converting holder of the Bonds (or its designee) in its register of members as the owner of the number of Shares to be delivered pursuant to this Condition 11(B) and an additional five Business Days from such registration date to make payment in accordance with the following paragraph.

If the Conversion Right attached to any Bond is exercised pursuant to this Condition 11(B), the Company shall, at the request of the converting holder of the Bonds, pay to such holder of the Bonds an amount in US dollars (or equivalent in a remittable currency) (the “Default Cure Amount”), equal to the product of (x) (i) the number of Shares that are required to be delivered by the Company to satisfy the Conversion Right in relation to such converting Bondholder minus (ii) the number of Shares that are actually delivered by the Company pursuant to the Notice of such holder of the Bonds and (y) the Closing Price of the Shares on the Conversion Date; provided that if such holder of the Bonds has received any payment under the Bonds pursuant to this Condition 11, the amount of such payment shall be deducted from the Default Cure Amount. Payment of the Default Cure Amount shall be deemed to cure the default under Condition 11(A)(ii) and the holders of the Bonds receiving payment of such Default Cure Amount shall have no further claim against the Company in respect of any unpaid amounts thereof.

12 PRESCRIPTION

Claims against any payment in respect of the Bonds shall be prescribed unless made within six years from the relevant date of payment in respect thereof.

Under ROC law, claims in respect of the (i) payment of principal would become unenforceable after 15 years and (ii) payment of interest (if any) and premium (if any) would become unenforceable after five years, each measured from the relevant date for payment in respect thereof.

13 ENFORCEMENT

At any time after the Bonds shall have become due and payable, the Trustee may, at its discretion and without further notice, take such proceedings against the Company as it may think fit to enforce payment in respect of the Bonds, including any premium (if any) and interest (if any), and to enforce the provisions of the Indenture; provided, however, that the Trustee shall not be bound to take any such actions unless (a) it shall have been

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so requested in writing by the holders of at least 25% in principal amount of the Bonds then outstanding or by a resolution of a duly called meeting of the holders by persons entitled to vote a majority in principal amount of the outstanding Bonds; and (b) it shall have been indemnified and/or secured to its satisfaction. However, the Trustee may refuse to follow any direction that (i) conflicts with any law, the Indenture or these Conditions or (ii) it determines in good faith would involve the Trustee in personal liability against which such indemnity and/or security would not be satisfactory. The Trustee may take any other action it deems proper that is not inconsistent with any such direction received from holders of the Bonds. No holder of the Bonds shall be entitled to proceed directly against the Company, unless (a) the Trustee, having become bound to take proceedings against the Company (as described in the Indenture), fails to do so and such failure shall have continued for a period of 60 days and (b) no direction inconsistent with the Trustee taking such proceedings has been given to the Trustee during such 60-day period by the holders of not less than a majority in principal amount of the Bonds then outstanding.

14 MEETINGS OF BONDHOLDERS, MODIFICATION AND WAIVER

(A) Quorums for Meetings

The Indenture contains provisions for convening meetings of the holders to consider any matter affecting their interests, including the approval of certain amendments or modifications of the terms of the Bonds or the provisions of the Indenture, upon either the written consent of the holders of a majority in principal amount of the outstanding Bonds or the approval at a duly called meeting of the holders by persons entitled to vote a majority in principal amount of the outstanding Bonds. The quorum at any such meeting shall be one or more persons entitled to vote a majority in principal amount of the outstanding Bonds.

(B) Modification with Consent of Holders

Modifications and amendments of the Indenture or the Bonds may be made by the Company and the Trustee with the written consent of the holders of not less than a majority in principal amount of the outstanding Bonds; provided that no such modification or amendment may, without the consent of each holder of the Bonds affected thereby:

(i) change the Maturity Date of, or any additional amount payable on, any Bond;
(ii) reduce the principal amount, premium, if any, or the rate of interest, on any Bond or increase the Conversion Price;
(iii) change the place or currency of payment of principal amount, premium, if any, or interest on any Bond or the method of calculating any such payment;
(iv) impair the right to institute suit for the enforcement of any payment on any Bond;
(v) alter the Company’s obligations relating to negative pledge, Mergers or the payment of Additional Amounts as described in Conditions 3(A), 3(B) and 10, respectively;
(vi) except to the extent permitted by Condition 14(C) or 14(D) below, modify, cancel or adversely affect in any material respect the Conversion Right, Holders’ Put Right, Delisting Put Right, Change-of-Control Put Right or Non-Redemption Option;

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(vii) reduce the above-stated percentage of outstanding Bonds the consent of whose holders is necessary to modify or amend the Indenture;
(viii) reduce the percentage or aggregate principal amount of outstanding Bonds the consent of whose holders is necessary for waiver of compliance with provisions of the Indenture or for waiver of an Event of Default under the Indenture;
(ix) modify any of the voting or quorum requirements under the Indenture for meetings of holders of Bonds; or
(x) release the Company from any obligation under the Indenture other than in accordance with the provisions of the Indenture, or amend or modify any provision relating to such release.

The Trustee shall provide, at the Company’s expense, any notice of convocation for a meeting of holders of the Bonds in accordance with Condition 16.

The Indenture provides that, in determining whether the holders of the Bonds representing the requisite principal amount of Bonds then outstanding are present at a meeting of holders of the Bonds for quorum purposes or have given any request, demand, authorization, direction, notice, consent or waiver under the Indenture, Bonds owned by the Company or any other obligor upon the Bonds or any affiliate of the Company or such other obligor shall be disregarded and deemed not to be outstanding; provided that in the making of any such determination, the Trustee shall be fully protected if it disregards only such Bonds as to which the Trustee has received actual notice that such Bonds are owned by the Company or such other obligor or any affiliate of the Company or such other obligor.

(C) Modification of Conversion Right

Notwithstanding Condition 14(B) above, the Trustee may agree to, without the consent of the holders of the Bonds, any modification to the Conversion Right that (i) is necessary or desirable to effect or facilitate conversion as contemplated in these Conditions and (ii) is not materially prejudicial to the interests of the holders of the Bonds. The Trustee’s agreement may be subject to any condition which the Trustee requires, including but not limited to the delivery of an opinion of a financial or legal or other expert of recognized standing in the applicable jurisdiction. The Trustee shall be entitled to accept such opinion as sufficient and conclusive evidence of the fulfillment of the conditions precedent referred to in this Condition 14(C), in which event it shall be conclusive and binding on the holders of the Bonds. Any such modification shall be notified by the Company to the holders of the Bonds as soon as practicable thereafter in accordance with Condition 16.

(D) Other Modifications and Waivers

The Trustee may also agree to, without the consent of the holders of the Bonds, among other things, (i) any modification of, or the waiver or authorization of any breach or proposed breach of, the Bonds, the Indenture or the Agency Agreement that is not, in the Trustee’s opinion, materially prejudicial to the interests of the holders of the Bonds or (ii) any modification of the Bonds, the Indenture or the Agency Agreement that, in the Trustee’s opinion, is of a formal, minor or technical nature or to correct a manifest error or to comply with mandatory provisions of law.

In connection with such modification, waiver or authorization, the Trustee may require a certificate from the Company certifying, and a legal opinion from a legal adviser of recognized international standing advising the Trustee, that the modification, waiver or

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authorization is of a formal, minor or technical nature or to correct a manifest error or to comply with mandatory provision of law. The Trustee shall be entitled to accept such certificate and opinion as sufficient and conclusive evidence of the fulfillment of the conditions precedent referred to in this Condition 14(D), in which event it shall be conclusive and binding on the holders of the Bonds. Any such modification, waiver or authorization shall be notified by the Company to the holders of the Bonds as soon as practicable thereafter in accordance with Condition 16.

(E) Waiver of Default

The holders of the Bonds, through the written consent of not less than a majority in principal amount of the Bonds then outstanding (or such lesser principal amount of the Bonds then outstanding as shall have acted at a meeting pursuant to the provisions of the Indenture and shall have made the initial request for the acceleration, provided that such lesser amount, which shall not be less than 25% of the principal amount of the Bonds outstanding, is more than the principal amount of the Bonds held by holders that made such request), may, on behalf of the holders of all the Bonds, waive any existing Event of Default and its consequences, except for (i) any Event of Default in any payment on the Bonds, (ii) any Event of Default with respect to the Conversion Rights or (iii) any Default with respect to certain covenants or provisions in the Indenture that may not be modified without the consent of the holder of each Bond as described in Condition 14(B) above. When an Event of Default is waived, it is deemed cured and shall cease to exist, but no such waiver shall extend to any subsequent or other Event of Default or impair any consequent right.

The right of a holder (i) to receive payment in respect of its Bonds, (ii) to receive Shares on or after any Conversion Date, (iii) to exercise its Conversion Right or (iv) to bring suit for the enforcement of any such right, shall not be impaired or adversely affected without such holder’s consent.

(F) Exercise of Trustee’s Functions

Where the Trustee is required in connection with the exercise of its powers, trusts, authorities, duties and discretions to have regard to the interests of the holders of the Bonds, it shall have regard to the interests of the holders of the Bonds as a class and, in particular but without prejudice to the generality of the foregoing, the Trustee shall not have regard to, or be in any way liable for, the consequences of such exercise for any individual holders of Bonds. In connection with any such exercise, the Trustee shall not be entitled to require, and no holder of Bonds shall be entitled to claim, from the Company, the Trustee or any other person any indemnification or payment in respect of any tax consequences of any such exercise upon individual holders of the Bonds.

15 REPLACEMENT OF CERTIFICATES

Any replacement of mutilated, defaced, destroyed, stolen or lost Definitive Certificates shall take place at the specified offices of the Registrar and Paying Agents in accordance with the provisions of the Indenture, which provisions include the following:

(i) replacement certificates shall only be issued upon payment by the claimant of such costs as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Company and the Registrar may require;
(ii) mutilated or defaced certificates must be surrendered before replacements will be issued; and

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(iii) in the event any Bonds represented by a mutilated, destroyed, lost or stolen Definitive Certificate has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Definitive Certificate representing such Bonds, make payment as consideration for the cancellation of the Bonds represented thereby in accordance with the Indenture.

16 NOTICES

Without prejudice to the requirements of the SGX-ST, all notices to holders of the Bonds shall be validly given if (i) made in writing in English and mailed to them at their respective addresses in the Bond Register; and (ii) published in Wall Street Journal Asia.

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

So long as the Bonds are represented by the Global Certificate and the Global Certificate is held on behalf of Euroclear or Clearstream, Luxembourg or a successor clearing system, notices to holders of the Bonds may be given by delivery of the relevant notice to Euroclear or Clearstream, Luxembourg or the successor clearing system, for communication by it to entitled accountholders in substitution for notification as required by the Conditions, provided (i) that such notice is also delivered to the SGX-ST; and (ii) so long as the Notes are listed on the SGX-ST and the rules of the SGX-ST so require, publication will also be made in a leading daily newspaper having general circulation in Singapore (which is expected to be The Business Times , Singapore edition) or on the website of the SGX-ST.

17 INDEMNIFICATION

The Indenture contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking proceedings to enforce any provisions of the Bonds or the Indenture unless indemnified to its satisfaction. The Trustee is entitled to enter into business transactions with the Company and any entity related to the Company without accounting for any profit. The Trustee will be under no obligation to exercise any rights or powers conferred under the Indenture for the benefit of the holders of the Bonds unless such holders have offered to the Trustee indemnity and/or security satisfactory to it against any loss, liability or expense.

18 AGENTS

The Company reserves the right, subject to the provisions of the Agency Agreement, at any time to vary or terminate the appointment of Agents; provided that it shall at all times (a) maintain a Registrar with a specified office in New York City who will maintain the Bond Register and a Paying Agent, Conversion Agent and Transfer Agent having a specified office in London and (b) appoint a Paying Agent, Conversion Agent and Transfer Agent in Singapore upon the issue of any Bonds in definitive form so long as any of the Bonds are listed on the SGX-ST and the rules of the SGX-ST so require. Notice of any such termination or appointment, of any changes in the specified offices of the Agents, or of any change in the identity or specified office of any Conversion Agent, Paying Agent or Transfer Agent shall be given promptly by the Company to the holders of the Bonds in accordance with Condition 16 and to the Trustee in accordance with the provisions of the Indenture.

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19 GOVERNING LAW AND JURISDICTION; THIRD PARTY RIGHTS

(A) Governing Law

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

(B) Jurisdiction

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

(C) Agent for Service of Process

The Company has irrevocably appointed Law Debenture Corporate Services Inc., whose offices are currently located at 767 Third Avenue, 31st Floor, New York, New York 10017, as its authorized agent for receipt of process in any Proceedings based on any of the Bonds.

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TRANSFER RESTRICTIONS

Because of the following restrictions, investors should consult legal counsel prior to making any offer, resale, pledge or other transfer of Bonds offered and sold in reliance on Regulation S or the Common Shares issuable upon conversion of the Bonds.

The Bonds may not be offered or sold directly or indirectly in the ROC. The Bonds and the Common Shares issuable upon conversion of the Bonds have not been and will not be registered under the US Securities Act. The Bonds and the Common Shares issuable upon conversion of the Bonds may not be offered or sold to any person in the United States or to, or for the account or benefit of, US persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the US Securities Act. In addition, no transfer of any interest in the Bonds may be made in the United States or to, or for the account or benefit of, any US person for a period of 40 days after the later of the commencement of this Offering and the latest closing date of this Offering. Terms used in this section are defined in Regulation S under the US Securities Act.

Except in certain limited circumstances, interests in the Bonds may only be held through interests in the Global Bond. Such interests in the Global Bond will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear and Clearstream, Luxembourg and their respective direct and indirect participants. See “Terms and Conditions of the Bonds”.

Each purchaser of the Bonds, by accepting delivery of this Offering Memorandum, will be deemed to have represented, agreed and acknowledged that:

(1) The Bonds and the Common Shares issuable upon conversion of the Bonds have not been and will not be registered under the US Securities Act or the laws of any state of the United States and are subject to significant restrictions on transfer;
(2) Each owner purchasing prior to the expiration of 40 days after the later of the commencement of the Offering and the latest closing date (the “Distribution Compliance Period”) is purchasing the Bonds in an offshore transaction meeting the requirements of Rule 903 or 904 of Regulation S;
(3) Such owner will not offer, sell, pledge or otherwise transfer any interest in the Bonds or Common Shares issuable upon conversion of the Bonds except as permitted by the legend set forth in paragraph (4) below; and
(4) The Bonds will bear a legend to the following effect, and such purchaser will observe the restrictions contained therein:

THE BONDS EVIDENCED HEREBY (THE “BONDS”) AND THE COMMON SHARES (THE “SHARES”) OF TAIWAN HIGH SPEED RAIL CORPORATION ISSUABLE UPON CONVERSION OF THE BONDS EVIDENCED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND PRIOR TO THE EXPIRATION OF 40 DAYS AFTER THE LATER OF THE COMMENCEMENT OF THE OFFERING OF BONDS AND THE LATEST CLOSING DATE (THE “DISTRIBUTION COMPLIANCE PERIOD”), SUCH BONDS MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, ANY US PERSON. EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THE BONDS EVIDENCED HEREBY, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING AND FOLLOWING RESTRICTIONS.

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THIS LEGEND WILL BE REMOVED AFTER THE END OF THE DISTRIBUTION COMPLIANCE PERIOD, AFTER WHICH THE BONDS EVIDENCED HEREBY AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THE BONDS SHALL NO LONGER BE SUBJECT TO THE RESTRICTIONS PROVIDED IN THIS LEGEND, PROVIDED THAT AT SUCH TIME AND THEREAFTER THE OFFER OR SALE OF THE BONDS EVIDENCED HEREBY AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THE BONDS WOULD NOT BE RESTRICTED UNDER ANY APPLICABLE SECURITIES LAWS OF THE UNITED STATES OR OF THE STATES OR TERRITORIES OF THE UNITED STATES.

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ROC TAXATION

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

Interest and Premium

Payment of interest and premium (if any) on a Bond to a Non-ROC Holder is subject to ROC withholding tax at the rate of 20% at the time of payment. We have agreed to pay additional amounts in respect of withholding taxes on the payment of premium or interest (if any). See “Terms and Conditions of the Bonds – Taxation”.

Sale

Securities transaction tax will be imposed on the transfer of the Bonds issued by us at the rate of 0.1%, which is payable by the seller. However, Article 20-1 of the Statute for Upgrading Industries, which is valid until December 31, 2009, provides that the purchase and sale of the Bonds is exempt from securities transaction tax.

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

Upon current ROC laws, capital gains on transactions of securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of the Bonds.

Conversion into Common Shares

For Non-ROC Entity Holders, the conversion of the Bonds into our Common Shares will be deemed as assets exchange and thus will not generate any gain or incur any loss. For Non-ROC Individual Holders, any gain generated or loss incurred from the conversion of the Bonds into our Common Shares will be deemed as capital gain or loss from securities transactions, and thus is exempt from the application of the current ROC Income Tax Law.

Stamp Duty

There is no ROC stamp, issue or registration tax imposed on the delivery of our Common Shares upon conversion of the Bonds.

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Common Shares

Dividends

Dividends (whether in cash or Common Shares) declared by us out of retained earnings and distributed to a Non-ROC Holder in respect of Common Shares are subject to ROC income tax by way of withholding at the time of distribution, 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 share dividends).

A 10% retained earnings tax is imposed on an ROC company’s after-tax earnings generated after January 1, 1998 that are not distributed in the following year. The retained earnings tax so paid reduces the retained earnings available for future distribution. When the company declares a dividend out of those retained earnings, a maximum amount of up to 10% of the declared dividend is credited against the 20% withholding tax imposed on the Non-ROC Holders so that the actual withholding tax imposed on the non-ROC Holders may be less than 20%.

Distribution of shares declared by us out of our capital reserve are not subject to ROC withholding tax.

Sale

Securities transaction tax will be withheld at the rate of 0.3% of the transaction price upon a sale of Common Shares.

Under current ROC law, capital gains on transactions in securities issued by ROC companies are exempt from income tax. This exemption applies to capital gains derived from the sale of Common Shares.

Preemptive Rights

Distributions of statutory subscription rights for the Common Shares in compliance with the ROC Company Law are not subject to ROC tax. Proceeds derived from sales of statutory subscription rights evidenced by securities are currently exempted from income tax but are subject to securities transactions tax, currently 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 (i) 25% of the gains realized by a Non-Resident Entity and (ii) 35% of the gains realized by a Non-Resident Individual. Subject to compliance with ROC law, we have the sole discretion to determine whether statutory subscription rights shall be evidenced by the issuances of securities.

Tax Treaties

At present, the ROC does not have a double taxation treaty with the United States, but does have double taxation treaties with Indonesia, Singapore, South Africa, Australia, Vietnam, New Zealand, Malaysia, Swaziland, Macedonia, Gambia, the Netherlands, the United Kingdom, Senegal, Sweden, Belgium and Denmark, which generally have reduced the rate of withholding tax on dividends and interests paid by ROC companies to residents of these countries. Residents of these countries should consult their tax advisers concerning their eligibility for benefits under the relevant treaty.

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Estate Taxation and Gift Tax

Subject to allowable exclusions, deductions and exemptions, ROC estate tax is payable on any property within the ROC of a deceased Non-Resident Individual, and ROC gift tax is payable on any property within the ROC donated by a Non-Resident Individual. Estate tax is currently imposed at rates ranging from 2% of the first NT$670,000 to 50% of amounts in excess of NT$111,320,000. Gift tax is imposed at rates ranging from 4% of the first NT$670,000 donated to 50% of amounts donated in excess of NT$50,090,000. Under ROC estate and gift tax laws, the Bonds and the Common Shares will be deemed to be located in the ROC without regard to the location of the owner.

Tax Guarantor

Any holder of the Bonds, when converting the Bonds into our Common Shares, is required under current ROC laws and regulations to appoint an agent in the ROC. Such agent must meet certain qualifications set by the ROC Ministry of Finance and, upon appointment and approved by the tax authority, becomes a guarantor of such withdrawing holder’s ROC tax obligations. Evidence of the appointment of such agent and the approval for such appointment by the ROC tax authorities may be required as conditions to such converting holder’s repatriation of the proceeds derived from the sale of Common Shares converted from the Bonds.

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PLAN OF DISTRIBUTION

Under the terms and subject to the conditions contained in a purchase agreement dated as of May 9, 2007 (the “Purchase Agreement”), the Managers named below, for whom Deutsche Bank AG, Hong Kong Branch, is acting as representative, have severally but not jointly agreed to purchase from us the following respective principal amounts of the Bonds:

Managers		Principal amount of Bonds
Deutsche Bank AG, Hong Kong Branch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fubon Securities Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiwan Securities Co., Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	US$282,000,000 9,000,000 9,000,000
	US$300,000,000

The Purchase Agreement provides that the obligations of the Managers are subject to certain conditions precedent and that the Managers will be obligated to purchase all the Bonds if any are issued. The Purchase Agreement provides that, in the event of a default by a Manager, in certain circumstances the purchase commitments of non-defaulting Managers may be increased or the Purchase Agreement may be terminated.

In connection with this Offering, Deutsche Bank AG, Hong Kong Branch, as the stabilization manager, may over-allot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail for a limited period after issue date. However, there may be no obligation on the stabilization manager or any of its agents to do so. Such stabilizing, if commenced, may be discontinued at any time and must be brought to an end after a limited period.

The purchase price for the Bonds under the Purchase Agreement will be 100% of the principal amount of the Bonds less a combined management and underwriting commission and selling concession equal to 1.5% of the principal amount of the Bonds purchased. The Managers propose to offer the Bonds to eligible investors at a fixed issue price. After the Bonds are released for sale, the issue price and other selling terms may from time to time be varied by the Managers. The Managers or their affiliates may purchase the Bonds for their own account and enter into transactions relating to the Bonds, including asset swaps, repacking and other transactions. Such transactions would be carried out as bilateral trades with selected counter-parties and separately from any existing sale or resale of the Bonds, even if the selected counter-parties may also be purchasers of the Bonds. These transactions may involve a substantial portion of the Bonds.

Pursuant to the Purchase Agreement, we have agreed to indemnify the Managers against certain liabilities, including civil liabilities under the US Securities Act, or to contribute to payments that the Managers may be required to make in respect thereof. The Purchase Agreement provides that the obligations of the Managers are subject to certain conditions precedent, and entitle the Managers to terminate it in certain circumstances prior to payments being made to us.

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Bonds by the Investors is subject to the Purchase Agreement. Each of the Investors has agreed to enter a 90-day lock-up in connection with the Bonds to be purchased by them, subject to certain exceptions.

United States

The Bonds and the Common Shares into which the Bonds are convertible have not been and will not be registered under the US Securities Act and may not be offered or sold in the United States except pursuant to an effective registration statement or in accordance with an applicable exemption from the registration requirements of the US Securities Act. Accordingly, the Bonds are being offered and sold by the Managers only outside the United States in reliance upon Regulation S.

Each Manager has agreed that, except as permitted by the Purchase Agreement, it will not offer, sell or deliver any Bonds or the Common Shares into which the Bonds are convertible as part of its distribution at any time within the United States.

As used in the immediately preceding paragraph, the term “United States” has the meaning given to it by Regulation S under the US Securities Act.

United Kingdom

No offer of Bonds has been made or will be made to the public in the United Kingdom within the meaning of Section 102B of the Financial Services and Markets Act 2000, as amended, or FSMA, except to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by us of a prospectus pursuant to the Prospectus Rules of the Financial Services Authority, or FSA. Each Manager (i) has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section 21 of FSMA does not apply to us, and (ii) has complied with, and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to the Bonds in from or otherwise involving the United Kingdom.

European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), the Bonds will not be offered or sold to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Bonds which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the Bonds to the public in that Relevant Member State at any time:

1 to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

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2 to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €143,000,000 and (3) an annual net turnover of more than €150,000,000, as shown in its last annual or consolidated accounts; or
3 in any other circumstances which do not require the publication by us of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of the Bonds to the public” in relation to any of the Bonds in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Bonds to be offered so as to enable an investor to decide to purchase or subscribe for the Bonds, as the same may be varied in that Relevant Member State, by any measure implementing the Prospectus Directive in that Relevant Member State, and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

ROC

Each Manager has agreed that, as part of the distribution of the Bonds, it has not offered or sold, and will not offer or sell, any Bonds directly or indirectly in the ROC.

Japan

Each Manager understands that the Bonds have not been and will not be registered under the Securities and Exchange Law of Japan, and has severally represented that it has not offered or sold, and agrees not to offer or sell, directly or indirectly, any of the Bonds in Japan or for the account of any resident of Japan except (1) pursuant to an exemption from the registration requirements of the Securities and Exchange Law of Japan and (2) otherwise in compliance with the applicable provisions of Japanese law.

Hong Kong

The Bonds may not be offered or sold by means of any document other than (1) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the Bonds may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to Bonds which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder.

Singapore

Each Manager has severally represented and agreed that this Offering Memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Manager has represented and agreed that it has not offered or sold any Bonds or caused the Bonds to be made the subject of an invitation for subscription or purchase nor will it offer or sell the Bonds or cause the Bonds to be made the subject of

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an invitation for subscription or purchase, nor has it circulated or distributed nor will it circulate or distribute this Offering Memorandum or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Bonds, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Bonds are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or
(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

(1) to an institutional investor (for corporations, under Section 274 of the SFA) or to a relevant person defined in Section 275(2) of the SFA, or to any person pursuant to an offer that is made on terms that such shares, debentures and units of shares and debentures of that corporation or such rights and interest in that trust are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of securities or other assets, and further for corporations, in accordance with the conditions specified in Section 275 of the SFA;
(2) where no consideration is or will be given for the transfer; or
(3) where the transfer is by operation of law.

France

This Offering Memorandum is not being distributed in the context of a public offering in France within the meaning of Article L.411-1 of the Code mone´ taire et financier , and has therefore not been submitted to the Autorite´ des marche´ s financiers for prior approval and clearance procedure.

Each of the Managers has represented and agreed that it has not offered or sold, and will not offer or sell, directly or indirectly, the Bonds or Common Shares to the public in France, and has not distributed or caused to be distributed, and will not distribute or cause to be distributed, to the public in France, this Offering Memorandum, or any other offering materials relating to the Bonds or Common Shares, and that such offers, sales and distributions have only been and shall only be made in France to: (i) providers of investment services relating to portfolio management for the account of third parties; and/ or (ii) qualified investors (investisseurs qualifie´ s) ; and/or (iii) a restricted circle of investors (cercle restreint d’investisseurs) , all as defined in and in accordance with Articles L.411-2,

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D.411-1 and D.411-2 of the Code mone´ taire et financier . Investors in France falling within the qualified investors or restricted circle of investors exemption may only participate in the offering of the Bonds or Common Shares for their own account in accordance with the conditions set out in Articles L.411-2, D.411-1, D.411-2, D.734-1, D.744-1, D.754-1 and D.764-1 of the Code mone´ taire et financier . The Bonds or Common Shares may only be issued directly, or indirectly, to the public in France in accordance with Articles L.411-1, L.411-2, L.412-1 and L.621-8 to L.621-8-3 of the Code mone´ taire et financier .

Italy

The offering of the Bonds or Common Shares have not been registered pursuant to Italian securities legislation and, accordingly, no Bonds or Common Shares may be offered, sold or delivered, nor may copies of this document or of any other document relating to the Bonds or Common Shares be distributed in the Republic of Italy, except:

to professional investors (operatori qualificati) , as defined in Article 31, second paragraph, of CONSOB Regulation No. 11522 of July 1, 1998, as amended; and
in circumstances which are exempt from the rules on solicitation of investments pursuant to Article 100 of Legislative Decree No. 58 of February 24, 1998, as amended (the “Financial Services Act”), and Article 33, first paragraph, of CONSOB Regulation No. 11971 of May 14, 1999, as amended.

Any offer, sale or delivery of the Bonds or Common Shares or distribution of copies of this Offering Memorandum or any other document relating to Bonds or Common Shares in the Republic of Italy under (i) or (ii) above must be:

(a) made by an investment firm, bank or financial intermediary permitted to conduct such activities in the Republic of Italy in accordance with the Financial Services Act and Legislative Decree No. 385 of September 1, 1993, as amended; and
(b) in compliance with any other applicable laws and regulations.

Lock-up Arrangements

Subject to the exceptions discussed below, we and CEC have agreed that, for a 180-day period following the date of this Offering Memorandum, without the prior written consent of the Representative, we or it will not, directly or indirectly:

(1) offer for sale, pledge, encumber, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of), directly or indirectly, any (A) Common Shares of our company, Bonds or securities convertible into or exercisable or exchangeable for Common Shares of our company or Bonds, (B) securities of the same class as our Common Shares or Bonds or (C) other instruments representing interests in securities of the same class as our Common Shares or Bonds; or
(2) sell, grant or enter into any option, right, warrant, swap or other arrangement that are with respect to, or transfers to another, in whole or in part, any of the economic consequences of ownership of our Common Shares or Bonds,

whether any such transaction described in clause (1) or (2) above is to be settled by delivery of our Common Shares, Bonds or such other securities, in cash or otherwise. In addition, we and CEC have agreed not to announce our or its intention or make any

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application or filing with any applicable regulatory authority for any of such transactions described in clause (1) or (2) above without the prior written consent of the Representative for a 180-day period following the date of this Offering Memorandum. The second immediately preceding sentence, however, shall not apply to (1) this offering or sale of the Bonds, (2) the issuance of any of our Common Shares after the date of this Offering Memorandum upon conversion of our preferred shares in existence on or prior to the date of this Offering Memorandum, (3) the issuance, sale or transfer by us of our Common Shares or options to purchase our Common Shares pursuant to any of our employee share option plans or employee share purchase plans in existence as of the date of this Offering Memorandum, (4) the distribution of Common Shares dividends or employee bonus shares by us after the date of this Offering Memorandum, (5) the issuance of any of our Common Shares after the date of this Offering Memorandum upon conversion of the Bonds and (6) the application or filing with applicable regulatory authorities for and announcement of an initial public offering and any announcement and offering (but not a sale) in connection therewith.

Each of the Investors has agreed to enter a 90-day lock-up in connection with the Bonds to be purchased by them, subject to certain exceptions.

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SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ROC GAAP AND US GAAP

The financial statements of THSRC included elsewhere in the Offering Memorandum have been prepared in conformity with ROC GAAP, which differ in certain significant respects from US GAAP. A brief description of certain significant differences between ROC GAAP and US GAAP are set out below. The regulatory organizations that promulgate ROC GAAP and US GAAP have projects ongoing that could have a significant impact on future comparisons such as the comparison below.

The summary is not intended to provide a comprehensive listing of all existing or future differences between ROC GAAP and US GAAP, including those specifically related to THSRC or to the industry in which THSRC operates. No attempt has been made to identify (a) future differences between ROC GAAP and US GAAP that may arise as a result of prescribed changes in accounting standards, or (b) disclosure, presentation or classification differences that would affect the manner in which transactions and events are reflected in our financial statements, or the respective notes thereto. Further, had we undertaken to identify the differences specifically affecting the financial statements presented in this Offering Memorandum, other potentially significant differences may have come to our attention, which are not provided in the following summary. Accordingly, this summary is not intended to provide a complete description of all differences which may have a significant impact on the financial statements of THSRC. US GAAP is generally more restrictive and comprehensive than ROC GAAP regarding the recognition and measurement of transactions, account classification and disclosure requirements.

Management has not quantified the effects of the differences between ROC GAAP and US GAAP on the financial results and equity of THSRC.

The following discussion refers to the historical practices of THSRC in preparing financial statements in accordance with ROC GAAP. We expect that we will follow comparable practices when preparing the financial statements of THSRC in the future.

SUBJECT ROC GAAP Impairment of Prior to January 1, 2005, ROC Long-Lived GAAP had no specific standards Assets and which address impairment of Long-Lived long-lived assets; normally such Assets to be assets would be accounted as Disposed of follows: a) Long-lived assets in use are carried at cost less accumulated depreciation/ amortization. b) Long-lived assets awaiting disposal are classified as other assets and are carried at the lower of cost or net realizable value.

US GAAP

US SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires entities to perform separate calculation for assets to be held and used to determine whether recognition of an impairment loss is required, and if so, to measure the impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than an asset’s carrying value, an impairment loss is recognized; if the sum of the expected future cash flows is greater than an asset’s carrying value, an impairment gain cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. US SFAS No. 144 also requires long-lived assets to be disposed to be reported at the lower of the carrying value or fair value, less selling costs.

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SUBJECT

ROC GAAP US GAAP Effective from January 1, 2005, Reversals of impairment losses the ROC Statement of Financial are prohibited. Accounting Standards (the “SFAS”) No. 35 ’’Accounting for Assets Impairment’’ requires the assessment of indicators for impairment of all assets within the scope of SFAS No. 35 at each balance sheet date.

If impairment indicators exist, the Company shall then compare the carrying amount with the recoverable amount of the assets or the cash-generating unit (’’CGU’’) and write down the carrying amount to the recoverable amount where applicable. Recoverable amount is defined as the higher of fair value less costs to sell and the value in use. Value in use of an asset is determined by estimating the future cash inflows and outflows derived from continuing use of the asset and from its ultimate disposal and applying the appropriate discount rate to the above future cash flows.

For previously recognized losses, the Company shall assess, at each balance sheet date, whether there is any indication that the impairment loss may no longer exist or may have decreased. If there is any such indication, the Company has to recalculate the recoverable amount of the asset. If the recoverable amount increases as a result of the increase in the estimated service potential of the assets, the Company shall reverse the impairment loss to the extent that the carrying amount after the reversal would not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the assets in prior years.

Impairment loss (reversal) is classified as nonoperating losses/ (income).

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SUBJECT ROC GAAP US GAAP Short-term Prior to January 1, 2006, Under US GAAP, investments in Investments short-term investments in equity securities that have readily in Marketable marketable securities are initially determinable fair values are Securities stated at cost and restated at the classified in two categories: lower of cost or market value at trading and available-for-sale. year-end. Subsequent recovery of Marketable equity securities fair value can be recognized as a classified as trading securities are gain to the extent that the fair reported at fair value with value does not exceed the original unrealized gains and losses acquisition cost of the recognized in earnings; and investments. marketable equity securities classified as available-for-sale Effective January 1, 2006, when securities are reported at fair the new SFAS No. 34 ’’Accounting value with unrealized gains and for Financial Instruments’’ takes losses reported as a separate effect, equity securities, other component of stockholders’ than those accounted for under equity. the equity method or cost method are classified and accounted for in the same way as US GAAP. Derivative ROC SFAS No. 34, which requires Under US GAAP, accounting for financial accounting treatments for derivative instruments is covered instruments derivative instruments similar to under US SFAS No. 133, as those required under US SFAS amended by US SFAS No. 138, No. 133 and No. 138, will take which requires that all entities effect on January 1, 2006. recognize derivative instruments as assets and liabilities in the Before January 1, 2006, a statement of financial position company may choose its own and subsequently measure them accounting policies for derivative at fair value. If certain conditions instruments, except (1) are met, entities may elect to foreign-currency forward contracts designate a derivative instrument that should be accounted for in a as one of the following: manner similar to that required under US SFAS No. 52, which in (a) Fair value hedge – a hedge of respect of measurement of the exposures to changes foreign currency forward contracts (that are attributable to a has been superseded by US SFAS particular risk) in the fair No. 133, and (2) foreign-currency value of (1) a recognized options bought or written for asset or liability or (2) an trading purposes, which, pursuant unrecognized firm to an interpretation issued by the commitment; Accounting Research and Development Foundation, should (b) Cash-flow hedge – a hedge of be stated at fair value. the exposure to variability that is attributable to a particular risk) in the cash flows of a forecasted transaction; and

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ROC GAAP

SUBJECT

US GAAP

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

Convertible Under ROC SFAS No. 34 Under US GAAP, such beneficial preferred ’’Accounting for Financial conversion feature should be stock Instruments’’ and No. 36 recognized and measured by ’’Disclosure and Presentation for allocating a portion of the Financial Instruments’’, which proceeds equal to the intrinsic took effect on January 1, 2006, value of that feature to additional any beneficial conversion feature paid-in capital. That amount embedded in the preferred stock should be calculated at the is not recognized or accounted for commitment date as the in the financial statements. This difference between the conversion beneficial conversion feature price and the fair value of the includes, among other things, the common stock, multiplied by the benefit being given to the number of shares into which the stockholders to convert the security is convertible. preferred stock at lower conversion price.
Preferred stock issued after January 1, 2006 with the nature of financial liability is classified either as a current or non-current liability depending on the period of maturity in accordance with the SFAS No. 36.

Preferred stock issued before January 1, 2006 with the nature of financial liability is classified as equity in the financial statements.

160

SUBJECT

ROC GAAP

ROC SFAS No. 22 “Accounting for Income Taxes” which was issued in June 1994, is substantially similar to US GAAP. However, under ROC GAAP, the criteria for determining whether a valuation allowance is required for deferred income tax asset are less stringent as compared to US GAAP.

Income Tax

Under ROC GAAP, in accordance with ROC SFAS No. 22, there are no differences in the calculation of income tax provision and the same corporate income tax rate of 25% is adopted for both periods between annual financial statements and interim quarterly financial statements.

Investment tax Companies in the ROC generally credits record the benefits of investment tax credits in the year when the related acquired asset is placed in service.

US GAAP

Under US GAAP, current tax liabilities are recognized for estimated taxes payable for the current period. US SFAS No. 109 requires that all temporary differences between the carrying amounts of assets and liabilities and their respective tax bases be recognized as deferred tax liabilities or assets. A valuation allowance is not provided on tax assets to the extent that it is not “more likely than not” that such deferred tax assets will be realized. Under US GAAP, if a company has experienced cumulative losses in recent years, it is not generally able to consider projections of future operating profits for the purpose of determining the valuation allowance for deferred income tax assets. A change in tax rate or law requires an adjustment to such deferred tax assets and liabilities in the period of enactment and is reported as part of the results of operations.

Under US GAAP, tax provisions in interim quarterly financial statements are provided based on an estimated effective tax rate expected to be applicable to the full fiscal year. Such estimated effective tax rate takes into account all anticipated tax attributes for the full fiscal year.

Under US GAAP, the benefit of the investment tax credit should reduce the basis in the long-lived asset acquired and should be reflected in net income over the productive life of the acquired long-lived asset.

161

LEGAL MATTERS

The validity of the Bonds being offered pursuant to this Offering Memorandum will be passed upon for us by Lee and Li, Taipei, Taiwan. Certain legal matters in connection with the Offering as to New York state and United States federal law will be passed upon for the Managers by Simpson Thacher & Bartlett LLP.

162

INDEPENDENT AUDITORS

Our financial statements as of and for the years ended December 31, 2004, 2005 and 2006 included in this Offering Memorandum have been audited by KPMG Certified Public Accountants, independent certified public accountants.

163

GENERAL INFORMATION

1 We are a company limited by shares and incorporated under the laws of the ROC in May 1998. As of March 31, 2007, our authorized share capital was 12 billion shares, NT$10 par value, with an issued fully paid-up share capital of 5,081,100,000 Common Shares and 5,428,956,500 preferred shares. We are not the subsidiary of any entity. Our registered and principal executive office is located at 3F, 100 Hsin Yi Road Sec. 5, Taipei, Taiwan, ROC, and our telephone number at the above address is (886-2) 8789-2000.
2 The Bonds have been accepted for clearance through the facilities of Euroclear and Clearstream, Luxembourg. Relevant trading information is set forth below.

ISIN 030064097	Common Code
	XS0300640975

3 Approval-in-principle has been obtained for the listing of the Bonds on the SGX-ST. For so long as the Bonds are listed on the SGX-ST and the rules of the SGX-ST so require, we will appoint and maintain a paying agent in Singapore, where the Bonds may be presented for payment or redemption, if definitive Bonds are issued in exchange for the Global Bond. We will announce through the SGX-ST any issue of definitive Bonds in exchange for the Global Bond, including in the announcement all material information on the delivery of the definitive bonds and details of the paying agent in Singapore.
4 The issuance of the Bonds was authorized by resolutions of our directors dated November 10, 2006. We have obtained all necessary consents, approvals and authorizations as may be required in connection with the issue, and performance, if applicable, of the Bonds, except as disclosed in this Offering Memorandum.

164

Page

INDEX TO FINANCIAL STATEMENTS

Audited Financial Statements
Independent Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-2
Audited Balance Sheets as of December 31, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . .	F-3
Audited Statements of Operations for each of the years ended
December 31, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-6
Audited Statements of Changes in Stockholders’ Equity for each of
the years ended December 31, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . .	F-7
Audited Statements of Cash Flows for each of the years ended
December 31, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-8
Notes to the Financial Statements as of and for the years ended
December 31, 2004, 2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	F-11

F-1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

Taiwan High Speed Rail Corporation

We have audited the accompanying balance sheets of Taiwan High Speed Rail Corporation (a development stage company) as of December 31, 2004, 2005 and 2006, and the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended and for the cumulative period from May 3, 1997 (inception date) to December 31, 2006. 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 generally accepted auditing standards and the “Rules Governing Auditing and Certification of Financial Statements by Certified Public Accountants” in the Republic of China. Those standards and rules 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 financial statements referred to above present fairly, in all material respects, the financial position of Taiwan High Speed Rail Corporation as of December 31, 2004, 2005 and 2006, and the results of its operations and its cash flows for the years then ended and for the cumulative period from May 3, 1997 (inception date) to December 31, 2006, in conformity with generally accepted accounting principles in the Republic of China.

The accompanying financial statements as of and for the year ended December 31, 2006, have been translated into United States dollars solely for the convenience of the readers. We have audited the translation, and in our opinion, the financial statements expressed in New Taiwan dollars have been translated into United States dollars on the basis set forth in note 2(a) to the accompanying financial statements.

The details of the fund-raising plans of Taiwan High Speed Rail Corporation were discussed in Note 4(i).

March 1, 2007

Note 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.

F-2

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) BALANCE SHEETS DECEMBER 31, 2004, 2005 AND 2006

(Amounts expressed in thousands)

Assets	2004.12.31	2005.12.31	2006.12.31	2006.12.31
Current Assets: Cash and cash equivalents (notes 4(a) and 4(o)) . . . . . . . . . . Inventories (note 4(b)) . . . . . . . . . . Prepayments and other current assets (notes 4(k) and 10) . . . . . . Restricted assets – current (notes 4(o), 5 and 6) . . . . . . . . . . Available-for-sale financial assets – current (notes 4(c) and 4(o)) . . Total current assets. . . . . . . . . . . Fixed Assets (Notes 4(d), 4(n), 5, 6 and 7): Cost: Land . . . . . . . . . . . . . . . . . . . . . . . Office equipment . . . . . . . . . . . . . Machinery and equipment . . . . . Leasehold improvements . . . . . . Other equipment . . . . . . . . . . . . . Less: accumulated depreciation . . . Construction in progress and prepayments. . . . . . . . . . . . . . . . . Fixed assets-net. . . . . . . . . . . . . . Intangible Assets: Deferred pension cost (note 4(j)) . . . . . . . . . . . . . . . . . . . Other Assets: Refundable deposits (notes 4(o) and 7) . . . . . . . . . . . . . . . . . . . . . . Deferred charges (note 4(e)). . . . . . Restricted assets – noncurrent (notes 4(o) and 6). . . . . . . . . . . . . Other assets (notes 4(f) and 4(k)). . Total other assets . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . .	NT$ 549,789 – 782,964 489,986 2,174,709 3,997,448 710 236,636 33,596 111,732 148,323 530,997 (259,646) 296,621,622 296,892,973 – 56,433 601,186 14,467,604 163,248 15,288,471 316,178,892	NT$ 62,412 – 1,045,226 240,525 654,189 2,002,352 710 267,212 35,578 106,296 178,272 588,068 (386,697) 363,510,915 363,712,286 – 118,832 549,830 10,217,542 9,714 10,895,918 376,610,556	NT$ 612,158 386,883 608,210 125,865 527,148 2,260,264 – 323,538 19,322 109,447 214,102 666,409 (499,180) 421,314,166 421,481,395 37,077 55,014 714,451 2,960,078 – 3,729,543 427,508,279	US$ 18,784 11,871 18,662 3,862 16,175 69,354 – 9,928 593 3,358 6,570 20,449 (15,317) 12,927,713 12,932,845 1,138 1,688 21,922 90,828 – 114,438 13,117,775

F-3

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) BALANCE SHEETS – (Continued)

Liabilities and Stockholders’ Equity	2004.12.31	2005.12.31	2006.12.31	2006.12.31
Current Liabilities: Short-term debts (notes 4(g), 4(o) and 6) . . . . . . . . . . . . . . . . . . . . . . Accounts payable (note 4(o)) . . . . . Construction payables to related parties – current (notes 4(d), 4(o) and 5) . . . . . . . . . . . . . . . . . . Hedging derivative financial liabilities – current (notes 4(n) and 4(o)). . . . . . . . . . . . . . . . . . . . Construction payables (notes 4(d),4(o)). . . . . . . . . . . . . . . . . . . . Dividends payable – preferred stock (note 4(l)) . . . . . . . . . . . . . . Current portion of long-term debts (notes 4(h) and 4(i)). . . . . . . . . . . Accrued expenses and other current liabilities . . . . . . . . . . . . . Total current liabilities . . . . . . . . Long-Term Liabilities: Bonds payable (notes 4(h) and 4(o)). . . . . . . . . . . . . . . . . . . . . . . . Long-term debts (notes 4(i), 4(o), 5 and 6). . . . . . . . . . . . . . . . . . . . . Total long-term liabilities . . . . . . Other Liabilities: Accrued pension liability (note 4(j)) . . . . . . . . . . . . . . . . . . . Construction retentions payable (notes 4(d) and 4(o)) Construction retentions payable to related parties-noncurrent (notes 4(d), 4(o) and 5) . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . Total other liabilities . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . .	NT$ – – 291,480 139,819 7,419,322 2,008,085 – 1,152,377 11,011,083 26,800,000 194,200,000 221,000,000 – 3,017,679 421,875 19,606 3,459,160 235,470,243	NT$ 3,815,135 – 614,464 904,439 10,256,544 3,071,211 3,249,155 1,335,947 23,246,895 26,800,000 237,250,845 264,050,845 – 151,154 72,745 19,606 243,505 287,541,245	NT$ 8,310,460 332,562 298,309 186,414 8,924,780 3,162,787 18,849,232 2,527,863 42,592,407 16,800,000 285,614,563 302,414,563 60,953 – – 24,021 84,974 345,091,944	US$ 255,000 10,205 9,153 5,720 273,850 97,048 578,375 77,566 1,306,917 515,496 8,763,871 9,279,367 1,870 – – 737 2,607 10,588,891

F-4

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) BALANCE SHEETS – (Continued)

Liabilities and Stockholders’ Equity	2004.12.31	2005.12.31	2006.12.31	2006.12.31
Stockholders’ Equity (Notes 4(k) and 4(l)): Capital Stock: Common stock . . . . . . . . . . . . . . . Preferred stock-convertible . . . . . Retained earnings (accumulated deficits) in the development stage: Legal reserve . . . . . . . . . . . . . . . . Accumulated deficits . . . . . . . . . Provision for dividends – preferred stock . . . . . . . . . . . . . . . Unrealized losses on financial instruments (notes 3, 4(n), and 4(o)) . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity. . . . . . Significant Commitments and Contingencies (Notes 4(n), 4(o), 5, and 7) Total Liabilities and Stockholders’ Equity . . . . . . . .	NT$ 49,999,000 40,577,565 90,576,565 40,285 (6,629,959) (6,589,674) (3,278,242) – 80,708,649 316,178,892	NT$ 49,999,000 55,101,565 105,100,565 40,285 (9,722,086) (9,681,801) (6,349,453) – 89,069,311 376,610,556	NT$ 50,509,000 54,591,565 105,100,565 40,285 (13,148,511) (13,108,226) (9,512,240) (63,764) 82,416,335 427,508,279	US$ 1,549,831 1,675,102 3,224,933 1,236 (403,452) (402,216) (291,876) (1,957) 2,528,884 13,117,775

F-5

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006, AND CUMULATIVE PERIOD FROM MAY 3, 1997 (INCEPTION DATE) TO DECEMBER 31, 2006

(Amounts expressed in thousands, except per share data)

2004 2005 2006 NT$ NT$ NT$ General and administrative expenses (note 10). . . . . . . . . . . . . . . . . . . . . . (1,373,593) (1,853,807) (3,129,999) Loss from operation. . . . . . . . . . . . . . . . (1,373,593) (1,853,807) (3,129,999) Non-operating income and gains: Interest income . . . . . . . . . . . . . . . . . 24,062 61,654 61,340 Gains on disposal of financial instruments . . . . . . . . . . . . . . . . . . . 83,428 34,134 70,620 Foreign exchange gain, net . . . . . . . . . . – 49,823 35,707 Others . . . . . . . . . . . . . . . . . . . . . . . . 121 1,197 2,942 107,611 146,808 170,609 Non-operating expenses and losses: Interest expense (net of capitalized interest of NT$5,039,243, NT$6,981,074 and NT$10,513,972 in 2004, 2005 and 2006, respectively) (notes 4(d) and 5) . . (40,253) (234,367) (380,572) Losses on disposal and obsolescence of fixed assets, net . . . . . . . . . . . . . . . . (171) (1,711) (106) Foreign exchange loss, net . . . . . . . . . . (18,418) – – Valuation loss on financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . – – (50,996) Loss on indemnification (note 4(p)). . . . . (2,085,200) (105,466) – Others . . . . . . . . . . . . . . . . . . . . . . . . (2,882) (26,904) (10,665) (2,146,924) (368,448) (442,339) Loss before income tax . . . . . . . . . . . . . (3,412,906) (2,075,447) (3,401,729) Income tax expense (note 4(k)). . . . . . . . . – – – Net loss before cumulative effect of changes in accounting principle . . . . . . . (3,412,906) (2,075,447) (3,401,729) Cumulative effect of change in accounting principle (note 3). . . . . . . . . . . . . . . . . – – (24,696) Net loss . . . . . . . . . . . . . . . . . . . . . . . . (3,412,906) (2,075,447) (3,426,425) 2004 2005 Loss before income tax Net loss Loss before income tax Net loss Basic and diluted loss per share (in the development stage) (note 4(m)) NT$ . . . . . . . . . . . . . . . . . . . . . . . . (1.08) (1.08) (1.03) (1.03) US$ . . . . . . . . . . . . . . . . . . . . . . . .	2004	2004	2005	2005	2006	2006			May 3, 1997~ December 31, 2006	May 3, 1997~ December 31, 2006
	NT$ (1,373,593) (1,373,593) 24,062 83,428 – 121 107,611 (40,253) (171) (18,418) – (2,085,200) (2,882) (2,146,924) (3,412,906) – (3,412,906) – (3,412,906)		NT$ (1,853,807) (1,853,807) 61,654 34,134 49,823 1,197 146,808 (234,367) (1,711) – – (105,466) (26,904) (368,448) (2,075,447) – (2,075,447) – (2,075,447)		NT$ (3,129,999) (3,129,999) 61,340 70,620 35,707 2,942 170,609 (380,572) (106) – (50,996) – (10,665) (442,339) (3,401,729) – (3,401,729) (24,696) (3,426,425)		US$ (96,042) (96,042) 1,882 2,167 1,096 90 5,235 (11,678) (3) – (1,565) – (327) (13,573) (104,380) – (104,380) (758) (105,138)		NT$ (11,365,724)
									(11,365,724)
									2,704,474 1,672,385 67,641 41,982
									4,486,482
									(1,605,085) (10,028) – (50,996) (2,190,666) (55,004)
									(3,911,779)
									(10,791,021) (140,794)
									(10,931,815) (24,696)
									(10,956,511)
	2004				2005			2006
Loss before income tax (1.08)		Net		Loss before income tax (1.03)		Net loss		Loss before income tax (1.32) (0.04)		Net loss
						(1.03)				(1.32) (0.04)

F-6

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006, AND CUMULATIVE PERIOD FROM MAY 3, 1997 (INCEPTION DATE) TO DECEMBER 31, 2006

(Amounts expressed in thousands)

Balance as of January 1, 2004. . . . Issuance of preferred stock . . . . . Issuance cost of preferred stock . . . Net loss in 2004. . . . . . . . . . Provision for dividends on preferred stock . . . . . . . . . . . . Balance as of December 31, 2004 . . Balance as of January 1, 2005. . . . Issuance of preferred stock . . . . . Net loss in 2005. . . . . . . . . . Provision for dividends on preferred stock . . . . . . . . . . . . Balance as of December 31, 2005 . . Balance as of January 1, 2006. . . . Convertible preferred stock converted to common stock . . . . . . . Effect of adopting SFAS No. 34 “Financial Instruments: Recognition and Measurement” commencing from January 1, 2006 . . . . . . . . . . . . . Net loss in 2006. . . . . . . . . . Provision for dividends on preferred stock . . . . . . . . . . . . Changes in unrealized losses on financial instruments . . . . . . Balance as of December 31, 2006 . . May 3, 1997 (inception date) advance receipts for common stock . . . Issuance of common stock on March 31, 1998 . . . . . . . . Issuance of common stock and preferred stock (Note) . . . . . Convertible preferred stock converted to common stock . . . . . . . Appropriations approved by stockholders: Legal reserve . . . . . . . . . . Stock dividends . . . . . . . . . Employees’ bonus . . . . . . . . Issuance cost of preferred stock . . . Cumulative net loss from May 3, 1997 (inception date) to December 31, 2006 . . . . . . . . . . . . . Provision for dividends on preferred stock . . . . . . . . . . . . . Changes in unrealized losses on financial instruments . . . . . . . Balance as of December 31, 2006 . . Balance as of December 31, 2006 . .		Capital Stock	Capital Stock			Retained Earnings (Deficit)	Retained Earnings (Deficit)	Retained Earnings (Deficit)
	Common stock	Preferred stock		Advance receipts for common stock		Legal reserve	Accumulated deficits in the development stage		Provision for dividends on preferred stock		Unrealized losses on financial instruments		Total
	NT$49,999,000 – – – – NT$49,999,000 NT$49,999,000 – – – NT$49,999,000 NT$49,999,000 510,000 – – – – NT$50,509,000 NT$ – 12,500,000 37,325,500 510,000 – 173,500 – – – – – NT$50,509,000 US$1,549,831		28,242,495 12,335,070 – – – 40,577,565 40,577,565 14,524,000 – – 55,101,565 55,101,565 (510,000) – – – – 54,591,565 – – 55,101,565 (510,000) – – – – – – – 54,591,565 1,675,102		– – – – – – – – – – – – – – – – – – 110,000 (110,000) – – – – – – – – – – –	40,285 – – – – 40,285 40,285 – – – 40,285 40,285 – – – – – 40,285 – – – – 40,285 – – – – – – 40,285 1,236		(2,257,271) (863,455) (96,327) (3,412,906) – (6,629,959) (6,629,959) (1,016,680) (2,075,447) – (9,722,086) (9,722,086) – – (3,426,425) – – (13,148,511) – – (1,880,135) – (40,285) (173,500) (1,753) (96,327) (10,956,511) – – (13,148,511) (403,452)		(1,270,157) – – – (2,008,085) (3,278,242) (3,278,242) – – (3,071,211) (6,349,453) (6,349,453) – – – (3,162,787) – (9,512,240) – – – – – – – – – (9,512,240) – (9,512,240) (291,876)	– – – – – – – – – – – – – 18,301 – – (82,065) (63,764) – – – – – – – – – – (63,764) (63,764) (1,957)		74,754,352 11,471,615 (96,327) (3,412,906) (2,008,085) 80,708,649 80,708,649 13,507,320 (2,075,447) (3,071,211) 89,069,311 89,069,311 – 18,301 (3,426,425) (3,162,787) (82,065) 82,416,335 110,000 12,390,000 90,546,930 – – – (1,753) (96,327) (10,956,511) (9,512,240) (63,764) 82,416,335 2,528,884

Note: Common stock issued amounted to NT$7,500,000, NT$20,547,500 and NT $9,278,000 in 1999, 2000 and 2001, respectively. Preferred stock issued amounted to NT$28,242,495, NT$12,335,070 and NT$14,524,000 in 2003, 2004 and 2005, respectively.

F-7

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006, AND CUMULATIVE PERIOD FROM MAY 3, 1997 (INCEPTION DATE) TO DECEMBER 31, 2006

(Amounts expressed in thousands)

2004	2005	2006	2006	May 3, 1997~ December 31, 2006
NT$ (3,412,906) 91,412 20,516 – 171 – 15,787 – (160,384) – – (3,445,404) 385,473 139,819 99,122 (78,160,170) 314 (1,257) (20,437) (11,903,826) 142,831 3,448,191 (85,869,940)	NT$ (2,075,447) 140,289 22,927 – 1,711 – (194,333) – (928) – – (2,105,781) 1,520,520 764,620 (67,929) (66,783,942) 32 (62,399) (19,925) 4,499,523 153,534 – (59,995,966)	NT$ (3,426,425) 125,676 23,958 21 106 (386,883) 361,034 332,562 793,396 23,876 24,696 (2,127,983) 127,189 (806,633) 75,982 (59,342,309) 715 63,818 (215,195) 7,372,124 9,714 – (52,714,595)	US$ (105,138) 3,856 735 1 3 (11,871) 11,078 10,204 24,345 733 758 (65,296) 3,903 (24,751) 2,332 (1,820,875) 22 1,958 (6,603) 226,208 298 – (1,617,508)	NT$ (10,956,511) 544,793 211,999 19,286 11,009 (386,883) (437,207) 332,562 1,113,127 23,876 24,696
				(9,499,253)
				(527,000) 97,806 (171,003) (411,207,631) 7,437 (55,014) (1,144,914) (3,085,943) – –
				(416,086,262)

F-8

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) STATEMENTS OF CASH FLOWS – (Continued)

2004	2005	2006	2006	May 3, 1997~ December 31, 2006
NT$ 79,613,204 – – – 11,471,615 – (96,327) (1,270,157) 89,718,335 402,991 146,798 549,789 40,253 291 72,984,528 1,522,359 861,027 (195,860) 2,713,679 274,437 78,160,170	NT$ 50,115,135 – – – 13,507,320 – – (2,008,085) 61,614,370 (487,377) 549,789 62,412 234,367 904 66,912,991 (2,837,222) (322,984) (184,498) 2,866,525 349,130 66,783,942	NT$ 58,459,120 – 4,415 – – – – (3,071,211) 55,392,324 549,746 62,412 612,158 380,572 532 57,869,011 1,331,764 316,155 (398,520) 151,154 72,745 59,342,309	US$ 1,793,775 – 136 – – – – (94,238) 1,699,673 16,869 1,915 18,784 11,678 16 1,775,668 40,864 9,701 (12,228) 4,638 2,232 1,820,875	NT$ 302,774,255 26,800,000 24,021 49,825,500 53,221,430 (1,753) (96,327) (6,349,453)
				426,197,673
				612,158 –
				612,158
				1,567,520
				307,040
				421,845,456 (8,924,780) (298,309) (1,414,736) – –
				411,207,631

F-9

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) STATEMENTS OF CASH FLOWS – (Continued)

Supplemental disclosures of noncash investing and financing activities: Reclassification to current liabilities of portion of long-term debts maturing within one year . . . . . . . . . . . . . . . . Provision for dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . Unrealized valuation losses on financial instruments . . . . . . . . . . . . . . . . . . . Deferred charges transferred from fixed assets. . . . . . . . . . . . . . . . . . . . . . .		2004 NT$ – 2,008,085 – –		2005 NT$ 3,249,155 3,071,211 – –	2006	US$ 578,375 97,048 (1,957) 1,071	May 3, 1997~ December 31, 2006
					NT$ 18,849,232 3,162,787 (63,764) 34,892		NT$ 18,849,232 3,162,787 (63,764) 34,892

F-10

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004, 2005 AND 2006

1. Organization and Principal Activities

Taiwan High Speed Rail Corporation (“the Company”) commenced preparation for incorporation on May 3, 1997, and obtained its company license in Taipei on May 11, 1998. On July 23, 1998, the Company signed both the “Taiwan North-South High Speed Rail Construction and Operation Agreement” (the “C&O Agreement”) and “Taiwan North-South High Speed Rail Station Zone Development Agreement” (the “SZD Agreement”) with the Ministry of Transportation and Communications (the “MOTC”) (refer to note 7), under which, the Company entered into a concession agreement for the construction and operation of the Taiwan North-South High Speed Rail and related facilities. As of December 31, 2006, the Company was in the development stage, and its activities to date primarily have included high speed rail construction, business process development, operation system development, financial planning, fund-raising, employee recruitment and training, station area planning, drive-testing and examination. On January 5, 2007, the Company started its railway operations from the Banciao Station to Tsoying Station. When the Taipei Station is completed, the entire railway service from the Taipei Station to Tsoying Station is expected to be operational from March 2, 2007.

On September 5, 2003, the Company applied with the Gre Tai Securities Market (the “GTSM”) for permission to list on the Emerging Stock Market.

As of December 31, 2004, 2005 and 2006, the Company had 1,887, 1,769 and 2,353 employees, respectively.

2. Summary of Significant Accounting Policies and Basis of Measurement

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the Republic of China (the “ROC”). The significant accounting policies and bases of measurement used in preparing the accompanying financial statements are as follows:

(a) Convenience translation into US dollars

The financial statements are stated in New Taiwan Dollars. Translation of the 2006 New Taiwan dollar amounts into US dollar amounts is included solely for the convenience of the readers, using the Federal Reserve exchange rate on December 29, 2006 of NT$32.59 to US$1 uniformly for all the financial statements’ accounts. 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 rate or any other rate of exchange.

(b) Foreign currency transactions

The Company maintains its books of account in New Taiwan dollars. Foreign currency transactions during the year are translated at the exchange rates on the transaction dates. Foreign currency denominated assets and liabilities are translated into New Taiwan dollars at the exchange rate prevailing on the balance sheet date, and the resulting translation gains or losses are recognized as non-operating income or expenses.

(c) Basis for classifying assets and liabilities as current or non-current

Cash or cash equivalents, assets held for the purpose of being traded and other assets that the Company will convert to cash or use within one year are classified as current assets, otherwise, are classified as non-current assets. Debts due within one year are classified as current liabilities, otherwise, are classified as long-term liabilities.

(d) Asset impairment

Commencing from January 1, 2005, the Company adopted the Statement of Financial Accounting Standards (the “SFAS”) No. 35 “Impairment of Assets”. Under SFAS No. 35, the Company assesses at each balance sheet date whether there is any indication that an asset (individual asset or cash-generating unit) other than goodwill may have been impaired. If any such indication exists, the Company estimates the recoverable amount of the asset. The Company recognizes impairment loss for an asset whose carrying value is higher than the recoverable amount. When there is any indication that the impairment loss recognized no longer exists or has decreased, the Company reverses an impairment loss recognized in prior periods for assets other than goodwill. However, the carrying value after the reversal should not exceed the recoverable amount or the depreciated or amortized balance of the assets assuming no impairment loss was recognized in prior periods.

F-11

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(e) Cash and cash equivalents

Cash and cash equivalents include cash on hand, savings and checking deposits, certificates of deposit. Cash equivalents represent short-term highly liquid investments with original maturities of three months or less. Certificates of deposit that are pledged as collateral for short-term and long-term debts are recognized as restricted assets – current and restricted assets – noncurrent, respectively.

(f) Financial instruments

Prior to January 1, 2006, the investments of the Company were classified into short-term investments, in accordance with their holding purposes. Investments were accounted for at acquisition cost and were evaluated at the lower of cost or market value. The market value of open-end mutual funds was based on the net asset value of the mutual funds at the balance sheet date.

Commencing from January 1, 2006, the Company adopted SFAS No. 34 “Financial Instruments: Recognition and Measurement”. Under SFAS No. 34, financial assets are classified as financial assets reported at fair value through profit or loss; available-for-sale financial assets; held-to-maturity financial assets; financial assets carried at cost; and bond investments without active market. Financial liabilities are classified as financial liabilities reported at fair value through profit or loss and financial liabilities carried at cost less amortization.

The Company adopted transaction-date accounting for financial instrument transactions. At initial recognition, financial instruments are evaluated at fair value. Except for financial instruments held for trading, acquisition cost or issuance cost is added to the cost of financial instruments at initial recognition.

Subsequent to the initial recognition, the financial instruments that the Company held or issued are classified into the following accounts in accordance with the purpose of holding or issuing.

i Financial instruments reported at fair value through profit or loss: These include financial instruments acquired for the purpose of short-term profit taking and that, upon initial recognition, are designated as financial instruments. The financial instruments are remeasured at fair value subsequently with changes in fair value recognized in current income. Except for derivatives that the Company held for hedging purposes and are considered to be effective, all derivatives are classified into this account. Financial instruments with a positive fair value are recorded as financial assets while those with a negative fair value are recorded as financial liabilities.
ii Available-for-sale financial assets: These are evaluated at fair value, and changes in fair value are recorded as a separate component of stockholders’ equity. If there is evidence of impairment, impairment loss is recognized. If the impairment loss decreases subsequently, the decline is adjusted against the stockholders’ equity. If the impairment loss on debt financial instruments decreases and is apparently related to events that occurred after the impairment, the decline on impairment loss is reversed and recognized in the accompanying statements of income.
iii Financial assets carried at cost: Equity investments which cannot be evaluated at fair value are carried at original cost. If there is evidence of impairment, impairment loss is recognized, but it cannot be reversed.
iv Financial liabilities carried at cost less amortization: Except for the liabilities which are held for purposes of hedging and trading, all liabilities are classified into this account.

(g) Derivative financial instruments held for hedging

Prior to January 1, 2006, forward foreign exchange contracts were accounted for as follows:

A forward exchange contract was recorded at the exchange rate as of the contract date if the contract was acquired for the purpose of hedging risks. If the purpose of the contract is to hedge the exchange risk of a foreign currency commitment, the difference between the forward and spot rate is deferred and recognized as an adjustment to the transaction price on the transaction date.

Derivative financial instruments held by the Company were intended to hedge foreign exchange rate and interest rate risk exposure on foreign-currency-denominated assets and liabilities. Derivative financial instruments, which were no longer held for hedging, were treated as financial instruments held for trading.

Commencing from January 1, 2006, the Company has adopted the SFAS No. 34 “Accounting for Financial Instruments”. Under SFAS No. 34, all derivative instruments are recorded on the balance sheet at fair value. If a derivative instrument is designated as a cash flow hedge, the effective portion of the change in its fair value is recorded as a separate component of stockholders’ equity and is recognized in the statement of operations when the hedged item affects earnings. Ineffective portion of the change in the fair value of cash flow hedge is immediately recognized in earnings. If a derivative is designated as a fair value hedge, the change in its fair

F-12

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

value and of the hedged item attributable to the hedged risk is recognized in earnings in the current period. For derivative instruments not designated as hedging instruments under SFAS No. 34, changes in their fair values are recognized in current operating results.

(h) Inventories

Inventories consist of spare parts and supplies for the maintenance of trains and merchandise for sale during travel. Merchandise is stated at the lower of cost or market value, while spare parts and supplies are stated at cost less allowance for slow-moving and obsolete items. Cost is calculated by the weighted-average method, and market value represents net realizable value. Net realizable value is determined based on the estimated selling price in the ordinary course of business, less the estimated selling expenses.

(i) Fixed assets

Fixed assets are stated at acquisition cost. Interest expenses related to the construction of the assets are capitalized prior to commencement of the intended use of those assets. Major additions, improvements and replacements are capitalized, while maintenance and repairs are recognized as expenses currently. Gains or losses on the disposal of fixed assets are classified as non-operating income and gains or non-operating expenses and losses.

Depreciation is provided using the straight-line method over the lower of the estimated useful lives of assets or the remaining period of concession agreement. The useful lives of major fixed assets are as follows:

i.	Office equipment: . . . . . . . . . .	3-10 years.
ii.	Leasehold improvements: . . . .	5 years.
iii.	Machinery and equipment: . . . .	3 years.
iv.	Other equipment: . . . . . . . . . .	2-5 years.

(j) Government grant

A non-monetary government grant which conforms to certain conditions is accounted for according to the principles pursuant to SFAS No. 29 “Accounting for Government Grants and Disclosure of Government Assistance”. Under SFAS No. 29, a non-monetary government grant, is only disclosed in the notes to financial statements, instead of being recognized, if its fair value cannot be reasonably evaluated. A non-monetary government grant, whose fair value can be reasonably evaluated, is recognized as follows:

i. Government grant related to an asset, including non-monetary grant, is recognized as deferred income, which is presented as a deduction to the relevant asset.
ii. Government grant related to income compensating for expenses or losses already incurred is recognized as income from government grant if realized, and as deferred income if unrealized.
iii. Government grant for giving immediate financial support to the Company with no future related costs is recognized as extraordinary gain.

(k) Deferred charges

i. Consulting fees on syndicated loans

Consulting fees incurred on syndicated loan obtained to finance the construction of the high speed rail system and stations are deferred and amortized over the term of the syndicated loan.

ii. Bank charges on syndicated loans

Bank charges incurred in securing the credit line approval for the syndicated loans obtained to finance the construction of the high speed rail system and stations are deferred and amortized over the terms of syndicated loans.

iii. Costs of computer software, issuance of corporate bonds, and other deferred charges are deferred and amortized using the straight-line method over 3-5 years.

F-13

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(l) Employee retirement plan

The Company has established an employee noncontributory defined benefit retirement plan (the “Plan”). Under the defined benefit retirement plan, the Company recognizes a minimum pension liability equal to the amount by which the actuarial present value of the accumulated benefit obligation exceeds the fair value of the retirement plan’s assets. The Company also recognizes the net periodic pension cost in accordance with the actuarial report. The amortization of transition obligation, and prior service cost, are calculated by the straight-line method over the remaining years of service using actuarial techniques.

Starting from July 1, 2005, the enforcement rules of the newly enacted Labor Pension Act (the “New Act”) require the following categories of employees to adopt a defined contribution plan:

i. Employees who were covered by the Plan and opted to be subject to the pension mechanism under the New Act; and
ii. Employees who commenced working after the enforcement date of the New Act.

In accordance with the New Act, the Company provides monthly contributions at the rate of 6% of the worker’s monthly wages. Such contributions are recognized as expense when made.

(m) Preferred stock

In accordance with the regulations of the Accounting Research and Development Foundation in the Republic of China, the discount and the essential external costs from issuing preferred stock are debited to accumulated deficits.

In addition, in accordance with the Company Law in the Republic of China, the Company appropriates dividends to preferred stockholders during the development stage subject to approval of the authority. The provision for dividend on preferred stocks is charged to stockholders’ equity.

(n) Income tax

Deferred income taxes are determined based on the temporary differences between the financial statements and tax basis of assets and liabilities, using the enacted tax rates in effect during the years in which the differences are expected to be realized or settled. A valuation allowance is recognized if it is more likely than not that deferred tax assets will not be realized in the future.

Deferred tax assets and liabilities are classified as current or noncurrent according to the classification of the related assets and liabilities, otherwise they are classified according to the expected period of realization or settlement.

The 10% surtax on undistributed earnings is recorded for as income tax expense in the year when the stockholders approve a resolution to retain such earnings.

(o) Earnings (losses) per common share

The earnings (losses) per share (the”EPS”) are computed by dividing the amount of net income (losses) attributable to common stock outstanding for the period by the weighted-average number of common shares outstanding during the period.

The calculation of diluted EPS is consistent with the calculation of basic EPS while giving the effects of all dilutive common stock equivalents that were outstanding during the reporting period. When calculating for the diluted EPS, the net income attributable to common stockholders and the weighted-average number of shares outstanding are adjusted for the effects of all dilutive common stock equivalents. Anti-dilutive common stock equivalents are ignored in calculating the diluted EPS.

3. Reason for and Effect of Accounting Changes

(a) Cumulative effect of change in accounting principle and stockholders’ equity adjustments

Commencing from January 1, 2006, the Company adopted the SFAS No. 34 “Financial Instruments: Recognition and Measurement”. Under SFAS No. 34, the financial assets and liabilities at the beginning of the period were evaluated at fair market value or at cost less amortization. This evaluation resulted in the cumulative effect of change in accounting principle of (NT$24,696) thousand and stockholders’ equity adjustments of NT$18,301 thousand for the year ended December 31, 2006.

F-14

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(b) Effect to income of changes in accounting principle

Commencing from January 1, 2006, the Company also adopted SFAS No. 34 “Financial Instruments: Recognition and Measurement”, SFAS No. 36 “Financial Instruments: Disclosure and Presentation” and SFAS No. 1 “Conceptual Framework for Financial Accounting and Preparation of Financial Statements”. The effects of the adoption of these new accounting principles on the financial statements as of and for the year ended December 31, 2006, were as follows:

Nature of change in accounting principle Accounting for financial instruments . . . . . . . . . .	Increase in net loss Increase in loss per share NT$ NT$ (in thousands dollars, except for loss 50,996 0.01	Decrease in stockholders’ equity
		NT$ per share data) 63,764

4. Significant Accounts

(a) Cash and cash equivalents

Cash on hand . . . . . . . . . . . . . . . . . . . Cash in banks . . . . . . . . . . . . . . . . . . .	2004.12.31	2004.12.31	2005.12.31	2005.12.31	2006.12.31	2006.12.31
		NT$ 2,357 547,432 549,789		NT$ NT$ (in thousands dollars) 2,081 14,335 60,331 597,823 62,412 612,158		US$ 440 18,344 18,784

(b) Inventories

Consumables for use . . . . . . . . . . . . . . Merchandise for sale . . . . . . . . . . . . . .	2004.12.31	2005.12.31	2006.12.31	2006.12.31
	NT$ – – –	NT$ NT$ (in thousands dollars) – 350,218 – 36,665 – 386,883		US$ 10,746 1,125 11,871

(c) Available-for-sale financial assets

Available-for-sale financial assets represented open-end bond funds, with fair value of NT$2,181,317 thousand, NT$657,308 thousand and NT$527,148 thousand as of December 31, 2004, 2005 and 2006, respectively.

In accordance with the interpretation ruling of the ROC Accounting Research and Development Foundation on ROC SFAS No. 34, the Company reclassified in its 2005 and 2004 financial statements as available-for-sale financial assets-current, those short-term investments of NT$2,174,709 and NT$654,189, which were originally accounted for under the lower-of-cost-or-market method as of December 31, 2004 and 2005, respectively.

(d) Fixed assets

i. Accumulated depreciation

Office equipment. . . . . . . . . . . . . Leasehold improvements . . . . . . . Machinery and equipment. . . . . . . Other equipment . . . . . . . . . . . . .	2004.12.31	2004.12.31	2005.12.31	2005.12.31	2006.12.31	2006.12.31
		NT$ 133,183 81,619 20,533 24,311 259,646		NT$ NT$ (in thousands dollars) 162,849 192,847 92,202 100,105 26,394 – 105,252 206,228 386,697 499,180		US$ 5,917 3,072 – 6,328 15,317

F-15

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

ii Construction in progress and prepayments

Civil work construction . . . . . . . . . Core system construction . . . . . . . Track construction . . . . . . . . . . . . Station construction. . . . . . . . . . . Depot construction . . . . . . . . . . . Other construction . . . . . . . . . . . . Capitalized construction department expenses . . . . . . . . Capitalized interest . . . . . . . . . . . Deferred exchange gains from hedging derivative financial instrument. . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . .	2004.12.31		2005.12.31	2006.12.31	2006.12.31
	NT$ 181,601,143 20,920,070 42,866,557 12,393,355 7,741,779 1,160,251 22,971,317 10,103,716 (3,149,903) 13,337 296,621,622		NT$ NT$ (in thousands dollars) 182,958,483 183,268,403 52,560,569 81,139,115 51,008,141 59,485,823 17,776,493 20,704,677 13,915,421 15,715,566 1,398,528 1,900,373 27,352,738 31,844,723 17,084,790 27,598,762 (590,985) (487,096) 46,737 143,820 363,510,915 421,314,166		US$ 5,623,455 2,489,694 1,825,278 635,308 482,220 58,311 977,132 846,848 (14,946) 4,413 12,927,713

For the years ended December 31, 2004, 2005 and 2006, the Company capitalized interest expenses on construction in process amounting to NT$5,039,243 thousand, NT$6,981,074 thousand and NT$10,513,972 thousand, respectively. The annual interest rates for the above capitalization in 2004, 2005 and 2006 ranged from 2.4156% to 2.8272%, 2.5716% to 3.0744% and 2.9784% to 3.9696%, respectively.

The Company provided a portion of construction in progress amounting to NT$13 billion as a guarantee for the C&O Agreement.

As of December 31, 2004, 2005 and 2006, the related payables arising from the high speed rail construction were as follows:

Construction payables to related parties – current . . . . . . . . . . . . Construction payables . . . . . . . . . Construction retentions payable to related parties – noncurrent . . . . Construction retentions payable – noncurrent . . . . . . . . . . . . . .	2004.12.31		2005.12.31		2006.12.31	2006.12.31
	NT$ 291,480 7,419,322 421,875 3,017,679 11,150,356		NT$ (in thousands 614,464 10,256,544 72,745 151,154 11,094,907		NT$ dollars) 298,309 8,924,780 – – 9,223,089	US$ 9,153 273,850 – – 283,003

iii. Insurance coverage

As of December 31, 2004, 2005 and 2006, insurance coverage for fixed assets was as follows:

Insurance on construction in progress . . . . . . . . . . . . . . . . . Insurance on other fixed assets . . .	2004.12.31		2005.12.31	2006.12.31		2006.12.31
	NT$ 396,262,634 411,974 396,674,608		NT$ NT$ (in thousands dollars) 396,262,634 412,394,218 461,226 528,401 396,723,860 412,922,619			US$ 12,654,011 16,214 12,670,225

F-16

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

iv. As of December 31, 2006, the total estimated costs and future payments for the high speed rail construction were as follows:

Construction	Civil work	Track	Station	Depot	Other
Total estimated cost (VAT excluded) . . . . . . . . Billed amounts . . . . . . . . . Unbilled amounts . . . . . . . Future billing in 2007 . . . . . Total estimated cost (VAT excluded) . . . . . . . . Billed amounts . . . . . . . . . Unbilled amounts . . . . . . . Future billing in 2007 . . . . .	NT$183.9 (183.3) NT$0.6 NT$0.6 US$5.64 (5.62) US$0.02 US$0.02	(in billions dollars) 60.3 21.2 17.3 (59.5) (20.7) (15.7) 0.8 0.5 1.6 0.8 0.5 1.6 1.85 0.65 0.53 (1.83) (0.64) (0.48) 0.02 0.01 0.05 0.02 0.01 0.05			3.1 (1.9) 1.2 1.2 0.10 (0.06) 0.04 0.04

The Company signed several construction consulting contracts aggregating to approximately NT$2,404,152 thousand (VAT included). Up to December 31, 2006, the costs incurred for these contracts amounted to NT$2,290,314 thousand (VAT included), which were recorded as construction in progress.

v. In 2000, the Company entered into the Core System Supply Contract with the Taiwan Shinkansen Corporation, under which, the related total estimated costs and future payments were as follows:

	US$	JPY	NT$
	(in thousands of US$/thousands of		JPY/billions of NT$)
Total estimated costs
(VAT excluded) . . . . . . . . . . .	576,771	218,746,046	17.2
Billed amounts . . . . . . . . . . . .	(544,559)	(164,264,007)	(12.8)
Unbilled amounts . . . . . . . . . .	32,212	54,482,039	4.4
Future billing in 2007 . . . . . . . .	32,212	54,482,039	4.4

(e) Deferred charges

Bank charges for syndicated loans . . . . . Computer software . . . . . . . . . . . . . . . Consulting fees on syndicated loans . . . . Cost of issuing corporate bonds . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . .	2004.12.31	2004.12.31	2005.12.31	2005.12.31	2006.12.31	2006.12.31
		NT$ 413,151 60,072 87,293 32,228 8,442 601,186		NT$ NT$ (in thousands dollars) 387,057 504,561 55,306 99,870 81,780 76,266 21,825 11,422 3,862 22,332 549,830 714,451		US$ 15,482 3,064 2,340 351 685 21,922

(f) Other assets

VAT receivable for construction retentions payable . . . . . . . . . . . . . . Deferred income tax assets – noncurrent . . . . . . . . . . . . . . . . . . Less: valuation allowance . . . . . . . . . . .		2004.12.31		2005.12.31	2006.12.31	2006.12.31
		NT$ 163,248 1,263,598 (1,263,598) 163,248		NT$ NT$ (in thousands dollars) 9,714 – 2,235,911 2,647,918 (2,235,911) (2,647,918) 9,714 –		US$ – 81,249 (81,249) –

F-17

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(g) Short-term debts

In order to meet its short-term repayment schedule for certain construction contracts, the Company had applied to several banks for credit lines in the form of usance letters of credit (usance L/C).

Total credit lines amounted to NT$23,791,250 thousand, NT$24,718,750 thousand and NT$16,741,550 thousand as of December 31, 2004, 2005 and 2006, respectively.

In 2004, 2005 and 2006, the annual interest rates borrowings denominated in Japanese yen ranged from 0.6800% to 0.6891%, 0.66375% to 0.7280% and 0.70428% to 1.90%, respectively. The annual interest rates borrowings denominated in US dollars ranged from 5.23256% to 5.7144% and 5.75% to 6.2710% in 2005 and 2006, respectively.

(h) Bonds payable

As of December 31, 2004, 2005 and 2006, the Company had issued secured corporate bonds to finance the construction costs and expenses of the high speed rail system and stations as follows:

Name	Guarantee bank	Annual interest rate	Issued date	Payment schedule	2004.12.31	2005.12.31	2006.12	.31
The second issuance in 2003 . . . . . . . . A Bonds B Bonds C Bonds Subtotal. . . . . . . . The first issuance in 2003 . . . . . . . . A Bonds B Bonds C Bonds D Bonds Subtotal. . . . . . . . The first issuance in 2002 . . . . . . . . A Bonds B Bonds C Bonds Subtotal. . . . . . . . Total . . . . . . . . . Less: Current portion . .	Syndicate (consisting of 21 banks, with Chiao Tung Bank (Note) as the original lead bank) ‘’ ‘’ Syndicate (consisting of 21 banks, with Chiao Tung Bank as the original lead bank) ‘’ ‘’ ‘’ Syndicate (consisting of 21 banks, with Chiao Tung Bank as the lead bank) ‘’ ‘’	1.90% 1.8911% 1.8866% 1.75% 1.7424% 1.90% 1.8911% 3.5% 3.47% 3.455%	September 2003 September 2003 September 2003 April 2003 April 2003 April 2003 April 2003 April 2002 April 2002 April 2002	Interest is calculated and paid according to the simple interest rate per year, and the bonds are redeemable in September 2008. Interest is calculated according to the compound interest rate every six months and is paid once a year. The bonds are redeemable in September 2008. Interest is calculated according to the compound interest rate quarterly and is paid once a year. The bonds are redeemable in September 2008. Interest is calculated and paid according to the simple interest rate per year, and the bonds are redeemable in April 2008. Interest is calculated according to the compound interest rate every six months and is paid once a year. The bonds are redeemable in April 2008. Interest is calculated and paid according to the simple interest rate per year, and the bonds are redeemable in April 2009. Interest is calculated according to the compound interest rate every six months and is paid once a year. The bonds are redeemable in April 2009. Interest is calculated and paid according to the simple interest rate per year, and the bonds are redeemable in April 2007. Interest is calculated according to the compound interest rate every six months and is once a year. The bonds are redeemable in April 2007. Interest is calculated according to the compound interest rate quarterly and is paid once a year. The bonds are redeemable in April 2007.	NT$ 2,500,000 2,300,000 2,000,000 6,800,000 3,500,000 2,500,000 3,000,000 1,000,000 10,000,000 3,700,000 3,400,000 2,900,000 10,000,000 26,800,000 – 26,800,000	NT$ (in thousan 2,500,000 2,300,000 2,000,000 6,800,000 3,500,000 2,500,000 3,000,000 1,000,000 10,000,000 3,700,000 3,400,000 2,900,000 10,000,000 26,800,000 – 26,800,000	NT$ ds dollars) 2,500,000 2,300,000 2,000,000 6,800,000 3,500,000 2,500,000 3,000,000 1,000,000 10,000,000 3,700,000 3,400,000 2,900,000 10,000,000 26,800,000 (10,000,000) 16,800,000	US$ 76,711 70,574 61,368 208,653 107,395 76,711 92,053 30,684 306,843 113,533 104,326 88,984 306,843 822,339 (306,843) 515,496

(Note) Chiao Tung Bank merged with Mega International Commercial Bank (“MICB”) in August 2006, with MICB as the surviving entity from this merger.

F-18

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

As of December 31, 2006, the bonds payable referred to above are repayable in the following years:

Year of Repayment

Year of Repayment	Year of Repayment	Year of Repayment

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ US$ (in thousands dollars) 10,000,000 306,843 12,800,000 392,759 4,000,000 122,737 26,800,000 822,339
		822,339

(i) Long-term debts

The first syndicated loan agreement: The credit facility, which was initially utilized on November 20, 2000, is payable in 27 semi-yearly installments commencing from November 20, 2006. . . . . . . . . . . . . The second syndicated loan agreement – Tranche A Facility: The credit facility, which was initially utilized on September 27, 2006 is payable in 3 installments on December 31, 2007, December 31, 2008, and September 30, 2009. . . . . . The second syndicated loan agreement – Tranche B Facility: The credit facility, which was initially utilized on October 23, 2006 is payable in 27 semi-yearly installments commencing from November 20, 2007. . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . Less: Current portion of long-term debts . . . . . . . . . . . .	2004.12.31		2005.12.31	2006.12.31	2006.12.31
	NT$ 194,200,000 – – 194,200,000 – 194,200,000		NT$ NT$ (in thousands dollars) 240,500,000 279,063,795 – 7,400,000 – 8,000,000 240,500,000 294,463,795 (3,249,155) (8,849,232) 237,250,845 285,614,563		US$ 8,562,866 227,063 245,474 9,035,403 (271,532) 8,763,871

In 2004, 2005 and 2006, the annual interest rates for the above loans were as follows:

Sources of long-term debts a. The first syndicated loan agreement (based on the debt source) Long-term funds from Council for Economic Planning and Development, Executive Yuan . . . . . Civil servants retirement pension fund . . . . . . . . . . . . . . . . . . . . . . Labor pension fund . . . . . . . . . . . . . Labor insurance fund . . . . . . . . . . . . Funds from banks . . . . . . . . . . . . . . b. The second syndicated loan agreement – Tranche A Facility . . . . The second syndicated loan agreement – Tranche B Facility . . . .	2004 2.6595%~2.7384% 2.6532%~2.7679% 2.6816%~2.7679% 2.6532%~2.8426% – – –	2005 2.8068%~3.1279% 2.8426%~3.2837% 2.8027%~3.2774% 2.8311%~3.2837% 7.8842%~7.9147% – –	2006
			3.1279%~3.3068% 3.2837%~3.5290% 3.2774%~3.5226% 3.2837%~3.5290% 7.9147%~8.1316% 4.8053%~4.8684% 4.0263%

F-19

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

As of December 31, 2006, the future maturities of the above loans were as follows:

Year of Repayment

Year of Repayment	Year of Repayment	Year of Repayment

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ US$ (in thousands dollars) 8,849,232 271,532 10,185,464 312,534 7,756,464 238,001 7,756,464 238,001 15,518,668 476,179 244,397,503 7,499,156 294,463,795 9,035,403
		9,035,403

To finance the construction of the high speed rail system and stations, the Company obtained the first secured credit facilities totaling NT$323.3 billion from the bank syndicate (consisting of 21 banks, with Chiao Tung Bank as the original lead bank) on February 2, 2000. The significant terms of the first syndicated loan agreement are as follows:

The Company is required to increase its capital according to the schedule prescribed in the first syndicated loan agreement, otherwise, the banks providing the syndicated loan may exercise their right to deactivate the Company’s credit line.

Under the Tripartite Agreement which was signed on February 2, 2000, between the Company, the MOTC and Chiao Tung Bank, the Company may suffer the following consequences for breach of contract as follows:

a. The MOTC may directly terminate the C&O Agreement with the Company, pursuant to the C&O Agreement, upon the expiration of the “six-month grace period” within which the Company is required to remedy a Material Event of Default under the Credit Facility Agreement, subject to a notification by Chiao Tung Bank to the MOTC within seven days prior to the expiration of the “six-month period” of the failure of the Company to remedy a Material Event of Default under the Credit Facility Agreement. (Refer to Note 7(a)(xii) for further details on this matter)
b. The Company should transfer to the MOTC its operating assets and other assets required to maintain the operation of the high speed railway which is required by the Company in accordance with the provision of the agreement upon the termination of the C&O Agreement. Furthermore, the MOTC could claim for damages from the Company for the termination of the agreement due to circumstances attributable to the Company. (Refer to Note 7(a)(x) for further details on this matter)
The first syndicated loan agreement requires the Company to maintain a specific debt-to-equity ratio and interest cover ratio at the end of each year, as follows (Due to the revision of the target operation date, the consortium agreed to waive its requirement for the Company to maintain the specified maximum debt-to-equity ratio at December 31, 2005, 2006, and 2007.):

Debt-to-equity ratio . . . . . Interest cover ratio . . . . .	2000~2004 300% NA	2005~2007 NA NA	2008 300% 110%	2009 280% 130%	2010~2013 220% 130%	2014 and after
						150% 130%

In addition, the Company had provided open-end bond funds and short-term notes to Chiao Tung Bank (the original lead bank and agent bank) as collateral to secure the loans as of December 31, 2006 and 2005. The details of these pledged assets are disclosed in note 6.

As of December 31, 2004, 2005 and 2006, the Company had outstanding promissory notes amounting to NT$310.3 billion in order to obtain credit lines for the first syndicated loan.

F-20

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

On July 31, 2006, the Company obtained the second secured credit facilities totaling NT$40.7 billion from the second bank syndicate (consisting of 7 banks, with Taipei Fubon Bank as the lead bank) in order to finance the construction and completion of the high speed rail system and stations and operating activities. This credit line can be increased to NT$65.5 billion upon the approval of the Company and the second bank syndicate within the year following the contract date. The increase of credit line to NT$65.5 billion, under the second secured credit facilities, has been approved by the original lead bank. However, the approval of the second bank syndicate other than the lead bank is still in the process.

The second syndicated loan agreement requires, among other things, the Company to maintain specified debt-to equity ratio and interest cover ratio at the end of each year, as follows:

Debt-to-equity ratio . . . . . Interest cover ratio . . . . .	2007 NA NA	2008 300% NA	2009 280% 130%	2010~2013 220% 130%	2014 and after
					150% 130%

As of December 31, 2006, the Company had issued promissory notes amounting to NT$40.7 billion in order to secure credit lines for the second syndicated loan.

As of December 31, 2004, 2005 and 2006, the used and unused credit lines of long-term loans were as follows:

NT$ 194,200,000 27,460,205 3,300,000 2,000,000	NT$ NT$ (in thousands dollars) 240,500,000 279,063,795 27,460,205 27,460,205 3,300,000 1,398,000 2,000,000 2,000,000	NT$ NT$ (in thousands dollars) 240,500,000 279,063,795 27,460,205 27,460,205 3,300,000 1,398,000 2,000,000 2,000,000	NT$ NT$ (in thousands dollars) 240,500,000 279,063,795 27,460,205 27,460,205 3,300,000 1,398,000 2,000,000 2,000,000	NT$ NT$ (in thousands dollars) 240,500,000 279,063,795 27,460,205 27,460,205 3,300,000 1,398,000 2,000,000 2,000,000
226,960,205 96,339,795 323,300,000	273,260,205 50,039,795		309,922,000 13,378,000 323,300,000	9,509,727 410,494 9,920,221
	323,300,000
	. . . . . . . . . . . . . . . . . . . . .
		NT$ US$ (in thousands dollars) 15,400,000 472,537 25,300,000 776,312 40,700,000 1,248,849

F-21

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(j) Retirement plan

The Company’s employee defined benefit retirement obligation is determined based on the actuarial calculations. The funding status of the plan was reconciled with accrued pension liability as of December 31, 2004, 2005 and 2006, as follows:

Benefit obligation: Vested benefit obligation . . . . . . . . . . Nonvested benefit obligation . . . . . . . Accumulated benefit obligation . . . . . . Projected compensation increases . . . . Projected benefit obligation . . . . . . . . Plan assets at fair value . . . . . . . . . . . . Funding status . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . Unrecognized pension gains (losses). . . . Unrecognized net transition obligation . . Additional pension liability . . . . . . . . . . Accrued pension liability. . . . . . . . . . . .	2004.12.31	2004.12.31	2005.12.31	2005.12.31	2006.12.31	2006.12.31
		NT$ 5,313 137,683 142,996 77,838 220,834 (193,642) 27,192 – (24,332) (2,860) – –		NT$ NT$ (in thousands dollars) 10,188 31,384 178,893 322,148 189,081 353,532 90,577 140,854 279,658 494,386 (248,374) (292,579) 31,284 201,807 – (182,814) (28,614) 7,363 (2,670) (2,480) – 37,077 – 60,953		US$ 963 9,885 10,848 4,322 15,170 (8,978) 6,192 (5,610) 226 (76) 1,138 1,870

The components of net periodic pension costs for 2004, 2005 and 2006 were as follows:

Service cost . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . Amortization. . . . . . . . . . . . . . . . . . . . Net pension cost . . . . . . . . . . . . . . . . .	2004.12.31	2004.12.31	2005.12.31	2005.12.31	2006.12.31	2006.12.31
		NT$ 60,144 5,639 (1,851) (7,178) 56,754		NT$ NT$ (in thousands dollars) 43,393 36,358 7,729 14,919 (3,088) (8,227) 3,610 18,610 51,644 61,660		US$ 1,115 458 (252) 571 1,892

Actuarial assumptions at December 31, 2004, 2005 and 2006 were as follows:

Discount rate . . . . . . . . . . . . . . . . . . . . . Rate of increase in compensation . . . . . . . . Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . .	2004 3.50% 3.00% 3.50%	2005 3.00% 3.00% 3.00%	2006
			2.75% 3.00% 2.75%

The pension information recognized for 2004, 2005 and 2006 were as follows:

Pension expense: Defined benefit net pension cost . . . . . Defined contribution pension cost . . . . Pension cost charged to construction in progress: Defined benefit net pension cost . . . . . Defined contribution pension cost . . . .		2004		2005	2006
		NT$ 12,328 – 12,328 44,426 – 44,426		NT$ NT$ (in thousands dollars) 14,407 29,146 10,776 34,477 25,183 63,623 37,237 32,514 13,638 22,087 50,875 54,601		US$ 894 1,058 1,952 998 678 1,676

F-22

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(k) Income tax

i. The Company’s earnings are subject to a maximum income tax rate of 25%.
ii. The Company is subject to the “Alternative Minimum Tax Act” commencing from January 1, 2006. This new Act has been enacted to impose an alternative minimum tax at the rate of 10% on the“basic taxable income”of any profit seeking enterprise in Taiwan determined pursuant to a certain formula. The income tax expense (benefit) calculated on the pre-tax accounting income (loss) at the statutory income tax of 25% was reconciled with the income tax as reported in the accompanying financial statements for the years ended December 31, 2004, 2005 and 2006, as follows:

Income tax expense (benefit) calculated on the pre-tax accounting income (loss) at statutory income tax rate . . . . . . . . . . . . . . . . . . . . Effect of change in accounting principle. . . . . . Tax-exempt income from sales of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . Expenses disallowed for tax purposes . . . . . . . Unrealized loss on indemnification . . . . . . . . . Expiry of deferred income tax assets of loss carryforwards. . . . . . . . . . . . . . . . . . . . . . Increase in valuation allowance for deferred income tax assets . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . .	2004	2005	2006	2006
	NT$ (853,226) – (20,857) 5,682 521,300 – 283,570 63,531 –	NT$ NT$ (in thousands dollars) (518,862) (850,432) – (6,174) (8,534) (17,655) 5,369 3,575 (521,300) – – 254,137 972,312 602,031 71,015 14,518 – –		US$ (26,095) (189) (542) 110 – 7,798 18,473 445 –

iii. The components of the deferred income tax expense (benefit) for the years ended December 31, 2004, 2005 and 2006 were as follows:

Loss carryforwards . . . . . . . . . . . . . . . . . . . Pension expenses in excess of tax limit . . . . . . Provision for employees welfare. . . . . . . . . . . Valuation loss on financial instruments . . . . . . Unrealized foreign exchange loss . . . . . . . . . . Increase in valuation allowance for deferred income tax assets . . . . . . . . . . . . . . . . . . .	2004	2005	2006	2006
	NT$ (289,683) (137) 6,250 – – 283,570 –	NT$ NT$ (in thousands dollars) (970,483) (597,100) (1,829) (2,188) – – – (43,841) – 41,098 972,312 602,031 – –		US$ (18,322) (67) – (1,345) 1,261 18,473 –

F-23

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

iv. As of December 31, 2004 and 2005 and 2006, the components of deferred income tax assets or liabilities were as follows:

2004.12.31	2004.12.31	2005.12.31	2005.12.31		2006.12.31	2006.12.31
Amount	Effect on income tax expense	Amount	Effect on income tax expense	Amount	Effect on income tax expense	Amount	Effect on income tax expense
NT$ – – – – 25,000 – 4,087,222 959,365 7,807 –	NT$ – – – – 6,250 (6,250) – 1,021,805 239,841 1,952 (1,263,598) –	NT$ – – – – – 7,969,155 959,365 15,122 –	NT$ NT$ (in thousands dollars) – 712,925 – 36,202 – 175,363 – (164,393) – – – – 1,992,289 9,644,631 239,841 923,163 3,781 23,876 (2,235,911) – –		NT$ 178,231 9,050 43,841 (41,098) – (190,024) – 2,411,158 230,791 5,969 (2,647,918) –	US$ 21,876 1,111 5,381 (5,044) – – 295,938 28,327 733 –	US$ 5,469 278 1,345 (1,261) – (5,831) – 73,985 7,082 183 (81,250) –

v. Pursuant to the ROC Income Tax Law, losses may be carried forward for five consecutive years to reduce future taxable income. The expiration years of the remaining loss carry-forwards were as follows:

Expiry year	NT$	US$
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(in thousands 712,925 987,868 3,402,376 1,849,438 3,404,949 10,357,556	dollars) 21,876 30,312 104,399 56,749 104,478
		317,814

vi. Income tax returns have been examined by the tax authorities for all years through 2004, except for the years 2001 and 2003.
vii. Imputation credit account (the”ICA”) and tax credit percentage

The income tax paid by the Company is appropriated to the stockholders together with the appropriation of earnings. A stockholder who is a resident of the ROC can use the imputed tax appropriated by the Company as a credit against the resident stockholder’s income tax liability. As of December 31, 2004, 2005 and 2006, details of the ICA were as follows:

ICA . . . . . . . . . . . . . . . . . . . . . . . . . .	2004.12.31	2005.12.31	2006.12.31
	NT$ 72,618	NT$ NT$ US$ (in thousands dollars) 72,618 72,618 2,228

There were no earnings appropriated to the Company’s stockholders in 2004, 2005 and 2006.

F-24

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

viii. Undistributed earnings

The accumulated deficits as of December 31, 2004, 2005 and 2006, amounted to NT$6,629,959 thousand, NT$9,722,086 thousand and NT$13,148,511 thousand, respectively.

(l) Stockholders’ equity

(1) Common stock and preferred stock

As of December 31, 2004, 2005 and 2006, the Company’s authorized share capital comprised of 10,000,000,000 shares, 12,000,000,000 shares and 12,000,000,000 shares, with par value of NT$10 per share. As of December 31, 2004, 2005 and 2006, the Company had issued NT$49,999,000 thousand, NT$49,999,000 thousand and NT$50,509,000 thousand of common stock and NT$40,577,565 thousand, NT$55,101,565 thousand and NT$54,591,565 thousand of preferred stock, respectively.

The rights and obligations of Class A Preferred Stock and Class B Preferred Stock are as follows:

i. On January 27, 2003, the Company issued and registered the Class A Convertible Preferred Stock of NT$26,900,000 thousand with par value of NT$10 per share and with maturity of January 26, 2009. However, the Company may exercise its right three months before the maturity date to extend the maturity date for another thirteen months, so that the new maturity date would be February 26, 2010. As of December 31, 2006, NT$510,000 thousand of class A Convertible Preferred Stock had been converted to common stock.
On September 9, 2003, the Company issued and registered the Class B Convertible Preferred Stock of NT$1,342,495 thousand with par value of NT$10 per share, and with maturity of September 8, 2009. However, the Company may exercise its right three months before the maturity date to extend the term for another thirteen months, so that the new maturity date would be October 8, 2010.
ii. The Dividend Yield of Preferred Stock is calculated based on the nominal value at the rate of 5% per annum. Dividends are payable in cash on a yearly basis during the issuance period of class A and B Preferred stock pursuant to Article 7-1 and Article 36 of the Company’s articles of incorporation on dividend allocation. The board of directors determines the record date for the distribution of dividends following the approval of the financial statements by the stockholders during their regular stockholders’ meeting. Dividends with different issue dates are calculated and allocated based on the actual number of issue days outstanding in a particular year.
iii. If, in any given year, the Company generates no profit or insufficient profit for the distribution of dividends for Preferred Stock, dividends are accumulated and are given preference over the dividends to be distributed to the holders of common stock in the year when the Company generates sufficient profit. Upon the maturity date of the Preferred Stock, the Company shall prioritize the payment in full of the undistributed dividends, in a particular year or each year thereafter.
iv. Commencing from the day following a full three years after the issuance of Preferred Stock and ending three months prior to the Maturity Date (the “Conversion Period”), the Preferred Stockholders may at any time make a one-time request to the Company for converting all their Preferred Stock to common shares newly issued by the Company at a 1:1 ratio.
v. If the Preferred Stockholders fail to convert the shares during the Conversion Period, the Company shall redeem the Preferred Stock at par value on maturity date. If the Company is prevented by laws and regulations from redeeming the Preferred Stock in whole or in part on Maturity Date, the rights and obligations associated with the unredeemed Preferred Stock will continue in accordance with the terms and conditions for issue hereunder, until they are redeemed.
vi. Other than the dividends on Preferred Stock, the Preferred Stockholders are not normally entitled to receive any dividends on common stock accrued from allocation of profits and capital reserve. The Preferred Stockholders are not entitled to receive preferred stock dividends in the year when the conversion takes place (the dividends for that particular year which are allocated in the following year). However, they may receive the dividends on common stock appropriated from profits and capital reserve (the dividends for that particular year which are approved by the stockholders during their meeting in the following year).

F-25

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

vii. The Preferred Stockholders are entitled to receive the remaining assets to be allocated by the Company before the common stockholders; provided, however, the amount of allocation shall not exceed the nominal value of Preferred Stock.
viii. The Preferred Stockholders are not entitled to cast votes during the common stockholders’ meeting and are not granted the right to vote for directors and supervisors. However, the Preferred Stockholders may be elected as directors or supervisors.
ix. When the Company issues new shares, both the Preferred Stockholders and common stockholders have the same preemptive rights to the subscription thereof.
On December 30, 2003, the stockholders approved a resolution to issue Class C Preferred Stock, but limited to 2,175,750,500 shares at par value of NT$10 per share, through private placement within one year of the resolution by stockholders. Upon the expiration of the term on December 29, 2004, NT$12,335,070 thousand of Class C Preferred Shares were issued, the details of which were as follows:

Item C1 . . . . C2 . . . . C3 . . . . C4 . . . . C5 . . . . C6 . . . . C7 . . . .	Issue Date NT$ (in thousands dollars) January 20, 2004 1,613,000 February 27, 2004 1,514,000 March 24, 2004 746,000 April 23, 2004 1,076,200 August 18, 2004 6,370,770 September 7, 2004 645,000 November 17, 2004 370,100

On March 4, 2005, the stockholders approved a resolution to issue Class C Preferred Stock, within the limit of 1,500,000,000 shares at par value NT$10 per share, through private placement within one year of the resolution by stockholders. Upon the expiration of the term on March 4, 2006, NT$14,524,000 thousand worth of Class C Preferred Shares were issued, the details of which were as follows:

Item C8 . . . . C9 . . . .	Issue Date NT$ (in thousands dollars) April 28, 2005 6,459,000 September 30, 2005 8,065,000

The rights and obligations of Class C Preferred stock are as follows:

i. Class C Preferred Stock shall be issued at NT$9.3 per share. The Dividend Yield is payable at the rate of 9.5% per annum for the initial two years, and 0% thereafter. Dividends are payable in cash on a yearly basis during the issuance period of Class C Preferred Stock pursuant to Article 7-2 and Article 36 of the Company’s articles of incorporation on dividend allocation. The board of directors determines the record date for the allocation of the dividends declared from earnings for the previous year following the approval by the shareholders of the related financial statements during their regular shareholders’ meeting. Dividends with different issue dates are calculated and allocated based on the actual number of issue days outstanding in a particular year, and the issue date is the record date of the capital increase. If the Company generates no profits or the profits are insufficient to pay dividends in a particular year, such dividends are accumulated and are given preference over the dividends to be distributed to the holders of common stock in the year when the Company gains sufficient profits.
ii. Class C Preferred Stock shall mature four years after the initial Issue Date. The Company shall redeem all Class C Preferred Stock at issuance value on maturity date. If legal restrictions prevent the Company from redeeming all or part of the Class C Preferred Stock, the unredeemed Class C Preferred Stock is entitled to payment of interest at the rate of 4.71% based on the face value of such unredeemed stock. The unredeemed Class C Preferred Stock is entitled to the same rights and obligations stated in the Company’s articles of incorporation until such unredeemed stock is fully redeemed.

F-26

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

iii. Class C Preferred Stockholders are not entitled to receive any other dividends on common stock accrued from the allocation of profits and capital reserve other than those dividends discussed herein.
iv. Class C Preferred Stockholders are entitled to receive any residual assets to be allocated by the Company before such assets are allocated to the common stockholders; provided, however, the amount of allocation shall not exceed the issuance amount of Class C Preferred Stock.
v. Class C Preferred Stockholders are not entitled to cast votes during a common stockholders’ meeting and do not have the right to vote for directors and supervisors. However, they may be elected as directors and supervisors.
vi. When the Company issues new shares, both the Class C Preferred Stockholders and common stockholders shall have equal preemptive rights to the subscription thereof.
vii. Commencing from the day following a full three years after the issuance of Class C Preferred Stock and ending three months prior to the Maturity Date (the “Conversion Date”), the Preferred Stockholders may at any time make a one-time request to the Company for converting all of their Preferred Stock to common stock newly issued by the Company at a 1:1 ratio.
viii. The Class C Preferred Stockholders may send their request to the Company for the conversion of their shares to common stock newly issued by the Company in accordance with the Terms and Conditions for Class C Preferred Stock. These stockholders are not entitled to receive dividends declared for Class C Preferred Stock in the year when the conversion takes place; however, they may be entitled to receive the dividends on common stock accrued from allocation of profits and capital reserve for that year. The rights and obligations of Class C Preferred Stockholders after conversion shall be identical to those of the Company’s common stockholders.

(2) Restrictions on appropriations of earnings and capital surplus

i. Capital surplus

Pursuant to the ROC Company Law, capital surplus can only be used to offset an accumulated deficit or to increase share capital. Capital surplus cannot be distributed as cash dividends. Capital surplus includes additional paid-in capital and gain from donations.

ii. Legal reserve

The ROC Company Law stipulates that the Company must retain 10% of its annual earnings, as defined in the Law, until such retention equals the amount of authorized share capital. This retention is accounted for by transfers to legal reserve, upon approval by the stockholders during their meeting. Legal reserve can be used to offset an accumulated deficit and cannot be distributed as cash dividends to stockholders. However, one-half of legal reserve may be converted to share capital when it reaches an amount equal to one-half of issued share capital, upon approval by the Company’s stockholders during their meeting.

iii. Distribution of earnings

The Company’s annual net profits, if any, shall be appropriated and used in the following order:

to pay all taxes and duties;
to cover any losses;
to set aside ten percent of the profits as legal reserve;
to set aside special reserve in addition to the legal reserve where necessary;
to pay dividends on preferred shares.

Thereafter 1% of the remaining profits is set aside as remuneration of directors and supervisors, and at least 1% of the remaining profits as employees’ bonus. Any remaining profits and undistributed retained earnings are distributed as dividends to common shareholders based on the resolution drawn up by the board of directors and approved by the shareholders’ during their meeting.

F-27

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

After obtaining prior government approval, the Company is allowed to declare dividends to preferred shareholders during the development stage regardless of the restrictions outlined above during the development stage. However, the Company is required to account for the prepayment of dividends to preferred shareholders in its balance sheet under shareholders’ equity; where the annual appropriations for dividends and bonuses exceed 6% of the Company’s paid-in capital, the excess is offset against prepaid dividends to preferred shareholders.

The Company’s policy of appropriating dividends and bonuses is based on the principles of stability and equity, balancing shareholder’s value, and the Company’s long-term financial plans and impact thereof on the business operations of the Company.

iv. Preferred Stock dividends are calculated and paid based on the actual number of issue days outstanding. The Company accrued NT$2,008,085 thousand, NT$3,071,211 thousand and NT$3,162,787 thousand of dividends payable on preferred stock in 2004, 2005 and 2006, respectively. As of December 31, 2004, 2005 and 2006, the dividends payable on preferred stock amounted to NT$2,008,085 thousand, NT$3,162,787 thousand and NT$2,008,085, respectively. In 2004, 2005 and 2006, the Company paid Preferred Stock dividends for 2003, 2004 and 2005 amounting to NT$1,270,157 thousand, NT$2,008,085 thousand and NT$3,071,211 thousand, respectively.

(m) Loss per share

2004	2004	2005	2006
Loss before income tax NT$ (3,412,906) – (2,008,085) (5,420,991) 4,999,900 (1.08)	Net loss NT$ (3,412,906) – (2,008,085) (5,420,991) 4,999,900 (1.08)	Loss before income tax Net loss Loss before income tax Net loss NT$ NT$ NT$ NT$ (in thousands dollars, except per share data) (2,075,447) (2,075,447) (3,401,729) (3,401,729) – – (24,696) (24,696) (3,071,211) (3,071,211) (3,162,787) (3,162,787) (5,146,658) (5,146,658) (6,589,212) (6,589,212) 4,999,900 4,999,900 5,000,738 5,000,738 (1.03) (1.03) (1.32) (1.32)	Loss before income tax US$ (104,380) (758) (97,048) (202,186) 5,000,738 (0.04)	Net loss
				US$ (104,380) (758) (97,048)
				(202,186)
				5,000,738
				(0.04)

F-28

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(n) Hedge accounting

(1) Fair value hedges

The Company entered into foreign currency forward contracts and foreign currency swap contracts to hedge the foreign exchange exposures on foreign-currency-denominated contract payables which the Company assesses as possibly significant.

As of December 31, 2006, the fair value of hedged items and derivative financial hedging instruments were as follows:

Hedged items Construction payables . . . . . . . . . . . . .	Hedging instruments Forward foreign exchange contracts and foreign currency swap contracts	Fair value of designated hedging instruments
		NT$ US$ (in thousands dollars) (178,153) (5,466)

(2) Cash flow hedges

The Company entered into foreign currency forward contracts, foreign currency swap contracts, and interest rate swap contracts to hedge the risks of fluctuation in market interest rates and foreign exchange rates on long-term debts and portion of construction contracts which the Company assesses as possibly significant.

As of December 31, 2004, 2005 and 2006, the cash flow hedged items and derivative financial hedging instruments were as follows:

Hedged items	Hedged items		Fair value of designated hedging instruments	Fair value of designated hedging instruments	Fair value of designated hedging instruments		Projected period of recognizing related gain
		Hedging instruments	2004.12.31	2005.12.31	2006.12.31	Projected period of cash flows	or loss in income statement (Note)
Construction contracts . . . . . . . Long-term debts . . . . . . . . .		Forward foreign exchange contracts and foreign currency swap contracts Interest rate swap contracts	NT$ NT$ NT$ US$ (in thousands dollars) (919,285) (1,256,879) (8,261) (253) (4,853) (2,940) – –			2007 –	2007~2033 –

(Note) The recognition of the related valuation gain or loss will be consistent during the concession period of the High Speed Rail (Refer to Note 7(a)(iii)).

As of December 31, 2006, the valuation losses generated from financial instruments on cash flow hedges amounted to NT$63,912 thousand, which were charged to stockholders’ equity.

F-29

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(o) Disclosure of financial instruments

(1) Fair value of financial instruments The details of financial instruments as of December 31, 2004, 2005 and 2006, were as follows:

Nonderivative financial instruments: Financial assets: Cash and cash equivalents . . . . . . . . . . . . Available-for-sale financial assets . . . . . . . . . . Refundable deposits . . . . . . . . . . . . . . Restricted assets (including current and noncurrent) . . . . Financial liabilities: Short-term debts . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . Bonds payable (including current portion) . . . . . . . Construction payables (including related parties) . . . . . Long-term debts (including current portion) . . . . . . Construction retentions payable (including related parties) . Derivative financial instruments: Financial liabilities: Forward foreign exchange contracts . . . . . . . . . Interest rate swap agreements . . . . . . . . . . . Off-balance-sheet financial instruments: Letter of credit . . . . . . . . . . . . . . . . Letter of credit for guarantee . . . . . . . . . . .		2004.12.31			2005.12.31				2006	.12.31
	Carrying value	Fair Publicly quoted market price	value Valuation value	Carrying value	Fair Publicly quoted market price	value Valuation value	Carrying value	Fair Publicly quoted market price	value Valuation value	Carrying value	Fair Publicly quoted market price	value Valuation value
	NT$ 549,789 2,174,709 56,433 10,478,067 – – 26,800,000 7,710,802 194,200,000 3,439,554 139,819 4,059 19,308,929 198,342	NT$ 549,789 – – – – – – – – – – – – –	NT$ NT$ – 62,412 2,181,317 654,189 56,433 118,832 10,496,393 10,458,067 – 3,815,135 – – 26,424,694 26,800,000 7,710,802 10,871,008 194,200,000 240,500,000 3,439,554 223,899 (314,561) 904,439 4,853 1,033 19,308,929 19,308,929 198,342 198,342		NT$ 62,412 – – – – – – – – – – – – –	NT$ NT$ (in thousands dollars) – 612,158 657,308 527,148 118,832 55,014 10,476,188 3,085,943 3,815,135 8,310,460 – 332,562 26,204,471 26,800,000 10,871,008 9,623,892 240,500,000 294,463,795 223,899 – (1,256,879) 186,414 (2,940) – 19,308,929 2,903,723 198,342 198,342		NT$ 612,158 – – – – – – – – – – – – –	NT$ – 527,148 55,014 3,085,943 8,310,460 332,562 26,194,625 9,623,892 294,463,795 – 186,414 – 2,903,723 198,342	US$ 18,784 16,175 1,688 94,690 255,000 10,205 822,339 283,003 9,035,403 – 5,720 – 89,099 6,886	US$ 18,784 – – – – – – – – – – – – –	US$ – 16,175 1,688 94,690 255,000 10,205 803,763 283,003 9,035,403 – 5,720 – 89,099 6,886

(2) Methods and assumptions to measure the fair value of financial instruments
i. Because the maturity dates of short-term financial instruments, including cash and cash equivalents, other financial assets–current, refundable deposits, short-term debts, accounts payable, construction payables, and construction retentions payable, are within one year of the balance sheet date, their book value is adopted as their fair value.
ii. If publicly quoted market prices of financial assets and liabilities are available, then the quoted price is adopted as the fair value. If market prices are not available, valuation technique is adopted to determine the fair value. When adopting a valuation technique, the estimates and assumptions used are consistent with those used by the financial market participants when setting prices for the financial instruments.
iii. The fair value of bonds payable is determined based on the discounted future cash flows, and discount rates of 2.7412%, 3.2746% and 4.0281% for the years ended December 31, 2004, 2005 and 2006, respectively.
iv. As the interest rates on long-term debts fluctuate with market interest rates, no material differences are expected between the carrying amount and fair value of long-term debts.
v. The fair values of derivative instruments are assessed by valuation techniques. When adopting a valuation technique, the estimates and assumptions used are close to those used by the financial market participants when setting prices for the financial instruments.
(3) As of December 31, 2006, the unrealized valuation gain on available-for-sale financial assets amounted to NT$148 thousand, which was recognized as an adjustment to stockholders’ equity.

F-30

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(4) Disclosure of financial risks and management information

i. Market risk

The Company’s securities were recorded as available-for-sale financial assets and measured at fair value. This exposes the Company to the risk of changes in market price.

The Company’s short-term debts and bonds payable carried a fixed interest rate. This exposes the Company to the risk of adverse movements in market interest rates.

The fair value of the Company’s forward foreign exchange contracts and foreign currency swap agreements fluctuate with the market exchange rates. If the fluctuation in market exchange rate between USD and NTD increases by USD 0.01, the fair value would increase by approximately NT$4,639 thousand. If the fluctuation in market exchange rate between USD and JPY increases by USD 0.01, the fair value would decrease by approximately NT$850 thousand.

ii. Credit risk

The Company is exposed to credit risk through its cash and securities. The Company deposited its cash in different financial institutions. The securities owned are open-end bond funds with good credit quality ratings. The Company controls the credit risk exposure in every financial institution, and concluded that there was no significant concentration of credit risk.

iii. Liquidity risk

The Company is exposed to liquidity risk through its forward exchange contracts and simplified interest exchange contracts as follows:

(a) Forward exchange contracts are exchanged in the Taipei Foreign Exchange Market. The liquidity risk is not considered material as the probability of failure to sell at reasonable prices is very low.
(b) The liquidity risk on simplified interest exchange contracts is not considered material as the probability of failure to sell at reasonable prices is very low.
(i) The Company held USD/JPY forward exchange contracts which will result in cash flows from January to May 2007 as follows:

In January 2007 . . . . . . . . . . . . . . . . . . . . . . . . . In February 2007 . . . . . . . . . . . . . . . . . . . . . . . . . In March 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . In April 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . In May 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	Cash Outflows Cash Inflows US$ JPY (in thousands dollars) 64,549 7,580,948 86,681 10,121,775 60,774 7,319,455 55,944 6,472,186 39,988 4,619,381	Cash Inflows

(ii) The Company held USD/NTD forward exchange contracts which will result in cash flows from January to May 2007 as follows:

In January 2007 . . . . . . . . . . . . . . . . . . . . . . . . . In February 2007 . . . . . . . . . . . . . . . . . . . . . . . . . In March 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . In April 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . In May 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .	In thousands	In thousands
	Cash Inflows	Cash Outflows
	US$ NT$ (in thousands dollars) 220,473 7,231,679 62,667 2,040,363 92,428 2,991,816 64,277 2,077,009 24,011 772,461

There are no material cash flow risks as the exchange rate of forward exchange contracts is fixed.

F-31

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

iv. Interest rate risk

Although the Company’s short-term debts and bonds payable are debts with fixed interest rates, its long-term debts bear floating interest rates. This exposes the Company to interest rate risk because the adverse changes in market interest rates will affect the future cash flows of the long-term debts. If the market interest rate increases by 1%, the Company’s future cash outflow would increase by approximately NT$2,944,638 thousand.

v. Risk management
(a) Foreign currency risk

Under the Company’s risk management policy, the foreign currency forward contracts and foreign currency swap contracts are used to mitigate foreign currency rate fluctuation risks.

(i) The Company utilizes foreign currency forward contracts in order to meet the payment schedule and to make available sufficient amount of foreign currency to pay foreign currency payables in the future.
(ii) The Company utilizes foreign currency swap contracts for foreign currency payables whose due dates were extended.
(b) Interest rate risk

The Company utilizes interest rate swap contracts to mitigate interest rate fluctuation

risk.

vi. Hedging strategy
(a) Foreign currency hedging strategy

The foreign currency risk on construction payables and other capital expenditures denominated in foreign currency is being hedged by using foreign derivative financial instruments involving foreign currency forward contracts and foreign currency swap contracts.

(b) Interest rate hedging strategy

The interest risk on the syndicated loans bearing floating interest is also being hedged by using derivative financial instruments involving interest swap contracts.

(p) Loss on indemnification

Dissatisfied with the R.O.C. court’s ruling, Eurotrain referred the matter to the International Court of Arbitration of the International Chamber of Commerce (“ICC”) for international arbitration against the Company in January 2001. Below is Eurotrain’s claim:

Eurotrain was seeking compensation from the Company through arbitration for the infringement upon Eurotrain’s rights and interests caused by the execution of a procurement contract between the Company and Taiwan Shinkansen on December 12, 2000, for the Taiwan High Speed Rail electrical and mechanical system. With the conclusion of the arbitration proceeding, an arbitral award was rendered on March 5, 2004. The Company received a copy of the award on March 15, 2004, as follows:

The Company should pay Eurotrain US$32,352,800 in reliance damages and US$35,689,434 for unjust enrichment. In addition, the Company should bear the costs of arbitration (fixed by ICC at US$1,220,000, of which the Company had already paid US$610,000 at the beginning of the arbitration proceeding) and shall pay Eurotrain its legal costs of US$3,780,701.71.

In order to carry out the enforcement action against the Company in Taiwan, Eurotrain filed an application with the Taipei District Court for recognition and approval to execute the award of arbitration between the Company and Eurotrain, which is deemed a foreign award of arbitration in accordance with Taiwan laws.

The Company and Eurotrain reached a reconciliation agreement regarding arbitration on November 25, 2004. Both parties agreed that the Company should pay US$65 million, plus interest of 5% per annum, to Eurotrain to settle all disputes with regard to the procurement of the High Speed Rail core system and the arbitration. Part of the settlement, US$50 million, shall be paid to Eurotrain immediately, and the remaining US$15 million and the assumed interest for one year at an annual rate of 5%, US$750 thousand, shall be

F-32

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

deposited in the escrow account, which should be opened and managed by the lawyers appointed by each of the parties. Accordingly, Eurotrain withdrew the application for recognition and approval to execute the foreign award of arbitration in the Taipei District Court.

After completing the related payment process on January 20, 2005, the actual amount paid to Eurotrain was US$15,115,068.50, and Eurotrain is required to return US$634,931.50 to the Company.

The Company recorded this settlement payment of NT$2,085,200 thousand (US$65 million) as indemnification loss in 2004. The Company also recognized interest expenses of NT$1,647 thousand in 2005. In 2005, the Company also recognized losses of NT$105,466 thousand resulting from the settlement payment, which included reimbursement for taxes paid.

In addition, in order to disburse the settlement amount plus interest on a timely basis, and to meet Eurotrain’s requirement to pay immediately to protect its creditor rights, the Company requested Evergreen International S.A. (registered in Panama) to pay the settlement amount on the Company’s behalf on the same date the Company signed the reconciliation agreement on November 25, 2004. The Company has already reimbursed Evergreen International S.A. (registered in Panama) for such payment.

(q) Superficies

On July 23, 1998, the Company entered into a C&O Agreement and SZD Agreement with the MOTC, under which, the Company was granted a concession right to construct and operate the high speed rail (the “HSR”), to operate businesses ancillary to high speed rail operation, and to develop and use the station zones.

Pursuant to the HSR Right-of-Way Map and the HSR Overpass/Underpass Superficies Space Map appended to the C&O Agreement, the Company further secured superficies from the MOTC over the transportation infrastructure land such as route land, maintenance bases, station land, etc. As of December 31, 2006, superficies had been procured over the land comprising a total of 15,391 lots, or 9,846,482.5 m[2] , and 194 certificates of other rights, with respect to land from Lot 0837-0000 Kuanghua Section, Hsinchuang, Taipei County, in the north to Lot 0421-0002, Subsection 6, Hsinchuang Section, Tsoying, Kaohsiung, in the south. The term of such superficies is from the date of their registration to the date of expiration or termination of the C&OA, i.e., 35 years as the agreed concession period under the C&O Agreement.

The Company also procured superficies from the MOTC over the ancillary business land of station zones within the designated area of the Taoyuan, Hsinchu, Taichung, Chiayi and Tainan stations, the area being 465,412.96 m[2] pursuant to the SZD Agreement. The MOTC entered into an Agreement on The Principles of Handling Superficies over Ancillary Business Land in Taiwan North-South High Speed Rail Station Zones (“ Superficies Agreement ”) with the Company on March 9, 2006. Through this Superficies Agreement, the MOTC granted the Company the rights to dispose the superficies over the ancillary land for business development purposes, transfer the superficies to others for development and operation, and create liens over the superficies. However, the terms and conditions of the contracts coverving the actual disposal and transfer of and creation of liens over these superficies shall be consented by the MOTC.

As of December 31, 2006, the Company had secured the right to develop and to conduct business on the ancillary land of the Chiayi station zone, with a total area of 54,223.42 m[2] .

5. Transactions with Related Parties

(a) Names and relationship of related parties

Name
Continental Engineering Corp. (CEC) . . . . . . . . . . . .
Pacific Electric Wire & Cable Co., Ltd.
(PEWC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TECO Electric and Machinery Co., Ltd.
(TECO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taipei Fubon Commercial Bank Co., Ltd. (Taipei
Fubon Bank) . . . . . . . . . . . . . . . . . . . . . . . . . .
Shinkong Insurance Co., Ltd.
(Shinkong Insurance). . . . . . . . . . . . . . . . . . . . .

Relationship with the Company

Its general manager is the Company’s
chairman of the board
A corporate director
A corporate director
A corporate director
A corporate director

F-33

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(b) Significant transactions with related parties

i. The Company entered into several construction contracts with its related parties as follows:

Effective Year 1999 . . . . . . . . 2000 . . . . . . . . 2000 . . . . . . . . 2002 . . . . . . . . 2002 . . . . . . . . 2002 . . . . . . . . 2002 . . . . . . . . 2003 . . . . . . . . 2003 . . . . . . . . 2003 . . . . . . . . 2003 . . . . . . . . 2004 . . . . . . . .	Nature of Contract Water Pipe Road Construction Contract Civilwork Construction of High Speed Rail Contract ‘’ Tsoying Station Construction Contract Chiayi Station Construction Contract Wuji Base Construction Contract Taichung Station Construction Contract Main Workshop Construction Contract Tsoying Depot Construction Contract Wuji Depot Construction Contract Train Lifting System Contract Train Wash System Contract	Related Party CEC Bilfinger+Berger-CEC JV Evergreen-Italian Thai-PEWC JV TAISEI-CEC JV TECO-TAKENAKA JV CEC TAISEI-CEC-CTCI-TAIAN JV Chung Lu-CTCI-TECO JV TECO-Barclay-Mowlem JV Chung Lu-CTLI-TECO JV Vector Systems-China Steel-TECO JV Vector Systems-China Steel-TECO JV	Contract Price	Contract Price
			Original Amended (Note) NT$ NT$ (in thousands dollars) 112,168 112,168 20,275,000 21,575,585 3,824,463 4,226,300 1,616,510 1,869,066 811,000 876,360 331,000 367,845 2,318,310 2,427,454 1,435,500 1,522,704 1,650,000 2,078,251 838,530 858,441 28,028 28,107 53,704 53,704	Amended (Note)

(Note) The contract price has been adjusted because of changes in specifications.

According to the contracts, the Company retains 10% of each construction payable as a guarantee for fulfilling the contracts but the aggregate amount of such retention shall not exceed 5% of the contract price. The retention amount is refundable when the construction is completed.

F-34

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

For the years ended December 31, 2004, 2005 and 2006, the related construction costs paid to contractors, which were recorded as construction in progress, were as follows:

				2004	2004
	Civil work NT$ 1,776,022 205,659 – 1,981,681			Depot Station NT$ NT$ (in thousands dollars) 35,090 1,123,564 – – 1,609,881 552,743 1,644,971 1,676,307				Total
								NT$ 2,934,676 205,659 2,162,624 5,302,959
				2005
	Civil work NT$ – 14,981 8,394 23,375			Depot Station NT$ NT$ (in thousands dollars) 1,945,784 502,979 (283)(Note) 903,342 – – 1,945,501 1,406,321				Total
								NT$ 2,448,763 918,040 8,394 3,375,197
. . . .	. . . .	. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	. . . .			2006
					Depot Station Total NT$ NT$ NT$ (in thousands dollars) 414,759 168,313 583,072 – 238,956 238,956 414,759 407,269 822,028			Total

							2006
					Depot Station US$ US$ (in thousands dollars) 12,727 5,165 – 7,332 12,727 12,497				Total
									US$ 17,892 7,332 25,224

(Note) The amount consisted of a discount obtained from CEC on construction expenditure, which was recognized as a reduction of construction in progress.

As of December 31, 2004, 2005 and 2006, the details of construction payables (including construction retentions) were as follows:

CEC . . . . . . . . . . . . . . . . . . . . . PEWC . . . . . . . . . . . . . . . . . . . . TECO . . . . . . . . . . . . . . . . . . . .			2004.12.31	2004.12.31	2004.12.31
	Civil work NT$ – 10 – 10		Depot NT$ (in thousands 10,117 – 323,965 334,082		Station NT$ Dollars) 242,961 – 136,302 379,263		Total
							NT$ 253,078 10 460,267 713,355

F-35

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

As of December 31, 2004, the construction payables to related parties-current and construction retentions payable to related parties-noncurrent amounted to NT$291,480 thousand and NT$421,875 thousand, respectively.

TECO . . . . . . . . . . . . . . . . . . . . CEC . . . . . . . . . . . . . . . . . . . . . PEWC . . . . . . . . . . . . . . . . . . . .			2005.12.31	2005.12.31	2005.12.31
	Civil work NT$ – 393 10 403		Depot NT$ (in thousands 363,518 – – 363,518		Station NT$ dollars) 116,633 206,655 – 323,288		Total
							NT$ 480,151 207,048 10 687,209

As of December 31, 2005, the construction payables to related parties-current and construction retentions payable to related parties-noncurrent amounted to NT$614,464 thousand and NT$72,745 thousand, respectively.

		2006.12.31
Depot Station Total NT$ NT$ NT$ (in thousands dollars) 148,105 57,039 205,144 – 93,165 93,165 148,105 150,204 298,309			Total

		2006
	Depot Station US$ US$ (in thousands dollars) 4,544 1,750 – 2,859 4,544 4,609			Total
				US$ 6,294 2,859 9,153

ii. Syndicated loans

The Company obtained the first and second secured credit facilities from the syndicate banks, including Taipei Fubon Bank. As of and for the years ended December 31, 2004, 2005 and 2006, the syndicated loans from Taipei Fubon Bank and interest expenses incurred thereon were as follows (expressed in thousands of New Taiwan dollars and US dollars):

2004

2004	2004	2004	2004	2004	2004

Maximum balance NT$6,000,780 . . . . . . . . . . . . . . .	Ending balance NT$6,000,780		Interest rate 2.6532%~2.8426%	Amount of interest (including capitalized interest)
					NT$124,989
		2005
Maximum balance NT$7,431,450 . . . . . . . . . . . . . . .	Ending balance NT$7,431,450		Interest rate 2.8027%~7.9147%	Amount of interest (including capitalized interest)
				NT$189,815

F-36

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

		2006
Maximum balance NT$11,651,749 . . . . . . . . . . . . . . US$357,525 . . . . . . . . . . . . . .		Ending balance NT$11,651,749 US$357,525	Interest rate 3.1279%~8.1316% 3.1279%~8.1316%	Amount of interest (including capitalized interest)
					NT$310,553 US$9,529

iii. Insurance expenses

In 2004 and 2006, the Company incurred insurance premium of NT$112,477 thousand and NT$55,476 thousand, respectively, under the Owner Controlled Insurance Program (OCIP) provided by Shinkong Insurance Co., Ltd. which were charged to construction in progress. As of December 31, 2004 and 2006, the related payables were paid.

vi. Other

The Company pledged time deposits as collateral for a short-term loan, which was obtained under a credit facility with the Taipei Fubon Bank. As of December 31, 2004 and 2006, the time deposits of NT$125,716 thousand and NT$112,000 thousand, respectively, which were pledged for this credit line facility were recorded as restricted assets–current.

6. Pledged Assets

As of December 31, 2004, 2005 and 2006, the carrying values of pledged assets were as follows:

Pledged assets	Pledged to secure	2004.12.31	2005.12.31	2006.12.31	2006.12.31
Restricted assets – current: Time deposit . . . . . . Time deposit . . . . . . Time deposit . . . . . . Time deposit . . . . . . Time deposit . . . . . . Open-end bond funds . . . . . . . . . . Sub-total . . . . . . . Restricted assets – noncurrent: Time deposit . . . . . . Time deposit . . . . . . Time deposit . . . . . . Time deposit . . . . . . Short-term notes . . . Open-end bond funds . . . . . . . . . . Sub-total . . . . . . . Construction in progress . . . . . . . . . Total . . . . . . . . . .	Guarantee for oil purchase Station land lease Import customs duties Syndicated loan Guarantee for bank overdraft Guarantee for bank overdraft Station land lease Letter of credit for guarantee Import customs duties Guarantee for oil purchase Syndicated loan Syndicated loan Construction guarantee	NT$ $1,600 2,670 360,000 – – 125,716 489,986 $9,507 40,000 20,000 – 13,696,684 701,413 14,467,604 13,000,000 $27,957,590	NT$ NT$ (in thousands dollars) – 2,000 1,865 1,865 10,000 10,000 228,660 – – 112,000 – – 240,525 125,865 9,366 12,078 40,000 40,000 – – 1,600 – 4,019,149 2,908,000 6,147,427 – 10,217,542 2,960,078 13,000,000 13,000,000 23,458,067 16,085,943		US$ 61 57 307 – 3,437 – 3,862 371 1,227 – – 89,230 – 90,828 398,895 493,585

F-37

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

7. Commitments and Contingencies

(a) Significant contracts

The Company entered into the C&O Agreement and SZD Agreement with the MOTC on July 23, 1998. The significant provisions of these contracts are as follows:

i. The C&O Agreement covers the building, operation and transfer (BOT) of the High Speed Rail between Taipei (Shihjy) and Kaohsiung (Tsoying). In addition, the contract includes the transfer of stations built by the Company and station facilities co-built by the Company with the Taiwan Railroad Administration and Taipei Rapid Transit Corporation.
ii. The SZD Agreement covers the development, operation, return of the land, and transfer of assets of five stations along the Taiwan High Speed Rail line: Taoyuan (Chinpu), Hsinchu (Luchia), Taichung (Wuji), Chiayi (Taipao), and Tainan (Shalun).
iii. The duration of the concession agreement for the High Speed Rail (the “HSR”), including the construction period and operating period, is 35 years from the contract date.

The concession agreement for the stations also includes the following:

1) The right to develop and operate the station land for 35 years from the contract date.
2) The concession agreement to operate businesses on the land neighboring the stations for 50 years after the land is transferred to the Company.
iv. Any changes to the Company’s articles of incorporation, organization by-laws, directors and supervisors should be reported to the MOTC within 15 days.
v. The promoters for the incorporation of the Company are required to hold 25% or more of the total equity shares issued by the Company during the construction period.
vi. The ratio of the Company’s stockholders’ equity to its total assets shall be maintained at 25% or more during the concession period. As of December 31, 2006, the ratio of the Company’s equity to its total assets is 19.28%. The Company has obtained the consent of the MOTC to improve the ratio by the end of 2008.
vii. During the operating period, the Company undertakes to return by profit sharing 10% of the operating profit before tax to the MOTC each year for use in projects associated with development; provided, however, that if the total amount of the Company’s cumulative profit sharing return is less than the amount listed in the table below, the Company undertakes to follow the table below:

				NT$
As	of	the	end of the fifth year of full operation . . . . . . . . . . . . . . . . . . . . . . . . . . .	2 billion
As	of	the	end of the tenth year of full operation . . . . . . . . . . . . . . . . . . . . . . . . . .	10 billion
As	of	the	end of the fifteenth year of full operation . . . . . . . . . . . . . . . . . . . . . . . .	25 billion
As	of	the	end of the twentieth year of full operation . . . . . . . . . . . . . . . . . . . . . . .	48 billion
As	of	the	end of the twenty-fifth year of full operation . . . . . . . . . . . . . . . . . . . . . .	75 billion
As	of	the	expiration of the concession period . . . . . . . . . . . . . . . . . . . . . . . . . . . .	108 billion

viii. Assets which are purchased with the consent of the MOTC during the five-year period immediately preceding the expiration of the concession period and are not yet completely depreciated and still available for normal operation and use upon the expiration of the concession period shall be transferred with compensation to the MOTC or other party designated by the MOTC. Except for those operating facilities of ancillary business and the land acquired by the Company, all other operating assets shall be transferred without compensation to the MOTC or other party designated by the MOTC.

The value of transferable assets with compensation shall be calculated at the residual value of the assets as derived from the subtraction of the comparative depreciated value for the service life that has elapsed from the original cost of the assets at the time of the transfer, and the period of depreciation shall be based on the minimum term of service life determined by the fixed-percentage-on-declining-base-method as set out in the “Property Standard Classification” issued by the Executive Yuan.

F-38

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

ix. Transfer of ownership prior to the expiration of the concession period
1) During the construction period: The transfer price is determined by the lower of actual construction costs (including capitalized financial costs) or agreed construction costs (including capitalized financial costs) multiplied by the percentage of the completion of construction.
2) During the operating period: The transfer price is determined by appraisal organizations.
x. Agreement guarantee
1) Construction period: The Company provided a bank guarantee of NT$2 billion and a portion of construction in progress amounting to NT$13 billion as a performance bond to guarantee for the fulfillment of its responsibility to construct the Taiwan High Speed Rail system. The MOTC is required to return the NT$15 billion 6 months after the start of full operation of the system.
2) During the operating period: The Company will provide a NT$5 billion worth of performance bond as a guarantee for fulfilling its operating responsibility. If there is no breach of the contract since the operating date, the MOTC will return NT$0.5 billion each year; however, the total returnable amount shall not exceed NT$3 billion. The deadline to return the remaining amount is the earlier of six months after the maturity of the concession period or six months after the termination of the agreement.
xi. Liabilities for the breach of contract and the consequences under the Company’s C&O Agreement with the MOTC.
1) Any of the following events attributable to the Company shall constitute a breach of contract:
- a) Material delay in work schedule
- b) Material default in quality control of the works
- c) A material default during the operation period in relation to traffic safety, service quality, or the relevant management as determined by the Authority in Charge.
- d) Other events which have a material impact on the construction or operation of the HSR and for which the situation is serious as determined by the MOTC or the Authority in Charge.
2) Consequences of breach of contract
- When it confirms that the Company breaches the contract, the MOTC may take the following actions:
- a) Suspend the construction or operation of the HSR
- b) Revoke the permit for construction or operation of the HSR
- c) Terminate the C&O Agreement

Upon revocation of the Company’s permit for construction or operation of HSR by the Authority in Charge, the C&O Agreement shall be terminated ipso facto. Where there are operating assets and works in progress which are necessary and useful, the MOTC shall apply to the Authority in Charge for a compulsory take-over of such assets and works.

(b) Operating lease

The Company rents its office premises. As of December 31, 2006, the Company had paid NT$45,987 thousand as a guarantee deposit for the lease of these premises. Future minimum lease payments at December 31, 2006, were as follows:

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	NT$ US$ (in thousands dollars) 151,422 4,646 146,119 4,484 10,849 333 10,849 333 319,239 9,796	NT$ US$ (in thousands dollars) 151,422 4,646 146,119 4,484 10,849 333 10,849 333 319,239 9,796
	319,239	9,796

F-39

TAIWAN HIGH SPEED RAIL CORPORATION (A Company In The Development Stage) NOTES TO FINANCIAL STATEMENTS – (Continued)

(c) Construction contracts

As of December 31, 2006, the Company had entered into several construction contracts amounting to NT$381,921,769 thousand, of which NT$362,213,957 thousand was recorded as construction in progress and prepayments.

(d) As of December 31, 2006, the Company had obtained credit line facilities in the form of letters of credit from several banks, of which US$19,773 thousand and JPY8,242,316 thousand were unused, and the Company had issued NT$26,083,800 thousand worth of promissory notes to banks to obtain guaranties for credit lines.
(e) As of December 31, 2006, the Company had provided a letter of credit of NT$198,342 thousand to the Bureau of Taiwan High Speed Rail, MOTC, as a guarantee for the development of the Chiayi Station.

8. Significant Damage Losses: none.

9. Significant Subsequent Events: none.

10. Others

(a) Total personnel, depreciation and amortization expenses incurred for the years ended December 31, 2004, 2005 and 2006, (development stage) were as follows:

		2004			2005			2006			2006
By function By item	Operating cost	Operating expenses	Total	Operating cost	Operating expenses	Total	Operating cost	Operating expenses	Total	Operating cost	Operating expenses	Total
Personnel expenses Salaries . . . . . . . . Insurance . . . . . . . Pension . . . . . . . . Others . . . . . . . . Depreciation . . . . . . . Amortization . . . . . . .	NT$ – – – – – –	NT$ 612,921 30,263 12,328 18,978 64,095 20,516	NT$ 612,921 30,263 12,328 18,978 64,095 20,516	NT$ – – – – – –	NT$ 722,215 43,394 25,183 20,250 120,824 22,927	NT$ NT$ (in thousands dollars) 722,215 – 43,394 – 25,183 – 20,250 – 120,824 – 22,927 –		NT$ 995,388 64,065 63,623 29,482 107,347 23,958	NT$ 995,388 64,065 63,623 29,482 107,347 23,958	US$ – – – – – –	US$ 30,543 1,966 1,952 905 3,294 735	US$ 30,543 1,966 1,952 905 3,294 735

(b) Reclassification

Certain accounts in the 2004 and 2005 financial statements have been reclassified to conform with the presentation adopted in the financial statements as of and for the year ended December 31, 2006. These reclassifications do not have a significant impact on the financial statements.

F-40

APPENDIX A

THE SECURITIES MARKETS OF THE ROC

The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by us, the Managers or any of our respective affiliates or advisors in connection with this Offering.

The Taiwan Stock Exchange

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

The Taiwan Stock Exchange commenced operations in 1962. During the early 1980s, the Securities and Futures Commission actively encouraged new listings on the Taiwan Stock Exchange and the number of listed companies has grown from 119 in 1983 to 688 as of December 31, 2006. As of December 31, 2006, the market capitalization of companies listed on the Taiwan Stock Exchange was approximately NT$19.4 trillion.

Historically, ROC companies have listed only shares and bonds on the Taiwan Stock Exchange. However, the Securities and Futures Bureau has encouraged companies to list other types of securities. In 1988, the Securities and Futures Bureau permitted the issuance of Taiwan’s first exchangeable bonds. Since 1989, there have been offerings of domestic convertible bonds and convertible preferred shares. In addition, beneficiary units evidencing beneficiary interests in closed-end investment funds and Dragon Bonds issued by the Asian Development Bank are also listed on the Taiwan Stock Exchange or traded on the GreTai Securities Market (which is discussed below). The Securities and Futures Bureau also has regulations which permit foreign issuers to list their equity securities directly on the Taiwan Stock Exchange or through the use of depositary receipts. To date, five foreign issuers have listed their equity securities on the Taiwan Stock Exchange through the use of depositary receipts in accordance with these regulations. The Taiwan Stock Exchange considers the following factors when evaluating a company for listing:

the number of shareholders and the distribution of shareholdings among such shareholders;
the length of time in business;
the amount of paid-in capital; and
profitability.

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

A-1

There are also special listing criteria for private companies participating in major national public construction projects under concession agreements with the Government. The Taiwan Stock Exchange will agree to list the stock of such company if the said Government or corporate shareholders issue a certificate confirming that the following requirements have been met:

the company is a company newly established for procurement of the concession agreement and its business scope has been approved by the competent authority in charge of the company’s business;
its paid-in capital is NT$5 billion or more at the time when it applies for listing;
the total expected cost of the construction project at the time when the concession agreement was procured was NT$20 billion or more;
the remaining term of the concession is 20 years or more at the time when it applies for listing;
the directors, supervisors, shareholders holding 5% or more of the company’s issued shares and contributors or operators of technology and know-how holding 0.5% or more of the company’s issued shares or 100,000 shares or more shall have the technical capability, financial means and other necessary abilities as required for the performance of the concession agreement;
the Government shall have issued an approval certificate for the concession agreement; and
the number of registered shareholders shall be 1,000 or more, with 500 shareholders holding 1,000 to 50,000 shares, and the total number of shares such shareholders hold shall be 20% or more of the total issued shares, or at least 10 million shares.

A private company applying for listing on the Taiwan Stock Exchange shall have been trading on the ROC Emerging Stock Market for no less than six months and have completed relevant procedures for scripless registration of the issued securities.

Directors, supervisors, shareholders holding three percent or more the of company’s issued shares and shareholders making equity investment in the form of technical know-how and holding 0.5% or more of the company’s issued shares or 100,000 shares or more shall submit 10% to 50% of their shares depending on the number of shares intended for listing for a lock-up of minimum three years, as determined by the Taiwan Stock Exchange listing rules.

The ROC GreTai Securities Market

To complement the Taiwan Stock Exchange, the GreTai Securities Market was established in September 1982 on the initiative of the Securities and Futures Bureau to encourage the trading of securities of companies who do not qualify for listing on the Taiwan Stock Exchange. As of December 31, 2006, 531 companies had listed equity securities on the GreTai Securities Market and the total market capitalization of those companies was approximately NT$1.9 trillion.

A-2

The following table sets forth, for the periods indicated, information relating to the GreTai Securities Market Index.

Period 1993 . . . . . . . . . . . . 1994 . . . . . . . . . . . . 1995 . . . . . . . . . . . . 1996 . . . . . . . . . . . . 1997 . . . . . . . . . . . . 1998 . . . . . . . . . . . . 1999 . . . . . . . . . . . . 2000 . . . . . . . . . . . . 2001 . . . . . . . . . . . . 2002 . . . . . . . . . . . . 2003 . . . . . . . . . . . . 2004 . . . . . . . . . . . . 2005 . . . . . . . . . . . . 2006 . . . . . . . . . . . .	Number of Listed Companies at the Period End 11 14 41 79 114 176 264 300 333 384 423 466 503 531	Stock Trading Values (Total Turnover) Index High(1) (NT$ in millions) 649 – 568 – 2,796 102.0 453,509 234.8 2,310,659 344.0 1,198,158 281.4 1,899,925 207.2 4,479,663 326.4 2,326,889 152.5 2,794,724 163.0 2,059,385 117.5 3,475,449 160.1 3,166,453 133.3 5,129,112 163.9	Index Low(1) – – 94.0 99.9 210.2 163.9 139.0 101.6 78.2 89.7 79.6 105.2 103.6 118.9	Index at Period End(1)
				– – 102.0 233.1 245.1 165.8 207.2 104.9 136.2 94.4 117.3 115.8 133.3 163.9

(1) The GreTai Securities Market Index was created in 1995. Source: GreTai Securities Exchange.

The ROC Emerging Stock Market

In order to cure various problems incurred from non-transparent and inconvenient trading of non TSE-listed or non GTSM-traded stocks among private individuals or entities and in the efforts to provide a legal, secure and transparent market for such stocks, the Securities and Futures Bureau had requested GreTai Securities Market to embark on the planning for establishment of a market system. The market system for trading non-TSE-listed and non GTSM-traded stocks, which was named as the ROC Emerging Stock Market, was approved by the GreTai Securities Market on July 19, 2001 and commenced trading on January 2, 2002. As of December 31, 2006, 230 companies had traded their stocks on the ROC Emerging Stock Market and the total market capitalization of these companies was approximately NT$723.4 billion. Stocks are traded by negotiation on the ROC Emerging Stock Market. The trading will begin with the quotation by the recommending securities firms as a reference and the investors can through a broker to place their orders in the GreTai Securities Market emerging stock electronic trading system or directly negotiate with the market makers if their order volume exceeds 100,000 shares.

A-3

Trading on the ROC Emerging Stock Market

There are no requirements on the revenue, profitability, market capitalization, years of operating and numbers of shareholders for trading stocks on the ROC Emerging Stock Market. Stock of a company can be traded on the ROC Emerging Stock Market if the following four criteria are satisfied:

(1) The company has entered into a contract for assisting in trading its stocks on the GreTai Securities Market or Taiwan Stock Exchange with a securities firm;
(2) having received written recommendations by two or more securities firms and the securities firms have submitted a “Financial and Operational Material Event Checklist” for the company for the past one month;
(3) the company has established a professional stock affairs agent or stock affairs unit at the location of the GreTai Securities Market to handle stock affairs; and
(4) all stocks and bonds that the company offered and issued shall be issued in scripless form.

Price Limit, Commissions, Transaction Tax and Other Matters

There is no restriction of fluctuation in the price of stock traded on the ROC Emerging Stock Market. Brokerage commission for trading shares in the ROC Emerging Stock Market shall not exceed the upper limit of 0.5% of the amount of the transaction, but if the commission would be less than NT$50 based on the abovementioned rate, the securities broker may charge the customer NT$50. A securities transaction tax, currently levied at 0.3% of the transaction price, is payable by the seller of the shares. Such securities transaction taxes are withheld at the time of the transaction giving rise to such tax. The minimum sale order for trading on the ROC Emerging Stock Market is one share.

Taiwan Stock Exchange Index

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

The weighting of 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.

A-4

The following table sets forth, for the periods indicated, information relating to the Taiwan Stock Exchange Index.

Period 1993 . . . . . . . . . . . . 1994 . . . . . . . . . . . . 1995 . . . . . . . . . . . . 1996 . . . . . . . . . . . . 1997 . . . . . . . . . . . . 1998 . . . . . . . . . . . . 1999 . . . . . . . . . . . . 2000 . . . . . . . . . . . . 2001 . . . . . . . . . . . . 2002 . . . . . . . . . . . . 2003 . . . . . . . . . . . . 2004 . . . . . . . . . . . . 2005 . . . . . . . . . . . . 2006 . . . . . . . . . . . .	Number of Listed Companies at the Period End 285 313 347 382 404 437 462 531 584 638 669 697 691 688	Stock Trading Values 9,056.7 18,812.1 10,151.5 12,907.6 37,241.2 29,619.0 29,291.5 30,526.6 18,354.9 21,874.0 20,355.3 23,875.3 18,818.9 23,900.3	Index High (NT$ in billions) 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 6,142.32 7,034.10 6,575.53 7,823.72	Index Low 3,135.56 5,194.63 4,503.37 4,690.22 6,820.35 6,251.38 5,474.79 4,614.63 3,446.26 3,850.04 4,139.50 5,316.87 5,632.97 6,257.80	Index at Period End
					6,070.56 7,124.66 5,173.73 6,933.94 8,187.27 6,418.43 8,448.84 4,739.09 5,551.24 4,452.45 5,890.69 6,139.69 6,548.34 7,823.72

Source: Taiwan Stock Exchange.

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

Price Limits, Commissions, Transaction Tax and Other Matters

The Taiwan Stock Exchange has placed limits on block trading and on the range of daily price movements. Fluctuations in the price of securities traded on the Taiwan Stock Exchange is restricted to 7% above and below the previous day’s closing price in the case of equity securities (no price fluctuation restriction will be imposed on the shares within five days from the listing date if such shares are the first tranche of the shares of the issuer listed on the Taiwan Stock Exchange), and 5% in the case of debt securities. The price limit for movements below the previous day’s closing price has been modified from time to time by the Securities and Futures Bureau based on market conditions.

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

A securities transaction tax of 0.3% of the transaction price is payable by the seller of equity securities. These securities transaction taxes are withheld at the time of the transaction. According to the amended ROC Statute of Upgrading Industries, which became effective on January 30, 2002, no securities transaction tax will be imposed on the transfer of corporate bonds and financial debentures until December 31, 2009.

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

A-5

order for a basket of stocks that involves at least five TSE-listed stocks with a total value of at least NT$15 million under the continuous trading method or at least five TSE-listed stocks with a total value of at least NT$30 million under the cross trading method must also be registered and executed in accordance with TSE guidelines.

Regulation and Supervision

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

The Securities and Futures Bureau has responsibility for implementing the ROC Securities and Exchange Law and for overall administration of governmental policies in the Taiwan securities market. It has extensive regulatory authority over the offering, issuance and trading of securities. In addition, the ROC Securities and Exchange Law specifically empowers the Securities and Futures Bureau to promulgate necessary rules. The ROC Securities and Exchange Law prohibits market manipulation. For example, it permits an issuer to recover short-swing trading profits made through purchases and sales or sales and purchases within six months by directors, managerial personnel, supervisors, as well as the spouses, minor children and nominees of these parties, and shareholders who (together with their spouses, minor children and nominees) hold 10% or more of the shares of the issuer. The ROC Securities and Exchange Law prohibits trading by “insiders” based on non-public information that materially affects share price movement prior to publication of such information and within 12 hours after publication of such information. “Insiders” include:

directors, supervisors, managers, as well as the spouses, minor children and nominees of these parties, and shareholders (together with their spouses, minor children and nominees) who hold 10% or more of the issuing company’s shares, and, in the event that a government agency or a legal entity, which is a shareholder of the issuing company, is elected director or supervisor, any individual designated by such government or legal entity to exercise the duties of director or supervisor;
any person who has learned material, non-public information due to an occupational or controlling relationship with the issuing company;
any person discharged from the status or position mentioned above for not more than six months; and
any person who has learned material, non-public information from any of the above.

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

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

A-6

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

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

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

In addition to providing a market for securities trading, the Gretai Securities Market reviews applications by Taiwan issuers to trade securities on the ROC Emerging Stock Market. If issuers of traded securities violate laws and regulations or encounter extended or severe negative results of operations, the Gretai Securities Market may terminate the trading of the securities of these issuers.

A-7

APPENDIX B

FOREIGN INVESTMENT AND EXCHANGE CONTROLS IN THE ROC

Foreign Investment

Historically, foreign investment in the ROC securities markets has been restricted. Since 1983, the ROC Government has periodically enacted legislation and adopted regulations to permit foreign investment in the ROC securities market.

Regulations Governing Investment in Securities By Overseas Chinese and Foreign Nationals (the “Regulations”), which was approved by the Executive Yuan on May 26, 1983 and has been amended from time to time, is one of the major regulations governing foreign investment in Taiwan.

Under the Regulations, foreign investors are classified as either “onshore foreign investors” or “offshore foreign investors” according to their respective geographical location. Both onshore and offshore foreign investors are allowed to invest in ROC securities after they register with the TSE. The Regulations further classify foreign investors into foreign institutional investors and foreign individual investors. “Foreign institutional investors” refer to those investors incorporated and registered in accordance with foreign laws outside of the ROC (i.e., offshore foreign institutional investors) or their branches set up and recognized within the ROC (i.e., onshore foreign institutional investors). Offshore overseas Chinese and foreign individual investors are subject to a maximum investment ceiling that will be separately determined by the ROC SFB after consultation with the CBC. On the other hand, foreign institutional investors are not subject to any ceiling for investment in the ROC securities market.

Depositary Receipts

In April 1992, the ROC SFB enacted regulations permitting ROC companies with securities listed on the TSE, with the prior approval of the ROC SFB, to sponsor the issue and sale to foreign investors of depositary receipts. Depositary receipts represent deposited shares of ROC companies. In December 1994, the Ministry of Finance allowed companies whose shares are traded on the GTSM or listed on the TSE, upon approval of the ROC SFB, to sponsor the issue and sale of depositary receipts. However, companies traded on the ROC Emerging Stock Market are not allowed to sponsor the issue and sale of depositary receipts.

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

stock dividends;
free distribution of shares;
due to the exercise by depositary receipt holders of their pre-emptive rights in the event of capital increase for cash; or
if permitted in the deposit agreement and the custody agreement, due to the purchase by depositary receipt holders, directly or through the depositary, of shares on the TSE or the GTSM or the delivery of shares held by such depositary receipt holders for deposit in the depositary receipt facility.

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In this event, the total number of depositary receipts outstanding after an issuance cannot exceed the aggregate number of:

(1) the number of issued depositary receipts previously approved by the ROC FSC; and
(2) the number of depositary shares created from stock dividends, free distributions of shares and rights offerings.

These issuance of depositary receipts under the fourth bullet point above may only be made to the extent that previously issued depositary receipts have been cancelled.

A holder of depositary receipts (other than citizens of the PRC and entities organized under the laws of the PRC) may withdraw shares after the issuance of the depositary receipts representing new shares to the extent permitted under the deposit agreement (in practice, typically four to seven business days thereafter).

Under existing laws and regulations relating to foreign exchange control, a depositary or a holder of depositary receipts may, without obtaining further approvals from the CBC or any other governmental authority or agency of the ROC, convert NT Dollars into other currencies, including US Dollars, in respect of the following: (1) proceeds of the sale of shares represented by depositary receipts, (2) proceeds of the sale of shares received as stock dividends and deposited into the depositary receipt facility and (3) any cash dividends or cash distributions received. In addition, a depositary, also without any of these approvals, may convert inward remittances of payments into NT Dollars for purchases of underlying shares for deposit into the depositary receipt facility against the creation of additional depositary receipts. A depositary may be required to obtain foreign exchange approval form the CBC on a payment-by-payment basis for conversion from NT Dollars into other currencies relating to the sale of subscription rights for new shares. Proceeds from the sale of the underlying shares withdrawn from the depositary receipt facility may be used for reinvestment in the TSE, the GTSM or the ROC Emerging Stock Market, subject to registration with the TSE.

Under current ROC laws, a non-ROC holder of depositary receipts, when withdrawing the depositary receipts, will be required to register with the TSE and appoint a local agent (with such qualifications as are set by the ROC SFB) to open a securities trading account with a local brokerage firm, pay taxes, remit funds, exercise rights relating to the securities and perform such other matters as may be designated by such holder of depositary receipts on behalf of and as an agent for such holder of depositary receipts. Any such holder of depositary receipts 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. In addition, such holder of depositary receipts is required to appoint a tax guarantor for filling tax returns and making tax payments.

Overseas Corporate Bonds

Since 1989, the ROC SFB has approved a series of overseas bonds issued by ROC companies listed on the TSE in offerings outside the ROC. Under current ROC law, such overseas corporate bonds can be (i) converted by bondholders, other than persons of the PRC, into shares of ROC companies or (ii) subject to ROC SFB approval, may be converted into depositary receipts issued by the same ROC company or by the issuing company of the exchange shares, in the case of exchangeable bonds. The relevant regulations also permit public issuing companies to issue corporate debt in offerings outside the ROC.

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Proceeds from the sale of the shares converted from overseas convertible bonds may be used for reinvestment in securities listed on the TSE or traded on the GTSM or the ROC Emerging Stock Market, subject to registration with the TSE.

Under current ROC law, a non-ROC converting bondholder, when exercising his conversion right to convert bonds into common shares, is required to register with the TSE and appoint a local agent (with such qualifications as are set by the ROC SFB) to open a securities trading account with a local brokerage firm, pay ROC taxes, remit funds, exercise rights relating to the securities and perform such other matters as may be designated by such converting bondholder on behalf of and as agent for such converting bondholder. Also, any such converting bondholder 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. In addition, such converting bondholder is required to appoint a tax guarantor 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 non-ROC currencies, including US Dollars, for making payments in respect of redemption of the bonds or repayment of principal of and interest on the bonds. A non-ROC converting bondholder may, through its local agent and without obtaining prior approval from the CBC, convert into foreign currencies net proceeds realized from the sale of converted entitlement certificates, common shares or any stock dividends relating to such shares, or any cash dividend or other cash distribution in respect of such common shares and, after becoming a shareholder, inward remittances of subscription payments in connection with a rights offering. However, a converting bondholder must obtain prior approval from the CBC on a payment-by-payment basis for conversion from NT dollars into other currencies in respect of the proceeds from the sale of subscription rights for newly issued shares.

Other Foreign Investment

In addition to investments permitted under the Regulations, foreign investors (other than foreign investors who have registered with the TSE for making investments in the ROC securities market) who wish to make direct investments in the shares of ROC companies are required to submit a Foreign Investment Approval application to the Investment Commission of the ROC Ministry of Economic Affairs or other government authority. The Investment Commission or such other government authority reviews each Foreign Investment Approval application and approves or disapproves each application after consultation with other governmental agencies (such as the CBC and the ROC SFB).

Under current law, any non-ROC person possessing a Foreign Investment Approval may remit capital for the approval investment and is entitled to repatriate annual net profits, interest and cash dividends attributable to such investment. Dividends attributable to such investment may be repatriated upon submitting certain required documents to the remitting bank, and investment capital and capital gains attributable to such investment may be repatriated after approvals of the Investment Commission or other authorities have been obtained.

In addition to the general restriction against direct investment by non-ROC persons in securities of ROC companies, non-ROC persons (except in certain limited cases) are currently prohibited from investing in certain industries in the ROC pursuant to a Negative List, as amended by the Executive Yuan. The prohibition on foreign investment in the prohibited industries specified in the Negative List is absolute in the absence of specific

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exemption from the application of the Negative List. Pursuant to the Negative List, certain other industries are restricted so that non-ROC persons (except in certain limited cases) 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 high speed rail is on the Negative List and direct investment by non-ROC persons in our securities cannot exceed 49% of our paid-in capital.

Exchange Controls

The ROC Foreign Exchange Control Statute and regulations provide that all foreign exchange transactions must be executed by banks designated by the FSC and the CBC to handle foreign exchange transactions. Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters. All foreign currency needed for the importation of merchandise and services may be purchased freely from the designated foreign exchange banks.

Aside from trade-related foreign exchange transactions, ROC companies and individual residents of the ROC may, without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$50 million, or its equivalent, and US$5 million, or its equivalent, respectively, each calendar year. Furthermore, any remittance of foreign currency into Taiwan by a Taiwan company or a resident individual in a year will be offset by the amount remitted out of Taiwan by such company or individual (as applicable) within its annual quota and will not use up its annual inward remittance quota to the extent of such offset. These limits apply to remittances involving a conversion between NT dollars and US dollars or other foreign currencies. In addition, all private enterprises are required to register all medium and long-term foreign debt with the CBC.

In addition, a foreign person may, subject to certain requirements but without foreign exchange approval, remit to and from Taiwan foreign currencies of up to US$100,000, or its equivalent, per remittance. This limit applies to remittances involving a conversion between NT dollars and US dollars or other foreign currencies and vice versa.

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ISSUER

Taiwan High Speed Rail Corporation

3F, 100 Hsin Yi Road Sec. 5 Taipei, Taiwan, ROC

TRUSTEE, PRINCIPAL PAYING, TRANSFER AND CONVERSION AGENT

REGISTRAR

The Bank of New York, London Branch

48th Floor,

One Canada Square, London E14 5AL

The Bank of New York

101 Barclay Street, 21st Floor West, New York, New York 10286

US LEGAL ADVISER TO THE MANAGERS

ROC LEGAL ADVISER TO THE ISSUER

Simpson Thacher & Bartlett LLP

35th Floor ICBC Tower

3 Garden Road, Central Hong Kong

Lee and Li

7th Floor No. 201, Tun Hua North Road Taipei, Taiwan, ROC

INDEPENDENT AUDITORS

KPMG Certified Public Accountants

6th Floor

156 Min Sheng East Road Section 3 Taipei, Taiwan, ROC

Special Note Regarding
Forward-Looking Statements . . . . . .
Enforceability of Foreign Judgments
in the ROC . . . . . . . . . . . . . . . . . . . . .
Summary . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . .
Market Price Information . . . . . . . . . . .
Exchange Rates . . . . . . . . . . . . . . . . . . .
Dividends and Dividend Policy. . . . . . .
Capitalization and Indebtedness . . . . .
Selected Financial Data. . . . . . . . . . . . .
Management’s Discussion and
Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . .
Recent Developments . . . . . . . . . . . . . .
Industry Overview . . . . . . . . . . . . . . . . .
Business. . . . . . . . . . . . . . . . . . . . . . . . .
Regulation . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . .
Related Party Transactions . . . . . . . . . .
Changes in Issued Share Capital . . . . .
Description of Share Capital. . . . . . . . .
Terms and Conditions of the Bonds . .
Transfer Restrictions . . . . . . . . . . . . . . .
ROC Taxation . . . . . . . . . . . . . . . . . . . . .
Plan of Distribution . . . . . . . . . . . . . . . .
Summary of Certain Significant
Differences between ROC
GAAP and US GAAP . . . . . . . . . . . . .
Legal Matters. . . . . . . . . . . . . . . . . . . . .
Independent Auditors . . . . . . . . . . . . . .
General Information . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . .
Appendix A: The Securities Markets of
the ROC . . . . . . . . . . . . . . . . . . . . . . .
Appendix B: Foreign Investment and
Exchange Controls in the ROC . . . . .

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F-1
A-1
B-1
Taiwan High
Corporation
(incorporated as a comp
in Taiwan, the Republic o
US$300,000,000
Convertible Bon
Deutsche Bank
Fubon Securities Co.
Taiwan Securities Co
Offering Memorandum
May 9, 2007

Taiwan High Speed Rail Corporation

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

US$300,000,000 Zero Coupon Convertible Bonds due 2012

Fubon Securities Co., Ltd Taiwan Securities Co., Ltd

AI assistant

THSRC — Capital/Financing Update 2016

52174_rns_2016-10-14_2967cea8-d50b-4cb1-8684-20dff1b0ed52.pdf

Taiwan High Speed Rail Corporation

US$300,000,000 Zero Coupon Convertible Bonds due 2012

Issue Price: 100%

Deutsche Bank

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

ENFORCEABILITY OF FOREIGN JUDGMENTS IN THE ROC

CERTAIN CONVENTIONS AND OTHER DATA

SUMMARY

Overview

Competitive Strengths

Business Strategies

THE OFFERING

SUMMARY FINANCIAL DATA

RISK FACTORS

Risks Relating to Our Business

We have a limited operating history, we have not yet achieved profitability and we may not be able to achieve profitability in the future.

We have incurred substantial debt.

Competition in Taiwan from other transport providers may adversely affect us.

We may not be able to generate sufficient ticket revenues to cover our operating costs, and our ability to raise fares to cover our operating costs is limited under the C&OA and could be limited by a number of other factors.

Accidents and natural disasters could lead to decreased revenues and increased expenditure and reduce our operating flexibility.

Our business depends on third-party contractors and expatriate engineers, and we will need to successfully transfer their technology, skills and know-how to our domestic employees in order to effectively operate the high speed rail.

We depend on our key personnel and have experienced turnover in our key management positions.

We are exposed to the impact of interest rate and foreign currency fluctuations.

We are dependent on our IT systems for operation of the high speed rail system and the management of our business.

Connecting transportation links and local public transportation arrangements for our Stations in Taoyuan, Hsinchu, Taichung, Chiayi, Tainan and Kaohsiung may not be sufficient.

Defaults under our syndicated loans could materially and adversely affect our financial condition.

Our future station area development business will be subject to fluctuations in the Taiwan property market as well as to general risks incidental to the ownership and management of properties, and we have limited experience in property development.

Any future outbreak of severe acute respiratory syndrome, avian influenza or any other new or unusual diseases may materially and adversely affect our business and operations, as well as our financial condition and results of operations.

Historical and forward-looking market data and projected ridership of the high speed rail may not be accurate.

Risks Relating to Taiwan, Republic of China

The value of our Common Shares and the Bonds may be adversely affected by the volatility of the ROC securities markets.

Strained relations between the Republic of China and the People’s Republic of China could negatively affect our business and the market price of our securities.

Political uncertainty in the ROC could negatively affect our business and the market price of our securities.

We are subject to ROC GAAP, which differs from US GAAP in many material respects.

Implementation of the Alternative Minimum Tax (“AMT”) may affect our tax exemptions.

Your investment may be adversely affected by earthquakes in Taiwan.

Risks Relating to the Bonds

Your right to receive payments on the Bonds is structurally subordinated.

An active trading market for the Bonds may not develop.

The ROC Emerging Stock Market is not an active trading market, and we may not be able to list our Common Shares on the Taiwan Stock Exchange.

There can be no assurance that any public offering or offerings undertaken by us will, in the aggregate, constitute a QPO, nor can there be any assurance that we will undertake a public offering.

Holders of the Bonds will bear the risk of fluctuations in the price of our Common Shares.

The imposition of foreign exchange restrictions may have an adverse effect on foreign investors’ ability to acquire Taiwan securities, including the Bonds and our Common Shares.

We may be unable to redeem the Bonds.

Our public shareholders may have difficulty protecting their interests.

Future sales of securities by us or our existing shareholders may adversely impact the market price of the Bonds and our Common Shares.

Holders of the Bonds will have no rights as holders of Common Shares until the Bonds are converted, and there are limitations on your ability to exercise conversion rights.

The Bonds and any Common Shares received upon conversion are subject to restrictions on transfer.

You must satisfy certain requirements in Taiwan, including registration with the Taiwan Stock Exchange and appointing a tax guarantor, a local agent and a custodian, before you can exercise your conversion rights and receive Common Shares.

A holder of the Bonds or its designee requesting the conversion of the Bonds into Common Shares may be required to provide certain information to us, and failure to provide such information may result in a delay of the conversion.

Fluctuations in the exchange rate between the NT dollar and the US dollar may have a material adverse effect on the value of the Bonds or our Common Shares in US dollar terms.

Holders of Common Shares may not be able to participate in rights offerings.

The value of your investment may be adversely affected by the volatility of the ROC securities market.

Employee stock bonuses paid by us may dilute the holdings and associated rights of holders who convert the Bonds to Common Shares.

USE OF PROCEEDS

MARKET PRICE INFORMATION

EXCHANGE RATES

DIVIDENDS AND DIVIDEND POLICY

CAPITALIZATION AND INDEBTEDNESS

SELECTED FINANCIAL DATA

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

Overview

Factors Affecting Our Future Results of Operations

Patronage

Ridership (per day)[(1)]

Fares

Competition

The Taiwanese Economy and Demographic Trends

Plan of Financing

Station Area Development Assets and Revenues

Critical Accounting Policies

Asset impairment

Income taxes

Results of Operations

Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

General and administrative expenses

Non-Operating Expenses and Losses

THSRC Capital/Financing Update 2016